THIS DOCUMENT IS AN AMENDMENT TO THE PAPER FORMAT
                    FILING OF THE ANNUAL REPORT ON FORM 10KSB
                   FOR THE FISCAL YEAR ENDED JUNE 30, 1996 OF
                     AMERICAN COMMUNICATIONS SERVICES, INC.
                 


                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                  FORM 10 - KSB/A
              ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

    For the fiscal year ended: June 30, 1996 Commission File number 0 - 25314

                     AMERICAN COMMUNICATIONS SERVICES, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

                               DELAWARE 52-1947746
         (State or other jurisdiction of (I.R.S. Employer Identification
             incorporation or organization) No. formerly 05-0440761)

           131 National Business Parkway Annapolis Junction, MD 20701
                    (Address of Principle Executive Offices)

                    Issuer's telephone number (301) 617-4200

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

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                                (Title of Class)

     Check whether the issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the Exchange  Act during the  preceding 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been  subject to such filing  requirements  for the last 90 days.  YES X
NO_________

     Check here if there is no disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the best of the registrant's  knowledge,  in the definitive proxy
incorporated  by reference in Part III of this Form 10-KSB/A or any amendment to
this Form 10-KSB/A. [ ]

     Issuer's revenues for the fiscal year ended June 30, 1996 were $3,415,137.

     The aggregate market value of the voting stock held by non-affiliates based
upon the last reported sales price of a share of common stock as reported on the
Nasdaq  National Market on September 20, 1996 was  $36,551,138.  As of September
20, 1996 there were  6,761,466  shares of common  stock  outstanding,  par value
$0.01 per share outstanding.

The Index to Exhibits appears on page 63.

<PAGE>



                       Documents Incorporated By Reference

The   registrant's   definitive  Proxy  Statement  for  its  annual  meeting  of
stockholders  scheduled to be held on November  15,  1996,  to be filed with the
Commission  not later than 120 days after the close of the  registrant's  fiscal
year, has been  incorporated  by reference,  in whole or in part, into Part III,
Items 9, 10, 11 and 12 of this Annual Report on Form 10-KSB/A.


<PAGE>


                     AMERICAN COMMUNICATIONS SERVICES, INC.
                        1996 FORM 10 - KSB/A ANNUAL REPORT
                                      Index

Part I                                                                Page


Item 1.  Business                                                       1

Item 2.  Properties                                                    46

Item 3.  Legal Proceedings                                             46

Item 4.  Submission of Matters to a Vote of Security Holders           47

Part II 

Item 5.  Market for Common Equity and Related Stockholders             48
                  Matters

Item 6.  Management's Discussion and Analysis of Results of            50
                  Operations and Financial Condition

Item 7.  Financial Information                                         61

Item 8.  Changes in and Disagreements with Accountants on              61
                  Accounting and Financial Disclosure

Part III 

Item 9   Directors and Executive Officers of the Registrant            62

Item 10. Executive Compensation                                        62

Item 11. Security Ownership of Certain Beneficial Owners and           62
                  Management

Item 12. Certain Relationships and Related Transactions                62

Item 13. Exhibits and Reports on Form 8-K                              63


<PAGE>




                                     Part I

Item 1.  Business
         --------



Industry Overview

     The  continuing   deregulation  of  the  telecommunications   industry  and
technological  change  have  resulted in an  increasingly  information-intensive
business  environment.  The  ability to access  information  quickly  has become
critical to the success of both business and  government  end users.  Both voice
and data communications  traffic of large business and government end users have
increased  significantly.  In addition,  deregulation  has led to an increase in
competition in the  telecommunication  services  industry,  most recently in the
local exchange  markets.  Competitive  local exchange  carriers ("CLEC") such as
American Communications Services, Inc. ("ACSI" or "Company") have sought to take
advantage of the opportunities presented by increased competition and the demand
for timely and reliable telecommunications  services.  Regulatory initiatives in
the  telecommunications  industry  introduced to foster competition in the local
exchange  market  have  stimulated  demand for local voice  services,  the total
market for which was approximately $93.0 billion in 1994.

     Several  factors have served  historically  to promote  competition  in the
local exchange  market,  including (i) rapidly  growing  customer  demand for an
alternative to the local exchange carrier's ("LEC") monopoly,  spurred partly by
the  development of  competitive  activities in the long distance  market;  (ii)
advances in the technology  for  transmission  of data and video,  which require
greater capacity and reliability levels than copper-based LEC networks were able
to  accommodate;  (iii) a monopoly  position  and rate of  return-based  pricing
structure  that provided  little  incentive for LECs to upgrade their  networks;
(iv) the development of fiber optics and digital  electronic  technology,  which
combined  the  ability  to build a  network  economically  with the  ability  to
transmit  data and  video at  high-speeds  and  greatly  increased  capacity  as
compared to the LECs'  copper-based  networks;  and (v) the  significant  access
charges  that long  distance  companies  (interexchange  carriers or "IXC") were
required to pay to LECs to access the LECs' networks.

<PAGE>

    Competition in the local exchange services market began in the mid-1980s. In
New York City,  Chicago and Washington,  D.C., newly formed companies,  known as
competitive access providers ("CAPs"),  provided dedicated non-switched services
by installing fiber optic facilities  connecting  points of presence ("POPs") of
IXCs within a  metropolitan  area and, in some cases,  connecting  business  and
government  end users  with IXCs.  Most of these  early  CAPs  operated  limited
networks in the central  business  districts of major cities in the US where the
highest  concentration  of voice and data  traffic,  including  IXC traffic,  is
typically  found.  CAPs used the  substantial  capacity  and  economies of scale
inherent in fiber optic cable to offer customers service that was generally less
expensive  and of higher  quality  than could be obtained  from the LECs due, in
part,  to  antiquated  copper-based  facilities  used in many LEC  networks.  In
addition,  based on management's  experience,  CAPs offered shorter installation
and repair intervals,  improved reliability and more responsive customer service
in comparison to the LECs.

    Initially,  CAPs  could  effectively  compete  only for  special  access and
private line  services to customers  in  buildings  directly  connected to their
separate   networks.   The   Federal    Communications    Commission's   ("FCC")
interconnection decisions of September,  1992, and August, 1993, allowed CAPs to
significantly  increase the number of  customers  and markets  serviced  without
physically  expanding  their  networks.  Those  interconnection  decisions  also
enabled CAPs to provide interstate  switched access services in competition with
LECs,  which has encouraged the development of competitive  interstate  switched
access market.

    With   the    enactment    of   the    Telecommunications    Act   of   1996
("Telecommunications  Act") in February of this year, the Company  believes that
competition in the local telecommunications marketplace will be enhanced through
(i) removal of state and local  entity  barriers,  (ii)  requirements  that LECs
provide interconnections to their facilities,  (iii) facilitation of the process
of  changing  from LEC  services  to those  offered by CLECs and (iv)  access to
rights-of-way.  To the  extent  that LECs  begin to  compete  with IXCs for long
distance services, IXCs may have a competitive incentive to move access business
away from LECs to CLECs, and CLEC market share may increase.


                                     Page 2

<PAGE>



The Company

    ACSI is a rapidly  growing CLEC that  constructs and operates  digital fiber
optic networks and offers local telecommunications services to IXCs and business
and government  end users in Tier II and Tier III markets  (200,000 to 2,000,000
in population)  principally in the southern United States.  The Company provides
non-switched  dedicated services,  including special access,  switched transport
and private line services.  These services  generally are offered by the Company
at a discount to those of the LEC and are delivered with a high level of network
reliability.  In addition to these dedicated services, the Company is developing
and has begun  offering  high-speed  data services to business,  government  and
other  communications   providers  (including  Internet  service  providers,  or
"ISPs").  High-speed data services include Internet  Protocol ("IP")  switching,
frame relay and  Asynchronous  Transfer Mode ("ATM").  Management  believes this
wide range of data services will ensure support of legacy,  current and emerging
applications,    including    multimedia    applications    such   as    desktop
videoconferencing.  The  Company  has also  begun  offering  on a limited  basis
enhanced voice messaging services. Management believes that successful marketing
of these  high-speed data and enhanced voice  messaging  services should provide
the Company with  increased  revenues,  an expanded  end-user  customer base and
relevant marketing experience that can be leveraged into offering local switched
voice  services.  The  Company  plans to begin  offering  local  switched  voice
services by late 1996.

As of June  30,  1996,  ACSI had 15  operational  networks  and nine  additional
networks  under  construction.  Since June 30, 1996,  the Company has  completed
construction  of three of the networks under  construction  at June 30, 1996 and
begun  construction of six additional  networks.  From June 30, 1995 to June 30,
1996,  the  Company  increased  its  operational  networks  from  five to 15 and
increased  its route  miles  from 43 to 415.  The  Company  intends,  subject to
receipt  of  necessary  additional  financing,  to  have  a  total  of 50  local
distribution networks in service or under construction by the middle of calendar
year 1998. To date, management believes that it has been able to use its capital
most efficiently by constructing,  rather than acquiring,  fiber optic networks.
By constructing all of its networks,  ACSI believes it has realized  significant
cost savings,  created considerable networking efficiencies and ensured quality,
reliability and high operating standards. The Company believes the concentration
of its 50 networks

                                     Page 3


<PAGE>


principally  throughout the southern  United  States,  together with its planned
inter-city  broadband data backbone network,  will provide an effective platform
for the provision of its local  switched  voice,  enhanced  voice  messaging and
high-speed  data  services at reduced  costs.  ACSI's  management  team includes
several  pioneers in the  development of the  competitive  access  industry with
demonstrated  expertise  in  successfully  deploying  fiber optic  networks  and
aggressively managing operations to generate positive operating cash flow.

                                  ACSI Networks

                                                       Targeted to be
                                                       Operational by
Operational as of September 30, 1996                   December 31, 1996
                                                       -----------------

Albuquerque, NM            Las Vegas, NV               Amarillo, TX
Birmingham, AL             Lexington, KY               Baton Rouge, LA
Charleston, SC             Little Rock, AR             Central Maryland
Columbia, SC               Louisville, KY              Chattanooga, TN
Columbus, GA               Mobile, AL                  Colorado Springs, CO
El Paso, TX                Montgomery, AL              Corpus Christi, TX
Fort Worth, TX             Spartanburg, SC
Greenville, SC             Tucson, AZ                  Targeted to be
Irving, TX                                             Operational by
Jackson, MS                                            March 31, 1997
                                                       --------------


                                                       Dallas, TX
                                                       Jacksonville, FL
                                                       Kansas City, MO
                                                       New Orleans, LA
                                                       Shreveport, LA
                                                       Tulsa, OK

    Information contained herein contains "forward-looking  statements" (as such
term is defined in the Private  Securities  Litigation Reform Act of 1995) which
can be identified by the use of forward-looking  terminology such as "believes,"
"expects,"  "may," "will," "should," or "anticipates" or the negative thereof or
other  variations  thereon  or  comparable  terminology,  or by  discussions  of
strategy.  Certain statements contained in "Business,"  "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results of  Operations"  and other
sections herein, including statements regarding the development of the Company's
businesses, the markets for the Company's services and products, the Company's

                                     Page 4


<PAGE>


anticipated  capital  expenditures,   regulatory  reform  and  other  statements
contained  herein  regarding   matters  that  are  not  historical   facts,  are
forward-looking  statements.  No assurance can be given that the future  results
covered by the  forward-looking  statements  will be  achieved.  The matters set
forth in  Exhibit  99.1  hereto  constitute  cautionary  statements  identifying
important  factors with respect to such  forward-looking  statements,  including
risks and uncertainties, that could cause actual results to vary materially from
the future  results  indicated,  expressed or implied,  in such  forward-looking
statements.  Other  factors could also cause actual  results to vary  materially
from the future results indicated in such forward-looking statements.

Company Strategy

The Company's objective is to become a leading provider of dedicated and private
line, high-speed data, including IP switching,  and enhanced voice messaging and
local  switched  voice services in its 50 planned  markets by  implementing  the
following strategies:

        Early  Entry in Tier II and  Tier III  Markets  in the  Southern  United
    States.  The Company  principally  targets Tier II and Tier III markets,  as
    they are generally  subject to less competition from other CLECs relative to
    larger,  more  developed  Tier I markets,  thereby  generally  enabling  the
    Company to achieve  market  penetration  quickly.  ACSI  intends to continue
    focusing its market entry principally in areas of the southern United States
    because of attractive  demographic  trends and expected growth in demand for
    telecommunications  services in these  regions,  which the Company  believes
    have been  underserved  to date.  Between 1989 and 1994,  the rate of access
    line growth in all regions of the South  exceeded  the  national  average by
    approximately  two and  one-half  times.  Additionally,  the  18-state  area
    targeted by the Company accounts for  approximately 37% of the US population
    and  approximately  35% of the  total  access  lines in the  United  States.
    Although not precluding entry into a particular  market by competitors,  the
    Company believes that the first operational  competitive network in a market
    generally has a competitive  advantage in  attracting  customers  willing to
    switch from the LEC.  Management believes that the Company will be the first
    competitor  to  offer  dedicated  services  in half of the  above-listed  30
    markets.

                                     Page 5


<PAGE>



    Building on Strong  Relationships  with IXCs. ACSI has significant  customer
    relationships with most of the major IXCs serving its markets.  Currently, a
    substantial portion of the Company's revenues is billed to IXCs for services
    provided for the benefit of their customers (i.e. private label). IXCs often
    choose the access provider for the local portion of a long distance call and
    have  a  strong  presence  in  all  of  the  Company's  target  markets.  By
    demonstrating  its ability to provide high quality  services in its existing
    markets and by not providing  interexchange  service in competition with the
    IXCs, the Company has the  opportunity to obtain  commitments  for dedicated
    services  from IXCs in new  markets.  The  Company  has  signed a  five-year
    agreement with MCImetro Access Transmission Services, Inc. ("MCImetro"),  in
    which MCImetro has agreed to purchase  minimum levels of dedicated  services
    from ACSI and has  committed  to  construct  portions of ACSI's  fiber optic
    networks in six cities.  The  Company has also signed  agreements  with AT&T
    Communications,  Inc.  ("AT&T")  and two other  IXCs,  pursuant to which the
    Company expects AT&T and such other IXCs to use the Company as a supplier of
    dedicated special access services,  as well as such other services as may be
    agreed upon, in particular markets.  Additionally,  the Company is currently
    negotiating  similar  arrangements  with other IXCs. The Company markets its
    services  directly to the end user in conjunction with IXC  representatives.
    The Company  expects further growth to the extent that LECs begin to compete
    with  IXCs  for  long  distance  services,  thereby  providing  IXCs  with a
    competitive  incentive  to move  access  business  away  from LECs to CLECs.
    Moreover,  because the  Telecommunications  Act  prohibits the three largest
    IXCs from jointly  marketing their long distance  services with resold local
    services of a Regional  Bell  Operating  Company  ("RBOC")  (until that RBOC
    itself offers  in-region long distance  service),  the Company believes that
    IXCs should have incentive to resell CLEC services.

        Aggressive  Bottom-Line  Approach  to Network  Deployment.  The  Company
    rapidly  deploys its  networks  and markets its services in order to quickly
    achieve  operating cash flow  breakeven,  i.e.,  positive EBITDA (net income
    (loss) before net interest,  income taxes,  depreciation  and  amortization)
    before  overhead  allocations.   The  Company's  objective  is  to  commence
    construction  of a network  in the  central  business  district  of a market
    immediately upon receipt of the requisite municipal  approval.  ACSI targets
    completion of its initial network

                                     Page 6


<PAGE>


    phase  and   commencement   of   commercial   service  in  a  market  within
    approximately  six  months  after the  start of  construction.  The  Company
    typically  begins  premarketing its services at the start of construction so
    that once a network becomes operational,  customer demand already exists for
    its  dedicated  services.  The Company then seeks to extend the reach of its
    network  outside  the  central  business  district  in  response to customer
    demand.  ACSI anticipates that each dedicated  services network will achieve
    operating   cash  flow   breakeven   within  ten  to  fifteen  months  after
    commencement of service. In its more mature markets, Louisville, Little Rock
    and Greenville, the Company achieved operating cash flow breakeven in a year
    or less after initiation of service.

    Cost-Effective Entry into Local Switched Voice and Value-Added  Services. To
    take advantage of the opportunities  created by the  Telecommunications  Act
    and following receipt of state regulatory approval and LEC interconnections,
    the Company plans to offer local switched  voice  services  beginning in the
    4th  calendar  quarter  of 1996  where it is  deploying  local  distribution
    networks.  The  Company  expects  to  deploy  telecommunications   switching
    equipment in eight  markets by mid-1997 and in 24 markets by early 1999.  To
    take  advantage of the size and regional  concentration  of ACSI's  markets,
    where technically feasible and economically  practicable,  the Company plans
    to  implement  a hubbed  switching  strategy  whereby  one  switch can serve
    multiple smaller markets via remote switching  modules.  This strategy would
    justify  the switch  investment  in Tier II and Tier III markets by reducing
    capital costs and operating expenses.  The Company recently agreed initially
    to lease eight Lucent  Technologies,  Inc. 5ESS-2000 switching systems.  The
    Company  believes that providing  dedicated,  enhanced  voice  messaging and
    high-speed data services will enhance the Company's  ability to cross-market
    local switched voice services.

       The Company's local switched voice services plan is targeted at small and
    medium sized  business and  government  end users.  The typical  customer is
    expected  to have  between  ten and 100  employees.  The  Company  plans  to
    initially target users within the buildings of ACSI's existing  customers to
    connect such users directly to its network and then to offer its services to
    customers that are not directly  connected to the Company's  network through
    interconnection   with  the  incumbent   LECs.   In   accordance   with  the
    Telecommunications  Act, the Company has negotiated  partial  agreements for
    interconnection with BellSouth, Southwestern Bell, US West and GTE,

                                     Page 7


<PAGE>


       covering a total of 12 states and is  currently  arbitrating  outstanding
    issues  before  public  service  commissions  ("PSCs") in those  states.  In
    addition,  the Company is negotiating  interconnection  agreements with Bell
    Atlantic  and  Sprint  Central.  The  Company  believes  that  many of these
    potential  customers can be gradually  attracted as the Company  expands the
    range of local switched voice services  within specific  buildings,  thereby
    justifying  the  expansion  of  the  Company's   network  to  connect  these
    additional customers and buildings.

    Additionally,   the  Company  will  seek  existing  and  emerging  technical
    solutions  in  order to  serve  smaller  markets,  where  feasible  and cost
    justified.  The Company will continue to seek and evaluate  opportunities in
    the future to deploy regional switching hubs that can serve multiple smaller
    markets.  In  addition,  the  Company  is  evaluating  opportunities,  on  a
    market-by-market  basis,  to partner with certain  entities  that have local
    switching requirements, experience, facilities and/or back-office operations
    that can result in mutually beneficial alliances.  Successful negotiation of
    switching   partnerships  may  further  reduce  the  Company's  capital  and
    operating  expenses  associated  with the  provisioning  of  local  switched
    services in its markets.

       The Company believes that its local digital fiber optic networks, coupled
    with the distributed hub configuration and its planned broadband  inter-city
    data  network,  will provide a robust  platform for the  provision of a wide
    variety of voice, data and  communications  services at a reduced cost. Over
    time,  the Company  believes it can  increase its market share in all of its
    service  offerings  as a  result  of  the  reliability  and  quality  of its
    networks,     prompt     customer     service,      competitive     pricing,
    cross-marketing/bundling synergy's and new service offerings over its target
    50-city market area.

    ACSI  has  begun  offering  on a  limited  basis a range of  enhanced  voice
    messaging services to small and mid-sized business and government end users.
    The Company's initial offerings of enhanced voice messaging services include
    business voice  messaging  services  utilizing the Company's  First Line and
    First Line Plus  products and  one-number  services  utilizing the Company's
    Virtualine  and  Virtualine  800  products.  The  Company's  enhanced  voice
    messaging  service can function as a virtual PBX.  Management  believes that
    the market  for voice  messaging  services  in 1993 was  approximately  $1.4
    billion,  that this market is underserved and that, with the availability of
    enhanced voice messaging

                                     Page 8


<PAGE>


    services such as the Company's, this market has the potential for continued,
    rapid growth as customers  become more  accustomed to use of these services.
    The Company  believes  that this market  should also serve as an  additional
    customer  base to which the  Company  can  market its local  switched  voice
    services.

    Developing a Broadband Data  Communications  Backbone Network with Extensive
    Local  Points  of  Presence.   The  Company   believes  that  switched  data
    communications  represent  one  of  the  fastest  growing  segments  of  the
    telecommunications  services  market.  Industry sources estimate that the US
    business  switched data services  market was  approximately  $1.1 billion in
    1995 and the Company  believes  that this market will grow to  approximately
    $10.0  billion by 2000 due,  in part,  to the  continuing  proliferation  of
    computers and the increasing need to interconnect  these computers via local
    and  wide  area  networks,  the  dramatic  growth  of the  Internet  and the
    emergence of multimedia  applications.  Together,  these  applications  have
    spawned  numerous  network  technologies  and  communications  protocols  to
    support   legacy,   current  and  emerging  needs.   The  domestic   network
    infrastructure   currently   supporting   both  voice  and  data   transport
    requirements  is being strained by the increasing  demand for high bandwidth
    transport at both the local and national  levels.  The Company believes that
    the growth of high speed  applications will further strain the networks that
    exist today. Unless additional network infrastructure  supporting these high
    bandwidth  requirements  is developed,  the ability of existing  networks to
    service the demand for both speed and  capacity  may continue to be strained
    and may result in further  degradation of the quality of service afforded by
    network  service  providers.  The Company  believes that this  constraint in
    bandwidth  capacity  creates  a  significant  business  opportunity  for the
    Company,  particularly  in its  Tier II and  Tier III  markets,  which  have
    largely been ignored by the larger data communications providers.

    The Company is  deploying a  coast-to-coast  broadband  data  communications
    backbone network via leased inter-city fiber connections on which customers'
    high-speed data and multimedia  traffic may be transported at a high-quality
    level on a cost-effective  basis. ACSI believes its ATM-based high bandwidth
    network will be capable of  simultaneously  supporting IP  switching,  frame
    relay and  multimedia  applications.  This  technology  will  allow  network
    customers  to  migrate  transparently  from  lower  speed  services  to high
    bandwidth services, as

                                     Page 9


<PAGE>


    their data communications  requirements expand. The Company currently has 25
    data POPs,  and plans to have 40 data POPs in service by the end of calendar
    year 1996. The Company  believes this backbone,  coupled with its planned 50
    local  distribution  networks,  provides  the  Company  with  both a service
    quality and a cost advantage for its high speed data services.

The Company  believes  that it can become a major  provider of  high-speed  data
communications  services  (including IP  switching,  frame relay and ATM) in the
southern United States by:

    - Offering  Data  Communications  Solutions  Based on Proven  Carrier-Grade,
      Standards-Based Technology with Flexible and Superior Back-Office Systems.
      The Company believes open and carrier-grade, standards-based technology is
      necessary for companies to compete  effectively  (with respect to features
      and price),  avoid costly  conversion from legacy systems,  offer multiple
      data  solutions  with  minimal  equipment  and  manpower  cost,  and  cost
      effectively establish  interconnection among key IXCs, LECs and customers.
      The  Company  believes  that  its  ability  to  maintain   flexibility  on
      provisioning  and billing with  respect to its initial and future  product
      offerings and pricing  differentiates ACSI from its competitors.  Examples
      of the  billing  flexibility  that the  Company  plans  to  offer  include
      accounting  and billing  information  at the  wholesale  level to IXCs and
      resellers,  retail level  accounting  and billing  information to business
      customers   and   ISPs,   flat/transaction   billing,   volume   discounts
      (multi-product/multi-service) and chain billing.

    - Packaging  Complex Data Solutions as a Simple Offering.  ACSI packages its
      data communications  service  capabilities  through a  solutions-oriented,
      consultative  selling  approach  supported by a highly  trained  sales and
      support  staff,  which  provides the customer with easy and  uncomplicated
      access  to a  series  of  complex  services.  Pricing,  provisioning,  and
      customer  interface  to the  product  has been  structured  as  simply  as
      possible.  The Company expects that one-stop  shopping through ACSI's data
      services  business  unit  will  facilitate   implementation  and  minimize
      customers'  need to interface with multiple  vendors.  A complete  service
      offering  capability is expected to enable the Company to provide improved
      quality of service as an "upstream" network provider to regional and local
      service providers as well as to public sector, corporate and institutional
      customers.
                                     Page 10


<PAGE>



    - Addressing the Need for High Bandwidth Data Network  Infrastructure in the
      Southern  United States.  The Company  believes that, to date,  major data
      services  providers,  such as the IXCs, have focused on serving the Tier I
      markets.  An  increasing  number of regional,  national and  multinational
      corporations  are located in mid-sized  markets within the southern United
      States   (the   principal   target   markets  of  ACSI's   local   network
      infrastructure)  and are  demanding  the  entire  range of  switched  data
      communications  services,  including  IP  switching,  frame relay and high
      bandwidth  transport  services.  The Company  believes there is inadequate
      data services infrastructure in this region to support these services.

    - Offering  Integrated  Data  Communications  Services  Via  a  Single  High
      Bandwidth Network.  While current growth in demand for data communications
      services has been focused on IP switching  and frame relay  services,  the
      Company  does not  believe  that  either has been  engineered  to meet the
      growing  demand for  bandwidth.  The Company  believes that end users will
      benefit from being able to have their  diverse data  communications  needs
      met by a single provider over a single network. By deploying an ATM-based,
      high bandwidth network, the Company can offer business,  institutional and
      government  customers  the entire  range of switched  data  communications
      service offerings through a single integrated network, aggregating traffic
      and  increasing  network   efficiencies,   managing  bandwidth,   ensuring
      consistent   delivery   and   servicing   of   customers'   diverse   data
      communications  requirements.  This backbone  should enable the Company to
      expand its range of service coverage and offerings.

    - Leveraging  Local Network and Switching  Infrastructure  to Reduce Cost of
      Service.  Local access  charges and switched  local lines are a major cost
      component  of  data  communications.   Most  data  communications  service
      providers, such as IXCs and ISPs, do not currently have local distribution
      network  facilities in place and,  therefore,  must  purchase  these local
      components from other parties such as the LEC or a CLEC. Similarly, to the
      extent  data  service  requirements  include  a need  for  local  switched
      services,  these lines must be obtained  from the LEC or a CLEC with local
      switching capability. Because ACSI is planning local network facilities in
      50 markets

                                     Page 11


<PAGE>


      and  switching  capability  in at least 24 of those  markets,  the Company
      believes that it can provide data communications  services to customers in
      those  markets  where it has network and  switching  facilities at a lower
      cost with higher quality of service.

    The  Company  believes  that  the  following  data  communications  services
constitute the principal growth areas in commercial data market:

        Internet Access Services. Businesses are increasingly using the Internet
    to transmit  e-mail,  engage in commercial  transactions  (e.g.,  electronic
    commerce) and develop  internal  communications  networks,  or  "intranets."
    Businesses  are also  using the World  Wide Web to  disseminate  information
    about their products and services.  Increasing  business  utilization of the
    Internet  has added to the demand for higher-  speed  Internet  connections,
    increased port capacity and secure network facilities.

        Industry  analysts estimate that the number of Internet users during the
    past  five to ten  years  has  grown  by 100% a year.  Demand  for  Internet
    services,   including  access  (i.e.,   services  connecting  users  to  the
    Internet),  applications (such as "Web browsers") and hardware, has resulted
    in significant  demand for local and  interexchange  communications  network
    services,  applications  software  and  systems  integration  services.  The
    current U.S. market for IP switching is estimated to be approximately $550.0
    million and is projected to grow to approximately $3.5 billion by 2000.

        Managed  Services.   Managed  services  are  comprehensive   value-added
    offerings that provide the design,  installation,  and on-going  management,
    maintenance  and  hardware  (such as  switches,  routers  and  modems) for a
    customer's  network.  By eliminating  many of the timing,  coordination  and
    inter-operability  issues  that arise in  installations  requiring  multiple
    vendors to design and  install a network,  managed  services  offer a single
    source  solution.  In addition,  configuration  management  issues,  such as
    maintaining consistent versions of the router software, deploying consistent
    configurations and overall network management, are addressed in most managed
    services offerings.

                                     Page 12


<PAGE>



    While  managed  services  can  be  provided  for  all  data   communications
    applications  and  technologies  (including  frame relay and ATM),  the most
    immediate market opportunity for managed services is with local and regional
    ISPs.  Managed services,  via a turnkey  approach,  address numerous network
    implementation,  expansion  and  management  issues for ISPs,  including the
    provision of hardware of local lines and  dedicated  circuits,  and securing
    physical space via collocation for expansion of the ISP's network  hardware.
    Collocation  of the  ISP's  equipment  in the  managed  services  provider's
    network  facility  also  reduces  the ISP's local  access  costs by reducing
    circuits to  approach  the  "zero-mile"  level.  Finally,  because a managed
    services   provider  can  aggregate  and  consolidate   interexchange   data
    communications  traffic from multiple customers (and thus purchase transport
    at more cost effective  higher  bandwidths,  e.g., 45 mbps versus 1.5 mbps),
    the provider can offer ISPs lower pricing on their interexchange  (longhaul)
    transport  than if the ISPs  obtained the service  directly  from a longhaul
    carrier (such as an IXC). The U.S. market for Internet-related  data network
    equipment was an estimated  $800.0  million in 1995 and is projected to grow
    to approximately  $4.0 billion by the year 2000.  Managed service  providers
    can penetrate this market for network  equipment  through  bundling an ISP's
    hardware needs with network services on a turnkey basis.

        Frame Relay.  Frame relay  service is a fast-packet  transport  solution
    targeted at LAN-to-LAN and legacy  networks such as SNA. Frame relay service
    is designed to meet fluctuating,  or periodic, data transfer requirements by
    offering shared virtual  bandwidth  connectivity at high speed.  Frame relay
    services offer low cost data  transmission with generally minimal delay, few
    errors and high speed  performance.  Frame  relay  provides a solution  that
    satisfies  customer   requirements  for  integrated,   cost-effective   data
    communications in environments where transmission needs fluctuate. As users'
    requirements  expand into  multimedia  applications,  which  require  higher
    bandwidth,  frame relay  offers a natural  migration  path to ATM.  Industry
    sources project that the U.S. market for frame relay services will grow from
    an estimated $1.3 billion in 1996 to  approximately  $3.7 billion by the end
    of the year 2000.

          ATM. ATM is a high bandwidth service providing virtual  networking for
     voice, data and multimedia traffic. The ability to combine all three media

                                     Page 13


<PAGE>


    provides  opportunities  to  reduce  costs  associated  with  running  three
    separate  networks  for each  medium.  The  major  benefits  of ATM  include
    providing  shared  access to trunk  bandwidth for multiple  application  and
    application  types,  minimizing the number of wide area connections  needed,
    and  supporting  user access speeds of at least 1.5 mbps (T-1).  Frame relay
    customers whose capacity  requirements  increase can achieve cost savings by
    migrating to fractional  T-3  transmission  speeds  (between 1.5 mbps and 45
    mbps) or to full 45 mbps and higher connectivity.  Large customers,  such as
    regional or national ISPs,  financial  institutions  and other entities with
    very high  volume  data  transport  requirements,  may also  seek  redundant
    dedicated transport at T-3 to OC-3 levels or higher,  essentially  obtaining
    the same level of network capacity and self-healing network reliability as a
    dedicated  facilities  customer with SONET service.  Local ATM  applications
    include native speed LAN connectivity, diagnostic imaging, videoconferencing
    and other high bandwidth  applications.  Industry  sources  estimate the ATM
    market will be  approximately  $63.0  million  during 1996,  and the Company
    believes that this market will increase to approximately $1.6 billion by the
    end of 2000.

    Attract  and  Retain a  Management  Team with  Extensive  Telecommunications
Experience.  The senior  management of ACSI pioneered the development of many of
the first  fiber optic  networks in Tier I markets in the United  States and has
substantial experience in rapidly building  cost-effective networks and managing
service  operations.  The  Company's  Chairman,  Anthony  J.  Pompliano,  is the
co-founder and former  President and Chief Executive  Officer of MFS. Richard A.
Kozak,  the Company's  President and Chief  Executive  Officer,  has held senior
management positions at several telecommunications companies,  including MFS and
Sprint  International  (formerly  Telenet  Communications  Corporation).   Other
members of the Company's senior  management team have experience  working at MFS
Communications  Group, Inc. ("MFS"),  Teleport  Communications Group, AT&T, MCI,
WilTel, Inc., BellSouth  Telecommunications,  Inc. and other  telecommunications
companies.  The Company's  management  team  collectively  has over 200 years of
marketing and operating experience in the telecommunications industry.

    The Company believes that various telecommunications  companies, such as the
IXCs and other LECs,  will seek entry into the now  competitive  local  exchange
services market through relationships with alternative service providers such as

                                     Page 14


<PAGE>


the Company.  The Company  further  believes that its service  offerings will be
attractive to such competitive telecommunications providers due to the Company's
breadth  of  market  coverage  in a  significant  number of Tier II and Tier III
markets in the southern United States.  The Company is developing  relationships
with key  partners  and  intends to create the  infrastructure  to support  this
resale opportunity.

Network Development

     The Company  constructs and operates  digital fiber optic networks.  Signal
transmissions  carried  over digital  fiber optic  networks are superior in many
respects  to  older  analog  transmissions  carried  over  copper  wire  and  by
microwave,  which continues to be used in varying  degrees by the LECs.  Digital
fiber optic telecommunications networks generally offer faster and more accurate
transmissions   for   all   data   and   voice    communications   than   analog
telecommunications  systems or digital  transmission  systems using copper wire.
Fiber optic networks also generally require less maintenance than copper wire or
microwave  facilities or comparable  transmission  capacity,  thereby decreasing
operating  costs.  An increase in capacity  can be achieved  through a change in
electronics.   Because  ACSI  is  employing  the  latest  digital   transmission
technology  in  its  networks,  its  digital  fiber  optic  networks  will  have
substantial additional capacity. The Company believes it will be able to use its
CLEC networks to provide a wide range of  telecommunications  services with only
incremental facilities costs.

     Management   believes  that  it  can  currently  deploy  its  capital  more
efficiently by constructing  fiber optic networks rather than acquiring networks
constructed by other CLECs. In light of the  significant  premium to book values
associated  with  recent  acquisitions  within  the  CLEC  industry,  there  are
considerable  efficiencies  associated  with  utilizing  consistent  vendors and
equipment in the Company's network, therefore ensuring high quality, reliability
and operating standards.

     Key  elements  of the  Company's  network  development  plan  include:  (i)
thoroughly analyzing potentially favorable markets for development; (ii) seeking
authorizations  from public and private  entities for  rights-of-way;  and (iii)
efficiently implementing construction plans in a timely manner, thereby allowing
the Company to gain a competitive position in the chosen market.

                                     Page 15


<PAGE>



Site  Selection.  Before  deciding  to enter a market,  the  Company  conducts a
detailed  feasibility  study to  determine  the  potential  size of the  market,
existing  competition  within  the  market,  the  Company's  ability  to  obtain
municipal authorizations,  including franchises and access to rights-of-way, and
the relative ease of market entry from a local and state regulatory  standpoint.
The   rights-of-way   assessment,   done   by   independent   telecommunications
consultants,  determines  whether another CAP/CLEC network is under construction
or ready to construct  in the target  market,  the  availability  of  economical
rights-of-way,   the  local  utility's   receptiveness   to  allow  use  of  its
rights-of-way,  the topology of the city and  concentrations  of commercial real
estate, and the local city permitting and franchise requirements.  The market or
end-user  survey,  also  done  by  independent  telecommunications  consultants,
identifies  the  significant  commercial  and government end users in the target
service areas.  Individual  telephone  and/or  face-to-face  interviews are then
conducted  with potential end users,  focusing on those  anticipated to have the
largest business volume. The interviews  determine the end user's  receptiveness
to using a competitor to the LEC, the  telecommunications  requirements  of such
end user,  current  pricing  by the LEC and  other  relevant  information.  This
"bottom  up" sizing of the target  service  areas  provides  an  estimate of the
prospective business by building and by customer.

    Rights-of-Way.  As part of its due  diligence  on a market  during  its site
selection  process,   the  Company  seeks  municipal   authorizations  (such  as
franchises,  licenses,  or permits) to construct and operate its network  within
the public  rights-of-way.  The duration of this approval  process can vary from
less than three  months to  several  years,  depending  on the  specific  legal,
administrative,  and political factors existing in that market. The initial term
of these municipal approvals,  once granted, may range from as few as five years
to as  many as 25  years,  and  such  approvals  typically  may be  renewed  for
additional terms.

    Concurrent with its seeking municipal authorizations,  the Company initiates
discussions with electric or gas utilities,  cable television companies ("CATV")
and other private providers of rights-of-way  and/or facilities that may be used
by the Company for installation of its network.  These  discussions are intended
to result in  agreements  that allow the  Company to make use of those  parties'
fiber optic cables (such as IRUs), the underground conduits, distribution poles,
transmission towers, and building entrances. The Company's ability to enter into
such

                                     Page 16


<PAGE>


agreements can have a material impact on the Company's capital costs for network
construction  and the speed with which the Company can  construct  its networks.
Additionally,  obtaining such agreements  facilitates  the Company's  ability to
expand  efficiently beyond the central business district to serve additional end
users in its markets.  The term of such agreements is typically ten to 25 years,
with renewal terms of five to 15 years. The Company believes that the experience
of members of its senior management team in negotiating such agreements gives it
a  competitive   advantage  over  other  CLECs  that  have  less  experience  in
successfully negotiating such agreements.

    Implementation of Network Construction.  The Company initially builds a one-
to  three-mile  self-healing  fiber loop in the central  business  district or a
discrete area outside the central  business  district of a given target  market.
This network provides the users with lower costs, fiber optic clarity, diversity
of access,  and fault tolerant  reliability of service,  with automatic stand-by
and rerouting in the event of operator, system or network failure. The Company's
networks are then expanded into  suburban  business  areas and other LEC central
offices to serve additional customers.  These expansions may be in excess of 100
route miles. The Company utilizes outside contractors to construct its networks.

Prior to its obtaining required municipal  authorizations,  the Company, through
outside consultants,  prepares preliminary and final engineering studies for the
initial portions of its networks.  The Company's intent is to have the necessary
route  maps,  detailed  final  engineering  drawings,   and  other  construction
documents  completed by the time  municipal  authorizations  are obtained.  This
process  enables  the  Company  to  initiate  network  construction   activities
immediately  upon  receipt  of  municipal  authorizations.  Concurrent  with the
engineering process, the Company identifies commercial space for the location of
its  administrative  and  sales  offices  and  node  (hub)  site  and  commences
negotiations  for the  lease of such  space.  Outside  plant  construction  of a
typical downtown network will take from four to six months, depending on various
factors.  Preparation  and build out of the Company's  office and node space and
subsequent  installation of electronics and cabling typically proceed during the
outside  construction  activity and are scheduled to be completed  concurrently.
Finally,  the Company  initiates the application  processes for collocation with
the LEC's downtown central office and interconnection  with selected IXC POPs to
coincide  with other  construction  milestones.  The Company  believes that this
coordinated construction process

                                     Page 17


<PAGE>


reduces overall network  development costs and reduces  construction  intervals,
allowing it to initiate operations at an earlier date.

Following  completion  of its initial  network and the  commencement  of network
operations,  the Company's local staff,  in  consultation  with personnel at the
Company's headquarters, designs expansion routes that will enable the Company to
reach  additional  end users and to  interconnect  with  additional  LEC central
offices outside the central business district or the targeted construction area.
Construction of these expansion  routes is typically done under  agreements with
third party  rights-of-way  providers as described  above, but in some instances
the  Company  constructs  its own new  facilities  (typically  by  trenching  or
directional boring) where third party facilities (whether aerial or underground)
do not exist or are not  available  for use by the  Company.  The  Company  also
constructs  lateral network  facilities from its fiber optic backbone to provide
on-network service to its customers. In some instances,  the Company will design
and  construct  some or  substantially  all of its routes  outside  the  central
business  district  concurrent with the  construction  of the downtown  network,
increasing  the speed of overall  network  construction  and,  in the  Company's
opinion, creating a competitive advantage over other CLECs that may have entered
or are seeking to enter the market. To the extent possible,  the Company engages
the third party right-of-way provider to install ACSI's cable in or on the third
party's  facilities,  usually at a lower cost and with  greater  speed than that
obtained by using outside contractors.

    The Company's  network  management  center in Annapolis  Junction,  Maryland
monitors all of the Company's  networks from one central  location.  Centralized
electronic  monitoring and control of the Company's  networks allows the Company
to avoid duplication of this function in each city. This consolidated operations
center also helps to reduce the Company's per customer  monitoring  and customer
service costs,  such that they are lower than would be available if monitored on
a single-city  basis. The Company also plans to use this facility to monitor the
performance of data and switched voice services.

Products and Services

    The  Company  currently  provides,  or is  actively  implementing  plans  to
provide, a wide range of local  telecommunications  services including dedicated
and private line, high-speed data service solutions,  including IP switching and
managed

                                     Page 18


<PAGE>


services,  local  switched  voice  services and enhanced  voice  messaging.  The
Company's local distribution networks are designed to support this wide range of
enhanced  communications  services,  provide increased  network  reliability and
reduce costs for its customers.

    Dedicated Services.  During fiscal 1996, dedicated and private line services
for IXCs and other carriers accounted for a substantial portion of the Company's
revenues with the remainder  coming from business and government end users.  The
Company's    dedicated    services    provide   high    capacity    non-switched
interconnections:  (i)  between  POPs of the  same  IXC;  (ii)  between  POPs of
different IXCs;  (iii) between large business and government end users and their
selected  IXCs;  (iv) between an IXC POP and a LEC central office or between two
LEC  central  offices;  and (v)  between  different  locations  of  business  or
government end users.

    - Special access services. Special access services provide a link between an
      end-user  location and the POP of its IXC, or links between IXC POPs, thus
      bypassing the facilities of the incumbent LEC. These  services,  which may
      be ordered by either the long  distance  customer  or directly by its IXC,
      typically provide the customer better  reliability,  shorter  installation
      intervals,  and lower  costs  than  similar  services  offered by the LEC.
      Customer charges are based on the number of channel  termination's,  fixed
      and  mileage-sensitive  transport  charges,  and  costs  for any  services
      required to multiplex  (increase or decrease the bandwidth or transmission
      speed) circuits  (e.g.,  taking VGE circuits at 64 kilobits per second and
      stepping them up to a single DS-1 (1.54)  megabit  circuit,  which has the
      capacity  to carry up to 24 VGE  circuits  and is priced at a  significant
      discount to multiple VGE circuits over the same route).  A CAP may provide
      special  access  service  on an  on-net  basis by  connecting  an end user
      directly  to its fiber  backbone,  or on an off-net  basis by  reselling a
      portion of the LEC's  network to  terminate  the circuit at the end user's
      location  and  passing  the cost of the LEC  services  on  through  to the
      customer (who  realizes cost savings and network  benefits for the portion
      of the circuit  that is on the CAP's  network).  While  resulting in lower
      margins than on-net service due to the payout to the LEC,  off-net service
      can be provided to any customer within a LATA,  reducing the CAP's need to
      build pervasive network infrastructure.


                                     Page 19


<PAGE>



    - Switched  transport  services.  Switched transport services are offered to
      IXCs that have large volumes of long distance traffic  aggregated by a LEC
      switch at a central office where the CAP has  collocated its network.  The
      CAP  provides  dedicated  facilities  for  transporting  these  aggregated
      volumes of long distance  traffic from the LEC central office to the IXC's
      POP or between LEC central offices.  The flat monthly charge to the IXC is
      typically  lower than the  transport  fees  charged by the LEC,  which are
      typically  lower than the LEC  charges for special  access  services  that
      include a charge for  terminating  the traffic at the end user's  location
      and/or  the IXC  POP.  Switched  transport  services,  however,  are  also
      typically  associated  with higher volume orders  compared to most special
      access  orders,  thus  providing  potential  for large  monthly  recurring
      revenues to the CAP.

    - Private line services.  Private line services provide dedicated facilities
      between two end-user  locations  in the same  metropolitan  area (e.g.,  a
      central banking  facility and a branch office or a manufacturing  facility
      and its remote data processing  center) and are priced like special access
      services  (channel  termination  charges plus transport and any associated
      multiplexing  charges).  The Company  expects the demand for private  line
      service  to  increase  in  conjunction  with  higher  bandwidth   customer
      applications.

    High-Speed  Data Services.  The Company is developing and has begun offering
advanced high-speed data services,  including Internet access service, and plans
to offer frame relay and ATM services to businesses,  government entities,  IXCs
and ISPs in the Company's targeted markets.

    The Company expects that the majority of its initial high-speed data network
traffic will be composed of Internet  access  traffic from regional and national
ISPs, online service providers, major corporations and educational and financial
institutions.   The  Company   expects  frame  relay,   LAN-to-LAN  and  network
consolidation traffic to constitute the second largest element of its high-speed
traffic.  The Company  believes that during the next five years,  the high-speed
data market will evolve to higher bandwidth requirements and will accept new ATM
applications  and technology.  Therefore,  the Company believes the price of ATM
service will decrease relative to that of frame relay offerings. The Company

                                     Page 20


<PAGE>


expects the growth in demand for frame relay services to slow and the demand for
ATM services to increase.  While ATM is currently in its introductory  stage and
is generally  considered a premium service  offering,  the Company believes that
ATM technology affords ACSI the ability to consolidate its internal and customer
traffic on large backbone links. This  consolidation  will enable the Company to
reduce its overall cost of service and  position it to migrate its  customers to
higher  bandwidth as their demand  increases,  with minimal impact to customers'
applications.

ACSI  initially  plans to utilize  its ATM network to provide IP and frame relay
transport  for ISPs and major  customers.  The rapid  growth in the Internet has
strained  the  existing  network  infrastructure,  which was not  engineered  to
support  the  speeds or  volumes  of  traffic  that it now  bears.  The  current
infrastructure  supporting the Internet  protocol has been engineered to support
speeds of up to 2 mbps (slightly above T-1 speed), while many major IP customers
are  demanding  up to 45 mbps.  ATM offers an immediate  solution for  providing
efficient  transport of IP switching traffic (as well as frame relay),  allowing
ACSI to utilize  available  capacity long before it becomes cost effective for a
larger number of customers to deploy high  bandwidth  video,  voice,  WAN-to-WAN
connectivity  and  multimedia  applications  via ATM.  ACSI, as a  network-based
national  service  provider,  will be  positioned to offer  Internet  access and
connectivity  to  national,  regional and local ISPs,  as well as to  corporate,
government  and  institutional  customers  that  require  direct  access  to the
Internet for both internal  and/or  external  communications.  Early focus on IP
customers is also  expected to bolster  demand for the  Company's  dedicated and
local switched service  offerings;  a large regional ISP can require hundreds or
up to several  thousands of dial-up  lines and numerous T-1 and DS-3 circuits to
meet its subscribers' demands.

    Local Switched Voice Services. Following receipt of the requisite regulatory
approvals and when  cost-effective,  the Company  plans to offer local  switched
voice  services,  such as origination  and  termination of local calls,  Centrex
services,  PBX trunking and switched access services,  in certain of its markets
beginning in late 1996.




                                     Page 21


<PAGE>



    The Company intends to offer the following local switched voice services:

    - Local Telephone Services. The Company plans to offer small and medium size
      businesses local telephone  exchange service,  which will also include
      optional enhanced services (e.g. call waiting, caller ID and three-way
      conference calling).

    - PBX Trunking. For those customers that use PBX equipment in their business
      offices,  the Company plans to offer  services to switch  traffic  between
      ACSI's switch and a business customer's PBX, routing local,  intraLATA and
      interLATA phone calls according to the customers' specific requirements.

    - Centrex Services.  The Company plans to offer advanced  telecommunications
      services for those businesses  desiring the advanced features available in
      a PBX environment  without the investment in PBX premise equipment and its
      attendant  support staff.  The Company  intends to provide local dial tone
      services with  functionality  such as free internal  communications,  call
      forwarding, call transfer, conference call and speed dialing.

    - ISDN  Services.  ACSI also will  offer  ISDN  data  services  to its local
      customer base.  Those small  businesses that require higher  bandwidth for
      data   communications   needs  such  as  remote  file  transfer,   e-mail,
      collaborative computing, multi-media computing, telecommuting and Internet
      access  services,  will be able to  access  the lower  cost data  services
      provided  by ACSI.  As these  customers'  data  requirements  expand,  the
      Company's  advanced  data services can be offered,  thereby  expanding the
      Company's opportunity to increase revenues from existing customers.

    - Enhanced  Services.  The Company  already offers  enhanced voice messaging
      services on a  stand-alone  basis.  These and other  services will also be
      offered on an integrated basis with local switched services,  allowing the
      business  or   government   customer  to  meet  their   telecommunications
      requirements from a single source.


                                     Page 22


<PAGE>



    - Switched  Access.  The Company will offer  origination  and termination of
      long distance traffic between a customer premise and interexchange carrier
      via shared trunks utilizing the Company's local switch.

    Enhanced Voice Messaging  Services.  Market sources  estimate that the voice
messaging  services  marketplace  was  approximately  $1.4 billion in 1993.  The
market for voice  messaging  services is projected to grow at a compound  annual
rate of 13% to  approximately  $3  billion  nationally  in 2000.  Local  service
providers (i.e., incumbent local exchange carriers ("ILEC"),  CLECs and wireless
CATVs),  are expected to begin to displace voice messaging  services  offered by
IXCs. The Company is developing and has begun  offering,  on a limited basis, an
enhanced voice messaging service to small and mid-sized  business and government
end users.  The Company's  enhanced  voice  messaging  service can function as a
virtual PBX. The Company's  business voice  messaging  services will include its
First Line and First Line Plus  products.  The Company  also plans to market one
number  services  under the brand names  Virtualine  and  Virtualine  800. These
offerings will be targeted towards the small and medium sized companies  without
voice  messaging and those who are currently  seeking to upgrade their  existing
systems,  which marketplace has a significantly  lower penetration rate than the
larger  business  market.  The Company  believes  there are  significant  growth
opportunities in this market.  Industry sources estimate that in 1994 fewer than
25% of companies with less than 100 employees had voice  messaging  services and
that fewer than 12% of companies  with 50 employees or less had voice  messaging
services.

    The services for the Company's  enhanced  messaging will include basic voice
messaging,  follow-me call routing, virtual calling card services, fax services,
e-mail and paging notification services, and automated attendant services.

     - Voice messaging -- a basic voicemail  solution that allows the subscriber
       greater  flexibility,  including closed-end user group message forwarding
       and interface capabilities with the office attendant.



                                     Page 23


<PAGE>



     - Follow-me  call  routing -- the platform  can be  programmed  to find the
       subscriber by  forwarding  calls to  designated  phone  numbers  anywhere
       nationwide at the subscriber's discretion and control. The current market
       for  follow-me  messaging is  relatively  undersized,  as the  technology
       enabling  this  feature  has  only  recently  begun to  emerge.  However,
       industry sources estimate that this market will have grown from less than
       60,000  subscribers in 1995 to approximately  2.9 million  subscribers in
       1999.

     - Virtual  calling card -- the platform  enables the  subscriber to use the
       service to make outbound calls in response to messages  received  without
       disconnecting the call.

     - Fax  services  --  the  platform   enables  faxes  to  be  stored  and
       transmitted at the discretion of the subscriber.

     - Notification services -- at the subscriber's  discretion,  the arrival
       of voicemail can trigger pager or e-mail notification.

     - Automated  attendant  -- the  platform  can  provide  all of the above
       services, as well as call screening for the subscriber.

    The Company's  enhanced voice messaging  services will also provide links to
the Internet  through  ACSI's web site,  providing  users with the capability to
access their voice,  electronic  mail and fax messages.  In addition to offering
these services in its operational  network markets,  the Company may offer these
services in other  markets  where it does not intend to construct or has not yet
constructed a network.  The Company believes that such services will allow it to
develop  relationships with end users that may be potential customers for either
dedicated  services  or  switched  voice  services  that may be offered in these
markets in the future. However, unlike traditional telephone service,  customers
have not yet become fully  accustomed to use of voice  messaging  services,  and
neither the usage  ramp-up of these  services  nor their  market  acceptance  is
certain at this time.




                                     Page 24


<PAGE>



Sales and Marketing

    While a network is under  construction,  the Company's  salespeople  in each
city  begin  selling  on-network  interstate  dedicated  services  to the  major
business and government end users in that city, while the central  headquarters'
sales staff  concentrates  on selling  services to IXCs. The Company  expects to
initially price its services at a discount to the LEC's tariffs and sells on the
basis of cost savings to the customer. However, based on management's experience
in other  cities  where  CAPs  offer  services,  end  users are  expected  to be
attracted to the Company as a provider of back-up service for disaster  recovery
and a 100% fiber optic  network that can provide  generally  higher  quality and
more reliable service than can the incumbent LEC's network.

    The  Company's  sales efforts with respect to dedicated  services  emphasize
cooperation  between ACSI's  centralized  and local sales staff and the regional
and field sales staff of the IXCs. ACSI's  centralized sales staff works closely
with  senior  management  of  the  IXCs  to  establish   technical  and  service
requirements,  pricing,  and  quality  standards  on a  nationwide  basis,  then
coordinates at the local level specific orders for service to the IXC and/or its
end user  customers  in a given  market.  The Company is pursuing  multiple-city
service  arrangements  with a number of IXCs,  but no assurance can be made that
the Company will  ultimately be successful in negotiating  such  agreements with
any of the IXCs.

    The  Company  typically  has a  general  manager  and at least  one  account
executive  in each of its major  markets.  In many cases,  the  general  manager
oversees the operations and sales efforts of additional smaller markets that may
be  operated  as  satellites  of the  larger  market,  thus  reducing  operating
overhead. In the Company's experience, the sales process in the southern regions
of the country is largely affected by personal relationships,  and the Company's
ability to hire sales and management staff with existing customer  relationships
enhances its ability to penetrate the market.

    The  Company  plans to  utilize  two  separate  sales  forces to market  its
enhanced voice messaging  services to business and government  customers.  While
the Company's  dedicated services sales force will target their on-net customers
for

                                     Page 25


<PAGE>


such enhanced  services,  the enhanced voice sales staff will focus on potential
customers that are not connected to ACSI's network and on potential resellers of
the  Company's  services.   These  enhanced  voice  salespersons  will  also  be
responsible  for  encouraging  existing  accounts  to  subscribe  to  additional
features and to increase  their usage of those  features.  The Company  believes
that, once established,  the customer  relationships  will enhance the Company's
ability to market  local  switched  voice  services to these  customers  as such
services are offered. The Company's enhanced voice messaging sales force will be
augmented  by  additional  sales  personnel  as  local  switched   services  are
introduced on a market by market basis.

    The Company's  data services will be marketed by a separate sales group that
focuses on providing total solutions to a customer's data and networking  needs.
This marketing will require a more technically  sophisticated staff than for the
Company's dedicated,  enhanced and switched voice services. The Company believes
that it will be able to package and  cross-market  all of its  services  through
centralized  and local  account team  coordination,  making ACSI a  full-service
regional provider of local telecommunications services.

    As of June 30,  1996,  the  Company has entered  into  contracts  to provide
managed  services to ISPs for fees to the Company  totaling  approximately  $6.2
million.  In addition,  the Company has begun  providing  local area frame relay
services to customers via the Company's local fiber optic networks.

    ACSI is marketing its data  communications  services via national,  regional
and local sales personnel  supported by teams of sales  engineers.  In addition,
sales  representatives  in  the  Company's  network  services  group  (primarily
responsible  for selling  dedicated  circuits at the local  level)  cross-market
ACSI's data  communications  service offerings,  generating leads and supporting
the  development  and closure of  relationships  with  established  local access
customers.

    The  Company  also  plans  to  expand  its   distribution  of  certain  data
communications  service  offerings through  alternative  channels such as CATVs,
electric utilities, out-of-region RBOCs, and independent LECs. ACSI is currently
in discussions with several providers regarding reseller and private labeling

                                     Page 26


<PAGE>


arrangements involving the Company's data communications service offerings,  but
there  can be no  assurance  that any of these  discussions  will  result  in an
agreement to resell and private label such offerings.

Competition

    Dedicated Services. The Company operates in a highly competitive environment
and has no  significant  market  share in any market in which it  operates.  The
Company provides  dedicated services to large business and government end users.
In each of the metropolitan  areas to be served by the Company's  networks,  the
Company's  dedicated  services  will  compete  principally  with  the  dedicated
services  offered by the  incumbent  LEC. The LECs, as the  historical  monopoly
providers of local access and other services,  have long-standing  relationships
with their  customers and have financial and technical  resources  substantially
greater than those of the Company. The LECs also offer certain services that the
Company cannot currently  provide without first obtaining  requisite  regulatory
approvals.

    Competition  for  dedicated  services  is based on price,  quality,  network
reliability,  customer  service,  service  features  and  responsiveness  to the
customer's  needs. The Company believes that its management  expertise,  coupled
with  its  highly  reliable,  state-of-the-art  digital  networks,  which  offer
significant  transmission  capacity  at  competitive  prices,  will  allow it to
compete  effectively  with the LECs, which may have not yet fully deployed fiber
optic networks in many of the Company's  target markets.  The Company  currently
prices its services at a modest discount compared to the prices of the LEC while
providing a higher level of customer service. The Company's fiber optic networks
will provide both  diverse  access  routing and  redundant  electronics,  design
features  not widely  deployed  by the LEC's  networks  (which  were  originally
designed in tree and branch or star configurations).

    Other potential  competitors of the Company  include CATV operators,  public
utilities,  IXCs,  wireless  telecommunications  providers,  microwave carriers,
satellite  carriers,  teleports,  private networks built by large end users, and
other  CLECs.  With the passage of the  Telecommunications  Act and the entry of
RBOCs into the long  distance  market,  the Company  believes  that IXC's may be
motivated

                                     Page 27


<PAGE>


to construct  their own local  facilities  and/or  resell the local  services of
ACSI's competitors. For example, AT&T has announced its intention to offer local
services and has filed for state  certification  in markets that include,  among
others,  several of the Company's  markets.  Other CLECs or CATVs  currently are
competitors in various markets in which the Company has networks in operation or
under construction. Based on management's experience at other CLECs, the initial
market entrant with an operational  fiber optic CLEC network  generally enjoys a
competitive  advantage over other CLECs that later enter the market. The Company
expects  that there will be other CLECs  operating  in most,  if not all, of its
target  markets  and that  some of these  CLECs may have  networks  in place and
operating  before the Company's  network is  operational.  While it is generally
considered within the CLEC industry that being the first market entrant to offer
services typically enhances that CLEC's competitive  advantage relative to CLECs
that enter the  market at a later  time,  the  Company  recognizes  that in some
instances  it  may  have  other  competitive  advantages  (such  as  a  superior
right-of-way  arrangement  or  large  customer  commitments)  that  it  believes
outweighs  another CLEC's first to market  advantage;  in these  instances,  the
Company may elect to enter a market where an established CLEC already exists.

    High-Speed  Data Services.  The Company's  competitors  for high-speed  data
services  include the major IXCs,  other CLECs,  and various  providers of niche
services  (e.g.,  Internet  access  providers,  router  management  services and
systems  integrators).  In general, none of these competitors currently offers a
comprehensive  solution for a customer's potential data service requirements,  a
core  premise of the  Company's  data  strategy.  The Company  intends to pursue
arrangements  with  other data  service  providers  to  leverage  each  entity's
strengths in a given market or segment of the service chain by bundling elements
of  complete  data  solutions  (i.e.,  bundle its local  access and frame  relay
services with an IXC's longhaul transport  services).  The  interconnectivity of
the Company's markets will create additional  competitive  advantages over other
data  service  providers  that must obtain  local access from the LEC or another
CLEC in each  market  or that  cannot  obtain  intercity  transport  rates on as
favorable terms as the Company.


                                     Page 28


<PAGE>



    There is significant competition for Internet access and related services in
the United  States,  with few barriers to entry other than capital.  The Company
expects  that  competition  will  increase  as  existing  services  and  network
providers  and new entrants  compete for  customers.  ACSI's  current and future
competitors  include  telecommunications  companies,  including the RBOCs, IXCs,
other  CLECs and  CATVs,  and other  Internet  access  providers,  such as UUNET
Technologies,  Inc., Advanced Network & Services, Inc., BBN Corporation,  NETCOM
On-Line Communications  Services, Inc. and PSINet Inc. Many of these competitors
have greater financial, technical, marketing and human resources, more extensive
infrastructure and stronger customer and strategic  relationships than ACSI. The
Company believes that it will have a competitive  advantage in offering Internet
access services to those ISP and commercial  customers in markets where ACSI has
local fiber optic network facilities relative to other Internet access providers
that must purchase  local loop access from the LEC, ACSI or another CLEC in that
market.  Additionally,  ACSI believes that customers with operations in multiple
locations  served by ACSI local fiber  optic  networks  will find  single-source
Internet access services from ACSI attractive and more cost effective.

    All of the seven  original  RBOCs  offer at least  some  basic  frame  relay
service.  The Company  believes  that most IXCs offer  substantial  domestic and
international frame relay service, generally positioned to provide a significant
savings over  traditional  private  lines.  Other frame relay service  providers
include MFS and  Intermedia  Communications.  A number of  companies,  primarily
CLECs, have announced plans to offer frame relay service. ATM offerings are only
beginning  to emerge.  ATM  service is  currently  being  offered by most of the
original RBOCs,  MFS, AT&T, MCI, Sprint and WilTel,  Inc. A number of other data
communications providers,  CLECs and facilities-based CATVs have announced their
intentions to offer ATM services in the future.

    A number of equipment vendors,  systems  integrators and Internet access and
service  providers offer  components of managed  services.  The Company believes
that it will have a competitive advantage over those managed services providers

                                     Page 29


<PAGE>


that do not have local loop  facilities  that means they  cannot  provide a full
solution for customers.

    Local  Switched Voice  Services.  In all of the markets where the Company is
currently  operating or plans to operate,  the LEC  currently is a de jure or de
facto monopoly  provider of local switched voice  services.  The Company expects
that the  enactment  of the  Telecommunications  Act will enable  CLECs,  CATVs,
electric utilities,  cellular and wireless providers,  and others to offer local
switched  voice services in  competition  with the LECs in the Company's  target
markets.  The Company  believes  that its strategy to leverage its basic network
infrastructure into higher margin service offerings, migrating to local switched
voice services,  will allow it to procure a profitable share of the market.  The
Company's ability to cross-market services will create opportunities to increase
margins by migrating  customers from  off-network to on-network  status.  As the
number of end users in a given  off-network  building  increases for all service
offerings,  the  economics  improve  to the  point  where the  capital  costs of
connecting the building to ACSI's network are more than covered by the increased
margins represented by retaining the portion of customer revenue paid out to the
LEC.

    Enhanced Voice Messaging Services.  Competition for enhanced voice messaging
services  primarily  consists of basic voice mail  services  offered by LECs and
cellular  providers  in  connection  with  their  core  offerings  and  customer
premise-based  voice  mail  platforms.  The  voice  mail  offerings  of the LECs
typically  have  limited  features  and  flexibility  compared  to the  services
contemplated  by the Company;  thus,  the Company  believes  its enhanced  voice
messaging  services  and  focused  sales  efforts  should  be able to  penetrate
effectively  those  segments  of the small and  mid-sized  business  market that
require more features  and/or  flexibility  than  services  offered by the LECs.
Customer  premise-based  platform  voice  mail  offerings  typically  require  a
relatively large up front capital investment and recurring maintenance costs and
are generally  marketed to large  companies  rather than the small and mid-sized
end users targeted by the Company.



                                     Page 30


<PAGE>



Regulation

Overview

    The Company's  services are subject to federal,  state and local regulation.
The  FCC   exercises   jurisdiction   over  all   facilities   and  services  of
telecommunications  common  carriers to the extent those  facilities are used to
provide,  originate or terminate  interstate  or  international  communications.
State regulatory  commissions retain jurisdiction over the Company's  facilities
and services to the extent they are used to  originate  or terminate  intrastate
communications.  Local governments may require the Company to obtain licenses or
franchises  regulating  use of public  rights-of-way  necessary  to install  and
operate its networks.

    The  allocation  of  jurisdiction  between  federal and state  regulation of
dedicated  facilities  carrying both  interstate and  intrastate  traffic raises
definitional  issues.  Although  the  FCC  generally  does  not  rule  as to the
jurisdictional nature of a carrier's traffic, under FCC practice,  such services
are considered to be jurisdictionally  interstate if at least 10% of the traffic
is  interstate  in nature.  Virtually  all  dedicated  services  provided by the
Company  between  long  distance  carrier  POPs,  and between IXCs and their end
users,  satisfy this  requirement  and are  jurisdictionally  interstate  in the
opinion of the Company.


Recent Federal Legislation

    On   February   1,   1996,   the   U.S.   Congress   enacted   comprehensive
telecommunications  reform  legislation,  which the President signed into law as
the Telecommunications Act of 1996 on February 8, 1996 (the  "Telecommunications
Act").  The  Telecommunications  Act  amends the  Communications  Act of 1934 to
impose a legal duty upon incumbent LECs to provide  interconnection  (i) for the
transmission and routing of telephone exchange service and exchange access, (ii)
at any  technically  feasible point within the LECs'  network,  (iii) that is at
least equal in quality to that provided by the LEC to itself,  its affiliates or
any other party to which the LEC  provides  interconnection,  and (iv) at rates,
terms and conditions that are just, reasonable and nondiscriminatory.  LECs also
are required

                                     Page 31


<PAGE>


under the new law to provide  nondiscriminatory access to network elements on an
unbundled basis at any technically  feasible point, to offer its local telephone
services  for  resale at  wholesale  rates,  and to  facilitate  collocation  of
equipment necessary for competitors to interconnect with or access the unbundled
network elements.

    The   Telecommunications   Act   also   imposes   a   legal   duty   on  all
telecommunications  carriers  (including  LECs and CLECs) (i) not to prohibit or
unduly  restrict  resale of their  services;  (ii) to 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.

    In addition,  under the terms of the Telecommunications Act, the RBOC's must
offer  terms and  conditions  for  interconnection  that  satisfy  a  prescribed
14-point  checklist  before  they may  obtain  authority  to  provide  interLATA
services  within  their  operating  regions.  In  addition  to  the  obligations
discussed  in the  preceding  paragraphs  in this  subsection,  RBOCs must offer
interconnection that includes each of the following:

     -    local loop  transmission  from the  central  office to the  customer's
          premises, unbundled from local switches, or other services;

     -    local switching, unbundled from transport, local loop transmission, or
          other services;

     -    nondiscriminatory   access  to  911  and  E911   services,   directory
          assistance services and operator services;

     -    white page directory listings;

     -    nondiscriminatory assignment of telephone numbers;




                                     Page 32


<PAGE>



     -    nondiscriminatory  access  to  data  bases  and  associated  signaling
          necessary for call routing or completion; and

     -    interim  number  portability  through remote call  forwarding,  direct
          inward dialing trunks or other comparable arrangements.

    The Company believes that this legislation is likely to enhance  competition
in the local  telecommunications  marketplace  through  (i) removal of state and
local entry barriers,  (ii) requirements that LECs provide  interconnections  to
their  facilities,  (iii)  facilitation  of the  process  of  changing  from LEC
services to those  offered by CLECs and (iv) access to  rights-of-way.  Although
there can be no  assurances,  the Company  expects  further growth to the extent
that  LECs  begin to  compete  with  IXCs for long  distance  services,  thereby
providing  IXCs with a competitive  incentive to move access  business away from
LECs to CLECs, such as ACSI. However, the legislation also has granted important
benefits to the LECs. The LECs have substantial new pricing  flexibility.  RBOCs
have  regained the ability to provide long  distance  services and have obtained
new rights to provide  certain cable TV services.  In addition,  the legislation
may encourage IXCs to construct their own local  facilities  and/or resell local
services in order to compete with the bundled local and long  distance  services
to be offered by the LECs as a result of the Telecommunications Act.

    The  Telecommunications  Act also amends the  Communications  Act of 1934 to
preempt any state or  municipal  action  requiring  cable  companies to obtain a
franchise  before  offering   telecommunications   services  or  allowing  their
franchise  fees  to  be  based  on  their   telecommunications   revenues.   The
Telecommunications  Act also  lifts  restrictions  previously  contained  in the
Public  Utility  Holding  Company Act of 1935,  which had  previously  prevented
certain   registered   utility   holding   companies  from   diversifying   into
telecommunications  services. These changes will tend to enhance the competitive
position of the LECs and increase local  competition  by IXCs,  CATVs and public
utility companies, which may have a material adverse effect on the Company.



                                     Page 33


<PAGE>



    The FCC has opened numerous proceedings intended to implement the provisions
of the  Telecommunications Ac, including its CC Docket No. 96-98 for adoption of
rules relating to local network interconnection,  unbundling,  and resale, which
is discussed hereunder.


Federal Regulation

    In general,  the FCC has a policy of encouraging  entry of new  competitors,
such  as  the  Company,  in  the  telecommunications   industry  and  preventing
anti-competitive practices.

    The FCC has established different levels of regulation for dominant carriers
and  nondominant  carriers.  For  domestic  common  carrier   telecommunications
regulation,  large  LECs  such as GTE and the  RBOCs  are  currently  considered
dominant  carriers,  while CLECs such as the Company are considered  nondominant
carriers.  As a  nondominant  carrier,  the  Company  may  install  and  operate
facilities for the transmission of domestic  interstate  communications  without
prior FCC authorization.  Services of nondominant  carriers have been subject to
relatively limited regulation by the FCC, primarily  consisting of the filing of
tariffs and periodic reports  concerning the carrier's  interstate  circuits and
deployment of network facilities.  However,  the FCC has proposed adopting rules
that would  preclude IXCs from filing  tariffs and is considering a request that
the proposed rules also be applicable to CLECs. Moreover, the Company must offer
its interstate  services on a  nondiscriminatory  basis,  at just and reasonable
rates, and remains subject to FCC complaint procedures.

    Pursuant to these FCC  requirements,  the Company has filed and  maintains a
tariff for its interstate  services with the FCC. All of the  interstate  retail
"basic"  services (as defined by the FCC)  provided by the Company are described
therein.  "Enhanced" services (as defined by the FCC) need not be tariffed.  The
Company has an  "enhanced"  frame relay  product,  which is not contained in the
Company's



                                     Page 34


<PAGE>


current  FCC  tariff.  A tariff  for a "basic"  frame  relay  offering  is under
development.  The Company  believes that its voice messaging and Internet access
products are "enhanced" services which need not be tariffed.

    In 1991, the FCC replaced  traditional  rate of return  regulation for large
LECs with price cap regulation. Under price caps, LECs can only raise prices for
certain  services,  including  interconnection  services provided to CLECs, by a
small percentage each year. In addition, there are constraints on the pricing of
LEC services that are  competitive  with those of CLECs.  On September 14, 1995,
the FCC proposed to adopt a three-stage plan that would substantially reduce LEC
price cap regulation as local markets become increasingly  competitive.  The FCC
proposed to  immediately  eliminate  the lower service band index limit on price
reductions  within service  categories,  modify tariff filing  requirements  and
revise  the  structure  of price cap  baskets.  The FCC also  sought  comment on
whether LECs should be permitted to expand use of option  discount plans such as
volume and term  discounts.  Under the FCC's  proposal,  during the second phase
certain LEC services could be removed from price cap regulation and regulated on
a  streamlined  basis if they were deemed to be subject to  competition.  In the
third stage,  LECs would be granted  nondominant  status.  Adoption of the FCC's
proposal  to   significantly   reduce  its   regulation  of  LEC  pricing  would
significantly  enhance  the  ability of LECs to compete  against the Company and
could have a material adverse effect on the Company.

    The FCC has granted LECs additional  flexibility in pricing their interstate
special and switched  access  services on a specific  central  office by central
office basis. Under this pricing scheme,  LECs may establish pricing zones based
on access traffic density and charge different prices for each zone. The Company
anticipates  that this pricing  flexibility  will result in LECs lowering  their
prices in high traffic density areas, the probable arena of competition with the
Company.  The Company also  anticipates  that the FCC will grant LECs increasing
pricing flexibility as the number of interconnections and competitors increases.
In a concurrent  proceeding on transport  rate  structure  and pricing,  the FCC
enacted interim pricing rules that  restructure LEC switched  transport rates in
order to facilitate competition for switched access.


                                     Page 35


<PAGE>



    On February 15, 1996,  the FCC released an order  granting in part Ameritech
Corporation's  (one of the seven RBOCs) request for a waiver of the Commission's
access  charge  rules  sufficient  to grant it  certain  access  charge  pricing
flexibility.  The FCC permitted Ameritech to "bulk bill" IXCs for the portion of
the  Carrier  Common Line  Charge  ("CCLC")  that  contributes  to the  National
Exchange Carriers Association Long Term Support Fund for high-cost carriers. The
FCC also allowed Ameritech to reduce the transport  interconnection  charge on a
geographically  deaveraged  basis in the Chicago and Grand Rapids LATAs,  on the
basis that Ameritech faces actual  competition  from CCLCs in those LATAs.  Such
access charge pricing  flexibility is likely to make it more difficult for CLECs
to compete against  Ameritech in the affected  areas.  Although the Company does
not provide service in the Ameritech operating region, if the FCC grants similar
access pricing flexibility to other LECs, it could become more difficult for the
Company to compete for access traffic.

FCC   Rules    Implementing   the   Local   Competition    Provisions   of   the
Telecommunications Act

    On August 8,  1996,  the FCC  released  both a First  Report and Order and a
Second  Report and Order and  Memorandum  Opinion and Order in its CC Docket No.
96-98 (combined,  the  "Interconnection  Orders")  establishing new policies and
rules  governing  local  telephone  services  interconnection  and  competition.
Although the new rules were scheduled to become effective on September 30, 1996,
numerous parties to the rulemaking appealed the Interconnection  Orders, and the
U.S.  Court of Appeals  for the Eighth  Circuit  ("Court of  Appeals")  issued a
temporary  stay of the effect of the  Interconnection  Orders on  September  27,
1996.  The  temporary  stay will defer  effectiveness  of the new rules until at
least  October 3, 1996,  during  which time the Court of Appeals  will  consider
whether to extend the stay for the duration of the appeal process.  In addition,
some parties have asked the FCC to stay its own order,  and multiple parties are
expected to file petitions with the FCC on September 30, 1996, asking the agency
to  reconsider  and revise  portions of the  Interconnection  Orders.  Moreover,
several   energy   utilities   have   initiated   litigation   challenging   the
constitutionality of the Telecommunications Act itself.


                                     Page 36


<PAGE>



    The Interconnection Orders establish a framework of minimum,  national rules
that will enable state Public Service Commissions  ("PSCs") and the FCC to begin
implementing  many of the local  competition  provisions  of the Act.  The FCC's
decision in CC Docket No.  96-98 is the first part of a trilogy of actions  that
the Commission contends will promote competition in the local telecommunications
market.  The  second  part is reform of the  system for  funding  and  providing
universal  service  support (as  described  hereafter).  The FCC stated that the
third part of the trilogy of actions consists of further reform of its rules for
establishing interexchange access charges. The FCC has stated that a competitive
telecommunications  market  requires  that  access  charges  be  moved  to  more
economically efficient levels.

    As described in greater detail below, in its Interconnection Orders, the FCC
prescribed  certain  minimum  points  of  interconnection  necessary  to  permit
competing  carriers to choose the most efficient points at which to interconnect
with the ILECs'  networks.  In addition,  the Commission  also adopted a minimum
list of unbundled network elements that ILECs must make available to competitors
upon request.  The Commission  also set forth a methodology for states to use in
establishing  rates for  interconnection  and the purchase of unbundled  network
elements,   and  a   methodology   for   states   to  use  when   applying   the
Telecommunications  Act's "avoided cost standard" for setting  wholesale  prices
with  respect  to retail  services.  The  following  summarizes  the key  issues
addressed in the Interconnection Orders.

    Interconnection.  Section 251(c)(2) of the  Telecommunications  Act requires
ILECs to provide interconnection to any requesting telecommunications carrier at
any technically  feasible point. The  interconnection  must be at least equal in
quality to that  provided by the ILEC to itself or its  affiliates,  and must be
provided  on  rates,  terms  and  conditions  that  are  just,   reasonable  and
nondiscriminatory.  The FCC  determined  that the term  "interconnection"  under
Section  251(c)(2)  refers only to the physical  linking of two networks for the
mutual exchange of traffic. The Commission  concluded that, at a minimum,  ILECs
must provided interconnection at


                                     Page 37


<PAGE>



     -    the line side of a local switch (i.e., the main distribution  frame)
     -    the trunk side of a local  switch
     -    the trunk interconnection  points for a tandem switch
     -    central office cross-connect  points
     -    out-of-band  signaling  transfer  points
     -    the points of access to unbundled network elements

The   Commission   found   that   telecommunications    carriers   may   request
interconnection  to  provide  telephone  exchange  service  or  exchange  access
service,  or both.  If the request is for such  purposes,  the ILEC must provide
interconnection to any telecommunications carrier, including IXCs and commercial
mobile radio service (CMRS) providers.

    Access to Unbundled  Elements.  Section 251(c)(3) of the  Telecommunications
Act  requires  ILECs to  provide  requesting  telecommunications  carriers  with
nondiscriminatory  access  to  network  elements  on an  unbundled  basis at any
technically  feasible  point on  rates,  terms,  and  conditions  that are just,
reasonable and  nondiscriminatory.  The FCC identified the following minimum set
of network elements that ILECs must unbundle and provide access to:

     -    network  interface  devices
     -    local  loops
     -    Local and tandem switches (including all software features provided by
          such switches
     -    interoffice  transmission  facilities
     -    signaling and call-related  database  facilities
     -    operations  support  systems and  information
     -    operator and directory assistance facilities

States may require ILECs to provide  additional network elements on an unbundled
basis,  pursuant  to a bona fide  request  by a  telecommunications  carrier  or
otherwise.  The FCC also  ruled  that ILECs  must  provide  requesting  carriers
nondiscriminatory  access to certain  operations support systems and information
that  ILECs use to provide  telecommunications  services  commercially,  such as
information required for pre-ordering, ordering, provisioning, billing and

                                     Page 38


<PAGE>


maintenance  and  repair  services.  Moreover,  the new rules  require  ILECs to
provide access to network elements in a manner that allows  requesting  carriers
to  combine  such  elements  as  they  choose.   Thus,   ILECs  may  not  impose
restrictions,  limitations  or  requirements  upon the use of unbundled  network
elements by other carriers.

    Methods  of  Obtaining  Interconnection  and Access to  Unbundled  Elements.
Section  251(c)(6)  of the  Telecommunications  Act  requires  ILECs to  provide
physical  collocation of equipment  necessary for  interconnection  or access to
unbundled  network  elements  at the ILEC's  premises,  except that the ILEC may
provide  virtual  collocation if it  demonstrates  to the state  commission that
physical  collocation is not practical for technical reasons or because of space
limitations.  Under the FCC's  Interconnection  Orders,  ILECs are  required  to
provide any technically  feasible method of  interconnection or access requested
by  a  telecommunications  carrier,  including  physical  collocation,   virtual
collocation,  and interconnection at meet points. The Commission  adopted,  with
certain   modifications,   the  existing   physical   and  virtual   collocation
requirements  it  adopted  in the early  1990s in its  Expanded  Interconnection
proceeding.

    Pricing  Methodologies.  The  Telecommunications  Act requires the states in
arbitrating  interconnection  disputes not resolved by negotiation to set prices
for    interconnection    and   unbundled    elements   that   are   cost-based,
nondiscriminatory  and may include a reasonable  profit.  To help the state PSCs
accomplish  this,  the FCC  concluded  that the  state  commissions  should  set
arbitrated rates for interconnection and access to unbundled elements pursuant a
forward-looking  economic cost pricing  methodology.  The FCC concluded that the
prices that new entrants pay for  interconnection  and unbundled elements should
be based on the ILEC's  Total  Element  Long-Run  Incremental  Cost  (TELRIC) of
providing  a  particular   network   element,   plus  a   reasonable   share  of
forward-looking  joint and common  costs.  States  will  determine,  among other
things, the appropriate risk-adjusted cost of capital and depreciation rates.

The TELRIC-based costing and pricing methodology described above must be used to
set permanent rates for both  interconnection  and unbundled  network  elements.
However,   recognizing   that  many  states   already  have  begun   arbitration
proceedings, and that TELRIC cost information may not be available for

                                     Page 39


<PAGE>


consideration  within the statutory time frame for  arbitrating  interconnection
disputes,  the FCC  authorized  the  states to use  certain  default  proxies as
ceilings on the pricing for local  interconnection and unbundled network element
pricing. If a proxy default is used, however, the states must replace such rates
with  TELRIC-based  rates on a going  forward  basis once they have  completed a
review of the TELRIC cost studies.

    With the exception of a default  proxies for switching,  which are expressed
as a rate range, the FCC's default proxies are maximum rates.  State commissions
are free to establish rates below the ceilings. The FCC's default proxies are as
follows:

   Element                         FCC Proxy

   Local Loops                     Varies by state, with a low of $9.83 (Mass.)
                                   and a high of $25.36 (N.D.)

   Switching                       $0.002 to $0.004/min. plus an additional
                                   $0.001515/min. if tandem switching is used

   Local Transport                 Existing tariffed interstate dedicated
                                   switched access  transport charges, with
                                   adjustments when tandem switched transport
                                   is used

   Signaling/Database Access       Existing tariffed interstate charges

   Collocation                     Existing rates established in the FCC's
                                   Expanded Interconnection proceeding

Notably, the FCC's default ceiling applicable to unbundled loop rates applies to
the rated average of all loop rates  established  for regions  within the state.
The FCC requires  that states  establish at least three  density  zones for loop
rates. A state is within the ceiling if the average of its loop prices, weighted
according  to the number of loops in each zone,  is at or below the proxy level.
The FCC did not establish  default proxies for the  non-recurring  charges often
associated with the

                                     Page 40


<PAGE>


initial  installation of unbundled loops (or other network elements),  which are
often relatively high in the Company's experience.

    Access Charges for Unbundled Switching and Access Charge Reform.  Nothing in
the FCC's Interconnection  Orders alter the collection of access charges paid by
an interexchange  carrier under Part 69 of the FCC rules, when the ILEC provides
exchange access service to an interexchange carrier,  either directly or through
ILEC service  resale.  Because access charges are not included in the cost-based
prices for unbundled  network  elements,  and because certain portions of access
charges currently support the provision of universal  service,  until the access
charge reform and universal  service  proceedings  have been completed,  the FCC
plans to continue providing for access charge recovery with respect to use of an
ILEC's unbundled switching element, for a defined period of time.

    Under the new rules,  ILECs will recover from all  interconnecting  carriers
the  carrier  common  line  charge  and a charge  equal to 75% of the  transport
interconnection  charge for all interstate  minutes  traversing the ILECs' local
switches for which the  interconnecting  carriers pay unbundled  network element
charges.  This aspect of the rules will expire at the  earliest  of: 1) June 30,
1997;  2) issuance of final  decisions by the FCC in the  universal  service and
access reform proceedings;  or 3) if the ILEC is a Bell Operating Company (BOC),
the  date  on  which  that  BOC  is   authorized   under   Section  271  of  the
Telecommunications  Act to provide in-region  interLATA  service,  for any given
state. The FCC is expected to issue a Notice of Proposed Rulemaking establishing
a  proceeding  to reform its  access  charge  rules in  November  1996,  with an
objective of issuing  revised access charge rules by June 30, 1997.  Although it
is  impossible  to predict  the outcome of the  upcoming  access  charge  reform
proceeding,  the Company  believes that it is likely that the planned  reform of
the FCC's access charge rules will result ultimately in a significant  reduction
in the rate levels of interstate switched access charges.

Resale.  The  Telecommunications  Act requires all ILECs to offer for resale any
telecommunications  service that the carrier  provides at retail to  subscribers
who are not telecommunications  carriers.  The Telecommunications  Act's pricing
standard for wholesale  rates requires  state PSCs to identify which  marketing,
billing,  collection  and other costs will be avoided or that are  avoidable  by
ILECs

                                     Page 41


<PAGE>


when they provide  services  wholesale,  and calculate the portion of the retail
rates for those  services  that is  attributable  to the avoided  and  avoidable
costs.  The  application  of this  definition is left to the states.  If a state
elects not to implement the  methodology,  it may elect,  on an interim basis, a
discount rate from within a default range of discount  rates  established by the
FCC. The  Commission  established a default  discount range of 17-25% off retail
prices.  State PSCs will be able to set specific rates within that range, in the
exercise of their discretion.

    Transport and Termination.  The Telecommunications Act requires that charges
by LECs for the transport and termination of local traffic  delivered to them by
competing  LECs be  cost-based.  The  FCC  concluded  that  state  PSCs,  during
arbitrations,  should set  symmetrical  prices based on the LECs' TELRIC cost of
providing the service.  The FCC established a default range of $0.002-$0.004 per
minute for end officer  termination for states which have not conducted a TELRIC
cost study. The Commission found  significant  evidence in the record in support
of the  lower  end  of the  ranges.  In  addition,  the  Commission  found  that
additional  reciprocal  charges  could  apply to  termination  through  a tandem
switch.  The default  ceiling for tandem  switching is $0.0015 per minute,  plus
applicable charges for transport from the tandem switch to the end office.

    Access to Rights of Way.  The FCC also  amended its rules to  implement  the
pole attachment  provisions of the  Telecommunications  Act.  Specifically,  the
Commission    established    procedures   for   nondiscriminatory    access   by
telecommunications  carriers and poles, ducts, conduits, and rights-of-way owned
by utilities or LECs. The Interconnection  Orders include several specific rules
as well as a number  of more  general  guidelines  designed  to  facilitate  the
negotiation and mutual  performance of fair,  pro-competitive  access agreements
without the need for regulatory intervention. Additionally, an expedited dispute
resolution procedure is provided when good faith negotiations fail.

ACSI is unable to predict  whether the new rules and  policies  described  above
will be  revised  by the FCC on  reconsideration,  be stayed or set aside by the
Court of  Appeals,  or  whether  another  federal  court  will  find some or all
portions of the Telecommunications Act to be unconstitutional.


                                     Page 42


<PAGE>



    Universal Service Reform.  Section 254(a) (1) of the  Telecommunications Act
requires  the FCC to  institute a  Federal-State  Joint Board for the purpose of
recommending a revised universal service funding program to the FCC. By means of
a Notice of Proposed Rulemaking and Order Establishing Joint Board issued in its
CC Docket No. 96-45 on March 8, 1996,  the FCC  proceeded  to  establish  such a
Joint Board and seek public  comment on a new or  reformed  system of  universal
service  support.  While it is  impossible  to predict  what system of universal
service support will ultimately result from this effort, the  Telecommunications
Act  requires  that all  telecommunications  carriers,  including  the  Company,
contribute to the funding effort on an equitable and nondiscriminatory basis, in
an amount  sufficient to preserve and advance  universal  service  pursuant to a
specific or predictable universal service funding mechanism.  The Company cannot
at this time predict the level or form of its  mandatory  contribution,  but the
Company  believes  that it will likely be a significant  expenditure.  The Joint
Board is expected to release its proposal  for  universal  service  reform on or
about November 8, 1996, and the proceeding must be concluded by May 8, 1997.


State Regulation

    The Company  believes that most, if not all,  states in which it proposes to
operate will require a certification or other  authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
have not yet addressed  issues relating to the regulation of CLECs.  Some states
that have  authorized the competitive  provision of dedicated  services have not
authorized the provision of competitive local switched services. Some states may
require authorization to provide enhanced services.

In some states,  existing state statutes,  regulations or regulatory  policy may
preclude some or all forms of local service competition.  The Telecommunications
Act contains  provisions  that prohibit  states and localities  from adopting or
imposing  any  legal  requirement  that  may  prohibit,  or have the  effect  of
prohibiting,  the ability of any entity to provide any  interstate or intrastate
telecommunications  service.  The FCC is  required  to preempt any such state or
local requirements to the extent necessary to enforce the Telecommunications

                                     Page 43


<PAGE>


 Act's open market  entry  requirements.  States and  localities  may,  however,
continue to regulate the  provision of intrastate  telecommunications  services,
and,  presumably,  require  carriers to obtain  certificates  or licenses before
providing service.

    The Company currently has obtained intrastate authority for the provision of
dedicated services in Alabama, Arkansas,  Florida, Georgia, Kentucky,  Maryland,
Nevada,  New  Mexico,  South  Carolina,  Tennessee  and Texas.  The  Company has
applications pending before the PSCs in Arizona, Colorado, Louisiana,  Missouri,
Oklahoma and Virginia for intrastate dedicated services authority. To the extent
the Company expands the scope of its intrastate  services in the future in these
states to include  the full range of local  switched  services,  the  Company is
required  to seek  additional  authorization  from such PSCs.  The  Company  has
applied  for  authorization  to provide  local  switched  services  in  Arizona,
Arkansas,  Colorado,  Kentucky,  Louisiana,  Mississippi,  Missouri, New Mexico,
Oklahoma,  South  Carolina and  Virginia and has been granted such  authority in
Alabama,  Florida,  Georgia,  Maryland,  Nevada, South Carolina,  Tennessee, and
Texas.   There  can  be  no  assurances   that  the  Company  will  receive  the
authorizations it is currently seeking, or will seek, from these PSCs.

    In most states,  the Company is required to file tariffs  setting  forth the
terms, conditions and prices for services that are classified as intrastate.

    The  Company  believes  that,  as  the  degree  of  intrastate   competition
increases,  the states will offer the LECs increasing pricing flexibility.  This
flexibility may present the LECs with an opportunity to subsidize  services that
compete with the Company's services with revenues generated from non-competitive
services,  thereby allowing LECs to offer  competitive  services at prices below
the cost of providing  the  service.  The Company  cannot  predict the extent to
which this may occur or its impact on the Company's business.

    Local  Interconnection.  The  Telecommunications Act imposes a duty upon all
incumbent  LECs to negotiate  in good faith with  potential  interconnectors  to
provide  interconnection  to the ILEC  network,  exchange  local  traffic,  make
unbundled  basic local  network  elements  available,  and permit resale of most
local services. In the event that negotiations do not succeed, the Company has a
right to

                                     Page 44


<PAGE>


seek state PSC arbitration of any unresolved issues. The state PSC must conclude
the  arbitration  within  nine months of the date upon which the  incumbent  LEC
received the  Company's  initial  request for  interconnection.  The Company has
negotiated  partial  agreements  with  BellSouth for local  interconnection  and
access to unbundled  elements in South  Carolina,  Georgia,  Florida,  Kentucky,
Tennessee,  Alabama,  Mississippi and Florida.  Similar partial  agreements have
been reached with Southwestern Bell for Arkansas and Texas, with US West for New
Mexico  and  Arizona  and with  GTE for  Texas,  Kentucky  and  Florida.  In all
instances,  the  Company  was  forced  to seek  state PSC  arbitration  for some
material   issues.   State   commission   arbitration   of  ACSI   requests  for
interconnection  are currently  underway in the twelve  states listed above.  In
addition,  the Company has initiated formal  interconnection  negotiations  with
Bell Atlantic and Sprint/Central Telephone.

Local Government Authorizations

The  Company is  required  to obtain  street use and  construction  permits  and
licenses and/or  franchises to install and expand its fiber optic networks using
municipal rights-of-way.  In some municipalities where the Company has installed
or  anticipates  constructing  networks,  it will be  required to 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 the Company  will not be required to post  similar  bonds in the
future,  nor is there any assurance  that,  following the expiration of existing
franchises,  fees will remain at their current levels. In many markets, the LECs
do not pay such  franchise  fees or pay fees  that are  substantially  less than
those required to be paid by the Company.  To the extent that competitors do not
pay the same level of fees as the Company, the Company could be at a competitive
disadvantage. However, the Telecommunications Act provides that any compensation
extracted by states and localities for use of public rights-of-way must be "fair
and  reasonable,"  applied on a  "competitively  neutral  and  nondiscriminatory
basis" and be "publicly disclosed" by such government entity. Termination of the
existing  franchise or license  agreements prior to their expiration dates could
have a materially adverse effect on the Company.



                                     Page 45


<PAGE>



Employees

    As of June 30, 1996, the Company  employed a total of 199  individuals  full
time. The Company  believes that its future success will depend on its continued
ability to attract and retain highly  skilled and qualified  employees.  None of
the Company's  employees is subject to a collective  bargaining  agreement.  The
Company believes that its relations with its employees are good.

Item 2.  Properties

    The Company leases a 23,925 square foot office space in Annapolis  Junction,
Maryland  for its  corporate  headquarters  and  network  management  center for
$28,647  per  month  as of June 30,  1996,  subject  to  periodic  increases  in
specified  amounts.  The  lease  expires  in 2002,  but may be  renewed  for two
additional  five-year  terms.  The Company's  field office,  housing its network
development and real estate development operations, is located in a 1,358 square
foot  facility in  Lombard,  Illinois  which the  Company  leases for $1,643 per
month, subject to periodic increases in specified amounts. This lease expires on
January 31, 1999.

As of June 30, 1996, the Company's  various  operating  subsidiaries have leased
facilities  for their offices and network nodes.  The aggregate  monthly rent on
these properties is approximately  $136,444.  The various leases expire on dates
ranging from February 28, 1998, to October 30, 2005. Most have renewal  options.
Additional  office  space and  equipment  rooms  will be  leased  as  additional
networks are constructed and the Company's operations are expanded.

    The Company  believes  that its  insurance  coverage on these  properties is
adequate and in compliance with the related leases.

Item 3.  Legal Proceedings

    On July 24,  1996,  the Company  was  notified  that a  complaint  against a
subsidiary had been filed in the District Court of El Paso County, Texas wherein
the  plaintiff  alleged  permanent  paraplegia  resulting  from his fall  into a
concealed basement during  construction of the Company's El Paso network. At the
time of

                                     Page 46


<PAGE>


the incident  giving rise to the lawsuit,  the  plaintiff was an employee of the
subcontractor  hired by the Company's general  contractor for this project.  The
plaintiff  seeks  recovery  from  the  Company's   subsidiary  and  the  general
contractor of at least $25 million in damages (plus punitive damages).  Both the
Company  and the general  contractor  have begun  investigations  into the facts
surrounding  the  incident and intend to defend  against  this suit  vigorously.
However,  based on the facts known as of the date  hereof,  the Company does not
believe it is likely,  although it is possible, that the Company could be liable
for  payment  of all or a portion  of the  requested  damages,  which  potential
liability  could  materially  adversely  affect  the  results of  operation  and
financial condition of the Company.

    Additionally,  the Company and its  subsidiaries  are  currently  parties to
routine litigation incidental to their business, none of which,  individually or
in the aggregate, are expected to have a material adverse effect on the Company.
The  Company  and  its  subsidiaries   continue  to  participate  in  regulatory
proceedings  before  the  FCC  and  state  regulatory  agencies  concerning  the
authorization of services and the adoption of new regulations.


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

None.















                                     Page 47


<PAGE>



                                     Part II

Item 5.  Market for Common Equity and Related Stockholders Matters
         ---------------------------------------------------------

         The  Company's  Common Stock is traded  under the symbol  "ACNS" in the
over-the-counter  market.  The  Company's  Common  Stock has been  quoted on the
Nasdaq  National  Market since May 22, 1996. From March 3, 1995 to May 21, 1996,
the Company's  Common Stock was quoted on the Nasdaq SmallCap  Market.  Prior to
that time the Common  stock was quoted in the pink  sheets,  although it was not
consistently  quoted  therein.  On September 20, 1996,  the high and the low bid
prices for the Company's  Common Stock as reported by the Nasdaq National Market
were $11.13 and $10.75,  respectively.  As of  September  20,  1996,  there were
approximately 266 stockholders of record of the Company's Common Stock.

The following table sets forth the range of high and low bid quotations obtained
from the  National  Quotations  Bureau  for the  Common  Stock for the first two
quarters  of the  fiscal  year  ended  June 30,  1995 and a portion of the third
quarter of the fiscal year ended June 30, 1995 (the period from  January 1, 1995
through  March 2, 1995,  the day prior to the day the Common  Stock  began being
quoted on the Nasdaq SmallCap  Market).  The following table also sets forth the
high and low bid  quotations  as  reported by the Nasdaq  SmallCap  Market for a
portion of the third  quarter of the fiscal year ended June 30, 1995 (the period
from March 3, 1995 through March 31, 1995),  the last quarter of the fiscal year
ended June 30, 1995,  the first three quarters of the fiscal year ended June 30,
1996 and a portion of the fourth  quarter of the fiscal year ended June 30, 1996
(the period from April 1, 1996  through May 21,  1996,  the day prior to the day
the Common Stock began being quoted on the Nasdaq National Market). Finally, the
following  table also sets forth the high and low bid  quotations as reported by
the Nasdaq  National  Market  for a portion of the fourth  quarter of the fiscal
year ended June 30, 1996 (the period from May 22, 1996 through  June 30,  1996).
The quotes as set forth below are believed to be  representative of inter-dealer
quotations,  without  retail  mark-up,  mark-down  or  commission,  and  may not
necessarily represent actual transactions.


                                     Page 48


<PAGE>



                                                       High Bid          Low Bid

Fiscal Year  Ended June 30, 1995
--------------------------------

First Quarter                                         $      4.50    $      1.50

Second Quarter                                        $      4.25    $      2.50

Third Quarter (through March 2, 1995)                 $      4.75    $      3.25

Third Quarter (March 3 through March 31, 1995)        $      4.75    $      3.25
 
Fourth Quarter                                        $      4.00    $      3.12

Fiscal Year  Ended June 30, 1996
--------------------------------

First Quarter                                         $      8.25    $      3.75

Second Quarter                                        $      7.25    $      5.37

Third Quarter                                         $      9.75    $      5.00

Fourth Quarter (through May 21, 1996)                 $     16.00    $      8.00

Fourth Quarter (May 22 through June 30, 1996)         $     15.62    $     12.00
 
         The  Company  has paid no  dividends  on its  Common  Stock  since  its
inception  and  does  not  plan to pay  dividends  on its  Common  Stock  in the
foreseeable  future.  Except as may be utilized to pay dividends  payable on the
Series A-1 Preferred Stock and the Series B Preferred  Stock, any earnings which
the Company may realize  will be retained to finance the growth of the  Company.
The agreements  relating to the Company's  secured debt financing  prohibits the
Company from paying any  dividends on its capital  stock,  except the Series A-1
Preferred  Stock and the Series B Preferred  Stock,  and restrict the ability of
the

                                     Page 49

<PAGE>



Company's  subsidiaries  to transfer  funds to the Company,  unless in each case
certain  financial  covenants are met. The indentures  relating to the Company's
Senior Notes  prohibit the Company from paying any dividend on its capital stock
unless  certain  financial  covenants  are met.  The  Company's  certificate  of
incorporation  prohibits the payment of dividends on the Common Stock unless all
dividends  due and  payable  (including  accrued  dividends)  on the  Series A-1
Preferred Stock and the Series B Preferred Stock have been paid in full.


Item 6.  Management's Discussion and Analysis of Financial Condition
         -----------------------------------------------------------
and Results and Operations
--------------------------

Overview

ACSI  provides or plans to provide a variety of  telecommunications  services to
IXCs and  business  and  government  end  users in Tier II and Tier III  markets
located   principally  in  the  southern   United  States.   The  Company  began
construction of its first fiber optic network in Louisville in February 1994 and
began to provide  commercial  service on that network in November 1994.  Between
August  1994  and  June 30,  1996,  the  Company  commenced  construction  of an
additional 23 networks,  17 of which (in addition to the Louisville network) are
currently operational. Since June 30, 1996 the Company has begun construction on
an additional six networks. The Company expects to provide commercial service in
the Amarillo, Baton Rouge, Central Maryland, Chattanooga,  Colorado Springs, and
Corpus Christi markets by the end of the fourth calendar  quarter of 1996 and in
the Dallas, Jacksonville, Kansas City, New Orleans, Shreveport and Tulsa markets
by March 31, 1997. The Company is actively  developing  necessary  marketing and
engineering  plans  and  pursuing  required  municipal  authorizations  to begin
construction  of additional  markets  during 1996 and plans to have,  subject to
receipt of additional necessary financing,  a total of 50 networks in service or
under  construction by June 30, 1998. The Company provides dedicated services to
IXCs and to those  business and  government end users whose volumes of voice and
data traffic are large  enough to warrant  paying a fixed  monthly  charge for a
specific capacity  requirement rather than a usage-based  variable charge. These
monthly  charges vary  according to the capacity of each circuit,  the volume of
individual  circuits ordered by the customer,  the mileage of the circuits,  the
need

                                     Page 50


<PAGE>


for any  ancillary  services  and  the  term of the  service  contract,  but are
typically less than the rates charged by the LECs for similar services,  volumes
and terms.  The Company focuses its sales efforts on the largest IXCs, with whom
it believes it has good customer relationships.  Sales of dedicated services are
typically coordinated with the end user's IXC account team and billed by the IXC
rather  than by the  Company,  thus  providing  the end user a  single  point of
contact  for its  entire  long  distance  account  and  reducing  the  Company's
back-office overhead requirements.  Currently, the Company offers these services
in all of its  operational  markets  and plans to offer  these  services  in all
markets where it constructs and operates networks.

The Company is  developing  and has begun  offering  high-speed  data  services,
including  Internet services and frame relay.  Internet services  facilitate the
connectivity  of  corporate,  institutional  and  governmental  customers to the
Internet,  a collection of data networks that communicate with one another using
common protocols.  Frame relay is a cost-effective  data transport  solution for
LAN-to-LAN connectivity,  legacy networks and client-server applications. ATM is
a high-bandwidth  service offering virtual  networking for voice, data and video
traffic, allowing a customer to use a single network for all three applications.
Customer charges include  nonrecurring charges for installation and provisioning
and either flat rate or  usage-based  recurring  charges based on network access
speed  and  the  statistically  guaranteed  throughput  rate  of  data  for  the
particular  service  order.  The Company is  deploying  a  broadband  inter-city
backbone data network using leased lines with ATM switches that will connect the
Company's  service markets,  major data markets and Internet access points.  The
same backbone  network  architecture  can be utilized by the Company's  enhanced
voice and local switched voice services for its  inter-market  connectivity  and
networking  requirements,  which the Company believes will result in operational
efficiencies  and lower costs while further  enhancing  opportunities  for cross
marketing and bundling services to ACSI's customers.

    ACSI is  implementing  its data  communications  network via high  bandwidth
(DS-3) longhaul  circuits leased from various  interexchange  carriers.  Network
connectivity  within  each  node  will  be  via  OC-3  bandwidth,  enabling  the
transparent   migration  of  longhaul  circuits  to  OC-3  capacity  as  needed.
Ultimately,  the platform  technology  is capable of  upgrading  the backbone to
OC-12,  without  further  modification.  The  Company's  initial  network  phase
established data POPs

                                     Page 51


<PAGE>


in seven markets plus a link to ACSI's  network  management  center in Maryland,
where the data  network is  monitored  on a  24-hour-a-day  basis.  The  Company
currently  has 25 POPs in  operation  and  plans  at least 40 POPs by the end of
calendar year 1996.

    The Company attained  national service provider status for Internet services
in May 1996.  Subsequently,  the Company entered into agreements to interconnect
at two major Network  Access Points  ("NAPs") where  national  Internet  service
providers  interconnect  their  networks,  allowing  the  multitude of local and
regional ISPs to exchange data and access the Internet globally,  seamlessly and
transparently.  In  addition to these two  initial  NAP  agreements  at MAE-East
(Vienna,  Virginia)  and  MAE-West  (San Jose,  California),  ACSI is  currently
negotiating for  interconnection at three additional NAPs as well as negotiating
peering agreements and  Network-to-Network  Interfaces  ("NNIs") with most major
interexchange  carriers.  The Company is  deploying a  coast-to-coast  DS-3/OC-3
backbone and deploying domain name systems for Internet routing.  As the Company
deploys additional data POPs (including POPs in all markets where ACSI has local
infrastructure),  it intends to  negotiate  additional  NNIs to  facilitate  the
exchange of data among other carriers' networks both domestically and abroad.

    In addition,  with a limited capital  investment,  the Company is developing
and  during  May  1996  began  offering  to small  and  mid-sized  business  and
government  end  users in its  first  five  markets,  enhanced  voice  messaging
services.  These customers will be billed by the Company.  The range of services
includes a voice messaging service for a flat monthly charge that may be bundled
with  one  or  more  additional  features  (such  as  automated   attendant/call
screening,  follow-me calling, remote fax and paging and e-mail notification) in
order  to  meet  the  customer's  specific  communications   requirements.   The
additional  features will be offered for incremental  fixed charges and/or usage
based charges.  Management believes that successful  marketing of these enhanced
voice messaging services will help build the Company's customer base and provide
relevant  sales  experience  that can be leveraged  into offering local switched
services.  The Company may also offer these enhanced voice messaging services on
a retail or  wholesale  basis in  markets  where it has no  network  facilities,
resulting in increased revenue potential.  However, the gross margins associated
with such revenues may be lower, resulting from the

                                     Page 52


<PAGE>


payment of LEC access charges in those non-ACSI  markets.  Additionally,  unlike
traditional telephone service, customers have not yet become fully accustomed to
use of voice  messaging  services,  and the demand for these services  cannot be
predicted at this time.

As requisite interconnection agreements and regulatory approvals are obtained on
a  state-by-state  basis,  the Company  plans to provide  local  switched  voice
services,  such as  local  dial  tone,  termination  of local  calling,  Centrex
services,  PBX trunking and switched  access  services.  These  services will be
offered  for  appropriate  fixed and  usage-based  charges at rates  below those
charged  by  LECs  for  similar  services.   Where   technically   feasible  and
economically  practicable,  the  Company  intends  to deploy a hubbed  switching
strategy by using Company-owned or leased switch capacity in a large,  centrally
located market to provide services within that market and to serve several other
smaller markets located within the same  geographical  area via remote switching
modules. The Company believes that this strategy,  if successfully  implemented,
could reduce the capital expense  associated with installing a fully  configured
switch in each  market,  which  market may  otherwise be too small on its own to
justify the  investment.  By  aggregating  switched  traffic from multiple small
markets  through a central  hub switch,  the Company  also can expect to realize
reduced operating  expenses  associated with switch engineering and maintenance.
The Company believes that providing dedicated and private line,  high-speed data
and enhanced  voice  messaging  services will enhance the  Company's  ability to
cross-market  local switched voice services to its then existing  customers at a
reduced  cost.  Finally,   the  Company  is  evaluating   opportunities,   on  a
market-by-market  basis, to establish mutually beneficial alliances with certain
entities that have local switching requirements,  experience,  facilities and/or
administrative  back-office  operations.  Successful  negotiation  of  switching
alliances  may  further  reduce the  Company's  capital and  operating  expenses
associated  with the provision of switched  voice  services as well as providing
additional market  opportunities by utilizing embedded  switching  technology in
those markets or deploying incremental switches more efficiently.

    The Company  believes that its local digital fiber optic  networks,  coupled
with its inter-city  broadband digital networks  described above, will provide a
platform  for  the  provision  of a  wide  variety  of  voice,  data  and  other
communications

                                     Page 53


<PAGE>


services  at a reduced  cost.  While the  Company  may  offer  its  services  to
customers that are not directly  connected to its network  through resale of the
LEC's network,  the Company believes that it can gradually migrate many of these
off-net  customers to higher margin on-net accounts as it increases  penetration
of all its services within a given building. As a result, the capital investment
of connecting additional buildings and customers to ACSI's network should become
more cost-effective.  Over time, the Company believes it can increase its market
share of all of its service offerings as a result of the reliability and quality
of  its  networks,   prompt  customer  service,   competitive   pricing,   cross
marketing/bundling  synergy's and new service  offerings over its target 50-city
market area.

Initially,  the Company expects to experience negative cash flow from operations
in each of its operating  networks.  The Company  estimates  that because of the
reduced  operating  costs  associated  with its smaller  markets and IXC-focused
sales force, it can achieve operating cash flow breakeven (i.e., positive EBITDA
before  overhead  allocations)  results on its networks  within ten to 15 months
from the start of commercial service.  Thereafter,  the Company anticipates that
its profit margins will increase as each network is expanded to directly connect
additional customers to its backbone, and as off-net customers migrate to on-net
status  (thus  allowing  the Company to retain the  portion of customer  charges
previously paid out to the LEC for resale of LEC  facilities).  The Company will
also  experience  initial  negative  cash flow  from  operations  as  additional
value-added services such as high-speed data, enhanced voice messaging and local
switched voice services are offered and until networks  providing those services
reach operating cash flow breakeven.

Capital Expenditures; Operating Cash Flow

    As of September  30, 1996 the Company is  operating  18 digital  fiber optic
networks,  with an additional  12 networks  under  construction,  and intends to
have,  subject  to  receipt  of  necessary  additional  financing,  50  networks
operating or under  construction by June 30, 1998. The costs associated with the
initial construction and operation of a network may vary greatly,  primarily due
to market  variations in geographic  and  demographic  characteristics,  and the
types of  construction  technologies  which can be used to deploy  the  network.
Management  estimates that  construction of the initial  one-to-three mile fiber
optic backbone and

                                     Page 54


<PAGE>


installation of related network  transmission  equipment for dedicated  services
for each market will  generally  cost  between  $3.5  million and $6.0  million,
depending on the size of the market served.  Including planned expansion routes,
total capital expenditures per network are estimated to average $6.0 million. In
addition  to capital  expenditure  requirements,  the Company  incurs  sales and
marketing  (including  sales  commissions)  and  operating  expenses  and  other
expenses such as property taxes and, in certain  markets,  franchise fees. Prior
to the completion of network  construction,  certain of these  expenses,  to the
extent they are related to  pre-service  construction,  are  capitalized.  These
capitalized  expenses,  estimated  by  management  to be  between  approximately
$500,000 and $1.0 million per network,  are amortized over the anticipated  life
of the network. These costs vary depending on the size of the market, the length
of time required to build-out the network and the rate of growth of the customer
base.

    At  such  time  as the  Company  develops,  introduces  and  rolls  out  its
high-speed  data,  enhanced voice  messaging and local switched  services in its
target markets,  additional capital expenditures and net operating costs will be
incurred.  The amount of these costs will vary based on the number of  customers
served and the actual services provided to the customers.

    Although the Company is now  generating  revenues from 18 of its fiber optic
networks, on a consolidated basis it is still incurring negative cash flows due,
in part,  to the  funding  requirements  for the  networks  the  Company  is now
planning or has under  construction  or  development  and due,  in part,  to the
roll-out of its new data and voice services.  The Company expects to continue to
incur negative cash flow for at least the next several years.

Results of Operations

 Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995

  Revenues

    During the fiscal year ended June 30, 1996, the Company recorded revenues of
$3,415,137 as compared to revenues of $388,887 during the fiscal year ended June
30, 1995. Four of the largest IXCs accounted for approximately $1,708,000, or

                                     Page 55


<PAGE>


60%,  of  revenues  for fiscal 1996 as compared to fiscal 1995 when three of the
largest IXCs accounts for approximately  $329,000, or 85% of revenues for fiscal
1995 reflecting the Company's increased sales to end users.

Total Operating Expenses

    Network  development  and  operations  expenses for fiscal 1996 increased to
$5,264,570 from $3,282,200 in fiscal 1995,  reflecting  significant increases in
personnel,   network  development  and  non-payroll  operating  expenses.  These
increased costs were associated  with  developing and  establishing  centralized
engineering, circuit provisioning and network management functions, constructing
and initially operating the Company's competitive access networks and performing
market  feasibility,  engineering,  rights-of-way and regulatory  evaluations in
additional  target cities,  as well as the start up of two new business units to
provide  advanced data service and switched voice  services.  Related  personnel
costs  increased to $4,464,358 in fiscal 1996 from  approximately  $1,341,100 in
fiscal 1995. Other operating  expenses related to the development of prospective
new markets,  which include  expenses such as contract  labor and legal expenses
and certain franchise fees, travel expenses, rent, utilities, charges and taxes,
decreased  to $800,212 in fiscal 1996 from  approximately  $1,941,100  in fiscal
1995.

In fiscal  1996,  selling,  general and  administrative  expenses  increased  to
$13,463,775 from $4,597,600 in fiscal 1995. Related personnel costs increased to
$3,232,811  in fiscal 1996 from  $1,974,200  in fiscal 1995,  and  corresponding
operating  costs  increased to  $10,230,964  in fiscal 1996 from  $2,210,900  in
fiscal 1995. This increase reflected costs associated with the Company's efforts
in  significantly  expanding  its national and local city sales,  marketing  and
administrative  staffs, as well as increased legal and other consulting expenses
associated with its aggressive programs for obtaining  regulatory  approvals and
certifications and providing quality network services.

    Depreciation  and  amortization  expenses  increased to $3,078,426 in fiscal
1996 from $497,811 in fiscal 1995.  During fiscal 1996 the Company increased its
capital  assets to  approximately  $80,147,964  representing  an  increase  from
$15,900,000  at the end of fiscal  1995.  Non-cash  stock  compensation  expense
decreased to $2,735,845 for fiscal 1996 from  $6,419,412  for fiscal 1995.  This
expense  reflects  the  Company's  accrual of  non-cash  costs for  options  and
warrants

                                     Page 56


<PAGE>


granted to key  executives,  employees  and others  arising from the  difference
between  the  exercise  price and the  valuation  prices  used by the Company to
record such costs and from the vesting of those options and warrants. Certain of
these  options had put rights and other  factors  that  required  variable  plan
accounting  in fiscal 1994 and fiscal 1995 but, at the end of fiscal  1995,  the
Company  renegotiated  contracts  with certain of its officers,  establishing  a
limit of $2,500,000 on the Company's put right obligations with respect to those
contracts. During fiscal 1996, the limit was further reduced to 2,000,000.

Interest and Other Expenses

Interest and other income  increased to $4,409,734 for fiscal 1996 from $217,525
in fiscal 1995.  Interest  expense and other costs  increased to  $10,476,904 in
fiscal  1996 from  $706,100 in fiscal  1995.  The  increase  in interest  income
reflects the significant  increase in available funds from the Company's sale of
its 9% Series B Preferred  Stock in June and November  1995,  the  Company's 13%
Senior  Discount  Notes Due 2005 (the  "2005  Notes") in  November  1995 and the
Company's  12 3/4% Senior  Discount  Notes Due 2006 (the "2006  Notes") in March
1996.  The  increase in interest  and other  expenses  reflected  the accrual of
interest  related to the 2005 Notes and 2006 Notes and the  Company's  increased
borrowings  under its secured  financing  facility with AT&T Credit  Corporation
(the "AT&T Credit  Facility").  Payments of  principal  and interest on the AT&T
Credit  Facility will begin in calendar  1997,  payments of interest on the 2005
Notes do not begin  until  November  2000 and  payments  of interest on the 2006
Notes do not begin until October 2001.

    Debt conversion expense in fiscal 1995 totaled $385,000, reflecting expenses
incurred in connection  with the  conversion of certain of the Company's debt to
equity in September 1994.  AT&T Credit  Corporation's  minority  interest in the
Company's  operating  subsidiaries  for  which  it  provided  funding,   reduced
operating losses by  approximately  $412,606 for fiscal 1996, and by $48,655 for
fiscal 1995.





                                     Page 57


<PAGE>



Liquidity and Capital Resources

To date,  the  Company  has  funded the  construction  of its  networks  and its
operations with external financing.  Prior to November 1995, the primary sources
of funds used to finance the building of existing networks and the completion of
new targeted networks were two private offerings of preferred stock completed in
October 1994 and June 1995, through which the Company raised approximately $39.6
million,  and the AT&T Credit Facility,  through which the Company has financing
commitments  for $31.2 million.  On November 14, 1995,  the Company  completed a
private  offering of 190,000  Units  consisting  of $190.0  million in principal
amount of the 2005 Notes and the  Warrants to purchase an aggregate of shares of
common stock at a price of $7.15 per share (as may be  adjusted)  from which the
Company  received  approximately  $96.8 million in net proceeds.  The 2005 Notes
will accrete to an aggregate  principal  amount of $190.0 million by November 1,
2000,  after which cash  interest  will  accrue and be payable on a  semi-annual
basis. In November 1995 the Company also received net proceeds of  approximately
$5.0  million  from the  private  sale of an  additional  50,000  shares  of its
Preferred Stock to a principal  stockholder and the exercise by that stockholder
of warrants to purchase 214,286 shares of Common Stock acquired in the Company's
June 1995 private placement.  On March 21, 1996, the Company completed a private
offering of $120.0 million in principal amount of the 2006 Notes. The 2006 Notes
will  accrete to an  aggregate  principal  amount of $120.0  million by April 1,
2001,  after which cash  interest  will  accrue and be payable on a  semi-annual
basis. The Company received net proceeds of approximately $61.8 million from the
sale of the 2006 Notes.

    The Company intends to continue to use these funds towards completion of the
Company's  50-city business plan,  including the development and construction of
fiber optic networks,  the further development and introduction of new services,
including high-speed data, enhanced voice messaging and local switched services,
for expansion of the Company's  existing networks and to fund negative operating
cash flow until cash flow break even.  The Company has estimated  that from July
1, 1996  through the end of the calendar  year 1998,  capital  requirements  for
implementation of its 50-city business plan are approximately $410.9 million. At
June 30, 1996, the Company had approximately $132.7 million in cash and cash

                                     Page 58


<PAGE>


equivalents available for this purpose. To meet additional capital requirements,
ACSI may be required to sell  additional  debt or equity  securities or increase
its existing credit facility.  The Company may also need to seek such additional
equity  financing to maintain  balance sheet and liquidity ratios required under
certain  of its debt  instruments.  In  addition,  the  Company  in the past has
considered and expects to continue to consider  potential  acquisitions or other
strategic  arrangements that may fit the Company's  strategic plan. Although the
Company  has  had  discussions   concerning   such  potential   acquisitions  or
arrangements,  to date no  agreements  have  been  reached  with  regard  to any
particular transaction. Any such acquisitions or strategic arrangements that the
Company  might  consider  are  likely  to  require  additional  equity  or  debt
financing, which the Company will seek to obtain as required.

Preferred Stock. In October 1994, the Company completed the private placement of
186,664 shares of its 9% Series A Convertible  Preferred  Stock, par value $1.00
per share  (which was later  exchanged  for Series A-1  Preferred  Stock that is
convertible into 7,466,560 shares of Common Stock) with accompanying warrants to
purchase an  aggregate  of 2,674,506  shares of Common  Stock,  for an aggregate
consideration  of  $16.8  million  (before   deduction  of  estimated   offering
expenses),  including the conversion of $4.3 million of outstanding debt. Of the
warrants sold in October 1994,  warrants to acquire  1,491,222  shares of Common
Stock were exercised by a principal  stockholder for an aggregate exercise price
of approximately $100,000.

    In June 1995, the Company completed a private placement of 227,500 shares of
its Series B Preferred Stock with accompanying warrants to purchase an aggregate
of  1,584,303  shares  of  Common  Stock,  for  an  aggregate  consideration  of
$22,750,000.  In addition,  in November  1995,  the Company  completed a private
placement of 50,000  shares of its Series B Preferred  Stock  together  with the
exercise of accompanying  warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $5,000,000. The Series
B Preferred Stock is convertible into an aggregate of 9,910,718 shares of Common
Stock.


                                     Page 59


<PAGE>



    Under the terms of the  Preferred  Stock,  the Company is required to accrue
quarterly  dividends at an annual rate of 9% of the face value of the  Preferred
Stock outstanding. Such accrued dividends will be payable cumulatively beginning
January  1,  1998,  subject to certain  covenants  contained  in the  indentures
relating to the 2005 Notes and the 2006 Notes,  or earlier upon  conversion into
Common Stock.

AT&T Credit Facility.  In October 1994, the Company entered into the AT&T Credit
Facility  pursuant to which AT&T Credit  Corporation has agreed to provide up to
$31.2 million in financing for the development  and  construction of fiber optic
networks by the Company's subsidiaries.  In connection with each loan made under
the AT&T Credit Facility, AT&T Credit Corporation purchases 7.25% of the capital
stock of the funded subsidiary, and ACSI pledges the other shares and the assets
of the subsidiary to AT&T Credit  Corporation  as security for the loan.  During
fiscal 1995, the Company's  subsidiaries in Louisville,  Fort Worth,  Greenville
and  Columbia  entered  into  loan  agreements  under the AT&T  Credit  Facility
providing  for AT&T  Credit  Corporation  funding of up to $19.8  million in the
aggregate,  and in September  1995, the Company's  subsidiary in El Paso entered
into a loan agreement  under the AT&T Credit  Facility  providing for up to $5.5
million of AT&T Credit Corporation funding. As of June 30, 1996, an aggregate of
$15.0 million had been borrowed under these agreements.


Effects of New Accounting Standards

    In March 1995, the Financial  Accounting  Standards Board (FASB) issued SFAS
No. 121,  Accounting for the Impairment of Long-lived  Assets and for Long-lived
Assets to Be  Disposed  Of,  which will  require  the  Company to review for the
impairment of long-lived assets and certain identifiable  intangibles to be held
and used by the Company  whenever  events or changes in  circumstances  indicate
that the carrying amount of any asset may not be  recoverable.  Adoption of SFAS
No. 121 is required in fiscal 1997.

     In October 1995, the FASB issued SFAS No. 123,  Accounting for  Stock-Based
Compensation, which establishes a fair value-based method for financial

                                     Page 60


<PAGE>


accounting and reporting  stock-based employee  compensation plans. However, the
new  standard  allows  compensation  to  continue  to be  measured  by using the
intrinsic  value based method  accounting  prescribed by  Accounting  Principles
Board Opinion No. 25,  Accounting  for Stock Issued to  Employees,  but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company
has elected to continue to apply the intrinsic  value-based method of accounting
for stock options.

While the Company does not know  precisely  the impact of adopting  SFAS No. 121
and SFAS No. 123,  the Company does not expect that the adoption of SFAS No. 121
and SFAS No.  123 will  have a  material  effect on the  Company's  consolidated
financial statements.


Item 7.  Financial Statements

The  response  to this Item is  submitted  as a separate  section of this report
commencing on Page F-1.


Item 8. Changes In and Disagreements With Accountants on
        ------------------------------------------------
        Accounting and Financial Disclosure
        -----------------------------------

Not Applicable.













                                     Page 61

<PAGE>


                                    Part III

         The  information  required by Item 9 - Directors,  Executive  Officers,
Promotors  and Control  Persons;  Compliance  with Section 16(a) of the Exchange
Act; Item 10 - Executive  Compensation;  Item 11 - Security Ownership of Certain
Beneficial  Owners  and  Management;  and Item 12 -  Certain  relationships  and
Related Transactions is incorporated into Part III of this Annual Report on Form
10-KSB/A by reference to the Company's  Proxy  Statement for the Annual Meeting 
of Stockholders scheduled to be held on November 15, 1996.


































                                     Page 62

<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

a) EXHIBITS (Numbered in accordance with Item 601 of Regulation S-B)
<TABLE>
<CAPTION>


                                                                                     EXHIBIT NO. OR
EXHIBIT                                                                              INCORPORATION
  NO.                     DESCRIPTION                                                BY REFERENCE
=======                   ===========                                                =============
<C>     <S>                                                                          <C>

 3.1    Amended and Restated Certificate of Incorporation of the Company.                      #
 3.2    Certificate of Designations of the Company's 9% Series A-l, Series
        B-1, Series B-2, Series B-3 and Series B-4 Convertible Preferred Stock.               **
 3.3    Certificate of Elimination regarding the 9% Series A Preferred Stock                  **
 3.4    Amended and Restated By-Laws of the Company, as amended.                               *
 3.5    Governance Agreement dated November 8, 1995, between the Company and
        the holders of its Preferred Stock.                                                   ++
 3.8    Certificate of Correction dated March 11, 1996.                                        #
 3.9    Supplemental Governance Agreement dated February 26, 1996.                             #
 4.1    Specimen Certificate of the Company's Common Stock.                                    #
 4.2    Specimen Certificate of the Company's 9% Series A-l Preferred Stock.                ****
 4.3    Specimen Certificate of the Company's 9% Series B-1 Preferred Stock.                ****
 4.4    Specimen Certificate of the Company's 9% Series B-2 Preferred Stock.                ****
 4.5    Specimen Certificate of the Company's 9% Series B-3 Preferred Stock.                ****
 4.6    Certificate of the Company's 9% Series B-4 Preferred Stock dated
        November 14, 1995.                                                                    ++
 4.7    Indenture dated November 14, 1995, between the Company and Chemical
        Bank, as trustee, relating to $190,000,000 in principal amount of
        13% Senior Discount Notes due 2005, including the form of global note.                ++
 4.8    Initial Global Note dated November 14, 1995.                                          ++
 4.9    Warrant Agreement dated November 14, 1995, between the Company and
        Smith Barney Inc. and Salomon Brothers Inc.                                          +++
 4.10   Initial Global Warrant dated November 14, 1995.                                      +++
 4.11   Indenture dated March 21, 1996, between the Company and Chemical Bank,
        as trustee, relating to $120,000,000 in principal amount of 12 3/4%
        Senior Discount Notes due 2006, including the form of global note.                 +++++
 9.1    Standstill Agreement dated June 26, 1995, between the Company and
        certain of its Preferred Stockholders.                                              ****
 9.2    Standstill Agreement dated November 8, 1995, between the Company and
        certain of its Preferred Stockholders.                                                ++
 9.3    Voting Rights Agreement dated November 8, 1995, between the Company and
        certain of its Preferred Stockholders.                                                ++
 9.4    Amendment to Voting Rights Agreement dated December 14, 1995.                          #
10.1    Exchange Agreement, dated June 1, 1994, between the Company and certain of
        its Preferred Shareholders.                                                            *
10.2    Exchange Agreement, dated June 26, 1995, between the Company and its 9%
        Series A Preferred Shareholders.                                                      **
10.3    Company's 1994 Stock Option Plan.                                                      *
10.4    Registration Rights Agreement dated July 1, 1992, between American
        Lightwave, Inc. and persons named therein.                                             *
10.5    Supplemental Registration Rights Agreement dated June 26, 1995.                     ****
10.6    Management Registration Rights Agreement dated June 30, 1995.                       ****
10.7    Registration Rights Agreement dated June 26, 1995, between the Company
        and certain Preferred Stockholders.                                                   **
10.8    Form of Warrant Agreement issued to certain Preferred Stockholders on
        June 26, 1995.                                                                      ****
10.9    Form of $.01 Warrant Agreement.                                                     ****
10.10   Form of $1.79 Warrant Agreement.                                                    ****
10.11   Form of $2.25 Warrant Agreement.                                                    ****
10.12   Stockholders Agreement dated June 26, 1995, between the Company and
        certain Preferred Stockholders.                                                     ****
10.13   Third Amended and Restated Employment Agreement between the Company
        and Anthony J. Pompliano.                                                           ****


<PAGE>

10.14   Third Amended and Restated Employment Agreement between the Company
        and Richard A. Kozak.                                                               ****
10.15   Third Amended and Restated Employment Agreement between the Company
        and George M. Tronsrue, III.                                                        ****
10.16   Third Amended and Restated Employment Agreement between the Company
        and Riley M. Murphy.                                                                ****
10.17   Third Amended and Restated Employment Agreement between the Company
        and Douglas R. Hudson.                                                              ****
10.18   Second Amended and Restated Employment Agreement between the Company
        and Ronald W. Kaiser.                                                               ****
10.19   Employment Agreement between the Company and Robert Ottman                          ****
10.20   Form of Non-Qualified Stock Option Certificates, as amended, issued to
        Richard A. Kozak.                                                                   ****
10.21   Form of Stock Option Certificates, as amended, issued to George M.
        Tronsrue, III under employment agreement.                                           ****
10.22   Form of Stock Option Certificates, as amended, issued to Riley M.
        Murphy under employment agreement.                                                  ****
10.23   Form of Stock Option Certificates, as amended, issued to Douglas R.
        Hudson under employment agreement.                                                  ****
10.24   Form of Stock Option Certificates, as amended, issued to Ronald W.
        Kaiser under employment agreement.                                                  ****
10.25   Form of Stock Option Certificates, as amended, issued to Robert Ottman.             ****
10.26   Agreement, dated March 2, 1994, between the Company and Gerard Klauer
        Mattison & Co., as amended.                                                            *
10.27   Agreement, dated March 20, 1995, between the Company and Gerard Klauer
        Mattison & Co., as amended.                                                         ****
10.28   Agreement, dated October 19, 1994, between the Company and Marvin
        Saffian & Company.                                                                     *
10.29   Lease Agreement for the Company's executive offices at 131 National
        Business Parkway, Suite 100, Annapolis Junction, Maryland, as amended.              ****
10.30   Loan and Security Agreement, dated October 17, 1994, between AT&T Credit
        Corporation and American Communication Services of Louisville, Inc.                    *
10.31   Loan and Security Agreement, dated February 28, 1995, between AT&T Credit
        Corporation and American Communication Services of Fort Worth, Inc.                 ****
10.32   Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
        Corporation and American Communication Services of Greenville, Inc. and
        American Communication Services of Columbia, Inc.                                   ****
10.33   Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
        between the Company and AT&T Credit Corporation.                                    ****
10.34   Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
        between the Company and AT&T Credit Corporation.                                    ****
10.35   Amendment No. 1 to Loan and Security Agreement between American
        Communications Services of Louisville, Inc. and AT&T Credit Corporation.            ****
10.36   Consulting Agreement, dated October 25, 1993, between the Company and
        Thurston Partners, Inc.                                                                *
10.37   Consulting Agreement, effective July 1, 1994, between the Company and SGC
        Advisory Services, Inc.                                                                *
10.38   Consulting Agreement, dated June 16, 1994, between the Company and Thurston
        Partners. Inc. and Global Capital, Inc.                                                *
10.39   Note Purchase Agreement, dated June 28, 1994.                                          *
10.40   Investment Agreement dated October 21, 1994, between the Company and the
        Purchasers named therein.                                                              *
10.41   Stock Purchase Agreement, dated October 17, 1994, between the Company and
        AT&T Credit Corporation.                                                               *
10.41   American Communication Services of Louisville, Inc. Common Stock Purchase
        Agreement, dated October 17, 1994.                                                     *
10.42   Stock Purchase Agreement, dated November 28, 1994, by and among the
        Company, CitiLink Corp., and the former directors and shareholders of
        CitiLink Corp., as amended August 3, 1995.                                          ****
10.43   Stock Purchase Agreement, dated May 12, 1995, by and among the Company,
        Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe, as amended.            ****
10.44   Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
        Company and the Purchasers named therein.                                             **
10.45   Form of Indemnity Agreement between the Company and its Director, as


                                      - 2 -
<PAGE>

        amended.                                                                            ****
10.46   Assignment and Assumption Agreement dated June 21, 1995, between the
        Company and Apex Investment Fund II, L.P.                                           ****
10.47   Registration Agreement dated November 9, 1995, between the Company and
        the Initial Purchasers.                                                               ++
10.48   Loan and Security Agreement, dated September 8, 1995, between AT&T Credit
        Corporation and American Communications Services of E1 Paso, Inc.                     ++
10.49   Parent Support and Pledge Agreement (E1 Paso) dated September 8, 1995,
        between the Company and AT&T Credit Corporation.                                      ++
10.50   Letter Agreement dated November 14, 1995, between the Company and ING
        Equity Partners, L.P.I, with respect to the purchase of 50,000 shares of
        the Company's 9% Series B-4 Convertible Preferred Stock and warrants to
        purchase 214,286 shares of Common Stock.                                              ++
10.51   Warrant to Purchase Shares of American Communications Services, Inc.
        Common Stock dated December 28, 1995, between the Company and Gerard
        Klauer, Mattison & Co. ("GKM Warrant I").                                             ++
10.52   Warrant to Subscribe For and Purchase Common Stock of American
        Communications Services, Inc. dated December 28, 1995, between the
        Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II").                         ++
10.53   Amended 1994 Stock Option Plan of the Company.                                        ++
10.54   Parent Pledge and Support Agreement dated as of October 17, 1994 between
        the Company and AT&T Credit Corporation.                                               *
10.55   American Communication Services of E1 Paso Inc. Common Stock Purchase
        Agreement dated September 8, 1995.                                                     #
10.56   Form of Non-Qualified Stock Option Certificates, as amended, issued to               E-1
        Anthony J. Pompliano.
10.57   Employment Agreement between the Company and Harry J. D'Andrea.                      E-2
10.58   Master Amendment to Loan and Security Agreements dated November 30, 1995,            E-3
        among American Communication Services of Louisville, Inc., American
        Communication Services of Fort Worth, Inc., American Communication
        Services of Columbia, Inc., American Communication Services of
        Greenville, Inc., American Communication Services of El Paso and AT&T
        Credit Corporation.
10.59   Master Reaffirmation of Parent Pledge and Support Agreements dated                   E-4
        November 30, 1995, between the Company and AT&T Credit Corporation.
10.60   Letter of Amendment to Loan and Security Agreements dated December 19, 1995,         E-5
        among American Communication Services of Fort Worth, Inc., American
        Communication Services of Columbia, Inc., American Communication Services
        of Greenville, Inc., American Communication Services of El Paso and AT&T
        Credit Corporation.
10.61   Second Master Amendment to Loan and Security Agreements, Waiver and                  E-6
        Equipment Notes Modification Agreement dated September 6, 1996 among
        American Communication Services of Louisville, Inc., American
        Communication Services of Fort Worth, Inc., American Communication
        Services of Columbia, Inc., American Communication Services of
        Greenville, Inc., American Communication Services of El Paso and AT&T
        Credit Corporation.
10.62   Second Master Reaffirmation of Parent Pledge and Support Agreements dated            E-7
        September 6, 1996 between the Company and AT&T Credit Corporation.
10.63   Master Equipment Lease Agreement dated August 26, 1996, between the Company          E-8
        and AT&T Credit Corporation.
11.1    Statement re: computation of per share earnings (loss).                              E-9
16.1    Letter re: change in certifying accountant.                                          ***
21.1    Subsidiaries of the Registrant.                                                     E-10
23.1    Consent of KPMG Peat Marwick LLP.                                                   E-11
27.1    Financial Data Schedules.                                                           E-12
99.1    Certain Factors to Consider in Connection with Forward Looking Statements.          E-13

</TABLE>

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

*    Previously filed as an exhibit to the Company's  Registration  Statement on
     Form SB-2 (File No. 33-87200) and incorporated herein by reference thereto.

**   Previously filed as an exhibit to the Company's  Current Report on Form 8-K
     dated


                                      - 3 -
<PAGE>

        June 26, 1995, and incorporated herein by reference thereto.

***  Previously  filed as an exhibit to the Company's  Quarterly  Report on Form
     10-QSB for the fiscal quarter ended March 31, 1995, and incorporated herein
     by reference thereto.

**** Previously  filed as an  exhibit  to the  Company's  Annual  Report on Form
     10-KSB for the fiscal year ended June 30, 1995, and incorporated  herein by
     reference thereto.

+    Previously  filed as an exhibit  to the  Company's  Annual  Report on Forrn
     10-QSB for the fiscal year ended June 30, 1995, and the Company's Quarterly
     Report on Form 10-QSB for the fiscal quarter ended September 30, 1995, both
     of which are incorporated herein by reference thereto.

++   Previously filed as an exhibit to the Company's  Registration  Statement on
     Form S-4 (File No. 33-80305) and incorporated herein by reference thereto.

+++  Previously filed as an exhibit to the Company's  Registration  Statement on
     Form SB-2 (File No. 33-80673) and incorporated herein by reference thereto.

+++++Previously filed as an exhibit to the Company's  Current Report on Form 8-K
     dated March 26, 1996 and incorporated herein by reference thereto.

     # Previously filed as an exhibit to the Company's Registration Statement on
     Form S-4 (File No. 333-3632) and incorporated herein by reference thereto.

b) Reports on Form 8-K

     On April 11,  1996,  the Company  filed with the  Securities  and  Exchange
Commission (the  "Commission") a Current Report on Form 8-K dated March 26, 1996
relating to the completion of the Company's private placement of $120,000,000 of
the  Company's  12-3/4%  Senior  Discount  Notes due 2006 under Rule 144A of the
Securities Act of 1933, as amended. (Item 5).

     On July 12, 1996, the Company filed with the Commission a Current Report on
Form 8-K dated  June 17,  1996  relating  to the  filing  on June 17,  1996 of a
Registration  Statement  on Form SB-2 with the  Commission,  and relating to the
filing on July 2, 1996 of Amendment No. 1 to the Form SB-2 with the  Commission,
relating to the registration of the Company's Common Stock. (Item 5 and Item 7).

                                      - 4 -

<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.

Dated: October 4, 1996.


                                        AMERICAN COMMUNICATIONS SERVICES, INC.


                                            /s/  HARRY J. D'ANDREA
                                        By: Harry J. D'Andrea
                                            Chief Financial Officer       
                                           (Principal Financial and Accounting 
                                                       Officer)

<PAGE>




                     AMERICAN COMMUNICATIONS SERVICES, INC.

                       Consolidated Financial Statements

                             June 30, 1996 and 1995



                         INDEX TO FINANCIAL STATEMENTS


================================================================================

<TABLE>
<CAPTION>

                                                                                                              Page


<S>                                                                                                           <C>
Independent Auditors' Report..................................................................................F-2

Consolidated Balance Sheets as of June 30, 1996 and 1995......................................................F-3

Consolidated Statements of Operations for the Years Ended June 30, 1996 and 1995..............................F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
     June 30, 1996 and 1995...................................................................................F-5

Consolidated Statements of Cash Flows for the Years Ended June 30, 1996 and 1995..............................F-6

Notes to Consolidated Financial Statements....................................................................F-7

</TABLE>

                                       F-1

<PAGE>










Independent Auditors' Report



The Board of Directors and Stockholders
American Communications Services, Inc.:


We have  audited  the  accompanying  consolidated  balance  sheets  of  American
Communications Services, Inc. and subsidiaries as of June 30, 1996 and 1995, and
the  related  consolidated   statements  of  operations,   stockholders'  equity
(deficit), and cash flows for the years then ended. 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  financial   position  of  American
Communications Services, Inc. and subsidiaries as of June 30, 1996 and 1995, and
the results of their  operations  and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.



                                                   /s/ KPMG PEAT MARWICK LLP
                                                   KPMG Peat Marwick LLP


Washington, DC
September 27, 1996

                                       F-2

<PAGE>
   

AMERICAN COMMUNICATIONS SERVICES, INC.

Consolidated Balance Sheets

June 30, 1996 and 1995

================================================================================
<TABLE>
<CAPTION>

Assets                                                                                           1996             1995
-----------------------------------------------------------------------------------------------------------------------

<S>                                                                                  <C>                    <C>

Current assets:
     Cash and cash equivalents (note 1)                                               $   132,706,427       20,350,791
     Restricted cash (note 1)                                                               3,751,706          752,000
     Trade accounts receivable, net of allowance for doubtful accounts of $189,510
     and
         $8,570 at June 30, 1996 and 1995, respectively                                       735,260          350,436
     Other current assets                                                                   1,003,465           92,325
-----------------------------------------------------------------------------------------------------------------------


Total current assets                                                                      138,196,858       21,545,552

Networks, equipment and furniture, gross (note 2)                                          80,147,964       15,897,562
     less:  Accumulated depreciation                                                      (3,408,698)        (330,272)
-----------------------------------------------------------------------------------------------------------------------

                                                                                           76,739,266       15,567,290

Deferred financing fees, net of accumulated amortization of $732,775 and $64,458
     at June 30, 1996 and 1995, respectively                                                8,334,183          292,113
Other assets                                                                                  329,584          222,010
-----------------------------------------------------------------------------------------------------------------------
Total assets                                                                          $   223,599,891       37,626,965
=======================================================================================================================

Liabilities, Redeemable Stock, Options and Warrants, Minority Interest
     and Stockholders' Equity
-----------------------------------------------------------------------------------------------------------------------

Current liabilities:
     Accounts payable                                                                 $    21,317,346      3,843,167
     Accrued financing fees                                                                         -        1,542,255
     Accrued employee costs                                                                   774,262          836,509
     Other accrued liabilities                                                                886,692        1,269,484
     Notes payable - current portion (note 4)                                                 252,809          146,083
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                  23,231,109        7,637,498

Long term liabilities:
     Notes payable (note 4)                                                               184,129,361        3,652,085
     Dividends payable (note 3)                                                             4,942,313        1,070,985
-----------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                         212,302,783       12,360,568
-----------------------------------------------------------------------------------------------------------------------

Redeemable stock, options and warrants (notes 6 and 11)                                     2,155,025        2,930,778
-----------------------------------------------------------------------------------------------------------------------

Minority interest (note 4)                                                                    160,270          194,402
-----------------------------------------------------------------------------------------------------------------------

Stockholders' equity (notes 4, 5 and 6):
     Preferred stock, $1.00 par value, 186,664 shares designated as 9% Series A-1 Convertible
         Preferred Stock authorized, issued and outstanding at June 30, 1996 and
         1995,
         respectively, convertible into 7,466,560 shares of common stock (notes 3 and 4)      186,664          186,664
     Preferred stock, $1.00 par value, 277,500 shares authorized and designated as 9%
         Series B Convertible Preferred Stock; 277,500 and 227,500 shares issued and
         outstanding at June 30, 1996 and 1995, respectively, convertible into 9,910,718
         shares of common stock (notes 3 and 5)                                               277,500          227,500
     Common stock, $.01 par value, 30,000,000 shares authorized, 6,645,691 and 5,744,782
         shares issued and outstanding at June 30, 1996 and 1995, respectively, (note 5)       65,837           56,827
     Additional paid-in capital                                                            55,975,078       42,411,448
     Accumulated deficit                                                                 (47,523,266)     (20,741,222)
-----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                  8,981,813       22,141,217
-----------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (notes 1, 4, 6, 7, 8, and 9)

Total liabilities, redeemable stock, options and warrants, minority interest
     and stockholders' equity                                                         $   223,599,891       37,626,965
=======================================================================================================================

See accompanying notes to consolidated financial statements.


</TABLE>
                                      F-3

<PAGE>
AMERICAN COMMUNICATIONS SERVICES, INC.

Consolidated Statements of Operations

June 30, 1996 and 1995
<TABLE>
<CAPTION>

=====================================================================================================================

                                                                                               1996             1995
---------------------------------------------------------------------------------------------------------------------

<S>                                                                               <C>                        <C>    
Revenues (note 1)                                                                 $       3,415,137          388,887
---------------------------------------------------------------------------------------------------------------------

Operating expenses:
      Network development and operations                                                  5,264,570        3,282,183
      Selling, general and administrative                                                13,463,775        4,597,615
      Noncash stock compensation (note 6)                                                 2,735,845        6,419,412
      Depreciation and amortization                                                       3,078,426          497,811
---------------------------------------------------------------------------------------------------------------------

Total operating expenses                                                                 24,542,616       14,797,021

Non-operating income (expenses):
      Interest and other income                                                           4,409,733          217,525
      Interest and other expense (note 4)                                              (10,476,904)        (170,095)
      Debt conversion expense (note 4)                                                            -        (385,000)
---------------------------------------------------------------------------------------------------------------------

Loss before minority interest                                                          (27,194,650)     (14,745,704)

Minority interest                                                                           412,606           48,055
---------------------------------------------------------------------------------------------------------------------

Net loss                                                                               (26,782,044)     (14,697,649)

Preferred stock dividends and accretion (note 3)                                        (3,871,328)      (1,070,985)
---------------------------------------------------------------------------------------------------------------------

Net loss to common stockholders                                                   $    (30,653,372)     (15,768,634)
=====================================================================================================================

Net loss per common share                                                         $          (4.96)          (3.30)
=====================================================================================================================

Average number of common shares outstanding (note 3)                                      6,185,459        4,771,689
=====================================================================================================================

See accompanying notes to consolidated financial statements.


</TABLE>

                                      F-4
<PAGE>

AMERICAN COMMUNICATIONS SERVICES, INC.

Consolidated Statements of Stockholders' Equity (Deficit)

Years ended June 30, 1996 and 1995

================================================================================
<TABLE>
<CAPTION>

                                                                                                                              
                                                                        Series A-1           Series B                         
                                                   Preferred Stock    Preferred Stock    Preferred Stock      Common Stock    '
                                                                                                                              
                                                  ------------------ ------------------ --------------------------------------
                                                  Shares      Amount Shares      Amount Shares      Amount   Shares    Amount 
                                                                                                                              
------------------------------------------------------------------------------------------------------------------------------

<S>                                               <C>    <C>               <C>     <C>        <C>     <C>        <C>         <C>    
Balances at June 30, 1994                         1,700  $ 1,700,000            $              $         2,755,005$        

    Preferred Stock exchange (note 12)            (1,700)  (1,700,000)                                   548,387          
    Set par value for common stock (note 5)                                                                        33,033 
    Acquisition of Piedmont Teleport, Inc. (note                                                          62,000          
    13)
    Write-ff of note receivable for common stock                                               
    Series A Preferred private placement, net of                           186,664   186,664                                  
    related costs (note 3)
    Series B Preferred private placement, net of                                               227,500   227,500                   
    related costs (note 3)
    Issuance of put right obligations (notes 6                                                               
    and 9)
    Cancellation of put right obligation (note                                                               
    7)
    Warrant and stock option exercises and stock                                                         2,379,390   23,794 
    grant (note 6)
    Establish limitation on common stock put                                                                 
    right obligation (note 6)
    Series A Preferred Stock dividends accrued                                                               
    (note 3)
    Net loss                                                                                                 
--------------------------------------------------------------------------------------------------------------------

Balances at June 30, 1995                                   $ 186,664     $ 186,664  227,500 $ 227,500  5,744,782$  56,827 

    Issuance of Series B-4 Preferred Stock (note                                                50,000     50,000                   
    3)
    Issuance of detachable warrants (note 4)                                                                   
    Warrants and stock options exercised (note                                                            900,909     9,010 
    5)
    Series A and B Preferred Stock dividends                                                                  
    accrued (note 3)
    Cancellation of and adjustments to put right                                                              
    obligations (note 6)
    Stock compensation expense                                                                                
    Net loss                                                                                                  
------------------------------------------------------------------------------------------------------------------------

Balances at June 30, 1996                             $        186,664     $ 186,664  277,500 $ 277,500  6,645,691$  65,837 
==============================================================================================================================

See accompanying notes to consolidated financial statements.
</TABLE>

<TABLE>
<CAPTION>

                                                                              Notes                       
                                                            Additional      receivable                         Total
                                                            paid-in         on sale of         Accumulated     stockholders
                                                            capital         common stock          deficit      equity (deficit)
-------------------------------------------------------------------------------------------------------------------------------
                                                                                            
 
                                                                                            
<S>                                                         <C>             <C>              <C>                 <C>            
Balances at June 30, 1994                                   1,080,566         (2,750)        (6,043,573)         (3,265,757) 
                                                                                                  
    Preferred Stock exchange (note 12)                      1,700,000                                                   
    Set par value for common stock (note 5)                  (33,033)                                                   
    Acquisition of Piedmont Teleport, Inc. (note 13)                                                                  
    Write-off of note receivable for common stock             (2,750)       2750                                        
    Series A Preferred private placement, net of           15,009,461                                         15,196,125  
    related costs (note 3)                                                                 
    Series B Preferred private placement, net of           20,434,000                                         20,661,500  
    related costs (note 3)                                                                 
    Issuance of put right obligations (notes 6               (53,303)                                           (53,303)   
    and 9)                                                                                 
    Cancellation of put right obligation (note                487,500                                            487,500   
    7)                                                                                     
    Warrant and stock option exercises and stock              349,030                                            372,824   
    grant (note 6)                                                                         
    Establish limitation on common stock put                4,510,962                                          4,510,962   
    right obligation (note 6)                                                              
    Series A Preferred Stock dividends accrued            (1,070,985)                                        (1,070,985) 
    (note 3)                                                                               
    Net loss                                                                                 (14,697,649)    (14,697,649)
-----------------------------------------------------------------------------------------  
                                                                                           
Balances at June 30, 1995                                 42,411,448                          (20,741,222)      22,141,217  
                                                                                           
    Issuance of Series B-4 Preferred Stock (note           4,950,000                                           5,000,000   
    3)                                                                                     
    Issuance of detachable warrants (note 4)               8,684,000                                           8,684,000   
    Warrants and stock options exercised (note               289,360                                             298,370   
    5)                                                                                     
    Series A and B Preferred Stock dividends             (3,871,328)                                         (3,871,328) 
    accrued (note 3)                                                                       
    Cancellation of and adjustments to put right             775,753                                             775,753   
    obligations (note 6)                                                                   
    Stock compensation expense                             2,735,845                                           2,735,845   
    Net loss                                                                                 (26,782,044)    (26,782,044)
-----------------------------------------------------------------------------------------  
                                                                                           
Balances at June 30, 1996                                 55,975,078                          (47,523,266)       8,981,813   
                                                  ========================================  
</TABLE>
                                      F-5

<PAGE>




AMERICAN COMMUNICATIONS SERVICES, INC.

Consolidated Statements of Cash Flows

Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>

========================================================================================================================

                                                                                                   1996            1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>             <C>  
Cash flows from operating activities:
     Net loss                                                                              $ (26,782,044)  (14,697,649)
     Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation and amortization                                                         3,078,426         497,811
        Interest deferral and accretion                                                      10,447,687               -
        Amortization of deferred financing fees                                                 668,317         323,900
        Provision for doubtful accounts                                                         180,940           8,570
        Loss attributed to minority interest                                                  (412,606)        (48,055)
        Noncash compensation, consultants and other expenses                                  2,735,845       6,419,412
        Noncash debt conversion expense                                                               -         385,000
        Changes in operating assets and liabilities:
           Trade accounts receivable                                                          (565,764)       (359,007)
           Restricted cash related to operating activities                                            -         200,000
           Other current assets                                                               (911,140)        (92,325)
           Other assets                                                                       (107,574)        (26,545)
           Accounts payable                                                                  17,474,179       3,170,885
           Accrued financing fees                                                            (1,542,255)      1,542,255
           Accrued employee costs                                                              (62,247)         719,333
           Other accrued liabilities                                                          (382,792)       1,055,673
------------------------------------------------------------------------------------------------------------------------

Net cash used in operating activities                                                         3,818,972       (900,742)
------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Purchase of net assets of Piedmont Teleport, Inc.                                                -        (19,135)
     Purchase of equipment and furniture                                                     (2,966,987)      (306,454)
     Restricted cash related to network activities                                           (2,999,706)      (752,000)
     Network development costs                                                               (57,889,227)  (14,996,303)
------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities                                                        (63,855,920)  (16,073,892)
------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
     Issuance of notes payable                                                               166,888,210      3,510,349
     Payment of deferred financing fees                                                      (8,710,387)      (310,175)
     Warrant and stock option exercises                                                         298,370         372,824
     Issuances of Series A Preferred Stock, net of offering costs and conversion of bridge            -      10,962,046
     financing
     Issuances of Series B Preferred Stock, net of offering costs                             5,000,000      20,661,500
     Issuance of warrants with 2005 Notes                                                     8,684,000               -
     Issuance of notes payable - stockholders                                                         -         250,000
     Proceeds from sale of minority interest in subsidiaries                                    378,474         242,457
     Payments of notes payable - stockholders                                                 (146,083)       (481,692)
     Payments of bridge notes                                                                         -     (1,000,000)
     Payments of secured note                                                                         -        (75,000)
     Payments of secured convertible notes                                                            -        (77,281)
------------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                                                    172,392,584     34,055,028
------------------------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                                                    112,355,636     17,080,394
                                                                                                      -
Cash and cash equivalents, beginning of year                                                 20,350,791       3,270,397
------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year                                                     $ 132,706,427     20,350,791
========================================================================================================================

Supplemental disclosure of cash flow information - interest paid on all debt obligations   $     29,217         219,554
========================================================================================================================

Supplemental disclosure of noncash investing and financing activities:

Equipment financing                                                                        $    343,024               -
========================================================================================================================
Dividends declared in connection with Series A Preferred Stock                             $  3,871,328       1,070,985
========================================================================================================================
Bridge financing, secured convertible notes, and notes payable - stockholders converted to
     equity in connection with private placements                                          $          -       4,080,079
========================================================================================================================
Cancellation of and adjustments to put right obligations                                   $  (775,753)       (487,500)
========================================================================================================================
Write off of note receivable from sale of common stock                                     $          -           2,750
========================================================================================================================
Preferred stock exchange                                                                   $          -       1,700,000
========================================================================================================================
Purchase of Piedmont Teleport, Inc. for common stock and related put right obligation      $          -         192,303
========================================================================================================================
Negotiation of right-of-way agreement for option discount                                  $          -         201,000
========================================================================================================================

See accompanying notes to consolidated financial statements.

</TABLE>
                                      F-6
    

<PAGE>

AMERICAN COMMUNICATIONS SERVICES, INC.


Notes to Consolidated Financial Statements

June 30, 1996 and 1995

================================================================================

                                                                    (Continued)

                                      
   (1)   Basis of Presentation and Related Matters

         Organization

         The consolidated  financial statements include the accounts of American
         Communications Services, Inc. and its majority-owned subsidiaries (ACSI
         or the Company).  As discussed in note 4 to the consolidated  financial
         statements, all of the Company's subsidiaries are wholly owned with the
         exception  of the  Louisville,  Fort Worth,  El Paso,  Greenville,  and
         Columbia  subsidiaries,  in which the Company has a 92.75%  controlling
         ownership interest. All material intercompany accounts and transactions
         have been eliminated in consolidation.

         Business

         ACSI  constructs  and operates  digital fiber optic networks and offers
         local  telecommunications  services  to  long  distance  companies  and
         business  and  government  end  users  in  selected   target   markets,
         principally  in  the  southern  United  States.  The  Company  provides
         nonswitched  dedicated  services,  including  special access,  switched
         transport  and private line  services.  In addition to these  dedicated
         services,  the Company is developing  and has begun offering high speed
         data  services  to  business,   government  and  other   communications
         carriers,  including Internet service  providers.  The Company has also
         begun offering on a limited basis enhanced voice messaging services and
         plans to begin  offering  local  switched voice services in the future.
         The Company is a competitive  local exchange carrier and is referred to
         as a competitive access provider with respect to provision of dedicated
         services.

         To date,  the Company has funded the  construction  of its networks and
         its  operations  with external  financing.  Prior to November 1995, the
         primary  sources of funds were two Preferred  Stock  private  offerings
         completed  in  October  1994 and June 1995  (see note 3),  and a credit
         facility from AT&T Credit  Corporation  (see note 4). During the fiscal
         year ended June 30, 1996, the Company raised  additional  funds through
         an  additional  sale of  Preferred  Stock  (see  note 3),  two  private
         offerings of Senior Notes,  one of which included  detachable  warrants
         and  further  borrowings  under  the  AT&T  Credit  Corporation  Credit
         Facility (see note 4).

         The Company has utilized and intends to continue to utilize  funds from
         its existing equity and debt  financings  towards the completion of its
         business plan,  including the  development  and  construction  of fiber
         optic  networks,  the  further  development  and  introduction  of  new
         services, including high speed data, enhanced voice messaging and local
         switched  voice  services,  for  expansion  of the  Company's  existing
         networks and to fund negative operating cash flow until cash flow break
         even. To meet its capital requirements,  the Company may be required to
         sell  additional  debt or equity  securities  or increase  its existing
         credit  facility.  The  Company  may also need to seek such  additional
         financing to maintain balance sheet and liquidity ratios required under
         certain of its debt instruments.


                                      F-7
<PAGE>


================================================================================
AMERICAN COMMUNICATIONS SERVICES, INC.
================================================================================

Notes to Consolidated Financial Statements



================================================================================

   (1)   Continued

         Cash Equivalents

         Cash  equivalents  generally  consist of highly liquid debt instruments
         with an initial maturity date of three months or less. At June 30, 1996
         and 1995,  cash  equivalents  consisting of government  securities  and
         overnight  investments are approximately  $137,938,000 and $20,945,000,
         respectively.

         The Company  has  provided  performance  bonds and letters of credit in
         various  cities  in  connection  with its  operations,  resulting  in a
         restriction  of cash  amounting to $2,342,000  and $752,000 at June 30,
         1996 and 1995,  respectively.  The face amount of all bonds and letters
         of credits was approximately $4,629,000 as of June 30, 1996.

         In addition,  as required under the AT&T Credit  Facility (see note 4),
         the Company has approximately  $1,410,000  deposited in restricted cash
         accounts at June 30, 1996.

         Networks, Equipment and Furniture

         Networks,  equipment and furniture are stated at cost less  accumulated
         depreciation.  Costs capitalized  during the network  development stage
         include  expenses  associated  with  network  engineering,  design  and
         construction,   negotiation  of  rights-of-way,   obtaining  legal  and
         regulatory  authorizations  and the amount of interest costs associated
         with the network development. In 1996 and 1995, the Company capitalized
         interest of approximately $3,051,000 and $536,000, respectively.

         Provision  for  depreciation  of networks,  equipment  and furniture is
         computed using the straight-line method over the estimated useful lives
         of the  assets  beginning  in the  month  a  network  is  substantially
         complete  and  available  for  use  and  equipment  and  furniture  are
         acquired.

         The estimated useful lives of the Company's principal classes of assets
are as follows:
          Networks:
                Fiber optic cables and installation costs      20 years
                Telecommunications equipment                   3-7 years
                Interconnection and collocation costs          3-10 years
                Leasehold improvements                         Life of lease
                Furniture and fixtures                         5 years

         Deferred Financing Fees

         Deferred financing fees include commitment fees and other costs related
         to certain debt financing  transactions  and are being  amortized using
         the  effective  interest  method over the  initial  term of the related
         debt.


                                      F-8
<PAGE>


   (1)   Continued

         Revenue Recognition

         Revenue is recognized  as services are provided.  Billings to customers
         for  services in advance of  providing  such  services are deferred and
         recognized as revenue when earned.

         Earnings (Loss) Per Common Share

         The  computation of earnings  (loss) per common share is based upon the
         weighted  average  number of common shares  outstanding.  The effect of
         including common stock options and warrants as common stock equivalents
         would be anti-dilutive and is excluded from the calculation of loss per
         common share.

         Income Taxes

         Deferred income taxes are recognized for temporary  differences between
         financial  statement and income tax bases of assets and liabilities and
         loss  carryforwards  and tax credit  carryforwards for which income tax
         benefits  are  expected  to be realized  in future  years.  A valuation
         allowance is  established  to reduce  deferred tax assets if it is more
         likely than not that all, or some portion,  of such deferred tax assets
         will not be realized.  The effect on deferred  taxes of a change in tax
         rates is recognized in income in the period that includes the enactment
         date.

         Reclassifications

         Certain  reclassifications  have  been  made to the  1995  consolidated
         financial  statements  to  conform  to  the  1996  presentation.   Such
         reclassifications  had no  effect  on net loss or  total  stockholders'
         equity.

         Effect of New Accounting Standards

         In March 1995, the Financial  Accounting  Standards Board (FASB) issued
         SFAS No. 121,  Accounting for the  Impairment of Long-Lived  Assets and
         for Long-Lived Assets to be Disposed of, which will require the Company
         to  review  for  the  impairment  of  long-lived   assets  and  certain
         identifiable  intangibles  to be held and used by the Company  whenever
         events or changes in circumstances indicate that the carrying amount of
         an asset may not be  recoverable.  Adoption of SFAS No. 121 is required
         in fiscal year 1997.

         In  October  1995,  the  FASB  issued  SFAS  No.  123,  Accounting  for
         Stock-Based  Compensation,  which establishes a fair value based method
         for  financial   accounting  and  reporting  for  stock-based  employee
         compensation  plans.  However,  the new standard allows compensation to
         continue to be measured by using the  intrinsic  value based  method of
         accounting  prescribed by Accounting  Principles  Board Opinion No. 25,
         Accounting  for  Stock  Issued  to  Employees,  but  requires  expanded
         disclosures. SFAS No. 123 is effective in fiscal year 1997.

                                      F-9
<PAGE>


   (1)   Continued

         While the Company does not know  precisely the impact that will result
         from  adopting  SFAS No. 121 and SFAS No. 123,  the  Company  does not
         expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material
         effect on the Company's  consolidated financial position or results of
         operations.

         Use of Estimates

         The preparation of the consolidated  financial statements in conformity
         with generally accepted  accounting  principles  requires management to
         make  estimates  and  assumptions  that affect the reported  amounts of
         assets  and  liabilities  and  disclosure  of  contingent   assets  and
         liabilities at the dates of the consolidated  financial  statements and
         reported  amounts of revenue and expenses during the reporting  period.
         Actual results may differ from those estimates.

         Concentration of Credit Risk

         The Company receives a significant portion of its revenues from a small
         number   of   major   customers,   particularly   the   long   distance
         telecommunications  companies that service the Company's  markets.  For
         the years  ended  June 30,  1996 and 1995,  approximately  60% and 85%,
         respectively,  of the Company's  revenues were attributable to services
         provided   to  four   and   three   of  the   largest   long   distance
         telecommunications  companies,  respectively.  The  loss  of any one of
         these customers could have an adverse  material impact on the Company's
         revenues.

<TABLE>
<CAPTION>

   (2)   Networks, Equipment and Furniture

         Networks, equipment and furniture consists of the following at June 30:

         <S>                                                                    <C>                       <C>       
         Networks and telecommunications equipment                              $76,853,865               15,570,450
         Furniture and fixtures                                                   1,982,910                  188,534
         Computer software                                                          948,848                   56,485
         Leasehold improvements                                                     362,341                   82,093

                                                                                 80,147,964               15,897,562

         Less - accumulated depreciation and amortization                          3,408,698                  330,272

         Total, net of accumulated depreciation and amortization                $76,739,266               15,567,290




</TABLE>

                                      F-10

<PAGE>


   (3)   Private Placements

         In October 1994,  the Company  completed a private  placement of its 9%
         Series A Convertible  Preferred  Stock,  $1.00 par value (the "Series A
         Preferred Stock"). There were 138,889 shares issued for cash at $90 per
         share  resulting in proceeds of  $10,962,046,  net of  placement  agent
         commissions and related placement fees and costs.

         In  addition,   bridge   financing  was  converted  and  several  other
         obligations  were retired with proceeds of the offering.  See note 4 to
         the consolidated financial statements.  Further, as discussed in note 6
         to the  consolidated  financial  statements,  certain parties  obtained
         warrants to purchase  shares of the  Company's  common  stock.  In June
         1995,  the Series A  Preferred  Stock was  exchanged  for an  identical
         number of 9% Series A-1 Convertible  Preferred Stock,  $1.00 par value.
         (the "Series A-1 Preferred Stock").

         In June 1995,  the  Company  completed  a private  placement  of its 9%
         Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9%
         Series B-2 Convertible Preferred Stock (the "Series B-2 Preferred") and
         9% Series B-3 Convertible Preferred Stock (the "Series B-3 Preferred"),
         each having a par value of $1.00 per share.  There were 227,500  shares
         issued for cash at $100 per share with proceeds of $20,661,500,  net of
         placement agent  commissions  and related  placement fees and costs. In
         November,  1995,  50,000 shares of 9% Series B-4 Convertible  Preferred
         Stock (the  "Series  B-4  Preferred")  were issued for cash of $100 per
         share  resulting in proceeds of  $5,000,000.  The Series B-1 Preferred,
         the Series B-2  Preferred,  the Series B-3 Preferred and the Series B-4
         Preferred  are  hereafter  collectively  referred  to as the  "Series B
         Preferred  Stock."  The  Series  A-1  Preferred  Stock and the Series B
         Preferred  Stock  are  hereafter   collectively   referred  to  as  the
         "Preferred Stock." Further,  as discussed in note 6 to the consolidated
         financial  statements,  certain parties  obtained  warrants to purchase
         shares of the Company's common stock.

         The Company's  Preferred  Stock and common stock vote as a single class
         (except with respect to the  election of  directors  and certain  other
         transactions  and matters)  with the common stock  entitled to one vote
         per share and the Preferred  Stock  entitled to one vote for each share
         of common stock into which it is  convertible.  At June 30,  1996,  the
         outstanding  Series A-1 Preferred Stock was convertible  into 7,466,560
         shares of common stock and the outstanding Series B Preferred Stock was
         convertible into 9,910,718 shares of common stock.

         Pursuant to the Company's  certificate of  incorporation,  the board of
         directors is currently  comprised  of seven  directors.  The holders of
         common  stock are entitled to elect four  directors  and the holders of
         the Preferred Stock are entitled to elect three directors. In addition,
         certain  transactions and matters require the consent of the holders of
         at least 75% of the  shares of  Preferred  Stock  voting as a  separate
         class.

         Certain holders of the Company's  Preferred Stock and common stock have
         entered  into  a  Voting  Rights  Agreement   pursuant  to  which  such
         stockholders  have agreed to vote their shares of  Preferred  Stock and
         common stock for the election of directors  designated  by the majority
         Preferred stockholders.

                                      F-11
<PAGE>


   (3)   Continued

         In  connection  with its Series A-1 and Series B Preferred  Stock,  the
         Company has recorded approximately $4,942,000 and $1,071,000 as of June
         30, 1996 and 1995,  respectively,  as a reduction in additional paid-in
         capital,  for the  payment  of  anticipated  dividends.  The  Company's
         certificate of incorporation  requires the Company to accrue dividends,
         on a quarterly  basis, at an annual rate of 9% of the face value of the
         Series A-1 and B Preferred Stock.

         Although the Board of Directors of the Company has not taken any formal
         action  as of June  30,  1996,  as a  condition  of the  aforementioned
         provisions of the certificate of incorporation, the dividends have been
         deemed declared and properly reflected in the accompanying consolidated
         financial  statements  as of June 30,  1996 and 1995.  Pursuant  to the
         Company's certificate of incorporation, dividends accrued shall be paid
         cumulatively,  beginning December 31, 1997, or earlier upon conversion.
         Upon such  conversion  prior to December 31, 1997,  the Company may, in
         lieu of accrued and unpaid  dividends,  issue  promissory  notes to the
         holders of the Preferred Stock. The Company expects to issue promissory
         notes to the  holders  on  January 1, 1998 for  dividends  accrued,  if
         conversion has not occurred,  subject to  restrictions  included in the
         Senior  Discount Note  Indentures.  Conversion may occur at any time at
         the  holder's  option  or  automatically,  upon  a  certain  qualifying
         issuance of common  stock.  As of June 30,  1996,  no  conversions  had
         occurred.

<TABLE>
<CAPTION>

   (4)   Debt

         <S>                                                                    <C>                      <C>
         Long-term debt at June 30 consists of the following:
                                                                                 1996                          1995
         Notes payable - stockholders at 10-15%, maturing                      $      -                  $    146,083
         September 15, 1995

         AT&T Credit Corporation equipment and working
         capital financing facility                                              14,971,122                 3,652,085

         2006 Senior Discount notes, interest at 12 3/4%,
         maturing April 1, 2006                                                  66,635,887                        -

         2005 Senior Discount notes, interest at 13%,
         maturing November 1, 2005                                              102,432,137                        -

         Secured equipment note payable,  interest of 9.98%,  payable in 36 equal
         monthly installments of $2,766, including interest commencing March 1,
         1996                                                                       343,024                        -

         Total Long-term debt                                                   184,382,170                  3,798,168
         Less current portion                                                       252,809                    146,083
                                                                                    -------                    -------

                                                                               $184,129,361                  3,652,085
</TABLE>

                                      F-12
<PAGE>


   (4)   Continued

         Principal  payments  for  each of the  years  from  1997  to 2001  and
         thereafter, are due as follows at June 30, 1996:


         Year ending June 30,                                   Amount
         -------------------------------------------------------------

          1997                                               $  252,809
          1998                                                  712,372
          1999                                                  861,939
          2000                                                1,323,195
          2001                                                1,902,943
          Thereafter                                        179,328,912
          -------------------------------------------------------------
          
                                                         $  184,382,170
                                                         --------------

         Notes Payable - Stockholders

         At June 30, 1995,  the Company had a total of $146,083 in notes payable
         to stockholders which matured and were repaid on September 14, 1995.

         AT&T Credit Corporation Equipment and Working Capital Financing
         Facility

         In October  1994,  the Company  entered  into the AT&T Credit  Facility
         pursuant to which AT&T Credit  Corporation  has agreed to provide up to
         $31.2 million  (including a reserve for deferred interest) in financing
         for the  development  and  construction  of fiber optic networks by the
         Company's  subsidiaries.  In accordance with the terms of the facility,
         the Company is obligated to use at least 10% of the borrowed  funds for
         purchases of equipment manufactured by AT&T or its affiliates. Pursuant
         to  the  AT&T  Credit  Facility,   during  fiscal  1995  the  Company's
         subsidiaries in Louisville, Fort Worth, Greenville and Columbia entered
         into loan agreements with AT&T Credit  Corporation  providing for up to
         $19.8 million in loans secured by the assets of such  subsidiaries.  As
         of June 30, 1995, an aggregate of  approximately  $3.7 million had been
         borrowed  under these  agreements.  Subsequent  to June 30,  1995,  the
         Company's  subsidiary in E1 Paso entered into a separate loan agreement
         with AT&T  Credit  Corporation  pursuant  to the AT&T  Credit  Facility
         providing for up to an aggregate of approximately $5.5 million in loans
         secured by its  assets.  As of June 30,  1996,  outstanding  borrowings
         under the AT&T  Credit  Facility  totaled  approximately  $15  million,
         including  accrued  interest of  approximately  $1.4 million.  Interest
         rates currently applicable to the loans range from 11.32% to 13.59%.


                                      F-13
<PAGE>


   (4)   Continued

         The loans  under the AT&T  Credit  Facility  are  secured by all of the
         assets of the respective borrowing subsidiary,  including its installed
         fiber  optic  system and other  equipment.  The  principal  of borrowed
         amounts is payable in 28 consecutive quarterly installments,  beginning
         with the ninth  quarter  after the date of the loan.  The  principal of
         borrowed amounts may be prepaid in certain  circumstances,  and must be
         prepaid  along with a premium in other  circumstances.  Interest is due
         quarterly.  At the borrowing subsidiary's option, the interest rate may
         be fixed or variable. The borrowing subsidiary has a one-time option to
         convert  all  variable  rate loans to fixed rate  loans.  Upon  certain
         events  of  default,  additional  interest  ranging  from 2% to 4% will
         become payable.  Interest may generally be deferred so long as it would
         not cause the  outstanding  principal  balance to exceed the commitment
         amounts for Capital  Loans and for  Equipment  Loans (as defined in the
         loan documents). To date, the Company has elected to defer all interest
         due under the loans.  In addition,  the AT&T Credit  Facility  includes
         covenants, some of which impose certain restrictions on the Company and
         its subsidiaries  including  restrictions on the declaration or payment
         of  dividends,  the  conduct of  certain  activities,  certain  capital
         expenditures,  the creation of additional  liens or  indebtedness,  the
         disposition of assets,  transactions with affiliates' and extraordinary
         corporate  transactions.  The AT&T Credit Facility imposes restrictions
         on the ability of those  subsidiaries  of ACSI that incur  indebtedness
         thereunder to transfer  funds to ACSI in the form of dividends or other
         distributions.  The AT&T Credit  Facility also imposes  restrictions on
         the  ability  of  such  subsidiaries  to  raise  capital  by  incurring
         additional indebtedness.  These restrictions could limit ACSI's ability
         to meet its  obligations  with  respect  to the  2005  and 2006  Senior
         Discount Notes.  The various  agreements which comprise the AT&T Credit
         Facility terminate on dates ranging from October 1996 to May 1997.

         Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased
         7.25%  of the  outstanding  capital  stock  of  each  of the  Company's
         operating subsidiaries for which it provided financing. The Company was
         required to pledge its  interest in these  subsidiaries  to AT&T Credit
         Corporation as a condition to each loan.  Under certain  circumstances,
         this pledge  agreement  also  restricts  the  Company's  ability to pay
         dividends on its capital stock.

         2005 Senior Discount Notes and 2006 Senior Discount Notes

         On November  14,  1995,  the Company  completed  an offering of 190,000
         Units (the "Units") consisting of $190,000,000  principal amount of 13%
         Senior  Discount  Notes due 2005 (the "2005  Notes")  and  warrants  to
         purchase  2,432,000  shares of the Company's common stock at a price of
         $7.15 per share (the "Warrants"). The 2005 Notes will accrete at a rate
         of 13% compounded  semi-annually  to an aggregate  principal  amount of
         $190,000,000  by  November  1, 2000.  Thereafter,  interest on the 2005
         Notes will accrue at the annual rate of 13% and will be payable in cash
         semi-annually.  The Company  received  net  proceeds  of  approximately
         $96,826,000  from the sale of the  Units.  The  value  ascribed  to the
         Warrants was $8,684,000.

                                      F-14
<PAGE>


   (4)   Continued

         On March 21, 1996, the Company completed an offering of $120,000,000 of
         12 3/4% Senior Discount Notes due 2006 (the "2006 Notes")  resulting in
         net proceeds of approximately $61,800,000.  The 2006 Notes will accrete
         at a  rate  of  12  3/4%  compounded  semi-annually,  to  an  aggregate
         principal amount of $120,000,000 by April 1, 2001. Thereafter, interest
         on the 2006 Notes will accrue at the annual rate of 12 3/4% and will be
         payable in cash  semi-annually  on April 1 and October 1, commencing on
         October 1, 2001. The 2006 Notes will mature on April 1, 2006.

         The 2005 Notes and 2006 Notes  (collectively  the  "Notes") are general
         unsubordinated and unsecured  obligations of the Company. The Company's
         subsidiaries  have no obligation to pay amounts due on the Notes and do
         not  guarantee  the  notes.   Therefore,   the  Notes  are  effectively
         subordinated to all liabilities of ACSI's subsidiaries, including trade
         payables.  Any rights of the Company and its  creditors,  including the
         holders  of the  Notes,  to  participate  in the  assets  of any of the
         Company's  subsidiaries  upon any liquidation or  reorganization of any
         such  subsidiaries  will  be  subject  to  the  prior  claims  of  that
         subsidiary's creditors.

         The Notes are subject to certain  covenants which,  among other things,
         restrict the ability of ACSI and certain of its  subsidiaries  to incur
         additional indebtedness, pay dividends or make distributions.

         Debt Conversion

         On June 28, 1994, the Company issued a total of $4,300,720 principal of
         its  15  percent  convertible  bridge  notes  due  December  31,  1994,
         including $1,300,720 issued to then existing stockholders. During 1995,
         the holders of $3,300,720 of these  convertible  bridge notes converted
         the notes plus accrued  interest  thereon of $35,754 into 37,073 shares
         of Series A Preferred Stock. The remaining  $1,000,000 principal amount
         was retired by cash payment from the proceeds of the Series A Preferred
         Stock private  offering (see note 3). The Company recorded noncash debt
         conversion expense of $231,000  associated with the related unamortized
         financing fees.

         At June 30, 1994,  the Company had  outstanding  loans from  affiliates
         with an  aggregate  principal  balance  of  $606,640,  which were notes
         secured by certain assets of the Company.  These loans bore interest at
         15% per annum and had a scheduled maturity date of December 31, 1994.

         In October  1994,  the  holders of $529,359  principal  amount of these
         notes,  plus accrued interest  thereon of $29,368,  converted the notes
         into 7,924 shares of Series A Preferred Stock. The remaining  principal
         on the  secured  convertible  notes of  $77,281  was  retired by a cash
         payment  from the  proceeds  of the Series A  Preferred  Stock  private
         placement  offering  (see note 3). The Company  recorded  noncash  debt
         conversion   expense  of  $154,000  equal  to  the  premium  to  induce
         conversion.

                                      F-15
<PAGE>


   (4)   Continued

         In August 1994,  the Company  borrowed  $250,000,  at a rate of 15% per
         annum from an affiliate  that was payable on demand.  In October  1994,
         this note was converted into 2,778 shares of Series A Preferred Stock.


   (5)   Stockholders' Equity

         Common Stock

         In fiscal  1995,  the Company  established  a par value of $.01 for its
issued and outstanding common stock.

         Preferred Stock
<TABLE>


         <S>                                                                                       <C>
         Pursuant to the Series B Preferred Stock offering, as described in note
         3, four classes of Series B Preferred  Stock have been  designated  and
         issued.  The  composition  of the Series B Preferred  Stock at June 30,
         1996 is as follows:

         Preferred Stock, $1.00 par value, 100,000 shares designated as 9% Series                  $  100,000
          B-1 Convertible Preferred Stock authorized, issued and outstanding

          Preferred Stock, $1.00 par value, 102,500 shares designated as 9% Series
          B-2 Convertible Preferred Stock authorized, issued and outstanding                          102,500

          Preferred  Stock,  $1.00 par value,  25,000  shares  designated as 9% Series B-3             25,000
          Convertible Preferred Stock authorized, issued and outstanding

          Preferred Stock, $1.00 par value, 50,000 shares designated                    
          as 9% Series B-4 Convertible Preferred Stock authorized, issued and outstanding              50,000
          ---------------------------------------------------------------------------------------------------



          Total                                                                                     $  277,500
          ----------------------------------------------------------------------------------------------------

</TABLE>




                                      F-16
<PAGE>


   (6)   Stock Options and Stock Purchase Warrants

         The Company has a stock option plan which  provides for the granting of
         options to  officers,  employees,  and  consultants  of the  Company to
         purchase shares of its common stock within prescribed periods.

         In 1994,  the Company  entered  into  employment  agreements  with five
         executive  officers.  Pursuant  to the  agreements,  as  amended,  such
         officers  have  been  granted  options  to  purchase  an  aggregate  of
         4,149,834  shares of common  stock of the  Company at  exercise  prices
         ranging  from $.875 to $3.40 per  share.  The  options  vest at various
         dates as specified in the employment  agreements  with 4,069,834 of the
         options  vesting on specific  dates  ranging  from  November 1, 1993 to
         November  4, 2001,  and 80,000 of such  options  which  vested upon the
         occurrence  of  certain  specified  performance  milestones.  When  the
         employment  of these  individuals  with the Company  terminates,  these
         individuals  have the  right to sell  certain  of their  shares  to the
         Company (the put right) for a price equal to fair market value. On June
         26, 1995, the employment  agreements were amended to limit the purchase
         price  paid by the  Company  pursuant  to the put right to a maximum of
         $2,500,000,  which amount is subject to further reductions based on the
         employee's  sale of stock.  During  fiscal 1996,  the limit was further
         reduced to $2,000,000.

         The Company has also issued  500,000  options to a supplier to purchase
         stock at 90% of the fair value at the date of  exercise.  Such  options
         give the  supplier  the  right to sell the stock  acquired  back to the
         Company at fair value under certain circumstances.  None of the options
         have been exercised to date and they expire in December, 1997.

         Stock option  activity for the years ended June 30, 1996 and 1995 is as
follows:

         

                                     Number                    Price Per Share
                                     -----------------------------------------

Balances, June 30, 1994             858,875                     $ .875 - 3.10

     Granted                      4,935,314                       .875 - 4.00
     Exercised                            -                         -      -
     Canceled                     (100,000)                       .875 - 4.00
     ------------------------------------------------------------------------

Balances, June 30, 1995           5,694,189                       .875 - 4.00

     Granted                      1,225,786                       2.25 - 6.27
     Exercised                    (104,699)                       .875 - 4.57
     Canceled                      (70,462)                       2.25 - 6.27
     ------------------------------------------------------------------------

Balances, June 30, 1996           6,744,814                   $  .875  - 6.27
-----------------------------------------------------------------------------






                                      F-17
<PAGE>


   (6)   Continued

         As of June 30,  1996,  a total of  4,681,343  options  are  vested  and
         exercisable.  Noncash  compensation  expense  associated  with employee
         stock options  amounted to $2,735,845  and $6,382,000 in 1996 and 1995,
         respectively.

         During  1995 and 1996 in  connection  with the  Series A-1 and Series B
         Preferred Stock private placements and related bridge note conversions,
         warrants  for  4,367,078  shares of common  stock were issued at prices
         ranging from $.01 to $3.10.  In 1996 and 1995,  1,189,958 and 2,299,967
         of such warrants were exercised  during the year for proceeds  totaling
         approximately $11,899 and $305,000,  respectively.  In 1996, as part of
         the  issuance  at the  2005  Notes,  detachable  warrants  to  purchase
         2,432,000  shares of the Company's common stock at a price of $7.15 per
         share were issued.

         At June 30, 1995,  warrants for 408,391  shares at a price of $.875 per
         share granted pursuant to consulting and subordinated  note agreements,
         during  1994 and  1995,  were  outstanding.  During  1996,  150 of such
         warrants were exercised.

         At June 30, 1996, the remaining warrants outstanding are as follows:
<TABLE>
<CAPTION>

                                                                 Number                        Price Per Share
                                                                 ---------------------------------------------
          <S>                                                    <C>                             <C>
          Pursuant to consulting and subordinated note
          agreements, expiration through September 13,             408,241                       $   0.875
          1996 
          Series A and Series B Preferred Stock placements         877,153                      .01 - 3.10
          2005 Senior Discount Notes offering                    2,432,000                            7.15
          ------------------------------------------------------------------------------------------------

          Total                                                  3,717,394                  $  .875 - 7.15
          ------------------------------------------------------------------------------------------------
</TABLE>




         The  gross  proceeds  that  would be  received  by the  Company  on the
         exercise  of all  outstanding  options and  warrants  is  approximately
         $33,700,000.


                                      F-18
<PAGE>


   (7)   Commitments and Contingencies

         Certain Agreements

         The Company has signed  nonexclusive  license  agreements  with various
         utility and inter-exchange carrier companies, including an affiliate of
         one of the country's three largest long distance  carriers,  to install
         and maintain  fiber cable  systems for the Company's use for periods up
         to 15 years or more,  upon  exercising of  extensions  available to the
         parties.  Under  these  agreements,   the  Company  has  use  of  these
         rights-of-way for its  telecommunications  systems, and may be entitled
         to certain payments for providing  telecommunications  service, subject
         to its satisfactory performance of certain agreed upon requirements.

         Retirement Plan

         On  February  1,  1996,  the  Company  began  sponsoring  the  American
         Communications  Services,  Inc.  401(k)  Plan (the  "Plan"),  a defined
         contribution  plan. All  individuals  employed on February 1, 1996 were
         eligible  to  participate.  Participation  to all  other  employees  is
         available  after three  months of  full-time  equivalent  service.  The
         Company  contributions  under the Plan are  discretionary and may be as
         much as 6% of an  employee's  gross  compensation  subject  to  certain
         limits. Total expense under the Plan amounted to approximately  $30,000
         in 1996.

         Legal Proceedings

         On July 24, 1996,  the Company was named as a codefendant  in a lawsuit
         arising from a personal injury sustained during the construction of one
         of its  networks.  At the  time  of the  incident  giving  rise  to the
         lawsuit,  the plaintiff was an employee of a subcontractor hired by the
         Company's general contractor for the construction  project. The lawsuit
         seeks recovery from the Company and the general  contractor of at least
         $25 million plus punitive damages. The Company, the general contractor,
         and the Company's insurance carrier have begun  investigations into the
         facts  surrounding  the incident and intend to defend against this suit
         vigorously.

         In  addition,  the  Company  is  a  party  to  certain  litigation  and
         regulatory  proceedings arising in the ordinary course of business.  In
         the  opinion  of  management,  based upon the  advice of  counsel,  the
         ultimate  disposition of these matters will not have a material adverse
         effect on the Company's consolidated financial position.


                                      F-19
<PAGE>


   (8)   Leases

         The Company is obligated under various  noncancelable  operating leases
         for  office  and node space as well as office  furniture.  The  minimum
         future lease obligations under these noncancelable  operating leases as
         of June 30, 1996 are, approximately, as follows:

          Year ending June 30,                                      Amount
          ----------------------------------------------------------------

          1997                                                $  1,566,000
          1998                                                   1,458,000
          1999                                                   1,347,000
          2000                                                   1,245,000
          2001                                                   1,576,000
          Thereafter                                             3,011,000
          ----------------------------------------------------------------

                                                             $  10,203,000
                                                             -------------


         Rent expense for the years ended June 30, 1996 and
         1995 was approximately $1,166,000 and $200,000, respectively.


   (9)   Related-Party Transactions

         In October  1993,  the  Company  executed a  financial  consulting  and
         advisory  agreement with a related party for a period of six months. In
         consideration,  the related party received warrants to purchase 300,000
         shares of ACSI common stock  exercisable at $.875 per share if a future
         equity financing was successfully completed.  The related party had the
         right to resell  the  shares to ACSI for $2.50 per share two years from
         the date of the agreement.  At June 30, 1994,  the Company  provided an
         accrual of $487,500 for this  redemption  privilege  at the  redemption
         price  net  of  the  exercise   price.  In  June  1995,  the  Company's
         obligations  to repurchase  the shares were assumed by a stockholder of
         the Company. Accordingly, as of June 30, 1995, the $487,500 share value
         has been transferred from redeemable  stock,  options,  and warrants to
         additional paid-in-capital.

         On June 16,  1994,  the Company  entered  into a  financial  consulting
         agreement for capital raising  activities with an entity  controlled by
         significant  stockholders  of the Company.  Under this  agreement,  the
         Company paid $153,750 for consulting services rendered through the date
         of the agreement relating to placement of the Convertible Bridge Notes.
         Additionally, the Company agreed to pay a $7,500 monthly consulting fee
         for a two  year  period  beginning  on the  closing  date of the  first
         private  placement.  During 1996 and 1995, the Company paid $90,000 and
         $67,500 under this arrangement, respectively.

                                      F-20
<PAGE>


   (9)   Continued

         Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
         ("SGC") as a financial and business  consultant for three years. SGC is
         an  affiliate of Steven G.  Chrust,  a former  director of the Company.
         Pursuant to the agreement,  the Company will compensate SGC as follows:
         (1) a monthly  fee of $5,000;  and (2) options to purchase up to 50,000
         shares of the  Company's  Common Stock which vest on July 1, 1997,  and
         are  exercisable on or before July 1, 1999. At the end of each month of
         the term of the  agreement,  SGC earns a credit  against  the  exercise
         price of those  options  equal to 1/36th  of the  exercise  price.  The
         shares  issued upon exercise of the options will be priced at $2.25 per
         share and the shares issued will have piggy back registration rights.


  (10)   Income Taxes

         Temporary  differences and carryforwards that give rise to deferred tax
         assets and liabilities at June 30 are as follows:

<TABLE>
<CAPTION>
                                                                                1996                          1995
                                                                                ----------------------------------
         <S>                                                                   <C>                           <C> 
         Deferred tax assets:
             Capitalized start-up and other costs                              $  3,733,898                  4,163,941
             Stock options - noncash compensation                                 3,848,128                  2,768,488
             Net operating loss carryforwards                                    12,181,162                  1,149,755
             Other accrued liabilities                                              496,634                    454,391
             -------------------------------------------------------------------------------------------------------

          Total gross deferred tax assets                                        20,259,822                  8,536,575

             Less:  valuation allowance                                          18,304,754                  8,291,380
             -------------------------------------------------------------------------------------------------------

          Net deferred tax assets                                                 1,955,068                    245,195

          Deferred tax liabilities - fixed assets depreciation and amortization   1,955,068                    245,195
          ------------------------------------------------------------------------------------------------------------

          Net deferred tax assets (liabilities)                                   $     -                          -
          ----------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-21
<PAGE>


  (10)   Continued

         The valuation  allowance for deferred tax assets as of July 1, 1995 and
         1994 was $8,291,380 and $2,375,327, respectively. The net change in the
         total valuation allowance for the year ended June 30, 1996 and 1995 was
         an increase of $10,013,374 and $5,916,053, respectively.  The valuation
         allowances  at June 30,  1996 and  1995  are a result  of the  ultimate
         utilization of the tax benefits related to the deferred tax assets. The
         utilization of the tax benefits associated with net operating losses of
         approximately  $31,000,000  at June  30,  1996 is  dependent  upon  the
         Company's ability to generate future taxable income.  The net operating
         loss  carryforward  period expires  commencing in 2008 through the year
         2011.   Further,   as  a  result  of  certain   financing  and  capital
         transactions, an annual limitation on the future utilization of the net
         operating loss carryforward may have occurred.

         No income tax provision has been provided for the years ended June 30,
         1996 and 1995 as the aforementioned  deferred tax assets have provided
         no tax benefit.


  (11)   Acquisition

         On September 12, 1994 the Company  executed a Stock Purchase  Agreement
         with Piedmont  Teleport,  Inc. under which the Company acquired certain
         assets, liabilities, and certain right-of-way agreements for $20,000 in
         cash and the issuance of 62,000 shares of the  Company's  common stock.
         The  Company   accounted  for  the   acquisition  as  a  purchase  and,
         accordingly,  the purchase  price was allocated to the assets  acquired
         and  liabilities  assumed  based upon their  estimated  fair  values at
         September  12, 1994.  The seller has the right to put these shares back
         to the  Company  on  November  1, 1996 for a price of $2.50 per  share.
         Accordingly,  this  obligation is recorded as  redeemable  stock in the
         accompanying consolidated financial statements.


(12)Fair Value of Financial Instruments

         The following notes summarize the major methods and assumptions used in
         estimating the fair value of financial instruments:

         Cash and Cash Equivalents

         The carrying amount approximates fair value due to the relatively short
         period to maturity of these instruments.

         Letters of Credit

         The fair  value of the  Letters  of credit  is based on fees  currently
charged for similar agreements.


                                      F-22
<PAGE>


(12)Continued

         Short-Term and Long-Term Debt

         The fair value of the  Company's  long term debt is estimated  based on
         the quoted  market prices for the same or similar issue if available or
         based on the present  value of expected  cash flows at rates  currently
         available to the Company borrowing with similar terms.

         The  carrying  amounts  and  fair  values  of the  Company's  financial
instruments at June 30, 1996 were:

         


<TABLE>
<CAPTION>

                                                                                1996
                                                                                ----

                                                              Carrying Value                 Fair Value
                                                              -----------------------------------------

<S>                                                              <C>                          <C>        
Cash and cash equivalents (including restricted cash)            136,458,133                  136,458,133
Letters of credit                                                          -                       69,000
Long-term debt                                                   184,382,170                  183,987,000
---------------------------------------------------------------------------------------------------------


===================================================================================================================
</TABLE>

                                      F-23
<PAGE>


<TABLE>
<CAPTION>

                                                            EXHIBIT INDEX


====================================================================================================================================
Exhibit
Numbers               Description                                                                                     Page Number
------------------------------------------------------------------------------------------------------------------------------------
<C>                   <S>                                                                                             <C>
10.56                 Form of Non-Qualified Stock Option Certificates, as amended,                                    E-1
                      issued to Anthony J. Pompliano.
------------------------------------------------------------------------------------------------------------------------------------
10.57                 Employment Agreement between the Company and Harry J.                                           E-2
                      D'Andrea.
------------------------------------------------------------------------------------------------------------------------------------
10.58                 Master Amendment to Loan and Security Agreements dated                                          E-3
                      November 30, 1995, among American Communication Services of
                      Louisville, Inc., American Communication Services of Fort
                      Worth, Inc., American Communication Services of Columbia,
                      Inc., American Communication Services of Greenville, Inc.,
                      American Communication Services of El Paso and AT&T Credit
                      Corporation.
------------------------------------------------------------------------------------------------------------------------------------
10.59                 Master Reaffirmation of Parent Pledge and Support Agreements                                    E-4
                      dated November 30, 1995, between the Company and AT&T Credit
                      Corporation.
------------------------------------------------------------------------------------------------------------------------------------
10.60                 Letter of Amendment to Loan and Security Agreements dated                                       E-5
                      December 19, 1995, among American Communication Services of
                      Fort Worth, Inc., American Communication Services of
                      Columbia, Inc., American Communication Services of
                      Greenville, Inc., American Communication Services of El Paso
                      and AT&T Credit Corporation.
------------------------------------------------------------------------------------------------------------------------------------
10.61                 Second Master Amendment to Loan and Security Agreements,                                        E-6
                      Waiver and Equipment Notes Modification Agreement dated
                      September 6, 1996 among American Communication Services of
                      Louisville, Inc., American Communication Services of Fort
                      Worth, Inc., American Communication Services of Columbia,
                      Inc., American Communication Services of Greenville, Inc.,
                      American Communication Services of El Paso and AT&T Credit
                      Corporation.
------------------------------------------------------------------------------------------------------------------------------------
10.62                 Second Master Reaffirmation of Parent Pledge and Support                                        E-7
                      Agreements dated September 6, 1996 between the Company and
                      AT&T Credit Corporation.
------------------------------------------------------------------------------------------------------------------------------------
10.63                 Master Equipment Lease Agreement dated August 26, 1996,                                         E-8
                      between the Company and AT&T Credit Corporation
------------------------------------------------------------------------------------------------------------------------------------
11.1                  Statement re: computation of per share earnings (loss).                                         E-9
------------------------------------------------------------------------------------------------------------------------------------
21.1                  Subsidiaries of the Registrant.                                                                 E-10
------------------------------------------------------------------------------------------------------------------------------------
23.1                  Consent of KPMG Peat Marwick LLP.                                                               E-11
------------------------------------------------------------------------------------------------------------------------------------
27.1                  Financial Data Schedules.                                                                       E-12

------------------------------------------------------------------------------------------------------------------------------------
99.1                  Certain Factors to Consider in Connection with Forward                                          E-13
                      Looking Statements.
====================================================================================================================================
</TABLE>

<PAGE>