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

                                   FORM 10-K

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

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

                         EQUALNET COMMUNICATIONS CORP.

A TEXAS                                                  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. [X]

Aggregate market value of the voting stock (common stock) held by
non-affiliates of registrant as of September 24, 1999                 $4,068,665

Number of shares of registrant's common stock outstanding
as of September 24, 1999                                              28,313,922
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Item                                                                        Page
________________________________________________________________________________

                               TABLE OF CONTENTS

PART I

1.   BUSINESS..............................................................    1
2.   PROPERTIES............................................................    8
3.   LEGAL PROCEEDINGS.....................................................    8
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................   10

PART II

5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
     STOCKHOLDER MATTERS..................................................    10
6.   SELECTED FINANCIAL DATA..............................................    12
7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
     RESULTS OF OPERATIONS................................................    13
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........    21
8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................    21
9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE.................................................    21

PART III

10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................    21
11.  EXECUTIVE COMPENSATION...............................................    23
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......    24
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................    28

PART IV

14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....    32

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

ITEM 1.  BUSINESS

GENERAL

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

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

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

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

     The Company's revenues increased to $32.4 million in fiscal year ended June
30, 1999, as compared to $24.9 million for the fiscal year ended June 30, 1998.
Revenues for the fiscal year ended June 30, 1997 were $46.6 million.  Pretax
losses (before extraordinary items) for the years ended June 30, 1999, 1998, and
1997 were $27.8 million, $17.9 million, and $12.6 million, respectively.
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     During fiscal year 1998, the Company continued to experience financial and
operational difficulties.  During the second half of fiscal 1998 the Company
focused on transitioning from being a switchless reseller to becoming a national
switch-based carrier by purchasing nine telecommunications switches ("Switches")
on March 6, 1998. During the process of connecting network facilities to the
Switches in the latter-half of fiscal year 1998 and continuing into 1999, the
Company realized it lacked adequate capital to support a national switched
approach.

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

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

INDUSTRY BACKGROUND, STRUCTURE AND COMPETITION

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

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

     Besides gross revenue, another significant distinction between long-
distance companies involves whether they maintain their own facilities.
Facilities-based companies own or lease transmission facilities, such as fiber
optic cable or digital microwave equipment.  Profitability for facilities-based

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carriers is highly dependent upon their ability to manage complex networking and
transmission costs. Substantially all of the first- and second-tier long
distance companies are facilities-based carriers and generally offer service
nationwide.  Facilities-based carriers in the third-tier of the market generally
have facilities in a focused geographic area or lease facilities from first- or
second-tier carriers.  Profitability for non-facilities based carriers is based
primarily on their ability to generate and retain sufficient revenue volume to
negotiate attractive pricing with one or more facilities-based carriers.
Pricing in such contracts typically is correlated inversely to minimum revenue
or volume commitment levels and term.

     Another distinction among long-distance companies is that of switch-based
versus switchless carriers.  Switch-based carriers have one or more switches,
which are computers directing telecommunications traffic in accordance with
programmed instructions.  All of the facilities-based carriers are switch-based
carriers, as are many non-facilities-based companies.  Switchless carriers
depend on one or more facilities-based carriers to provide both transmission
capacity and switch facilities.  In addition, switchless resellers enjoy the
benefit of offering their service on a nationwide basis, assuming their
underlying carrier has a nationwide network.  An "underlying carrier" is the
carrier that owns and is responsible for the management of the facilities needed
to transmit a customer's long-distance telephone call.  Through fiscal 1997,
EqualNet was a switchless reseller.  During the third quarter of fiscal 1998,
Netco acquired the Switches and associated network assets for approximately
$13.2 million.  EqualNet entered into an agreement with Netco to provide for
operation of the Switches and build out of network facilities in exchange for
the right to carry traffic over the network and as a result became a switch-
based carrier.

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

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

     Competitive factors in the long distance industry affecting the Company's
market share include brand recognition, pricing, customer service, network
quality, value-added services and regulatory and judicial developments.  Non-
facilities-based carriers typically receive rates from underlying carriers in
inverse correlation with the amount of traffic that they can commit to the
underlying carrier; the larger the commitment, the lower the cost of service.
Subject to contract restrictions and customer brand loyalty, resellers may
competitively bid their traffic among various national long-distance carriers to

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lower their cost of service.  Non-facilities-based switchless carriers devote
their resources entirely to marketing, operations and customer service, leaving
the costs of network maintenance and management to the underlying carrier.
Conversely, facilities-based carriers concentrate on maximizing network
efficiency.  In order to operate efficiently, facilities based carriers require
concentrations of their customer traffic where they have facilities to attempt
to maximize their network utilization and reduce the effective cost per minute.
Additional pricing pressure may come from the introduction of new technologies,
such as Internet telephony, which utilizes voice communications at a cost below
that of traditional switched long distance services.  Reductions in prices
charged by competitors could have a material adverse effect on the Company.

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

     The telecommunications marketplace is marked by a high rate of customer
attrition. The Company's competitors engage in national advertising campaigns,
telemarketing programs, and offer cash payments and other incentives to the
Company's end users, who are not obligated to purchase any minimum usage amount
and can discontinue service, without penalty, at any time. There can be no
assurance the Company can replenish its customer base, and failure to do so
could have a material adverse effect on the Company.

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


BRITTAN COMMUNICATIONS INTERNATIONAL

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

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SA TELECOM ACQUISITION

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

ACMI ACQUISITION

     In January 1999, the Company acquired substantially all of the assets of
Limit LLC; doing business as ACMI ("ACMI") a network marketing company with
approximately 2,500 independent agents. In connection with this transaction, the
Company issued 1 million shares of its common stock and assumed a note payable
of $1 million. Subsequent to year-end, the parties of this transaction agreed to
modify the transaction whereby the Company would return the $1 million note
payable to the Sellers and, in consideration for the issued shares of the
Company's common stock, would acquire assets primarily consisting of the
independent agent contracts, debit card platform, and other associated assets.

PRODUCTS AND SUPPLIERS

     MCI WorldCom, Frontier, AT&T, and Qwest were the principal underlying
providers of outbound and inbound long-distance services during fiscal year 1999
through multiple contracts. The Company believes its diversity of carrier
contracts provides further flexibility and alternatives for the Company in the
event it is not able to continue to contract with any of its current underlying
carriers. For example, one carrier may offer the lowest international rates to
one country while another offers the lowest rate to a different country. Under
the terms of the Company's contracts with its various carriers, the Company is
able to choose which services and in what volume the Company wishes to obtain
the services from each carrier. This flexibility enables the Company to minimize
its costs for such services by purchasing those services from the carrier
offering the Company the best rates at a given time.

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

CUSTOMER SERVICE AND CUSTOMER MANAGEMENT SYSTEM

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

     During the third quarter of fiscal year 1998 and continuing through the
fourth quarter of fiscal year 1999, the Company experienced billing difficulties
converting to various customer management and

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information systems with billing capabilities. The initial conversion coincided
with the management of the SA Telecom customer base and the migration to a
switch-based environment which resulted in (a) considerable billing errors, (b)
billing delays, and (c) customer attrition. The Company believes its new cost
rating, billing, and customer care system has dramatically improved rating speed
and billing accuracy.

CUSTOMERS AND MARKETING

Customers

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

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

Marketing

     Historically, EqualNet has relied on independent marketing agents to market
its long-distance products. In the bankruptcy proceedings, EqualNet rejected the
marketing contracts for virtually all of its sales agents. Consequently, many of
these agents may no longer be willing to continue to market for EqualNet under
new contractual arrangements. None of these former agents have executed new
agreements with EqualNet to continue as independent marketing agents. The
Company is currently evaluating several proposals for the resumption of an agent
program in order to increase its customer base.

REGULATION

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

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

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

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

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

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

     Beginning in the third quarter of fiscal year 1998, the Company began to be
assessed both universal service charges and Primary Interexchange Carrier
Charges ("PIC-C charges").  Although the funding of universal service and access
charges are not new, the manner in which the Company is having to pay for these
items is new.  Although the Company, and not its underlying carriers, is now
primarily responsible for the payment of these charges, EqualNet has not
experienced a lowering of its cost of service from its underlying carriers in an
amount equal to the increased amounts of the assessments it has to pay for
universal service and access charges. To the extent the Company does not receive
a lowering of its cost of service from its underlying carriers equal in amount
to its increased cost of business by virtue of these assessments, its operating
margins are diminished. The Company is attempting to recoup at least a portion
of the increase of these assessments by passing these charges through, where
permitted, to its end user customers. In such circumstances, although the per-
minute rates charged to the end user customers are not increased, the effect is
an increase to the Company's customers in their cost of obtaining service.

     The FCC imposes additional reporting, accounting, record-keeping and other
regulatory obligations on the Company.  The Company must offer interstate
services under rates, terms and

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

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

EMPLOYEES

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

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

ITEM 2.  PROPERTIES

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

ITEM 3.  LEGAL PROCEEDINGS

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

     On September 17, 1998, Comerica Leasing Corporation filed suit against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings.  A
settlement agreement was entered into by the parties dismissing the

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earlier litigation and adding the Company as an obligor for the payment of the
settlement amounts. Pursuant to an agreement reached in the bankruptcy
proceedings of EqualNet Corporation, Comerica Leasing agreed to release the
Company from any liability under the settlement and underlying agreements in
exchange for payment of $265,000 plus the issuance of a warrant for the purchase
of up to 300,000 shares of Common Stock of the Company at an exercise price of
$1.50 per share for a period of five years from the date of the agreement.

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

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

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

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

     During 1997, EqualNet settled disputed claims with the attorneys general
from eleven states alleging violations of consumer protection statutes of those
states.  The settlement amount, which was paid in March 1998, totaled $225,000
plus the issuance of certain customer credits and adjustments.  The

                                       9
<PAGE>

Company was either not included as a party or was dismissed as a party before
the entry of any final judgment in any of these proceedings.

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

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

Not applicable.

                                    PART II

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

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

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

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

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

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

     The Company has never declared or paid a dividend on the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of

                                       10
<PAGE>

the Company. The Company does not expect to pay cash dividends in the
foreseeable future. The Company is prohibited from declaring dividends on the
Common Stock unless and until the Company has paid all accrued and outstanding
dividends on the Company's Preferred Stock. Furthermore, the Company's existing
credit facility contains restrictions relating to the payment of dividends and
other distributions. The Company intends to retain any future earnings to
finance the expansion and development of its business. The declaration and
payment in the future of any Common Stock cash dividends will be at the election
of the Company's Board of Directors and will depend upon the earnings, capital
requirements and financial position of the Company, existing or future loan
covenants, general economic conditions' and other pertinent factors.

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

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

On September 4, 1998, the Company issued 3,700 shares in the aggregate of Series
D Preferred Stock and a warrant to purchase 666,232 shares of Common Stock  at a
exercise price of $0.9006 in connection with the Note Issuance Transaction
described more fully in the Company's Form 10-Q for the quarter ended September
30, 1998.

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

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

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

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

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

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

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

                                       11
<PAGE>

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

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

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

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

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

On June 10, 1999, the Company issued 833,333 shares of Common Stock to Infinity
Investments in return for $500,000, issued 833,333 shares of Common Stock to IEO
Holdings in return for $500,000, issued 500,000 shares of Common Stock to James
Crane in return for $300,000, issued 1,250,000 shares of Common Stock to The
Willis Group, LLC in return for $750,000, issued 250,000 shares of Common Stock
to James Lineberger in return for $150,000, and issued 833,333 shares of Series
E Preferred Stock which converts to 833,333 shares of Common Stock at the
Company's sole option to MCM Partners in return for $500,000.

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

ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                           FISCAL YEAR ENDED JUNE 30,
                                                  ____________________________________________________________________________
                                                     1995            1996             1997            1998            1999
                                                  -----------    ------------     ------------    ------------    ------------
INCOME STATEMENT DATA:
<S>                                              <C>             <C>             <C>              <C>             <C>
Sales                                             $67,911,000    $ 78,355,000     $ 46,588,000    $ 24,877,000    $ 32,436,000
Cost of sales                                      54,655,000      61,807,000       34,481,000      21,992,000      30,528,000
Selling, general and                                8,936,000      13,720,000       12,453,000      14,139,000      13,372,000
 administrative expenses
Depreciation and amortization                       1,356,000       5,934,000        6,000,000       4,735,000      10,559,000
Write down of assets                                     ----       6,882,000        4,400,000       1,134,000       3,070,000
                                                  -----------    ------------     ------------    ------------    ------------
Operating income(loss)                              2,964,000      (9,988,000)     (10,746,000)    (17,123,000)    (25,093,000)
</TABLE>

                                       12
<PAGE>

<TABLE>
<CAPTION>
<S>                                              <C>             <C>             <C>              <C>             <C>
Other income (expense)                                (93,000)     (1,089,000)      (1,889,000)       (820,000)     (2,918,000)
                                                  -----------    ------------     ------------    ------------    ------------
Income (loss) before federal                        2,871,000     (11,077,000)     (12,635,000)    (17,943,000)    (28,011,000)
 income taxes and extraordinary
 item
Provision (benefit) for federal income taxes          507,000      (2,660,000)       2,346,000            ----             ---
                                                  -----------    ------------     ------------    ------------    ------------
Net income (loss) before extraordinary item       $ 2,364,000    $ (8,417,000)    $(14,981,000)   $(17,943,000)    (28,011,000)
                                                  -----------    ------------     ------------    ------------    ------------
Extraordinary gain on forgiveness of debt         $      ----    $       ----     $       ----    $       ----    $ 10,022,000
                                                  -----------    ------------     ------------    ------------    ------------
Net Income (loss)                                 $ 2,364,000    $ (8,417,000)    $(14,981,000)   $(17,943,000)   $(17,989,000)
Net loss per share - basic and  diluted                          $      (1.40)    $      (2.46)   $      (1.64)          (1.11)
                                                                 ------------     ------------    ------------    ------------
Pro forma net income(1)                           $ 1,751,000
                                                  -----------
Pro forma net income per share                    $      0.38
                                                  -----------
Weighted average number of  shares(2)               4,618,043       6,017,332        6,096,932      10,943,630      19,936,124
                                                  -----------    ------------     ------------    ------------    ------------
Cash dividends per share(3)                       $      0.61    $       ----     $       ----    $       ----    $       ----
                                                  -----------    ------------     ------------    ------------    ------------
Balance Sheet Data:
Cash and equivalents                              $ 3,527,000    $    382,000     $    828,000    $    460,000    $    266,000
Working capital (deficiency)                        7,772,000      (3,161,000)      (4,667,000)    (13,560,000)     (7,673,000)
Total assets                                       39,316,000      34,596,000       19,162,000      27,760,000      25,714,000
Total long-term debt and capital leases, net        1,143,000          45,000             ----            ----       5,301,000
 of current portion
Total shareholders' equity (deficit)               20,706,000      12,384,000       (1,689,000)      2,958,000       3,728,000
</TABLE>

_______________
(1)  From July 1, 1992 to March 7, 1995, the Company had reported for federal
     income tax purposes as an S corporation.  Accordingly, all taxable earnings
     of the Company during that time have been taxed directly to the
     shareholders of the Company at their individual tax rates.  A pro forma
     adjustment to reflect federal and state income taxes as if the Company were
     a C corporation is presented for the respective periods at an estimated
     effective rate of 39%.

(2)  Shares used to compute pro forma net income per share are based upon the
     actual weighted-average shares outstanding giving retroactive effect to the
     Company's reorganization which occurred March 8, 1995.

(3)  Shares used to compute cash dividends per share are based upon 4,000,000
     shares outstanding beginning in 1993 and for the remaining periods as a
     result of the reorganization.  On March 7, 1995, the Company declared a
     final dividend of $0.53 per share to the shareholders of record on such
     date.  The dividend was paid on March 24, 1995, to the shareholders of
     record on March 7, 1995.

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

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

OVERVIEW

     Because of the continued erosion of market share and continuing declines in
cash flow, one of the Company's wholly-owned subsidiaries, EqualNet Corporation
("EqualNet"), and EqualNet Wholesale Services, Inc. ("Wholesale"), a non-
operating wholly-owned subsidiary of EqualNet, filed voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code (the
"Bankruptcy Code") on September 10, 1998 (the "Petition Date") in the United
States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy
Court"), Houston, Texas.  On October 2, 1998, Wholesale filed its motion to
convert its bankruptcy proceeding from a Chapter 11 reorganization to a Chapter
7 liquidation.  Pursuant to Sections 1107 and 1108 of the Bankruptcy Code,
EqualNet managed

                                       13
<PAGE>

its assets and operated its business as a debtor-in-possession pending
confirmation of its reorganization plan, which plan was confirmed on April 28,
1999. The plan of reorganization provided for the restructuring of amounts and
repayment terms for secured and unsecured creditors. In conjunction with the
confirmation and consummation of the reorganization plan, certain debts were
reduced, resulting in an extraordinary gain of approximately $10.0 million. As
voting control of the Company's common stock remained the same as a result of
the confirmation of the plan of reorganization, fresh start accounting was not
used in accordance with AICPA Statement of Position 90-7.

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

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

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

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

     The Company's selling, general and administrative costs are primarily the
costs of back office operations including billing, provisioning and customer
service.  The Company also has devoted significant resources to the information
technology necessary to support customer service with the purchase of and
successful implementation of a new and effective information system.

                                       14
<PAGE>

REORGANIZATION OF EQUALNET CORPORATION

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

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

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

CONSOLIDATED RESULTS OF OPERATIONS

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

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

                                       15
<PAGE>

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

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

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

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

     Depreciation and amortization increased approximately $5.8 million, or
122.9% for the year ended June 30, 1999 when compared to 1998.  This increase is
primarily attributable to the amortization of the customer acquisition costs of
the 1999 acquisitions of the SA Tel and BCI customer bases ($4.5 million), and a
full year of depreciation associated with the Company's switches ($2.8 million)
which were acquired in the fourth quarter of fiscal year 1998.

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

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

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary cash requirements, in addition to normal operating
expenses, are debt service, potential acquisitions, and sustaining capital
expenditures.  To date, the external funds necessary to fund the Company's cash
requirements have been provided primarily from asset-based financing and third-
party sources of capital.  The Company has a working capital credit facility
with RFC Capital

                                       16
<PAGE>

Corporation ("RFC") whereby RFC purchases the Company's receivables and unbilled
call detail records and periodically remits back to the Company excess
collections over amounts funded less financing fees. The maximum allowable
amount of funding under the RFC credit facility is $10.0 million.

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

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

Cash Used in Operating Activities

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

Cash Used in Investing Activities

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

Cash Provided by Financing Activites

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

Debt Facilities

     In connection with the SA Telecom acquisition, the Company assumed a note
payable of approximately $4.0 million.  In August 1998, this note was paid off
through the proceeds of various new third-party loans and the proceeds of a new
note agreement in the amount of approximately $560,000.  This new note agreement
bears interest at a rate of prime plus 2.5% and is secured by the assets of USC

                                       17
<PAGE>

Telecom.  The principal balance of this new note was due on February 22, 1999.
The Company is currently in default of this note and the corresponding debt is
classified as debt in default as of June 30, 1999.

     In September 1998, the Company executed a loan agreement in favor of the
Willis Group of approximately $0.2 million for certain advances made on behalf
of the Company.  This note is secured by the assets of the Company and each of
its subsidiaries, bears interest at a rate of 11% per annum, and is due December
31, 1999.

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

Working Capital and Long Cash Cycle.

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

Management's Plans to Return to Profitability

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

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

                                       18
<PAGE>

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

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

SEASONALITY

     The Company's long distance revenue is subject to seasonal variations.
Because much of the Company's revenue is generated by non-residential customers,
the Company traditionally experiences decreases in long-distance usage and
revenue in those periods with holidays.  In past years the Company's long-
distance traffic, which is primarily non-residential, has declined slightly
during the quarter ending December 31 due to the November and December holiday
periods.

YEAR 2000

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

In addition to addressing the Company's own systems, as described above, the
Company must assess the state of readiness of the systems of other entities with
which it does business.  Failure by these third-

                                       19

<PAGE>

parties to adequately resolve their Y2K issues could have a material adverse
effect on the Company's operations.

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

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

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

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

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

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

     .  Customer attrition rates in excess of those anticipated;

     .  Increased price competition for long distance services;

     .  Changes in governmental policy, regulation, and enforcement;

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

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

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

     .  Maintaining the Company's NASDAQ listing.

                                       20
<PAGE>

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

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
                                                                                                    Year Term As
                                                                                                    Director Will
                Name                        Age                     Position(s)                         Expire
_______________________________           _______      __________________________________           ______________
<S>                                       <C>          <C>                                          <C>
Mark A. Willis                              31         Chairman of the Board , Director                   2000
Mitchell H. Bodian                          48         President, Chief Executive Officer,                1999
                                                       Director
</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>
<S>                                       <C>          <C>                                          <C>
William D. Rhodes, Jr.                      51         Chief Operating Officer
Michael P. Gallagher                        32         Chief Financial Officer
John Isaac "Ike" Epley                      32         Director                                      1999
Ronald J. Salazar                           50         Director                                      1998
</TABLE>

     Mark A. Willis has served as Chairman of the Board and a director of the
Company since March 1998.  Mr. Willis founded the Willis Group, an investment
fund, in 1997 and serves as its President.  The fund has made investments in
industries such as offshore oil platform equipment, geophysical services, oil
and gas production, telecommunications, and an aircraft parts supplier.  Before
forming the Willis Group, Mr. Willis worked at Eagle USA Airfreight, an air
freight forwarder, for two and a half years, where he rose to the position of
Regional Sales and Marketing Manager.  Before that, Mr. Willis served as a
marketing and sales representative for Talent Tree, a temporary help agency
providing primarily clerical and office staffing services.

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

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

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

     John Isaac "Ike" Epley has served as a director of the Company since March
1998.  Mr. Epley has been a Managing Director of Omni Ventures, L. L. C., a
venture capital and investment banking

                                       22
<PAGE>

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

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

     Section 16(a) Beneficial Ownership Reporting Compliance

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

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

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

ITEM 11.  EXECUTIVE COMPENSATION

     COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION

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

     SUMMARY COMPENSATION TABLE

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

<TABLE>
<CAPTION>
                                                 Annual Compensation
               Name and                   Fiscal        Salary          Bonus        Common Stock             All Other
          Principal Position               Year                                   Underlying Options       Compensation(1)
 <S>                                      <C>         <C>               <C>       <C>                     <C>
Mitchell H. Bodian                            1999       $204,818           -             -                     $  338
Hal Turner                                    1998       $ 14,423           -             -                     $3,076
former Chief Executive Officer                1997       $100,961
                                                                -

Dean H. Fisher                                1998        129,800           -             -                      6,059
General Counsel                               1997        129,000           -        35,000                      3,451
                                              1996        128,000           -             -                      6,097

</TABLE>

----------------------



                                       23

<PAGE>

(1)  Represents contributions in 1999 by the Company under the Company's 401(k)
     Plan for Mr. Fisher of $5,037 and health insurance premiums paid in 1999 by
     the Company for Messrs. Bodian and Fisher of $338 and $2,445, respectively.
     Represents contributions in 1998 by the Company under the Company's 401(k)
     Plan for Mr. Fisher of $3,894, and health insurance premiums paid in 1998
     by the Company for Messrs. Turner, and Fisher of $3,076, and $2,165,
     respectively.  Represents contributions in 1997 by the Company under the
     Company's 401(k) Plan for Mr. Fisher of $1,676, and health insurance
     premiums paid in 1997 by the Company for Mr. Fisher of $1,775.

OPTION GRANTS IN FISCAL 1999

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

<TABLE>
<CAPTION>
                                    NUMBER OF SHARES OF
                                  COMMON STOCK UNDERLYING                                VALUE OF UNEXERCISED
                                  UNEXERCISED WARRANTS AND                             IN THE MONEY WARRANTS AND
                                  OPTIONS AT JUNE 30, 1998                            OPTIONS AT JUNE 30, 1998 (1)
                            ------------------------------------                  ---------------------------------
NAME                        EXERCISABLE            UNEXERCISABLE                  EXERCISABLE          UNEXERCISABLE
                            -----------            -------------                  -----------          -------------
<S>                         <C>                    <C>                            <C>                  <C>
Dean H. Fisher                 35,000                    ---                           ---                    ---
                                                                                                              ---
                                                                                                              ---
</TABLE>
(1)  The value of each unexercised in-the-money warrant or option is equal to
the difference between the closing price of the common stock on the NASDAQ
National Market on June 30, 1999 of $.6875 per share and the exercise price
of the warrant or option.

                           COMPENSATION OF DIRECTORS

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

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                                       24
<PAGE>

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


<TABLE>
<CAPTION>
                                                          Series A       Series B       Series C      Series D     Series E
                                      Common Stock        Preferred      Preferred      Preferred     Preferred    Preferred
                                ----------------------- -------------  -------------  ------------- ------------- -------------
Directors, Executive Officers    Number of      % of    No. of   % of  No. of  % of   No. of  % of  No. of  % of  No. of  % of
and 5.0% Shareholders             Shares       Class    Shares  Class  Shares  Class  Shares  Class Shares  Class Shares  Class
-----------------------------    ---------     -----    ------  -----  ------  -----  ------  ----- ------  ----- ------- -----
<S>                             <C>            <C>      <C>     <C>    <C>     <C>    <C>     <C>   <C>     <C>   <C>     <C>
Michael T. Willis             30,707,575(1)     60.2%      -       -      -       -       -      -      -      -      -      -
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

James T. Harris               30,507,575(1)(4)  60.4%      -       -      -       -       -      -      -      -      -      -
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

Willis Group, LLC             30,207,575(1)     59.8%      -       -      -       -       -      -      -      -      -      -
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

Mark A. Willis                30,270,736(1)(14) 59.9%      -       -      -       -       -      -      -      -      -      -
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

James R. Crane                 4,070,000(2)     14.3%      -       -      -       -       -      -      -      -      -      -
 15350 Vickery Drive
 Houston, Texas 77032

MCM Partners                  13,113,930(3)     31.7%    2,057    100%    -       -       -      -      -      -    833,333  100%
 10500 NE 8th,
 Suite 1920
 Bellevue, Washington 98004

Genesee Fund Limited           9,801,773(5)     25.8%      -       -      -       -       -      -      -      -      -      -
 Portfolio B
 10500 NE 8th,
 Suite 1920
 Bellevue, Washington 98004

Advantage Fund Limited        11,855,336(6)     29.5%      -       -      -       -      -       -   1,982    50%     -      -
 10500 NE 8th,
 Suite 1920
 Bellevue, Washington 98004

SA Telecommunications, Inc     2,157,990(7)      7.1%      -       -      -       -     215,799 100%    -      -      -      -
 1600 Promenade
 Center, 15th Floor
 Richardson, Texas 75080

The Furst Group, Inc           1,822,500(8)      6.1%      -       -    3,000    100%     -      -      -      -      -      -
 459 Oakshade Road
 Shamong, New Jersey  08088

James D. Kaylor                1,822,500(8)      6.1%      -       -      -       -       -      -      -      -      -      -
 916 P Street,
 Suite 200
 Lincoln, Nebraska 68508

John S. Streep                 1,822,500(8)      6.1%      -       -      -       -       -      -      -      -      -      -
 15841 Kilmarnock Drive
 Ft. Myers, Florida 33912

Mitchell H. Bodian                49,221(1)        *       -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Robert H. Turner                    -              -       -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

R. Chadwick Paul, Jr.               -              -       -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Zane Russell                   1,152,556(4)(9)   4.1%      -       -      -       -       -      -      -      -      -      -
 20607 Shadow Mill Court
 Houston, Texas 77450

Dean H. Fisher                   267,601(1)        -       -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079
</TABLE>

<TABLE>
<CAPTION>

                                  Series E
                                  Preferred
                                -------------
Directors, Executive Officers   No. of   % of
and 5.0% Shareholders           Shares   Class
-----------------------------   -------  -----
<S>                             <C>      <C>
Michael T. Willis               1,586(13) 50%
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

James T. Harris                 1,586(13) 50%
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

Willis Group, LLC               1,586(13) 50%
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

Mark A. Willis                  1,586(13) 50%
 5005 Woodway,
 Suite 350
 Houston, Texas 77056

James R. Crane                      -      -
 15350 Vickery Drive
 Houston, Texas 77032

MCM Partners                        -      -
 10500 NE 8th,
 Suite 1920
 Bellevue, Washington 98004

Genesee Fund Limited            1,586     50%
 Portfolio B
 10500 NE 8th,
 Suite 1920
 Bellevue, Washington 98004

Advantage Fund Limited              -      -
 10500 NE 8th,
 Suite 1920
 Bellevue, Washington 98004

SA Telecommunications, Inc          -      -
 1600 Promenade
 Center, 15th Floor
 Richardson, Texas 75080

The Furst Group, Inc                -      -
 459 Oakshade Road
 Shamong, New Jersey  08088

James D. Kaylor                     -      -
 916 P Street,
 Suite 200
 Lincoln, Nebraska 68508

John S. Streep                      -      -
 15841 Kilmarnock Drive
 Ft. Myers, Florida 33912

Mitchell H. Bodian                  -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Robert H. Turner                    -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

R. Chadwick Paul, Jr.               -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Zane Russell                        -      -
 20607 Shadow Mill Court
 Houston, Texas 77450

Dean H. Fisher                      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079
</TABLE>
                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                          Series A       Series B       Series C      Series D     Series E
                                      Common Stock        Preferred      Preferred      Preferred     Preferred    Preferred
                                ----------------------- -------------  -------------  ------------- ------------- -------------
Directors, Executive Officers    Number of      % of    No. of   % of  No. of  % of   No. of  % of  No. of  % of  No. of  % of
and 5.0% Shareholders             Shares       Class    Shares  Class  Shares  Class  Shares  Class Shares  Class Shares  Class
-----------------------------    ---------     -----    ------  -----  ------  -----  ------  ----- ------  ----- ------- -----
<S>                             <C>            <C>      <C>     <C>    <C>     <C>    <C>     <C>   <C>     <C>   <C>     <C>
Michael L. Hlinak                190,000(9)       *        -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

John Isaac "Ike" Epley            40,153(14)      *        -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Ronald J. Salazar, Ph.D.         156,725(14)      *        -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

William D. Rhodes, Jr.               -            *        -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Michael P. Gallagher                 -            *        -       -      -       -       -      -      -      -      -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Current directors and         30,516,835(12)    60.4%      -       -      -       -       -      -   1,982(13) 50%    -      -
 executive officers as a
 group (6 persons)
</TABLE>

<TABLE>
<CAPTION>
                                  Series F
                                  Preferred
                                 -------------
Directors, Executive Officers    No. of  % of
and 5.0% Shareholders            Shares  Class
-----------------------------    ------- -----
<S>                              <C>     <C>
Michael L. Hlinak                    -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

John Isaac "Ike" Epley               -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Ronald J. Salazar, Ph.D.             -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

William D. Rhodes, Jr.               -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Michael P. Gallagher                 -      -
 1250 Wood Branch Park Dr.
 Houston, Texas 77079

Current directors and            1,586(13) 50%
 executive officers as a
 group (6 persons)
</TABLE>
---------------------
*   Less than 1%.

1.  Includes warrants exercisable for an aggregate of 933,116 shares of common
    stock, 1,982 shares of series D preferred stock convertible in the aggregate
    into approximately 11,832,836 shares of common stock and series F preferred
    stock convertible in the aggregate into approximately 9,468,657 shares of
    common stock. Michael T. Willis holds directly a warrant for the purchase of
    500,000 shares of common stock and James T. Harris holds 300,000 shares of
    common stock directly as the result of a transfer from Willis Group. None of
    such shares issuable pursuant to the terms of the warrants were outstanding
    as of September 24, 1999. Information relating to ownership by Willis Group
    and Messrs. Michael T. Willis, Mark A. Willis and James T. Harris is based
    on Amendment No. 5 to Schedule 13D filed with the SEC on March 12, 1999.
    Michael T. Willis and Mark A. Willis each own 48.5% of the membership
    interest in Willis Group and Mr. Harris owns the remaining 3% membership
    interest. Michael T. Willis is the Secretary of Willis Group, Mark A. Willis
    is the President of Willis Group and Mr. Harris is the Treasurer of Willis
    Group. According to the report, Willis Group has sole voting and dispositive
    power with respect to all shares other than shares or warrants held directly
    and Messrs. Michael T. Willis, Mark A. Willis and Harris have shared voting
    and dispositive power with respect to all shares other than shares or
    warrants held directly.

2.  Includes a warrant exercisable for an aggregate of 170,000 shares of common
    stock, none of which had been issued as of June 8, 1999. Information
    relating to ownership by James R. Crane is based on reports on Schedule 13D
    filed with the SEC on May 6, 1998.

3.  Consists of 2,057 shares of series A preferred stock currently convertible
    in the aggregate into approximately 12,280,597 shares of common stock and
    833,333 shares of series E convertible preferred stock currently
    exchangeable in the aggregate into 833,333 shares of common stock.

4.  Excludes 5,000 shares of common stock issuable upon exercise of stock
    options awarded under the Director Plan that are not exercisable within 60
    days.

                                       26
<PAGE>

5.  Includes a warrant exercisable for an aggregate of 333,116 shares of common
    stock and series F preferred stock convertible into an aggregate of
    approximately 9,468,657 shares of common stock.

6.  Includes 1,982 shares of series D preferred stock convertible in the
    aggregate into approximately 11,832,836 shares of common stock.

7.  Includes 215,799 shares of series C preferred stock convertible in the
    aggregate into 2,157,990 shares of common stock.

8.  Includes 3,000 shares of series B preferred stock convertible in the
    aggregate into 1,500,000 shares of common stock. Information relating to
    ownership by Furst Group, James D. Kaylor and John S. Streep is based on
    management's information regarding the transactions. Messrs. Kaylor and
    Streep each own 45% of the common stock of Furst Group. Mr. Kaylor is the
    Chairman of the Board of Furst Group and Mr. Streep is the Chief Executive
    Officer of Furst Group.

9.  Includes a warrant exercisable for an aggregate of 90,000 shares of common
    stock.

10. Includes options exercisable for an aggregate of 35,000 shares of common
    stock. Excludes 40,000 shares of common stock held by trusts for the benefit
    of Mr. Fisher's children. Mr. Fisher has disclaimed any beneficial ownership
    of these shares.

11. Includes beneficial ownership of warrants exercisable for an aggregate of
    66,667 shares of common stock.

12. See Note 1 above and Notes 13 and 14 below.

13. All 1,982 shares of series D preferred stock and all 1,586 shares of series
    F preferred stock are beneficially owned by Mark A. Willis, Michael T.
    Willis and James T. Harris, and are held directly by Willis Group.

14. Includes options issued on March 7, 1999 under the Director Plan
    exercisable for 1,667 shares of common stock to each of Messrs. Willis,
    Bodian and Epley and Dr. Salazar.

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

     Under the terms of the warrants held by Willis Group and Genesee, and the
series A, series D and series F preferred stock, those securities are
convertible or exercisable by any holder only to the

                                       27
<PAGE>

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


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE


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

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


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


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

     The series B preferred stock consists of 3,000, shares all of which were
issued in connection with the Exchange Agreement.  Each share of series B
preferred stock has a stated value of $1,000 and is entitled to receive
dividends only if, as and when the Board of Directors declares dividends on the
common stock.  Each share of series B preferred stock is convertible initially
into 500 shares of common stock (for an aggregate of 1,500,000 shares), subject
to adjustment pursuant to certain anti-dilution provisions.  Each share of
series B preferred stock automatically converts into common stock, based upon
the conversion rate then in effect, on December 31, 1999.

                                       28
<PAGE>

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

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

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

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

     Under the terms of several related agreements (the "Agreements") among
Equalnet, Willis Group and MCM Partners entered into on December 2, 1997,
Equalnet acquired nine telecommunications switches (the "Switches") from Willis
Group for aggregate consideration consisting of $5,850,000 in cash, 1,400,000
shares of common stock, and warrants to purchase an additional 400,000 shares of
common stock.  Equalnet secured  financing of $6,050,000 for the cash portion of
the consideration through an unaffiliated third party lender, which loan is
secured by the Switches, bears interest at an annual rate of 6.42% above an
index rate based on U.S.  Treasury Notes (the loan interest rate currently is
12.1%) and is payable in 36 consecutive monthly payments.  In addition, Equalnet
granted 500,000 warrants to Michael T.  Willis, a member of Willis Group and
father of director Mark A.  Willis, for guaranteeing a portion of this
financing.

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

                                       29
<PAGE>

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

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

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

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

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


As compensation for these services, Bodian received or will receive:

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

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

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

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

 . certain additional compensation from Netco Acquisition LLC; and

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


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

                                       30
<PAGE>

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

     The terms of the series A preferred stock have been amended.  See "Proposal
4:  To Ratify the Amendment of the Statement of Resolution of the Board of
Directors With Respect to the Series A Preferred and To Approve the Issuance of
Common Stock Upon the Conversion of the Series A Preferred Pursuant to the Terms
of the Amended Series A Statement of Resolution."

     During the quarter ended March 31, 1998, Equalnet obtained a cash flow
bridge loan of $400,000 from Netco Acquisition, LLC, an entity owned 50% by
Willis Group.  This note was payable on March 31, 1998 and had an interest rate
of 10%.  This note is secured by the accounts attributable to web page
customers.  This note was renewed and extended by the execution of a Renewal and
Extension Promissory Note in the principal amount of $426,849.32 on December 31,
1998.  The principal sum thereof, and interest at 10% thereon, must be paid on
or before July 31, 1999.

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

     On September 2, 1998, Equalnet executed a loan agreement in favor of Willis
Group in the amount of $241,106.  The loan documents certain advances Willis
Group has made on Equalnet's behalf.  This loan is secured by the assets of
Equalnet and its subsidiaries.  The related note bore interest at a rate of 11%
per year and matured on January 31, 1999.  This note was renewed and extended by
the execution of a Renewal and Extension Subordinated Promissory Note on January
31, 1999.  The principal sum thereof, and interest at 11% thereon, must be paid
on or before July 31, 1999.

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

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

                                       31
<PAGE>

     John Isaac "Ike" Epley, a member of Equalnet's Board of Directors, has been
performing consulting services for Equalnet from June 1998 through March 1999.
Mr. Epley has consulted on such matters as mergers, acquisitions, strategy and
corporate development for Equalnet.  He has been paid $85,400 to date under this
arrangement, based upon annual compensation of $175,000.  Mr. Epley will
continue to serve as a consultant to Equalnet on a month-to-month basis in the
future.

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

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

                                    PART IV

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

(A)  DOCUMENTS INCLUDED IN THIS REPORT:

1. FINANCIAL STATEMENTS.............................  PAGE

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

                                       32
<PAGE>

2.  FINANCIAL STATEMENT SCHEDULES

Schedule II

(B)   REPORTS ON FORM 8-K:

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

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

(C)  EXHIBITS:


                                       33
<PAGE>

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).

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

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

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

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

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

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

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

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

                                       34
<PAGE>

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

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

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

10.10 Exchange Agreement, dated March 6, 1998 between the Company and The Furst
      Group, Inc. (incorporated by reference to Exhibit 10.5 of the Company's
      Quarterly Report on Form 10-Q for the quarter ended 3/31/98).

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

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

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

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

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

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

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

                                       35
<PAGE>

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

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

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

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

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

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

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

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

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

10.27 *Form of Common Stock Purchase Warrant (attached as Annex III to Note
      Purchase and Exchange Agreements in Exhibits 10.23 and 10.24 above).

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

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

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

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

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

                                       36
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       37
<PAGE>

10.48 *Stock Purchase Warrant dated March 5, 1998 from the Company to the
      Willis Group, LLC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23.1  *Consent of Independent Auditors.

23.2  Consent of Independent Auditors (filed herewith).

27.1  Financial Data Schedule (filed herewith).

*     -Incorporated by reference to the respective exhibit of the same number to
      the Company's Annual Report on Form 10-K for the fiscal year ended June
      30, 1998 filed on October 13, 1998.

                                       38
<PAGE>

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

                                       39
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Equalnet Communications Corp.

We have audited the accompanying consolidated balance sheets of Equalnet
Communications Corp., and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. Our audit
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Equalnet
Communications Corp. and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.  Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

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




                                                           ERNST & YOUNG LLP

Houston, Texas
October 13, 1999

                                       40
<PAGE>


                         EQUALNET COMMUNICATIONS CORP.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                                                 ------------------------------------------------
                                                       1999             1998             1997
                                                 -------------     ------------      ------------
<S>                                               <C>              <C>               <C>
Sales                                             $ 32,436,000     $ 24,877,000      $ 46,588,000
Cost of Sales                                       30,528,000       21,992,000        34,481,000
                                                 -------------     ------------      ------------
Gross profit                                         1,908,000        2,885,000        12,107,000
                                                 -------------     ------------      ------------

Selling, general, and administrative expenses       13,372,000       14,139,000        12,453,000
Depreciation and amortization                       10,559,000        4,735,000         6,000,000
Write down of long-lived assets                      3,070,000        1,134,000         4,400,000
                                                 -------------     ------------      ------------
Operating loss                                     (25,093,000)     (17,123,000)      (10,746,000)
                                                 -------------     ------------      ------------

Other income (expense):
Interest, net                                       (2,827,000)      (1,109,000)       (1,019,000)
Other                                                  (91,000)         289,000          (870,000)
                                                 -------------     ------------      ------------
                                                    (2,918,000)        (820,000)       (1,889,000)
                                                 -------------     ------------      ------------

Loss before income taxes and extraordinary item    (28,011,000)     (17,943,000)      (12,635,000)

Provision for income taxes                                   -                -        (2,346,000)
                                                 -------------     ------------      ------------

Loss before extraordinary item                     (28,011,000)     (17,943,000)      (14,981,000)

Extraordinary gain on forgiveness of debt           10,022,000                -                 -
                                                 -------------     ------------      ------------
Net loss                                          $(17,989,000)    $(17,943,000)     $(14,981,000)
                                                  ============     ============      ============
Preferred stock dividends and deemed
  distributions                                   $  4,177,000     $     52,000      $          -

Net loss applicable to common shareholders         (22,166,000)     (17,995,000)      (14,981,000)
                                                  ============     ============      ============
Net loss per share - basic and diluted                   (1.11)           (1.64)            (2.46)
                                                  ============     ============      ============
</TABLE>

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

                                      41
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                            June 30,
                                                                ----------------------------
                                                                      1999           1998
                                                                ----------------------------
<S>                                                             <C>               <C>
                 ASSETS
Current assets:
 Cash and cash equivalents                                      $   266,000      $   460,000
 Accounts receivable, net                                         7,873,000        5,839,000
 Other receivables                                                  472,000        1,596,000
 Advance on acquisition purchase price                                   -         3,014,000
 Prepaid expenses and other                                         401,000          110,000
                                                                -----------      -----------
  Total current assets                                            9,012,000       11,019,000
                                                                -----------      -----------
Property and equipment                                           20,801,000       20,212,000
Less accumulated depreciation and amortization                   (8,368,000)      (4,838,000)
                                                                -----------      -----------
 Net property and equipment                                      12,433,000       15,374,000
                                                                -----------      -----------
Customer acquisition costs, net                                   3,862,000          356,000
Other assets                                                        407,000        1,011,000
                                                                -----------      -----------
Total assets                                                    $25,714,000      $27,760,000
                                                                ===========      ===========

                 LIABILITIES AND EQUITY
Current liabilities:
 Accounts payable                                               $ 3,991,000      $10,480,000
 Accrued liabilities                                              5,749,000        4,427,000
 Current portion of long term debt - related party                  322,000               -
 Current portion of long term debt                                2,726,000        1,183,000
 Debt in default                                                    558,000        5,753,000
 Debt in default - related party                                         -           400,000
 Contractual obligations with regard to receivable
  sales agreement                                                 3,339,000        2,335,000
                                                                -----------      -----------
  Total current liabilities                                      16,685,000       24,578,000
                                                                -----------      -----------
Deferred liabilities                                                     -           224,000
Long term debt                                                    5,301,000               -

Commitments and contingencies                                            -                -
Preferred stock, $0.01 par value, 5,000,000 shares authorized:   16,153,000        5,000,000
 Common stock, $0.01 par value.  Authorized 50,000,000 shares;
  issued and outstanding 28,437,983 and 28,029,281 and
  21,793,517 and 21,393,070 shares as of June 30, 1999 and
  1998, respectively                                                284,000          218,000
 Treasury stock, at cost                                           (232,000)        (817,000)
 Additional paid in capital                                      46,840,000       37,064,000
 Stock warrants                                                   3,019,000        1,763,000
 Deferred compensation                                              (20,000)        (116,000)
 Accumulated deficit                                             62,316,000      (40,154,000)
                                                                -----------      -----------
 Total shareholders' equity                                       3,728,000        2,958,000
                                                                -----------      -----------
 Total liabilities and shareholders' equity                     $25,714,000      $27,760,000
                                                                ===========      ===========
</TABLE>
                The accompanying notes are an integral part of
                   these consolidated financial statements.

                                      42
<PAGE>


                         EQUALNET COMMUNICATIONS CORP.
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                Preferred        Common          Treasury        Additional
                                                  Stock           Stock           Stock       Paid-in-Capital     Warrants
                                               -----------      --------       -----------    ---------------    ----------
<S>                                             <C>              <C>           <C>            <C>                <C>
Balance, July 1, 1996                          $       -        $ 60,000       $  (105,000)      $19,942,000     $      -
Common stock and warrants
 issued in acquisition                                 -           2,000               -             449,000        199,000
Stock warrants issued with debt                        -             -                 -                 -          169,000
Deferred compensation amortization                     -             -                 -                 -              -
Net loss                                               -             -                 -                 -              -
                                               -----------      --------       -----------       -----------     ----------
Balance, June 30, 1997                         $       -        $ 62,000       $  (105,000)      $20,391,000     $  368,000

Forfeiture of shares of stock
 granted to key employees                              -             -             (12,000)          (48,000)           -
Common stock shares reacquired                         -             -            (700,000)              -              -
Proceeds from issuance of
 common stock and warrants                             -          87,000               -           9,044,000        270,000
Issuance of warrants with debt                         -             -                 -                 -           43,000
Conversion of convertible debt                   3,000,000        14,000               -           1,528,000            -
Interest charge on convertible debt                    -             -                 -             150,000            -
Preferred stock dividends                              -             -                 -                 -              -
Exchange of warrants for common stock                  -             -                 -                 -         (169,000)
Issuance of stock and warrants
 for equipment                                   2,000,000        50,000               -           4,954,000        950,000
Warrants issued under severance agreement              -             -                 -                 -          301,000
Issuance of stock for note receivable                  -           5,000               -           1,045,000            -
Deferred compensation amortization                     -             -                 -                 -              -
Net loss                                               -             -                 -                 -              -
                                               -----------      --------       -----------       -----------     ----------
Balance, June 30, 1998                         $ 5,000,000      $218,000       $  (817,000)      $37,064,000     $1,763,000

Forfeiture of shares of stock
 granted to employees                                  -             -             (11,000)          (49,000)           -
Exercise of common stock options                       -           1,000               -              56,000            -
Issuance of preferred stock                      8,797,000           -                 -                 -              -
Exchange of convertible debt for
 preferred stock                                 1,889,000                      (1,689,000)
Issuance of treasury stock to bankruptcy trust         -             -           2,285,000           529,000            -
Proceeds from issuance of
 common stock and warrants                             -          44,000               -           2,500,000        155,000
Issuance of warrants with debt                         -             -                 -                 -          479,000
Issuance of stock for director's fees                  -           1,000               -              67,000            -
Preferred stock dividends and beneficial
 conversion                                        467,000           -                 -           3,582,000            -
Beneficial conversion on convertible debt              -             -                 -             450,000            -
Issuance of stock and warrants for acquisition         -          11,000               -           1,716,000         74,000
Issuance of stock and warrants for
 settlement of claim                                   -           4,000               -             237,000        435,000
Issuance of stock and warrants
 for services                                          -           4,000               -             212,000        113,000
Relief of debt by significant shareholder              -             -                 -             427,000            -
Stock issued under severance agreement                 -           1,000               -              49,000            -
Deferred compensation amortization                     -             -                 -                 -              -
Net loss                                               -             -                 -                 -              -
                                               -----------      --------       -----------       -----------     ----------
Balance, June 30, 1999                         $16,153,000      $284,000       $  (232,000)      $46,840,000     $3,019,000
                                               ===========      ========       ===========       ===========     ==========
</TABLE>


<TABLE>
<CAPTION>
                                                               Accumulated
                                                  Deferred      Earnings
                                                Compensation    (Deficit)          Total
                                              ---------------  -----------     ------------
<S>                                             <C>           <C>              <C>
Balance, July 1, 1996                            $(336,000)   $ (7,178,000)   $ 12,383,000
Common stock and warrants
 issued in acquisition                                 -               -           650,000
Stock warrants issued with debt                        -               -           169,000
Deferred compensation amortization                  90,000             -            90,000
Net loss                                               -       (14,981,000)    (14,981,000)
                                                 ---------    ------------    ------------
Balance, June 30, 1997                           $(246,000)   $(22,159,000)   $ (1,689,000)

Forfeiture of shares of stock
 granted to key employees                           60,000             -               -
Common stock shares reacquired                         -               -          (700,000)
Proceeds from issuance of                                                              -
 common stock and warrants                             -               -         9,401,000
Issuance of warrants with debt                         -               -            43,000
Conversion of convertible debt                         -               -         4,542,000
Interest charge on convertible debt                    -               -           150,000
Preferred stock dividends                              -           (52,000)        (52,000)
Exchange of warrants for common stock                  -               -          (169,000)
Issuance of stock and warrants
 for equipment                                         -               -         7,954,000
Warrants issued under severance agreement              -               -           301,000
Issuance of stock for note receivable                  -               -         1,050,000
Deferred compensation amortization                  70,000             -            70,000
Net loss                                               -       (17,943,000)    (17,943,000)
                                                 ---------    ------------    ------------
Balance, June 30, 1998                           $(116,000)   $(40,154,000)   $  2,958,000

Forfeiture of shares of stock
 granted to employees                               60,000             -               -
Exercise of common stock options                       -               -            57,000
Issuance of preferred stock                            -               -         8,997,000
Exchange of convertible debt for
 preferred stock                                                                   200,000
Issuance of treasury stock to bankruptcy trust         -               -         2,814,000
Proceeds from issuance of
 common stock and warrants                             -               -         2,699,000
Issuance of warrants with debt                         -               -           479,000
Preferred stock dividends and beneficial conversion    -        (4,173,000)       (124,000)
Issuance of stock for directors fees                   -               -            68,000
Issuance of stock and warrants for settlement
 of claim                                              -               -           676,000
Relief of debt by significant shareholder              -               -           427,000
Beneficial conversion on convertible debt              -               -           450,000
Issuance of stock and warrants for acquisition         -               -         1,801,000
Issuance of stock and warrants
 for services                                          -               -           329,000
Stock issued under severance agreement                 -               -            50,000
Deferred compensation amortization                  36,000             -            36,000
Net loss                                               -       (17,989,000)    (17,989,000)
                                                 ---------    ------------    ------------
Balance, June 30, 1999                           $ (20,000)   $ 62,316,000    $  3,728,000
                                                 =========    ============    ============
</TABLE>

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

                                      43
<PAGE>


                         EQUALNET COMMUNICATIONS CORP.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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


                                      44
<PAGE>

NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation and Use of Estimates

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

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

Cash and Cash Equivalents

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

Property and Equipment

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

Revenue Recognition

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

Fair Value of Financial Instruments

The carrying amounts of accounts receivable, accounts payable, and other
payables approximate fair value due to the short-term nature of those
instruments. With the exception of certain related-party debt, the carrying
value of the Company's long-term debt and contractual obligations regarding its
receivables sales agreement approximate fair value because the rate on such debt
is variable, based on the current market.

Concentrations of Credit Risk

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

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<PAGE>

Long-Lived Assets

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

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

Income Taxes

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

Customer Acquisition Costs

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

Treasury Stock

The Company records its treasury stock at cost.

Change in Presentation

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

New Accounting Pronouncements

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

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131") which establishes standards
for the way public companies report information about operating segments. SFAS
131 defines operating segments as components of a company about which separate
financial information is available

                                      46
<PAGE>

which is evaluated regularly by management in deciding how to allocate resources
and in assessing performance. The Company adopted SFAS 131 in 1998. The
Company's sole operating segment is long distance sales and, as a result, there
are no separate required disclosures for any of the periods presented.

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

NOTE 2 - BANKRUPTCY FILINGS

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

NOTE 3 - LIQUIDITY AND WORKING CAPITAL DEFICIT

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

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

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

                                      47
<PAGE>

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

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

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

NOTE 4 - PROPERTY AND EQUIPMENT

The cost of property and equipment is as follows:

                                        1999            1998
                                        ----            ----
Telecommunications switches          $13,390,000     $13,390,000
Computer equipment                     4,955,000       4,435,000
Furniture and Fixtures                 1,209,000       1,209,000
Leasehold improvements                 1,247,000       1,178,000
                                     -----------     -----------
                                     $20,801,000     $20,212,000

Accumulated depreciation and
 amortization                         (8,368,000)     (4,838,000)
                                     -----------     -----------
                                     $12,433,000     $15,374,000
                                     ===========     ===========

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

NOTE 5 - ASSET PURCHASE AND ACQUISITIONS

Brittan Communications International Corporation

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

The acquired customer base has been recorded in customer acquisition costs and
is being amortized by applying the estimated attrition rate of the purchased
customer base of 8% per month against the unamortized balance of the previous
month

                                      48
<PAGE>

(declining balance method) switching to the straight line method when the
straight line method results in greater amortization over an 18 month period.

SA Telecom

On January 21, 1998, the Company signed an agreement with SA Telecommunications,
Inc. ("SA Telecom"), a switch based, long distance telecommunications carrier
serving customers primarily in Texas and California to acquire certain assets
and customer bases in exchange for a combination of shares of stock, cash and
assumption of certain liabilities. The transaction was subject to certain
conditions, including approval of the bankruptcy court supervising the
reorganization of SA Telecom under Chapter 11 of the United States Bankruptcy
Code. On March 9, 1998, the Company won approval from the bankruptcy court. The
purchase of SA Telecom was approved by the Company's shareholders on June 30,
1998 for approximately $3.47 million in cash, approximately $5.4 million of
Series C Preferred Stock and the assumption of approximately $4 million in debt.
The Company's newly formed wholly owned subsidiary, USC Telecom, Inc. ("USC
Telecom"), acquired the SA Telecom assets on July 22, 1998. To facilitate the
purchase of the SA Telecom assets, the Company and SA Telecom entered into a
management agreement pursuant to which the Company managed the operations of SA
Telecom from April 1, 1998 until the close of the transaction whereby the
Company was responsible for any losses from SA Telecom's operations on or after
April 1, 1998.

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

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

AMCI

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

NOTE 6 - RELATED PARTY TRANSACTIONS

Willis Group Transactions

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

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

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

                                      49
<PAGE>

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

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

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

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

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

Other Related Party Transactions

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

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

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

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

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

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

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

                                      50
<PAGE>

NOTE 7 - CAPITAL STOCK

Series A Preferred Stock

During fiscal year 1998 the Company issued 2,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") valued at $2,000,000 and had 2,030 and
2,000 shares of Series A Preferred with a stated value of $1,000 per share
outstanding at June 30, 1999 and 1998, respectively. Series A Preferred
dividends are cumulative at the rate of $60.00 per year, payable quarterly in
either cash or additional shares of Series A Preferred. The Series A Preferred
resolution has been amended effective October 28, 1998 to include conversion
features such that the Series A Preferred is convertable at a discounted price.
A deemed distribution approximating $7,838,000 was recorded during fiscal year
ended June 30, 1999. Per the amended resolutions, the Holders of Series A have
the right to convert their shares into the Company's common stock based upon a
formula which, subject to the Company's continued listing on a national
exchange, will not be less than $0.75 per share of common stock adjusted 31 days
(and adjusted again every six months afterwards) after shareholder approval of
the Company's proposed reverse stock split to 75% of the average closing price
of the Company's common stock for the five previous trading days; the proposed
reverse stock split has been submitted for shareholder approval in the Company's
1999 Annual Shareholder Meeting proxy statement. Should the Company be delisted
from all national exchanges, the conversion floor is removed and the conversion
formula of 85% of the Average Market Price (as defined by the Series A Preferred
Stock Designation) has no lower conversion price per share limit. The Series A
Preferred has a $1,000 liquidation preference plus accrued and unpaid dividends
over the Company's common stock. The Company is prohibited from declaring or
paying dividends on its common stock unless all accrued dividends on the Series
A Preferred have been paid. The Series A preferred is redeemable at a rate of
$1,000 per share at the option of the holder when certain events, which are in
control of the Company, occur such as the Company's inability to convert
preferred shares into common shares. Series A preferred ranks senior to the
Company's other series of preferred stock in liquidation preference. Dividend
payments for the Series A Preferred was waived by the holders through February
22, 1999. The Company issued 30 shares of Series A Preferred as payment of
dividends during the year ended June 30, 1999.

Series B Preferred Stock

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

Series C Preferred Stock

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

Series D Preferred Stock

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

                                      51
<PAGE>

Series E Preferred Stock

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

Series F Preferred Stock

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

Stock Purchase Plan

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

Stock Option and Restricted Stock Plan

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

                                      52
<PAGE>

to the restricted stock covered by the awards for a period of five years, after
which time the restrictions will lapse and the stock will be owned by the
employees free of further restrictions under the 1995 Plan. During each of
fiscal years 1999 and 1998, 5,454 shares of the Company's common stock were
received into treasury stock resulting from the forfeiture of restricted stock
awards.

Non-Employee Director Stock Option Plan

The shareholders approved on November 28, 1995, the adoption of the Non-Employee
Director Stock Option Plan (the "Director Option Plan"). The Director Option
Plan is designed to attract and retain the services of experienced and
knowledgeable non-employee directors of the Company and to provide an incentive
for such directors to increase their proprietary interest in the Company and in
the Company's long-term success and progress. The Director Option Plan is
administered by the Board of Directors. The Company has adopted the Director
Plan, as amended in May 1998, pursuant to which each non-employee director
receives options to purchase a number of shares of Common Stock equal to $60,000
divided by the average of the highest and lowest price of the Common Stock the
day before the date of his election as a director ("Fair Market Value") and
options to purchase a number of shares of Common Stock equal to $30,000 divided
by the Fair Market Value of the Common Stock the day before each annual meeting
of the Company's shareholders for each year thereafter. These options have an
exercise price equal to the Fair Market Value of the Common Stock and the
initial grants vest over three years in 33-1/3% increments and the annual grants
vest in six months from the date of grant, assuming continued service on the
Board of Directors. Employee directors of the Company do not receive any
additional compensation from the Company for their services as directors. Each
stock option granted to a non-employee director will have a ten-year term. All
options granted under the Director Option Plan are non-qualified stock options
and may not be repriced. No awards may be granted under the Director Option Plan
after May 8, 2005, or such earlier date as determined by the Board of Directors.
The Director Option Plan may be amended by the Board of Directors without any
requirement of shareholder approval, except as required by Rule 16b-3 under the
Securities Exchange Act of 1934 and the incentive stock option provisions of the
Internal Revenue Code of 1986, and except that no amendment may be made more
than once every six months that would change the amount, price or timing of
grants under the Director Option Plan.

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

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

                                                     WEIGHTED AVERAGE
                                                      EXERCISE PRICE
                                       SHARES           PER SHARE
                                       ------        ----------------
  Outstanding at July 1, 1996           11,000            $16.74
  Granted                              538,000            $ 3.31
  Exercised                                  -            $    -
  Forfeited                            (23,000)           $ 3.87
                                     ---------
  Outstanding at June 30, 1997         526,000            $ 3.57
  Granted                               20,000            $ 1.88
  Exercised                                  -            $    -
  Forfeited                           (366,000)           $ 3.36
                                     ---------
  Outstanding at June 30, 1998         180,000            $ 3.79
  Granted                            2,135,000            $ 0.50
  Exercised                           (128,000)           $ 0.41
  Forfeited                           (414,000)           $ 1.32
                                     ---------
  Outstanding at June 30, 1999       1,773,000            $ 0.65
                                     ---------

                                      53
<PAGE>

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

                                                     WEIGHTED AVERAGE
                                                      EXERCISE PRICE
                                       SHARES           PER SHARE
                                       ------        ----------------
                June 30, 1999         243,000             $ 1.12
                June 30, 1998          95,000               3.93
                June 30, 1997           3,000              16.93

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

As allowed under Statement of Financial Accounting Standard ("SFAS") No., 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB
Opinion 25 and related interpretations in accounting for its stock option plan.
Accordingly, compensation expense is not recognized for stock options unless the
options were granted at an exercise price lower than market on the grant date.

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

401(k) Plan

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

Warrants

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

                          EXERCISE
  WARRANTS                 PRICE            EXERCISE PRICE
  --------                --------          --------------
  294,000                  $0.55       September 1998-July 2003
  150,000                   0.68       June 1999-June 2004
  666,232                   0.90       September 1998-September 2000
1,320,000                   1.00       October 1997-April 2003
   83,333                   1.13       March 1999-February 2004
  300,000                   1.33       January 1999-January 2004
  400,000                   1.50       March 1998-May 2004
  230,000                   2.00       April 1998-April 2003
   83,334                   2.50       August 1999-February 2004
  100,000                   7.50       January 1998-November 2001

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

                                      54
<PAGE>

NOTE 8 - TAXES

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

                        FEDERAL         STATE           TOTAL
                        -------         -----           -----
     Current          $   29,000      $ 88,000        $  117,000
     Deferred          1,953,000       276,000         2,229,000
                      ----------      --------        ----------
                      $1,982,000      $364,000        $2,346,000
                      ==========      ========        ==========

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

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

                                             1999              1998
                                             ----              ----
Deferred tax liabilities:
  Other, net                             $          -     $    (75,000)
                                         ------------     ------------
Total deferred tax liabilities                      -          (75,000)

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

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

                                      55
<PAGE>

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

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

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

NOTE 9 - DEBT

Parent Company

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

In September 1998 and January 1999, the Company executed loan agreements in
favor of the Willis Group of approximately $0.2 million and $0.1 million,
respectively, for certain advances made on behalf of the Company. These notes
are secured by the assets of the Company and each of its subsidiaries, bear
interest at a rate of 11% per annum, and are due January 31, 2000. At June 30,
1999, the Company had approximately $0.3 million outstanding under these loans.

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

Effective February 3, 1997, the Company executed an agreement with an accredited
investor whereby the accredited investor loaned the Company $3.0 million at an
annual interest rate of 10%, maturing on December 31, 1998. In connection with
this transaction, the Company issued stock warrants for an aggregate 1.5 million
shares of the Company's common stock at a purchase price of $2.00 per share. On
March 6, 1998, the Company entered into an exchange agreement with this
accredited investor, exchanging the $3.0 million note, accrued interest, and
warrants for 3,000 shares of the Company's Series B Senior Convertible Preferred
Stock.

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

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

On July 23, 1998, the Company entered into a loan agreement, and amended on
September 8, 1998, with a third party and received approximately $1.5 million,
which was funded in two separate tranches: Tranche A in the amount of
approximately $0.8 million and Tranche B in the amount of approximately $0.7
million. Monthly principal and interest payments commenced in November 1998,
with the total balances due on June 30, 2000 and October 30, 2002 for Tranche A
and

                                      56
<PAGE>

Tranche B, respectively. This note bears interest at the prime lending rate plus
5.5% and is secured by all of the Company's assets. In connection with this
loan, the Company granted to the lender warrants to purchase up to 294,000
shares of the Company's common stock at an exercise price equal to the average
closing price of the Company's common stock for the three trading days
immediately preceding September 8, 1998; these warrants expire in July 2003. The
Company used the proceeds of this loan to retire a portion of the SA Telecom
debt (see below). At June 30, 1999, the Company had approximately $1.4 million
outstanding under this loan. At June 30, 1999, the Company was in technical
default of this loan agreement, and obtained a waiver of this default from the
Lender through July 1, 1999.

EqualNet

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

USC Telecom

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

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

Netco

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

                                      57
<PAGE>

NOTE 10 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                              WEIGHTED AVERAGE      PER SHARE
                                               NET LOSS        COMMON SHARES         AMOUNT
                                               --------       ----------------      ---------
<S>                                          <C>                <C>                 <C>
Year Ended June 30, 1999:
  Net loss                                   $(17,989,000)
  Dividends and deemed distribution
   applicable to preferred stock             $  4,177,000
                                             ------------
  Basic and diluted EPS-
    Net loss applicable to common stock      $(22,166,000)       19,936,000          $(1.11)
                                             ============        ==========          ======
Year Ended June 30, 1998:
  Net loss                                   $(17,943,000)
  Dividends applicable to preferred stock    $    (52,000)
                                             ------------
  Basic and diluted EPS-
    Net loss applicable to common stock      $(17,995,000)       10,944,000          $(1.64)
                                             ============        ==========          ======
Year Ended June 30, 1997:
  Net loss                                   $(14,981,000)
  Dividends applicable to preferred stock    $          -
                                             ------------
  Basic and diluted EPS-
    Net loss applicable to common stock      $(14,981,000)        6,097,000          $(2.46)
                                             ============        ==========          ======
</TABLE>

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

                                      58
<PAGE>

NOTE 11 - COMMITMENTS AND CONTINGENCIES

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

         YEAR ENDED
          JUNE 30,                                      AMOUNT
         ----------                                     ------
            2000                                     $  396,000
            2001                                        365,000
            2002                                        375,000
            2003                                        375,000
            2004                                        375,000
         Thereafter                                           -
                                                     ----------
                                                     $1,886,000
                                                     ----------

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

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

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

On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom and the Company for
operating losses for the period from April 1, 1998 - July 22, 1998, damages for
delayed or unbillable revenue, delivery of shares of the Company's Series C
Senior Preferred Stock, and other items. On December 28, 1998, the court signed
an order approving those claims in the amount of approximately $813,000. The
Company and USC Telecom disputed the monetary claims asserted by SA
Telecommunications in its demand and filed a notice of appeal of the
court's order in the proceedings. On October 9, 1999, SA Telecommunications,
Greyrock Business Credit, and the Company presented an agreement to the SA
Telecom bankruptcy court providing for the settlement of the SA
Telecommunications judgment and amounts owed to Greyrock. The agreement calls
for the payment of the remaining principal balance of the promissory note to
Greyrock, plus accrued but unpaid interest, by the issuance of a number of
shares of the Company's unregistered common stock valued at the lessor of $0.28
per common share (as adjusted to account for any stock split) or the market
price of the unregistered common stock at the date registration of the shares is
effective. In addition, the agreement calls for satisfaction of the remaining
obligation to SA Telecommunications by the payment of $150,000 cash plus the
issuance of an amount of the Company's unregistered common stock equal to
approximately $660,000 valued at the lesser of $0.28 per common share (as
adjusted to account for any stock split) or the market price of the unregistered
common stock at the date registration of the shares is effective. If the
registration of these shares of the Company's common stock is not effective as
of October 31, 1999, the amount of the Company's common stock to be issued will
increase, over varying periods of time from November 1, 1999 to January 30,
2000, from 7.5% to 22.5% of the amount to be ultimately issued. The Company has
reserved the right to repurchase the shares of the Company's common stock issued
in settlement of these obligations prior to January 31, 2000.

As a result of liquidity problems, on September 10, 1998, EqualNet filed for
protection under Chapter 11 of Title 11 of the United States Code, in case
number 98-39561-H5-11 in the United States District Court for the Southern
District of Texas and Wholesale filed for protection under Chapter 11 of Title
11 of the United States Code, in case number 98-39560-H4-11 in the United States
District Court for the Southern District of Texas. On October 2, 1998, Wholesale
filed a motion seeking to convert its Chapter 11 reorganization proceeding to a
Chapter 7 liquidation proceeding. Pursuant to Sections 1107 and 1108 of the
Bankruptcy Code, EqualNet managed its assets and operated its business as a
debtor-in possession pending

                                      59
<PAGE>

confirmation of its reorganization plan, which plan was confirmed on April 28,
1999, and consummated on May 28, 1999. The plan of reorganization provided for
the restructuring of amounts and repayment terms for secured and unsecured
creditors. In conjunction with the confirmation and consummation of the
reorganization plan, certain debts were reduced resulting in an extraordinary
gain of approximately $10.0 million.

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

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

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

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

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

NOTE 12 - SUBSEQUENT EVENT

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

                                      60
<PAGE>

                         Equalnet Communications Corp.
                Schedule II - Valuation and Qualifying Accounts
                                 (in thousands)

<TABLE>
<CAPTION>
                                        Balance at     Charged to                                         Balance at
                                        Beginning       Costs and        Charged to        Deductions       End of
                                        of Period       Expenses       other Accounts     Describe(A)       Period
                                        ---------      ----------      --------------     ------------    -----------
<S>                                    <C>            <C>             <C>                <C>              <C>
Fiscal Year Ended June 30, 1999
 Allowance for Doubtful Accounts             $1,034          $6,414          $   61              $7,109        $  400


Fiscal Year Ended June 30, 1998
 Allowance for Doubtful Accounts             $1,451          $1,661          $ (112)             $1,966        $1,034


Fiscal Year Ended June 30, 1997
 Allowance for Doubtful Accounts             $3,285          $1,727          $2,011(B)           $5,572        $1,451
 Allowance for Advances to Agents            $1,000          $  -            $  -                $1,000        $  -
</TABLE>

(A) Uncollectible accounts written off, net of recoveries
(B) Provision for uncollectible accounts receivable taken against agent
commissions payable

                                       61
<PAGE>

                              SIGNATURES

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

                              Equalnet Communications Corp.
                              (Registrant)

                              by: /s/ Mitchell H. Bodian
                              --------------------------------------------------
                                  Mitchell H. Bodian, President, Chief Executive
                                  Officer, and Director

Dated:  October 13, 1999

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

<TABLE>
<CAPTION>
               Signature                                   Title                              Date
---------------------------------------   ---------------------------------------    --------------------
<S>                                       <C>                                        <C>
/s/ Mark A. Willis                        Chairman of the Board of Directors         October 13, 1999
---------------------------------------
Mark A. Willis
                                          President, Chief Executive Officer,        October 13, 1999
/s/ Mitchell H. Bodian                    and Director
---------------------------------------
Mitchell H. Bodian

                                          Chief Financial Officer, principal         October 13, 1999
/s/ Michael P. Gallagher                  financial and accounting officer
---------------------------------------
Michael P. Gallagher                                                                 October 13, 1999

/s/ John Isaac "Ike" Epley                Director                                   October 13, 1999
---------------------------------------
John Isaac "Ike" Epley

/s/ Ronald J. Salazar                     Director                                   October 13, 1999
---------------------------------------
Ronald J. Salazar
</TABLE>

                                       62