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

                               AMENDMENT NUMBER 3 TO
                                     FORM 10-K
                                   ON FORM 10K/A

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


FOR THE FISCAL YEAR ENDED JUNE 30, 1997        COMMISSION FILE NUMBER  0-025842

                             EQUALNET HOLDING CORP.

              A TEXAS                                        IRS EMPLOYER
            CORPORATION                                     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. [ ]

Aggregate market value of the voting stock (common stock) held by non-affiliates
 of registrant as of January 15, 1998

                                                           $6,660,968

Number of shares of registrant's common stock outstanding as of January 15, 1998

                                                            6,660,968
<PAGE>
                               EXPLANATORY NOTE

This form 10-K/A amends Items 7, 8 and 14 of the Annual report on Form 10-K as
amended by Amendments No. 1 and 2 to Annual Report on Form 10K on 10-k/A, of
EqualNet Holding Corp. ("EqualNet" or the "Company") for the year ended June 30,
1997.

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

      THE FOLLOWING DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION OF EQUALNET
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. SPECIAL
NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2.

OVERVIEW

      The Company's long-distance volume was more than 10.6 million monthly
minutes in June 1997. Substantially all of the Company's revenues have been
derived from the sale of long-distance services to small business customers. The
source of these accounts is primarily the Company's network of independent
marketing agents and the acquisition of customer accounts of other resellers.
Many of these agents actively market the Company's long-distance products via
telemarketing.

      The Company's primary costs, its costs of sales, are variable and consist
of the underlying "wholesale" cost of long-distance services from its underlying
providers, commissions to independent agents and billing costs. However, in the
opinion of the Company, to the extent that the Company is able to continue to
negotiate more favorable rates from its providers, additional savings may be
achieved in the Company's costs, particularly the costs of long-distance
service. Additionally, with the completion of the Company's internal customer
billing system, the Company believes it will see a reduction in the current cost
of billing as a percentage of revenues as well.

      The Company has generated revenue through orders received from independent
marketing agents and by acquiring the customer accounts of several other
resellers. The Company acquires customer accounts from certain of its
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 will be offset by future commissions earned (agent advances) and
others receiving a higher initial payment with no future commission owed
(deferred acquisition costs). This allows the Company to use the agents as a
vehicle to outsource telemarketing activities. Expenditures associated with
individually acquired orders, both advanced and purchased, totaled approximately
$9.8 million and $3.2 million in fiscal years 1996 and 1997, respectively. The
Company expects that future revenue growth will come primarily from the
development of independent marketing agents and additional acquisitions of
customer accounts or businesses.

      The Company's selling, general and administrative costs are primarily the
costs of back office operations and customer service. The Company also has
devoted significant resources to the development of the information technology
necessary to support customer service and the network of 

                                       2
<PAGE>
independent marketing agents. NetBase is a proprietary software system designed
to provide efficient order provisioning and access to customer account
information. The Company's operations and customer service efforts depend on
NetBase, which serves as the interface between the Company and its independent
marketing agents. The Company plans to continue to develop and enhance this
system.

      The Company reported for federal income tax purposes as an S corporation
under the Internal Revenue Code of 1986, as amended, until its reorganization in
connection with its initial public offering in March 1995, and was similarly
treated for state income tax purposes under comparable state laws.

                                       3
<PAGE>
RESULTS OF OPERATIONS

      The following table sets forth for the fiscal periods indicated the
percentages of total sales represented by certain items reflected in the
Company's consolidated statements of income and expenses:
<TABLE>
<CAPTION>
                                                  Percentage of Total Revenues
                                                    Fiscal Year Ended June 30,
                                          ------------------------------------------
                                            1993     1994     1995     1996     1997
                                          ------   ------   ------   ------   ------
<S>                                        <C>      <C>      <C>      <C>      <C>   
Total sales ...........................    100.0%   100.0%   100.0%   100.0%   100.0%
Cost of sales .........................     86.8     81.4     80.5     78.9     74.0
                                          ------   ------   ------   ------   ------
Gross margin ..........................     13.2     18.6     19.5     21.1     26.0
Selling, general and administrative
expenses ..............................      9.5     14.9     13.1     17.5     26.7
Depreciation and amortization .........      0.4      0.8      2.0      7.6     12.9

Write down of long term assets ........     --       --       --        8.8      9.4
                                          ------   ------   ------   ------   ------
Operating income (loss) ...............      3.3      2.9      4.4    (12.8)   (23.0)
Other income (expense):
   Interest income ....................      0.2      0.1      0.7      0.1      0.0
   Interest expense ...................     (0.4)    (0.4)    (0.8)    (0.9)    (2.2)
   Miscellaneous ......................     --        2.4     (0.1)    (0.6)    (1.9)
                                          ------   ------   ------   ------   ------
Income (loss) before federal
income taxes and extraordinary item ...      3.1      5.0      4.2    (14.2)   (27.1)
Provision (benefit) for federal
income taxes ..........................     --       --        0.7     (3.4)     5.0
                                          ------   ------   ------   ------   ------
Net income (loss) .....................      3.1%     5.0%     3.5%   (10.8)%  (32.1)%
                                          ======   ======   ======   ======   ======
</TABLE>
YEAR ENDED JUNE 30, 1997, COMPARED TO YEAR ENDED JUNE 30, 1996

      TOTAL SALES. Long-distance sales decreased 40.5%, from $78.4 million in
fiscal 1996 to $46.6 million for the year ended June 30, 1997. The decrease was
due primarily to a decrease in the number of customer accounts and a
corresponding decrease in billable minutes. The decline in revenues in fiscal
year 1997 was the result of an increased rate of attrition on existing customers
and a decline in order activity beginning in the last half of fiscal year 1996.
The Company began reducing order activity in early calendar 1996 to reduce the
incidence of loss due to delayed provisioning times at AT&T and because it
discovered a new customer management system was severely hampering the Company's
ability to provision and service new customers. The Company slowly began
increasing order activity once it had reverted to the original Netbase system
and provisioning times had returned to acceptable levels; however, the Company
began experiencing liquidity problems during this time frame and has been unable
to fund agent advances that stimulate order activity as significant as those
experienced prior to January 1996.

      TOTAL COST OF SALES. The Company's cost of sales, which are variable,
decreased from $61.8 million in fiscal 1996 to $34.5 million for the year ended
June 30, 1997, a decrease of 44.2%. This decrease was a result of a decrease in
the Company's sales. The Company's cost of long distance (which is a component
of cost of sales) improved as a percentage of sales, decreasing from 63.6% to
55.6% for the years ended June 30, 1996 and 1997, respectively. The improvement
in the percentage is the result of the renegotiation of the company's contracts
with its carriers and from the recognition of a one-time credit from AT&T. The
Company negotiated an 8% improvement in the interstate rate it receives from
AT&T in May 1996 followed by an 8% 

                                       4
<PAGE>
improvement again in November 1996 and another 8% improvement in May 1997.
Additionally, the Company was granted a one-time credit of $1.2 million as part
of the new contract with AT & T, effective May 1, 1997 and a $400,000 backlog of
carrier disputes being processed by the Company and credited by the Company's
carriers in March 1997. The carrier dispute backlog was the result of
difficulties AT & T encountered in processing the Company's disputed long
distance usage which had accumulated over an extended period of time.

      Commission expense as a percentage of sales decreased from 6.5% to 5.6%.
Commission expense included a $1.0 million charge and $400,000 charge for fiscal
years 1996 and 1997, respectively, to expense advances to agents that are not
expected to be recovered through future commissions earned by those agents.
Commissions as a percentage of revenues without these charges would be 5.2% and
4.7% for fiscal years 1996 and 1997, respectively. The decrease relates in part
to a payment in the second quarter of fiscal 1996 to a principal agent to reduce
the agent's commission rate by approximately 4%. Of the Company's total sales
during fiscal years 1996 and 1997, 28% and 23%, respectively, were derived from
customers introduced to the Company from this agent. The Company shifted its
sales strategy from that of purchasing customer accounts and bases of customer
accounts, which have very little associated commission expense, to one of
advancing commissions to independent marketing agents for individual customer
accounts. Accordingly, the Company expects commission expense as a percent of
revenue to increase moderately in future periods as a result of the increased
emphasis in obtaining orders utilizing agents with residual commissions on those
orders. This increase in commission expense will be offset by a decrease in
amortization expense of purchased accounts.

      Billing expense as a percentage of sales increased from 4.0% to 7.3% for
the fiscal years ending 1996 and 1997, respectively, as a result of the Company
beginning to bill a significant portion of its customers through Local Exchange
Carriers ("LECs"). Billings through the LECs represented 26.8% of the Company's
revenues for the year ended June 30, 1997. The cost of billing through LECs is
generally greater than billing customers through independent billing companies;
however, the Company believes that by billing customers through the LECs,
savings will also be recognized by decreased bad debt expense and reduced
customer attrition. In addition, because the majority of customer service is
performed by the LECs, the Company has been able to reduce overhead related to
the cost of servicing these customers directly. Bad debt expense decreased from
4.9% of sales in fiscal year 1996 to 3.7% of sales in fiscal year 1997. The
Company's collection efforts were hindered in fiscal 1996 by the failure of a
new customer management system to produce the necessary information to allow for
the most effective method of collection, resulting in a higher than normal
incident of uncollected accounts.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 9.2% from $13.7 million for the year ended
June 30, 1996, to $12.5 million for the same period in fiscal 1997. Selling,
general and administrative expenses increased as a percentage of sales from
17.5% to 26.7% for the years ended June 30, 1996 and 1997, respectively. The
decrease in this expense was a result of cost reduction efforts by the Company.
Total staff decreased from an average of 204 temporary and permanent employees
during the year ended June 30, 1996 (183 employees at June 30, 1996) to an
average of 163 temporary and permanent employees in fiscal 1997 (151 at June 30,
1997). Salary related expense decreased $1.5 million from fiscal 1996 to fiscal
1997 as a result of the decrease in personnel. Administrative expense was down
$404,000 for fiscal 1997 compared to fiscal 1996 as the result of decreasing
supplies and office expense by $135,000 and due to a reduction in long-distance
and telephone related expenses by $259,000. The decrease in long-distance and
phone related expenses was related to the acquisition of a new telephone system
in January 1996 which allowed the Company to significantly reduce hold times,
thereby reducing long-distance costs, and due to the decrease in the number of
customers, resulting in fewer calls. Additionally, the Company incurred $246,000
in acquisition related costs in early fiscal 1996 which were not present in
fiscal 1997. These 

                                       5
<PAGE>
savings were offset somewhat by an increase in professional fees, bank fees,
marketing fees, lease expense and the addition of Creative and its related
overhead. The Company incurred approximately $170,000 in additional legal and
professional fees in fiscal 1997 as compared to fiscal 1996. Included in
professional fees are fees paid to third party verification companies which the
Company utilized to verify customer orders. These fees totaled approximately
$151,000 in fiscal 1997 as compared to $1,500 in fiscal 1996. Bank fees
increased as a result of the cost of obtaining an amendment to the Company's
loan agreement while marketing fees increased as the Company conducted an
aggressive campaign related to the placement of long-distance calling cards with
all of its customers. Lease expense increased $422,000 from fiscal 1996 to
fiscal 1997. The Company entered into two significant leases in January 1996 for
a new telephone system and for computer equipment to support the Company's
information system network. Creative resulted in an additional $450,000 in
selling, general and administrative expenses to support its operations, which
were acquired by the Company in fiscal 1997.

       DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
slightly as the company recorded $5.9 million and $6.0 million in expense during
1996 and 1997, respectively. The Company expended very little on capital
equipment during fiscal 1997 and returned to compensating agents through
commissions and advances on commissions.

      The Company wrote down assets of approximately $6.9 million and $4.4
million during the years ended June 30, 1996 and 1997, respectively. During
fiscal 1997 the Company recorded a charge to earnings for $4.4 million to reduce
the carrying value of purchased customer accounts to an estimate of future
discounted cash flows from the purchased accounts. Included in the write down in
fiscal 1996 was a similar $4.6 million non-cash charge to reduce the carrying
value of acquired customer bases to the present value of the expected future
cash flows associated with the underlying customer accounts and a $2.2 million
write off of capitalized software development costs associated with the NetBase
Plus system. The write down of deferred acquisition costs was necessitated by a
greater than expected turnover of acquired customer bases which resulted from
difficulties in billing and servicing the underlying customer accounts.

      OPERATING LOSS. The operating loss increased 7.6% from $10.0 million for
the year ended June 30, 1996, to $10.7 million for the year ended June 30, 1997.

      OTHER INCOME (EXPENSE). Other expense increased from $1.1 million for
fiscal 1996 to $1.9 million for the year ended June 30, 1997. This increase was
primarily attributable to an increase in interest expense of $343,000 from
fiscal 1996 to fiscal 1997 and an increase in miscellaneous expense of $406,000.
The increase in interest expense was the result of the increase in the interest
rate under the Company's bank line of credit and the addition of the note
payable to Furst. Other expense in fiscal 1996 includes a $250,000 accrual for
possible penalties, settlement costs and legal expenses associated with the
resolution of pending complaints against the Company by various state regulatory
agencies with regard to customer complaints. Fiscal 1997 includes an additional
$226,000 for settlements reached in certain states during the year and to
increase the accrual related to regulatory complaints in the states with
inquiries still pending. See Item 3, "Legal Proceedings". Other expense also
included $135,000 and $195,000 in fiscal 1996 and 1997, respectively, in losses
related to the failed Unified Network Services joint venture, which the Company
entered into in February 1996.

                                       6
<PAGE>
YEAR ENDED JUNE 30, 1996, COMPARED TO YEAR ENDED JUNE 30, 1995

      TOTAL SALES. Long-distance sales increased 15.4%, from $67.9 million in
fiscal 1995 to $78.4 million for the year ended June 30, 1996. The increase
resulted from the significant growth of customer minutes in the third and fourth
quarters of fiscal 1995, which continued into fiscal 1996. Quarterly revenues
peaked in the first quarter of fiscal 1996 at $23.9 million and declined each
quarter thereafter, with fourth quarter revenues totaling $16.2 million in
fiscal 1996. The decline in revenues during fiscal 1996 was more gradual than
the growth in fiscal 1995, resulting in an overall increase when comparing the
two fiscal years. The decline in revenues on a quarterly basis in fiscal year
1996 was the result of an increased rate of attrition on existing customers and
a decline in order activity in the last half of fiscal year 1996.

      TOTAL COST OF SALES. The Company's cost of sales, which is variable,
increased from $54.7 million in fiscal 1995 to $61.8 million for the year ended
June 30, 1996, an increase of 13.1%. This increase was a result of an increase
in the Company's sales. The Company's cost of long distance (which is a
component of cost of sales) remained relatively stable as a percentage of sales,
decreasing slightly from 63.7% to 63.6% for the years ended June 30, 1995 and
1996, respectively. Commission expense as a percentage of sales decreased from
11.9% to 6.5%. This decrease in commissions was the result of a change in the
Company's sales strategy from that of advancing commissions to independent
marketing agents for individual customer accounts, to one of purchasing customer
accounts and bases of customer accounts. The purchased bases and accounts have
no associated commission expense. In addition, the Company made a payment in the
second quarter of fiscal 1996 to a principal agent to reduce the agent's
commission rate. Of the Company's total sales during fiscal years 1995 and 1996,
40% and 28%, respectively, were derived from customers introduced to the Company
from this agent. Billing expense as a percentage of sales increased from 3.6% to
4.0%, a result of the average monthly customer bill decreasing from $55 per
month to $50 per month and the increase in the number of delinquent accounts.
Bad debt expense increased from 1.3% of sales in fiscal year 1995 to 4.9% of
sales in fiscal year 1996. A primary factor to the increase in bad debt expense
incurred by the Company was the result of the shift to more purchased orders for
which the Company had full exposure to uncollectible accounts as compared to
commissioned orders for which the agents shared in a substantial portion of the
risk on uncollectible accounts. In addition, the Company's collection efforts
were hindered by the failure of NetBase Plus to produce the necessary
information to allow for the most timely and effective method of collection.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 53.5% from $8.9 million for the year ended
June 30, 1995, to $13.7 million for the same period in fiscal 1996. Selling,
general and administrative expenses increased as a percentage of sales from
13.1% to 17.5% for the years ended June 30, 1995 and 1996, respectively. The
increase in this expense was a result of the substantial growth of the Company
over the last half of fiscal year 1995 and through December 1995. Total staff
increased from an average of 144 temporary and permanent employees during the
year ended June 30, 1995 (220 at June 30, 1995), to an average of 204 temporary
and permanent employees during the year ended June 30, 1996. Staffing peaked in
December 1995 at 283 employees (including temporary employees) and declined to
183 temporary and permanent employees in June 1996. Salary related expense
increased $2.8 million as a result of the increase in personnel. Lease expense
increased from $700,000 in fiscal 1995 to $1.7 million in fiscal 1996. The
Company entered into two sale leaseback transactions, the proceeds from which
totaled $1.4 million during fiscal year 1996. Additionally, the Company leased a
new telephone system and computer equipment to support the Company's information
system network. The Company incurred approximately $500,000 in additional legal,
accounting and professional fees in fiscal 1996 as compared to fiscal 1995 as a
result of the added 

                                       7
<PAGE>
cost of being a public company for all of fiscal 1996, the significant level of
attempted acquisition activity in the first half of fiscal 1996, the joint
venture with Metrolink, Inc. ("Metrolink"), and the renegotiation of the
Company's loan agreement with its principal lender in November 1995 and
amendments to that agreement in March and June 1996.

       DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
338% from $1.4 million for the year ended June 30, 1995, to $5.9 million for the
same period for the year ended June 30, 1996. Amortization expense has increase
substantially because of the purchase of a customer base in June 1995 for $8.4
million and the investment of $8.5 million in fiscal 1996 in individual orders
purchased from independent marketing agents. Depreciation expense has risen over
the same periods as a result of the significant investment in computers needed
to support the Company's growth and as a result of the investment in NetBase
Plus.

      The Company wrote down assets during the year ended June 30, 1996, of
approximately $6.9 million. Included in the write down were a $4.6 million
non-cash charge to reduce the carrying value of acquired customer bases to the
present value of the expected future cash flows associated with the underlying
customer accounts and a $2.2 million write off of capitalized software
development costs associated with the NetBase Plus system. The write down of
deferred acquisition costs was necessitated by continued greater than expected
turnover of acquired customer bases which resulted from difficulties in billing
and servicing the underlying customer accounts.

      During fiscal 1996, the Company reverted from the NetBase Plus operating
system which was implemented in November 1995, to the Company's original NetBase
operating system. The Company determined that the NetBase Plus system had
inherent design flaws which resulted in inefficient operation and abandoned the
entire system in April 1996. The Company expects the reversion to the original
NetBase to reduce cash outlays that were required to service, maintain and
modify the NetBase Plus system, as well as decrease depreciation expense in the
future by approximately $50,000 per month.

      OPERATING INCOME (LOSS). Operating income decreased 437% from $3.0 million
for the year ended June 30, 1995, to an operating loss of $10.0 million for
fiscal 1996.

      OTHER INCOME (EXPENSE). Other expense increased from $92,856 for fiscal
1995 to $1.1 million for the year ended June 30, 1996. This increase was
primarily attributable to a decrease in interest income of $443,000 from fiscal
1995 to fiscal 1996 and an increase in miscellaneous expense of $400,000. The
decrease in interest income was the result of the use during fiscal year 1996 of
the excess cash generated through the Company's initial public offering in March
1995. Miscellaneous expense in fiscal 1996 includes a $250,000 accrual for
possible penalties, settlement costs and legal expenses associated with the
resolution of pending complaints against the Company by various state regulatory
agencies with regard to customer complaints. See Item 3, "Legal Proceedings".
Interest expense increased as a result of an increase in the size and
utilization of borrowings under the Company's line of credit during the year
ended June 30, 1996.

                                       9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

      The Company generated pro forma net income of $1.8 million for the year
ended June 30, 1995, and recorded net losses of $8.4 million and $15.0 million
for the years ended June 30, 1996 and 1997, respectively. The Company funded its
operations during the year ended June 30, 1997 through extension of payment
terms from the Company's major suppliers, advances under its revolving credit
facility, from a $3.0 million debt offering and through operating cash flows.
Due to operating losses sustained in the second half of fiscal 1996 and
throughout fiscal 1997 and a declining revenue base, the Company reached its
maximum borrowing capacity under its revolving credit facility. The Company's
borrowing capacity under this credit facility continued to decline as a result
of operating losses, a decline in the revenue base and the exclusion of certain
receivables from the criteria of eligible receivables. At current levels of
operations and with a declining borrowing base, the Company must seek additional
capital and continued concessions from its vendors and must continue to reduce
expenses to bring them in line with current levels of revenues.

   
      CASH FLOW FROM OPERATIONS. The Company generated (used) net cash of
($1,172,798) and $3,974,000 in operating activities in fiscal 1996 and 1997,
respectively. Cash from net losses adjusted for non-cash expenses decreased from
a source of $6.0 million in fiscal year 1996 to a use of cash of $1.7 million in
1997. This use in fiscal 1997 was offset by the change in operating assets and
liabilities, including a $3.6 million change in accounts receivable, a $2.9
million change in accounts payable and a $1.5 million change in prepaid expenses
and other. Accounts receivable decreased as revenues continued their decline
throughout fiscal 1997 and due to continued improvement in collection activities
by the Company. Accounts payable, particularly the payable to providers of
long-distance, increased as a result of the extended payment terms negotiated by
the Company. The decrease in prepaid expenses and other was primarily the
receipt of a $1.3 million federal tax refund during fiscal 1997. Offsetting
these sources was the use of cash for advances paid to agents for orders,
resulting in the increase in the amounts due from agents, and for the change in
other assets, $552,000 of which were advances to UNS. The Company is involved in
negotiations with the attorneys general for eleven states concerning alleged
consumer protection violations in the marketing of long distance service by the
Company's independent contractor sales agents in those states. The attorneys
general have indicated that they will not seperately negotiate with the Company
to attempt to resolve these matters. The Company is not currently able to pay
the amounts being demanded by the group of state attorneys general to settle
these matters unless such payments are to be made over an extended period of
time. See Item 3 Legal Proceedings.
    
   
      CASH FLOW FROM INVESTING ACTIVITIES. Net cash used in investing activities
decreased significantly from $12.9 million in fiscal 1996 to $344,000 in fiscal
1997. During fiscal year 1995 the Company purchased a book of customer accounts
for $8.5 million. The Company expended $3.4 million for computer equipment and
related software development in 1996. Because of the liquidity concerns the
Company experienced during fiscal 1997 the Company consciously restricted
investing activities. The Company invested $272,000 in property, plant and
equipment, $141,000 of which was for the completion of the in-house billing
system which was placed into service in February 1997. In addition, the Company
reverted from its policy of buying orders from its agents to a strategy of
advancing commissions which, if the advances are recovered by the Company, will
provide the agents with a continuing revenue stream. As such, the Company
expended only $76,000 on purchased orders during fiscal 1997.
    

      FINANCING ACTIVITIES. Financing activities provided $10.9 million to the
Company in fiscal year 1996 and used $3.2 million in fiscal 1997. The Company
increased borrowings under the revolving credit facility during fiscal 1996,
resulting in net proceeds of $9.6 million. However, in fiscal 1997 due to
increased restrictions imposed upon the Company by its primary lender and due to
the declining 

                                       9
<PAGE>
revenue base, the Company experienced a decline in the borrowing base available
under the line of credit. This resulted in a net reduction in borrowings under
the line in fiscal 1997 of $6.1 million. The Company sought to offset a portion
of the loss of funds under the line of credit and issued subordinated debt in
February 1997 which resulted in $3.0 million in proceeds.

      WORKING CAPITAL AND LONG CASH CYCLE. Customer billings for long-distance
services are generated from detailed call records which are generally available
from the carrier on or about the tenth day of the month following the month of
customer usage. Customer invoices usually are generated within ten days
thereafter and are due by the 34th day following the month of customer usage.
However, the Company historically collects a large portion of receivables after
the scheduled due date, resulting in an average cash cycle of approximately 60
days. Since the Company's underlying carriers historically have been paid within
35 days following the month of usage, delays in receipt of customer payments
have resulted in significant working capital needs. The Company has currently
negotiated extended payment terms with its primary underlying carrier which
extend payment terms on newly generated costs in excess of 60 days. In addition,
the Company has negotiated terms with its current carriers on past due
obligations which allow the Company to satisfy the obligations over the next
four to eight months. Failure to comply with the negotiated terms could result
in the acceleration of the demand for payment and, in the extreme, could result
in the termination of the Company's underlying service. There can be no
assurance that the Company can continue to obtain concessions from its carriers.
Should the Company be unable to meet the currently agreed to terms or, should
the Company be unable to continue to negotiate favorable terms, it would be
required to fund the obligations through its operating cash flow, funds
available under its borrowing arrangement, third-party sources of capital and
working capital. If required at this time, such funds would not be available to
satisfy the obligations when due and the carrier could terminate the Company's
underlying service.

      SALES TAXES. In early 1994, the Company determined that its treatment and
disbursement of sales taxes was not being properly administered and engaged an
outside tax compliance firm to assist in the resolution of the matter with the
various states and other regulatory and taxing authorities At June 30, 1997, the
Company has accrued $140,000 for resolution of this matter. The improper
treatment of sales taxes arose from the Company's failure to remit the sales tax
due to various taxing authorities on the incremental component of revenue in
excess of the cost of the underlying service (for which taxes were properly
paid). The Company believes that the amount accrued is adequate for the
satisfaction of this tax liability, including any interest payable. The Company
has an installment agreement with the Internal Revenue Service which allows for
the Company to satisfy the amount outstanding in equal payments of $25,000 per
month.

      HISTORICAL CAPITAL RESOURCES. To date, the external funds necessary to
fund the Company's capital requirements arising from capital expenditures,
acquisitions and working capital have been provided primarily from bank credit
financing , third-party sources of capital and the proceeds from the Company's
initial public offering. Maximum borrowings under the Company's line of credit
increased from $100,000 in 1992 to $7.5 million in 1997. The Company's credit
facility at June 30, 1997 provided for a borrowing base that was dependent upon
the amount and aging of accounts receivable. As of June 30, 1997, the borrowing
base under the credit facility was estimated to be $4.7 million. Under this
facility the interest on the outstanding balance accrued at a rate equal to
prime plus 6% (14.5% at June 30, 1997). The line of credit was secured by the
Company's accounts receivable. As of June 30, 1997, approximately $189,000 of
borrowings were available under the credit facility. The Company replaced the
credit facility under which borrowings at June 30, 1997 were outstanding with a
new arrangement effective June 18, 1997 and which funded July 7, 1997. The new
agreement bases borrowing capacity on a percentage of the Company's outstanding
receivables up to a maximum allowable amount of $8,000,000 and allows for the
lender to cease funding of new receivables without prior written notice at 

                                       10
<PAGE>
the lenders option. Interest on the outstanding balance is prime plus 4.5% per
annum. Should the lender cease to provide financing in accordance with its
option, the Company would be forced to seek immediate replacement of the
facility to provide working capital. Current sources of funds from operations
and working capital would be insufficient to provide funds adequate to continue
funding operations. In the event the Company would be unable to find an
immediate replacement of the funds, it would seek an alliance with a strategic
partner, or in the event no such strategic alliance were accomplished, the
Company would be required to seek protection under United States bankruptcy
laws.

      The Company's agreement with AT&T covers the pricing of the services and
establishes minimum semi-annual revenue commitments which must be met to receive
the contractual price and to avoid shortfall penalties. At June 30, 1997, the
Company had not yet reached the completion of the term of the first MSARC;
however, the Company was $477,000 below the cumulative pro rata monthly
commitment. Should the Company continue at similar revenue levels, it would be
in a shortfall at the end of the first MSARC period in October 1997. If the
existing contract with AT&T is terminated, either by the Company or by AT&T for
non-payment, prior to the expiration of the full term without execution of a new
contract, the Company will be liable for the total amount of the unsatisfied
MSARC for the period in which the discontinuance occurs and for 100% of the
MSARCs for each semi-annual period remaining in the contract tariff term. In
addition, should the Company fail to meet the first MSARC, it will be required
to refund $398,000 in credits issued to the Company by AT&T. See note 6 of the
notes to consolidated financial statements. The contract expires in April 2000.
The MSARCs increase over the term of the contract. Historically, the Company has
been able to negotiate a settlement of such shortfalls with the carrier which
has resulted in no penalty being incurred by the Company. No assurances can be
made that the Company will be able to reach similar favorable settlements with
the carrier should it continue to fail to meet its commitment. Should the
Company be unable to reach a favorable settlement with the carrier, it would be
required to fund the resulting penalties through its operating cash flow, funds
available under its existing financing arrangement and working capital. If
required at this time, such funds would not be available to meet the commitments
when due and the carrier could terminate the Company's underlying service.

      During fiscal 1997, the Company had moderate expenditures of $272,000 on
capital items. Included in capital expenditures during fiscal 1997 were $141,000
to complete the in-house proprietary billing system and $108,000 on computer
related equipment. The Company has no planned capital expenditures budgeted for
fiscal year 1998; however, should funds be available, the Company intends to
continue to modify and improve NetBase.

      The Company has gross deferred tax assets of $8.9 million for which a
valuation allowance of $8.6 million has been established. The deferred tax
assets arise from deductible temporary differences of $15.4 million and a net
operating loss carryforward of $7.5 million. In assessing the need for and
amount of a valuation allowance, the Company considered its inability to
generate taxable income in recent periods, the facts and circumstances which led
to the significant operating loss incurred in the years ended June 30, 1996 and
1997, and projections of future taxable income. Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes", allows for the
recognition of deferred tax assets by considering, among other things, the
ability of the Company to generate future taxable income. A valuation allowance
is required to reduce tax assets to their expected realizability if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Statement 109 explicitly provides that reaching a conclusion that a
valuation allowance is not required is difficult when there is negative evidence
such as cumulative losses in recent years. The Company has been in a cumulative
loss position at June 30, 1997. The Company does not believe that positive
evidence of the ability to generate future taxable income is sufficient to
counteract the negative evidence, the cumulative losses, and accordingly has
recorded a valuation allowance for the full amount of the deferred tax. The

                                       11
<PAGE>
Company generally can be expected to generate taxable income in excess of book
income as a result of deductible temporary differences related to the allowance
for doubtful accounts and amortization of deferred acquisition costs.

      The Company continues to pursue the final steps of its financial
restructuring: an additional financing of between $5.0 million and $11.0 million
in debt or equity and the agreement to additional concessions from its carriers
for special terms and consideration. In the event the Company is unsuccessful in
achieving any one or a combination of these objectives sufficient to meet the
Company's liquidity needs, it may seek an alliance with a strategic partner, or
in the event no such strategic alliance is accomplished, the Company may be
required to seek protection under United States bankruptcy laws.
   
LEGAL LIABILITIES

      The Company has been involved in negotiations with attorneys general for
eleven states concerning alleged consumer protection violations in the marketing
of long-distance service by the Company's independent contractor sales agents in
those states. The State Attorneys General originally demanded a settlement
payment in the total amount of $750,000. The Company and the Attorneys General
reached an agreement on December 22, 1997 on a settlement of claims without an
admission of liability by the Company. This settlement will require the company
to make payments to the various Attorneys General involved in a total amount of
$225,000 on or before February 28, 1998. The Company has accrued $390,000 for
the anticipated settlement of such claims based on preliminary settlement
negotiations with the State Attorneys General during fiscal 1996 and 1997.
    

SEASONALITY

      The Company's long distance revenue is subject to seasonal variations.
Because most 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, which is primarily non-residential, has declined slightly
during the quarter ending December 31 due to the November and December holiday
periods.


INFLATION

      Inflation has not had a significant impact on the Company's operations to
date.

CAUTIONARY STATEMENTS

IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY WHEN EVALUATING THE LIKELIHOOD
OF THE COMPANY'S REALIZATION OF EXPECTATIONS WITH RESPECT TO OPERATING RESULTS
AND OTHER MATTERS DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K. SEE " SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS " ON
PAGE 2.

NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL - The Company continues to pursue
additional financing of between $5.0 million and $11.0 million in debt or
equity. If the Company is unsuccessful in achieving one or a combination of
these objectives sufficient to meet the Company's liquidity needs, it will be
necessary to seek an alliance with a strategic partner, or in the event no such
strategic alliance is accomplished, the Company may be required to seek
protection under United States bankruptcy laws.

                                       12
<PAGE>
ATTRITION RATES - In the event that the Company experiences attrition rates in
excess of those anticipated either as a result of increased provisioning times
by its underlying carrier, the purchase of poorly performing traffic, or the
inability to properly manage the existing customer base, additional charges that
affect earnings may be incurred.

DEPENDENCE ON INDEPENDENT MARKETING AGENTS - The Company has a small internal
sales force and obtains a significant majority of its new customers from
independent marketing agents ("Agents"). The Company's near-term ability to
expand its business depends upon whether it can continue to maintain favorable
relationships with existing Agents and recruit and establish new relationships
with additional Agents. No assurances can be made as to the willingness of the
existing Agents to continue to provide new orders to the Company or as to the
Company's ability to attract and establish relationships with new Agents.

DEPENDENCE ON AT&T AND OTHER FACILITIES-BASED CARRIERS - The Company does not
own transmission facilities and currently depends primarily upon AT&T and, to a
lesser extent, upon Sprint, through its contract with Furst, to provide the
telecommunications services that it resells to its customers and the detailed
information upon which it bases its customer billings. The Company's near-term
ability to expand its business depends upon whether it can continue to maintain
favorable relationships with AT&T and Sprint. Although the Company believes that
its relationships with AT&T and Sprint are good and should remain so with
continued contract compliance, the loss of the telecommunications services that
the Company receives from AT&T or Sprint could have a material adverse effect on
the Company's results of operations and financial condition.

This dependence on the Company's primary carrier further manifested itself
during the quarter ended March 31, 1996, as continued delays in provisioning
(activating new customers) by the carrier resulted in a backlog of customers who
would otherwise have been activated on the Company's long-distance service and
billing. Although the carrier has taken certain steps to decrease the
provisioning time which has resulted in an elimination of a significant
provisioning backlog, there can be no assurance that similar delays will not
occur in the future.

CARRIER COMMITMENTS - The Company has significant commitments with its primary
carrier to resell long-distance services. The Company's contract with its
carrier contains clauses that could materially and adversely impact the Company
should the Company incur a shortfall in meeting its commitments. Although the
Company has from time to time failed to meet its commitment levels under a
particular contract and in each case has been able to negotiate a settlement
with the carrier which resulted in no penalty being incurred by the Company,
there can be no assurances that the Company will be able to reach similar
favorable settlements with its carriers in the event that the Company should
fail to meet its future commitments. The Company continues to experience such
delays whenever it sends large numbers of new customer orders to AT & T for
provisioning.

In recent years, AT&T, MCI Communications Corporation ("MCI") and Sprint have
consistently followed one another in pricing their long-distance products. If
MCI and Sprint were to lower their rates for long-distance service and AT&T did
not adopt a similar price reduction, adverse customer reaction could affect the
Company's ability to meet its commitments under the AT&T contract which could
have a material adverse affect on the Company's financial position and results
of operations.

DEVELOPMENTAL PROBLEMS WITH NETBASE - NetBase Plus(R), the Company's second
generation customer management system, was not able to meet the operating
requirements of the Company. As a result, in the third quarter of fiscal 1996
the Company began reverting to an enhanced version of the original NetBase
operating system. Although the Company successfully completed the 

                                       13
<PAGE>
reversion in the fourth quarter of fiscal 1996 and has made continued
improvements to the operating system, to the extent that the Company experiences
significant growth, the existing NetBase operating system may reach technical
limitations and hinder reporting visibility to management as well as cause a
decline in customer service, thereby negatively impacting attrition levels and,
therefore, results of operations.

RELATIONSHIPS WITH STATE REGULATORY AGENCIES - The Company's intrastate
long-distance telecommunications operations are subject to various state laws
and regulations, including prior certification, notification or registration
requirements. The Company must generally obtain and maintain certificates of
public convenience and necessity from regulatory authorities in most states in
which it offers service. The Company is presently responding to consumer
protection inquiries from eleven states. The Company believes these inquiries
will be resolved satisfactorily, although settlement offers may be made or
accepted in instances in which it is determined to be cost effective. The
Company currently has recorded an accrual of $390,000 for such estimated
settlements. No assurances can be made however, that additional states will not
begin inquiries or that the current accrual will be sufficient to provide for
existing or future settlements. Failure to resolve inquiries satisfactorily or
reach a settlement with the regulatory agencies could, in the extreme, result in
the inability of the Company to provide long-distance service in the
jurisdiction requiring regulatory certification. Any failure to maintain proper
certification in jurisdictions in which the Company provides a significant
amount of intrastate long-distance service could have a material adverse effect
on the Company's business, see "Item 3, Legal Proceedings".

VOLATILITY OF SECURITIES PRICES - Historically, the market price of the Common
Stock has been highly volatile. During the last two quarters of fiscal 1996 and
all of fiscal 1997, the market price for the Common Stock as reported by The
Nasdaq Stock Market has ranged from a high of $10-1/2 per share to a low of
$0-9/16 per share. There can be no assurance that the market price of the Common
Stock will remain at any level for any period of time or that it will increase
or decrease to any level. Changes in the market price of the Common Stock may
bear no relation to EqualNet's actual operational or financial results. In
addition, if the Company fails to maintain the minimum bid price requirements of
The Nasdaq Stock Market, the Common Stock would be subject to delisting
therefrom.


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 19 through 40 of this Annual
Report on Form 10-K, and are incorporated herein by reference.
    

                                       14
<PAGE>
                                    PART IV

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

(A)     DOCUMENTS INCLUDED IN THIS REPORT:

        1.   FINANCIAL STATEMENTS                                           PAGE

        Report of Independent Auditors          

        Consolidated Balance Sheets as of June 30, 1996
          and 1997                

        Consolidated Statements of Operations for the years
          ended June 30, 1995, 1996 and 1997          

        Consolidated Statements of Shareholders' Equity (Deficit)
          for the years ended June 30, 1995, 1996 and 1997

        Consolidated Statements of Cash Flows for the years ended 
          June 30, 1995, 1996 and 1997

        Notes to Financial Statements           

        2.  FINANCIAL STATEMENT SCHEDULES

   
        Schedule II-Valuation and Qualifying Accounts
    

(B)     REPORTS ON FORM 8-K:

        None.

(C)     EXHIBITS:

   
        Exhibits designated by the symbol * are filed with this Amendment No.3 
        to Annual Report on Form 10-K/A. All exhibits not so designated are
        incorporated by reference to a prior filing as indicated.
    

        Exhibits designated by the symbol ** are management contracts or
        compensatory plans or arrangements that are required to be filed with
        this report pursuant to this Item 14.

        The Company undertakes to furnish to any shareholder so requesting a
        copy of any of the following exhibits upon payment to the Company of the
        reasonable costs incurred by the Company in furnishing any such exhibit.

EXHIBIT NO. DESCRIPTION
   
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).

                                       15
<PAGE>
4.1     Form of Common Stock Certificate (incorporated by reference to Exhibit
        4.1 to Amendment No. 2 to the Registrant's Registration Statement on
        Form S-1 (Registration No. 33-88742) filed March 2, 1995).

4.2     The Company's 10% Senior Subordinated Note due December 31, 1998, in the
        principal amount of $3,000,000 (incorporated by reference to Exhibit 4.3
        to the Company's Registration Statement on Form S-3 (Registration No.
        333-23427), filed March 31, 1997).
 
 
10.1    AT&T Billing Service Agreement between EqualNet and AT&T Communications,
        Inc., as amended by letter agreement dated October 28, 1994, between
        EqualNet and AT&T Corp. (incorporated by reference to Exhibit 10.2 to
        the Registrant's Registration Statement on Form S- 1 (Registration No.
        33-88742) filed on January 24, 1995).
 
10.2    **Form of Employment Agreement, by and between EqualNet and the persons
        listed on the schedule attached thereto (incorporated by reference to
        Exhibit 10.3 to Amendment No. 1 to the Registrant's Registration
        Statement on Form S-1 (Registration No. 33-88742) filed on February 13,
        1995).
 
10.3    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).
 
10.4    **EqualNet Holding Corp. Stock Option and Restricted Stock Plan
        (incorporated by reference to Exhibit 10.8 to Registrant's Annual Report
        on Form 10-K for the year ended June 30, 1996, filed October 15, 1996).
 
10.5    EqualNet Corporation 401(k) Plan effective January 1, 1993, as amended
        by the First Amendment to the Equal Net Communications, Inc. 401(k)
        Plan, dated effective as of July 1, 1993, and First Amendment to the
        Adoption Agreement dated effective as of June 2, 1994 (incorporated by
        reference to Exhibit 10.8 to Registrant's Registration Statement on Form
        S-1 (Registration No. 33-88742) filed January 24, 1995).
 
10.6    Interstate and International Carrier Transport Switch Services Agreement
        dated effective August 1, 1994, by and between EqualNet and Sprint
        Communications Company, L.P. ("Sprint"), as amended by the Amendment
        dated effective August 1, 1994, between EqualNet and Sprint
        (incorporated by reference to Exhibit 10.11 to Registrant's Registration
        Statement on Form S-1(Registration No. 33-88742) filed January 24,
        1995).
  
10.7    EqualNet Holding Corp. Employee Stock Purchase Plan (incorporated by
        reference to Exhibit 10.14 to Registrant's Annual Report on Form 10-K
        for the year ended June 30, 1996, Filed October 15, 1996).

                                       16
<PAGE>
10.8    **Promissory Note by Zane D. Russell in favor of EqualNet (incorporated
        by reference to Exhibit 10.16 to Registrant's Registration Statement on
        Form S-1 (Registration No. 33-88742) filed on January 24, 1995).
 
10.9    **Promissory Note by Marc R. Smith in favor of EqualNet (incorporated by
        reference to Exhibit 10.17 to Registrant's Registration Statement on
        Form S-1 (Registration No. 33-88742) filed January 24, 1995).
 
10.10   **Promissory Note by Byron A. Russell in favor of EqualNet (incorporated
        by reference to Exhibit 10.18 to Registrant's Registration Statement on
        Form S-1 (Registration No. 33-88742) filed January 24, 1995).
 
10.11   Loan Agreement dated March 10, 1995, between EqualNet Corporation and
        EqualNet Holding Corp. (incorporated by reference to Exhibit 10.2 to the
        Registrant's Quarterly Report on Form 10-Q for the period ended March
        31, 1995).
 
10.12   Security Agreement dated March 10, 1995 by EqualNet Corporation in favor
        of EqualNet Holding Corp. (incorporated by reference to Exhibit 10.3 to
        the Registrant's Quarterly Report on Form 10-Q for the period ended
        March 31, 1995).

10.13   Note and Warrant Purchase Agreement, dated February 3, 1997, among the
        Company , EqualNet Corporation , a Delaware corporation, and The Furst
        Group, Inc., a New Jersey corporation. ( incorporated by reference to
        Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q, filed May
        15, 1997)

10.14   Warrant for Purchase of Common Stock, issued February 11, 1997. (
        incorporated by reference to Exhibit 10.2 to Registrant's Quarterly
        Report on Form 10-Q, filed May 15, 1997)

10.15   Security Agreement, dated February 11,1997, among the Company, its
        subsidiaries and The Furst Group, Inc., a New Jersey corporation. (
        incorporated by reference to Exhibit 10.3 to Registrant's Quarterly
        Report on Form 10-Q, filed May 15, 1997)

10.16   Right in the Event of Change of Control, dated February 11, 1997. (
        incorporated by reference to Exhibit 10.4 to Registrant's Quarterly
        Report on Form 10-Q, filed May 15, 1997)

10.17   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)

10.18   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)

                                       17
<PAGE>
10.19   **Employment Agreement dated April 1, 1997 between Michael L. Hlinak and
        the Company. (incorporated by reference to Exhibit 10.19 to Amendment 2
        to the Registrant's Annual Report on Form 10-K for the year ended June
        30, 1997, filed October 28, 1997)

21.1    List of Subsidiaries of EqualNet. (incorporated by reference to Exhibit 
        21.1 to Registrant's Annual Report on Form 10-K for the year ended June 
        30, 1997, filed September 28, 1997)

23.1    *Consent of Ernst & Young LLP.

27.1    Financial Data Schedule. (incorporated by reference to Exhibit 27.1 to 
        Registrant's Annual Report on Form 10-K for the year ended June 30,
        1997, filed September 28, 1997)
    
                                       18
<PAGE>
INDEX TO FINANCIAL STATEMENTS                                               PAGE

        Report of Independent Auditors          

        Consolidated Balance Sheets as of June 30, 1996 and 1997                

        Consolidated Statements of Operations for the years ended 
          June 30, 1995, 1996 and 1997          

        Consolidated Statements of Shareholders' Equity (Deficit)
          for the years ended June 30, 1995, 1996 and 1997              

        Consolidated Statements of Cash Flows for the years ended 
          June 30, 1995, 1996 and 1997          

        Notes to Financial Statements           

                                       19
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
EqualNet Holding Corp.

We have audited the accompanying consolidated balance sheets of EqualNet Holding
Corp. and subsidiaries as of June 30, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity(deficit), and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 Holding
Corp. and subsidiaries at June 30, 1996 and 1997, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming EqualNet
Holding Corp. and subsidiaries will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring operating losses and has
a working capital deficiency. 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 2. 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.

As discussed in Note 1, in fiscal 1997 the Company changed its method of
accounting for long- lived assets.

                                                    ERNST & YOUNG LLP

Houston, Texas
September 25, 1997

                                       20
<PAGE>
                            EQUALNET HOLDING CORP.
                         CONSOLIDATED BALANCE SHEETS

                                                     JUNE 30,        JUNE 30,
                                                       1996            1997
                                                   ------------    ------------
ASSETS
Current assets
  Cash and equivalents .........................   $    381,849    $    828,478
  Accounts receivable, net of allowance for
    doubtful accounts of $3,284,886 at
    June 30,1996 and $1,450,954 at June 30,
                                            1997     14,372,858       9,048,961
  Receivable from officers .....................         28,367          28,367
  Due from agents, net of allowances of
    $1,000,000 at June 30, 1996 and $0 at
    June 30, 1997 ..............................      1,640,808       2,907,922
  Prepaid expenses and other ...................        582,052         285,516
  Recoverable federal income taxes .............      1,302,595            --
  Deferred tax asset ...........................        696,868            --
                                                   ------------    ------------
Total current assets ...........................     19,005,397      13,099,244

Property and equipment
  Computer equipment ...........................      3,172,950       3,435,121
  Office furniture and fixtures ................      1,204,880       1,209,032
  Leasehold improvements .......................      1,174,510       1,174,777
                                                   ------------    ------------
                                                      5,552,340       5,818,930
  Accumulated depreciation and amortization ....     (1,864,068)     (3,028,768)
                                                   ------------    ------------
                                                      3,688,272       2,790,162
Customer acquisition costs, net of
  accumulated amortization of $5,379,338 at
  June 30, 1996 and $13,050,667 at June 30,
  1997..........................................      9,019,774       1,262,939
Deferred tax asset .............................      1,531,209            --
Other assets ...................................      1,273,240       1,027,507
Goodwill, net of accumulated
amortization of $46,020 ........................           --           982,308
                                                   ------------    ------------
Total assets ...................................   $ 34,517,892    $ 19,162,160
                                                   ============    ============

                           See accompanying notes.

                                       21
<PAGE>
                            EQUALNET HOLDING CORP.
                         CONSOLIDATED BALANCE SHEETS

                                                     JUNE 30,        JUNE 30,
                                                       1996            1997
                                                   ------------    ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
  Accounts payable .............................   $  2,057,092    $  1,858,065
  Accrued expenses .............................        879,484       1,398,319
  Accrued sales taxes ..........................        912,123         591,182
  Brokerage commissions payable ................        177,891         151,755
  Payable to providers of long distance
    services ...................................      7,116,916       7,977,531
    Current maturities of capital lease
obligations ....................................         90,000          51,000
  Notes payable to long distance provider ......           --         1,183,059
  Revolving line of credit .....................     10,654,245       4,555,442
                                                   ------------    ------------
Total current liabilities ......................     21,887,751      17,766,353

Subordinated note payable ......................           --         2,864,058
Long term obligations under capital leases .....         45,000            --
Deferred rent ..................................        201,143         220,288
Commitments and contingencies
Shareholders' equity (deficit)
  Preferred stock (non-voting), $.01 par value
    Authorized shares - 1,000,000 at June 30,
    1996 and 1997 Issued and outstanding
    shares - 0 at June 30, 1996 and 1997 .......           --              --
  Common stock, $.01 par value
    Authorized shares - 20,000,000 at June 30,
    1996 and 1997 Issued and outstanding shares
    - 6,023,750 at June 30, 1996, and 6,173,750
    at June 30, 1997 ...........................         60,237          61,738
  Treasury stock at cost: 21,750 shares at
    June 30, 1996 and June 30, 1997 ............       (104,881)       (104,881)
  Additional paid in capital ...................     19,942,428      20,390,927
  Stock warrants ...............................           --           368,000
  Deferred compensation ........................       (335,836)       (245,829)
  Retained deficit .............................     (7,177,950)    (22,158,494)
                                                   ------------    ------------
Total shareholders' equity (deficit) ...........     12,383,998      (1,688,539)
                                                   ============    ============
Total liabilities and shareholders' equity
(deficit) ......................................   $ 34,517,892    $ 19,162,160
                                                   ============    ============

                           See accompanying notes.

                                       21
<PAGE>
                            EQUALNET HOLDING CORP.
                    CONSOLIDATED STATEMENTS OF OPERATIONS

                                               YEAR ENDED JUNE 30,
                                   --------------------------------------------
                                       1995            1996            1997
                                   ------------    ------------    ------------
Sales ..........................   $ 67,911,405    $ 78,354,858    $ 46,588,496
Cost of Sales ..................     54,655,313      61,807,113      34,481,128
                                   ------------    ------------    ------------
Gross Profit ...................     13,256,092      16,547,745      12,107,368

Selling, general and
  administrative expenses ......      8,936,102      13,719,573      12,453,814
Depreciation and amortization ..      1,355,832       5,933,890       5,999,898
Write down of assets ...........           --         6,882,661       4,400,000
                                   ------------    ------------    ------------
Operating income (loss) ........      2,964,158      (9,988,379)    (10,746,344)

Other income (expense)
Interest income ................        498,280          55,546           3,685
Interest expense ...............       (526,733)       (679,745)     (1,022,284)
Other expense ..................        (64,403)       (464,688)       (870,290)
                                   ------------    ------------    ------------
                                        (92,856)     (1,088,887)     (1,888,889)
Income (loss) before federal
  income taxes .................      2,871,302     (11,077,266)    (12,635,233)

Provision (benefit) for federal
  income taxes .................        507,057      (2,659,853)      2,345,311
                                   ------------    ------------    ------------
Net income (loss) ..............   $  2,364,245    $ (8,417,413)   $(14,980,544)
                                   ============    ============    ============
Net loss per share .............                   $      (1.40)   $      (2.46)
                                                   ============    ============
Unaudited pro forma information

Pro forma adjustment for taxes .       (612,751)

Pro forma net income ...........   $  1,751,494 
                                   ============  
Pro forma net income per share .   $       0.38  
                                   ============  
Weighted average number of
  shares .......................      4,618,043       6,017,332       6,096,932
                                   ============    ============    ============

                           See accompanying notes.

                                       23
<PAGE>
                             EQUALNET HOLDING CORP.
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                         EQUALNET          EQUALNET          EQUALNET          ADDITIONAL      
                                       CORPORATION       HOLDING CORP.     HOLDING CORP.        PAID-IN        
                                       COMMON STOCK      COMMON STOCK     TREASURY STOCK        CAPITAL        
                                     ---------------    ---------------   ---------------    ---------------   
<S>                                  <C>                <C>               <C>                <C>               
Balance, June 30, 1994 ...........   $         2,000    $          --     $          --      $        34,907   
  Shareholder distributions ......              --                 --                --                 --     
  Net Income ($0.61 per share) ...              --                 --                --                 --     
  Exchange of stock (2,000 shares
    of EqualNet Corporation common
    stock for 4,000,000 shares of
    EqualNet Holding Corp. common
    stock) .......................            (2,000)            40,000              --              (34,907)  
  Issuance of stock (1,810,000
    shares) ......................              --               18,100              --           17,831,690   
  Issuance of stock (150,111
    shares) ......................              --                1,501              --            1,534,145   
  Grant rights to 63,638 shares
    of stock to key employees ....              --                  636              --              699,364   
  Amortization of deferred
    compensation .................              --                 --                --                 --     
                                     ---------------    ---------------   ---------------    ---------------   
Balance, June 30, 1995 ...........              --               60,237              --           20,065,199   
  Forfeiture of 18,182 shares
    of stock granted to key
    employees ....................              --                 --             (77,229)          (122,771)  
  Forfeiture of 3,658 shares of
    stock granted to key
    employees for tax
    withholdings payable .........              --                 --             (27,652)              --     
  Net Loss ($1.40 per share) .....              --                 --                --                 --     
  Amortization of deferred
    compensation .................              --                 --                --                 --     
                                     ---------------    ---------------   ---------------    ---------------   
Balance, June 30, 1996 ...........              --               60,237          (104,881)        19,942,428   
  Net Loss ($1.40 per share) .....              --                 --                --                 --     
  Common stock and warrants
    issued in acquisition ........              --                1,501              --              448,499   
  Stock warrants issued with
    debt .........................              --                 --                --                 --     
  Amortization of deferred
    compensation .................              --                 --                --                 --     
                                     ---------------    ---------------   ---------------    ---------------   

Balance, June 30, 1997 ...........   $          --      $        61,738   $      (104,881)   $    20,390,927   
                                     ===============    ===============   ===============    ===============   
<CAPTION>
                                                                              RETAINED
                                        DEFERRED                              EARNINGS
                                      COMPENSATION         WARRANTS           (DEFICIT)            TOTAL
                                     ---------------    ---------------   ---------------    ---------------
Balance, June 30, 1994 ...........   $          --      $          --     $     1,313,791    $     1,350,698
  Shareholder distributions ......              --                 --          (2,435,480)        (2,435,480)
  Net Income ($0.61 per share) ...              --                 --           2,364,245          2,364,245
  Exchange of stock (2,000 shares
    of EqualNet Corporation common
    stock for 4,000,000 shares of
    EqualNet Holding Corp. common
    stock) .......................              --                 --              (3,093)              --
  Issuance of stock (1,810,000
    shares) ......................              --                 --                --           17,849,790
  Issuance of stock (150,111
    shares) ......................              --                 --                --            1,535,646
  Grant rights to 63,638 shares
    of stock to key employees ....          (700,000)              --                --                 --
  Amortization of deferred
    compensation .................            40,825               --                --               40,825
                                     ---------------    ---------------   ---------------    ---------------
Balance, June 30, 1995 ...........          (659,175)              --           1,239,463         20,705,724
  Forfeiture of 18,182 shares
    of stock granted to key
    employees ....................           200,000               --                --                 --
  Forfeiture of 3,658 shares of
    stock granted to key
    employees for tax
    withholdings payable .........              --                 --             (27,652)
  Net Loss ($1.40 per share) .....              --                 --          (8,417,413)        (8,417,413)
  Amortization of deferred
    compensation .................           123,339               --                --              123,339
                                     ---------------    ---------------   ---------------    ---------------
Balance, June 30, 1996 ...........          (335,836)              --          (7,177,950)        12,383,998
  Net Loss ($1.40 per share) .....              --                 --         (14,980,544)       (14,980,544)
  Common stock and warrants
    issued in acquisition ........              --              199,000              --              649,000
  Stock warrants issued with
    debt .........................              --              169,000              --              169,000
  Amortization of deferred
    compensation .................            90,007               --                --               90,007
                                     ---------------    ---------------   ---------------    ---------------

Balance, June 30, 1997 ...........   $      (245,829)   $       368,000   $   (22,158,494)   $    (1,688,539)
                                     ===============    ===============   ===============    ===============
</TABLE>
                             See accompanying notes.

                                       24
<PAGE>
                             EQUALNET HOLDING CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                     YEARS ENDED JUNE 30,
                                         --------------------------------------------
                                             1995            1996            1997
                                         ------------    ------------    ------------
<S>                                      <C>             <C>             <C>          
OPERATING ACTIVITIES
Net income (loss) ....................   $  2,364,245    $ (8,417,413)   $(14,980,544)
Adjustments to reconcile net income
(loss) to cash provided by (used in)
operating activities:
  Depreciation and amortization ......      1,355,832       5,933,890       5,999,898
  Provision for bad debt .............      1,033,160       3,820,701       1,726,929
  Provision for due from agents ......           --         1,000,000            --
  Provision (benefit) for deferred
    income taxes .....................        (43,986)     (3,486,686)      2,228,077
  Loss on sale of assets .............           --             1,508             341
  Imputed interest on note payable ...           --              --            33,058
  Compensation expense recognized
    for common stock issue ...........         40,825         123,339          90,007
  Write down of long term assets .....           --         6,882,661       4,400,000
  Credit from carrier ................           --              --        (1,200,000)
  Change in operating assets and
    liabilities:
    Accounts receivable ..............    (15,067,615)      2,068,102       3,596,968
    Due from agents ..................           --        (3,104,424)     (1,765,853)
    Prepaid expenses and other .......        (14,667)       (519,802)      1,467,672
    Other assets .....................       (268,160)       (562,786)       (479,207)
    Accounts payable and accrued
    liabilities ......................      9,859,253      (4,911,888)      2,856,222
                                         ------------    ------------    ------------
Net cash provided by (used in)
operating activities .................       (741,113)     (1,172,798)      3,973,568

INVESTING ACTIVITIES
Purchase of property and equipment ...     (3,291,321)     (4,404,531)       (272,010)
Proceeds from certificates of deposit         300,000            --              --
Proceeds from notes receivable .......        209,245            --              --
Proceeds from sale of equipment ......           --             1,010           4,331
Purchase of customer accounts ........    (10,493,960)     (8,468,472)        (76,457)
                                         ------------    ------------    ------------
Net cash used in investing activities     (13,276,036)    (12,871,993)       (344,136)

FINANCING ACTIVITIES
Proceeds from subordinated note
  payable ............................           --              --         3,000,000
Repayments on long term debt .........        (84,379)           --              --
Proceeds from revolving line of credit     57,875,733      88,316,775      45,610,000
Repayments on revolving line of credit    (57,329,188)    (78,715,170)    (51,708,803)
Proceeds from sale leaseback
transaction ..........................           --         1,434,144            --
Repayments on capital lease
obligations ..........................        (63,000)       (108,000)        (84,000)
Proceeds from issuance of stock ......     19,385,436            --              --
Shareholder distributions ............     (2,435,481)           --              --
Acquisition of treasury stock ........           --           (27,652)           --
                                         ------------    ------------    ------------
Net cash provided by (used in)
 financing activities ................     17,349,121      10,900,097      (3,182,803)
                                         ------------    ------------    ------------
Net increase (decrease) in cash and
  equivalents ........................      3,331,972      (3,144,694)        446,629
Cash and equivalents, beginning of
  year ...............................        194,571       3,526,543         381,849
                                         ============    ============    ============
Cash and equivalents, end of year ....   $  3,526,543    $    381,849    $    828,478
                                         ============    ============    ============
</TABLE>
                            See accompanying notes.

                                       25
<PAGE>
                             EQUALNET HOLDING CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 1997

1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

        EqualNet Communications, Inc. was incorporated in Texas on July 18,
1990. On November 28, 1994, the company changed its name from EqualNet
Communications, Inc. to EqualNet Corporation. Prior to its initial public
offering of common stock, the company formed EqualNet Holding Corp. (the
Company) as a newly organized holding company. Subsequent to the reorganization,
EqualNet Corporation became a wholly owned subsidiary of the Company. (See also
Note 12.)

        The Company is a national long-distance telephone company contracting
primarily with AT&T Corp. ("AT&T") and Sprint Communications Company, L.P.
("Sprint"), through its contract with The Furst Group, a privately held reseller
of long-distance and other telecommunications services, (collectively the
"Carriers") to provide switching and long-haul transmissions of its traffic. The
Carriers bill the Company at contractual rates for the combined usage of the
Company's nationwide base of customers utilizing their network. The Company
bills its customers individually at rates established by the Company utilizing
the Company's own billing system.

        A significant amount of the Company's business is acquired through
independent marketing agents. Substantially all of the agreements with these
independent marketing agents provide for the Company to charge a percentage, as
specified by the agreement, of overdue receivables (typically defined as
accounts delinquent in the payment of charges for more than 120 days after the
invoice date) on accounts placed by the independent marketing agents against
commissions otherwise payable to these independent marketing agents. In the
event the Company later collects on any account which was previously declared a
bad debt, the Company credits back to the independent marketing agent the amount
of commission previously deducted. Bad debt expenses charged against the agent
commissions due were $1,729,419, $2,536,883 and $30,156 in 1995, 1996, and 1997,
respectively. Customers placed by one independent marketing agent accounted for
approximately 40%, 28% and 23% of sales in 1995, 1996 and 1997, respectively.

PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of EqualNet
Holding Corp. and all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated. The Company's investments in associated
companies owned 20% or more (but not in excess of 50%) are accounted for using
the equity method.

PROPERTY AND EQUIPMENT

        Computer equipment, office furniture and fixtures, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided for by the straight-
line method over the estimated useful lives of the depreciable 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.

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 a five-year period, switching to the straight-line method when the
straight-line method results in greater amortization. The Company's monthly
attrition rate used to amortize deferred acquisition costs was 3.0% for fiscal
year 1995. During fiscal year 1996, the attrition rate used to amortize customer
acquisition costs was 3% through March 31, 1996 and 5% thereafter. The attrition
rate used during fiscal year 1997 was 9%. The attrition rates used by the
Company in amortizing customer acquisition costs is an estimate 

                                       26
<PAGE>
of the attrition rate of the acquired customer bases, and actual attrition may
differ from the estimates used. The Company evaluates the attrition rate of the
acquired customer base each quarter and then 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 by
comparing the undiscounted future cash flows of the acquired customer base to
the net book value of the associated customer base. If it appears that an
impairment has been incurred, management will write the unamortized balance down
to its fair value.

        During the years ended June 30, 1996 and 1997, the Company wrote off
$4.6 million and $4.4 million of customer acquisition costs as a result of
higher than expected attrition associated with those accounts.

 PREPAID COMMISSIONS

        During the year ended June 30, 1996, the Company modified the agreement
with one of its principal agents to reduce the commission rate the Company pays
to the agent on existing customers in exchange for $1.2 million from the
Company. The Company paid $710,000 in cash, with the remainder from the
transaction being utilized to offset advances due from the agent to the Company.
The prepaid commissions are amortized by applying the Company's attrition rate
associated with the underlying customers each month against the unamortized
balance of the previous month (declining balance method) over a three-year
period, switching to the straight-line method when the straight-line method
results in greater amortization.

CASH AND CASH EQUIVALENTS

        Highly liquid investments with a maturity of three months or less are
considered cash equivalents.

GOODWILL

        Goodwill represents the excess cost over the net assets of an acquired
business and is being amortized on a straight line basis over 10 years.

REVENUE RECOGNITION

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

INCOME TAXES

        The Company accounts for deferred income taxes using the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

USE OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CONCENTRATION 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 conditions and
generally does not require collateral. The Company's allowance for doubtful
accounts is based on current market conditions and management's expectations.
Write-offs of accounts receivable, net of recoveries, were $79,431, $2.46
million and $3.61 million for the years 1995, 1996, and 1997, respectively.

                                       27
<PAGE>
EARNINGS PER SHARE

        Earnings per share is computed by dividing net income for the period by
the weighted-average number of shares of common stock and dilutive common stock
equivalents outstanding for the period.

PRO FORMA EARNINGS PER SHARE

        Pro forma earnings per share is based on pro forma earnings after giving
effect to a pro forma tax adjustment (See Note 3) applicable to common shares
and the average number of shares of common stock equivalents (stock grants)
outstanding.

TREASURY STOCK

        Treasury stock is accounted for using the cost method. During 1996 two
employees terminated their employment with the Company which resulted in the
forfeiture of 18,182 shares which had been granted to them contingent upon
future service (See Note 13). As a result, $77,229 in deferred compensation is
recorded as the cost of these treasury shares. The cost of the treasury shares
was determined by the closing price per share of common stock on the date of
forfeiture which ranged from $3.84 to $5.88 per share. In addition, upon the
vesting of stock grants by certain employees, the employees elected to reduce
the number of shares received to satisfy federal income tax withholding
liabilities to be paid by the Company on the employee's behalf. The Company
received 3,568 treasury shares required to satisfy the liability based on the
market value of the exchanged shares on the date of the exchange, resulting in a
total increase in treasury stock of $27,652.

ACCOUNTING FOR EMPLOYEE STOCK BASED COMPENSATION

        The Company accounts for employee stock based compensation in accordance
with APB Opinion 25 and expects to continue doing so.

NEW ACCOUNTING PRONOUNCEMENT

        The FASB issued Statement No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, which requires
an entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when control has
been surrendered in accordance with the criteria provided in the Statement. The
Company will apply the new rules prospectively to transactions beginning in the
first quarter of fiscal 1998. Based on the current circumstances, the Company
believes the application of the new rules will not have a material impact on the
financial statements.

        In February 1997, the FASB issued Statement No. 128, EARNINGS PER SHARE,
which is required to be adopted by the Company in the second quarter of fiscal
1998. At that time, the Company will be required to change its method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of common stock equivalents will be excluded. The impact of Statement 128 on
primary and fully diluted net income (loss) per share is not expected to be
material.

        In 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, and Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. These statements, which are effective for periods beginning
after December 15, 1997, expand and modify disclosures and, accordingly , will
have no impact on the Company's reported financial position, results of
operations, or cash flows.

ACCOUNTING CHANGES

        In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the asset's
carrying amount. Statement No. 12 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 

                                       29
<PAGE>
fiscal 1997. Prior to the adoption of Statement 121, the Company determined any
impairment writedowns of long-lived assets in a manner generally consistent with
Statement No. 121. At the date of adoption, there was no impact to the financial
statements. The Company reviews its long-lived assets for impairment on a
quarterly basis.

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying amounts of accounts receivable, accounts payable and other
payables approximate fair values due to the short term maturities of these
instruments. The carrying value of the Company's notes payable to a long
distance carrier and the revolving line of credit approximate fair value because
the rate on such debt is variable, based on the current market.

RECLASSIFICATION

        Certain balances from the year ending June 30, 1996 have been
reclassified to be consistent with June 30, 1997 classifications.

2.      LIQUIDITY AND WORKING CAPITAL DEFICIT

        For the years ended June 30, 1996 and 1997 the Company reported pre-tax
losses of $11.1 million and $12.6 million, respectively. Declining revenues
beginning in the second quarter of fiscal year 1996 were attributable to a
number of internal and external factors. With the rapid growth of the Company,
provisioning time -- the time it takes the Company's primary underlying
long-distance carrier to activate new customers -- rose sharply, from
approximately 20 days to approximately 45 days. In addition, NetBase, the
Company's customer management system, was not equipped to handle the rapid
growth, leading to delays in providing the Company's customers with accurate
bills on a timely basis. This problem was compounded when the Company converted
to the NetBase Plus operating system ("NetBase Plus"), a new customer management
information system. After implementation, NetBase Plus was determined to have
inherent design flaws which resulted in further billing and provisioning
problems and the entire system was subsequently abandoned. These conditions
caused customer attrition rates to increase and, although the number of new
customers placed on the Company's service was increasing, actual revenues were
declining due to the higher than expected loss of existing customers. The
problems with the customer management systems also lead to difficulties in
assimilating and managing a substantial acquired customer base. The inability of
the Company to successfully transfer the acquired base into NetBase resulted in
difficulties in billing and servicing the customer accounts and a greater than
expected migration of the base to other long-distance providers. The higher than
expected attrition on the acquired customer base and other purchased customers
resulted in the impairment of the carrying value of the customer bases and the
Company recorded a $4.6 million and $4.4 million charge to earnings to reduce
the unamortized balance to its fair value during fiscal year 1996 and fiscal
year 1997, respectively. During fiscal year 1996, the Company also wrote off
approximately $2.2 million in capitalized software development costs associated
with the NetBase Plus system. The difficulties in billing and provisioning
accounts along with the shift by the Company to more purchased orders on which
the Company had full exposure to uncollectible accounts as compared to
commissioned orders whereby the agents shared in a substantial portion of the
risk on uncollectible accounts resulted in a substantial increase in bad debt
expense. The Company's collection efforts were also hindered by the failure of
NetBase Plus to produce some of the necessary information to allow for the most
effective method of collection. The Company therefore recorded an additional
charge to uncollectible receivables of $2.6 million in the third quarter of
fiscal year 1996. Selling, general and administrative costs also increased
substantially in 1996 as compared to 1995. The historical rapid growth and
management's expectations resulted in a structure designed for continued growth
with an increase in staffing, equipment and office space. The unanticipated
decline in revenues obscured by the lack of accurate and timely management
information due to the problems with NetBase Plus resulted in an inefficient
cost structure. In addition, substantial professional fees were incurred as the
Company aggressively pursued acquisition targets in early fiscal 1996 and other
professional fees increased due to cost associated with being a public company,
and costs associated with the negotiation of amendments to the line of credit
and the raising of additional capital.

                                       29
<PAGE>
        By December 31, 1995, the remaining funds from the initial public
offering had been expended, and, due to the operating losses sustained in the
second half of fiscal 1996 and all of fiscal 1997 and the declining revenue
base, the Company reached its maximum borrowing capacity under its revolving
line of credit facility. Additional sources of liquidity during this time period
have been an extension of payment terms from the Company's major suppliers,
although there can be no assurance that any such extensions will be granted in
the future. The Company also funded its operations during the year ended June
30, 1997 through advances under its revolving credit facility, a $3.0 million
infusion of capital from The Furst Group, Inc. ("Furst"), a privately held
reseller of long-distance and other telecommunications services, and through
operating cash flows. The Company's borrowing capacity under its credit facility
continued to decline as a result of operating losses, a decline in the revenue
base and the exclusion of certain receivables from the criteria of eligible
receivables. At current levels of operations and with a declining borrowing
base, the Company must seek additional capital and continued concessions from
its vendors and must continue to reduce expenses to bring them in line with
current levels of revenues.

        At June 30, 1997 the Company was in default on certain loan covenants of
its credit agreement. The Company replaced the credit facility under which
borrowings at June 30, 1997 were outstanding with a new arrangement effective
July 7, 1997. The new agreement (see Note 4) bases borrowing capacity on a
percentage of the Company's outstanding receivables. The borrowings under the
new line were sufficient to retire the previous credit agreement and provide
some working capital; however, the amount available under the new agreement does
not generate sufficient capital to satisfy the Company's current liquidity
needs.

        On September 25, 1997, the Company announced that it was in discussion
with The Willis Group, LLC, a privately held investment partnership relating to
a possible transaction or series of transactions in which the Company might
ultimately acquire certain assets of a switch-based provider of
telecommunications services and to announce that its previously announced merger
with another telecommunications company has been terminated. On September 24,
1997, the court approved a plan presented by The Willis Group to purchase the
switch-based assets of Total National Telecommunications, an operating
subsidiary of Total World Telecommunications which is currently under Chapter 7
protection of the United States Bankruptcy Code. As part of these discussions,
The Willis Group is considering an equity contribution to the Company for
approximately $5 to $10 million in a combination of stock and convertible debt.
Upon successful completion of the capital infusion by The Willis Group and the
successful purchase of Total National Telecommunications' assets from The Willis
Group, the Company would become a switch-based provider of long distance
telecommunications services. While the Company believes the potential
transactions with The Willis Group can recapitalize the Company, there is
currently no assurance such transaction will occur. In the event the proposed
recapitalization does not occur, the Company will continue to pursue options
including seeking additional capital and/or an alliance with a strategic
partner. In the event no strategic alliance is accomplished, the Company may be
required to seek protection under the United States bankruptcy laws. The
conditions noted above raise substantial doubt about the Company's ability to
continue as a going concern.

3.    PRO FORMA INFORMATION (UNAUDITED)

        As described in Note 5, the Company in 1992 elected to be treated as an
S corporation for federal income tax purposes. Prior to its initial public
offering, as discussed in Note 12, the Company terminated its status as an S
corporation. The pro forma tax provision has been calculated as if the Company's
taxable results were taxable as a C corporation under the Internal Revenue Code
for the period ended March 7, 1995, calculated in conformity with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" (FAS
109) at an effective tax rate of 39%. Under the provisions of FAS 109, deferred
tax assets or liabilities are recorded for the estimated future tax effects
attributable to temporary differences between the bases of assets and
liabilities recorded for financial and tax reporting purposes. Assuming the
change in its tax status occurred July 1, 1992, the Company would have recorded
additional income tax expense of $612,751 in 1995.

4.    DEBT

        At June 30, 1997, the Company had a $7,500,000 revolving line of credit
with a bank which expired July 1, 1997. Interest on the outstanding balance was
prime plus 6% (14.5% at June 30, 1997). The maximum borrowings under the
revolving line of credit were subject to borrowing base limitations as defined
in the agreement. There was 

                                       30
<PAGE>
$189,365 available to be borrowed against the line of credit at June 30, 1997.
The line of credit was secured by the accounts receivable of the Company. The
revolving line of credit required the Company to meet certain restrictive
covenants including tangible net worth and debt to equity requirements. The
Company was not in compliance with the covenants at June 30, 1997. Additionally,
the agreement limited the Company's ability to make dividend payments.

        The Company replaced the revolving line of credit under which borrowings
at June 30, 1997 were outstanding with a new arrangement effective June 18, 1997
and which funded July 7, 1997. The new agreement is essentially a receivable
factoring arrangement which bases borrowing capacity on a percentage of the
Company's outstanding receivables up to a maximum allowable amount of $8,000,000
and allows for the lender to cease funding of new receivables without prior
written notice at the lenders option. Interest on the outstanding balance is
prime plus 4.5% per annum.
        
        Effective February 3, 1997, the Company executed an agreement with
Furst, pursuant to which Furst has loaned the Company $3 million at an annual
interest rate of 10%, maturing December 31, 1998. In addition, the Company has
issued stock purchase warrants to Furst, exercisable for an aggregate of
1,500,000 shares of Common Stock at a purchase price of $2.00 per share, subject
to adjustment in certain events (including (i) changes in the capitalization of
the Company, (ii) the cessation of Zane Russell and Michael L. Hlinak to serve
as Executive Officers of the Company and (iii) the failure of the Company to
satisfy the quantitative continued listing requirements of the Nasdaq National
Market or suspension or delisting of the Company from trading on that market).
The warrants expire on December 31, 1999. In connection with this transaction,
the Company began purchasing telecommunications services, effective November 1,
1996, under Furst's contract with Sprint Communications Company, L..P. at costs
less than what the Company had been paying.

        At June 30, 1997, the Company has two notes payable with a long-distance
carrier for past long distance services provided by the carrier which were
converted from trade payables. The notes with original principal of $1,066,603
and $649,987 bear interest at 17% and 12%, mature on February 5, 1998 and August
15, 1997, respectively, and are payable in equal monthly installments until
maturity.
        
        At June 30, 1996, the Company had a $12,500,000 revolving line of credit
with a bank which would have expired December 1, 1997. Interest on the
outstanding balance was prime plus 3% (11.25% at June 30, 1996). The maximum
borrowings under the revolving line of credit were subject to borrowing base
limitations as defined in the agreement. The line of credit was secured by the
accounts receivable of the Company. The revolving line of credit required the
Company to meet certain restrictive covenants including tangible net worth and
debt to equity requirements.

        Interest paid by the Company during the years ended June 30, 1995, 1996
and 1997, totaled $526,723 $573,721, and $946,665, respectively.

5.    FEDERAL INCOME TAXES

From inception to June 30, 1992, the Company was organized as a C corporation
for federal income tax purposes. Effective July 1, 1992, the Company elected S
corporation status and operated as such through March 7, 1995. Accordingly, all
federal income tax liabilities related to income generated by the Company during
that time were borne by the individual shareholders, and no provision for
federal income taxes was recorded by the Company. As a result of the S
corporation election, the deferred federal income tax account as of June 30,
1992, was reclassified to additional paid-in capital during fiscal year 1993.
Prior to its initial public offering, as discussed in Note 10, the Company
terminated its S corporation status. A separate presentation in the accompanying
consolidated statements of income shows a provision for income taxes and net
income for the period ending March 7, 1995 as if all of the Company's operations
had been subject to income taxes for the entire period, and assuming an
effective tax rate of 39%.

                                       31
<PAGE>
The following disclosures relate to balances and activity for the fiscal years
ending June 30, 1996 and 1997.

   Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:

                                                       June 30,       June 30,
                                                         1996           1997
                                                     -----------    -----------
Deferred tax liabilities:
     Cash to accrual differences .................   $  (392,500)   $  (196,250)
     Other, net ..................................       (45,172)       (62,256)
                                                     -----------    -----------
Total deferred tax liabilities ...................      (437,672)      (258,506)
Deferred tax assets:
     Amortization of deferred acquisition costs ..     2,425,065      4,769,258
     Bad debt allowance ..........................     1,274,536        562,970
     Accrued liabilities .........................       172,134        390,534
     Net operating loss carryforward .............       236,803      2,922,038
     Other .......................................       104,910        258,641
                                                     -----------    -----------
Total deferred tax assets ........................     4,213,448      8,903,441
Valuation allowance ..............................    (1,547,699)    (8,644,935)
                                                     -----------    -----------
Net deferred tax assets ..........................   $ 2,228,077    $         0
                                                     ===========    ===========

The Company recorded a valuation allowance amounting to the entire net deferred
tax asset balance at June 30, 1997 due to recent operating losses which give
rise to uncertainty as to whether the deferred tax asset is realizable.

The Company has a net operating loss carryforward of $7.5 million which is
available to offset future taxable income through the year 2012. Any future
capital contribution which results in a change in control may restrict the
Company's ability to utilize the net operating loss carry forwards.

                                    32
<PAGE>
The differences between income taxes computed at the federal statutory income
tax rate and the provision for income taxes for the years ended June 30, 1996
and 1997 are as follows:

                                                     1996               1997
                                                 -----------        -----------
Income tax benefit computed at
  the federal statutory rate .............       $(3,766,270)       $(4,295,979)
State income tax benefit .................          (443,841)          (518,532)
Valuation allowances .....................         1,547,699          7,097,236
Other ....................................             2,559             62,586
                                                 -----------        -----------
Provision (benefit) for
  federal income taxes ...................       $(2,659,853)       $ 2,345,311
                                                 ===========        ===========

   The provision (benefit) for income taxes for the years ended June 30, 1996
and 1997 consisted of the following:


                                                     1996                1997
                                                 -----------          ----------
Current
   Federal .............................         $  (476,612)         $   29,275
   State ...............................                 850              87,959
                                                 -----------          ----------
                                                    (475,762)            117,234
Deferred:
   Federal .............................          (1,914,217)          1,952,439
   State ...............................            (269,874)            275,638
                                                 -----------          ----------
                                                  (2,184,091)          2,228,077
Provision (benefit) for
  federal income taxes .................         $(2,659,853)         $2,345,311
                                                 ===========          ==========

   Taxes paid during the fiscal years ended June 30, 1995, 1996 and 1997 totaled
$22,595, $1,355,296 and $87,959, respectively.

6.    COMMITMENTS AND CONTINGENCIES

COMMITMENTS WITH PROVIDERS

   At June 30, 1997 the Company had an agreement with AT&T which expires in
April 2000. At expiration or any time prior, the Company can negotiate with AT&T
for the renewal of all material aspects of the present agreement with AT&T. In
the event that this is not possible, the Company may be able to negotiate
equally beneficial terms with other major telecommunications companies. Should
neither of these alternatives be possible, there could be materially adverse
implications for the Company's financial position and operations. Management's
experience has been to renegotiate the multi-year agreement every six months,
and management believes the Company will be able to continue to renegotiate the
agreement.

   The agreement covers the pricing of the services and establishes minimum
semi-annual revenue commitments ("MSARCs") which must be met to receive the
contractual price and to avoid shortfall penalties. The commitment with AT&T is
segregated into components differentiated by the type of traffic. At June 30,
1997, the Company had not yet reached the completion of the term of the first
MSARC; however, the Company was $476,540 below the cumulative pro rata monthly
commitment. Should the Company continue at similar revenue levels, it would be
in a shortfall at the end of the first MSARC period in October 1997.
Historically, the Company has been able to negotiate a settlement with the
carrier which has resulted in no penalty being incurred by the Company and no
amount has been accrued in the financial statements. No assurances can be made
that the Company will be able to reach similar favorable settlements with the
carrier should it continue to fail to meet its commitment.

                                       33
<PAGE>
 Total future minimum usage commitments to AT&T at June 30, 1997 are as follows:

    YEAR ENDING JUNE 30,
            1998                           $18,666,666
            1999                            20,000,000
            2000                            16,666,667
                                        --------------
                                           $55,333,333

   If the contract with AT&T is terminated prior to the expiration of the full
term, either by the Company or by AT&T for non-payment, the Company will be
liable for the total amount of the unsatisfied MSARC for the period in which the
discontinuance occurs and for 100% of the MSARCs for each semi-annual period
remaining in the contract tariff term. In addition, if the Company does not meet
the first MSARC, it will be required to refund $398,375 in credits issued the
Company by AT&T.

REGULATORY APPROVAL

   The Company's intrastate long-distance telecommunications operations are
subject to various state laws and regulations, including prior certification,
notification or registration requirements. The Company must generally obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. The Company is presently
responding to consumer protection inquiries from eleven states. The inquiries do
not state specific damage amounts and the potential liability, if any, is not
determinable. Management believes these inquiries will be resolved
satisfactorily, although settlement offers may be made or accepted in instances
in which it is determined to be cost effective. As of June 30, 1997, the Company
had recorded an accrual of $390,000 for such estimated settlements. No
assurances can be made however, that the inquiries can be settled for amounts
within the current amount accrued or that additional states will not begin
inquiries or that the current accrual will be sufficient to provide for existing
or future settlements. Failure to resolve inquiries satisfactorily or reach a
settlement with the regulatory agencies could, in the extreme, result in the
inability of the Company to provide long distance service in the jurisdiction
requiring regulatory certification. Any failure to maintain proper certification
could have a material adverse effect on the Company's business.

CAPITAL LEASES

   During 1995, the Company entered into long-term lease agreements for the
purchase of equipment and furniture. The leases were capitalized and the related
obligations were recorded in the accompanying financial statements based on the
present value of future minimum lease payments. The gross balance of assets
included in property and equipment at June 30, 1996 and 1997 is $306,000.
Accumulated depreciation associated with these assets at June 30, 1996 and 1997
was $172,000, and $255,000 respectively. Depreciation on these assets is
included in depreciation and amortization expense. Future minimum lease payments
related to capital lease obligations are as follows:

          Year ended June 30, 1998                 53,678
                                                 --------
          Total minimum lease payments             53,678
          Less amounts representing interest
            (9.4% to 17.0% rate)                   (2,678)
                                                 --------
          Present value of future minimum 
            lease payments                         51,000
          Less current maturities of capital
            lease obligations                      51,000
                                                 --------
          Long-term obligations under capital
            leases                                $     0
                                                 ========

                                       34
<PAGE>
OPERATING LEASES

   The Company leases certain equipment and office space under operating leases
that expire over the next nine years. Rental expense under operating leases was
$695,166, $1,715,636, and $2,137,857 in 1995, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:

  YEAR  ENDED JUNE 30,
  --------------------
          1998                                 $1,960,554
          1999                                  1,297,899
          2000                                    692,932
          2001                                    662,550
          2002                                    662,550
       Thereafter                               1,719,004
                                               ----------
                                               $6,995,489
                                               ==========

   The Company has entered into several agreements for the sale and leaseback of
certain computer equipment and office furniture. The Company has purchase and
lease renewal options at projected future fair market values under the
agreements. The leases are classified as operating leases in accordance with the
FASB Statement No. 13 - "Accounting for Leases". The leases have thirty-six
month terms and the future minimum lease payments are included in the table
above. Lease payments on these transactions average $477,000 annually.

7.     WRITE DOWN OF ASSETS

      The Company wrote down assets during the year ended June 30, 1996 and
1997, totaling $6.9 million and $4.8 million, respectively. Included in the
write downs were $4.6 million and $4.4 million non-cash charges in fiscal 1996
and 1997, respectively, to reduce the carrying value of acquired customer bases
(customer acquisition costs) to the present value of the expected future cash
flows associated with the underlying customer accounts and a $2.2 million
non-cash charge in fiscal 1996 to eliminate capitalized software development
costs associated with the NetBase Plus system. The write down of deferred
acquisition costs was necessitated by continued greater than expected turnover
of acquired customer bases which resulted from difficulties in billing and
servicing the Company's customer accounts.

   In 1995 the Company began development of a new customer management
information system, the NetBase Plus operating system ("NetBase Plus"). In the
second quarter of fiscal year 1996, the Company implemented NetBase Plus. After
implementation, NetBase Plus was determined to have inherent design flaws which
resulted in inefficient operation and the entire system was subsequently
abandoned. The Company reverted from NetBase Plus to an improved form of
NetBase, the Company's original customer management information system, in April
1996. As a result, the Company wrote off approximately $2.2 million in
capitalized software development costs associated with the NetBase Plus system
in fiscal year 1996.

8. INTANGIBLE ASSETS

   On November 12, 1996, the Company purchased certain assets of Creative
Communications International, Inc., a Texas-based debit card company, for
150,000 shares of EqualNet Holding Corp. common stock, $.01 par value per share
("Common Stock"), a warrant to purchase 100,000 shares of Common Stock, and the
assumption of certain liabilities totaling $379,328. The total purchase
consideration was $1 million. The warrant issued in this transaction was
outstanding at March 31, 1997 and allows the holder to purchase an aggregate of
100,000 shares of Common Stock at a price of $7.50 per share. The warrant
expires on November 1, 2001. Substantially all of the purchase price was
recorded as goodwill and is being amortized over ten years using the straight
line method of amortization. The acquisition was accounted for as a purchase and
the operations of Creative Communications, Inc. is included in the operations of
the Company from the date of acquisition. The pro forma effect of the
acquisition on the prior and current year is not material.

                                       35
<PAGE>
9.    EMPLOYMENT AGREEMENT

   The Company has employment agreements with its president and chief operating
officer. The agreements include certain conditions of employment including a
covenant not to compete should they terminate employment with the Company.

10.     SAVINGS PLAN

   The Company sponsors a 401(k) Plan (the "Plan") which became effective
January 1, 1993. The Plan is open to all employees over the age of 21. To become
eligible, an employee must have been employed on the effective date or must
complete six consecutive months of employment. The Plan gives the Company the
option to determine the amount they will contribute each year. The Company
currently matches 50% of the first 6% contributed by the participants.
Contributions were made to the Plan in the amount of $46,217, $81,597 and
$63,061 for the years ended June 30, 1995, 1996 and 1997, respectively.

11.    RELATED PARTY TRANSACTIONS

   During the year ended June 30, 1996, the Company entered into a joint venture
with MetroLink, Inc., an Illinois Corporation ("MetroLink"), the purpose of
which was to market and sell wholesale long-distance services to the Company and
other long-distance resellers. The joint venture, Unified Network Services, LLC
("UNS"), is owned 49% by EqualNet Wholesale Services, Inc., a Delaware
Corporation and wholly owned subsidiary of the Company, 25% by MetroLink, 25% by
MediaNet, Inc., an Illinois Corporation and wholly owned subsidiary of
MetroLink, and 1% by EqualNet Corporation. The Company utilized the services of
UNS during fiscal years 1996 and 1997 to provide wholesale long-distance for
resale and had accounts payable, net of advances, to UNS at June 30, 1996 and
1997 of $24,757 and $644,301, respectively.

   The Company utilizes the marketing services of a marketing company managed
and directed by the brother-in-law of one of the principal shareholders of the
Company. The Company paid commissions to the marketing company of $152,687,
$75,388 and $6,223 in 1995, 1996, and 1997, respectively. Advances due the
Company from the marketing company were $64,735, $43,015 and $0 at June 30,
1995, 1996 and 1997, respectively.

12.    INITIAL PUBLIC OFFERING

   The Company completed an initial public offering of 1,960,000 shares of its
common stock (the Offering) in March 1995. The Company used a portion of the net
proceeds from the Offering to repay amounts outstanding under the Company's
principal credit facility, pay various accounts payable and accrued expenses,
fund a dividend payable to its existing shareholders, fund acquisitions of
customer accounts and of other resellers, and for working capital and general
corporate purposes.

   In April 1995, the underwriters exercised an over-allotment option and
purchased 150,111 shares of Common Stock from the Company at the original issue
price of $11 per share less the underwriting discount of $0.77 per share. Net
proceeds to the Company totaled $1,535,646.

   Prior to the Offering, the Company terminated its S-Corporation status and
formed EqualNet Holding Corp. as a newly organized holding company. Each
shareholder of EqualNet Corporation contributed each share of common stock in
EqualNet Corporation to the Company in exchange for 2,000 shares of common stock
in the Company. Subsequent to the reorganization, EqualNet Corporation became a
wholly owned subsidiary of the Company. The authorized capital stock of the
Company consists of 20 million shares of Common Stock and 1,000,000 shares of
Preferred Stock.

                                       36
<PAGE>
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 $4,653 and
$13,704 on behalf of employees toward the purchase of Company stock during the
years ended June 30, 1996 and 1997, respectively.

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. 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 for a period of more than ten years. In the case of a 10%
Shareholder, no option may be granted for a period 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 granted restricted stock awards for 63,638 shares of Common Stock having
an aggregate fair market value, based on the per share price of the Common Stock
at the measurement date, March 14, 1995, of $700,000 to certain key employees,
none of whom is a director or executive officer of the Company. 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. Two employees terminated
employment during fiscal year 1996 resulting in the forfeiture of restricted
stock awards totaling 18,182 shares of Common Stock. These shares were held in
treasury at June 30, 1997.

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 and an aggregate of 250,000 shares of
Common Stock have been authorized and reserved for issuance to non-employee
directors. The aggregate number of shares 

                                       37
<PAGE>
of Common Stock for which options may be granted under the Director Option Plan
may be adjusted based on certain anti-dilution provisions contained in the
Director Option Plan. On the date of election, any new non-employee director
will be granted an option to purchase 5,000 shares of Common Stock at the fair
market value of such stock on the date that the option is granted. Each stock
option granted to a non-employee director will have a ten-year term, one-third
of which will become vested and exercisable on the first, second and third
anniversary of the date of grant, assuming continued service on the Board of
Directors. On the date following each annual meeting of shareholders, each
current non-employee director will be granted an option to purchase 1,000 shares
of Common Stock at the fair market value of such stock on the date of grant with
such annual grants becoming exercisable on the six month anniversary of the date
of grant. 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. Options to purchase 5,000 shares of common stock awarded
May 9, 1995 with an exercise price of $14 3/4, 1,000 shares of common stock
awarded November 29, 1995, with an exercise price of $17 7/8 per share, 5,000
options to purchase shares of common stock awarded November 30, 1995, with an
exercise price of $18 1/2 per share and options to purchase 2,000 shares of
common stock awarded November 27, 1996 with an exercise price of $2 3/16 are
still outstanding at June 30, 1997.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options is
greater than or equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
Statement 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
1996 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 2.3; and a
weighted-average expected life of the option of 10 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For  purposes  of pro  forma  disclosures,  the  estimated  fair  value of the
options  is  amortized  to  expense  over the  options'  vesting  period.  The
Company's pro forma information follows:

                                      1996                1997
                               -----------------------------------------
Pro forma net income (loss)    $(8,417,413)         $(15,583,461)
Pro forma earnings (loss) per
share                          $     (1.40)         $      (2.56)

                                       38
<PAGE>
A summary of the Company's stock option activity, and related information for
the years ended June 30 follows:
<TABLE>
<CAPTION>
                                   1995                        1996                        1997
                        -------------------------   ---------------------------  ---------------------------
                                  WEIGHTED-AVERAGE             WEIGHTED-AVERAGE             WEIGHTED-AVERAGE
                         OPTIONS   EXERCISE PRICE   OPTIONS     EXERCISE PRICE   OPTIONS     EXERCISE PRICE
                        --------   --------------   --------    --------------   --------    --------------
<S>                       <C>      <C>                <C>       <C>               <C>        <C>           
Outstanding-beginning
of year .............       --               --       10,000    $        14.75     11,000    $        16.74
Granted .............     10,000   $        14.75      7,000             18.32    538,000              3.31
Exercised ...........       --               --         --                --         --                --
Forfeited ...........       --               --       (6,000)            15.27    (23,000)             3.87
Outstanding- end
of year .............     10,000   $        14.75     11,000    $        16.74    526,000    $         3.57
                        ========   ==============   ========    ==============   ========    ==============

Exercisable at
end of year .........       --               --        2,667    $        15.92      3,333    $        16.63

Weighted-Average
fair value of
options granted
during the year .....   $  14.75             --     $  18.32              --         --      $         2.73
</TABLE>
-------------------------------------------------------------------------------

Exercise prices for options outstanding under the Stock Option and Restricted
Stock Option Plan (513,000 shares) as of June 30, 1997 ranged from $2.19 to
$4.25. The weighted-average remaining contractual life of those options is 9
years.

14.  INTERIM FINANCIAL DATA (UNAUDITED)

   Selected quarterly financial results for the years 1996 and 1997 are
summarized below (in thousands):

                                    FIRST      SECOND       THIRD      FOURTH
                                   QUARTER     QUARTER     QUARTER     QUARTER
                                   --------    --------    --------    --------
  1996
      Revenues .................   $ 23,920    $ 19,047    $ 19,212    $ 16,176

      Gross margin .............      5,708       5,448         787       4,604

      Net income (loss) ........        881      (2,002)     (6,430)       (866)

      Net income (loss) per share  $  (0.15)   $  (0.33)   $  (1.07)   $  (0.14)


  1997
      Revenues .................   $ 13,315    $ 12,090    $ 10,662    $ 10,521

      Gross margin .............      3,027       2,445       2,818       3,817

      Net loss .................     (1,558)     (7,151)     (1,940)     (4,332)

      Net loss per share .......   $  (0.26)   $  (1.18)   $  (0.32)   $  (0.70)

                                       39
<PAGE>
The quarter ending December 31, 1996, includes a $4.4 million write down of
deferred acquisition costs (See Note 7). The quarter ending March 31, 1996,
includes a $3.6 million charge to the provision for uncollectible accounts, a
$1.0 million write down of deferred acquisition costs, a $2.2 million write off
of capitalized software development costs associated with the NetBase Plus
system (See Note 7) and $700,000 of other charges which included accruals for
estimated settlements related to disputed carrier charges, long-distance
commitment shortfalls and consumer complaints filed with state agencies.

      (1) Earnings per share are computed independently for each of the quarters
      presented. Therefore, the sum of the quarterly earnings per share in 1996
      does not equal the total computed for the year due to stock transactions
      which occurred during the year.

                                       40
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
                        ON FINANCIAL STATEMENT SCHEDULES

We have audited the consolidated financial statements of EqualNet Holding Corp.
and subsidiaries as of June 30, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 1997, and have issued our
report thereon dated September 25, 1997. Our audits also included the financial
statement schedule listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth thereon.



ERNST & YOUNG LLP

Houston, Texas
September 25, 1997

                                       41
<PAGE>
                              EQUALNET HOLDING CORP
               SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                     BALANCE      CHARGED
                                        AT        TO COSTS     CHARGED                     BALANCE
                                    BEGINNING       AND        TO OTHER       DEDUCTIONS    AT END
                                      PERIOD      EXPENSES     ACCOUNTS        DESCRIBE(A) OF PERIOD
                                    ----------   ----------   ----------      ----------   ----------
<S>                                 <C>          <C>          <C>             <C>          <C>       
Fiscal Year Ended June 30, 1997
 Allowance for Doubtful Accounts    $3,284,886   $1,726,929   $2,011,042(B)   $5,571,903   $1,450,954
 Allowance for Advances to Agents   $1,000,000   $     --     $     --        $1,000,000   $     --

Fiscal Year Ended June 30, 1996
 Allowance for Doubtful Accounts    $1,219,154   $3,820,701   $  705,378(B)   $2,460,347   $3,284,886
 Allowance for Advances to Agents   $     --     $1,000,000   $     --        $     --     $1,000,000

Fiscal Year Ended June 30, 1995
 Allowance for Doubtful Accounts    $  265,425   $1,033,160    $    --        $   79,431   $1,219,154
</TABLE>
(A) Uncollectible accounts written off, net of recoveries 
(B) Provision for uncollectible accounts receivable taken against agent 
    commissions payable

                                       42
<PAGE>
                                   SIGNATURES

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

                                            EQUALNET HOLDING CORP.
                                                 (Registrant)


                                            By: /S/ MICHAEL L. HLINAK
                                                    Michael L. Hlinak, Executive
                                                    Vice President and Chief 
                                                    Financial Officer

Dated:  January 20, 1998

                                       43