<PAGE>

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

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

                               FORM 10-Q/A

                            (Amendment No. 1)

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

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

                 For the quarterly period ended March 31, 1999

                                      OR

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

          For the transition period from      , 19   to      , 19  .

                        Commission File Number: 0-25482

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

                         EQUALNET COMMUNICATIONS CORP.
            (Exact Name of Registrant as Specified in its Charter)

                Texas                                  76-0457803
   (State of Other Jurisdiction of                  (I.R.S. Employer
   Incorporation or Organization)                Identification Number)

                          1250 Wood Branch Park Drive
                             Houston, Texas 77079
          Address of Principal Executive Offices, Including Zip Code

                                (281) 529-4600
             (Registrant's Telephone Number, Including Area Code)

                                      n/a
             (Former Name, Former Address and Former Fiscal Year,
                         if Changed Since Last Report)

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

  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 [_]

  There were 31,974,369 shares of the Registrant's $.01 par value common stock
outstanding as of January 10, 2000.

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<PAGE>

                                     PART I

                             FINANCIAL INFORMATION

Item 1. Financial Statements

                         EQUALNET COMMUNICATIONS CORP.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                       June 30,     March 31,
                                                         1998         1999
                                                      -----------  -----------
                                                        (Note)     (Unaudited)
                       ASSETS
                       ------
<S>                                                   <C>          <C>
Current assets
  Cash and equivalents............................... $   459,581  $   744,414
  Accounts receivable, net of allowance for doubtful
   accounts of $1,034,253 at June 30, 1998 and
   $2,417,936 at March 31, 1999......................   5,839,284   13,235,942
  Due from agents....................................   1,596,590      337,120
  Advance on acquisition purchase price..............   3,014,000           --
  Prepaid expenses and other.........................     109,684      442,771
                                                      -----------  -----------
    Total current assets.............................  11,019,139   14,760,247

Property and equipment
  Computer equipment.................................  17,824,993   18,793,237
  Office furniture and fixtures......................   1,209,032    1,209,032
  Leasehold improvements.............................   1,177,592    1,246,855
                                                      -----------  -----------
                                                       20,211,617   21,249,124
  Accumulated depreciation and amortization..........  (4,837,626)  (7,590,123)
                                                      -----------  -----------
                                                       15,373,991   13,659,001

Customer acquisition costs, net of accumulated
 amortization of $13,957,622 at June 30, 1998 and
 $19,494,491 at March 31, 1999.......................     355,984    5,408,189
Marketing agents contracts, net of accumulated
 amortization of $166,849 at March 31, 1999..........          --    1,835,342
Other assets.........................................   1,011,333      763,854
                                                      -----------  -----------
    Total assets..................................... $27,760,447  $36,426,633
                                                      ===========  ===========
</TABLE>


   Note: The balance sheet at June 30, 1998 has been derived from the audited
                       financial statements at that date.

                                       2
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                       June 30,     March 31,
                                                         1998          1999
                                                     ------------  ------------
                                                        (Note)     (Unaudited)
       LIABILITIES AND SHAREHOLDERS' EQUITY
       ------------------------------------
<S>                                                  <C>           <C>
Current Liabilities Not Subject to Compromise--Post
 Petition (Note 2)
  Payable to providers of long distance services...  $  6,627,711  $  1,155,335
  Accounts payable.................................     4,237,310     4,827,511
  Accrued expenses.................................     3,838,315     2,351,788
  Accrued sales taxes..............................       205,108       985,437
  Notes payable to long distance providers.........     1,183,059            --
  Debt in default..................................     5,752,535     6,092,553
  Debt in default to an Affiliate..................       400,000            --
  Contractual obligations with regard to receivable
   sales agreement.................................     2,334,710     3,783,071
  Notes Payable....................................            --     1,624,183
                                                     ------------  ------------
    Total Current Liabilities Not Subject to
     Compromise--Post Petition.....................    24,578,748    20,819,878
Current Liabilities Not Subject to Compromise--Pre
 Petition (Note 2)
  Accrued sales taxes..............................            --       287,902
  Contractual obligations with regard to receivable
   sales agreement.................................            --     2,010,072
  Notes Payable....................................            --       400,000
                                                     ------------  ------------
    Total Current Liabilities Not Subject to
     Compromise--Pre Petition......................            --     2,697,974
Current Liabilities Subject to Compromise (Note
 2)................................................            --    15,216,266
                                                     ------------  ------------
    Total current liabilities......................    24,578,748    38,734,118

Deferred rent......................................       223,917            --
Notes Payable......................................            --     2,172,436
Convertible Debt...................................            --     2,559,812
Shareholders' equity
 (deficit) Preferred stock, $.01 par value
  5,000,000 shares authorized at June 30, 1998.....     5,000,000    15,815,094
 Common stock, $.01 par value
  Authorized shares--50,000,000 at June 30, 1998
    and December 31, 1998. Issued and outstanding
    21,385,832 at June 30, 1998 and 20,189,611 at
    March 31, 1999.................................       217,935       235,582
 Treasury stock at cost; 400,447 shares at June 30,
  1998 and 3,408,703 at March 31, 1999.............      (817,153)   (2,522,644)
 Additional paid in capital........................    37,063,468    39,613,597
 Stock warrants....................................     1,763,240     2,698,810
 Deferred compensation.............................      (115,826)      (20,415)
 Retained deficit..................................   (40,153,882)  (62,859,757)
                                                     ------------  ------------
    Total shareholders' equity (deficit)...........     2,957,782    (7,039,733)
                                                     ------------  ------------
    Total liabilities and shareholders' equity
     (deficit).....................................  $ 27,760,447  $ 36,426,633
                                                     ============  ============
</TABLE>

Note: The balance sheet at June 30, 1998 has been derived from the audited
financial statements at that date.

                                       3
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (Unaudited)

<TABLE>
<CAPTION>
                             Three Months Ended         Nine Months Ended
                                  March 31,                 March 31,
                           ------------------------  -------------------------
                              1998         1999         1998          1999
                           -----------  -----------  -----------  ------------
<S>                        <C>          <C>          <C>          <C>
Sales....................  $ 5,765,688  $ 9,345,633  $20,574,243  $ 25,356,218
Cost of Sales............    4,640,738    7,459,706   15,634,291    24,809,039
                           -----------  -----------  -----------  ------------
                             1,124,950    1,885,927    4,939,952       547,179
Selling, general and
 administrative
 expenses................    3,749,553    2,255,979    9,005,284     8,488,203
Depreciation and
 amortization............    1,146,239    3,737,712    3,302,027     8,867,608
                           -----------  -----------  -----------  ------------
Operating loss...........   (3,770,842)  (4,107,764)  (7,367,359)  (16,808,632)

Other income (expense)
  Interest income........        5,537           --        6,700           877
  Interest expense.......     (245,319)    (721,942)  (1,180,773)   (1,984,766)
  Miscellaneous..........      (31,507)     (54,266)      73,922       (37,165)
                           -----------  -----------  -----------  ------------
                              (271,289)    (776,208)  (1,100,151)   (2,021,054)

Loss before federal
 income taxes and
 reorganization costs....   (4,042,131)  (4,883,972)  (8,467,510)  (18,829,686)
Benefit for federal
 income taxes............           --           --           --            --
                           -----------  -----------  -----------  ------------
Loss before
 reorganization costs....   (4,042,131)  (4,883,972)  (8,467,510)  (18,829,686)
Reorganization costs.....           --     (234,000)          --      (376,658)
                           -----------  -----------  -----------  ------------
    Net loss.............  $(4,042,131) $(5,117,972) $(8,467,510) $(19,206,344)
                           ===========  ===========  ===========  ============
Preferred stock dividends
 and deemed
 distributions...........      (11,557)  (1,042,753)     (11,557)   (3,500,082)
                           -----------  -----------  -----------  ------------
Net loss available to
 Common shareholders.....  $(4,053,688) $(6,160,725) $(8,479,067) $(22,706,426)
                           ===========  ===========  ===========  ============
Net loss per share--basic
 and diluted.............  $     (0.43) $     (0.32) $     (1.15) $      (1.18)
                           ===========  ===========  ===========  ============
Weighted average number
 of shares...............    9,486,275   19,027,111    7,365,587    19,309,972
                           ===========  ===========  ===========  ============
</TABLE>


                                       4
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                        Nine Months Ended
                                                            March 31,
                                                     -------------------------
                                                        1998          1999
                                                     -----------  ------------
<S>                                                  <C>          <C>
Operating activities
Net loss...........................................  $(8,467,510) $(19,206,344)
Adjustments to reconcile net income to cash
 provided by (used in) operating activities
  Depreciation and amortization....................    3,302,027     8,867,608
  Provision for bad debt...........................    1,112,310     1,383,683
  Amortization of discount on convertible debt.....           --       106,253
  Interest charge on convertible debt issued at
   discount........................................      150,000       450,000
  Change in deferred rent..........................        7,203      (223,917)
  Compensation expense recognized for common stock
   issue...........................................       52,502        35,417
  Change in operating assets and liabilities:
    Accounts receivable............................    3,141,625    (3,705,510)
    Due from agents................................    1,068,981        (6,727)
    Prepaid expenses and other.....................     (294,782)      129,594
    Other assets...................................   (1,167,723)      203,498
    Accounts payable and accrued liabilities not
     subject to compromise.........................      130,461    (5,220,046)
    Accounts payable and accrued liabilities
     subject to compromise.........................           --    14,083,207
                                                     -----------  ------------
Net cash provided by (used in) operating
 activities........................................     (964,906)   (3,103,284)

Investing activities
Purchase of property and equipment.................   (6,369,202)     (639,934)
Cash paid for acquisition..........................   (1,550,000)     (555,000)
Proceeds from sale of equipment....................           --        74,775
                                                     -----------  ------------
Net cash used in investing activities..............   (7,919,202)   (1,120,159)
Financing activities
Proceeds from subordinated notes payable...........           --     4,981,615
Proceeds from notes payable........................    7,407,260
Net repayments on revolving line of credit.........   (4,555,442)           --
Net proceeds on contractual obligations with regard
 to receivable sales agreement.....................    1,861,274     3,458,433
Repayments on capital lease obligations............      (51,000)           --
Proceeds from issuance of stock....................    6,249,999       107,155
Proceeds from issuance of warrants.................      142,740            --
Repayments on long-term debt.......................           --    (7,038,927)
Proceeds from convertible debt.....................           --     2,800,000
Proceeds from exchange of Common Stock for
 Preferred Stock...................................           --       200,000
                                                     -----------  ------------
Net cash provided by (used in) financing
 activities........................................   11,054,831     4,508,276
                                                     -----------  ------------
Net increase in cash...............................    2,170,723       284,833
Cash, beginning of period..........................      828,478       459,581
                                                     -----------  ------------
Cash, end of period................................  $ 2,999,201  $    744,414
                                                     ===========  ============
Reorganization costs paid..........................  $        --  $     71,658
                                                     ===========  ============
</TABLE>


                                       5
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (Unaudited)

NOTE 1--MANAGEMENT'S REPRESENTATION

  The consolidated financial statements included herein have been prepared by
the management of Equalnet Communications Corp. (the "Company") without audit.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of the management of the Company,
all adjustments considered necessary for fair presentation of the consolidated
financial statements have been included and were of a normal recurring nature,
and the accompanying consolidated financial statements present fairly the
financial position of the Company as of March 31, 1999, and the results of
operations and cash flows for the three months and nine months ended March 31,
1998 and 1999.

  It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes for the three
years ended June 30, 1998, included in the Company's Annual Report on Form 10-
K for the year ended June 30, 1998, which was filed with the Securities and
Exchange Commission. The interim results are not necessarily indicative of the
results for a full year.

NOTE 2--CHAPTER 7 AND 11 FILING

  EqualNet Corporation ("EqualNet"), one of the Company's operating
subsidiaries, and EqualNet Wholesale Services, Inc. ("Wholesale"), a wholly
owned nonoperating subsidiary of the EqualNet filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Court for the Southern
District of Texas (the "Bankruptcy Court"), in Houston, Texas. EqualNet's
financial statements have been prepared in accordance with Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", and include disclosure of liabilities subject to compromise.
Such financial statements are consolidated into the Company's consolidated
financial statements. Under Chapter 11, certain claims against EqualNet in
existence prior to the filing of the petitions for relief under the federal
bankruptcy laws are stayed while EqualNet continues business operations as a
debtor-in-possession. These claims are reflected in the March 31, 1999 balance
sheet as "liabilities subject to compromise." Additional claims (liabilities
subject to compromise) may arise subsequent to the filing date resulting from
rejection of executory contracts, including leases, and from the determination
by the court (or agreed to by parties in interest) of allowed claims for
contingencies and other disputed amounts.

  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 as debtor-
in-possession, will continue to manage and operate EqualNet's assets and
business pending the confirmation of a reorganization plan and subject to the
supervision and orders of the Bankruptcy Court. The Company has filed its
disclosure statement which includes its reorganization plan. The Bankruptcy
Court approved the Disclosure Statement for the Plan of Reorganization of
EqualNet on March 1, 1999. On April 28, 1999, the Bankruptcy Court confirmed
the Plan of Reorganization subject to funding which is set by the Bankruptcy
Court to be May 24, 1999.

  As a debtor-in-possession, EqualNet is authorized to operate its business,
but may not engage in transactions outside of the normal course of business
without approval, after notice and hearing, of the Bankruptcy Court. A
creditors' committee was formed in October, 1998, which has the right to
review and object to business transactions outside the ordinary course.

  The consolidated financial statements do not purport to show: (a) the
realizable value of assets on a liquidation basis or their availability to
satisfy liabilities; (b) ultimate pre-petition liability amounts that may be

                                       6
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

allowed for claims or contingencies or the status or priority thereof; (c) the
effect of any changes that may be made to the capitalization of EqualNet; or
(d) the effect of any changes that may be made in EqualNet's business
operations. The outcome of these matters is not presently determinable.

  Although management intends that EqualNet will emerge from bankruptcy in a
prompt and expeditious manner during the fourth quarter of fiscal year 1999,
there can be no assurance that a reorganization will be consummated.

  In the event EqualNet's plan as confirmed by the Court is consummated,
continuation of the Company's business is dependent upon the success of future
operations and the Company's ability to meet its obligations as they become
due. The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities and commitments in the normal course
of business. The Chapter 11 filing by EqualNet, as well as related
circumstances and the losses from operations continue to raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements included herein do not include any
adjustments relating to the commencement of EqualNet's bankruptcy case or 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 the uncertainty of the Company's ability to continue as a
going concern.

  The principal categories of claims classified as "Current Liabilities
Subject to Compromise" on the Company's consolidated balance sheet are
identified below:

<TABLE>
      <S>                                                           <C>
      Payable to providers of long distance services............... $ 9,833,383
      Accounts payable.............................................   3,060,247
      Accrued expenses.............................................   1,139,577
      Notes Payable to long distance provider......................   1,183,059
                                                                    -----------
                                                                    $15,216,266
                                                                    ===========
</TABLE>

                                       7
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following condensed financial statements present the financial position
of EqualNet as of March 31, 1999 and the results of its operations and cash
flows for the nine months ended March 31, 1999, and have been prepared on the
same basis as the Company's consolidated financial statements.

                             EQUALNET CORPORATION
                                 BALANCE SHEET
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                 March 31, 1999
                                                                 --------------
                                                                  (Unaudited)
                             ASSETS
                             ------
<S>                                                              <C>
Current assets
  Cash and equivalents..........................................  $    482,114
  Accounts receivable, net of allowance for doubtful accounts of
   $1,574,629...................................................     4,783,502
  Due from agents...............................................       329,393
                                                                  ------------
Total current assets............................................     5,595,009
Property and equipment
  Computer equipment............................................     4,558,189
  Office furniture and fixtures.................................     1,209,032
  Leasehold improvements........................................     1,246,855
                                                                  ------------
                                                                     7,014,076
  Accumulated depreciation and amortization.....................    (4,708,028)
                                                                  ------------
                                                                     2,306,048
Other assets....................................................       318,518
                                                                  ------------
Total assets....................................................  $  8,219,575
                                                                  ============

<CAPTION>
             LIABILITIES AND SHAREHOLDERS' DEFICIT
             -------------------------------------
<S>                                                              <C>
Current Liabilities Not Subject to Compromise
Post Petition (Note 2)
  Payable to providers of long distance services................  $    262,333
  Accounts Payable..............................................     2,067,701
  Accrued Expenses..............................................       821,005
  Accrued sales taxes...........................................       236,433
  Debt in Default to an Affiliate...............................            --
  Contractual obligations with regard to receivable Sales
   agreement....................................................      (193,972)
  Intercompany Note Payable.....................................    10,000,000
                                                                  ------------
    Total Current Liabilities Not Subject to Compromise Post
     Petition...................................................    13,193,500
Current Liabilities Not Subject to Compromise
Pre Petition (Note 2)
  Contractual obligations with regard to receivable Sales
   agreement....................................................     2,010,072
  Accrued sales taxes...........................................       287,902
  Notes Payable.................................................       400,000
                                                                  ------------
    Total Current Liabilities Not Subject to Compromise Pre
     Petition...................................................     2,697,974
Current Liabilities Subject to Compromise
  Payable to providers of long distance services................     9,833,383
  Accounts payable..............................................     3,060,247
  Accrued expenses..............................................     1,139,577
  Notes Payable to long distance providers......................     1,183,059
  Intercompany Note Payable.....................................    27,605,154
                                                                  ------------
    Total Current Liabilities Subject to Compromise.............    42,821,420
                                                                  ------------
    Total Current Liabilities...................................    58,712,894
Shareholders' deficit
  Common Stock..................................................             1
  Retained deficit..............................................   (50,493,320)
                                                                  ------------
Total shareholders' deficit.....................................   (50,493,319)
                                                                  ------------
Total liabilities and shareholders' deficit.....................  $  8,219,575
                                                                  ============
</TABLE>

                                       8
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                             EQUALNET CORPORATION

                            STATEMENT OF OPERATIONS

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                               Nine Months Ended
                                                                March 31, 1999
                                                               -----------------
                                                                  (Unaudited)
<S>                                                            <C>
Revenues......................................................    $11,589,169
Cost of Revenues..............................................     12,416,276
                                                                  -----------
                                                                     (827,107)
Selling, general and administrative expenses..................      5,875,703
Depreciation and amortization.................................      1,839,503
                                                                  -----------
Operating loss................................................     (8,542,313)
Other income (expense)
  Interest income.............................................            869
  Interest expense............................................       (270,636)
  Miscellaneous...............................................        (48,718)
                                                                  -----------
                                                                     (318,485)
                                                                  -----------
Loss before federal income taxes and other item...............     (8,860,798)
Benefit for federal income taxes..............................             --
                                                                  -----------
Loss before other item........................................     (8,860,798)
Reorganization Costs..........................................       (376,658)
                                                                  -----------
Net loss......................................................    $(9,237,456)
                                                                  ===========
</TABLE>

  Reorganization expenses, which represent professional fees, incurred during
the quarter ended March 31, 1999 totaled approximately $234,000.

                                       9
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                             EQUALNET CORPORATION

                            STATEMENT OF CASH FLOWS

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                             Nine Months Ended
                                                              March 31, 1999
                                                             -----------------
<S>                                                          <C>
Operating activities
Net loss....................................................   $ (9,237,456)
Adjustments to reconcile net loss to cash used in operating
 activities
  Depreciation and amortization.............................      1,839,503
  Provision for bad debt....................................      2,681,109
  Change in deferred rent...................................       (223,917)
  Change in operating assets and liabilities:
    Accounts receivable.....................................     (1,625,328)
    Due from agents.........................................        705,694
    Other assets............................................       (112,554)
    Accounts payable and accrued liabilities not subject to
     compromise.............................................    (10,749,706)
    Accounts payable and accrued liabilities subject to
     compromise.............................................     14,651,002
                                                               ------------
Net cash used in operating activities.......................     (2,071,653)
Investing activities
Purchase of property and equipment..........................       (192,237)
                                                               ------------
Net cash used in investing activities.......................       (192,237)
Financing activities
Net proceeds from intercompany note payable.................      2,807,290
Net change on contractual obligations with regard to
 receivable sales agreement.................................       (518,610)
                                                               ------------
Net cash provided by financing activities...................      2,288,680
                                                               ------------
Net increase in cash........................................         24,790
Cash, beginning of period...................................        457,324
                                                               ------------
Cash, end of period.........................................   $    482,114
                                                               ============
Reorganization costs paid...................................   $     71,658
                                                               ============
</TABLE>

NOTE 3--DIP FINANCING AND EXIT FACILITY

  Prior to filing for bankruptcy protection, EqualNet and RFC Capital
Corporation ("RFC") entered into an agreement whereby RFC agreed to amend
certain financing agreements with EqualNet to eliminate EqualNet's bankruptcy
filing as an event of default and, subject to bankruptcy court approval, to
continue to finance EqualNet's receivables under a debtor in possession
("DIP") facility. On November 24, 1998, the bankruptcy court approved the DIP
financing which allowed EqualNet to continue to obtain funds from RFC in the
same manner as it did prior to the bankruptcy filing. The financing cost of
the DIP facility is prime rate plus seven percent (7%).

  EqualNet will be required to seek additional financing to consummate its
plan of reorganization. The Company currently is in active negotiations with 2
outside investor groups that could provide EqualNet with the capital needed
for the exit facility.

  The Company is continuing discussions with these 2 investor groups and is
negotiating with other potential investors to provide the capital for the exit
facility. If the Company successfully raises the capital to provide for

                                      10
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the exit facility, the Company would continue to own EqualNet after the
bankruptcy proceedings. There can be no assurance that the Company will raise
the capital required to fund the exit facility.

NOTE 4--ACQUISITIONS AND ASSET PURCHASES

 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 and
approximately $5.4 million of Series C Preferred Stock and the assumption of
approximately $4 million in debt, payable to Greyrock Business Credit, subject
to final closing adjustments. The Company's newly formed wholly owned
subsidiary, USC Telecom, Inc. ("USC Telecom"), acquired the SA Telecom assets
on July 23, 1998. Prior to the closing of this transaction and for the purpose
of providing for a smooth transition of the acquired customer base, 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. SA Telecom provided
the Company with notice that the Company owes SA Telecom for operating losses
during the period the management agreement was effective. The Company disputed
the amount of operating losses as provided by SA Telecom. Additionally, SA
Telecom disputed the final purchase price settlement and requested additional
funding. On December 23, 1998, the bankruptcy court in the SA Telecom case
ruled in favor of SA Telecom and entered a judgment requiring USC Telecom to
pay approximately $812,772 to SA Telecom. The Company is appealing this
decision and is also in settlement negotiations with SA Telecom. The estimated
amount of this liability has been recorded as additional purchase
consideration.

  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.

<TABLE>
      <S>                                                               <C>
      Purchase consideration (in thousands):
        Cash paid...................................................... $ 3,569
        Fair value of preferred stock issued...........................   5,400
        Liabilities assumed............................................   4,495
                                                                        -------
        Fair value of assets acquired (including intangibles)           $13,464
                                                                        =======
</TABLE>

  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 five-year period.

  The Company issued 196,553 shares of Series C Preferred Stock to SA Telecom
as part of the purchase price. The Series C Preferred Stock is convertible at
the holder's option into shares of the Company's common stock ("Common Stock")
at the rate of ten (10) shares of Common Stock per share of Series C Preferred
Stock, or an aggregate of 1,965,530 shares of Common Stock. The Series C
Preferred Stock has a liquidation preference equal to $27.50 (plus any accrued
but unpaid dividends) per share of Series C Preferred Stock. The Company

                                      11
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

issued 5,358 shares of Series C Preferred in January 1999 as additional
purchase consideration and issued 10,224 shares during the quarter ended March
31, 1999 as dividends.

  The following results of operations have been prepared assuming the SA
Telecom acquisition occurred as of the beginning of the periods presented. 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 the beginning of the periods presented.

<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                                               March 31,
                                                         ----------------------
                                                            1998        1999
                                                         ----------  ----------
                                                         (in thousands, except
                                                          per share amounts)
      <S>                                                <C>         <C>
      Revenues.......................................... $   52,092  $   20,206
      Net income (loss)................................. $  (12,032) $  (17,889)
      Net loss per share................................ $    (1.63) $    (0.93)
</TABLE>

 ACMI

  In January, 1999, the Company's newly formed wholly owned subsidiary, ACMI
Acquisition Corp. ("ACMI Acquisition") acquired substantially all of the
assets of Limit, LLC d/b/a ACMI ("ACMI"), a network marketing company with
approximately 2,500 independent agents. The Company issued 1 million shares of
its Common Stock to ACMI and ACMI Acquisition assumed a note payable of $1
million ("ACMI Note"). In addition, the Company is required to issue up to an
additional 1.5 million shares of its Common Stock if ACMI generates $670,000
per month of revenue from new customers within six (6) months of the closing
date. If new customer revenues are less than $670,000 per month at the end of
the six (6) month period, then the number of additional shares issuable will
be prorated based on the ratio of actual monthly revenue to $670,000. In the
event the Company's Common Stock's average closing price is below seventy-five
cents ($.75) per share for the period between 150 and 180 days after the
closing date, additional Common Stock would be issuable to ACMI. In addition
to the foregoing, ACMI is entitled to earn more Common Stock ("Earn Out
Shares") if it attains certain performance measures based on sales at the end
of each year over a three year period. ACMI is not entitled to any Earn Out
Shares if its revenues for a twelve month period are less than $2.5 million. A
director of the Company was granted 105,000 shares of the Company's Common
Stock valued at approximately $164,000 for facilitating this transaction.

  The Company accounted for the ACMI 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.

<TABLE>
      <S>                                                                <C>
      Purchase consideration (in thousands):
        Fair value of Common Stock issued............................... $1,727
        Liabilities assumed.............................................  1,076
                                                                         ------
        Fair value of assets acquired (including intangibles)........... $2,803
                                                                         ======
</TABLE>

  The Company recorded marketing agent contracts as an asset valued at
approximately $2.0 million. This asset is being amortized on the straight line
method over a three year period. The results of operations related to the ACMI
acquisition do not have a material effect on the operations of the Company and
therefore pro forma information is not presented.

                                      12
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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 $1.6 million,
including the assumption of a $1.5 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 Common Stock at the
exercise date over the $1.33 exercise price.

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

NOTE 5--DEBT

  Netco Acquisition Corp. ("Netco"), a wholly owned subsidiary of the Company,
defaulted on its note payable in the original principal amount of $6.05
million during the first quarter, due to failure to make the monthly payments
beginning with the July 1998 payment. These payment defaults were cured in
September, 1998. Following the cure, the Company has been making interest-only
payments on this loan under a written agreement with the lender where
principal and interest payments are due beginning in March 1999. As of March
31, 1999 the remaining principal balance of this debt of $5.5 million is
classified as debt in default.

  As of September 30, 1998, EqualNet was in default on its $0.4 million cash
flow bridge loan obtained from Netco Acquisition, LLC, an entity owned 50% by
the Willis Group, LLC ("Willis Group"), an affiliate of the Company, as no
principal or interest payments have been made. The principal amount is
classified as Debt in Default to an Affiliate at June 30, 1998. Effective
December 31, 1998, the loan was modified to extend its maturity to July 31,
1999 and therefore, the Company was not in default at the end of the current
quarter.

  EqualNet entered into an agreement with 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 $10.0 million and allows for the lender to cease funding
of new receivables without prior written notice at the lender's option. The
program fee applied to the outstanding balance of net purchased receivables
was prime plus 4.5% per annum (13% at June 30, 1998), but changed to prime
plus 7% on September 17, 1998 (after the Chapter 11 filing by EqualNet). As of
March 31, 1999, the amount owed to RFC under this agreement was approximately
$1.8 million with a credit reserve of $106,000. This RFC agreement was
extended on July 19, 1998 and subsequently amended and approved by EqualNet's
bankruptcy court on November 23, 1998.

  On July 23, 1998, the Company entered into a Loan and Security Agreement
with RFC which was subsequently amended on September 8, 1998 (the agreement as
amended, "RFC Loan"). RFC loaned the Company approximately $1.5 million.
Periodic monthly principal and interest payments of $14,812 are due commencing
on November 30, 1998. The balance due on the RFC Loan is payable on June 30,
2000. Interest is payable on the outstanding principal balance in an amount
equal to the prime lending rate plus 5.5%. The RFC Loan is secured by all of
the assets of the Company and the stock of EqualNet and USC Telecom. In
connection with the RFC Loan, the Company granted to RFC a warrant for the
purchase of up to 294,000 shares of Common Stock at the exercise price equal
to the arithmetic average of the closing price of the Common Stock on Nasdaq
for the three trading days immediately preceding the consummation of the RFC
Loan. The warrant expires July 23, 2003. Proceeds from the RFC Loan were
primarily used to retire a portion of the Greyrock Business Credit

                                      13
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Loan which was owed by SA Telecom (see below). After taking into account the
discount associated with the warrants, the RFC Loan is recorded on the
Company's books at March 31, 1999 in the amount of $1,047,438.

  In connection with the July 23, 1998 SA Telecom acquisition, the Company
assumed a note payable to Greyrock Business Credit of approximately $4.0
million. In August 1998, this loan was paid off with the proceeds from various
RFC loans and the proceeds from a new $558,370 loan from Greyrock. The loan
bears interest at a rate of prime plus 2.5% and is secured by the assets of
USC Telecom. The principal balance of the Greyrock loan was due on February
22, 1999. Greyrock has given notice of its intention to foreclose its security
interest in the event the note is not paid. The Company is currently unable to
pay the principal balance and is in discussions with Greyrock related to
amending the loan agreement. The debt is classified as debt in default on
March 31, 1999.

  In August 1998, USC Telecom entered into a receivables purchase arrangement
with RFC and used the proceeds of the initial funding of $2.1 million to pay
off a portion of the debt to Greyrock Business Credit ("Greyrock"), which was
assumed in the SA Telecom transaction. This facility is USC Telecom's primary
source of working capital. The maximum purchase commitment amount from RFC is
$4.0 million, and the program fee is equal to the prime rate plus 4.0%. The
term of the facility is two years from the funding date. As of March 31, 1999,
the amount owed to RFC under the USC Telecom agreement was approximately $1.8
million.

  On September 2, 1998, the Company executed a loan agreement in favor of the
Willis Group in the amount of $241,106. The loan documented certain advances
which the Willis Group had made on the Company's behalf. The Willis Group loan
is secured by the assets of the Company and each of its subsidiaries. This
loan bears interest at 11%. Effective December 31, 1998, the loan was modified
to extend its maturity to July 31, 1999 and, therefore, the Company was not in
default at March 31, 1999.

  Effective 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, an affiliate of the Company, and Genesee Fund
Limited Portfolio B ("Genesee"), a British Virgin Islands corporation, both
accredited investors. The 2001 Notes are convertible into a variable number of
shares of the Company's Common Stock. The 2001 Notes bear interest at 6% and
interest payments are due each February 15, May 15, August 15 and November 15
commencing on November 15,1998. The 2001 Notes were issued with an original
issue discount ("OID") in an initial amount of $100,000 for each note.

  The 2001 Notes rank equally with all other unsubordinated debt obligations
of the Company. The Company's obligations under the 2001 Notes are secured by
certain collateral pursuant to security agreements. A holder of the 2001 Note
may require the Company to repurchase the 2001 Note if an event of default
occurs. Events of default include among other things, the Nasdaq delisting of
the Common Stock.

  In connection with the issuance of the 2001 Notes, the Company issued to
each of the Willis Group and Genesee a warrant ("Warrant") to purchase 333,116
shares of Common Stock at a purchase price of $0.9006 per share. The Warrants
expire on September 4, 2003. After taking into account the OID and an
allocation of the purchase price to the Warrants, the 2001 Notes are recorded
on the Company's March 31, 1999 Balance Sheet in the amount of $2.6 million.
As explained below, the 2001 Notes are convertible to Common Stock at a
discount to market. The net conversion discount of $0.5 million is recorded to
interest expense and paid in capital.

  Any holder of a 2001 Note may convert the 2001 Note, in whole or in part,
into shares of Common Stock at a conversion price per share equal to the
lesser of:

                                      14
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The product of (1) the average of the lowest sales price of the Company's
  Common Stock on Nasdaq for the five days immediately preceding the date of
  conversion and (2) 85% (subject to reduction pursuant to the terms of the
  2001 Notes); and

  $0.9006 (subject to reduction pursuant to the terms of the 2001 Notes).

  The holders of the 2001 Notes have verbally agreed, subject to the execution
of the definitive agreement, that, subject to certain conditions, the
conversion price of the 2001 Notes will not be less than $.75 per share.

  The Note Agreements are being submitted to the shareholders for ratification
at the annual meeting of the shareholders tentatively scheduled to be held in
July, 1999. This is being done to comply with rules of Nasdaq Stock Market
that require shareholder approval for any transaction involving the issuance
of common stock (or securities convertible into or exercisable for common
stock) equal to 20% or more of the issuer's outstanding common stock for less
than the market value of the common stock.

  If the Note Agreements are not ratified by the shareholders at the Meeting,
the holders of the 2001 Notes and the Series D Preferred Stock will have the
right to require the Company to redeem, at a 15% premium, all of the 2001
Notes and the Series D Preferred Stock. The payment of the entire principal
amount of the 2001 Notes and the entire value of the outstanding Series D
Preferred Stock, and the 15% premium thereon, would have a material adverse
effect on the Company's financial condition. The Company may not have adequate
funds to effect any such redemption. If the Company is required to effect such
redemption, the Company may be forced to seek protection under the United
States bankruptcy laws.

  In connection with the January 27, 1999 BCI transaction, USC Telecom assumed
a $1.5 million term loan payable to RFC. The note bears interest at the prime
rate plus 4.5%. The term of the facility is two years from the funding date.
As of March 31, 1999, the amount owed to RFC under the USC Telecom agreement
was approximately $1.5 million. In addition, USC Telecom assumed the accounts
receivable purchase arrangement that BCI had with RFC. The maximum purchase
commitment is $10 million with a program fee of prime plus 3.0%. As of March
31, 1999 the amount owed to RFC under this receivable purchase arrangement was
approximately $2.1 million.

  In connection with the January 21, 1999 ACMI acquisition, the Company's
newly formed wholly owned subsidiary, ACMI Acquisition Corp., assumed a note
payable of $1.0 million to Union Planter's Bank. The loan bears interest at a
rate of prime plus .5% and interest only is currently payable on a quarterly
basis. The loan continues to be secured by the personal guarantees of the two
principals from the company from which the assets were purchased as well as
two other individuals. The note is due June 11, 1999. The amount owed to Union
Planter's Bank as of March 31, 1999 was $1.0 million.

NOTE 6--PREFERRED STOCK

Series A Preferred Stock

  During fiscal year 1998 the Company issued 2,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred") valued at $2,000,000 and
had 2,030 and 2,000 shares of Series A Preferred with a stated value of $1,000
per share outstanding at June 30, 1999 and 1998, respectively. Series A
Preferred dividends are cumulative at the rate of $60.00 per year, payable
quarterly in either cash or additional shares of Series A Preferred. The
Series A Preferred resolution has been amended effective October 28, 1998 to
include conversion features such that the Series A Preferred is convertible at
a discounted price. A deemed distribution approximating $0.7 million was
recorded during the current quarter. Per the amended resolutions, the Holders
of

                                      15
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

Series D Preferred Stock

  In connection with the 2001 Notes transaction, the Company issued to certain
buyers, in the aggregate, approximately 3,750 shares of Series D Preferred
Stock in exchange for, in the aggregate, 3,000,000 shares of Common Stock and
exchange fees of, in the aggregate, $200,000. Each share of Series D Preferred
Stock will be entitled to receive dividends at a rate of $60 per share per
year, payable in cash or additional shares of Series D Preferred Stock.

  Holders of shares of Series D Preferred Stock have the right to convert each
of their shares into a number of shares of Common Stock equal to the quotient
of:

  the sum of (1) $1,000 (subject to adjustment pursuant to the Series D
  Preferred Stock documents), (2) accrued but unpaid dividends to the
  applicable conversion date on the share of Series D Preferred Stock being
  converted and (3) accrued but unpaid interest on the dividends on the share
  of Series D Preferred Stock being converted; and

an amount equal to the lesser of:

  the product of (1) the average of the lowest sales price of the Common
  Stock on Nasdaq for any five trading days during the 25 trading days
  immediately preceding the conversion date and (2) 85% (subject to downward
  adjustment, if applicable, pursuant to the Series D Preferred Stock
  documents); and

  $1.2281 (subject to reduction pursuant to the Series D Preferred Stock
  documents),

subject to adjustment pursuant to the anti-dilution provisions. The holders of
the Series D Preferred Stock have agreed that, subject to certain conditions,
the conversion price of the Series D Preferred Stock will not be less than
$.75 per share.

  The Company has the option to redeem any of the shares of Series D Preferred
Stock which has not been previously converted at a redemption price determined
by a formula which includes a substantial premium to the underlying
liquidation preference. The Series D Preferred Stock has a liquidation
preference equal to $1,000 (plus accrued and unpaid dividends plus interest
thereon) per share of Series D Preferred Stock.

  The Series D Preferred shareholders can require the Company to redeem all
shares if any of a number of events occur. The Series D Preferred shareholders
have agreed to waive certain redemption rights effective September 30, 1998,
to allow the Series D Preferred Stock to be classified as equity on the
Company's Balance

                                      16
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Sheet as of March 31, 1999. The Company has recorded $2.0 million of Series D
Preferred Stock as of March 31, 1999. This amount was equal to the exchange
fees plus the product of 3,000,000 shares of Common Stock exchanged in the
transaction multiplied by the closing price per share of Common Stock on the
date of the exchange plus the value of 44 shares and 56 shares issued as
dividends on November 15, 1998 and February 15, 1999, respectively.

NOTE 7--INCOME TAXES

  The Company recorded a valuation allowance amounting to the entire net
deferred tax asset balance at March 31, 1999, due to operating losses which
give rise to uncertainty as to whether the deferred tax asset is realizable.
The Company has recorded no income tax benefit for the period ended March 31,
1999.

NOTE 8--LIQUIDITY AND WORKING CAPITAL DEFICIT

  The Company's sole current source of capital is provided by receivable sales
agreements with RFC. The Company's two operating subsidiaries, EqualNet and
USC Telecom, have accounts receivable purchase agreements with RFC. Funding
under these agreements are based on specific accounts receivable eligibility
requirements with the primary factor being the collections history per
account. Funding percentages have declined during the quarter due to billing
delays, errors in bills and related collections problems.

  The Company continues to incur operating deficits and is exploring ways to
increase revenue and reduce operating costs. To operate profitably, the
Company must reduce its variable long-distance carrier costs, right-size and
make efficient its back office and administrative operations and increase
revenues by implementing new sales and marketing plans. In addition, the
Company intends to continue its strategy to acquire distressed companies,
substantially eliminate their overhead, and therefore recognize positive cash
flow from the acquired assets.

  The Company recently completed the acquisitions of ACMI and the BCI customer
base (see Note 4). The Company expects to immediately generate a profit from
the former BCI customer base. The ACMI acquisition provides sales and
marketing activities the Company needs to replace its eroding customer base.
ACMI is a network marketing company with over 2,500 agents who will be selling
the Company's long distance and other telecommunications services. The Company
has also initiated an inbound telemarketing program using the distribution of
debit cards as the mechanism to generate incoming calls.

  The Company intends to simplify its operations once EqualNet emerges from
bankruptcy. Eliminating the duplicate costs associated with having two long
distance carriers (i.e., USC Telecom and EqualNet) could be accomplished after
the bankruptcy plan is consummated. The Company continually assesses its long
distance carrier costs and seeks to identify alternatives to reduce the
Company's cost of service.

  The Company continues to develop its strategy and is considering a number of
alternatives including expanding its service offerings to include a number of
bundled telecommunications services.

  There can be no assurance the Company will have the capital resources
necessary to implement these measures and return to profitability. It is
highly likely the Company will need additional capital to complete the funding
of the plan of reorganization and to continue in business during its
restructuring phase. Also, the Company intends to issue 3,000,000 shares of
its Common Stock to the Trustee of the Creditor's Committee in the EqualNet
Bankruptcy as partial payment of obligations under the plan of reorganization.
In addition to the capital required to fund EqualNet's plan of reorganization,
the Company expects that it will need additional capital to fund new marketing
initiatives and new business ventures, such as Intelesis and its proposed
acquisition of NCS. The Company believes that the rate at which it will be
able to develop these new marketing initiatives

                                      17
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and new business ventures will be directly related to the amount of new
capital it has available. The Company intends to raise the capital it requires
for these activities through possible private placements of its debt and
equity securities. There can be no assurance the Company will be able to raise
the capital it will require. If the Company is not able to raise the required
capital, it may have to curtail its marketing initiatives and not be able to
realize the full potential of these or other potential business ventures.

NOTE 9--COMMITMENTS AND CONTINGENCIES

  At September 30, 1998 EqualNet had an agreement with AT&T which was
scheduled to expire in April 2000. The agreement covered the pricing of the
services and established minimum semi-annual revenue commitments ("MSARCs")
which must be met to receive the contractual price and to avoid shortfall
penalties. The commitment with AT&T was segregated into components
differentiated by the type of traffic. EqualNet estimated its shortfall
position to be approximately $11.6 million at the end of the third MSARC
period in October 1998. As a result of the contract termination, EqualNet may
be liable for the total amount of the unsatisfied MSARC for the period in
which the discontinuance occurs and for 50% of the MSARCs for each semi-annual
period remaining in the contract tariff term, which amounts to an estimate of
$29.1 million.

  Effective October 31, 1998, EqualNet rejected its contract with AT&T. Any
liabilities for MSARC relating to periods after the rejection date will likely
be treated in the bankruptcy as pre-petition unsecured indebtedness. Due to
the amount of EqualNet's secured indebtedness (approximately $16.0 million),
it is unlikely AT&T would realize significant benefits even if it does assert
its claim for additional MSARC payments.

  On October 31, 1998, EqualNet entered into a switchless resale operator
agreement with U.S. Republic Communications, Inc. ("U.S. Republic"). As a
result of this agreement, EqualNet was able to replace its AT&T contract,
which was rejected in bankruptcy, with a wholesale carrier agreement with U.S.
Republic. This was a seamless transition for EqualNet's customers since U.S.
Republic provides its carrier services on the AT&T network. The term of the
agreement is month-to-month and there are no MSARC requirements. EqualNet is
required to prepay for services provided by U.S. Republic and has entered into
an agreement whereby RFC remits funds directly to U.S. Republic.

  In August, 1998, the Company executed a telecommunications services
agreement with Frontier Communications of the West, Inc. ("Frontier"). The
Company's operating subsidiaries are utilizing this switchless resale
agreement to provide services to a portion of their customers. Beginning in
December, 1998, this contract requires an MSARC of $250,000 per month. The
Company has been meeting this MSARC requirement throughout the term of the
agreement which extends to September, 2000. Frontier received a subordinated
security interest in the customers of the Company as collateral for the
extension of credit under this agreement. The Frontier carrier agreement was
amended effective March 17, 1999, which extended the agreement to December 31,
2000.

  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.

  On August 7, 1998, Robert H. Turner ("Turner") filed suit against the
Company, Mark A. Willis and Willis Group, LLC in the 61st District Court of
Harris County, Texas in case number 98-37682 alleging an unspecified amount of
damages based upon an alleged breach of his employment contract and other
claims. The Company vehemently denies any wrongdoing or liability in the
matter, and intends to vigorously defend itself in this action. Since no
significant discovery has taken place in this matter, it is impossible to
state with any degree of certainty the amount of damages, if any, that the
Company may incur, or if it will be successful in asserting any cross claims
or counterclaims it may have in connection with the employment of Turner.


                                      18
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  On August 13, 1998, Steverson & Company, Inc. filed suit against the Company
in case number 704,244 in the County Civil Court at Law Number 2 of Harris
County Texas, seeking damages in the amount of $22,892.78 plus attorneys fees
and court costs. The Company maintains that these charges were for temporary
services personnel utilized by EqualNet, and not the Company. Since then,
Steverson & Company has filed a nonsuit against the Company, and have filed
their claim with the Bankruptcy Court.

  On August 13, 1998, Centillion Data Systems, Inc. filed suit against
EqualNet in case number 49D029808CP001147 in the Superior Court of Marion
County, Indiana, seeking damages in the amount of $115,490.50 for billing and
other services allegedly provided to EqualNet, plus interest, attorneys fees
and court costs. The fact that these charges are a claim in the bankruptcy
proceedings of EqualNet discussed below make it impossible at this time to
state with any degree of certainty the ultimate exposure of EqualNet in this
matter.

  On September 3, 1998, the Company received a demand from New Boston Systems
through their attorneys, Steadman & Steele, for the payment of placement fees
for personnel hired by EqualNet. Although New Boston System's engagement
letter was with the Company, the personnel it placed were hired as employees
of EqualNet. It is the position of the Company that any payment due to New
Boston Systems would be due from EqualNet and not the Company. The amount
claimed as due to New Boston Systems is $10,526.25.

  On September 15, 1998, Technigrafiks, Inc. filed suit against EqualNet dba
Creative Communications in case number 705,562 in the County Civil Court at
Law Number 1 of Harris County, Texas, seeking damages in the amount of $24,399
for the printing of plastic cards for debit card sales, plus interest,
attorneys fees and court costs. The fact that these charges are a claim in the
bankruptcy proceedings of EqualNet discussed below make it impossible at this
time to state with any degree of certainty the ultimate exposure of EqualNet
in this matter.

  On September 17, 1998, KISS Catalog Ltd. filed suit against the Company as
assignee from Creative Communications International, Inc. of certain contract
rights from KISS Catalog Ltd. in case number 98 CIV. 6570 in the United States
District Court for the Southern District of New York, seeking payment of
$100,000 in license fees, attorneys fees, and any royalties which may be owing
under the license agreement. On March 17, 1999 KISS Catalog Ltd. and the
Company reached a settlement where the Company made an initial payment of
$20,000 and then will make eleven monthly payments of $5,000 that commenced on
April 16, 1999.

  On September 17, 1998, Comerica Leasing Corporation filed suit in the 270th
District Court of Harris County, Texas in case number 98-44481 against the
Company and EqualNet for breach of a settlement agreement arising out of
previous litigation for the enforcement of equipment and office furnishings
leases filed on February 12, 1998 in the 157th District Court of Harris
County, Texas in case number 98-06841. 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. Under the terms of the
settlement, EqualNet will pay Comerica $130,000 on the effective date of the
agreement, in addition to issuing warrants for the purchase of up to 300,000
shares of the Company's Common Stock at an exercise price of $1.50 per share
and a term of five years. The Company also agrees to pay $135,000 on or before
June 30, 1999. The remaining balance will be treated as an unsecured claim in
the bankruptcy.

  On September 21, 1998, Cyberserve, Inc., WSHS Enterprises, Inc. and William
Stuart (collectively "Bluegate") filed suit in the 215th District Court of
Harris County, Texas in case number 98-45115 against the Company, Willis
Group, LLC, Mark A. Willis, and Netco Acquisition LLC alleging damages for
breach of contract, breach of an employment agreement, fraud and fraud in the
inducement, statutory fraud in a stock transaction, tortious interference with
a contract, conspiracy, and quantum meruit. The matters complained of
originated with a letter of intent dated on or about October 28, 1997, 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

                                      19
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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
vehemently denies any wrongdoing or liability in this matter and intends to
vigorously defend itself against all claims of the plaintiffs.

  On September 29, 1998, SA Telecommunications Incorporated asserted claims
pursuant to the Purchase Agreement against USC Telecom, Inc. and the Company
for (i) $654,934 in operating losses for the period from April 1 through July
22, 1998, (ii) $278,377 for damages for delayed or unbillable revenue through
USBI/ZPDI, (iii) reimbursement of $8,149 for switch site leases, (iv) payment
of Specified Network Contracts Liabilities (amount not specified), (v)
delivery of 5,358 shares of Series C Preferred escrowed at closing, and (vi)
for return of certain leased equipment not owned by SA Telecommunications but
previously in its possession and allegedly removed by EqualNet or USC Telecom.
On December 28, 1998, the court signed an order approving SA Telecom's claims
in the amount of $812,772. The Company and USC Telecom disputed the monetary
claims asserted by SA Telecommunications in its demand and have filed a notice
of appeal of the court's order in these proceedings.

  During the past several months, EqualNet and the Company have experienced
severe liquidity problems and have received numerous notices of default in
payment of trade creditors and other financial obligations. As a result of
these liquidity problems and other matters, 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. It is
impossible to state at this time whether or not EqualNet as a debtor in
bankruptcy will be able to reorganize its liabilities or to confirm a plan of
reorganization in bankruptcy.

  On March 30, 1999, Chas. P. Young filed suit against the Company in case
number 99-15940 in the 164th District Court of Harris County, Texas seeking
damages in the amount of $60,653 plus interest and attorneys fees and court
costs. The Company has denied that it owes the full amount sought to be
recovered by the plaintiff in the action. At this time, it is impossible to
state with any degree of certainty the amount of the Company's liability in
this matter.

NOTE 10--SUBSEQUENT EVENTS

  The Company's Common Stock began trading on the Nasdaq SmallCap Market on
May 7, 1999, subject to certain contingencies and via an exception to the
normal continued listing requirements of Nasdaq.

  This change occurred as a result of a Nasdaq panel's decision dated May 5,
1999, following a hearing held February 4, 1999, on the continued listing of
the Company's Common Stock on the Nasdaq National Market. While the panel
ruled that the Company had failed to meet the minimum bid price and net
tangible asset requirements, the Company was granted a temporary exception
from these standards, subject to the Company meeting certain conditions.
Specifically, in addition to the standard requirements for listing on the
Nasdaq SmallCap Market, on or before June 1, 1999, the Company must make a
public filing with the SEC and Nasdaq

                                      20
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

evidencing a minimum of $10 million in net tangible assets and a closing bid
price of $1.00 per share. Immediately after June 1, 1999, the minimum bid
price for the Company's Common Stock must meet or exceed $1.00 per share for a
minimum of ten consecutive trading days.

  The Company believes that it can meet these conditions, however there can be
no assurance that it will do so. If at some future date the Company's Common
Stock should cease to be listed on the Nasdaq SmallCap Market, it may continue
to be listed in the OTC-Bulleting Board. Such delisting could have an adverse
effect on the liquidity of the Company's Common Stock.

  The Company has informed Nasdaq that it intends to propose to its
shareholders at the Company's next annual meeting that they approve giving the
Company's Board of Directors the discretionary authority to effect a reverse
split of the Company's Common stock if such reverse split is deemed by the
Board to be essential for the Company conforming to Nasdaq's minimum bid price
requirement. The Company anticipates that its next annual meeting of
shareholders will occur sometime in July, 1999.

  On January 10, 1999, EqualNet Corporation filed a Disclosure Statement in
its bankruptcy proceedings which included a proposed plan of reorganization
(the "Plan"). The Company was a co-proponent of the Plan. As a result of
negotiations with the committee of unsecured creditors of EqualNet, EqualNet
filed an amended Disclosure Statement on February 9, 1999. The bankruptcy
court approved the amended Disclosure Statement on March 1, 1999. The
creditors of EqualNet approved the Plan and the bankruptcy court confirmed the
Plan on April 27, 1999. The Plan, if consummated, will result in the exchange
of approximately 3 million newly issued shares of the Company's Common Stock
and $1.35 million in cash to a newly created trust for the benefit of the
unsecured creditors of EqualNet and the elimination of approximately $15
million of unsecured debt of EqualNet.

  The Company subsequently obtained commitments from two investor groups (the
"Investors") to provide the $3.6 million required for the consummation of the
Plan and entered into a definitive agreement with the Investors for their
investment in the Company. These Investors have notified the Company that it
is in breach of its obligations under the terms of the agreement and that they
do not intend to complete the funding and stock purchase. The Company
vehemently denies that it has breached its obligations under the agreement.
However, the Company also is engaged in negotiations with other prospective
sources of funding for the consummation of the Plan, in the event that the
Investors, for any reason, fail to provide funding as provided in the
agreement. There can be no assurance that the Company will be able to raise
the capital required to consummate the Plan.

  On April 20, 1999, the Company signed a definitive agreement for the
acquisition of The Intelesis Group, Inc. ("Intelesis") and a related entity in
a transaction potentially valued at up to $22.5 million. Equalnet has agreed
to issue 2.5 million shares of its Common Stock to Intelesis along with a one-
year "earn-out" opportunity of up to $20 million, which, if achieved, would
represent approximately a $50 million annual revenue run rate for Intelesis at
that time. Intelesis is a development stage company that holds pending patent
and trademark rights to "FreeCaller(TM)," an advertiser-sponsored, residential
telecommunications service that allows subscribers to make domestic long
distance calls for free in exchange for listening to a 30-second
advertisement. Intelesis has not yet generated any revenue.

  On April 7, 1999, the Company entered into a Letter of Intent to acquire
Network Communications Solutions, LLC ("NCS"), a privately held Internet
service provider, and Web host and design firm for total purchase price
consideration of $1 million, payable in common stock of the Company. The
Company currently is conducting due diligence on NCS and negotiating a
definitive agreement for the acquisition of NCS. There can be no assurance
that the acquisition of NCS will be consummated.


                                      21
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  On October 19, 1998, the Company signed an agreement with S4 Communications
Corporation ("S4") to a acquire all of the equity interest of S4. S4 is a
provider of telecommunications services in the Chicago, Illinois area. Closing
of the transaction was subject to the satisfactory completion of due
diligence. The Company does not currently intend to consummate this
transaction.

  On February 5, 1999, the Company entered into a subscription agreement with
LaMonda Management Family Limited Partnership ("LaMonda"). Pursuant to the
terms of the agreement, LaMonda purchased 769,000 shares of the Company's
Common Stock, plus warrants to purchase up to 50,000 shares of common stock at
an exercise price of $1.00 per share for one (1) year, plus warrants to
purchase up to 50,000 shares of common stock at an exercise price of $1.50 per
share for two (2) years, plus warrants to purchase up to 50,000 shares of
Common Stock at an exercise price of $2.00 for three (3) years, for total
consideration of $500,000.

NOTE 11--FIXED ASSETS

  During fiscal year 1998, the Company acquired nine telecommunications
switches (the "Switches") from the Willis Group, LLC ("Willis Group") for $7.6
million of aggregate consideration. In a related transaction, the Company
acquired Netco, a corporation controlled by the Willis Group, which held
certain intangible rights related to the operation of the Switches and assets
previously acquired by the Willis Group. The Company acquired Netco for $5.6
million in aggregate consideration. As a result of these two transactions, the
Company recorded $13.2 million as its cost basis of the Switches and related
network. The Company incurred additional direct cost to purchase, install and
implement the Switches and related network of approximately $1 million which
have been capitalized as cost of the Switches and related network.

  Netco, the owner of the Switches, subsequently entered into an agreement
with EqualNet whereby EqualNet assumed the operating responsibilities of the
Switches. EqualNet incurred substantial costs in the fourth quarter of fiscal
1998 in extending the network's access to most of the large metropolitan areas
in the United States in anticipation of a national marketing effort. This
marketing effort did not produce significant revenue due to EqualNet's
internal provisioning problems and the lack of sufficient capital. Utilization
of the Switches and national network without sufficient traffic to support the
fixed costs created negative operating margins and created an event that
indicated the $14.2 million asset might be impaired.

  In October 1998, EqualNet completed the process of turning off the Switches
and network in an effort to reduce significant fixed charges. At that time,
the Company intended to reconfigure the network in Texas and Southern
California to improve operating margins on customers located in those
geographical areas. The Company has not, however, completed this
reconfiguration and may not do so. The Company has started a program to
partition or lease ports on the Switches to other carriers. The Company has
entered into one agreement to partition approximately 110 ports from its Texas
Switches. However, the party that has partitioned the ports currently is not
using or paying for all the ports that it has agreed to partition. EqualNet
has successfully interfaced and integrated the ports with the customer, but
the customer is having difficulty ramping up their international customer
base, and therefore, are currently not able to pay EqualNet. EqualNet has
allowed this customer to build up their business and customer base before they
are required to fully pay EqualNet what they are owed. The entire network of
Switches has over 1,400 ports.

  As of March 31, 1999, the Company classified the Switches and network as
operating assets and has supported the carrying value of the assets through a
projected undiscounted cash flow analysis based on the partitioning ports
program plan as discussed above. Additionally, as part of the plan of
reorganization and plan to return the Company to profitability, the Company
will continue to evaluate the best economic use of the Switches and related
network. As part of this continued evaluation, the Company may elect to sell
all or a portion of the Switches and related network. Management believes that
the carrying value of the assets will be realized

                                      22
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

through the operations of the assets or a combination of operating the assets
and potential sale of the assets. 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 12--SHAREHOLDER'S EQUITY

  The Company issued 420,000 shares of its Common Stock in March 1999 to third
parties in consideration for services rendered and for full satisfaction of
amounts due. This included the issuance of 100,000 share of its Common Stock
to satisfy the severance agreement made between the Company and Mr. Michael
Hlinak on April 1, 1998 and 320,000 shares to satisfy services rendered by
other third parties.

  On January 21, 1999, the Company entered into a subscription agreement with
Kevin Pirolo whereby Mr. Pirolo committed to purchase $2 million of Common
Stock of the Company at a purchase price per share equal to 90% of the average
closing price per share of Common Stock for the ten trading days prior to the
date of the confirmation of the Plan. As of May 24, 1999 the shares had not
been purchased.

NOTE 13--RELATED PARTY TRANSACTIONS

  In March 1999, the Company issued 136,296 shares of its Common Stock to
Directors of the Company in satisfaction of amounts owed for unpaid Director
fees. Ronald J. Salazar, 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 dated effective
December 31, 1998 for the acquisition of substantially all of the assets of
Limit, LLC, a Tennessee limited liability company. Zane Russell, 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 this transaction.
See ACMI Purchase Agreement--Exhibit 10.1.

                                      23
<PAGE>

Item 2. 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 Financial Statements and Notes
thereto included elsewhere in this Quarterly Report on Form 10-Q. Special
Note: Certain statements set forth below constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended. See "Special
Note Regarding Forward-Looking Statements" and "Cautionary Statements".

 Results of Operations

  Sales for the three months ended March 31, 1999 increased 62.1% to $9.3
million compared to sales of $5.8 million for the same period of the prior
year. Gross margin increased during the current quarter to $1.9 million
compared to a gross margin of $1.1 million for the same period of the prior
year. The net loss for the three months ended March 31, 1999, excluding
preferred stock dividends and deemed distributions was $5.1 million and
included no tax benefit. The net loss for the corresponding period in the
previous year was $4.0 million and included no tax benefit.

  Sales for the nine months ended March 31, 1999 increased 23.2% to $25.4
million from $20.6 million for the same period of the previous year. Gross
margin decreased for the nine month period 88.9% to $0.5 million from $4.9
million for the comparable period the prior year. Much of this decrease is
attributable to a write off of accounts receivable of $3.3 million in the
second quarter of this year. The net loss for the nine months ended March 31,
1999 was $19.2 million and included no tax benefit. The net loss for the
corresponding period in the previous year was $8.5 million and included no tax
benefit.

  The following table sets forth for the fiscal periods indicating the
percentages of total sales represented by certain items reflected in the
Company's consolidated statements of income:

<TABLE>
<CAPTION>
                                              Three Months      Nine Months
                                                  Ended            Ended
                                                March 31,        March 31,
                                              ---------------   -------------
                                               1998     1999    1998    1999
                                              ------   ------   -----   -----
<S>                                           <C>      <C>      <C>     <C>
Revenues....................................   100.0%   100.0%  100.0%  100.0%
Cost of revenues............................    80.5%    79.8%   76.0%   97.8%
                                              ------   ------   -----   -----
Gross margin................................    19.5%    20.2%   24.0%    2.2%
Selling, general & administrative expenses..    65.0%    24.1%   43.8%   33.5%
Depreciation and amortization...............    19.9%    40.0%   16.0%   35.0%
                                              ------   ------   -----   -----
Operating income (loss).....................   (65.4%)  (44.0%) (35.8%) (66.3%)
Other income (expense)
  Interest income...........................     0.1%     0.0%    0.0%    0.0%
  Interest expense..........................    (4.3%)   (7.7%)  (5.7%)  (7.8%)
  Miscellaneous.............................    (0.5%)   (0.6%)   0.4%   (0.2%)
                                              ------   ------   -----   -----
                                                (4.7%)   (8.3%)  (5.3%)  (8.0%)
Loss before federal income taxes and
 reorganization cost........................   (70.1%)  (52.3%) (41.1%) (74.3%)
Provision for federal income taxes..........     0.0%     0.0%    0.0%    0.0%
                                              ------   ------   -----   -----
Net Loss before reorganization costs........   (70.1%)  (52.3%) (41.1%) (74.3%)
Reorganization costs........................     0.0%    (2.5%)   0.0%   (1.5%)
                                              ------   ------   -----   -----
Net Loss....................................   (70.1%)  (54.8%) (41.1%) (75.8%)
                                              ======   ======   =====   =====
</TABLE>

 Sales

  The Company's sales in the three months ended March 31, 1999 increased 62.1%
to $9.3 million compared to $5.8 million for the comparable period of the
prior year. The increase was due primarily to an increase in customer accounts
as a result of several acquisitions this fiscal year. During the current
quarter, the Company

                                      24
<PAGE>

reported sales of $2.7 million related to the customers acquired on July 23,
1998 from SA Telecom and $3.6 million related to customers acquired from the
BCI transaction on January 27, 1999. Sales resulting from the January 1999
acquisition of ACMI were $0.2 million for the current quarter. Excluding sales
from the acquired customers, the Company's historical customer base
experienced a decrease in sales of 51.7% to $2.8 million in the current
quarter compared to $5.8 million for the comparable period of the prior year.
Increasing customer attrition has caused this decline in sales that has also
resulted in a corresponding decrease in billable minutes. The billable minutes
for this historical customer base for the three months ended March 31, 1999
decreased 23.3% to 13.8 million from 18.0 million for the same period last
year. The customer base acquisitions of the company in this fiscal year have
resulted in an increase in total billable minutes for the current quarter of
137.2% to 42.7 million minutes from 18.0 million minutes for the same period
of the prior year. The acquired SA Telecom customer base generated 19.3
million billable minutes and the acquired BCI customer base generated 9.6
million billable minutes in this quarter.

  For the nine months ended March 31, 1999, sales increased 23.2% to $25.4
million compared to $20.6 million for the same period in the previous year.
Sales during the first, second, and third quarters of fiscal 1999 from the
July 23, 1998 SA Telecom customer base acquisition were $3.5, $3.8, and $2.7
million, respectively. The BCI transaction which occurred in the current
quarter generated $3.6 million in sales and the ACMI transaction generated
$0.2 million in revenue in this period. The Company's historical customer base
experienced a decrease in sales for the nine months ended March 31, 1999 of
43.9% to $11.5 million compared to $20.6 million for the same period in the
previous year. This resulted from a decrease in billable minutes for this
customer base of 30.7% to 46.9 million minutes from 67.7 million minutes for
the nine months ended March 31, 1999. The total billable minutes for the
Company increased 80.4% to 122.1 million minutes from 67.7 million in the same
period the previous year. The acquired SA Telecom base generated billable
minutes of 22.2, 24.1, and 19.3 million for the first, second, and third
quarters of this fiscal year, respectively. The newly acquired BCI customer
base generated 9.6 million minutes for the current period. Although several
key acquisitions have improved the Company's sales and billable minutes from
the same period the prior year, the Company has experienced increased customer
attrition. The Company has only recently initiated an expansion of several
existing sales channels and the development of key alternative sales channels
to allow significant future growth.

 Cost of Sales

  The cost of sales for the three months ended March 31, 1999, increased 60.7%
to $7.5 million compared to $4.6 million for the comparable period of the
prior year. The current quarter increase was primarily attributable to
additional costs associated with the BCI and SA Telecom billings. Cost of
sales for the nine months ended March 31, 1999 increased 58.7% to $24.8
million compared to $15.6 million for the same period last year. Included in
this increase is a $3.3 million write off of accounts receivable in the second
quarter. In addition to the write off, the primary cause of this increase
relates to lower rates per billed minute for the acquired SA Telecom customer
base as compared to the Company's historical customer base.

  The Company's cost of long-distance (which is a component of cost of sales)
for the three months ended March 31, 1999 increased as a percentage of sales
to 57.4% from 55.0% for the comparable period in the previous year. The cost
of long distance for the nine months ended March 31, 1999 increased to 66.1%
from 53.9% for the comparable period of the previous year. The increase in the
percentage in the fiscal year is the result of the costs associated with the
Company's network of switches ("Network") and higher costs related to SA
Telecom customers. The cost of long distance for the SA Telecom customer base
was 38.4% of sales for the current quarter. The cost of long distance related
to the BCI customers was $0.9 million for the quarter. The total long distance
costs during the first, second and third quarters of fiscal 1999 of $5.3, $6.1
and $5.4 million, respectively, includes approximately $.2, $1.7 and $0.0
million, respectively, related to the Network.

  Commission expense as a percent of sales decreased to 1.2% for the third
quarter of fiscal 1999, compared to 11.5% for the third quarter of fiscal
1998. EqualNet discontinued paying commissions as a result of rejecting its
agent agreements in its bankruptcy case. Commission expenses, as a percent of
sales for the nine months ended March 31, 1999, was 4.0% as compared to 8.4%
in the prior period.

                                      25
<PAGE>

  Billing expense as a percentage of sales increased to 14.5% for the three
months ended March 31, 1999 compared to 8.0% for the same period in the
previous year. This increase is attributable to the acquisition of the BCI
customers in the third quarter that bill exclusively through Local Exchange
Carriers ("LECs"). The cost of billing through LECs is generally greater than
billing customers directly. Billing expense for the nine months ended March
31, 1999 increased to 8.8% compared to 8.0% in the same period in fiscal 1998.
Billings through the LECs represented 75.0% and 46.6% of the Company's
revenues for the nine months ended March 31, 1999 and 1998, respectively.

  Bad debt expense as a percentage of sales for the three and nine months
ended March 31, 1999 was 6.3% and 18.3%, respectively, as compared to 6.2% and
5.4%, respectively, for the three and nine months ended March 31, 1998. The
increase resulted from a $3.3 million write off of accounts receivable in the
second quarter.

 Selling, General and Administrative Expenses

  Selling, general and administrative expenses decreased to $2.3 million for
the three months ended March 31, 1999 as compared to $3.7 million for the same
period of the prior year. Selling, general and administrative expenses
decreased as a percentage of sales to 24.1% for the three months ended March
31, 1999, from 65.0% for the same period of the prior year. The decrease in
selling, general and administrative expenses as a percentage of sales relates
to the increase in the Company's revenues during the current three month
period. For the nine months ended March 31, 1999, selling, general and
administrative expenses decreased to 33.5% of sales from 43.8% of sales for
the same period last year.

  Salary expense decreased $279,790 for the quarter ended March 31, 1999,
compared to the same quarter of the previous year and decreased by $105,186
for the nine months ended March 31, 1999 versus the same period in 1998.

  During the comparative three month periods, departmental direct expenses
including reorganization costs decreased $1.2 million. Departmental expenses
increased by $390,537 during the nine month period ended March 31, 1999
compared to the same period last year. The increase in departmental expenses
for the nine months resulted in part from an increase in legal and
professional fees associated with EqualNet's bankruptcy and other transactions
and registration fees associated with USC Telecom.

 Depreciation and Amortization

  Depreciation and amortization increased 226.0% to $3.7 million for the
quarter ended March 31, 1999, as compared to $1.1 million for the same period
in the previous year. Depreciation and amortization expense increased 168.6%
for the nine month period ended March 31, 1999 over the same period of 1998.
The increase relates to current quarter costs for depreciation of the Network
of $0.6 million, amortization of the SA Telecom customer acquisition costs of
$2.1 million, amortization of the acquired BCI customer base of $.2 million
and amortization of the acquired ACMI marketing agent contracts of $.2
million. The Company did not own any of these assets during the same period of
the prior year.

 Liquidity and Capital Resources

  The Company utilized $3.1 million in cash flow from operations for the nine
months ended March 31, 1999, compared to utilizing $1.0 million for the same
period of the prior year. Cash flow deficits in the current nine months were
attributable to operating losses incurred by the Company.

  Cash used in investing activities totaled $1.1 million for the nine months
ended March 31, 1999, compared to $7.9 million for the same period of the
previous year. The primary use of cash for investing activities during the
period ended March 31, 1999, was for cash paid in connection with the SA
Telecom acquisition and for cash paid for property, plant and equipment.

                                      26
<PAGE>

  Net cash generated in financing activities was $4.5 million for the nine
months ended March 31, 1999, compared to the generation of $11.1 million for
the same period of the previous year. The majority of this amount was
generated from the proceeds received from the issuance of the 2001 Notes and
an increase in funds available under the Company's receivables funding
arrangement as a result of the Company's purchase of BCI's residential long
distance customers from RFC.

  As more fully described in Note 5 to the Consolidated Financial Statements,
the Company is submitting to its shareholders for approval of the 2001 Note
and Series D Preferred Stock transactions. If these transactions are not
approved, the shareholders have the right to require the Company to redeem the
2001 Notes and Series D Preferred Stock. The Company does not have adequate
funds to effect such redemption.

  As discussed in the notes to the financial statements, the Company has
significant potential additional liabilities which might result from the
bankruptcy proceedings or reorganization. The Company currently does not have
the capital to settle these potential future liabilities. The Company will
continue to seek additional capital should these liabilities materialize.
However, no assurance can be made that such capital will be available to meet
these potential obligations and the Company may be required to seek additional
protection under the bankruptcy laws.

  It is highly likely the Company will need additional capital to complete the
funding of the plan of reorganization and to continue in business during its
restructuring phase. Also, the Company intends to issue 3,000,000 shares of
its Common Stock to the Trustee of the Creditor's Committee in the EqualNet
Bankruptcy as partial payment of obligations under the plan of reorganization.
In addition to the capital required to fund EqualNet's plan of reorganization,
the Company expects that it will need additional capital to fund new marketing
initiatives and new business ventures, such as Intelesis and its proposed
acquisition of NCS. The Company believes that the rate at which it will be
able to develop these new marketing initiatives and new business ventures will
be directly related to the amount of new capital it has available. The Company
intends to raise the capital it requires for these activities through possible
private placements of its debt and equity securities. There can be no
assurance the Company will be able to raise the capital it will require. If
the Company is not able to raise the required capital, it may have to curtail
its marketing initiatives and not be able to realize the full potential of
these or other potential business ventures.

 Year 2000 Readiness Disclosure

  The Company's Year 2000 ("Y2K") project is intended to address potential
processing errors in computer programs that use two digits, rather than four,
to define the applicable year. The Company is providing Y2K disclosure because
its assessment of Y2K issues is not complete and because if these issues are
not resolved by its software vendors and its underlying carriers (i.e., MCI
Worldcom, AT&T, Frontier and others), it will have material adverse
consequences to the Company.

 State of Readiness

  The Company's Y2K issues relate primarily to its internal billing systems,
the Network and the systems of its third party carriers. The Company uses two
billing systems, the CostGuard system developed by IDI, which utilizes
Microsoft's SQL Server software, and a system internally developed by BCI with
a Novell platform. The Company believes the BCI billing system is Y2K
compliant, however, the CostGuard system is not Y2K compliant. The Company is
relying on IDI and Microsoft to modify these systems to be Y2K compliant. Each
of these companies is developing system modifications to be Y2K compliant. The
Company does monitor the progress of its software vendors and anticipates
receiving Y2K compliant versions of its billing software no later than
September 30, 1999.

  The Company's Network comprises nine switches manufactured by Siemens
Telecom Networks ("Siemens"). These switches utilize software that is not
currently Y2K compliant. The Company has received a commitment from Siemens
that it will provide Y2K compliant software prior to the end of the calendar
year 1999.

                                      27
<PAGE>

  The Company provides its customers with long distance telephone services
through resale agreements utilizing the networks of AT&T, Frontier
Communications, MCI Worldcom and Qwest Communications. These are very large
public companies with the resources necessary to develop and maintain Y2K
compliant systems. The Company monitors Y2K development activities of these
companies primarily through their public disclosures concerning Y2K.

  The Company is in the process of auditing its existing computer hardware for
Y2K compliance and making required changes.

  With regard to Equalnet's plan for non-information technology systems Year
2000 compliance, Equalnet has identified three key areas to address: 1) phone
service; 2) building/facilities issues; and 3) document retention.

  Equalnet operates a computerized phone system that could be vulnerable to
Year 2000 issues. Equalnet is in the process of evaluating this phone system
and will make corrections as necessary. However, it is possible that an
unforeseen problem could still prevent the computerized phone system from
operating properly. Equalnet is currently considering adding additional
personnel qualified to correct problems with the phone system that may occur.

  The building that the corporate offices are located in has computerized
building and secure area access, computerized elevator control, and might
possibly have computerized climate controls and sprinkler systems. To address
any Year 2000 issue that may arise, Equalnet is in the process of requesting a
representative of the building management company to be available to handle
any building-specific problems such as keyed rather than computerized access
to secure areas. Additionally, Equalnet employees will be prepared to take
additional corrective measures such as using stairs instead of elevators and
dressing appropriately for any climate control problems. Special
accommodations may be necessary for Equalnet employees with handicaps and
company management may determine that conditions exists such that it is
necessary to close down the company's corporate offices for a period of time
required to correct any Year 2000 problems related to the building.

  Immediately prior to the end of the year, Equalnet will make a computerized
backup of all its software and data. Additionally, certain sensitive documents
such as bank account records and customer lists will also be reduced to paper.
Notwithstanding these plans, it is still possible that a Year 2000 related
problem may result in the loss of data. Equalnet has on staff several
information technology experts who will attempt data recovery, but it is
possible that permanent data loss may occur and additional costs and expenses
will be incurred as a result.

 Costs

  To date, the Company has not expended any money to deal with Y2K issues. It
does, however, anticipate purchasing software updates from its third party
billing system vendors to update its system to be Y2K compliant. Although the
Company has not received quotes from these vendors, it does not believe its
Y2K software upgrade costs will exceed $100,000. The Company is not obligated
to bear any costs related to the Y2K compliant costs being incurred by its
underlying carriers.

 Risks

  The Company is engaged in the long distance telecommunications business and,
therefore, connects directly with hundreds of other carriers. While many
carriers have announced plans to assess and remediate their networks, there is
risk that some carriers will not address or resolve Y2K issues. Failure of
these carriers to resolve Y2K issues could result in disruption of service to
the Company's customers or the inability to bill for services. These problems
could result in the Company either losing its customers or misbilling its
customers for long distance services until the problem is remediated.

                                      28
<PAGE>

  The Company's Network has a $10.7 million book basis as recorded on its
consolidated balance sheet at March 31, 1999. If Siemens is unable to develop
and provide the Company with Y2K compliant software, the value of the Network
will be substantially impaired.

  The billing system utilized by the Company has been developed by third party
vendors and currently is not Y2K compliant. Without these billing systems, the
Company cannot bill its customers or collect for services. The inability of
these systems to function after 1999 would severely impair the Company's
ability to continue its business.

 Contingency Plans

  The Company is monitoring its Y2K issues relating to the progress being made
by its software vendors, Siemens and its underlying carriers. The Company does
not have any significant internally developed software required to conduct its
business, therefore, it does not require significant internal assessment or
development plans. The Company anticipates being Y2K compliant by the end of
1999, but cannot control issues that involve other carriers and outside
vendors. The Company is monitoring Y2K issues of its carriers and software
vendors and, to the extent the Company becomes aware of Y2K compliance
problems of those companies, it intends to move its client base to Y2K
compliant carriers or purchase Y2K compliant software. There can be no
assurance that the Company will be able to utilize the services of any Y2K
compliant carrier or acquire Y2K compliant software needed to utilize its
Network or bill or service its clients.


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

  No significant change.

                                      29
<PAGE>

                          PART II--OTHER INFORMATION

Item 1. Legal 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.

  On September 29, 1998, SA Telecommunications Incorporated ("SA Telecom")
asserted claims pursuant to the Purchase Agreement against USC Telecom, Inc.
and the Company for (i) $654,934 in operating losses for the period from April
1 through July 22, 1998, (ii) $278,377 for damages for delayed or unbillable
revenue through USBI/ZPDI, (iii) reimbursement of $8,149 for switch site
leases, (iv) payment of Specified Network Contracts Liabilities (amount not
specified), (v) delivery of 5,358 shares of Series C Preferred escrowed at
closing, and (vi) for return of certain leased equipment not owned by SA
Telecommunications but previously in its possession and allegedly removed by
EqualNet or USC Telecom. On December 28, 1998, the court signed an order
approving SA Telecom's claims in the amount of approximately $812,772. The
Company and USC Telecom disputed each of the claims asserted by SA
Telecommunications in its demand and have filed a notice of appeal of the
court's order in these proceedings.

  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. It is impossible to state at this time whether or not
EqualNet as a debtor in bankruptcy will be able to reorganize its liabilities
or to confirm a plan of reorganization in bankruptcy.

  On March 30, 1999, Chas. P. Young filed suit against the Company in case
number 99-15940 in the 164th District Court of Harris County, Texas seeking
damages in the amount of $60,653 plus interest and attorneys fees and court
costs. The Company has denied that it owes the full amount sought to be
recovered by the plaintiff in the action. At this time, it is impossible to
state with any degree of certainty the amount of the Company's liability in
this matter.

Item 2. Changes in Securities

  On January 4, 1999, the Company issued an additional 5,358 shares of its
Series C Preferred Stock to SA Telecommunications, Inc. as payment of the
withheld purchase price from the purchase of assets on July 23, 1998
previously approved at the meeting of shareholders held on June 30, 1998. The
Company also issued 3,596 shares of its Series C Preferred Stock to the holder
of the Series C Preferred Stock as dividends due on this series of preferred
stock, payable in kind.

  On January 21, 1999, the Company closed a transaction dated effective
December 31, 1998 for the acquisition of substantially all of the assets of
Limit, LLC, a Tennessee limited liability company, in exchange for the
issuance of 1,000,000 shares of Common Stock. There are earn out provisions
based upon future performance that could result in the issuance of up to an
additional 1,500,000 shares of Common Stock. Zane Russell, 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 this transaction. See ACMI
Purchase Agreement -Exhibit 10.1.

  On January 27, 1999 the Company issued to RFC Capital Corporation a warrant
for the purchase of 300,000 shares of Common Stock at an exercise price of
approximately $1.33 per share, subject to adjustment (the "RFC Warrant"). The
RFC Warrant is excisable for a period of five years. The RFC Warrant was
issued in connection with the acquisition of a customer base and related
accounts receivable of Brittan Communications International, Inc. ("BCI") by
USC Telecom, Inc. at a foreclosure sale conducted by RFC Capital Corporation
as a secured creditor of BCI.

                                      30
<PAGE>

  On February 3, 1999, the Board of Directors approved the formation of the
Equalnet Communications Corp. Independent Contractor Stock Option Plan, which
plan is to be administered by a committee of the Board of Directors,
authorized to compensate independent contractors providing services for the
Company and its subsidiaries with grants of stock, stock options and/or stock
appreciation rights. A total of 3,000,000 shares were initially reserved for
issuance. There have not yet been any grants of stock, options or stock
appreciation rights pursuant to the terms of the plan.

  On February 15, 1999, the Company issued 56 shares of its Series D Preferred
Stock to the holders of the Series D Preferred Stock as dividends due on this
series of preferred stock, payable in kind.

  On March 9, 1999, the Board of Directors satisfied several outstanding
obligations of the Company with the issuance of Common Stock. These
obligations included the issuance of 320,000 shares of Common Stock to Vinson
& Elkins LLP for payment of legal fees and expenses, the issuance of 100,000
shares of Common Stock to Michael L. Hlinak in settlement of all amounts due
pursuant to a severance agreement entered into earlier with Mr. Hlinak, and
the issuance of 30,000 shares of Common Stock in payment for consulting
services rendered by Director Ronald J. Salazar during calendar year 1998. In
addition, Directors agreed to accept shares of Common Stock in lieu of
directors fees due to non-employee directors since being elected to serve as
directors of the Company. Each director waived the right to be compensated for
director fees for any period of time that they were otherwise compensated as
either an employee or independent contractor or consultant for the Company.
The number of shares of Common Stock issued to each director were as follows:
Mark A. Willis received 30,747 shares, Mitchell H. Bodian received 23,777
shares, John Isaac "Ike" Epley received 19,243 shares, Ronald J. Salazar
received 62,529 shares. Shares were valued at $0.50 per share. The average of
the high and low bid price for the Common Stock on the date of the approval of
the payment of these fees was $0.4845.

  On March 9, 1999, the Company issued to Market Pathways Financial Relations,
Incorporated a warrant for the purchase of a total of 250,000 shares of Common
Stock, the first portion for the purchase 83,333 shares at an exercise price
of $1.125 per share, vesting immediately, the second portion for the purchase
83,333 shares at an exercise price of $1.75 per share, vesting one half
immediately and one half on August 30, 1999, and a third portion for the
purchase of 83,334 shares at an exercise price of $2.50 per share, vesting on
August 30, 1999. The warrant is exercisable for a period of five years. Market
Pathways continues to provide financial public relations services for the
Company.

Item 3. Defaults upon Senior Securities

  The Company has not made the dividend payments required under the Series A
Preferred Stock agreement. The holder of the stock has agreed to amend the
Series A Preferred Stock agreement. If said agreement is approved by the
Company's shareholders at the next shareholder meeting, the Company will no
longer be in default on the Series A Preferred Stock.

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

  None.

Item 5. Other Information

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:

  This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical facts
included in this report, including without limitation, statements regarding
the Company's financial position, business strategy, products, products under
development, markets, budgets and plans and objectives of management for
future operations, are forward-looking statements. Although the Company
believes that the expectation of such forward-looking

                                      31
<PAGE>

statements are reasonable, it can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Cautionary Statements" and elsewhere in this
Report, including, without limitation, in conjunction with the forward-looking
statements included in this Report. All subsequent written and oral forward-
looking statements attributable to the Company, or persons on its behalf, are
expressly qualified in their entirety by the Cautionary Statements.

CAUTIONARY STATEMENTS:

  See "Special Note Regarding Forward-Looking Statements".

  No Assurance Of Additional Necessary Capital--EqualNet and Wholesale filed
for Chapter 11 protection in September of 1998. The Company will need
additional capital to obtain the creditor's approval of a plan of
reorganization for EqualNet. In addition, it is likely that additional capital
may be needed to fund operating deficits of the Company's other subsidiaries
during the foreseeable future. Although the Company has no current funding
sources, it believes it can attract additional funding if it is able to reduce
the liabilities of EqualNet through the plan of reorganization. There can be
no assurances that the Company will be able to obtain the necessary capital or
sufficiently reduce EqualNet's liabilities to continue to operate the Company.

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

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

  Dependence On Other Facilities-Based Carriers--The Company, even though it
now owns nine switches, depends upon other carriers to provide the
telecommunications services that it resells to its customers and the detailed
information upon which it bases its customer billings. The Company's near-term
ability to expand its business partially depends upon whether it can continue
to maintain relationships with S4 Communications, MCI WorldCom, Frontier and
U.S Republic. The loss of the telecommunications services that the Company
receives from any of these vendors could have a material adverse effect on the
Company's results of operations and financial condition.

  Carrier Commitments--The Company and EqualNet have significant commitments
with certain carriers to resell long-distance services. The Company's contract
with its carrier contains clauses that could materially and adversely impact
the Company should the Company incur a shortfall in meeting its commitments.

  To the extent that these carriers are considered to be utilities in
EqualNet's bankruptcy proceeding, these carriers will be entitled to adequate
assurance of payment for carrier services after September 10, 1998, the
Bankruptcy Filing Date. Adequate assurance may be in the form of cash deposits
or advance payments in an amount determined by the court as sufficient to
provide these carriers with adequate assurance of payment. The failure to
provide adequate assurance of payment for future services would give these
carriers the right to discontinue to provide such services. Current sources of
funds from operations and working capital may not be sufficient to provide the
amount of adequate assurance of payment required by these carriers. There can
be no assurance that EqualNet will be able to secure funding for the amount of
any adequate assurance that may be required of EqualNet.

                                      32
<PAGE>

  Billing System Problems--EqualNet converted to a new customer management,
billing and rating system--AMS, purchased from Platinum Communications in
March 1998. Unlike NetBase (the system used for most of fiscal year 1998 prior
to conversion), AMS has capabilities required for switch-based data gathering,
rating and billing. The conversion coincided with the acquisition of a new
customer base (SA Telecom) and a migration to a switch based environment,
considerable billing errors and delays occurred. Additionally, there are
aspects of AMS that could require continuing support from Platinum
Communications. This reliance upon an outside source for billing system
troubleshooting has slowed the conversion recovery process. In December, 1998
EqualNet converted its billing system to CostGuard ENTERPRISE, an industrial
class rating, billing and customer care system built on a Microsoft SQL Server
database platform. This system was purchased from Info Directions, Inc., "IDI"
and should improve rating speed and billing accuracy. Also, EqualNet expects
to be able to more readily extract meaningful data and management reports from
CostGuard. The system design is flexible enough to respond to rapid changes in
the telecommunications marketplace. In fiscal year 1998, EqualNet recorded a
write-off of $270,000 for NetBase and estimated the useful file of AMS to be
approximately one year until the CostGuard system can be implemented. The new
system, CostGuard, will cost $272,000 initially, then $68,000 per year in
subsequent years for ongoing support and software upgrades. There can be no
assurance that the IDI billing system will fully meet EqualNet's current and
on going needs. If the IDI system fails to provide the expected results,
EqualNet may need to invest in other alternative billing systems.

  Relationships With State Regulatory Agencies--EqualNet's and USC Telecom's
intrastate long-distance telecommunications operations are subject to various
state laws and regulations, including prior certification, notification or
registration requirements. EqualNet and USC Telecom must generally obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. Any failure to maintain
proper certification in jurisdictions in which either of these companies
provide a significant amount of intrastate long-distance service could have a
material adverse effect on the Company's business.

  Volatility Of Securities Prices--Historically, the market price of the
Common Stock has been highly volatile. During the period from July 1, 1997, to
March 31, 1999, the market price for the Common Stock as reported by The
Nasdaq Stock Market has ranged from a high of $3.25 per share to a low of $.18
per share. There can be no assurance that the market price of the Common Stock
will remain at any level for any period of time or that it will increase or
decrease to any level. Changes in the market price of the Common Stock may
bear no relation to the Company's actual operational or financial results.

  In addition, the Company's Common Stock began trading on the Nasdaq SmallCap
Market on May 7, 1999, subject to certain contingencies and via an exception
to the normal continued listing requirements of Nasdaq.

  This change occurred as a result of a Nasdaq panel's decision dated May 5,
1999, following a hearing held February 4, 1999, on the continued listing of
the Company's Common Stock on the Nasdaq National Market. While the panel
ruled that the Company had failed to meet the minimum bid price and net
tangible asset requirements, the Company was granted a temporary exception
from these standards, subject to the Company meeting certain conditions.
Specifically, in addition to the standard requirements for listing on the
Nasdaq SmallCap Market, on or before June 1, 1999, the Company must make a
public filing with the SEC and Nasdaq evidencing a minimum of $10 million in
net tangible assets and a closing bid price of $1.00 per share. Immediately
after June 1, 1999, the minimum bid price for the Company's Common Stock must
meet or exceed $1.00 per share for a minimum of ten consecutive trading days.

  The Company believes that it can meet these conditions, however there can be
no assurance that it will do so. If at some future date the Company's Common
Stock should cease to be listed on the Nasdaq SmallCap Market, it may continue
to be listed in the OTC-Bulleting Board. Such delisting could have an adverse
effect on the liquidity of the Company's Common Stock.

                                      33
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

  a. Exhibits

<TABLE>
<CAPTION>
    Exhibit
      No.   Description
    ------- -----------
    <C>     <S>
    10.1    Amended and Restated Asset Purchase Agreement among ACMI
            Acquisition Corp., EqualNet Communications Corp., Limit LLC d/b/a
            AMCI and members of Limit LLC (filed previously)
    10.2    Subscription Agreement with Kevin Pirolo (filed previously)
    10.3    Purchase Agreement between RFC Capital Corporation and USC Telecom,
            Inc. (filed previously)
    10.4    Assumption Agreement between RFC Capital Corporation and USC
            Telecom, Inc. (filed previously)
    10.5    Common Stock Purchase Warrant for RFC Capital Corporation (filed
            previously)
    10.6    Subscription Agreement with LaMonda Management Family Limited
            Partnership (filed previously)
    27.1    Financial Data Schedule (filed previously)
</TABLE>

  b. Reports on Form 8-K

   The Company filed a Current Report on Form 8-K on February 5, 1999,
   reporting under item -.

                                       34
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                          EQUALNET COMMUNICATIONS CORP.

   Date:                             /s/Mitchell H. Bodian
        April 24, 2000
     ---------------------           ------------------------------------------
                                      Mitchell H. Bodian, President and Chief
                                                 Executive Officer
                                     (duly authorized officer and principal
                                     financial officer)

                                       35