<PAGE>

                          SECURITIES AND EXCHANGE COMMISSION

                               WASHINGTON, D.C.  20549
                                     ___________

                                      FORM 10-K

          FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934

/ /  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934 FOR THE FISCAL YEAR ENDED ______________________.
                                          OR
/X/  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JULY 1, 1997 TO 
     DECEMBER 31, 1997.

                            COMMISSION FILE NUMBER 0-22293

                           IWL Communications, Incorporated

                (Exact name of registrant as specified in its charter)


                          TEXAS                              76-0043882
             (State or other jurisdiction of              (I.R.S.  Employer
            incorporation or organization)               Identification no.)

    12000 AEROSPACE AVENUE, SUITE 200, HOUSTON, TEXAS          77034
       (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code: (281) 482-0289

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:    COMMON STOCK,
          (Title of Class)                                     $0.01 PAR VALUE


     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes /X/  No / /

     Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   /X/

     The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of June 15,
1998, computed by reference to the closing sales price of the registrant's
Common Stock on the Nasdaq National Market on such date, was approximately
$29,820,512.

     The number of shares of the registrant's Common Stock outstanding as of
June 15, 1998 was 3,986,718.

<PAGE>

                                  TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                           NO.
                                                                           ---

                                      PART I
 <S>       <C>                                                            <C>
 Item  1.  Business  . . . . . . . . . . . . . . . . . . . . . . . . .        1
 Item  2.  Properties  . . . . . . . . . . . . . . . . . . . . . . . .       17
 Item  3.  Legal Proceedings . . . . . . . . . . . . . . . . . . . . .       18
 Item  4.  Submission of Matters to a Vote of Security Holders . . . .       18

                                     PART II
 Item  5.  Market for the Registrant's Common Equity and Related
           Stockholder Matters . . . . . . . . . . . . . . . . . . . .       18
 Item  6.  Selected Consolidated Financial Data  . . . . . . . . . . .       20
 Item  7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations . . . . . . . . . . . . . . . . .       21
 Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.       29
 Item  8.  Financial Statements  . . . . . . . . . . . . . . . . . . .       29
 Item  9.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosure  . . . . . . . . . . . . . . . . .       29

                                     PART III
 Item 10.  Directors and Executive Officers of the Registrant  . . . .       29
 Item 11.  Executive Compensation  . . . . . . . . . . . . . . . . . .       33
 Item 12.  Security Ownership of Certain Beneficial Owners and
           Management  . . . . . . . . . . . . . . . . . . . . . . . .       36
 Item 13.  Certain Relationships and Related Transactions  . . . . . .       38

 Signatures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       41
 Index to Consolidated Financial Statements  . . . . . . . . . . . . .      F-1
</TABLE>




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                                        PART I

ITEM 1.  BUSINESS

BUSINESS OVERVIEW

     IWL Communications, Incorporated ("IWL" or the "Company") commenced doing
business as IWL Communications in 1981 and was incorporated as a Texas
corporation in 1983.  IWL delivers voice, data and broadband services to its
customers by utilizing a broad range of analog and digital technologies,
including satellite, microwave radio, trunked/conventional two-way radio and
fiber optic cable.  IWL's core business to date has focused on the provision
of communications solutions for customers in the oil and gas industry, such as
Amoco Eurasia Petroleum Company, Chevron Information Technology Company, Polar
Lights Company (a joint venture of Conoco Oil Company), Exxon Computing
Services Company and Shell Offshore Services Company.  IWL provides extensive
local and long distance voice and data services to oil and gas customers in
the Gulf of Mexico and elsewhere in the world.  Through its recent acquisition
of ICEL, IWL has expanded its customer base to include customers in the North
Sea.

     IWL provides its telecommunications services through a satellite network
consisting of leases for access to multiple satellites, a microwave network,
two-way radio licenses and carrier agreements for long distance service combined
with a switch-based network. The IWL satellite network includes VSAT networks,
including two Ku band hub earth stations in Houston.  IWL's microwave network
includes a system that has been built by IWL onshore in the Texas and Louisiana
Gulf Coast region and extends offshore into the Gulf of Mexico.  Additionally,
IWL has access to capacity from other microwave systems owned by carriers
throughout the Louisiana Gulf Coast region and offshore in the Gulf of Mexico.
In order to provide its wireless mobile services, IWL owns various radio systems
that provide two-way voice communications and has obtained approximately 35 FCC
licenses with approximately 300 frequency pairs.

     In 1997, IWL installed a tandem switch and a value-added services
platform in Houston, Texas.  This switch and platform enabled IWL to lower the
cost of providing local and long distance voice services.  IWL has received
approval to operate as a competitive local exchange carrier ("CLEC") in Texas
and Louisiana and is able to provide unbundled network elements of the local
services of Southwestern Bell, GTE and BellSouth. In 1998, IWL installed an
end-office switch in Houston to provide LEC services through (i) reselling the
services of incumbent local exchange carriers ("ILECs") and through (ii)
providing such services through the use of IWL's switch and leasing unbundled
network elements from ILECs.

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     IWL has developed a high level of complex project management expertise
through planning, designing and implementing total communications solutions for
multi-site customers with operations located in remote areas.

RECENT DEVELOPMENTS

     On February 16, 1998, the Company entered into an Agreement and Plan of 
Merger and Plan of Exchange (as amended, the "Merger Agreement") among the 
Company, CapRock Communications Corp., a Texas corporation now known as 
CapRock Telecommunications Corp. ("Telecommunications"), IWL Holdings Corp., 
a Texas corporation now known as CapRock Communications Corp. ("Holdings"), 
IWL Acquisition Corp., a Texas corporation ("I-Sub"), CapRock Acquisition 
Corp., a Texas corporation ("C-Sub"), and CapRock Fiber Network, Ltd., a 
Texas limited partnership (the "Partnership").  The Merger Agreement 
provides, among other things, for (a) the merger of I-Sub with and into IWL 
(the "IWL Merger"), with IWL surviving the IWL Merger as a wholly owned 
subsidiary of Holdings, (b) the exchange (the "Interest Exchange" and, 
together with the Mergers (as defined below), the "Transaction") of all of 
the general and limited partnership interests (collectively, the "Partnership 
Interests") in the Partnership for shares of the common stock, par value $.01 
per share, of Holdings, and (c) the merger of C-Sub with and into 
Telecommunications (the "CapRock Merger" and together with the IWL Merger, 
the "Mergers"), with Telecommunications surviving the CapRock Merger as a 
wholly owned subsidiary of Holdings. Upon the effectiveness of the Mergers, 
the holders of IWL Common Stock and the holders of CapRock Common Stock will 
become shareholders of Holdings. The Mergers are expected to become effective 
after the receipt of the requisite regulatory and shareholder approvals.  
Upon consummation of the Interest Exchange, and after giving effect to the 
indirect contribution by Holdings to Telecommunications of the general 
partner interest received by Holdings in the Interest Exchange, 
Telecommunications will become a substituted general partner of the 
Partnership, Holdings will become a substituted limited partner of the 
Partnership and the holders of Partnership Interests will become shareholders 
of Holdings. The original Merger Agreement (as amended in April 30, 1998) 
provided that each outstanding share of IWL common stock would be converted 
into one share of Holdings common stock, each outstanding share of 
Telecommunications common stock would be converted into .75295288 shares of 
Holdings common stock and, upon consummation of the Interest Exchange, each 
one percent (1%) general or limited partnership interest in the Partnership 
that was validly tendered to and accepted by Holdings would be exchanged for 
26,619.8 shares of Holdings common stock. On June 20, 1998, the original 
Merger Agreement was amended for the second time. The First Amendment to the 
Merger Agreement was made on April 30, 1998 to make minor adjustments to the 
number of shares of Holdings common stock into which each outstanding share 
of Telecommunications common stock would be converted in order to address 
calculation errors in the number of options and shares of Telecommunications 
common stock that were outstanding. Such amendment did not change any of the 
other exchange ratios or change the total number of shares that had been 
approved for issuance by Holdings. The Second Amendment provided that each 
outstanding share of IWL common stock would be converted into one share of 
Holdings common stock, each outstanding share of Telecommunications common 
stock would be converted into 1.789030878 shares of common stock of Holdings 
and each one percent (1%) general or limited partnership interest in the 
Partnership that was validly tendered to and accepted by Holdings would be 
exchanged for 63,194.54 shares of Holdings common stock. The amendment is 
expected to result in an additional 14,639,148 shares of Holdings common 
stock being issued, for a total of 29,738,607 (assuming all of the 
partnership interests are validly tendered to and accepted by Holdings in the 
exchange offer). The Second Amendment and the revised exchange ratios were 
prompted by assertions by Telecommunications and the Partnership that the 
reduction in IWL's revenues from its plan and the delays in contracts, among 
other factors, constituted a Material Adverse Effect (as defined in the 
Merger Agreement) with respect to IWL which could reasonably be expected to 
have have a Material Adverse Effect on Telecommunications and the 
Partnership. In lieu of terminating the Merger Agreement or disputing whether 
such a right to terminate existed, the parties agreed to modify the exchange 
ratios.  In modifying the exchange ratios, the parties considered, among 
other factors, (i) contract delays causing lower IWL project revenues and 
operating income than those set forth in the IWL business plan furnished to 
Telecommunications and the Partnership in connection with the original 
negotiations of the Merger Agreement, (ii) the continued improvement in 
Telecommunications' and the Partnership's operations, and (iii) the 
significant expansion in Telecommunications' and the Partnership's business 
plans from the plans furnished to IWL in connection with the original 
negotiations of the Merger Agreement.  The second amendment also removed 
various conditions to closing that had been met or which had been determined 
to not be material.

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<PAGE>

     On January 22, 1998, to expand its presence in the North Sea, IWL
purchased all of the issued share capital of Integrated Communications and
Engineering Limited, a  limited company incorporated in Scotland ("ICEL") from
its shareholders and paid the sum of L230,540.06 or U.S.$377,854 and
issued to such shareholders 207,266 shares of IWL common stock.

SERVICE OFFERINGS

     IWL's service offerings consist of telecom and carrier services, land
mobile services and product resales.

TELECOM AND CARRIER SERVICES

     IWL currently offers its customers a single source for voice, data and
Internet communications services.  To provide its customers with total,
integrated communications services, IWL performs many functions, including
system specification, project engineering, integration, equipment procurement,
test, installation and maintenance and network management.

     IWL's expertise in planning, designing and implementing communications
solutions for customers with operations in remote regions or underdeveloped
areas allows IWL, from time to time, to provide communications services for
special projects with critical-timing requirements or other extreme and unusual
challenges.  These special projects offer IWL opportunities to realize gross
margins that are higher than those typically earned by IWL on other projects.

     IWL's telecom services also provide the connection between other carriers'
network and a customer's location.  Although this connection can span large
distances, it is commonly referred to as last-mile connectivity.  IWL's Offshore
Dedicated Digital Services Program ("ODDS"), which delivers connectivity to
offshore locations, exemplifies IWL's last-mile connectivity services in the
Gulf of Mexico.  ODDS is a fully digital communications system that is flexible
enough to be reconfigured to a new location after the customer's drilling rig
changes locations.  In order to provide last-mile connectivity, IWL utilizes a
variety of equipment and services.  Satellite services are used where access to
the public switched telephone network is not available on other transmission
media and other means of connectivity, such as microwave or fiber optic cable,
are cost prohibitive based on the volume of the data being transmitted.  The
public switched network is a direct distance dialing telephone network available
for public use, which consists of an integrated system of transmission and
switching facilities, signaling processors and associated operations support
systems, that is


                                          3
<PAGE>

shared by customers.  IWL owns and operates two satellite earth stations in
Friendswood, Texas and has space segment agreements with Orion and GTE Spacenet
to use their respective satellites.  IWL's earth stations receive signals from
and transmit signals to orbital satellites, which have footprints covering parts
of the U.S. and Europe.

     The IWL-owned digital microwave network in the Gulf of Mexico consists of
five microwave repeaters that cover over 40 drilling sites in a 100 mile radius.
IWL has installed microwave infrastructure where capacity is required for data
transmissions and there is no existing infrastructure or, if there is such
infrastructure, it cannot be used cost effectively.  In areas not served by
IWL's microwave network, IWL leases the right to install microwave repeaters on
other companies' digital microwave networks.  In addition, for onshore remote
communications, radio telephone is used between the microwave backbone (such as
microwave radios) and destinations within the line of sight of such backbone.

     In addition to providing its customers with project-specific communications
solutions, in recent years IWL has expanded the provision of its long distance
carrier services, including international services, through its IWL Connect-TM-
division.   In 1997, IWL installed a tandem switch and a value-added services
platform in Houston, Texas, thus enabling IWL to operate as a switch-based
reseller, rather than a switchless reseller.  IWL's domestic and international
switched access services include a full range of services with enhanced
features, including: direct dial switched domestic service, direct dial switched
international service, dedicated access services, 800/888 switched and dedicated
service, calling card service, debit card service, voice mail, follow-me number
portability and 1+ dialing.

INTERNET SERVICE PROVIDER

     IWL provides Internet access to retail, commercial and other ISPs in the
Houston area and in Moscow.  The services include a mail server, news server,
and hosting of customer web pages.  IWL is linked to the Internet backbone via a
direct connection with a global service provider in Houston on dedicated lines.

LAND MOBILE SERVICES

     IWL provides two-way radio sales and maintenance services to oil and gas
companies, governmental agencies and petrochemical plants located on the Texas
and Louisiana Gulf Coast through its land mobile radio division ("LMR
Division").  IWL resells a broad line of two-way and trunking radios, paging
products and wireless systems for both voice and data applications.  IWL also
engineers and designs new systems and modifies existing systems to meet its
customers' specifications.  In addition, IWL provides complete turnkey design
and implementation of conventional and trunking radio networks, integrates new
equipment into existing networks, and engineers and designs new systems or
updates existing systems to meet new FCC regulations as they are adopted.


                                          4
<PAGE>

     IWL maintains a fleet of rental radio equipment for short- or long-term
rentals. Customers rent this equipment from IWL to support temporary
communication needs for plant maintenance, shutdowns, disaster recovery,
sporting events and conventions.  IWL's inventory of radio equipment includes
intrinsically safe ("IS") portables, which are important to oil and gas
companies because they require the use of IS-rated radio products in the
hazardous or explosive atmospheres typically found in petrochemical plants.  IWL
employs factory-trained licensed technicians on call 24-hours a day, seven days
a week.  These personnel are trained in safety procedures for on-site service in
petrochemical plants.

PRODUCT RESALES

     Product resales currently consist of sales of telecom products to Shell.
Shell had a purchasing contract with IWL for Alcatel radios and other related
equipment and hardware. Sales to Shell under the contract were approximately
$10.6 million and $7.6 million for the years ended June 30, 1996 and June 30,
1997, respectively.  The Shell project was substantially completed in May 1997
and, therefore, is not expected to contribute in a material manner to IWL's
total sales in future periods.  It is possible that IWL may have other large
projects consisting primarily of product resales that will be included in
product resales in the future.  Sales of hardware made under the Alcatel
distributorship agreement may result in commissions being paid to IWL.

SALES AND MARKETING

     Since its inception, IWL has utilized a direct sales approach in marketing
its services to its customers.  IWL currently has a sales force of approximately
23 sales representatives, with sales offices located in Houston, Texas, New
Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland.  IWL's direct sales
approach enables it to provide a high level of customer service.  To complement
IWL's direct sales efforts, IWL often participates in various domestic and
international industry trade shows and conducts advertising campaigns in trade
publications.

     IWL targets domestic and international customers that require turnkey
system solutions and other telecommunications services.  IWL's sales force sells
frequency bandwidth and call completion and system solutions, which allows IWL
to further develop its own telecommunications infrastructure.  Current and
prospective customers are assigned to account managers, who are principally
responsible for providing high levels of contact and customer service.  In
addition, IWL utilizes business development managers to focus on specific
customer requirements and opportunities.  The business development manager
typically is involved in major projects and the installation of infrastructure
domestically or internationally.

STRATEGIC RELATIONSHIPS AND ALLIANCES

     Recognizing the importance of strategic alliances in the telecom services
industry, IWL has negotiated several agreements with various manufacturers to
resell their products or to combine their facilities and relationships with
IWL's expertise.  Certain of these key alliances are described below:


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     ALCATEL.  IWL has entered into an agreement with Alcatel under which IWL
serves as the exclusive representative for the sale of Alcatel's fiber and radio
system products to companies in the U.S. oil and gas industry.  In return for
Alcatel's agreement not to accept orders directly from such companies, IWL has
agreed to actively pursue purchase orders for Alcatel's products and to propose
only Alcatel's products to its prospective customers in the U.S. oil and gas
industry, except where the Alcatel products do not meet the technical
requirements of the prospective customers.  Although IWL is an exclusive sales
representative for such products, Alcatel has other authorized distributors that
are not part of the Alcatel agreement, and those distributors may or may not
provide quotations and accept orders from oil and gas industry companies.
Furthermore, in international transactions, other divisions of Alcatel or its
affiliates and other resellers of Alcatel products outside of the U.S. have been
in the past, and in the future may be, competitive with IWL using Alcatel or
non-Alcatel products.  The Alcatel agreement expires on December 31, 1999.

     NERA.  On January 22, 1998, IWL acquired from NERA, ASA, a Norwegian 
corporation ("NERA"), all of the issued and outstanding shares of stock of 
Integrated Communications and Engineering Limited, a corporation incorporated 
in Scotland ("ICEL") from its three foreign shareholders and paid the sum of 
L230,540.06 or U.S.$377,854 and issued to such shareholders 207,266 shares of 
IWL common stock.  ICEL provides advanced communication solutions to oil and 
gas, as well as fishing industry customers in the North Sea.  As a former 
subsidiary of NERA it uses and is recognized as a distributor and service 
provider for NERA INMARSAT products.  The NERA products are used offshore to 
provide data and voice communications and to comply with Global Marine Distress 
Safety Systems requirements.  Simultaneously with the acquisition, ICEL entered 
into a ten year distribution agreement to be the exclusive distributor of NERA 
INMARSAT products to certain areas of the North Sea and Scotland for oil and 
gas, as well as fishing industry customers and a nonexclusive distributor for 
most of England and Wales.  ICEL also supplies VSAT services in the North Sea.

     ITAR-TASS.  IWL has established a strategic relationship with ITAR-TASS,
the Russian News Agency, in order to provide information and communications
services using INTELSAT satellite capacity and other facilities.  Under its
agreement with ITAR-TASS, IWL has agreed to provide marketing services, develop
proposals for customers, engineer, purchase, ship, install and test equipment,
and provide monitoring and maintenance services on systems owned or leased by
customers.  In return, ITAR-TASS has agreed to provide marketing and sales
support and to implement, monitor and maintain a communications backbone network
in the Russian Federation (including purchasing or leasing from IWL equipment
associated with earth stations, cable systems and the network).  Through their
collaborative efforts, IWL and ITAR-TASS provide services to major Western oil
companies with operations in Russia such as Amoco, Conoco/Polar Lights and
Exxon.

     The ITAR TASS agreement provides for a competitive rate structure for space
segment, earth station, and local connections within Russia.  This agreement has
been in place since 1994 and has been recently re-negotiated and extended until
November 1999.  Either party may end the agreement by giving 60 days written
notice if, in the opinion of that party, business or political conditions call
for an earlier termination.  No early termination will affect any existing
agreements that IWL has entered into, and notwithstanding such termination,
ITAR-TASS will be required to provide


                                          6
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marketing support and other services with respect to existing agreements for the
remainder of their respective terms.

     ENTERGY.  In July 1996, IWL entered into a Memorandum of Understanding
("MOU") with Interstate FiberNet operating on its behalf and on behalf of
Entergy Technology Corporation for the purpose of defining a contractual
relationship between the parties for the interconnection, co-location, and
leasing capacity of each of the parties' fiber optic cable networks in
Louisiana.  The MOU reflects the parties' mutual intent to provide each other
with transport capacity on a leased basis at prevailing carriers' rates.  The
MOU also provides that the parties will mutually agree to a formal set of
policies to be provided to customers and that they will move forward
expeditiously to conclude a final agreement embodying the intent set forth in
the MOU.  The MOU provides that such final agreement will be for an initial term
of five years, with two additional five-year option terms. There can be no
assurance that the parties will enter into a definitive agreement.

CUSTOMER SERVICE

     IWL provides customer support for products and services through its
full-service support teams in Friendswood, Texas, Lafayette and New Orleans,
Louisiana, Moscow, Russia and Aberdeen Scotland. Support services include:
(i) on-site maintenance, with over 50 technical specialists on call for
immediate dispatch when customers' communications systems require maintenance;
(ii) a Network Operations Center where IWL professionals remotely monitor
customers' communications systems throughout the Gulf of Mexico and around the
world seven days a week, 24 hours a day; (iii) customer support through its LMR
Division, (iv) training programs designed to maximize the customers'
communications investment, classroom training at customers' sites and multimedia
video training tools; and (v) research and development for unique applications
where IWL's engineers can custom design or modify hardware to improve its
performance within a particular system.

COMPETITION

     OVERVIEW.  The communications services industry is highly competitive,
rapidly evolving and subject to constant technological change.  In particular,
there are numerous companies offering long distance and local services, and the
Company expects competition to increase in the future.  IWL believes that
existing competitors are likely to continue to expand their service offerings to
appeal to its existing or potential customers.  Moreover, IWL expects that new
competitors are likely to enter the communications market, and some of these new
competitors may market communications services similar to IWL's services.  Some
of these new competitors may have financial, personnel and other resources,
including brand name recognition substantially greater than that of IWL.

     In addition, the regulatory environment in which IWL operates is undergoing
significant change.  As this regulatory environment evolves, changes may occur
which could create greater or unique competitive advantages for all or some of
IWL's current or potential competitors, or could make it easier for additional
parties to provide services.  Other providers currently offer one or more of
each of the services offered by IWL and, many communications companies operate
generally in


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the same 1+ and local submarkets as IWL.  As a service provider in the long
distance communications industry, IWL competes with several well established
providers, as well as many other long distance providers with less significant
market shares.

     DOMESTIC AND INTERNATIONAL LONG DISTANCE.  IWL provides long distance
services using its own facilities and by reselling the facilities of other
carriers in the United States and between the United States and other countries.
The long distance communications industry is intensely competitive and
significantly influenced by the marketing and pricing decisions of the larger
industry participants such as AT&T, MCI, Sprint and WorldCom. Moreover, the
industry is undergoing significant consolidation that has created and will
continue to create numerous other entities with substantial resources to compete
for long distance business, such as Frontier Communications Service, Inc and
Qwest. In addition, as a result of the 1996 Telecommunications Act, Regional
Bell Operating Companies ("RBOCs") and GTE Operating Companies ("GTOCs") are
able or will be able in the future to enter the long distance market.  These
larger competitors have significantly greater name recognition, financial,
technical, network and marketing resources.  They may also offer a broader
portfolio of services and have long standing relationships with customers
targeted by IWL.  Many of IWL's competitors enjoy economies of scale that can
result in a lower cost structure for transmission and related terminating costs,
which could cause significant pricing pressures on IWL.

     IWL competes in the long distance market  primarily on the basis of price,
customer service and the ability to provide a variety of communications products
and services. Customers frequently change long distance providers in response
to the offering of lower rates or promotional incentives by competitors. Prices
for domestic and international long distance calls have declined in recent years
and are likely to continue to decrease.  Competition in all of the relevant
markets is expected to increase which could adversely affect net revenue per
minute and gross margins as a percentage of net revenue.   There can be no
assurance that IWL will be able to compete effectively in the domestic or
international long distance markets.

     LOCAL EXCHANGE SERVICE.  IWL seeks to expand significantly its operations
to provide local exchange carriers ("LECs") typically provided by ILECs. The
local service market has only recently been opened to new service providers
following enactment of the 1996 Telecommunications Act.  The services intended
to be offered by IWL will compete with those offered by ILECs, such as
BellSouth, Southwestern Bell and the GTOCs, as well as very large interexchange
carriers ("IXCs"), such as AT&T, MCI, WorldCom and Sprint.  The ILECs currently
dominate the provision of local services in their respective markets.  They and
major IXCs have greater name recognition, financial, technical, network,
marketing and personnel resources, as well as long-standing relationships with
regulatory authorities at the federal and state levels than the new entrants.
Moreover, there can be no assurance that certain of IWL's competitors will not
be better situated to negotiate contracts with suppliers of telecommunications
services which are more favorable than contracts negotiated by IWL. IWL also may
face competition from other current and potential market entrants, including
other competitive local exchange carriers ("CLECs"), cable companies, electric
utilities, LECs operating outside their current local service areas, other long
distance carriers, wireless telephone


                                          8
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system owners, microwave owners, satellite carriers, private networks built by
large companies, and start-up telecommunications ventures.  There can be no
assurance that IWL will be able to compete effectively in the local service
markets.

     TECHNOLOGICAL ADVANCES.  In the future, IWL may be subject to intense
competition due to the development of new technologies resulting in an increased
supply of domestic and international transmission capacity.  The
telecommunications industry is experiencing a period of rapid and significant
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite transmission capacity for services similar to
those to be provided by IWL. For instance, recent advances in wave division
multiplexing technology permit substantial increases in transmission capacity of
both new and older fiber.  The introduction of new products or emergence of new
technologies may cause capacity to greatly exceed the demand, reducing the
pricing of certain services to be provided by IWL. There can be no assurance
that IWL's services will satisfy future customer needs, that IWL's technologies
will not become obsolete in light of future technological developments, or that
IWL will not have to make significant additional capital investments to upgrade
or replace its system and equipment.  The effect on IWL's operations of
technological changes cannot be predicted and if IWL is unable to keep pace with
advances, could have a material adverse effect on the financial condition,
results of operations and cash flow of IWL.

     OFFSHORE, REMOTE, DIFFICULT-ACCESS AND TELECOMMUNICATIONS SERVICES.
Currently, the Company provides telecommunications services to oil and gas
customers in the Gulf of Mexico, the North Sea and other oil and gas producing
regions around the world.  In the Gulf of Mexico, the Company competes directly
with Autocomm Communications Engineering Corp., Sola Communications, Inc.,
Datacom, Shell, as well as cellular carriers such as Petrocom and Coastel, and
with Data Marine Systems and EAE Ltd. in the North Sea.  Shell currently
provides competing services through its microwave network in the Gulf of Mexico
and has announced plans to become a full service telecommunications provider to
the oil and gas industry in the region. The Company provides private-line
telecommunications services in Russia.  In Russia, the major competitors for
networks are SOVAMTEL and AMRUSCOM.  Although the Company believes that it
competes successfully in each of its markets today, there can be no assurance
that the Company will be able to continue to compete successfully in the future.
The Company believes that most of  its larger competitors have generally not
made it a priority to provide remote, difficult-access telecommunications
services.  Should one or more of the competitors decide to focus on such
services, it could have a material adverse effect on the financial condition,
results of operations and cash flow of the Company.

GOVERNMENT REGULATION

     IWL provides domestic and international services that are subject to
varying degrees of U.S. federal, state and local regulation.  In the United
States, the provision of telecommunications services is subject to the 1934
Communications Act, the 1996 Telecommunications Act and the regulations
thereunder promulgated by the FCC, as well as the applicable laws and
regulations of the various states and state regulatory commissions.  The FCC
exercises jurisdiction under Title II of the 1934


                                          9
<PAGE>

Communications Act over all facilities of, and services offered by,
telecommunications common carriers to the extent such services involve
jurisdictionally interstate communications, including international
communications, while state regulatory authorities retain jurisdiction over
jurisdictionally intrastate communications.  Under Title III of the 1934
Communications Act, the FCC is also charged with regulating the licensing and
use of the radio frequency spectrum.  Local governments sometimes impose
franchise or licensing requirements on local service competitors.  Services
provided in other countries are subject to the telecommunications laws and
regulations of those countries.

     IWL is subject to the authority of the FCC and the state regulatory
agencies to enforce applicable regulatory requirements.  The FCC and the state
regulatory agencies may address regulatory non-compliance with a variety of
enforcement mechanisms, including monetary forfeitures, injunctive relief,
license conditions, and/or license revocation.

     The regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state.  Moreover,
as deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to carriers.  There can be
no assurance that future regulatory, judicial or legislative activities will not
have a material adverse effect on the financial condition, results of operations
or cash flow of IWL or that domestic or international regulators or third
parties will not raise material issues with regard to compliance or
non-compliance with applicable regulations.

     U.S. FEDERAL REGULATION

     LOCAL SERVICE REGULATION UNDER THE 1996 TELECOMMUNICATIONS ACT.  The 1934
Communications Act was substantially amended by the 1996 Telecommunications Act,
which provides for comprehensive reform of the United States' telecommunications
laws.  The 1996 Telecommunications Act may have potentially significant effects
on the financial condition, results of operations or cash flow of IWL. The 1996
Telecommunications Act is designed to enhance competition in, among other
markets, the local telecommunications marketplace by: (i) removing state and
local entry barriers, (ii) requiring ILECs to provide interconnection to their
facilities, (iii) facilitating the end users' choice to switch service providers
from ILECs to CLECs, and (iv) requiring access to rights-of-way.  The
legislation also is designed to increase local competition by newer competitors
such as long distance carriers, cable companies and public utility companies.
Under the 1996 Telecommunications Act, RBOCs have the opportunity to provide
long distance services if certain conditions are met and are no longer
prohibited from providing certain cable TV services.  Entry of such companies
into the domestic and international long distance business and the emergence of
other new local competitors could result in substantial competition to IWL and
may have a material adverse effect on the financial condition, results of
operations or cash flow of IWL.

     The 1996 Telecommunications Act specifically requires all
telecommunications carriers (including ILECs and CLECs): (i) not to prohibit or
unduly restrict resale of their services; (ii) to


                                          10
<PAGE>

provide dialing parity and nondiscriminatory access to telephone numbers,
operator services, directory assistance and directory listings; (iii) to afford
access to poles, ducts, conduits and rights-of-way; and (iv) to establish
reciprocal compensation arrangements for the transport and termination of
telecommunications.  ILECs are specifically required to provide interconnection
on certain terms and conditions, as well as unbundled network elements, resold
local services at wholesale rates, etc.  An RBOC can enter the market for
"in-region" long distance services within the area where it provides local
exchange service upon FCC approval based on a showing that facilities-based
competition is present and that interconnection agreements meeting a 14-point
checklist are in place in the states to be entered.  RBOCs are permitted to
enter the out-of-region long distance market immediately upon enactment.  The
provision of inter-LATA services by RBOCs is expected to reduce the market share
of major IXCs, and consequently, may have an adverse effect on the ability of
CLECs to generate access revenues from the IXCs.

     On August 8, 1996, the FCC released the Interconnection Decision, which
established a framework of minimum, national rules enabling state commissions
and the FCC to begin implementing many of the local competition provisions of
the 1996 Telecommunications Act.  Among other things, the Interconnection
Decision prescribed certain minimum points of interconnection; adopted a minimum
list of unbundled network elements that ILECs must make available to
competitors; and adopted a methodology for states to use when setting wholesale
prices for retail services.  The U.S. Court of Appeals for the Eighth Circuit
issued a decision vacating certain portions of the Interconnection Decision and
the United States Supreme Court has agreed to consider the challenges to the
Eighth Circuit Court's decision filed by the FCC and interested carriers.
Whether the Eighth Circuit decisions will stand, or what further actions the FCC
may or may not take in response to these appellate decisions cannot be
predicted.  On December 31, 1997, the U.S. District Court for the Northern
District of Texas ruled that Sections 271 to 275 of the 1996 Telecommunications
Act, which establish the conditions the RBOCs must satisfy before they may
provide long distance telecommunications services, are unconstitutional (the
"SBC Decision").  The SBC Decision has been stayed and is being reviewed by
higher courts, possibly including the Supreme Court.  The outcome of that review
cannot be predicted.  If, however, the SBC Decision were upheld on appeal it
would likely have an unfavorable effect on the ability of new entrants to
compete because the SBC Decision removes the incentive for RBOCs to open their
local markets to competition.

     DOMESTIC INTERSTATE SERVICES.  Domestic interstate common carriers without
market power, such as IWL, are deemed nondominant and are subject to minimal FCC
regulation.  Interstate carriers offering services to the public must comply
with the federal statutory and regulatory requirements of common carriage under
the 1934 Communications Act.  Among other things, interstate common carriers
must offer service on a non-discriminatory basis at just and reasonable rates.
Nondominant carriers are exempt from the requirement to obtain specific prior
FCC approval to initiate or expand domestic interstate services, although they
are required to file a tariff at the FCC and remain subject to the FCC's
complaint jurisdiction.  The FCC has issued an order eliminating the requirement
that nondominant carriers maintain tariffs for their domestic interstate
services on file at the FCC.  The FCC order has been appealed to the U.S. Court
of Appeals for the District of


                                          11
<PAGE>

Columbia and stayed pending resolution of the appeal.  If the FCC order becomes
effective, nondominant interexchange carriers will need to find new means of
providing notice to customers of prices, terms and conditions on which they
offer their interstate services.

     INTERNATIONAL SERVICE REGULATION.  IWL is a nondominant international
carrier. International common carriers are required to obtain authority under
Section 214 of the 1934 Communications Act and to file a tariff containing the
rates, terms, and conditions applicable to their services prior to initiating
their international telecommunications services.  IWL holds global authority
from the FCC to provide resale of switched services, and IWL holds global
authority from the FCC to provide private line and facilities-based services.
IWL maintains an international tariff on file with the FCC.  International
telecommunications service providers are also required to file copies of their
contracts with other carriers, including foreign carrier agreements and a
variety of reports regarding its international revenue, traffic flows and use of
international facilities.  Carriers holding Section 214 authority are subject to
FCC rules requiring prior approval for transfers of control and assignments.

     Authorized international carriers are subject to the FCC's international
service regulations, including the International Settlements Policy ("ISPY")
that governs the payment settlements between U.S. common carriers and their
foreign correspondents for terminating traffic over each other's networks, the
accounting rates for such settlement and permissible deviations from these
policies.  The FCC recently enacted certain changes in its rules designed to
permit alternative arrangements outside of its ISPY as a means of encouraging
competition and lower, cost-based accounting rates.  As a part of implementing
the ISPY, the FCC maintains a private line resale policy that prohibits carriers
from reselling international private leased circuits to provide switched
services to or from a country unless the FCC has found that the country affords
U.S. carriers equivalent competitive opportunities ("ECO") to engage in similar
activities in that country.  The FCC recently revised this and other policies to
accommodate the 1997 WTO Agreement on basic services, a compact that addresses
market access, foreign investment, and procompetitive regulatory principles in
areas currently generating a vast majority of the world's telecommunications
revenue.  Currently, international simple resale is permitted to countries where
the country is a member of the WTO and the local telecommunications provider
generally charges U.S. carriers at or below an FCC-determined rate for
terminating the U.S. carriers' traffic.

     The FCC has adopted measures intended to overhaul the system of
international settlements by, among other things, establishing lower ceilings
("benchmarks") for the rates that U.S. carriers will pay foreign carriers for
the termination of international services.  Several parties have sought
reconsideration and/or filed appeals of the FCC's benchmark decision.  While
these rule changes may provide carriers with more flexibility to respond more
rapidly to changes in the global telecommunications market, they will also
likely increase the level of competition in the international telecommunications
marketplace.

     WIRELESS SERVICES.  IWL owns and maintains a variety of telecommunications
infrastructures and holds various FCC and international licenses to transmit
voice and data.  IWL currently holds numerous FCC licenses to provide land
mobile, microwave and satellite communications services.


                                          12
<PAGE>

IWL holds approximately 35 FCC licenses, with approximately 300 frequency pairs
for business radio service.  These licenses allow IWL to provide two-way
wireless radio services along the Texas and Louisiana Gulf Coast region and
offshore to oil and gas-related companies.  Each frequency pair allows two way
transmission and reception.  IWL holds approximately 20 microwave licenses
providing voice and date services along the Texas and Louisiana Gulf Coast
region and offshore to drilling, production and related companies.  IWL holds
and operates a network of fixed earth stations and Very Small VSAT networks,
which includes seven KU band and two C band fixed earth station authorizations.

     Facilities licensed by the FCC to provide microwave, satellite earth
station and land mobile service are subject, under Title III of the 1934
Communications Act, to a variety of detailed licensing, operational and
technical requirements specific to each service.  Among other requirements,
licensees seeking to continue operating beyond the expiration date of the
licenses must renew their authority.  FCC rules also impose prior approval
requirements on proposed transfers of control or license assignments.  The FCC
continues to refine its wireless rules for each service area to accommodate
advances in technology, developing markets and new service arrangements, to
implement certain provisions of the 1996 Telecommunications Act, and to
eliminate confusing, outdated, redundant or otherwise burdensome regulation.
Opportunities to obtain certain new common carrier wireless licenses are often
limited by the FCC's auction process under which wireless licenses are assigned
to the highest bidder.

     The 1934 Communications Act generally limits direct foreign ownership of
wireless licenses to 20%, but provides for indirect foreign ownership holdings
above 25% upon FCC approval.  In its order implementing the U.S. commitment
under the WTO Agreement, the FCC established new rules that effectively relax
the foreign ownership limits for common carrier wireless licenses.
Specifically, the new rules allow for up to 100% indirect ownership of wireless
licenses by foreign interests from countries that have participated in the WTO
Agreement.

     ACCESS CHARGES.  The cost of providing long distance and local exchange
services will be affected by changes in the "access charge" rates imposed by
ILECs on long-distance carriers for origination and termination of calls over
local facilities.  On May 8, 1997, the FCC released an order intended to reform
its system of interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act.
Access service is the use of local exchange facilities for the origination and
termination of interexchange communications.  The FCC's recent access reform
order adopts various changes to its policies governing interstate access service
pricing designed to move access charges, over time, to more economically
efficient levels and rate structures.  Among other things, the FCC modified rate
structures for certain non-traffic sensitive access rate elements, moving some
costs from a per-minute-of-use basis to flat-rate recovery, including one new
flat rate element; changed its structure for interstate transport services; and
affirmed that ISPYs may not be assessed interstate access charges.  In response
to claims that existing access charge levels are excessive, the FCC stated that
it would rely on market forces first to drive prices for interstate access to
levels that would be achieved through competition but that a "prescriptive"
approach, specifying the nature and timing


                                          13
<PAGE>

of changes to existing access rate levels, might be adopted in the absence of
competition.  The FCC has indicated that it will promulgate additional rules
sometime in 1998 that may grant price cap LECs increased pricing flexibility
upon demonstrations of increased competition (or potential competition) in
relevant markets.

     UNIVERSAL SERVICE CHARGES.  In 1997, the FCC released an order establishing
a significantly expanded federal universal service subsidy regime to be funded
by interstate carriers and certain other entities.  The FCC established new
universal service funds to support telecommunications and information services
provided to qualifying schools, libraries and rural health care providers, and
expanded the federal subsidies for local telephone services provided to
low-income consumers.  In accordance with the 1996 Telecommunications Act, the
FCC adopted plans to implement the recommendations of a Federal-State Joint
Board to preserve universal service, including a definition of services to be
supported, and defining carriers eligible for contributing to and receiving from
universal service subsidies.  The FCC plans to revise its rules for subsidizing
service provided to consumers in high cost areas, which may result in further
substantial increases in the overall cost of the subsidy program.  The FCC
issued a public notice in April 1998 seeking comment on proposals to revise the
methodology for determining universal service support.  The outcome of this
proceeding or its effect on the companies, cannot be predicted.  Several parties
have appealed the FCC's order and those appeals are pending before the Fifth
Circuit Court of Appeals.  The outcome of the further FCC proceedings or of the
pending judicial appeals or petitions for FCC reconsideration on its operations
cannot be predicted.

     INTERNET SERVICES.  Federal and state regulations generally treat ISPs as
"enhanced service providers" and exempt from federal and state common carrier
regulations.  Accordingly, Internet access services are exempt from tariffing,
certification and rate regulation.  In December 1996, the FCC initiated a Notice
of Inquiry regarding whether to impose regulations or surcharges upon providers
of Internet access and Information Services (the "Internet NOI").  The Internet
NOI sought public comment upon whether to impose or continue to forebear from
regulation of Internet and other packet-switched network service providers and
specifically identifies Internet telephony as a subject for FCC consideration.
Additionally, regulations governing disclosure of confidential communications,
copyright, excise tax, and other requirements may apply to the provision of
Internet access services.  The extent to which federal and state regulatory
authorities will impose additional regulation on Internet service providers
cannot be predicted.

     The Eighth Circuit is currently considering the issue of whether the FCC
has a reasonable basis for not requiring Internet service providers to pay
access charges.  In June 1997, every RBOC advised CLECs that they did not
consider calls in the same local calling area from their customers to CLEC
customers, who are ISPs, to be local calls under the interconnection agreements
between the RBOCs and the CLECs.  The RBOCs claimed, however, that the FCC
exempted these calls from access charges so that no compensation is owed to the
CLECs for transporting and terminating such calls.  As a result, the RBOCs
threatened to withhold, and in many cases did withhold, reciprocal compensation
for the transport and termination of such calls.  To date, numerous state
commissions have ruled on this issue in the context of state commission
arbitration proceedings or enforcement


                                          14
<PAGE>

proceedings.  In every state, to date, the state commission has determined that
reciprocal compensation is owed for such calls.  Several of these cases are
presently on appeal.  The outcome of these appeals, or of additional pending
cases, cannot be predicted.

     STATE REGULATION

     Most states require a certification or other authorization to offer
intrastate services.  These certifications generally require a showing that the
carrier has adequate financial, managerial and technical resources to offer the
proposed services in a manner consistent with the public interest.  In addition
to tariff requirements, most states require that common carriers charge just and
reasonable rates and not discriminate among similarly situated customers.  Some
states also require the filing of periodic reports, the payment of various
regulatory fees and surcharges, and compliance with service standards and
consumer protection rules.  States also often require prior approvals or
notifications for certain transfers of assets, customers, or ownership.  States
generally retain the right to sanction a carrier or to revoke certifications if
a carrier violates relevant laws and/or regulations. If any states agency were
to conclude that the companies are or were providing intrastate service without
the appropriate authority, the agency could initiate enforcement actions, which
could include the imposition of fines, the disgorging of revenues, or the
refusal to grant the regulatory authority necessary for the future provision of
intrastate telecommunications services.  IWL holds authority to provide
interexchange and competitive local exchange services in certain service areas
in Louisiana and Texas.  See "Regulatory Approvals."

     In addition, carriers are subject to the outcome of proceedings held by
state utility commissions to determine state regulatory policies with respect to
ILEC and CLEC competition, geographic build-out, mandatory de-tariffing and
other matters.  Certain states have adopted specific universal service funding
obligations.  Proceedings to adopt state universal service funding obligations
rules are also pending or contemplated in numerous other states.  State
commissions generally have authority to impose sanctions on carriers ranging
from fines to license revocation to address non-compliance with the states'
particular regulatory policies and requirements.

     State regulatory agencies also regulate access charges and other pricing
for telecommunications services within each state.  The RBOCs and other LECs
have been seeking reduction of state regulatory requirements, including greater
pricing flexibility.  If regulations are changed to allow variable pricing of
access charges based on volume, IWL could be placed at a competitive
disadvantage over larger long distance carriers.  IWL also could face increased
price competition from the RBOCs and other LECs for local and long distance
services, which competition may be increased by the removal of former
restrictions on long distance service offerings by the RBOCs as a result of the
1996 Telecommunications Act.  The impact of such rule changes on IWL cannot be
predicted.


                                          15
<PAGE>

     LOCAL GOVERNMENT AUTHORIZATIONS

     IWL may own telecommunications facilities that may be subject to certain
local government requirements.  In particular, facilities-companies must obtain
street use and construction permits and licenses and/or franchises to install
and expand fiber optic networks using municipal rights of way.  Termination of
the existing franchise or license agreements prior to their expiration dates or
failure to renew such agreements and any resulting requirement to remove
facilities could have material adverse effect.  In some municipalities carriers
must pay license or franchise fees based on a percentage of gross revenues or on
a per linear foot basis, as well as post performance bonds or letters of credit.
There can be no assurance that following expiration of existing franchises, fees
will remain at their current levels.

     FOREIGN REGULATION

     International telecommunications providers are subject to varying degrees
of regulation in each of the jurisdictions in which they provide services.
Local laws and regulations, and the interpretation of such laws and regulations,
differ significantly from country to country.

     To the extent that IWL provides, now or in the future, services in non-U.S.
countries, it will be subject to the laws and regulations of foreign countries.
The nature and extent of telecommunications regulation varies significantly from
country to country and may include requirements that reflect closed or limited
market access and/or requirements IWL may also be required to obtain initial
licensing, operational and rate requirements in the relevant countries.

EMPLOYEES

     As of March 31, 1998, the Company employed approximately 166 people,
including approximately 23 in sales and marketing, 100 in engineering and
technical services and 43 in management, administration and finance.  None of
the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement.  The Company believes that its relations with
its employees are good.

COMPANY LICENSES AND CERTIFICATIONS

     IWL has owned and maintained a variety of telecommunications 
infrastructures and holds many FCC and international licenses to transmit voice 
and data.  FCC radio licenses issued to IWL allow it to provide land mobile, 
microwave and satellite communications services.  IWL currently holds 
approximately 35 FCC licenses, with approximately 300 frequency pairs, for 
commercial mobile radio service.  These licenses have varying terms which 
expire and will require renewal between July 1998 and August 2002. As licenses 
come due for renewal, IWL evaluates the need for such license and elects to 
either renew the license or let it expire. For example, the license that will 
expire in July 1998 is for a location in Arkansas that is no longer used by IWL 
and which is not anticipated to be leased in the future. As a result, IWL does 
not intend to renew it. These licenses allow IWL to provide two-way wireless 
radio services along the Texas and Louisiana Gulf Coast region and offshore to 
oil and gas-related companies.  Each frequency pair allows two-way transmission 
and reception.  IWL holds approximately 20 microwave FCC licenses providing 
voice and data services along the Texas and Louisiana Gulf Coast region and 
offshore to drilling, production and related companies.  IWL holds


                                          16
<PAGE>

seven Ku band and two C band fixed earth station authorizations and holds FCC
licenses that allow IWL to locate earth stations in Texas and other U.S.
locations.

     IWL operates as a FCC licensed 214 carrier to provide resold switched
telecommunications services.  IWL has also obtained broader common carrier
authority from the FCC to provide global resale of switched and private line
services as well as global facilities-based service.  IWL currently provides
international facilities-based private line service on a private carrier basis
into Bolivia, Bosnia, Croatia, Ecuador, Hungary and Russia.  In 1997, IWL
installed a Class 4 tandem switch and value-added services platform at its
facility in Houston, Texas as part of its new point-of-presence for its IWL
Connect-TM- division.  As part of IWL's plans to increase its service offerings,
IWL has obtained authority to provide dedicated services in Louisiana and CLEC
and long distance services in Texas and Louisiana.  In addition, IWL has been
approved to have pole attachment rights to existing or future facilities of
Entergy, BellSouth and the State of Louisiana.  Pole attachment rights allow IWL
to attach its own fiber optic cable to such parties' respective utility poles.

ITEM 2.   PROPERTIES

     The Company occupies buildings that contain approximately 65,000 square
feet of floor space.  The Company owns an office building in Friendswood, Texas
and Lafayette, Louisiana and leases additional space in Friendswood and Houston,
Texas, New Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland under
agreements that expire at various times.  The principal facilities are located
as follows:

<TABLE>
<CAPTION>

         LOCATION         APPROXIMATE                DESCRIPTION
                          SQUARE FEET
<S>                       <C>          <C>
 Houston, Texas             18,940     Corporate headquarters for
 (Aerospace)                           administration, finance and sales
                                       functions, and IWL Connect.

 Friendswood, Texas         12,500     Engineering, Research and Development,
                                       Network Operations Center, Production,
                                       and Warehouse.

 Lafayette, Louisiana        8,450     Administration, Sales, Production,
                                       Shipping/Receiving, and Warehouse.

 Friendswood, Texas          7,000     Administration, Sales, Production and
                                       Warehouse.


                                          17
<PAGE>

 New Orleans, Louisiana      6,470     Administration, Sales, Production,
                                       Shipping/Receiving, and Warehouse.

 Friendswood, Texas          5,000     Procurement, Inventory,
                                       Shipping/Receiving and Warehouse.

 Aberdeen, Scotland          4,200     Administrative, Sales, Shipping/Receiving
                                       and Warehouse.

 Moscow, Russia              1,800     Administrative, Engineering.
</TABLE>

     The Company considers its current facilities adequate for its current needs
and believes that suitable additional space will be available, as needed, to
accommodate further physical expansion of corporate operations and for
additional sales and service.

ITEM 3.   LEGAL PROCEEDINGS

     The Company is party to ordinary litigation incidental to its business,
none of which is expected to have a material adverse effect on the results of
operations, financial position or liquidity of the Company.

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

     Not applicable.

                                       PART II

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

STOCK PRICES

     The Company's common stock, par value $0.01 per share (the "Common 
Stock"), is traded on the Nasdaq National Market under the symbol "IWLC," and 
has been so traded since the Company's initial public offering on June 12, 
1997.  Prior to the offering, there was no public trading market for the 
Company's equity securities.  For the quarter ended December 31, 1997, the high 
and low closing sale prices for the Common Stock on the Nasdaq National Market 
were $12.75 and $8.00, respectively.  On June 15, 1998, the last reported bid 
for the Company's common stock on the Nasdaq National Market was $16.  As of 
June 18, 1998, there were approximately 20 holders of record of the Common 
Stock, including brokers holding shares in nominee or street name accounts for 
an indeterminate number of beneficial holders.

DIVIDEND POLICY


                                          18
<PAGE>

     The Company has never paid dividends on its Common Stock and does not
anticipate paying dividends on the Common Stock in the foreseeable future.  In
addition, under the terms of the Company's bank line of credit, the Company may
not pay dividends without the prior consent of the lending bank.  The Company
expects that it will retain all available earnings generated by the Company's
operations for the development and growth of its business.  Any future
determination as to the payment of dividends will be made in the discretion of
the Board of Directors of the Company and will depend upon the Company's
operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant.

RECENT SALES OF UNREGISTERED SECURITIES

None.

USES OF PROCEEDS FROM REGISTERED SECURITIES

     On June 12, 1997 (the "Effective Date"), the Company's Registration
Statement on Form S-1 (Registration No. 333-22801) relating to its initial
public offering (the "IPO") was declared effective and the offering of up to
1,667,500 shares of the Company's Common Stock covered by such Registration
Statement commenced.  The IPO was managed by Cruttenden Roth Incorporated, as
the representative (the "Representative") of the several underwriters (the
"Underwriters") of the IPO.  Of the shares of Common Stock sold by the Company,
1,450,000 shares were sold in June 1997 and 62,495 shares (which were subject to
an overallotment option granted by the Company to the Underwriters) were sold in
July 1997.  From the Effective Date of the IPO until December 31, 1997, total
expenses of approximately $1,775,097 were incurred for the Company's account in
connection with the 1,512,495 shares of Common Stock sold in the IPO, which
expenses consisted of: (i) $635,000 representing underwriting discounts and
commissions paid to the Underwriters; (ii) $272,000 representing a
nonaccountable expense allowance paid to the Representative; and (iii) other
offering expenses, including without limitation, attorney's fees, accountants'
fees, printing costs and filing fees, of approximately $868,097.  None of such
expense payments were direct or indirect payments to directors or officers of
the Company or their associates or to persons owning 10 percent or more of any
class of equity securities of the Company or to affiliates of the Company.  The
net offering proceeds of 1,512,495 shares sold by the Company in the IPO, after
deducting such total expenses, was approximately $7.3 million through December
31, 1997.  The Company had expended $2.8 million on infrastructure, property and
equipment, retired debt of $667,000, and used $533,000 for working capital
support.  The remaining $3.3 million was invested at December 31, 1997 in a
money market account with the Company's lending bank pending application of such
proceeds by the Company.

     Information pertaining to working capital restrictions and other
limitations upon the payment of dividends is incorporated herein from Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.


                                          19
<PAGE>

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

     The data set forth below in this table are qualified in their entirety
by, and should be read in conjunction with, the financial statements of IWL
and the related notes thereto included elsewhere herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
IWL."

<TABLE>
<CAPTION>
                                                                                           SIX MONTHS
                                                                                             ENDED
                                                  YEAR ENDED JUNE 30,                    DECEMBER 31,
                                   ------------------------------------------------  --------------------
                                      1993      1994      1995     1996      1997       1996      1997
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
<S>                                <C>       <C>       <C>       <C>      <C>        <C>        <C>
Revenues  . . . . . . . . . . .      $12,960  $14,860   $15,794  $27,796   $30,342    $15,644    $11,963
Cost of revenues  . . . . . . .        8,641   10,071     9,639   20,416    21,737     11,684      6,557
                                   --------- --------- --------- -------- ---------  ---------  ---------
 Gross profit  . . . . . . . . .       4,319    4,789     6,155    7,380     8,605     3,960      5,406
 Operating expenses:
 Selling, general and
  administrative  . . . . . . . .      3,132    4,070     4,399    5,099     5,845     2,736      3,631
 Depreciation and  amortization .        359      571       821    1,003     1,403       635        982
                                   --------- --------- --------- -------- ---------  ---------  ---------
 Total operating expenses  . . .       3,491    4,641     5,220    6,102     7,248     3,371      4,613
                                   --------- --------- --------- -------- ---------  ---------  ---------
 Operating income  . . . . . . .         828      148       935    1,278     1,357       589        793
 Interest expense, net . . . . .        (10)    (215)     (244)    (270)     (514)     (214)      (218)
 Other income (loss) . . . . . .        (86)      252       139       42       129        19        110
                                   --------- --------- --------- -------- ---------  ---------  ---------
 Income before income taxes  . .         732      185       830    1,050       972       394        685
 Income tax expense  . . . . . .         249       41       294      316       283       134        264
                                   --------- --------- --------- -------- ---------  ---------  ---------
 Net income  . . . . . . . . . .     $   483  $   144   $   536  $   734   $   689   $   260    $   421
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                   --------- --------- --------- -------- ---------  ---------  ---------
Net income per share amounts(1):
Basic  . . . . . . . . . . . . .     $  0.24  $  0.07   $  0.24  $  0.33   $  0.30   $  0.12    $  0.11
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                   --------- --------- --------- -------- ---------  ---------  ---------
Diluted  . . . . . . . . . . . .      $ 0.24   $ 0.07    $ 0.24   $ 0.33    $ 0.30   $  0.11    $  0.11
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                   --------- --------- --------- -------- ---------  ---------  ---------
 Weighted average  shares
  outstanding:
   Basic  . . . . . . . . . . .        2,000    2,001     2,222    2,222     2,298     2,226      3,737
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                   --------- --------- --------- -------- ---------  ---------  ---------
   Diluted  . . . . . . . . . .        2,011    2,011     2,233    2,233     2,323     2,261      3,908
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                   --------- --------- --------- -------- ---------  ---------  ---------
</TABLE>


                                          20
<PAGE>

<TABLE>
<CAPTION>
                                                       JUNE 30,
                                   ------------------------------------------------      DECEMBER 31,
                                      1993      1994      1995     1996      1997            1997
                                   --------- --------- --------- -------- ---------  --------------------
                                                                (IN THOUSANDS)
BALANCE SHEET:
<S>                                <C>       <C>       <C>       <C>      <C>        <C>
Cash and cash equivalents . . .     $     72    $   --   $   291  $   361   $ 7,660           $   3,345
Working capital (deficit) . . .          709      (367)     (265)   1,811     9,721               1,330
Total assets  . . . . . . . . .        5,748     7,437     8,232   12,409    26,062              26,284
Long-term debt and capital
  lease obligations, net of 
  current portion . . . . . . .          533     1,108     1,329    2,944     7,692               3,588
Stockholders' equity  . . . . .        1,511     2,419     2,955    3,698    11,394              12,166

<CAPTION>
                                                                                           SIX MONTHS
                                                                                             ENDED
                                                  YEAR ENDED JUNE 30,                    DECEMBER 31,
                                   ------------------------------------------------  --------------------
                                      1993      1994      1995     1996      1997       1996      1997
                                   --------- --------- --------- -------- ---------  ---------  ---------
                                                     (IN THOUSANDS)
OTHER DATA:
<S>                                <C>       <C>       <C>       <C>      <C>        <C>        <C>
EBITDA (2)  . . . . . . . . . .       $ 1,101   $  971    $1,895  $ 2,323   $ 2,889   $ 1,243    $ 1,885
Cash flows provided by (used
  in) operating activities(3) .                   (510)      696      341     2,545       334          3
Cash flows used in investing
  activities(3) . . . . . . . .                   (983)   (1,231)    (631)   (6,919)   (2,453)    (5,636)
Cash flows provided by
  financing activities(3) . . .                  1,422       825      360    11,673     2,040      1,318
Capital expenditures(3) . . . .                  1,439     1,585    1,492     6,988     2,432      6,190
</TABLE>


(1)  Earnings (loss) per share amounts have been calculated in accordance with
     SFAS No. 128, "Earnings Per Share," in 1997 and 1998.  Prior year amounts
     have been restated on a comparable basis. On November 1, 1995, the Board 
     of Directors declared a two hundred- for-one common stock split effective 
     November 1, 1995. All share amounts and numbers of shares have been 
     restated to reflect the stock split.

(2)  EBITDA consists of earnings before interest, income taxes, depreciation and
     amortization.  EBITDA is a measure commonly used in the communications
     industry to analyze companies on the basis of operating performance.
     EBITDA is not a measure of financial performance under generally accepted
     accounting principles and should not be considered as an alternative to net
     income as a measure of performance nor as an alternative to cash flow as a
     measure of liquidity.  EBITDA may not be comparable with other similarly
     titled measures of other companies.  See IWL's Consolidated Financial
     Statements and the notes thereto included elsewhere in this document.
     EBITDA is calculated as set forth below.

<TABLE>
<CAPTION>
                                                                                                               SIX MONTHS
                                                                                                                  ENDED
                                                            YEAR ENDED JUNE 30,                                DECEMBER 31,
                                      -------------------------------------------------------------    ----------------------------
                                        1993          1994         1995         1996         1997         1996              1997
                                      --------      ---------------------     --------     --------    ----------        ----------
                                                             (IN THOUSANDS)
<S>                                   <C>           <C>          <C>          <C>          <C>         <C>               <C>
Net income . . . . . . . . . . . . .    $483          $144         $536         $734         $689         $ 260             $ 421

Interest expense . . . . . . . . . .      10           215          244          270          514           214               218

Income tax expense . . . . . . . . .     249            41          294          316          283           134               264

Depreciation and amortization. . . .     359           571          821        1,003        1,403           635               982

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

EBITDA                                $1,101          $971       $1,895       $2,323       $2,889        $1,243            $1,885

                                      --------      --------     --------     --------     --------    ----------        ----------
                                      --------      --------     --------     --------     --------    ----------        ----------
</TABLE>

                                          21
<PAGE>

(3)   Cash flow information and capital expenditures information for the fiscal
year 1993 are not available.

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

     The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in this report.
See "Item 8--Financial Statements."

FORWARD LOOKING INFORMATION

     Certain information contained herein contains forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995) regarding
future events or the future financial performance of the Company, and are
subject to a number of risks and other factors which could cause the actual
results of the Company to differ materially from those contained in and
anticipated by the forward-looking statements.  Among such factors are: industry
concentration and the Company's dependence on major customers, competition,
risks associated with international operations and entry into new markets,
government regulation, variability in operating results, general business and
economic conditions; customer acceptance of and demand for the Company's new
products, the Company's overall ability to design, test, and introduce new
products on a timely basis, reliance on third parties and other
telecommunication carriers, the Company's ability to manage change, dependence
on key personnel, dependence on information systems and changes in technology,
and possible service interruptions.  The forward-looking statements contained
herein are necessarily dependent upon assumptions, estimates and data that may
be incorrect or imprecise.  Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or circumstances and
may not be realized.   Forward-looking statements contained herein include, but
are not limited to, forecasts, projections and statements relating to inflation,
future acquisitions and anticipated capital expenditures.  All forecasts and
projections in this report are based on management's current expectations of the
Company's near term results, based on current information available pertaining
to the Company, including the aforementioned risk factors.  Actual results could
differ materially.

OVERVIEW

     IWL's total revenues are derived from the provision of a variety of
services, including telecommunications services, project and other services and
product resales.  Telecommunications services include the resale of long
distance telecommunications services, the provision of private leased lines, and
the rental of telecommunications equipment and systems.  IWL operates a tandem
switch at its facility in Houston, Texas to provide services as a switch-based
long distance carrier and is currently completing the installation of its Gulf
Coast regional network.  Project and other


                                          22
<PAGE>

services consist of the performance of telecommunications system projects and
the sale, service and maintenance of communications systems.

     In connection with product resales, IWL serves as the exclusive
manufacturer's representative of Alcatel products to the U.S. oil and gas
industry.  In fiscal 1996 and 1997, IWL provided services to a subsidiary of
Shell, which included the resale of a significant amount of Alcatel products.
For the years ended June 30, 1996 and 1997, the Shell subsidiary purchased from
IWL approximately $10.6 million and $7.6 million of Alcatel products and other
equipment and hardware, representing approximately 38.0% and 25.2%,
respectively, of total sales during such periods.  Although profitable, the sale
of Alcatel products to the Shell subsidiary significantly reduced IWL's gross
margin in these periods.  The Shell project was substantially completed in
fiscal 1997 and, therefore, is not expected to contribute in a material manner
to IWL's total sales in future periods.

     IWL was founded in 1981 as a contract supplier of communications technology
installation and equipment leasing services, and over the ensuing years
broadened the scope of its service offerings to include microwave, two-way radio
and related wireless services and technologies for an expanded customer base,
primarily comprised of major oil and gas companies operating in the Gulf of
Mexico region.  During this period, IWL began to provide an increasing variety
of services to its oil and gas customers in other remote and underdeveloped
regions around the world, including communications services for special projects
with critical timing and other extreme or unusual challenges.

     To support its international expansion, in 1994 IWL began providing
telecommunications services and network support inside the former Soviet Union
to United States oil and gas customers.  As IWL expanded its service offerings
and developed greater infrastructure, it commenced service as a switchless
reseller of long distance services in the United States in 1994.  IWL is
continuing to expand its network through its tandem switch and the installation
of fiber optic cable and microwave radios in targeted service areas.  In
connection with such expansion, IWL has also received CLEC status in Texas and
Louisiana.

     While annual growth rates of IWL's total sales since 1992 have ranged from
6.3% to 76.0%, IWL's quarterly operating results have varied significantly in
the past, and can be expected to vary in the future.  These fluctuations in
operating results generally are caused by a number of factors, including changes
in IWL's services and product mix, levels of product resales, adverse weather
conditions in customer locations, the degree to which IWL encounters competition
in its existing or target markets, general economic conditions, the volume and
timing of orders received during the period, sales and marketing expenses
related to entering new markets, the timing of new product or service
introductions by IWL or its competitors and changes in billing rates by IWL or
its competitors.  IWL's ability to grow its revenues will be dependent upon a
number of factors, many of which are not within its control and as a result no
assurance can be given that such objectives will be met.

     On May 7, 1998, IWL changed its fiscal year from June 30 to December 31.


                                          23
<PAGE>

COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996

     TOTAL REVENUES.  Total revenues decreased approximately $3.7 million or
approximately 23.5% to approximately $12.0 million for the six months ended
December 31, 1997 from approximately $15.6 million for the six months ended
December 31, 1996.  This decrease was comprised of an increase of approximately
$1.2 million or approximately 33.2% in IWL's telecommunications services, a
decrease of approximately $196,000 or approximately 2.7% in IWL's project and
other services and a decrease of approximately $4.7 million or 100% in product
resales to a single customer.  The increase in telecommunications services was
largely attributable to increased traffic on IWL's telecom network in the Gulf
of Mexico and the continued expansion of IWL's ODDS services in the Gulf of
Mexico.  The decrease in project and other services resulted from a decrease in
product and project sales. The product resales were substantially completed in
May 1997.

     GROSS PROFIT.  Gross profit increased approximately $1.4 million or
approximately 36.5% to approximately $5.4 million for the six months ended
December 31, 1997 from $4.0 million for the six months ended December 31, 1996,
representing gross margins of approximately 45.2% and approximately 25.3%,
respectively.  The increase in margin was due in principal part to the
completion of the product resale to a single customer in May 1997, which had
lower margins, and from changes in IWL's sales mix to higher margin services.
Excluding product resales, gross profit for the six months ended December 31,
1996 would have been approximately $3.9 million representing a gross margin of
approximately 36.0%.

     SELLING EXPENSES.  Selling expenses increased approximately $298,000 or
approximately 60.2% to approximately $793,000 for the six months ended December
31, 1997 from approximately $495,000 for the six months ended December 31, 1996.
The increase in selling expenses resulted from increased salary expenses related
to the addition of sales personnel and from increases in travel and advertising
expenses.

     GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased approximately $598,000 or approximately 26.7% to approximately $2.8
million for the six months ended December 31, 1997 from approximately $2.2
million for the six months ended December 31, 1996.  The increase in the dollar
amount of general and administrative expenses over these periods were due in
principal part to increases in salaries and personnel cost and increases in
telephone, insurance, rent, and legal expenses.

     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
approximately $347,000 or approximately 54.5% to approximately $982,000 for the
six months ended December 31, 1997 from approximately $635,000 in the six months
ended December 31, 1996.  This increase was primarily due to infrastructure and
network expansion.

     NET INTEREST EXPENSE.  Net interest expense increased approximately $4,000
or approximately 1.9% to approximately $218,000 for the six months ended
December 31, 1997 from approximately


                                          24
<PAGE>

$214,000 for the six months ended December 31, 1996.  The increase was comprised
of an increase in interest expense of approximately $116,000 to approximately
$348,000 from approximately $232,000 for the comparable six month period last
year.  This increase was offset by an increase in interest income of
approximately $112,000 to approximately $130,000 from approximately $18,000 for
the same six month period last year.

     OTHER INCOME, NET.  Other income for the six months ended December 31, 1997
included the gain of approximately $66,000 resulting primarily from the
disposition of IWL's 50% ownership in Kenwood, as well as certain other asset
dispositions, and from IWL's 50% ownership interest in the earnings of Kenwood
through the date of sale.  Other income for the six months ended December 31,
1996 included IWL's 50% ownership interest in the earnings of Kenwood, as well
as certain other asset dispositions.

     INCOME TAX EXPENSE.  Provision for income taxes increased approximately
$130,000 or approximately 97.2% to approximately $265,000 for the six months
ended December 31, 1997 from approximately $134,000 for the six months ended
December 31, 1996 which represents an effective tax rate of 38.6% and 34% for
each period, respectively.

COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1996

     TOTAL REVENUES.  Total revenues increased approximately $2.5 million or
approximately 9.0% to approximately $30.3 million for fiscal 1997 from
approximately $27.8 million for fiscal 1996.  This increase was comprised of an
increase of approximately $1.5 million or approximately 5.4% in IWL's
telecommunications services, an increase of approximately $3.9 million or
approximately 14.4% in IWL's project and other services and a decrease of
approximately $2.9 million or approximately 27.6% in product resales to a single
customer.  The increase in telecommunications services was largely attributable
to increased traffic on IWL's telecom network in the Gulf of Mexico, an increase
in the number of ODDS units in the Gulf of Mexico, and expansion of IWL's
business outside the Gulf of Mexico. The increase in project and other services
was largely due to increases in the winning of larger projects and the
associated support revenues.  The product resales were substantially completed
in May 1997 and, therefore, are not expected to contribute in a material manner
to IWL's total sales in future periods.

     GROSS PROFIT.  Gross profit increased approximately $1.2 million or
approximately 16.6% to approximately $8.6 million for fiscal 1997 from
approximately $7.4 million for fiscal 1996, representing gross margins of
approximately 28.4% and 26.6%, respectively.  The increase in margin was due in
principal part to the completion of the product resale to a single customer in
May 1997.  Excluding product resales, gross profit for fiscal 1997 and fiscal
1996 would have been approximately $8.0 million and $6.5 million, respectively,
representing a gross margin of approximately 35.2% and 37.7%, respectively.  The
decrease in margin was attributable to the increase of land mobile services
(which yield lower margins) in IWL's overall service mix.


                                          25
<PAGE>

     SELLING EXPENSES.  Selling expenses increased approximately $299,000 or
approximately 35.5% to approximately $1.1 million for fiscal 1997 from
approximately $842,000 for fiscal 1996.  Selling expenses as a percentage of
total sales increased to approximately 3.8% from 3.0% during these respective
periods.  The increase in selling expenses resulted from the addition of sales
personnel and from increases in travel and advertising.

     GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased approximately $447,000 or approximately 10.5% to approximately
$4.7 million for fiscal 1997 from approximately $4.3 million for fiscal 1996.
As a percentage of total sales, general and administrative expenses increased to
approximately 15.5% for fiscal 1997 from approximately 15.3% for fiscal 1996.
The increase in general and administrative expenses as a percentage of sales was
primarily due to the decline in product resales overall.  The increases in the
dollar amount of general and administrative expenses over these periods were due
in principal part to increased telephone expenses, insurance expenses, rent
expenses and legal expenses relating to facilities and personnel additions in
Houston, Texas and Lafayette, Louisiana.

     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
approximately $400,000 or approximately 39.9% to approximately $1.4 million for
fiscal 1997 from approximately $1.0 million in fiscal 1996.  This increase was
primarily attributable to the acquisition of an additional approximately
$5.9 million of property, plant and equipment, comprised of approximately
$4.7 million in equipment for satellite, microwave and other equipment,
approximately $936,000 for computers, furniture and fixtures, service vehicles
and test equipment and approximately $285,000 for buildings and improvements.

     NET INTEREST EXPENSE.  Net interest expense increased approximately
$244,000 or approximately 90.4% to approximately $514,000 for fiscal 1997 from
approximately $270,000 for fiscal 1996.  IWL's borrowings increased to
approximately $8.7 million for fiscal 1997 from approximately $3.9 million for
fiscal 1996.  Borrowings were reduced in fiscal 1996 due to the receipt of
approximately $2.0 million from a subsidiary of Shell as a deposit under a
product resale contract.  The increase in borrowings was used to fund
acquisitions of property, plant and equipment.

     OTHER INCOME, NET.  Other income for fiscal 1997 and 1996 resulted from
IWL's 50% ownership interest in Kenwood, as well as certain asset dispositions
affected in such periods.  Such items were not material to IWL's operating
results for fiscal 1997 and 1996.

     INCOME TAX EXPENSE.  Provision for income taxes decreased approximately
$33,000 or approximately 10.4% to approximately $283,000 for fiscal 1997 from
approximately $316,000 for fiscal 1996 which represents an effective tax rate of
29.0% and 30.1% for each period, respectively.

COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND 1995

     TOTAL REVENUES.  Total revenues increased by approximately $12.0 million or
approximately 75.9% to approximately $27.8 million for fiscal 1996 from
approximately $15.8 million for fiscal


                                          26
<PAGE>

1995.  Of this increase, approximately $741,000 or approximately 12.8% resulted
from increases in IWL's telecommunications services, project and other services
accounted for approximately $707,000 or approximately 7.1%, and approximately
$10.6 million, or approximately 88%, resulted in part from product resales to a
single customer.  While revenues related to project and other services were
relatively constant, the increase in sales of telecommunications services
reflected continued growth of IWL's offshore network. Excluding product resales,
total sales for fiscal 1996 would have been approximately $17.3 million.  Since
such product resales were completed in May 1997, they are not expected to 
contribute in a material manner to IWL's total sales in future periods after 
fiscal 1997.

     GROSS PROFIT.  Gross profit increased approximately $1.2 million or
approximately 19.7% to approximately $7.3 million in fiscal 1996 from
approximately $6.1 million in fiscal 1995, representing gross margins of
approximately 26.5% and 39.0%, respectively.  The decrease in gross margin
primarily was due to the lower profit margin from product resales. Excluding
product resales, gross profit would have been approximately $6.5 million in
fiscal 1996, representing a gross margin of approximately 37.7%.

     SELLING EXPENSES.  Selling expenses decreased approximately $20,000 or
approximately 2.4% to approximately $842,000, or approximately 3.0% of total
sales, in fiscal 1996 from approximately $862,000, or approximately 5.5% of
total sales, in fiscal 1995.  Advertising and promotion expenditures increased
approximately $81,000, travel expenses increased approximately $21,000 and
salaries and employee benefits decreased approximately $110,000, which reflected
the reassignment of certain employees to other departments.

     GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
increased approximately $720,000 or approximately 20.4% to approximately
$4.2 million in fiscal 1996 from approximately $3.5 million in fiscal 1995.  As
a percentage of total sales, general and administrative expenses decreased to
approximately 15.3% for fiscal 1996 from approximately 22.4% for fiscal 1995.
The increase in general and administrative expenses was primarily due to a
higher level of expenses in fiscal 1996 associated with the expansion of IWL's
international operations and related travel, including increased activity in
Russia and South America as well as a project in Bosnia that was started and
completed in fiscal 1996.  In addition, general and administrative expenses were
higher in fiscal 1996 due to increased development of IWL's infrastructure to
accommodate growth, which resulted in increases in insurance costs and employee
compensation through an increased number of employees, increased telephone
expenses relating to increased activity in IWL's international operations and
costs associated with opening offices in Lafayette and New Orleans, Louisiana.

     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
approximately $183,000 or approximately 22.3% to approximately $1.0 million in
fiscal 1996 from approximately $820,000 in fiscal 1995.  This increase was
principally attributable to an additional $1.2 million of property, plant and
equipment, comprised of approximately $621,000 for satellite, microwave and


                                          27
<PAGE>

other telecommunications equipment, and approximately $579,000 for computers,
furniture and fixtures, service vehicles and test equipment.

     NET INTEREST EXPENSE.  Net interest expense increased approximately $26,000
or approximately 10.6% to approximately $270,000 in fiscal 1996 from
approximately $244,000 in fiscal 1995.  The increase in interest expense was due
to an increase of approximately $350,000 in borrowings under IWL's credit lines.
Interest expense was minimized during fiscal 1996 as a result of a $2.0 million
deposit received from Shell under a product resale contract.

     OTHER INCOME, NET.  Other income in fiscal 1996 and fiscal 1995 resulted
from IWL's 50% ownership interest in Kenwood, as well as certain asset
dispositions affected in such periods.  Such items were not material to IWL's
operating results in fiscal 1996 or fiscal 1995.

     INCOME TAX EXPENSE.  Provision for income taxes increased approximately
$22,000 or approximately 7.8% to approximately $316,000 in fiscal 1996,
representing an effective income tax rate of 30.0%, from approximately $293,000
in fiscal 1995, representing an effective tax rate of 35.4%.  The decrease in
the effective tax rate in fiscal 1996 primarily was due to the availability of
foreign tax credits in such year.

LIQUIDITY AND CAPITAL RESOURCES

     During the six months ended December 31, 1997, the Company generated
$3,383 of cash in operating activities, borrowed an additional net amount
of $967,450 from credit facilities, and received $351,000 from the sale and
issuance of Common Stock.  The Company invested $6.2 million in property and
equipment (net of proceeds of $24,000 from certain dispositions of assets)
and reduced its investment in an unconsolidated subsidiary by $529,262
through disposition.  The increase in property, plant and equipment reflects
the Company's work in progress in relation to the deployment of the Company's
ODDS program and the development of its Gulf Coast Network.  These activities
decreased the Company's cash balance by $4.3 million to a balance of $3.3
million at December 31, 1997.

     The Company's working capital was $1.3 million at December 31, 1997.
Accounts receivable increased $631,783 from $5.7 million at June 30, 1997 to
$6.3 million at December 31, 1997, while inventory decreased from $1.9
million at June 30, 1997 to $1.0 million at December 31, 1997.  Accounts
payable and accrued expenses decreased from $5.4 million at June 30, 1997 to
$3.6 million at December 31, 1997.  In addition, the current portion of notes
payable increased from $964,000 at June 30, 1997 to $6.0 million at December
31, 1997, while deferred revenue and customer deposits increased from $77,000
at June 30, 1997 to $187,000 at December 31, 1997.  The increase in current
portion of notes payable reflects the reclassification of the Company's
working capital loan which will be due October 31, 1998. The Company plans 
to refinance the Line of Credit prior to the due date.

     The Company has three credit facilities with Bank One, Texas, N.A., its
primary lender, to provide working capital and to finance equipment to be
leased by the Company to its customers.  In May 1997, the Company entered
into a commitment to obtain a secured revolving line of credit (the "Working
Capital Loan"), a secured guidance line of credit (the "Guidance Line"), and
a term facility (the "Term Loan") from Bank One, Texas, N.A. The Working
Capital Loan and Guidance Line were finalized as of August 1, 1997, and the
Term Loan was finalized as of August 28, 1997.

     The maximum amount of the Working Capital Loan is $5.0 million subject
to a borrowing base based on accounts receivables and inventory. The proceeds
of the Working Capital Loan are to be used for working capital needs and
general corporate purposes. The maximum amount of the Guidance Line is $5.0
million, which will be used to finance the Company's purchase and subsequent
lease of telecommunications equipment. The Term Loan and the Working Capital
Loan are collateralized by substantially all of the personal property of the
Company.  The Guidance Line is secured specifically by the equipment
purchased with the proceeds thereof and by an assignment of the leases of
such equipment, as well as the other personal property of the Company.  The
Company had approximately $900,000 available under the Working Capital Loan
at December 31, 1997 and $5.0 million available under the Guidance Line.  The
Guidance Line is reduced by the term load created as the leased equipment is
deployed.  The interest rate on each facility is, at the Company's option,
Bank One's base rate or 30, 60 or 90 day adjusted LIBOR plus 2.40%.  The
interest rate will be subject to downward adjustment in certain circumstances
as specified in the credit agreement.  The entire unpaid principal balance
and accrued but unpaid interest for the Working Capital Loan will be due on
October 31, 1998.  The Guidance Line expires on May 1, 1998.  The Term Loan
matures on September 1, 2001.

     Borrowing availability under the Working Capital Loan is based upon
eligible accounts receivable and inventory, and a fee equal to 0.25% will be
charged on any unused portion of the Working Capital Loan.  In addition,
fundings under the Guidance Line will only be permitted with respect to
communications equipment and installation pursuant to leases which (a) have a
term of not more than 60 months or the estimated useful life of the leased
equipment, (b) have been assigned to the lender as collateral for the Loans
and (c) have as lessees companies formed and with principal offices in the
United States.  The Loans will be collateralized by substantially all of the
Company's assets.  The Company is able to reduce the commitment under the
Working Capital Loan and is able to make voluntary prepayments on the
Guidance Line without prepayment penalty.  The Loans are cross-defaulted and
cross-collateralized.  The credit agreement prohibits the payment of
dividends without prior approval of the lender and requires the Company to
maintain certain covenants and financial ratios including working capital and
net worth ratios.  The credit agreement also prohibits certain changes in the
Company's basic business or in its Chief Executive Officer, Chief Financial
Officer and President positions, without prior lender approval.

     The Company anticipates that, based on current plans and assumptions 
relating to its operations, its financial resources and equipment financing 
arrangements will be sufficient to fund the Company's growth and operations 
through June 30, 1998. The Company believes that its capital needs at the end 
of such period will continue to be significant and, therefore, the Company will 
continue to seek additional sources of capital.  Further, in the event the 
Company's plans or assumptions change or prove to be inaccurate, or if the 
Company consummates any unplanned acquisitions of businesses or assets, the 
Company may be required to seek additional sources of capital sooner than 
currently anticipated.  Sources of additional capital may include public and 
private equity and debt financings, sales of nonstrategic assets and other 
financing arrangements.

     Under certain circumstances, the Merger Agreement obligates IWL to pay to 
Telecommunications and the Partnership a fee of $2.5 million in the aggregate 
if the Merger Agreement is terminated (of which $1,875,000 is to be paid to 
Telecommunications and $625,000 is to be paid to the Partnership) and under 
certain circumstances obligates Telecommunications and the Partnership to pay 
to IWL a fee of $2.5 million in the aggregate if the Merger Agreement is 
terminated (of which $1,875,000 is to be paid by Telecommunications and 
$625,000 is to be paid by the Partnership).  No assurances can be made that 
IWL would have sufficient liquidity to pay any such termination fee.

CONTINGENCIES

     The Company is party to ordinary litigation incidental to its business,
none of which is expected to have a material adverse effect on the results of
operations, financial position or liquidity of the Company.

YEAR 2000

     As the year 2000 approaches, the Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 computer software
failures.   The Company is addressing this issue to ensure the availability and
integrity of its financial systems and the reliability of its operational
systems.   The Company has established processes for evaluating and managing the
risks.


                                          28
<PAGE>

and costs associated with this problem.   The Company has and will continue to
make certain investments in its software systems and applications to ensure the
Company is Year 2000 compliant.  The financial impact to the Company has not yet
been fully determined, however such impact is not anticipated to have a material
adverse effect on the Company.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components.  The required disclosures for SFAS 130 will be
adopted in 1998.  The adoption of SFAS 130 will have no impact on the
Partnership's results of operations, financial position or cash flows and any
effect will be limited to the presentation of its disclosures.

     In June 1997, the FASB issued Statement of Financial accounting Standards
No. 131, Disclosure About Segments of an Enterprise and Related Information
("SFAS 131").  SFAS 131 establishes standards for the manner in which business
enterprises are to report selected information regarding operating statements in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services, geographic areas and major
customers.  SFAS 131 is effective for fiscal years beginning after December 15,
1997.  Financial statements disclosures for prior periods are required to be
restated.  The Partnership is in the process of evaluating the disclosure
requirements.  The adoption of SFAS 131 will not have an impact on the
Partnership's results of operations, financial position or cash flows and any
effect will be limited to the presentation of its disclosure.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
     MARKET RISK.

     Not applicable.

ITEM 8.   FINANCIAL STATEMENTS.

     Information called for by this item is set forth in the Company's
Consolidated Financial Statements contained in this report.  The Company's
Consolidated Financial Statements begin at page F-1 hereunder.

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

     None.




                                          29
<PAGE>

                                       PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table provides certain information regarding the directors
and executive officers of the Company as of June 15, 1998:

<TABLE>
<CAPTION>

         NAME                    AGE                     POSITIONS
         ----                    ---                     ---------
<S>                              <C>    <C>
Ignatius W.  Leonards . . . .    44     Chairman, Chief Executive Officer and Director
Byron M.  Allen . . . . . . .    50     President and Director
Richard H.  Roberson. . . . .    39     Chief Financial Officer, Secretary and Director
James T.  Gordon. . . . . . .    59     Vice President--Telecom Operations
J.  Keith Johnson . . . . . .    36     Vice President--Marketing
Bryan L.  Olivier(1). . . . .    36     Vice President--IWL Connect Division
Errol J.  Olivier(1). . . . .    35     Vice President--Telecom Sales
Christopher J.  Amenson . . .    48     Director
Myron J.  Goins . . . . . . .    37     Director
</TABLE>


-----------
(1)  The Oliviers are not related.

     Mr. Ignatius W.  Leonards has served as Chairman of the Board, Chief
Executive Officer and a director of the Company since founding the Company in
1981 and served as President from 1981 until February 1997.  Mr. Leonards was
employed by Bibbins & Rice Electronics as Telecom Service Manager until 1981.
Mr. Leonards has an industrial electronics degree from the T.H. Harris Technical
Institute in Opelousas, Louisiana.

     Mr. Byron M.  Allen has served as President and a director of the Company
since February 1997 and served as a Vice President of the Company from December
1993 until February 1997.  From 1986 to 1993, Mr. Allen served as Executive Vice
President of SBS Technologies, Inc., a manufacturer of computer components.
Mr. Allen was a co-founder of SBS Technologies, Inc.  In 1985 and 1986,
Mr. Allen served as a senior principal staff member at BDM Corporation, a
defense consulting firm.  In 1984 and 1985, he served as manager of Navy New
Business Development for the Singer Link Corporation.  From 1983 to 1984,
Mr. Allen served as the managing director of European operations of
Intermetrics, Inc.  He served as manager of Houston operations of Intermetrics,
Inc.  from 1977 to 1983.  Mr. Allen graduated from the University of Alabama
with a degree in Mathematics.  He attended graduate school at Wright State
University in Dayton, Ohio where he studied systems engineering.

     Mr. Richard H. Roberson has served as Chief Financial Officer of the
Company since joining the Company in October 1996 and has served as a director
of the Company since February 1997.  From November 1995 until October 1996,
Mr. Roberson was Director of Administration at Weaver and Tidwell, LLP., a
certified public accounting firm.  From May 1989 until October 1995,


                                          30
<PAGE>

Mr. Roberson was Chief Financial Officer and Controller of Local and Western of
Texas, Inc., a wholesaler of meat and other food products.  Mr. Roberson is a
certified public accountant and is a member of the American Institute of
Certified Public Accountants and the Texas Society of Certified Public
Accountants.  Mr. Roberson has a BBA in Accounting from the University of Texas
at Austin.

     Mr. James T. Gordon has served as Vice President--Telecom Operations of the
Company since October 1996.  Prior to joining the Company, he was an independent
telecommunications consultant.  From September 1992 through December 1994,
Mr. Gordon was Director--Installation and Test Engineering Services for Alcatel
Network Systems, Inc. and, from April 1991 to September 1992, he served as
Manager--Customer Account Services--Independent Operating Cos. for Alcatel
Network Systems, Inc.  Mr. Gordon was employed by Rockwell International
Corporation in various capacities from 1970 until 1991.  Mr. Gordon received a
BBA in Production Management from the University of North Texas.

     Mr. J.  Keith Johnson has served as Vice President of Marketing since
December 1992 and was Director of Sales and Marketing of the Company from
December 1986 to December 1992.  From June 1985 to December 1986, Mr. Johnson
was an Account Executive with ARGO Communications, Inc., a long distance
carrier, where he sold long-distance voice and data lines to medium and large
commercial users.  Mr. Johnson worked for AT&T from May 1983 until June 1985,
where he sold telephone systems to small and medium-sized companies.
Mr. Johnson graduated from Houston Baptist University with a double major in
marketing and management.

     Mr. Bryan L.  Olivier has served as a Vice President of the Company's IWL
Connect-TM- division since January 1996.  Prior thereto, he served as Director
of Engineering for Spacelink Systems, Inc.  from May 1992 to December 1995.
From January 1992 to March 1992, he was a member of the strategic planning group
of Wiltel Communications, a long distance carrier.  From May 1981 to December
1988, he was the manager of the International Telecommunications Group of
Tenneco Oil E&P/Operators Inc.  Mr. Olivier graduated with a B.S.  Degree in
Electrical Engineering from the University of Southwest Louisiana with a
concentration in telecommunications management and from T.H.  Harris Technical
Institute in Opelousas, Louisiana in the field of industrial engineering.

     Mr. Errol J.  Olivier has served as Vice President of Telecom Sales since
September 1996 and served as Vice President of Telecom Services from July 1995
until September 1996.  From February 1995 until July 1995, Mr. Olivier served as
Director of Telecom Services and was responsible for the opening of the
Company's Lafayette and New Orleans offices.  Mr. Olivier joined the Company in
March 1990 and served as an Account Manager from March 1990 until January 1992
and as the Regional Manager of the Company's New Orleans office from January
1992 until February 1995.  Mr. Olivier has an electronics technology degree from
T.H. Harris Technical Institute in Opelousas, Louisiana.


                                          31
<PAGE>

     Mr. Christopher J.  Amenson has served as a director of the Company since
June 1997.  Mr. Amenson has served as President and Chief Operating Officer of
SBS Technologies, Inc.  since April 1992 and as a director since August 1992.
In October 1996, he became the Chief Executive Officer of SBS Technologies, Inc.
For five years prior to joining SBS Technologies, Inc., Mr. Amenson was
President of Industrial Analytics, Inc., a Boston-based investment banking firm.
Mr. Amenson holds a B.A.  Degree in Government from the University of Notre Dame
and a Master's Degree in Business Management from the Sloan Fellows Program at
the Massachusetts Institute of Technology.

     Mr. Myron J.  Goins has served as a director of the Company since June
1997.  Mr. Goins has served as a Managing Director of Seruus Ventures LLC, an
investment firm specializing in telecommunications-related investments, since
September 1996.  From September 1995 until the founding of Seruus, Mr. Goins was
employed by National Telemanagement Corporation, a diversified telecom company,
as its Chief Financial Officer.  From April 1994 until Corporate Telemanagement
Group's sale to LCI International in September of 1995, Mr. Goins was Vice
President of Corporate Development for Corporate Telemanagement Group, a long
distance company.  From 1988 to April 1994, Mr. Goins was Director of Financial
Analysis at Sprint Corp.  where he was involved in numerous merger and
acquisition transactions including the $3.5 billion merger of Sprint and Centel
and various local, long distance, satellite and other infrastructure
investments.  Mr. Goins received his BBA degree from the University of Memphis
and his MBA from Vanderbilt University's Owen Graduate School of Management.

     Each director serves until the next annual meeting of shareholders and
until his successor is duly elected and qualified.  The Company's Board of
Directors is currently composed of five directors.  Officers serve at the
discretion of the Board of Directors.  There are no family relationships among
any of the directors or named executive officers of the Company.

     Pursuant to the Company's By-Laws, the next annual meeting of shareholders
of the Company will be held in 1998.

BOARD COMMITTEES

     Effective upon the consummation of the Company's initial public offering in
June 1997, the Board of Directors established two standing committees: the Audit
Committee and the Compensation Committee.  The functions of the Audit Committee,
of which Mr. Amenson and Mr. Goins are the initial members, is to make
recommendations regarding the engagement of the Company's independent auditors
and to review with management and the independent auditors the Company's
financial statements, basic accounting and financial policies and practices,
audit scope and competency of control personnel.  The functions of the
Compensation Committee, of which Mr. Amenson and Mr. Goins are the initial
members, is to review and recommend to the Board of Directors the compensation
of executive officers of the Company and to administer and make awards and take
all other action as prescribed under the employee benefit plans of the Company
(other than the 1997 Director Option Plan, which is administered by the entire
Board of Directors of the


                                          32
<PAGE>

Company).  All members of the Compensation Committee are and will continue to be
"non-employee directors" within the meaning of Rule 16b-3(b) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
"outside directors" as contemplated by Section 162(m)(4)(C)(i) of the Internal
Revenue Code of 1986, as amended (the "Code").

COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT

     Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership on Form 3 and
changes in ownership on Form 4 or Form 5 with the Securities and Exchange
Commission (the "SEC").  Such officers, directors and ten percent stockholders
are also required by SEC rules to furnish the Company with copies of all
Section 16(a) forms they file.

     Based solely on its review of the copies of such forms received by it, the
Company believes that, during the fiscal year ended June 30, 1997 (the "1997
Fiscal Year") and for the transition period from July 1, 1997 until December 31,
1997 (the "1997 Transition Period"), the Company's officers, directors and ten
percent shareholders complied with all applicable Section 16(a) filing
requirements.

LIMITATION OF LIABILITY

     As permitted by the Texas Business Corporation Act, the Company's Restated
Articles of Incorporation provide that the directors of the Company shall not be
liable to the Company or its shareholders for monetary damages for an act or
omission in the director's capacity as a director, except that such provision
does not authorize the elimination or limitation of liability of a director to
the extent the director is found liable for (i) a breach of the director's duty
of loyalty to the Company or its shareholders, (ii) any act or omission not in
good faith or that constitutes a breach of duty of the director to the Company
or an act or omission that involves intentional misconduct or a knowing
violation of law, (iii) any transaction from which the director derived any
improper personal benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office or (iv) any act or omission for
which the liability of the director is expressly provided by statute.

     As a result of this provision, the Company and its shareholders may be
unable to obtain monetary damages from a director for breach of the duty of
care.  Although shareholders may continue to seek injunctive or other equitable
relief for an alleged breach of fiduciary duty by a director, shareholders may
not have any effective remedy against the challenged conduct if equitable
remedies are unavailable.

     In addition, the Company's Restated Articles of Incorporation and Amended
and Restated Bylaws provide certain rights of indemnification for all officers
and directors.

                                          33
<PAGE>

ITEM 11.   EXECUTIVE COMPENSATION.

DIRECTOR COMPENSATION

     Non-employee directors of the Board of Directors of the Company are paid
$1,000 per meeting for attending or participating in meetings of the Board of
Directors or any committee thereof, and receive reimbursement for out-of-pocket
expenses incurred for attendance at meetings.  Non-employee directors will also
receive from time to time non-statutory stock options under the 1997 Director
Option Plan (as defined below).  The Company granted options to acquire 10,000
shares of Common Stock at a per share exercise price of $6.00 under the 1997
Director Option Plan to each of Messrs. Amenson and Goins effective upon their
commencing to serve as directors of the Company in June 1997. The Company's
policy is not to pay any additional compensation to employees of the Company for
their services as a director.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Messrs. Amenson and Goins were the sole members of the Compensation
Committee during the 1997 Transition Period.  The Board of Directors established
the Compensation Committee effective upon consummation of the Company's initial
public offering in June 1997.  Prior thereto, the Company had no Compensation
Committee or other committee of the Board of Directors performing similar
functions, and accordingly, the Board of Directors determined the compensation
for the executive officers and related matters.

     During the 1997 Transition Period, no executive officer of the Company
served as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.

     Caroline Fontenot, the sister of Mr. Leonards, IWL's Chairman of the Board
and Chief Executive Officer, lent IWL $75,000 on June 1, 1992, of which a
balance of $39,460, bearing interest at the rate of 12% per annum, remained
outstanding as of December 31, 1997 and a balance of $43,693 remained
outstanding as of June 30, 1997.

     IWL paid to Mr. Leonards during fiscal year 1996 and fiscal year 1997, 
$18,000 and $10,500, respectively, in management fees ($1,500 a month) for 
management rights granted by Mr. Leonards to IWL with respect to a condominium 
owned by Mr. Leonards and used by IWL.

EXECUTIVE COMPENSATION

     SUMMARY COMPENSATION TABLE.   The following table sets forth certain
compensation awarded or paid by the Company to its Chairman of the Board and
Chief Executive Officer and the other executive officers of the Company whose
total annual salary and bonus for services to the Company exceeded $100,000 in
the 1997 Fiscal Year (the "Named Executive Officers").  Information is also
provided for such persons for the period from July 1, 1997 to December 31, 1997 
(the "1997 Transition Period").

                              SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                                                OPTIONS        ALL OTHER
 NAME AND PRINCIPAL POSITION                       YEARS            SALARY          BONUS       (SHARES)      COMPENSATION
 ---------------------------                       -----            ------          -----       --------      ------------
 <S>                                               <C>              <C>             <C>         <C>           <C>
</TABLE>


                                          34
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    LONG-TERM
                                                                                                 COMPENSATION
                                                                    ANNUAL COMPENSATION             AWARDS
                                                                    -------------------             ------
 <S>                                                  <C>           <C>              <C>         <C>                     <C>
 Ignatius W.  Leonards . . . . . . . . . . . .        1997(1)         $  84,390        -                                 $  4,260(2)
    Chairman of the Board and                            1997           157,427        -                -                  29,254(3)
    Chief Executive Officer                              1996           150,000        -                -                  36,522(4)

 J.  Keith Johnson . . . . . . . . . . . . . .        1997(1)         $  60,000        -                -                $    806(5)
     Vice President--Marketing                           1997           115,485        -           $  5,000(6)              1,801(5)
                                                         1996           100,604    $12,250           36,141(7)              1,655(5)
</TABLE>

-----------

(1)  The Company changed its year end from June 30 to December 31, therefore the
     information presented in this line item represents the 1997 Transition
     Period, which is from July 1, 1997 to December 31, 1997.

(2)  Represents (i) $606 of matching payments made by the Company to
     Mr. Leonards' account under the Company's Retirement and Savings Plan (the
     "401(k) Plan"); and (ii) $3,654 for the company car provided to Mr.
     Leonards by the Company.

(3)  Represents (i) $8,998 earned by Mr. Leonards pursuant to an agreement (the
     "Kenwood Agreement") between the Company and Kenwood Americas Corporation
     ("KAC") whereby Mr. Leonards is paid 10% of the net profits of Kenwood
     Systems Group, Inc.  (the Company owns 50% of the outstanding capital stock
     of Kenwood Systems Group, Inc., with the other 50% owned by KAC);
     (ii) $2,448 of matching payments made by the Company to Mr. Leonards'
     account under the Company's Retirement and Savings Plan (the "401(k)
     Plan"); and (iii) $10,500 in management fees ($1,500 a month) paid to Mr. 
     Leonards by the Company for management rights granted by Mr. Leonards to 
     the Company with respect to a condominium owned by Mr. Leonards and used 
     by the Company; and (iv) $7,308 for the company car provided to Mr. 
     Leonards by the Company.

(4)  Represents (i) $9,000 earned by Mr. Leonards pursuant to the Kenwood
     Agreement; (ii) $2,214 of matching payments made by the Company to
     Mr. Leonards' account under the Company's 401(k) Plan; (iii) $18,000 in
     management fees ($1,500 a month) paid to Mr. Leonards by the Company for 
     management rights granted by Mr. Leonards to the Company with respect to 
     a condominium owned by Mr. Leonards and used by the Company; and (iv) 
     $7,308 for the company car provided to Mr. Leonards by the Company.

(5)  Represents matching payments made by the Company to Mr.  Johnson's account
     under the Company's 401(k) Plan.

(6)  Represents stock options granted pursuant to the Company's 1997 Stock
     Option Plan, which have an exercise price of $6.00 per share and are
     subject to vesting requirements.

(7)  Represents stock options granted pursuant to the Company's Employee
     Incentive Stock Option Plan, which have an exercise price of $3.56 per
     share.  The vesting of all such options was accelerated upon consummation
     of the Company's initial public offering in June 1997.

     OPTION GRANTS.  There were no option grants during the 1997 Transition 
Period to the Named Executive Officers.

                      FISCAL YEAR-END OPTION VALUES TABLE
 
<TABLE>
<CAPTION>
                                                     NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                                                    UNDERLYING UNEXERCISED       IN-THE-MONEY OPTIONS
                                                  OPTIONS AT FISCAL YEAR-END    AT FISCAL YEAR-END(1)
                                                  --------------------------  --------------------------
NAME                                              EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
------------------------------------------------  -----------  -------------  -----------  -------------
<S>                                               <C>          <C>            <C>          <C>
J. Keith Johnson................................      36,141(2)       5,000    $ 341,171      $ 35,000
</TABLE>
 
------------------------
 
(1) Based on the fair market value of the Common Stock of $13.00 per share as
    reported on the Nasdaq National Market on December 31, 1997.
 
(2) The Board of Directors accelerated the vesting of all outstanding options
    granted under the Employee Incentive Stock Option Plan effective upon
    completion of the Company's initial public offering in June 1997.


                                          35
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1998 by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each of the Company's Named Executive Officers,
directors and director nominees, and (iii) all of the current executive officers
and directors of the Company as a group.  The information contained in this
table with respect to beneficial ownership reflects "beneficial ownership" as
defined in Rule 13d-3 under the Exchange Act.  Shares of Common Stock not
outstanding but deemed beneficially owned by virtue of the right of an
individual or group to acquire shares within 60 days after May 31, 1998 are
treated as outstanding only when determining the amount and percentage of Common
Stock owned by such individual or group.  Except as otherwise noted or pursuant
to community property laws, each person has sole voting and sole investment
power with respect to the shares shown.  The address of each person listed is
12000 Aerospace Avenue, Suite 200, Houston, Texas 77034, except as otherwise
indicated.

<TABLE>
<CAPTION>

 NAME                                                                       NUMBER            PERCENTAGE
 ----                                                                       ------            OWNERSHIP
                                                                                              ---------
                                                                                SHARES OF COMMON STOCK
                                                                                ----------------------
                                                                                BENEFICIALLY OWNED (1)
                                                                                ----------------------
 <S>                                                                        <C>               <C>
 Ignatius W.  Leonards(2)  . . . . . . . . . . . . . . . . . . . . .            1,897,528          47.6%
 Byron M.  Allen (3) . . . . . . . . . . . . . . . . . . . . . . . .              222,200           5.6%
 J.  Keith Johnson(4)  . . . . . . . . . . . . . . . . . . . . . . .               37,949            *


 Richard H.  Roberson (5)  . . . . . . . . . . . . . . . . . . . . .                3,400            *
 Christopher J.  Amenson                                                            2,000            *
  c/o SBS Technologies, Inc.
  2400 Louisiana Boulevard, NE
  AFC Building 5, Suite 600
  Albuquerque, New Mexico 87110
 Myron J. Goins                                                                        --            --
  200 North Main Street, Suite 301
  Greenville, South Carolina 29601
 Wellington Management Company, LLP (6). . . . . . . . . . . . . . .              360,000           9.0%
  75 State Street
  Boston, MA  02109
 All executive officers and directors as a group (nine persons)(3) .            2,250,203          54.8%
</TABLE>


----------
*    Less than 1% of the outstanding shares of the class.


                                          36
<PAGE>

(1)  Based upon 3,986,718 shares of IWL Common Stock issued and outstanding.

(2)  Includes 6,666 shares held by Ignatius W. Leonards as custodian for minor
     children.

(3)  Includes 7,300 shares held by Byron M. Allen as custodian for minor
     children and 7,300 shares held by Mr. Allen's daughters, the voting,
     investment and dispositive power of which are shared by Mr. Allen with his
     daughters.

(4)  Includes 36,141 shares of IWL Common Stock subject to currently exercisable
     options and 1,000 shares of IWL Common Stock subject to options exercisable
     within 60 days of May 31, 1998.  Does not include 4,000 shares of IWL
     Common Stock subject to options not yet vested.

(5)  Includes 100 shares of IWL Common Stock held by spouse of Richard H.
     Roberson and 200 shares of IWL Common Stock held by Richard H. Roberson as
     custodian for minor children, the voting, investment and dispositive power
     of which are shared by Mr. Roberson with his spouse.  Includes 3,000 shares
     of IWL Common Stock subject to options exercisable within 60 days of May
     31, 1998.  Does not include 27,000 shares of IWL Common Stock subject to
     options not yet vested.

(6)  Address and current ownership information obtained from review of
     Commission Form 13G filed by Wellington Management Company, LLP on February
     9, 1998.

(7)  Includes 102,807 shares of IWL Common Stock subject to currently
     exercisable options, and 20,200 shares of IWL Common Stock subject to
     options exercisable within 60 days of May 31, 1998, granted to the
     executive officers of IWL, as a group.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Caroline Fontenot, the sister of Mr. Leonards, IWL's Chairman of the Board
and Chief Executive Officer, lent IWL $75,000 on June 1, 1992, of which a
balance of $39,460, bearing interest at the rate of 12% per annum, remained
outstanding as of December 31, 1997 and a balance of $43,693 remained
outstanding as of June 30, 1997.

     IWL paid to Mr. Leonards during fiscal year 1996 and fiscal year 1997, 
$18,000 and $10,500, respectively, in management fees ($1,500 a month) for 
management rights granted by Mr. Leonards to IWL with respect to a condominium 
owned by Mr. Leonards and used by IWL.


                                          37
<PAGE>

                                       PART IV

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

     (a)

     (1)  Financial Statements.  The financial statements filed as a part of
          this Annual Report on Form 10-K are listed in the "Index to
          Consolidated Financial Statements" on page F-1 hereof.

     (2)  Financial Statement Schedules.

     The financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and therefore
have been omitted or otherwise disclosed in the financial statements.

     (3)  Exhibits.

     The following exhibits are filed as a part of this Annual Report on
Form 10-K.

<TABLE>
<CAPTION>

    <C>     <S>
     +3.1   Amended and Restated Articles of Incorporation of the Registrant.
      3.2   Amended and Restated Bylaws of the Registrant.  (Incorporated by
            reference from Exhibit 3.2 to the Company's Quarterly Report on
            Form 10-Q for the period ending December 31, 1997.)
     +4.1   Specimen certificate for the Common Stock of the Registrant.
    +10.1   IWL Communications, Incorporated Employee Incentive Stock Option
            Plan.
    +10.2   IWL Communications, Incorporated 1997 Stock Option Plan.
    +10.3   IWL Communications, Incorporated 1997 Director Stock Option Plan.
   **10.4   Telecommunications Equipment Lease Agreement dated as of June 1,
            1997 between the Registrant and Diamond Offshore Company.#
    +10.5   Office Lease Agreement dated May 22, 1996, by and between Ellington
            Field, Ltd., a Texas limited partnership and the Registrant.
    +10.6   Authorized Distributor Agreement dated February 16, 1997, by and
            between Radio Frequency Systems, Inc., a Cablewave Systems
            Division, and the Registrant.#
    +10.7   License Agreement dated November 25, 1996, between Entergy
            Services, Inc.  and the Registrant d/b/a IWL Connect.#
    +10.8   Memorandum of Understanding dated July 11, 1996, between Interstate
            FiberNet (IFN) operating on its behalf and on behalf of Entergy
            Technology Corporation and the Registrant.#
</TABLE>


                                          38
<PAGE>

<TABLE>
<CAPTION>

  <C>       <S>
    +10.9   Satellite Information Network Service Agreement dated May 1, 1994,
            by and between the Registrant and the Information Telegraphy Agency
            of Russia ITAR-TASS.#
   +10.10   Reseller Agreement dated December 31, 1996, by and between Alcatel
            Network Systems, Inc.  and the Registrant.#
   +10.11   Select Partner Agreement dated effective October 11, 1996, by and
            between Newbridge Networks, Inc.  and the Registrant.#
   +10.12   Form of Service Agreement.
   +10.13   Lease Agreement dated November 18, 1996, by and between the
            Registrant and CLG, Inc.
   +10.14   License Agreement for Pole Attachments and/or Conduit Occupancy
            between BellSouth Telecommunications, Inc.  and the Registrant.
   +10.15   Promissory Note dated September 20, 1996 payable by the Registrant
            to First Bank and Trust, Cleveland, Texas.
   +10.16   Loan Agreement and Security Agreement dated December 20, 1995
            between the Registrant and Marine Midland Business Loans, Inc.
   +10.17   Promissory Note dated May 4, 1995 payable by the Registrant to
            Byron M.  Allen.
   +10.18   Letter Agreement dated February 28, 1997, by and between the
            Registrant and Marine Midland Bank as successor-in-interest to
            Marine Midland Business Loans, Inc.
   +10.19   Reseller Agreement dated December 31, 1995, by and between Alcatel
            Network Systems, Inc.  and the Registrant.#
   +10.20   Second Amendment to Loan and Security Agreement dated as of May 7,
            1997, between the Registrant and Marine Midland Business Loans,
            Inc.
   +10.21   Commitment Letter dated May 20, 1997 for financing arrangements
            between the Registrant and Bank One, Texas, N.A.
  **10.22   Credit Agreement, dated August 1, 1997, executed by and between the
            Registrant and Bank One, Texas, N.A.  ("Lender").
  **10.23   Promissory Note, dated August 1, 1997, in the principal amount of
            $822,000.00, executed by the Registrant, and made payable to
            Lender.
  **10.24   Promissory Note, dated August 1, 1997, in the principal amount of
            $605,000.00, executed by the Registrant, and made payable to
            Lender.
  **10.25   Collateral Assignment and Security Agreement, dated August 1, 1997,
            executed by Registrant, as assignor, and Lender, as assignee.
  **10.26   Revolving Credit Agreement, dated August 1, 1997, executed by and
            between the Registrant and Lender.
  **10.27   Promissory Note, dated August 1, 1997, in the principal amount of
            $5,000,000.00, executed by the Registrant, and made payable to
            Lender.
  **10.28   Security Agreement, dated August 1, 1997, executed by the
            Registrant, as debtor, and Lender, as secured party.
  **10.29   Amended and Restated Credit Agreement, dated August 28, 1997,
            executed by and between the Registrant and Lender.
</TABLE>


                                          39
<PAGE>

<TABLE>
<CAPTION>

  <C>       <S>
  **10.30   Promissory Note, dated August 28, 1997, in the principal amount of
            $1,055,000.00, executed by the Registrant, and made payable to
            lender.
   *23.1    Consent of KPMG Peat Marwick LLP
 ***27.1    Financial Data Schedule.
</TABLE>

-----------

*    Filed herewith.
#    Confidential treatment has been granted.
+    Incorporated by reference from the exhibit of the same number in the
     Company's Form S-1 filed March 5, 1997, as amended, file no.  333-22801.
**   Incorporated by reference from the exhibit of the same number in the
     Company's Annual Report on Form 10-K for the year ending June 30, 1997.
***  Amended and filed herewith.

     (b)  Reports on Form 8-K.

     Current report on Form 8-K dated as of October 2, 1997, and filed October
7, 1997, regarding the sale of the Company's interest in Kenwood System Group.





                                          40
<PAGE>

                                      SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

                              IWL COMMUNICATIONS, INCORPORATED

                              By            /s/ Ignatius W. Leonards
                                  ----------------------------------------------
                                  Ignatius W.  Leonards, Chief Executive Officer
                                               Date: June 22, 1998

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated below.

<TABLE>
<CAPTION>
         SIGNATURE                             TITLE                      DATE
         ---------                             -----                      ----
  <S>                            <S>                                  <C>
   /s/ Ignatius W. Leonards      Chief Executive Officer, Chairman    June 22, 1998
  --------------------------     of the Board, and Director
     Ignatius W. Leonards        (Principal Executive Officer)

      /s/ Byron M. Allen
  --------------------------     President and Director               June 22, 1998
        Byron M. Allen

   /s/ Richard H. Roberson       Chief Financial Officer and          June 22, 1998
  --------------------------     Director (Principal Financial and
     Richard H. Roberson         Accounting Officer

  /s/ Christopher J. Amenson
  --------------------------     Director                             June 22, 1998
    Christopher J. Amenson


  --------------------------     Director                             June  1998
        Myron J. Goins
</TABLE>







                                          41

<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                                     <C>
Independent Auditors' Report..........................................................        F-2
Consolidated Balance Sheets at June 30, 1996 and 1997 and at December 31, 1997........        F-3
Consolidated Statements of Operations for the Years ended June 30, 1995, 1996 and 1997
  and for the Six Months ended December 31, 1996 and 1997.............................        F-4
Consolidated Statements of Stockholders' Equity for the Years ended June 30, 1995,
  1996 and 1997 and for the Six Months ended December 31, 1997........................        F-5
Consolidated Statements of Cash Flows for the Years ended June 30, 1995, 1996 and 1997
  and for the Six Months ended December 31, 1996 and 1997.............................        F-6
Notes to Consolidated Financial Statements............................................        F-8
</TABLE>


                                       F-1


<PAGE>

                          INDEPENDENT AUDITORS' REPORT
 
The Stockholders
IWL Communications, Inc. and Subsidiaries:
 
    We have audited the accompanying consolidated balance sheets of IWL
Communications, Inc. and Subsidiaries (the Company) as of June 30, 1996 and
1997, and as of December 31, 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended June 30, 1997 and for the six months ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IWL Communications, Inc. and Subsidiaries as of June 30, 1996 and 1997 and
December 31, 1997 and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 1997 and for the six
months ended December 31, 1997 in conformity with generally accepted accounting
principles.
 
                                          KPMG Peat Marwick LLP
 
Houston, Texas
April 3, 1998,
except as to the
second paragraph of
Note 1 which is as of May 7, 1998
                                      F-2

<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                  JUNE 30, 1996 AND 1997 AND DECEMBER 31, 1997
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                           JUNE 30,     JUNE 30,    DECEMBER 31,
                                                                             1996         1997          1997
                                                                          -----------  -----------  ------------
<S>                                                                       <C>          <C>          <C>
Current assets:
  Cash and cash equivalents.............................................  $   360,930  $ 7,659,983   $3,345,312
  Accounts receivable:
    Trade, less allowance for doubtful accounts of $74,513, $100,936 and
      $140,613, respectively............................................    5,501,317    5,710,344    6,342,127
    Affiliate...........................................................       73,234       67,074       30,344
    Other...............................................................        7,172      116,020      239,298
  Notes receivable-trade, current portion...............................      230,429           --           --
  Inventory.............................................................      851,380    1,856,617    1,022,927
  Costs and estimated earnings in excess of billings on uncompleted
    contracts...........................................................      135,675      242,862           --
  Deferred tax asset-current............................................       74,659      242,317      107,750
  Prepaid expenses and deposits.........................................      132,266      388,272      447,067
                                                                          -----------  -----------  ------------
      Total current assets..............................................    7,367,062   16,283,489   11,534,825
                                                                          -----------  -----------  ------------
Property, plant and equipment...........................................    8,385,538   14,281,182   20,387,102
  Accumulated depreciation..............................................   (3,894,863)  (5,164,829)  (6,039,032)
                                                                          -----------  -----------  ------------
      Net property, plant and equipment.................................    4,490,675    9,116,353   14,348,070
                                                                          -----------  -----------  ------------
Investment in unconsolidated subsidiary.................................      297,153      428,374           --
Other assets............................................................      254,448      233,527      400,681
                                                                          -----------  -----------  ------------
      Total assets......................................................  $12,409,338  $26,061,743   $26,283,576
                                                                          -----------  -----------  ------------
                                                                          -----------  -----------  ------------
                                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Notes payable-current portion.........................................  $   997,904  $   963,595   $6,035,069
  Trade accounts payable and accrued expenses...........................    3,907,185    5,436,445    3,626,519
  Customer deposits.....................................................      388,993       23,365      171,972
  Federal income taxes payable..........................................       37,418           --      264,964
  Deferred revenue-current portion......................................      175,977       53,480       14,667
  Billings in excess of costs and estimated earnings on uncompleted
    contracts...........................................................       48,892       85,553       92,022
                                                                          -----------  -----------  ------------
      Total current liabilities.........................................    5,556,369    6,562,438   10,205,213
                                                                          -----------  -----------  ------------
Notes payable, noncurrent portion.......................................    2,943,837    7,692,332    3,588,308
Deferred revenue, noncurrent portion....................................       66,748           --           --
Deferred income taxes...................................................      144,034      413,071      323,913
                                                                          -----------  -----------  ------------
      Total liabilities.................................................    8,710,988   14,667,841   14,117,434
                                                                          -----------  -----------  ------------
Stockholders' equity:
  Common stock, $.01 par value; 100,000,000 authorized, issued and
    outstanding 2,225,008, 3,677,816 and 3,754,230 shares,
    respectively........................................................       22,250       36,778       37,542
  Additional paid-in capital............................................      259,626    7,251,600    7,601,589
  Retained earnings.....................................................    3,416,474    4,105,524    4,527,011
                                                                          -----------  -----------  ------------
      Total stockholders' equity........................................    3,698,350   11,393,902   12,166,142
                                                                          -----------  -----------  ------------
Commitment and contingencies
      Total liabilities and stockholders' equity........................  $12,409,338  $26,061,743   $26,283,576
                                                                          -----------  -----------  ------------
                                                                          -----------  -----------  ------------
</TABLE>

          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND
                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                                              
                                                                                              
                                                                                               SIX MONTHS     SIX MONTHS   
                                                                                                  ENDED          ENDED     
                                                         YEARS ENDED JUNE 30,                 DECEMBER 31,    DECEMBER 31, 
                                                 1995            1996            1997             1996           1997      
                                             -------------  --------------  --------------    -------------  ------------- 
                                                                                               (UNAUDITED)
<S>                                          <C>            <C>             <C>             <C>             <C>
Sales:                                                                                                      
  Telecommunication services...............  $   5,789,570  $    6,530,887  $    7,993,104  $   3,645,771   $   4,855,428
  Project/other revenue....................     10,004,504      10,711,346      14,707,698      7,303,096       7,107,213
  Product resales..........................       --            10,553,846       7,640,788      4,695,225        --
                                             -------------  --------------  --------------  -------------   -------------
    Total sales............................     15,794,074      27,796,079      30,341,590     15,644,092      11,962,641
Cost of sales (exclusive of items shown                                                                     
  separately below)........................     (9,639,347)    (10,743,266)    (14,709,249)    (7,004,414)     (6,556,544)
Cost of sales-product resales..............       --            (9,672,078)     (7,027,061)    (4,680,001)       --
                                             -------------  --------------  --------------  -------------   -------------
Gross profit...............................      6,154,727       7,380,735       8,605,280      3,959,677       5,406,097
Selling expenses...........................        862,183         842,038       1,140,953        494,702         792,667
General and administrative expenses........      3,537,004       4,257,067       4,704,302      2,240,224       2,838,058
Depreciation and amortization..............        820,957       1,003,296       1,403,036        635,415         981,733
                                             -------------  --------------  --------------  -------------   -------------
Income from operations.....................        934,583       1,278,334       1,356,989        589,336         793,639
                                             -------------  --------------  --------------  -------------   -------------
Other income and (expense):                                                                                 
  Interest income..........................         52,036          46,300          20,374         17,764         130,024
  Interest expense.........................       (296,299)       (316,412)       (534,218)      (231,490)       (347,844)
  Gain from sale of investment in                                                                           
    unconsolidated subsidiary..............       --              --              --             --                66,266
  Equity in earnings (loss) of                                                                              
    unconsolidated subsidiary..............        105,829         (25,873)         81,221            776          34,662
  Gain from sale of assets.................         24,926          67,021          47,690         18,148           9,240
  Other....................................          8,123        --              --                   28        --
                                             -------------  --------------  --------------  -------------   -------------
Total other income (expense)...............       (105,385)       (228,964)       (384,933)      (194,774)       (107,652)
                                             -------------  --------------  --------------  -------------   -------------
Income before income taxes.................        829,198       1,049,370         972,056        394,562         685,987
Income tax expense.........................        293,557         315,708         283,006        134,154         264,500
                                             -------------  --------------  --------------  -------------   -------------
Net income.................................  $     535,641  $      733,662  $      689,050  $     260,408   $     421,487
                                             -------------  --------------  --------------  -------------   -------------
                                             -------------  --------------  --------------  -------------   -------------
Net income per share:                                                                                      
  Basic....................................  $        0.24  $         0.33  $         0.30  $        0.12   $        0.11
  Diluted..................................           0.24            0.33            0.30           0.11            0.11
                                             -------------  --------------  --------------  -------------   -------------
                                             -------------  --------------  --------------  -------------   -------------
Weighted average shares outstanding:                                                                       
  Basic....................................      2,222,200       2,222,416       2,298,377      2,225,939       3,736,967
  Diluted..................................      2,232,751       2,232,967       2,323,330      2,261,149       3,907,877
                                             -------------  --------------  --------------  -------------   -------------
                                             -------------  --------------  --------------  -------------   -------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND
                       SIX MONTHS ENDED DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                                                    COMMON STOCK        ADDITIONAL
                                                ---------------------    PAID-IN       RETAINED
                                                  SHARES     AMOUNT      CAPITAL       EARNINGS        TOTAL
                                                ----------  ---------  ------------  ------------  -------------
<S>                                             <C>         <C>        <C>           <C>           <C>
Balances at June 30, 1994.....................   2,222,200  $  22,222  $    249,658  $  2,147,171  $   2,419,051
Net income....................................      --         --           --            535,641        535,641
                                                ----------  ---------  ------------  ------------  -------------
Balances at June 30, 1995.....................   2,222,200     22,222       249,658     2,682,812      2,954,692
Issuance of stock.............................       2,808         28         9,968       --               9,996
Net income....................................      --         --           --            733,662        733,662
                                                ----------  ---------  ------------  ------------  -------------
Balances at June 30, 1996.....................   2,225,008     22,250       259,626     3,416,474      3,698,350
Issuance of stock.............................       2,808         28         9,969       --               9,997
Proceeds from initial public common stock
  offering, net of expenses...................   1,450,000     14,500     6,982,005       --           6,996,505
Net income....................................      --         --           --            689,050        689,050
                                                ----------  ---------  ------------  ------------  -------------
Balances at June 30, 1997.....................   3,677,816     36,778     7,251,600     4,105,524     11,393,902
Issuance of stock.............................      76,414        764       386,260       --             387,024
Additional expenses from initial public
  offering....................................      --         --           (36,271)      --             (36,271)
Net income....................................      --         --           --            421,487        421,487
                                                ----------  ---------  ------------  ------------  -------------
Balance at December 31, 1997..................   3,754,230  $  37,542  $  7,601,589  $  4,527,011  $  12,166,142
                                                ----------  ---------  ------------  ------------  -------------
                                                ----------  ---------  ------------  ------------  -------------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5

<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED JUNE 30, 1995, 1996, AND 1997 AND
                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>

                                                                                      SIX MONTHS     SIX MONTHS
                                                                                        ENDED          ENDED
                                                     YEARS ENDED JUNE 30,            DECEMBER 31,   DECEMBER 31,
                                               1995          1996          1997         1996            1997
                                           ------------  ------------  ------------  ------------   ------------
                                                                                     (UNAUDITED)
<S>                                        <C>           <C>           <C>           <C>           <C>
Cash flows from operating activities:
Net income...............................  $    535,641  $    733,662  $    689,050   $  260,408    $  421,487
Adjustments to reconcile net income to
  net cash provided by (used in)
  operating activities:
Depreciation and amortization............       820,957     1,003,296     1,403,036      635,415       981,733
Gain from sale of KSG....................       --            --            --            --           (66,266)
Gain from sale of assets.................       (24,926)      (67,021)      (47,690)     (18,148)       (9,240)
Deferred income taxes....................        78,903        (9,528)      101,379       34,509        45,409
Equity in (earnings) loss of
  unconsolidated subsidiary..............      (105,829)       25,873       (81,221)        (776)      (34,662)
Changes in operating assets and
  liabilities:
Accounts receivable......................      (296,166)   (3,903,405)     (311,715)     468,269      (718,331)
Inventory................................       374,297      (253,022)      (70,003)    (868,242)      833,690
Costs and estimated earnings in excess of
  billings...............................        (2,881)     (132,794)     (107,187)      52,410       242,862
Prepaid expenses and deposits............       (43,997)          (58)     (256,006)    (232,870)      (58,795)
Other assets.............................        32,274      (101,611)      (91,197)    (151,430)     (205,805)
Trade accounts payable and accrued
  expenses...............................      (640,238)    2,762,020     1,871,807      (34,128)   (1,809,926)
Customer deposits........................      (118,485)      327,692      (365,628)    (274,894)      148,607
Deferred revenue.........................       177,296      (130,359)     (189,245)     378,151       (38,813)
Billings in excess of costs and estimated
  earnings...............................       --             48,892        36,661       86,609         6,469
Federal income taxes payable.............       (90,559)       37,418       (37,418)      (1,643)      264,964
                                           ------------  ------------  ------------  ------------  ------------
Net cash provided by (used in) operating
  activities.............................       696,287       341,055     2,544,623      333,640         3,383
                                           ------------  ------------  ------------  ------------  ------------
Cash flows from investing activities:
Purchase of property, plant, and
  equipment..............................    (1,585,103)   (1,492,487)   (6,987,778)  (2,431,532)   (6,189,659)
Proceeds from disposal of property,
  plant, and equipment...................        70,525       201,550       119,210       28,776        24,140
Proceeds from notes receivable...........       283,755       659,972       --            --            --
Proceeds from sale of KSG................       --            --            --            --           529,262
Investment in unconsolidated
  subsidiary.............................       --            --            (50,000)     (50,000)       --
                                           ------------  ------------  ------------  ------------  ------------
Net cash used in investing activities....  $ (1,230,823) $   (630,965) $ (6,918,568)  $(2,452,756)  $(5,636,257)
                                           ------------  ------------  ------------  ------------  ------------
</TABLE>
 
                                      F-6
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                 YEARS ENDED JUNE 30, 1995, 1996, AND 1997 AND
                  SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>

                                                                                      SIX MONTHS    SIX MONTHS
                                                                                        ENDED         ENDED
                                                     YEARS ENDED JUNE 30,            DECEMBER 31,   DECEMBER 31,
                                               1995          1996          1997          1996          1997
                                           ------------  ------------  ------------  ------------  ------------
                                                                                     (UNAUDITED) 
<S>                                        <C>           <C>           <C>           <C>           <C>
Cash flows from financing activities:
Proceeds from debt.......................     2,350,729     8,352,398     5,902,612    2,684,377    14,280,634
Debt payments............................    (1,496,470)   (8,002,183)   (1,236,116)    (654,706)  (13,313,184)
Proceeds from issuance of common stock...       --              9,996     7,006,502        9,997       350,753
Decrease in cash overdraft...............       (29,094)      --            --            --            --
                                           ------------  ------------  ------------  ------------  ------------
Net cash provided by financing
  activities.............................       825,165       360,211    11,672,998    2,039,668     1,318,203
                                           ------------  ------------  ------------  ------------  ------------
Net increase (decrease) in cash for
  period.................................       290,629        70,301     7,299,053      (79,448)   (4,314,671)
Cash and cash equivalents at beginning of
  period.................................       --            290,629       360,930      360,930     7,659,983
                                           ------------  ------------  ------------  ------------  ------------
Cash and cash equivalents at end of
  period.................................  $    290,629  $    360,930  $  7,659,983   $  281,482    $3,345,312
                                           ------------  ------------  ------------  ------------  ------------
                                           ------------  ------------  ------------  ------------  ------------
Supplemental disclosures of cash flow
  information:
Cash paid during the year for interest...  $    317,404  $    298,546  $    509,931   $  220,185    $  347,759
                                           ------------  ------------  ------------  ------------  ------------
                                           ------------  ------------  ------------  ------------  ------------
Cash paid during the year for income
  taxes..................................  $    367,267  $    150,866  $    320,424   $   57,500    $   --
                                           ------------  ------------  ------------  ------------  ------------
                                           ------------  ------------  ------------  ------------  ------------
Supplemental schedule of noncash
  investing activities:
Conversion of accounts receivable to
  notes receivable.......................  $    331,983  $    395,637  $    --        $   --        $   --
Offset of notes receivable in lieu of
  accounts payable to vendor.............  $    --       $    --       $    342,547   $   --        $   --
                                           ------------  ------------  ------------  ------------  ------------
                                           ------------  ------------  ------------  ------------  ------------
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-7
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996  AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
NATURE OF BUSINESS
 
    The Company provides communications solutions to customers with operations
in remote, difficult-access regions and in areas around the world where
government deregulation has created new market opportunities. The Company
delivers communications services to its customers by utilizing a broad range of
analog and digital technologies, including satellite, microwave radio,
conventional two-way radio and fiber optic cable. The Company has operations in
Friendswood and Houston, Texas, New Orleans and Lafayette, Louisiana and Moscow,
Russia.

CHANGE IN FISCAL YEAR-END

    The Company changed its fiscal year end from June 30 to December 31 on 
May 7, 1998.  These audited consolidated financial statements reflect the 
results of operations and statement of cash flows for the transition 
six-month period ended December 31, 1997.  The results of operations and 
statement of cash flows for the comparable six-month period ended December 31,
1996 are derived from unaudited consolidated financial statements of IWL 
which in the opinion of IWL's management, contain all adjustments (consisting 
only of normal recurring adjustments) necessary for a fair presentation thereof.

BASIS OF PRESENTATION

    The consolidated financial statements include the accounts of IWL
Communications, Inc. and its wholly-owned subsidiaries, Spacelink Systems, Inc.,
Spacelink Systems FSC, Inc. and IWL Communications Ltd. (Russia). All material
intercompany accounts and transactions have been eliminated. The Company's
investment in and operating results of Kenwood Systems Group, which was a 50%
owned entity for the years ended June 30, 1995, 1996 and 1997 and for the six
months ended December 31, 1997 until the date of sale are included in the
accompanying financial statements on the basis of the equity method of
accounting.
 
CASH EQUIVALENTS
 
    The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
 
CONCENTRATION OF CREDIT RISK
 
    The Company performs credit evaluations of its customers, but does not
require collateral.
 
MAJOR CUSTOMERS AND SUPPLIERS
 
    For the years ended June 30, 1996 and 1997, approximately $11,688,251 
(42%) and $9,818,000 (32%), respectively of the Company's sales were from one 
customer. None of the Company's sales to customers accounted for more than 
10% of sales for the year ended June 30, 1995 or the six months ended 
December 31, 1997. At June 30, 1997, accounts receivable-trade included 
balances of approximately $880,100 and $594,200 from two of the Company's 
major customers. At December 31, 1997, no customer balances accounted for 
more than 10% of accounts receivable-trade.

    The majority of the sales to the major customer for the year ended June 30,
1996 and 1997 ($10,553,846 and $7,640,800, respectively) were attributable to a
one-time project, which included a significant equipment resale component, that
the Company substantially completed in 1997, and, therefore, is not expected to
contribute in a material manner to the Company's revenue in future periods.

    Customers in the oil and gas industry account for substantially all of 
the Company's offshore and project related sales.  Price decreases in oil and 
gas and other market forces which negatively affect the oil and gas industry 
as a whole, could affect funding for drilling activities in the Gulf of 
Mexico, North Sea and elsewhere, and could impact the Company's financial 
condition, results of operations and cash flows.

                                      F-8
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    The Company purchases substantially all of its telecommunications equipment
for use in the oil and gas industry from one supplier pursuant to an exclusive
distributorship agreement.
 
INVENTORY
 
    Inventory substantially consists of parts and equipment held for resale.
Inventory that can be specifically identified using a unique identification
number is stated at the lower of specific cost or market. Inventory that cannot
be specifically identified is stated at the lower of cost or market where cost
is determined using the first in-first out method. Market value, in all cases,
represents the lower of replacement cost or net realizable value.
 
PROPERTY, PLANT AND EQUIPMENT/DEPRECIATION
 
    Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as indicated
below:
 
<TABLE>
<S>                                                               <C>
     Buildings and improvements.................................  7-31 years
     Vehicles...................................................     5 years
     Furniture and fixtures.....................................   5-7 years
     Leasehold improvements.....................................  Lease term
     Equipment for rent/lease...................................  7-10 years
     Computers, office and test equipment.......................   5-7 years
</TABLE>
 
    Significant expenditures that add materially to the utility or useful lives
of property, plant and equipment are capitalized. All other maintenance and
repair costs are charged to current operations. The cost and related accumulated
depreciation of assets replaced, retired or otherwise disposed of are eliminated
from the property accounts and any gain or loss is reflected as other income and
expense.
 
REVENUE RECOGNITION
 
    The Company provides services such as telecommunication services whose
revenue is recognized based on the monthly service provided. Lease revenues from
equipment rentals are recorded over the life of the lease contract.
Communication systems contracts are typically fixed price and revenue is
recognized based on the percentage-of-completion method, primarily based on
contract cost incurred to date compared with total estimated contract costs.
Costs and estimated earnings or losses, if any, recognized in excess of amounts
billed are classified as current assets. It is anticipated that the incurred
costs associated with work in progress at the end of the respective periods will
be billed and collected within the next year. Amounts received from clients in
excess of revenues recognized to date are classified as current liabilities.
 
STOCK OPTION PLAN
 
    Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provision of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as
 
                                      F-9
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123 commencing in its June 30, 1997 financial statements.
 
INCOME TAXES
 
    The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rate and laws that will be in effect when
the differences are expected to reverse.
 
    The provision for income taxes includes federal, foreign, state and local
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities.
 
FAIR VALUE
 
    The Company believes that the carrying amounts of its financial instruments
included in current assets and current liabilities approximate the fair value of
such items due to their short-term nature. The carrying amount of long-term
notes payable approximates their fair value because interest rates approximate
market.
 
ESTIMATES
 
    Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare this balance sheet in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.

                                      F-10
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME PER SHARE
 
    In February 1997, the FASB issued Statement of Financial Accounting 
Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128 establishes new 
standards for computing and presenting earnings per share ("EPS") amounts for 
companies with publicly held common stock. The new standards require the 
presentation of both basic and diluted EPS amounts for companies with complex 
capital structures. Basic EPS is computed by dividing income available to 
common stockholders by the weighted-average number of common shares 
outstanding for the period, and excludes the effect of potentially dilutive 
securities (such as options, warrants and convertible securities) which are 
converted into common stock. Dilutive EPS reflects the potential dilution 
related to the incremental shares from such convertible securities.  
Incremental shares resulting from dilutive employee stock options of 10,551, 
10,551, and 24,953 for the years ended June 30, 1995, 1996, and 1997, 
respectively were used in the calculation of diluted EPS.  Incremental shares 
of 35,210 and 170,910 for the six-month periods ended December 31, 1996 and 
1997, respectively, were used in the calculation of diluted EPS.
 
    Effective October 1, 1997, the Company adopted the requirements of SFAS 128
and has presented basic and diluted EPS for all periods presented.
 
    On November 1, 1995, the Board of Directors declared a two hundred- for-one
common stock split effective November 1, 1995. All share amounts and numbers of
shares have been restated to reflect the stock split.
 
(2) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
<TABLE>
<CAPTION>
                                                                            JUNE 30,     JUNE 30,    DECEMBER 31,
                                                                              1996         1997          1997
                                                                           ----------  ------------  ------------
<S>                                                                        <C>         <C>           <C>
Costs incurred on uncompleted contracts..................................  $  271,100  $    958,295   $  381,074
Estimated earnings.......................................................     127,332       315,106      281,869
                                                                           ----------  ------------  ------------
                                                                              398,432     1,273,401      662,943
Less billings to date....................................................     311,649     1,116,092      754,965
                                                                           ----------  ------------  ------------
                                                                           $   86,783  $    157,309   $  (92,022)
                                                                           ----------  ------------  ------------
                                                                           ----------  ------------  ------------
</TABLE>
 
    Included in accompanying balance sheets under the following captions:
 
<TABLE>
                                                                            JUNE 30,     JUNE 30,    DECEMBER 31,
                                                                              1996         1997          1997
                                                                           ----------  ------------  ------------
<S>                                                                        <C>         <C>           <C>
Costs and estimated earnings in excess of billings on 
  uncompleted contracts..................................................  $  135,675  $    242,862  $     --
Billings in excess of costs and estimated earnings on
  uncompleted contracts..................................................     (48,892)      (85,553)      (92,022)
                                                                           ----------  ------------  ------------
                                                                           $   86,783  $    157,309  $    (92,022)
                                                                           ----------  ------------  ------------
                                                                           ----------  ------------  ------------
</TABLE>
 
                                      F-11
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(3) INVESTMENT IN KENWOOD SYSTEMS GROUP
 
    In September 1997, the Company sold its ownership in Kenwood Systems Group,
Inc. (KSG), a California corporation. Prior to the date of sale, the Company
owned 50% of the voting common stock, with the remaining 50% of the voting
common stock owned by Kenwood Americas Corporation (KAC). The results of
operations from July 1, 1997 through the date of sale (September 30, 1997) of
KSG have been reflected in the Company's operating results. The Company and KAC
were the original owners of KSG, which began operations on May 1, 1994. The
Company recorded a gain on the sale of KSG of $66,226.
 
    The investment was recorded using the equity method in which the original
investment, adjusted for the Company's proportionate share of KSG's income,
losses and dividend distributions, was recorded as a long-term investment. The
Company's original investment in KSG was $200,000. An additional investment of
$50,000 was made during the year ended June 30, 1997. The Company's
proportionate share of KSG's (losses)/earnings for the years ended June 30,
1995, 1996 and 1997 and for the six months ended December 31, 1997 were
$105,829, $(25,873), $81,221 and $34,662, respectively.

    The Company received a management fee from KSG equal to 2% of gross sales 
that was paid quarterly. For the years ended June 30, 1995, 1996 and 1997 and 
the six months ended December 31, 1997, the Company earned a management fee 
of $59,995, $58,253, $82,476 and $25,406, respectively. In addition, KSG was 
covered by worker's compensation, property, medical, dental and general 
liability insurance policies maintained by the Company. KSG also purchased 
various supplies and computer equipment from the Company from time to time. 
Employees of KSG were eligible to participate in a 401(k) plan maintained by 
the Company. Billings by the Company to KSG for the years ended June 30, 
1995, 1996 and 1997 and the six months ended December 31, 1997 for insurance, 
supplies, equipment and management fees totaled approximately $128,178, 
$199,000 and $75,000, respectively. At June 30, 1996 and 1997, $73,234 and 
$67,074, respectively, is included on the accompanying balance sheet as 
account receivable-affiliate which is due from KSG.

    Pertinent financial data (unaudited) of KSG, for the years ended June 30,
1995, 1996 and 1997 and the six months ended December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                                      YEARS ENDED JUNE 30,               SIX MONTHS
                                            ----------------------------------------        ENDED
                                                1995          1996          1997      DECEMBER 31, 1997
                                            ------------  ------------  ------------  -----------------
<S>                                         <C>           <C>           <C>           <C>
Total assets at period end................  $  1,095,449  $  1,248,217  $  1,812,491         --
                                            ------------  ------------  ------------  -----------------
                                            ------------  ------------  ------------  -----------------
Stockholders' equity at period end........  $    646,053  $    594,307  $    869,745         --
                                            ------------  ------------  ------------  -----------------
                                            ------------  ------------  ------------  -----------------
Revenues..................................  $  2,999,745  $  2,912,637  $  4,121,335    $   1,206,966
                                            ------------  ------------  ------------  -----------------
                                            ------------  ------------  ------------  -----------------
Net earnings (loss).......................  $    211,660  $    (51,746) $    159,115    $      69,324
                                            ------------  ------------  ------------  -----------------
                                            ------------  ------------  ------------  -----------------
</TABLE>
 
(4) ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
    The activity in the allowance for doubtful accounts is as follows:
 
<TABLE>
<CAPTION>
                                                        BALANCE AT   CHARGED TO   WRITE-OFFS   BALANCE AT
                                                       BEGINNING OF   COSTS AND     NET OF     THE END OF
                                                          PERIOD      EXPENSES    RECOVERIES     PERIOD
                                                       ------------  -----------  -----------  ----------
<S>                                                    <C>           <C>          <C>          <C>
Year ended June 30, 1995.............................   $   85,000    $  29,510    $ (86,529)  $   27,981
Year ended June 30, 1996.............................       27,981       46,532       --           74,513
Year ended June 30, 1997.............................       74,513       26,423       --          100,936
Six months ended December 31, 1997...................      100,936       39,677       --          140,613
</TABLE>

                                      F-12
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(5) PROPERTY, PLANT AND EQUIPMENT
 
    Property, plant and equipment at June 30, 1996 and 1997 and December 31,
1997 was as follows:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,      JUNE 30,     DECEMBER 31,
                                                                 1996          1997           1997
                                                             ------------  -------------  -------------
<S>                                                          <C>           <C>            <C>
Assets:
  Land.....................................................  $     41,046  $      41,046  $      41,046
  Equipment for rent/lease.................................     6,355,557      9,743,043     12,003,374
  Building and improvements................................       456,355        767,327        796,198
  Computer, office and test equipment......................       889,326      1,919,700      2,321,238
  Vehicles.................................................       475,353        570,716        516,693
  Furniture and fixtures...................................       167,901        304,116        335,054
  Construction in process..................................       --             935,234      4,373,499
                                                             ------------  -------------  -------------
                                                                8,385,538     14,281,182     20,387,102
Accumulated depreciation and amortization:
  Equipment for rent/lease.................................     3,316,813      4,285,492      4,989,079
  Building and improvements................................       144,548        170,631        187,598
  Computer, office and test equipment......................       100,283        268,159        396,380
  Vehicles.................................................       234,601        306,219        310,635
  Furniture and fixtures...................................        98,618        134,328        155,340
                                                             ------------  -------------  -------------
                                                                3,894,863      5,164,829      6,039,032
                                                             ------------  -------------  -------------
Net property, plant and equipment..........................  $  4,490,675  $   9,116,353  $  14,348,070
                                                             ------------  -------------  -------------
                                                             ------------  -------------  -------------
</TABLE>
 
(6) SEGMENT AND GEOGRAPHIC INFORMATION
 
    The Company operates in one industry segment: provision of advanced
communication solutions. The Company markets and sells its products and services
in the United States and in foreign countries through its direct sales
organization.
 
    The following table presents information about the Company by geographic
area. Export sales and certain income and expense items are reported in the
geographic area where the transaction originates. Substantially all identifiable
assets of the Company are held in the United States.
 
                                      F-13
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(6) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)

    All significant transactions and agreements of the Company are conducted in
U.S. dollars; therefore, no foreign currency translation gains or losses are
included in the accompanying financial statements.
 
<TABLE>
<CAPTION>
                                                                            NORTH
                                                                           AMERICA    RUSSIA      OTHER      TOTAL
                                                                          ---------  ---------  ---------  ---------
<S>                                                                       <C>        <C>        <C>        <C>
                                                                                        (IN THOUSANDS)
For the year ended June 30,
  1995:
    Revenues............................................................  $  11,956  $   3,262  $     576  $  15,794
    Operating income (loss).............................................        520        190        225        935
    Identifiable assets.................................................      8,232     --         --          8,232
  1996:
    Revenues............................................................     25,306      2,281        209     27,796
    Operating income (loss).............................................        908        436        (66)     1,278
    Identifiable assets.................................................     12,409     --         --         12,409
  1997:
    Revenues............................................................     27,457      2,323        562     30,342
    Operating income (loss).............................................        578        555        224      1,357
    Identifiable assets.................................................     26,062     --         --         26,062
For the six months ended December 31,
  1997:
    Revenues............................................................      9,701        780      1,482     11,963
    Operating income (loss).............................................        397        123        274        794
    Identifiable Assets.................................................     26,284     --         --         26,284
</TABLE>
 
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS
 
    Borrowing under the Company's credit facility and long-term notes payable
consists of the following:
 
<TABLE>
<CAPTION>
                                                                                  JUNE 30,
                                                                          ------------------------  DECEMBER 31,
                                                                             1996         1997          1997
                                                                          -----------  -----------  ------------
<S>                                                                       <C>          <C>          <C>
Borrowing under a revolving credit facility, bearing interest at LIBOR
  plus 2.4% (8.12% at December 31, 1997), due in October 1998, secured
  by specific underlying accounts receivable, equipment and inventory.
  Maximum borrowings are $5,000,000 under the facility. The weighted
  average interest rate was 8.12% for the six months ended December 31,
  1997..................................................................  $   --       $   --        $4,123,279
Borrowings under a revolving credit facility, bearing interest at prime
  plus .75%. Facility was fully paid and closed in August 1997..........    1,426,598    4,521,024       --
Note payable to bank, principal and interest due monthly in the amount
  of $25,707, interest at 30-day LIBOR plus 2.4% (8.12% at December 31,
  1997), due in December 1999, secured by underlying lease equipment....      --           --           539,589
Note payable to bank, principal and interest due monthly in the amount
  of $36,053, interest at 30-day LIBOR plus 2.4% (8.12% at December 31,
  1997), due in May 2000, secured by underlying lease equipment.........      --           --           745,939
</TABLE>
 
                                      F-14
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                  JUNE 30,
                                                                          ------------------------  DECEMBER 31,
                                                                             1996         1997          1997
                                                                          -----------  -----------  ------------
<S>                                                                       <C>          <C>          <C>
Note payable to bank, principal and interest due in the amount of
  $46,939, interest at 8.5%, due in June 2000, secured by underlying
  lease equipment.......................................................      --           --           987,000
Note payable to bank, varying principal and interest due monthly
  ($29,567 at December 31, 1997), interest at 30-day LIBOR plus 2.4%
  (8.12% at December 31, 1997), due in September 2001, secured by
  underlying lease equipment............................................      --           --           989,062
Note payable to bank, principal and interest due monthly in the amount
  of $22,500, interest at 9.0%, due in November 2001, secured by
  specific underlying equipment.........................................      --         1,192,500      979,561
Note payable to financing company, principal and interest due monthly in
  the amount of $9,200, interest at 6.75%, due in June 2007, secured by
  specific underlying equipment.........................................      --           801,248      772,690
Note payable to bank, principal due monthly in the amount of $15,833,
  plus interest at prime plus .75%. Note was fully paid in August
  1997..................................................................      870,835      680,839       --
Note payable to bank, principal due monthly in the amount of $24,306,
  plus interest at prime plus 1%. Note was fully paid in December
  1997..................................................................      440,233      101,598       --
Note payable to leasing company, principal and interest due monthly in
  the amount of $13,699, interest at 10.7%, due in February 1998,
  secured by specific underlying equipment..............................      247,040      102,428       24,260
Note payable to mortgage company, varying principal and interest due
  monthly ($1,955 at December 31, 1997), principal and interest adjusted
  quarterly to prime plus 2.5% (11.0% at December 31, 1997), due in
  April 2015, secured by specific underlying property...................      185,462      182,702      180,328
Note payable to leasing company, principal and interest due monthly in
  the amount of $5,595, interest at 9%, due in December 1998, secured by
  specific underlying equipment.........................................      149,963       94,069       64,214
Note payable to finance company, principal and interest due monthly in
  the amount of $3,180, interest at 10.2%, due in February 2000, secured
  by specific underlying equipment......................................      108,657       81,655       64,482
Note payable to bank, principal due monthly in the amount of 2.1% of the
  amount outstanding plus interest at prime plus .75%. Note was fully
  paid in August 1997...................................................       90,473      500,000       --
Note payable to bank, principal due monthly in the amount of $10,556
  plus interest at prime plus 1%. Note was fully paid in February
  1997..................................................................       84,444      --            --
Note payable to leasing company, principal and interest due monthly in
  the amount of $4,831, interest at 10%. Note was fully paid in December
  1997..................................................................       84,210       32,272       --
</TABLE>
 
                                      F-15
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                  JUNE 30,
                                                                          ------------------------  DECEMBER 31,
                                                                             1996         1997          1997
                                                                          -----------  -----------  ------------
<S>                                                                       <C>          <C>          <C>
Note payable to finance company, principal and interest due monthly in
  the amount of $1,916, interest at 8.8%, due in June 1999, secured by
  specific underlying equipment.........................................       56,203       37,258       27,168
Notes payable to individuals, who are employees and relatives of the
  principal shareholder, principal and interest due monthly in the
  amount of $4,296, interest rates ranging from 9%-12%, due in August
  2001, unsecured.......................................................       54,818       43,693       39,460
Note payable to bank, principal and interest due monthly in the amount
  of $8,959, interest at 6.98%. Note was fully paid in December 1996....       52,694      --            --
Note payable to benefit plan, principal and interest due monthly in the
  amount of $5,500, interest at 10%. Note was fully paid in February
  1997..................................................................       43,399      --            --
Notes payable to bank, principal and interest due monthly in the amount
  of $1,090, interest at 8.5%, due in March 1998, secured by vehicles...       19,735        7,885        2,113
Note payable to finance company, principal and interest due monthly in
  the amount of $499, interest at 12.1%, due in June 1999, secured by
  specific underlying equipment.........................................       14,777       10,652        8,213
Notes payable to finance company, principal and interest due monthly in
  the amount of $3,520, interest at 8.5%, due in September 1999, secured
  by specific underlying equipment......................................      --            83,589       65,706
Note payable to bank, principal and interest due monthly in the amount
  of $1,220, interest at prime plus .75%. Note was fully paid in August
  1997..................................................................      --           168,198       --
Other...................................................................       12,200       14,317       10,313
                                                                          -----------  -----------  ------------
                                                                            3,941,741    8,655,927    9,623,377
Less current portion....................................................      997,904      963,595    6,035,069
                                                                          -----------  -----------  ------------
  Total long-term debt..................................................  $ 2,943,837  $ 7,692,332   $3,588,308
                                                                          -----------  -----------  ------------
                                                                          -----------  -----------  ------------
</TABLE>
 
                                      F-16
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(7) NOTES PAYABLE AND FINANCING ARRANGEMENTS (CONTINUED)

    The following is a summary of maturities of notes payable and financing
arrangements at December 31, 1997 during the next five years:
 
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S>                                                                               <C>
1998............................................................................  $  6,035,069
1999............................................................................     1,766,429
2000............................................................................       722,406
2001............................................................................       431,754
2002............................................................................        84,610
Thereafter......................................................................       583,109
                                                                                  ------------
  Total.........................................................................  $  9,623,377
                                                                                  ------------
                                                                                  ------------
</TABLE>
 
    The Company's secured revolving line of credit allows the Company to borrow
up to a maximum of $5.0 million subject to a borrowing base based on accounts
receivable and inventory. The Company also has a secured guidance line of credit
that allows the Company to borrow up to $5.0 million to finance the Company's
purchase and subsequent lease of communication equipment. The interest rate on
both lines is at the Company's option, the lending bank's base rate or 30, 60 or
90 day adjusted LIBOR plus 2.4% (8.12% at December 31, 1997). The lines of
credit are secured by specific underlying accounts receivable, equipment and
inventory. The lines of credit provide for certain reporting and financial
covenants including minimum net worth and maximum debt to net worth
requirements. The Company was in compliance with such covenants at December 31,
1997. The guidance line of credit is due on May 1, 1998. The Company had $5.0
million available under the guidance line of credit at December 31, 1997.
 
    Under the terms of the Company's revolving credit facility, the Company may
not pay dividends without prior consent of the lending bank.
 
    The Company was in violation of the financial covenant requiring 
maintenance of a specified current ratio as of March 31, 1998 and was in 
technical default of a covenant requiring the Lender's consent to the 
Transaction. The Company has obtained a waiver for these covenant violations 
and has obtained the Lender's consent to the Transaction. In June 1998, the 
Company was extended additional credit under the Working Capital Loan by the 
Lender of up to $4.0 million. The Working Capital Loan will mature on the 
earlier of consummation of the Transaction or August 31, 1998.

    The Company capitalized financing costs of $79,981 for the six months ended
December 31, 1997 and is amortizing such costs over the life of the respective
loan. These financing costs are included in other assets on the balance sheet.
Amortization expense for the six months ended December 31, 1997 amounted to
$38,651.
 
(8) INCOME TAXES
 
    Income tax expense attributable to income consists of:
 
<TABLE>
<CAPTION>
                                                                                       SIX MONTHS ENDED
                                                           YEAR ENDED JUNE 30,           DECEMBER 31,
                                                        1995       1996       1997           1997
                                                     ----------  ---------  ---------  ----------------
<S>                                                  <C>         <C>        <C>        <C>
United States Federal
  Current income tax expense.......................  $  214,654    175,404     59,989        115,080
  Deferred income tax expense......................      78,903     (9,528)    81,607         65,181
Foreign--current income tax expense................      --        149,832    141,410         84,239
                                                     ----------  ---------  ---------        -------
                                                     $  293,557    315,708    283,006        264,500
                                                     ----------  ---------  ---------        -------
                                                     ----------  ---------  ---------        -------
</TABLE>
 
                                      F-17
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
    Foreign income tax expense results from taxes withheld on sales related to
the Russian operations. Operating income from such operations for the years
ended June 30, 1995, 1996 and 1997 and the six months ended December 31, 1997
were $190,000, $436,000, $555,000 and $123,000, respectively.
 
    The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and 1997 and December 31, 1997 are presented below:
 
<TABLE>
<CAPTION>
                                                                         JUNE 30
                                                                 ------------------------  DECEMBER 31,
                                                                    1996         1997          1997
                                                                 -----------  -----------  ------------
<S>                                                              <C>          <C>          <C>
Deferred tax assets:
  Accounts receivable, due to allowance for doubtful
    accounts...................................................  $    25,335       34,317       47,808
  Accrued vacation pay.........................................       30,497       27,200       27,200
  Deferred revenue.............................................       41,521       12,467        7,142
  Alternative minimum tax credit carryforward..................       74,918      105,267      116,958
  Foreign tax credit...........................................      --            63,066       25,600
  Equity in losses of affiliates...............................        8,796      --            --
                                                                 -----------  -----------  ------------
    Total deferred tax assets..................................      181,067      242,317      224,708
Deferred tax liabilities:
  Property, plant and equipment................................     (250,442)    (381,170)    (440,871)
  Equity in income of affiliates...............................      --           (12,130)      --
                                                                 -----------  -----------  ------------
    Total deferred tax liabilities.............................     (250,442)    (393,300)    (440,871)
                                                                 -----------  -----------  ------------
    Net deferred tax liability.................................  $   (69,375)    (150,983)    (216,163)
                                                                 -----------  -----------  ------------
                                                                 -----------  -----------  ------------
</TABLE>
 
    There was no valuation allowance on deferred tax assets as of June 30, 1996
and 1997 and December 31, 1997, as management has determined that it is more
likely than not that these tax assets will be realized.
 
    The Company also has alternative minimum tax credit carryforwards of
$116,958 at December 31, 1997 which are available to reduce future federal
regular income taxes, if any, over an indefinite period.
 
    The difference between the actual income tax provision and the tax provision
computed by applying the statutory Federal income tax rate to income before
taxes is attributable to the following:
 
<TABLE>
<CAPTION>
                                                                                            SIX MONTHS
                                                               YEAR ENDED JUNE 30             ENDED
                                                       ----------------------------------  DECEMBER 31,
                                                          1995        1996        1997         1997
                                                       ----------  ----------  ----------  ------------
<S>                                                    <C>         <C>         <C>         <C>
Income tax provision at 34%..........................  $  281,927     356,789     330,499      235,582
Expenses not deductible for tax purposes.............      11,630      11,990       6,463       16,547
Effect of foreign operations, including foreign tax
  credits............................................      --         (53,071)    (53,956)     (19,451)
Sale of KSG..........................................      --          --          --           31,822
                                                       ----------  ----------  ----------  ------------
Actual income tax provision..........................  $  293,557     315,708     283,006      264,500
                                                       ----------  ----------  ----------  ------------
                                                       ----------  ----------  ----------  ------------
Effective tax rate...................................       35.4%       30.1%       29.1%        38.6%
                                                       ----------  ----------  ----------  ------------
                                                       ----------  ----------  ----------  ------------
</TABLE>
 
                                      F-18
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(9) EMPLOYEE BENEFITS
 
    The Company has a 401(k) profit sharing plan covering employees with six or
more months of tenure. The plan allows employee contributions of zero to 15% of
applicable employee wages. The Company makes matching contributions to the plan
as a percentage of the employee's contribution. The Company's contribution is
subject to the employee meeting certain vesting requirements. The Company's net
contributions to the plan (after forfeitures) for the years ended June 30, 1995,
1996, and 1997 the six months ended December 31, 1997 were $23,367, $30,287,
$15,035 and $31,035, respectively.
 
(10) INCENTIVE STOCK OPTION PLANS
 
    During the year ended June 30, 1996, the Company adopted an Employee
Incentive Stock Option Plan (the Plan). The Plan provides for the granting of a
maximum of 258,600 options to purchase shares of common stock to key employees
of the Company. The option price per share may not be less than the fair market
value of a share on the date the option is granted. Options generally vest at
the rate of 20% per year over a five year period, however, the Board at its
discretion may accelerate the vesting schedule. All options under the Plan
granted on or prior to the IPO date, June 12, 1997, vested in full on the
offering date. Stock options will expire ten years from the date of grant.
 
    As of December 31, 1997, there were options for 146,695 shares granted under
the Plan with option prices ranging from $3.56 to $4.49. All options granted
were outstanding and exercisable at December 31, 1997. On December 31, 1997,
there were 111,905 additional shares available for grant under the plan.
 
    The Company adopted a 1997 Stock Option Plan and a 1997 Director Stock
Option Plan in February 1997 (the Plans). Options granted under the 1997 Stock
Option Plan may be either Incentive Stock Options or non-statutory stock options
under the Code. Incentive Stock Options may be granted under the 1997 Stock
Option Plan to any person who is an officer or other employee of the Company or
any of its subsidiaries. The 1997 Director Stock Option Plan was adopted to
encourage ownership of the Company by eligible non-employee directors. All
options granted will be non-qualified and not eligible for treatment as
Incentive Stock Options under Section 422 of the Code. A total of 300,000 and
100,000 shares of Common Stock have been reserved for issuance upon the exercise
of options which may be granted under the 1997 Stock Option Plan and the 1997
Director Stock Opiton Plan, respectively.
 
    As of December 31, 1997, there were options for 197,350 shares granted under
the 1997 Stock Option and 1997 Director Stock Option Plans with option prices
ranging from $6.00 to $9.50. All options granted were outstanding and none were
exercisable at December 31, 1997. On December 31, 1997, there were 202,650
additional shares available for grant under the Plans.
<TABLE>
<CAPTION>
                                                                                                            SIX MONTHS
                                                                                                               ENDED
                                                         YEAR ENDED                  YEAR ENDED             DECEMBER 31,
                                                        JUNE 30, 1996               JUNE 30, 1997              1997
                                                ----------------------------  ----------------------------  -----------
                                                                WEIGHTED-                     WEIGHTED-
                                                 NUMBER OF       AVERAGE       NUMBER OF       AVERAGE       NUMBER OF
                                                  SHARES     EXERCISE PRICE     SHARES     EXERCISE PRICE     SHARES
                                                -----------  ---------------  -----------  ---------------  -----------
<S>                                             <C>          <C>              <C>          <C>              <C>
Options outstanding at beginning of year......      --             --            152,836      $    3.59        310,514
Options granted...............................     152,836       $   3.59        157,678           5.91         47,750
Options exercised.............................      --             --             --             --            (13,919)
Options forfeited.............................      --             --             --             --               (300)
                                                -----------         -----     -----------         -----     -----------
Options outstanding at end of year............     152,836       $   3.59        310,514      $    4.77        344,045
                                                -----------         -----     -----------         -----     -----------
                                                                              -----------         -----     -----------
Options exercisable at end of year............      --             --            160,614      $    3.62        146,695
                                                -----------         -----     -----------         -----     -----------
                                                -----------         -----     -----------         -----     -----------
 
<CAPTION>
                                                   WEIGHTED-
                                                    AVERAGE
                                                EXERCISE PRICE
                                                ---------------
<S>                                             <C>
Options outstanding at beginning of year......     $    4.77
Options granted...............................          6.16
Options exercised.............................          3.56
Options forfeited.............................          6.00
                                                       -----
Options outstanding at end of year............     $    5.01
                                                       -----
                                                       -----
Options exercisable at end of year............     $    3.63
                                                       -----
                                                       -----
</TABLE>
 
                                      F-19
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(10) INCENTIVE STOCK OPTION PLANS (CONTINUED)

    A summary of options outstanding as of December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
              NUMBER OF     WEIGHTED-AVERAGE      NUMBER OF
 EXERCISE      OPTIONS    REMAINING CONTRACTUAL    OPTIONS
   PRICE     OUTSTANDING          LIFE           EXERCISABLE
-----------  -----------  ---------------------  -----------
<S>          <C>          <C>                    <C>
 $    3.56      136,140               8.0           136,140
      4.49       10,555               8.4            10,555
      6.00      186,600               9.5            --
      6.25        5,000               9.7            --
      6.75        5,000               9.8            --
      9.50          750               9.8            --
             -----------              ---        -----------
                344,045               8.9           146,695
             -----------              ---        -----------
             -----------              ---        -----------
</TABLE>
 
    The per share weighted-average value of stock options granted during the
years ended June 30, 1996 and 1997 and the six months ended December 31, 1996
(unaudited) and 1997 were $.24, $.35, $.79 and $2.61, respectively, on the date
of grant, using the Black Scholes model with the following assumptions:
risk-free interest rate of 5.77% for the 1996 options and 5.89% for the 1997
options, expected life of 2 to 3 years, expected volatility of 55%, and no
expected dividend yield.
 
    The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
                                                                          YEARS ENDED               SIX MONTHS ENDED
                                                                            JUNE 30                   DECEMBER 31,
                                                                         -------------        ----------------------------
                                                                       1996         1997           1996           1997
                                                                       -----        -----     ---------------     -----
                                                                                                (UNAUDITED)
                                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                    <C>          <C>       <C>                 <C>
Net income
  As reported.....................................................      $  734          689            260            421
  Pro Forma.......................................................      $  729          592            247            364
Earnings per share (diluted)
  As reported.....................................................      $  .33          .30            .12            .11
  Pro Forma.......................................................      $  .33          .25            .11            .09
</TABLE>
 
(11) LEASE CONTRACTS
 
    The Company provides telecommunications services to various customers under
operating leases with typical terms of one to five years. The services may
include communications equipment, line/satellite charges and/or maintenance
charges. These leases impose certain obligations on both the lessor and lessee
which must be met during the term of the lease.
 
    A significant portion of these services requires that the Company have
access to international communication satellites. The Company has contracted
with a Russian entity for rights to access its portion
 
                                      F-20
<PAGE>
                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(11) LEASE CONTRACTS (CONTINUED)

of an international communications satellite. The Company has agreed to pay a
recurring monthly fee to the entity based on the amount of satellite space
segment utilized by each lessee. Additionally, the Company has sold
communication equipment to the entity. The Company utilizes those facilities to
provide communication services to various United States energy oil and gas
companies and other customers doing business in Russia.
 
    The following is a summary of the expected revenue to be earned during the
next five years by the Company on lease agreements executed on or before
December 31, 1997:
 
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------
<S>                                                           <C>
1998........................................................  $  3,821,383
1999........................................................     2,420,810
2000........................................................     2,033,177
2001........................................................       908,116
2002........................................................       247,552
Thereafter..................................................       --
                                                              ------------
  Total.....................................................  $  9,431,038
                                                              ------------
                                                              ------------
</TABLE>
 
(12) COMMITMENTS
 
    The Company leases office space, equipment and communication services for
its operations under leases expiring through 2005. Rental expense under the
leases for the years ended June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1997 was $348,184, $555,033, $896,354 and $699,497, respectively.
 
    Future minimum lease payments as of December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------
<S>                                                           <C>
1998........................................................  $  2,669,054
1999........................................................     1,772,903
2000........................................................     1,304,659
2001........................................................     1,116,553
2002........................................................       665,595
Thereafter..................................................       568,250
                                                              ------------
  Total.....................................................  $  8,097,014
                                                              ------------
                                                              ------------
</TABLE>
 
(13) STOCKHOLDERS' EQUITY
 
    (a) Preferred Stock
 
    The Company has authorized 10,000,000 shares of preferred stock which may be
issued by the Board of Directors in one or more series and the Board is
authorized to fix the designations, relative powers, preferences, rights,
qualifications, limitations and restrictions of all shares of each of such
series, including
 
                                      F-21

<PAGE>

                   IWL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND SIX MONTHS ENDED DECEMBER 31, 1997
 
(13) STOCKHOLDERS' EQUITY (CONTINUED)

without limitation dividend rates, preemptive rights, conversion rights, voting
rights, redemption and sinking fund provisions, liquidation preferences and the
number of shares constituting each such series, without any further vote or
action by the shareholders. The Company's Articles of Incorporation grant the
Board of Directors power to establish the rights, preferences and privileges of
authorized and unissued preferred stock. The issuance of shares of preferred
stock pursuant to the Board of Director's authority described above could
decrease the amount of earnings and assets available for distribution to holders
of common stock.
 
    (b) Common Stock
 
    The Company amended and restated its Articles of Incorporation in March,
1997 to restate the common stock authorized, issued and outstanding from no par
value to a $0.01 par value per common share. All share amounts have been
restated to reflect this amendment.
 
    The Company completed an initial public offering (IPO) of common stock on
June 12, 1997, issuing 1,450,000 shares at $6.00 per share. The proceeds, net of
commissions and expenses, from this IPO totaled $6,996,505.  In July 1997 the
Underwriters exercised an overallotment option and purchased an additional
62,496 shares resulting in net proceeds of $337,473.

    (c) Representative's Warrant

    The Company agreed to sell to the Representative or its designees, for
nominal consideration, the Representative's Warrant to purchase up to 145,000
shares of Common Stock at an exercise price equal to 120% of the IPO price. The
Representative has certain demand and "piggy-back" registration rights that may
require the Company to register for resale the shares of Common Stock issuable
under the Representative's Warrant. The Representative's Warrant is exercisable
for a period of four years, beginning June 12, 1998.
 
(14) SUBSEQUENT EVENTS
 
    The Company acquired Integrated Communications and Engineering Limited
("ICEL") on January 29, 1998 in a business combination accounted for under the
purchase method of accounting. The acquisition was for $2.7 million which
consisted of IWL common stock and cash.
 
    The Company announced in February 1998 that it had entered into a definitive
agreement to merge with CapRock Communications Corp. and CapRock Fiber Network,
Ltd.
 
                                      F-22