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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-K/A
                               (AMENDMENT NO. 1)

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

    FOR THE FISCAL YEAR ENDED JUNE 30, 1999 COMMISSION FILE NUMBER 0-025842

                         EQUALNET COMMUNICATIONS CORP.

         A TEXAS CORPORATION                   IRS EMPLOYER NO. 76-0457803

                          1250 WOOD BRANCH PARK DRIVE
                              HOUSTON, TEXAS 77079
                         Telephone Number 281/529-4600

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

                                      NONE

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

                          Common Stock, $.01 Par Value

   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]

   Aggregate market value of the voting stock (common stock) held by non-
affiliates of registrant as of March 24, 2000  $9,667,431

   Number of shares of registrant's common stock outstanding as of March 24,
2000  36,231,035

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                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 Item                                                                     Page
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 <C> <S>                                                                  <C>
 PART I
 1.  BUSINESS...........................................................    1
 2.  PROPERTIES.........................................................    7
 3.  LEGAL PROCEEDINGS..................................................    8
 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................    9
 PART II
 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS...........................................................   10
 6.  SELECTED FINANCIAL DATA............................................   12
 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS.............................................   13
 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........   19
 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................   19
 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE..............................................   19
 PART III
 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................   19
 11. EXECUTIVE COMPENSATION.............................................   21
 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....   22
 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................   27
 PART IV
 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...   30
</TABLE>

   ALL DEFINED TERMS UNDER RULE 4-10(A) OR REGULATION S-X SHALL HAVE THEIR
STATUTORILY PRESCRIBED MEANINGS WHEN USED IN THIS REPORT.
<PAGE>

                                     PART I

Item 1. Business

General

   Equalnet Communications Corp. (the "Company"), incorporated in the state of
Texas on January 20, 1995 (previously known as EqualNet Holding Corp.), is a
holding company currently comprising three wholly-owned operating subsidiaries,
EqualNet Corporation ("EqualNet"), a long-distance telephone company providing
services to generally smaller commercial and residential accounts nationwide,
Netco Acquisition Corp., ("Netco") the owner of nine telecommunications
switches located in major U.S. cities, and USC Telecom, Inc. ("USC Telecom")
formed in the first quarter of fiscal 1999 to acquire the assets purchased from
SA Telecommunications, Inc. ("SA Telecom") (see "SA Telecom Acquisition").

   The Company began fiscal 1998 as a switchless reseller of long distance
services through EqualNet. During the third quarter of fiscal 1998 the Company
purchased nine telecommunications switches and became a switch-based reseller
with leased line facilities (see "Industry Background, Structure and
Competition"). The Company utilizes AT&T Corp. ("AT&T") through its arrangement
with an AT&T reseller, Frontier Communications, Qwest Communications and MCI
WorldCom Inc. ("MCI WorldCom") to provide transmission of its customers'
traffic.

   EqualNet and EqualNet Wholesale Services, Inc. ("Wholesale") a non-operating
wholly-owned subsidiary of EqualNet, filed voluntary petitions for relief under
Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the "Bankruptcy
Code") on September 10, 1998 (the "Petition Date") in the United States
Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"),
Houston, Texas. On October 2, 1998, Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7
liquidation, which motion was subsequently granted. The cases were conducted in
such court as Cases No. 98-39561-H5-11 and 98-39560-H4-11. Pursuant to Sections
1107 and 1108 of the Bankruptcy Code, EqualNet managed its assets and operated
its business as a debtor-in-possession, pending the confirmation of its
reorganization plan. This reorganization plan was confirmed on April 28, 1999
and consummated on May 28, 1999. At the time of its bankruptcy filing, EqualNet
reported total assets of $20.7 million and total liabilities of $57.6 million.
The largest individual creditor of EqualNet as of the bankruptcy filing date
was the Company, which was owed approximately $33.0 million at the time of
EqualNet's bankruptcy filing. In conjunction with the confirmation and
consummation of the reorganization plan, certain debts were reduced resulting
in an extraordinary gain of approximately $10.0 million.

   The Company markets its services primarily to residential and small business
customers with monthly long-distance bills of less than $500. For the year
ended June 30, 1999, the monthly long-distance bill of the Company's average
customer was approximately $37.00. As of June 30, 1999, the Company had over
59,000 long-distance customers. The Company is one of the several hundred "tier
three" long distance service providers. See "Industry Background Structure and
Competition."

   The Company's revenues increased to $32.4 million in fiscal year ended June
30, 1999, as compared to $24.9 million for the fiscal year ended June 30, 1998.
Revenues for the fiscal year ended June 30, 1997 were $46.6 million. Pretax
losses (before extraordinary items) for the years ended June 30, 1999, 1998,
and 1997 were $28.0 million, $17.9 million, and $12.6 million, respectively.

   During fiscal year 1998, the Company continued to experience financial and
operational difficulties. During the second half of fiscal 1998 the Company
focused on transitioning from being a switchless reseller to becoming a
national switch-based carrier by purchasing nine telecommunications switches
("Switches") on March 6, 1998. During the process of connecting network
facilities to the Switches in the latter-half of fiscal year 1998 and
continuing into 1999, the Company realized it lacked adequate capital to
support a national switched approach.

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   In October, 1998, the Company began to disconnect its Switches in order to
reduce fixed costs in areas in which the Company had little or no long-distance
traffic which simultaneously allowed the Company to reconfigure its circuits to
increase its margins in areas where the Company had concentrations of traffic.
The Company has adopted a geographic focus around six of its switch sites:
Houston, Dallas, Miami, Los Angeles, Chicago, and New York. In addition to
providing dedicated service to key accounts, the Company has entered into
wholesale agreements, such as partitioning or leasing contracts, to turn its
Switches into revenue-generating assets.

   During fiscal year 1999, the Company made several acquisitions which had an
aggregate positive impact on both cash flow and earnings. In January 1999, the
Company purchased approximately 80,000 residential long distance customers in a
foreclosure sale. In July 1998, the Company acquired the customer base and
certain assets of a switch-based long-distance telecommunications carrier
serving customers primarily in Texas and California.

Industry Background, Structure and Competition

   According to industry data, AT&T, together with MCI WorldCom and Sprint
constitute what generally is regarded as the first tier in the long distance
market. The second tier, generally defined as comprising companies generating
between $500 million and $2 billion in annual long distance revenue, such as
Frontier Corporation ("Frontier"), Cable & Wireless Communications, Inc. and
Qwest Communications, are believed to account for less than 5% of the more than
$80 billion long-distance market cumulatively. The remaining market share is
held by several hundred smaller companies, known as third-tier carriers. Recent
legislative and regulatory activity is designed to foster a telecommunications
industry that encourages greater competition among providers of long-distance
and local telecommunications services, as well as data and network services.

   Many first- and second-tier companies, most notably AT&T, Sprint, MCI
WorldCom and Frontier, have been providing long-distance products for resale
for a number of years to capture incremental traffic volume. In 1991, EqualNet
entered into the first of its agreements with AT&T to resell long distance
service over AT&T's network. In 1994, EqualNet entered into an agreement with
Sprint to resell long distance over Sprint's network. In 1996, EqualNet
replaced its direct contractual relationship with Sprint with its arrangement
with a third-party reseller to continue service to EqualNet's customers over
Sprint's network. In 1998, Equalnet entered into a contract with MCI WorldCom
to resell long distance over MCI WorldCom's network. In 1999, EqualNet entered
into agreements with Frontier and Qwest to resell long distance over their
networks.

   Besides gross revenue, another significant distinction between long-distance
companies involves whether they maintain their own facilities. Facilities-based
companies own or lease transmission facilities, such as fiber optic cable or
digital microwave equipment. Profitability for facilities-based carriers is
highly dependent upon their ability to manage complex networking and
transmission costs. Substantially all of the first- and second-tier long
distance companies are facilities-based carriers and generally offer service
nationwide. Facilities-based carriers in the third-tier of the market generally
have facilities in a focused geographic area or lease facilities from first- or
second-tier carriers. Profitability for non-facilities based carriers is based
primarily on their ability to generate and retain sufficient revenue volume to
negotiate attractive pricing with one or more facilities-based carriers.
Pricing in such contracts typically is correlated inversely to minimum revenue
or volume commitment levels and term.

   Another distinction among long-distance companies is that of switch-based
versus switchless carriers. Switch-based carriers have one or more switches,
which are computers directing telecommunications traffic in accordance with
programmed instructions. All of the facilities-based carriers are switch-based
carriers, as are many non-facilities-based companies. Switchless carriers
depend on one or more facilities-based carriers to provide both transmission
capacity and switch facilities. In addition, switchless resellers enjoy the
benefit of offering their service on a nationwide basis, assuming their
underlying carrier has a nationwide network. An "underlying carrier" is the
carrier that owns and is responsible for the management of the facilities
needed to transmit a customer's long-distance telephone call. Through fiscal
1997, EqualNet was a switchless reseller.

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During the third quarter of fiscal 1998, Netco acquired the Switches and
associated network assets for approximately $13.2 million. EqualNet entered
into an agreement with Netco to provide for operation of the Switches and build
out of network facilities in exchange for the right to carry traffic over the
network and as a result became a switch-based carrier.

   The multi-billion dollar local telecommunications industry is dominated by
the regional Bell operating companies ("RBOC"s) and GTE Communications
Corporation ("GTE"). The RBOCs and GTE have the authority to provide interLATA
(geographic areas created by the AT&T divestiture known as local access
transport areas) long-distance service outside their service regions. The
Telecommunications Act of 1996 (the "Act") established procedures whereby the
RBOCs can apply for authority to provide interLATA long-distance service inside
their respective service region. Similarly, certain of the requirements
governing GTE's provision of in-region long-distance service were removed by
the Act. The nature of competition in the telecommunications industry is
expected to change significantly as legislative, regulatory and judicial
activities progress. As barriers are removed for the RBOCs to provide long
distance services inside their geographic areas, and as telecommunications
mergers and consolidations occur, the Company would expect an increase in
competition for long-distance services which could result in the further loss
of market share, more price competition and/or a further decrease in operating
margins. The Company expects additional industry wide downward price pressure
as the RBOCs begin to compete more aggressively in the long distance market.

   The Company's ability to compete and grow is subject to changing industry
conditions. Legislation and the resulting regulatory and judicial action have
had a significant impact on the current industry environment. These changes are
expected to continue to alter the nature and degree of competition in both the
local and long-distance segments of the industry and could directly impact the
Company's future growth opportunities.

   Competitive factors in the long distance industry affecting the Company's
market share include brand recognition, pricing, customer service, network
quality, value-added services and regulatory and judicial developments. Non-
facilities-based carriers typically receive rates from underlying carriers in
inverse correlation with the amount of traffic that they can commit to the
underlying carrier; the larger the commitment, the lower the cost of service.
Subject to contract restrictions and customer brand loyalty, resellers may
competitively bid their traffic among various national long-distance carriers
to lower their cost of service. Non-facilities-based switchless carriers devote
their resources entirely to marketing, operations and customer service, leaving
the costs of network maintenance and management to the underlying carrier.
Conversely, facilities-based carriers concentrate on maximizing network
efficiency. In order to operate efficiently, facilities based carriers require
concentrations of their customer traffic where they have facilities to attempt
to maximize their network utilization and reduce the effective cost per minute.
Additional pricing pressure may come from the introduction of new technologies,
such as Internet telephony, which utilizes voice communications at a cost below
that of traditional switched long distance services. Reductions in prices
charged by competitors could have a material adverse effect on the Company.

   The relationship between resellers and the major underlying carriers is
predicated primarily upon the pricing strategies of the first-tier companies,
which has resulted historically in higher rates for the small business customer
when compared to the rates paid by larger commercial customers. Small business
customers typically are not able to make the volume commitments necessary to
negotiate reduced rates under individualized contracts. The higher rates result
from the higher cost of credit, collection, billing and customer service per
revenue dollar associated with small billing level long-distance customers. By
committing to large volumes of traffic, the reseller is guaranteeing traffic to
the underlying carrier. The underlying carrier is also relieved of the
administrative burden of qualifying and servicing large numbers of relatively
small accounts. The successful reseller efficiently markets the long-distance
services, processes orders, verifies credit and provides customer service to
these large numbers of small accounts.

   The telecommunications marketplace is marked by a high rate of customer
attrition. The Company's competitors engage in national advertising campaigns,
telemarketing programs, and offer cash payments and other incentives to the
Company's end users, who are not obligated to purchase any minimum usage amount

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and can discontinue service, without penalty, at any time. There can be no
assurance the Company can replenish its customer base, and failure to do so
could have a material adverse effect on the Company.

   The Company believes the rapid evolution of the communications industry
presents an opportunity for consolidation of third-tier companies in general,
and resellers and smaller, regionally focused switch based carriers, in
particular. Many of these companies are undercapitalized and may have
difficulty providing their services profitably, especially given the level of
price competition among carriers has continued to increase. By growing through
consolidation, the Company believes it can (i) generate increased margins by
securing better pricing from underlying carriers because of increased volume
commitments, (ii) justify the installation of switches in geographic areas with
concentrations of long distance traffic, and (iii) achieve economies of scale
in overhead allocation. The ability to obtain such increased margins, the
ability to concentrate customer traffic of the Company, and the economies of
scale in overhead allocation are not certain and cannot be precisely predicted.

Brittan Communications International

   On January 27, 1999, the Company purchased approximately 80,000 residential
long distance customers of Brittan Communications International Corporation
("BCI") in a foreclosure sale for approximately $1.8 million, including the
assumption of a $1.7 million term loan, and the issuance of 300,000 warrants to
a third-party valued at $75,000. The warrants entitle the holder to purchase
300,000 shares of Common Stock at $1.33 per share during a five-year period.
The term loan is reduced by 80% of the excess of the fair market value of the
Company's common stock at the exercise date over the $1.33 exercise price.

SA Telecom Acquisition

   On January 21, 1998, the Company signed an agreement with SA
Telecommunications, Inc. ("SA Telecom") a switch-based, long-distance
telecommunications carrier serving customers primarily in Texas and California
to acquire certain assets and customer bases in exchange for a combination of
shares of stock, cash and assumption of certain liabilities. The transaction
was subject to certain conditions, including approval of the bankruptcy court
supervising the reorganization of SA Telecom under Chapter 11 of the United
States Bankruptcy Code. On March 9, 1998, the Company won approval from the
bankruptcy court. The purchase of SA Telecom was approved by the Company's
shareholders on June 30, 1998 for approximately $3.5 million in cash and
approximately $5.4 million of Series C Preferred Stock and the assumption of
approximately $4.0 million in debt. The Company's newly formed wholly-owned
subsidiary, USC Telecom, Inc. ("USC Telecom"), acquired the SA Telecom assets
on July 22, 1998. Prior to the closing of this transaction, the Company and SA
Telecom entered into a management agreement pursuant to which the Company
managed the operations of SA Telecom from April 1, 1998 until the close of the
transaction whereby the Company was responsible for any losses from SA
Telecom's operations on or after April 1, 1998.

ACMI Acquisition

   In January 1999, the Company acquired substantially all of the assets of
Limit LLC; doing business as ACMI ("ACMI") a network marketing company with
approximately 2,500 independent agents. In connection with this transaction,
the Company issued 1 million shares of its common stock and assumed a note
payable of $1 million. Subsequent to year-end, the parties of this transaction
agreed to modify the transaction whereby the Company would, in consideration
for the issued shares of the Company's common stock, no longer be liable for
ACMI's $1 million note payable the Company had previously agreed to pay, and
acquire assets primarily consisting of the independent agent contracts, debit
card platform, and other associated assets.

Products and Suppliers

   MCI WorldCom, Frontier, AT&T, and Qwest were the principal underlying
providers of outbound and inbound long-distance services during fiscal year
1999 through multiple contracts. The Company believes its

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diversity of carrier contracts provides further flexibility and alternatives
for the Company in the event it is not able to continue to contract with any of
its current underlying carriers. For example, one carrier may offer the lowest
international rates to one country while another offers the lowest rate to a
different country. Under the terms of the Company's contracts with its various
carriers, the Company is able to choose which services and in what volume the
Company wishes to obtain the services from each carrier. This flexibility
enables the Company to minimize its costs for such services by purchasing those
services from the carrier offering the Company the best rates at a given time.

   In October 1998, EqualNet rejected, during its bankruptcy proceedings, its
contract with AT&T. AT&T had historically provided the majority of EqualNet's
underlying outbound and inbound long-distance services under a long-term
contract. Rather than negotiate a new contract with AT&T, which contained
certain minimum obligations through April 2000, EqualNet chose to acquire
services on a wholesale basis from another AT&T reseller.

Customer Service and Customer Management System

   The Company's operating subsidiaries' customer service function seeks to
develop long-term customer relationships by providing accurate billing
information and processing customer requests in a timely and efficient manner.
The responsibilities of the operations department include billing,
"provisioning" or processing orders with the underlying carriers, and
supporting independent marketing agents. The operations department receives
orders from independent marketing agents and from the sales department of
EqualNet and USC Telecom and then processes the orders for entry into the
appropriate subsidiary's database. Operations personnel interface with the
underlying carriers and billing companies for processing and procedural
matters.

   During the third quarter of fiscal year 1998 and continuing through the
fourth quarter of fiscal year 1999, the Company experienced billing
difficulties converting to various customer management and information systems
with billing capabilities. The initial conversion coincided with the management
of the SA Telecom customer base and the migration to a switch-based environment
which resulted in (a) considerable billing errors, (b) billing delays, and (c)
customer attrition. The Company believes its new cost rating, billing, and
customer care system has dramatically improved rating speed and billing
accuracy.

Customers and Marketing

 Customers

   The Company markets its long-distance services primarily to residential and
small business customers with monthly long-distance bills of less than $500.
For the year ended June 30, 1999, the monthly long-distance phone bill for an
average EqualNet customer was approximately $37. The Company does not have long
term contracts with its customers, but receives authorization from new
customers in connection with their order for service. In July, 1998, USC
Telecom acquired certain customers from SA Telecommunications. In January,
1999, USC Telecom and EqualNet acquired certain customers formerly serviced by
BCI at a foreclosure sale conducted by one of BCI's secured creditors.

   The former BCI customers are more geographically diversified and comprise
primarily small residential customers. The former SA Telecom customers are
primarily located in southern California and Texas and comprised mainly smaller
commercial users, similar to the customer base of EqualNet, but also include
some larger, dedicated service customers whose average monthly usage is larger
than the average EqualNet customer's usage. The average usage for the USC
Telecom customers located primarily in California historically has been $178
per month and the average usage for the USC Telecom customers located primarily
in Texas historically has been $73 per month.

 Marketing

   Historically, EqualNet has relied on independent marketing agents to market
its long-distance products. In the bankruptcy proceedings, EqualNet rejected
the marketing contracts for virtually all of its sales agents.

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Consequently, many of these agents may no longer be willing to continue to
market for EqualNet under new contractual arrangements. None of these former
agents have executed new agreements with EqualNet to continue as independent
marketing agents. The Company is currently evaluating several proposals for the
resumption of an agent program in order to increase its customer base.

Regulation

   The Company's provisioning of communications services is subject to
government regulation. The Federal Communications Commission ("FCC") regulates
interstate and international telecommunications, while each state regulates
telecommunications services originating and terminating within the same state.
Changes in existing regulations could have a material adverse effect on the
Company.

   The Company's marketing services, and its current and past direct marketing
efforts require compliance with relevant federal and state regulations
governing the sale of telecommunications services. The FCC and some states have
rules that prohibit switching a customer from one long distance carrier to
another without the customer's consent and specify how that consent can be
obtained and must be verified. Most states also have consumer protection laws
further defining the framework within which the Company's marketing activities
must be conducted. While directed at curbing abusive marketing practices,
unless carefully designed and enforced, such rules can have the incidental
effect of entrenching incumbent carriers and hindering the growth of new
competitors, such as the Company.

   Restrictions on the marketing of telecommunications services are becoming
stricter in the wake of widespread consumer complaints throughout the industry
for "slamming" (the unauthorized conversion of a customer's pre-selected
telecommunications carrier) and "cramming" (the unauthorized provision of and
billing for additional telecommunications services). The Telecommunications Act
of 1996 strengthened penalties against slamming, and the FCC has issued rules
tightening federal requirements on the verification of orders for
telecommunications services and establishing additional financial penalties for
slamming. In addition, many states have been active in restricting marketing
through new legislation and regulation, as well as through enhanced enforcement
activities. The constraints of federal and state regulation, as well as
increased FCC and state enforcement attention, could limit the scope and the
success of the Company's marketing efforts and subject them to enforcement
action.

   Allegedly to combat slamming, many local exchange carriers have initiated
"PIC freeze" programs that, once selected by the customer, require a customer
seeking to change long distance carriers to contact the local carrier directly
instead of having the long distance carrier contact the local carrier on the
customer's behalf. Many local carriers have imposed burdensome requirements on
customers seeking to lift PIC freezes and change carriers, and thereby make it
difficult for customers to switch to the Company's long distance service.

   Statutes and regulations designed to protect consumer privacy also may have
the incidental effect of hindering the growth of telecommunications carriers
such as the Company. The FCC has released rules severely restricting the use of
"customer proprietary network information" (information a carrier obtains about
its customers through their use of the carrier's services). These rules may
make it more difficult for the Company to market additional telecommunications
services (such as local and wireless), as well as other services and products,
to its existing customers, if and when the Company begins to offer such
services and products.

   The FCC requires the Company and other providers of telecommunications
services to contribute to the Universal Service Fund ("USF"), which helps to
subsidize the provision of local telecommunications services and other services
to low-income consumers, schools, libraries, health care providers, and rural
and insular areas that are costly to serve. The Company's contributions to the
universal service fund could increase over time, and some of the Company's
potential competitors (such as providers of Internet telephony) are not
currently, and in the future may not be, required to contribute to the USF.

   Beginning in the third quarter of fiscal year 1998, the Company began to be
assessed both universal service charges and Primary Interexchange Carrier
Charges ("PIC-C charges"). Although the funding of

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universal service and access charges are not new, the manner in which the
Company is having to pay for these items is new. Although the Company, and not
its underlying carriers, is now primarily responsible for the payment of these
charges, EqualNet has not experienced a lowering of its cost of service from
its underlying carriers in an amount equal to the increased amounts of the
assessments it has to pay for universal service and access charges. To the
extent the Company does not receive a lowering of its cost of service from its
underlying carriers equal in amount to its increased cost of business by virtue
of these assessments, its operating margins are diminished. The Company is
attempting to recoup at least a portion of the increase of these assessments by
passing these charges through, where permitted, to its end user customers. In
such circumstances, although the per-minute rates charged to the end user
customers are not increased, the effect is an increase to the Company's
customers in their cost of obtaining service.

   The FCC imposes additional reporting, accounting, record-keeping and other
regulatory obligations on the Company. The Company must offer interstate
services under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory. The Company must file tariffs listing the rates,
terms and conditions of the Company's service, but the FCC has proposed to
abolish some tariff filing requirements and instead mandate the posting of
similar information on the Internet. Although the Company's tariffs, and the
rates and charges they specify, are subject to FCC review, they are presumed to
be lawful and have never been contested. The Company may be subject to
forfeitures and other penalties for allegedly violating the FCC's rules if
contested.

   The vast majority of the states require the Company to apply for
certification to provide intrastate telecommunications services, or at least to
register or to be found exempt from regulation, before commencing intrastate
service. The vast majority of states also require the Company to file and
maintain detailed tariffs listing its rates for intrastate service. Many states
also impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations.

Employees

   As of June 30, 1999, the Company employed approximately 100 persons. The
Company considers relations with its employees to be good.

   Various members of management left the Company during fiscal 1999. Robert H.
Turner was removed by the Board of Directors as Chief Executive Officer of the
Company in July 1998. Bob Henson resigned as Chief Operating Officer in July
1998. Maurie Daignean, who was appointed as the Company's Chief Operating
Officer in July 1998 resigned in August 1998 to pursue other opportunities.
David Kerr resigned as Interim Chief Financial Officer in February 1999.

Item 2. Properties

   The Company leases approximately 32,000 square feet of general and
administrative office space in Houston, Texas, under leases with unaffiliated
third parties that expire in 2004. The Company's monthly rental obligation for
its facilities is approximately $29,000. During its bankruptcy proceeding, the
Company amended its lease to reduce the number of square feet of lease space
from 57,000 to 32,000, thereby reducing its monthly rental obligation from
approximately $54,000 to $29,000 per month. The Company also leases properties
in the cities in which its Switches have been installed.

                                       7
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Item 3. Legal Proceedings

   On August 7, 1998, Robert H. Turner, the Company's former Chief Executive
Officer filed suit against the Company alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims. Although the Company denies any wrongdoing or liability in the matter,
and intends to vigorously defend itself, settlement discussions have been held,
and this matter will most likely settle. The Company believes it has adequate
reserves for this matter.

   On September 17, 1998, Comerica Leasing Corporation filed suit against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings. A
settlement agreement was entered into by the parties dismissing the earlier
litigation and adding the Company as an obligor for the payment of the
settlement amounts. Pursuant to an agreement reached in the bankruptcy
proceedings of EqualNet Corporation, Comerica Leasing agreed to release the
Company from any liability under the settlement and underlying agreements in
exchange for payment of $265,000 plus the issuance of a warrant for the
purchase of up to 300,000 shares of Common Stock of the Company at an exercise
price of $1.50 per share for a period of five years from the date of the
agreement.

   On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit against the Company and Netco
Acquisition LLC alleging damages for breach of contract and other alleged
claims. The matters originated with a letter of intent wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000, an
additional 525,000 shares of Common Stock, and other damages. The Company
denies any wrongdoing or liability in this matter and intends to defend itself
against all claims of the plaintiffs. This action is in the initial stage of
discovery and proceedings. Accordingly, at this time the Company is unable to
determine the amount of exposure, if any, under this action.

   On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom and the Company for
operating losses for the period from April 1, 1998--July 22, 1998, damages for
delayed or unbillable revenue, delivery of shares of the Company's Series C
Senior Preferred Stock, and other items. On December 28, 1998, the court signed
an order approving those claims in the amount of approximately $812,000. The
Company and USC Telecom disputed the monetary claims asserted by SA
Telecommunications in its demand and filed a notice of appeal of the court's
order in the proceedings.

   On October 9, 1999, SA Telecommunications, Greyrock Business Credit, and the
Company presented an agreement to the SA Telecom bankruptcy court providing for
the settlement of the SA Telecommunications judgement and amounts owed to
Greyrock. The agreement calls for the payment of the remaining principal
balance of the promissory note to Greyrock, plus accrued but unpaid interest,
by the issuance of a number of shares of the Company's unregistered common
stock valued at the lesser of $0.28 per common share (as adjusted to account
for any stock split) or the market price of the unregistered common stock at
the date registration of the shares is effective. In addition, the agreement
calls for satisfaction of the remaining obligation to SA Telecommunications by
the payment of $150,000 cash plus the issuance of an amount of the Company's
unregistered common stock equal to approximately $660,000 valued at the lesser
of $0.28 per common share (as adjusted to account for any stock split) or the
market price of the unregistered common stock at the date registration of the
shares is effective. If the registration of these shares of the Company's
common stock is not effective as of October 31, 1999, the amount of the
Company's common stock to be issued will increase, over varying periods of time
from November 1, 1999 to January 30, 2000, from 7.5% to

                                       8
<PAGE>

22.5% of the amount to be ultimately issued. The Company has reserved the right
to repurchase the shares of the Company's common stock issued in settlement of
these obligations prior to January 31, 2000. The Company believes it has
adequate reserves recorded for this matter.

   As a result of liquidity problems, on September 10, 1998, EqualNet filed for
protection under Chapter 11 of Title 11 of the United States Code, in case
number 98-39561-H5-11 in the United States District Court for the Southern
District of Texas and Wholesale filed for protection under Chapter 11 of Title
11 of the United States Code, in case number 98-39560-H4-11 in the United
States District Court for the Southern District of Texas. On October 2, 1998,
Wholesale filed a motion seeking to convert its Chapter 11 reorganization
proceeding to a Chapter 7 liquidation proceeding. Pursuant to Sections 1107 and
1108 of the Bankruptcy Code, EqualNet managed its assets and operated its
business as a debtor-in possession pending confirmation of its reorganization
plan, which plan was confirmed on April 28, 1999, and consummated on or about
May 28, 1999. The plan of reorganization provided for the restructuring of
amounts and repayment terms for secured and unsecured creditors. In conjunction
with the confirmation and consummation of the reorganization plan, certain
debts were reduced resulting in an extraordinary gain of approximately $10.0
million.

   During 1997, EqualNet settled disputed claims with the attorneys general
from eleven states alleging violations of consumer protection statutes of those
states. The settlement amount, which was paid in March 1998, totaled $225,000
plus the issuance of certain customer credits and adjustments. The Company was
either not included as a party or was dismissed as a party before the entry of
any final judgment in any of these proceedings.

   From time to time the Company is involved in what it believes to be routine
litigation, or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

   Not applicable.

                                       9
<PAGE>

                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

   On May 7, 1999, the Company's Common Stock was conditionally moved to the
Nasdaq National Market ("Nasdaq") Small Cap Market under the trading symbol
"ENETC;" prior to this date the Company's Common Stock was traded on the Nasdaq
under the symbol "ENET." Continued trading on The Nasdaq SmallCap Market is
dependent upon the Company's meeting certain conditions, including the
maintenance of the minimum bid price of $1 per share as required by both Nasdaq
and The Nasdaq SmallCap Market. The table below sets forth the high and low
sales prices of the Common Stock for the fiscal years 1999 and 1998, as
reported by Nasdaq. The quotations reflect inter-dealer prices, without retail
mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
                                                        Fiscal Year Ended
                                                         June 30,
                                                       Price Range
                                                 -----------------------
                                                   High           Low
                                                 ---------      --------
  <S>                                            <C>            <C>
  1999
  Fourth Quarter................................    $1 7/32       $  5/8
  Third Quarter.................................    $1 1/2        $  9/16
  Second Quarter................................    $1 1/4        $  13/16
  First Quarter.................................    $1 3/8        $  9/32

  1998
  Fourth Quarter................................    $3            $1 13/16
  Third Quarter.................................    $2 31/32      $  13/16
  Second Quarter................................    $2 1/8        $1 1/4
  First Quarter.................................    $2 7/16       $  7/8
</TABLE>

   On September 24, 1999, the last sales price per share of the Company's
Common Stock, as reported by Nasdaq, was $0.25.

   On September 24, 1999, the Company's 28,313,822 shares of Common Stock
outstanding were held by approximately 2,900 shareholders of record.

   The Company has never declared or paid a dividend on the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Company. The Company does not expect
to pay cash dividends in the foreseeable future. The Company is prohibited from
declaring dividends on the Common Stock unless and until the Company has paid
all accrued and outstanding dividends on the Company's Preferred Stock.
Furthermore, the Company's existing credit facility contains restrictions
relating to the payment of dividends and other distributions. The Company
intends to retain any future earnings to finance the expansion and development
of its business. The declaration and payment in the future of any Common Stock
cash dividends will be at the election of the Company's Board of Directors and
will depend upon the earnings, capital requirements and financial position of
the Company, existing or future loan covenants, general economic conditions'
and other pertinent factors.

   The following sets forth required information regarding all securities sold
without registration (and not previously reported) during fiscal year 1999:

   On August 19, 1998, the Company issued a warrant to purchase 22,500 shares
of Common Stock at a exercise price of $1.86 to Lance Hack in connection with a
severance agreement between Mr. Hack and the Company. Mr. Hack is a former
employee of the Company.

   On September 4, 1998, the Company issued 3,700 shares in the aggregate of
Series D Preferred Stock and a warrant to purchase 666,232 shares of Common
Stock at a exercise price of $0.9006 in connection with the

                                       10
<PAGE>

Note Issuance Transaction described more fully in the Company's Form 10-Q for
the quarter ended September 30, 1998.

   On January 4, 1999, the Company issued 5,380 shares of Series C Preferred
Stock, convertible under certain circumstances to 53,580 shares of Common
Stock, to SA Telecommunications, Inc. in connection with the SA
Telecommunications asset purchase.

   On January 27, 1999, the Company issued a warrant to purchase 594,000 shares
of Common Stock at a exercise price of $1.33 to RFC Capital Corp. in connection
with the purchase of the Brittan Communications International Corporation
assets.

   On February 17, 1999, the Company issued 1,000,000 shares of Common Stock to
Limit, LLC as partial fulfillment of the Company's obligations under the Asset
Purchase Agreement.

   On February 17, 1999, the Company issued 105,000 shares of Common Stock to
Zane D. Russell in connection with a finder's fee owed. Russell is a former
Director and Officer of the Company and played a material part in coordinating
the ACMI Asset Purchase.

   On March 9, 1999, the Company issued a warrant to purchase 250,000 shares of
Common Stock at exercise prices ranging from $1.125 to $2.50 to Market Pathways
Financial Relations, Inc. in connection with services to be rendered to the
Company.

   On March 24, 1999, the Company issued 100,000 shares of Common Stock to
Michael L. Hlinak in connection with a severance agreement between Mr. Hlinak
and the Company. Mr. Hlinak is a former Officer of the Company.

   On March 24, 1999, the Company issued 320,000 shares of Common Stock to
Vinson & Elkins LP in connection with payment for legal services rendered.

   On March 24, 1999, the Company issued 30,000 shares of Common Stock to Dr.
Ronald J. Salazar in connection with payment for independent contractor
services rendered. Dr. Salazar is a Director of the Company.

   On March 24, 1999, the Company issued 136,296 shares of Common Stock in the
aggregate to the following individuals: 62,529 to Dr. Ronald J. Salazar, 19,
243 to John "Ike" Epley, 30,747 to Mark Willis, and 23,777 to Mitchell H.
Bodian. All four individuals are Directors of the Company. The issuances
reflect payments for Director services in stock in lieu of cash.

   On April 14, 1999, the Company issued 759,000 shares of Common Stock and an
additional 150,000 warrant to purchase Common Stock at exercise prices varying
from $1.00 to $2.00 to the LaMonda Family Trust. In return, the LaMonda Family
Trust paid the Company $500,000 cash.

   On May 28, 1999, the Company issued a warrant to purchase 300,000 shares of
Common Stock at an exercise price of $1.50 per share to Comerica Leasing in
connection with a settlement between Comerica and the Company.

   On June 1, 1999, the Company issued a warrant to purchase 150,000 shares of
Common Stock at an exercise price of $0.68 per share to Brittan Communications
International Corporation in connection with a settlement between Brittan and
the Company.

   On June 10, 1999, the Company issued 833,333 shares of Common Stock to
Infinity Investments in return for $500,000, issued 833,333 shares of Common
Stock to IEO Holdings in return for $500,000, issued 500,000 shares of Common
Stock to James Crane in return for $300,000, issued 1,250,000 shares of Common
Stock to The Willis Group, LLC in return for $750,000, issued 250,000 shares of
Common Stock to James Lineberger in

                                       11
<PAGE>

return for $150,000, and issued 833,333 shares of Series E Preferred Stock
which converts to 833,333 shares of Common Stock at the Company's sole option
to MCM Partners in return for $500,000.

   The Company issued each warrant referenced above without registration in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended.

Item 6. Selected Financial Data

   The following table sets forth certain selected consolidated financial data
from the audited consolidated financial statements of the Company for each of
the five years ended June 30, 1999. This information should be read in
connection with and is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
under Item 8 of this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                            Fiscal Year Ended June 30,
                          -------------------------------------------------------------------
                             1995          1996          1997          1998          1999
                          -----------  ------------  ------------  ------------  ------------
<S>                       <C>          <C>           <C>           <C>           <C>
INCOME STATEMENT DATA:
Sales...................  $67,911,000  $ 78,355,000  $ 46,588,000  $ 24,877,000  $ 32,436,000
Cost of sales...........   54,655,000    61,807,000    34,481,000    21,992,000    30,528,000
Selling, general and
 administrative
 expenses...............    8,936,000    13,720,000    12,453,000    14,139,000    13,372,000
Depreciation and
 amortization...........    1,356,000     5,934,000     6,000,000     4,735,000    10,559,000
Write down of assets....           --     6,882,000     4,400,000     1,134,000     3,070,000
                          -----------  ------------  ------------  ------------  ------------
Operating income
 (loss).................    2,964,000    (9,988,000)  (10,746,000)  (17,123,000)  (25,093,000)
Other income (expense)..      (93,000)   (1,089,000)   (1,889,000)     (820,000)   (2,918,000)
                          -----------  ------------  ------------  ------------  ------------
Income (loss) before
 federal income taxes
 and extraordinary
 item...................    2,871,000   (11,077,000)  (12,635,000)  (17,943,000)  (28,011,000)
Provision (benefit) for
 federal income taxes...      507,000    (2,660,000)    2,346,000            --            --
                          -----------  ------------  ------------  ------------  ------------
Net income (loss) before
 extraordinary item.....  $ 2,364,000  $ (8,417,000) $(14,981,000) $(17,943,000)  (28,011,000)
Extraordinary gain on
 forgiveness of debt....  $        --  $         --  $         --  $         --  $ 10,022,000
Net Income (loss).......  $ 2,364,000  $ (8,417,000) $(14,981,000) $(17,943,000) $(17,989,000)
Net loss per share--
 basic and diluted......               $      (1.40) $      (2.46) $      (1.64)        (1.11)
                                       ------------  ------------  ------------  ------------
Pro forma net
 income(1)..............  $ 1,751,000
                          -----------  ------------  ------------  ------------  ------------
Pro forma net income per
 share..................  $      0.38
                          -----------
Weighted average number
 of shares(2)...........    4,618,043     6,017,332     6,096,932    10,943,630    19,936,124
                          -----------  ------------  ------------  ------------  ------------
Cash dividends per
 share(3)...............  $      0.61  $         --  $         --  $         --  $         --
                          -----------  ------------  ------------  ------------  ------------
BALANCE SHEET DATA:
Cash and equivalents....  $ 3,527,000  $    382,000  $    828,000  $    460,000  $    266,000
Working capital
 (deficiency)...........    7,772,000    (3,161,000)   (4,667,000)  (13,560,000)   (7,673,000)
Total assets............   39,316,000    34,596,000    19,162,000    27,760,000    25,714,000
Total long-term debt and
 capital leases, net of
 current portion........    1,143,000        45,000            --            --     5,301,000
Total shareholders'
 equity (deficit).......   20,706,000    12,384,000    (1,689,000)    2,958,000     3,728,000
</TABLE>
--------
(1)  From July 1, 1992 to March 7, 1995, the Company had reported for federal
     income tax purposes as an S corporation. Accordingly, all taxable earnings
     of the Company during that time have been taxed directly to the
     shareholders of the Company at their individual tax rates. A pro forma
     adjustment to reflect federal and state income taxes as if the Company
     were a C corporation is presented for the respective periods at an
     estimated effective rate of 39%.
(2)  Shares used to compute pro forma net income per share are based upon the
     actual weighted-average shares outstanding giving retroactive effect to
     the Company's reorganization which occurred March 8, 1995.
(3)  Shares used to compute cash dividends per share are based upon 4,000,000
     shares outstanding beginning in 1993 and for the remaining periods as a
     result of the reorganization. On March 7, 1995, the Company declared a
     final dividend of $0.53 per share to the shareholders of record on such
     date. The dividend was paid on March 24, 1995, to the shareholders of
     record on March 7, 1995.

                                       12
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

   The following discussion of operations and financial condition of the
Company should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K.

Overview

   Because of the continued erosion of market share and continuing declines in
cash flow, one of the Company's wholly-owned subsidiaries, EqualNet Corporation
("EqualNet"), and EqualNet Wholesale Services, Inc. ("Wholesale"), a non-
operating wholly-owned subsidiary of EqualNet, filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code
(the "Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the
United States Bankruptcy Court for the Southern District of Texas (the
"Bankruptcy Court"), Houston, Texas. On October 2, 1998, Wholesale filed its
motion to convert its bankruptcy proceeding from a Chapter 11 reorganization to
a Chapter 7 liquidation. Pursuant to Sections 1107 and 1108 of the Bankruptcy
Code, EqualNet managed its assets and operated its business as a debtor-in-
possession pending confirmation of its reorganization plan, which plan was
confirmed on April 28, 1999. The plan of reorganization provided for the
restructuring of amounts and repayment terms for secured and unsecured
creditors. In conjunction with the confirmation and consummation of the
reorganization plan, certain debts were reduced, resulting in an extraordinary
gain of approximately $10.0 million. As voting control of the Company's common
stock remained the same as a result of the confirmation of the plan of
reorganization, fresh start accounting was not used in accordance with AICPA
Statement of Position 90-7.

   During fiscal year ended June 30, 1999, the approximate number of billable
minutes increased to 146 million from 85 million minutes for the fiscal year
ended June 30, 1998. The approximate number of customers increased to 59,000 in
June 1999 as compared to 30,000 in June 1998. These increases are primarily
attributable to the BCI and SA Tel acquisitions during fiscal year 1999.

   During the first three quarters of fiscal 1998, EqualNet's primary costs,
costs of sales, were variable and consisted of the underlying "wholesale" cost
of long-distance services from its underlying providers, commissions to
independent agents, and billing costs. During the fourth quarter of fiscal year
1998, EqualNet entered into an agreement with Netco to provide for operation of
Netco's nine switches ("switches") and build out of network facilities in
exchange for the right to carry traffic over the network. At this time,
EqualNet became a switch-based carrier with new fixed costs (primarily
maintenance and network management). As EqualNet did not have the customer
density to support the costs associated with the network facilities, EqualNet
incurred losses in fiscal years 1999 and 1998 which created even larger cash
flow deficits.

   EqualNet historically acquired customer accounts from independent marketing
agents on an individual price per order basis, with some agents receiving an
initial payment to help defer the cost of acquiring the orders which would be
offset by future commissions earned (agent advances) and others receiving a
higher initial payment with no future commission owed (deferred acquisition
costs). This allowed EqualNet to use the agents as a vehicle to outsource
telemarketing activities.

   The Company encountered significant operational problems as a result of the
attempted conversion from one billing system to another. This situation kept
EqualNet from being able to calculate and pay its marketing agents the
commissions due them on either a timely or regular basis. In addition, these
operational problems resulted in delays in provisioning new customer orders
from some of these agents, causing delays in generating revenues from these
customers and, in some instances, the loss of new customer orders. These delays
also adversely impacted revenues and cash flows for the Company. As a result,
the Company's and EqualNet's relationships with marketing agents deteriorated.
See Liquidity and Capital Resources.

   The Company's selling, general and administrative costs are primarily the
costs of back office operations including billing, provisioning and customer
service. The Company also has devoted significant resources to the

                                       13
<PAGE>

information technology necessary to support customer service with the purchase
of and successful implementation of a new and effective information system.

Reorganization of Equalnet Corporation

   As mentioned previously, on September 10, 1998, EqualNet and Wholesale filed
for protection under Chapter 11 of the United States Bankruptcy Code. In the
initial bankruptcy filing, EqualNet reported total assets of $20.7 million and
total liabilities of $57.6 million. As of that date, the largest individual
creditor of EqualNet was the Company, which was owed approximately $33.0
million, representing approximately 57.2% of EqualNet's total recorded
liabilities. On October 2, 1998 Wholesale filed its motion to convert its
bankruptcy proceeding from a Chapter 11 reorganization to a Chapter 7
liquidation.

   Although EqualNet's filing was a voluntary petition, it was in default on
its debt and was in arrears on most of its vendor payables. Other than the
Company, the largest creditor of EqualNet was AT&T, which was owed
approximately $9.0 million. EqualNet rejected its contract with AT&T in the
bankruptcy proceeding and entered into an agreement as to the amount of AT&T's
claim for pre-petition liabilities as being $5.8 million as well as the amount
of its administrative claim as being $0.3 million. Although it did not own
them, EqualNet was the entity operating the network of nine switches, and it
had incurred a substantial amount of additional indebtedness to vendors
associated with those operations.

   EqualNet has reorganized its business under bankruptcy protection, and its
plan of reorganization was confirmed on April 28, 1999. The plan of
reorganization provided for the restructuring of amounts owed and repayment
terms for secured and unsecured creditors. In conjunction with the confirmation
and consummation of the reorganization plan, certain debts were reduced
resulting in an extraordinary gain of approximately $10.0 million. The
liabilities compromised by the confirmed plan were recorded at the present
values of the amounts to be paid.

Consolidated Results of Operations

   For the year ended June 30, 1999, consolidated revenues increased
approximately $7.6 million, or 30.3% when compared to 1998. This increase is
primarily attributable to the company's acquisition of the SA Telecom customer
base in July of 1998 and the acquisition of the BCI customer base in January of
1999. The SA Telecom and BCI customer base acquisitions contributed $10.9
million and $7.2 million, respectively, of revenues in fiscal year 1999. The
consolidated net loss for the year ended June 30, 1999 increased by $0.1
million, or 0.2%. Included in the 1999 results was an extraordinary gain of
approximately $10.0 million due to the reduction of certain debts in connection
with the confirmation and consummation of EqualNet's reorganization plan.
Excluding this extraordinary gain, the consolidated net loss for the fiscal
year ended June 30, 1999 increased approximately $10.1 million, or 56.1%,
primarily a result of the writedowns of customer acquisition costs ($1.8
million) trade accounts receivable ($7.1 million), as well as an increase in
accounting, legal, and other professional fees associated with EqualNet's
bankruptcy proceedings of $0.5 million.

   For the year ended June 30, 1998, consolidated revenues decreased
approximately $21.7 million, or 46.6%, when compared to 1997. This decrease was
primarily attributable to a decrease in the number of customer accounts and a
corresponding decrease in billable minutes. This decrease in the number of
customers was directly attributable to the Company's problems associated with
the conversion of a new customer care and billing system, as well as the
marketing efforts of the Company's competitors.

   Cost of sales for the year ended June 30, 1999 increased approximately $8.5
million, or 38.8% when compared to 1998. This increase was primarily due to the
increase in sales volumes associated with the acquisitions of the SA Tel and
BCI customer bases in fiscal year 1999, as well as an increase to bad debt
expense. Bad debt expense increased $4.8 million, or 286.1%, when compared to
fiscal year 1998 due to problems primarily associated with the Company's
previous billing software system: customers routinely received many of their
invoices several months late and were subsequently unwilling to pay amounts
due.

                                       14
<PAGE>

   Cost of sales for the year ended June 30, 1998 decreased $12.5 million, or
36.2%, when compared to 1997. This decrease was primarily due to a decrease in
the Company's total sales as a result of the customer attrition mentioned
above. 1998 amounts also included $3.4 million of costs associated in
connection with the implementation of the Company's switches, which were not
incurred in fiscal year 1997.

   Selling, general, and administrative expenses for the year ended June 30,
1999 decreased $0.8 million, or 5.4%, when compared to 1998. This decrease was
primarily attributable to decreases in the Company's infrastructure during the
year when compared to 1998: until the fourth quarter of fiscal year 1998, the
Company's infrastructure was better-suited for a much larger company. This
decrease was offset by increases in accounting, legal, and other professional
fees associated with EqualNet's bankruptcy proceedings of $0.5 million.

   Selling, general, and administrative expenses for the year ended June 30,
1998, increased approximately $1.7 million, or 13.5% when compared to 1997.
This increase was primarily attributable to the Company's infrastructure being
in excess of what was required to maintain the Company's level of operations.

   Depreciation and amortization increased approximately $5.8 million, or
122.9% for the year ended June 30, 1999 when compared to 1998. This increase is
primarily attributable to the amortization of the customer acquisition costs of
the 1999 acquisitions of the SA Tel and BCI customer bases ($4.6 million), and
a full year of depreciation associated with the Company's switches ($2.7
million) which were acquired in the fourth quarter of fiscal year 1998.

   Depreciation and amortization for the year ended June 30, 1998 decreased
$1.3 million, or 21.0%, as compared to 1997. This decrease was primarily
attributable to the decreased carrying value of purchased customer accounts; in
fiscal year 1997, the Company recorded an approximate $4.4 million non-cash
charge to earnings to reduce the carrying value of purchased accounts to an
estimate of future discounted cash flows of the purchased accounts.

   Other expenses increased $2.1 million, or 255.8% for the fiscal year ended
June 30, 1999 when compared to 1998, primarily as a result of increased
interest expense of $1.7 million. Other expenses decreased by $1.1 million, or
56.5%, in fiscal year 1998 as compared to 1997 primarily due to payments of
penalties, settlement costs, and legal fees which were accrued in fiscal year
1997.

Liquidity and Capital Resources

   The Company's primary cash requirements, in addition to normal operating
expenses, are debt service, potential acquisitions, and sustaining capital
expenditures. To date, the external funds necessary to fund the Company's cash
requirements have been provided primarily from asset-based financing and third-
party sources of capital. The Company has a working capital credit facility
with RFC Capital Corporation ("RFC") whereby RFC purchases the Company's
receivables and unbilled call detail records and periodically remits back to
the Company excess collections over amounts funded less financing fees. The
maximum allowable amount of funding under the RFC credit facility is $10.0
million.

   The Company's receivable purchase agreement at June 30, 1999 provides for a
funding base dependent upon the amount and aging of accounts receivable and
unbilled call detail records; RFC can cease funding of new receivables without
prior written notice at its option. Should RFC cease to provide financing in
accordance with its option, the Company would be forced to seek immediate
replacement of the facility to provide interim working capital; current sources
of funds from operations and working capital would be insufficient to provide
funds adequate to continue funding operations.

   The Company expects to fund capital expenditures through additional
borrowings and equity transactions. Interest payments are expected to be paid
from cash flows from operating activities; debt principal payments will be met
through cash flows from operating activities and/or additional borrowings as
they become due or by the issuance of additional equity instruments.

                                       15
<PAGE>

Cash Used in Operating Activities

   Net cash provided by operating activities was $3.9 million for 1999. This
amount was $1.0 million less than the $4.9 million used in operating activities
in 1998. This decrease in cash flow used in operating activities was primarily
the result of increased net loss for the year and higher non-cash depreciation
and amortization charges, as well as an increased non-cash charge for writeoffs
of long term assets. The increased overall change in cash used in operating
activities was partially offset by lower cash inflows relative to net changes
in operating assets and liabilities. This decrease was primarily due to the
non-cash writeoff of customer accounts determined to be uncollectible during
the year in the amount of $7.1 million, as well as the relief of certain
obligations in connection with EqualNet's bankruptcy proceedings.

Cash Used in Investing Activities

   Net cash used in investing activities was $1.2 million in 1999, compared to
$10.1 million in 1998. The decrease in funds utilized in investing activities
was primarily attributable to the purchase of the Company's Switches in 1998,
offset by the consideration paid in connection with the SA Telecom acquisition
in 1999.

Cash Provided by Financing Activities

   Net cash provided by financing activities was $4.9 million in 1999, compared
to $14.6 million provided by financing activities in 1998. This decrease is
primarily due to 1998 non-recurring items such as the $9.4 million issuance of
the Company's common stock and warrants.

Debt Facilities

   In connection with the SA Telecom acquisition, the Company assumed a note
payable of approximately $4.0 million. In August 1998, this note was paid off
through the proceeds of various new third-party loans and the proceeds of a new
note agreement in the amount of approximately $560,000. This new note agreement
bears interest at a rate of prime plus 2.5% and is secured by the assets of USC
Telecom. The principal balance of this new note was due on February 22, 1999.
The Company is currently in default of this note and the corresponding debt is
classified as debt in default as of June 30, 1999.

   In September 1998, the Company executed a loan agreement in favor of the
Willis Group of approximately $0.3 million for certain advances made on behalf
of the Company. This note is secured by the assets of the Company and each of
its subsidiaries, bears interest at a rate of 11% per annum, and is due January
31, 2000. Additionally, this note contains an automatic monthly renewal period
unless the Willis Group presents a written demand for the payment of principal
and accrued interest.

   On July 31, 1998, the Company issued two 6% Senior Secured Convertible Notes
due in 2001 (the "2001 notes") in the amount of $1.5 million each to the Willis
Group and an accredited investor. The 2001 Notes were convertible into a
variable number of shares of the Company's common stock and were issued with an
original issue discount of approximately $0.1 million for each note. The 2001
Notes accrued interest at an annual rate of 6% and interest payments were due
quarterly. The Company's obligations under the 2001 notes were secured by
certain collateral of the Company. In connection with the issuance of the 2001
Notes, the Company issued to each of the Willis Group and the accredited
investor warrants to purchase approximately 333,000 shares of the Company's
common stock at a purchase price of $0.90 per share; these warrants expire in
September 2003. Any holder of a 2001 note had the right to convert, in whole or
in part, into shares of the Company's common stock. The holders of the 2001
Notes agreed to exchange these notes for Series F Preferred Stock.

Working Capital and Long Cash Cycle

   Customer billings for long distance services are generated from detailed
call records which are generally available from the carriers on a weekly basis
following the previous week's customer usage, and from the

                                       16
<PAGE>

switches on a daily basis following the day of customer usage. Customer
invoices usually are generated on a monthly basis for the direct-billed
customers and weekly for the LEC billed customers and are due upon receipt by
the customer. However, the Company historically collects a large portion of
receivables after the scheduled due date, resulting in an average cash cycle of
in excess of 90 days. Since the Company's underlying carriers typically have
required payment within 35 days following the month of usage, delays in receipt
of customer payments have resulted in significant working capital needs.

Management's Plans to Return to Profitability

   The Company's management is continuing actions to strengthen the financial
position of the Company. New products are being developed to significantly
enhance sales and revenue, including (i) bundled minute long distance products
resembling cellular offerings, (ii) wholesale international rates for retail
customers (iii) prepaid debit-card, (iv) advertiser-sponsored long distance and
(v) the pursuit of acquisitions expected to be accretive to earnings. The
Company is also considering entering the wholesale international long distance
market, offering local service as a competitive local exchange carrier, and
offering internet access. Additionally, the Company is evaluating several
proposals for the resumption of an agent program in order to increase its
customer base, as well as negotiating with several third parties for possible
acquisitions to form strategic alliances in order to maximize the utilization
of the Switches.

   The Company believes the new product offerings noted above are particularly
significant to increasing the Company's revenues and returning to
profitability. Furthermore, management believes the Company must increase its
innovation and not depend on competitive pricing alone in order to become more
competitive in the marketplace. Most of the new product offerings noted above
are pricing packages only and will not require a significant amount of capital.
Any new product offerings requiring technology advancements will most likely
come from strategic alliances or potential mergers. Financing for potential
strategic alliances or mergers is expected to come from the issuance of the
Company's common stock.

   In order to provide financing to support operations during the next twelve
months, the Company must also continue to increase revenue generated from its
existing resources. Specific actions to maximize revenue generated by the
switch network include (i) placing dedicated customers on the network via
connectivity to a local switch, (ii) port leasing of switch assets and (iii)
international product offerings accessed through the switches. In addition, the
Company is continuing to reduce its primary carrier costs for its existing
customer base. The Company continues to make improvements in its billing and
MIS systems to more accurately bill customers, maximize customer revenue and
ensure proper audit of vendor invoices related to the cost of service. The
Company has also recently implemented a cost reduction program, and continues
to refine these efforts, related to general, administrative, and overhead
expenditures. In addition to utilizing the Switches to provide transmission of
its customer traffic, the Company is focusing on offering bundled services to
its customers, mainly long-distance service, internet access, and local
service.

   Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek possible
strategic alliances and business combinations in order to more rapidly
implement its plans for increasing the service offerings or for reducing costs
of the Company. Management is attempting to balance the cash flows from
operations to meet current needs, and is continuously seeking additionally
capital resources to fund the expansion of service offerings of the Company.
Should capital resource requirements to achieve the management's plan to return
to profitability significantly exceed management's ability to meet those needs,
the Company's ability to return to profitability could be significantly delayed
or impaired.

Seasonality

   The Company's long distance revenue is subject to seasonal variations.
Because much of the Company's revenue is generated by non-residential
customers, the Company traditionally experiences decreases in long-distance
usage and revenue in those periods with holidays. In past years the Company's
long-distance traffic,

                                       17
<PAGE>

which is primarily non-residential, has declined slightly during the quarter
ending December 31 due to the November and December holiday periods.

Year 2000

   The Company recognizes the challenges associated with year 2000 issues
("Y2K") and has undertaken a comprehensive review and testing of its computer
systems to identify Y2K-related issues associated with any items of software or
hardware used in its business operations. Most of the software systems used by
the Company are licensed from third-parties and are Y2K compliant and have been
upgraded to Y2K compliant releases before the end of calendar year 1999. This
issue has been addressed by the Company in multiple phases, including
assessment, remediation, testing, and implementation, and progress is being
monitored by the Company's senior management. All material systems, including
non-information technology systems which may house non-compliant, embedded
technology are being or have been evaluated.

   In addition to addressing the Company's own systems, as described above, the
Company must assess the state of readiness of the systems of other entities
with which it does business. Failure by these third-parties to adequately
resolve their Y2K issues could have a material adverse effect on the Company's
operations.

   The Company believes its success on being Y2K compliant will not be
conclusively known until the year 2000 is actually reached and beyond. Although
failure by one or more of the Company's own systems could result in lost
revenues and/or additional expenses required to carry out manual processing of
transactions, the Company cannot predict the effect external forces could have
on its business. Failures by banking institutions, governmental entities, and
others could have far-reaching effects on the entire economy and the Company.

   The Company's operations (including information technology and non-
information technology systems) are in varying states of readiness for
compliance with Y2K issues. The initial assessment, remediation, and testing
phases have been completed for substantially all of the Company's operations,
and implementation activities have also been completed. The Company completed
all phases of its Y2K program prior to December 31, 1999.

   The Company believes it is not possible to determine with certainty all Y2K
problems affecting the Company have been identified or corrected. The number of
devices which could be affected and the interactions among theses devices are
simply too numerous. In addition, the Company cannot accurately predict how
many failures related to the Y2K problem will occur or the severity, duration,
or financial consequences of such failures. The Company has contingency plans
to define and address the worst-case scenario likely to be faced by the
Company.

   Expenses incurred by the Company related to assessing, remediating, and
testing its information technology systems, which were not material, have been
expensed as incurred and funded from operations. The Company does not
anticipate the cost to become fully Y2K compliant will be material.

Information Regarding Forward-Looking Statements

   This filing includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are identified as any
statement which does not relate strictly to historical or current facts. They
may use such words as "anticipate," "continue," "estimate," "expect," "may,"
"will," or other similar words. These statements discuss future expectations or
contain projections. Specific factors which could cause actual results to
differ from those in the forward-looking statements include:

  . Customer attrition rates in excess of those anticipated;

  . Increased price competition for long distance services;

  . Changes in governmental policy, regulation, and enforcement;

                                       18
<PAGE>

  . The company's ability to integrate any acquired operations into its
    existing operations;

  . The Company's ability to successfully identify and close strategic
    acquisitions and make cost-saving changes in operations;

  . The condition of the capital and equity markets in the United States; and

  . The Company's ability to continued to receive favorable payment terms
    from its creditors.

   The Company disclaims any obligations to update the above list or to
announce publicly the results of any revisions to any of the forward-looking
statements to reflect future events or developments.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

   The Company is subject to market risk exposure related to changes in
interest rates on its borrowing and receivable sales facilities. These
instruments carry interest at a pre-agreed upon percentage point spread over
the prime interest rate or U.S. Treasury Rate Index. At June 30, 1999 and 1998,
the Company had $8.7 million and $5.8 million, respectively outstanding under
its debt facilities with variable interest rates. Based on these balances, an
immediate change of one percent in the interest rate would cause a change in
interest expense of approximately $87,000 and $58,000, or $0 and $0 per diluted
share, respectively, on an annual basis. The Company has two loans totaling
approximately $0.3 million with fixed interest rates of 11%. The interest rate
risk on these loans is not material to the Company or its operations. The
Company's objective in maintaining these variable rate borrowings is the
flexibility obtained regarding lower overall cost as compared with fixed-rate
borrowings.

Item 8. Financial Statements and Supplementary Data

   The financial statements and supplementary financial information required to
be filed under this Item are presented on pages 41 through 61 of this Annual
Report on Form 10-K, and are incorporated herein by reference.

Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

   None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

   The following table sets forth the names, ages and titles of the Company's
directors and executive officers as of October 13, 1999.

<TABLE>
<CAPTION>
                                                                           Year Term As
                                                                             Director
          Name            Age                 Position(s)                  Will Expire
          ----            ---                 -----------                  ------------
<S>                       <C> <C>                                          <C>
Mark A. Willis..........   31 Chairman of the Board, Director                  2000
Mitchell H. Bodian......   48 President, Chief Executive Officer, Director     1999
William D. Rhodes, Jr...   51 Chief Operating Officer
Michael P. Gallagher....   32 Chief Financial Officer
John Isaac "Ike" Epley..   32 Director                                         1999
Ronald J. Salazar.......   50 Director                                         1998
</TABLE>

   Mark A. Willis has served as Chairman of the Board and a director of the
Company since March 1998. Mr. Willis founded the Willis Group, an investment
fund, in 1997 and serves as its President. The fund has made investments in
industries such as offshore oil platform equipment, geophysical services, oil
and gas production, telecommunications, and an aircraft parts supplier. Before
forming the Willis Group, Mr. Willis

                                       19
<PAGE>

worked at Eagle USA Airfreight, an air freight forwarder, for two and a half
years, where he rose to the position of Regional Sales and Marketing Manager.
Before that, Mr. Willis served as a marketing and sales representative for
Talent Tree, a temporary help agency providing primarily clerical and office
staffing services.

   Mitchell H. Bodian has served as President and Chief Executive Officer since
July 1998 and as a director of the Company since March 1998. Mr. Bodian has
been the Managing Director of Bodian Associates, an investment banking firm
providing financial advisory services to middle market companies, since 1990.
Bodian Associates specializes in providing merger and acquisition services to
niche telecommunications services providers. In October 1996, Mr. Bodian was
appointed as Chapter 11 Trustee for Conectco, a switchless reseller that sold
telephone debit cards and provided one plus telecommunications services, and
that filed for the protection under the United States bankruptcy laws in August
1996. Mr. Bodian has approximately twenty years of experience in management
consulting and investment banking with Kearney Management Consultants, Warburg
Paribas Becker and Merrill Lynch. Mr. Bodian holds an MBA from Stanford
Business School.

   William D. Rhodes, Jr. has served as Chief Operating Officer since February
1999. Mr. Rhodes has over 13 years executive telecommunications management
experience including roles in domestic and international marketing, sales and
operations addressing global private networks, interexchange carrier ("IXC")
and competitive local exchange carrier ("CLEC") businesses. Mr. Rhodes has an
MSEE and BSEE from the University of Missouri at Columbia and has been involved
in state-of-the-art electronics, navigation, and communication projects
throughout his career.

   Michael P. Gallagher has been an officer of the Company since September
1999. Prior to joining the Company, Mr. Gallagher spent the past eight years
with PricewaterhouseCoopers, an international accounting and business advisory
firm. A CPA, Mr. Gallagher received his MBA from Texas A&M University and his
BBA in Accounting from the University of Texas at Tyler.

   John Isaac "Ike" Epley has served as a director of the Company since March
1998. Mr. Epley has been a Managing Director of Omni Ventures, L.L.C., a
venture capital and investment banking firm, since August 1995. He also has
been a Managing Director of Omni Securities, L.L.C. , a registered
broker/dealer, since its inception in November 1997. He is a registered
Principal and General Securities Representative. Mr. Epley served as Vice
President of Alex Brown & Sons, an investment banking firm in Houston, from
January 1993 to 1995 where Mr. Epley focused on institutional fixed income
sales. His clients included large multinational companies, financial
institutions, insurance companies and money management firms.

   Ronald J. Salazar, Ph.D. has served as a director of the Company since March
1998. Dr. Salazar received his Ph.D. in business administration from the
University of Texas in 1990 in the area of Strategic Management and Competitive
Strategy. Since 1995, Dr. Salazar has been a partner in the management
consulting firm of Palladian Analysis & Consulting, L.L.C. in Houston, Texas.
Prior to that Dr. Salazar was an assistant professor at the University of
Houston and Idaho State University since 1988 teaching management courses. Dr.
Salazar is married to Mr. Willis' aunt.

 Section 16(a) Beneficial Ownership Reporting Compliance

   Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, the Company believes during the fiscal year ended June 30, 1999, all
officers, directors and greater than 10% shareholders complied with all filing
requirements applicable to them.

Section 16(a) Beneficial Ownership Reporting Compliance

   Section 16(a) of the Securities Exchange Act of 1934 requires Equalnet's
officers, directors and persons who own more than 10% of a registered class of
Equalnet's equity securities to file Form 3, Form 4 and Form 5 reports of
ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish
Equalnet with copies of all Section 16(a) reports they file.

                                       20
<PAGE>

   Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to Equalnet during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, Equalnet believes that during the fiscal year ended June 30, 1999,
all officers, directors and greater than 10% shareholders complied with all
filing requirements applicable to them, except that Dean H. Fisher and James T.
Harris failed to file timely Form 5s. Messrs. Fisher and Harris completed and
filed delinquent Form 5s on October 13, 1998.

Item 11. Executive Compensation

               COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION

   Dr. Salazar and Mr. Epley, Directors for the Company, served on the
Compensation Committee.

                           SUMMARY COMPENSATION TABLE

   The following table summarizes compensation information concerning the Chief
Executive Officer and each of the Company's most highly compensated executive
officers as to whom the total annual salary and bonus for the fiscal year ended
June 30, 1999 exceeded $100,000 (the "Named Executive Officers").

<TABLE>
<CAPTION>
                                   Annual
                                Compensation     Common Stock
                               --------------- -----------------
                               Fiscal                 Underlying    All Other
 Name and Principal Position    Year   Salary  Bonus   Options   Compensation(1)
 ---------------------------   ------ -------- ------ ---------- ---------------
 <S>                           <C>    <C>      <C>    <C>        <C>
 Mitchell H. Bodian..........   1999  $204,808 15,000       --        $  24
 Chief Executive Officer

 Hal Turner..................   1999    14,423     --       --          685
 Former Chief Executive
  Officer                       1998   100,961                        3,076

 Dean H. Fisher..............   1999   167,887     --       --        9,713
 General Counsel and former     1998   129,000     --   35,000        3,451
 Senior Vice President and
  Secretary                     1997   128,000     --       --        6,097
</TABLE>
--------
(1) Represents contributions in 1999 by the Company under the Company's 401(k)
    Plan for Mr. Fisher of $2,136 and health insurance premiums paid in 1999 by
    the Company for Messrs. Bodian, Turner and Fisher of $24, $658 and $7,577,
    respectively. Represents contributions in 1998 by the Company under the
    Company's 401(k) Plan for Mr. Fisher of $3,894, and health insurance
    premiums paid in 1998 by the Company for Messrs. Turner and Fisher of
    $3,076, and $2,165, respectively. Represents contributions in 1997 by the
    Company under the Company's 401(k) Plan for Mr. Fisher of $1,676, and
    health insurance premiums paid in 1997 by the Company for Mr. Fisher of
    $1,775.

                          OPTION GRANTS IN FISCAL 1999

   Equalnet did not grant options to any of the Named Executive Officers during
fiscal 1999. The following table sets forth information regarding the value of
unexercised warrants and options held by the Named Executive Officers. None of
the Named Executive Officers exercised any warrants or options in fiscal year
1998.

<TABLE>
<CAPTION>
                                Number of Shares of     Value of Unexercised In
                              Common Stock Underlying   the Money Warrants and
                             Unexercised Warrants and     Options at June 30,
                             Options at June 30, 1998           1998(1)
                             ------------------------- -------------------------
            Name             Exercisable Unexercisable Exercisable Unexercisable
            ----             ----------- ------------- ----------- -------------
<S>                          <C>         <C>           <C>         <C>
Dean H. Fisher..............   35,000          --           --           --
</TABLE>
--------
(1) The value of each unexercised in-the-money warrant or option is equal to
    the difference between the closing price of the common stock on the NASDAQ
    National Market on June 30, 1999 of $.6875 per share and the exercise price
    of the warrant or option.

                                       21
<PAGE>

                           COMPENSATION OF DIRECTORS

   Each non-employee director is paid $20,000 per year, plus $1,500 for each
meeting of the Board which he personally attends, $1,500 for each meeting of a
committee of the Board which he personally attends and $500 for each meeting in
which he participates by telephone. All non-employee directors of the Company
are reimbursed for ordinary and necessary expenses incurred in attending Board
or committee meetings. The Company has adopted the Director Plan, as amended in
May 1998, pursuant to which each non-employee director receives options to
purchase a number of shares of Common Stock equal to $60,000 divided by the
average of the highest and lowest price of the Common Stock the day before the
date of his election as a director ("Fair Market Value") and options to
purchase a number of shares of Common Stock equal to $30,000 divided by the
Fair Market Value of the Common Stock the day before each annual meeting of the
Company's shareholders for each year thereafter. These options have an exercise
price equal to the Fair Market Value of the Common Stock and the initial grants
vest over three years in 33-1/3% increments and the annual grants vest in six
months from the date of grant. Employee directors of the Company do not receive
any additional compensation from the Company for their services as directors.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The following table sets forth information as of the Record Date (unless
indicated otherwise), with respect to the beneficial ownership of the common
stock and the series A, series B, series C, series D, series E and series F
preferred stock of Equalnet by (1) persons known to Equalnet to be the
beneficial owners of more than 5% of any class of capital stock of Equalnet,
(2) each director, director nominee and Named Executive Officer of Equalnet and
(3) all directors and executive officers of Equalnet as a group.

<TABLE>
<CAPTION>
                                                    Series A      Series B     Series C
                           Common Stock            Preferred     Preferred     Preferred
                          ----------------------  ------------  ------------ -------------
  Directors, Executive
      Officers and         No. of          % of   No. of % of   No. of % of  No. of  % of
   5.0% Shareholders       Shares          Class  Shares Class  Shares Class Shares  Class
  --------------------    ---------        -----  ------ -----  ------ ----- ------- -----
<S>                       <C>              <C>    <C>    <C>    <C>    <C>   <C>     <C>
Michael T. Willis.......  9,281,082 (1)(2) 28.9%     --    0.0%   --    0.0%      --   0.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
James T. Harris.........  8,797,232 (1)    27.8%     --    0.0%   --    0.0%      --   0.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
Willis Group............  8,781,082 (1)    27.7%     --    0.0%   --    0.0%      --   0.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
Mark A. Willis..........  8,813,495 (1)(4) 27.8%     --    0.0%   --    0.0%      --   0.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
James R. Crane..........  4,070,000 (5)    13.2%     --    0.0%   --    0.0%      --   0.0%
 15350 Vickery Drive
 Houston, TX 77032
MCM Partners............    833,333 (6)     2.6%  2,087  100.0%   --    0.0%      --   0.0%
 10500 NE 8th, Ste. 1920
 Bellevue, WA 98004
Advantage Fund Limited..     22,500 (7)     0.1%     --    0.0%   --    0.0%      --   0.0%
 10500 NE 8th, Ste. 1920
 Bellevue, WA 98004
Genesee Fund Limited....    333,116 (8)     1.1%     --    0.0%   --    0.0%      --   0.0%
 Portfolio B
 10500 NE 8th, Ste. 1920
 Bellevue, WA 98004
SA Telecommunications,
 Inc....................  2,198,830 (9)     6.7%     --    0.0%   --    0.0% 219,883 100.0%
 1600 Promenade Center
 15th Floor
 Richardson, TX 75080
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                 Series A     Series B      Series C
                           Common Stock         Preferred    Preferred     Preferred
                          -------------------- ------------ ------------  ------------
  Directors, Executive
      Officers and         No. of        % of  No. of % of  No. of % of   No. of % of
   5.0% Shareholders       Shares        Class Shares Class Shares Class  Shares Class
  --------------------    ---------      ----- ------ ----- ------ -----  ------ -----
<S>                       <C>            <C>   <C>    <C>   <C>    <C>    <C>    <C>
The Furst Group.........  1,822,000 (10)  5.7%   --    0.0% 3,000  100.0%   --    0.0%
 459 Oakshade Road
 Shamong, NJ 08088
James D. Kaylor.........  1,822,000 (10)  5.7%   --    0.0% 3,000  100.0%   --    0.0%
 916 P Street, Ste. 200
 Lincoln, NE 68508
John S. Streep..........  1,822,000 (10)  5.7%   --    0.0% 3,000  100.0%   --    0.0%
 15841 Kilmarnock Drive
 Ft. Meyers, FL 33912
Mitchell H. Bodian......     25,443 (11)  0.1%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
R. Chadwick Paul........         --       0.0%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
John Isaac "Ike" Epley..     20,909 (12)  0.1%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
Ronald J. Salazar,
 Ph.D...................     94,195 (13)  0.3%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
William D. Rhodes.......         -- (14)  0.0%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
Michael P. Gallagher....         -- (15)  0.0%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
Dean H. Fisher..........    267,601 (16)  0.9%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
Robert H. Turner........    575,000 (17)  1.8%   --    0.0%    --    0.0%   --    0.0%
 8714 Stable Crest
 Houston, TX 77024
Zane Russell............    195,000 (18)  0.6%   --    0.0%    --    0.0%   --    0.0%
 20607 Shadow Mill Court
 Houston, TX 77450
Michael L. Hlinak.......    190,000 (19)  0.6%   --    0.0%    --    0.0%   --    0.0%
 19910 Erika Way
 Katy, TX 77450
Bruce N. Shortt.........         --       0.0%   --    0.0%    --    0.0%   --    0.0%
 1250 Wood Branch Park
  Dr.
 Houston, TX 77079
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>
                               Series D          Series E       Series F
                              Preferred          Preferred      Preferred
                             ----------------  -------------  ----------------
    Directors, Executive
          Officers           No. of     % of   No. of  % of   No. of     % of
   and 5.0% Shareholders     Shares     Class  Shares  Class  Shares     Class
   ---------------------     ------     -----  ------- -----  -------    -----
<S>                          <C>        <C>    <C>     <C>    <C>        <C>
Michael T. Willis........... 2,069 (3)  50.7%       --   0.0%   1,647(3) 50.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
James T. Harris............. 2,069 (3)  50.7%       --   0.0%   1,647(3) 50.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
Willis Group................ 2,069 (3)  50.7%       --   0.0%   1,647(3) 50.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
Mark A. Willis.............. 2,069 (3)  50.7%       --   0.0%   1,647(3) 50.0%
 5005 Woodway, Ste. 350
 Houston, TX 77056
James R. Crane..............    --       0.0%       --   0.0%      --     0.0%
 15350 Vickery Drive
 Houston, TX 77032
MCM Partners................    --       0.0%  833,333 100.0%      --     0.0%
 10500 NE 8th, Ste. 1920
 Bellevue, WA 98004
Advantage Fund Limited...... 2,012      49.3%       --   0.0%      --     0.0%
 10500 NE 8th, Ste. 1920
 Bellevue, WA 98004
Genesee Fund Limited--......    --       0.0%       --   0.0%   1,647    50.0%
 Portfolio B
 10500 NE 8th, Ste. 1920
 Bellevue, WA 98004
SA Telecommunications,
 Inc........................    --       0.0%       --   0.0%      --     0.0%
 1600 Promenade Center
 15th Floor
 Richardson, TX 75080
The Furst Group.............    --       0.0%       --   0.0%      --     0.0%
 459 Oakshade Road
 Shamong, NJ 08088
James D. Kaylor.............    --       0.0%       --   0.0%      --     0.0%
 916 P Street, Ste. 200
 Lincoln, NE 68508
John S. Streep..............    --       0.0%       --   0.0%      --     0.0%
 15841 Kilmarnock Drive
 Ft. Meyers, FL 33912
Mitchell H. Bodian..........    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 77079
R. Chadwick Paul............    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 77079
John Isaac "Ike' Epley......    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 77079
Ronald J. Salazar, Ph.D.....    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 770079
William D. Rhodes...........    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 77079
Michael P. Gallagher........    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 77079
Dean H. Fisher..............    --       0.0%       --   0.0%      --     0.0%
 1250 Wood Branch Park Dr.
 Houston, TX 77079
Robert W. Turner............    --       0.0%       --   0.0%      --     0.0%
 8714 Stable Crest
 Houston, TX 77024
Zane Russell................    --       0.0%       --   0.0%      --     0.0%
 20607 Shadow Mill Court
 Houston, TX 77450
Michael L. Hlinak...........    --       0.0%       --   0.0%      --     0.0%
 19910 Erika Way Katy, TX
 77450
</TABLE>

                                       24
<PAGE>

--------
 (1)  Includes warrants exercisable for an aggregate of 933,116 shares of
      common stock, but does not include 2,069 shares of Series D Preferred
      Stock or 1,647 shares of Series F Preferred Stock, which if converted,
      would convert in the aggregate into 18,412,265 shares of common stock.
      The terms of both the Series D and Series F Preferred Stock designation
      allow conversion of the respective series of preferred stock only so long
      as the holder seeking conversion does not hold more than 4.9% of the
      Company's common stock at the time of conversion. None of such shares
      issuable pursuant to the terms of the warrants were outstanding as of
      December 17, 1999. Information relating to ownership by Willis Group and
      Messers. Michael T. Willis, Mark A. Willis and James T. Harris is based
      on Schedule 13-D/A filed with the SEC on March 9, 1999. Michael T. Willis
      and Mark A. Willis each own 48.5% of the membership interest in Willis
      Group and Mr. Harris owns the remaining 3% membership interest. Michael
      T. Willis is the Secretary of Willis Group, Mark A. Willis is the
      President of Willis Group, and Mr. Harris is the Treasurer of Willis
      Group. According to the report, Willis Group has sole voting and
      dispositive power with respect to all shares other than shares or
      warrants held directly and Messrs. Michael T. Willis, Mark A. Willis and
      Harris have shared voting and dispositive power with respect to all
      shares other than shares or warrants held directly.
 (2)  Includes warrants for the purchase of 500,000 shares of common stock.
 (3)  All 2,069 shares of Series D Preferred Stock and 1,647 shares of Series F
      Preferred Stock are beneficially owned by Mark A. Willis, Michael T.
      Willis and James T. Harris, and are held directly by Willis Group LLC.
 (4)  Includes 1,666 shares of common stock issuable upon exercise of stock
      options awarded under the Non-Employee Director Stock Option Plan (the
      "Director Plan") that are exercisable within 60 days, but does not
      include 3,334 shares of common stock issuable upon exercise of stock
      options awarded under the Director Plan that are not exercisable within
      60 days.
 (5)  Includes warrants for the purchase of 170,000 shares of common stock.
 (6)  Does not include 2,087 shares of Series A Preferred Stock, which if
      converted, would convert into 10,340,795 shares of common stock. The
      terms of the Series A Preferred Stock designation allow conversion of the
      preferred stock only so long as the holder seeking conversion does not
      hold more than 4.9% of the Company's common stock at the time of
      conversion. Includes 833,333 shares of Series E Junior Preferred Stock
      convertible in the aggregate into 833,333 shares of common stock.
 (7)  Does not include 2,012 shares of Series D Preferred Stock, which if
      converted, would convert into 9,969,181 shares of common stock. The terms
      of the Series D Preferred Stock designation allow conversion of the
      preferred stock only so long as the holder seeking conversion does not
      hold more than 4.9% of the Company's common stock at the time of
      conversion.
 (8)  Does not include 1,647 shares of Series F Preferred Stock, which if
      converted, would convert into 8,160,657 shares of common stock. The terms
      of the Series F Preferred Stock designation allow conversion of the
      preferred stock only so long as the holder seeking conversion does not
      hold more than 4.9% of the Company's common stock at the time of
      conversion.
 (9)  Includes 219,883 shares of Series C Preferred Stock convertible in the
      aggregate into 2,198,830 shares of common stock.
(10)  Includes 3,000 shares of Series B Preferred Stock convertible in the
      aggregate into 1,500,000 shares of common stock. Information relating to
      ownership by Furst Group, James D. Kaylor and John S. Streep is based on
      management's information regarding the transactions. Messrs. Kaylor and
      Streep each own 45% of the common stock of Furst Group. Mr. Kaylor is the
      Chairman of the Board of Furst Group and Mr. Streep is the Chief
      Executive Officer of Furst Group.
(11)  Includes 1,666 shares of common stock issuable upon exercise of stock
      options awarded under the Director Plan that are exercisable within 60
      days, but does not include 3,334 shares of common stock issuable upon
      exercise of stock options awarded under the Director Plan that are not
      exercisable within 60 days.

                                       25
<PAGE>

(12)  Includes 1,666 shares of common stock issuable upon exercise of stock
      options awarded under the Director Plan that are exercisable within 60
      days, but does not include 3,334 shares of common stock issuable upon
      exercise of stock options awarded under the Director Plan that are not
      exercisable within 60 days.
(13)  Includes 1,666 shares of common stock issuable upon exercise of stock
      options awarded under the Director Plan that are exercisable within 60
      days, but does not include 3,334 shares of common stock issuable upon
      exercise of stock options awarded under the Director Plan that are not
      exercisable within 60 days.
(14)  Does not include 500,000 shares of common stock issuable upon exercise of
      stock options awarded under the Employee Stock Option Plan that are not
      exercisable within 60 days.
(15)  Does not include 300,000 shares of common stock issuable upon exercise of
      stock options awarded under the Employee Stock Option Plan that are not
      exercisable within 60 days.
(16)  Includes 35,000 shares of common stock issuable upon exercise of stock
      options awarded under the Employee Stock Option Plan that are exercisable
      within 60 days.
(17)  Includes 450,000 shares of common stock issuable upon exercise of stock
      options awarded under the Independent Contractor Stock Option Plan that
      are exercisable within 60 days.
(18)  Includes warrants for the purchase of 90,000 shares of common stock. (19)
      Includes warrants for the purchase of 90,000 shares of common stock.

   Except as otherwise noted, each shareholder has sole voting and dispositive
power with respect to the shares of common stock held by it to be voted at the
Meeting. Except under limited circumstances, the holders of the series A
preferred stock, series C preferred stock, series D preferred stock, series E
preferred stock and series F preferred stock are not entitled to vote. For
purposes of calculating the beneficial ownership of each stockholder, it was
assumed (in accordance with the SEC's definition of "beneficial ownership")
that such stockholder had exercised all options or warrants, or converted any
convertible securities, by which such stockholder had the right, within 60 days
following the Record Date, to acquire shares of common stock. It was further
assumed that in each case, the exercise or conversion was based on a conversion
or exercise price of $0.1675 per share.

   Under the terms of the warrants held by Willis Group and Genesee, and the
series A, series D and series F preferred stock, those securities are
convertible or exercisable by any holder only to the extent that the number of
shares of common stock issuable upon the conversion of those securities,
together with the number of shares of common stock owned by the holder and its
affiliates (but not including shares of common stock underlying unconverted and
unexercised portions of those securities or securities containing similar
provisions) would not exceed 4.9% of the then outstanding common stock as
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended. Thus, the number of shares of common stock set forth in the
table for each of Willis Group, Genesee, MCM Partners and Advantage Fund
Limited exceeds the number of shares of common stock that Willis Group,
Genesee, MCM Partners and Advantage could own beneficially at any given time
through their ownership of the Notes, the warrants and the series A, series D
and series F preferred stock. However, this limitation does not prevent any of
Willis Group, Genesee, MCM Partners or Advantage from converting and selling
some of its holdings and then converting more of its holdings. By doing this,
any of Willis Group, Genesee, MCM Partners or Advantage could sell more than
4.9% of the outstanding common stock of Equalnet while never holding more than
4.9% at any one time.

Section 16(a) Beneficial Ownership Reporting Compliance

   Section 16(a) of the Securities Exchange Act of 1934 requires Equalnet's
officers, directors and persons who own more than 10% of a registered class of
Equalnet's equity securities to file Form 3, Form 4 and Form 5 reports of
ownership and changes in ownership with the SEC. Officers, directors and
greater than 10% shareholders are required by the regulation to furnish
Equalnet with copies of all Section 16(a) reports they file.

                                       26
<PAGE>

   Based solely on a review of reports on Forms 3 and 4 and amendments thereto
furnished to Equalnet during its most recent fiscal year and written
representations from certain reporting persons that no report on Form 5 was
required, Equalnet believes that during the fiscal year ended June 30, 1999,
all officers, directors and greater than 10% shareholders complied with all
filing requirements applicable to them, except that Dean H. Fisher and James T.
Harris failed to file timely Form 5s. Messrs. Fisher and Harris completed and
filed delinquent Form 5s on October 13, 1998.

Item 13. Certain Relationships and Related Transactions

   On February 11, 1997, Equalnet issued to The Furst Group, Inc., a New Jersey
corporation ("Furst Group") and an accredited investor, a $3,000,000 note
bearing interest at the rate of 10% per year and maturing December 31, 1998
(the "Furst Note") and a warrant for the purchase of up to 1,500,000 shares of
common stock at an exercise price of $2.00 per share (the "Furst Warrant"),
together with certain rights in the event of a change of control. On March 9,
1998, Equalnet and Furst entered into an Exchange Agreement (the "Exchange
Agreement") pursuant to which Furst exchanged the Furst Note, the Furst Warrant
and the aforementioned rights for 3,000 shares of series B preferred stock and
322,000 shares of common stock (representing the accrued and unpaid interest on
the Furst Note). The Exchange Agreement enabled Equalnet to reduce its debt and
increase its tangible net worth while allowing Furst to maintain a liquidation
preference over the common stock with respect to its initial $3,000,000
investment.

   The series B preferred stock consists of 3,000 shares all of which were
issued in connection with the Exchange Agreement. Each share of series B
preferred stock has a stated value of $1,000 and is entitled to receive
dividends only if, as and when the Board of Directors declares dividends on the
common stock. Each share of series B preferred stock is convertible initially
into 500 shares of common stock (for an aggregate of 1,500,000 shares), subject
to adjustment pursuant to certain anti-dilution provisions. Each share of
series B preferred stock automatically converts into common stock, based upon
the conversion rate then in effect, on March 15, 2000.

   If Equalnet were to be liquidated, the holders of the series B preferred
stock would be entitled to receive out of the assets of Equalnet $1,000 per
share before any distributions would be made to holders of common stock. Each
share of series B preferred stock generally entitles the holder thereof to one
vote on matters submitted to the holders of common stock for approval, with the
holders of common stock and series B preferred stock voting as a single class.
Holders of series B preferred stock will be entitled to vote as a class on
transactions involving an amendment or waiver of the rights of holders of
series B preferred or in the creation of a series of shares with liquidation
rights equal to or greater than the series B preferred stock.

   On March 6, 1998, the shareholders of Equalnet approved certain transactions
detailed below:

   On March 6, 1998, as a result of various transactions, Willis Group and its
affiliates gained control of the Board of Directors of Equalnet, having
nominated for shareholder approval four of the seven members of the Board.
Willis Group beneficially owns more than five percent of Equalnet's voting
securities. Mark A. Willis, the Chairman of the Board of Directors of Equalnet,
owns a 48.5% membership interest in Willis Group.

   On October 1, 1997, Equalnet issued to Willis Group a $1,000,000 Convertible
Secured Note, bearing interest at the rate of 12% per year and maturing April
1, 1998 (the "October Note"), and a warrant for the purchase of up to 200,000
shares of common stock at an exercise price of $1.00 per share, subject to
adjustment (the "October Warrant"). The October Warrant is exercisable for five
years. As of the date of issuance of the October Note Equalnet recorded an
interest charge of $150,000 to record the impact of the debt being convertible
at a discount to market. On March 5, 1998, the October Note and accrued
interest were exchanged for 1,050,000 shares of common stock.

   Under the terms of several related agreements (the "Agreements") among
Equalnet, Willis Group and MCM Partners entered into on December 2, 1997,
Equalnet acquired nine telecommunications switches (the

                                       27
<PAGE>

"Switches") from Willis Group for aggregate consideration consisting of
$5,850,000 in cash, 1,400,000 shares of common stock, and warrants to purchase
an additional 400,000 shares of common stock. Equalnet secured financing of
$6,050,000 for the cash portion of the consideration through an unaffiliated
third party lender, which loan is secured by the Switches, bears interest at an
annual rate of 6.42% above an index rate based on U.S. Treasury Notes (the loan
interest rate currently is 12.1%) and is payable in 36 consecutive monthly
payments. In addition, Equalnet granted 500,000 warrants to Michael T. Willis,
a member of Willis Group and father of director Mark A. Willis, for
guaranteeing a portion of this financing.

   Under the terms of the Agreements, Equalnet acquired Netco Acquisition Corp.
("Netco"), a Delaware corporation, from Willis Group. Netco held certain
intangible rights and assets previously acquired by Willis Group and formerly
held by Total National Telecommunications. These assets consisted of intangible
rights to use certain software and codes necessary to operate the Switches.
Equalnet acquired Netco for aggregate consideration consisting of approximately
3,581,633 shares of common stock, 2,000 shares of series A preferred stock and
the issuance of approximately 4,000,000 shares of common stock for $1.00 per
share in cash. MCM Partners, the holder of all 2,030 currently issued and
outstanding shares of series A preferred stock, beneficially owns more than
five percent of Equalnet's voting securities. Mitchell H. Bodian, President,
Co-Chief Executive Officer, principal financial officer and a director of
Equalnet, has been a consultant, on a fee basis, for MCM Partners and its
affiliates for several years.

   On October 1, 1997, Bodian Associates ("Bodian"), an entity controlled by
Mitchell H. Bodian, President and Chief Executive Officer and a director of
Equalnet, entered into an investment advisory services agreement with Genesee.
Under the terms of the agreement, Bodian was to provide, among other things,
the following services to Genesee, Advantage Fund and their affiliates:

  . assisting and advising Genesee in connection with pursuing and
    implementing alternatives to maximize the value of the Genesee entities'
    investments in Total World Telecommunications, Inc. ("TWTI"), a party to
    the transactions approved at the March 5, 1998 annual meeting of the
    shareholders of Equalnet, and Total National Telecom, Inc. ("TNT")
    (including analyzing, from a financial perspective, alternatives
    available to the Genesee entities throughout the bankruptcy proceedings
    of TNT, and in negotiating the letter of intent with Willis Group and
    Equalnet for the creation of Netco Acquisition LLC, an entity that
    acquired and transferred certain network assets to Equalnet as described
    in the February 15, 1998 proxy statement related to, and as approved at,
    the March 5, 1998 annual meeting of the shareholders of Equalnet);

  . assisting and advising the Genesee entities in connection with their
    investment in Netco Acquisition LLC and with regard to their investment
    in Equalnet or other alternatives with regard to the Genesee investment
    in Netco Acquisition LLC;

  . assisting Netco Acquisition LLC in maximizing the cash consideration to
    be realized from the liquidation of the assets of Netco Acquisition LLC;
    and

  . providing such opinions regarding the value, from a financial point of
    view, of the investments of the Genesee entities in TNT and TWTI as may
    be reasonably be requested by Genesee.

   As compensation for these services, Genesee agreed to pay Bodian:

  . a non-refundable cash retainer of $100,000;

  . a non-recourse loan to acquire, at the face amount of the investment by
    the Genesee entities, an interest equal to 10% of the interest of the
    Genesee entities in Equalnet, or, in the event the Equalnet investment by
    Genesee did not "materialize", a similar sort of compensation arrangement
    to be negotiated between Genesee and Bodian with regard to an alternate
    transaction;

  . $10,000 per month on October 1, November 1, and December 1, 1997 for
    assistance through December 31, 1997 in regard to the causes of action
    related to the Genesee entities' investments in TNT and TWTI or such
    other services related to TNT, TWTI or Netco Acquisition LLC as Genesee
    reasonably requested;

                                       28
<PAGE>

  . a time based fee if Bodian's assistance is requested by Genesee after
    December 31, 1997;

  . certain additional compensation from Netco Acquisition LLC; and

  . reimbursement, upon Bodian's request, for any of Bodian's out-of-pocket
    expenses incurred in connection with any of the services.

   Further, the Genesee entities agreed to use their best efforts to cause
Equalnet to retain the services of Bodian at market rates to be negotiated
between Bodian and Equalnet in connection with any extraordinary corporate
transactions contemplated by Equalnet and in connection with Equalnet's
corporate development activities generally.

   Under the terms of the original Statement of Resolution with respect to the
series A preferred stock, the series A preferred stock had very limited voting
rights, had a stated value of $1,000 per share and were entitled to receive
dividends at the rate of $80.00 per share per year, payable quarterly. Holders
of series A preferred stock had the right to convert their shares into common
stock at the rate of 1,000 shares of common stock per share of series A
preferred stock (or the stated value divided by $1.00), or an aggregate of
2,000,000 shares of common stock, subject to adjustment pursuant to certain
anti-dilution provisions. The series A preferred stock had a $1,000 per share
liquidation preference over Equalnet's common stock. Dividends when not paid
were cumulative and bore interest at a rate of 12.0% per year. Cumulative
dividends in arrears at June 30, 1998 were approximately $52,000, or $25.78 per
series A preferred stock share. Equalnet may not declare or pay dividends on
the common stock unless all accrued dividends on the series A preferred stock
have been paid. Under the original terms of the series A preferred stock,
Equalnet could redeem the outstanding shares of series A preferred stock at a
price of $1,000 per share (plus any accrued and unpaid dividends and any
interest thereon) if the market price of the common stock exceeded $5.00 per
share.

   During the quarter ended March 31, 1998, EqualNet obtained a cash flow
bridge loan of $400,000 from Netco Acquisition, LLC, an entity owned 50% by
Willis Group. This note was payable on March 31, 1998 and had an interest rate
of 10%. This note is secured by the accounts attributable to web page
customers. This note was treated as a claim in EqualNet's bankruptcy
proceedings.

   Willis Group received a finder's fee of $54,000 related to certain financing
transactions that closed during fiscal year 1998. Willis Group entered into an
agreement with Equalnet in April 1998 related to merger and acquisition
consulting services. The agreement requires Equalnet to pay Willis Group
$20,000 per month beginning in May 1998, and a success fee based on a
percentage of the purchase price of acquisitions closed by Equalnet.

   On September 2, 1998, Equalnet executed a loan agreement in favor of Willis
Group in the amount of $241,106. The loan documents certain advances Willis
Group has made on Equalnet's behalf. This loan is secured by the assets of
Equalnet and its subsidiaries. The related note bore interest at a rate of 11%
per year and originally matured on January 31, 1999. This note was renewed and
extended through January 31, 2000.

   Equalnet pays Willis Group $12,500 per month for consulting services
performed by Mark Willis, Chairman of the Board of Equalnet, pursuant to an
Independent Contractor/Consulting Agreement entered into between Equalnet and
Willis Group on October 30, 1998.

   The Plan of Reorganization empowers the trustee of the Unsecured Creditors'
Trust to select a director nominee to the board of directors. The trustee, in
the exercise of this authority, has selected Mr. Paul as such nominee. The Plan
provides generally for the establishment of the Unsecured Creditors' Trust and
payment to the trust by the plan proponents of $1.35 million plus 3,000,000
shares of common stock of Equalnet for the benefit of the unsecured creditors
of EqualNet Corporation. In addition, payments are to be made of administrative
claims of approximately $1.5 million.

   John Isaac "Ike" Epley, a member of Equalnet's Board of Directors, has been
performing consulting services for Equalnet from June 1998 through March 1999.
Mr. Epley has consulted on such matters as

                                       29
<PAGE>

mergers, acquisitions, strategy and corporate development for Equalnet. He has
been paid $85,400 to date under this arrangement, based upon annual
compensation of $175,000. Mr. Epley will continue to serve as a consultant to
Equalnet on a month-to-month basis in the future.

   In February 1999, Equalnet entered into an Employment Agreement with William
D. Rhodes, Jr., Equalnet's Chief Operating Officer, pursuant to which Equalnet
is required to grant to Mr. Rhodes, under Equalnet's Employee Stock Option and
Restricted Stock Plan, options to purchase an aggregate of 500,000 shares of
common stock at an exercise price of $1.00 per share. One-third of the options
vest on February 8, 2000, one-third vest on February 8, 2001 and one-third vest
on February 8, 2002.

   In July 1999, Equalnet entered into an Employment Agreement with Michael P.
Gallagher, Equalnet's Chief Financial Officer, pursuant to which Equalnet is
required to grant to Mr. Gallagher, under Equalnet's Employee Stock Option and
Restricted Stock Plan, options to purchase an aggregate of 300,000 shares of
common stock at an exercise price of $0.56 per share for a term of five years.
One-third of the options vest on July 26, 2000, one-third vest on July 26, 2001
and one-third vest on July 25, 2002. Any unvested options vest immediately upon
a change of control of Equalnet or a termination of Mr. Gallagher's employment
by Equalnet without cause.

                                    PART IV

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

 (A) Documents Included in This Report:

1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Auditors...........................................  54
Consolidated Balance Sheets as of June 30, 1999 and 1998.................  55
Consolidated Statements of Operations for the years ended June 30, 1999,
 1998 and 1997...........................................................  57
Consolidated Statements of Shareholders' Equity (Deficit) for the years
 ended June 30, 1999, 1998 and 1997......................................  58
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
 1998 and 1997...........................................................  60
Notes to Consolidated Financial Statements...............................  61
</TABLE>

2. FINANCIAL STATEMENT SCHEDULES

   Schedule II

 (B) Reports on Form 8-K:

   Current report on Form 8-K, regarding the acquisition of the BCI customer
base, dated February 2, 1999 was disclosed under Item 5.

   Current Report on Form 8-K, regarding the filing for protection under
Chapter 11 of the Bankruptcy Code for EqualNet Corporation and Wholesale
Services, Inc., dated September 21, 1998, was disclosed under Item 3.

                                       30
<PAGE>

 (C) Exhibits:

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
   3.1   Articles of Incorporation of the Registrant (incorporated by reference
         to Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration
         Statement on Form S-1 (Registration No. 33-88742); filed on February
         13, 1995).

   3.2   Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
         the Registrant's Registration Statement on Form S-1 (Registration No.
         33-88742); filed on January 24, 1995).

   4.1   $1,000,000 Note dated October 1, 1997, issued by the Company to the
         Willis Group (incorporated by reference to Exhibit 4.1 of the
         Company's Quarterly Report on Form 10-Q for the quarter ended
         12/31/97).

   4.2   Loan and Security Agreement, dated March 6, 1998, between the Company
         and Finova Capital Corporation (incorporated by reference to Exhibit
         4.2 of the Company's Quarterly Report on Form 10-Q for the quarter
         ended 3/31/98).

  10.1   Lease Agreement dated June 28, 1994, between EqualNet and Caroline
         Partners, Ltd., as amended by First Amendment dated August 15, 1994,
         and Second Amendment dated September 8, 1994 (incorporated by
         reference to Exhibit 10.6 to Registrant's Registration Statement on
         Form S-1 (Registration No. 33-88742) filed on January 24, 1995).

  10.2   Financing agreement between Receivables Funding Corporation and
         EqualNet Holding Corporation, dated June 18, 1997 (incorporated by
         reference to Exhibit 10.17 to Amendment 2 to the Registrant's Annual
         Report on Form 10-K for the year ended June 30, 1997, filed on October
         28, 1997)

  10.3   Carrier Agreement between AT & T and EqualNet Corporation, dated May
         13, 1997 (certain confidential portions of this exhibit have been
         omitted pursuant to a request for confidential treatment pursuant to
         Rule 246-2 under the Securities Exchange Act of 1934, incorporated by
         reference to Exhibit 10.18 to Amendment 2 to the Registrant's Annual
         Report on Form 10-K for the year ended June 30, 1997, filed on October
         28, 1997)

  10.4   Subscription Agreement, dated as of July 1, 1997, among the Company
         and Lexus Commercial Enterprises, Ltd. (incorporated by reference to
         Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
         quarter ended 9/30/97).

  10.5   Secured Promissory Note, dated as of July 1, 1997, made by Lexus
         Commercial Enterprises, Ltd. in favor of the Company (incorporated by
         reference to exhibit 10.2 of the Company's Quarterly Report on Form
         10-Q for the quarter ended 9/30/97).

  10.6   Note and Warrant Purchase Agreement, dated October 1, 1997, by and
         among the Company and the Willis Group, as amended February 12, 1998
         (incorporated by reference to exhibit 10.1 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended 12/31/97).

  10.7   Switch Agreement, dated December 2, 1997, between the Company and the
         Willis Group, as amended by the First Amendment dated December 19,
         1997, and Second Amendment dated February 12, 1998 (incorporated by
         reference to exhibit 10.2 of the Company's Quarterly Report on Form
         10-Q for the quarter ended 12/31/97).

  10.8   Agreement of Merger and Plan of Reorganization, dated December 2,
         1997, between the Company and EQ Acquisition Sub. Inc., Netco
         Acquisition, LLC and Netco Acquisition Corp., as amended by the First
         Amendment dated December 19, 1997, and Second Amendment dated February
         12, 1998 (incorporated by reference to Exhibit 10.3 of the Company's
         Quarterly Report on Form 10-Q for the quarter ended 12/31/97).

  10.9   Stock Purchase Agreement, dated December 2, 1997, by and among the
         Company and the Willis Group, as amended by the First Amendment dated
         December 19, 1997, (incorporated by reference to Exhibit 10.4 of the
         Company's Quarterly Report on Form 10-Q for the quarter ended
         12/31/97).
</TABLE>


                                       31
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.10   Exchange Agreement, dated March 6, 1998 between the Company and The
         Furst Group, Inc. (incorporated by reference to Exhibit 10.5 of the
         Company's Quarterly Report on Form 10-Q for the quarter ended
         3/31/98).

 10.11   Stock and Warrant Purchase Agreement dated March 26 1998, between the
         Company and First Sterling Ventures Corp. and Frank Hevrdejs
         (incorporated by reference to Exhibit 10.6 of the Company's Quarterly
         Report on Form 10-Q for the quarter ended 3/31/98).

 10.12   Stock Purchase Warrant dated March 26 1998, between the Company and
         First Sterling Ventures Corp. (incorporated by reference to Exhibit
         10.7 of the Company's Quarterly Report on Form 10-Q for the quarter
         ended 3/31/98).

 10.13   Stock Purchase Warrant dated March 26 1998, between the Company and
         Frank Hevrdejs (incorporated by reference to Exhibit 10.8 of the
         Company's Quarterly Report on Form 10-Q for the quarter ended
         3/31/98).

 10.14   Stock and Warrant Purchase Agreement dated April 24, 1998, between the
         Company and James R. Crane (incorporated by reference to Exhibit 10.9
         of the Company's Quarterly Report on Form 10-Q for the quarter ended
         3/31/98).

 10.15   Registration Rights Agreement dated April 24, 1998, between the
         Company and James R. Crane (incorporated by reference to Exhibit 10.10
         of the Company's Quarterly Report on Form 10-Q for the quarter ended
         3/31/98).

 10.16   Warrant Agreement dated April 24, 1998, between the Company and James
         R. Crane (incorporated by reference to Exhibit 10.11 of the Company's
         Quarterly Report on Form 10-Q for the quarter ended 3/31/98).

 10.17   Purchase Agreement dated January 15, 1998 between the Company and SA
         Telecommunications, Inc. and Certain of its Subsidiaries as amended by
         Amendment dated March 10, 1998 (incorporated by reference to Exhibit
         10.12 of the Company's Quarterly Report on Form 10-Q for the quarter
         ended 3/31/98).

 10.18   Management Services Agreement dated March 12, 1998 between the Company
         and SA Telecommunications, Inc. (incorporated by reference to exhibit
         10.13 of the Company's Quarterly Report on Form 10-Q for the quarter
         ended 3/31/98).

 10.19*  Secured Convertible Note, dated September 4, 1998, issued by the
         Company to Genesee Fund Limited-Portfolio B.

 10.20*  Secured Convertible Note, dated September 4, 1998, issued by the
         Company to the Willis Group, LLC.

 10.21*  Common Stock Purchase Warrant, dated September 4, 1998 between the
         Company and Genesee Fund Limited-Portfolio B.

 10.22*  Common Stock Purchase Warrant, dated September 4, 1998 between the
         Company and the Willis Group, LLC.

 10.23*  Note Purchase and Exchange Agreement, effective as of July 31, 1998,
         between the Company and Advantage Fund Limited.

 10.24*  Note Purchase and Exchange Agreement, effective as of July 31, 1998,
         between the Company and the Willis Group, LLC.

 10.25*  Form of 6% Senior Secured Convertible Note due 2001 (attached as Annex
         I to Note Purchase and Exchange Agreements in Exhibits 10.23 and 10.24
         above).

 10.26*  Form of Series D Preferred documents of Board of Directors
         Establishing and Designating Series D Convertible Preferred Stock and
         Fixing the Rights and Preferences of such Series (attached as Annex II
         to Note Purchase and Exchange Agreements in Exhibits 10.23 and 10.24
         above).
</TABLE>


                                       32
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.27*  Form of Common Stock Purchase Warrant (attached as Annex III to Note
         Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).

 10.28*  Form of Registration Rights Agreement (attached as Annex V to Note
         Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).

 10.29*  Form of Notice of Conversion of Series D Preferred Stock of Equalnet
         Communications Corp. (attached as Annex VII to Note Purchase and
         Exchange Agreements in Exhibits 10.23 and 10.24 above).

 10.30*  Form of Opinion of Counsel to be Delivered on Closing Date (attached
         as Annex VIII to Note Purchase and Exchange Agreements in Exhibits
         10.23 and 10.24 above).

 10.31*  Form of Opinion of the Company's General Counsel (attached as Annex IX
         to Note Purchase and Exchange Agreements in Exhibits 10.23 and 10.24
         above).

 10.32*  Form of Opinion in Connection with Security Agreement (attached as
         Annex X to Note Purchase and Exchange Agreements in Exhibits 10.23 and
         10.24 above).

 10.33*  Note Purchase Agreement, effective as of July 31, 1998 between the
         Company and Genesee Fund Limited-Portfolio B.

 10.34*  Form of 6% Senior Secured Convertible Note due 2001 (attached as Annex
         I to Note Purchase Agreements in Exhibits 10.33 above).

 10.35*  Form of Common Stock Purchase Warrant (attached as Annex II to Note
         Purchase Agreements in Exhibits 10.33 above).

 10.36*  Form of Registration Rights Agreement (attached as Annex IV to Note
         Purchase Agreements in Exhibits 10.33 above).

 10.37*  Form of Opinion of Counsel to be Delivered on Closing Date (attached
         as Annex VI to Note Purchase Agreements in Exhibits 10.33 above).

 10.38*  Form of Opinion of the Company's General Counsel (attached as Annex
         VII to Note Purchase Agreements in Exhibits 10.33 above).

 10.39*  Form of Opinion in Connection with Security Agreement (attached as
         Annex X to Note Purchase Agreement in Exhibit 10.33 above).

 10.40*  Letter Agreement regarding net proceeds interest dated September 4,
         1998 between the Company, Netco, Genesee Fund Limited-Portfolio B and
         the Willis Group, LLC.

 10.41*  Master Purchase Agreement dated as of July 31, 1998 by and between the
         Company, Genesee Fund Limited-Portfolio B, the Willis Group, LLC and
         Advantage Fund Limited.

 10.42*  Security Agreement dated as of July 31, 1998 by and among the Company,
         USC Telecom, Netco, EqualNet, the Willis Group, LLC and Genesee Fund
         Limited-Portfolio B.

 10.43*  Assignment of Rights and Obligations Under Purchase Agreement, dated
         July 21, 1998 between the Company and SA Telecom, making reference to
         the Purchase Agreement in exhibit 10.18 above.

 10.44*  Receivables Sales Agreement dated July 23, 1998 between USC Telecom
         and RFC.

 10.45*  Carrier Services Switchless Agreement, dated June 30, 1998 between
         Frontier Communications of the West, Inc. and the Company, (certain
         confidential portions of this exhibit have been omitted pursuant to a
         request for confidential treatment pursuant to Rule 246-2 under the
         Securities Exchange Act of 1934, incorporated by reference to Exhibit
         10.52 to the Registrant's Annual Report on Form 10-K for the year
         ended June 30, 1998, filed on October 13, 1998).

 10.46*  Stock Purchase Warrant dated October 1, 1997 from the Company to the
         Willis Group, LLC.

 10.47*  Stock Purchase Warrant dated as of December 2, 1997 between the
         Company and Netco Acquisition, LLC.
</TABLE>


                                       33
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.48*  Stock Purchase Warrant dated March 5, 1998 from the Company to the
         Willis Group, LLC.

 10.49*  Stock Purchase Warrant dated March 5, 1998 from the Company to Mike
         Willis.

 10.50*  Stock Purchase Warrant dated March 6, 1998 from the Company to J. C.
         Bradford.

 10.51*  Stock Purchase Warrant dated April 15, 1998 from the Company to
         Mezzanine Telecom, Inc.

 10.52*  Stock Purchase Warrant dated April 15, 1998 from the Company to John
         Dalton.

 10.53*  Stock Purchase Warrant dated April 15, 1998 from the Company to Zane
         Russell.

 10.54*  Stock Purchase Warrant dated April 15, 1998 from the Company to
         Michael L. Hlinak.

 10.55*  Stock Purchase Warrant dated June 27, 1998 from the Company to Pacific
         Global Networks, Inc.

 10.56*  Stock Purchase Warrant dated June 27, 1998 from the Company to Future
         Telecom Networks, Inc.

 10.57*  Stock Purchase Warrant dated July 23, 1998 from the Company to RFC
         Capital Corporation.

 10.58*  Stock Purchase Warrant dated August 19, 1998 from the Company to Lance
         Hack.

 10.59*  Stock Purchase Warrant dated September 10, 1998 from the Company to
         RFC Capital Corporation.

 10.60*  Registration Rights Agreement dated November 12, 1996 between the
         Company and Creative Communications International, Inc.

 10.61** Statement of Resolution of Board of Directors Establishing and
         Designating Series F Convertible Preferred Stock and Fixing the Rights
         and Preferences of such Series adopted by Board of Directors on May
         24, 1999.

 10.62** Statement of Resolution of Board of Directors Establishing and
         Designating Series A Convertible Preferred Stock and Fixing the Rights
         and Preferences of such Series adopted by Board of Directors on June
         15, 1999.

 10.63** Statement of Resolution of Board of Directors Establishing and
         Designating Series D Convertible Preferred Stock and Fixing the Rights
         and Preferences of such Series adopted by Board of Directors on June
         15, 1999.

 10.64** Statement of Resolution of Board of Directors Establishing and
         Designating Series E Junior Preferred Stock and Fixing the Rights and
         Preferences of such Series adopted by Board of Directors on June 15,
         1999.

 10.65** Amendment Agreement of Statement of Resolution of Board of Directors
         Establishing and Designating Series A Convertible Preferred Stock and
         Fixing the Rights and Preferences of such Series dated as of June 15,
         1999, by and among Equalnet Communications Corp. and MCM Partners.

 10.66** Amendment Agreement of Statement of Resolution of Board of Directors
         Establishing and Designating Series D Convertible Preferred Stock and
         Fixing the Rights and Preferences of such Series dated as of June 15,
         1999, by and among Equalnet Communications Corp. and Willis Group LLC.

 10.67** Amendment Agreement of Statement of Resolution of Board of Directors
         Establishing and Designating Series D Convertible Preferred Stock and
         Fixing the Rights and Preferences of Such Series dated as of June 15,
         1999 by and among Equalnet Communications Corp. and Advantage Fund
         Limited.

 10.68** Exchange Agreement dated as of June 15, 1999 by and among Equalnet
         Communications Corp. and Willis Group LLC.

 10.69** Exchange Agreement dated as of June 15, 1999 by and among Equalnet
         Communications Corp. and Genessee Fund Limited--Portfolio B.

 23.1*   Consent of Independent Auditors.

 23.2**  Consent of Independent Auditors.

 27.1    Financial Data Schedule (previously filed).
</TABLE>
--------
* Incorporated by reference to the respective exhibit of the same number to the
  Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999
  filed on October 13, 1999.
** Filed herewith.

                                       34
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Auditors...........................................  40
Consolidated Balance Sheets as of June 30, 1999 and 1998.................  41
Consolidated Statements of Operations for the years ended June 30, 1999,
 1998 and 1997...........................................................  42
Consolidated Statements of Shareholders' Equity (Deficit) for the years
 ended June 30, 1999, 1998 and 1997......................................  43
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
 1998 and 1997...........................................................  45
Notes to Consolidated Financial Statements...............................  46
</TABLE>

                                       35
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Equalnet Communications Corp.

   We have audited the accompanying consolidated balance sheets of Equalnet
Communications Corp., and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. Our audit
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 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 consolidated financial position of Equalnet
Communications Corp. and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

   The accompanying financial statements have been prepared assuming Equalnet
Communications Corp. and subsidiaries will continue as a going concern. As more
fully described in Note 3, the Company has incurred recurring operating losses,
has a working capital deficiency, and debt in default. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

                                          ERNST & YOUNG LLP

Houston, Texas
October 13, 1999

                                       36
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                               Year Ended June 30,
                                      ----------------------------------------
                                          1999          1998          1997
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Sales...............................  $ 32,436,000  $ 24,877,000  $ 46,588,000
Cost of Sales.......................    30,528,000    21,992,000    34,481,000
                                      ------------  ------------  ------------
Gross profit........................     1,908,000     2,885,000    12,107,000
                                      ------------  ------------  ------------
Selling, general, and administrative
 expenses...........................    13,372,000    14,139,000    12,453,000
Depreciation and amortization.......    10,559,000     4,735,000     6,000,000
Write down of long-lived assets.....     3,070,000     1,134,000     4,400,000
                                      ------------  ------------  ------------
Operating loss......................   (25,093,000)  (17,123,000)  (10,746,000)
                                      ------------  ------------  ------------
Other income (expense):
Interest, net.......................    (2,827,000)   (1,109,000)   (1,019,000)
Other...............................       (91,000)      289,000      (870,000)
                                      ------------  ------------  ------------
                                        (2,918,000)     (820,000)   (1,889,000)
                                      ------------  ------------  ------------
Loss before income taxes and
 extraordinary item.................   (28,011,000)  (17,943,000)  (12,635,000)
Provision for income taxes..........            --            --    (2,346,000)
                                      ------------  ------------  ------------
Loss before extraordinary item......   (28,011,000)  (17,943,000)  (14,981,000)
Extraordinary gain on forgiveness of
 debt...............................    10,022,000            --            --
                                      ------------  ------------  ------------
  Net loss..........................  $(17,989,000) $(17,943,000) $(14,981,000)
                                      ============  ============  ============
Preferred stock dividends and deemed
 distributions......................  $  4,177,000  $     52,000  $         --
Net loss applicable to common
 shareholders.......................   (22,166,000)  (17,995,000)  (14,981,000)
                                      ============  ============  ============
Net loss per share--basic and
 diluted............................  $      (1.11) $      (1.64) $      (2.46)
                                      ============  ============  ============
</TABLE>


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

                                       37
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                            June 30,
                                                    --------------------------
                                                        1999          1998
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      ASSETS
--------------------------------------------------
Current assets:
  Cash and cash equivalents.......................  $    266,000  $    460,000
  Accounts receivable, net........................     7,873,000     5,839,000
  Other receivables...............................       472,000     1,596,000
  Advance on acquisition purchase price...........            --     3,014,000
  Prepaid expenses and other......................       401,000       110,000
                                                    ------------  ------------
    Total current assets..........................     9,012,000    11,019,000
                                                    ------------  ------------
Property and equipment............................    20,801,000    20,212,000
Less accumulated depreciation and amortization....    (8,368,000)   (4,838,000)
                                                    ------------  ------------
  Net property and equipment......................    12,433,000    15,374,000
                                                    ------------  ------------
Customer acquisition costs, net...................     3,862,000       356,000
Other assets......................................       407,000     1,011,000
                                                    ------------  ------------
    Total assets..................................  $ 25,714,000  $ 27,760,000
                                                    ============  ============
              LIABILITIES AND EQUITY
--------------------------------------------------
Current liabilities:
  Accounts payable................................  $  3,991,000  $ 10,480,000
  Accrued liabilities.............................     5,749,000     4,427,000
  Current portion of long term debt--related
   party..........................................       322,000            --
  Current portion of long term debt...............     2,726,000     1,183,000
  Debt in default.................................       558,000     5,753,000
  Debt in default--related party..................            --       400,000
  Contractual obligations with regard to
   receivable sales agreement.....................     3,339,000     2,335,000
                                                    ------------  ------------
    Total current liabilities.....................    16,685,000    24,578,000
                                                    ------------  ------------
Deferred liabilities..............................            --       224,000
Long term debt....................................     5,301,000            --
Commitments and contingencies.....................            --            --
Preferred stock, $0.01 par value, 5,000,000 shares
 authorized:......................................    16,153,000     5,000,000
Common stock, $0.01 par value. Authorized
 50,000,000 shares; issued and outstanding
 28,437,983 and 28,029,281 and 21,793,517 and
 21,393,070 shares as of June 30, 1999 and 1998,
 respectively.....................................       284,000       218,000
Treasury stock, at cost...........................      (232,000)     (817,000)
Additional paid in capital........................    46,840,000    37,064,000
Stock warrants....................................     3,019,000     1,763,000
Deferred compensation.............................       (20,000)     (116,000)
Accumulated deficit...............................   (62,316,000)  (40,154,000)
                                                    ------------  ------------
    Total shareholders' equity....................     3,728,000     2,958,000
                                                    ------------  ------------
    Total liabilities and shareholders' equity....  $ 25,714,000  $ 27,760,000
                                                    ============  ============
</TABLE>

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

                                       38
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                            Additional
                           Preferred   Common   Treasury     Paid-in-
                             Stock     Stock      Stock       Capital     Warrants
                          ----------- -------- -----------  -----------  ----------
<S>                       <C>         <C>      <C>          <C>          <C>
Balance, July 1, 1996...  $        -- $ 60,000  $ (105,000) $19,942,000  $       --
 Common stock and
  warrants issued in
  acquisition...........           --    2,000          --      449,000     199,000
 Stock warrants issued
  with debt.............           --       --          --           --     169,000
 Deferred compensation
  amortization..........           --       --          --           --          --
 Net loss...............           --       --          --           --          --
                          ----------- -------- -----------  -----------  ----------
Balance, June 30, 1997..  $        -- $ 62,000  $ (105,000) $20,391,000  $  368,000
 Forfeiture of shares of
  stock granted to key
  employees.............           --       --     (12,000)     (48,000)         --
 Common stock shares
  reacquired............           --       --    (700,000)          --          --
 Proceeds from issuance
  of common stock and
  warrants..............           --   87,000          --    9,044,000     270,000
 Issuance of warrants
  with debt.............           --       --          --           --      43,000
 Conversion of
  convertible debt......    3,000,000   14,000          --    1,528,000          --
 Interest charge on
  convertible debt......           --       --          --      150,000          --
 Preferred stock
  dividends.............           --       --          --           --          --
 Exchange of warrants
  for common stock......           --       --          --           --    (169,000)
 Issuance of stock and
  warrants for
  equipment.............    2,000,000   50,000          --    4,954,000     950,000
 Warrants issued under
  severance agreement...           --       --          --           --     301,000
 Issuance of stock for
  note receivable.......           --    5,000          --    1,045,000          --
 Deferred compensation
  amortization..........           --       --          --           --          --
 Net loss...............           --       --          --           --          --
                          ----------- -------- -----------  -----------  ----------
Balance, June 30, 1998..  $ 5,000,000 $218,000  $ (817,000) $37,064,000  $1,763,000
 Forfeiture of shares of
  stock granted to
  employees.............           --       --     (11,000)     (49,000)         --
 Exercise of common
  stock options.........           --    1,000          --       56,000          --
 Issuance of preferred
  stock.................    8,797,000       --          --           --          --
 Exchange of convertible
  debt for preferred
  stock.................    1,889,000           (1,689,000)
 Issuance of treasury
  stock to bankruptcy
  trust.................           --       --   2,285,000      529,000          --
 Proceeds from issuance
  of common stock and
  warrants..............           --   44,000          --    2,500,000     155,000
 Issuance of warrants
  with debt.............           --       --          --           --     479,000
 Issuance of stock for
  director's fees.......           --    1,000          --       67,000          --
 Preferred stock
  dividends and
  beneficial
  conversion............      467,000       --          --    3,582,000          --
 Beneficial conversion
  on convertible debt...           --       --          --      450,000          --
 Issuance of stock and
  warrants for
  acquisition...........           --   11,000          --    1,716,000      74,000
 Issuance of stock and
  warrants for
  settlement of claim...           --    4,000          --      237,000     435,000
 Issuance of stock and
  warrants for
  services..............           --    4,000          --      212,000     113,000
 Relief of debt by
  significant
  shareholder...........           --       --          --      427,000          --
 Stock issued under
  severance agreement...           --    1,000          --       49,000          --
 Deferred compensation
  amortization..........           --       --          --           --          --
 Net loss...............           --       --          --           --          --
                          ----------- -------- -----------  -----------  ----------
Balance, June 30, 1999..  $16,153,000 $284,000  $ (232,000) $46,840,000  $3,019,000
                          =========== ======== ===========  ===========  ==========
</TABLE>

<TABLE>
<CAPTION>
                                                    Accumulated
                                         Deferred     Earnings
                                       Compensation  (Deficit)       Total
                                       ------------ ------------  ------------
<S>                                    <C>          <C>           <C>
Balance, July 1, 1996................   $(336,000)  $ (7,178,000) $ 12,383,000
 Common stock and warrants issued in
  acquisition........................          --             --       650,000
 Stock warrants issued with debt.....          --             --       169,000
 Deferred compensation amortization..      90,000             --        90,000
 Net loss............................          --    (14,981,000)  (14,981,000)
                                        ---------   ------------  ------------
Balance, June 30, 1997...............   $(246,000)  $(22,159,000) $ (1,689,000)
 Forfeiture of shares of stock
  granted to key employees...........      60,000             --            --
 Common stock shares reacquired......          --             --      (700,000)
 Proceeds from issuance of common
  stock and warrants.................          --             --     9,401,000
 Issuance of warrants with debt......          --             --        43,000
 Conversion of convertible debt......          --             --     4,542,000
 Interest charge on convertible
  debt...............................          --             --       150,000
 Preferred stock dividends...........          --        (52,000)      (52,000)
 Exchange of warrants for common
  stock..............................          --             --      (169,000)
 Issuance of stock and warrants for
  equipment..........................          --             --     7,954,000
 Warrants issued under severance
  agreement..........................          --             --       301,000
 Issuance of stock for note
  receivable.........................          --             --     1,050,000
 Deferred compensation amortization..      70,000             --        70,000
 Net loss............................          --    (17,943,000)  (17,943,000)
                                        ---------   ------------  ------------
Balance, June 30, 1998...............   $(116,000)  $(40,154,000) $  2,958,000
 Forfeiture of shares of stock
  granted to employees...............      60,000             --            --
 Exercise of common stock options....          --             --        57,000
 Issuance of preferred stock.........          --             --     8,797,000
 Exchange of convertible debt for
  preferred stock....................                                  200,000
 Issuance of treasury stock to
  bankruptcy trust...................          --             --     2,814,000
 Proceeds from issuance of common
  stock and warrants.................          --             --     2,699,000
 Issuance of warrants with debt......          --             --       479,000
 Preferred stock dividends and
  beneficial conversion                        --     (4,173,000)     (124,000)
 Issuance of stock for directors
  fees...............................          --             --        68,000
 Issuance of stock and warrants for
  settlement of claim................          --             --       676,000
 Relief of debt by significant
  shareholder........................          --             --       427,000
 Beneficial conversion on convertible
  debt...............................          --             --       450,000
 Issuance of stock and warrants for
  acquisition........................          --             --     1,801,000
 Issuance of stock and warrants for
  services...........................          --             --       329,000
 Stock issued under severance
  agreement..........................          --             --        50,000
 Deferred compensation amortization..      36,000             --        36,000
 Net loss............................          --    (17,989,000)  (17,989,000)
                                        ---------   ------------  ------------
Balance, June 30, 1999...............   $ (20,000)  $ 62,316,000  $  3,728,000
                                        =========   ============  ============
</TABLE>

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

                                       39
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                Year Ended June 30,
                                       ----------------------------------------
                                           1999          1998          1997
                                       ------------  ------------  ------------
<S>                                    <C>           <C>           <C>
OPERATING ACTIVITIES
Loss from continuing operations......  $(17,989,000) $(17,943,000) $(14,981,000)
Adjustments to reconcile net loss to
 cash provided by (used in) operating
 activities:
  Extraordinary gain on forgiveness
   of debt...........................   (10,022,000)           --            --
  Depreciation and amortization......    10,559,000     4,735,000     6,000,000
  Provision for bad debts............     6,414,000     1,661,000     1,727,000
  Deferred income taxes..............            --            --     2,228,000
  Interest charge on convertible debt
   issued at discount................       665,000       150,000            --
  Warrants issued under severance
   agreements........................            --       302,000            --
  Write down of long-lived assets....     3,070,000     1,135,000     4,400,000
  Credit from carrier................            --            --    (1,200,000)
  Working capital changes, net of
   non-cash transactions.............            --            --            --
  Accounts receivable................    (4,242,000)    1,549,000     3,597,000
  Stock and warrants issued for
   services..........................       195,000            --            --
  Stock issued for settlement of
   claim.............................       676,000            --            --
  Compensation expense recognized for
   common stock issuance.............        35,000            --            --
  Other receivables..................        (7,000)      922,000    (1,766,000)
  Prepaid expenses and other.........        97,000      (252,000)    1,468,000
  Other assets.......................       649,000      (655,000)     (479,000)
  Accounts payable and accrued
   liabilities.......................     6,009,000     3,457,000     2,856,000
  Other, net.........................            --        70,000       123,000
                                       ------------  ------------  ------------
    Net cash provided by (used in)
     operating activities............    (3,891,000)   (4,869,000)    3,973,000
                                       ------------  ------------  ------------
INVESTING ACTIVITIES
Purchase of property and equipment...      (703,000)   (6,835,000)     (272,000)
Cash paid for acquisitions of
 business and assets.................      (555,000)   (3,295,000)      (76,000)
Other, net...........................        75,000            --         4,000
                                       ------------  ------------  ------------
    Net cash used in investing
     activities......................    (1,183,000)  (10,130,000)     (344,000)
                                       ------------  ------------  ------------
FINANCING ACTIVITIES
Proceeds from long-term debt.........     2,822,000     7,800,000     3,000,000
Payments on long-term debt...........    (5,204,000)     (297,000)           --
Repayments on revolving line of
 credit..............................            --    (4,555,000)   (6,099,000)
Net proceeds on contractual
 obligations with regard to
 receivables sales agreement.........     1,004,000     2,335,000            --
Proceeds from issuance of preferred
 stock...............................       500,000            --            --
Proceeds from convertible debt.......     2,800,000            --            --
Proceeds from exchange of common
 stock for preferred stock...........       200,000            --            --
Proceeds from issuance of common
 stock and warrants..................     2,758,000     9,400,000            --
Other, net...........................            --       (52,000)      (84,000)
                                       ------------  ------------  ------------
Net cash provided by (used in)
 financing activities................     4,880,000    14,631,000    (3,183,000)
                                       ------------  ------------  ------------
Net increase (decrease) in cash and
 cash equivalents....................      (194,000)     (368,000)      446,000
Cash and cash equivalents, beginning
 of year.............................       460,000       828,000       382,000
                                       ------------  ------------  ------------
    Cash and cash equivalents, end of
     year............................  $    266,000  $    460,000  $    828,000
                                       ============  ============  ============
    Cash paid during the year for
     interest........................  $  2,395,000  $    843,000  $    947,000
                                       ============  ============  ============
</TABLE>

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

                                       40
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1--Organization and Summary of Significant Accounting Policies

   Equalnet Communications Corp., formerly Equalnet Holding Corp., (the
"Company") is a national long-distance telephone company. The Company is
comprised of three wholly-owned operating subsidiaries, EqualNet Corporation
("EqualNet"), a long-distance telephone company providing services to generally
small commercial and residential accounts nationwide; USC Telecom, Inc. ("USC
Telecom"), a long-distance company formed in the first quarter of fiscal year
1999; and, Netco Acquisition Corp. ("Netco"), the owner of nine
telecommunications switches located in major cities in the United States. The
following significant accounting policies are followed by the Company and its
subsidiaries in the preparation of its consolidated financial statements.

 Principles of Consolidation and Use of Estimates

   The consolidated financial statements include the accounts of all majority-
owned and controlled subsidiaries of the Company. All significant intercompany
transactions and balances have been eliminated in consolidation.

   The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

 Cash and Cash Equivalents

   The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost, which
approximates market, and are classified as cash equivalents. The Company did
not hold any derivative financial instruments for the three years ended June
30, 1999.

 Property and Equipment

   Property and equipment are carried at original cost. Certain leases have
been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements of
existing equipment are capitalized. Repairs and minor replacements that do not
materially increase values or extend useful lives are expensed as incurred. The
cost of property and equipment sold or retired and the related depreciation and
amortization are removed from the accounts in the period of sale or
disposition. Depreciation of property and equipment is provided on the
straight-line basis at rates based upon the expected useful lives of the
various classes of assets, which range from four to ten years. Leasehold
improvements are amortized over the shorter of their useful lives or the term
of the lease.

 Revenue Recognition

   The Company recognizes revenue in the month customers complete telephone
calls. Allowances are provided for estimated uncollectible usage.
Collectibility is reviewed regularly, and the allowance is adjusted as
necessary. The balance of this provision at June 30, 1999 and 1998 was $0.4
million and $1.0 million, respectively.

 Fair Value of Financial Instruments

   The carrying amounts of accounts receivable, accounts payable, and other
payables approximate fair value due to the short-term nature of those
instruments. With the exception of certain related-party debt, the carrying

                                       41
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

value of the Company's long-term debt and contractual obligations regarding its
receivables sales agreement approximate fair value because the rate on such
debt is variable, based on the current market.

 Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk are accounts receivable. The Company continuously evaluates the
credit worthiness of its customers' financial condition and generally does not
require collateral. The company's allowance for doubtful accounts is based on
current market conditions and management's expectations. Non-cash write-offs of
accounts receivable, net of recoveries, were $7.1 million, $2.0 million, and
$5.6 million in 1999, 1998, and 1997, respectively.

 Long-Lived Assets

   Under the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), the carrying value of long-lived assets
such as customer acquisition costs and property and equipment is evaluated
using undiscounted future cash flows when events or circumstances indicate the
carrying amount of an asset may not be recoverable. To the extent impairment is
indicated to exist, an impairment loss will be recognized under SFAS 121 based
on fair value.

   The Company had non-cash write-downs of assets during the years ended June
30, 1999, 1998, and 1997 in the amounts of approximately $3.1 million, $1.1
million, and $4.4 million, respectively. Included in the non-cash write-downs
for 1999 and 1997 were approximately $1.8 million and $4.1 million,
respectively, to reduce the carrying value of customer acquisition costs; these
write-downs were primarily necessitated by greater than expected customer
attrition. Write-downs in 1998 included approximately $0.9 million related to a
previous software billing management program and approximately $0.2 million
associated with unrealizable goodwill.

 Income Taxes

   Income taxes are based on income reported for tax return purposes along with
a provision for deferred income taxes. Deferred income taxes are provided to
reflect the tax consequences in future years of differences between the
financial statement and tax bases of assets and liabilities at each year end.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not a portion of the deferred
tax assets will not be realized in a future period. The estimates utilized in
the recognition of deferred tax assets are subject to revision in future
periods based on new facts or circumstances.

 Customer Acquisition Costs

   Customer acquisition costs represent the direct costs of an acquired billing
base of customer accounts and orders bought on an individual basis from certain
agents or telemarketers. These costs are amortized by applying the Company's
attrition rate associated with the acquired customers each month against the
unamortized balance of the previous month (declining balance method) over the
expected life of the customer base of five years or less, switching to the
straight-line method when the straight-line method results in greater
amortization. The attrition rate used to amortize customer attrition costs was
9.0% for fiscal years 1998 and 1997, and was 6.0% and 8.0% for two customer
bases acquired in fiscal year 1999. The attrition rate used by the Company in
amortizing customer acquisition costs is an estimate of the attrition rate of
the acquired customer bases, and actual attrition may differ from the estimates
used. Accumulated amortization at June 30, 1999 and 1998 was approximately
$19.7 million and $13.1 million, respectively. The Company evaluates the
attrition rate of the acquired customer base each quarter and adjusts the
attrition rate as necessary. The Company periodically evaluates the unamortized
balance of customer acquisition costs to determine whether there has been any
impairment under SFAS 121.

                                       42
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Treasury Stock

   The Company records its treasury stock at cost.

 Change in Presentation

   Certain prior-year financial statement items have been reclassified to
conform with the 1999 presentation.

 New Accounting Pronouncements

   In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," ("SFAS 130") which establishes
standards for reporting and display of comprehensive income, its components,
and accumulated balances. Comprehensive income is generally defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires all items
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. The Company adopted SFAS 130 in
1998; as of June 30, 1999 there were no components of comprehensive income for
disclosure for any of the periods presented.

   In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," ("SFAS 131") which establishes
standards for the way public companies report information about operating
segments. SFAS 131 defines operating segments as components of a company about
which separate financial information is available which is evaluated regularly
by management in deciding how to allocate resources and in assessing
performance. The Company adopted SFAS 131 in 1998. The Company's sole
operating segment is long distance sales and, as a result, there are no
separate required disclosures for any of the periods presented.

   In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which requires companies to
recognize all derivative instruments as either assets or liabilities in the
assessment of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company does not have any derivative financial instruments.

NOTE 2--Bankruptcy Filings

   EqualNet Corporation ("EqualNet"), one of the Company's operating
subsidiaries, and EqualNet Wholesale Services, Inc. ("Wholesale"), a wholly-
owned non-operating subsidiary of EqualNet filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code
(the "Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the
United States Bankruptcy Court for the Southern District of Texas (the
"Bankruptcy Court"), Houston, Texas. On October 2, 1998, Wholesale filed its
motion to convert its bankruptcy proceeding from a Chapter 11 reorganization
to a Chapter 7 liquidation. Pursuant to Sections 1107 and 1108 of the
Bankruptcy Code, EqualNet managed its assets and operated its business as a
debtor-in-possession pending confirmation of its reorganization plan, which
plan was confirmed on April 28, 1999. The plan of reorganization provided for
the restructuring of amounts and repayment terms for secured and unsecured
creditors. In conjunction with the confirmation and consummation of the
reorganization plan, certain debts were reduced resulting in an extraordinary
gain of approximately $10.0 million ($0.50 per share--basic and diluted). As
voting control of the Company's common stock remained the same as a result of
the confirmation of the plan of reorganization, fresh start accounting was not
used in accordance with AICPA Statement of Position 90-7.

                                      43
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 3--Liquidity and Working Capital Deficit

   For the years ended June 30, 1999, 1998, and 1997, the Company reported pre-
tax net operating losses of $28.0 million, $17.9 million, and $12.6 million,
respectively, has a working capital deficiency and debt in default. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Increases in pre-tax net operating losses were attributable to
several internal and external factors. Continued provisioning challenges
through the second quarter of fiscal year 1999 led to delayed billing and
increased customer attrition. In addition, the Company attempted to convert to
a new customer management, billing, and rating system in late fiscal year 1998
which proved to be unsuccessful. Simultaneous with the Company's attempted
conversion and implementation to this customer management, billing, and rating
system the Company acquired a significant customer base; conversion problems
adversely affected the Company's cash collections and, to a greater extent, led
to increased customer attrition.

   The Company's primary source of capital is provided by receivable sales
agreements with a third-party. Funding under these agreements are based on
specific accounts receivable eligibility requirements with the primary factor
being the collections history per account.

   The Company's management is continuing actions to strengthen the financial
position of the Company. New products are being developed to significantly
enhance sales and revenue, including (i) bundled minute long distance products
resembling cellular offerings, (ii) wholesale international rates for retail
customers (iii) pre-paid debit-cards, (iv) advertiser-sponsored long distance
and (v) the pursuit of acquisitions expected to be accretive to earnings. The
Company is also considering entering the wholesale international long distance
market, offering local service as a competitive local exchange carrier,
offering internet access, and entering the wireless and paging markets.
Additionally, the Company is evaluating several proposals for the resumption of
an agent program in order to increase its customer base, as well as negotiating
with several third parties for possible acquisitions to form strategic
alliances in order to maximize the utilization of the Switches.

   The Company believes the new product offerings noted above are particularly
significant to increasing the Company's revenues and returning to
profitability. Furthermore, management believes the Company must increase its
innovation and not depend on competitive pricing alone in order to become more
competitive in the marketplace. Most of the new product offerings noted above
are pricing packages only and will not require a significant amount of capital.
Any new product offerings requiring technology advancements will most likely
come from strategic alliances or potential mergers. Financing for potential
strategic alliances or mergers is expected to come from the issuance of the
Company's common stock.

   In order to provide financing to support operations during the next twelve
months, the Company must also continue to increase revenue generated from its
existing resources. Specific actions to maximize revenue generated by the
switch network include (i) placing dedicated customers on the network via
connectivity to a local switch, (ii) port leasing of switch assets and (iii)
international product offerings accessed through the switches. In addition, the
Company is continuing to reduce its primary carrier costs for its existing
customer base. The Company continues to make improvements in its billing and
MIS systems to more accurately bill customers, maximize customer revenue and
ensure proper audit of vendor invoices related to the cost of service. The
Company has also recently implemented a cost reduction program, and continues
to refine these efforts, related to general, administrative, and overhead
expenditures. In addition to utilizing the Switches to provide transmission of
its customer traffic, the Company is focusing on offering bundled services to
its customers, mainly long-distance service, internet access, local service,
wireless and paging.

   Management believes the plans discussed above are critical to returning the
Company to profitability. Additionally, the Company intends to seek possible
strategic alliances and business combinations in order to more rapidly
implement its plans for increasing the service offerings or for reducing costs
of the Company.

                                       44
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Management is attempting to balance the cash flows from operations to meet
current needs, and is continuously seeking additionally capital resources to
fund the expansion of service offerings of the Company. Should capital resource
requirements to achieve the management's plan to return to profitability
significantly exceed management's ability to meet those needs, the Company's
ability to return to profitability could be significantly delayed or impaired.

NOTE 4--Property and Equipment

   The cost of property and equipment is as follows:

<TABLE>
<CAPTION>
                                                          1999         1998
                                                       -----------  -----------
<S>                                                    <C>          <C>
  Telecommunications switches......................... $13,390,000  $13,390,000
  Computer equipment..................................   4,955,000    4,435,000
  Furniture and Fixtures..............................   1,209,000    1,209,000
  Leasehold improvements..............................   1,247,000    1,178,000
                                                       -----------  -----------
                                                       $20,801,000  $20,212,000
  Accumulated depreciation and amortization...........  (8,368,000)  (4,838,000)
                                                       -----------  -----------
                                                       $12,433,000  $15,374,000
                                                       ===========  ===========
</TABLE>

   During fiscal year 1999, the Company changed its strategy for realizing the
value of the switches from migrating the acquired customer base from SA Telecom
to the switches to a program of part partioning, dedicated service,
international retail and international wholesale. The implementation of this
strategy was hampered by the EqualNet's bankruptcy proceedings. Upon
consummation of EqualNet's plan of reorganization, the Company has been able to
achieve significant progress in implementing its strategy to realize the value
of the switches. Management has supported the carrying value of the switches
through a projected undiscounted cash flow analysis. However, it is reasonably
possible that the undiscounted cash flows may change in the near future
resulting in the need to write-down those assets to fair value.

NOTE 5--Asset Purchase and Acquisitions

 Brittan Communications International Corporation

   On January 27, 1999, the Company purchased approximately 80,000 residential
long distance customers of Brittan Communications International Corporation
("BCI") from RFC in a foreclosure sale for approximately $1.8 million,
including the assumption of a $1.7 million term loan, and the issuance of
300,000 warrants to RFC valued at $75,000. The warrants entitle the holder to
purchase 300,000 shares of Common Stock at $1.33 per share during a five year
period and were valued using the Black Scholes model. The term loan is reduced
by 80% of the excess of the fair market value of the Company's common stock at
the exercise date over the $1.33 exercise price.

   The acquired customer base has been recorded in customer acquisition costs
and is being amortized by applying the estimated attrition rate of the
purchased customer base of 8% per month against the unamortized balance of the
previous month (declining balance method) switching to the straight line method
when the straight line method results in greater amortization over an 18 month
period.

 SA Telecom

   On January 21, 1998, the Company signed an agreement with SA
Telecommunications, Inc. ("SA Telecom"), a switch based, long distance
telecommunications carrier serving customers primarily in Texas and California
to acquire certain assets and customer bases in exchange for a combination of
shares of stock, cash

                                       45
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and assumption of certain liabilities. The transaction was subject to certain
conditions, including approval of the bankruptcy court supervising the
reorganization of SA Telecom under Chapter 11 of the United States Bankruptcy
Code. On March 9, 1998, the Company won approval from the bankruptcy court. The
purchase of SA Telecom was approved by the Company's shareholders on June 30,
1998 for approximately $3.47 million in cash, approximately $5.4 million of
Series C Preferred Stock and the assumption of approximately $4 million in
debt. The Company's newly formed wholly owned subsidiary, USC Telecom, Inc.
("USC Telecom"), acquired the SA Telecom assets on July 22, 1998. To facilitate
the purchase of the SA Telecom assets, the Company and SA Telecom entered into
a management agreement pursuant to which the Company managed the operations of
SA Telecom from April 1, 1998 until the close of the transaction whereby the
Company was responsible for any losses from SA Telecom's operations on or after
April 1, 1998.

   The Company accounted for the SA Telecom acquisition using the purchase
method of accounting. Accordingly, the results of operations of the acquired
business is included in the Company's consolidated results of operations from
the date of acquisition. The Company booked an asset for customer acquisition
costs of approximately $8.7 million. This asset is being amortized by applying
the estimated attrition rate of the acquired customer base per month against
the unamortized balance of the previous month (declining balance method)
switching to the straight line method when the straight line method results in
greater amortization over a three-year period.

   Assuming the above transaction occurred at the beginning of the year ended
June 30, 1998, the summarized unaudited pro forma revenues, net loss, and
allocation of net loss per common share (basic and diluted) would have been
$52.1, $(16.6), and $(1.52), respectively. The pro forma operating results are
not necessarily indicative of future operating results nor of results that
would have occurred had the acquisitions been consummated as of fiscal year
1998.

   In January 1999, the Company acquired substantially all of the assets of
Limit LLC, doing business as ACMI ("ACMI"), a network marketing company with
approximately 2,500 independent agents. In connection with this transaction,
the Company issued 1 million shares of its common stock and assumed a note
payable of $1 million. Subsequent to year-end, the parties of this transaction
agreed to modify the transaction whereby the Company would return the $1
million note payable to the Sellers and, in consideration for the issued shares
of the Company's common stock, would acquire assets primarily consisting of the
independent agent contracts, a debit card platform, and the associated assets.
The results of operations related to the ACMI acquisition do not have a
material effect on the operations of the Company and, as a result, pro forma
information is not presented.

NOTE 6--Related Party Transactions

 Willis Group Transactions

   On October 1, 1997, the Company issued to the Willis Group, LLC ("Willis
Group") a $1.0 million Convertible Secured Note, bearing interest at the rate
of 12% per year and maturing April 1, 1998, and a warrant for the purchase of
up to 0.2 million shares of Common Stock at an exercise price of $1.00 per
share, subject to adjustment and exercisable for five years. The outstanding
balance of this note was convertible into a number of shares of Common Stock
determined by dividing the outstanding balance by the lesser of $1.00 or 85% of
the market price of the Common Stock. As of the date of issuance of the
convertible debt the Company recorded an interest charge of $0.15 million to
record the impact of the debt being convertible at a discount to market. On
March 5, 1998, the Note and accrued interest were exchanged for 1.05 million
shares of the Company's common stock.

                                       46
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   On December 2, 1997, the Company entered into several related agreements,
(as amended, the "Agreements") involving the Willis Group and other third
parties. Collectively, these Agreements provided for a recapitalization of the
Company and for the Company to acquire certain telecommunications network
assets and switches (collectively the "Transactions"). On March 6, 1998 as a
result of various transactions the Willis Group gained control of the Board of
Directors of the Company, having nominated for shareholder approval four of the
seven members of the Board of Directors.

   Under the terms of the Agreements, the Company acquired nine
telecommunications switches (the "Switches") from the Willis Group for $7.6
million, consisting of $5.85 million in cash, 1.4 million shares of Common
Stock, and warrants to purchase up to 0.4 million shares of Common Stock at an
exercise price of $1.00. The Company secured financing of $6.05 million for the
cash portion of the consideration through an unaffiliated third party lender,
whose loan is secured by the Switches, bears interest at a rate per year of
6.42% above an index rate based on U. S. Treasury Notes (12.1% as of June 30,
1998) and is payable in 36 consecutive monthly payments. An affiliate of the
Company was granted a warrant for the purchase of up to 0.5 million shares of
Common Stock at an exercise price of $1.00 per share for guaranteeing a portion
of this financing.

   Under the terms of the Agreements, the Company acquired Netco Acquisition
Corp. ("Netco"), a Delaware corporation controlled by the Willis Group, which
held certain intangible rights and assets previously acquired by the Willis
Group. These assets consisted of intangible rights to use certain software and
codes necessary to operate the Switches. The Company acquired Netco for $5.6
million, including 3.58 million shares of the Company's common stock and 2,000
shares of the Company's Series A Convertible Preferred Stock.

   Under the terms of the Agreements, the Company also issued and sold to the
Willis Group 4.0 million shares of Common Stock at a price of $1.00 per share
for total aggregate consideration of $4.0 million in cash.

   On March 26, 1998, the Company issued to a corporation and an individual,
both accredited investors, an aggregate of 1.33 million shares of the Company's
common stock and warrants to purchase an additional 0.67 million shares of the
Company's common stock for an aggregate of $2.0 million in cash. The Willis
Group was granted a $20,000 facilitation fee for these transactions.

   On April 24, 1998, the Company entered into an agreement with an individual
investor to issue 3.4 million shares of the Company's common stock and warrants
for the purchase of 0.17 million shares of the Company's common stock in
exchange for $3.4 million. The Willis Group was granted a $34,000 facilitation
fee for this transaction.

   During fiscal year 1998, the Willis Group incurred approximately $306,000 in
out of pocket expenses on behalf of the Company related to services provided by
consultants, travel expenses and other miscellaneous expenses. The Company
executed a note payable of approximately $306,000 to the Willis Group for these
expenses.

 Other Related Party Transactions

   In March 1999 the Company issued 136,296 shares of its Common Stock to
certain Directors of the Company in satisfaction of amounts owed for unpaid
Director fees. A director of the Company was also issued 30,000 shares of the
Company's Common Stock for satisfaction of services rendered.

   On January 21, 1999, the Company closed a transaction where a director of
the Company, at the time of the closing of the transaction, was paid 105,000
shares of Common Stock as a fee for his role in completing the transaction.

                                       47
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Ronald J. Salazar, a director of the Company, was paid $20,000 for
consulting services in fiscal year 1998. James T. Harris, a former Director of
the Company, was paid approximately $87,000 for consulting services during
fiscal year 1998.

   Effective April 1, 1998, the Company entered into a severance agreement with
Michael L. Hlinak, former Chief Financial Officer, Chief Operating Officer and
Director of the Company. In connection with this severance agreement, the
Company issued Mr. Hlinak 100,000 shares of the Company's common stock and paid
health insurance benefits to Mr. Hlinak during the severance period.
Additionally, the Company issued to Mr. Hlinak a warrant for the purchase of up
to 90,000 shares of Common Stock at an exercise price of $2.00.

   Effective April 1, 1998, the Company entered into a severance agreement with
Zane Russell, former Chief Executive Officer and Director of the Company, which
required the Company to pay Mr. Russell severance payments through January 31,
1999 at an annualized rate of $87,500 and forgive and cancel a $75,000 note
payable by Mr. Russell to the Company. Additionally, the Company issued to Mr.
Russell a warrant for the purchase of up to 90,000 shares of Common Stock at an
exercise price of $2.00.

   Michael T. Willis, a member of the Willis Group, personally guaranteed $3.0
million of the Company's $6.05 million note payable to Finova Capital
Corporation. In connection with this transaction, Mr. Willis received warrants
to acquire 500,000 shares of Common Stock.

   Equalnet pays Willis Group $12,500 per month for consulting services
performed by Mark Willis, Chairman of the Board of Equalnet, pursuant to an
Independent Contractor/Consulting Agreement entered into between Equalnet and
Willis Group on October 30, 1998.

NOTE 7--Capital Stock

 Series A Preferred Stock

   During fiscal year 1998 the Company issued 2,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred") valued at $2,000,000 and had
2,030 and 2,000 shares of Series A Preferred with a stated value of $1,000 per
share outstanding at June 30, 1999 and 1998, respectively. Series A Preferred
dividends are cumulative at the rate of $60.00 per year, payable quarterly in
either cash or additional shares of Series A Preferred. The Series A Preferred
resolution has been amended effective October 28, 1998 to include conversion
features such that the Series A Preferred is convertible at a discounted price.
A deemed distribution approximating $3.6 million was recorded during fiscal
year ended June 30, 1999. Per the amended resolutions, the Holders of Series A
have the right to convert their shares into the Company's common stock based
upon a formula which, subject to the Company's continued listing on a national
exchange, will not be less than $0.75 per share of common stock adjusted 31
days (and adjusted again every six months afterwards) after shareholder
approval of the Company's proposed reverse stock split to 75% of the average
closing price of the Company's common stock for the five previous trading days;
the proposed reverse stock split has been submitted for shareholder approval in
the Company's 1999 Annual Shareholder Meeting proxy statement. Should the
Company be delisted from all national exchanges, the conversion floor is
removed and the conversion formula of 85% of the Average Market Price (as
defined by the Series A Preferred Stock Designation) has no lower conversion
price per share limit. The Series A Preferred has a $1,000 liquidation
preference plus accrued and unpaid dividends over the Company's common stock.
The Company is prohibited from declaring or paying dividends on its common
stock unless all accrued dividends on the Series A Preferred have been paid.
The Series A preferred is redeemable at a rate of $1,000 per share at the
option of the holder when certain events, which are in control of the Company,
occur such as the Company's inability to convert preferred shares into common
shares. Series A preferred ranks senior to the Company's other series of
preferred stock in liquidation preference. Dividend payments for the Series A
Preferred was waived by the holders through February 22, 1999. The Company
issued 30 shares of Series A Preferred as payment of dividends during the year
ended June 30, 1999.

                                       48
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Series B Preferred Stock

   During fiscal year 1998, the Company issued 3,000 shares of Series B
Convertible Preferred Stock ("Series B Preferred") valued at $3,000,000 and had
3,000 shares of Series B Preferred with a stated value of $1,000 per share
outstanding at June 30, 1999 and 1998. Series B Preferred has no redemption
features. Holders of Series B Preferred are entitled to share with holders of
the Company's common stock in any common stock dividends declared based upon
the number of shares of the Company's common stock the Series B Preferred is
convertible into at the time such a dividend is declared; Series B Preferred
dividends are non-cumulative. Each share of Series B Preferred is convertible
into 500 shares of the Company's common stock subject to certain anti-dilution
provisions, and has a $1,000 per share liquidation preference over the Series A
Preferred and the Company's common stock. Each share of Series B preferred
entitles the holder thereof to one vote, voting as a single class with common
stock, on matters submitted to the shareholders of the Company. No dividends
were paid on Series B Preferred during fiscal year 1999. Series B Preferred is
junior to Series A Preferred in liquidation preference.

 Series C Preferred Stock

   On July 22, 1998 the Company had 211,946 shares of Series C Senior
Convertible Preferred Stock ("Series C Preferred") outstanding at June 30,
1999. Each share of Series C Preferred is non-voting and is convertible, at the
holder's option, into ten shares of the Company's common stock, and has a
liquidation preference of $27.50 per share (plus any accrued but unpaid
dividends) of Series C Preferred. Holders of Series C Preferred are entitled to
receive dividends at the rate of $2.00 per year, payable quarterly in either
cash or additional shares of Series C Preferred. The Company issued 196,553
shares of Series C Preferred valued at approximately $5,405,000 in July 1998 in
connection with an acquisition and issued 5,358 shares of Series C Preferred
valued at approximately $147,000 in January 1999 as additional purchase
consideration. Additionally, the Company issued 10,035 shares of Series C
Preferred in fiscal year 1999 as payment of dividends, which represents all
dividends payable for the year ended June 30, 1999. Series C Preferred is
redeemable after July 22, 1999, at the Company's option at a rate of
approximately $28.19 per share of Series C Preferred if the Company's common
stock is trading above $3.44 per share on quoted national exchanges. Series C
Preferred is junior in liquidation preference to Series A Preferred and Series
B Preferred.

 Series D Preferred Stock

   On September 4, 1998 the Company issued 3,750 shares of Series D Senior
Convertible Preferred Stock ("Series D") valued at approximately $1,889,000 and
had 3,906 shares of Series D Senior Convertible Preferred Stock ("Series D
Preferred") outstanding at June 30, 1999. Holders of Series D Preferred are
entitled to receive cumulative dividends at the rate of $60.00 per year,
payable in cash or additional shares of the Series D Preferred. The holders of
Series D Preferred have the right to convert Series D Preferred at a discounted
price. A deemed distribution approximating $986,000 was recorded during fiscal
year ended June 30, 1999. Specifically, the holders of Series D Preferred have
the right to convert their shares of Series D Preferred into shares of the
Company's common stock based upon a formula which, subject to the Company's
continued listing on a national exchange, will not be less than $0.75 per share
of the Company's common stock adjusted 31 days (and again every six months
afterwards) after shareholder approval of the Company's proposed reverse stock
split to 75% of the average closing price of the Company's common stock for the
five previous trading days; the proposed reverse stock split has been submitted
for shareholder approval in the Company's 1999 Annual Shareholder Meeting proxy
statement. Should the Company be delisted from all national exchanges, the
conversion floor is removed and the conversion formula of 85% of the Average
Market Price (as defined by the Series D Preferred Stock Designation) has no
lower conversion price per share limit. The Series D Preferred has a
liquidation preference of $1,000 per share plus accrued and unpaid dividends.
The Company issued 156

                                       49
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

shares of Series D preferred in fiscal year 1999 as payment of dividends.
Series D Preferred is non-voting and is redeemable at a rate of $1,000 per
share at the option of the holder when certain events occur such as the
Company's inability to convert preferred shares into common shares. Series D
Preferred is junior in liquidation preference to Series A Preferred, Series B
Preferred, and Series C Preferred.

 Series E Preferred Stock

   On May 25, 1999 the Company issued 833,333 shares of Series E Senior
Convertible Preferred Stock ("Series E Preferred") valued at $500,000 and had
833,333 shares of Series E Preferred outstanding at June 30, 1999. Holder of
Series E preferred are not entitled to receive dividends. The Series E
Preferred are convertible on a 1:1 ratio into shares of the Company's common
stock at the Company's option, is not redeemable at the option of the holder,
and is non-voting. The Company is obligated to redeem the Series E Preferred
shares on a 1:1 ratio into shares of the Company's common stock on December 31,
1999. Series E Preferred is junior in liquidation preference to Series A
Preferred, Series B Preferred, Series C Preferred, and Series D Preferred.

 Series F Preferred Stock

   On June 15, 1999, the Company issued 3,142 shares of Series F Senior
Convertible Preferred Stock ("Series F Preferred") valued at approximately
$2,747,000 and had 3,142 shares of Series F Preferred outstanding at June 30,
1999. Holders of Series F Preferred are entitled to receive cumulative
dividends at the rate of $60.00 per year, payable in cash or additional shares
of Series F Preferred based upon a formula which, subject to certain
conditions, will not be less than $0.75 per share of common stock. The Series F
Preferred has a liquidation preference of $1,000 per share plus accrued and
unpaid dividends. Holders of Series F Preferred are entitled to receive
cumulative dividends at the rate of $60.00 per year, payable in cash or
additional shares of the Series D Preferred. The holders of Series F Preferred
have the right to convert Series F Preferred at a discounted price. A deemed
distributions approximating $595,000 was recorded during fiscal year ended June
30, 1999 and as deemed distribution approximating $880,000 will be recorded in
the first quarter of fiscal year 2000. Specifically, the holders of Series F
Preferred have the right to convert their shares of Series D Preferred into
shares of the Company's common stock based upon a formula which, subject to the
Company's continued listing on a National Exchange, will not be less than $0.75
per share of the Company's common stock adjusted 31 days (and again every six
months afterwards) after shareholder approval of the Company's proposed reverse
stock split to 75% of the average closing price of the Company's common stock
for the five previous trading days; the proposed reverse stock split has been
submitted for shareholder approval in the Company's 1999 Annual Shareholder
Meeting proxy statement. Should the Company be delisted from all national
exchanges, the conversion floor is removed and the conversion formula of 85% of
the Average Market Price (as defined by the Series F Preferred Stock
Designation) has no lower conversion price per share limit. Series F Preferred
is senior in liquidation preference to Series E Preferred.

 Stock Purchase Plan

   During 1995, the Company adopted the EqualNet Holding Corp. Employee Stock
Purchase Plan (the Stock Purchase Plan) in which substantially all employees
are eligible to participate. The Stock Purchase Plan provides eligible
employees of the Company and its subsidiaries an opportunity to purchase shares
of Common Stock through after-tax payroll deductions. The Company will match
contributions in an amount equal to 15% of each participant's contribution. The
Stock Purchase Plan is administered by an independent administrator which
purchases shares of Common Stock on the open market with the amounts
contributed by the participants and the matching contributions made by the
Company. The Stock Purchase Plan was implemented during fiscal year 1996 and
the Company contributed approximately $1,000, $20,000, and $14,000 on behalf of
employees toward the purchase of Company stock during the years ended June 30,
1999, 1998, and 1997, respectively.

                                       50
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Stock Option and Restricted Stock Plan

   During 1995, the Company adopted the EqualNet Holding Corp. Stock Option and
Restricted Stock Plan (the 1995 Plan). The 1995 Plan is designed to provide
certain full-time key employees, including officers and directors of the
Company, with additional incentives to promote the success of the Company's
business and to enhance the ability to attract and retain the services of
qualified persons. The 1995 Plan is administered by a committee of no less than
two persons (the Committee) appointed by the Board of Directors. Committee
members cannot be employees of the Company and must not have been eligible to
participate under the 1995 Plan for a period of at least one year prior to
being appointed to the Committee. Under the 1995 Plan, the Committee may grant
restricted stock awards or options to purchase up to an aggregate of 800,000
shares of Common Stock. In June 1998, the Plan was amended to increase the
aggregate number of shares for grant to 4.0 million. The exercise price of an
option granted pursuant to the 1995 Plan is determined by the Committee on the
date the option is granted. In the case of a grant to an employee who owns ten
percent or more of the outstanding shares of Common Stock (a 10% Shareholder),
the exercise price of each option under the 1995 Plan may not be less than 110%
of the fair market value of the Common Stock on the date of the grant. No
option may be granted under the 1995 Plan with a term of more than ten years.
In the case of a 10% Shareholder, no option may be granted with a term of more
than five years. Options under the 1995 Plan are considered non-incentive stock
options when the aggregate fair market value of the stock with respect to which
the options are exercisable for the first time by the option holder in any
calendar year, under the 1995 Plan or any other incentive stock option plan of
the Company, exceeds $100,000. Under the 1995 Plan, the Committee may issue
shares of restricted stock to employees for no payment by the employee or for a
payment below the fair market value on the date of grant. The restricted stock
is subject to certain restrictions described in the 1995 Plan, with no
restrictions continuing for more than five years from the date of the award.
The 1995 Plan may be amended by the Board of Directors without any requirement
of shareholder approval, except as required by Rule 16b-3 under the Securities
Exchange Act of 1934 and the incentive option rules of the Internal Revenue
Code of 1986. The Company has granted 63,638 restricted stock awards for shares
of Common Stock to certain key employees, none of whom is a director or
executive officer of the Company as of June 30, 1999. These employees will not
be required to make any payment for these restricted stock awards, which vest
over five years in 20% increments. Restrictions on transfer and forfeiture
provisions upon termination of employment will apply to the restricted stock
covered by the awards for a period of five years, after which time the
restrictions will lapse and the stock will be owned by the employees free of
further restrictions under the 1995 Plan. During each of fiscal years 1999 and
1998, 5,454 shares of the Company's common stock were received into treasury
stock resulting from the forfeiture of restricted stock awards.

 Non-Employee Director Stock Option Plan

   The shareholders approved on November 28, 1995, the adoption of the Non-
Employee Director Stock Option Plan (the "Director Option Plan"). The Director
Option Plan is designed to attract and retain the services of experienced and
knowledgeable non-employee directors of the Company and to provide an incentive
for such directors to increase their proprietary interest in the Company and in
the Company's long-term success and progress. The Director Option Plan is
administered by the Board of Directors. The Company has adopted the Director
Plan, as amended in May 1998, pursuant to which each non-employee director
receives options to purchase a number of shares of Common Stock equal to
$60,000 divided by the average of the highest and lowest price of the Common
Stock the day before the date of his election as a director ("Fair Market
Value") and options to purchase a number of shares of Common Stock equal to
$30,000 divided by the Fair Market Value of the Common Stock the day before
each annual meeting of the Company's shareholders for each year thereafter.
These options have an exercise price equal to the Fair Market Value of the
Common Stock and the initial grants vest over three years in 33-1/3% increments
and the annual grants vest in six months from the date of grant, assuming
continued service on the Board of Directors. Employee directors of

                                       51
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the Company do not receive any additional compensation from the Company for
their services as directors. Each stock option granted to a non-employee
director will have a ten-year term. All options granted under the Director
Option Plan are non-qualified stock options and may not be repriced. No awards
may be granted under the Director Option Plan after May 8, 2005, or such
earlier date as determined by the Board of Directors. The Director Option Plan
may be amended by the Board of Directors without any requirement of shareholder
approval, except as required by Rule 16b-3 under the Securities Exchange Act of
1934 and the incentive stock option provisions of the Internal Revenue Code of
1986, and except that no amendment may be made more than once every six months
that would change the amount, price or timing of grants under the Director
Option Plan.

   There are currently two non-employee directors eligible to participate in
the Director Option Plan. As of June 30, 1999, options to purchase 20,000
shares of the Company's common stock at an exercise price of $1.875 were
outstanding.

   The changes in stock options outstanding for the Company's plans for 1999,
1998, and 1997 were as follows:

<TABLE>
<CAPTION>
                                                                Weighted Average
                                                                 Exercise Price
                                                      Shares       Per Share
                                                     ---------  ----------------
   <S>                                               <C>        <C>
   Outstanding at July 1, 1996......................    11,000       $16.74
     Granted........................................   538,000       $ 3.31
     Exercised......................................       --        $  --
     Forfeited......................................   (23,000)      $ 3.87
                                                     ---------
   Outstanding at June 30, 1997.....................   526,000       $ 3.57
     Granted........................................    20,000       $ 1.88
     Exercised......................................       --        $  --
     Forfeited......................................  (366,000)      $ 3.36
                                                     ---------
   Outstanding at June 30, 1998.....................   180,000       $ 3.79
     Granted........................................ 2,135,000       $ 0.50
     Exercised......................................  (128,000)      $ 0.41
     Forfeited......................................  (414,000)      $ 1.32
                                                     ---------
   Outstanding at June 30, 1999..................... 1,773,000       $ 0.65
                                                     ---------
</TABLE>

   Vested stock options as of June 30, 1999, 1998, and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                Weighted Average
                                                                 Exercise Price
                                                        Shares     Per Share
                                                        ------- ----------------
   <S>                                                  <C>     <C>
     June 30, 1999..................................... 243,000      $ 1.12
     June 30, 1998.....................................  95,000        3.93
     June 30, 1997.....................................   3,000       16.93
</TABLE>

   The weighted average fair value of options granted during the years ended
June 30, 1999, 1998, and 1997 was $0.33, $1.84, and $2.73, respectively.
Exercise prices for options outstanding as of June 30, 1999 ranged from $0.25
to $4.25 and the weighted average remaining contractual life of those options
was approximately 9.4 years.

   As allowed under Statement of Financial Accounting Standard ("SFAS") No.,
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company
applies APB Opinion 25 and related interpretations

                                       52
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in accounting for its stock option plan. Accordingly, compensation expense is
not recognized for stock options unless the options were granted at an exercise
price lower than market on the grant date.

   Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal years 1999, 1998, and 1997: risk-free interest rate of
6%; no dividend yield; volatility factors of the expected market price of the
Company's common stock of 2.1 in 1999, 1.4 in 1998, and 2.3 in 1997; and, a
weighted-average expected life of the option of 9 years. Using estimates
calculated by this option pricing model, pro forma net loss, basic earnings per
share, and diluted earnings per share would have been $(18.3), $(.92), and
$(.92), respectively, for the year ended June 30, 1999. For the year ended June
30, 1998, pro forma net loss, basic loss per share and diluted loss per share
would have been $(18,078,000), $(1.65), and $(1.65), respectively. For the year
ended June 30, 1997, pro forma net loss, basic loss per share and diluted loss
per share would have been $(15,583,000), $(2.56), and $(2.56), respectively.

 401(k) Plan

   The Company sponsors a 401(k) Plan which is open to all employees over the
age of 21. Generally, an employee must complete six consecutive months of
employment for eligibility. The 401(k) Plan gives the Company the option to
determine the amount they will contribute each year. Contributions made to the
401(k) Plan by the Company were approximately $10,000, $43,000, and $63,000 for
the years ended June 30, 1999, 19998, and 1997, respectively.

 Warrants

   The following presents warrants outstanding to purchase shares of the
Company's common stock as of June 30, 1999. Each warrant may be used to
purchase one share of common stock.

<TABLE>
<CAPTION>
                                          Exercise
Warrants                                   Price          Exercise Price
--------                                  -------- -----------------------------
<S>                                       <C>      <C>
294,000..................................  $0.55   September 1998-July 2003
150,000..................................   0.68   June 1999-June 2004
666,232..................................   0.90   September 1998-September 2000
1,320,000................................   1.00   October 1997-April 2003
83,333...................................   1.13   March 1999-February 2004
300,000..................................   1.33   January 1999-January 2004
400,000..................................   1.50   March 1998-May 2004
230,000..................................   2.00   April 1998-April 2003
83,334...................................   2.50   August 1999-February 2004
100,000..................................   7.50   January 1998-November 2001
</TABLE>

   Warrants issued in connection with debt has been valued using the Black-
Scholes model and have been recorded as debt origination costs or debt discount
and are being amortized over the term of the related debt. Warrants issued for
services performed have been valued using the Black-Scholes model and have been
expensed.

                                       53
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 8--Taxes

   For fiscal years 1999 and 1998, the Company recorded no benefit for income
taxes due to a valuation allowance being established for the entire operating
loss and other deferred tax assets. The provision for income taxes for the
fiscal year ended June 30, 1997 is as follows:

<TABLE>
<CAPTION>
                                                   Federal    State     Total
                                                  ---------- -------- ----------
<S>                                               <C>        <C>      <C>
  Current........................................ $   29,000 $ 88,000 $  117,000
  Deferred.......................................  1,953,000  276,000  2,229,000
                                                  ---------- -------- ----------
                                                  $1,982,000 $364,000 $2,346,000
                                                  ========== ======== ==========
</TABLE>

   Deferred income tax provisions or benefits result from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements which will result in differences between income for
tax purposes and income for financial statement purposes in future years.

   Significant components of the Company's deferred tax assets and liabilities
at June 30 are as follows:

<TABLE>
<CAPTION>
                                                        1999          1998
                                                    ------------  ------------
<S>                                                 <C>           <C>
Deferred tax liabilities:
  Other, net....................................... $        --   $    (75,000)
                                                    ------------  ------------
Total deferred tax liabilities.....................          --        (75,000)
Deferred tax assets:
  Amortization of acquisition costs................    5,611,000     4,568,000
  Write-off of goodwill............................      310,000       336,000
  Bad debt allowance...............................      155,000       401,000
  Accrued liabilities..............................      705,000       265,000
  Net operating loss carryforward..................   15,597,000     9,735,000
  Other............................................      188,000       365,000
                                                    ------------  ------------
Total deferred tax assets..........................   22,566,000    15,670,000
Valuation allowance................................  (22,566,000)  (15,670,000)
                                                    ------------  ------------
Net deferred tax assets............................ $        --   $        --
                                                    ============  ============
</TABLE>

   The Company recorded a valuation allowance amounting to the entire net
deferred tax asset balance at June 30, 1999 and 1998 as it is more likely than
not the deferred tax asset is unrealizable. The Company has net operating loss
carryforwards ("NOL") of approximately $38.3 million at June 30, 1999 which is
available to offset future taxable income which expire in 2012 through 2017.
The Company experienced a change of control in March 1998 which restricts the
ability to utilize approximately $15.0 million of the NOL. During 1999, the
Company recognized an extraordinary gain of approximately $10.0 million
following the consummation of EqualNet's plan of reorganization. This
extraordinary gain resulted in a direct reduction of NOL's generated in prior-
years. A portion of the NOL's generated prior to the change of control were
reduced due to this extraordinary gain.

                                       54
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The reasons for the differences between the amount of tax expense (benefit)
provided and the amount of tax expense (benefit) computed by applying the
statutory Federal income tax rate to income before taxes for the years 1999,
1998, and 1997 are as follows:

<TABLE>
<CAPTION>
                                           Year Ended June 30,
                          ------------------------------------------------------------
                                1999                 1998                 1997
                          ------------------   ------------------   ------------------
                            Amount       %       Amount       %       Amount       %
                          -----------  -----   -----------  -----   -----------  -----
<S>                       <C>          <C>     <C>          <C>     <C>          <C>
Tax expense at statutory
 rates..................  $(6,116,000)  34.0%  $(6,101,000)  34.0%  $(4,296,000)  28.7%
Increase (decrease) in
 taxes resulting from:
  State income tax
   benefit..............     (863,000)   4.8%     (861,000)   4.8%     (519,000)   3.5%
  Valuation allowances..    6,896,000  (38.3)%   6,950,000  (38.7)%   7,097,000  (47.4)%
  Other.................       83,000   (0.5)%      12,000   (0.1)%      63,000   (0.4)%
                          -----------  -----   -----------  -----   -----------  -----
                          $       --     0.0%  $       --     0.0%  $ 2,345,000  (15.7)%
                          -----------  -----   -----------  -----   -----------  -----
</TABLE>

   No income tax payments were made during fiscal years 1999 and 1998. Taxes
paid during fiscal year 1997 totaled approximately $88,000.

NOTE 9--Debt

 Parent Company

   In connection with the SA Telecom acquisition, the Company assumed a note
payable of approximately $4.0 million to Greyrock Business Credit ("Greyrock").
In August 1998, this note was paid off through the proceeds of various new
third-party loans and the proceeds of a new note agreement with Greyrock of
approximately $0.8 million. This new note agreement bears interest at a rate of
prime plus 2.5% and is secured by the assets of USC Telecom. The principal
balance of this new note was due on February 28, 1999. The Company is currently
in default of this note and the corresponding debt is classified as debt in
default as of June 30, 1999. At June 30, 1999, the Company had approximately
$0.6 million outstanding under this facility. Also, see Note 12 to the
consolidated financial statements.

   In September 1998 and January 1999, the Company executed loan agreements in
favor of the Willis Group of approximately $0.2 million and $0.1 million,
respectively, for certain advances made on behalf of the Company. These notes
are secured by the assets of the Company and each of its subsidiaries, bear
interest at a rate of 11% per annum, and are due March 1, 2000. At June 30,
1999, the Company had approximately $0.3 million outstanding under these loans.

   On July 31, 1998, the Company issued two 6% Senior Secured Convertible Notes
due in 2001 (the "2001 notes") in the amount of $1.5 million each to the Willis
Group and an accredited investor. The 2001 Notes are convertible into a
variable number of shares of the Company's common stock and were issued with an
original issue discount of approximately $0.1 million for each note. The 2001
Notes bear interest at an annual rate of 6% and interest payments are due
quarterly. The Company's obligations under the 2001 notes are secured by the
assets of the Company. In connection with the issuance of the 2001 Notes, the
Company issued to each of the Willis Group and the accredited investor warrants
to purchase approximately 333,000 shares of the Company's common stock at a
purchase price of $0.90 per share; these warrants expire in September 2003. Any
holder of a 2001 note may convert, in whole or in part, into shares of the
Company's common stock. The holders converted the 2001 Notes to Series F
Preferred as of June 15, 1999.

   Effective February 3, 1997, the Company executed an agreement with an
accredited investor whereby the accredited investor loaned the Company $3.0
million at an annual interest rate of 10%, maturing on December 31, 1998. In
connection with this transaction, the Company issued stock warrants for an
aggregate

                                       55
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1.5 million shares of the Company's common stock at a purchase price of $2.00
per share. On March 6, 1998, the Company entered into an exchange agreement
with this accredited investor, exchanging the $3.0 million note, accrued
interest, and warrants for 3,000 shares of the Company's Series B Senior
Convertible Preferred Stock.

   On October 1, 1997, the Company issued to the Willis Group a $1.0 million
convertible secured note, bearing interest at the rate of 12% annually and
maturing on April 1, 1998, and a warrant for the purchase of up to 200,000
shares of the Company's common stock at an exercise price of $1.00 per share.
On March 5, 1998, this note and accrued interest was exchanged for
approximately 1.05 million shares of the Company's common stock.

   During the quarter ended March 31, 1998, the Company obtained a cash flow
bridge loan of $0.4 million from Netco Acquisition, LLC, an entity owned 50% by
the Willis Group. This note was payable on March 31, 1998. The relief of this
loan by Netco as of June 30, 1999 was considered and treated as a capital
contribution.

   On July 23, 1998, the Company entered into a loan agreement, and amended on
September 8, 1998, with a third party and received approximately $1.5 million,
which was funded in two separate tranches: Tranche A in the amount of
approximately $0.8 million and Tranche B in the amount of approximately $0.7
million. Monthly principal and interest payments commenced in November 1998,
with the total balances due on June 30, 2000 and October 30, 2002 for Tranche A
and Tranche B, respectively. This note bears interest at the prime lending rate
plus 5.5% and is secured by all of the Company's assets. In connection with
this loan, the Company granted to the lender warrants to purchase up to 294,000
shares of the Company's common stock at an exercise price equal to the average
closing price of the Company's common stock for the three trading days
immediately preceding September 8, 1998; these warrants expire in July 2003.
The Company used the proceeds of this loan to retire a portion of the SA
Telecom debt (see below). At June 30, 1999, the Company had approximately $1.4
million outstanding under this loan. At June 30, 1999, the Company was in
technical default of this loan agreement, and obtained a waiver of this default
from the Lender through July 1, 1999.

 EqualNet

   EqualNet entered into a new arrangement with Receivables Funding Corp.
("RFC") effective June 18, 1997 which is essentially a receivable purchase
arrangement which bases borrowing capacity on a percentage of EqualNet's
outstanding receivables up to a maximum allowable amount of $8.0 million and
increased to $10.0 million in July 1998 and allows for the lender to cease
funding of new receivables without prior written notice at the lenders option.
The program fee applied to the outstanding balance of net purchased receivables
was prime plus 4.5% per annum but changed to prime plus 7% on September 17,
1998 (after Chapter 11 filing). As of June 30, 1999, the amount owed to RFC
under this agreement is $.9 million.

 USC Telecom

   In connection with the January 1999 BCI transaction, USC Telecom assumed a
$1.5 million term loan payable. This term loan bears interest at the rate of
prime plus 4.5% and is due January 2001. At June 30, 1999, the amount owed
under this term loan was approximately $1.5 million. In addition, USC Telecom
assumed an accounts receivable purchase agreement with the holder of this term
loan. The maximum purchase commitment under this accounts receivable purchase
price agreement is $10 million with a program fee of 3.0%. At June 30, 1999,
the amount owed under this receivable purchase commitment was approximately
$1.5 million. At June 30, 1999, the Company was in technical default of this
loan agreement and obtained a waiver of this default from the Lender through
July 1, 1999.

                                       56
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In August 1998, USC Telecom entered into a receivables purchase agreement
and used the proceeds of the initial funding to pay of a portion of the debt
assumed in the SA Telecom acquisition. The maximum purchase commitment under
this facility is $4.0 million with a program fee of prime plus 2%--4% per annum
(12.1% at June 30, 1999). At June 30, 1999, the amount owed under this
receivable purchase commitment was approximately $1.0 million.

 Netco

   In March 1998, Netco secured financing of approximately $6.1 million for the
cash portion of the consideration to purchase nine telecommunications switches
from the Willis Group, a related entity, through an unaffiliated third-party
lender. This loan bears interest at a rate of 6.04% above an index rate based
on the US Treasury rate (12.1% as of June 30, 1999) and is payable in 36
consecutive monthly payments. At June 30, 1999, the Company had approximately
$5.2 million outstanding under this loan. At June 30, 1999, Netco was in
technical default of this note agreement, and obtained a waiver of this default
from the lender through July 1, 1999. The principal amount outstanding as of
June 30, 1998 of approximately $5.8 million was classified as debt in default
as Netco did not pay its July 1998 monthly payment.

NOTE 10--Earnings Per Share

   The following table sets forth the computation of basic and diluted earnings
per share:

<TABLE>
<CAPTION>
                                                     Weighted Average Per Share
                                         Net Loss     Common Shares    Amount
                                       ------------  ---------------- ---------
<S>                                    <C>           <C>              <C>
Year Ended June 30, 1999:
  Net loss............................ $(17,989,000)
  Dividends and deemed distribution
   applicable to preferred stock...... $ (4,177,000)
                                       ------------
  Basic and diluted EPS-
   Net loss applicable to common
   stock.............................. $(22,166,000)    19,936,000     $(1.11)
                                       ============     ==========     ======
Year Ended June 30, 1998:
  Net loss............................ $(17,943,000)
  Dividends applicable to preferred
   stock.............................. $    (52,000)
  Basic and diluted EPS-
   Net loss applicable to common
   stock.............................. $(17,995,000)    10,944,000     $(1.64)
                                       ------------
Year Ended June 30, 1997:
  Net loss............................ $(14,981,000)
  Dividends applicable to preferred
   stock.............................. $        --
                                       ------------
  Basic and diluted EPS-
   Net loss applicable to common
   stock.............................. $(14,981,000)     6,097,000     $(2.46)
                                       ============     ==========     ======
</TABLE>

   The analysis above assumes there are no conversions of any securities during
the periods shown because there is a loss in each fiscal year and, as a result,
the effect of the conversion of any security would be anti-dilutive.

                                       57
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 11--Commitments and Contingencies

   The following is a schedule by years of future minimum lease payments under
operating leases as of June 30, 1999:

<TABLE>
<CAPTION>
Year Ended June 30,    Amount
-------------------  ----------
<S>                  <C>
   2000              $  396,000
   2001                 365,000
   2002                 375,000
   2003                 375,000
   2004                 375,000
Thereafter                  --
                     ----------
                     $1,886,000
                     ==========
</TABLE>

   On August 7, 1998, Robert H. Turner, the Company's former Chief Executive
Officer filed suit against the Company alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims. Although the Company denies any wrongdoing or liability in the matter,
and intends to vigorously defend itself in this action settlement discussions
have been held and this matter will most likely settle. The Company believes
it has adequate reserves for this matter.

   On September 17, 1998, Comerica Leasing Corporation filed suit against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings. A
settlement agreement was entered into by the parties dismissing the earlier
litigation and adding the Company as an obligor for the payment of the
settlement amounts. Pursuant to an agreement reached in the bankruptcy
proceedings of EqualNet Corporation, Comerica Leasing agreed to release the
Company from any liability under the settlement and underlying agreements in
exchange for payment of $265,000 plus the issuance of a warrant for the
purchase of up to 300,000 shares of Common Stock of the Company at an exercise
price of $1.50 per share for a period of five years from the date of the
agreement.

   On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit against the Company and Netco
Acquisition LLC alleging damages for breach of contract and other alleged
claims. The matters originated with a letter of intent wherein the Company
proposed the purchase of certain assets of Cyberserve, Inc. and WSHS
Enterprises, Inc. subject to the performance of due diligence by the parties.
Bluegate and certain of its shareholders had threatened to sue the Company in
the event the proposed transaction was not consummated substantially in
conformity with the terms set forth in the Letter of Intent. The damages
Bluegate alleges it incurred were as a result of, among other things, the
claimed modification of its business to its detriment in anticipation of the
integration of its operations with those of EqualNet. It is impossible to
determine with any degree of certainty what, if any, liability Equalnet or any
of its subsidiaries, may incur in this matter. The total amount of damages are
unspecified, but include a demand for a cash payment of $685,000, a sufficient
number of shares of Common Stock of the Company for the payment of $585,000,
an additional 525,000 shares of Common Stock, and other damages. The Company
denies any wrongdoing or liability in this matter and intends to vigorously
defend itself against all claims of the plaintiffs. This action is in the
initial act of discovery and proceedings. Accordingly, at this time the
Company is unable to determine the amount of expense, if any, under this
action.

   On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom and the Company for
operating losses for the period from April 1, 1998--July 22, 1998, damages for
delayed or unbillable revenue, delivery of shares of the Company's Series C
Senior

                                      58
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Preferred Stock, and other items. On December 28, 1998, the court signed an
order approving those claims in the amount of approximately $813,000. The
Company and USC Telecom disputed the monetary claims asserted by SA
Telecommunications in its demand and filed a notice of appeal of the court's
order in the proceedings. On October 9, 1999, SA Telecommunications, Greyrock
Business Credit, and the Company presented an agreement to the SA Telecom
bankruptcy court providing for the settlement of the SA Telecommunications
judgment and amounts owed to Greyrock. The agreement calls for the payment of
the remaining principal balance of the promissory note to Greyrock, plus
accrued but unpaid interest, by the issuance of a number of shares of the
Company's unregistered common stock valued at the lessor of $0.28 per common
share (as adjusted to account for any stock split) or the market price of the
unregistered common stock at the date registration of the shares is effective.
In addition, the agreement calls for satisfaction of the remaining obligation
to SA Telecommunications by the payment of $150,000 cash plus the issuance of
an amount of the Company's unregistered common stock equal to approximately
$660,000 valued at the lesser of $0.28 per common share (as adjusted to account
for any stock split) or the market price of the unregistered common stock at
the date registration of the shares is effective. If the registration of these
shares of the Company's common stock is not effective as of October 31, 1999,
the amount of the Company's common stock to be issued will increase, over
varying periods of time from November 1, 1999 to January 30, 2000, from 7.5% to
22.5% of the amount to be ultimately issued. The Company has reserved the right
to repurchase the shares of the Company's common stock issued in settlement of
these obligations prior to January 31, 2000.

   As a result of liquidity problems, on September 10, 1998, EqualNet filed for
protection under Chapter 11 of Title 11 of the United States Code, in case
number 98-39561-H5-11 in the United States District Court for the Southern
District of Texas and Wholesale filed for protection under Chapter 11 of Title
11 of the United States Code, in case number 98-39560-H4-11 in the United
States District Court for the Southern District of Texas. On October 2, 1998,
Wholesale filed a motion seeking to convert its Chapter 11 reorganization
proceeding to a Chapter 7 liquidation proceeding. Pursuant to Sections 1107 and
1108 of the Bankruptcy Code, EqualNet managed its assets and operated its
business as a debtor-in possession pending confirmation of its reorganization
plan, which plan was confirmed on April 28, 1999, and consummated on May 28,
1999. The plan of reorganization provided for the restructuring of amounts and
repayment terms for secured and unsecured creditors. In conjunction with the
confirmation and consummation of the reorganization plan, certain debts were
reduced resulting in an extraordinary gain of approximately $10.0 million.

   In connection with the consummation of the reorganization plan, the Company
has disputed certain administrative and priority claims totaling approximately
$9.7 million. The Company has evaluated the claims and has accrued
approximately $830,000 based on management's best estimate of the Company's
liability associated with these claims. The Company continues to dispute the
remaining claims and is working with the claimants to resolve the differences.
Any settlement of these claims which is significantly greater than amounts
accrued could have a material adverse effect on the Company.

   The reorganization plan required the Company to issue 3 million shares of
its Common Stock to the Unsecured Creditors' Trust (the Trust) for the benefit
of holders of unsecured claims who were non-insiders or affiliates of the
Company. The Trust may sell up to 375,000 shares of the Company's Common Stock
during each of the first four consecutive six month periods after the effective
date of the reorganization plan. Based upon the price and trading volume, the
Company may authorize the Trust to sell more than 375,000 shares of Common
Stock during any of the four six month periods. If the gross proceeds, prior to
commission, of the Trust's stock sales in any six month period are less than
the average price of $1 per share, then the Company shall pay the trust an
amount of cash to make up the difference between the actual sales price and $1
per share. At any time during the four six month periods, but not thereafter,
the Company may elect to purchase for $1.50 per share, the entire balance of
shares of Common Stock held by the Trust. Since the effective date of the
reorganization plan, the Trust has sold shares of Common Stock for less than
$1. The Company has recorded a liability of $148,000 for its obligation under
this agreement for shares sold through June 30, 1999.



                                       59
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The reorganization also calls for the Company to issue additional shares of
Common Stock of the Company should the average closing price of the Company's
stock, during the 25 consecutive trading days preceding the date that is two
years after the effective date of the reorganization be less than $1 per share
as defined Plan of Reorganization.

   During 1997, EqualNet settled disputed claims with the attorneys general
from eleven states alleging violations of consumer protection statutes of those
states. The settlement amount, which was paid in March, 1998, totaled $225,000
plus the issuance of certain customer credits and adjustments. The Company was
either not included as a party or was dismissed as a party before the entry of
any final judgment in any of these proceedings.

   From time to time the Company is involved in what it believes to be routine
litigation, or other legal proceedings that may be considered as part of the
ordinary course of its business. The Company does not believe that the adverse
determination of any such claims would have a material adverse effect on either
the results of operations or the financial condition of the Company.

NOTE 12--Subsequent Event

   On October 9, 1999, SA Telecommunications, Greyrock, and the Company
presented an agreement to the SA Telecom bankruptcy court providing for the
settlement of the SA Telecommunications judgment and amounts owed to Greyrock.
The agreement calls for the payment of the remaining principal balance of the
promissory note to Greyrock, plus accrued but unpaid interest, by the issuance
of a number of shares of the Company's unregistered common stock valued at the
lessor of $0.28 per common share (as adjusted to account for any stock split)
or the market price of the unregistered common stock at the date registration
of the shares is effective. In addition, the agreement calls for satisfaction
of the remaining obligation to SA Telecommunications by the payment of $150,000
cash plus the issuance of an amount of the Company's unregistered common stock
equal to approximately $660,000 valued at the lesser of $0.28 per common share
(as adjusted to account for any stock split) or the market price of the
unregistered common stock at the date registration of the shares is effective.
If the registration of these shares of the Company's common stock is not
effective as of October 31, 1999, the amount of the Company's common stock to
be issued will increase, over varying periods of time from November 1, 1999 to
January 30, 2000, from 7.5% to 22.5% of the amount to be ultimately issued. The
Company has reserved the right to repurchase the shares of the Company's common
stock issued in settlement of these obligations prior to January 31, 2000.


                                       60
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                         Balance at Charged to                            Balance at
                         Beginning  Costs and    Charged to   Deductions    End of
                         of Period   Expenses  other Accounts Describe(A)   Period
                         ---------- ---------- -------------- ----------- ----------
<S>                      <C>        <C>        <C>            <C>         <C>
Fiscal Year Ended June
 30, 1999
  Allowance for Doubtful
   Accounts.............   $1,034     $6,414       $   61       $7,109      $  400
Fiscal Year Ended June
 30, 1998
  Allowance for Doubtful
   Accounts.............   $1,451     $1,661       $ (112)      $1,966      $1,034
Fiscal Year Ended June
 30, 1997
  Allowance for Doubtful
   Accounts.............   $3,285     $1,727       $2,011(B)    $5,572      $1,451
  Allowance for Advances
   to Agents............   $1,000     $  --        $  --        $1,000      $  --
</TABLE>
--------
(A) Uncollectible accounts written off, net of recoveries
(B) Provision for uncollectible accounts receivable taken against agent
    commissions payable

                                       61
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this Annual Report on Form 10-K/A to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          Equalnet Communications Corp.
                                          (Registrant)

                                          By: /s/ Mitchell H. Bodian
                                             __________________________________
                                             Mitchell H. Bodian, President,
                                             Chief Executive Officer,
                                             Principal Financial and
                                             Accounting Officer and Director

Dated: April 19, 2000

   In accordance with the Securities and Exchange Act of 1934, this Annual
Report on Form 10-K/A has been signed by the following persons on behalf of the
registrant and in the capacities and on the date indicated:

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                -------------------------- -------------------
<S>                                    <C>                        <C>
        /s/ Mark A. Willis             Chairman of the Board        April 19, 2000
______________________________________  of Directors
            Mark A. Willis

      /s/ Mitchell H. Bodian           President, Chief Executive   April 19, 2000
______________________________________  Officer, Principal
          Mitchell H. Bodian            Financial and Accounting
                                        Officer and Director

      /s/ Ronald J. Salazar            Director                     April 19, 2000
______________________________________
          Ronald J. Salazar
</TABLE>