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

                                   ---------

                                   FORM 10-K

/x/          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
                       For the Fiscal Year Ended September 30, 1997
                                       OR
/ /          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
                       For the Transition  Period from             to

                         Commission File Number:  0-18195
                                       
                           USLD COMMUNICATIONS CORP.
              (Exact Name of Registrant as Specified in its Charter)

        DELAWARE                                          74-2522103
(State of Incorporation)                               (I.R.S. Employer 
                                                      Identification No.)

9311 SAN PEDRO, SUITE 100, SAN ANTONIO, TEXAS                78216
(Address of Principal Executive Office)                    (Zip Code)
                                       
                                (210) 525-9009
              (Registrant's Telephone Number, Including Area Code)

       Securities Registered Pursuant to Section 12(b) of the Act:  NONE

       Securities Registered Pursuant to Section 12(g) of the Act:
                    COMMON STOCK, PAR VALUE $0.01 PER SHARE
                                (Title of Class)
                        SERIES A JUNIOR PARTICIPATING
                       PREFERRED STOCK PURCHASE RIGHTS
                               (Title of Class)

                                   ---------

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

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

     The aggregate market value of the Registrant's voting and non-voting 
outstanding Common Stock held by non-affiliates of the Registrant at November 
28, 1997 was $330,008,540. There were 16,325,409 shares of the Registrant's 
voting and non-voting Common Stock outstanding at November 28, 1997.
                                       
                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None

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                  USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
                                       
                        ANNUAL REPORT ON FORM 10-K
               FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

 ITEM                                                                    PAGE
NUMBER                                                                  NUMBER

-   Index                                                                  2
                                       
                                     PART I

1.  Business                                                               3
2.  Properties                                                            12
3.  Legal Proceedings                                                     12
4.  Submission of Matters to a Vote of Security Holders                   12

                                    PART II

5.  Market for the Company's Common Equity and Related Stockholder 
    Matters                                                               13
6.  Selected Financial Data                                               14
7.  Management's Discussion and Analysis of Financial 
    Condition and Results of Operations                                   15
7A. Quantitative and Qualitative Disclosures About Market Risk            23
8.  Financial Statements and Supplementary Data                           23
9.  Changes in and Disagreements with Accountants on Accounting and 
    Financial Disclosure                                                  42
                                       
                                   PART III

10. Directors and Executive Officers of the Company                       43
11. Executive Compensation                                                46
12. Security Ownership of Certain Beneficial Owners and Management        59
13. Certain Relationships and Related Transactions                        60

                                    PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K      61

    Signatures                                                            68

                                       2
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                                    PART I

ITEM 1.  BUSINESS

     OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS 
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS 
THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF USLD COMMUNICATIONS 
CORP. (INDIVIDUALLY, OR TOGETHER WITH ITS SUBSIDIARIES, THE "COMPANY") MAY 
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING 
STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH DIFFERENCES ARE 
DISCUSSED WITH THE FORWARD-LOOKING STATEMENTS THROUGHOUT THIS REPORT AND ARE 
SUMMARIZED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS-FORWARD-LOOKING STATEMENTS-CAUTIONARY LANGUAGE."

GENERAL

     The Company is a fully-integrated, switch-based communications company. 
From fiscal 1992 through fiscal 1997, the Company's revenues increased at a 
compounded annual rate of 36%, totaling $226.9 million for fiscal 1997. The 
Company offers a full array of communication services including direct dial 
long distance and local services, prepaid calling cards, travel cards, 
Internet access, data transmission and calling center services.

     On August 19, 1997, stockholders of the Company approved a proposal to 
amend the Company's Restated Certificate of Incorporation to change the name 
of the Company from U.S. Long Distance Corp. to USLD Communications Corp. The 
new name more accurately represents the Company's role as a provider of a 
diverse line of communications services, rather than just a provider of long 
distance services.

     The telecommunications industry has changed significantly since the 
mandated divestiture by American Telephone and Telegraph Co. ("AT&T") of its 
22 local telephone companies in 1984. Regulations mandating equal access to 
the existing telecommunications network led to the creation of hundreds of 
new long distance companies. Competition now pervades across all categories 
of long distance telephone services, including both domestic and 
international direct dial long distance telephone services, operator assisted 
and calling card services and 800/888 specialized in-bound long distance 
telephone services. While AT&T and, to a lesser extent, MCI 
Telecommunications Corporation ("MCI") and Sprint Corporation ("Sprint"), 
together dominate the estimated $85 billion long distance telecommunications 
industry, management believes that a growing share of the market is serviced 
by smaller long distance companies such as the Company. Industry sources 
estimate that approximately 80% of the long distance market is shared among 
AT&T, MCI and Sprint.

     The Telecommunications Act of 1996 ( the "Telecommunications Act"), 
which was signed into law on February 8, 1996, was the first major overhaul 
of the telecommunications law since the divestiture of AT&T. This act allows 
telecommunications providers such as the Company to provide local telephone 
services. The local telephone services industry is estimated to be a $95 
billion industry and is dominated by the Regional Bell Operating Companies 
("RBOCs"). The Company is aggressively expanding into the local services 
industry and began offering local services in February 1997. The Company is 
currently certified to offer local services in 21 states and has 
certification pending in six other states. The Company has signed 
interconnection agreements with Southwestern Bell Telephone Company ("SWBT"), 
U S WEST Communications Inc. ("U S WEST") and GTE Telephone Operating 
Companies ("GTE"), enabling the Company to provide local telephone service to 
business and residential customers in these respective companies' local 
service areas. The Company also has entered into a local resale agreement 
with BellSouth Telecommunications, Inc. ("BellSouth") for its nine-state 
service territory. Additionally, the Telecommunications Act allows the RBOCs 
to compete in the long distance industry. However, the applicant RBOC must 
first satisfy a legislative "checklist" that outlines the steps required for 
an RBOC to open its network to competition on a local basis. To date, no RBOC 
has been granted authority for in-region interLATA services.

PROPOSED MERGER

     On September 17, 1997, the Company signed a definitive agreement to 
merge with a wholly-owned subsidiary of LCI International, Inc. ("LCI") (the 
"Merger"). Under the terms of the agreement, for each of the Company's 
outstanding shares of common stock, par value $0.01 per share (the "Common 
Stock"), LCI will exchange a fraction of one share of LCI common stock having 
a value of $20.00 based upon the average price of LCI common stock for the 20 
trading days ending three days before the Merger, subject to certain 
exceptions. The transaction is to be accounted for as a pooling-of-interests 
business combination. The transaction is anticipated to be tax-free to both 
the Company's and LCI's stockholders and is expected to be completed by 
December 31, 1997. A Special Meeting of Stockholders of the Company is 
scheduled for December 17, 1997, for the purpose of considering and voting 
upon the Merger. There can be no assurances that such Merger will be approved 
by the stockholders of the Company at the Special Meeting, or, if approved, 
that the other conditions to closing will be met or waived in order to permit 
consummation of the Merger. At this time, the effect of completion of the 
Merger on forward-looking statements contained in this Form 10-K is not 
determinable.

                                       3
<PAGE>

DIRECT DIAL LONG DISTANCE SERVICES

     The Company is a full-service long distance carrier currently providing 
direct dial long distance services to small and medium-sized commercial 
customers and, to a lesser extent, residential customer accounts. The Company 
was authorized to complete international and interstate calls throughout the 
United States as well as intrastate calls within 47 states at September 30, 
1997. However, the Company focuses its direct sales efforts in the West 
Coast, Pacific Northwest, Southwest and Southeast regions of the United 
States to take advantage of network efficiencies. In addition to its basic 
"one-plus" service, the Company provides inbound 800 service, travel and 
prepaid calling card services, private line services, data transmission 
services, wholesale carrier services and other customer-specific products.

     The Company began offering direct dial long distance services following 
its entry into the direct dial long distance business in August 1991 through 
the acquisition of three related direct dial long distance companies in 
Texas. At September 30, 1997, the Company serviced approximately 87,100 
commercial and residential customer accounts. The Company billed an average 
of 151.2 million minutes per month of long distance traffic during the fiscal 
quarter ended September 30, 1997, as compared to 106.5 million and 62.6 
million during the fiscal quarters ended September 30, 1996 and 1995, 
respectively. In fiscal 1997, 1996 and 1995, the Company had $167.9, $119.4 
million and $84.5 million, respectively, in direct dial long distance 
revenues, comprising 74%, 66% and 59% of total operating revenues in each 
period, respectively.

INDUSTRY OVERVIEW

     Direct dial long distance revenues industry wide are estimated to be 
approximately $85 billion in 1997, up from approximately $78 billion in 1996. 
AT&T, MCI and Sprint dominate the long distance industry. Industry sources 
estimate that these companies control a combined market share of 
approximately 80%. These companies offer comprehensive communications 
services in a wider array of products than other long distance companies and 
typically target national, multi-state business customers and millions of 
residential long distance users through national television and media 
advertising. The Company believes that over 500 smaller long distance 
companies account for the remaining 20% of the market. These companies 
typically concentrate on smaller regional and local business customers. 
Competition in the direct dial long distance industry has historically been 
based upon price. More recently, the focus has been moving towards customer 
service, product design and innovation, customized billing capabilities, 
transmission quality and availability of service.

SALES AND MARKETING

     The Company's direct dial long distance sales personnel are located 
throughout the Company's service area and are responsible for marketing to 
commercial accounts. The Company supervises sales and marketing efforts from 
its corporate headquarters and utilizes various advertising media to enhance 
its commercial marketing efforts and to attract and retain residential 
customers. The Company examines the calling profiles of target markets and 
designs long distance services that specifically address certain demands. For 
example, the Company issues long distance calling cards customized to include 
a customer's corporate logo and has also customized prepaid calling cards to 
be used as promotional marketing tools. The Company also directly markets to 
employees of commercial customers for their residential service. In addition 
to its own sales force, the Company markets its direct dial long distance 
services through authorized agents, other carriers and affinity organizations 
(strategic partnerships).

     The Company currently has an exclusive marketing agreement with Nolan 
Ryan, formerly a player with the Texas Rangers-Registered Trademark- 
professional baseball team and a potential hall of fame candidate, who acts 
as the Company's spokesman for its direct dial long distance services and 
whose picture appears in the Company's advertisements and product literature, 
including prepaid calling cards.

OPERATIONS

     The Company completes calls that are originated when a pre-subscribed 
customer dials "1" plus the area code and number or when a customer selects 
the Company's network through dial-up access to reach any domestic or 
international destination. All long distance calls placed over the Company's 
network are directed to call destination points by computerized digital 
network switching equipment operating at one of the Company's switching 
centers. The switching equipment receives a customer's direct dial call, 
verifies the caller's billing status, routes the call to the dialed 
destination, monitors the call's duration and collects other information for 
billing purposes. The Company's switching equipment selects the most 
cost-efficient transmission circuit or path available prior to switching and 
completing each call. The Company employs state-of-the-art digital switching 
equipment at the Company's switching centers in Houston, Texas; Waco, Texas; 
Seattle, Washington; Los Angeles, California; and the newest facility in 
Atlanta, Georgia. The Atlanta switch was purchased in January 1997 and is the 
Company's launch pad into the Southeast and East Coast markets.

     To satisfy increasing or anticipated usage of its long distance network 
and to ensure that its network is optimally accessible when network demand is 
heavy, the Company, from time to time, adds circuit capacity at each existing 
switching center by increasing the number of telecommunications ports and 
access lines. The Company utilizes state-of-the-art Common Channel Signaling 
System 7, which 

                                       4
<PAGE>

is currently operational for virtually all originating and terminating 
traffic within the Company's markets. This network protocol significantly 
reduces connect time delays and provides additional technical capabilities 
and efficiencies for the routing of calls.

COMPETITIVE ADVANTAGES

     The Company competes with AT&T, MCI, Sprint and numerous local, regional 
and national carriers on the basis of its products and services, competitive 
pricing and local identity. The Company, generally, prices its services below 
AT&T, MCI and Sprint comparable service offerings. In addition, by designing 
long distance products and services that fill specific market needs, the 
Company enhances its ability to compete with AT&T, MCI, Sprint and others.

     The Company believes that its emphasis on customer service distinguishes 
itself from many of its competitors. The Company has taken an integrated team 
approach to sales and service by increasing the number of account development 
specialists in its field offices to maintain responsive service after the 
sale. In an effort to improve sales force productivity and streamline 
functional processes, the Company deployed notebook computers to the field 
sales and support staff. These notebook computers have software that allows 
the Company's sales force to quickly prepare sales proposals and make 
enhanced marketing presentations on site at customer locations.

     Additionally, the Company offers a computerized bulletin board service 
called Advantage Direct, which is similar to the remote access service 
offered to its operator services customers. This service allows customers to 
monitor and evaluate calling patterns and volume by department or location. 
Moreover, in competing with certain regional and local long distance 
carriers, the Company believes it holds a competitive advantage within its 
territory because the Company's regional concentration of traffic over its 
network facilities allows for certain cost efficiencies of a national 
carrier. In addition, the Company believes that its local identity in the 
markets it serves provides an advantage in marketing its services and 
competing with long distance carriers based outside of the target regions. 
Management believes that the Company has developed the expertise in 
information systems necessary to meet the needs of its direct dial long 
distance customers. For instance, the Company provides an invoice indicating 
call detail in a form that assists customers in controlling and monitoring 
communications costs for various projects or departments.

     The Company employs digital switching equipment utilizing a network 
comprised largely of high quality fiber-optic circuitry to maximize 
communications quality. The Company believes that its use of a digital 
fiber-optic network is particularly advantageous in marketing both its voice 
and data transmission services. The Company also designs redundant and 
diverse routes to each major service area to ensure maximum service 
availability.

     The communications industry is dynamic, and the Telecommunications Act 
is expected to continue to have a major impact on the industry's competitive 
environment. In essence, the RBOCs will be competing with long distance 
carriers for both domestic and international long distance customers. The 
Company believes it is prepared to meet this challenge by capitalizing on its 
experienced management team and sales force, personalized customer service, 
quality products and services and competitive pricing structures.

STRATEGY AND GROWTH OPPORTUNITIES

     The Company's strategic focus in the direct dial long distance industry 
is to compete with AT&T, MCI and Sprint primarily on the basis of competitive 
pricing, while offering a comparable or higher level of service. Moreover, 
the Company intends to remain focused on small and medium-sized commercial 
customers and will continue its efforts to develop innovative and 
cost-efficient services that meet the needs of its customers. In December 
1996 and February 1997, Company expanded product offerings to include 
Internet access and local access services, respectively. Furthermore, the 
Company is in the process of expanding product offerings based on market 
opportunity that will likely include frame relay, paging and wireless 
services in selected markets within the next 12 to 18 months. The Company's 
ability to offer this array of services will allow it to be the customer's 
"one source" for communications.

     The Company believes that there are opportunities for geographic 
expansion through acquisitions, mergers and continued development of the 
Company's network. The primary focus of the Company's acquisition activities 
is on acquisitions that will grow the Company's direct dial long distance 
business. The Company believes that its base of operator services business 
affords it the opportunity to expand its direct dial long distance and local 
services on a more cost effective basis than many of its competitors. By 
having a concentration of operator services call traffic in a particular 
geographic region, the Company can utilize any long distance facilities it 
installs or acquires to service a ready base of call traffic, thereby 
lowering the marginal transmission costs for any direct dial long distance 
traffic that the Company acquires or develops in that region. The Company 
believes this cost advantage not only improves the potential profitability of 
both the Company's operator services and direct dial long distance services 
businesses in such region, but also expands the number of companies that 
would be attractive acquisition candidates in that region.

     In January 1997, the Company completed the acquisition of Omni 
Communications, Inc. ("Omni"), a regional direct dial long distance service 
provider headquartered in Palm Beach Gardens, Florida. In May 1997, the 
Company completed the acquisition of TransAmerica Communications, Inc. 
("TransAmerica"), a regional direct dial long distance service provider 
headquartered in Boca 

                                       5
<PAGE>

Raton, Florida. The Omni and TransAmerica acquisitions, although not material 
to the Company's financial position or results of operations, were 
strategically planned to increase the Company's presence in the Southeast 
region of the United States as they bring to the Company a high quality 
customer base concentrated in Florida. The existing customer bases of Omni 
and TransAmerica complement the Company's network expansion strategy, as 
their customers are being serviced directly by the switch in Atlanta, Georgia.

     The Company continually evaluates business opportunities, including 
potential acquisitions. One or more of such acquisitions could result in a 
substantial change in the Company's operations and financial condition. The 
success of the Company's acquisition activities will depend, among other 
things, on the availability of acquisition candidates, the availability of 
funds to finance acquisitions and the availability of management resources to 
oversee the operation of acquired businesses. While the Company has, from 
time to time, had discussions with communications companies, it has no 
agreements or pending negotiations, with the exception of the Merger noted 
above.

OPERATOR SERVICES

     The Company provides operator assisted services for private pay 
telephones, hotels, motels, university dormitories and hospitals. The 
Company's operator services are accessed when calls requiring operator 
assistance and/or alternate billing options are placed from customer 
locations or customer pay telephone equipment. Such services involve the use 
of live and automated operator stations to receive, validate and complete the 
calls. The Company processes collect, third-party, person-to-person and 
calling card calls and, generally, shares a percentage of call revenues with 
its customers.

     At September 30, 1997, the Company provided operator services to 
approximately 141,500 hotel, motel, hospital and dormitory rooms. In 
addition, at September 30, 1997, the Company had service contracts with 
private pay telephone owners covering approximately 71,600 pay telephones. 
The Company carried 6.8 million average monthly minutes of operator services 
traffic during the fourth quarter of fiscal 1997, as compared to 7.6 million 
and 8.3 million average monthly minutes during the fourth quarters of fiscal 
1996 and 1995, respectively. The Company's operator services revenues 
amounted to $57.5 million, $60.9 million, $59.6 million in fiscal 1997, 1996 
and 1995, respectively.

INDUSTRY OVERVIEW

     Management believes that there are approximately 130 operator services 
providers competing within the long distance communications industry. AT&T 
continues to dominate the operator services market, supplying operator 
services for traffic originating from both the hospitality and pay telephone 
industries. Additionally, MCI and Sprint provide operator services and are 
considered by management to be major competitors. Excluding AT&T, MCI, 
Sprint, GTE and the RBOCs, management believes the Company is one of the five 
largest providers of operator services.

     Many operator services providers, including the Company, initially 
focused on the hospitality industry. More recently, as the private pay 
telephone industry has grown and taken market share from the public pay 
telephone market traditionally served by AT&T, many operator services 
providers gained increased market share by providing service to the owners of 
private and public pay telephones. Competition between the Company and other 
operator services providers is based upon commission programs, quality of 
service, reporting and customer service.

SALES AND MARKETING

     The Company markets its operator services nationally through the 
combined effort of regional sales representatives based in Illinois, Texas, 
Florida and California and a network of agents. The Company's corporate sales 
force focuses on larger accounts, such as hotel management companies, 
multi-unit franchises, hospital chains, large private pay telephone companies 
and universities. The Company's agents market the Company's operator services 
on a nationwide basis and typically receive a commission based upon the 
volume of business generated. The Company also participates in various 
industry trade shows and promotes its operator services through 
advertisements in trade magazines. The Company customizes its communications 
services to provide, among other things, individualized reports and 
specialized call branding to customers.

OPERATIONS

     The Company owns and operates its own operator center in San Antonio, 
Texas, which employed 264 operators and support staff at September 30, 1997. 
The Company provides live and automated operator services 24 hours per day, 
365 days per year, and features multi-lingual operators versed in English, 
Spanish and a variety of other languages. The Company maintains a 
sophisticated emergency call handling system that enables its operators to 
access police, fire and other emergency agencies within the jurisdiction of 
the telephone from which the call is placed. The Company utilizes its own 
transmission facilities when possible or contracts to use facilities of 

                                       6
<PAGE>

other long distance network providers as necessary.

     The Company switches its operator assisted calls at its five main 
switching centers. Many operator assisted calls are transmitted to the 
Company's switching centers via call processing equipment installed at 
customer locations or in customer pay telephone equipment. This call 
processing equipment is programmed to recognize calls requiring operator 
assistance and to access the Company's network by dialing the Company's 
access number, then passing the call record information to one of the 
switching centers. The Company validates the authorization code or telephone 
number to be billed and then completes the call, while recording the date, 
destination, duration and time of day for subsequent billing purposes. At 
September 30, 1997, the Company was authorized to complete international and 
interstate calls placed throughout the United States, as well as intrastate 
calls within 47 states.

COMPETITIVE ADVANTAGES

     Management believes that the Company enjoys several competitive 
advantages over many others in the operator services industry. By virtue of 
the Company's large call volumes relative to many other operator services 
providers and the cost efficiencies it realizes by routing a large portion of 
its operator services traffic over its own facilities and maintaining its own 
operator center, the Company is able to provide high quality transmission on 
an efficient and economical basis. Additionally, because it is the source of 
commission payments to its operator services customers, the Company believes 
that its financial stability and history of timely payments allow it to 
compete effectively against many smaller, under-capitalized operator services 
providers. Moreover, the Company's flexible rate options allow it to offer 
customized commission programs to its customers as compared to larger 
operator services providers.

     In 1994, the Company implemented a computerized bulletin board service 
called Stealth that allows its customers to access the system from remote 
locations and obtain customized and sophisticated reporting of calling 
patterns and volumes for each customer location or pay telephone. This 
advanced reporting system allows the Company's operator services customers to 
analyze their traffic on a daily basis and maximize telecommunications 
revenues by, for example, relocating underutilized telephones. The Company's 
detailed reporting also allows its customers to reconcile the accuracy or 
integrity of their commissions. The Company employs a skilled, professional 
staff of customer service employees and technicians, who provide service 24 
hours per day, 365 days per year.

STRATEGY AND GROWTH OPPORTUNITIES

     The Company has developed a strong presence in operator services 
throughout the United States. Through its direct sales force and agents and 
its participation in state, regional and national trade associations, the 
Company intends to pursue geographic expansion on a nationwide basis. The 
Company will continue to market its operator services business to both the 
private pay telephone and hospitality industries and present new products and 
services for these markets.

     In addition, due to the Telecommunications Act, the Company's 
opportunities in the operator services market have expanded. The 
Telecommunications Act requires RBOCs desiring to enter the long distance 
services market to, among other things, open their networks to competition on 
a local basis as well as establish separate subsidiaries through which they 
can offer in-region long distance services. In addition to the 350,000 
private pay telephones the Company has traditionally marketed its services 
to, operator, long distance and local services will now be marketed to an 
additional 1.7 million public pay telephones, or to a total pay telephone 
market of approximately 2.0 million. The Company is currently developing new 
products and redesigning existing products to support the expanded market. In 
June 1997, the Company entered into an agreement with GTE to provide repair 
and refund services for GTE pay telephones nationwide. Other services covered 
under the agreement include but are not limited to local, information and 
technology services. In June 1997, the Company also extended its agreement 
with G-Five Corp., a California aggregator of over 300 private pay telephone 
affiliates, adding three years to the contract period. Under the agreement, 
the Company will provide expanded communications services, including 
operator, direct dial and local services, to approximately 12,000 
privately-owed pay telephones throughout California. The Company expects that 
both the expanding operator services market opportunity and the expansion of 
product offerings will increase revenues, as well as strengthen customer 
relationships and increase customer retention. However, as the Company is in 
the early stages of this marketing effort, the revenue increase cannot be 
accurately predicted and may not be material to the Company's financial 
position or results of operations.

     The Company's existing relationships with operator service customers, 
who typically own or manage numerous pay telephones or hotels, provide a 
unique opportunity for the Company. The Company has the potential to provide 
local access services to a large volume of telephone lines through its 
existing customer base. These characteristics will allow the Company to 
quickly and efficiently enter the local services market in targeted areas.

LOCAL SERVICES

     The Telecommunications Act provides for certain significant changes to 
the regulatory market structure of the domestic telecommunications industry. 
For example, competitive telecommunications providers such as the Company now 
are permitted to offer 

                                       7
<PAGE>

local telephone services in competition with the Incumbent Local Exchange 
Companies ("ILECs") throughout most areas in each state. The Company, 
therefore, can offer local services either by reselling services over the 
network of an ILEC or over its own network and facilities, or any combination 
of the two.

     Management of the Company believes that the introduction of the local 
service product provides the Company a significant opportunity for revenue 
growth. The Company was one of the first long distance carriers to offer 
local resale service and has provided Centrex resale for ten years in the 
Northwest. The Company introduced two local service products in fiscal 1997. 
In February 1997, the Company began offering a local  resale product to its 
pay telephone customers, primarily in SWBT exchanges within the State of 
Texas. In June 1997, a local resale product was offered to the Company's 
commercial customers. A third product, a switched local product, was offered 
to commercial and pay telephone customers in select markets in the first 
quarter of fiscal 1998. At September 30, 1997, the Company was providing 
local service to approximately 12,900 subscriber lines. In fiscal 1997, the 
Company had $1.6 million in local services revenue.

INDUSTRY OVERVIEW

     The local telecommunications market is estimated to be a $95 billion 
industry. Prior to the Telecommunications Act, regulations prohibited 
competition in this industry, and, therefore, the geographic markets were 
exclusively controlled by the ILECs. The introduction of competition in 1996 
has yet to have any measurable effect on the overall market dominance of the 
collective ILECs. These companies' marketing practices traditionally have 
been driven by regulations rather than customer demand, and as a result the 
local services offered currently are not as diverse or competitively priced 
as direct dial long distance services today. Also, because prices for local 
services sometimes contain intrinsic built-in subsidies for other local 
exchange products, some services are priced well over their actual costs and, 
therefore, are highly vulnerable to competition in a competitive market.

     Entry into the local market by niche providers has been slow due to the 
tremendous amount of coordination and investment necessary. For example, a 
Competitive Local Exchange Company ("CLEC"), such as the Company, needs to 
negotiate an interconnection agreement with an ILEC and submit such agreement 
to the applicable state regulatory agency for approval. The CLEC also must 
obtain the appropriate license and/or certification from that state before it 
can offer local services. The CLEC and the ILEC then must coordinate their 
order entry/service delivery process and address related issues such as 911 
services, city franchise requirements, rights-of-way permits, intraLATA toll 
transiting agreements and service and maintenance obligations. As these 
issues are resolved, niche providers should have a unique opportunity to 
design local services that meet actual customer needs.

SALES AND MARKETING

     The Company is offering local services in the geographic areas in which 
it can provide such services through its direct sales force, with emphasis on 
the Company's existing customer base. The Company has relied upon its 
traditional marketing channels, radio and television advertisements as well 
as billboard and print ad campaigns in geographically concentrated markets. 
The Company believes that it has the potential to capitalize on its 
relationship with existing customers to bundle the local product with its 
existing products and services. The bundling of these services with local 
services will enhance the Company's product offerings and provide new and 
existing customers with the integrated communication services they desire. To 
a lesser extent, the Company also continues to market to residential 
customers.

     As noted above, the Company currently has an exclusive marketing 
agreement with Nolan Ryan. Mr. Ryan acts as the Company's spokesman for its 
local services and appears in the Company's radio and television 
advertisements and product literature, promoting 1-800-TRY-USLD.

COMPETITIVE ADVANTAGES

     To the extent the Company can provide the necessary billing, customer 
service and back-office support for local services for less cost per line 
than the contractual wholesale discount, the Company can offer its customer a 
lower rate for the same service than the ILEC. The Company also believes that 
its optional billing methods (e.g., bulletin board service), its customer 
service and its ability to combine an invoice for local and long distance 
services on a single bill from a single source serve as competitive 
advantages. These advantages are even greater in geographical areas where 
similarly situated carriers have not yet entered the local market.

     The Company is aggressively expanding into the local service business 
and is currently certified to offer local services in 21 states and has 
certification pending in six other states. The Company has signed 
interconnection agreements with SWBT enabling the Company to provide local 
telephone service to business and residential customers in SWBT's five-state 
service area. The Company has also entered into a local resale agreement with 
BellSouth for their nine-state service territory. In addition, the Company's 
existing relationship with pay telephone customers provides a unique 
opportunity for the Company. The Company has the potential to provide local 
access to a large volume of telephone lines through its existing customer 
base.

                                       8
<PAGE>

STRATEGY AND GROWTH OPPORTUNITIES

     The Company will continue to pursue interconnection agreements, 
regulatory authority and technical functionality to carry, sell and provide 
local telephone services. The Company's strategy has been to roll out three 
product offerings over a nine-month period. The first was a resale product 
targeted to the Company's private pay telephone customers. This product was 
offered in February 1997. In June 1997, a resale local product was offered to 
commercial customers. This product is offered in targeted markets where the 
Company has high concentration of existing long distance customers. This 
strategy should provide the Company a higher than average sales success rate 
and increase customer retention. The third product, a switched local product, 
was offered to commercial and pay telephone customers in selected markets in 
the first quarter of fiscal 1998. This product is offered through a switch 
which was installed in San Antonio, Texas, in the fourth quarter of fiscal 
1997. This $1.0 million, state-of-the-art, modular Lucent switch is initially 
able to service 6,000 separate subscriber lines and, with an additional 
investment, the next expansion will increase the capacity to 20,000 
subscriber lines. The maximum expansion possibility of the switch is 200,000 
subscriber lines. This switch is the first of several the Company plans to 
install in certain cities where the Company has a high concentration of 
existing customers.

CORPORATE SYNERGY

     Management believes that the Company has certain operating advantages 
and cost efficiencies through the integration of its long distance, operator 
and local services businesses. The combined traffic volumes of the Company's 
operator services and direct dial long distance businesses operate to lower 
the Company's transmission costs for both of these businesses in geographic 
regions where the Company operates long distance switching equipment. In 
addition, the Company's sales force can provide integrated communications 
solutions by offering operator services, direct dial long distance and local 
telephone services. The opportunity to bundle products and services 
strengthens customer relationships and, thus, improves customer retention.

GOVERNMENT REGULATION

GENERAL

     The Company competes in an industry that, to a large degree, continues 
to be regulated by government agencies. At approximately the same time as the 
required divestiture of the Bell telephone companies by AT&T in 1984, the 
Federal Communications Commission (the "FCC") announced rules that were 
created to foster a self-regulating, interstate telecommunications industry, 
relying upon competitive forces to keep rates and services in check. 
Management believes that the current direct dial marketplace demonstrates 
substantial progress toward the fulfillment of these objectives. For example, 
the cost of a long distance call has significantly declined while the number 
of long distance companies has multiplied. Competition has encouraged these 
direct dial long distance companies to find ever more efficient methods of 
carrying calls.

OPERATOR SERVICES

     On October 15, 1990, President Bush signed into law the Telephone 
Operator Consumer Service Improvement Act of 1990. Congress directed the FCC 
to impose upon the interstate operator services market certain rules and 
regulations designed to increase consumer awareness concerning the operator 
services provider carrying the call, the information the caller can request 
of the operator, and the alternatives available to the consumer for reaching 
other long distance carriers. Operator services providers were required to 
file with the FCC informational tariffs that describe the rules and 
regulations governing the provision of interstate operator assisted 
telecommunications and to include all rates that may apply to an interstate 
call. Furthermore, operator services providers were required to submit, on a 
Congressionally prescribed timetable, certain reports relating to rate 
changes, complaints and costs. Based on these reports, on November 16, 1992, 
the FCC submitted to Congress its "Final Report Pursuant to the Telephone 
Operator Consumer Services Improvement Act of 1990." The purpose of this 
report was to identify whether increased regulatory scrutiny by the FCC was 
required to satisfy Congressional objectives. The FCC determined that 
"...market forces are securing rates and charges that are just and 
reasonable..." and therefore stated "...we conclude that no further action is 
necessary...".

     At September 30, 1997, the Company was authorized to carry intrastate 
operator assisted traffic in 47 states. Authorization is pending approval in 
two other states. State regulatory agencies have the authority to impose 
their own rules and regulations governing the provision of intrastate 
operator services, including regulation of rates. Many states have rules 
similar if not identical to those imposed by the FCC on interstate operator 
assisted calls. At the date of this report, the Company was in material 
compliance with the requirements of each of the individual state regulatory 
agencies and continues to pursue authorization to provide intrastate operator 
services in other targeted states. Certain states are expected to introduce 
or revise their rules governing operator services providers within the next 
year. Currently, the Company does not anticipate significant difficulty in 
complying with the new or revised rules.

                                       9
<PAGE>

DIRECT DIAL LONG DISTANCE SERVICES

     The FCC has regulatory jurisdiction over interstate and international 
telecommunications common carriers, like the Company. Under Section 214 of 
the Federal Communications Act, the FCC must certify a communications common 
carrier before it may provide international services. The Company has 
obtained Section 214 authorization to provide international switched services 
by means of resale. The FCC has ruled that "non-dominant" common carriers, 
like the Company, need not apply for Section 214 authorization for the 
provision of domestic U.S. interstate services.

     At September 30, 1997, the Company was authorized to provide intrastate 
long distance service within 47 states with authorization pending approval in 
one other state. Regulations within each of these states, as they pertain to 
completing direct dial long distance calls for the Company's customers within 
the state, are virtually static and pose no foreseeable concern. As the 
Company expands the geographic scope of its direct dial long distance 
business, it will seek state regulatory approvals as necessary to provide 
intrastate long distance service.

BILLED PARTY PREFERENCE

     In April 1992, the FCC tentatively proposed adopting a "Billed Party 
Preference" ("BPP") system for automatically routing operator assisted calls 
to each caller's pre-selected carrier, fundamentally changing the nature of 
the operator services industry. Comments were requested by the FCC during 
1992 and again in 1994. In each case, industry participants overwhelmingly 
opposed the idea as too costly, relative to the perceived benefits of such a 
system.

     On March 9, 1995, the FCC requested industry comment on two proposals it 
had recently received relative to the BPP proceeding. In an ex-parte 
petition, the National Association of Attorney's General ("NAAG") suggested 
that the FCC modify its current branding requirement such that operator 
service providers ("OSPs") would be required to announce at the beginning of 
each call more specific information for obtaining access to alternate 
carriers (the "NAAG Petition"). Another petition filed by a coalition of 
industry members, including most of the RBOCs, two competitive access 
providers, the American Public Communications Counsel ("APCC") and the 
Competitive Telecommunications Association ("CompTel"), recommended that the 
FCC impose certain rate thresholds for interstate operator assisted services, 
which the FCC would presume to be reasonable, and any OSP electing to charge 
rates higher than such threshold would be required to first prove to the FCC 
that such rates are justified based upon the underlying costs of the service 
(the "APCC Rate Cap Proposal"). The NAAG Petition was proposed to remain in 
effect until such time that BPP is adopted and fully implemented. The APCC 
Rate Cap Proposal was proposed to obviate the need to consider any further 
action regarding BPP.

     Subsequently, in June 1996, the FCC issued a Second Further Notice of 
Proposed Rulemaking ("SFNPRM") in this proceeding. In it, the FCC proposed 
adopting a rule which would require OSPs to announce the rates for certain 
calls to the billed party prior to connecting the call, thereby allowing the 
billed party to disconnect such call without incurring any unwanted charges. 
In 1996, the FCC released its Second Request for Comment in the SFNPRM, 
soliciting technical and other administrative details to support the proposed 
announcement requirement. Most commentors objected to the discriminatory 
nature of the proposal, which would have some carriers announcing rates while 
others would not. If any of these proposals are adopted by the FCC, the 
Company's operator service traffic could be materially adversely affected.

MFJ LEGISLATION

     On February 8, 1996, President Clinton signed the Telecommunications Act 
into law. This act allows the RBOCs to seek authority from the FCC to provide 
"in-region" long distance services. To obtain this authority, each state 
agency is required to certify to the FCC that the applicant RBOC has 
satisfied a legislative "checklist" that outlines the steps required for an 
RBOC to open its network to competition on a local basis. These steps include 
the provision of competitive network interconnection, unbundled access to 
network elements and other  necessary access to poles, ducts, conduits and 
rights-of-way, non-discriminatory access to white pages listings and 
telephone number assignments, local number portability, toll dialing parity 
and local service resale. The FCC is required to consult with the Department 
of Justice ("DOJ") to assist in determining if an applicant RBOC's entry into 
the long distance business violates any antitrust standards the DOJ considers 
appropriate. Ninety days after receiving such an application, the FCC is 
required to render its decision. RBOCs are required to establish separate 
subsidiaries through which they could first offer in-region long distance 
services. RBOCs may provide out-of-region long distance services subject to 
existing laws and regulations governing long distance communications.

     To date, no RBOC has been granted authority for in-region interLATA 
services, because the provisions set forth above have not been satisfied by 
any RBOC. However, many entities, including the Company, have reached 
interconnection agreements with one or more of the RBOCs to date, and many 
states have adopted rules governing local competition. It is reasonable to 
expect that the conditions for RBOC entry will be met in the near future, and 
carriers in the interLATA long distance business today, such as the 

                                      10
<PAGE>

Company, will encounter new, formidable competition.

INTERCONNECTION ORDER

     On August 8, 1996, the FCC released its Interconnection Order, designed 
to implement federal regulations governing the opening of the local 
telecommunications market to competition. After a Circuit Court Appeal and 
temporary stay of certain aspects of this decision, the Circuit Court 
released its opinion on July 18, 1997. In that opinion, the Court stated that 
state regulatory agencies, and not the FCC, are authorized to establish 
pricing rules for local unbundled network elements. Furthermore, the Court 
found that states have jurisdiction over disputes regarding interconnection 
agreements between carriers. Finally, the Court stated that Local Exchange 
Companies ("LECs") were not required to offer any carrier requesting 
interconnection the best components of different previously reached 
agreements, contrary to the FCC's original Interconnection Order. Rather, the 
LECs are required to offer those agreements in their entirety to requesting 
interconnectors.

     The three aspects in this decision will lead to the implementation of 
local competition to different degrees in each state. Furthermore, carriers 
will be able to negotiate different and unique terms of interconnection with 
each LEC, leading, therefore, to a disparity of opportunity to enter and 
compete in the local market. To the extent that LECs offer better rates or 
discounts in exchange for volume commitments or other contingencies which 
cannot be met by non-first tier carriers, those carriers will be at a 
competitive disadvantage. To the extent that such carriers are relying on 
expeditious and non-discriminatory entry into the local telecommunications 
market as an integral part of their overall growth strategy, such a 
development could have a negative effect. The Company cannot determine if 
such developments will unfold, or, if so, to what extent they affect the 
Company's efforts to enter the local exchange market.

ACCESS CHARGE REFORM

     On May 6, 1997, pursuant to their interpretation of the 
Telecommunications Act, the FCC released its Access Reform Order (the "Access 
Order"). The FCC sought through this decision to restructure the manner in 
which interexchange carriers compensate facilities-based LECs for providing 
access to their local end users. One requirement within the Access Order 
would significantly shift the economic burden associated with providing 
access from "direct-trunked" carriers, or long distance companies with 
dedicated facilities to a particular local exchange central office, to 
carriers who utilize toll tandem switching, i.e., those who used shared 
access facilities to reach that same central office. The overwhelming 
majority of long distance carriers, including in many cases, the Company, 
today buy "tandem switched" transport. However, if the price discrepancy 
becomes too great between direct trunk transport and tandem switched 
transport, with all other cost factors remaining constant, the Company may be 
at a competitive disadvantage relative to larger, direct trunk transport 
carriers. Access is an essential element to the origination and completion of 
all long distance calls, and if certain entities are provided special pricing 
for the same service relative to their competitors, they are thereby afforded 
a formidable competitive cost advantage.

     This Access Order also imposes the phase-in of replacing a usage based 
carrier common line charge with a line-based flat fee to be assessed upon all 
long distance companies beginning on January 1, 1998. In addition, the Access 
Order requires LECs to reduce their access revenue requirements by reducing 
interconnection access charges to long distance companies. Management of the 
Company does not anticipate that the net effect of these modifications will 
have a material impact on the Company's financial position or results of 
operations.

REGULATORY RATE PROCEEDINGS

     During the course of normal operations, a regulated company may at any 
time come under specific scrutiny with regard to any of its rates, terms or 
conditions by which such service is rendered by a state or federal regulatory 
agency charged with such oversight responsibility, or by an attorney general 
or other jurisdictional consumer officials. In such cases, a regulated 
company can be required to, among other things, provide cost justification 
for the charges it imposes on some or all of its services, or to address 
perceived consumer inequities. After review of such justification, the 
regulatory agency, generally, has the authority to require a carrier to 
modify the process by which such services are rendered or to effect changes 
to its applicable rate structure. Consumer officials and attorneys general 
can pursue civil action if their concerns are not adequately addressed by the 
carrier. The Company operates in several jurisdictions in which its tariffs 
or services may, from time to time, fall under such scrutiny at the 
discretion of the governing regulatory agency or other officials. The Company 
could therefore be required, as a result of such an investigation and 
subsequent proceeding, to implement changes in its rate structure, which 
could ultimately affect its revenues. The Company cannot predict whether or 
not any such requirement may be imposed in any particular jurisdiction.

                                      11
<PAGE>

EMPLOYEES

     At September 30, 1997, the Company had 658 full-time employees, 
including 18 officers, 219 sales and marketing personnel, 148 network, 
technical and operations personnel, 92 accounting, administrative and support 
personnel and 181 telephone operators and customer service representatives 
and related support personnel. At September 30, 1997, the Company also 
employed 178 part-time telephone operators and customer service 
representatives. None of the Company's employees are represented by a union. 
The Company believes that its employee relations are good.

ITEM 2.  PROPERTIES

     At September 30, 1997, the Company occupied approximately 75,185 square 
feet of space for its corporate offices at 9311 San Pedro, San Antonio, 
Texas, pursuant to a lease agreement that expires in March 2004. 
Additionally, at September 30, 1997, the Company leased approximately 17,000 
square feet of space for its operator services center at 2200 Danbury, San 
Antonio, Texas, and approximately 69,300 square feet in the aggregate for 30 
sales and operations offices throughout Texas, Oklahoma, New Mexico, 
Louisiana, California, Oregon, Florida, Washington, Georgia and North 
Carolina. The Company believes that its facilities are adequate to meet its 
current needs.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is involved in various claims, legal actions and regulatory 
proceedings arising in the ordinary course of business. The Company believes 
it is unlikely that the final outcome of any of the claims or proceedings to 
which the Company is a party would have a material adverse effect on the 
Company's financial position or results of operations; however, due to the 
inherent uncertainty of litigation, there can be no assurance that the 
resolution of any particular claim or proceeding would not have a material 
adverse effect on the Company's results of operations for the fiscal period 
in which such resolution occurred.

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

     A Special Meeting of Stockholders of the Company was held on August 19, 
1997 for the purpose of considering and voting upon a proposal to amend the 
Company's Restated Certificate of Incorporation to change the name of the 
Company from U.S. Long Distance Corp. to USLD Communications Corp. The new 
name more accurately represents the Company's role as a provider of a diverse 
line of communications services, rather than just a provider of long distance 
services.

     The results of the Special Meeting were as follows:

                                      Number of Votes
     Votes For                          13,848,201
     Votes Against                          20,451
     Votes Abstained                         9,762







                                      12
<PAGE>

                                    PART II

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

MARKET INFORMATION

     The Company's Common Stock is quoted on the Nasdaq National Market 
System under the symbol "USLD." The table below sets forth the high and low 
bid prices for the Common Stock from October 1, 1996, through November 28, 
1997, as reported by the Nasdaq National Market System. These price 
quotations reflect inter-dealer prices, without retail mark-up, mark-down or 
commission, and may not necessarily represent actual transactions.

                                                     HIGH         LOW
                                                     ----         ---
  Fiscal Year Ended September 30, 1996:
     1st quarter                                 $ 15 1/8      $ 10 7/8
     2nd quarter                                 $ 20 1/2      $ 13
     3rd quarter (1)                             $ 41 1/8 (1)  $ 19 5/8 (1)
     4th quarter (Pre-Distribution) (1)          $ 39 3/8 (1)  $ 25 1/2 (1)
     4th quarter (Post-Distribution) (1)         $ 10     (1)  $  4 3/8 (1)
  Fiscal Year Ended September 30, 1997:
     1st quarter                                 $ 10 1/8      $  7 1/2
     2nd quarter                                 $ 12 7/8      $  7 7/8
     3rd quarter                                 $ 17 1/4      $ 10 1/4
     4th quarter                                 $ 20 1/8      $ 13
  Fiscal Year Ended September 30, 1998:
     1st quarter (through November 28, 1997)     $ 21          $ 18 3/8

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

(1)  On May 14, 1996, the Company's Board of Directors announced the spin-off of
Billing Information Concepts Corp. ("Billing"). On August 2, 1996, the Company
completed the distribution of all of the capital stock of Billing. The average
stock price for the first ten business days after the distribution date was 
$6.77 for the Company and $19.36 for Billing.

STOCKHOLDERS

     At November 28, 1997, there were 16,325,409 shares of Common Stock 
outstanding, held by 527 holders of record. The last reported sales price of 
the Common Stock on November 28, 1997, was $20 3/4 per share.

DIVIDEND POLICY

     The Company has never declared or paid any cash dividends on the Common 
Stock. The Company presently intends to retain all earnings for the operation 
and development of its business and does not anticipate paying any cash 
dividends on the Common Stock in the foreseeable future. Furthermore, certain 
covenants in various credit agreements of the Company together with the 
definitive Merger agreement with LCI prohibit the payment of cash dividends 
on the Common Stock.

                                      13

<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial data presented below are derived from the audited 
Consolidated Financial Statements of the Company. The data presented below 
for the fiscal years ended September 30, 1997, 1996 and 1995 should be read 
in conjunction with the Consolidated Financial Statements, the Notes thereto 
and the other financial information included elsewhere in this report. All 
periods presented reflect the spin-off of Billing as discontinued operations 
as of September 30, 1992. The Company has never declared cash dividends on 
its Common Stock, nor does it anticipate doing so in the foreseeable future.

<TABLE>
                                                                 FISCAL YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------------------------  
                                                      1997       1996        1995      1994       1993    
                                                   --------   --------    --------   --------   --------  
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>        <C>         <C>        <C>        <C>
CONSOLIDATED INCOME STATEMENT DATA:
  Total operating revenues                         $226,893   $180,346    $144,050   $117,541   $80,119   
  Net income (loss) from continuing operations     $  5,251   $(13,754)   $ (2,083)  $ (2,475)  $(1,265)  
  Net income (loss) from continuing operations
   per common share                                $   0.32   $  (0.89)   $  (0.14)  $  (0.18)  $ (0.10)  


                                                                        SEPTEMBER 30,
                                                   -----------------------------------------------------  
                                                      1997       1996        1995      1994       1993    
                                                   --------   --------    --------   --------   --------  
                                                                       (IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
  Total assets (1)                                 $123,003   $ 99,244    $ 86,027   $ 79,413   $64,835
  Long-term obligations, less current portion      $ 16,022   $ 10,341    $ 16,168   $ 16,684   $13,266


                                                                        SEPTEMBER 30,
                                                   -----------------------------------------------------  
                                                      1997       1996        1995      1994       1993    
                                                   --------   --------    --------   --------   --------  
                                                                       (IN THOUSANDS)
OPERATING DATA (UNAUDITED):
  Operator services minutes per month (2)             6,800      7,600       8,300      9,100    10,600  
  Pay telephones serviced (3)                          71.6       61.3        60.9       52.0      44.8  
  Rooms serviced (3)                                  141.5      135.9       136.9      122.0     106.0  
  Direct dial long distance minutes per month (2)   151,200    105,400      62,600     44,700    17,200  
</TABLE>

------------------
(1)  Excludes net assets of discontinued operations.

(2)  Calculated based upon a monthly average over the fiscal quarter ended on
     the date indicated.

(3)  At end of the period.


                                      14

<PAGE>

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

FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS

     THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN "FORWARD-LOOKING 
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, 
AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE 
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SPECIFICALLY, ALL STATEMENTS 
OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS REPORT, INCLUDING 
THE "OUTLOOK," REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY 
AND PLANS AND OBJECTIVES OF MANAGEMENT OF THE COMPANY FOR FUTURE OPERATIONS 
ARE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON 
THE BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND 
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN 
THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "COULD," "ESTIMATE," "EXPECT" 
AND "INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE 
COMPANY OR COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING 
STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEW OF THE COMPANY WITH 
RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND 
ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT LIMITATIONS, 
COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER RELATIONS, 
RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT, GOVERNMENTAL 
REGULATION AND SUPERVISION, SEASONALITY, THE OPERATION OF THE COMPANY'S 
NETWORKS, TRANSMISSION COSTS, PRODUCT INTRODUCTIONS AND ACCEPTANCE, 
TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONE-TIME EVENTS AND 
OTHER FACTORS DESCRIBED HEREIN ("CAUTIONARY STATEMENTS"). ALTHOUGH THE 
COMPANY BELIEVES THAT THE EXPECTATIONS ARE REASONABLE, IT CAN GIVE NO 
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. BASED UPON 
CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES 
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL 
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, 
BELIEVED, ESTIMATED, EXPECTED OR INTENDED. ALL SUBSEQUENT WRITTEN AND ORAL 
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON 
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE APPLICABLE 
CAUTIONARY STATEMENTS.

GENERAL

     The following is a discussion of the consolidated financial condition 
and results of operations of the Company for fiscal 1997, 1996 and 1995. It 
should be read in conjunction with the Consolidated Financial Statements of 
the Company, the Notes thereto and the other financial information included 
elsewhere in this report. For purposes of the following discussion, 
references to year periods refer to the Company's fiscal years ended 
September 30 and references to quarterly periods refer to the Company's 
fiscal quarters ended December 31, March 31, June 30 and September 30.

     On July 10, 1996, the Company's Board of Directors approved a plan to 
spin off the Company's commercial billing clearinghouse and information 
management services business ("Billing Group Business") as a separate public 
company. To effect the spin-off, the Board approved the distribution of the 
outstanding shares of common stock of its wholly owned subsidiary that owned 
and operated the Billing Group Business, Billing, to the Company's 
stockholders. The distribution was tax-free for federal income tax purposes 
to the Company's stockholders, and the Company did not recognize income, gain 
or loss as a result of the distribution except for direct spin-off costs. The 
distribution was completed on August 2, 1996.

     The accompanying Consolidated Statements of Income reflect the operating 
results of Billing as discontinued operations in accordance with Accounting 
Principles Board Opinion No. 30. Prior period operating results have been 
restated to reflect continuing operations. The Consolidated Pro Forma 
Statements of Operations are also included and discussed in a separate 
section below.

OVERVIEW

     Revenues grew to $226.9 million in 1997 from $180.3 million in 1996 and 
$144.1 million in 1995. During the five-year period ended September 30, 1997, 
revenues grew at a 36% annual compounded rate. The Company's gross profit 
margin was 33.8% in 1997, 34.3% in 1996 and 34.7% in 1995. The decrease in 
gross margin from 1995 to 1997 was largely due to the growth of lower gross 
margin direct dial long distance revenues as a percentage of total revenues.

     The Company's selling, general and administrative ("SG&A") expenses as a 
percentage of revenues were 23.4%, 28.1% and 28.9% in 1997, 1996 and 1995, 
respectively. The decrease from 1995 to 1997 was primarily the result of 
tighter expense controls and increased efficiencies. Depreciation and 
amortization expenses as a percentage of revenues were 5.0%, 6.5% and 7.0% in 
1997, 1996 and 1995, respectively. Net income (loss) from continuing 
operations of $5.3 million, ($13.8) million and ($2.1) million was reported 
for 1997, 1996 and 1995, respectively.


                                      15

<PAGE>

RESULTS OF OPERATIONS

     The following table presents certain items in the Consolidated 
Statements of Income as a percentage of total operating revenues for the 
years ended September 30, 1997, 1996 and 1995:

                                              1997        1996       1995
                                              -----       -----      -----
     Operating revenues:
       Direct dial long distance services      74.0%       66.2 %     58.6 %
       Operator services                       25.3        33.8       41.4
       Local services                           0.7         0.0        0.0
                                              -----       -----      -----
       Total operating revenues               100.0%      100.0 %    100.0 %
     Operating expenses:
       Cost of services                        66.2%       65.7 %     65.3 %
       Selling, general and administrative     23.4        28.1       28.9
       Non-recurring special charges            0.8         8.8        0.0
       Depreciation and amortization            5.0         6.5        7.0
                                              -----       -----      -----
     Income (loss) from operations              4.6%       (9.1)%     (1.2)%
                                              -----       -----      -----
                                              -----       -----      -----

OPERATING REVENUES

     Revenues in 1997 increased by 26% to $226.9 million from $180.3 million 
in 1996 and by 25% from $144.1 million in 1995. Growth in direct dial long 
distance services revenues accounted for $48.5 million of the total increase 
in revenues from 1996 to 1997.

     DIRECT DIAL LONG DISTANCE SERVICES.  Direct dial long distance services 
revenue increased 41% to $167.9 million in 1997 compared to $119.4 million in 
1996 and 41% compared to $84.5 million in 1995. The increase in revenue is 
primarily attributable to growth in the number of customers serviced. The 
Company believes that there are opportunities for continued expansion, both 
internally and externally through acquisitions, in both of its primary 
businesses. However, because direct dial long distance services represent the 
largest market in which the Company is active, management believes that this 
business presents the Company with its greatest revenue growth opportunity. 
The Company believes that its base of operator services business affords it 
the opportunity to expand its direct dial long distance business on a more 
cost effective basis than many of its direct dial long distance competitors. 
Accordingly, the Company continues to consider potential acquisitions. While 
the Company has, from time to time, had discussions with such companies, it 
has no agreements or pending negotiations, with the exception of the Merger.

     OPERATOR SERVICES.  Operator services revenue was $57.5 million in 1997 
compared to $60.9 million in 1996 and $59.6 million in 1995. The Company 
processed 15.3 million operator services calls in 1997 compared to 17.5 
million in 1996 and 17.4 million in 1995. The Company serviced an average of 
approximately 66,100 pay telephones and 140,500 hospitality rooms per month 
for 1997, compared to an average of approximately 66,100 pay telephones and 
128,300 hospitality rooms per month for 1996 and 55,200 pay telephones and 
130,300 hospitality rooms per month for 1995. The decrease in revenue is 
principally attributable to the decrease in volume of operator services 
calls. The decrease in call volume is primarily attributed to an increasing 
awareness on the part of the consumer of the ability to select a carrier of 
choice by dialing access codes of other carriers ("dial-around"). 
Additionally, changes in federal or state regulations could negatively impact 
revenues of the Company (see "Item 1 - Business - Government Regulations").

     LOCAL SERVICES.  Local service revenue was $1.6 million in 1997. The 
Company entered the local service market during the second quarter of 1997, 
and was providing local resale service to approximately 12,900 subscriber 
lines at September 30, 1997.

OPERATING EXPENSES

     COST OF SERVICES.  The gross profit margin was 33.8%, 34.3% and 34.7% 
during 1997, 1996 and 1995, respectively. The decline in gross profit margins 
from 1995 to 1997 is primarily due to the change in the Company's revenue 
mix. The direct dial long distance services revenue as a percentage of total 
revenues has increased. Such revenues have a lower gross margin than the 
operator services revenue and accounted for 74%, 66% and 59% of total revenue 
during 1997, 1996 and 1995, respectively.

     SELLING, GENERAL AND ADMINISTRATIVE.  SG&A expenses for 1997 were $53.2 
million, representing 23.4% of revenues, compared to $50.7 million in 1996, 
or 28.1% of revenues, and $41.6 million in 1995 or 28.9% of revenues. SG&A 
expenses as a percentage of revenues have continued to decrease as a result 
of tighter expense controls and successful efforts to streamline the 
Company's operations.

     NON-RECURRING SPECIAL CHARGES.  The Company incurred $1.9 million and 
$15.8 million in non-recurring special charges in 1997 and 1996, 
respectively. The 1997 charges consisted of $1.2 million in charges 
associated with the resignation of Parris H. Holmes, Jr. as Chairman of the 
Board of the Company. The Company paid Mr. Holmes an $875,000 cash bonus and 
granted him 25,000 shares of 


                                      16

<PAGE>

restricted Common Stock. In addition, the Company incurred $669,000 in 
professional fees during 1997 in association with the Merger. Non-recurring 
special charges in 1996 represent costs incurred in connection with the 
spin-off of Billing and restructuring charges. The Company incurred $13.0 
million in certain professional and filing fees, payments required for 
terminating or restructuring employment contracts, tax payments triggered by 
the spin-off and non-cash expenses associated with the vesting of stock 
grants. The Company also incurred $2.8 million in restructuring charges. The 
charges include costs associated with consolidating customer service, credit 
and collection and other support functions; vacating certain office 
facilities; terminating certain marketing contracts; writing down excess 
assets and providing severance payments.

     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense 
was $11.3 million, $11.8 million and $10.0 million in 1997, 1996 and 1995, 
respectively. Depreciation and amortization expense as a percentage of 
revenues decreased to 5.0% in 1997 from 6.5% in 1996 and 7.0% in 1995. This 
decrease as a percentage of revenues is primarily attributable to the 
increase in revenues.

INCOME (LOSS) FROM CONTINUING OPERATIONS

     Income from continuing operations in 1997 increased to $10.3 million 
from losses of $16.5 million in 1996 and $1.6 million in 1995. Excluding 
non-recurring special charges, the Company would have reported income from 
continuing operations of $12.2 million in 1997, and a loss from continuing 
operations of $667,000 in 1996. The continued improvement in operations is 
primarily attributable to the increase in revenues and the decrease in SG&A 
expenses as a percentage of revenues, as discussed above.

OTHER EXPENSE, NET

     Net other expense was $982,000, $628,000 and $999,000 in 1997, 1996 and 
1995, respectively. The increase in 1997 from 1996 is primarily attributable 
to a higher average level of indebtedness during the past year as well as a 
decrease in other income. The decrease in 1996 from 1995 is due to a lower 
level of indebtedness in 1996.

INCOME TAXES

     The Company's effective tax rate is higher than the federal statutory 
rate due to the addition of state income taxes and certain deductions taken 
for financial reporting purposes which are not deductible for federal income 
tax purposes.

NET INCOME

     The Company reported net income of $5.3 million, $1.4 million and $12.0 
million in 1997, 1996 and 1995, respectively. The increase in 1997 from 1996 
is attributable to the increase in revenues and the decrease in SG&A expenses 
as a percentage of revenues, as discussed above. The decrease in 1996 from 
1995 is due to the non-recurring special charges incurred in 1996. In 
addition, 1996 and 1995 include $15.2 million and $14.1 million, 
respectively, in income from discontinued operations due to the spin-off of 
Billing.

EFFECTS OF SPIN-OFF OF BILLING GROUP BUSINESS

     On July 10, 1996, the Company's Board of Directors approved a plan to 
spin off the Company's Billing Group Business as a separate public company. 
To effect the spin-off, the Board approved the distribution of the 
outstanding shares of common stock of its wholly owned subsidiary that owned 
and operated the Billing Group Business, Billing, to its stockholders. The 
distribution was tax-free for federal income tax purposes to the stockholders 
of the Company, and the Company did not recognize income, gain or loss as a 
result of the distribution, except for direct spin-off costs. The spin-off 
was completed on August 2, 1996.

     The Consolidated Statements of Income included in this report reflect 
the continuing operations of the Company for the year ended September 30, 
1997, and the continuing and discontinued operations for the years ended 
September 30, 1996 and 1995. Included below is supplemental unaudited pro 
forma financial information that management believes is important to provide 
an understanding of the results of the Company on a stand-alone basis. 
Consolidated Pro Forma Statements of Operations are presented below for the 
years ended September 30, 1996, 1995, 1994 and 1993. These unaudited 
Consolidated Pro Forma Statements of Operations are based on the historical 
statements of the periods presented adjusted to reflect the items discussed 
in the accompanying Notes to the unaudited Consolidated Pro Forma Financial 
Statements. The unaudited Consolidated Pro Forma Statements of Operations 
give effect to the spin-off of Billing as if it had occurred on September 30, 
1992. The pro forma adjustments reflect the terms of the spin-off agreements, 
which are expected to have a continuing impact on the Company.

     The unaudited consolidated pro forma financial information is presented 
for informational purposes only and should be read in conjunction with the 
accompanying Notes and with the Company's historical Consolidated Financial 
Statements and Notes thereto and "Management's Discussion and Analysis of 
Financial Condition and Results of Operations" set forth herein. The pro 
forma financial statements should not be considered indicative of the 
operating results which the Company will achieve in the future if it were 
operated on an independent, stand-alone basis because, among other things, 
these statements are based on historical rather than prospective information 
and upon certain assumptions which are subject to change.

     The unaudited Consolidated Pro Forma Statements of Operations of the 
Company reflect, in management's opinion, all 


                                      17

<PAGE>

adjustments necessary to fairly state the pro forma results of operations for 
the periods presented and to make the unaudited pro forma statements not 
misleading.

                USLD COMMUNICATIONS CORP. AND SUBSIDIARIES

             CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                               (UNAUDITED)

<TABLE>
                                                              FISCAL YEAR ENDED
                                                                 SEPTEMBER 30,
                                                 -----------------------------------------  
                                                   1996       1995       1994       1993    
                                                 --------   --------   --------   --------  
<S>                                              <C>        <C>        <C>        <C>
PRO FORMA
Operating revenues:
  Direct dial long distance services (A)         $119,401   $ 84,484   $ 62,834   $ 29,673
  Operator services                                60,945     59,566     54,707     50,446
                                                 --------   --------   --------   --------  
      Total operating revenues                    180,346    144,050    117,541     80,119
Cost of services                                  118,493     94,038     72,944     47,403
                                                 --------   --------   --------   --------  
  Gross profit                                     61,853     50,012     44,597     32,716
Selling, general and administrative expense (B)    50,722     41,580     38,541     27,804
Depreciation and amortization expense              11,798     10,032      8,424      5,060
                                                 --------   --------   --------   --------  
  Loss from operations (C)                           (667)    (1,600)    (2,368)      (148)
Other expense, net                                   (628)      (999)      (865)    (1,561)
                                                 --------   --------   --------   --------  
Loss before income tax benefit                     (1,295)    (2,599)    (3,233)    (1,709)
Income tax benefit (D)                                544      1,092      1,358        718
                                                 --------   --------   --------   --------  
Net loss before extraordinary items                  (751)    (1,507)    (1,875)      (991)
Extraordinary loss                                      0          0          0       (316)
                                                 --------   --------   --------   --------  
Net loss                                          $  (751)  $ (1,507)  $ (1,875)  $ (1,307)
                                                 --------   --------   --------   --------  
                                                 --------   --------   --------   --------  

Net loss per common share                         $ (0.05)  $  (0.10)  $  (0.13)  $  (0.11)

Weighted average common shares and common
  share equivalents outstanding                    15,398     14,587     14,069     12,117
</TABLE>

NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS

(A)  The long distance and 800 services provided by the Company to Billing
     were, historically, eliminated in consolidation. The pro forma statements 
     of operations reflect an adjustment for these long distance and 800 
     services revenues to achieve arm's length pricing consistent with the 
     Telecommunications Agreement executed between the Company and Billing.

(B)  The billing clearinghouse and information management services provided by
     Billing to the Company were, historically, eliminated in consolidation. 
     The pro forma statements of operations reflect an adjustment for these 
     billing clearinghouse and information management costs to achieve arm's 
     length pricing consistent with the Zero Plus-Zero Minus Billing and 
     Information Management Services Agreement and the One-Plus Billing and 
     Information Management Services Agreement executed between Billing and 
     the Company.

(C)  In order to reflect the operating results of the Company on normalized 
     basis, these unaudited Consolidated Pro Forma Statements of Operations 
     exclude direct spin-off costs and restructuring charges. Direct spin-off 
     costs were $13.0 million for the year ended September 30, 1996, 
     respectively. Restructuring charges were $2.8 million for the year ended 
     September 30, 1996.

(D)  On the unaudited Consolidated Pro Forma Statements of Operations, the
     Company reflects a pro forma benefit for income taxes at a 42% tax rate
     for all periods presented for purposes of comparability. Actual tax amounts
     were higher in the third and fourth quarters of fiscal 1996 due to 
     nondeductibility of certain non-recurring expenses associated with the 
     spin-off and restructuring.


                                      18

<PAGE>

OUTLOOK

     The statements contained in this "Outlook" are based on management's
current expectations. These statements are forward-looking, and actual
results may differ materially.

     On September 17, 1997, the Company signed a definitive agreement to
merge with a wholly-owned subsidiary of LCI. The transaction is to be
accounted for as a pooling-of-interests business combination. The transaction
is anticipated to be tax-free to both the Company's and LCI's stockholders
and is expected to be completed by December 31, 1997. A Special Meeting of
Stockholders of the Company is scheduled for December 17, 1997, for the
purpose of considering and voting upon the Merger. There can be no assurances
that such Merger will be approved by the stockholders of the Company at the
Special Meeting, or, if approved, that the other conditions to closing will
be met or waived in order to permit consummation of the Merger. At this time,
the effect of completion of the Merger on the Company's "Outlook" and other
forward-looking statements contained in this Form 10-K is not determinable.

     The industry in which the Company operates is very competitive and is
characterized by rapid change. In addition, the Company has faced, and
continues to face, regulatory issues that have affected or that may affect
operating revenues and operating profit. The continued success of the Company
is dependent on its ability to adapt to these competitive and regulatory
changes. In developing strategies to achieve continued growth in operating
revenues and operating profits, the Company anticipates continuing geographic
expansion, expanding its product offerings and controlling costs to improve
gross margins and reduce SG&A expenses as a percentage of revenues.

     The Company continues to evaluate and take actions to improve the
profitability of its existing products through, among other things, a
regionalized approach to pricing, to identify new products to fully utilize
the Company's existing sales distribution channels and to evaluate programs
that are expected to increase revenues through partnerships with independent
sales agents. In December 1996 and February 1997, management expanded product
offerings to include Internet access and local access services, respectively.
Furthermore, the Company is in the process of expanding product offerings
based on market opportunity that will likely include frame relay, paging and
wireless services in selected markets within the next 12 to 18 months. The
Company is expanding its direct dial long distance services residential
customer base by offering long distance services to employees of commercial
customers. In addition, due to the Telecommunications Act, the Company's
opportunities in the operator services market have expanded. The
Telecommunications Act requires RBOCs desiring to enter the long distance
services market to, among other things, open their networks to competition on
a local basis as well as establish separate subsidiaries through which they
can offer in-region long distance services. In addition to the 350,000
private pay telephones the Company has traditionally marketed its services
to, operator, long distance and local services will now be marketed to an
additional 1.7 million public pay telephones, or to a total pay telephone
market of approximately 2.0 million. The Company is currently developing new
products and redesigning existing products to support the expanded market.
The Company expects that both the expanding operator services market
opportunity and the expansion of product offerings will increase revenues, as
well as strengthen customer relationships and increase customer retention.
However, as the Company is in the early stages of its marketing efforts, the
revenue increase cannot be accurately predicted and may not be material to
the Company's financial position or results of operations.

     Management believes that there are opportunities for continued
geographic expansion through acquisition and continued development of the
Company's network. The Company believes that its base of operator services
business affords it the opportunity to expand its direct dial long distance
and local services on a more cost-effective basis than many of its
competitors. The Company continues to evaluate acquisition candidates in
strategic geographic areas to expand its market. Acquisition activity is
focused primarily on companies that will grow the Company's direct dial long
distance business. Management is considering and will continue to consider
new investments in switching and related networking equipment.

     The Company believes that the introduction of the local service product
provides the Company a significant opportunity for revenue growth. The local
services industry in the United States is estimated to be a $95 billion
market. The Company is aggressively expanding into the local service business
and has signed resale agreements with two RBOCs and one LEC covering 16
states and interconnection agreements with two RBOCs and one LEC covering
seven states. The Company has signed interconnection agreements with SWBT,
U S WEST and GTE, enabling the Company to provide local service to business and
residential customers in these respective companies' local service areas. The
Company believes that it has the potential to capitalize on its relationships
with existing customers to bundle the local product with its existing
products and services and that these factors will enable the Company to
quickly and efficiently enter the local services market in targeted areas.
The Company's strategy has been to roll out three product offerings over a
nine-month period. The first was a resale product targeted to the Company's
pay telephone customers. The Company's existing relationships with pay
telephone customers provides a unique opportunity for the Company. The
Company has the potential to provide local access to a large volume of
telephone lines, yet a limited number of customers. This product was offered
in February 1997. In June 1997, a resale local product was offered to
commercial customers. This product is offered in targeted markets where the
Company has high concentration of existing long distance customers. This
strategy should provide the Company a higher than average sales success rate
and increase customer retention. In addition, it should enable the Company to
more quickly attain the critical mass necessary to justify a capital
investment in local switching equipment. The third product, a switched local
product, was offered to commercial and pay


                                      19

<PAGE>

telephone customers in selected markets in the first quarter of fiscal 1998.
This product is provided through a switch which was installed in San Antonio,
Texas, during the fourth quarter of fiscal 1997. This $1.0 million,
state-of-the-art, Lucent modular switch is initially able to service 6,000
separate subscriber lines and, with an additional investment, the next
expansion will increase the capacity to 20,000 subscriber lines. The maximum
expansion possibility of the switch is 200,000 subscriber lines. This switch
is the first of several the Company plans to install in certain cities where
the Company has a high concentration of existing customers. The bundling of
these services with operator and long distance services will enhance the
Company's product offerings and provide new and existing customers with the
integrated communication services they desire. Initially, all three products
are being sold into the Company's existing customer base in an effort to
leverage existing relationships and minimize SG&A expenses.

     The Company has implemented a number of actions designed to improve
overall profitability and reduce the Company's cost structure. With regard to
improving the Company's gross margins, management is focused on maximizing
network efficiencies by implementing technological improvements and reducing
unit costs. As discussed above, the Company installed a digital switch in
Atlanta, Georgia, and a local switch in San Antonio, Texas. Both of these
investments were made in order to reduce unit costs in the long term. In
addition, the Company has purchased a multi-vendor switch network integration
platform which will allow Advanced Intelligent Network ("AIN") services and
enhanced call processing capabilities. This platform will allow the Company
to fully integrate the local and long distance switch networks and achieve
maximum utilization of the capabilities of each. This investment is expected
to result in lower unit costs in the long term. In November 1995, the Company
joined the Associated Communication Companies of America ("ACCA"), a
cooperative that provides members with opportunities to pool $2.0 billion in
purchasing power to acquire lower transmission rates from interexchange
carriers, volume discounts on switching equipment purchases and to work in
partnership with other members to capitalize on resource sharing arrangements
such as information services and network sharing. The Company already has
realized, from this arrangement, lower network costs and expects continued
benefits as the organization broadens its member and vendor base.

     In an effort to improve sales force productivity, streamline functional
processes and reduce future SG&A expenses, the Company has implemented and is
developing new, technologically advanced sales tools. An example of one such
implementation is the Company's deployment of notebook computers to the field
sales and support staff. These notebook computers have software that allows
the Company's sales force to quickly prepare sales proposals and make
enhanced marketing presentations on site at customer locations. In connection
with the advanced phase of this project, the Company is developing software
which will allow the sales force to use the notebook computer to
electronically transmit sales order information into the Company's
centralized order system automatically. This sales automation tool will not
only accelerate the Company's revenue flow as customer orders will be
received on an on-line, real-time basis, but should also streamline the sales
and order processing functions and thus reduce SG&A expenses. In addition,
management has streamlined and reorganized certain corporate, administrative
and overhead functions to align its infrastructure with the smaller operation
that resulted from the spin-off.

     Over the past several years, the Company has undertaken a program of
developing new products and expanding its existing service offerings,
geographic focus and network. In connection with these new products and
services, the Company has made significant investments in circuitry, switches
and related equipment and software. These investments, generally, are timed
to coincide closely with anticipated revenue growth.  In addition, the
Company continues to increase its sales and marketing, customer support,
network operations and field services commitments in anticipation of the
expansion of its customer base in targeted geographic markets. The Company
expects to continue to expand the breadth and scale of its network and
related sales and marketing, customer support and operations activities. The
Company attempts to carefully plan these expansion efforts to minimize the
effect on SG&A expenses; however, these expansion efforts could cause the
Company to incur significant increases in expenses, from time to time, in
anticipation of potential future growth in the Company's customer base and
targeted geographic markets.

     On February 8, 1996, President Clinton signed the Telecommunications Act
into law. This act allows the RBOCs to seek authority from the FCC to provide
"in-region" long distance services in competition with the Company. To obtain
this authority, each state agency is required to certify to the FCC that the
applicant RBOC has satisfied a legislative "checklist" that outlines the
steps required for an RBOC to open its network to competition on a local
basis, which would allow the Company to offer local service in RBOC service
areas. It is reasonable to expect that the conditions for RBOC entry will be
met in the near future. As a result, carriers in the interLATA long distance
business today, such as the Company, will encounter new, formidable
competition. The viability of competition in the local market depends greatly
upon the conditions under which such service is made available by the RBOCs.
On July 18, 1997, the Eighth Circuit Court of Appeals vacated certain
important provisions of the FCC's Interconnection Order and, if let stand,
will have the effect of allowing each state to determine how to set prices
for unbundled network elements, and allow RBOCs greater flexibility when
negotiating local interconnection agreements with competitive local exchange
carriers. These decisions will result in disparity in opportunities among
states and between carriers. Additionally, as a result of the
Telecommunications Act, the FCC has undertaken to restructure the means by
which long distance access services are priced, and the manner in which
universal service subsidies are collected and re-distributed. The charges
currently assessed in support of these subsidies are a significant component
of the Company's overall line costs. The charges currently assessed are
equitable and allow for competitive pricing within the industry. However, the
latest FCC decision is expected to create a price discrepancy among long
distance carriers. Refer to "Item 1 - Business - Government Regulations"
within this Form 10-K for a detailed discussion of this matter. The Company
cannot predict


                                      20

<PAGE>

whether the ultimate dispensation of the FCC's rulemakings or further
adjudication of the aforementioned appeals will have a material impact upon
the Company's financial position or results of operations. The continued
success of the Company is dependent on its ability to adapt to these
competitive and regulatory changes.

     The Company's future results of operations and the other forward-looking
statements contained in this "Outlook," in particular the statements
regarding revenue growth and reducing cost structure, involve a number of
risks and uncertainties. In addition to the factors discussed above, other
factors that could cause actual results to differ materially are the
following: business conditions and the general economy, regulatory
developments, competitive factors, introduction and acceptance of new
products, pricing pressures, availability of leased network facilities, risk
of collection of accounts receivable, technological advancements, regulatory
factors, litigation and other factors as discussed in the cautionary
statements and elsewhere herein.

     The Company believes that it has the competitive product offerings,
personnel and financial resources for continued business success; however,
future revenues, costs and profits all are influenced by a number of factors
and are subject to certain risks and uncertainties, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash balance decreased to $4.8 million at September 30,
1997, from $8.8 million at September 30, 1996. This decrease is attributable
to the purchase of certain computer and network equipment in the fourth
quarter of 1997. Working capital was $26.2 million at September 30, 1997,
compared to $20.1 million at September 30, 1996. The Company's current ratio
was 1.7:1 at September 30, 1997 and September 30, 1996. The Company's cash
flow provided by operations was $16.0 million for fiscal 1997 and $1.6
million for 1996. Improved cash flow provided by operations was primarily due
to increased profitability of the Company.

     Accounts receivable increased to $43.1 million at September 30, 1997
from $35.9 million at September 30, 1996. This increase is attributable
primarily to a higher level of direct dial long distance services revenues in
1997 compared to 1996. Federal income tax receivable increased to $7.3
million at September 30, 1997 from $0 at September 30, 1996. This increase is
attributable to a refund of federal income taxes due to the Company. Trade
accounts payable and accrued liabilities increased to $30.5 at September 30,
1997 from $24.5 million at September 30, 1996 due to the overall expansion of
the Company's business. Prepaids and other current assets increased to $7.2
million at September 30, 1997 from $6.0 million at September 30, 1996. This
increase is due to an increase in prepaid line costs and notes receivable.
The increase in other assets to $8.8 million at September 30, 1997 from $4.9
million at September 30, 1996 is due to an increase in purchased customer
lists.

     Capital expenditures amounted to approximately $17.1 million during
1997. These expenditures were related primarily to the purchase of
telecommunications equipment, computer equipment and software and office
furniture. During 1997, the Company financed approximately $4.1 million of
equipment through long-term borrowings. During fiscal 1998, the Company
anticipates capital expenditures of $21.0 million to $25.0 million to service
the Company's projected growth. Approximately $14.0 million to $16.0 million
of these capital expenditures are expected to be purchases of
telecommunications equipment, approximately $5.5 million to $7.5 million are
expected to be purchases of computer hardware and software to develop systems
to support the anticipated growth of the Company's business and the remainder
is expected to be for purchases of office furniture and equipment. The
Company anticipates financing these capital expenditures primarily through
term notes with various lending institutions. Although line of credit
commitments have been made to the Company by various lenders for equipment
purchases, there is no assurance that the Company will be able to obtain
satisfactory financing for these capital expenditures.

     In fiscal 1997, the Company entered into two revolving credit receivable
financing facilities and one equipment financing facility. One revolving
facility allows the Company to borrow against its own operator services
accounts receivable. Any borrowings under this facility will bear interest at
the prime rate plus 4.0%. The second revolving facility is a one-year,
annually renewable facility and allows the Company to borrow against its own
direct dial long distance services accounts receivable. Any borrowings under
this facility will bear interest at the prime rate plus .5%. This financing
facility terminates on January 31, 1998. The equipment financing facility
will bear interest at the five-year treasury bond rate, as defined in the
agreement, plus approximately 3.0%. This financing facility terminates on
December 31, 1997. At September 30, 1997, the Company had  $21.0 million
available for borrowing and did not have any amounts borrowed under these
facilities.

     In addition, the Company has a $10.0 million equipment financing
facility with an interest rate at the 30-day commercial paper rate, as
defined in the agreement, plus 2.70%. The agreement provided for a one-year
period during which the Company could finance up to $10.0 million in
equipment on an interest payment only basis. During fiscal 1997, this
interest-only period was extended through December 31, 1997. Upon completion
of this period, the outstanding borrowings will convert to a series of term
notes with 20% of the total amount borrowed due in each of the next five
years. Any amounts not due in a given year may be prepaid and reborrowed at
the Company's discretion. At September 30, 1997, the Company had $4.1 million
borrowed and $5.9 million available for borrowing under this facility. No
amounts were outstanding under this facility at September 30, 1996.


                                      21

<PAGE>

     The Company has various fixed rate notes with interest rates ranging
from 6.75% to 11.0%, due in varying amounts through August 2001. The proceeds
from the issuance of these notes were used to acquire certain computer and
telecommunications equipment and office furniture. The loans are secured by
the assets acquired with the proceeds of such notes. Certain of these notes
are also guaranteed by Billing.

     Historically, the Company has obtained financing for capital
expenditures through term debt and capital lease agreements that were
guaranteed and cross-collateralized by the Company and Billing. These debt
agreements were negotiated based on the strength of the consolidated
financial statements, earnings and cash flow of the consolidated group. Most
of these debt agreements were secured by the assets of all the subsidiaries
within the consolidated group prior to the spin-off. In connection with the
spin-off, the Company received from certain lenders loan agreement amendments
or separate loan agreements whereby the subject indebtedness is secured by
only the Company's assets. In other cases, the existing guarantees and
security arrangements between the Company and Billing remained in place for
the duration of the facility. In this regard, the Company has agreed to pay
Billing a credit support fee of 1% of the average annual outstanding balance.

     The credit facilities discussed above contain various restrictions and
financial ratio maintenance requirements. Under one of its credit facilities,
the Company is required to maintain a quarterly ratio of consolidated
operating income, as defined in the agreement, to consolidated fixed charges
of 1.5 to 1.0. Further, the Company is required to maintain a ratio of funded
debt, as defined in the agreement, to total capitalization of not greater
than 60% and total debt to total capitalization of not greater than 85%.
Other agreements require the Company to maintain cash flow coverage ratios,
as defined in the agreements, ranging between 1.25 and 1.40, a minimum
tangible net worth ranging between $30.0 million and $35.0 million, minimum
total liabilities to net worth ratio of 1.20, a current ratio of greater than
1.50 and working capital in excess of $18.0 million. Under one agreement, the
Company is prohibited from paying a cash dividend on its Common Stock.
Cross-default provisions of the Company's most significant credit facilities
may place the Company in default of such facilities should it fail to satisfy
provisions of certain other loan agreements. Under the Company's most
significant credit facilities, USLD has guaranteed the obligations of its
subsidiaries. The Company was in compliance with all required covenants at
September 30, 1997 and 1996. In order to remain in compliance with certain
debt covenants, the Company is required to obtain written consent from
certain lenders regarding any proposed merger activity. The Company expects
that these consents will be obtained in connection with the Merger.

     The Company continually evaluates business opportunities, including
potential acquisitions. The primary focus of the Company's acquisition
activities is to make additional acquisitions that will grow the Company's
direct dial long distance business.  One or more of such acquisitions could
result in a substantial change in the Company's operations and financial
condition. The success of the Company's acquisition activities will depend,
among other things, on the availability of acquisition candidates, the
availability of funds to finance acquisitions and the availability of
management resources to oversee the operation of acquired businesses. As
consideration for any acquisitions, the Company may issue Common Stock,
preferred stock, convertible debt or other securities, in addition to or in
lieu of the payment of cash, that could result in dilution of the percentage
ownership of public stockholders. The Company does not intend to seek
stockholder approval for any such acquisitions or security issuances unless
required by applicable laws or regulations. While the Company has, from time
to time, had discussions with communications companies, it has no agreements
or pending negotiations, with the exception of the Merger noted above.

     The Company's operations and expansion into new geographic markets will
continue to require substantial capital investment for the development and
procurement of transmission facilities and telecommunications and office
equipment. In addition, any acquisitions that the Company may consummate may
require substantial capital investment. The Company believes that it has the
ability to continue to secure long-term equipment financing and that this
ability, combined with cash flow generated from operations and available
borrowing capacity under its existing credit facilities, will be sufficient
to fund capital expenditures, working capital needs and debt repayment
requirements for the foreseeable future.

SEASONALITY

     Approximately 95% of the Company's direct dial long distance revenues is
generated by commercial customers and, accordingly, the Company experiences
general decreases in long distance revenues around national holidays when
commercial traffic is reduced. The Company typically experiences decreases in
operator services revenues in the fall and winter months as pay telephone
usage declines due to cold and inclement weather in many parts of the United
States. As a result of the seasonal variations discussed above, revenue
reported in the Company's first fiscal quarter ending December 31 (which
includes the Thanksgiving, Christmas and New Year's Eve holidays), historically,
has been the lowest level of any quarter of the year. Conversely, due to
increased traffic from pay telephones during the spring and summer months and
a lower concentration of national holidays, the Company has historically
experienced its highest revenue levels in the third and fourth quarters of
the fiscal year. Because the Company's fixed operating expenses do not decrease
during the first fiscal quarter, the Company's profitability is also, generally,
at its lowest level for any quarter of the year.


                                      22

<PAGE>

EFFECT OF INFLATION

     Inflation is not a material factor affecting the Company's business.
Prices charged to the Company for switching equipment and transmission costs
have not materially changed during the year. General operating expenses such
as salaries, employee benefits and occupancy costs are, however, subject to
normal inflationary pressures.

NEW ACCOUNTING STANDARDS

     The Company is not currently, nor does it expect to be, materially
affected by any new standards recently issued by the Financial Accounting
Standards Board.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     None.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company and the related
report of the Company's independent public accountants thereon are included
in this report at the page indicated.

ITEM                                                                       PAGE
----                                                                       ----
Report of Independent Public Accountants                                    24
Consolidated Balance Sheets at September 30, 1997 and 1996                  25
Consolidated Statements of Income for the Years Ended
  September 30, 1997, 1996 and 1995                                         26
Consolidated Statements of Stockholders' Equity for the
  Years Ended September 30, 1997, 1996 and 1995                             27
Consolidated Statements of Cash Flows for the Years
  Ended September 30, 1997, 1996 and 1995                                   28
Notes to Consolidated Financial Statements                                  29


                                      23

<PAGE>

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
USLD Communications Corp.:

     We have audited the accompanying consolidated balance sheets of USLD
Communications Corp. (a Delaware corporation) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of USLD
Communications Corp. and subsidiaries as of September 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.

                                               ARTHUR ANDERSEN LLP

San Antonio, Texas
November 14, 1997



                                     24
<PAGE>

                  USLD COMMUNICATIONS CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
              (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

                                    ASSETS
                                                            SEPTEMBER 30,
                                                      ------------------------
                                                         1997           1996
Current assets:                                       ---------      ---------
  Cash and cash equivalents                           $   4,816      $  8,842
  Accounts receivable, net of allowances for
   doubtful accounts of $2,827 (1997) and
   $2,519 (1996)                                         43,124        35,867
  Federal income tax receivable                           7,302             0
  Prepaids and other                                      7,239         6,002
                                                      ---------      ---------
    Total current assets                                 62,481        50,711
                                                      ---------      ---------
Property and equipment                                   76,161        60,110
  Less accumulated depreciation and amortization        (37,637)      (30,251)
                                                      ---------      ---------
    Net property and equipment                           38,524        29,859
                                                      ---------      ---------
Other assets:
  Excess of cost over net assets acquired, net of
   accumulated amortization of $2,634 (1997)
   and $2,065 (1996)                                     13,234        13,804
Other assets, net of accumulated amortization
 of $6,901 (1997) and $4,892 (1996)                       8,764         4,870
                                                      ---------      ---------
    Total assets                                      $ 123,003      $ 99,244
                                                      ---------      ---------
                                                      ---------      ---------
         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Trade accounts payable                              $  21,524      $ 10,909
  Accrued liabilities                                     9,039        13,581
  Current portion of long-term debt                       5,572         5,854
  Current portion of obligations under capital leases       109           294
                                                      ---------      ---------
    Total current liabilities                            36,244        30,638
                                                      ---------      ---------
Long-term debt, less current portion                      5,852        10,146
Line of credit                                            4,158             0
Other liabilities                                           614           143
Deferred tax liability                                    5,398            52

Commitments and contingencies (See Notes 7 and 15)

Stockholders' equity:
  Preferred stock, $0.01 par value, 10,000,000 shares
   authorized, no shares issued or outstanding at
   September 30, 1997 or 1996                                 0             0
  Common stock, $0.01 par value, 50,000,000 shares
   authorized; 16,493,524 and 15,255,977 shares
   issued and 16,289,423 and 15,051,876 shares outstanding
   at September 30, 1997 and 1996, respectively             165           153
  Additional paid-in capital                             62,147        54,554
  Retained earnings                                      10,332         5,465
  Treasury stock                                         (1,907)       (1,907)
                                                      ---------      ---------
    Total stockholders' equity                           70,737        58,265
                                                      ---------      ---------
    Total liabilities and stockholders' equity        $ 123,003      $ 99,244
                                                      ---------      ---------
                                                      ---------      ---------

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

                                       25

<PAGE>

                  USLD COMMUNICATIONS CORP. AND SUBSIDIARIES
                                       
                       CONSOLIDATED STATEMENTS OF INCOME
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
                                                                 FOR THE YEAR
                                                              ENDED SEPTEMBER 30,
                                                    -------------------------------------
                                                       1997          1996          1995
                                                    ---------     ---------     ---------
<S>                                                 <C>           <C>           <C>
Operating revenues:
  Direct dial long distance services                $ 167,866     $ 119,401     $  84,484
  Operator services                                    57,468        60,945        59,566
  Local services                                        1,559             0             0
                                                    ---------     ---------     ---------
    Total operating revenues                          226,893       180,346       144,050
Cost of services                                      150,214       118,493        94,038
                                                    ---------     ---------     ---------
  Gross profit                                         76,679        61,853        50,012
Selling, general and administrative expense            53,181        50,722        41,580
Non-recurring special charges (See Note 4)              1,902        15,809             0
Depreciation and amortization expense                  11,333        11,798        10,032
                                                    ---------     ---------     ---------
  Income (loss) from continuing operations             10,263       (16,476)       (1,600)
Other income (expense):
Interest income                                           490           894           682
Interest expense                                       (1,456)       (1,356)       (1,643)
Other, net                                                (16)         (166)          (38)
                                                    ---------     ---------     ---------
    Total other expense                                  (982)         (628)         (999)
                                                    ---------     ---------     ---------
Income (loss) from continuing operations before
 income tax benefit (provision)                         9,281       (17,104)       (2,599)
Income tax benefit (provision)                         (4,030)        3,350           516
                                                    ---------     ---------     ---------
Net income (loss) from continuing operations            5,251       (13,754)       (2,083)
Discontinued operations (See Note 3):
   Income from discontinued operations, net of
    income taxes of  $9,292 (1996) and $8,661 
    (1995)                                                  0        15,161        14,118
                                                    ---------     ---------     ---------
Net income                                          $   5,251     $   1,407     $  12,035
                                                    ---------     ---------     ---------
                                                    ---------     ---------     ---------
Net income (loss) per common share, primary:
  Continuing operations                             $    0.32     $   (0.89)    $   (0.14)
  Discontinued operations                                0.00          0.98          0.97
                                                    ---------     ---------     ---------
  Net income per common share                       $    0.32     $    0.09     $    0.83
                                                    ---------     ---------     ---------
                                                    ---------     ---------     ---------
  Weighted average common shares and common share
   equivalents outstanding                             16,662        15,398        14,587
                                                    ---------     ---------     ---------
                                                    ---------     ---------     ---------

Net income (loss) per common share, fully diluted:
  Continuing operations                             $    0.31     $   (0.89)    $   (0.14)
  Discontinued operations                                0.00          0.98          0.96
                                                    ---------     ---------     ---------
  Net income per common share                       $    0.31     $    0.09     $    0.82
                                                    ---------     ---------     ---------
                                                    ---------     ---------     ---------

  Weighted average common shares and common share
   equivalents outstanding                             16,756        15,473        14,617
                                                    ---------     ---------     ---------
                                                    ---------     ---------     ---------
</TABLE>
                   The accompanying notes are an integral part of 
                      these consolidated financial statements.


                                         26

<PAGE>
                USLD COMMUNICATIONS CORP. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
          FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
                                (IN THOUSANDS)
<TABLE>
                                                 COMMON STOCK       PREFERRED STOCK    ADDITIONAL
                                                ---------------     ----------------    PAID-IN     RETAINED    TREASURY
                                                SHARES   AMOUNT     SHARES    AMOUNT    CAPITAL     EARNINGS     STOCK
                                                ------   ------     ------    ------    -------     --------    --------
<S>                                             <C>      <C>        <C>       <C>       <C>         <C>         <C>
Balances at September 30, 1994                  12,932    $129         0        $0      $42,540     $  8,211    $(1,664)
   Business combinations                           175       2         0         0            1          227          0
   Exercise of stock options and
    warrants                                     1,080      11         0         0        4,805            0          0
   Issuance of common stock                        195       2         0         0        2,422            0          0
   Issuance of treasury stock                     (100)     (1)        0         0         (949)           0        950
   Purchase of treasury stock                        0       0         0         0            0            0     (1,075)
   Other capital contribution                        0       0         0         0          485            0          0
   Net income                                        0       0         0         0            0       12,035          0
                                                ------   ------     ------    ------    -------     --------    --------
Balances at September 30, 1995                  14,282     143         0         0       49,304       20,473     (1,789)

   Issuance of common stock                        223       2         0         0        1,210            0          0
   Return of escrowed shares                         0       0         0         0            0            0       (118)
   Exercise of stock options and warrants          751       8         0         0        3,913            0          0
   Other capital contribution                        0       0         0         0          127            0          0
   Spin-off of Billing Information Concepts 
    Corp.                                            0       0         0         0            0      (16,415)         0
   Net income                                        0       0         0         0            0        1,407          0
                                                ------   ------     ------    ------    -------     --------    --------
Balances at September 30, 1996                  15,256     153         0         0       54,554        5,465     (1,907)

   Issuance of common stock                        116       1         0         0          846            0          0
   Exercise of stock options and warrants          884       9         0         0        6,499            0          0
   Business combinations                           238       2         0         0          248         (384)         0
   Net income                                        0       0         0         0            0        5,251          0
                                                ------   ------     ------    ------    -------     --------    --------
Balances at September 30, 1997                  16,494    $165         0        $0      $62,147     $ 10,332    $(1,907)
                                                ------   ------     ------    ------    -------     --------    --------
                                                ------   ------     ------    ------    -------     --------    --------
</TABLE>
                The accompanying notes are an integral part of 
                  these consolidated financial statements.


                                    27

<PAGE>

                USLD COMMUNICATIONS CORP. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
<TABLE>
                                                                   FOR THE YEAR
                                                                ENDED SEPTEMBER 30,
                                                      ---------------------------------------
                                                         1997           1996           1995
                                                      ---------       --------       --------
<S>                                                   <C>             <C>            <C>
Cash flows from operating activities:
  Net income (loss) from continuing operations        $   5,251       $(13,754)      $ (2,083)
  Adjustments to reconcile net income (loss) from
   continuing operations to net cash
   provided by operating activities:
    Depreciation and amortization                        11,333         11,798         10,032
    Provision for losses on accounts receivable           9,156          8,388          6,231
    Deferred compensation                                     0          4,078            255
    Loss on write-down of property and equipment             35          1,084            171
    Changes in current assets and liabilities, net of
     effects from acquisitions of direct
     dial long distance companies:
      Increase in accounts receivable                   (17,115)       (13,001)       (12,882)
      Decrease (increase) in prepaids and other          (2,391)          (766)           600
      Increase (decrease) in accounts payable            10,052            161         (4,222)
      Increase (decrease) in accrued liabilities         (4,419)         6,897          1,869
      Increase (decrease) in other liabilities            4,122         (3,266)         1,843
                                                       --------       --------       --------
Net cash provided by operating activities                16,024          1,619          1,814
                                                       --------       --------       --------
Net cash provided by discontinued operations                  0         16,661          6,549
                                                       --------       --------       --------
Cash flows from investing activities:
  Purchases of property and equipment                   (17,111)       (11,007)        (9,761)
  Purchases of customer lists                            (5,016)             0              0
  Acquisition of direct dial long distance companies,
   net of cash acquired                                       0              0           (175)
  Proceeds from sale of assets                                0             45            632
  Other investing activities                               (216)          (335)           (54)
                                                       --------       --------       --------
Net cash used in investing activities                   (22,343)       (11,297)        (9,358)
                                                       --------       --------       --------
Cash flows from financing activities:
  Proceeds from issuance of debt                          1,741          3,500          4,784
  Payments on debt                                       (6,231)        (5,742)        (5,512)
  Payments on capital leases                               (304)          (458)        (1,267)
  Proceeds from line of credit, net                       4,018              0              0
  Proceeds from issuance of common stock, net of
   issuance costs                                         3,069          4,559          4,065
  Purchase of treasury stock                                  0              0         (1,075)
                                                       --------       --------       --------
Net cash provided by financing activities                 2,293          1,859            995
                                                       --------       --------       --------
Net increase (decrease) in cash and cash equivalents     (4,026)         8,842              0
Cash and cash equivalents, beginning of year              8,842              0              0
                                                       --------       --------       --------
Cash and cash equivalents, end of year                 $  4,816       $  8,842       $      0
                                                       --------       --------       --------
                                                       --------       --------       --------
</TABLE>

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

                                      28
<PAGE>

                  USLD COMMUNICATIONS CORP. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       SEPTEMBER 30, 1997, 1996 AND 1995

NOTE 1. BUSINESS ACTIVITY

     USLD Communications Corp. ("USLD") was redomesticated from Canada and 
reincorporated under the Delaware Corporation Law Act in the State of 
Delaware, United States of America, in 1987. USLD (individually, or together 
with its subsidiaries, the "Company") offers an integrated group of 
communications services including direct dial long distance and local 
services, prepaid calling cards, travel cards, Internet access, data 
transmission and calling center services. The Company's network consists of a 
digital switching system which provides nationwide, largely fiber-optic, 
access throughout the United States.

     The Company is a fully-integrated, switch-based communications company 
currently providing direct dial long distance services to small and 
medium-sized commercial customers and, to a lesser extent, residential 
customers. In addition, the Company provides operator assisted services for 
pay telephones, hotels, motels, university dormitories and hospitals. In 
February 1997, the Company began offering local services to pay telephone and 
commercial customers. In fiscal 1997, direct dial long distance services 
represented approximately three-fourths of the Company's revenues, while 
operator services represented approximately one-fourth of revenues. Local 
services revenues were not significant in fiscal 1997.

     On August 19, 1997, stockholders of the Company approved a proposal to 
amend the Company's Restated Certificate of Incorporation to change the name 
of the Company from U.S. Long Distance Corp. to USLD Communications Corp.

     On September 17, 1997, the Company signed a definitive agreement to 
merge with a wholly-owned subsidiary of LCI International, Inc. ("LCI") (the 
"Merger"). Under the terms of the agreement, for each of the Company's 
outstanding shares of Common Stock, LCI will exchange a fraction of one share 
of LCI common stock having a value of $20.00 based upon the average price of 
LCI common stock for the 20 trading days ending three days before the Merger, 
subject to certain exceptions. The transaction is to be accounted for as a 
pooling-of-interests business combination. The transaction is anticipated to 
be tax-free to both the Company's and LCI's stockholders and is expected to 
be completed by December 31, 1997. A Special Meeting of Stockholders of the 
Company is scheduled for December 17, 1997, for the purpose of considering 
and voting upon the Merger. There can be no assurances that such Merger will 
be approved by the stockholders of the Company at the Special Meeting, or, if 
approved, that the other conditions to closing will be met or waived in order 
to permit consummation of the Merger.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts 
of USLD and its wholly owned subsidiaries. All significant intercompany 
accounts and transactions have been eliminated in consolidation. Certain 
current period and prior period amounts have been reclassified for 
comparative purposes.

     On August 2, 1996, the Company completed the spin-off of its commercial 
billing clearinghouse and information management services business, Billing 
Information Concepts Corp. ("Billing"). The spin-off has been accounted for 
as a discontinued operation and, accordingly, the Company restated its 
consolidated financial statements for all periods presented prior to that 
date in accordance with Accounting Principles Board ("APB") Opinion No. 30. 
Financial disclosures for all periods presented which are prior to the 
spin-off reflect that restatement.

     Cash was historically managed by a centralized cash management 
department in Billing. Consequently, cash was not allocated among the 
Company's subsidiaries and was recorded on the balance sheet of Billing. 
Total consolidated cash was $22.9 million at September 30, 1995, none of 
which is reflected on the Company's statement of cash flows for financial 
reporting purposes.

ESTIMATES IN THE FINANCIAL STATEMENTS

     The preparation of 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 date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period. Actual results could differ from those estimates.

                                       29

<PAGE>

REVENUE RECOGNITION POLICIES

     The Company recognizes revenue from its direct dial long distance, 
operator and local services as such services are performed.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Depreciation and amortization 
are computed on a straight-line basis over the estimated useful lives of the 
related assets, which range from three to ten years. Upon disposition, the 
cost and related accumulated depreciation and amortization are removed from 
the accounts and the resulting gain or loss is reflected in other income for 
that period. Expenditures for maintenance and repairs are charged to expense 
as incurred. Direct installation costs and major improvements are capitalized.

EXCESS OF COST OVER NET ASSETS ACQUIRED

     Excess of cost over net assets acquired represents the excess of the 
consideration paid over the fair value of the net assets acquired. The 
initial acquisition of the direct dial long distance business is being 
amortized using the straight-line method over 40 years. All subsequent 
acquisitions of direct dial long distance businesses are being amortized over 
20 years. The Company annually assesses the appropriateness of the asset 
valuations and the amortization periods.

OTHER ASSETS

     Other assets include financing costs related to the issuance of 
long-term debt, which have been deferred and are amortized over the life of 
each respective agreement, acquisition costs of direct dial long distance 
customer bases, which are amortized over the expected useful life of the 
customer bases, and costs incurred to acquire operator services agreements, 
which are amortized over the life of each respective contract. In addition, 
the cash surrender value of executive and director deferred compensation life 
insurance, long-term deposits and the long-term portion of notes receivable 
have been included in other assets.

OTHER LIABILITIES

     Other liabilities include deferred compensation costs associated with 
the executive and director deferred compensation plans.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value amounts of the Company's financial instruments 
have been determined by the Company using appropriate valuation methodologies 
and approximate their recorded book values at September 30, 1997 and 1996. 
The carrying values of the Company's cash, debt and all other financial 
instruments approximate their fair market values.

ADVERTISING EXPENSE

     The Company charges advertising costs to expense as the costs are 
incurred. Total advertising expense was $1.5 million, $1.1 million and 
$543,000 for the years ended September 30, 1997, 1996 and 1995, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

     In March 1995, the Financial Accounting Standards Board ("FASB") issued 
Statement of Financial Accounting Standards (the "SFAS") No. 121, "Accounting 
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be 
Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for 
impairment whenever events or changes in circumstances indicate that the 
carrying amount of an asset may not be recoverable. In fiscal 1997, the 
Company determined that there was no impairment of long-lived assets. In 
fiscal 1996, the Company determined that certain computer equipment, customer 
lists and goodwill were impaired and, accordingly, wrote down these assets by 
$1.8 million.

INCOME TAXES

     Deferred tax liabilities and assets are recorded based on enacted income 
tax rates that are expected to be in effect in the period in which the 
deferred tax liability or asset is expected to be settled or realized. A 
change in the tax laws or rates results in adjustments to the deferred tax 
liabilities or assets. The effects of such adjustments are required to be 
included in  income in the period in which the tax laws or rates are changed.

                                       30

<PAGE>

NET INCOME (LOSS) PER COMMON SHARE

     Net income (loss) per common share was computed by dividing net income 
(loss) applicable to the Company's common stock, par value $0.01 per share 
(the "Common Stock"), by the weighted average number of common shares and 
common share equivalents outstanding during the applicable period. The 
weighted average number of shares outstanding during each fiscal year differs 
from the number of shares outstanding at each year end due to assumed 
conversions of options and warrants that were outstanding during the 
respective periods.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and 
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 
125 provides accounting and reporting standards for, among other things, the 
transfer and servicing of financial assets, such as factoring receivables 
with recourse. SFAS No. 125 is effective for transfers and servicing of 
financial assets occurring after December 31, 1996, and is to be applied 
prospectively. Earlier or retroactive application is not permitted. In 
December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date 
of Certain Provisions of SFAS No. 125." SFAS No. 127 amends the effective 
date for certain provisions of SFAS No. 125 to December 31, 1997. Management 
of the Company does not anticipate that the adoption of SFAS No. 125 will 
have a material impact on the Company's financial position or results of 
operations.

     In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," 
which establishes standards for computing and presenting earnings per share 
("EPS") for entities with publicly held common stock or potential common 
stock. SFAS No. 128 simplifies the standards for computing EPS previously 
found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable 
to international EPS standards. It replaces the presentation of "primary EPS" 
with a presentation of "basic EPS," which excludes dilution. It also requires 
dual presentation of basic and diluted EPS on the face of the income 
statement for all entities with complex capital structures. SFAS No. 128 is 
effective for financial statements for periods ending after December 15, 1997 
and early adoption is not permitted. Had SFAS No. 128 been applied, pro forma 
basic EPS from continuing operations would have been $0.34, $(0.94) and 
$(0.16) for the years ended September 30, 1997, 1996 and 1995, respectively. 
Pro forma diluted EPS from continuing operations would have been $0.32, 
$(0.89) and $(0.14) for the years ended September 30, 1997, 1996 and 1995, 
respectively. Management of the Company does not anticipate that the adoption 
of SFAS No. 128 will have a material impact on the Company's earnings per 
share.

NOTE 3.  DISCONTINUED OPERATIONS

     On August 2, 1996, the Company completed the spin-off of Billing, its 
billing clearinghouse and information management services business. The 
spin-off has been accounted for as a discontinued operation and, accordingly, 
the Company restated its Consolidated Financial Statements for all periods 
presented prior to that date. The spin-off was a tax-free distribution of 
100% of the common stock of Billing to the Company's stockholders. Revenue of 
the discontinued operations of Billing was $85.8 million and $80.8 million in 
fiscal 1996 and 1995, respectively. Net income of the discontinued operations 
of Billing was $15.2 million and $14.1 million in fiscal 1996 and 1995, 
respectively. In connection with the spin-off, the Company entered into an 
agreement with Billing under which the intercompany payable/receivable 
balances were forgiven. Additionally, Billing agreed to  reimburse the 
Company for direct out-of-pocket expenses associated with the spin-off and to 
transfer cash to the Company to provide the Company a working capital balance 
of $21.5 million at the spin-off date. The net effect of this agreement 
resulted in the Company recording the distribution as a dividend in the 
amount of $16.4 million for financial statement purposes.

NOTE 4. NON-RECURRING SPECIAL CHARGES

     Effective June 2, 1997, the Chairman of the Board of the Company 
resigned. This action completed the separation of the Company and its former 
wholly owned subsidiary, Billing, that began with the distribution of all of 
the common stock of Billing to the stockholders of the Company in August 
1996. The Company paid the former Chairman an $875,000 cash bonus and granted 
him 25,000 shares of restricted Common Stock, for a total $1.2 million 
one-time charge for the year ended September 30, 1997.

     Additionally, $669,000 of professional fees incurred in association with 
the Merger are included in non-recurring special charges for the year ended 
September 30, 1997.

     Direct spin-off costs recorded as operating expenses and included in 
non-recurring special charges in the year ended September 30, 1996 were 
approximately $13.0 million and include professional fees, tax payments 
triggered by the spin-off, payments called for under employment agreements 
and costs associated with accelerated vesting of stock grants.

     In fiscal 1996, the Company recorded restructuring charges of $2.8 
million. These restructuring charges are included in non-recurring special 
charges and include costs associated with consolidating customer service, 
credit and collection and other support functions, vacating certain office 
facilities, terminating certain marketing contracts, writing down excess 
assets and providing severance payments.

                                      31
<PAGE>

NOTE 5. STATEMENTS OF CASH FLOWS

     Cash payments and non-cash activities during the periods indicated were 
as follows:

                                                    YEAR ENDED SEPTEMBER 30,
                                                    1997     1996      1995
                                                    ----     ----      ----
                                                        (IN THOUSANDS)

Cash payments for interest                         $1,456   $ 1,393   $1,685
Cash payments for income taxes                      1,316       187      414
Noncash investing and financing activities:
  Assets acquired in connection with business
   combinations                                       471         0      939
  Liabilities assumed in connection with business
   combinations                                       593         0      351
  Common stock issued in connection with business
   combinations                                       250         0      896
  Capital lease and debt obligations incurred          53     1,159      470
  Tax benefit recognized in connection with stock
   option exercises                                 3,602     1,421    1,236
  Issuance of restricted stock                        358         0        0
  Exercise of warrants to purchase common stock       235         0        0
  Return of escrowed treasury stock                     0       118        0
  Reimbursable spin-off costs due from Billing          0       704        0
  Dividend pursuant to spin-off of Billing              0    34,345        0

     For purposes of determining cash flows, the Company considers all 
temporary cash investments purchased with an original maturity of three 
months or less to be cash equivalents.

NOTE 6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

                                                            SEPTEMBER 30,
                                                       -----------------------
                                                         1997           1996
                                                       --------       --------
                                                           (IN THOUSANDS)

Communications equipment                               $ 48,003       $ 40,573
Furniture, fixtures and equipment                        23,693         15,018
Leasehold improvements                                    2,830          2,779
Equipment held under capital leases                       1,635          1,740
                                                       --------       --------
Less accumulated depreciation                           (37,637)       (30,251)
                                                       --------       --------

     Net property and equipment                        $ 38,524       $ 29,859
                                                       --------       --------
                                                       --------       --------

NOTE 7. DEBT

Long-term debt is comprised of the following:
                                                            SEPTEMBER 30,
                                                       -----------------------
                                                         1997           1996
                                                       --------       --------
                                                           (IN THOUSANDS)

Fixed interest rate term notes                          $11,424        $16,000
Less - current portion                                    5,572          5,854
                                                        -------        -------

     Long-term debt, less current portion               $ 5,852        $10,146
                                                        -------        -------
                                                        -------        -------

     In fiscal 1997, the Company entered into two revolving credit receivable 
financing facilities and one equipment financing facility. One revolving 
facility allows the Company to borrow against it own operator services 
accounts receivable. Any borrowings under this facility will bear interest at 
the prime rate plus 4.0%. At September 30, 1997, the Company had $5.0 million 
available for borrowing and did not have any amounts borrowed under this 
facility. The second revolving facility is a one-year, annually renewable 
facility and 

                                      32
<PAGE>

allows the Company to borrow against its own direct dial long distance 
services accounts receivable. Any borrowings under this facility will bear 
interest at the prime rate plus .5%. At September 30, 1997, the Company had 
$10.0 million available for borrowing and did not have any amounts borrowed 
under this facility. This financing facility terminates on January 31, 1998 
and is collateralized by the related accounts receivable and the Company's 
cash accounts. The equipment financing facility will bear interest at the 
five-year treasury bond rate, as defined in the agreement, plus approximately 
3.0%. At September 30, 1997, the Company had $6.0 million available for 
borrowing and did not have any amounts borrowed under this facility. This 
financing facility terminates on December 31, 1997.

     In addition, the Company has a $10.0 million equipment financing 
facility with an interest rate at the 30-day commercial paper rate, as 
defined in the agreement, plus 2.70%. The agreement provided for a one-year 
period during which the Company could finance up to $10.0 million in 
equipment on an interest payment only basis. During fiscal 1997, this 
interest-only period was extended through December 31, 1997. Upon completion 
of this period, the outstanding borrowings will convert to a series of term 
notes with 20% of the total amount borrowed due in each of the next five 
years. Any amounts not due in a given year may be prepaid and reborrowed at 
the Company's discretion. At September 30, 1997, the Company had $4.2 million 
borrowed and $5.9 million available for borrowing under this facility. No 
amounts were outstanding under this facility at September 30, 1996.

     The Company has various fixed rate notes with interest rates ranging 
from 6.75% to 11.0%, due in varying amounts through August 2001. The proceeds 
from the issuance of these notes were used to acquire certain computer and 
telecommunications equipment and office furniture. The loans are secured by 
the assets acquired with the proceeds of such notes. Certain of these notes 
are also guaranteed by Billing.

     Historically, the Company has obtained financing for capital 
expenditures through term debt and capital lease agreements that were 
guaranteed and cross-collateralized by the Company and Billing. These debt 
agreements were negotiated based on the strength of the consolidated 
financial statements, earnings and cash flow of the consolidated group. Most 
of these debt agreements were secured by the assets of all the subsidiaries 
within the consolidated group prior to the spin-off. In connection with the 
spin-off, the Company received from certain lenders loan agreement amendments 
or separate loan agreements whereby the subject indebtedness is secured by 
only the Company's assets. In other cases, the existing guarantees and 
security arrangements between the Company and Billing remained in place for 
the duration of the facility. In this regard, the Company has agreed to pay 
Billing a credit support fee of 1% of the average annual outstanding balance.

     The credit facilities discussed above contain various restrictions and 
financial ratio maintenance requirements. Under one of its credit facilities, 
the Company is required to maintain a quarterly ratio of consolidated 
operating income, as defined in the agreement, to consolidated fixed charges 
of 1.5 to 1.0. Further, the Company is required to maintain a ratio of funded 
debt, as defined in the agreement, to total capitalization of not greater 
than 60% and total debt to total capitalization of not greater than 85%. 
Other agreements require the Company to maintain cash flow coverage ratios, 
as defined in the agreements, ranging between 1.25 and 1.40, a minimum 
tangible net worth ranging between $30.0 million and $35.0 million, minimum 
total liabilities to net worth ratio of 1.20, a current ratio of greater than 
1.50 and working capital in excess of $18.0 million. Under one agreement, the 
Company is prohibited from paying a cash dividend on its Common Stock. 
Cross-default provisions of the Company's most significant credit facilities 
may place the Company in default of such facilities should it fail to satisfy 
provisions of certain other loan agreements. Under the Company's most 
significant credit facilities, USLD has guaranteed the obligations of its 
subsidiaries. The Company was in compliance with all required covenants at 
September 30, 1997 and 1996. In order to remain in compliance with certain 
debt covenants, the Company is required to obtain written consent from 
certain lenders regarding any proposed merger activity. The Company expects 
that these consents will be obtained in connection with the Merger.

     Scheduled maturities for long-term debt and the line of credit for the 
years ending September 30, 1998 through 2002 are as follows (in thousands):

          Year Ending September 30,
             1998                                             $ 5,572
             1999                                               3,949
             2000                                               2,463
             2001                                               1,516
             2002                                                 878
             Thereafter                                         1,204
                                                              -------
          Total debt                                          $15,582
                                                              -------
                                                              -------

NOTE 8. LEASES

     The Company leases certain equipment and office space under operating 
leases. Rental expense for fiscal 1997, 1996 and 1995, was $2.2, $2.5 and 
$2.6 million, respectively. Future minimum lease payments under 
non-cancelable operating leases at September 30, 1997, are as follows (in 
thousands):

                                      33
<PAGE>

          Year Ending September 30,
             1998                                             $ 2,444
             1999                                               1,874
             2000                                               1,658
             2001                                               1,373
             2002                                               1,305
             Thereafter                                         1,908
                                                              -------
          Total minimum lease payments                        $10,562
                                                              -------
                                                              -------

     The Company also leases various computer and telecommunications 
equipment under capital lease arrangements. Future minimum lease payments 
under these capital leases, together with the present value of the net 
minimum lease payments at September 30, 1997, are $133,000 and are due in 
varying amounts through 1999.

NOTE 9. SHARE CAPITAL

     At September 30, 1997, 1996 and 1995, the Company had 204,101, 204,101 
and 187,232 shares of treasury stock, respectively, carried at cost.

     Other capital contributions in fiscal 1996 and 1995 are from a former 
director and officer of the Company and represent a settlement of certain 
securities matters. No cash dividends were paid on the Company's Common Stock 
during fiscal 1997, 1996 or 1995.

     On December 12, 1995, the Board of Directors adopted the USLD 
Communications Corp. 1995 Employee Restricted Stock Plan (the "Restricted 
Stock Plan"), which provides for the awarding of restricted stock to officers 
and certain key employees of the Company. An aggregate of 1,000,000 shares of 
Common Stock are reserved for awards under the Restricted Stock Plan, as 
amended. The number of shares of Common Stock to be awarded to an employee 
and other terms of the award are determined by a committee of disinterested 
persons who will administer the Restricted Stock Plan. The Restricted Stock 
Plan provides for certain restrictions upon the sale of the stock. 
Subsequently, the Restricted Stock Plan was amended to allow for immediate 
vesting at the discretion of the committee. No shares were granted under this 
plan in fiscal 1997. In fiscal 1996, 188,000 shares of stock were granted 
under this plan. Compensation expense of $0 and $553,000 was recognized upon 
the amortization of deferred compensation for the years ended September 30, 
1997 and 1996, respectively. An additional $3.4 million of compensation 
expense was recognized in fiscal 1996 due to the acceleration of vesting of 
stock grants pursuant to the spin-off of Billing and is included in 
non-recurring special charges. At September 30, 1997, 487,000 shares were 
available for granting  under this plan.

     Additionally, during 1997, the Company granted 25,000 shares of 
restricted stock to a former officer and director in connection with his 
resignation as Chairman of the Board of the Company. This stock was granted 
outside of any plan and expense of $358,000 was charged to non-recurring 
special charges during the year ended September 30,1997.

     On April 12, 1996, the Company, upon authorization by its Board of 
Directors, adopted a Shareholder Rights Plan ("Rights Plan") and declared a 
dividend of one preferred share purchase right on each share of its 
outstanding Common Stock. The rights will become exercisable if a person or 
group acquires 15% or more of the Company's Common Stock or announces a 
tender offer, the consummation of which would result in ownership by a person 
or group of 15% or more of the Common Stock. These rights, which expire on 
April 12, 2006, entitle stockholders to buy one ten-thousandth of a share of 
a new series of participating preferred shares at a purchase price of $90.00 
per one ten-thousandth of a preferred share. The Rights Plan was designed to 
assure that stockholders receive fair and equal treatment in the event of any 
proposed takeover of the Company. Subsequently, on September 17, 1997, the 
Rights Plan was amended to exclude the Merger as an event that would cause 
the shareholder rights to become exercisable.

NOTE 10. STOCK OPTIONS AND STOCK PURCHASE WARRANTS

     The Company has granted stock options to directors, employees and other 
affiliated parties as follows:
                                                                   WEIGHTED
                                                  NUMBER OF        AVERAGE
                                                    SHARES       EXERCISE PRICE
                                                  ----------     --------------
Outstanding, September 30, 1996                    2,404,130         $ 3.33
  Canceled                                          (148,855)        $ 5.51
  Granted                                          1,111,500         $13.48
  Exercised                                         (771,187)        $ 2.88
                                                   ---------

Outstanding, September 30, 1997                    2,595,588         $ 7.70
                                                   ---------
                                                   ---------

                                      34
<PAGE>

     The following table summarizes information about stock options 
outstanding at September 30, 1997:

<TABLE>
                                OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                  ------------------------------------------------  -----------------------------
                    NUMBER      WEIGHTED-AVERAGE                      NUMBER
   RANGE OF       OUTSTANDING      REMAINING      WEIGHTED-AVERAGE  EXERCISABLE  WEIGHTED-AVERAGE
EXERCISE PRICES    AT 9/30/97   CONTRACTUAL LIFE   EXERCISE PRICE    AT 9/30/97   EXERCISE PRICE
---------------   -----------   ----------------  ----------------  -----------  ----------------
<S>               <C>           <C>               <C>               <C>          <C>
$0.39 - $ 2.91      744,445        2.1 years           $ 2.55          564,471         $2.43
$4.38 - $ 8.75      886,643        4.9 years           $ 4.97          265,337         $4.72
$9.75 - $15.38      964,500        5.5 years           $14.18                0         $0.00
</TABLE>

     The Company has a Director Plan and an Employee Option Plan. Outstanding 
options under both plans call for an exercise price equal to the fair market 
value of the stock on the date of the grant, three-year vesting periods and 
expiration dates of up to four years from the date of the grant. The Employee 
Option Plan provides for the granting of incentive stock options and 
nonqualified stock options to full-time employees and officers of the 
Company. The Director Plan provides for the granting of incentive stock 
options to directors of the Company. Stock options to purchase an aggregate 
of 317,500 shares were outstanding at September 30, 1997 under the provisions 
of the Director Plan and expire at varying dates through June 2, 2003. There 
were 405,000 shares remaining to be issued under the Director Plan at 
September 30, 1997. Stock options to purchase an aggregate of 2,278,088 
shares were outstanding at September 30, 1997 under the provisions of the 
Employee Option Plan and expire at varying dates through August 20, 2003. At 
September 30, 1997, there were 56,870 shares remaining to be issued under the 
Employee Option Plan.

     The excess of the market value of the Common Stock on the date granted 
over the exercise price of such options results in compensation expense to 
the Company over the vesting period. No compensation expense was recognized 
by the Company during fiscal 1997. Approximately $145,000 and $255,000 of 
compensation expense was recognized by the Company during fiscal 1996 and 
1995, respectively. There were no deferred compensation costs associated with 
stock options netted against additional paid-in capital at September 30, 1997 
or 1996.

     Stock warrants to purchase 469,741 shares of Common Stock were 
outstanding at September 30, 1995. These warrants were issued in connection 
with the sale of senior subordinated notes during the fiscal year ended 
September 30, 1991 and were exercisable at $0.01 per share. Warrants to 
purchase 469,741 and 608,459 shares of Common Stock were exercised in fiscal 
1996 and 1995, respectively. There were no such stock purchase warrants 
associated with this transaction outstanding at September 30, 1997 or 1996.

     During the fiscal years ended September 30, 1995 and 1992, the Company 
granted warrants to purchase 100,000 and 125,000 shares of Common Stock, 
respectively, pursuant to two telecommunications service agreements. The 
exercise price of the warrants was equal to the market value of the Company's 
Common Stock on the date of grant. Pursuant to the spin-off of Billing, the 
exercise price associated with these warrants was adjusted to $3.24 per 
share. The warrants vest ratably over the contract periods. Warrants to 
purchase 112,500 shares of Common Stock were exercised in fiscal 1997. At 
September 30, 1997, 1996 and 1995, there were 112,500, 225,000 and 225,000, 
respectively, of these stock purchase warrants outstanding.

     In addition, during fiscal 1997, the Company granted warrants to 
purchase 100,000 shares of Common Stock, pursuant to a telecommunications 
service agreement. The exercise price of the warrants was equal to the market 
value of the Company's Common Stock on the date of the grant, or $8.25 per 
share. The warrants vest ratably over the contract period. At September 30, 
1997, 100,000 of these stock purchase warrants were outstanding. The 
estimated fair value of these warrants was $2.22 per share. The fair value 
was estimated on the grant date using the Black-Scholes option-pricing model, 
with an expected dividend yield of 0.0%, expected stock price volatility of 
46.9%, risk-free interest rate of 6.1% and expected life of 1.6 years.

     In connection with the August 2, 1996 spin-off of Billing, further 
discussed in Note 3, the Company effected a tax-free distribution of 100% of 
the common stock of Billing to the Company's stockholders. Immediately prior 
to that distribution, Billing, under its employee stock plans, granted 
options to purchase Billing common stock to each holder of an outstanding 
option to purchase shares of the Company's Common Stock under the USLD 
Communications Corp. 1990 Employee Stock Option Plan, as amended (the 
"Employee Option Plan") and the USLD Communications Corp. 1993 Non-Employee 
Director Plan, as amended (the "Director Plan"), respectively. In connection 
with the grant of the Billing options, the exercise price of the Company's 
options was adjusted via a formula adjustment designed to preserve the 
economic value of the Company's options existing immediately prior to the 
distribution. Except for the formula adjustment, the terms of each of the 
Company's adjusted option are substantially the same as those in effect prior 
to the distribution. The per share exercise price of the Company's options 
was adjusted based on the relative fair market values of the underlying 
common stock of each of the two companies, or by a factor of 25.9%. The fair 
market value per share of common stock of each company was defined as the 
average of the last sales price per share of that common stock on the Nasdaq 
National Market System for each of the ten consecutive trading days 
immediately subsequent to the date of distribution.

                                       35
<PAGE>

     The Merger agreement provides that, at the effective date of the Merger, 
each stock option and warrant granted by the Company ("USLD Stock Option") to 
purchase shares of Common Stock which is outstanding and unexercised shall be 
assumed by LCI and converted into an option or warrant to purchase common 
stock of LCI ("LCI Common Stock") in such amount and at such exercise price 
as is provided below and otherwise having the same terms and conditions as 
are in effect immediately prior to the effective date of the Merger. The 
number of shares of LCI Common Stock to be subject to the new option or 
warrant will be equal to the number of shares that the holder of such USLD 
Stock Option would be entitled to receive pursuant to the Merger had such 
holder exercised such option or warrant in full immediately prior to the 
effective date of the Merger (whether or not such option or warrant was in 
fact exercisable). The exercise price per share of LCI Common Stock under the 
new option or warrant will be equal to the aggregate exercise price for the 
Company's Common Stock purchasable pursuant to such USLD Stock Option divided 
by the number of shares of LCI Common Stock deemed purchasable pursuant to 
such USLD Stock Option.

     Pursuant to the Company's Employee Option Plan, Director Plan and 
certain contract stock option grants (the "USLD Stock Option Plans"), the 
Merger will result in each USLD Stock Option, whether or not fully vested, 
becoming fully vested and exercisable. Any USLD Stock Option not exercised 
will be assumed and converted into an immediately exercisable option to 
purchase LCI Common Stock on the terms described above. The vesting period of 
outstanding stock purchase warrants will be unaffected by the Merger. In 
addition, pursuant to the terms of the spin-off with Billing, Billing 
granted, under its 1996 Employee Comprehensive Stock Plan and 1996 
Non-Employee Director Plan, options to purchase Billing common stock to each 
holder of an outstanding option to purchase shares of the Company's Common 
Stock under the USLD Stock Option Plans. The Billing options were granted on 
the basis of an option exercisable for one share of Billing common stock for 
every one share of the Company's Common Stock subject to the outstanding USLD 
Stock Options. Each Billing option agreement provides that the Merger will 
result in each Billing option held by the Company's employees, whether or not 
fully vested, becoming fully vested and exercisable. Billing options held by 
Billing employees will be unaffected by the Merger.

NOTE 11. PRO FORMA STOCK-BASED COMPENSATION EXPENSE

     The Company has adopted SFAS No. 123, "Accounting For Stock-Based 
Compensation" but will continue to account for employee stock-based 
compensation under the provisions of APB Opinion No. 25, "Accounting for 
Stock Issued to Employees." Accordingly, no compensation expense has been 
recognized for options granted to employees where the exercise price is equal 
to the market price of the underlying stock at the date of the grant. It is 
the policy of the Company that the exercise price of all options granted be 
equal to the market price of the underlying stock at the date of the grant. 
In the event that options were issued with an exercise price less than the 
market price of the underlying stock on the date of grant, the Company is 
aware that it would be required to recognize compensation expense for those 
options under provisions of APB Opinion No. 25. In addition, in accordance 
with the adoption of SFAS No. 123 and the provisions of APB Opinion No. 25, 
no compensation expense has been recognized for employee stock purchases 
under the USLD Communications Corp. Employee Stock Purchase Plan (the "ESPP").

     Had compensation expense for the Company's employee stock option grants 
and ESPP purchases been determined based on the fair value at the grant date 
for awards and purchases in 1997 and 1996, the Company's net income and 
earnings per share would have been reduced to the pro forma amounts indicated 
below (in thousands, except per share amounts):

                                                       FISCAL YEAR ENDED
                                                         SEPTEMBER 30,
                                                       -----------------
                                                         1997     1996
                                                        ------   ------
      Net income, as reported                           $5,251   $1,407
      Net income, pro forma                              4,337    1,287
     
      Primary earnings per share, as reported           $ 0.32   $ 0.09
      Primary earnings per share, pro forma               0.26     0.08
     
      Fully diluted earnings per share, as reported     $ 0.31   $ 0.09
      Fully diluted earnings per share, pro forma         0.26     0.08

     The fair value of each option grant is estimated on the date of grant 
using the Black-Scholes option-pricing model with the following 
weighted-average assumptions used for grants in 1997 and 1996:

                                                        FISCAL YEAR ENDED
                                                           SEPTEMBER 30,
                                                      ---------------------
                                                         1997       1996
                                                      ---------   ---------
      Expected dividend yield                              0.0%        0.0%
      Expected stock price volatility                     45.6%       45.6%
      Risk-free interest rate                         5.6%-5.9%   5.5%-6.0%
      Expected life of options                        1-3 Years   1-3 Years

     The weighted-average estimated fair value of market price options 
granted during fiscal 1997 and 1996 was $3.73 and $1.27 per share, 
respectively.

                                       36
<PAGE>

     The 1997 volatility percentage was also used in the fiscal 1996 
option-pricing calculation because the August 2, 1996 spin-off of Billing 
created an anomaly in the Company's stock price. The stock price in the 
months prior to the spin-off fluctuated at a rate greater than is typical for 
the Company's stock and thus created an unusually high volatility rate. Use 
of this rate in the estimated fair value calculation would have caused a 
distorted fair value.

     Because the SFAS No. 123 method of accounting has been applied only to 
grants after October 1, 1995, the resulting pro forma compensation expense 
may not be representative of that to be expected in future periods.

NOTE 12. BENEFIT PLANS

     The Company adopted the USLD Communications Corp. 401(k) Retirement Plan 
(the "Retirement Plan") effective January 1, 1992. Participation in the 
Retirement Plan is offered to eligible employees of the Company or its 
subsidiaries. Generally, all employees of the Company or its subsidiaries who 
are 21 years of age and who have completed one year of service during which 
they worked at least 1,000 hours are eligible for participation in the 
Retirement Plan.

     The Retirement Plan is a defined contribution plan which allows 
participants to make voluntary salary deferral contributions, on a pretax 
basis, of between 1% and 15% of their compensation in the form of voluntary 
payroll deductions up to a maximum amount as statutorily determined. In 
fiscal 1997 and 1996, the Company made matching contributions of 50% of the 
first 3% of the participant's contribution. In fiscal 1995, the Company made 
matching contributions at a percentage determined annually of 25% of the 
first 6% of the participant's contribution. The Company may, from time to 
time, make additional discretionary contributions. No discretionary 
contributions were made in fiscal 1997, 1996 or 1995. During fiscal 1997, 
1996 and 1995, the Company's contributions totaled approximately $122,000, 
$162,000, and $150,000, respectively.

     The Company adopted the USLD Communications Corp. Executive Compensation 
Deferral Plan (the "Executive Deferral Plan") and the USLD Communications 
Corp. Director Compensation Deferral Plan (the "Director Deferral Plan"), 
effective January 1, 1994. Participation in the Executive Deferral Plan is 
offered to selected employees occupying management positions who are 
determined by the Company's Board of Directors, from time to time, to be 
eligible to participate in the Executive Deferral Plan. Participation in the 
Director Deferral Plan is offered to individuals occupying a position as an 
outside director. The Executive and Director Deferral Plans are defined 
contribution plans which provide that participants may make voluntary 
contributions, on a pretax basis, of between 1% and 100% of their eligible 
compensation. During fiscal 1997, the Company did not make any matching 
contributions under the Executive Deferral Plan or the Director Deferral 
Plan. During fiscal 1996 and 1995, under the Executive Deferral Plan, the 
Company made matching contributions equal to the lesser of 100% of a 
participant's contributions or an amount determined by a formula established 
by the plan. Matching contributions under the Director Deferral Plan were 33% 
of the participant's contributions during fiscal 1996 and 1995. The Company 
has the right to make matching contributions of a different amount or no 
contributions under both plans. During fiscal 1997, 1996 and 1995, the 
Company contributed $16,000, $189,000 and $102,000, respectively, to the 
Executive Deferral Plan and the Director Deferral Plan.

     Additionally, the Company adopted the USLD Communications Corp. 
Executive Qualified Disability Plan (the "Disability Plan"), effective 
January 1, 1994. The Disability Plan provides long-term disability benefits 
for certain employees occupying management positions through disability 
insurance coverage purchased by the Company and through Company funded 
payments. Benefits under the Disability Plan are provided directly by the 
Company based on definitions contained in the insurance policies.

     In addition, the Company created an Employee Stock Purchase Plan (the 
"ESPP") effective July 1, 1995 which was established under the requirements 
of Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP 
enables employees who have completed at least six months of continuous 
service with the Company to purchase shares of the Company's Common Stock at 
a 15% discount through voluntary payroll deductions.

NOTE 13. INCOME TAXES

     The income tax benefit (provision) is comprised of the following:

                                                 YEAR ENDED SEPTEMBER 30,
                                             --------------------------------
                                               1997         1996        1995
                                             -------       ------     -------
                                                       (IN THOUSANDS)
Current                                      $ 1,457       $  119     $ 2,574
Deferred                                      (5,487)       3,231      (2,058)
                                             -------       ------     -------
     Income tax benefit (provision)          $(4,030)      $3,350     $   516
                                             -------       ------     -------
                                             -------       ------     -------


                                      37
<PAGE>

     The income tax benefit for fiscal 1997, 1996 and 1995 differs from the 
amount computed by applying the statutory federal income tax rate of 35% for 
fiscal 1997, 1996 and 1995 to income (loss) from continuing operations before 
taxes. The reasons for these differences were as follows:

<TABLE>
                                                          YEAR ENDED SEPTEMBER 30,  
                                                         -------------------------  
                                                           1997      1996     1995  
                                                         -------    ------   -----  
                                                               (IN THOUSANDS) 
     <C>                                                 <C>       <C>       <C>
     Computed income tax benefit (provision) 
       at statutory rate                                 $(3,249)  $ 5,986   $ 910  
     Reductions (increases) in taxes resulting from:
       State income taxes                                   (510)     (311)   (146)  
       Amortization of asset valuations in excess of tax    (154)      (98)   (165)  
       Non-deductible expenses related to spin-off             0    (2,455)      0   
       Non-deductible costs related to the Merger           (245)        0       0   
       Other, net                                            128       228     (83)  
                                                         -------   -------   -----  
     Income tax benefit (provision)                      $(4,030)  $ 3,350   $ 516
                                                         -------   -------   -----  
                                                         -------   -------   -----  
</TABLE>

     The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:

<TABLE>
                                                                  SEPTEMBER 30,
                                                                ------------------ 
                                                                 1997       1996
                                                                -------    ------- 
                                                                  (IN THOUSANDS)
     <C>                                                        <C>        <C>
     Deferred tax assets:
       Deferred compensation                                    $     0    $ 1,713  
       Expense provisions                                           373      1,460
                                                                -------    ------- 
         Total gross deferred tax assets                            373      3,173
     Deferred tax liabilities:
       Tax depreciation and amortization in excess of book       (5,323)    (2,556)
       Prepaid expenses                                            (226)      (262)
       Other                                                       (319)      (407)
                                                                -------    ------- 
         Total gross deferred tax liabilities                    (5,868)    (3,225)
     Deferred tax assets not related to assets or liabilities:
       Tax benefit of operating loss carryforward                    97          0
                                                                -------    ------- 
         Net deferred tax liability                             $(5,398)   $   (52)
                                                                -------    ------- 
                                                                -------    ------- 
</TABLE>

     During fiscal 1996, the Company incurred expenses related to the 
spin-off of Billing. Under federal income tax law, expenses incurred for 
effecting a corporate reorganization are non-deductible capital expenditures. 
Approximately $7.0 million of the spin-off expenses were determined to be 
non-deductible, resulting in a reduction of the income tax benefit of 
approximately $2.5 million.

     During fiscal 1996, the Company recognized a tax gain related to the 
liquidation of its wholly owned foreign subsidiary, Mega Plus Dialing, Inc. 
("MPDI"). The gain arose in conjunction with the redemption of common and 
preferred shares of Billing held by MPDI. The Company paid Canadian federal 
taxes totaling US $3.3 million on the gain. This tax payment generated a 
foreign tax credit for U.S. federal income tax purposes equal to this amount.

     In fiscal 1996, the Company was notified by the Internal Revenue Service 
(the "IRS") that a fiscal 1992 transaction between a wholly owned foreign 
subsidiary (Mega Plus Dialing, Inc.) and its U.S. subsidiary (Billing, 
formerly Zero Plus Dialing, Inc.) was proposed to be treated differently by 
the IRS than originally characterized by the Company. The IRS district office 
issued a report that proposed an assessment of taxes, penalties and interest. 
The assessment was appealed to the appellate division of the IRS. The 
appellate division of the IRS agreed with the Company's original treatment of 
the transaction. In addition, the appellate division also agreed to 
depreciation adjustments to the Company's tax returns for fiscal years 1992 
through 1994 that will result in a refund of taxes for those years. In fiscal 
1997, the Company and the IRS each signed a closing letter stating that a 
refund of $1.2 million is to received by the Company. The Company is 
currently waiting on final approval of the refund by the Joint Committee of 
Taxation of the U. S. Congress, which is required for refunds over certain 
materiality thresholds. Consequently, the income tax refund of $1.2 million 
has been recorded in federal income tax receivable at September 30, 1997.

NOTE 14. RELATED PARTY TRANSACTIONS

     Until June 2, 1997, the Company and Billing shared a common individual 
on their respective boards of directors. Therefore, the companies were 
considered related parties for financial disclosure purposes through June 2, 
1997. At September 30, 1996, the Company had accounts receivable from Billing 
of $1.3 million, as well as notes receivable of $1.0 million. In addition, 
the Company 


                                      38

<PAGE>

had accounts payable to Billing of $1.1 million at September 30, 1996. 
Operating revenues recognized from Billing were $1.9 million, $3.6 million 
and $1.7 million for the years ended September 30, 1997, 1996 and 1995, 
respectively. In addition, the Company incurred operating expenses related to 
billing and collection fee charges from Billing of $3.4 million, $5.3 million 
and $5.3 million for the years ended September 30, 1997, 1996 and 1995, 
respectively.

     For purposes of governing certain ongoing relationships between the 
Company and Billing after the spin-off and to provide for an orderly 
transition, the Company and Billing entered into certain agreements. Such 
agreements include: (i) the Distribution Agreement, providing for, among 
other things, the spin-off and the division between the Company and Billing 
of certain assets and liabilities and material indemnification provisions; 
(ii) the Benefits Plans and Employment Matters Allocation Agreement, 
providing for certain allocations of responsibilities with respect to benefit 
plans, employee compensation, and labor and employment matters; (iii) the Tax 
Sharing Agreement pursuant to which the Company and Billing agreed to 
allocate tax liabilities that relate to periods prior to and after the 
Distribution Date; (iv) the Transitional Services and Sublease Agreement 
pursuant to which the Company provides certain services on a temporary basis 
and subleases certain office space to Billing and Billing provides certain 
services to the Company on a temporary basis; (v) the Zero Plus-Zero Minus 
Billing and Information Management Services Agreement and the One-Plus 
Billing and Information Management Services Agreement pursuant to which 
Billing is to provide billing clearinghouse and information management 
services to the Company for an initial period of three years; and (vi) the 
Telecommunications Agreement pursuant to which the Company is to provide long 
distance telecommunications services to Billing for an initial period of 
three years; and (vii) the Leasing Agreement, whereby the Company and Billing 
agree to pay certain usage charges. It is the intention of the Company and 
Billing that the Transitional Services and Sublease Agreement, the Zero 
Plus-Zero Minus Billing and Information Management Services Agreement, the 
One-Plus Billing and Information Management Services Agreement, the 
Telecommunications Agreement, and the Leasing Agreement reflect terms and 
conditions similar to those that would have been arrived at by independent 
parties bargaining at arm's length; however, there can be no assurances that 
such agreements are on terms at least as favorable as could have been 
obtained from unaffiliated third parties.

     From time to time, the Company has loaned to or was otherwise owed 
amounts from certain officers and directors of the Company. The highest 
amount outstanding of advances to officers and directors during fiscal 1997 
and 1996 was $75,000 and $212,000, respectively. The amount outstanding at 
September 30, 1997 and 1996 was $75,000.

     During fiscal 1997, the Company contracted for certain policies of 
insurance from a company partially owned by a director of the Company. The 
amount paid for these insurance policies was not material to the Company's 
financial position or results of operations.

     A director of the Company is Chairman and Chief Executive Officer of a 
diversified media company. Pursuant to on-going agreements, the Company 
purchases advertising from this company and this company purchases long 
distance services from the Company. The amount associated with these 
agreements is not material to the Company's financial position or results of 
operations.

NOTE 15. COMMITMENTS AND CONTINGENCIES

     The Company is involved in various claims, legal actions and regulatory 
proceedings arising in the ordinary course of business. The Company believes 
it is unlikely that the final outcome of any of the claims or proceedings to 
which the Company is a party would have a material adverse effect on the 
Company's financial position or results of operations; however, due to the 
inherent uncertainty of litigation, there can be no assurance that the 
resolution of any particular claim or proceeding would not have a material 
adverse effect on the Company's results of operations for the fiscal period 
in which such resolution occurs.

     The Company is obligated to pay a minimum of approximately $8.0 million 
during fiscal 1998 for usage charges under service agreements with certain 
long distance carriers. The Company anticipates exceeding the minimum usage 
volumes with these vendors.

     In the event the Merger is consummated, the Company is obligated to pay 
approximately $1.8 million in lump-sum severance payments to certain officers 
of the Company.

NOTE 16. REGULATORY MATTERS

BILLED PARTY PREFERENCE

     In April 1992, the Federal Communications Commission (the "FCC") 
tentatively proposed adopting a "Billed Party Preference" ("BPP") system for 
automatically routing operator assisted calls to each caller's pre-selected 
carrier, fundamentally changing the nature of the operator services industry. 
Comments were requested by the FCC during 1992 and again in 1994. In each 
case, industry participants overwhelmingly opposed the idea as too costly, 
relative to the perceived benefits of such a system.

     On March 9, 1995, the FCC requested industry comment on two proposals it 
had recently received relative to the BPP


                                      39

<PAGE>

proceeding. In an ex-parte petition, the National Association of Attorney's 
General ("NAAG") suggested that the FCC modify its current branding 
requirement such that operator service providers ("OSPs") would be required 
to announce at the beginning of each call more specific information for 
obtaining access to alternate carriers (the "NAAG Petition"). Another 
petition filed by a coalition of industry members, including most of the 
Regional Bell Operating Companies ("RBOCs"), two competitive access 
providers, the American Public Communications Counsel ("APCC") and the 
Competitive Telecommunications Association ("CompTel"), recommended that the 
FCC impose certain rate thresholds for interstate operator assisted services, 
which the FCC would presume to be reasonable, and any OSP electing to charge 
rates higher than such threshold would be required to first prove to the FCC 
that such rates are justified based upon the underlying costs of the service 
(the "APCC Rate Cap Proposal"). The NAAG Petition was proposed to remain in 
effect until such time that BPP is adopted and fully implemented. The APCC 
Rate Cap Proposal was proposed to obviate the need to consider any further 
action regarding BPP.

     Subsequently, in June 1996, the FCC issued a Second Further Notice of 
Proposed Rulemaking ("SFNPRM") in this proceeding. In it, the FCC proposed 
adopting a rule which would require OSPs to announce the rates for certain 
calls to the billed party prior to connecting the call, thereby allowing the 
billed party to disconnect such call without incurring any unwanted charges. 
In 1996, the FCC released its Second Request for Comment in the SFNPRM, 
soliciting technical and other administrative details to support the proposed 
announcement requirement. Most commentors objected to the discriminatory 
nature of the proposal, which would have some carriers announcing rates while 
others would not. If any of these proposals, which remain under 
consideration, are adopted by the FCC, the Company's operator service traffic 
could be materially adversely affected.

MFJ LEGISLATION

     On February 8, 1996, President Clinton signed the Telecommunications Act 
of 1996 (the "Telecommunications Act") into law. This act allows the RBOCs to 
seek authority from the FCC to provide "in-region" long distance services. To 
obtain this authority, each state agency is required to certify to the FCC 
that the applicant RBOC has satisfied a legislative "checklist" that outlines 
the steps required for an RBOC to open its network to competition on a local 
basis. These steps include the provision of competitive network interconnection,
unbundled access to network elements and other  necessary access to poles, 
ducts, conduits and rights-of-way, non-discriminatory access to white pages 
listings and telephone number assignments, local number portability, toll 
dialing parity and local service resale. The FCC is required to consult with 
the Department of Justice ("DOJ") to assist in determining if an applicant 
RBOC's entry into the long distance business violates any antitrust standards 
the DOJ considers appropriate. Ninety days after receiving such an application,
the FCC is required to render its decision. RBOCs are required to establish 
separate subsidiaries through which they could first offer in-region long 
distance services. RBOCs may provide out-of-region long distance services 
subject to existing laws and regulations governing long distance 
communications.

     To date, no RBOC has been granted authority for in-region interLATA 
services, because the provisions set forth above have not been satisfied by 
any RBOC. However, many entities, including the Company, have reached 
interconnection agreements with one or more of the RBOCs to date, and many 
states have adopted rules governing local competition. It is reasonable to 
expect that the conditions for RBOC entry will be met in the near future, and 
carriers in the interLATA long distance business today, such as the Company, 
will encounter new, formidable competition.

INTERCONNECTION ORDER

     On August 8, 1996, the FCC released its Interconnection Order, designed 
to implement federal regulations governing the opening of the local 
telecommunications market to competition. After a Circuit Court Appeal and 
temporary stay of certain aspects of this decision, the Circuit Court released
its opinion on July 18, 1997. In that opinion, the Court stated that state 
regulatory agencies, and not the FCC, are authorized to establish pricing 
rules for local unbundled network elements. Furthermore, the Court found that 
states have jurisdiction over disputes regarding interconnection agreements 
between carriers. Finally, the Court stated that Local Exchange Companies 
("LECs") were not required to offer any carrier requesting interconnection 
the best components of different previously reached agreements, contrary to 
the FCC's original Interconnection Order. Rather, the LECs are required to 
offer those agreements in their entirety to requesting interconnectors.

     The three aspects in this decision will lead to the implementation of 
local competition to different degrees in each state. Furthermore, carriers 
will be able to negotiate different and unique terms of interconnection with 
each LEC, leading, therefore, to a disparity of opportunity to enter and 
compete in the local market. To the extent that LECs offer better rates or 
discounts in exchange for volume commitments or other contingencies which 
cannot be met by non-first tier carriers, those carriers will be at a 
competitive disadvantage. To the extent that such carriers are relying on 
expeditious and non-discriminatory entry into the local telecommunications 
market as an integral part of their overall growth strategy, such a 
development could have a negative effect. The Company cannot determine if 
such developments will unfold, or, if so, to what extent they affect the 
Company's efforts to enter the local exchange market.


                                      40

<PAGE>

ACCESS CHARGE REFORM

     On May 6, 1997, pursuant to their interpretation of the 
Telecommunications Act, the FCC released its Access Reform Order (the "Access 
Order"). The FCC sought through this decision to restructure the manner in 
which interexchange carriers compensate facilities-based LECs for providing 
access to their local end users. One requirement within the Access Order 
would significantly shift the economic burden associated with providing 
access from "direct-trunked" carriers, or long distance companies with 
dedicated facilities to a particular local exchange central office, to 
carriers who utilize toll tandem switching, i.e., those who used shared 
access facilities to reach that same central office. The overwhelming 
majority of long distance carriers, including in many cases, the Company, 
today buy "tandem switched" transport. However, if the price discrepancy 
becomes too great between direct trunk transport and tandem switched 
transport, with all other cost factors remaining constant, the Company may be 
at a competitive disadvantage relative to larger, direct trunk transport 
carriers. Access is an essential element to the origination and completion of 
all long distance calls, and if certain entities are provided special pricing 
for the same service relative to their competitors, they are thereby afforded 
a formidable competitive cost advantage.

     This Access Order also imposes the phase-in of replacing a usage based 
carrier common line charge with a line-based flat fee to be assessed upon all 
long distance companies beginning on January 1, 1998. In addition, the Access 
Order requires LECs to reduce their access revenue requirements by reducing 
interconnection access charges to long distance companies. Management of the 
Company does not anticipate that the net effect of these modifications will 
have a material impact on the Company's financial position or results of 
operations.

AUTHORIZATION

     At September 30, 1997, the Company was authorized to carry intrastate 
operator assisted traffic in 47 states. Authorization is pending approval in 
two other states. State regulatory agencies have the authority to impose 
their own rules and regulations governing the provision of intrastate 
operator services, including regulation of rates. Many states have rules 
similar if not identical to those imposed by the FCC on interstate operator 
assisted calls. At the date of this report, the Company was in material 
compliance with the requirements of each of the individual state regulatory 
agencies and continues to pursue authorization to provide intrastate operator 
services in other targeted states. Certain states are expected to introduce 
or revise their rules governing operator services providers within the next 
year. Currently, the Company does not anticipate significant difficulty in 
complying with the new or revised rules.

     At September 30, 1997, the Company was authorized to provide intrastate 
long distance service within 47 states with authorization pending approval in 
one other state. Regulations within each of these states, as they pertain to 
completing direct dial long distance calls for the Company's customers within 
the state, are virtually static and pose no foreseeable concern. As the 
Company expands the geographic scope of its direct dial long distance 
business, it will seek state regulatory approvals as necessary to provide 
intrastate long distance service.

REGULATORY RATE PROCEEDINGS

     During the course of normal operations, a regulated company may at any 
time come under specific scrutiny with regard to any of its rates, terms or 
conditions by which such service is rendered by a state or federal regulatory 
agency charged with such oversight responsibility, or by an attorney general 
or other jurisdictional consumer officials. In such cases, a regulated 
company can be required to, among other things, provide cost justification 
for the charges it imposes on some or all of its services, or to address 
perceived consumer inequities. After review of such justification, the 
regulatory agency, generally, has the authority to require a carrier to 
modify the process by which such services are rendered or to effect changes 
to its applicable rate structure. Consumer officials and attorneys general 
can pursue civil action if their concerns are not adequately addressed by the 
carrier. The Company operates in several jurisdictions in which its tariffs 
or services may, from time to time, fall under such scrutiny at the 
discretion of the governing regulatory agency or other officials. The Company 
could therefore be required, as a result of such an investigation and 
subsequent proceeding, to implement changes in its rate structure, which 
could ultimately affect its revenues. The Company cannot predict whether or 
not any such requirement may be imposed in any particular jurisdiction.


                                      41

<PAGE>

NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

In thousands, except per share amounts

<TABLE>
                                                               THREE MONTHS ENDED
                                               ------------------------------------------------- 
                                               DECEMBER 31,  MARCH 31,   JUNE 30,  SEPTEMBER 30, 
                                                   1996         1997       1997        1997
                                               -----------   --------    --------  ------------- 
     <C>                                       <C>           <C>         <C>       <C>
     Operating revenues                          $48,747      $53,168    $60,058     $64,920
     Income from operations                        2,192        2,525      2,210       3,336
     Net income                                    1,153        1,445      1,097       1,556
     Net income per common share                 $  0.07      $  0.09    $  0.07     $  0.09

                                                                 THREE MONTHS ENDED
                                               ------------------------------------------------- 
                                               DECEMBER 31,  MARCH 31,   JUNE 30,  SEPTEMBER 30, 
                                                   1995         1996       1996        1996
                                               -----------   --------    --------  ------------- 
     <C>                                       <C>           <C>         <C>       <C>
     Operating revenues                          $39,708      $43,655    $46,684     $50,299
     Loss from operations                           (831)      (1,087)    (6,283)     (8,273)
     Loss from continuing operations                (846)      (1,078)    (4,015)     (7,812)
     Income from discontinued operations, net      3,948        5,022      4,317       1,875
     Net income (loss)                             3,102        3,944        302      (5,937)

     Net income (loss) per common share:
     Continuing operations                       $ (0.06)     $ (0.07)   $ (0.25)    $ (0.50)
     Discontinued operations                        0.27         0.33       0.27        0.11
     Net income (loss) per common share             0.21         0.26       0.02       (0.39)
</TABLE>

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

     None.


                                      42

<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS

     The Bylaws of the Company, as amended, provide that the Board of 
Directors shall consist of not fewer than three nor more than 15 members and 
that the number of directors, within such limits, shall be determined by 
resolution of the Board of Directors at any meeting or by the stockholders at 
the Annual Meeting of Stockholders. The Board of Directors of the Company has 
set the number of directors comprising the Board of Directors at five, with 
such directors being divided into three classes with current terms expiring 
at the 1998, 1999 and 2000 Annual Meetings of Stockholders, or sooner upon 
consummation of the Merger.

     The following table sets forth the name, age and current term of office 
of the directors of the Company as of November 28, 1997, as well as the year 
each first became a director of the Company:

                                              YEAR          YEAR FIRST
                                            CURRENT           BECAME
            NAME                 AGE     TERM EXPIRES(4)    A DIRECTOR
     ------------------------    ---     ---------------    ----------
     LARRY M. JAMES (1)(2)        50           1998            1991

     CHARLES E. AMATO (3)         50           1999            1992

     GARY D. BECKER (1)(3)        38           1999            1986

     L. LOWRY MAYS (1)            62           2000            1997

     F. GARDNER PARKER (1)(2)     55           2000            1996

--------------------
(1)  Member of the Compensation Committee
(2)  Member of the Executive Committee
(3)  Member of the Audit Committee
(4)  Or such term will expire sooner upon consummation of the Merger

     All directors hold office for their elected term or until their 
successors are duly elected and qualified. If a director should be 
disqualified or unable to serve as a director, the vacancy so arising may be 
filled by the Board of Directors for the unexpired portion of his term.

     The following is a description of the biographies of the Company's 
directors for the past five years.

     LARRY M. JAMES has served as Chief Executive Officer and President of 
the Company since August 1996 and has been a director of the Company since 
February 1991. Mr. James served as Chief Operating Officer of the Company 
from February 1991 to August 1996 and was named President of the Company in 
March 1993. From February 1991 to August 1996, Mr. James served as President 
of USLD Communications, Inc., a wholly owned subsidiary of the Company. From 
August 1994 to August 1996, Mr. James served as Chief Executive Officer of 
Zero Plus Dialing, Inc., now Billing Information Concepts, Inc., a separate 
subsidiary of the Company which conducted the Company's billing and 
information management services business prior to the spin-off of Billing. He 
joined the Company as Vice President - Sales and Marketing in April 1988.

     CHARLES E. AMATO has served as a director of the Company since October 
1992. Since 1976, he has been Chairman of Southwest Business Corporation 
("SWBC"), a financial services company in the insurance brokerage and 
mortgage banking business.

     GARY D. BECKER has served as a director of the Company since 1986. Since 
February 1980, he has been a senior officer at Pace Entertainment Corp., a 
diversified live entertainment production and promotion organization. Mr. 
Becker was promoted to Chief Executive Officer of Pace Motor Sports, Inc., a 
wholly owned subsidiary of Pace Entertainment Corp., in January 1996.

     L. LOWRY MAYS was appointed to the Company's Board of Directors in June 
1997. Mr. Mays has served as President and Chief Executive Officer of Clear 
Channel Communications, Inc. ("Clear Channel") since its incorporation in 
April 1974 and in February 1997 was named Chairman of the Board and Chief 
Executive Officer and has been a director of Clear Channel since 1974. Clear 
Channel is a diversified broadcasting company with radio and television 
stations in the United States, and broadcasting 


                                      43

<PAGE>

operations in Australia, New Zealand and the Czech Republic. Clear Channel 
also has outdoor advertising display faces and is part owner of Heftel 
Broadcasting Corporation, the largest Spanish-language radio broadcaster in 
the United States.

     F. GARDNER PARKER was appointed to the Company's Board of Directors in 
December 1996. Mr. Parker has owned and operated Parker Investments, a 
private investment firm, since June 1984. Mr. Parker also serves as Managing 
Trustee of Camden Property Trust, a New York Stock Exchange real estate 
investment trust, and Chairman of the Board of Computer Control Systems, 
Inc., as well as serving on the boards of directors of several privately 
owned companies.

COMMITTEES, MEETINGS AND BOARD COMPENSATION

     The Board of Directors conducts its business through meetings of the 
Board of Directors and through its committees. In accordance with the Bylaws 
of the Company, the Board of Directors has established a Compensation 
Committee, an Audit Committee and an Executive Committee. The Executive 
Committee acts as a nominating committee.

COMPENSATION COMMITTEE

     The Compensation Committee reviews and makes recommendations to the 
Board of Directors concerning major compensation policies and compensation of 
officers and executive employees. This committee currently is comprised of 
directors Becker, Mays, Parker and James. See "Executive Compensation - 
Report of the Compensation Committee."

AUDIT COMMITTEE

     The Audit Committee acts on behalf of the Board of Directors with 
respect to the Company's financial statements, record-keeping, auditing 
practices and matters relating to the Company's independent public 
accountants, including recommending to the Board of Directors the firm to be 
engaged as independent public accountants for the next fiscal year; reviewing 
with the Company's independent public accountants the scope and results of 
the audit and any related management letter; consulting with the independent 
public accountants and management with regard to the Company's accounting 
methods and the adequacy of its internal accounting controls; approving 
professional services by the independent public accountants; and reviewing 
the independence of the independent public accountants. The Audit Committee 
currently is comprised of directors Amato and Becker.

EXECUTIVE COMMITTEE

     In June 1997, the Board of Directors established an Executive Committee, 
to be comprised of the chief executive officer of the Company and up to four 
other members. The Executive Committee's responsibilities include review of 
contracts which are over $2.5 million in value, initial review of offers for 
major acquisitions by the Company or for the possible sale of the Company, 
review of investment banking opportunities and interviewing and recommending 
to the Board of Directors nominees to fill vacancies on the Board of 
Directors. The Executive Committee currently is comprised of directors Parker 
and James.

BOARD OF DIRECTOR AND COMMITTEE MEETINGS

     During the fiscal year ended September 30, 1997, the Board of Directors 
met seven times and took actions on 26 other occasions by unanimous written 
consents. During the year, the Compensation Committee of the Board of 
Directors took action on four separate occasions by unanimous written 
consents and the Audit Committee met on three occasions. During fiscal 1997, 
each director attended at least 75% of the total of all meetings of the Board 
of Directors and any committee on which he served.

EXECUTIVE OFFICERS

     At November 28, 1997, the executive officers of the Company were as 
follows:

          NAME           AGE                    POSITION
     ---------------     ---    -----------------------------------------------
     LARRY M. JAMES      50     Chairman of the Board, Chief Executive 
                                 Officer and President

     W. AUDIE LONG       53     General Counsel, Senior Vice President - Legal
                                 and Regulatory Affairs and Corporate Secretary

     JAMES S. SPEIRS     46     Senior Vice President - Network Operations and
                                 Chief Technology Officer


                                      44

<PAGE>

     PHILLIP J. STORIN   46     Senior Vice President, Chief Financial Officer
                                 and Corporate Treasurer

     STAN G. MASTERS     47     Senior Vice President - Sales

     PATRICK M. AELVOET  35     Vice President and Corporate Controller

     RICHARD E. BURK     51     Vice President - Strategic Planning

     DAVID S. HORNE      43     Vice President - Human Resources

     MARION K. JENKINS   44     Vice President - Management Information Systems

     STEPHEN M. WAGNER   41     Vice President - Marketing, Sales and Business
                                 Development

     The following is a description of the biographies of the Company's 
executive officers for the past five years. Mr. James' biography is listed 
above under "Directors."

     W. AUDIE LONG has been General Counsel and Senior Vice President - Legal 
and Regulatory Affairs of the Company since February 1991 and Corporate 
Secretary of the Company since August 1993. Mr. Long joined the Company as 
General Counsel and Vice President - Legal and Regulatory Affairs in April 
1990. Previously, Mr. Long was an attorney in private practice. He has been 
General Counsel to the Company since 1986.

     JAMES S. SPEIRS joined the Company in October 1995 as Vice President - 
Network Operations and Chief Technical Officer. He was elected Senior Vice 
President - Network Operations and Chief Technology Officer in July 1996. Mr.
Speirs has been Senior Vice President - Network Operations of USLD 
Communications, Inc. since October 1995. Prior to joining the Company, Mr. 
Speirs was Vice President of Network Engineering for Frontier Communications 
Corp. from May 1994 to September 1995. From January 1992 to December 1994, he 
was a partner in Carlin Club Lodge. He served as Senior Vice President of 
Network Operations for COM Systems, Inc. from July 1986 to October 1991.

     PHILLIP J. STORIN joined the Company in July 1992 as Vice President 
- Accounting, was named Corporate Controller effective October 1994 and 
promoted to Senior Vice President, Chief Financial Officer and Corporate 
Treasurer in August 1996. From April 1987 to July 1992, Mr. Storin was 
Director of Accounting for Dell Computer Corporation in Austin, Texas. Mr. 
Storin was charged with primary responsibility of all accounting matters 
while employed with Dell Computer Corporation.

     STAN G. MASTERS joined the Company in June 1991 as Director of Operator 
Services and Direct Dial Sales Agents of USLD Communications, Inc. Mr. 
Masters was elected Vice President - Direct Dial Sales of USLD 
Communications, Inc. in April 1993 and Senior Vice President - Sales in 
October 1994. He was elected Vice President - Sales of the Company in October 
1994 and Senior Vice President - Sales in July 1996.

     PATRICK M. AELVOET has served as Vice President and Corporate Controller 
of the Company since October 1996. Mr. Aelvoet joined the Company in March 
1993 as Director of Financial Reporting. He was promoted to Director of 
Accounting in September 1993 and to Financial Controller in December 1994. 
Mr. Aelvoet worked for KPMG Peat Marwick as Senior Audit Manager from August 
1985 to March 1993.

     RICHARD E. BURK joined the Company in June 1996 as Vice President - 
Strategic Planning, with the primary responsibility of implementing the 
Company's proposed local exchange business. From January 1996 through June 
1996, Mr. Burk was President of Network Intelligence, Inc., a 
telecommunications consulting firm, and from October 1990 to January 1996, he 
was Vice President of Operations for American Telco, Inc., where he was 
responsible for management information systems and software development, 
network operations and regulatory affairs. Mr. Burk has served as President 
of the Texas Association of Long Distance Carriers ("Texaltel") for the last 
four years.

     DAVID S. HORNE has served as Vice President - Human Resources of the 
Company since November 1990. Mr. Horne has over 18 years of experience in 
human resources management and previously was Director of Human Resources for 
Scott's Food Services, Inc. in Austin, Texas.

     MARION K. JENKINS joined the Company in October 1996 as Vice President -
Management Information Systems after having been a consultant to the Company 
since July 1996. Mr. Jenkins was employed by American Telco, Inc. from 
January 1986 to July 


                                      45

<PAGE>

1996, where he was Vice President of Sales and Customer Service from September 
1991 to July 1996.

     STEPHEN M. WAGNER has been Vice President - Marketing, Sales and 
Business Development of the Company since January 1997. He joined USLD 
Communications, Inc. in June 1992 as Vice President - Sales. In October 1994, 
Mr. Wagner was promoted to Vice President - Sales and Business Development of 
USLD Communications, Inc., and in March 1996, he also became Vice President - 
Marketing. Mr. Wagner was Executive Vice President of Fone America, Inc. from 
May 1991 to June 1992.

     All officers serve at the discretion of the Board of Directors. There 
are no family relationships between members of the Board of Directors or any 
executive officers of the Company.

SECTION 16 (a) REPORTING

     Paragraph Section 16(a) of the Securities Exchange Act of 1934 (the 
"Exchange Act") requires the Company's directors and executive officers, and 
persons who own more than 10% of the Company's Common Stock, to file with the 
United States Securities and Exchange Commission (the "SEC") initial reports 
of ownership and reports of changes in ownership of Common Stock and other 
equity securities of the Company. Officers, directors and greater than 10% 
stockholders are required by SEC regulation to furnish the Company with 
copies of all Section 16(a) reports they file. To the Company's knowledge, 
based solely on review of the copies of such reports furnished to the Company 
and written representations, during the fiscal year ended September 30, 1997, 
all Section 16(a) filing requirements applicable to its officers, directors 
and greater than 10% beneficial owners were complied with.

ITEM 11.  EXECUTIVE COMPENSATION

DIRECTORS' COMPENSATION

MEETING AND ANNUAL RETAINER FEES

     Each outside member of the Board of Directors received a meeting fee of 
$2,000 for each meeting of the Board attended during fiscal 1997. 
Additionally, each outside member of the Compensation Committee or Audit 
Committee received $500 for each committee meeting attended during the year 
except that the chairperson of each such committee received $1,000 for 
attendance. Mr. Parker receives $3,000 per month for services rendered as 
chairman of the Executive Committee. In each case, the members of the Board 
are reimbursed for their travel expenses to and from the meetings, and Mr. 
Parker is reimbursed for travel expenses incurred in connection with his 
duties on the Executive Committee. The Board members do not receive a fee for 
telephonic meetings.

     In addition, commencing December 1994, the Company instituted an annual 
retainer fee (the "Annual Director Fee") for all outside directors. The 
Director Plan provides for receipt by each outside director of an Annual 
Director Fee on the business day on or immediately after December 15 of each 
year. Each non-employee director of the Company must make an election, no 
later than December 31 of each year, to receive his Annual Director Fee for 
the following year in cash ($15,000) or in whole or in part through the grant 
of an option ("Director Fee Option") exercisable for up to 7,500 shares of 
Common Stock at an exercise price per share equal to the fair market value of 
the Common Stock on the date of grant (i.e., the business day on or 
immediately after December 15). Each non-employee director previously has 
elected to receive the Annual Director Fee for calendar 1997 in the form of a 
Director Fee Option for 7,500 shares of Common Stock to be granted on 
December 15, 1997. A non-employee director must still be a director on 
December 15 to be eligible to receive an Annual Director Fee. The Director 
Fee Option vests immediately, but at least six months must elapse from the 
date of the acquisition of the Director Fee Option to the date of disposition 
of the Director Fee Option (other than upon exercise or conversion) or its 
underlying Common Stock. Each Director Fee Option will expire five years from 
the date of grant.

DIRECTOR BONUSES

     In the first quarter of fiscal 1998, Messrs. Amato, Becker and Parker 
each received a cash bonus of $50,000 for services rendered in fiscal 1997.

STOCK OPTIONS

     As amended, the Director Plan provides that each non-employee director 
of the Company who is elected or appointed to the Board of Directors will be 
granted a nonqualified stock option ("Director Option") exercisable for 
30,000 shares of Common Stock on the date such non-employee director is so 
elected or appointed as a director, whether at the Annual Meeting of 
Stockholders or otherwise, at an exercise price equal to the fair market 
value of the Common Stock on the date such non-employee director is elected 
or appointed. In addition, upon their re-election, each non-employee director 
currently receives, on the first business day after the date of each Annual 
Meeting of Stockholders of the Company, commencing with the Annual Meeting of 
Stockholders immediately 


                                      46

<PAGE>

following the full vesting of any previously granted Director Option, a 
Director Option to purchase an additional 30,000 shares of Common Stock at an 
exercise price per share equal to the fair market value of the Common Stock 
on the date of grant. Prior to amendment of the Director Plan as approved by 
the stockholders of the Company in February 1997, such automatic, periodic 
grants of Director Options were for 15,000 shares of Common Stock. In each 
case, the Director Option currently vests one third of the shares of Common 
Stock on each of the first three anniversaries of the date of grant or sooner 
upon a change of control such as the Merger, and each Director Option expires 
five years after the date of grant unless sooner terminated as provided in 
the Director Plan.

     In addition, the Director Plan, as amended, authorizes discretionary 
grants of stock options ("Discretionary Options") from time to time by the 
Board of Directors to any non-employee director of the Company. The 
Discretionary Options will vest according to the vesting schedule determined 
by the Board of Directors (immediately upon a change of control such as the 
Merger) and will expire five years from the date of grant. At least six 
months must elapse from the date of the acquisition of the Discretionary 
Option to the date of disposition of the Director Fee Option (other than upon 
exercise or conversion) or its underlying Common Stock.

     Each outside director has been granted a Director Option or Director 
Options to purchase certain shares of Common Stock. In fiscal 1997, Messrs. 
Amato and Becker each were granted a Director Fee Option for the purchase of 
7,500 shares at $8.75 per share. In addition, in fiscal 1997, Mr. Becker was 
granted a Discretionary Option for the purchase of 20,000 shares at $8.625 
per share and Mr. Parker was granted a Discretionary Option for the purchase 
of 100,000 shares at $14.3125 per share, each of which vests one-third on 
each of the first three anniversaries of the date of grant, or sooner upon a 
change of control such as the Merger, and is exercisable for five years. At 
September 30, 1997, the outside directors of the Company held the following 
number and value of options granted under the Director Plan and outside the 
Director Plan:

<TABLE>
                           SECURITIES UNDERLYING                         UNREALIZED VALUE OF OPTIONS  
                                  OPTIONS (1)                            AT SEPTEMBER 30, 1997($)(2)  
                         --------------------------   EXERCISE PRICE     ---------------------------  
         DIRECTOR        EXERCISABLE  UNEXERCISABLE      PER SHARE       EXERCISABLE   UNEXERCISABLE  
     ----------------    -----------  -------------   ---------------    -----------   -------------  
     <C>                 <C>          <C>             <C>                <C>           <C>
     CHARLES E. AMATO       10,834        16,666      $4.375 - $ 8.75     $ 137,146     $   257,598
     GARY D. BECKER         12,500        30,000       $4.76 - $ 8.75     $ 161,356     $   381,775
     L. LOWRY MAYS               0        30,000               $15.375    $       0     $   140,625
     F. GARDNER PARKER           0       145,000       $8.25 - $14.3125   $       0     $ 1,051,563
</TABLE>

-------------------- 
(1)  Does not include Billing stock options received by the listed individuals
     in August 1996, if any, pursuant to the terms of the spin-off.

(2)  Reflects the aggregate market value of the underlying securities as 
     determined by reference to the closing price of the Common Stock on the 
     Nasdaq National Market System on September 30, 1997 ($20.0625 per share)
     minus the aggregate exercise price for each option.

DIRECTOR COMPENSATION DEFERRAL PLAN

     The Company adopted the Director Deferral Plan effective January 1, 
1994. Participation in the Director Deferral Plan is offered to outside 
directors of the Company who elect to participate as provided in the plan 
(the "Director Deferral Participants"). At November 28, 1997, there were four 
Director Deferral Participants in the Director Deferral Plan. The Director 
Deferral Plan is a deferred compensation plan that generally allows Director 
Deferral Participants to make voluntary deferral contributions (the 
"Voluntary Director Contribution"), on a pre-tax basis, in increments of 1%, 
of up to 100% of the fees paid by the Company for services rendered as a 
director. The Company contributed, on behalf of each Director Deferral 
Participant, an amount equal to 33% of that director's Voluntary Director 
Contribution (the "Company Director Contribution") each plan year through 
December 31, 1996. However, the Company reserved the right at any time to 
provide a Company Director Contribution of a different amount. The Company 
made approximately $1,800 in Company Director Contributions to the Director 
Deferral Plan during the first quarter of fiscal 1997 on behalf of directors 
Amato and Becker. Effective January 1, 1997, matching contributions by the 
Company were eliminated.

     Director Deferral Participants are annually vested in 33% of any Company 
Director Contribution beginning with the Director Deferral Participant's 
first anniversary of service and becoming 100% vested after the third 
anniversary of service or upon a change in control of the Company such as the 
Merger. At September 30, 1997, Messrs. Amato and Becker were 100% vested in 
Company Director Contributions. No Company Director Contributions have been 
made on behalf of Messrs. Mays and Parker. Benefits generally are payable to 
a Director Deferral Participant (or his beneficiary) upon retirement, 
disability, termination of service or death, in each case as provided in the 
Director Deferral Plan.


                                      47
<PAGE>

REPORT OF THE COMPENSATION COMMITTEE

     The Compensation Committee of the Board of Directors of the Company (the
"Committee") has furnished the following report on the Company's executive
compensation policies. The report describes the Committee's compensation
policies applicable to the Company's executive officers and provides specific
information regarding the compensation of the Company's Chief Executive
Officers in 1997. (The information contained in the report shall not be deemed
to be "soliciting material" or to be "filed" with the SEC, nor shall such
information be incorporated by reference into any future filings under the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange
Act, except to the extent that the Company specifically incorporates it by
reference into such filing).

     In fiscal 1997, the Committee was comprised of directors Amato and Becker
until January 1997, when Mr. Amato resigned and Mr. Parker was appointed to
the Committee. In June 1997, Mr. James was appointed as a third member of the
Committee, and in July 1997 Mr. Mays was appointed as a fourth member. The
Committee administers and oversees all aspects of the Company's executive
compensation policy and reports its determinations to the Board of Directors.
See "Management - Committees, Meetings and Board Compensation - Compensation
Committee." The Committee's overall goal is to develop executive compensation
policies that are consistent with, and linked to, strategic business
objectives and Company values. The Committee approves the design of, assesses
the effectiveness of, and administers executive compensation programs in
support of, the Company's compensation policies. The Committee also reviews
and approves all salary arrangements and other remuneration for executives,
evaluates executive performance and considers related matters.

COMPENSATION PHILOSOPHY

     The Company's executive compensation policies have four primary
objectives: to attract and retain highly competent executives to manage the
Company's business, to offer executives appropriate incentives for
accomplishment of the Company's business objectives and strategy, to encourage
stock ownership by executives to enhance mutuality of interest with
stockholders and to maximize long-term stockholder value. The Committee
believes that the compensation policies should operate in support of these
objectives and should emphasize the following: a long-term and at-risk focus,
a pay-for-performance culture, an equity orientation and management
development.

ELEMENTS OF COMPENSATION

     Each element of compensation considers median compensation levels paid
within the competitive market. Competitive market data compares the Company's
compensation practices to a group of comparator companies that tend to have
similar sales volumes, market capitalizations, employment levels and lines of
business. The Committee reviews and approves the selection of companies used
for compensation comparison purposes.

     The key elements of the Company's executive compensation are base salary,
annual incentive and long-term incentive. These key elements are addressed
separately below. In determining compensation for fiscal 1997, the Committee
considered all elements of an executive's total compensation package.

     BASE SALARIES. Base salaries for executives are initially determined by
evaluating executives' levels of responsibility, prior experience, breadth of
knowledge, internal equity issues and external pay practices.

     Mr. James's annual, calendar year base salary did not increase in fiscal
1997.

     INCENTIVE BONUS. Annually, each executive is considered for an incentive
bonus. Factors considered in determining the amount of the award include
revenue growth, cost control, net profitability and achievement of individual
goals and objectives. Typically, minimum revenue and earnings thresholds have
been established, below which no awards are made. Bonus awards for all
executives are approved by the Chief Executive Officer. Bonus awards for the
Company's Chief Executive Officer are subject to approval by the Compensation
Committee. Beginning with fiscal year 1997, the timing of these bonus payments
changed from an annual to a quarterly basis for all executives except Mr.
James, who received his bonus in installments paid in April, August and
November 1997 and Messrs. Long and Storin, who received their bonuses in
installments paid in August and November 1997. Mr. James earned a cash bonus
of $1,281,000 in fiscal 1997. Because of the Company's record performance,
sizable bonuses also were earned by other executive officers in fiscal 1997.

     LONG-TERM INCENTIVE. The Company's long-term compensation philosophy
provides that long-term incentives should relate to improvement in stockholder
value, thereby creating a mutuality of interests between executives and
stockholders. Long-term

                                     48
<PAGE>

incentives are provided to executives through restricted stock awards, the
Company's Employee Option Plan and the Company's Executive Deferral Plan.

     In keeping with the Company's commitment to provide a total compensation
package that favors at-risk components of pay, long-term incentives comprise
an appreciable portion of an executive's total compensation package. When
awarding long-term incentives, the Committee considers executives' respective
levels of responsibility, prior experience, historical award data, various
performance criteria and compensation practices at comparator companies.
Again, the Committee does not utilize formal mathematical formulae when
determining the number of options/shares granted to executives.

RESTRICTED STOCK AWARDS

     On December 12, 1995, the Board of Directors adopted the Restricted Stock
Plan for the purpose of enabling the Company to provide incentives to its key
employees to maximize stockholder value by giving them a proprietary interest
in the Company through the ownership of stock. The Board of Directors approved
an amendment to the Restricted Stock Plan on July 2, 1996, to allow for
immediate vesting of restricted stock grants at the discretion of the
committee administering the Restricted Stock Plan. On July 14, 1997, the Board
of Directors approved an amendment to the Restricted Stock Plan to increase
the number of shares reserved for awards under the plan from 500,000 to
1,000,000. Officers and certain key employees of the Company, including
directors who are also full-time employees, are eligible for awards under the
Restricted Stock Plan. The number of shares of Common Stock to be awarded to
an employee and other terms of the award are determined by a committee of
disinterested persons who administer the Restricted Stock Plan. Each award is
evidenced by an agreement that sets forth the terms and conditions of the
restricted stock granted, including the vesting schedule. The Restricted Stock
Plan provides for certain vesting upon death, permanent disability,
retirement, termination for good reason by the employee and upon a change of
control such as the Merger. The employee, as owner of the restricted stock,
has all rights of a stockholder including voting rights and the right to
receive cash dividends, if any. No grants were made under the Restricted Stock
Plan in fiscal 1997. At September 30, 1997, 812,000 shares were available for
granting under the plan.

     The Committee believes that restricted stock provides the Company's
executives with an immediate link to stockholder interests. Upon becoming a
stockholder, the executive receives the right to vote Company shares and
receive dividends, further aligning the executive's interests to those of the
Company's stockholders. During fiscal 1996, Messrs. James and Long were
granted a total of 38,000 and 22,000 shares, respectively, under the
Restricted Stock Plan. No unvested restricted stock grants exist for 1997. See
"Summary Compensation Table" below.

STOCK OPTIONS

     Stock options are granted at an option price not less than the fair
market value of the Common Stock on the date of grant. Accordingly, stock
options have value only if the price of the Common Stock appreciates after the
date the options are granted. This design focuses executives on the creation
of stockholder value over the long term and encourages equity ownership in the
Company.

     As detailed in the table entitled "Stock Option Grants in Fiscal 1997"
under the caption "Executive Compensation" below, in fiscal 1997 Mr. James
received an option to purchase 130,000 shares of the Common Stock with an
exercise price of $14.3125 per share, exercisable for six years and vesting
one-third on each of the first three anniversaries of the grant or in its
entirety upon a change in control such as the Merger.

     In determining the number of shares subject to the options granted to Mr.
James, the Committee considered the number of options previously granted to
him, the level of total stockholder return and numerous subjective factors
indicative of his dedication to the success of the Company. At November 28,
1997, Mr. James owned 105,818 shares of the Company's Common Stock and,
including his fiscal 1997 grant, held options to purchase an additional
403,000 shares. The Committee believes that this equity interest provides an
appropriate link to the interests of stockholders.

EXECUTIVE COMPENSATION DEFERRAL PLAN

     During fiscal 1997, the Company continued offering to certain key
employees the ability to defer a portion of their respective salaries, on a
pre-tax basis, up to 100% of base compensation, with benefits generally
payable upon retirement, disability, termination of employment (other than for
cause) or death. The Company may make certain matching contributions to each
participant's account under such plan with vesting to occur over time or upon
change of control such as the Merger; however, the Company has retained the
ability to limit its contributions thereunder at any time. The Committee
believes that this type of plan provides additional long-term incentive for
overall corporate success. The Company made an aggregate of approximately
$13,730 in matching contributions during the first quarter of fiscal 1997,
$2,102 of which was made on behalf of Mr. James. Effective January 1, 1997,
matching contributions by the Company were eliminated.

                                     49
<PAGE>

CONCLUSION

     The Committee believes that these executive compensation policies serve
the interests of the stockholders and the Company effectively. The Committee
believes that the various pay vehicles offered are appropriately balanced to
provide increased motivation for executives to contribute to the Company's
overall future successes, thereby enhancing the value of the Company for the
stockholders' benefit.

     Gary D. Becker     L. Lowry Mays     F. Gardner Parker     Larry M. James

SUMMARY COMPENSATION TABLE

     The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's
Chief Executive Officer and each of the Company's four other most highly
compensated executive officers whose base salary and bonus exceeded $100,000
for fiscal 1997.

<TABLE>
                                                                                            LONG-TERM
                                                                                        COMPENSATION AWARDS
                                                                                    ---------------------------
                                            ANNUAL COMPENSATION      OTHER ANNUAL     RESTRICTED   SECURITIES     ALL OTHER
NAME AND PRINCIPAL                 FISCAL  ----------------------    COMPENSATION       STOCK      UNDERLYING   COMPENSATION
POSITION                            YEAR   SALARY($)    BONUS ($)       ($)(1)       AWARDS($)(2) OPTIONS(#)(3)     ($)
-------------------------          ------  ---------    ---------    ------------    ------------ ------------- ------------
<S>                                <C>     <C>        <C>            <C>             <C>          <C>           <C>
LARRY M. JAMES                      1997    240,000   1,281,000(4)       7,730              0        130,000      12,100(5)
 CHIEF EXECUTIVE OFFICER,           1996    229,231     300,000          8,467        176,900(6)     180,000      17,241(7)
 PRESIDENT AND DIRECTOR             1995    200,000     140,000          7,280              0         50,000       9,492(8)

W. AUDIE LONG                       1997    156,231     120,000(9)       9,189              0         50,000     13,776(10)
 GENERAL COUNSEL, SENIOR            1996    174,616      55,000         11,152        103,380(11)     75,000    380,634(12)
 VICE PRESIDENT-LEGAL               1995    160,427     100,000          9,327              0         25,000     10,583(13)
 AND REGULATORY AFFAIRS
 & CORPORATE SECRETARY

JAMES S. SPEIRS                     1997    120,000      37,993          3,482              0         40,000      2,106(14)
 SENIOR VICE PRESIDENT-             1996    117,692      40,000          1,582              0         70,000      2,373(15)
 NETWORK OPERATIONS AND             1995        N/A         N/A            N/A            N/A            N/A        N/A
 CHIEF TECHNOLOGY OFFICER

PHILLIP J. STORIN                   1997    139,215     120,000(9)       4,287              0         40,000      2,245(16)
 SENIOR VICE PRESIDENT,             1996    102,230      60,000          3,148              0         50,000      4,319(17)
 CHIEF FINANCIAL OFFICER            1995     92,000      36,000              0              0              0      3,567(18)
 AND CORPORATE TREASURER

STAN G. MASTERS                     1997    114,539      44,497              0              0         40,000      2,510(19)
 SENIOR VICE PRESIDENT-             1996     93,654      40,000              0              0         50,000      4,472(20)
 SALES                              1995     89,712      22,000              0              0              0      4,304(21)
</TABLE>

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

(1)  Represents amounts reimbursed during fiscal 1997, 1996 and 1995 for the
     payment of certain taxes.

(2)  At September 30, 1997, the number and value of aggregate restricted stock
     award holdings were as follows: Mr. James, 38,000 shares ($762,375); Mr.
     Long, 22,000 shares ($441,375); Messrs. Speirs, Storin and Masters did
     not hold any restricted stock at September 30, 1997. The value of the
     restricted stock awards was determined by multiplying the market value of
     the Common Stock on September 30, 1997 as determined by reference to the
     closing price of the Common Stock on the Nasdaq National Market System
     ($20.0625 per share) by the number of shares of restricted stock held.
     The value of the restricted stock awards does not include the value of
     Billing stock awards received by the foregoing individuals pursuant to
     the terms of the spin-off. If any dividends are paid with respect to the
     Company's Common Stock, such dividends will be paid on the restricted
     stock.

(3)  Certain of the options granted during fiscal 1996 were the result of the
     voluntary surrender and exchange of previously granted options under the
     Company's Employee Option Plan.

(4)  Represents bonus earned in fiscal 1997, $1,066,000 of which was paid in
     the first quarter of fiscal 1998.

(5)  Represents $3,600 in Company 401(k) Retirement Plan contributions, $2,102
     in Company deferred compensation contributions and $6,398 in life
     insurance premiums made or paid on behalf of Mr. James during fiscal 1997.

(6)  Mr. James was granted 28,000 shares on December 14, 1995 which, as
     amended, vested 100% on July 2, 1996, and was granted 10,000 shares on
     July 16, 1996 which vested 100% on the date of grant.

                                     50
<PAGE>

(7)  Represents $3,202 in Company 401(k) Retirement Plan contributions, $8,121
     in Company deferred Compensation contributions and $5,918 in life
     insurance premiums made or paid on behalf of Mr. James during fiscal 1996.

(8)  Represents $2,236 in Company 401(k) Retirement Plan contributions and
     $7,256 in Company deferred compensation contributions made on behalf of
     Mr. James during fiscal 1995.

(9)  Represents bonus earned in fiscal 1997, $50,000 of which was paid in the
     first quarter of fiscal 1998.

(10) Represents $2,344 in Company 401(k) Retirement Plan contributions, $2,664
     in Company deferred compensation contributions and $8,768 in life
     insurance premiums made or paid on behalf of Mr. Long during fiscal 1997.

(11) Mr. Long was granted 16,000 shares on December 14, 1995 which, as
     amended, vested 100% on July 2, 1996, and was granted 6,000 shares on
     July 16, 1996 which vested 100% on the date of grant.

(12) Represents $2,536 in Company 401(k) Retirement Plan contributions,
     $10,015 in Company deferred Compensation contributions and $8,083 in life
     insurance premiums made or paid on behalf of Mr. Long during fiscal 1996
     and $360,000 paid under contractual agreement in connection with the
     spin-off of Billing.

(13) Represents $2,494 in Company 401(k) Retirement Plan contributions and
     $8,089 in Company deferred compensation contributions made on behalf of
     Mr. Long during fiscal 1995.

(14) Represents $1,315 in Company 401(k) Retirement Plan contributions and
     $791 in Company deferred compensation contributions made on behalf of
     Mr. Speirs during fiscal 1997.

(15) Represents $2,373 in Company deferred compensation contributions made on
     behalf of Mr. Speirs during fiscal 1996.

(16) Represents $1,465 in Company 401(k) Retirement Plan contributions and
     $780 in Company deferred compensation contributions made on behalf of
     Mr. Storin during fiscal 1997.

(17) Represents $1,427 in Company 401(k) Retirement Plan contributions and
     $2,892 in Company deferred compensation contributions made on behalf of
     Mr. Storin during fiscal 1996.

(18) Represents $1,359 in Company 401(k) Retirement Plan contributions and
     $2,208 in Company deferred compensation contributions made on behalf of
     Mr. Storin during fiscal 1995.

(19) Represents $1,718 in Company 401(k) Retirement Plan contributions and
     $792 in Company deferred compensation contributions made on behalf of
     Mr. Masters during fiscal 1997.

(20) Represents $1,353 in Company 401(k) Retirement Plan contributions and
     $3,119 in Company deferred compensation contributions made on behalf of
     Mr. Masters during fiscal 1996.

(21) Represents $1,466 in Company 401(k) Retirement Plan contributions and
     $2,838 in Company deferred compensation contributions made on behalf of
     Mr. Masters during fiscal 1995.

                                     51

<PAGE>

STOCK OPTION GRANTS IN FISCAL 1997

     The following table provides information related to options granted to 
the named executive officers during fiscal 1997. The Company has never 
granted stock appreciation rights.

<TABLE>
                           INDIVIDUAL GRANTS
                        -----------------------                               POTENTIAL REALIZABLE
                                     % OF TOTAL                                 VALUE AT ASSUMED
                        NUMBER OF      OPTIONS                                ANNUAL RATES OF STOCK
                        SECURITIES   GRANTED TO     EXERCISE                  PRICE APPRECIATION FOR
                        UNDERLYING   EMPLOYEES      OR BASE                     OPTION TERM(1)
                         OPTIONS      IN FISCAL      PRICE     EXPIRATION   ------------------------
       NAME             GRANTED(#)      1997         ($/SH)       DATE         5%($)          10%($)
------------------     ------------ ------------   ---------   -----------  ---------     ----------
<S>                    <C>          <C>            <C>         <C>          <C>           <C>
LARRY M. JAMES          130,000         15.4        14.3125     6/03/03      514,056       1,135,930

W. AUDIE LONG            50,000          5.9        14.3125     6/03/03      197,714         436,896

JAMES S. SPEIRS          40,000          4.7        14.3125     6/03/03      158,171         349,517

PHILLIP J. STORIN        40,000          4.7        14.3125     6/03/03      158,171         349,517

STAN G. MASTERS          46,000(2)       5.4        14.3125     6/03/03      181,897         401,945
</TABLE>

---------
(1) Calculation based on stock option exercise price over the exercise period 
    of the option assuming annual compounding. The columns present estimates of
    potential values based on certain mathematical assumptions. The actual 
    value, if any, that an executive officer may realize is dependent upon the 
    market price on the date of option exercise.

(2) Includes the grant of an option for 6,000 shares to Mr. Masters' wife, who 
    serves as the Company's Director of Product Management.

AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES

     The following table provides information related to options exercised by 
the named executive officers during the 1997 fiscal year and the number and 
value of options held at fiscal year ("FY") end. The Company does not have 
any outstanding stock appreciation rights.

<TABLE>
                                                                 NUMBER OF SECURITIES       VALUE(3) OF UNEXERCISED
                                                                UNDERLYING UNEXERCISED           IN-THE-MONEY
                          SHARES ACQUIRED                       OPTIONS AT FY-END(#)(2)      OPTIONS AT FY-END($)
                            UPON OPTION           VALUE       --------------------------  --------------------------
      NAME                  EXERCISE(#)       REALIZED($)(1)  EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
-------------------       ---------------     --------------  -----------  -------------  -----------  -------------
<S>                       <C>                 <C>             <C>          <C>            <C>          <C>
LARRY M. JAMES                     0                 N/A        186,334       216,666      3,175,300     2,107,073

W. AUDIE LONG                      0                 N/A        158,667        83,333      2,837,729       810,411

JAMES S. SPEIRS                    0                 N/A         23,334        86,666        380,702       991,373

PHILLIP J. STORIN              5,000             $32,125         34,668        73,332        581,679       762,661

STAN G. MASTERS                    0                 N/A         40,919(4)     83,331(5)     672,139       860,871
</TABLE>

---------
(1) Market value of the underlying securities at exercise date, minus the 
    exercise price.

(2) Does not include Billing stock options received by the listed individuals 
    in August 1996 pursuant to the terms of the spin-off.

(3) Market value of the underlying securities at September 30, 1997 ($20.0625), 
    minus the exercise price.

(4) Includes options for 5,751 shares held by Mr. Masters' wife.

(5) Includes options for 9,999 shares held by Mr. Masters' wife.

                                      52
<PAGE>

EMPLOYEE BENEFIT PLANS

USLD COMMUNICATIONS CORP. 401(K) RETIREMENT PLAN

     The Company adopted the Retirement Plan effective January 1, 1992. 
Participation in the Retirement Plan is offered to eligible employees of the 
Company (collectively, the "Participants"). Generally, all employees of the 
Company who are 21 years of age and who have completed one year of service 
during which they worked at least 1,000 hours are eligible for participation 
in the Retirement Plan.

     The Retirement Plan is a 401(k) plan, a form of defined contribution 
plan which provides that Participants generally may make voluntary salary 
deferral contributions, on a pre-tax basis, of between 1% and 15% of their 
base compensation in the form of voluntary payroll deductions up to a maximum 
amount as indexed for cost-of-living adjustments ("Voluntary Contributions"). 
From January 1993 through December 1994, the Company made matching 
contributions equal to 33% of the first 6% of a Participant's compensation 
contributed as salary deferral. Effective January 1, 1995, the Company made 
matching contributions equal to 25% of the first 6% of a Participant's 
compensation contributed as salary deferral. Effective January 1, 1996, the 
Company made matching contributions equal to 50% of the first 3% of a 
Participant's compensation contributed as salary deferral. The Company may 
from time to time make additional discretionary contributions at the sole 
discretion of the Board. The discretionary contributions, if any, are 
allocated to Participants' accounts based on a discretionary percentage of 
the Participants' respective salary deferrals.

     Participants are gradually vested in all contributions made by the 
Company over a period of five years of credited service, vesting 25% a year 
for each full year of service beginning with the Participant's second 
anniversary, and becoming 100% vested after five years of service or upon 
death, total and permanent disability, retirement under the Retirement Plan, 
Retirement Plan termination, or upon a change in control such as the Merger. 
Participants are always 100% vested in their Voluntary Contributions.

STOCK OPTION PLANS

     On February 6, 1990, the stockholders of the Company approved the 
Employee Option Plan. The Employee Option Plan provides for the grant of 
incentive stock options ("ISOs") under Section 422 of the Internal Revenue 
Code of 1986, as amended (the "Code") and stock options that do not qualify 
under Section 422 of the Code ("NQSOs"). Under the terms of the Employee 
Option Plan, as amended by the stockholders at the Company's 1992, 1994 and 
1996 Annual Meetings of Stockholders, 3,966,666 shares of Common Stock have 
been reserved for the granting of options. At November 28, 1997, options to 
purchase 3,905,797 shares had been granted. If any option granted under the 
Employee Option Plan terminates, expires or is surrendered, new options may 
thereafter be granted covering such shares.

     The Employee Option Plan is administered by a committee (the "Option 
Plan Committee") of three "disinterested persons" appointed by the Board. The 
Option Plan Committee currently consists of non-employee members of the 
Compensation Committee of the Board:  Gary D. Becker, L. Lowry Mays and F. 
Gardner Parker. The Employee Option Plan grants broad authority to the Option 
Plan Committee to grant options to full-time employees and officers of the 
Company and its subsidiaries (totaling 672 eligible individuals at November 
28, 1997), selected by the Option Plan Committee, to determine the number of 
shares subject to options and to provide for the appropriate periods and 
methods of exercise and requirements regarding the vesting of options. The 
option price for ISOs may not be less than 100% of the fair market value of 
the Common Stock on the date of grant, or 110% of the fair market value with 
respect to any ISO issued to a holder of 10% or more of the Company's shares. 
There is no price requirement for NQSOs, other than that the option price 
must exceed the par value of the Common Stock. The Employee Option Plan 
further directs the Option Plan Committee to set forth provisions in option 
agreements regarding the exercise and expiration of options according to 
stated criteria. The Option Plan Committee oversees the methods of exercise 
of options, with attention being given to compliance with appropriate 
securities laws and regulations. The Employee Option Plan permits the use of 
already owned Common Stock as payment for the exercise price of options. 
Options for no more than 150,000 shares may be granted to any individual 
employee under the Employee Option Plan during any single fiscal year.

     On March 9, 1993, the, Board of Directors adopted, subject to 
stockholder approval, the Director Plan. The Director Plan incorporated and 
expanded a previous director option plan and authorizes the granting of 
nonqualified options ("Director Options") to purchase Common Stock to 
non-employee directors (totaling four eligible individuals at November 28, 
1997). The Director Plan was approved by the Company's stockholders at the 
Company's 1994 Annual Meeting of Stockholders, and the Company's stockholders 
approved certain amendments to the Director Plan at the Company's 1996 Annual 
Meeting of Stockholders, which amendments included the Annual Director Fee 
for non-employee directors of the Company. Under the terms of the Director 
Plan, each non-employee director must make an election, no later than 
December 31 of each year, to receive his Annual Director Fee for the 
following year in cash ($15,000) or in whole or in part through the grant of 
a Director Fee Option exercisable for up to 7,500 shares of Common Stock at 
an exercise price per share equal to the fair market value of the Common 
Stock on the date of grant (i.e., the business day on or immediately after 
December 15). At the Company's 1997 Annual Meeting of Stockholders, the 
stockholders 

                                      53
<PAGE>

approved certain additional amendments to the Director Plan, which amendments 
included an increase in the aggregate number of shares of Common Stock 
subject to issuance under this plan from 250,000 to 750,000, an increase in 
the number of shares subject to Director Options from 15,000 to 30,000, a 
provision for the granting of Discretionary Options and deletion of the 
limitation that the plan not be amended more frequently than once every six 
months.

     During the fiscal year ended September 30, 1997, director F. Gardner 
Parker was granted Director Options, directors Amato and Becker were granted 
Director Fee Options and directors Becker and Parker were granted 
Discretionary Options. A total of 750,000 shares of Common Stock (subject to 
certain adjustments) has been reserved for issuance upon exercise of Director 
Options. At November 28, 1997, options to purchase 345,000 shares of Common 
Stock had been granted under the Director Plan. Each such option had a per 
share option exercise price equal to the market price per share of the Common 
Stock on the date of grant. All Director Options vest in three equal portions 
over three years from the first date of the individual's service to the 
Company as a director or date of grant, as the case may be, or sooner upon a 
change of control such as the Merger, and are exercisable for a period of 
five years from the date of grant. All Director Fee Options vest on the date 
of grant and are exercisable for a period of five years from the date of 
grant. Discretionary Options vest according to the vesting schedule 
determined by the Board of Directors (immediately upon a change of control 
such as the Merger) and are exercisable for a period of five years from the 
date of grant. Each of the Discretionary Options granted in fiscal 1997 vest 
one-third on each of the first three anniversaries of the date of grant.

     Director Options, Director Fee Options and Discretionary Options, once 
granted and to the extent vested and exercisable, will remain exercisable 
throughout their term, except that the unexercised portion of a Director 
Option will terminate 30 days after the date an optionee ceases to be a 
Director for any reason other than death, in which case the Director Option 
will terminate one year after the optionee's death or six months after the 
optionee's death if the death occurs during the 30-day period referenced 
above.

     The Merger agreement provides that, at the effective date of the Merger, 
each stock option and warrant granted by the Company ("USLD Stock Option") to 
purchase shares of Common Stock which is outstanding and unexercised shall be 
assumed by LCI and converted into an option or warrant to purchase common 
stock of LCI ("LCI Common Stock") in such amount and at such exercise price 
as is provided below and otherwise having the same terms and conditions as 
are in effect immediately prior to the effective date of the Merger. The 
number of shares of LCI Common Stock to be subject to the new option or 
warrant will be equal to the number of shares that the holder of such USLD 
Stock Option would be entitled to receive pursuant to the Merger had such 
holder exercised such option or warrant in full immediately prior to the 
effective date of the Merger (whether or not such option or warrant was in 
fact exercisable). The exercise price per share of LCI Common Stock under the 
new option or warrant will be equal to the aggregate exercise price for the 
Company's Common Stock purchasable pursuant to such USLD Stock Option divided 
by the number of shares of LCI Common Stock deemed purchasable pursuant to 
such USLD Stock Option.

     Pursuant to the Company's Employee Option Plan, Director Plan and 
certain contract stock option grants (the "USLD Stock Option Plans"), the 
Merger will result in each USLD Stock Option, whether or not fully vested, 
becoming fully vested and exercisable. Any USLD Stock Option not exercised 
will be assumed and converted into an immediately exercisable option to 
purchase LCI Common Stock on the terms described above. The vesting period of 
outstanding stock purchase warrants will be unaffected by the Merger. In 
addition, pursuant to the terms of the spin-off with Billing, Billing 
granted, under its 1996 Employee Comprehensive Stock Plan and 1996 
Non-Employee Director Plan, options to purchase Billing common stock to each 
holder of an outstanding option to purchase shares of the Company's Common 
Stock under the USLD Stock Option Plans. The Billing options were granted on 
the basis of an option exercisable for one share of Billing common stock for 
every one share of the Company's Common Stock subject to the outstanding USLD 
Stock Options. Each Billing option agreement provides that the Merger will 
result in each Billing option held by the Company's employees, whether or not 
fully vested, becoming fully vested and exercisable. Billing options held by 
Billing employees will be unaffected by the Merger.

EMPLOYEE STOCK PURCHASE PLAN

     The Company adopted the ESPP effective July 1, 1995, and the 
stockholders of the Company approved the ESPP on February 29, 1996. The ESPP 
allows participating employees to purchase shares of the Common Stock at a 
discount with funds from payroll deductions. Every employee of the Company 
and its subsidiaries is eligible to participate in the ESPP on a voluntary 
basis with the exception of (i) employees who have not completed at least six 
months of continuous service with the Company as of the applicable enrollment 
date and (ii) employees who would, immediately upon enrollment, own directly 
or indirectly, or hold purchase rights, options or rights to acquire, an 
aggregate of 5% or more of the total combined voting power or value of all 
outstanding shares of all classes of the Company. At November 28, 1997, there 
were 255 participants in the ESPP.

     Enrollment in the ESPP constitutes a grant by the Company to the 
participant of the right to purchase shares of the Company's Common Stock. 
Under the terms of the ESPP, 1,000,000 shares of Common Stock have been 
reserved for purchase under the plan, subject to adjustment as provided in 
the ESPP. At November 28, 1997, 125,821 shares had been purchased under the 
ESPP. Each offering of Common Stock under the ESPP (except for the initial 
offering period, which was seven months, and the second 

                                      54
<PAGE>

offering period, which was shortened to four months due to the spin-off of 
Billing) covers a period of approximately six months. To participate in the 
ESPP, eligible employees must enroll in the ESPP and authorize payroll 
deductions pursuant to the ESPP. These payroll deductions may not exceed 
$10,600 in any six-month participation period. The purchase price per share 
is the lesser of (i) 85% of the fair market value of the Common Stock on the 
first day of the applicable participation period or (ii) 85% of the fair 
market value of the Common Stock on the last day of such participation 
period. The ESPP is administered, at the Company's expense, by the Employee 
Stock Purchase Plan Committee, which was appointed by the Board of Directors. 
The Committee consists of at least three persons who need not be members of 
the Board of Directors.

EXECUTIVE COMPENSATION DEFERRAL PLAN

     On December 15, 1993, the Board of Directors adopted the Executive 
Deferral Plan to be effective January 1, 1994. Participation in the Executive 
Deferral Plan is offered to certain key employees occupying management 
positions and/or certain other highly compensated employees of the Company 
who are determined by the Board, from time to time, to be eligible to 
participate in the Executive Deferral Plan ("Executive Deferral 
Participants"). At November 28, 1997, there were 15 Executive Deferral 
Participants in the Executive Deferral Plan.

     The Executive Deferral Plan is a deferred compensation plan that 
provides that Executive Deferral Participants generally may make voluntary 
salary deferral contributions, on a pre-tax basis, in equal monthly amounts 
of up to 100% of his or her base compensation ("Voluntary Deferral 
Contribution"). In addition, through December 31, 1996, the Company made 
certain matching contributions with respect to each Voluntary Deferral 
Contribution (the "Company Deferral Contribution") equal to the lesser of (i) 
the Voluntary Deferral Contribution or (ii) that amount together with the 
Voluntary Deferral Contribution which actuarially determined would yield a 
10-year annuity equal to 50% of the Executive Deferral Participant's 
compensation payable at age 65, with a minimum contribution of $3,000. 
However, the Company reserved the right, at any time, to decrease the Company 
Deferral Contribution or provide no Company contribution whatsoever for any 
plan year. The Company Deferral Contributions were eliminated beginning 
January 1, 1997. The Company made approximately $13,700 in Company Deferral 
Contributions to this plan during the first quarter of fiscal 1997.

     Unless terminated for cause, Executive Deferral Participants are vested 
annually in 33% of any Company Deferral Contribution beginning with the 
Executive Deferral Participant's first anniversary of service and becoming 
100% vested after the third anniversary of service or upon a change in 
control of the Company such as the Merger. Benefits generally are payable to 
an Executive Deferral Participant (or his or her beneficiaries) upon 
retirement, disability, termination of employment (other than for cause) or 
death, in each case as provided in the Executive Deferral Plan. Messrs. 
James, Long, Storin and Masters were 100% vested in their respective Company 
Deferral Contributions. At November 28, 1997, Mr. Speirs was 66% vested in 
Company Deferral Contributions but will be 100% vested if the Merger is 
consummated.

DISABILITY PLAN

     Effective January 1, 1994, the Board of Directors of the Company adopted 
the Disability Plan. The Disability Plan provides long-term disability 
benefits for certain employees occupying management positions with the 
Company or its subsidiaries. Benefits under the Disability Plan are provided 
directly by the Company based on definitions, terms and conditions contained 
in the Disability Plan documents. At November 28, 1997, there were 18 
participants in the Disability Plan. No benefits were paid to any participant 
under the Disability Plan during fiscal 1997.

EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL ARRANGEMENTS

     Effective February 14, 1997, the Company entered into an employment 
agreement with Mr. James. This agreement expires on February 13, 2000, 
subject to automatic one-year extensions on each anniversary of the 
agreement. Mr. James's employment agreement provided for an annual, calendar 
year base salary of $240,000 in fiscal 1997 and an incentive bonus at the 
discretion of the Compensation Committee of the Board of Directors. Effective 
August 1, 1997, the Company entered into a new employment agreement with Mr. 
James which expires on the same terms as the February 14, 1997 agreement and 
provides for an annual base salary of $325,000 beginning October 1, 1997 and 
an incentive bonus at the discretion of the Compensation Committee of the 
Board of Directors.

     Effective as of August 2, 1996, the Company and Billing entered into an 
employment agreement with Mr. Long. This agreement expired on August 1, 1997, 
subject to extension for successive one-year terms unless the Company elected 
not to extend the agreement. The employment agreement provided for an annual 
base salary of $150,000 and an incentive bonus at the discretion of the 
Compensation Committee of the Board of Directors. Effective August 1, 1997, 
the Company entered into a new employment agreement with Mr. Long. The 
agreement expires on July 31, 1999, subject to automatic two-year extensions 
on each two-year anniversary of the agreement unless the Company elects not 
to extend the agreement. The agreement provides for an annual base salary of 
$190,000 and an incentive bonus at the discretion of the Compensation 
Committee of the Board of Directors.

                                      55
<PAGE>

     The employment agreement with Mr. James provides that if the Company 
terminates his employment without cause (including the Company's election to 
not extend the employment agreement at any renewal date) or if he resigns his 
employment for "good reason" (as "good reason" is defined in the employment 
agreement), Mr. James will be entitled to a lump-sum payment in the amount 
his then effective annual base salary through the expiration of the 
three-year term then in effect (up to $975,000 depending on the actual date 
of the termination and between $650,000 and $975,000 upon consummation of the 
Merger, depending on the actual effective date). In addition, under the terms 
of the Agreement Regarding Vesting of Stock Options entered into between the 
Company and Mr. James on August 2, 1996, if Mr. James' employment is 
terminated under any of the circumstances listing in the preceding sentence, 
all outstanding stock options held by Mr. James shall become fully vested and 
exercisable for the latter of the remainder of the exercise period under the 
Employee Option Plan or two years following the date of termination.

     The employment agreement with Mr. Long provides that if the Company 
terminates his employment without cause (including the Company's election to 
not extend the employment agreement at any renewal date) or if he resigns his 
employment for "good reason" (as "good reason" is defined in the employment 
agreement), Mr. Long will be entitled to a lump-sum payment in the amount 
equal to two times his annual base salary ($380,000). In addition, under the 
terms of the Agreement Regarding Vesting of Stock Options entered into 
between the Company and Mr. Long on August 2, 1996, if Mr. Long's employment 
is terminated under any of the circumstances listing in the preceding 
sentence, all outstanding stock options held by Mr. Long shall become fully 
vested and exercisable for the latter of the remainder of the exercise period 
under the Employee Option Plan or two years following the date of termination.

     A change of control is deemed to have occurred if (i) more than 30% of 
the combined voting power of the Company's then outstanding securities is 
acquired, directly or indirectly, or (ii) at any time during the 24-month 
period after a tender offer, merger, consolidation, sale of assets or 
contested election, or any combination of such transactions, at least a 
majority of the Company's Board of Directors shall cease to consist of 
"continuing directors" (meaning directors of the Company who either were 
directors prior to such transaction or who subsequently became directors and 
whose election, or nomination for election by the Company's stockholders, was 
approved by a vote of at least two-thirds of the directors then still in 
office who were directors prior to such transaction), or (iii) the 
stockholders of the Company approve a merger or consolidation of the Company 
with any other corporation such as the Merger, other than a merger or 
consolidation that would result in the voting securities of the Company 
outstanding immediately prior thereto continuing to represent (either by 
remaining outstanding or by being converted into voting securities of the 
surviving entity) at least 60% of the total voting power represented by the 
voting securities of the Company or such surviving entity outstanding 
immediately after such merger or consolidation, or (iv) the stockholders of 
the Company approve a plan of complete liquidation of the Company or an 
agreement of sale or disposition by the Company of all or substantially all 
of the Company's assets.

     The employment agreements with Messrs. James and Long are subject to 
early termination as provided therein, including termination by the Company 
for "cause" (as defined in the employment agreements) or termination by the 
employee for "good reason" (as defined in the employment agreements). The 
employment agreements also provide that if, at any time within 12 months of a 
change of control, the employee ceases to be an employee of the Company by 
reason of (i) termination by the Company (or its successor) without "cause" 
(as defined in the employment agreement) or (ii) voluntary termination by the 
employee for "good reason upon change of control" (as defined in the 
employment agreements), in addition to the severance stated above, all 
outstanding stock options held by them shall become fully vested and 
exercisable, and they shall receive an additional payment that, when added to 
all other payments received in connection with a change of control, will 
result in the maximum amount allowed to be paid to an employee without 
triggering an excess parachute payment (as defined by the Internal Revenue 
Code), and Mr. Long's employment agreement provides that all benefits (as 
defined by the employment agreement) shall continue throughout the remainder 
of the two-year term of the agreement then in effect, and continuation of 
medical benefits for two years from the date of termination.

     Effective January 1, 1997, the Company entered into employment 
agreements with Messrs. Speirs and Storin, each of which continues thereafter 
until terminated by the Company or the employee upon 120 days' notice as 
provided therein. These employment agreements provide for annual, base 
salaries of $120,000 and $140,000 for Mr. Speirs and Mr. Storin, 
respectively. Messrs. Speirs and Storin also are eligible to receive 
incentive bonuses at the discretion of the Compensation Committee of the 
Board. These employment agreements were amended on July 16, 1997 to increase 
the annual base salaries for Messrs. Speirs and Storin to $160,000 effective 
October 1, 1997.

     The employment agreements with Messrs. Speirs and Storin provide that if 
the Company terminates their employment without cause (including the 
Company's election to not extend the employment agreements at any renewal 
date) or if they resign their employment for "good reason" (as "good reason" 
is defined in the employment agreement), Mr. Speirs will be entitled to a 
lump-sum payment equal to one times his annual base salary ($160,000) and Mr. 
Storin will be entitled to a lump-sum payment equal to two times his annual 
base salary ($320,000).

                                      56
<PAGE>

     In anticipation of the Merger and as part of LCI's efforts to insure an 
efficient integration of the Company's operations with its existing 
operations, LCI has caused its wholly owned subsidiary, LCI Acquisition Corp. 
("Merger Sub"), to enter into or to anticipate entering into employment 
agreements with approximately 30 of the Company's employees, including 
Messrs. James, Long, Speirs, Storin and Masters and other members of the 
Company's management, to be effective as of the effective date of the Merger. 
These employment agreements will provide for (i) annual salaries consistent 
with such individual's responsibilities in accordance with LCI's knowledge of 
industry standards; (ii) grants of options to purchase shares of LCI Common 
Stock pursuant to the 1997/1998 LCI International, Inc. Stock Option Plan 
that vest over five years; (iii) stay bonuses to induce such individuals to 
remain in the employ of the surviving corporation for specified periods of 
time equal to 100% of such individual's annual salary for the Messrs. James, 
Long, Speirs, Storin and Masters and certain other senior members of the 
Company's management and 50% of such individual's annual salary for certain 
other employees entering into such agreements; and (iv) certain 
non-competition and non-solicitation restrictions on the activities of these 
individuals. In addition, such employees will be eligible for standard bonus 
compensation in accordance with LCI's corporate incentive plan for non-sales 
employees and sales incentive plan for sales employees, as the case may be.

     The employment agreements entered into by Merger Sub with current senior 
officers of the Company will provide for annual salaries and option grants as 
follows: The annual salary of Mr. James will remain at $325,000 and he will 
receive options to purchase 50,000 shares of LCI Common Stock; the annual 
salary of Mr. Long will increase to $192,000 from $190,000 and he will 
receive options to purchase 25,000 shares of LCI Common Stock; the annual 
salary of Mr. Speirs will increase to $184,000 from $160,000 and he will 
receive options to purchase 25,000 of LCI Common Stock; the annual salary of 
Mr. Storin will increase to $188,000 from $160,000 and he will receive 
options to purchase 25,000 of LCI Common Stock; the annual salary of Mr. 
Masters will increase to $160,000 from $140,000 and he will receive options 
to purchase 40,000 of LCI Common Stock.

     Pursuant to the terms of the employment agreements with Merger Sub 
described above, Messrs. James, Long, Speirs, Storin and Masters will be 
entitled to receive their respective severance payments.

     In addition, effective as of the effective date of the Merger, Merger 
Sub has entered into or anticipates entering into non-competition agreements 
with certain of the Company's employees, including Messrs. James, Long, 
Speirs, Storin and Masters. Such non-competition agreements place broader and 
longer non-competition and broader non-solicitation restrictions on such 
individuals than those contained in the employment agreements described in 
the preceding three paragraphs. In consideration for entering into such 
non-competition agreements, Merger Sub has agreed to pay $1,000,000 to Mr. 
James, $500,000 to Mr. Long and $200,000 for each other employee who enters 
into such agreements, which amounts were determined after consultation with 
LCI's independent consultants.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Upon resignation of Parris H. Holmes, Jr. as Chairman of the Board in July
1997, Mr. James was named Chairman of the Board and appointed to the 
Compensation Committee. Mr. James also serves as Chief Executive Officer and 
President of the Company.












                                      57
<PAGE>

PERFORMANCE GRAPH

     The following performance graph compares the performance of the 
Company's Common Stock to the Standard and Poors 500 Index (the "S&P 500 
Index") and to the Standard and Poors Telecommunications Index (the "S&P Tel 
Index") for the period since September 30, 1992. The S&P Tel Index is 
comprised of AT&T, MCI, Sprint and Worldcom, Inc. The graph assumes that the 
value of the investment in the Company's Common Stock and each index was $100 
at September 30, 1992 and that all dividends were reinvested. Performance 
data for the Company is provided as of the last trading day of each of the 
Company's last five fiscal years. Performance data for the S&P 500 Index and 
for the S&P Tel Index is provided for the last trading day closest to 
September 30 of each year.

                                       
                                       
          COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
          USLD COMMUNICATIONS CORP., S&P 500 INDEX AND S&P TEL INDEX




                                    [GRAPH]




                                         FISCAL YEAR ENDING
                           ------------------------------------------------
COMPANY                    1992   1993     1994     1995     1996     1997
------------------------   ----  ------   ------   ------   ------   ------
USLD COMMUNICATIONS CP     100   164.89    85.11   128.19    76.06   170.74
INDUSTRY INDEX             100   142.49   135.57   160.20   142.17   188.59
BROAD MARKET               100   113.01   117.18   152.04   182.96   256.97




Notes:
(1) Assumes that the value of the investment in the Company's Common Stock,
    and each index, was $100 on September 30, 1992, and that all dividends were
    reinvested.

(2) The peer group index is comprised of the following companies: AT&T, MCI,
    Sprint and Worldcom, Inc. The index is weighted to reflect the relative 
    market capitalization of the peer group companies.

(3) The cumulative total return for fiscal 1996 includes the value of Billing
    common stock distributed to the Company's stockholders in the spin-off.



     There can be no assurance that performance of an investment in the 
Company will continue in the future with the same or similar trends depicted 
above. The Company does not and will not make or endorse any predictions as 
to future stock performance.

                                      58
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth certain information with respect to 
persons who are known to the Company to be the beneficial owners of 5% or 
more of the outstanding Common Stock at November 28, 1997:

                                     AMOUNT AND NATURE OF      PERCENT OF CLASS
     NAME AND ADDRESS               BENEFICIAL OWNERSHIP(1)   OWNED BENEFICIALLY
     ----------------               -----------------------   ------------------
     AIM MANAGEMENT GROUP INC.            1,023,800                   6.3%
     11 Greenway Plaza, Suite 1919
     Houston, Texas  77046

----------
(1) Unless otherwise noted, each of the persons named has sole voting and
    investment power with respect to the shares reported.

SECURITY OWNERSHIP OF MANAGEMENT

     The following table and notes thereto set forth certain information with 
respect to the shares of Common Stock beneficially owned at November 28, 1997 
by (i) each director of the Company, (ii) each executive officer of the 
Company included in the Summary Compensation Table set forth under the 
caption "Executive Compensation" in Item 11 of this report and (iii) all 
executive officers and directors of the Company as a group.

<TABLE>
                                                            COMMON STOCK
                                           ------------------------------------------------
                                            AMOUNT AND NATURE OF        PERCENT OF CLASS
    NAME OF BENEFICIAL OWNER               BENEFICIAL OWNERSHIP (1)  OWNED BENEFICIALLY (2)
    ------------------------               ------------------------  ----------------------
    <S>                                    <C>                       <C>
    LARRY M. JAMES                               292,152(3)                   1.8%
    W. AUDIE LONG                                181,667(4)                   1.1%
    JAMES S. SPEIRS                               38,622(5)                     *
    PHILLIP J. STORIN                             63,980(6)                     *
    STAN G. MASTERS                               40,481(7)                     *
    CHARLES E. AMATO                              56,134(8)                     *
    GARY D. BECKER                                17,500(9)                     *
    L. LOWRY MAYS                                  5,000                        *
    F. GARDNER PARKER                             12,000(10)                    *
    ALL EXECUTIVE OFFICERS AND DIRECTORS
     AS A GROUP (14 persons, including the
     executive officers and directors
     listed above)                               834,009(11)                  4.9%
</TABLE>

----------
*    Represents less than 1% of the issued and outstanding shares of Common 
     Stock.

(1)  Unless otherwise noted, each of the persons named has sole voting and 
     investment power with respect to the shares reported.

(2)  The percentages indicated are based on outstanding stock options 
     exercisable within 60 days for each individual and 16,325,409 shares of 
     Common Stock issued and outstanding on November 28, 1997.

(3)  Includes 186,334 shares that Mr. James has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days, and 3,000 shares 
     owned by Mr. James's wife.

(4)  Includes 158,667 shares that Mr. Long has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days.

(5)  Includes 33,334 shares that Mr. Speirs has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days.

(6)  Includes 38,001 shares that Mr. Storin has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days.

(7)  Includes 4,672 shares owned by Mr. Master's wife and 26,500 and 6,084 
     shares that Mr. Masters and his wife, respectively, have the right to 
     acquire upon the exercise of stock options, exercisable within 60 days.

                                      59
<PAGE>

(8)  Includes 10,834 shares that Mr. Amato has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days.

(9)  Includes 12,500 shares that Mr. Becker has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days.

(10) Includes 5,000 shares that Mr. Parker has the right to acquire upon the 
     exercise of stock options, exercisable within 60 days.

(11) Includes 561,340 shares that 14 directors and executive officers 
     (including those held by Mr. Masters' wife) have the right to acquire upon
     the exercise of stock options, exercisable within 60 days.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Parris H. Holmes, Jr. served as Chairman of the Board and as a member of 
the Compensation Committee of the Board of Directors until his resignation on 
June 2, 1997. In connection with his resignation from the Board of Directors 
of the Company in June 1997, the Company paid Mr. Holmes an $875,000 cash 
bonus and granted him 25,000 shares of restricted Common Stock having a value 
of $358,000 based on the closing price of the Common Stock on the Nasdaq 
National Market System on June 4, 1997 ($14.3125 per share).

     During fiscal 1997, the Company contracted for director and officer 
liability, employee dishonesty, general liability, commercial auto, workers' 
compensation, umbrella liability, employee benefits liability, property, 
earthquake, fiduciary responsibility, employment practices and aircraft 
policies of insurance. SWBC Insurance Services, Inc., a full service 
insurance agency owned 25% by Mr. Amato, a director of the Company, served as 
the agent for the placement of these policies. The aggregate amount of these 
insurance policy premiums was not material to the Company's financial 
position or results of operations. Mr. Amato also serves as a director and 
Vice President of SWBC Insurance Services, Inc.

     On April 18, 1997, Richard E. Burk, Vice President - Strategic Planning 
of the Company, borrowed $75,000 from the Company. This loan accrued interest 
at the rate of 10% per annum and matures on April 15, 1998. This loan is 
secured by a first lien collateral interest in and to (i) any bonus realized 
by Mr. Burk from the Company for fiscal year 1997 and (ii) the proceeds from 
the exercise of stock options that vest prior to the repayment of such loan. 
The largest aggregate amount of this indebtedness outstanding from Mr. Burk 
to the Company for this loan during the period October 1, 1996 through 
September 30, 1997 was $75,000.

     L. Lowry Mays, a director of the Company is Chairman and Chief Executive 
Officer of Clear Channel. Pursuant to on-going agreements, the Company 
purchases advertising from Clear Channel and Clear Channel purchases long 
distance services from the Company. The amount associated with these 
agreements is not material to the Company's financial position or results of 
operations.






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<PAGE>
                                       
                                    PART IV

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

         (a)  DOCUMENTS FILED AS PART OF REPORT

         1.   Financial Statements:

              The consolidated financial statements of the Company and the 
         related report of the Company's independent public accountants thereon
         have been filed under Item 8 hereof.

         2.   Financial Statement Schedules:

              The following financial statement schedule and the report of 
         independent public accountants thereon are included in this report at 
         the page indicated. All other schedules for which provision is made in 
         the applicable accounting regulations of the SEC have been omitted 
         because such schedules are not required under the related instructions 
         or are inapplicable or because the information required is included in 
         the Consolidated Financial Statements or notes thereto.

ITEM                                                                      PAGE
----                                                                      ----
Report of Independent Public Accountants                                   62
Schedule II - Valuation and Qualifying Accounts                            63









                                      61
<PAGE>

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
USLD Communications Corp.:

     We have audited, in accordance with generally accepted auditing 
standards, the consolidated financial statements of USLD Communications Corp. 
and subsidiaries and have issued our report thereon dated November 14, 1997. 
Our audit was made for the purpose of forming an opinion on the basic 
financial statements taken as a whole. Schedule II is the responsibility of 
the Company's management and is presented for purposes of complying with the 
Securities and Exchange Commission's rules and is not part of the basic 
financial statements. This schedule has been subjected to the auditing 
procedures applied in the audit of the basic financial statements and, in our 
opinion, fairly states in all material respects the financial data required 
to be set forth therein in relation to the basic financial statements taken 
as a whole.


                                                ARTHUR ANDERSEN LLP

San Antonio, Texas
November 14, 1997











                                      62
<PAGE>

                                                                    SCHEDULE II

                  USLD COMMUNICATIONS CORP. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
                                                                     ADDITIONS
                                                               ----------------------
                                                BALANCE AT     CHARGED TO  CHARGED TO   WRITE-OFFS
FISCAL                                         BEGINNING OF    COSTS AND     OTHER      CHARGED TO    BALANCE AT 
 YEAR               DESCRIPTION                   PERIOD        EXPENSES    ACCOUNTS     ALLOWANCE   END OF PERIOD
------              -----------                ------------    ----------  ----------   ----------   -------------
<S>       <C>                                  <C>             <C>         <C>          <C>          <C>
 1995     Allowance for doubtful accounts         $2,298         $6,231        $0        $(6,591)        $1,938
 1996     Allowance for doubtful accounts         $1,938         $8,388        $0        $(7,807)        $2,519
 1997     Allowance for doubtful accounts         $2,519         $9,156        $0        $(8,848)        $2,827
</TABLE>






                                      63
<PAGE>

     3.   Exhibits:

     The exhibits listed below are filed as part of or incorporated by reference
     in this report. Where such filing is made by incorporation by reference to
     a previously filed document, such document is identified in parentheses.

EXHIBIT
NUMBER    DESCRIPTION
-------   -----------
 3.1      Restated Certificate of Incorporation (Exhibit 3.1 to September 30,
          1996, Form 10-K)

 3.2      Certificate of Designation, Preference and Rights of Series A Junior
          Participating Preferred Stock, filed with the Delaware Secretary of 
          State on April 27, 1996 (Filed herewith)

 3.3      Certificate of Amendment of Restated Certificate of Incorporation,
          amending Article 1 to change the name of the corporation to USLD
          Communications Corp., filed with the Delaware Secretary of State on 
          August 19, 1997 (Filed herewith)

 3.4      Bylaws, as amended (Exhibit 3.2 to September 30, 1996, Form 10-K)

 4.1      Form of Certificate Evidencing Common Stock (Filed herewith)

 4.2      Amended Letter Agreement dated October 6, 1992, by and between 
          Communications Central, Inc., U.S. Long Distance Corp. and U.S. Long
          Distance, Inc. (Exhibit 4.7 to Amendment No. 1 to Registration 
          Statement on Form  S-3, SEC File No. 33-71228, dated November 23, 
          1993) as amended by Letter Agreement dated January 11, 1995 (Exhibit 
          4.7 to September 30, 1995, Form 10-K) and as amended by Letter 
          Agreement dated August 21, 1996 (Exhibit 4.2 to September 30, 1996, 
          Form 10-K)

 4.3      Agreement dated March 23, 1993 by and between Paytel Northwest, Inc.,
          U.S. Long Distance Corp. and U.S. Long Distance, Inc., as amended by
          Agreement dated August 23, 1995 (Exhibit 4.8 to September 30, 1995, 
          Form 10-K) and as amended by Addendum No. 3 to Telecommunications 
          Services Agreement dated February 22, 1996 (Exhibit 4.3 to September 
          30, 1996, Form 10-K)

 4.4      Rights Agreement by and between the Company and U.S. Trust Company of
          Texas, N.A. dated April 12, 1996 (Exhibit 4.1 to Form 8-K filed 
          April 17, 1996), as amended by Amendment No. 1 to Rights Agreement 
          dated as of September 17, 1997 (Exhibit 4.1 to Form 8-K filed 
          September 23, 1997)

10.1      Amended and Restated Employment Agreement, dated August 1, 1997, by
          and between the Company and Larry M. James (Filed herewith)

10.2      Amended and Restated Employment Agreement, dated August 1, 1997, by
          and between the Company and W. Audie Long (Filed herewith)

10.3      Employment Agreement and Agreement Regarding Vesting of Stock Options,
          both dated January 1, 1997, by and between the Company and Phillip J.
          Storin (Filed herewith)

10.4      Form of letter agreement and Agreement Regarding Vesting of Stock
          Options, both dated January 1, 1997, by and between the Company and 
          David S. Horne, Stan G. Masters and James S. Speirs, amending 
          employment agreements by and between the Company and each of such 
          individuals on January 1, 1997 (Filed herewith)

10.5      Form of Employment Agreement by and between the Company and its Vice
          Presidents (Exhibit 10.4 to September 30, 1993, Form 10-K)

10.6      1990 Employee Stock Option Plan, as amended (Exhibit 10.5 to 
          September 30, 1996, Form 10-K)

10.7      Form of Option Agreement by and between the Company and its Employees,
          Under the Employee Stock Option Plan (Exhibit 10.8 to September 30, 
          1992, Form 10-K)

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<PAGE>

10.8      Form of Stock Option Agreement by and between the Company and 
          Directors, Key Employees and Advisors (Filed herewith)

10.9      Form of Discretionary Option Agreement by and between the Company and
          Non-Employee Directors (Filed herewith)

10.10     Amended and Restated Loan and Security Agreement dated May 22, 1991,
          by and between Zero Plus Dialing, Inc. (currently Billing Information
          Concepts, Inc.), U.S. Long Distance Corp. and U.S. Long Distance, 
          Inc. and Bell Atlantic TriCon Leasing Corporation ("Bell Atlantic") 
          (currently FINOVA Capital Corporation) (Exhibit 10.10 to September 30,
          1991, Form 10-K) and related Revolving Credit Note dated May 24, 1991,
          Term Note dated June 1992, Corporate Guaranties dated May 24, 1991, 
          and First Amendment and Joinder to Amended and Restated Loan and 
          Security Agreement dated December 17, 1992 (Exhibit 10.9 to 
          September 30, 1992, Form 10-K)

10.11     Second Amendment to Amended and Restated Loan and Security Agreement
          dated April 2, 1993 by and between Zero Plus Dialing, Inc. (currently
          Billing Information Concepts, Inc.), U.S. Long Distance Corp., U.S. 
          Long Distance, Inc., U.S. Billing, Inc. and Bell Atlantic (currently 
          FINOVA Capital Corporation) (Exhibit 10.11 to September 30, 1993, 
          Form 10-K)

10.12     Third Amendment to Amended and Restated Loan and Security Agreement
          dated October 1, 1993 by and between Zero Plus Dialing, Inc. 
          (currently Billing Information Concepts, Inc.), U.S. Long Distance 
          Corp., U.S. Long Distance, Inc., U.S. Billing, Inc. and Bell Atlantic
          (currently FINOVA Capital Corporation) (Exhibit 10.12 to September 30,
          1993, Form 10-K)

10.13     Fourth Amendment to Amended and Restated Loan and Security Agreement
          dated October 1, 1993 by and between Zero Plus Dialing, Inc. 
          (currently Billing Information Concepts, Inc.), U.S. Long Distance 
          Corp., U.S. Long Distance, Inc., U.S. Billing, Inc. and Bell Atlantic
          (currently FINOVA Capital Corporation) (Exhibit 10.13 to September 30,
          1993, Form 10-K)

10.14     Fifth Amendment to Amended and Restated Loan and Security Agreement
          dated November 16, 1993 by and between Zero Plus Dialing, Inc. 
          (currently Billing Information Concepts, Inc.), U.S. Long Distance 
          Corp., U.S. Long Distance, Inc., U.S. Billing, Inc., USLD Acquisition
          Corp. d/b/a Telecom West, Inc., STS Telecommunications, Inc. and Bell
          Atlantic (currently FINOVA Capital Corporation) (Exhibit 10.14 to 
          September 30, 1993, Form 10-K)

10.15     Sixth Amendment to Amended and Restated Loan and Security Agreement
          dated December 7, 1993 by and between Zero Plus Dialing, Inc. 
          (currently Billing Information Concepts, Inc.), U.S. Long Distance 
          Corp., U.S. Long Distance, Inc., U.S. Billing, Inc., USLD Acquisition 
          Corp., STS Telecommunications, Inc. and Bell Atlantic (currently 
          FINOVA Capital Corporation) (Exhibit 10.36 to September 30, 1994, 
          Form 10-K)

10.16     Seventh Amendment to Amended and Restated Loan and Security Agreement
          dated March 17, 1994 by and between Zero Plus Dialing, Inc. (currently
          Billing Information Concepts, Inc.), U.S. Long Distance Corp., U.S. 
          Long Distance, Inc., U.S. Billing, Inc., USLD Acquisition Corp., 
          California Acquisition Corp., Telecom Acquisition Corp., STS 
          Telecommunications, Inc., Enhanced Services Billing, Inc. and Bell 
          Atlantic (currently FINOVA Capital Corporation) (Exhibit 10.37 to 
          September 30, 1994, Form 10-K)

10.17     Letter Agreement dated December 2, 1993 by and between Bell Atlantic
          (currently FINOVA Capital Corporation) and U.S. Long Distance Corp.
          (Exhibit 10.15 to September 30, 1993, Form 10-K)

10.18     Office Lease Agreement entered into on March 14, 1997, and effective
          April 1, 1997, by and between U.S. Long Distance, Inc. and Nowlin 
          Partners (Exhibit 10.38 to Form 10-Q for the Quarterly Period Ended 
          March 31, 1997)

10.19     Agreement of Lease dated September 1, 1992, by and between U.S. Long
          Distance, Inc. and Multi-Employer Property Trust (Exhibit 10.13 to
          September 30, 1992, Form 10-K), as amended by Modification and
          Ratification of Lease dated as of September 1, 1997 (Filed herewith)

10.20     Loan and Security Agreement dated July 25, 1991, by and between Buyer
          Acquisition Corporation (NTX) and Bell Atlantic (currently FINOVA 
          Capital Corporation) (Exhibit 10.13 to September 30, 1991, Form 10-K) 
          and related Revolving Credit Note, Term Note, Subordination Agreement
          and Corporation Guaranties dated July 25, 1991 (Exhibit 10.14 to 
          September 30, 1992, Form 10-K)

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<PAGE>

10.21     Loan and Security Agreement Nos. 2882, 2883, 2884 and 2885 by and
          between U.S. Long Distance Corp. and Charter Financial, Inc. dated 
          August 29, 1996 (Exhibit 10.20 to September 30, 1996, Form 10-K)

10.22     WCMA and Term WCMA Loan and Security Agreement No. 9608340801 by and
          between U.S. Long Distance, Inc. and Merrill Lynch Business Financial
          Services Inc. ("Merrill Lynch"), dated as of August 23, 1996, as 
          amended by letter agreement dated November 5, 1996, and Term WCMA 
          Note, dated August 23, 1996, made by U.S. Long Distance, Inc. and 
          payable to Merrill Lynch (Exhibit 10.21 to September 30, 1996, 
          Form 10-K), as amended by letter agreement dated October 13, 1997 
          (Filed herewith)

10.23     Operator Services Agreement by and between the Company and G-Five
          Corp., dated September 16, 1993 (Exhibit 10.33 to September 30, 1993, 
          Form 10-K), as amended by Amendment to Operator Services Agreement 
          dated August 31, 1995 (Exhibit 10.22 to September 30, 1996, 
          Form 10-K)

10.24     1993 Non-Employee Director Plan of U.S. Long Distance Corp., as 
          amended (Filed herewith)

10.25     Form of Director Option Agreement by and between the Company and Non-
          Employee Directors (Exhibit 10.24 to September 30, 1996, Form 10-K)

10.26     Form of Director Fee Option Agreement by and between the Company and
          Non-Employee Directors (Exhibit 10.25 to September 30, 1996, 
          Form 10-K)

10.27     U.S. Long Distance Corp. Executive Qualified Disability Plan 
          (Exhibit 10.42 to September 30, 1994, Form 10-K)

10.28     U.S. Long Distance Corp. Executive Compensation Deferral Plan,
          Restated Effective December 12, 1995 (Exhibit 10.27 to September 30, 
          1996, Form 10-K)

10.29     U.S. Long Distance Corp. Director Compensation Deferral Plan, 
          Restated Effective December 19, 1995 (Exhibit 10.28 to September 30, 
          1997, Form 10-K)

10.30     U.S. Long Distance Corp. Employee Stock Purchase Plan (Exhibit 10.44
          to September 30, 1995, Form 10-K)

10.31     U.S. Long Distance Corp. Restricted Stock Plan (Exhibit 10.45 to
          September 30, 1995, Form 10-K), as amended by First Amendment dated 
          July 2, 1996 and Second Amendment dated July 14, 1997 (Filed herewith)

10.32     Merrill Lynch Special Prototype Defined Contribution Plan and 
          Adoption Agreement for Merrill Lynch Special Prototype Defined 
          Contribution Plan (401(k) Plan) (Exhibit 10.31 to September 30, 
          1996, Form 10-K)

10.33     Distribution Agreement dated as of July 10, 1996 between the Company
          and Billing Information Concepts Corp. (Exhibit 10.1 to Form 8-K 
          filed August 2, 1996)

10.34     Benefit Plans and Employment Matters Allocation Agreement dated as of
          July 10, 1996 between the Company and Billing Information Concepts 
          Corp. (Exhibit 10.2 to Form 8-K filed August 2, 1996)

10.35     Tax Sharing Agreement dated as of July 10, 1996 between the Company
          and Billing Information Concepts Corp. (Exhibit 10.3 to Form 8-K filed
          August 2, 1996)

10.36     Transitional Services and Sublease Agreement dated as of July 10,
          1996 between the Company and Billing Information Concepts Corp. 
          (Exhibit 10.4 to Form 8-K filed August 2, 1996)

10.37     Zero Plus-Zero Minus Billing and Information Management Services
          Agreement dated as of July 10, 1996 between the Company and Billing
          Information Concepts Corp. (Exhibit 10.5 to Form 8-K filed August 2, 
          1996)

10.38     Telecommunications Agreement dated as of July 10, 1996 between the
          Company and Billing Information Concepts Corp. (Exhibit 10.6 to 
          Form 8-K filed August 2, 1996)

10.39     Agreement and Plan of Merger dated September 17, 1997 between the
          Company and LCI International, Inc. (Exhibit 2.1 to Form 8-K filed
          September 23, 1997)

11.1      Statement regarding computation of per share earnings (Filed herewith)

                                      66
<PAGE>

21.1      Subsidiaries of the Company (Filed herewith)

23.1      Consent of Arthur Andersen LLP (Filed herewith)

27.1      Financial Data Schedule (Filed herewith)

     (b)  REPORTS ON FORM 8-K

     The Company filed a Report on Form 8-K on September 23, 1997, relating 
to (i) an amendment to the Company's Restated Certificate of Incorporation to 
change its name to USLD Communications Corp. and (ii) execution of the 
September 17, 1997 Agreement and Plan of Merger with LCI International, Inc. 
and a wholly-owned subsidiary of LCI International, Inc.















                                      67
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, as amended, the Registrant has duly caused this report 
to be signed on its behalf by the undersigned, thereunto duly authorized:


                                USLD COMMUNICATIONS CORP.


                                By: /s/ LARRY M. JAMES
                                    ----------------------------------------
                                      Larry M. James
                                      CHAIRMAN OF THE BOARD,
                                      PRESIDENT AND
                                      CHIEF EXECUTIVE OFFICER

Date: December 15, 1997

     Pursuant to the requirements of the Securities Exchange Act of 1934, as 
amended, this report has been signed below by the following persons on behalf 
of the Registrant and in the capacities indicated on the 15th day of 
December, 1997.

         SIGNATURE                              TITLE
         ---------                              -----

   /s/  LARRY M. JAMES                   Chairman of the Board,
---------------------------       President and Chief Executive Officer
       Larry M. James                  (Principal Executive Officer)


  /s/  PHILLIP J. STORIN      Senior Vice President and Chief Financial Officer
---------------------------            (Principal Financial Officer)
    Phillip J. Storin


  /s/  PATRICK M. AELVOET         Vice President and Chief Accounting Officer
---------------------------              (Principal Accounting Officer)
     Patrick M. Aelvoet


   /s/  CHARLES E. AMATO                            Director
---------------------------              
    Charles E. Amato


   /s/  GARY D. BECKER                              Director
---------------------------              
      Gary D. Becker


   /s/  L. LOWRY MAYS                               Director
---------------------------              
     L. Lowry Mays


 /s/  F. GARDNER PARKER                             Director
---------------------------              
   F. Gardner Parker






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