<PAGE>

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

                                   FORM 10-Q

 [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 Identi-
 Incorporation or Organization)                    fication 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 20,972,111 shares of the Registrant's $.01 par value common stock
outstanding as of May 24, 1999.
<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)
<S>                                                            <C>                 <C>
ASSETS
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)
<S>                                                                    <C>                         <C>
Liabilities and shareholders' equity
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                                 24,578,748                   20,819,878
       to Compromise - Post Petition
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                                            -                    2,697,974
       to Compromise - Pre Petition
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
     Series A Convertible Preferred Stock (non-voting)
       aggregate liquidation preference of $2.1
       million; Issued and outstanding shares -
       2,000 at June 30, 1998 and March 31, 1999                              2,000,000                    2,000,000
     Series B Senior Convertible Preferred Stock (voting)
       aggregate liquidation preference of $3.0
       million; Issued and outstanding shares-
       3,000 at June 30, 1998 and March 31, 1999                              3,000,000                    3,000,000
</TABLE>

                                       3
<PAGE>

                         EQUALNET COMMUNICATIONS CORP.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             June 30,                    March 31,
                                                                               1998                        1999
                                                                        -----------------           ------------------
                                                                             (Note)                   (Unaudited)
<S>                                                                     <C>                         <C>
   Series C Convertible Preferred Stock (voting)
     aggregate liquidation preference of $5.8
     million; Issued and outstanding shares -
     0 at June 30, 1998 and 212,135 at
     March 31, 1999                                                                   -                   5,826,446
   Series D Convertible Preferred Stock (voting),
     $.01 par value,
     aggregate liquidation preference of $3.9
     million; Issued and outstanding shares -
     0 at June 30, 1998 and 3,850 at
     March 31, 1999                                                                   -                   2,002,235
   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)                (59,873,344)
                                                                        ---------------             ---------------
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.

                                       4
<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                         (11,557)            (376,086)                    (11,557)             (513,669)
                                           --------------        -------------              --------------        --------------
Net loss available to Common
    shareholders                           $   (4,053,688)        $ (5,494,058)             $   (8,479,067)       $  (19,720,013)
                                           ==============        =============              ==============        ==============
Net loss per share - basic and diluted     $        (0.43)        $      (0.29)             $        (1.15)       $        (1.02)
                                           ==============        =============              ==============        ==============
Weighted average number of shares               9,486,275           19,027,111                   7,365,587            19,309,972
                                           ==============        =============              ==============        ==============
</TABLE>

                                       5
<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>

                                       6
<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

                                       7
<PAGE>

               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 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>

                                       8
<PAGE>

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)
     <S>                                                                <C>
     Assets
     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
                                                                          ===========


     Liabilities and shareholders' deficit
     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            13,193,500
            Post Petition
     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                      2,697,974
              Compromise Pre Petition
     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>

                                       9
<PAGE>

                             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.

                                       10
<PAGE>

                             EQUALNET CORPORATION
                            STATEMENT OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                               Nine Months
                                                                                   Ended
                                                                              March 31, 1999
                                                                          ----------------------
               <S>                                                        <C>
               Operating activities                                         $        (9,237,456)
               Net loss
               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.

                                       11
<PAGE>

               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 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>
<CAPTION>
                    <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

                                       12
<PAGE>

               (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 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.

                                                           Nine Months Ended
                                                              March 31,
                                                          1998          1999
                                                         (in thousands, except
                                                           per share amounts)

               Revenues                           $    52,092      $    20,206
               Net income (loss)                  $   (12,032)     $   (17,889)
               Net loss per share                 $     (1.63)     $     (0.93)

               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.

                                       13
<PAGE>

               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>
<CAPTION>
<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.

               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.

                                       14
<PAGE>

               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 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

                                       15
<PAGE>

               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:

                              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.

                                       16
<PAGE>

               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 -       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.

                                       17
<PAGE>

               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 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


                                       18
<PAGE>

               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 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.

                                       19
<PAGE>

               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.

               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

                                       20
<PAGE>

               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 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

                                       21
<PAGE>

               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 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.

                                       22
<PAGE>

               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.

               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

                                       23
<PAGE>

               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 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.

                                       24
<PAGE>

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.

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, 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:

                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                          Three Months Ended                   Nine Months 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 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

                                       26
<PAGE>

     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.

     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.

                                       27
<PAGE>

     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.

     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.


                                       28
<PAGE>

     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.

                                       29
<PAGE>

     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.

     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

                                       30
<PAGE>

     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.

     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.

                                       31
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

     No significant change.

                                       32
<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


                                       33
<PAGE>

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.

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

                                       34
<PAGE>

     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
     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

                                       35
<PAGE>

     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.

     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.

                                       36
<PAGE>

     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.

Item 6.  Exhibits and Reports on Form 8-K

     a.  Exhibits

         Exhibit
          No.           Description
         -------        -----------
         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
         10.2      Subscription Agreement with Kevin Pirolo
         10.3      Purchase Agreement between RFC Capital Corporation and USC
                   Telecom, Inc.
         10.4      Assumption Agreement between RFC Capital Corporation and USC
                   Telecom, Inc.
         10.5      Common Stock Purchase Warrant for RFC Capital Corporation
         10.6      Subscription Agreement with LaMonda Management Family Limited
                   Partnership
         27.1      Financial Data Schedule

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

                                       37
<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: May 24, 1999

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

                                       38