OPTEL INC, S-1/A, 1999-03-25

OPTEL INC
S-1/A, 1999-03-25
CABLE & OTHER PAY TELEVISION SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1999

REGISTRATION NO. 333-56231
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 4

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
OPTEL, INC.
(Exact name of registrant as specified in its charter)
---------------------

<TABLE>
<S> <C> <C>
DELAWARE 4841 95-4495524
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

1111 W. MOCKINGBIRD LANE
DALLAS, TEXAS 75247
(214) 634-3800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
LOUIS BRUNEL, PRESIDENT AND CHIEF EXECUTIVE OFFICER
OPTEL, INC.
1111 W. MOCKINGBIRD LANE
DALLAS, TEXAS 75247
(214) 634-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:

<TABLE>
<S> <C> <C>
RALPH J. SUTCLIFFE, ESQ. MICHAEL E. KATZENSTEIN, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
KRONISH LIEB WEINER & HELLMAN LLP OPTEL, INC. CAHILL GORDON & REINDEL
1114 AVENUE OF THE AMERICAS 1111 W. MOCKINGBIRD LANE 80 PINE STREET
NEW YORK, NEW YORK 10036-7798 DALLAS, TEXAS 75247 NEW YORK, NEW YORK 10005
(212) 479-6000 (214) 634-3800 (212) 701-3000
</TABLE>

---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------

CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par
value $.01 per share.... $100,000,000 $29,500(2)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.

(2) Previously paid on June 5, 1998.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED MARCH 25, 1999

PROSPECTUS

[LOGO]

OPTEL, INC.

COMMON STOCK

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

OpTel, Inc. is selling shares of its common stock, and the
selling stockholders named in this prospectus are selling shares.
OpTel will not receive any proceeds from the sale of the shares by the selling
stockholders. The underwriters named in this prospectus may purchase up to
additional shares of common stock from OpTel under certain
circumstances.

This is an initial public offering of common stock. OpTel currently expects
the initial public offering price to be between $ and $ per
share, and has applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "OTEL".

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

INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public offering price $ $
Underwriting discount $ $
Proceeds to OpTel (before expenses) $ $
Proceeds to the selling stockholders (before expenses) $ $
</TABLE>

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 1999.

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

SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.

CIBC WORLD MARKETS

, 1999

<PAGE> 3

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. OPTEL
HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. OPTEL IS
NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Historical Consolidated Financial and Operating
Data...................................................... 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Business.................................................... 42
Management.................................................. 66
Principal and Selling Stockholders.......................... 74
Certain Relationships and Related Transactions.............. 77
Description of Capital Stock................................ 79
Certain Federal Income Tax Considerations................... 84
Description of Certain Indebtedness......................... 87
Underwriting................................................ 88
Certain Market Information.................................. 90
Legal Matters............................................... 90
Experts..................................................... 90
Additional Information...................................... 90
Glossary.................................................... A-1
Index to Financial Statements............................... F-1
</TABLE>

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

Until 1999, all dealers that buy, sell or trade the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information included elsewhere in this
Prospectus, including the Consolidated Financial Statements and the notes
thereto. As used in this Prospectus, the terms "Company" or "OpTel" mean OpTel,
Inc., a Delaware corporation, and its subsidiaries, except where the context
otherwise requires. Certain terms used herein are defined in the glossary
attached hereto as Appendix A. References to fiscal years throughout this
Prospectus are to the Company's fiscal years, which end on August 31 of each
calendar year. Prospective investors should carefully consider the factors set
forth in "Risk Factors." This Prospectus contains "forward-looking" statements
concerning the Company's operations, economic performance and financial
condition, which are subject to inherent risks and uncertainties, including
those identified under "Risk Factors."

THE COMPANY

OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone, cable television and high
speed Internet access services, to residents of multiple dwelling units ("MDUs")
in the United States. In each market that it serves, OpTel seeks to become the
principal competitor in the MDU marketplace to the incumbent local exchange
carrier ("ILEC") and the incumbent franchise cable television operator by
providing a package of voice, video and Internet access services at competitive
prices. OpTel believes its ability to deliver an integrated service offering to
MDU residents over its own networks and its long-term contractual relationships
with MDU owners and associations provide it with a competitive advantage.

MDUs comprise a wide variety of high density residential complexes,
including high- and low-rise apartment buildings, condominiums, cooperatives,
town houses and mobile home communities. According to 1990 U.S. Census Bureau
data, there are more than 13.2 million dwelling units in MDUs with greater than
10 dwelling units in the United States. Within the MDU market, the Company
focuses on MDUs of 150 or more dwelling units ("Large MDUs"). Based on industry
sources, the Company believes that, within its existing markets there are
approximately 3.0 million dwelling units within these Large MDUs.

The Company currently provides cable television and telecommunications
services in a number of metropolitan areas including Houston, Dallas-Fort Worth,
Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta, Orlando-Tampa and Indianapolis. The Company is licensed as a
competitive local exchange carrier ("CLEC") in each of its major markets. The
Company has commenced offering central office switched local exchange services
in Houston and Dallas-Fort Worth and intends to offer these services in
substantially all of its major markets by the end of calendar 2000. In addition,
the Company commenced offering high speed Internet access at select MDUs in
Houston, Dallas-Fort Worth, and San Francisco in January 1999 and intends to
introduce its high speed Internet access services in substantially all of its
major markets over the next 12 months. As of February 28, 1999, the Company had
435,738 units under contract and 401,600 units passed for cable television
services and 218,023 cable television subscribers. At that date, the Company had
107,109 units under contract and 47,462 units passed for telecommunications and
13,229 telecommunications lines in service.

OpTel secures long-term rights of entry agreements ("Rights of Entry") with
MDU owners. Rights of Entry generally grant OpTel the exclusive right to provide
cable television service to an MDU or group of MDUs and provide that the MDU
owner will promote OpTel as the preferred provider of telecommunications
services within the MDU. Rights of Entry generally provide OpTel with the
exclusive services of the MDU's leasing staff to market the Company's services
to residents. Rights of Entry also generally grant OpTel the exclusive right to
use the coaxial cable network at the MDU. As a result, at MDUs where OpTel has
cable television Rights of Entry, OpTel effectively will be the only company
positioned to provide high speed Internet access via cable modem. Rights of
Entry generally provide financial incentives to property owners to promote and
sell the Company's services to MDU residents. The Company's Rights of Entry
typically have original terms of 10 to 15 years (five years for Rights of Entry
with condominium associations). The weighted average unexpired term of the
Company's Rights of Entry was approximately eight and one half years as of
February 28, 1999 (assuming the Company's exercise of available renewal
options).

<PAGE> 5

The Company intends to continue to develop and utilize its own networks to
deliver its service offerings. The Company also plans to collocate network
facilities for telecommunications services in selected ILEC end offices in
certain of its markets. Through collocation, the Company will lease the ILEC's
transport network on an unbundled basis to initially reach a subscriber. The
Company believes collocation will decrease the time required to provide
telephone services to a subscriber, increase the Company's addressable market by
providing a cost effective means of servicing smaller MDUs and, over time,
promote new Rights of Entry. The Company will select the ILEC end offices in
which it will collocate based upon MDU concentration. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins.

STRATEGY

OpTel's goal is to become the nation's largest integrated communications
provider for Large MDUs. In order to achieve this objective, OpTel has
customized strategies to rapidly and cost effectively address its markets,
deploy its networks and offer an integrated service package supported by
superior customer service. The following highlights key elements of OpTel's
growth and operating strategies:

Provide an Integrated Service Offering. In order to establish the broadest
possible relationship with its subscribers, OpTel offers an integrated package
of communications services at competitive rates. OpTel's service offerings
include: (i) basic and premium tier cable television services, which the Company
can customize on a sub-market basis to meet local preferences; (ii) a full
featured switched local and long distance telephone offering; (iii) high speed
Internet access via cable modem with downstream transmission speeds of up to 1.5
MB per second, which is delivered through a venture with an independent Internet
service provider; and (iv) where market conditions justify, an additional tier
of direct broadcast satellite ("DBS") programming from EchoStar Satellite
Corporation ("EchoStar") that includes over 300 channels of digital video and
audio programming. The Company believes its integrated service offering will
capitalize on MDU residents' preference for a single source provider of
communications services, enhancing OpTel's ability to attract and retain
subscribers.

Continue to Rapidly Expand Subscriber Base. The Company intends to rapidly
expand its subscriber base by: (i) securing additional Rights of Entry from MDU
owners through the use of its experienced and growing sales force and (ii)
increasing penetration and cross-selling additional services to existing
subscribers in MDUs where the Company has Rights of Entry through the use of
marketing and incentive programs. The Company will continue to market its Rights
of Entry on a business to business basis to local, regional and national MDU
owners, including real estate investment trusts ("REITs"). The Company's
strategy to promote subscriber growth includes having MDU leasing agents provide
an effective point of sale including at the time MDU residents initially secure
their leases. As an additional strategy to drive growth, the Company will
directly market local and long distance telephone services to tenants residing
in MDUs not covered by Rights of Entry but who can be served by collocating
telecommunications network facilities at certain ILEC end offices and leasing
unbundled transport network from that ILEC. The Company believes that its
ability to directly market services to MDU residents will drive Rights of Entry
with owners who will want to share in OpTel's success. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins.

2
<PAGE> 6

Company expects to serve substantially all of its major markets with its own
central office switches by the end of calendar 2000. As a licensed CLEC in each
of its major markets, the Company also intends to collocate facilities and lease
ILEC transport network in order to offer telecommunications services in advance
of installing network transport facilities from its switch to the subscriber.
Over time, OpTel believes substantially all telecommunications services to MDUs
serviced under Rights of Entry will be migrated from ILEC leased transport
network to its own network facilities.

Provide Superior Customer Service. The Company believes that an important
success factor for competitive service providers will be to ensure superior
customer service. Accordingly, the Company has focused on implementing,
provisioning and servicing practices designed around the residential MDU
customer. The Company has a national customer service center staffed with
knowledgeable representatives to address the needs of residents 24-hours-a-day,
seven-days-a-week and dedicated local service teams, trained to support all of
the Company's service offerings, that provide prompt installation and response
to customer service calls. The Company also has service center staff dedicated
to responding to calls from MDU owners and their leasing agents. Because the
Company believes that the best way to control the quality and consistency of
technical and field services is to train and supervise the service technicians,
the Company relies primarily on its own personnel to perform these functions and
dedicates individual technical service teams to a few proximate MDUs.

Pursue Selective Acquisitions and Strategic Relationships. OpTel began
operations in April 1993 with a strategy of consolidating the then fragmented
private cable television, or non-franchise cable television, industry serving
MDUs. Since May 1996, the Company has completed and successfully integrated six
acquisitions of MDU oriented video providers representing approximately 700 MDUs
served and 103,000 subscribers. The Company intends to continue to seek
acquisition opportunities in order to capitalize on economies of scale, expand
its subscriber base, provide a client base to cross-sell its other services and
decrease the time to market. The Company delivers high speed Internet access
services through a strategic relationship with an Internet service provider that
specializes in delivering broadband Internet connectivity and content to MDUs.
In addition, the Company has entered into a strategic relationship with EchoStar
for the delivery of an additional tier of DBS programming and will continue to
evaluate other strategic alliances.

EXPERIENCED MANAGEMENT AND COMMITTED SHAREHOLDER

Since April 1995, OpTel has been indirectly majority owned by Le Groupe
Videotron Ltee ("GVL"), which also owns the second largest cable television
operator in Canada (based on number of subscribers). GVL has invested
approximately $250 million of equity capital in OpTel. These invested amounts
have been critical to OpTel's growth.

OpTel benefits from GVL's experience developing and providing cable
television and telecommunications services to residential customers in the
United Kingdom. The President and Chief Executive Officer and Chief Financial
Officer of OpTel served as the Vice-Chairman and Chief Executive Officer and
Chief Financial Officer, respectively, of the since-divested GVL affiliate in
the United Kingdom. OpTel management's extensive operating experience in both
the telecommunications and cable television industries, including the
construction and design of networks and sales and customer support, provides
OpTel with significant expertise in managing and developing an infrastructure to
support voice, video and Internet access operations.

RISK FACTORS

The Company operates in highly competitive market segments which are
subject to extensive regulation at the federal, state and local level. The
Company's success in providing telecommunications services, as well as cable
television and Internet access services, is dependent upon a number of factors,
some of which are controlled by the Company and some of which are controlled by
third parties, including ILECs, MDU owners and residents and government
entities. Such factors include risks associated with the Company's history of
net losses and negative cash flow, the Company's substantial indebtedness and
the insufficiency of its earnings to cover fixed charges, the significant
capital requirements of the Company's operations and the Company's dependence
upon its strategic relationships with MDU owners. See "Risk Factors" for a
detailed discussion of certain factors which should be considered by purchasers
of the common stock.

3
<PAGE> 7

ORGANIZATION AND PRINCIPAL OFFICE

OpTel was incorporated in Delaware in July 1994 as the successor to a
California limited partnership that was organized in April 1993. The Company's
principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247,
and its telephone number is (214) 634-3800.

4
<PAGE> 8

THE OFFERING

Unless otherwise indicated, the information in this Prospectus assumes (i)
an initial public offering price of $ per share, (ii) that the Underwriters'
over-allotment option will not be exercised, (iii) a for 1 stock split
which will be effected upon consummation of the Offering (the "Split") and (iv)
the conversion of all the outstanding classes of common stock and all
outstanding series of preferred stock into shares of Class A Common Stock, par
value $.01 per share (the "Common Stock") immediately prior to the consummation
of the Offering. While the information in this Prospectus assumes the conversion
of all of the outstanding shares of the Company's 9.75% Series A Preferred
Stock, par value $.01 per share (the "Series A Preferred"), immediately prior to
the consummation of the Offering, the actual conversion will occur after the
Offering is consummated. See "Risk Factors -- Risks Associated with GVL's Series
A Preferred Stock."

Common Stock offered by the Company..... shares

Common Stock offered by the Selling
Stockholders............................ shares
________

Total.............................. shares

Common Stock outstanding after the
Offering................................ shares of Common
Stock(1)

Use of Proceeds......................... The Company intends to use the net
proceeds from the Offering for
capital expenditures related to the
purchase and installation of
communications equipment and for
general corporate purposes,
including working capital. The
Company will not receive any
proceeds from the sale of shares by
the Selling Stockholders. See "Use
of Proceeds."

Proposed Nasdaq National Market
Symbol.................................. OTEL
- ---------------

(1) Excludes (i) 28,039.16 shares of Common Stock issuable upon exercise of
presently exercisable stock options granted to officers, employees and
consultants at a weighted average exercise price of $83.90 per share and
(ii) 35,127.22 shares of Common Stock issuable upon exercise of presently
exercisable warrants at a weighted average exercise price of $59.81 per
share.

5
<PAGE> 9

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The summary consolidated financial data as of August 31, 1998 and for the
years ended August 31, 1996, 1997 and 1998 have been derived from the
consolidated financial statements of the Company included elsewhere herein and
audited by Deloitte & Touche LLP, independent auditors, as set forth in their
report thereon also included herein. The summary historical consolidated
financial and operating data presented below as of and for the six months ended
February 28, 1998 and 1999 have been derived from unaudited consolidated
financial statements of the Company. In the opinion of management, the unaudited
interim consolidated financial statements have been prepared on the same basis
as the audited financial statements and include all adjustments, which consist
only of normal recurring adjustments, necessary for the fair presentation of the
Company's financial position and results of operation for these periods.
Operating results for the six months ended February 28, 1998 and 1999, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period. As a result of the Company's history of growth
through acquisitions, the Company's historical financial results are not
directly comparable from period to period, nor are they indicative of future
results of operations in many respects. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the Consolidated Financial Statements
of the Company and the notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television...................... $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095
Telecommunications.................... 1,711 2,922 3,882 1,644 2,870
-------- -------- -------- -------- --------
Total revenues................ 27,604 39,837 64,963 26,891 40,965
Operating expenses:
Programming, access fees and revenue
sharing............................ 11,868 19,202 28,825 12,419 18,689
Customer support, general and
administrative..................... 19,636 28,926 35,847 15,855 26,335
Depreciation and amortization......... 8,676 14,505 28,481 10,759 17,997
-------- -------- -------- -------- --------
Total operating expenses................ 40,180 62,633 93,153 39,033 63,021
-------- -------- -------- -------- --------
Loss from operations.................... (12,576) (22,796) (28,190) (12,142) (22,056)
Interest expense, net(1)................ (5,854) (25,739) (39,564) (21,885) (22,558)
-------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item.................... (18,430) (48,535) (67,754) (34,027) (44,614)
Net loss(2)............................. $(18,430) $(48,535) $(74,398) $(34,027) $(44,614)
-------- -------- -------- -------- --------
Dividends on preferred stock............ -- -- (8,748) -- (9,710)
Loss attributable to common equity...... $(18,430) $(48,535) $(83,146) $(34,027) $(54,324)
======== ======== ======== ======== ========
Basic and diluted loss per share of
common equity(3)...................... $ (8.30) $ (19.98) $ (31.45) $ (13.20) $ (19.81)
</TABLE>

6
<PAGE> 10

<TABLE>
<CAPTION>
HISTORICAL
------------------------- AS ADJUSTED
AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1998 1999 1999(4)
---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.................................. $123,774 $ 60,032 $
Restricted investments..................................... 63,207 38,645 38,645
Property, plant and equipment, net......................... 268,044 308,289 308,289
Intangible assets.......................................... 160,370 159,055 159,055
Total assets............................................... 627,170 581,459
Notes payable and long-term obligations.................... 429,278 428,853 428,853
Total liabilities.......................................... 466,394 465,297 465,297
Stockholders' equity....................................... 160,776 116,162
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in operating
activities......................... $ (453) $ (15,935) $ (26,268) $ (15,215) $(31,441)
Net cash flows used in investing
activities......................... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by (used in)
financing activities............... 72,131 244,688 184,269 117,745 (1,115)
Capital expenditures(5).............. 62,121 71,505 85,643 37,900 56,928
EBITDA(6)............................ (3,900) (8,291) 291 (1,383) (4,059)
</TABLE>

<TABLE>
<CAPTION>
AS OF
----------------------------------------------
AUGUST 31,
------------------------------ FEBRUARY 28,
1996 1997 1998 1999
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(7).......................... 241,496 295,149 432,955 435,738
Units passed(8).................................. 225,433 254,032 399,210 401,600
Basic subscribers................................ 114,163 132,556 216,249 218,023
Basic penetration(9)............................. 50.6% 52.2% 54.2% 54.3%
Premium units(10)................................ 60,641 95,150 182,788 176,411
Pay-to-basic ratio(10)(11)....................... 53.1% 71.8% 84.5% 80.9%
Average monthly revenue per basic
subscriber(12)................................. $22.70 $24.94 $27.95 $29.20
TELECOMMUNICATIONS
Units under contract(7).......................... 20,945 39,831 94,338 107,109
Units passed(8).................................. 12,364 16,572 35,671 47,462
Lines(13)........................................ 4,126 6,185 9,244 13,229
Line penetration(14)............................. 33.4% 37.3% 25.9% 27.9%
Average monthly revenue per line(15)............. $42.10 $47.23 $46.62 $44.50
</TABLE>

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

(1) Interest expense, net is reflected net of interest income and interest
capitalized in property, plant and equipment. Includes interest expense on
the Company's 15% Convertible Notes (the "GVL Notes") of approximately
$5,342,000, $15,204,000 and $9,640,000 for the years ended August 31, 1996,
1997 and 1998, respectively and $9,640,000 for the six months ended
February 28, 1998. Effective March 1, 1998, the GVL Notes were exchanged
for approximately 6,962 shares of Series A Preferred.

(2) The Company reported an extraordinary loss on debt extinguishment of
$6,644,000 for the year ended August 31, 1998 due to the repayment and
termination of a senior secured credit facility (the "Senior Credit
Facility").

(3) Loss per share has been restated to reflect the adoption of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic and
diluted loss per share are computed in the same manner since common stock
equivalents are antidilutive.

7
<PAGE> 11

(4) Gives effect to the Offering and the assumed conversion of all outstanding
classes of common stock and all outstanding series of preferred stock into
Common Stock immediately prior to the consummation of the Offering. Such
conversions will have no impact on stockholders' equity.

(5) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding expenditures for business
acquisitions.

(6) EBITDA represents earnings (loss) before interest expense (net of interest
income and amounts capitalized), income tax benefits, depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other
companies. The Company believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the cable television and telecommunications industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in its industry.

(7) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. At this time the
majority of all units under contract for telecommunications are also under
contract for cable television.

(8) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively. The difference between units under contract and units passed
represents units for which Rights of Entry have been entered into, but
which are not yet connected for cable television and telecommunications
services, respectively.

(9) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.

(10) Beginning with the year ended August 31, 1997, to be consistent with most
other cable television providers, the Company revised the method of
reporting premium penetration to include all premium units in the
calculation. Historically the calculation excluded premium channels that
were provided to customers as part of an expanded basic line up or other
special arrangements. Prior years have not been restated. For comparative
purposes, the premium units and the pay-to-basic ratio as of August 31,
1997 and 1998 and February 28, 1999 presented under the previous method of
reporting are 84,875, 136,863 and 128,137, respectively, and 64.0%, 63.3%
and 58.8%, respectively.

(11) Pay-to-basic ratio is calculated by dividing the total number of premium
units by the total number of basic subscribers.

(12) Represents average monthly revenue divided by the average number of basic
subscribers for the fiscal periods ended as of the date shown.

(13) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the number of lines
previously reported to reflect this change.

(14) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.

(15) Represents average monthly revenue divided by the average number of lines
for the fiscal periods ended as of the date shown.

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<PAGE> 12

RISK FACTORS

Any investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following factors in
addition to other information set forth elsewhere in this Prospectus.

LIMITED OPERATIONS OF CERTAIN SERVICES; HISTORY OF NET LOSSES AND NEGATIVE CASH
FLOW

OpTel's business commenced in 1993. Historically, substantially all of
OpTel's revenues were derived from providing cable television services. The
Company's telephone and Internet access services only recently have been
initiated or their availability only recently expanded in new market areas.
OpTel expects to increase substantially the size of these operations in the near
future. There is, therefore, limited historical financial information about
OpTel upon which to base an evaluation of OpTel's performance in the markets and
for the services that will be its principal focus in the future. Furthermore, as
a result of its rapid growth and implementation of various new business
strategies, including the expansion of its telecommunications business, the
Company has incurred in the past, and may incur the future, certain
unanticipated costs and capital expenses. Given OpTel's limited experience
operating telecommunications networks, there can be no assurance that it will be
able to compete successfully in the telecommunications industry.

The development of OpTel's business and the expansion of its networks will
require substantial capital, operational and administrative expenditures, a
significant portion of which may be incurred before the realization of revenues.
These expenditures will result in negative cash flow until an adequate customer
base is established and revenues are realized. Although its revenues have
increased in each of the last three years, OpTel has incurred substantial
up-front operating expenses for marketing, customer operations, administration
and maintenance of facilities, general and administrative expenses and
depreciation and amortization in order to solicit and service customers in
advance of generating significant revenues. As a result of these factors, the
Company has generated operating losses of $22.1 million, $28.2 million, $22.8
million and $12.6 million for the six months ended February 28, 1999, fiscal
1998, fiscal 1997 and fiscal 1996, respectively, as its cable television and
telecommunications customer base has grown. While the Company reported positive
EBITDA (as defined in the Glossary) of $0.3 million for fiscal 1998, the Company
reported negative EBITDA of $4.1 million, $8.3 million and $3.9 million for the
six months ended February 28, 1999, fiscal 1997 and fiscal 1996, respectively.
There can be no assurance that OpTel will achieve profitability or positive
EBITDA in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT

The Company's indebtedness is substantial in relation to its stockholders'
equity and cash flow. As of February 28, 1999, assuming the Offering had been
completed on such date, the Company would have had total consolidated
indebtedness of approximately $428.9 million and stockholders' equity of
approximately million. The Company's earnings were insufficient to cover
its debt service by approximately $77.2 million for fiscal 1998 and $45.7
million for the six months ended February 28, 1999. See "Capitalization" and
"Selected Historical Consolidated Financial and Operating Data."

The indentures governing the Company's two series of outstanding notes (the
"Indentures") impose certain restrictions on the operations and activities of
the Company. The Company's ability to make scheduled payments of principal of,
or to pay interest on, or to refinance, its indebtedness depends upon the
success of its business strategies and its future performance, which to a
significant extent are subject to general economic, financial, competitive,
regulatory and other factors beyond its control. There can be no assurance that
the Company will be able to generate the substantial increases in cash flow from
operations that will be necessary to service its indebtedness. In the absence of
such operating results, the Company could face substantial liquidity problems
and might be required to raise additional financing through the issuance of debt
or equity securities. Furthermore, the Company expects that it may need to
refinance the principal amount of its outstanding notes at their respective
maturities. There can be no assurance that the Company will be successful in
raising such financing when required or that the terms of any such financing
will be attractive.

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<PAGE> 13

See "-- Significant Capital Requirements and Need for Additional Financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

The degree to which OpTel is leveraged could have adverse consequences to
holders of its Common Stock including the following: (i) a substantial portion
of OpTel's cash flow from operations will be dedicated to the payment of the
principal of and interest on its indebtedness thereby reducing funds available
for other purposes, (ii) OpTel's vulnerability to changes in general economic
conditions or increases in prevailing interest rates could be increased, (iii)
OpTel's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes could
be impaired and (iv) OpTel may be more leveraged than certain of its
competitors, which may be a competitive disadvantage.

SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING

The Company will require substantial capital on a continuing basis to
finance cable television, telecommunications and Internet network expansion
related to subscriber and market growth, to upgrade existing facilities to
desired technical and signal quality standards and to finance any acquisitions
of other operators. The Company believes, based on its current business plan,
that its cash on hand, together with the proceeds of the Offering, will provide
the Company with sufficient financial resources to fund its capital requirements
through the third quarter of fiscal 2000. However, the Company's future capital
requirements will depend upon a number of factors, including the Company's
success in obtaining new Rights of Entry, the extent of its telecommunications
roll out, the size and timing of any acquisitions, marketing expenses, staffing
levels and customer growth, as well as other factors that are not within the
Company's control, such as competitive conditions, changes in technology,
government regulation and capital costs. The Company expects to fund additional
capital requirements through internally generated funds and public or private
debt and/or equity financing. There can be no assurance, however, that OpTel
will be successful in raising sufficient debt or equity when required or on
terms that it will consider acceptable. Moreover, the terms of OpTel's
outstanding indebtedness impose certain restrictions upon OpTel's ability to
incur additional indebtedness or issue additional stock. Under the terms of the
more restrictive of the Company's Indentures, the Company can only incur
approximately $50 million of additional indebtedness. The aggregate amount of
indebtedness which can be incurred by the Company under its more restrictive
Indenture is directly related to the number of cable television subscribers
served by the Company. As a result, growth of the Company's telecommunications
business, where the Company has focused significant management attention and
resources, will not increase the Company's ability to incur indebtedness under
the terms of the more restrictive Indenture. The Company may need to incur
indebtedness in excess of its current capacity. See "Description of Certain
Indebtedness." In addition, GVL has the power to prevent the Company from
obtaining additional debt or equity financing. See "-- Control by GVL." Failure
to generate or raise sufficient funds may require OpTel to delay or abandon some
of its future expansion or expenditures, which would have a material adverse
effect on its growth and its ability to compete in the cable television,
telecommunications and Internet access industries. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

RISKS ASSOCIATED WITH ACQUISITIONS

OpTel expects to continue to make acquisitions of strategically important
businesses when sufficiently attractive opportunities arise. Acquisitions may
divert the resources and management time of OpTel and will require integration
of the acquired operations with OpTel's existing networks and services. There
can be no assurance that any acquisition of assets, operations or businesses
will be successfully integrated into OpTel's operations. The Company typically
has acquired businesses that were privately held by entrepreneurs, many of which
businesses were without the same regulatory compliance practices and internal
accounting controls and procedures as those of the Company. Accordingly, the
Company frequently is required to take remedial actions, which may include the
expenditure of funds and take extensive time to implement. In general, the
Company factors the costs associated with these matters into the terms of its
acquisitions, including, where practicable, through indemnification rights.
However, there can be no assurance that the Company's results of operations will
not be materially adversely affected by these or other matters arising from past
or future

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<PAGE> 14

acquisitions. Consistent with its consolidation strategy, OpTel is currently
evaluating and often engages in discussions regarding various acquisition
opportunities. These acquisitions may be funded by cash on hand and/or through
the issuance of OpTel's debt and/or equity securities. It is possible that one
or more of such possible acquisitions, if completed, could adversely affect
OpTel's cash flow, or increase OpTel's debt, or that such an acquisition could
be followed by a decline in the market value of OpTel's securities.

RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY

The Company is currently introducing central office switched
telecommunications services to MDUs served by its existing networks. The Company
believes that a successful introduction of these telecommunications services is
important to its long-term growth. Its success will be dependent upon, among
other things, the Company's ability to assess markets, design and install
telecommunications networks, including switches, obtain cooperation of the ILECs
and obtain any required government authorizations and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions, and the
willingness of MDU residents to accept a new provider of telecommunications
services. There can be no assurance that the Company will be able to
successfully introduce central office switched telecommunications services in
any of its markets in a timely manner in accordance with its strategic
objectives and failure to do so could have a material adverse effect on the
Company. Specific risks associated with the Company's telecommunications
strategy include:

Switch Installation and Network Enhancement; Lack of Redundant Switches. An
essential element of the Company's telecommunications strategy is the provision
of switched local exchange service. The Company has recently commenced operating
central office switches in its Houston and Dallas-Fort Worth markets and intends
to implement central office switches in substantially all of its major markets
by the end of calendar year 1999. In connection with the implementation of
central office switches in additional markets, the Company will be reconfiguring
its microwave networks in such markets to carry bi-directional voice traffic.
The Company intends to use certain components of its existing infrastructure to
deliver bi-directional transmission utilizing microwave frequencies, principally
in the 23GHz band. While the Company believes this frequency and other required
frequencies are available for license on the paths that will be required, the
Company has not yet commenced frequency coordination in each of its markets and
there can be no assurance regarding path or frequency availability. In addition,
there can be no assurance that the installation of the required switches and the
reconfiguration of the network will be completed on schedule. The failure of the
Company to successfully reconfigure its microwave networks and to have its
switches operational on a timely basis could have a material adverse effect upon
the Company's ability to expand its telecommunications services. In addition,
the Company intends initially to install only one switch in each market. As a
result, a switch failure which disables both the primary and redundant
capabilities of a Company switch may have a material adverse effect on the
Company's ability to provide telecommunications services in the affected market
which may continue for an indefinite period. The Company may seek to enter into
contracts with other telecommunications service providers to provide backup
capabilities in the event of a switch failure. However, there can be no
assurance that the Company will be able to successfully negotiate such
agreements or that such agreements will be available on favorable terms. See
"Business -- Network Architecture."

Reliance On Third Parties. As part of its telecommunications configuration,
the Company may transport telephone traffic across municipal boundaries or local
access and transport areas ("LATAs") which may require the Company to have
multiple interconnection agreements. While the Company has entered into
interconnection agreements with ILECs serving portions of its markets, the
Company is currently negotiating agreements for the interconnection of its
networks with the network of other ILECs in certain areas. There can be no
assurance that the Company will be able to successfully negotiate
interconnection agreements with the ILEC or any other local exchange carrier
("LEC") in each market where the Company plans to offer central office switched
telecommunications services or that it will be able to do so on favorable terms.
The failure to negotiate the necessary interconnection agreements could have a
material adverse effect upon the Company's ability to expand its
telecommunication services. See "-- Uncertainties Related to Subscriber Access."
Currently, the Company provides local telephone service as an STS provider in
most of its markets. STS providers generally use an ILEC's facilities (although
in many states CLECs can now supply STS

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<PAGE> 15

operators with facilities) to provide local telephone service as a reseller,
subject to state regulation. If ILECs were no longer required to provide
tariffed services to STS providers or if STS-type service classifications were
to be eliminated, the Company's telephone operations could be materially
adversely affected. The Company relies on the services of a third-party vendor
to provide certain carrier-to-carrier billing services. The failure by such
vendor to accurately bill interexchange carriers' ("IXCs") access charges could
have a material adverse effect on the Company.

Uncertainties Related to Collocation Strategy. In order to accelerate the
Company's time to market and increase the Company's addressable market, the
Company intends to collocate facilities in certain ILEC end offices and to lease
from the ILEC unbundled transport network from the office to the customer.
Collocation space is obtained on a first come/first served basis. As a result,
there can be no assurance the Company will be able to obtain collocation sites
in the end offices it desires. Where the Company relies on leased unbundled
network elements, the Company and its customer are dependent on the ILEC to
assure uninterrupted service. The ILECs have limited experience in providing
unbundled network elements, and there can be no assurance the ILECs will provide
and maintain these elements in a prompt and efficient manner. The failure to
obtain collocation space or unbundled network elements on a timely basis or of
the ILEC to maintain such unbundled network elements in a prompt and efficient
manner could have a material adverse effect on the Company's ability to expand
its telecommunications services. Pursuing a collocation strategy requires the
Company to invest in network infrastructure in advance of signing up customers.
The Company's marketing strategy to date has relied heavily on its ability,
derived from its Rights of Entry, to maintain a presence at the MDU, to market
to the residents of an MDU through the leasing agent and to offer a bundled
service offering. As part of the Company's collocation strategy, the Company
will be marketing its services directly to residents of MDUs where the Company
does not have a Right of Entry. There can be no assurance that the Company will
be able to successfully market its services directly to MDU residents and, as a
result, generate a return on its invested capital.

Uncertainties Related to Reciprocal Compensation. The Communications Act of
1934, as amended, (the "Communications Act") requires LECs to provide reciprocal
compensation to other carriers for local traffic terminated on such other
carrier's network. Notwithstanding this requirement, a number of ILECs have
taken the position that traffic terminated to Internet service providers
("ISPs") is not local traffic. Competitive carriers generally have been
successful in challenging this position before the public utility commissions
("PUCs") in several states. However, the FCC has determined that ISP-bound calls
constitute interstate traffic for jurisdictional purposes and it is considering
the adoption of a federal rule regarding the appropriate inter-carrier
compensation for such traffic. There can be no assurance that traffic terminated
to an ISP will not ultimately be held to be exempt from the reciprocal
compensation requirements. If that were the case, the Company may not receive
compensation for traffic originated on another carriers' network and terminated
by the Company to an ISP.

Uncertainties Related to Subscriber Access. ILECs often refuse to
reconfigure their networks so that CLECs may access on-property distribution
facilities at a single point on or near an MDU property. Accordingly, the
Company has experienced and can be expected to continue to experience
difficulties bringing its network-based telephone services to subscribers at
some of the MDUs that it seeks to serve. Where the Company is not able to access
on-property ILEC distribution facilities, it must either install duplicative
distribution facilities or lease unbundled loops from an ILEC in order to reach
individual subscribers within an MDU. Either of these alternatives may raise the
cost of service or delay entry. While the Company is seeking regulatory changes
to address access to on-property MDU telephone wiring, there can be no assurance
that this barrier to entry will be reduced or diminished, or that it will not
have an adverse effect on the Company's efforts to expand its competitive
telephone services. See "Business -- Regulation -- Telecommunications
Regulation -- Competitive Local Exchange Carrier Regulation."

Uncertainties Related to Access Charges. The Company charges IXCs "access
charges" for the right to terminate and originate traffic on the Company's local
network. The Company depends in substantial part upon these access charges to
defray the costs of its network build-out. At least one IXC has questioned the
reasonableness of the Company's access rate and has refused to pay any access
rate greater than that charged by the ILEC in the same local calling area. There
can be no assurance that the Company's access rates will

12
<PAGE> 16

not be found to be unreasonable, or that regulatory or market forces will not
compel the Company to lower its access rates, which could, in either case,
materially adversely affect the profitability or the speed of deployment of the
Company's local telephone network.

Potential 911, E-911 and Intrusion Alarm Liability. The Company delivers
local exchange service, including access to emergency ("911") services, to MDU
residents. Mechanical or electrical defects, power failures or catastrophic
events may temporarily disrupt operation of the Company's switches, preventing,
delaying or impeding access to 911 service. In many jurisdictions,
telecommunications carriers are required to implement services which permit a
911 operator to immediately identify the location of the caller ("E-911
service"). To provide E-911 service at an MDU, the telecommunications service
provider or its agent must maintain a database with certain information relating
to the MDU residents. The failure of the Company or its agent to maintain such
database in a timely and accurate manner could prevent, delay or impede the
operation of E-911 service. In addition, because of the configuration of the
Company's telecommunications networks, the Company's telecommunications traffic
may cross more than one E-911 jurisdiction. This will require the Company to
coordinate among these various jurisdictions. There can be no assurance that the
Company will not be liable for damage to property or personal injuries that may
directly or indirectly result from any failure of 911 or E-911 service to
operate properly. Moreover, the Company may provide 911, E-911 or operator
services by contracting such services from other carriers in its markets. The
providers of these services will generally require the Company to indemnify them
for any losses or liability incurred in connection with such services except for
those caused exclusively by the gross negligence or malfeasance of the carrier.
In addition, the Company currently provides certain intrusion alarm services
through subcontractors. There can be no assurance that the Company will not be
liable for any property damage or personal injuries that may result from
intrusion alarm malfunctions or from a subcontractor's failure to appropriately
monitor the intrusion alarm systems under contract.

RISKS ASSOCIATED WITH RIGHTS OF ENTRY

The Company's business depends upon its ability to enter into and exploit
favorable new long-term Rights of Entry for demographically attractive MDUs and
to exploit and renew its existing Rights of Entry. Its success in doing so may
be affected by a number of factors, including (i) the extent of competition in
the provision of multichannel television and telecommunications services, (ii)
its ability to identify suitable MDUs and contract with their owners, (iii) the
continuing demographic attractiveness of the markets in which the Company has
chosen to focus its business, (iv) occupancy rates in the MDUs to which it
provides services, (v) its ability to maintain superior levels of customer
service, (vi) the absence of material adverse regulatory developments and (vii)
the enforceability of the material terms of its Rights of Entry, including
exclusivity provisions. Cancellation or non-renewal of certain of such
arrangements could materially adversely affect the Company's business in any
such affected area. In addition, the failure by the Company to enter into and
maintain any such arrangements for a particular network which is already under
development may affect the Company's ability to acquire or develop that network.
See "Business -- Competition" and "-- Regulation."

The Company's Rights of Entry generally provide that the Company will have
the exclusive right to provide residents within the applicable MDU with
multichannel television services and, where Rights of Entry extend to
telecommunications services, an undertaking by the MDU owner to promote OpTel as
the preferred provider of telecommunications services within the MDU. While the
Company believes that the exclusivity provisions in its cable television Rights
of Entry are now generally enforceable under applicable law, current trends at
the state and federal level suggest that the future enforceability of these
provisions may be uncertain. Certain states in which the Company operates,
including Illinois and Florida (for condominiums only), and certain cities and
municipalities in states in which the Company operates, have adopted "mandatory
access" laws that provide that no resident of an MDU may be denied access to
programming provided by incumbent franchise cable systems, regardless of any
rights granted by an MDU owner to another multichannel television operator.
Texas has adopted a "mandatory access" law for state certified
telecommunications service providers. In addition, Virginia, where the Company
serves two MDUs, prohibits private cable television operators from entering into
revenue sharing or up front incentive payment arrangements with MDU owners.

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<PAGE> 17

Draft legislation has been proposed in each of Georgia and Indiana which, if
passed, would effectively limit the Company's ability to enter into exclusive
Rights of Entry. Further, the Federal Communications Commission (the "FCC") has
initiated a notice of proposed rulemaking seeking comment on whether the FCC
should adopt regulations restricting exclusive contracts. While the
constitutionality of present "mandatory access" laws is uncertain, there can be
no assurance that such laws will not be adopted elsewhere or upheld as
constitutional which may have a material adverse effect on the Company's
business. Broad mandatory access would likely increase the Company's capital
costs associated with new Rights of Entry and result in competitive services
being offered at MDUs where the Company presently has exclusive Rights of Entry.
See "-- Regulation."

In a number of instances individual Rights of Entry are subordinate by
their terms to indebtedness secured by the MDU, with the effect that enforcement
of the security interest or default under such indebtedness could result in
termination of such Right of Entry. Bankruptcy of an MDU owner could also result
in rejection of a Right of Entry as an "executory contract." Moreover, the terms
of a number of the Company's Rights of Entry require it to remain competitive
with other competitors in that market in general or competitive in terms of
price of offering, technology, number of programming channels and levels of
service. To meet these requirements, the Company could be required to upgrade
its networks and equipment, which would require capital expenditures. The
failure to remain competitive under any of these standards in a market could
result in a loss or cancellation of the related Right of Entry. Such losses or
cancellations could, in the aggregate, have a material adverse effect on the
Company's business. See "Business -- Strategic Relationships with MDU Owners."

UNCERTAINTIES RELATED TO THE AVAILABILITY OF RADIO SPECTRUM

The Company relies upon use of the radio spectrum, principally 18 GHz
microwave radio, in its network architecture. The 18 GHz point-to-point
microwave paths that the Company uses, and the other microwave frequencies that
the Company uses or intends to use, are licensed by the FCC. The FCC has issued
a Notice of Proposed Rulemaking seeking comment on a proposal to make
terrestrial microwave users, like the Company, secondary to satellite downlinks
in portions of the 18 GHz band that currently are used by the Company. Under the
proposal, any 18GHz microwave paths licensed to the Company pursuant to
applications filed with the FCC after the date the new rules are released to the
public would not be permitted to cause harmful interference to satellite
downlinks in the 18GHz band. If adopted, the proposal would severely limit the
Company's use of the 18 GHz microwave band and potentially strand some of the
Company's investment in network facilities. If the proposal is adopted, the
Company would seek authority to use other portions of the radio spectrum, but
such use will likely require other FCC rule changes, as to which there can be no
assurance, and there can be no assurance that migration by the Company to other
bands is technically feasible or that such migration would not negatively affect
the cost of the Company's networks. In addition, the bands of spectrum that the
Company uses or intends to use, including but not limited to the 18 GHz band,
are shared with other users. There can be no assurance that the FCC will not
change the allocation for, or the rules applicable to, any frequency band that
the Company uses or seeks to use in such a way as to limit the Company's access
to or use of the band. See "Business -- Regulation -- Microwave and Private
Cable Regulation."

DISTANCE AND WEATHER LIMITATIONS; LINE OF SIGHT; AVAILABILITY OF TRANSMISSION
SITES

Point-to-point microwave transmission requires a direct line of sight
between two dishes comprising a link and is subject to distance and rain
attenuation. The Company expects that its average coverage radius of Network
Hubs will be approximately five miles, depending on local conditions, and it is
expected that the Company's Network Hubs will utilize power control to increase
signal strength and mitigate the effects of rain attenuation. In areas of heavy
rainfall, transmission links are engineered for shorter distances and greater
power to maintain transmission quality. The reduction of path link distances to
maintain transmission quality may increase the cost of service coverage. While
these increased costs may not be significant in all cases, such costs may render
point-to-point microwave transmissions uneconomical in certain circumstances.

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<PAGE> 18

Due to line of sight limitations, the Company currently plans to install
its dishes and antennas on the rooftops of buildings and on other tall
structures. The Company expects generally to be able to construct intermediate
links or use other means to resolve line of sight and distance issues. However,
these limitations may render point-to-point links uneconomical in certain
locations.

The Company's microwave network expansion plans require the Company to
lease or otherwise obtain permission to install equipment at rooftop and tower
transmission sites in substantially all of its markets. The availability of
these sites is subject to market conditions and may be subject to zoning and
other municipal restrictions. The Company believes that as additional wireless
video and telecommunications providers emerge, competition for such transmission
sites will continue to increase. There can be no assurance that the necessary
sites will be available or that the terms upon which access to such sites may be
obtained will be acceptable.

DEPENDENCE ON STRATEGIC RELATIONSHIPS

OpTel has entered into a number of important strategic relationships which
are necessary for OpTel to provide certain of its service offerings. These
include OpTel's alliance with I(3)S, Inc. ("I(3)S"), an ISP, to provide
high-speed Internet access services and OpTel's agreement with EchoStar which
permits OpTel to provide an additional digital tier of DBS programming. The
failure of these parties to deliver the services for which OpTel has contracted
could adversely affect the Company's ability to deliver these services.

RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT

The multichannel television and telecommunications industries, including
Internet services, are subject to rapid and significant changes in technology
and frequent service innovations. The effect on the business of the Company of
future technological changes, such as changes relating to emerging transmission
technologies, cannot be predicted. The Company believes that its future success
will depend on its ability, as to which no assurance can be given, to enhance
its existing systems or implement new systems, to respond to new technologies
and to develop and introduce in a timely fashion new products and services on a
competitive basis.

The markets in which the Company competes are constantly evolving. Many
telecommunications and cable television operators are attempting to integrate
network components. For example, video distribution equipment is being
considered for voice and data telecommunications and vice versa. The convergence
of these traditional services towards integrated multimedia services presents
both opportunity and material risk to companies such as OpTel. The Company will
face enhanced competition from competitors with greater financial, technical,
marketing and other resources. Many of these competitors may offer packages of
services that are more extensive than the services which the Company plans to
offer. There can be no assurance that the Company will be able to predict
accurately the direction of this evolving market or be able to respond
effectively to the highly competitive environment. See "-- Competition" and
"Business -- Competition."

INFORMATION SYSTEMS AND AUTOMATION

The Company has recently implemented a new customer management information
system and has migrated its telephone subscribers to the new system. The Company
intends to migrate its cable television subscribers to the new system during
fiscal 1999. The Company expects the new customer management information system
to be an important factor in its operations. If the conversion is not completed
in a timely manner, or is not completed at all or, if after conversion, the new
system fails or is unable to perform as expected, it could have a material
adverse effect on the Company. Furthermore, as the Company's business expands,
problems may be encountered with higher processing volumes or with additional
automation features, in which case the Company might experience system
breakdowns, delays and additional unbudgeted expense to remedy the defect or to
replace the defective system with an alternative system. The Company's Year 2000
compliance depends in part on the successful conversion to the new system and on
the new system being Year 2000 compliant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."

15
<PAGE> 19

MANAGEMENT OF GROWTH AND DEPENDENCE ON QUALIFIED PERSONNEL

The Company is highly dependent upon the efforts of its senior management,
the loss of any of whom could impede the achievement of service delivery and
marketing objectives and could have a material adverse effect on the Company.
The Company has undertaken a rapid expansion of its networks and services. This
growth has increased the operating complexity of the Company as well as the
level of responsibility for both existing and new management personnel. The
Company's ability to manage its expansion effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base and attract and retain highly skilled
and qualified personnel. Any failure by the Company to effectively manage its
growth and attract and retain qualified personnel could have a material adverse
effect on its business.

COMPETITION

Substantially all markets for voice, video and Internet services are highly
competitive and the Company expects that competition will intensify. See
"Business -- Competition." In each of its markets, the Company faces significant
competition from larger companies with greater access to capital, technology and
other competitive resources. The Company's switched local exchange services
compete with ILECs, STS providers, CLECs and competitive access providers
("CAPs") and will compete with long distance telephone companies, franchise
cable television operators and Internet protocol telephone services as they
begin to enter the local telephone business. The Company's long distance service
competes with established IXCs and resellers and with long distance Internet
protocol telephone services. In addition, recent telecommunications offerings,
including PCS, and future offerings may increase competition in the
telecommunications industry. The Company's private cable television services
compete with incumbent franchise cable television operators as well as wireless
cable television operators, other private cable television operators, DBS
operators and stand-alone satellite service providers. Recent and future
legislative, regulatory and technological developments likely will result in
additional competition, as telecommunications companies enter the cable
television market, franchise cable television operators and IXCs begin to enter
the local telephone market and ILECs enter the interexchange market. See
"Business -- Regulation." Similarly, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators, regional Bell
operating companies ("RBOCs") and IXCs may result in providers capable of
offering bundled cable television and telecommunications services in direct
competition with the Company. For example, the recent merger of AT&T and Tele-
Communications, Inc. ("TCI") has resulted in a single large, well financed
integrated communications provider with which the Company may compete.

The Company competes with multichannel television operators and
telecommunications service providers to obtain Rights of Entry and to enroll
subscribers. In most markets serviced by the Company, franchise cable television
operators now offer revenue sharing and access fee arrangements to MDU owners in
exchange for exclusive rights of entry agreements. There can be no assurance
that these payments will not increase in the future as competition increases for
access to the higher quality MDUs. Another basis of competition is the breadth
of programming and range of services offered. Although the Company as a matter
of course investigates new sources of programming and technologies that may
increase its range of services, other larger and more diversified competitors
may attract the targeted MDUs based on their increased menu of services. There
can be no assurance that the Company will be able to compete successfully with
existing competitors or new entrants in the market for such services. See
"Business -- Competition."

Competition also may be enhanced by technological developments that allow
competitors of the Company to bypass property owners altogether and market their
services directly to the residents of MDUs. Although the Company's Rights of
Entry prohibit residents from installing receiving equipment on the exterior of
the building, these provisions are not always enforced and do not prohibit
residents from utilizing other services and technologies. For example, the
Rights of Entry do not prevent a resident from using cellular telephone service
offered by another provider. While the Company believes that the exclusivity
provisions of its Rights of Entry provide it with competitive advantages, such
advantages may be significantly diminished by technological, regulatory and
other developments beyond the control of the Company. Such developments

16
<PAGE> 20

may impact the Company's strategies and may require it to expend funds beyond
the levels currently contemplated. See "Business -- Regulation -- Regulation of
Cable Television -- Subscriber Access."

As an emerging CLEC in each of its major markets, OpTel faces significant
competition for the local exchange services it offers from ILECs which currently
dominate their local telecommunications markets. ILECs have longstanding
relationships with their customers, which relationships may create competitive
barriers. Furthermore, ILECs may have the potential to subsidize competitive
service from monopoly service revenues. OpTel believes that various legislative
initiatives, including the Telecom Act have removed most of the remaining
legislative barriers to local exchange competition. Nevertheless, in light of
the passage of the Telecom Act, regulators also are likely to provide ILECs with
increased pricing flexibility as competition increases. If ILECs are permitted
to lower their rates substantially or engage in excessive volume or term
discount pricing practices for their customers, the net income or cash flow of
integrated communications carriers and CLECs, including OpTel, could be
materially adversely affected.

DEPENDENCE UPON PROGRAM MATERIAL

The Company has fixed-term contracts with various program suppliers. The
average term of such contracts is approximately five years and such contracts
are typically renewed upon expiration. In recent years the cable industry has
experienced a rapid escalation in the cost of programming. This escalation may
continue and the Company may not be able to pass the full programming cost
increases on to its subscribers. In addition, if the contracts were terminated
or not renewed, the Company would be required to seek program material from
other sources, which could place the Company at a competitive disadvantage.
Although federal law and FCC regulations require that vertically integrated
franchise cable television system operators and cable television programmers
sell programming to other video distributors, such as the Company, on fair and
non-discriminatory terms, the Company has in the past been denied certain
popular sports programming by certain providers who claim that the programming
is not required to be licensed to the Company. These denials have adversely
impacted, and any such denials in the future could adversely impact, the
Company's activities in the affected markets. There can be no assurance that the
equal program access laws and regulations will not be invalidated, changed or
repealed, which could limit the Company's ability to obtain programming or raise
the cost of programming. In addition, one aspect of the equal program access
laws, the prohibition on the sale of exclusive distribution rights by certain
programmers, is scheduled to expire on October 5, 2002, unless the FCC finds,
during a proceeding to be conducted in 2001, that the prohibition continues to
be necessary to promote competition in the multichannel television market. See
"Business -- Regulation."

REGULATION

The cable television and telecommunications industries are subject to
extensive regulation at the federal, state and local levels. Many aspects of
regulation at the federal, state and local levels currently are subject to
judicial review or are the subject of administrative or legislative proposals to
modify, repeal, or adopt new laws and administrative regulations and policies,
the results of which the Company is unable to predict. The United States
Congress and the FCC have in the past, and may in the future, adopt new laws,
regulations and policies regarding a wide variety of matters, including
rulemakings arising as a result of the Telecom Act, that could, directly or
indirectly, affect the operation of the Company's business. The business
prospects of the Company could be materially adversely affected (i) by the
application of current FCC rules or policies in a manner leading to the denial
of applications by the Company for FCC licenses or a change in the regulatory
status of the Company's private cable television and telecommunications
operations, (ii) by the adoption of new laws, policies or regulations, (iii) by
changes in existing laws, policies or regulations, including changes to their
interpretations or applications, that modify the present regulatory environment
or (iv) by the failure of certain rules or policies to change in the manner
anticipated by the Company. See "Business -- Regulation."

The Company believes that its exclusive Rights of Entry are now generally
enforceable under applicable law; however, current trends at the state and
federal level suggest that the future enforceability of these provisions may be
uncertain. The FCC is seeking comment on whether such exclusive contracts should
be limited to a maximum period of seven years. Although it is open to question
whether the FCC has statutory

17
<PAGE> 21

and constitutional authority to compel mandatory access, there can be no
assurance that it will not attempt to do so. Any such action would tend to
undermine the exclusivity provisions of the Company's Rights of Entry. See
"-- Risks Associated with Rights of Entry." The FCC also has issued a rule
preempting certain state, local and private restrictions on over-the-air
reception antennas. There can be no assurance that future state or federal laws
or regulations will not restrict the ability of the Company to offer revenue
sharing or access payments, limit MDU owners ability to receive revenue sharing
or prohibit MDU owners from entering into exclusive access agreements, any of
which could have a material adverse effect on the Company's business. See
"Business -- Sales and Marketing," "-- Strategic Relationships with MDU Owners"
and "-- Regulation."

The Company uses a substantial number of point-to-point microwave paths
which are licensed by the FCC. There can be no assurance that the Company will
be able to acquire licenses for the microwave paths that it seeks in the future,
or that changes in the FCC's regulations will not limit the Company's ability to
use desirable frequencies for the distribution of its services, or otherwise
impair the Company's microwave licenses. See "-- Uncertainties Related to the
Availability of Radio Spectrum." If the Company cannot license the necessary
paths on the desired frequencies, it may be necessary to utilize other
frequencies for signal transport or other means of signal transport. There can
be no assurance that the cost of such alternate means of transport will not
exceed those associated with the desired microwave frequency. Further, even if
the FCC grants the desired licenses, the Company may not have the financial
resources to construct the necessary facilities within the time permitted by the
license. In addition, state and local zoning and land use laws may impede the
efficient deployment of the Company's microwave antennas. Any of the foregoing
developments could have a material adverse effect on the Company's business. See
"Business -- Network Architecture."

As an emerging CLEC, OpTel is subject to varying degrees of federal, state
and local regulation. OpTel is not currently subject to price cap or rate of
return regulation at the state or federal level. OpTel is, however, generally
subject to certification or registration and tariff or price list filing
requirements for intrastate services by state regulators. Although passage of
the Telecom Act should result in increased opportunities for companies that are
competing with the ILECs, no assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on OpTel. Moreover, while the Telecom Act reduces
regulation to which non-dominant LECs are subject, it also reduces the level of
regulation that applies to the ILECs and increases their ability to respond
quickly to competition from OpTel and others. In addition, the Telecom Act will
permit RBOCs, for the first time, to offer long distance service in the regions
in which they provide local exchange service upon demonstrating to the FCC and
state regulatory agencies that they have complied with the FCC's interconnection
regulations designed to foster local exchange competition. While the FCC has not
yet approved an RBOC application to provide in-region long distance service it
may do so in the future.

In addition, the FCC has put in place access charge reform rules which may
over time result in a net decrease in the access charges paid by IXCs to LECs
for originating or terminating long distance traffic. To the extent ILECs are
afforded increased pricing flexibility or access charges are reduced, the
ability of the Company to compete with ILECs for certain services may be
adversely affected.

The Company, increasingly uses ILEC network elements for transport and
other network functions as it expands its telecommunications offering. The ILECs
were required to make these unbundled network elements ("UNEs") available to
CLECs by FCC regulation. The Supreme Court, however, recently vacated the FCC's
UNE regulations. As a result, it is unclear at this time whether, and to what
extent, the ILEC UNEs that OpTel has used or intends to use will be available in
the future.

The majority of states currently permit STS services with relatively few
regulatory barriers. However, several states require certification and place
some conditions or restraints on the provision of STS services. Additionally,
STS providers must comply with the conditions of service set forth in the LEC's
tariffs under which STS providers receive service. There can be no assurance
that the regulatory environment will continue to be favorable for STS providers
or that regulatory changes will not slow or stop the Company's planned migration
from an STS provider into a CLEC in each of its markets. Although the current
regulatory

18
<PAGE> 22

environment enables competition for local exchange services, there is no
assurance that the Company will be able to compete successfully against
established providers and new entrants in that marketplace. In addition, various
state and federal laws and regulations limit the Company's ability to enforce
exclusivity provisions of Rights of Entry so as to exclude other
telecommunications providers from an MDU.

FOREIGN OWNERSHIP RESTRICTIONS

The Communications Act prohibits any corporation directly or indirectly
controlled by any other corporation of which more than 25 percent of the capital
stock is owned or voted by non-U.S. citizens from holding a common carrier radio
station license absent a finding by the FCC that the grant of such a license to
such a licensee would serve the public interest. In 1997, the United States
agreed, in the context of the World Trade Organization ("WTO") Basic Telecom
Agreement, to allow foreign suppliers from WTO member nations, including Canada,
to provide a broad range of basic telecommunications services in the United
States. Those commitments became effective in February 1998. In light of those
commitments, the FCC has determined that it will adopt an "open entry standard"
for suppliers of telecommunications services from WTO member nations, including
Canada. In conjunction with its new open entry policies, the FCC has adopted a
presumption favoring grant of applications to exceed the 25 percent limit on
non-U.S. ownership described above when the non-U.S. investment is from a WTO
member nation. GVL, the Company's principal stockholder, is a Canadian
corporation. As the Company expands its telecommunications services, it plans to
offer services which may constitute "common carrier" services. To the extent
that the Company seeks to use its frequency licenses to provide "common carrier"
telecommunications services, it will be required to obtain FCC approval.
Although grant of such authority will be presumed to be in the public interest,
there can be no assurance that the FCC will permit the Company to hold common
carrier authorizations. The failure to obtain such common carrier authorizations
could limit the Company's ability to offer certain telecommunications services
and therefore have a material adverse effect on its marketing plan.

CONTROL BY GVL

General. After consummation of the Offering and assuming the conversion of
all outstanding classes of common stock and all outstanding series of preferred
stock into Common Stock immediately prior to the consummation of the Offering,
VPC Corporation ("VPC"), an indirect wholly-owned subsidiary of GVL, will own
approximately % of the outstanding Common Stock and voting rights of the
Company. Accordingly, VPC can and, following consummation of the Offering, will
continue to be able to elect a majority of the Board of Directors of the Company
(the "Board") and control the vote on matters submitted to the vote of the
Company's stockholders.

Potentially Competing Ventures. In addition to its investment in the
Company, GVL, through other subsidiaries, currently holds interests in wireless
cable systems or licenses to operate wireless cable systems in a number of U.S.
markets including San Francisco, San Diego and Victorville, California and
Tampa, Florida. These subsidiaries employ wireless cable systems, satellite
master antenna television ("SMATV") systems or hard wire franchise cable
television systems. As a result, affiliates of GVL may compete with the Company
in markets where their services overlap. In addition, an affiliate of GVL has
recently commenced delivering high speed Internet access in the San Francisco
area. These services may compete with the Company's high speed Internet
offering.

GVL Indenture. GVL is party to an indenture which limits the aggregate
amount of indebtedness which can be incurred by GVL and its subsidiaries,
including the Company, taken as a whole (based upon a ratio of total
consolidated indebtedness to consolidated operating cash flow). As a result,
GVL's strategies and the operating results of its subsidiaries other than the
Company may affect the ability of the Company to incur additional indebtedness.
As of November 30, 1998, GVL was able to incur approximately Cdn $446 million
(approximately $293 million based on an exchange rate of $1.00 = Cdn $1.5211 as
reported by the Wall Street Journal on March 18, 1999) of indebtedness under its
indenture. There can be no assurance that this number may not decrease
substantially in the future. There can be no assurance that GVL will not
restrain the Company's growth or limit the indebtedness incurred by the Company
so as to ensure GVL's compliance with the terms of its debt instruments.

19
<PAGE> 23

Stockholders' Agreement. GVL, VPC, Capital Communications CDPQ Inc.
("CDPQ"), a subsidiary of Caisse, a Quebec financial institution and minority
shareholder of GVL, and the Company are parties to a Stockholders' Agreement,
dated as of August 15, 1997 (the "Stockholders' Agreement"), pursuant to which,
among other things, VPC and CDPQ agreed to vote for certain of CDPQ's nominees
for director and CDPQ was granted preemptive rights to acquire new securities
issued by the Company subject to certain exceptions (including a registered
public offering) and tag along rights upon the sale by VPC of its interest in
OpTel. In addition, CDPQ agreed to certain restrictions on the transfer of its
shares of Common Stock. See "Principal and Selling Stockholders -- Stockholders'
Agreement."

RISKS ASSOCIATED WITH GVL'S SERIES A PREFERRED STOCK

VPC, an indirect wholly-owned subsidiary of GVL, holds all of the
outstanding shares of Series A Preferred. The Series A Preferred is expected to
be converted into Common Stock and therefore all financial and stockholder
ownership information in the Prospectus assumes such conversion occurred
immediately prior to the consummation of the Offering. The actual conversion,
however, will not take place until a date expected to occur not more than 90
days after the Offering.

Pursuant to an agreement dated , 1999 among the Company, VPC and
GVL (the "Conversion and Exchange Agreement"), VPC is required, (i) on or before
the earlier to occur of August 29, 1999 or the 90th day following the
consummation of the Offering, to convert all of the Series A Preferred then
outstanding into Class B Common, and (ii) immediately upon receipt of these
shares of Class B Common to convert them into shares of Common Stock.

In the event of a breach by VPC or GVL of the Conversion and Exchange
Agreement it is possible that (i) the Series A Preferred would remain
outstanding and, under the terms of such securities, accrue dividends at 9.75%
per annum in kind until August 29, 1999 and thereafter in cash or (ii) the
Series A Preferred would be converted by VPC into Class B Common but not then
converted into Common Stock. If the Series A Preferred were to remain
outstanding, it would continue to enjoy a dividend and liquidation preference
over the Common Stock and to restrict the Company's ability to pay dividends on
the Common Stock. If the Class B Common were to remain outstanding after the
conversion of the Series A Preferred, it would enjoy ten votes per share, while
the Common Stock is entitled to one vote per share. In either event, the equity
interest or voting power, or both, of the holders of the Common Stock would be
diluted. There can be no assurance that the Company or the holders of the Common
Stock would have an adequate remedy in the event of a breach of the Conversion
and Exchange Agreement by VPC or GVL. See "Description of Capital Stock."

CHANGE OF CONTROL UNDER THE INDENTURES

A transfer by VPC of its interest in OpTel or a transfer by GVL of its
interest in VPC or an election by VPC not to convert its Series A Preferred may
result in a "Change of Control" as defined under the Indentures, which would
require the Company to offer to purchase its outstanding notes.

There can be no assurance that the Company would have the financial
resources to meet its obligations under the Indentures in the event of a Change
of Control. A Change of Control could also result in the acceleration of or an
event of default in respect of other indebtedness of the Company allowing the
lenders or holders thereof to require repayment of such indebtedness in full.

Neither VPC nor GVL is under any obligation to prevent a Change of Control.
The occurrence of a Change of Control could have a material adverse effect on
the Company, including the loss of GVL's strategic involvement with the Company.

YEAR 2000 RISK

OpTel has implemented a Year 2000 program to ensure that its subscriber
serving cable and telecommunications equipment and its critical computer
systems, applications and other technology will function properly beyond
December 31, 1999. There can, however, be no assurance that the Year 2000
program will be successful. If the Company's Year 2000 program is not
successfully completed, the Company may not be able

20
<PAGE> 24

to deliver or bill for its cable television, telecommunications or Internet
access services after December 31, 1999. The ability of third parties with whom
OpTel transacts business to adequately address their Year 2000 issues is outside
of the Company's control. There can be no assurance that the failure of the
Company or such third parties to adequately address their respective Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."

LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price for the Common Stock will be
determined through negotiations among the Company and the Underwriters and may
not be indicative of the market price of the Common Stock after the Offering.
See "Underwriting." The market prices of securities of early stage
communications companies similar to the Company have historically been highly
volatile. Future announcements concerning the Company or its competitors,
including quarterly results, technological innovations, services offered,
government legislation or regulation and general market, economic and political
conditions, may have a significant effect on the market price of the Common
Stock.

DILUTION

There will be an immediate and substantial dilution of a purchaser's
investment in the Common Stock in that the net tangible book value per share of
Common Stock after the Offering will be substantially less than the per share
offering price of the Common Stock. See "Dilution."

LACK OF DIVIDEND HISTORY; RESTRICTIONS ON PAYMENT OF DIVIDENDS

OpTel has never declared or paid any cash dividends on its Common Stock and
does not expect to declare any such dividends in the foreseeable future. Payment
of any future dividends will depend upon earnings and capital requirements of
OpTel, OpTel's debt facilities and other factors the Board considers
appropriate. OpTel intends to retain earnings, if any, to finance the
development and expansion of its business. In addition, the terms of OpTel's
outstanding indebtedness restrict the payment of dividends on Common Stock. See
"Description of Certain Indebtedness."

ANTI-TAKEOVER PROVISIONS

VPC's voting control of OpTel, certain other provisions of OpTel's
Certificate of Incorporation and Bylaws, the provisions of the Delaware General
Corporation Law (the "DGCL") and OpTel's outstanding indebtedness may make it
difficult in some respects to effect a change in control of OpTel and replace
incumbent management. The existence of these provisions may have a negative
impact on the price of the Common Stock, may discourage third-party bidders from
making a bid for OpTel or may reduce any premiums paid to stockholders for their
Common Stock. In addition, the Board has the authority to issue shares of a
class of common stock which has multiple votes per share and to fix the rights
and preferences of, and to issue shares of, OpTel's preferred stock, which may
have the effect of delaying or preventing a change in control of OpTel without
action by its stockholders. See "Description of Capital Stock -- Certain
Provisions of OpTel's Certificate of Incorporation and Bylaws and of Delaware
Law" and "-- Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of shares, or the perception that such sales may occur, by
existing stockholders under Rule 144 of the Securities Act, or through the
exercise of outstanding registration rights or the issuance of shares of Common
Stock upon the exercise of options or warrants, could materially adversely
affect the market price of shares of Common Stock and could materially impair
OpTel's future ability to raise capital through an offering of equity
securities. No predictions can be made as to the effect, if any, that market
sales of such shares or the availability of such shares for future sale will
have on the market price of shares of

21
<PAGE> 25

Common Stock prevailing from time to time. See "Description of Capital
Stock -- Shares Eligible for Future Sales" and "-- Registration Rights of
Certain Security Holders."

FORWARD LOOKING STATEMENTS

The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes" or the negative thereof or other variations
thereon or comparable terminology or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the reader that these
forward-looking statements are only estimates or predictions. No assurance can
be given that future results will be achieved. Actual events or results may
differ materially as a result of risks facing OpTel or actual events differing
from the assumptions underlying such statements. All forward-looking statements
made in connection with this Prospectus which are attributable to OpTel or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements. The safe harbor for forward-looking statements provided
in the Private Securities Litigation Reform Act of 1995 does not apply to
initial public offerings.

22
<PAGE> 26

USE OF PROCEEDS

The net proceeds to the Company from the Offering (based on an assumed
initial public offering price of $ per share) are estimated to be
approximately $ million ($ million if the over-allotment option granted
to the Underwriters is exercised in full) after deducting estimated underwriting
discounts and commissions and other offering expenses payable by the Company.
Upon consummation of the Offering, the Company will have cash on hand of
approximately $ . The Company anticipates its capital requirements over
the next five years to be approximately $650 million. The Company cannot
precisely quantify the amount of the proceeds from the Offering which will be
used for capital expenditures. The Company intends to use the net proceeds from
the Offering for capital expenditures related to the purchase and installation
of communications equipment and for general corporate purposes, including
working capital. In addition, the Company may use a portion of the net proceeds
for acquisitions. Although the Company is currently evaluating and often engages
in discussions regarding various acquisition opportunities, no agreement or
agreement in principle to effect any material acquisition has been reached.
Pending such uses, the net proceeds of the Offering will be invested in
short-term investment grade securities.

The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholders.

DIVIDEND POLICY

The Company has never paid cash dividends on the Common Stock and does not
anticipate paying dividends in the foreseeable future. Any future determination
to pay dividends will be at the discretion of the Board and will be dependent
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board deems relevant. In addition,
the Company's ability to declare and pay dividends on the Common Stock is
restricted by the terms of OpTel's outstanding indebtedness. See "Risk
Factors -- Lack of Dividend History; Restrictions on Payment of Dividends."

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<PAGE> 27

CAPITALIZATION

The following table sets forth, on an unaudited basis at February 28, 1999,
(i) the historical capitalization of the Company, and (ii) the capitalization as
adjusted to give effect to the Offering and the conversion of all outstanding
classes of common stock and all outstanding series of preferred stock into
Common Stock, each of which will occur on or before the 90th day after the
consummation of the Offering. This table should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1999
-----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 60,032 $
Restricted Investments...................................... 38,645 38,645
--------- --------
Total..................................................... $ 98,677 $
========= ========
Indebtedness:
13% Senior Notes Due 2005................................. $ 219,786 $219,786
11 1/2% Senior Notes Due 2008............................. 200,000 200,000
Notes payable and other long-term liabilities............. 3,476 3,476
Deferred acquisition liabilities.......................... 5,591 5,591
--------- --------
Subtotal............................................. 428,853 428,853
Stockholders' equity:
Class A common stock, $0.01 par value ("Common Stock");
8,000,000 shares authorized; 164,272 issued and
outstanding; issued and outstanding as
adjusted;.............................................. 2
Class B common stock, $0.01 par value ("Class B Common");
6,000,000 shares authorized; 2,353,498 issued and
outstanding; none issued and outstanding as
adjusted;.............................................. 24 --
Class C common stock, $0.01 par value ("Class C Common");
300,000 shares authorized; 225,000 issued and
outstanding; none issued and outstanding as
adjusted;.............................................. 2 --
Series A Preferred Stock, $0.01 par value, 10,000 shares
authorized; 7,301.6 issued and outstanding; none issued
and outstanding as adjusted............................ 153,341 --
Series B Preferred Stock, $0.01 par value; 1,000 shares
authorized; 1,042.6 issued and outstanding; none issued
and outstanding as adjusted............................ 63,827 --
Additional paid-in capital................................ 113,780
Accumulated deficit....................................... (214,814)
--------- --------
Subtotal............................................. 116,162
--------- --------
Total capitalization.............................. $ 545,015 $
========= ========
</TABLE>

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

(1) Gives effect to the Offering (assuming an initial public offering price of
$ per share and after deducting estimated underwriting discounts and
commissions and estimated fees and expenses of $ ) and to the
conversion of all outstanding classes of common stock and all outstanding
series of preferred stock into Common Stock upon consummation of the
Offering. See "Risk Factors -- Risks Associated with GVL's Series A
Preferred Stock" and "Description of Capital Stock."

24
<PAGE> 28

DILUTION

The net tangible book value per share of Common Stock is the difference
between the Company's tangible assets and its liabilities, divided by the number
of shares of common stock outstanding. For investors in the Common Stock,
dilution is the per share difference between the assumed $ per share
initial offering price of the Common Stock offered hereby and the net tangible
book value of the Common Stock immediately after completing the Offering.
Dilution in this case results from the fact that the per share offering price of
the Common Stock is substantially in excess of the per share net tangible book
value of the Common Stock prior to the Offering.

As of February 28, 1999, without taking into account any changes in the
Company's net tangible book value subsequent to that date other than to give
effect to the assumed conversion of all outstanding classes of common stock and
all outstanding series of preferred stock into an aggregate of shares of
Common Stock, (based on an assumed offering price of $ per share), the
as adjusted net tangible book value of each of the assumed outstanding shares of
Common Stock would have been $ per share. As of February 28, 1999,
without taking into account any changes in the Company's net tangible book value
subsequent to that date other than to give effect to the sale of the Common
Stock offered hereby based on an assumed offering price of $ per share
(after deducting estimated offering expenses including discounts and
commissions) and the conversions described above, the as adjusted net tangible
book value of each of the assumed outstanding shares of Common Stock would have
been $ per share. Therefore, investors in the Common Stock would have paid
$ for a share of Common Stock having a net tangible book value of
approximately $ per share after the Offering; that is, their investment
would have been diluted by approximately $ per share. At the same time,
existing stockholders would have realized an increase in net tangible book value
of $ per share after the Offering without further cost or risk to
themselves. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Net tangible book value per share of Common Stock before the
Offering.................................................. $
As adjusted net tangible book value per share of Common
Stock after the assumed conversion of the outstanding
classes of common stock and outstanding series of
preferred stock into Common Stock(1)...................... $
-------
Decrease in net tangible book value per share resulting from
conversions(1)............................................ $
Assumed initial public offering price per share of Common
Stock..................................................... $
Increase in net tangible book value per share of Common
Stock attributable to investors in the Offering(1)(2)..... $
As adjusted net tangible book value per share of Common
Stock after the Offering(1)(2)............................ $
--------
Dilution to new investors(1)(2)............................. $
========
</TABLE>

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

(1) Assumes that none of the Company's outstanding options or warrants are
exercised. See "Management -- Incentive Stock Plan," and "-- Stock Purchase
Plan" and "Description of Capital Stock." Assumes the conversion of all
outstanding classes of common stock and all outstanding series of preferred
stock into an aggregate of shares of Common Stock, respectively,
all based on an assumed initial offering price of $ per share of Common
Stock.

(2) After deduction of the estimated offering expenses payable by the Company
(including the underwriting discounts and commissions).

25
<PAGE> 29

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected historical consolidated financial
data as of August 31, 1997 and 1998 and for the years ended
August 31, 1996, 1997 and 1998 have been derived from the
consolidated financial statements of the Company included
elsewhere herein and audited by Deloitte & Touche LLP,
independent auditors as set forth in their report thereon also
included herein. The selected financial data of the Company as
of and for the periods ended December 31, 1993, December 31,
1994 and August 31, 1995 and as of August 31, 1996 have been
derived from the Company's audited financial statements not
included herein. The selected financial data presented below as
of and for the six month periods ended February 28, 1998 and
1999 have been derived from unaudited interim consolidated
financial statements of the Company. In the opinion of
management, the unaudited consolidated financial statements have
been prepared on the same basis as the audited financial
statements and include all adjustments, which consist only of
normal recurring adjustments, necessary for the fair
presentation of the Company's financial position and results of
operation for these periods. Operating results for the six
months ended February 28, 1998 and 1999, are not necessarily
indicative of the results that may be expected for the entire
fiscal year or any other interim period. In 1995, the Company
changed its fiscal year end to August 31 to match that of its
majority stockholder. As a result of the change in fiscal year
and the Company's history of growth through acquisitions the
Company's historical financial results are not directly
comparable from period to period, nor are they indicative of
future results of operations in many respects. The following
information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial
Statements of the Company and the notes thereto, appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
APRIL 20, 1993 EIGHT MONTH
(DATE OF INCEPTION) YEAR ENDED PERIOD ENDED YEAR ENDED AUGUST 31,
TO DECEMBER 31, DECEMBER 31, AUGUST 31, ------------------------------
1993 1994 1995 1996 1997 1998
------------------- ------------ ------------ -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television............ $ 12 $ 240 $ 8,783 $ 25,893 $ 36,915 $ 61,081
Telecommunications.......... -- 202 788 1,711 2,922 3,882
----- ------- -------- -------- -------- --------
Total revenues.............. 12 442 9,571 27,604 39,837 64,963
Operating expenses:
Programming, access fees and
revenue sharing........... 6 470 4,558 11,868 19,202 28,825
Customer support, general
and administrative........ 304 7,733 12,055 19,636 28,926 35,847
Depreciation and
amortization.............. 8 117 2,420 8,676 14,505 28,481
----- ------- -------- -------- -------- --------
Total operating expenses...... 318 8,320 19,033 40,180 62,633 93,153
----- ------- -------- -------- -------- --------
Loss from operations.......... (306) (7,878) (9,462) (12,576) (22,796) (28,190)
Interest expense, net(1)...... (1) (66) (1,169) (5,854) (25,739) (39,564)
----- ------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item.......... (307) (7,944) (10,631) (18,430) (48,535) (67,754)
Net loss(2)................... $(307) $(7,944) $(10,161) $(18,430) $(48,535) $(74,398)
===== ======= ======== ======== ======== ========
Basic and diluted loss per
share of Common Equity(3)... N/A N/A $ (6.89) $ (8.30) $ (19.98) $ (31.45)

SIX MONTHS ENDED
FEBRUARY 28,
-------------------
1998 1999
-------- --------

<S> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television............ $ 25,247 $ 38,095
Telecommunications.......... 1,644 2,870
-------- --------
Total revenues.............. 26,891 40,965
Operating expenses:
Programming, access fees and
revenue sharing........... 12,419 18,689
Customer support, general
and administrative........ 15,855 26,335
Depreciation and
amortization.............. 10,759 17,997
-------- --------
Total operating expenses...... 39,033 63,021
-------- --------
Loss from operations.......... (12,142) (22,056)
Interest expense, net(1)...... (21,885) (22,558)
-------- --------
Loss before income taxes and
extraordinary item.......... (34,027) (44,614)
Net loss(2)................... $(34,027) $(44,614)
======== ========
Basic and diluted loss per
share of Common Equity(3)... $ (13.20) $ (19.81)
</TABLE>

26
<PAGE> 30

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
-------------- ----------------------------------------- FEBRUARY 28,
1993 1994 1995 1996 1997 1998 1999
---- ------- -------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents......................... $ 41 $ 5,019 $ 2,036 $ 1,677 $ 87,305 $123,774 $ 60,032
Restricted investments............................ -- -- -- -- 67,206 63,207 38,645
Property, plant and equipment, net................ 509 11,379 48,060 103,800 160,442 268,044 308,289
Intangible assets................................. -- 16,189 55,443 65,876 82,583 160,370 159,055
Total assets...................................... 588 33,820 108,072 175,978 403,416 627,170 581,459
Convertible notes due stockholder................. -- 15,000 17,950 89,414 129,604 -- --
Notes payable and long-term obligations........... 52 7,675 9,023 8,963 228,573 429,278 428,853
Total liabilities................................. 206 31,007 39,527 116,700 383,051 466,394 465,297
Stockholders' equity.............................. 382 2,813 68,545 59,279 20,365 160,776 116,162
</TABLE>

<TABLE>
<CAPTION>
PERIOD FROM
APRIL 20, 1993
(DATE OF EIGHT MONTH
INCEPTION) YEAR ENDED PERIOD ENDED
TO DECEMBER 31, DECEMBER 31, AUGUST 31,
1993 1994 1995
--------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in
operating activities......... $(183) $ (3,332) $ (3,494)
Net cash flows used in
investing activities......... (517) (10,576) (72,144)
Net cash flows provided by
(used in) financing
activities................... 741 18,886 72,655
Capital expenditures(4)........ 517 9,278 22,170
EBITDA(5)...................... (298) (7,761) (7,042)

SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
-------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in
operating activities......... $ (453) $ (15,935) $ (26,268) $ (15,215) $ (31,441)
Net cash flows used in
investing activities......... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by
(used in) financing
activities................... 72,131 244,688 184,269 117,745 (1,115)
Capital expenditures(4)........ 62,121 71,505 85,643 37,900 56,928
EBITDA(5)...................... (3,900) (8,291) 291 (1,383) (4,059)
</TABLE>

<TABLE>
<CAPTION>
AS OF AUGUST 31,
------------------------------------------ FEBRUARY 28,
1995 1996 1997 1998 1999
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA(6)
CABLE TELEVISION
Units under contract(7)..................................... 173,324 241,496 295,149 432,955 435,738
Units passed(8)............................................. 170,336 225,433 254,032 399,210 401,600
Basic subscribers........................................... 75,944 114,163 132,556 216,249 218,023
Basic penetration(9)........................................ 44.6% 50.6% 52.2% 54.2% 54.3%
Premium units(10)........................................... 39,753 60,641 95,150 182,788 176,411
Pay-to-basic ratio(10)(11).................................. 52.3% 53.1% 71.8% 84.5% 80.9%
Average monthly revenue per basic subscriber(12)............ $ 22.84 $ 22.70 $ 24.94 $ 27.95 $ 29.20
TELECOMMUNICATIONS
Units under contract(9)..................................... 10,322 20,945 39,831 94,338 107,109
Units passed(10)............................................ 9,116 12,364 16,572 35,671 47,462
Lines(13)................................................... 2,650 4,126 6,185 9,244 13,229
Line penetration(14)........................................ 29.1% 33.4% 37.3% 25.9% 27.9%
Average monthly revenue per line(15)........................ $ 36.86 $ 42.10 $ 47.23 $ 46.62 $ 44.50
</TABLE>

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

(1) Interest expense, net is reflected net of interest income
and interest capitalized in property, plant and equipment.
Includes interest expense on the GVL Notes of approximately
$919,000, $5,342,000, $15,204,000 and $9,640,000 for the
eight month period ended August 31, 1995, the years ended
August 31, 1996, 1997 and 1998, respectively and $9,640,000
for the six months ended February 28, 1998. Effective March
1, 1998, the GVL Notes were exchanged for approximately
6,962 shares of Series A Preferred.

(2) The Company had no taxable income for the periods reported.
The Company reported an income tax benefit of approximately
$470,000 in the eight month period ended August 31, 1995.
In addition, the Company incurred an extraordinary loss of
$6,644,000 in the year ended August 31, 1998.

(3) Loss per share is not presented for the periods the Company
was organized as a partnership. Loss per share has been
restated to reflect the adoption of statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Basic
and diluted loss per share are computed in the same manner
since common stock equivalents have an antidilutive effect.

(4) Capital expenditures include expenditures on property,
plant and equipment together with intangible assets
excluding expenditures for business acquisitions.

27
<PAGE> 31

(5) EBITDA represents earnings (loss) before interest expense
(net of interest income and amounts capitalized), income
tax benefits, depreciation and amortization. EBITDA is not
intended to represent cash flow from operations or an
alternative to net loss, each as defined by generally
accepted accounting principles. In addition, the measure of
EBITDA presented herein may not be comparable to other
similarly titled measures by other companies. The Company
believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other
interested parties in the cable television and
telecommunications industries. Accordingly, this
information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating
performance relative to other companies in its industry.

(6) Operating data for 1993 and 1994 is not available because
such information was not tracked prior to the acquisition
of the Company by VPC. The Company does not believe that
the operating statistics for 1993 and 1994, if they were
available, would be material because the Company's revenues
during such periods were minimal.

(7) Units under contract represents the number of units
currently passed and additional units with respect to which
the Company has entered into Rights of Entry for the
provision of cable television and telecommunications
services, respectively, but which the Company has not yet
passed and which the Company expects to pass within the
next five years. At this time the majority of all units
under contract for telecommunications are also under
contract for cable television.

(8) Units passed represents the number of units with respect to
which the Company has connected its cable television and
telecommunications systems, respectively. The difference
between units under contract and units passed represents
units for which Rights of Entry have been entered into, but
which are not yet connected for cable television and
telecommunications services, respectively.

(9) Basic penetration is calculated by dividing the total
number of basic subscribers at such date by the total
number of units passed.

(10) Beginning with the year ended August 31, 1997, to be
consistent with most other cable television providers, the
Company has revised the method of reporting premium
penetration to include all premium units in the
calculation. Historically the calculation excluded premium
channels that were provided to customers as part of an
expanded basic line up or other special arrangements. Prior
years have not been restated. For comparative purposes, the
premium units and the pay-to-basic ratios as of August 31,
1997 and 1998, and February 28, 1999, presented under the
previous method of reporting are 84,875, 136,863 and
128,137, respectively, and 64.0%, 63.3% and 58.8%,
respectively.

(11) Pay-to-basic ratio is calculated by dividing the total
number of premium units by the total number of basic
subscribers.

(12) Represents average monthly revenue divided by the average
number of basic subscribers for the fiscal periods ended as
of the date shown.

(13) Lines represent the number of telephone lines currently
being provided to telecommunications subscribers. A
telecommunications subscriber can subscribe for more than
one line. The Company has revised its method of reporting
lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the
number of lines previously reported to reflect this change.

(14) Line penetration is calculated by dividing the total number
of telecommunications lines at such date by the total
number of units passed.

(15) Represents average monthly revenue divided by the average
number of lines for the fiscal period ended as of the date
shown.

28
<PAGE> 32

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus. Except as otherwise indicated, the following analysis relates solely
to historical results and does not consider any potential impact that the
Offering or the proposed use of proceeds may have on the operations and
financial condition of the Company.

OVERVIEW

OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone, cable television and high
speed Internet access services, to residents of MDUs in the United States. The
Company was organized in April 1993 to build, acquire and operate private cable
television and telecommunications systems. The Company seeks to capitalize on
opportunities created by the Telecom Act to become the principal competitor in
the Large MDU market to the ILEC and the incumbent franchise cable television
operator. The Company has commenced offering central office switched
telecommunications services in Houston and Dallas-Fort Worth and expects to
offer such services in substantially all of its major markets by the end of
calendar 2000. In addition, the Company recently commenced offering high speed
Internet access at select MDUs in several of its markets and intends to
introduce its high speed Internet access services in all of its major markets
over the next 12 months.

Since inception, the Company has experienced substantial growth. This
growth has been achieved through a combination of acquisitions of other
operators, many of which operated SMATV systems, and the negotiation of new
Rights of Entry. In general, the conduct of the acquired operations prior to
acquisition was materially different from the conduct of operations following
acquisition. Among the changes made in many of the businesses after acquisition
were (i) commencing conversion of SMATV systems to 18GHz or fiber optic
networks, (ii) delivering customer service from a more advanced national call
center in Dallas, (iii) increasing the number of programming channels, (iv)
improving technical and field service and system reliability, (v) improving
regulatory and financial controls and (vi) initiating telecommunications
services offerings.

On April 13, 1998, OpTel completed the acquisition of the private cable
television and telecommunications services and related agreements of Interactive
Cable Systems, Inc. ("ICS"), representing approximately 90,000 cable television
and telecommunication units under contract. On October 27, 1997, the Company
purchased the residential cable television and associated fiber optic network
assets of Phonoscope Ltd. and the stock of several affiliated entities
(collectively "Phonoscope") representing approximately 56,000 units under
contract for cable television.

As of February 28, 1999, the Company had 435,738 and 107,109 units under
contract for cable television and telecommunications, respectively, and 401,600
and 47,462 units passed for cable television and telecommunications,
respectively. As of such date, OpTel had 218,023 cable television subscribers
and 13,229 telecommunication lines in service.

OpTel believes that by utilizing an advanced proprietary network
infrastructure it can market a competitive integrated package of voice, video
and Internet access services in its serviced markets. As of February 28, 1999,
approximately 270,736 units representing approximately 67% of the Company's
units passed for cable television were passed by the Company's networks. OpTel
expects to connect a majority of the MDUs currently served by SMATV systems to
18GHz or fiber optic networks by the end of calendar 2000. Once an MDU is
brought onto the Company's networks, gross profit per subscriber at the MDU
generally increases. In addition, networks provide OpTel with the infrastructure
necessary to deliver an integrated package of communications services to
subscribers at the MDU.

The Company's telecommunications revenue is comprised of monthly recurring
charges, usage charges and initial non-recurring charges. Monthly recurring
charges include fees paid by subscribers for line rental and additional
features. Usage charges consist of fees paid by end users for long distance,
fees paid by the ILEC for terminating intraLATA traffic to the Company's network
and access charges paid by carriers for

29
<PAGE> 33

long distance traffic originated and terminated to and from local customers.
Initial non-recurring charges include fees paid by subscribers for installation.

The Company's cable television revenue is comprised of monthly recurring
charges paid by subscribers, monthly recurring charges paid by MDU owners for
bulk services and fees paid by subscribers for premium services and some
non-recurring charges. The Company offers its cable services under either retail
or bulk agreements. Under retail agreements, the Company contracts directly with
MDU residents. Under bulk agreements, the Company contracts directly with MDU
owners for basic cable to be provided to all units in a particular MDU, but
generally at lower rates per unit than under retail agreements. The effect of
this lower per unit rate on revenue is generally offset by the 100% penetration
achieved by bulk agreements. Premium services are contracted for directly by
subscribers under both types of agreements and include fees paid for premium
channels and pay-per-view. The Company anticipates that its overall revenue per
subscriber will increase as the number of bulk contracts declines as a
percentage of the Company's Rights of Entry. Additionally, the Company believes
that its revenue per subscriber will increase as it migrates its SMATV
properties onto the Company's networks. See "Business -- Network Architecture."

The line item programming, access fees and revenue sharing with respect to
the Company's telecommunications services consists of leased transport
facilities, terminating access charges from ILECs, fees paid to IXCs for long
distance and revenue sharing. Leased transport facility costs may include the
rental of T-1s to connect the MDUs to the ILEC and may include costs associated
with connecting the Company's Network Hubs to each other and to its central
office switch. Terminating access charges are fees paid to the ILEC for
intraLATA calls which are originated by OpTel's subscribers and terminated on
the ILECs network. Fees paid to IXCs for long distance include costs associated
with terminating toll calls initiated by OpTel's subscribers. Revenue sharing
costs represent certain fees paid to owners of MDUs pursuant to the terms of
Rights of Entry.

The line item programming, access fees and revenue sharing with respect to
the Company's cable television services consists of programming costs, franchise
fees and revenue sharing. Programming costs include those fees paid to obtain
the rights to broadcast certain video programming. Revenue sharing costs
represent certain fees paid to owners of MDUs pursuant to the terms of Rights of
Entry.

The Company's customer support, general and administrative expenses include
selling and marketing costs, customer service, engineering, facilities and
corporate and regional administration.

Through February 28, 1999, the Company had invested approximately $526
million primarily in its cable television and telecommunications assets. The
Company's revenues have grown from $0.4 million for the year ended December 31,
1994 to $65.0 million for fiscal 1998 and $41.0 million for the six months ended
February 28, 1999. While pursuing its investment and development strategy, the
Company has incurred substantial up-front operating expenses for marketing,
customer operations, administration and maintenance of facilities, general and
administrative expenses and depreciation and amortization in order to solicit
and service customers in advance of generating significant revenues. As a result
of these factors, the Company has generated operating losses of $22.1 million,
$28.2 million, $22.8 million and $12.6 million for the six months ended February
28, 1999 and the years ended August 31, 1998, 1997, 1996, respectively, as its
cable television and telecommunications customer base has grown. The Company
reported positive EBITDA of $0.3 million for the year ended August 31, 1998 as
compared with negative EBITDA of $8.3 million and $3.9 million for the years
ended August 31, 1997 and 1996, respectively. For the six months ended February
28, 1999, the Company reported negative EBITDA of $4.1 million. The decline in
EBITDA is primarily the result of the increased costs associated with the roll
out of telecommunications services in the Company's major markets and the
deployment of switch collocation access and Internet access services. For the
six months ended February 28, 1999, telephone passings, revenues and line growth
have been gaining momentum, however, cable passings, revenues and subscribers
remained flat. To address the situation, the Company is reorganizing marketing
and sales management, has launched direct sales activities and will introduce
other direct marketing initiatives in the third quarter. There can be no
assurance that the Company will generate operating profits or achieve positive
EBITDA in the future.

30
<PAGE> 34

FACTORS AFFECTING FUTURE OPERATIONS

The principal operating factors affecting the Company's future results of
operations are expected to include (i) changes in the number of MDUs under
Rights of Entry, (ii) penetration rates for its services, (iii) the terms of its
arrangements with MDU owners, including revenue sharing and length of contract,
(iv) the prices that it charges its subscribers, (v) normal operating expenses,
which in the cable television business principally consist of programming
expenses and in the telecommunications business principally consist of fees paid
to long distance carriers, the cost of trunking services and other LEC charges,
as well as, in each case, billing and collection costs, technical service and
maintenance expenses and customer support services, (vi) financing costs, and
(vii) capital expenditures as the Company commences offering central office
switched telecommunication services in additional markets and completes its
conversion of SMATV systems. The Company's results of operations may also be
impacted by future acquisitions, as well as by various initiatives to broaden
the Company's service offering and addressable market. The first of such
initiatives is to collocate network facilities for telecommunication services in
selected ILEC end offices in certain of its markets. The Company will select the
ILEC end offices in which it will collocate based upon MDU concentration.
Through collocation, the Company will lease the ILEC's transport network on an
unbundled basis to initially reach a subscriber. The Company believes
collocation will decrease the time required to provide telephone services to a
subscriber, increase the Company's addressable market by providing a cost
effective means of servicing smaller MDUs and, over time, promote new Rights of
Entry. Other initiatives aim at creating new revenue sources by offering related
services including a range of Internet access and DBS services.

The Company anticipates that it will continue to have higher churn than is
typical of an incumbent franchise cable television operator due to the frequent
turnover of MDU tenants. This churn generally does not result in a reduction in
overall penetration rates since the outgoing subscriber is generally quickly
replaced by a new tenant in the unit. This may result in installation revenue
per unit that is higher than for a franchise cable television operator. Although
this may also require higher installation expenses per subscriber, because of
the layout of MDUs and the Company's ability to obtain "permission to enter"
from the MDU owner, installations can often be completed when the subscriber is
not home, limiting the expense of installation. Accordingly, the Company does
not believe that churn is as significant an operating statistic as it is for
franchise cable television operators. With respect to the Company's
telecommunications services, the Company believes that its best opportunity for
a sale arises when a subscriber first signs a lease and takes occupancy in an
MDU. Accordingly, the Company believes that during the early stages of the roll
out of its central office switched telecommunications services in a market it
benefits from the high rate of MDU resident turnover.

RESULTS OF OPERATIONS

All of the Company's acquisitions have been accounted for by the purchase
method of accounting. As a result of the Company's growth through acquisitions
and the change in fiscal year, the Company's historical financial results are
not directly comparable from period to period, nor are they indicative of future
results of operations in many respects.

31
<PAGE> 35

The following table sets forth, for the periods indicated, certain
operating and financial information relating to the Company.

<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF FEBRUARY 28,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(1)...................... 241,496 295,149 432,955 372,138 435,738
Units passed(2).............................. 225,433 254,032 399,210 320,286 401,600
Basic subscribers............................ 114,163 132,556 216,249 172,643 218,023
Basic penetration(3)......................... 50.6% 52.2% 54.2% 53.9% 54.3%
Average monthly revenue per basic
subscriber(4).............................. $22.70 $24.94 $27.95 $27.57 $29.20
TELECOMMUNICATIONS
Units under contract(1)...................... 20,945 39,831 94,338 61,082 107,109
Units passed(2).............................. 12,364 16,572 35,671 17,551 47,462
Lines(5)..................................... 4,126 6,185 9,244 6,375 13,229
Line penetration(6).......................... 33.4% 37.3% 25.9% 36.3% 27.9%
Average monthly revenue per line(7).......... $42.10 $47.23 $46.62 $43.64 $44.50
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- -------------------
1996 1997 1998 1998 1999
-------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
Revenues:
Cable television................... $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095
Telecommunications................. 1,711 2,922 3,882 1,644 2,870
-------- --------- --------- -------- --------
Total revenues............. $ 27,604 $ 39,837 $ 64,963 $ 26,891 $ 40,965
EBITDA(8)............................ $ (3,900) $ (8,291) $ 291 $ (1,383) $ (4,059)
Net cash flows used in operating
activities......................... $ (453) $ (15,935) $ (26,268) $(15,215) $(31,441)
Net cash flows used in investing
activities......................... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by (used in)
financing activities............... 72,131 244,688 184,269 117,745 (1,115)
Net loss............................. (18,430) (48,535) (74,398) (34,027) (44,614)
</TABLE>

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

(1) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. At this time the
majority of all units under contract for telecommunications are also under
contract for cable television.

(2) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively.

(3) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.

(4) Represents average monthly revenue divided by the average number of basic
subscribers for the fiscal periods ended as of the date shown.

(5) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple customers
share a single line. The Company has restated the number of lines previously
reported to reflect this change.

(6) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.

(7) Represents average monthly revenue divided by the average number of lines
for the fiscal period ended as of the date shown.

(8) EBITDA represents income (loss) from operations before interest (net of
interest income and amounts capitalized), income taxes and depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other companies.
The Company believes that EBITDA is a standard measure commonly reported and
widely used by analysts, investors and other interested parties in the cable
television and telecommunications industries. Accordingly, this information
has been disclosed herein to permit a more complete comparative analysis of
the Company's operating performance relative to other companies in its
industry.

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Six months ended February 28, 1999 compared to six months ended February 28,
1998

Total Revenues. Total revenues for the first six months of fiscal 1999
increased by $14.1 million, or 52%, to $41.0 million compared to revenues of
$26.9 million for the first six months of fiscal 1998. The increase in total
revenue is principally the result of the acquisition of ICS in April 1998 and
the inclusion of the operating results of Phonoscope, which was acquired in
October 1997, for the full six month period.

Cable Television. Cable television revenues for the first six months of
fiscal 1999 increased by $12.8 million, or 51%, to $38.1 million from $25.2
million for the comparable period in fiscal 1998. This reflected a 26% increase
in the number of basic subscribers and a 6% increase in the average monthly
revenue per basic subscriber. The average monthly revenue per basic subscriber
increased from $27.57 for the first six months of fiscal 1998 to $29.20 for the
first six months of fiscal 1999. The increase in average monthly revenue per
basic subscriber mainly resulted from annual rate increases, rate increases
following property upgrades and a shift in the mix of basic subscribers to favor
cities with higher average monthly revenue per basic subscriber. The Company
maintained basic penetration at 54%.

Telecommunications. Telecommunications revenues for the first six months of
fiscal 1999 increased by 75% to $2.9 million, up from $1.6 million for the
comparable period of the preceding year, reflecting both a 108% increase in the
number of lines compared to the first six months of fiscal 1998 and a 2%
increase in the average monthly revenue per line, which rose from $43.64 to
$44.50. Since launching central office switches in Houston and Dallas during
fiscal 1998, the Company has increased its efforts to market its telephone
product in these markets. Although the average monthly revenue per line for the
six months ended February 28, 1999 increased from the six months ended February
28, 1998, it decreased from the year ended August 31, 1998. This decrease
reflects a combination of (i) seasonal variations in long distance usage; (ii)
the impact of incentives offered by the Company to subscribers as part of the
initial marketing of its central office switched services in Dallas; and (iii)
the impact of changes in call volumes. The Company does not believe the changes
in call volumes are reflective of a trend. However, because of the relatively
small number of lines serviced by the Company, changes in the number or length
of calls made by a small group of individual subscribers can have a noticeable
impact on the average revenue per line.

Programming, Access Fees and Revenue Sharing. Programming, access fees and
revenue sharing increased from $12.4 million for the first six months of fiscal
1998 to $18.7 million for the first six months of fiscal 1999. The increased
cost is primarily attributed to the subscriber growth mentioned above and to
increases in rates charged by programming suppliers.

Customer Support, General and Administrative. Customer support, general and
administrative expenses were $26.3 million for the first six months of fiscal
1999 compared to $15.9 million for the first six months of fiscal 1998. The
increase in customer support, general and administrative expenses was largely
due to an increase in personnel associated with the expansion of the Company's
operations and the roll-out of telephone and Internet services.

EBITDA. The Company's EBITDA (earnings (loss) before interest, income
taxes, and depreciation and amortization) for the first six months of fiscal
1999 was negative $4.1 million compared to negative $1.4 million for the first
six months of fiscal 1998. EBITDA is not intended to represent cash flow from
operations or an alternative to net loss, each as defined by generally accepted
accounting principles.

Depreciation and Amortization. Depreciation and amortization was $18.0
million for the first six months of fiscal 1999 compared to $10.8 million for
the first six months of fiscal 1998. This increase is primarily attributable to
an increase in cable and telephone systems and intangible assets resulting from
continued purchases and construction of such systems and from acquisitions of
businesses.

Interest Expense. Interest expense (net of amounts capitalized) was $25.8
million for the first six months of fiscal 1999, a small decrease from interest
expense of $26.0 million for the first six months of fiscal 1998. This decrease
is attributable to the elimination of interest expense associated with the
convertible notes payable to stockholders in March 1998 with the conversion of
these notes to preferred stock.

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<PAGE> 37

Interest and Other Income. For the first six months of fiscal 1999,
interest and other income was $3.3 million, compared to $4.1 million for the
first six months of fiscal 1998, reflecting a decrease of $0.9 million. This is
primarily the result of the Company having a smaller average balance of invested
cash during the first six months of fiscal 1999 than fiscal 1998. The Company
invests its cash in money market funds and other short-term, high grade
instruments according to its investment policy and certain restrictions of its
indebtedness.

Fiscal year ended August 31, 1998 compared to fiscal year ended August 31,
1997

Total Revenues. Total revenues for the fiscal year ended August 31, 1998
increased by $25.1 million or 63% to $64.9 million compared to revenues of $39.8
million for the fiscal year ended August 31, 1997.

Cable Television. Compared to fiscal 1997, cable television revenues
increased by $24.2 million, or 66%, to $61.1 million from $36.9 million,
reflecting both a 63% increase in the number of subscribers and a 12% increase
in the average monthly revenue per basic subscriber which rose from $24.94 for
fiscal 1997 to $27.95 for fiscal 1998. The increase in average monthly revenue
per basic subscriber resulted from a combination of rate increases following
property upgrades, annual rate increases and increased premium revenues as the
Company's pay to basic ratio improved from 72% to 85% over the course of the
year. The Company continued to grow basic penetration which increased by 2% over
the year.

Telecommunications. Compared to fiscal 1997, telecommunications revenues
increased by $1.0 million, or 33%, to $3.9 million from $2.9 million. This
increase is mainly due to the increase in the number of lines served by the
Company and higher average monthly revenue per line associated with the lines
served by the Company's central office switches.

Programming, Access Fees and Revenue Sharing. Programming, access fees and
revenue sharing was $28.8 million for fiscal 1998 compared to $19.2 million for
fiscal 1997. Substantially all of the increased cost is attributable to the
subscriber growth mentioned above.

Customer Support, General and Administrative. Customer support, general and
administrative expenses were $35.8 million for fiscal 1998 compared to $28.9
million for fiscal 1997. The increase in expenses was largely due to an increase
in personnel associated with the expansion of the Company's operations and
recruitment for the roll out of the Company's telecommunications services in
advance of the expected revenues.

EBITDA. The Company's EBITDA increased from negative $8.3 million to
positive $0.3 million over the year. There can be no assurance that the Company
will be able to achieve or sustain positive EBITDA in the future.

Depreciation and Amortization. Depreciation and amortization was $28.5
million for fiscal 1998 compared to $14.5 million in fiscal 1997. This increase
is primarily attributable to an increase in cable and telephone systems and
intangible assets resulting from continued purchases and construction of such
systems and from acquisitions of businesses.

Interest Expense, Net. Interest expense (net of amounts capitalized) was
$48.5 million for fiscal 1998, an increase of $17.1 million over interest
expense of $31.4 million for fiscal 1997, reflecting the increase in the
Company's debt incurred principally to fund the build out of its networks.

Interest and Other Income. Interest and other income was $8.9 million for
fiscal 1998, an increase of $3.2 million over interest income and other income
of $5.7 million for fiscal 1997. The increase in interest and other income was
largely due to an increase in cash and cash equivalents and restricted
investments resulting from the proceeds of the offering of $225 million of 13%
Senior Notes due 2005 (the "1997 Notes") in February 1997, and from the proceeds
of the offering of the 11.5% Senior Notes due 2008 (the "1998 Notes") in July
1998.

Income Tax Benefit. The Company has experienced net operating losses for
the years ended August 31, 1998 and 1997. Realization of deferred tax assets is
dependent on generating sufficient taxable income prior to

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<PAGE> 38

expiration of the loss carryforwards. The Company is unable to determine whether
these accumulated losses will be utilized; accordingly, a valuation allowance
has been provided and no benefit has been recognized.

Extraordinary Loss. The Company incurred an extraordinary loss of $6.7
million in 1998. This loss can be directly attributed to the repayment of the
Senior Credit Facility, which was retired in July of 1998. Included in the
extraordinary loss are $5.4 million for write off of debt issue costs and $1.3
million associated with the prepayment penalty.

Fiscal year ended August 31, 1997 compared to fiscal year ended August 31,
1996

Total Revenues. Total revenues for the fiscal year ended August 31, 1997
increased by $12.2 million or 44% to $39.8 million compared to revenues of $27.6
million for the fiscal year ended August 31, 1996.

Cable Television. Compared to fiscal 1996, cable television revenues
increased by $11.0 million, or 42%, to $36.9 million from $25.9 million,
reflecting both a 16% increase in the number of subscribers and a 10% increase
in the average monthly revenue per basic subscriber which rose from $22.70 for
fiscal 1996 to $24.94 for fiscal 1997. The increase in average monthly revenue
per basic subscriber resulted from a combination of rate increases following
property upgrades, annual rate increases and increased premium revenues as the
Company's pay to basic ratio improved from 53% to 72% over the course of the
year. The Company continued to grow basic penetration which increased by 1.6%
over the year.

Telecommunications. The Company's strategy is to roll out central office
switched local exchange services in each of the major markets in which it
operates. Until recently the Company served certain properties as an STS
provider, reselling telephone service using PBXs situated at the MDU properties.
The Company has not historically promoted such STS service because it was not in
line with its strategy to offer central office switched telecommunications
services to its subscribers. Despite not promoting telecommunications services
during the year, telecommunications contributed $2.9 million of revenue compared
to $1.7 million in the preceding year, mainly as a result of increased
penetration and a 34% increase in the number of units where telephone service is
offered from 12,364 at the end of fiscal 1996 to 16,572 at the end of fiscal
1997.

Programming, Access Fees and Revenue Sharing. Programming, access fees and
revenue sharing was $19.2 million for fiscal 1997 compared to $11.9 million for
fiscal 1996. Such costs are generally variable based on the number of
subscribers or gross revenues. Overall, programming, access fees and revenue
sharing as a percentage of total revenues increased over the year from 43.0% to
48.2%, largely due to costs associated with the increase in the number of
subscribers served by PBX telephone service, the increase in premium cable
penetration which has lower associated margins and, to a lesser extent, an
increase in the proportion of the Company's portfolio under revenue sharing
arrangements with property owners. The PBX costs represent the costs of
interconnecting individual properties with the ILEC's central office switch.
These costs will be substantially reduced once the Company is able to utilize
its own networks to pass telephone traffic to Company owned central office
switches.

Customer Support, General and Administrative. Customer support, general and
administrative expenses were $28.9 million for fiscal 1997 compared to $19.6
million for fiscal 1996. The increase in expenses was largely due to an increase
in personnel associated with the expansion of the Company's operations and
recruitment for the roll out of the Company's telecommunications services in
advance of the expected revenues. In addition, the Company incurred a one time
reorganization charge of $1.4 million associated with the restructuring of
certain senior management positions during the year which was included in such
expenses.

EBITDA. The Company's EBITDA decreased from negative $3.9 million to
negative $8.3 million over the year, largely due to the reduced gross margins
and the expansion of the Company's operations in anticipation of the roll out of
telecommunications services. The increase in negative EBITDA was largely within
expectations given that the Company increased its personnel in the middle of
fiscal 1997 in anticipation of two significant events that occurred after the
end of the fiscal year: the launch of the Houston central office switch and the
consummation of the acquisition of certain residential cable television and
associated fiber optic network assets also in Houston.

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<PAGE> 39

Depreciation and Amortization. Depreciation and amortization was $14.5
million for fiscal 1997 compared to $8.7 million in fiscal 1996. This increase
is primarily attributable to an increase in cable and telephone systems and
intangible assets resulting from continued purchases and construction of such
systems and from acquisitions of businesses.

Interest Expense, Net. Interest expense (net of amounts capitalized) was
$31.4 million for fiscal 1997, an increase of $25.4 million over interest
expense of $6.0 million for fiscal 1996, reflecting the increase in the
Company's debt incurred principally to fund the build out of its network.

Interest and Other Income. Interest and other income was $5.7 million for
fiscal 1997, an increase of $5.6 million over interest income and other income
of $0.1 million for fiscal 1996. The increase in interest income and other
income was largely due to an increase in cash and cash equivalents and
restricted investments resulting from the proceeds of the offering of the 1997
Notes in February 1997.

Income Tax Benefit. The Company has experienced net operating losses for
the years ended August 31, 1997 and 1996. Realization of deferred tax assets is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. The Company is unable to determine whether these accumulated
losses will be utilized; accordingly, a valuation allowance has been provided
and no benefit has been recognized.

LIQUIDITY AND CAPITAL RESOURCES

The development of OpTel's business and the expansion of its network have
required substantial capital, operational and administrative expenditures, a
significant portion of which have been incurred before the realization of
revenues. These expenditures will continue to result in negative cash flow until
an adequate customer base is established and revenues are realized. Although its
revenues have increased in each of the last three years, OpTel has incurred
substantial up-front operating expenses for marketing, customer operations,
administration and maintenance of facilities, general and administrative
expenses and depreciation and amortization in order to solicit and service
customers in advance of generating significant revenues. As a result of these
factors, the Company has generated operating losses of $22.1 million, $28.2
million, $22.8 million and $12.6 million for the six months ended February 28,
1999 and for the years ended August 31, 1998, 1997, and 1996, respectively, as
its cable television and telecommunications customer base has grown. The Company
reported net losses of $44.6 million for the six months ended February 28, 1999
as compared with net losses of $74.4 million, $48.5 million and $18.4 million
for the years ended August 31, 1998, 1997 and 1996, respectively.

During the past year, the Company has required external funds to finance
capital expenditures associated with the completion of acquisitions in strategic
markets, expansion of its networks and operating activities. Net cash used in
the acquisition and construction of the Company's cable television and
telecommunications networks and related business activities was $56.9 million
for the first six months of fiscal 1999 compared to $129.0 million for fiscal
1998 and $78.2 million for fiscal 1997.

From inception and until February 1997, the Company relied primarily on
investments from GVL, its principal stockholder, in the form of equity and
convertible notes to fund its operations. Effective March 1, 1998, GVL converted
all of the outstanding GVL Notes, including accrued interest, into shares of
Series A Preferred with an aggregate liquidation preference of approximately
$139.2 million. The Series A Preferred earns dividends at the annual rate of
9.75%, initially payable in additional shares. Pursuant to the terms of the
Conversion and Exchange Agreement, VPC has agreed to convert all of its shares
of Series A Preferred, including accrued and unpaid dividends thereon through
the conversion date, into Common Stock on or before the earlier to occur of
August 29, 1999 or the 90th day after the consummation of the Offering. See
"Risk Factors -- Risks Associated with GVL's Series A Preferred Stock." None of
the Company's stockholders or affiliates is under any contractual obligation to
provide additional financing to the Company.

In February 1997, the Company issued $225 million principal amount at
maturity of 13% Senior Notes Due 2007 (the "1997 Notes") along with 225,000
shares of Class C Common for aggregate net proceeds of $219.2 million. Of this
amount, approximately $79.6 million was placed in an escrow account in order to
cover the first six semi-annual interest payments due on the 1997 Notes. At
February 28, 1999, approximately

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<PAGE> 40

$28.0 million remained in such escrow account. On July 7, 1998, the Company
issued $200 million principal amount of 1998 Notes. The aggregate net proceeds
of the 1998 Notes were approximately $193.5 million. Of this amount,
approximately $126.3 million was used to repay all outstanding amounts under the
Senior Credit Facility and to pay other costs associated with terminating the
Senior Credit Facility and approximately $22.0 million was placed in an escrow
account to fund the first two semi-annual interest payments on the 1998 Notes.
At February 28, 1999, approximately $10.7 million remained in such escrow
account.

The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. The Company expects that
it will spend approximately $650 million on capital expenditures over the next
five years. The Company expects it will need approximately $550 million in
financing in addition to the proceeds of the Offering over the next five years
in order to achieve its business strategy within its targeted markets. The
Company will incur approximately $260 million in cash interest expense on its
outstanding indebtedness, including the $38.7 million currently held in escrow,
over the next five years. A considerable portion of the Company's capital
expenditure requirements is scaleable dependent upon the number of Rights of
Entry that the Company signs. The foregoing estimates are based on certain
assumptions, including the timing of the signing of Rights of Entry, the
conversion of MDUs currently served by SMATV systems to networks and the
telecommunications roll out, each of which may vary significantly from the
Company's plan. The capital expenditure requirements will be larger or smaller
depending upon whether the Company is able to achieve its expected market share
among the potential MDUs in its markets. The Company plans to finance its future
capital requirements through additional public or private equity or debt
offerings. There can be no assurance that the Company will be successful in
obtaining any necessary financing on reasonable terms or at all.

Under the terms of the more restrictive of the Company's Indentures, the
Company can only incur approximately $50 million of additional Indebtedness. The
aggregate amount of indebtedness which can be incurred by the Company under its
more restrictive Indenture is directly related to the number of cable television
subscribers served by the Company. As a result, growth of the Company's
telecommunications business, where the Company has focused significant
management attention and resources, will not increase the Company's ability to
incur indebtedness under the terms of the more restrictive Indenture. The
Company may need to incur indebtedness in excess of its current capacity.

In addition, GVL has the power to prevent the Company from obtaining
additional debt or equity financing. See "Risk Factors -- Control by GVL." GVL
is party to an indenture which limits the aggregate amount of indebtedness which
can be incurred by GVL and its subsidiaries, including the Company, taken as a
whole (based upon a ratio of total consolidated indebtedness to consolidated
operating cash flow). As a result, GVL's strategies and the operating results of
its subsidiaries other than the Company may affect the ability of the Company to
incur additional indebtedness. As of November 30, 1998, GVL was able to incur
approximately Cdn. $446 million (approximately $293 million based on an exchange
rate of $1.00 = Cdn. $1.5211 as reported by the Wall Street Journal on March 18,
1999) of indebtedness under its indenture. There can be no assurance that this
number may not decrease substantially in the future. There can be no assurance
that GVL will not restrain the Company's growth or limit the indebtedness
incurred by the Company so as to ensure GVL's compliance with the terms of its
debt instruments.

The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks. A significant portion of the
capital investment required to connect subscribers consists of costs associated
with establishing a minimum point of entry, the costs of internal wiring and
distribution equipment and the erection of microwave transmitting and receiving
equipment specific to the MDU. These expenditures are, to a large extent,
"success-based" and will only be incurred when new properties are brought into
service or when existing properties serviced by SMATV or PBX systems are
connected to the networks. When a new Right of Entry is signed, it takes
approximately four months of construction work to activate signal at the
property. Once the property is activated, penetration rates increase rapidly.
The balance of the budgeted capital expenditures is for infrastructure assets
not related to individual MDUs. These assets include central office switches,
cable television head ends, computer hardware and software and capitalized
construction costs. The

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<PAGE> 41

Company, can to some degree, control the timing of the infrastructure capital
expenditures by controlling the timing of the telecommunications roll out and
the scope of its expansion.

In order to accelerate the achievement of the Company's strategic goals,
the Company is currently evaluating and often engages in discussions regarding
various acquisition opportunities. The Company also engages from time to time in
preliminary discussions relating to possible investments in the Company by
strategic investors. There can be no assurance that any agreement with any
potential acquisition target or strategic investor will be reached nor does
management believe that any thereof is necessary to achieve its strategic goals.

YEAR 2000 COMPLIANCE

The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to provide services to subscribers, process
transactions, send invoices, or engage in similar normal business activities. To
ensure that its subscriber serving cable and telecommunications equipment and
its critical computer systems, applications and other technology (collectively
"Date Sensitive Technology") will function properly beyond 1999, the Company has
implemented a Year 2000 program.

PROJECT AND STATE OF READINESS

The Company has developed a three-phase plan that is designed to assess the
impact of the Year 2000 issue on its Date Sensitive Technology.

Due to the fact that it is not always necessary to complete one phase prior
to commencing the next, some projects within a given phase have been started,
while there may be outstanding tasks associated with prior phases. Priority is
always placed on mission critical systems affecting large numbers of customers
or the Company's ability to take and process service orders and bill for its
services.

Phase I -- Problem Determination

In this phase the Company performed an inventory and assessment to
determine which portions of its Date Sensitive Technology would have to be
replaced or modified in order for its networks, office equipment and information
management systems to function properly after December 31, 1999. While the
Company believes its inventory is substantially complete, the equipment utilized
by OpTel is disbursed throughout the markets that the Company serves, and there
can be no assurances that mission critical equipment has not been overlooked.
The Company also conducted a risk assessment to identify those systems whose
failure would be expected to result in the greatest risk to the Company's
business. The Company's risk assessment and determinations as to the need for
remediation were based in part on representations made by hardware and software
vendors as to the Year 2000 compliance of systems and equipment utilized by the
Company and in part on the results of Year 2000 equipment testing done by GVL.
There can be no assurances that any vendor representations received and relied
upon by the Company were accurate or complete or that the results of GVL's Year
2000 equipment tests are a reliable indicator of the Year 2000 compatability of
the Company's equipment. In addition, OpTel has not yet received responses from
all of its equipment vendors, and there can be no assurance that OpTel will
receive responses from all of its vendors in a timely manner or that responses
will be accurate or complete. As of March 15, 1999, the Company estimated that
this phase was 95% complete.

Phase II -- Plan for Remediation of Mission Critical Known Non-Compliant Date
Sensitive Technology

During Phase II, the Company designed a plan to make the necessary
modifications to and/or replace Date Sensitive Technology that is mission
critical and known to be non-compliant. While the Company believes that as of
March 15, 1999, its planning for achieving Year 2000 compliance was 75%
complete, the discovery of additional Date Sensitive Technology requiring
remediation could adversely impact the current plan and increase the resources
required to implement the plan. The plan includes the conversion of the
Company's current customer management system to a vendor certified compliant
platform and the upgrade of

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PBX switches that the Company does not currently plan to replace with central
office switches prior to December 31, 1999.

Phase III -- Operational Sustainability

The Company has begun the process of remediating its non-compliant Date
Sensitive Technology and plans to use both internal and external resources to
reprogram or replace and test certain components of its networks and information
processing systems for Year 2000 compliance. The Company is currently scheduling
the installation of other necessary upgrades to Date Sensitive Technology.
Although the Company intends to conduct tests to ensure its equipment is Year
2000 compliant, it will focus primarily on those systems whose failure would
pose the greatest risks to the Company's operations. The Company will endeavor
to test all mission critical equipment but will likely not test all of its
equipment that is not deemed mission critical. The Company will rely upon vendor
representations, if received, or on the results of Year 2000 equipment testing
done by GVL, where tests are not conducted. There can be no assurance that any
vendor representations received and relied upon will be accurate or complete or
that the results of GVL's Year 2000 equipment tests will be a reliable indicator
of the Year 2000 compatibility of the Company's equipment or that the Company
will have recourse against any vendors whose representations or certifications
as to the Year 2000 compliance of their products prove misleading.

The Company is striving to achieve operational sustainability no later than
September 30, 1999, which is prior to any anticipated impact on its operating
systems. Though the majority of the work will be completed by that date, certain
elements will not be completed until the fourth quarter of calendar 1999,
primarily due to limited availability of compliant software and hardware and
prioritization of mission critical systems. As of March 15, 1999, the Company
estimated that its remediation efforts were approximately 25% complete.

Successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system which is dependent upon a third party vendor
meeting an implementation schedule and delivering a system that is Year 2000
compliant. As a contingency plan, the Company will be upgrading its existing
cable subscriber billing system to a version represented by the vendor to be
Year 2000 compliant. There can be no assurance that (i) the new customer
management information system will be implemented on schedule, (ii) the Company
will successfully implement all of the other necessary hardware and software
upgrades or (iii) other components of the Year 2000 conversion program will be
completed in a timely manner. See "Risk Factors -- Information Systems and
Automation."

COSTS

The Company estimates the cost of its Year 2000 program will be $4.2
million, of which $4.1 million remains to be incurred. Remediation costs and
costs to replace non-compliant systems are expensed as incurred. Additionally,
the Company has incurred and will incur costs related to the purchase and
implementation of its new accounting system and customer management information
systems. The estimated total cost of these systems is $7.6 million, of which
$3.6 million remains to be incurred. The foregoing estimates will likely be
revised and there can be no assurance that the revisions will not be
significant.

The estimated costs of the project and the date which the Company has
established to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans, the cost of third party hardware, software and services, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions and similar uncertainties. The failure of the Company to become
Year 2000 compliant on a timely basis could have a material adverse effect on
the Company's business, financial condition, cash flows and results of
operations.

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RISKS AND CONTINGENCY PLAN

While the Company is working to test its own mission-critical systems for
Year 2000 compliance, the Company does not control the systems of its service or
content providers. The Company has taken an inventory of its third party service
or content providers and believes that its inventory is complete. However, there
can be no assurance that mission critical providers have not been overlooked.
Based on this inventory, the Company is currently seeking assurances from its
suppliers and strategic business partners regarding the Year 2000 readiness of
their systems. Many of the Company's third party providers have indicated that
they are, or will be, Year 2000 compliant. The Company, however, has not
undertaken an in-depth evaluation of such providers in relation to the Year 2000
issue and the ability of third parties with which OpTel transacts business to
adequately address their Year 2000 issues is outside of OpTel's control. The
Company has not obtained and will not obtain Year 2000 certifications from video
programming suppliers, ILECs, CLECs and IXCs with whom it does business. There
is risk that the interaction of the Company's systems and those of its suppliers
or business partners may be impacted by the Year 2000 change. In addition, in
light of the vast interconnection and interoperability of telecommunications
networks worldwide and the reliance of cable television systems on satellite
distribution of programming, the ability of any cable television or
telecommunications provider, including the Company, to provide services to its
customers (e.g., to complete calls and deliver programming and to bill for such
services) is dependent, to some extent, on the networks and systems of other
parties. To the extent the networks and systems of those parties are adversely
impacted by Year 2000 problems, the ability of the Company to service its
customers may be adversely impacted as well. There can be no assurance that the
failure of OpTel or such third parties to adequately address their respective
Year 2000 issues will not have a material adverse effect on OpTel's business,
financial condition, cash flows and results of operations.

In a recent release regarding Year 2000 disclosure, the Commission stated
that public companies must disclose the most reasonably likely worst case Year
2000 scenario. Although it is not possible to assess the likelihood of any of
the following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical, gas, and similar supplies serving
the Company; widespread disruption of the services provided by common
communications carriers and satellites that transmit video programming; similar
disruption to the means and modes of transportation for the Company and its
employees, contractors, suppliers, and customers; significant disruption to the
Company's ability to gain access to, and remain working in, office buildings and
other facilities; failure of controllers contained in the cable television
system headends and of the Company's video distribution network; failure of the
Company's switches, telephone network and telephone traffic distribution system;
failure in customer service networks and/or automated voice response systems;
and failure of substantial numbers of the Company's critical computer hardware
and software systems, including both internal business systems and systems
controlling operational facilities such as electrical generation, transmission,
and distribution systems; and the failure of outside entities' systems,
including systems related to billing, banking and finance.

The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third party providers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition. The
Company believes that, with the implementation of new business systems and
completion of the Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations should be reduced. In addition, the Company
is currently developing appropriate contingency plans to address situations in
which various systems of the Company, or of third party providers, are not Year
2000 compliant. The Company also intends to participate in industry wide efforts
to address Year 2000 issues, the goal of which is to develop contingency plans
which address not only the Company's issues but those of the industry as a
whole.

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<PAGE> 44

RECENTLY ISSUED ACCOUNTING PRINCIPLES

Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," is effective for earnings per share calculations and disclosures for
periods ending after December 15, 1997, including interim periods, and requires
restatement of all prior period earnings per share data that is presented. SFAS
No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and provides reporting standards for calculating "Basic" and "Diluted"
earnings per share. The Company has adopted SFAS No. 128, which did not have a
significant impact upon the Company's reported earnings per share, and its
earnings per share computations have been restated for all prior periods.

Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and display
of comprehensive income and its components in the financial statements. The
Company has no items of other comprehensive income to report in the periods
presented.

The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company is currently evaluating the applicability of the requirements
of SFAS No. 131. Depending on the outcome of the Company's evaluation,
additional disclosure may be required for fiscal 1999.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for accounting
and reporting for derivative instruments. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999; however, earlier application is permitted.
Management is currently not planning on early adoption of this statement and has
not completed an evaluation of the impact of the provisions of this statement on
the Company's consolidated financial statement.

INFLATION

The Company does not believe that inflation has had a material effect on
its results of operations to date. However, there can be no assurance that the
Company's business will not be adversely affected by inflation in the future.

MARKET RISK

At February 28, 1999, the Company had no derivative financial instruments.
Furthermore, substantially all of the Company's indebtedness bears a fixed
interest rate. Therefore, the Company is not sensitive to changes in market
interest rates.

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<PAGE> 45

BUSINESS

THE COMPANY

OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone, cable television and high
speed Internet access services, to residents of MDUs in the United States. In
each market that it serves, OpTel seeks to become the principal competitor in
the MDU marketplace to the ILEC and the incumbent franchise cable television
operator by providing a package of voice, video and Internet access services at
competitive prices. OpTel believes its ability to deliver an integrated service
offering to MDU residents over its own networks and its long-term contractual
relationships with MDU owners and associations provide it with a competitive
advantage.

MDUs comprise a wide variety of high density residential complexes,
including high- and low-rise apartment buildings, condominiums, cooperatives,
town houses and mobile home communities. According to 1990 U.S. Census Bureau
data, there are more than 13.2 million dwelling units in MDUs with greater than
10 dwelling units in the United States. Within the MDU market, the Company
focuses on Large MDUs. Based on industry sources, the Company believes that,
within its existing markets there are approximately 3.0 million dwelling units
within these Large MDUs.

The Company currently provides cable television and telecommunications
services in a number of metropolitan areas including Houston, Dallas-Fort Worth,
Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta, Orlando-Tampa and Indianapolis. The Company is licensed as a
CLEC in each of its major markets. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and
intends to offer these services in substantially all of its major markets by the
end of calendar 2000. In addition, the Company commenced offering high speed
Internet access at select MDUs in Houston, Dallas-Fort Worth and San Francisco
in January 1999 and intends to introduce its high speed Internet access services
in substantially all of its major markets over the next 12 months. As of
February 28, 1999, the Company had 435,738 units under contract and 401,600
units passed for cable television services and 218,023 cable television
subscribers. At that date, the Company had 107,109 units under contract and
47,462 units passed for telecommunications and 13,229 telecommunications lines
in service.

OpTel secures long-term Rights of Entry with MDU owners. Rights of Entry
generally grant OpTel the exclusive right to provide cable television service to
an MDU or group of MDUs and provide that the MDU owner will promote OpTel as the
preferred provider of telecommunications services within the MDU. Rights of
Entry generally provide OpTel with the exclusive services of the MDU's leasing
staff to market the Company's services to residents. Rights of Entry also
generally grant OpTel the exclusive right to use the coaxial cable network at
the MDU. As a result, at MDUs where OpTel has cable television Rights of Entry,
OpTel effectively will be the only company positioned to provide high speed
Internet access via cable modem. Rights of Entry generally provide financial
incentives to property owners to promote and sell the Company's services to MDU
residents. The Company's Rights of Entry typically have original terms of 10 to
15 years (five years for Rights of Entry with condominium associations). The
weighted average unexpired term of the Company's Rights of Entry was
approximately eight and one half years as of February 28, 1999 (assuming the
Company's exercise of available renewal options).

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<PAGE> 46

OpTel is a holding company with limited assets that conducts substantially
all of its operations through its subsidiaries. OpTel derives substantially all
of its revenue from the operations of its subsidiaries. OpTel has 21
subsidiaries, each of which generally operates in a specific geographic area.

INDUSTRY OVERVIEW -- MARKET OPPORTUNITIES

Widespread Changes in Communications Industry

Both the telephone and cable television segments of the communications
industry are currently undergoing widespread changes brought about by, among
other things, (i) decisions of federal and state regulators which have opened
the monopoly local telephone and cable television markets to competition, (ii)
the ensuing transformation of the previously monopolistic communications market
controlled by heavily regulated incumbents into a consumer-driven competitive
service industry, and (iii) the need for higher speed, higher capacity networks
to meet the increasing consumer demand for expanded communications services
including broader video choices and high speed Internet services. The
convergence of these trends has created opportunities for new types of
communications companies capable of providing a wide range of voice, video and
data services.

Opening of Communications Markets

Divestiture of the Bell System. Until the passage of recent federal
legislative reform and other state and federal regulatory efforts to expand
competition into the local telephone market, the structure of the U.S.
telecommunications industry was shaped principally by the 1984 court-supervised
divestiture of local telephone services from AT&T (the "Divestiture") and other
judicial and regulatory initiatives which were designed primarily to implement
structural and technical industry changes through which competition could
develop in the long distance market. Under this structure, the RBOCs and certain
other LECs were permitted to retain their monopolies in the provision of local
exchange services, but were required to connect their local subscribers to the
long-distance services of AT&T and other IXCs. Under this regime, two distinct
industry segments developed; competitive IXCs, which offered subscribers long
distance telephone services between judicially defined LATAs, and monopoly LECs,
which offered subscribers local and toll services within judicially defined
LATAs, including connection (or "access") to IXCs for interLATA long-distance
services. As a result, the long-distance business became intensely competitive,
with low barriers to entry and many service providers competing in a
commodity-type market, while providers of local exchange services continued to
face relatively little competition.

Deregulation of Local Telephone Services. After the structural and
technical network changes were put in place following the Divestiture to give
IXCs other than AT&T "equal access" to the local exchange facilities of the
monopoly ILECs, and with long-distance competition beginning to provide
consumers with diverse services and lower rates, regulatory policy makers
gradually began to examine whether the competitive benefits which were being
experienced in the long-distance marketplace as a result of Divestiture should
be expanded to local exchange services. While a small number of states and the
FCC had already adopted rules and regulations which opened certain limited and
discrete segments of the local exchange market to competition from CAPs and
CLECs offering primarily dedicated high-speed private line and some local
switching services to large business users, the passage of the Telecom Act in
February 1996 codified the pro-competitive policies on a national level and
required both the FCC and the state regulatory commissions to adopt dramatic and
sweeping changes in their rules and regulations in furtherance of those
policies. The Telecom Act required regulators to remove market entry barriers
and to enable companies like OpTel to become full service providers of local
telephone service by, among other things, mandating that the ILECs provide
interconnection and competitively priced network facilities to competitors. In
addition, the Telecom Act permits RBOCs to offer long-distance interLATA
services in competition with IXCs once they have demonstrated that they have
implemented changes to permit economically efficient competition in their local
markets for both business and residential services. The Telecom Act also
repealed the LEC/cable television cross-ownership restriction, which prohibited
LECs from providing multichannel television directly to subscribers in their
telephone service areas. See "-- Regulation."

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<PAGE> 47

Deregulation of Cable Television. Unlike the local telephone market, the
cable television market is not subject to regulatory or statutory prohibitions
on competition. Nevertheless, competition to incumbent franchised cable
television operators has developed in relatively few markets nationwide. Because
of the lack of any meaningful competition, in 1992 Congress passed legislation
providing for the regulation of certain cable rates. Subsequently, as part of
its general goal of supplanting regulation with competition, the Telecom Act
took further steps to provide alternative regulatory structures to encourage
entry into the multichannel video programming distribution market.

Rapid Growth of Internet Access Services. In recent years, the Internet has
experienced rapid growth and the number of subscribers accessing the Internet is
expected to increase significantly in the foreseeable future. ISPs provide a
means for subscribers to access the Internet's resources. ISP Internet access
services vary from dial-up access to high speed dedicated transmission lines and
high speed cable modem access for broadband services.

OpTel's Opportunity. The Company believes that its ability to serve a
single subscriber with both twisted pair and coaxial cable "last mile"
connections positions the Company to take advantage of the new regulatory and
market environment. As a result, the Company believes that it will be among the
first to offer a single-source package of integrated voice, video and Internet
access services in its MDU markets. By combining the enhanced telephone services
offered by CLECs with high quality video programming and high speed cable modem
based Internet access, OpTel will act as a single source provider of a wide
range of voice, video and Internet access services to the MDU market. OpTel's
integrated service offerings are available either individually or in bundled
packages, providing the consumer with added choice and convenience.

STRATEGY

Provide an Integrated Service Offering. In order to establish the broadest
possible relationship with its subscribers, OpTel offers an integrated package
of communications services at competitive rates. OpTel's service offerings
include: (i) basic and premium tier cable television services, which the Company
can customize on a sub-market basis to meet local preferences; (ii) a full
featured switched local and long distance telephone offering; (iii) high speed
Internet access via cable modem with downstream transmission speeds of up to 1.5
MB per second, which is delivered through a venture with an independent ISP; and
(iv) where market conditions justify, an additional tier of DBS programming from
EchoStar that includes over 300 channels of digital video and audio programming.
The Company believes its integrated service offering will capitalize on MDU
residents' preference for a single source provider of communications services,
enhancing OpTel's ability to attract and retain subscribers.

Continue to Rapidly Expand Subscriber Base. The Company intends to rapidly
expand its subscriber base by: (i) securing additional Rights of Entry from MDU
owners through the use of its experienced and growing sales force and (ii)
increasing penetration and cross-selling additional services to existing
subscribers in MDUs where the Company has Rights of Entry through the use of
marketing and incentive programs. The Company will continue to market its Rights
of Entry on a business to business basis to local, regional and national MDU
owners, including REITs. The Company's strategy to promote subscriber growth
includes having MDU leasing agents provide an effective point of sale including
at the time MDU residents initially secure their leases. As an additional
strategy to drive growth, the Company will directly market local and long
distance telephone services to tenants residing in MDUs not covered by Rights of
Entry but who can be served by collocating telecommunications network facilities
at certain ILEC end offices and leasing unbundled transport network from that
ILEC. The Company believes that its ability to directly market services to MDU
residents will drive Rights of Entry with owners who will want to share in
OpTel's success. When it has secured a Right of Entry and a sufficient
subscriber base at an MDU, the Company intends to bring its own

44
<PAGE> 48

network transport facilities to the MDU and discontinue collocation services in
order to increase operating margins.

Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. OpTel's advanced proprietary network infrastructure
utilizes a combination of point-to-point microwave transmission equipment and
fiber optic cable to efficiently deliver the Company's various services to MDU
residents. A substantial portion of the Company's network cost to serve an MDU
is related to the infrastructure specific to that MDU and is invested only after
the Company and the MDU owner have entered into a long-term Right of Entry. The
Company plans to interconnect its microwave network hubs to provide a redundant
ring architecture for telecommunications and to permit the future transport of
digital video programming and Internet traffic from a single source within a
market. The Company intends to expand its use of central office switches in
order to improve cost efficiencies and enhance its local service offering. The
Company expects to serve substantially all of its major markets with its own
central office switches by the end of calendar 2000. As a licensed CLEC in each
of its major markets, the Company also intends to collocate facilities and lease
ILEC transport in order to offer telecommunications services in advance of
installing network transport facilities from its switch to the subscriber. Over
time, OpTel believes substantially all telecommunications services to MDUs
serviced under Rights of Entry will be migrated from ILEC leased transport
network to its own network facilities.

Pursue Selective Acquisitions and Strategic Relationships. OpTel began
operations in April 1993 with a strategy of consolidating the then fragmented
private cable television, or non-franchise cable television, industry serving
MDUs. Since May 1996, the Company has completed and successfully integrated six
acquisitions of MDU oriented video providers representing approximately 700 MDUs
served and 103,000 subscribers. The Company intends to continue to seek
acquisition opportunities in order to capitalize on economies of scale, expand
its subscriber base, provide a client base to cross-sell its other services and
decrease the time to market. The Company delivers high speed Internet access
services through a strategic relationship with an ISP that specializes in
delivering broadband Internet connectivity and content to MDUs. In addition, the
Company has entered into a strategic relationship with EchoStar for the delivery
of an additional tier of DBS programming and will continue to evaluate other
strategic alliances.

MARKETS

Historically, the Company's strategy has been to enter markets either
through the acquisition of private cable television operators serving the target
market or by entering into Rights of Entry with a major MDU owner in the market.
Upon acquisition of an operator, the Company historically has begun the process
of upgrading the acquired systems by converting MDUs from SMATV technology to
the Company's microwave or, in Houston, fiber optic networks, adding additional
programming and improving customer service. In addition, the Company has been
able to achieve cost efficiencies by consolidating acquired operations into its
existing organization. The Company's strategy for deploying telecommunications
services in its markets is through developing network infrastructure which
utilizes, to the extent possible, elements of the Company's existing video
distribution network. See "-- Network Architecture."

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<PAGE> 49

The following table sets forth, as of February 28, 1999 the markets where
OpTel currently operates and, for each such market, certain additional
information including the date the Company launched, or intends to launch, its
central office switched telecommunications service offering. The timing and
order of the launch of central office switched telecommunications services in
each of the Company's markets may vary and will depend on a number of factors,
and no assurance can be given the Company will launch such services in each of
its markets.

<TABLE>
<CAPTION>
NUMBER OF
UNITS IN UNITS UNDER
NUMBER OF MDUS UNITS UNDER CABLE CONTRACT FOR TELE-
UNITS IN WITH OVER CONTRACT UNITS PASSED TELEVISION TELE- COMMUNICATIONS
LOCATION MARKET(1) 150 UNITS(2) FOR CABLE FOR CABLE(3) SUBSCRIBERS COMMUNICATIONS LINES IN SERVICE
- -------- --------- ------------ ----------- ------------ ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston................. 363,000 315,000 144,565 138,113 65,231 30,926 5,059
Dallas-Fort Worth....... 486,000 405,000 62,207 52,577 25,531 26,198 4,289
Los Angeles............. 730,000 295,000 27,815 20,634 13,467 9,202 93
Phoenix................. 219,000 155,000 26,359 25,848 10,119 3,326 368
San Francisco........... 410,000 246,000 25,724 23,930 16,138 5,046 70
Denver.................. 142,000 106,000 19,402 19,009 10,661 7,031 298
San Diego............... 504,000 304,000 24,051 23,348 14,031 4,998 943
Miami-Ft. Lauderdale.... 234,000 225,000 27,825 25,079 19,530 8,343 165
Chicago................. 417,000 342,000 30,552 29,933 18,726 3,109 90
Atlanta................. 285,000 233,000 11,084 10,530 6,116 1,291 132
Orlando-Tampa........... 240,000 205,000 18,372 17,231 10,339 2,494 286
Other markets(4)........ -- -- 17,782 15,368 8,134 5,145 1,436
--------- --------- ------- ------- ------- ------- ------
Total........... 4,030,000 2,831,000 435,738 401,600 218,023 107,109 13,229
========= ========= ======= ======= ======= ======= ======

EXPECTED
CLEC SERVICES
LOCATION LAUNCH DATE
- -------- ----------------
<S> <C>
Houston................. In service
Dallas-Fort Worth....... In service
Los Angeles............. 3rd Quarter 1999
Phoenix................. 3rd Quarter 1999
San Francisco........... 3rd Quarter 1999
Denver.................. 4th Quarter 1999
San Diego............... Fiscal 2000
Miami-Ft. Lauderdale.... Fiscal 2000
Chicago................. Fiscal 2000
Atlanta................. Fiscal 2001
Orlando-Tampa........... Fiscal 2001
Other markets(4)........
Total...........
</TABLE>

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

(1) Represents rental units in MDUs and is based on March 25, 1998 information
published by industry sources. The number of units does not include
condominiums. According to 1990 U.S. Census Bureau data there were 1.8
million dwelling units in condominiums in the Company's markets.

(2) Represents rental units in MDUs with more than 150 dwelling units in the
United States and is based on March 25, 1998 information published by
industry sources. The number of units in MDUs with greater than 150 units
does not include condominiums.

(3) Units passed represents the number of units to which the Company has
connected its cable television systems. The Company has connected
telecommunications infrastructure at only 47,462 of the units passed for
cable television services.

(4) Other markets include Austin, Texas; Las Vegas, Nevada; Indianapolis,
Indiana; and greater Washington, D.C.

The Company installed its first central office switches in the Houston and
Dallas-Fort Worth markets and currently offers switched access local exchange
services to most of its telecommunications customers in these markets. As of
February 28, 1999, the Company had 57,124 units under contract for
telecommunications in Houston and Dallas-Fort Worth. The Company intends to
progressively commence full scale marketing of local exchange based
telecommunications services in substantially all of its major markets by the end
of calendar 2000. The Company is licensed as a CLEC in all of its major markets
and has completed or is negotiating interconnection agreements with the
principal ILECs in each of these markets. The Company commenced offering high
speed Internet access at select MDUs in Houston, Dallas-Fort Worth and San
Francisco in January 1999, and intends to introduce its high speed Internet
access services in substantially all of its major markets over the next 12
months.

SERVICES

OpTel provides a wide range of voice, video and Internet access services,
both individually and as integrated service offerings.

Voice. OpTel's telephone Rights of Entry generally provide that the MDU
owner will market exclusively OpTel's local telephone services to MDU residents.
In the markets where it has central office switches, OpTel offers local exchange
telephone service, including standard dial tone access and substantially all
other feature groups provided by the ILEC. OpTel offers a wide range of
value-added services, including call forwarding, call waiting, caller
identification, conference calling, speed dial, calling card, 800-numbers and
voice mail. OpTel generally prices its local telephone offering at a discount to
the ILEC rates in each of its serviced markets. OpTel also provides long
distance services, including outbound, inbound and calling card services,
through a resale arrangement with a large national interexchange carrier. OpTel
contracts or plans to contract

46
<PAGE> 50

for other ancillary services, including operator service, directory listings and
emergency 911 service and, in certain markets, transport, from the local ILEC
and other service providers.

The Company currently provides telephone service under two regulatory
frameworks. In Houston and Dallas-Fort Worth, the Company provides telephone
services as a CLEC through Company owned central office switches. In other
markets, and to a limited extent in Houston and Dallas-Fort Worth, OpTel
provides telephone services as an STS provider. The Company intends to convert a
substantial portion of its STS telephone operations to CLEC operations and to
provide switched access local exchange services to a substantial portion of its
telephone customers by the end of calendar 2000.

Video. OpTel offers its subscribers a full range of popular cable
television programming at competitive prices. The Company's networks are capable
of delivering up to 72 uncompressed analog channels of programming. The Company
offers various programming packages to its cable television subscribers. The
Company's basic video programming package provides extensive channel selection
featuring all major cable and broadcast networks. The Company's premium video
programming package features uninterrupted, full-length motion pictures,
sporting events, concerts and other entertainment programming and includes HBO,
Cinemax, Showtime and The Movie Channel, as well as supplementary channels such
as HBO 2, HBO 3 and Cinemax 2. Premium services are offered individually or in
discounted packages with basic or other services. Certain of the Company's
systems are capable of offering movies, sporting events, concerts and other
special events on a pay-per-view basis.

In addition, the programming selections available at an MDU served by the
Company's microwave networks can be tailored on a sub-market basis to meet local
preferences and, unlike franchise cable television systems which may be required
to carry all local broadcast channels and public access channels, the Company's
microwave networks can utilize all of their available channels to provide
popular entertainment, news and information programming.

The Company's programming packages are generally competitively priced
compared to similar packages offered by the incumbent franchise cable television
operator.

To enhance its video programming offerings, the Company has made
arrangements with a distributor of DBS programming services providing for the
Company's receipt of programming via DBS technology and the insertion of that
programming into its analog lineup ("DBS Transport Right"). The Company
currently uses the DBS Transport Right on a limited basis to service MDUs in its
San Francisco and Miami-Ft. Lauderdale markets using a single, standard DBS
receiving antenna at each serviced MDU. The DBS signal is received in digital
form, converted at the MDU receiver site to analog form and distributed over the
existing coaxial cable to the subscriber's unit. The DBS Transport Right permits
the Company to provide basic programming or to supplement the Company's other
programming services.

DBS Services. To augment its own video programming offerings, the Company
has entered into an agreement with EchoStar that provides OpTel with the right
to order and receive, on behalf of OpTel's MDU customers, EchoStar's DISH
Network DBS programming. At MDUs where the Company decides to offer this
service, its basic and expanded basic cable customers will be able to select any
one or more of DISH Network's programming services or packages as additional
tiers. DISH Network's digital service offers CD-quality audio and high-quality
video channels providing over 300 programming services consisting of local,
national and international video and music entertainment. To receive and
distribute DISH Network's programming at a particular MDU, the Company will
install on the property one or more DBS receiving antennae and signal
distribution equipment. The Company will then distribute DISH Network's DBS
services in digital format to MDU customers through the Company's on-property
cable distribution network. The Company's agreement with EchoStar has an initial
term ending December 31, 2001.

High-Speed Internet Access. OpTel has recently initiated a cable modem
based high-speed Internet access service in its Houston, Dallas-Fort Worth, San
Francisco and Denver markets in conjunction with I(3)S, an ISP that specializes
in delivering broadband Internet connectivity and content to MDUs. The Company
and I(3)S have a strategic alliance to provide high-speed Internet services in
the Company's major markets. The

47
<PAGE> 51

Company intends to roll out its high speed Internet access service in
substantially all of its major markets over the next 12 months.

The Company expects to offer customers a choice of transmission speeds
ranging from approximately 64 kilobits ("KB") per second (normal dial-up
Internet speed is typically 28.8 KB per second) to 1.5 megabits ("MB") per
second. Internet connections providing transmission speeds greater than 128 KB
per second are generally referred to as "high-speed." The transmission speeds of
the services that the Company intends to offer will greatly exceed the speed of
services typically offered by ILECs and compare favorably to Integrated Services
Digital Network ("ISDN") and to digital subscriber line ("DSL") services that
might be offered by competitors.

OpTel initially will connect each property to the ISP's point of presence
using OpTel's microwave transport or its owned or leased local loop transport.
At each property, the data stream will be carried to the subscriber's unit via
the property's existing coaxial cable distribution wiring. The subscriber will
connect a personal computer to the high-speed Internet service using software
provided by the ISP and the subscriber's cable modem which will be connected to
a standard cable television outlet.

Optel intends to explore the possibility of providing dial-up Internet
access services in addition to its current high-speed Internet access services.
The Company is also evaluating offering a DSL high speed Internet access
service. If offered, such services may be bundled with other services or offered
on a stand-alone basis.

NETWORK ARCHITECTURE

The Company's strategy is to deliver its service offerings through
integrated networks. The diagram below depicts the configuration of a typical
microwave network used by the Company to deliver cable television,
telecommunications and high speed Internet access services.

[DIAGRAM]

The Company uses a combination of point-to-point microwave transmission
equipment and fiber optic cable in order to offer a single source for video,
voice telecommunications and eventually high speed Internet access services. As
of February 28, 1999, the Company had 56 microwave networks in service
(consisting of over 650 microwave paths) in eleven metropolitan areas, and, in
Houston, three fiber optic networks, covering over 400 route miles. In order to
integrate service offerings, the Company actively adds properties it services

48
<PAGE> 52

within existing network coverage to its networks and seeks to cost effectively
develop new networks to cover MDU clusters serviced by the Company in new or
expanded markets.

To maximize network coverage of its microwave networks, the Company
establishes hubs designed to service MDU clusters (each a "Network Hub").
Network Hubs usually are located on rooftops or towers. The network is extended
from the Network Hubs to the serviced MDUs via point-to-point microwave using
18GHz for video, 23 GHz for telephone and, in certain markets, 12GHz for video.
Each Network Hub includes equipment to receive and transmit the Company's video
programming. The signal is transmitted to a receiving dish at the MDU which must
be within the line of site of the Network Hub or a repeater site. To ensure
transmission quality, the Company limits the radius of each microwave link to
between four and ten miles, depending on topographic and climatic conditions.
Within the MDUs it serves, the Company distributes video programming and
Internet services via conventional coaxial cable. The on-property network uses a
combination of traps (electronic filtering devices), addressable
decoder-converter boxes and interdiction.

OpTel's network design is digital capable. All voice traffic over OpTel's
networks is digitally encoded. The networks will facilitate digital compression
for video signal when economical and required by the marketplace. If OpTel is
required to carry digital broadcast programming (e.g., HDTV), then the networks
may be upgraded to transmit such programming without material architectural
change.

The Company transports video programming to MDUs which are not yet on the
Company's networks by receiving video programming at a self-contained SMATV head
end located at the MDU. The Company intends to convert the majority of its SMATV
systems to microwave or fiber optic networks by the end of calendar 2000. See
"-- Regulation."

To roll out its central office switched voice telecommunications offering
in areas covered by its microwave networks, the Company will link certain of its
Network Hubs to both the central office switch and other Network Hubs to form a
network backbone. When fully deployed in a market, this network backbone will
utilize either of 6GHz or 11GHz microwave or fiber optic transmission capacity
to form synchronous optical network ("SONET") self-healing rings that provide
high speed redundant connections for the delivery of voice traffic. Where it
uses fiber, the Company either will install its own fiber optic facilities or on
a limited basis will lease fiber from other providers. Voice traffic will be
delivered from a Network Hub to a serviced MDU over 23GHz microwave links. The
23GHz microwave links will use the same microwave transmission equipment that is
used to relay video signal. Voice traffic is delivered to the individual unit
using a traditional copper wire twisted pair. The Company has commenced offering
network based central office switched telecommunication services in Houston over
its fiber optic networks and in Dallas-Fort Worth over its microwave networks.

The Company has chosen the 5ESS-2000 digital switch manufactured by Lucent
Technologies Inc. ("Lucent"). Unlike traditional long distance or local
switches, the Lucent switch enables the Company to provide local and long
distance services from a single platform. This uniform and advanced switch
platform enables the Company to (i) deploy features and functions quickly in all
of its networks, (ii) expand switch capacity in a cost effective manner and
(iii) lower maintenance costs through reduced training and spare part
requirements. The Company expects to continue to deploy Lucent switches to
provide a consistent technology platform throughout its network. The Company
will use its networks to aggregate MDU long distance and local traffic at its
central office switch. Prior to or in lieu of establishing a microwave link for
telecommunications services, the Company may lease transport (T-1 service) from
another facilities based carrier. As an initial entry strategy in certain
markets, the Company may lease telecommunication switch capacity in certain
markets from third-party providers in order to accelerate the roll out of
telephone services and to migrate telecommunications services to its own switch
over time. OpTel has entered into an agreement with a national CLEC, pursuant to
which OpTel may purchase local telephone service and local loop elements. During
any time period and in any market that the Company is purchasing such services
from the CLEC, the CLEC has the exclusive right to provide OpTel with these
services. OpTel is required to maintain each service ordered for a 24-month
minimum period. The Company has not yet used the services of the CLEC in any
market.

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The Company intends to continue to develop and utilize its own networks to
deliver its service offerings. The Company also plans to collocate network
facilities for telecommunication services in selected ILEC end offices in
certain of its markets. Through collocation, the Company will lease the ILEC's
transport network on an unbundled basis to initially reach a subscriber. The
Company believes collocation will decrease the time required to provide
telephone services to a subscriber, increase the Company's addressable market by
providing a cost effective means of servicing smaller MDUs and, over time,
promote new Rights of Entry. The Company will select the ILEC end offices in
which it will collocate based upon MDU concentration. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins.

In areas where the Company offers telecommunications services but where it
has not yet migrated to its networked central office switch architecture, a PBX
switch is installed at the MDU and traffic from the MDU is transported via
leased trunk lines to the LEC's central office. From the LEC's central office,
local calls are routed through the LEC's network. The Company intends to convert
all of its PBX serviced properties to its central office switched
telecommunications offering.

OpTel has contracted with a third party to monitor its central office
switches and certain network elements connected to those switches. In 1999,
OpTel will establish a Network Operations Center to internalize the functions
now provided by the third party and to enhance monitoring, control and
maintenance of its networks. OpTel's Network Operational Center will be located
at its Dallas headquarters and will be staffed 24-hours-a-day,
seven-days-a-week. The Network Operations Center will monitor and manage OpTel's
central office telephone switches, PBX switches and certain additional elements
of its telecommunications and cable television networks.

SALES AND MARKETING

A critical aspect of the Company's sales and marketing efforts is the
development of strategic contractual relationships with MDU owners. These
relationships encourage the owners to promote and sell the Company's cable
television and telecommunications services to MDU residents. The Company intends
to grow its business by negotiating additional Rights of Entry to serve MDUs
currently served by other providers and newly-constructed MDUs, by acquiring
other existing operators that serve MDUs, as appropriate, and by providing MDUs
it currently serves for cable television with additional services, such as
telephone and Internet access. As an additional strategy to drive growth, the
Company will directly market local and long distance telephone services to
tenants residing in MDUs not covered by Rights of Entry but who can be served by
collocating telecommunications network facilities at certain ILEC end offices
and leasing unbundled transport network from that ILEC. The Company believes
that its ability to directly market services to MDU residents will drive Rights
of Entry with owners who will want to share in OpTel's success.

The Company tailors its sales and marketing efforts to two different
constituencies: (i) owners of MDUs and their agents and (ii) residents at MDUs
for which the Company has obtained Rights of Entry. Each constituency is served
by a separate sales and marketing team.

Sales to MDU Owners

The Company maintains a full-time professional sales force dedicated to
securing Rights of Entry from owners of MDUs. Many of the Company's sales
representatives have previous experience in commercial real estate sales and
leasing. The Company has developed an incentive compensation plan for sales
personnel which the Company believes encourages sales personnel to target MDUs
with more favorable demographic characteristics.

Promotion of sales to local MDU owners is conducted primarily by (i) using
established relationships with property developers, owners and management
companies, (ii) direct mail and direct sales campaigns to owners and apartment
managers, (iii) canvassing MDU owners with properties within the coverage of the
Company's existing and planned networks and (iv) attending and participating in
trade shows, conventions and seminars targeted to the MDU industry. In addition,
the Company markets to owners of large

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multiregional portfolios of MDUs. When marketing to MDUs, the Company emphasizes
the following competitive advantages:

New Revenue Source for MDU Owner. An MDU owner who enters into Rights of
Entry with the Company generally receives a percentage of the revenue generated
by the MDU. The revenue sharing percentages generally range between six and ten
percent of such revenue, are often scaled based on penetration and are fixed
over the term of the Right of Entry. The Company may from time to time pay
up-front "key-money" in lieu of or in combination with revenue participation.
While some franchise cable television operators and ILECs now offer revenue
sharing and access fee arrangements to some MDU owners, it is the Company's
experience that neither the ILECs nor the incumbent franchise cable television
operators are willing to offer broad-based, revenue-based incentive compensation
to MDU owners.

Property Enhancements. The Company often installs a package of
telecommunications and security enhancements at the MDUs it serves, at a nominal
cost or at no cost to the MDU owner. For example, the Company can install a
monitoring camera at the main entrance that permits MDU residents to identify
guests by tuning their television set to the building's security channel. In
addition, the Company often provides a dedicated information channel that
permits the building's management to send messages to the MDU residents over the
private cable television system. These enhancements are relatively inexpensive
for the Company to provide and can be important to MDU owners and property
managers.

New Marketing Tool and Amenity to Rent Apartments. The principal concern of
an MDU owner is to rent apartments. The Company believes that its services and
property enhancements can serve as an important marketing tool for owners to
attract prospective tenants because its services are generally provided at a
price competitive with those charged by the franchise cable operator and lower
than those charged by the ILEC and long distance carriers. The Company works
with on-site managers to emphasize the benefits of the Company's services and
the added value and convenience provided by the Company. The Company also
maintains direct lines to facilitate rapid response to customer support calls
initiated by MDU owners and managers.

Marketing to MDU Residents

Once an MDU owner executes a Right of Entry, the Company aggressively
markets its services to actual and potential subscribers within the MDU in order
to increase penetration rates for basic and additional services. The Company
believes that its best opportunity for a sale arises when a resident first signs
a lease and takes occupancy in an MDU. Accordingly, the Company believes that
during the first few years after it activates cable television or
telecommunications services at an MDU it benefits from the high rate of MDU
resident turnover. The Company has developed orientation and incentive programs
for on-site property managers and leasing agents, with the objective of
enlisting them as the Company's subscriber sales force. In addition, the Company
markets to residents of MDUs covered by Rights of Entry through (i) direct mail
and direct sales campaigns, (ii) special promotions and sign-up parties, (iii)
establishment of a physical presence at a building and (iv) distribution of
point-of-sale marketing materials. The Company intends to market telephone
services to residents of MDUs not covered by Rights of Entry but that can be
serviced using the Company's collocation strategy by (i) direct mail and direct
sales campaigns, including telemarketing, and (ii) where the MDU owner permits,
through on property sales activities similar to those described above. The
Company stresses the following themes when marketing its services to MDU
tenants:

Simplicity and Convenience. In general, a subscriber can order any of the
Company's services offered at that MDU through the MDU's leasing agent at the
time of lease signing. In addition, in certain of its markets, the Company is
able to provide one-stop shopping for both cable television and
telecommunications services.

Competitive Pricing. The Company believes it offers a competitive
telecommunications offering and cable television channel line-up (often
including pay-per-view and premium services) at prices that are generally
competitive with those charged by the ILEC and local franchise cable television
operator. Upon introduction of its integrated billing system, the Company plans
to offer pricing incentives to purchase more than one service from OpTel.

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Competitive Video Offering. The Company's analog video programming offering
at an MDU is generally competitive with or superior to the analog offering of
the local franchise operator in that market. In addition, the programming
selections available at an MDU served by the Company's microwave networks can be
tailored on a sub-market basis to meet local preferences and, unlike franchise
cable television systems which may be required to carry all local broadcast
channels and public access channels, the Company's microwave networks can
utilize all of their available channels to provide popular programming. The
Company believes that its additional tier of DBS programming will be superior to
the current or announced offerings of the franchise cable television operator in
each of its markets.

Better Service and Quality. The Company is upgrading its networks and
support systems to ensure continued reliable, high quality delivery of a range
of cable television and telecommunications services and expanding its offerings
to encompass a broad range of value-added telecommunications services. The
Company is committed to providing excellent customer service. The Company
believes the most effective means of attracting and retaining MDU owners and
subscribers is by providing high quality subscriber service, including: (i)
maintaining a 24-hour-a-day, seven-day-a-week subscriber telephone support, (ii)
com-puterized tracking of all incoming calls to minimize waiting times, (iii)
service calls generally made the same day the subscriber indicates a service
problem, (iv) scheduling flexible, seven-day-a-week installation and service
appointments, (v) placing follow-up calls and on-site inspections to verify
subscriber satisfaction and (vi) completing 80% of installations completed
within three business days of receiving the initial installation request, often
within 24 hours. The Company also uses focus groups and subscriber surveys to
monitor subscriber satisfaction.

STRATEGIC RELATIONSHIPS WITH MDU OWNERS

A critical aspect of the Company's growth strategy is the development of
strategic relationships with owners of MDU portfolios. These relationships
encourage the MDU owner (which may be an ownership association) to promote and
sell the Company's cable television and telecommunications services to MDU
residents.

The Company solicits and negotiates Rights of Entry with owners of
national, regional and local portfolios of MDUs. The Company's Rights of Entry
typically have original terms of ten to fifteen years (five years for Rights of
Entry with condominium associations). The weighted average unexpired term of the
Company's Rights of Entry was approximately eight and one half years as of
February 28, 1999 (assuming the Company's exercise of available renewal
options).

Many Rights of Entry provide MDU owners with financial incentives to work
closely with the Company to promote its products and services. Financial
incentives may include revenue sharing or payment of up-front inducements to MDU
owners. In addition, the Company believes that the delivery of special services
tailored to MDU owners and residents provides marketing advantages to the MDU
owner in leasing its units. A substantial majority of the Company's Rights of
Entry were acquired through various acquisitions and, as a result, have not
always contained all of the foregoing terms and provisions.

The long-term Rights of Entry negotiated with MDU owners effectively make
the Company the exclusive multichannel television provider, leaving MDU
residents with the option of receiving multichannel television from the Company
or receiving off-air programming from local broadcasters. Rights of Entry
covering telecommunications include an undertaking by the MDU owner to promote
OpTel as the preferred provider of telecommunications services within the MDU.
The Company believes that the development of strategic relationships with MDU
owners will enable the Company to maintain its preferred competitive position
even if the exclusivity of the Rights of Entry becomes limited by future
developments. However, legal and regulatory limitations on exclusivity could
adversely affect the Company's ability to form new strategic relationships with
MDU owners and could increase the capital costs associated therewith. See "Risk
Factors -- Risks Associated with Rights of Entry" and
"-- Regulation -- Telecommunications Regulation -- Competitive Local Exchange
Carrier Regulation."

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COMPETITION

Substantially all markets for voice, video and Internet services are highly
competitive and the Company expects that competition will intensify. In each of
its markets, the Company faces significant competition from larger companies
with greater access to capital, technology and other competitive resources. The
Company's switched local exchange services compete with the ILEC, STS providers,
CLECs and CAPs and will compete with long distance telephone companies,
franchise cable television operators and Internet protocol telephone services as
they begin to enter the local telephone business. The Company's long distance
services compete with established IXCs and resellers and long distance Internet
protocol telephone services. In addition, recent telecommunications offerings,
including PCS, and future offerings may increase competition in the
telecommunications industry. The Company's private cable television services
compete with incumbent franchise cable television operators as well as wireless
cable television operators, other private cable television operators, DBS
operators and stand-alone satellite service providers.

Recent and future legislative, regulatory and technological developments
likely will result in additional competition in each of the markets in which the
Company competes. Moreover, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators, RBOCs and IXCs may
result in providers capable of offering bundled cable television and
telecommunications services in direct competition with the Company. For example,
the recent merger of AT&T and TCI has resulted in the formation of a single
large, well-financed ICP with which the Company may compete. Although certain
technological and regulatory barriers remain, the proposed merger could have a
substantial impact on the telecommunications and cable television markets.

Although the Company as a matter of course investigates new sources of
programming and technologies that may increase its range of services, other
larger and more diversified competitors may attract the targeted MDUs based on
their increased menu of services. While the Company believes that the
exclusivity provisions of its Rights of Entry provide it with competitive
advantages, such advantages may be significantly diminished by technological and
other developments beyond the control of the Company. In addition, technological
developments may allow competitors of the Company to bypass property owners
altogether and market their services directly to tenants of MDUs. See "Risk
Factors -- Risks Associated with Rights of Entry" and "-- Competition."

Certain of the Company's current and potential competitors are described
below.

ILECs. In each of its markets, OpTel faces, and expects to continue to
face, significant competition for the local exchange services it offers from the
ILECs, which currently dominate their local telephone markets. OpTel competes
with the ILECs in its markets on the basis of product offerings (including the
ability to offer integrated voice and video services), reliability, technology
and customer service, as well as price.

In addition, under the Telecom Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
introduction of such competition also establishes the predicate for the
incumbent RBOCs to provide in-region interexchange long distance services. The
RBOCs are currently allowed to offer "incidental" long distance service
in-region and to offer out-of-region long distance service. Once the RBOCs are
allowed to offer in-region long distance services, they will also be in a
position to offer single source local and long distance service similar to that
offered by OpTel and proposed by the three largest IXCs (AT&T, MCI Worldcom and
Sprint Corporation). The Company expects that the increased competition made
possible by regulatory reform will result in certain pricing and margin
pressures in the telecommunications services businesses. See "Risk
Factors -- Regulation" and "-- Regulation."

OpTel has sought, and will continue to seek, to provide a full range of
local voice services in competition with ILECs in its service areas. The Company
expects to compete in this market by (i) establishing strategic relationships
with MDU owners so as to allow the Company to market effectively to MDU
residents, (ii) providing value added, enhanced services to MDU residents, (iii)
bundling its telecommunications and cable television services, (iv) providing a
high level of customer service and responsiveness, and (v) competitively pricing
its products.

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The Telecom Act permits the ILECs and others to provide a wide variety of
video services directly to subscribers in competition with OpTel. Various LECs
currently provide video services within and outside their telephone service
areas through a variety of distribution methods, including both the deployment
of broadband wire facilities and the use of wireless transmission facilities.
The Company cannot predict the likelihood of success of video service ventures
by LECs or the impact on the Company of such competitive ventures.

CLECs and Other Competitors. Other CLECs compete for local telephone
services, although they have to date focused primarily on the market for
corporate customers. In addition, potential competitors capable of offering
private line and special access services also include other smaller long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end-users. However, OpTel believes that it will be among the first to
offer an integrated package of voice, video and Internet access services to
customers in MDUs.

Incumbent Franchise Cable Systems. The Company's major competition for
cable television Rights of Entry in each market comes from the incumbent
franchise cable television operator. In certain markets serviced by the Company,
franchise cable television operators now offer revenue sharing and access fee
arrangements to MDU owners. There can be no assurance that these payments will
not increase in the future as competition increases for access to the MDUs.
Another basis of competition is the breadth of programming and range of services
offered. The Company competes with franchise cable operators by (i) focusing
exclusively on MDUs, (ii) sharing profits with MDU owners, (iii) providing an
integrated product offering that to an increasing extent in the future will
include Internet services, (iv) offering customized programming and (v) charging
lower cable and local telephone rates to subscribers.

Wireless Cable. Wireless cable systems are similar to the Company's 18GHz
and 12GHz networks in that they use microwave transmitting and receiving
equipment. Wireless cable systems differ from 18GHz and 12GHz systems in that
(i) they "broadcast" their video programming directly to individual subscribers
and generally not to an MDU's receiver (ii) their systems transmit in an
omni-directional manner, which allows them to provide service to all households
within a wireless operator's "line-of-sight," and (iii) wireless cable systems
may include subscriber-to-hub transmission capabilities, which would allow them
to provide interactive and telecommunication services. Historically, wireless
operators have had difficulty acquiring or leasing the critical mass of channels
required to offer a competitive programming lineup.

Local Multipoint Distribution Service. The FCC has issued rules
reallocating the 28GHz band to create a new local exchange and video programming
delivery service referred to as local multipoint distribution service ("LMDS").
LMDS systems, like wireless cable systems, will use point-to-multipoint
microwave distribution. Unlike wireless cable systems, however, LMDS systems
will be able to provide channel capacity equal or greater to that of most cable
systems, including the Company's cable systems. In addition, LMDS systems may
include subscriber-to-hub transmission capabilities, which would allow them to
provide interactive and telecommunication services. In March 1998, the FCC
completed its auction of LMDS licenses. So far, however, there has been no
significant commercial deployment of LMDS systems in the Company's serviced
markets.

SMATV Systems. The largest number of private cable companies are operators
of SMATV systems. Like the Company, these SMATV operators offer a multichannel
television service pursuant to Rights of Entry with MDU owners. Where the
Company has introduced or will introduce 18GHz systems, the Company competes
with SMATV systems on the basis of (i) larger channel offerings (typically SMATV
offers 33 to 45 channels), (ii) the quality of its video programming delivery,
(iii) customer service and (iv) the perceived high price of SMATV relative to
the programming package provided.

Direct Broadcast Satellite. DBS systems involve the transmission of encoded
video programming direct from a satellite to the home user without any
intermediate processing or retransmission by a terrestrial operator. Although
prices have been decreasing, DBS service typically requires the purchase of
equipment and installation fees which are a significant cost to the subscriber.
In addition, subscribers generally pay a monthly programming fee to receive DBS
service, which can be lower than those charged by the Company before
consideration of the equipment costs. However, the Company believes that it can
effectively compete with DBS systems in the MDU marketplace for the following
reasons. First, DBS line-of-sight problems are
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significant (unless an entire MDU is connected to the service) because a DBS
antenna must be pointed in the proper direction to receive video programming
from the satellite. More importantly, DBS operators are generally not permitted
to retransmit network or local broadcasting programming. Certain DBS operators
have announced "MDU programs" which generally consist of either (i) paying
commissions to a local satellite dish dealer who has, at its own expense,
overbuilt an MDU or (ii) billing MDU owners for the service on a bulk basis. The
Company's Rights of Entry currently prohibit an MDU owner from allowing a DBS
system to be installed at the MDU subject to legal and regulatory limitations.
See "-- Regulation -- Regulation of Cable Television -- Subscriber Access" for
discussion of limits on the enforceability of restrictions on DBS antennae
placement in MDU areas (such as apartment balconies or patios).

Internet Services. The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
competition in this market is expected to intensify as use of the Internet
grows. The Company competes (or in the future may compete) directly or
indirectly with (i) national and regional ISPs, (ii) national telecommunications
companies, (iii) LECs, (iv) cable operators, and (v) nonprofit or educational
ISPs. Some of these present or potential future competitors have or can be
expected to have substantially greater market presence and financial, technical,
marketing and other resources than the Company. Certain of the Company's online
competitors have introduced unlimited access to the Internet and their
proprietary content at flat rates, and certain of the LECs have also introduced
competitive flat-rate pricing for unlimited access and have initiated in certain
markets "always on" service such as DSL. There can be no assurance that
competition will not lead to pricing pressures in the Internet business.

Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring. In
addition, a continuing trend towards business combinations and alliances in the
communications industry may also create significant new competitors to OpTel.
The Company cannot predict whether competition from such developing and future
technologies or from such future competitors will have a material impact on its
operations. See "Risk Factors -- Competition."

REGULATION

The telecommunications and multichannel television industries are subject
to extensive regulation at the federal, state and local levels. The following
summary does not purport to describe all present and proposed federal, state and
local regulations and legislation relating to the telecommunications and
multichannel television industries. Legislative and regulatory proposals under
consideration from time to time by Congress and various federal agencies, as
well as state and local franchise requirements, have in the past, and may in the
future, materially affect the Company and the telecommunications and
multichannel television industries. Additionally, many aspects of regulation at
the federal, state and local levels currently are subject to judicial review or
are the subject of administrative or legislative proposals to modify, repeal or
adopt new laws and administrative regulations and policies. Neither the outcome
of these proceedings nor their impact on the Company can be predicted at this
time. The Company believes that it is in compliance in all material respects
with all federal, state and local regulations applicable to it. In some
instances, the Company has acquired businesses that did not comply with all
regulations applicable to them and it undertook to remediate such matters as
soon as practicable. See "Risk Factors -- Risks Associated with Acquisitions."

TELECOMMUNICATIONS REGULATION

The telecommunications services provided by the Company are subject to
regulation by federal, state and local government agencies. As the Company
implements its telecommunications strategy, which includes replacing many of its
current PBX switches with networked central office switches, the Company will
increasingly become regulated as a CLEC. The FCC has jurisdiction over
interstate services and state regulatory commissions exercise jurisdiction over
intrastate services. Additionally, local authorities may regulate limited
aspects of the Company's business, such as the use of public rights-of-way. The
following subsections summarize the local, state and federal regulations that
pertain to the Company's current and projected telecommunications services.

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Competitive Local Exchange Carrier Regulation

The FCC historically has left the regulation of the intrastate aspects of
local exchange service to the states. It has, however, exercised its
jurisdiction over interstate matters and jurisdictionally mixed matters
respecting local telephone service. The Telecom Act expands the FCC's authority
to regulate local exchange service, and there can be no assurance that the FCC
will not exercise this authority aggressively.

State regulation of local exchange service traditionally has favored the
ILECs. The state laws have, with the exception of STS, generally prohibited
competition in the local exchange services market. The Telecom Act expressly
preempts such prohibitions. The Telecom Act declares that no state or local laws
or regulations may prohibit or have the effect of prohibiting the ability of any
entity to provide any interstate or intrastate telecommunications service.
States may, however, impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. Local authorities may also require reasonable, competitively neutral
compensation for use of the public rights-of-way.

For purposes of the Telecom Act, CLECs and ILECs are subject to the same
basic set of requirements. However, certain additional obligations are imposed
on ILECs, but not on CLECs. Although the Company does not believe that the
regulatory burdens applicable to CLECs will have a material effect on its
business, no assurance can be given at this time regarding the extent or impact
of such regulation.

The Telecom Act requires all carriers, both CLECs and ILECs, to
interconnect with the facilities of other carriers, to resell their services, to
provide number portability, to provide dialing parity, to afford access to their
poles, ducts, conduits and rights-of-way and to establish reciprocal
compensation for the transport and termination of other LECs' telephone traffic.
All providers of telecommunications services are also subject to the Telecom
Act's requirements that they contribute to state and federal universal service
funds. ILECs are subject to certain additional requirements, such as a duty to
negotiate interconnection agreements in good faith, to unbundle elements of
their networks, to provide nondiscriminatory interconnection with their
networks, to comply with specific resale obligations, to provide notice of
changes to their networks and to allow collocation of other carriers' equipment
on their premises. The Company is not, however, considered an ILEC in any state.

The FCC and various state PUCs are in the process of defining the precise
contours of the requirements that will govern local exchange service in the
future. Although the Telecom Act sets forth certain standards, it also
authorizes the states to adopt additional regulations provided that such
regulations do not conflict with the federal standards. It is unclear at this
time how the states will respond to the Telecom Act and what additional
regulations they may adopt.

The Supreme Court recently vacated the FCC's regulations regarding the UNEs
that ILECs are required to make available to CLECs. Although the Court concluded
that the FCC does have jurisdiction to establish certain national pricing
standards for UNEs, it determined that the FCC had not applied an appropriate
limiting principle in identifying the UNEs subject to its rules. Accordingly,
the FCC will, on remand, again consider which network elements ILECs must
unbundle and make available to CLECs.

In its first implementing order, issued prior to the Supreme Court
decision, the FCC identified as UNEs most network functionalities for which
access is technically feasible. The FCC declined, however, to define any subloop
elements as UNEs. As a result, ILECs often refuse to reconfigure their networks
so that CLECs may access on-property distribution facilities at a single point
on or near an MDU property. Accordingly, the Company has experienced, and can be
expected to continue to experience, practical difficulties bringing its
network-based telephone services to subscribers at some of the MDUs that it
seeks to serve. Where the Company is not able to access on-property ILEC
distribution facilities, it must either install duplicative distribution
facilities on the MDU property or lease unbundled loops from an ILEC in order to
reach individual subscribers within the MDU. Either of these alternatives may
raise the cost of service or delay entry by the Company. If, on remand, the FCC
identifies subloop distribution facilities as UNEs, as advocated by the Company,
the Company would likely have increased access to subscribers at the properties
that it serves.

The Communications Act requires LECs to pay reciprocal compensation to
other carriers for terminating their local traffic. A number of ILECs have taken
the position that traffic terminated to an ISP is not local and that no
reciprocal compensation payment by the originating carrier to the terminating
carrier for such traffic

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therefore is required. The vast majority of states that have addressed the issue
have rejected that argument and concluded that LECs are entitled to reciprocal
compensation for terminating ISP-bound traffic. However, the FCC has determined
that ISP-bound calls constitute interstate traffic for jurisdictional purposes
and it is considering the adoption of a federal rule regarding the appropriate
inter-carrier compensation for such traffic. There can be no assurance that
traffic terminated to an ISP will not ultimately be held to be exempt from the
reciprocal compensation requirements.

It is not possible for the Company to predict the outcome of these or any
other proceedings relating to the Telecom Act. Nonetheless, at this time it is
clear that an increasing number of service providers will be seeking to compete
as CLECs in the local exchange markets and that state and federal regulations
will, to some extent, allow for such market entry. Although jurisdictional lines
of authority and basic implementation issues are being determined by the FCC and
the federal courts in accordance with the statutory provisions outlined above,
several states already have begun the process of opening the local exchange
market to competition.

Most states require companies seeking to compete in intrastate
telecommunications services to be certified to provide such services. These
certifications generally require a showing that the carrier has the financial,
managerial and technical resources to offer the proposed services consistent
with the public interest. State regulation of telecommunications services may
impose upon the Company additional regulatory burdens, including quality of
service obligations and universal service contributions.

The California Public Utilities Commission ("CPUC") recently issued a
decision prohibiting any carrier from entering into an agreement or other
arrangement with a MDU owner that has the effect of restricting access by other
carriers to the property or affords other carriers with inferior access to the
property. By way of example, the CPUC decision explains that an agreement that
provides for the exclusive marketing of ILEC services to MDU tenants may be
improper if the agreement has the effect of preventing other carriers from
accessing, and providing service to, a MDU because of the building owner's
financial incentives under the marketing agreement. Under the Company's Rights
of Entry, the Company typically assumes ownership or management of the
on-property telephone wiring and secures exclusive marketing arrangements with
MDU management. The Company provides all other carriers with non-discriminatory
and competitively-neutral access to the on-property wiring and believes that its
Rights of Entry are consistent with the CPUC's decision. However, there can be
no assurance that, if such Rights of Entry were challenged in a complaint
brought by another carrier, the CPUC would not conclude otherwise.

From time to time state legislative and regulatory proposals are introduced
or considered in states where the Company operates which, if adopted, would
limit the Company's ability to enter into exclusive marketing agreements for its
telephone services. While the Company does not believe that these proposals have
broad support, there can be no assurance as to the likelihood of their passage
or adoption in any state.

Shared Tenant Services

The resale of STS is subject to the terms and conditions in the tariffs of
the telecommunications company whose services it resells and to regulation by
the states in which the Company resells such services. Historically, virtually
all such telecommunications company tariffs flatly prohibited resale of local
exchange service. However, in recent years several state legislatures and PUCs
determined that resale of local exchange service is in the public interest and
have directed telecommunications companies within their jurisdictions to allow
for resale of local exchange service, opening the way for STS operations.
Moreover, the Telecom Act requires such resale pursuant to interconnection
agreements with the ILEC. In some states, PUCs have issued detailed regulations
governing the provision of STS and other resale services. In other jurisdictions
where no formal requirements have been adopted, most telecommunications
companies have nonetheless modified their tariffs to provide for resale of local
exchange services.

The precise terms and conditions under which such resale services may be
provided varies from state to state, and from LEC to LEC, and may include
significant restrictions and limitations. These include: (i) a requirement to be
certified by the state PUC, (ii) restrictions with respect to the location and
ownership of MDUs to which STS service may be provided and the crossing of
public rights-of-way by STS operator
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facilities, (iii) regulations allowing telecommunications companies to apply
different local service rate structures (e.g., measured use vs. flat rate) to
STS providers and other subscribers, in some cases lessening or even eliminating
efficiencies which might otherwise be realized through the use of the LECs'
trunking facilities, (iv) regulations providing for LEC access or rights-of-way
to directly service individual customers within an MDU and (v) in certain
states, limits or prohibitions on resale of intrastate long distance and local
service at a profit.

None of the states in which the Company has significant operations has
adopted regulations governing the provision of STS services. The California PUC
has, however, adopted informal STS "guidelines." In addition, Florida requires
providers of STS services to be certified to resell local exchange services.
Other than the California "guidelines" and Florida's certification requirement,
the Company may provide STS services in each of its major markets, subject only
to individual telecommunications company tariff provisions. The tariffs of all
major LECs serving these jurisdictions provide for resale of local exchange
service pursuant to varying terms and conditions. Provision of STS service in
these states in the future will be subject to any regulations that ultimately
may be adopted by state authorities, and to changes in telephone company
tariffs.

Information Service Provider Regulation

Information service providers, including Internet access providers, are
largely unregulated at this time (apart from federal, state and local laws and
regulations applicable to business in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
For instance, although the FCC has rejected proposals to impose additional costs
and regulations on information service providers to the extent they use local
exchange telephone network facilities, it has suggested that certain
telephone-to-telephone services provided by information service providers using
the Internet backbone may be reclassified as "telecommunications services" and
subject to regulation as such. Any such change may affect demand for the
Company's Internet related services.

There also have been efforts at the federal and state level to impose taxes
and other burdens on information service providers and to regulate content
provided via the Internet and other information services. These efforts have not
generally been upheld when challenged in court. Nonetheless, the Company expects
that proposals of this nature will continue to be debated in Congress and state
legislatures in the future. No assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to Internet services would not have a material
adverse effect on OpTel. In addition, although there is a trend in the law away
from ISP liability for content posted or published on the Internet, there can be
no assurance that the Company's involvement in the provision of ISP services
will not subject it to liability for acts performed by third parties using the
Internet.

Long Distance Resale Regulation

Non-dominant IXCs, such as the Company, are subject to limited federal
regulation. Nonetheless, carriers are required by statute to offer their
services under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory, and to file tariffs for their international and
interexchange services. As a non-dominant carrier, the Company is permitted to
make tariff filings on a single day's notice and without cost support to justify
specific rates. The FCC generally does not exercise direct oversight over cost
justification and the level of charges for service of non-dominant carriers,
although it has the statutory power to do so. The FCC has jurisdiction to act
upon complaints brought by third parties, or on the FCC's own motion, against a
carrier for failure to comply with its statutory obligations.

REGULATION OF CABLE TELEVISION

Certain of the Company's networks are, for regulatory purposes, deemed to
be "Cable Systems." To constitute a Cable System, a multichannel television
system must use hard-wire or fiber optic cable that makes a tangible physical
crossing or use of a public right-of-way. All Cable Systems are required to
obtain a local franchise and are subject to state and local regulation as well
as federal Cable System regulation, including rate regulation in certain
circumstances. The Company's microwave and SMATV systems are not

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considered Cable Systems and thus are not subject to local franchising
requirements and are free from most Cable System regulation. The Company's
Houston system, a portion of its Fort Worth system and certain other small
systems are regulated as Cable Systems. However, the Company's Houston, Fort
Worth and other small franchise cable television systems are exempt from federal
rate regulation and the universal service obligation, even though they are Cable
Systems, because they are subject to "effective competition" as discussed in
greater detail below.

Set forth below is a discussion of the principal laws and regulations
governing the Company's private and franchise cable television operations.

Federal "Cable System" Regulation. The regulations imposed on Cable Systems
include requirements to (i) obtain a local franchise (which may require the
franchisee to pay franchise fees to local governments of up to 5% of yearly
gross revenues), (ii) delete certain programs from cablecasts, (iii) comply with
certain customer service standards, (iv) retransmit certain broadcast television
programming, (v) in most circumstances, conform subscriber service and equipment
rates to applicable federal regulations, (vi) comply with FCC equal employment
opportunity ("EEO") rules and policies, (vii) make available channels for
leased-access programmers at rates that are to be calculated on a formula
established by the FCC and (viii) offer customer service to all buildings passed
by the network. In addition, rates for basic cable service on Cable Systems not
subject to "effective competition" are regulated by local franchising
authorities. The Company's networks that are Cable Systems are subject to these
requirements, which impose regulatory costs and reduce the speed and flexibility
with which the Company and its Cable System competitors can respond to
competitive challenges from other video distribution technologies. The Company's
Cable Systems, however, are exempt from rate regulation because they are, the
Company believes, subject to "effective competition."

Cable Systems are deemed to be subject to "effective competition" if any
of: (i) fewer than 30% of the households in the franchise area subscribe to the
service of the Cable System, (ii) the area is served by at least two
unaffiliated multichannel television operators, both of which are able to
provide service to at least 50% of the households in the franchise area, and the
number of households actually subscribing to all but the largest multichannel
television operator exceeds 15%, (iii) the local franchising authority itself
offers multichannel television to at least 50% of the households in the
franchise area, or (iv) a LEC or its affiliate offers multichannel television
directly to subscribers by any means (other than direct-to-home satellite
services) in the franchise area. No assurance can be given that the Company does
not, or will not in the future, constitute "effective competition" to any
franchise cable television operator with which it competes.

Copyright Licensing. Cable Systems and private cable television systems are
entitled to federal compulsory copyright licensing privileges. In order to
obtain a compulsory copyright, such systems must make semi-annual payments to a
copyright royalty pool administered by the Library of Congress. A compulsory
copyright provides a blanket license to retransmit the programming carried on
television broadcast stations. Non-broadcast programming, often referred to as
cable channel programming, is not subject to the compulsory copyright license.
The Company purchases this copyrighted programming from program suppliers (e.g.,
ESPN), which in turn obtain rights to the programming directly from the program
copyright owner pursuant to a private negotiated agreement. Bills have been
introduced in Congress over the past several years that would eliminate or
modify the cable compulsory license. The need to negotiate with the copyright
owners for each program carried on each broadcast station in the channel lineup
could increase the cost of carrying broadcast signals or could impair the
Company's ability to obtain programming.

Must-Carry and Retransmission Consent. The Communications Act grants local
television stations the right to elect either to force local Cable Systems to
"carry" the television station free of charge (a "must carry" right) or to
prohibit Cable Systems and private cable television systems from carrying the
local television station (a "retransmission consent" right). Under the
must-carry rules, a Cable System, subject to certain restrictions, generally
must carry, upon request by the station and depending on the number of usable
activated channels on the system, all commercial television stations with
adequate signals that are licensed to the same market as the Cable System. Under
the retransmission consent rules, Cable Systems and private cable television
systems are precluded from carrying commercial broadcast stations that choose
not to exercise their must-carry rights, all "distant" commercial broadcast
stations (except for "superstations", i.e., commer-

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cial satellite-delivered independent stations such as WTBS), commercial radio
stations and certain low-powered television stations, without obtaining those
stations' explicit written consent for the retransmission of their programming.
Retransmission consent agreements do not obviate a copyright license for the
programming carried on the broadcaster's signal. However, Cable Systems and
private cable television systems may obtain a compulsory copyright license for
broadcast programming as described above. To date, the "must
carry/retransmission consent" regulations have not had a significant impact on
either the operations or profitability of the Company. Nonetheless, there can be
no assurance that broadcasters, in some circumstances, will not withhold
retransmission consent, require excessive compensation for that consent or
impose onerous conditions thereon which could adversely affect the Company.
Furthermore, it is unclear at this time the extent to which Cable Systems will
be required to carry multiple signals of digital television broadcast stations
or HDTV signals. The resolution of these must-carry issues may have a
significant impact on the programming carried on the Company's systems.

Elimination of the Telco-Cable Cross-Ownership Restriction. The Telecom Act
repealed the LEC cable television cross-ownership restriction, which prohibited
LECs from providing multichannel television directly to subscribers in their
telephone service areas. This change may increase the level of competition in
the multichannel television market. LECs now have several options for entering
and competing in the multichannel television marketplace. LECs now may (i)
provide video programming to subscribers through radio communications under
Title III of the Communications Act, (ii) provide transmission of video
programming on a common carrier basis under Title II of the Communications Act
(i.e., provide a common carrier video platform), (iii) provide video programming
as a Cable System under Title VI of the Communications Act (franchise cable) or
(iv) provide video programming by means of an "open video system." Open video
systems are not required to comply with the full panoply of federal Cable System
regulation, but they are subject to certain additional programming selection
limitations. It is unclear at this time the extent to which any of these market
entry options will be used by LECs.

The Uniform Rate Requirement. Prior to enactment of the Telecom Act, the
Communications Act generally provided that Cable Systems were required to have a
rate structure for the provision of cable service that was uniform throughout
its geographic area. The Telecom Act provides that this requirement is
applicable only where "effective competition" is absent. Further, the Telecom
Act exempts from the uniform rate requirement non-predatory bulk discounts
offered to MDUs. Consequently, the franchise cable television operators with
which the Company competes now have increased pricing flexibility with respect
to MDU bulk discounts.

Program Access. The program access provisions of the Communications Act
were intended to eliminate unfair competitive practices and facilitate
competition by providing competitive access to certain defined categories of
programming. Generally, these restrictions are applicable to Cable System
operators, satellite cable programming vendors in which a Cable System operator
has an attributable interest and satellite broadcast programming vendors. The
programming access provisions prohibit these entities from charging unfair,
unreasonable or discriminatory prices for programming. Further, the programming
access provisions prohibit most exclusive dealing arrangements pursuant to which
Cable Systems obtain the exclusive right to distribute the subject programming
within their franchise areas. Such exclusive distribution arrangements have been
found to inhibit the ability of new entrants to compete in the multichannel
television market. The prohibition on exclusive contracts, however, is scheduled
to expire on October 5, 2002 unless the FCC determines, during a proceeding that
is to be conducted in 2001, that the prohibition continues to be necessary to
promote competition in the multichannel television market. The Telecom Act
amended the program access provisions by adding that the provisions shall also
apply to common carriers and their affiliates. Thus, telecommunications
companies entering the market will find it more difficult to limit their
competitors' access to programming.

Subscriber Access. The FCC has initiated a notice of proposed rulemaking
seeking comment on whether the FCC should adopt regulations restricting
exclusive contracts. The FCC has indicated that it seeks to ensure a level
competitive playing field in the emerging multichannel television market. One
possibility raised by the FCC is the establishment of a federal mandatory access
requirement or a limit on the duration of exclusive service agreements between
MDU owners and video programming providers. Although it is open to

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question whether the FCC has statutory and constitutional authority to compel
mandatory access or restrict exclusive agreements, there can be no assurance
that it will not attempt to do so. Either such action would tend to undermine
the exclusivity provisions of the Company's Rights of Entry with MDU owners. The
FCC also has preempted certain state, local and private restrictions on
over-the-air reception antennas placed on MDU properties, including rental
properties and properties occupied by, but not within the exclusive control of
the viewer. This limits the extent to which MDU owners and the Company may
enforce certain aspects of the Company's Rights of Entry agreements which
otherwise would prohibit, for example, placement of DBS receive antennae in MDU
areas (such as apartment balconies or patios) under the exclusive occupancy of a
renter.

State and Local Cable System Regulation. Because Cable Systems use public
rights-of-way, they are subject to state and local regulation, typically imposed
through the franchising process. State and/or local officials often are involved
in the franchisee selection, system design and construction, safety, consumer
relations, billing and community-related programming and services among other
matters. Cable Systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions of the franchise.

Cable franchises typically contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public rights-of-way and types
of cable services provided.

Although federal law contains certain procedural safeguards to protect
incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal
of a cable franchise cannot be assured unless the franchisee has met certain
statutory standards. Moreover, even if a franchise is renewed, a franchising
authority may impose new requirements, such as the upgrading of facilities and
equipment or higher franchise fees. At least two states, Massachusetts and
Connecticut, have adopted legislation subjecting Cable Systems to regulation by
a centralized state government agency. There can be no assurance that other
states will not similarly adopt state level regulation.

The Company's Houston cable television franchise and its other limited
cable television franchises are subject to state and local franchise laws.
Moreover, although the Company's non-franchised private cable systems that use
microwave distribution technologies are not subject to local franchise laws,
state and local property tax and environmental laws are applicable to the
Company's business. For example, the Company has to comply with local zoning
laws and applicable covenants, conditions and restrictions when installing its
antennae and other microwave equipment.

In addition, a number of states have enacted mandatory access laws.
Although such laws differ in some respects from state to state, state mandatory
access laws generally require that, in exchange for just compensation, the
owners of rental apartments (and, in some instances, the owners of condominiums
and manufactured housing parks) must allow the local franchise cable television
operator to have access to the property to install its equipment and provide
cable service to residents of the MDU. Such state mandatory access laws
effectively eliminate the ability of the property owner to enter into an
exclusive Right of Entry with a provider of cable or other video programming
services. In addition, Virginia has an anti-compensation statute that forbids an
owner of an MDU from accepting compensation from whomever the owner permits to
provide cable or other video programming services to the property. Such a
statute limits the ability of a cable or other video programming provider to
enter into an exclusive Right of Entry with an owner of an MDU because an owner
usually is induced to enter an exclusive agreement through financial incentives.
These statutes have been and are being challenged on constitutional grounds in
various states.

The Company does not have significant operations in any mandatory access
state other than Florida (with respect to condominiums) and Illinois. When
operating in Illinois, the Company generally enters into bulk sales agreements
with MDU owners, whereby the MDU owner agrees to purchase cable television, at a
discount, for each unit in the MDU and provides the service to the MDU resident
as one of the amenities included in their rent.

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MICROWAVE AND PRIVATE CABLE REGULATION

The Company uses microwave distribution networks, which typically operate
in the 18GHz band, to interconnect individual private cable systems with each
other and with head-end facilities. The FCC exercises jurisdiction over 18GHz
microwave and other transport technologies using the radio frequency spectrum
pursuant to Title III of the Communications Act, which vests authority in the
FCC to regulate radio transmissions and to issue licenses for radio stations.
The scope, content and meaning of existing laws, rules and regulations governing
all microwave technologies are subject to legislative, judicial and
administrative changes. There can be no assurance that future legislative or
regulatory actions will not adversely affect the Company's ability to deliver
video or telecommunications programming using the radio frequency spectrum or
raise the cost of such delivery.

The Company's microwave networks must comply with the FCC's licensing
procedures and rules governing a licensee's operations. Application to use
microwave "paths" and frequencies is made to the FCC and is subject to certain
technical requirements and eligibility qualifications. After microwave paths are
licensed to an applicant, the facilities must normally be constructed and fully
operational within 18 months of the grant. The facilities must be built in
strict accordance with the terms of the granted application. New licenses are
valid for ten years from the date of grant, after which the licensee must apply
to the FCC for license renewal. License renewal is not an automatic right,
although it is routinely granted if the licensee is in substantial compliance
with the FCC rules.

Licensing procedures include (i) obtaining an engineering report confirming
that the proposed path does not interfere with existing paths and (ii) filing
with the FCC a statement of eligibility and use, a system diagram and a
statement regarding compliance with the frequency coordination requirement. The
entire licensing procedure requires approximately 120 days.

The Company does not "own" the paths and frequencies granted by the FCC.
Rather, the Company is merely licensed or permitted to "use" the frequencies.
Moreover, the rights granted to the Company to use microwave frequencies are not
to the complete exclusion of other potential licensees. First, the Company's
rights only extend to the microwave paths identified in its application as
connecting the various points in its network. Other microwave users are
permitted to file applications and serve the same buildings as the Company (in
so far as the microwave licensing is concerned), but they may not interfere with
an incumbent user's licensed microwave paths. Second, the Company has no right
to the airspace over which the programming is transmitted. Obstructions could be
constructed in the line-of-sight of the microwave paths, precluding connection
of the Network Hubs with the various reception points to be served. The
microwave bands used by the Company also are authorized for use by other kinds
of users, including non-video, point-to-point microwave, mobile communications
and satellite transmissions. Although sharing these frequencies is technically
feasible, it is possible that the Company will be unable to obtain licenses for
frequency paths it desires, or that it will be able to use only a portion of the
frequencies at certain locations because of pre-existing users.

The Company anticipates that in the future it will use 6GHz, 11GHz and
23GHz microwave frequencies, which are available for both private or common
carrier communications, to provide bi-directional telecommunications services.
The Company also intends to use the 11 GHz frequencies for hub-to-hub
transmission of video entertainment material. The FCC recently denied a request
filed by the Company for waiver of the FCC rule that prohibits private microwave
licensees from using the 11 GHz frequencies for the delivery of video
entertainment materials to customers or for the final radio link to a private
cable system. Although there can be no assurance, the Company does not believe
that the denial will have an adverse impact on its proposed use of 11 GHz
frequencies for hub-to-hub transport. The application and licensing procedures
for authorizations to use the 6GHz, 11GHz and 23GHz frequencies are
substantially the same as those described above. Although the Company expects
that 6GHz, 11GHz and 23GHz frequencies will be available on its current paths
and to meet its future needs, the Company has not commenced frequency
coordination, and there can be no assurance that the Company will be able to
obtain licenses for these frequencies on the paths it desires.

The FCC, at the request of national defense agencies, restricted the use of
18GHz frequencies in the greater Denver and Washington, D.C. areas. This change
has limited the Company's ability to use 18GHz

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microwave technologies in these two markets. The Company has, however, received
assurances from the FCC that it will be permitted, subject to certain waiver
and/or rulemaking procedures, to use 12GHz microwave as a medium to deliver
multi-channel video programming and telecommunications services in Denver. The
Company believes that 12GHz microwave paths are an acceptable substitute for
18GHz microwave paths and that the change will not materially adversely affect
the Company's network plans in Denver. The 12GHz frequencies are not, however,
generally available to private microwave licensees. Nonetheless, the Company has
been granted a waiver by the FCC of the rule prohibiting the use of the 12 GHz
band by private microwave licensees for the carriage of video programming
material, and special temporary authority to use the 12 GHz frequencies, on
selected paths in Denver. There can, however, be no assurance that 12 GHz paths
will be available for the Company's future needs in Denver or the Washington,
D.C. area.

The FCC also has issued a Notice of Proposed Rulemaking seeking comment on
a proposal to make terrestrial microwave systems secondary to satellite
downlinks in 250 MHz of spectrum between 18.3 GHz and 18.55 GHz. The Company's
18 GHz networks currently use 440 MHz of spectrum in the frequencies between
18.140 GHz and 18.580 GHz. Under the proposal as originally released,
terrestrial stations in existence or applied for as of September 18, 1998, would
have been grandfathered as co-primary with satellite services in the 18.3-18.55
GHz band, but terrestrial systems for which applications were filed after that
date would not have been permitted to cause harmful interference to satellite
downlinks in the band. The Company, however, working in cooperation with the
private cable industry, successfully petitioned the FCC to amend its
grandfathering proposal. Under the new proposal, all terrestrial microwave
stations operated in this band by private cable operators, such as those
operated by the Company, that are constructed or for which an application has
been filed by the date of the release of the order implementing the new rules,
if such new rules are adopted, will be grandfathered as co-primary in the band.
Further, in its order amending the grandfathering proposal, the FCC suggested
that it would make every effort to preserve an appropriate spectrum allocation
for private cable services such as those offered by the Company. Nonetheless, if
terrestrial microwave systems ultimately are made secondary to satellite
downlinks in the 18 GHz band, the Company's use of that band would be severely
limited and there can be no assurance that the Company would be able to migrate
its networks to alternative spectrum, or that such migration would not
negatively affect the cost of the Company's systems.

To reduce the Company's reliance on 18GHz microwave and to take advantage
of superior propagation characteristics of lower frequency microwave
transmissions, the Company has filed a petition for rulemaking that proposes FCC
rule changes to allow the Company and other private microwave licensees to use
12GHz frequencies nationwide for the delivery of video programming materials.
This band, which the Company has obtained limited authority to use in the Denver
market, normally is not available for video distribution services by private
microwave licensees. There can be no assurance that this proceeding will be
resolved in a manner satisfactory to the Company. Further, the FCC has issued a
Notice of Proposed Rulemaking seeking comment on rule changes that would permit
increased use of both the 11 GHz and 12 GHz bands by satellite operators. There
can be no assurance that the FCC will not adopt rules in this proceeding that
would negatively affect the Company's proposed use of these bands.

Radio frequency ("RF") emissions from microwave equipment may pose health
risks to humans. The FCC recently adopted new guidelines and methods for
evaluating the environmental effects of RF emissions from FCC-regulated
transmitters, including microwave equipment. The updated guidelines and methods
generally are more stringent than those previously in effect. The Company
expects that the microwave equipment to be provided by its vendors will comply
with applicable FCC guidelines.

Although private cable television operators are not subject to the full
range of regulation applicable to Cable Systems, they are subject to the
following federal regulations. First, private cable television operators are
entitled to the compulsory copyright license described above. Second, private
cable television operators benefit from the federal laws and regulations that
require certain programming providers to make cable programming available to all
multichannel video programming distributors on fair, reasonable and
nondiscriminatory terms. Third, as noted above, private cable television
operators are required to obtain retransmission consent from local broadcasters
in order to retransmit their signals. Finally, private cable television systems
are required to comply with the FCC's EEO rules and policies, although the
continuing validity of these rules and

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policies has been called into question by a recent court of appeals decision
overturning portions of the FCC's EEO rules applicable to broadcast stations.

Because they are subject to minimal federal regulation, private cable
television operators have significantly more competitive flexibility than do the
franchised Cable Systems with which they compete. Private cable television
operators have fewer programming restrictions, greater pricing freedom, and they
are not required to serve any customer who they do not choose to serve. In
addition, with the exception of local zoning laws and regulations, state and
local authorities generally have no jurisdiction over private cable television
operators. The Company believes that these advantages help to make its private
cable television systems competitive with larger franchised Cable Systems.

EMPLOYEES

As of February 28, 1999, the Company had a total of 747 full-time
employees. The Company believes that its continued success will depend in large
part on its ability to attract and retain highly skilled and qualified
personnel. The Company has nondisclosure agreements with all of its senior
executive officers. From time to time the Company also uses the services of
contract technicians for installation and maintenance services. The Company
relies principally on outside contractors for network construction. None of the
Company's employees are currently represented by a collective bargaining
agreement. The Company believes that its relationships with its employees are
good.

PROPERTIES

The Company's executive offices are located in Dallas, Texas and house its
national call center and its corporate, engineering, sales and marketing and
corporate administrative services groups. The original lease provides for
approximately 52,000 square feet of space and has a ten-year term expiring
November 30, 2005. The Company has an option to extend the lease term for an
additional five-year term at the then market rental rate. In September 1998, the
Company leased an additional 17,000 square feet in the same building, for a term
of one year, to provide for needed expansion. The Company pays approximately
$71,000 per month for the space in its headquarters building. The Company has
the right to acquire additional space at its current location when such space
becomes available.

In October 1997, the Company purchased a building proximate to its
executive offices in Dallas, Texas. The Company has installed the central office
switch for the Dallas-Fort Worth market in the building and has relocated its
Dallas regional operations to the same building. The Company also leases
facilities in each of the thirteen cities in which it has established regional
operations.

The Company owns substantially all of the telecommunications and cable
television equipment essential to its operations. The Company's major fixed
assets are telecommunications switches, cable television head ends, microwave
transmitters and receivers, SMATV receivers, PBX switches and coaxial fiber
optic cable. These properties do not lend themselves to description by character
and location of principal units. Substantially all of this equipment (other than
fiber optic cable laid under public rights of way) resides on or under the MDUs
served by the Company or in leased facilities in various locations throughout
the metropolitan areas served by the Company.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings except for those
described below and those arising in the ordinary course of business. The
Company does not believe that any legal proceeding to which it is a party will
have a material adverse impact on the Company's financial condition, results of
operations or cash flows.

On April 27, 1998, an action was commenced against the Company in the
United States District Court for the Northern District of California by Octel
Communications Corp. ("Octel"), charging the Company with trademark
infringement, trade name infringement, trademark dilution, and unfair
competition (the "Civil Action") based on its use of the name "OpTel" and
seeking to enjoin the Company from using the name and trademark "OpTel."
Although the Company does not believe that its use of the name "OpTel" infringes
on

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the trademark rights or trade name rights of Octel or any other person, there
can be no assurance as to the outcome of the Civil Action or related
administrative proceedings, if either go forward, or that any such outcome would
not materially adversely affect the Company.

Shortly after the filing of the Civil Action, the parties commenced
settlement discussions and the Company's time to answer the complaint and assert
counterclaims has been continuously extended by agreement of the parties. The
parties have reached an agreement in principle, subject to definitive agreement
(the "Proposed Settlement), that would resolve all issues between the parties
and settle the Civil Action and related administrative proceedings. Under the
Proposed Settlement, the Company will change the name under which it conducts
business from OPTEL to OPTELNET, or such other name or names as determined by
the Company. The change of business name will occur over time, enabling the
Company to transition signage over a nearly three year period, change markings
on vehicles as they are phased out of service and use existing supplies of
printed materials. The Company will retain the right to use "Optel, Inc." as its
corporate name and as a service mark in conjunction with certain services and
the Company will receive trademark registrations for OPTEL for which it has
previously applied. Under the Proposed Settlement, Octel will assign to the
Company its common law rights in the name OCTELNET and will discontinue use of
that name over an agreed time period. The settlement, if consummated, is not
expected to have a material financial or other impact on the Company.

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<PAGE> 69

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the directors
and executive officers of the Company as of February 28, 1999:

<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Andre Chagnon.................. Chairman of the Board and Director 70
Louis Brunel................... Director; President and Chief Executive Officer 57
Frederick W. Benn.............. Director 64
Christian Chagnon.............. Director 43
William O. Hunt................ Director 65
R. Douglas Leonhard............ Director 62
Lynn McDonald.................. Director 39
Alain Michel................... Vice Chairman of the Board and Director 49
Jayne L. Stowell............... Director 47
Bertrand Blanchette............ Chief Financial Officer 41
Stephen Dube................... Chief Operating Officer 43
James Greene................... Vice President, Telephone 53
Michael E. Katzenstein......... Vice President, Legal Affairs and General Counsel 39
Lynn Zera...................... Vice President, Human Resources 51
</TABLE>

Andre Chagnon has served as Chairman of the Board and as a Director since
October 1998. Since October 1998, Mr. Chagnon has served as Chairman of the
Board, President and Chief Executive Officer of GVL; prior thereto he was its
Chairman of the Board and Chief Executive Officer. Mr. Chagnon is also a
director of Toronto Dominion Bank and Cable Television Laboratories, Inc.

Louis Brunel has served as a Director since March 1995 and as President and
Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held
various positions at GVL and its subsidiaries, including, immediately prior to
joining OpTel, Vice-Chairman and Chief Executive Officer of Videotron Holdings
Plc ("VHP"), a since-divested United Kingdom based cable and telephone
subsidiary of GVL. While at VHP, Mr. Brunel was the chief architect of VHP's
cable television/telecommunications business. From 1988 to 1990, he served as
Vice President, Corporate Development of GVL. In addition, he served as
President of Videotron International Ltee from September 1994 through December
1996.

Frederick W. Benn was appointed as a Director in November 1998. From 1987
until his retirement at the end of 1995, Mr. Benn was a partner with the law
firm of Smith Lyons in Toronto, Canada. Mr. Benn also serves as a director of
both GVL and its affiliate, Videotron Ltee.

Christian Chagnon has served as a Director since March 1997 and has been
Senior Vice President, Strategic Planning and Technology of GVL since September
1994. Prior to August 1994, Mr. Chagnon was also President of Videotron Services
Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL. Mr. Christian
Chagnon is the son of Mr. Andre Chagnon.

William O. Hunt was appointed as a Director in June 1998. Since December
1992, Mr. Hunt has served as Chairman of the Board, Chief Executive Officer and
President of Intellicall, Inc., a manufacturer of network and customer premise
equipment. Mr. Hunt also serves as a Director of The Allen Group Inc., American
Homestar Corporation, DSC Communications Corporation and Dr. Pepper Bottling
Company of Texas.

R. Douglas Leonhard was appointed as a Director in November 1998. From 1986
until his retirement in 1997, Mr. Leonhard was Senior Vice President of the
LaCantera Development Company, a wholly owned subsidiary of United Services
Automobile Association, a large financial services company that provides an
array of services including property and casualty insurance, personal financial
service products, and travel and personal banking services. Mr. Leonhard also
serves on the board of Continental Mortgage and Equity Trust,

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<PAGE> 70

Income Opportunity Realty Investors, Inc., and Transcontinental Realty
Investors, Inc., each a publicly traded REIT.

Lynn McDonald was appointed as a Director in June 1998. Since 1996, Ms.
McDonald has been a Manager with CDPQ, a subsidiary of Caisse that actively
manages private placements in communications companies. Prior to joining CDPQ,
Ms. McDonald worked at the Fonds de Solidarite des Travailleurs du Quebec, a
venture capital fund. Previously, Ms. McDonald was a special situations equity
analyst at BBN James Capel, a Canadian stock brokerage firm. Ms. McDonald is
also a Director of Fundy Communications Inc., Telexis Corporation, Les Systemes
Proxima Ltee and Regional Vision Inc.

Alain Michel has served as a Director since April 1997. Since July 1992,
Mr. Michel has held various management positions at GVL, including, since July
1994, Senior Vice President and Chief Financial Officer. Mr. Michel is also a
Director of NB Capital, Inc., a publicly traded Delaware real estate investment
trust, Microcell Telecommunications Inc., a Canadian public company which
provides telecommunications services and in which GVL holds a minority interest,
and Groupe Goyette Inc., a Canadian private company which provides
transportation and storage services.

Jayne L. Stowell was appointed as a Director in December 1998. Since
December 1998, Ms. Stowell has served as a Senior Vice President of Level 3
Communications, Ltd. From May 1996 to December 1998, Ms. Stowell served as a
Senior Vice President of MCI WorldCom. From June 1993 to January 1996, Ms.
Stowell served as a Managing Director of Bell Canada International. Ms. Stowell
also serves as a director of another affiliate of GVL.

Bertrand Blanchette was appointed Chief Financial Officer in September
1996. From September 1995 to December 1996, Mr. Blanchette served as Chief
Financial Officer of VHP. From June 1994 to December 1995, he was Vice
President, Control of GVL. From October 1986 to May 1994, Mr. Blanchette was
Vice President, Finance of Heroux, Inc., a Canadian public company which
manufactures airplane parts.

Stephen Dube was appointed Chief Operating Officer in October 1998. Since
July 1995 Mr. Dube has held various senior management positions at OpTel,
including Vice President, Operations and Vice President, Marketing and Corporate
Development. From July 1995 to March 1997, Mr. Dube served as a Director of
OpTel. From July 1995 to December 1996, Mr. Dube served as a Vice President of
Videotron International. From January 1992 to April 1995, Mr. Dube was Senior
Vice President of Laurentian Financial Inc., a financial services company.

James Greene was appointed Vice President, Telephone in April 1998. From
June 1997 to April 1998, Mr. Greene was an independent consultant and advised
the Company on the launch of its first central office switch in Houston, Texas
and the commencement of CLEC services. Mr. Greene consulted for OpTel on an
exclusive basis from November 1997 until his appointment as Vice President. From
1993 to November 1997, Mr. Greene was a consultant for several state and local
regulatory bodies and worked principally with the State of Oregon.

Michael E. Katzenstein was appointed Vice President, Legal Affairs and
General Counsel in November 1995. Prior to joining OpTel, Mr. Katzenstein was a
partner at Kronish Lieb Weiner & Hellman LLP. Mr. Katzenstein received his J.D.
from Boston University School of Law in 1985.

Lynn Zera was appointed Vice President, Human Resources in November 1995.
From July 1994 to October 1995, Ms. Zera was Executive Director of Keystone
Consulting. From July 1993 to July 1994, she was Executive Director of Human
Resources of Intellicall, Inc.

Pursuant to the Company's Bylaws, Directors are elected annually and serve
in such capacity until the earlier of their removal or resignation or the
election of their successors.

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<PAGE> 71

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain information concerning compensation
awarded to or paid to the Company's Chief Executive Officer and the four most
highly compensated executive officers (collectively, the "Named Executive
Officers") for the fiscal years ended August 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ------------------------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS* COMPENSATION OPTIONS COMPENSATION(17)
--------------------------- ------ -------- ------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Louis Brunel........................ 1998 $309,600 $25,000 $ 89,179(7)(8) 10,204.55 --
President and Chief 1997 $269,623 -- $ 66,062(8)(9) 16,034.79 --
Executive Officer 1996 $ 35,095(1) -- -- -- --
Michael E. Katzenstein.............. 1998 $182,000 $30,000 $ -- -- $4,184
Vice President, Legal Affairs 1997 $175,000 $57,500 $ 65,196(10) 9,137.61 $2,820
and General Counsel 1996 $135,346(2) $40,000 $103,756(11) -- $3,334
Bertrand Blanchette................. 1998 $158,000 $17,500 $ --(12) -- --
Vice President and 1997 $129,702(3) $ 5,000 $ 33,961(12)(13) 4,373.12 --
Chief Financial Officer 1996 -- -- -- -- --
Stephen Dube........................ 1998 $170,775 $30,000 $ 24,172(14)(15) 2,915.50 $3,006
Vice President and Chief Operating 1997 $119,139 $15,000 $ 63,514(15)(16) 3,381.88 $2,844
Officer 1996 $ 36,542(4) -- -- -- --
John Czapko......................... 1998 $150,000 -- $ -- 3,265.31 $ 346(18)
Vice President, Sales and
Marketing 1997 $ 70,000(5) $10,000 -- -- --
1996 -- -- -- -- --
Lynn Zera........................... 1998 $124,000 $17,500 $ 6,000 -- $2,575
Vice President, Human Resources 1997 $112,877 $21,040 -- 2,565.57 $2,809
1996 $ 83,750(6) -- -- -- $2,513
</TABLE>

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

* In fiscal 1999, bonuses in respect of fiscal 1998 services were paid as
follows: Mr. Brunel $135,000; Mr. Katzenstein $45,500; Mr. Blanchette
$39,500; Mr. Dube $41,000; Mr. Czapko $37,500; and Ms. Zera $31,000. These
bonuses are not reflected in the schedule.

(1) During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Brunel's salary was allocated to the Company.
Effective November 1, 1996, Mr. Brunel accepted the position of President
and Chief Executive Officer on a full-time basis.

(2) Mr. Katzenstein commenced employment with the Company in November 1995.

(3) Mr. Blanchette commenced employment with the Company as Chief Financial
Officer in September 1996. During the period September 1996 through
December 1996, Mr. Blanchette continued to act as Chief Financial Officer
of VHP, a subsidiary of GVL which was divested in December 1996. During
such period, Mr. Blanchette's salary was paid by VHP and a portion of such
salary was allocated to the Company. Mr. Blanchette commenced full-time
employment with the Company effective January 1, 1997.

(4) During fiscal 1996, Mr. Dube was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Dube's salary was allocated to the Company.
Effective January 1, 1997, Mr. Dube became a full-time employee of the
Company.

(5) Mr. Czapko commenced employment with the Company in March 1997.

(6) Ms. Zera commenced employment with the Company in November 1995.

(7) $51,960 represents temporary housing and commuting reimbursements.

(8) Does not include tax return preparation fees paid or reimbursed by the
Company.

(9) $39,790 represents temporary housing and commuting reimbursements and
$21,680 represents an automobile allowance.

(10) $49,823 represents tax reimbursements resulting from relocation.

(11) $93,706 represents relocation payments.

(12) Does not include tax return preparation fees and the cost of family travel
to Montreal paid or reimbursed by the Company.

(13) $29,161 represents relocation payments.

(14) $22,179 represents tax reimbursements resulting from relocation payments.

(15) Does not include tax return preparation fees, the cost of family travel to
Montreal and family education costs paid or reimbursed by the Company.

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<PAGE> 72

(16) $54,288 represents relocation payments.

(17) Represents 401(k) matching fund contributions by the Company.

(18) Mr. Czapko resigned effective January 19, 1999. As part of a severance
package, Mr. Czapko was, among other things, paid a lump sum amount of
$155,000. Such payment was made in fiscal 1999.

OPTION GRANTS IN FISCAL 1998

The following table sets forth options to purchase shares of the Common
Stock granted to the Named Executive Officers during fiscal 1998.

<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- ------------ -------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Louis Brunel.................... 10,204.55 31.06% $85.75 March, 2008 $676,359.26 $1,483,015.76
Stephen Dube.................... 1,399.46 4.26% $85.75 January, 2008 $ 92,756.44 $ 203,381.95
1,516.04 4.62% $85.75 April, 2008 $100,483.38 $ 220,324.39
John Czapko..................... 3,265.31 9.94% $85.75 March, 2007 $216,425.29 $ 474,543.82
</TABLE>

AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END 1998 OPTION
VALUES

The following table shows the values of options held by the Named Executive
Officers as of the end of fiscal 1998. No options were exercised by the Named
Executive Officers during fiscal 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
1998 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Louis Brunel........................ 6,559.91 19,679.74 $80,358.90 $241,076.82
Michael E. Katzenstein.............. 2,284.40 6,853.21 $53,866.15 $161,598.69
Bertrand Blanchette................. -- 4,373.12 -- $ 53,570.72
Stephen Dube........................ 1,195.34 5,102.13 $14,642.92 $ 62,501.08
John Czapko......................... -- 3,265.41 -- $ 40,001.27
Lynn Zera........................... 1,282.78 1,282.79 $15,714.06 $ 15,714.18
</TABLE>

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

(1) Based on an assumed fair market value of $98.00 per share of Common Stock.

EMPLOYMENT AGREEMENTS

Louis Brunel is employed as President and Chief Executive Officer of the
Company pursuant to an at will employment agreement. Mr. Brunel currently
receives an annual base salary of $350,000, a Company automobile and a housing
allowance. In addition, Mr. Brunel is entitled to participate in the Company's
Incentive Stock Plan (as described below) and Bonus Plan (as described below).
If Mr. Brunel's employment is terminated by the Company for other than cause,
Mr. Brunel will receive a severance payment equal to two years base salary.

Michael E. Katzenstein is employed as Vice President, Legal Affairs and
General Counsel of the Company pursuant to an employment agreement expiring in
November 2000. Mr. Katzenstein currently receives an annual base salary of
$194,000 and a Company automobile. In addition, Mr. Katzenstein is entitled to
participate in the Company's Incentive Stock Plan and Bonus Plan.

Bertrand Blanchette is employed as Chief Financial Officer of the Company
pursuant to an at will employment agreement. Mr. Blanchette currently receives
an annual base salary of $175,000 and a monthly automobile allowance. In
addition, Mr. Blanchette is entitled to participate in the Company's Incentive
Stock Plan and Bonus Plan.

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<PAGE> 73

Stephen Dube is employed as Chief Operating Officer of the Company pursuant
to an at will employment agreement. Mr. Dube currently receives an annual base
salary of $200,000 and a monthly automobile allowance. In addition, Mr. Dube is
entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. If
Mr. Dube's employment is terminated by the Company other than for cause, Mr.
Dube will receive a severance payment equal to one year's base salary and bonus
and certain relocation and outplacement services.

Lynn Zera is employed as Vice President, Human Resources of the Company
pursuant to an at will employment agreement. Ms. Zera currently receives an
annual base salary of $138,000 and a monthly automobile allowance. In addition,
Ms. Zera is entitled to participate in the Company's Incentive Stock Plan and
Bonus Plan.

Upon termination by the Company of any of its most senior executives
without cause, the Company has in the past offered severance equal to one year's
base salary.

INCENTIVE STOCK PLAN

In fiscal 1997, the Company adopted an Incentive Stock Plan. In fiscal
1998, the Company adopted amendments to such plan, certain of which will become
effective, subject to stockholder approval, on the date the Offering is
consummated (as so amended, the "Plan"). Five percent of the Common Stock
outstanding, on a fully diluted basis, on the date the Offering is consummated,
may be issued under the terms of the Plan. The number of shares issuable under
the Plan will be adjusted on each January 1 to 5% of the then outstanding Common
Stock, on a fully diluted basis, if such adjustment would increase the number of
shares. As of February 28, 1999, options to purchase 183,397.53 shares of Common
Stock have been granted under the Plan, none of which have been exercised, at a
weighted average exercise price of $92.41 per share of Common Stock. The Plan
authorizes the Board to issue incentive stock options ("ISOs") as defined in
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
stock options that do not conform to the requirements of that Code section
("Non-ISOs"), stock appreciation rights ("SARs"), restricted stock, stock
awards, dividend equivalent rights, performance based awards and similar
stock-based awards. The Plan shall terminate on the tenth anniversary of the
date the Offering is consummated.

Stock Options. The Board has discretionary authority to determine the types
of options to be granted, the persons to whom options shall be granted (provided
that options shall only be granted to directors, senior executives and other
employees designated by the Board), the number of shares to be subject to each
option granted (provided that no single participant in the Plan shall be
entitled to receive more than 100,000 shares of Common Stock pursuant to the
Plan) and the terms of the stock option agreements. Unless otherwise
specifically provided in the option agreement, (i) the exercise price of an
option will not be less than the fair market value, as determined by the Board,
of the Common Stock on the date of the grant and (ii) the options shall become
exercisable in equal installments on each of the second, third, fourth and fifth
anniversaries of the effective date of grant; provided that if a participant
owns 10% of the voting power or equity interests of all classes of the Company's
stock, ISOs granted to such person (i) shall have an exercise price not less
than 110% of the fair market value of the Common Stock on the date of the grant
and (ii) shall expire five years from the date of grant. In the event of a
"change of control," all options shall vest and become immediately exercisable.
At the discretion of the Board, the exercise price may be paid by personal
check, bank draft, money order, or money transfers, through the delivery of
shares of the Common Stock, pursuant to a broker-assisted "cashless exercise"
program if established by the Company or by such other method as the Board may
deem appropriate.

Stock Appreciation Rights. The Board may award SARs, which may or may not
be granted together with options, under the plan. Generally, SARs permit the
holder thereof to receive an amount (in cash, Common Stock or a combination
thereof) equal to the number of shares of Common Stock with respect to which
SARs are exercised multiplied by the excess of the fair market value of the
Common Stock on the exercise date over the exercise price. In general, the
exercise of any portion of the SARs or any related option will cause a
corresponding reduction in the number of shares of Common Stock remaining
subject to such SARs and related option.

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<PAGE> 74

Restricted Stock. Awards of Common Stock granted under the Plan may be
subject to forfeiture until such restrictions, terms and conditions as the Board
may determine lapse or are fulfilled, as the case may be. The Board will
determine how the price for the Common Stock, if any, may be paid. Generally, a
participant obtaining a restricted stock award will have all the rights of a
stockholder while the Common Stock is subject to restrictions, including the
right to vote the Common Stock and to receive dividends. Restricted Common Stock
will be issued in the name of the participant and held in escrow until any
applicable restrictions lapse or terms and conditions are fulfilled, as the case
may be. Until the restrictions are eliminated, restricted Common Stock may not
be transferred.

Dividend Equivalent Award. The Board may grant an award that represents the
right to receive a dividend or its equivalent with respect to any new or
previously existing award, which will entitle the recipient to receive at the
time of settlement an amount equal to the actual dividends paid on the Common
Stock delivered to the recipient, calculated from the date of award and
accounted for as if reinvested in Common Stock on the dividend payment dates.
This type of award may be paid in the form of Common Stock, cash or a
combination of both.

Performance-Based Awards. The Board may grant awards under the Plan upon
the satisfaction of specified performance goals. The performance period for a
performance based award shall be established prior to the time such award is
granted and may overlap with performance periods relating to other awards
granted under the Plan to the same recipient. Each award shall be contingent
upon future performance and achievement of objectives described either in terms
of Company-wide performance or in terms that are related to the performance of
the recipient or of the division, subsidiary, department or function within the
Company in which the recipient is employed. Such objectives shall be based on
increases in share prices, operating income, net income or cash flow thresholds,
sales results, return on common equity or any combination of the foregoing.
Following the end of each performance period, the holder of each award shall be
entitled to receive payment of an amount, not exceeding the maximum value of the
award, based on the achievement of the performance measures for such performance
period, as determined by the Board. Unless the award specifies otherwise,
including restrictions in order to satisfy the conditions under Section 162(m)
of the Code, the Board may adjust the payment of awards or the performance
objectives if events occur or circumstances arise which would cause a particular
payment or set of performance objectives to be inappropriate, as determined by
the Board.

Other Stock Based Awards. The Board may grant Common Stock or other Common
Stock based awards that are related to or similar to the awards described above.

STOCK PURCHASE PLAN

In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Stock Purchase Plan") which is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. The Stock Purchase Plan will
become effective, subject to stockholder approval, on the date the Offering is
consummated. One percent of the Common Stock outstanding, on a fully diluted
basis, on the date the Offering is consummated, will be issuable under the terms
of the Stock Purchase Plan. The Stock Purchase Plan provides for a series of six
month "Option Periods." Subject to certain limitations, employees may contribute
between 1% and 10% of their compensation to the Stock Purchase Plan during an
Option Period and purchase Common Stock at the end thereof. At the start of each
Option Period, employees electing to participate in the Stock Purchase Plan are
deemed to have been granted an option to purchase a number of whole shares of
Common Stock at an exercise price (the "Exercise Price") equal to eighty-five
percent (85%) of the lower of the fair market value of one share of the Common
Stock on (i) the first day of the Option Period or (ii) the last day of the
Option Period (the "Exercise Date"). The number of shares underlying such option
is determined by dividing (i) the amount contributed by such employee to the
Stock Purchase Plan during the Option Period by (ii) the Exercise Price. On each
Exercise Date, each employee will automatically be deemed to have exercised his
or her option to purchase at the Exercise Price the largest number of whole
shares of Common Stock which can be purchased with the amount contributed by
such employee to the Stock Purchase Plan less any amounts previously applied to
option exercises under the terms of the Stock Purchase Plan; provided, however,
no employee shall be permitted to purchase more than 4,000 shares of Common

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<PAGE> 75

Stock during any Option Period and subject to reduction in order to avoid
issuance of more shares than are provided for under the terms of the Stock
Purchase Plan.

ANNUAL BONUS PLAN

The Company has adopted an Annual Bonus Plan (the "Bonus Plan") pursuant to
which the Board is authorized to grant cash bonuses to certain employees of the
Company. Bonuses are payable only if the Company achieves certain performance
targets approved by the Compensation Committee at the beginning of the fiscal
year.

401(k) PLAN

The Company has implemented an employee savings and retirement plan (the
"401(k) Plan") covering certain of the Company's employees who have at least
three months of service with the Company and have attained the age of 21.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 15% of such compensation or the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The Company has made, and may in the future
make, contributions to the 401(k) Plan on behalf of eligible employees.
Employees become 100% vested in these Company contributions after one year of
service. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by employees or by the Company to the 401(k) Plan, and income
earned on the 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. The trustee under the 401(k)
Plan, at the direction of each participant, invests the 401(k) Plan employee
salary deferrals in selected investment options.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board has an Audit Committee and a Compensation Committee. The
functions of the Audit Committee include recommending to the Board the retention
of independent public accountants, reviewing the scope of the annual audit
undertaken by the Company's independent public accountants and the progress and
results of their work and reviewing the financial statements of the Company and
its internal accounting and auditing procedures. The Audit Committee is composed
of Andre Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The chairman
of the Audit Committee is Mr. Hunt. The function of the Compensation Committee
is to supervise the Company's compensation policies, administer the employee
incentive plans, review officers' salaries and bonuses, approve significant
changes in employee benefits and consider other matters referred to it by the
Board. The Compensation Committee is composed of Andre Chagnon, William O. Hunt,
Lynn McDonald and Alain Michel. The Chairman of the Compensation Committee is
Mr. Chagnon.

COMPENSATION OF DIRECTORS

Directors of the Company who are neither employees of the Company nor
designees of the Company's significant stockholders will receive an annual fee
of $15,000, a fee of $1,000 per meeting of the Board and an annual fee of $1,500
if they serve as the chairperson of a committee of the Board. Each such Director
also receives options to purchase 1,000 shares of Common Stock at the fair
market value on the date of grant. The options will become exercisable in equal
installments on each of the second, third, fourth and fifth anniversaries of the
effective date of the grant. Directors who are either employees of the Company
or designees of the Company's significant stockholders will not be compensated
for their services. However, all Directors will be reimbursed for actual
out-of-pocket expenses incurred by them in connection with their attending
meetings of the Board or any committees of the Board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1997 and part of fiscal 1998, Mr. Brunel served as a member
of the Compensation Committee. Effective May 19, 1998, Mr. Brunel resigned from
the Compensation Committee.

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<PAGE> 76

LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE

The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by the DGCL, indemnify all persons which it may
indemnify pursuant thereto (i.e., directors and officers) and shall advance
expenses incurred in defending any proceeding for which such right to
indemnification is applicable, provided that, if the DGCL so requires, the
indemnitee provides the Company with an undertaking to repay all amounts
advanced if it is determined by a final judicial decision that such person is
not entitled to indemnification pursuant to this provision. The Company's
Certificate of Incorporation also contains a provision eliminating the personal
liability of the Company's directors for monetary damages for breach of any
fiduciary duty. By virtue of this provision, under the DGCL, a director of the
Company will not be personally liable for monetary damages for breach of his
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock purchases or redemptions that are
unlawful under the DGCL and (iv) any transaction from which a director derives
an improper personal benefit. However, this provision of the Company's
Certificate of Incorporation pertains only to breaches of duty by directors as
directors and not in any other corporate capacity such as officers, and limits
liability only for breaches of fiduciary duties under the DGCL and not for
violations of other laws, such as the federal securities laws. As a result of
the inclusion of such provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with respect
to such actions. The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the Company and its stockholders.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling OpTel pursuant to
the foregoing provisions, OpTel has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The directors and officers of the Company are insured (subject to certain
exceptions and deductions) against liabilities that they may incur in their
capacity as such, including liabilities under the Securities Act, under a
liability insurance policy carried by GVL. Such policy provides coverage in an
aggregate amount of $50 million (subject to a $250,000 deductible) and expires
in October 1999. The Company expects that this insurance will be renewed in the
ordinary course.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by (i) each Director of the Company who
beneficially owns any Common Stock, (ii) each Named Executive Officer, (iii)
each person known by the Company to beneficially own 5% or more of the
outstanding shares of Common Stock, (iv) each person (other than the Company)
including shares in the Offering and (v) all directors and executive officers of
the Company as a group, in each case as adjusted to reflect the assumed
conversion of all of the outstanding classes of common stock and all outstanding
series of preferred stock into Common Stock immediately prior to the
consummation of the Offering.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR BENEFICIAL OWNERSHIP AFTER
TO OFFERING OFFERING
--------------------------- NUMBER --------------------------
NUMBER OF OF SHARES NUMBER OF
BENEFICIAL OWNER SHARES(1) PERCENT(2) OFFERED SHARES(1) PERCENT(2)
- ---------------- ----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Le Groupe Videotron Ltee........................... (3)
Caisse de depot et placement du Quebec............. 429,939.00(4)
Interactive Cable Systems, Inc..................... (5)
Nomura Holding America Inc......................... (5)
MCI Telecommunications Corporation................. (5)
Frederick W. Benn.................................. --(6)
William O. Hunt.................................... --(6)
R. Douglas Leonhard................................ --(6)
Louis Brunel....................................... 13,119.67(7)
Michael E. Katzenstein............................. 4,568.81(8)
Bertrand Blanchette................................ 1,093.28(9)
Stephen Dube....................................... 2,390.67(10)
Lynn Zera.......................................... 1,282.78(11)
All directors and officers as a group (14
persons)......................................... 22,455.21(12)
</TABLE>

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

(1) Except as otherwise indicated in the other footnotes to this table, each
person named in the table has sole voting and dispositive power with
respect to the shares of Common Stock beneficially owned by such person.

(2) "*" indicates less than one percent. In accordance with the Commission's
rules, each beneficial owner's holdings have been calculated assuming the
full exercise of warrants and options and the conversion of all shares of
convertible preferred stock held by such holder which are currently
exercisable or convertible or which will become exercisable or convertible
within 60 days after the date of this Prospectus and no exercise of
warrants and options or conversion of preferred stock held by any other
person.

(3) Such shares are owned by VPC, an indirect wholly-owned subsidiary of GVL.
Andre Chagnon, the founder of GVL, indirectly controls approximately 72% of
GVL's outstanding voting rights. See "-- Stockholders' Agreement" and
"-- GVL Shareholders' Agreement" for the terms of certain agreements
governing the voting and disposition of the shares of Common Stock held by
VPC and GVL. GVL's address is 300 Avenue Viger East, Montreal, Quebec, H2X
3W4.

(4) Such shares are owned by CDPQ, a wholly-owned subsidiary of Caisse. See "--
Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms
of certain agreements covering the voting and disposition of the shares of
Common Stock held by Caisse and CDPQ. In addition, Caisse holds $20.0
million of 1998 Notes. Caisse's address is 1981, Avenue McGill College,
Montreal, Quebec, H3A 3C7.

(5) See "-- ICS Stockholders' Agreement and ICS Registration Rights Agreement"
for the terms of certain agreements governing the disposition of such
shares of Common Stock. ICS's address is 1901 N. Glenville Drive, Suite
800, Richardson, Texas 75081. Nomura Holding America Inc.'s ("Nomura")
address is 2 World Financial Center, Building B, New York, New York 10281.
MCI Telecommunications Corporation's ("MCI") address is 1801 Pennsylvania
Avenue, N.W., Washington, D.C. 20006. Includes shares currently held in
escrow pending the resolution of post-closing adjustments in connection
with the acquisition of certain assets of ICS.

(6) Excludes 1,000.00 shares of Common Stock underlying options which are not
exercisable until at least 60 days after the date of this Prospectus.

(7) Includes 13,119.67 shares of Common Stock underlying presently exercisable
options. Excludes 28,952.92 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.

(8) Includes 4,568.81 shares of Common Stock underlying presently exercisable
options. Excludes 8,768.73 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.

(9) Includes 1,093.28 shares of Common Stock underlying presently exercisable
options. Excludes 7,238.20 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.

(10) Includes 2,390.67 shares of Common Stock underlying presently exercisable
options. Excludes 10,593.10 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.

(11) Includes 1,282.78 shares of Common Stock underlying presently exercisable
options. Excludes 5,149.46 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.

(12) With respect to executive officers who are not Named Executive Officers,
excludes 7,265.11 shares of Common Stock underlying options which are not
exercisable until at least 60 days after the date of this Prospectus.

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<PAGE> 78

As of February 28, 1999, all of the outstanding shares of the Class B
Common were held by VPC and CDPQ and all of the outstanding shares of Common
Stock were held by ICS. See "Risk Factors -- Control by GVL."

ICS STOCKHOLDERS' AGREEMENT AND ICS REGISTRATION RIGHTS AGREEMENT

In connection with the Company's acquisition of certain assets of ICS, ICS,
Nomura, MCI (ICS, Nomura, and MCI, together, the "ICS Group"), VPC, GVL and the
Company entered into a Stockholders' Agreement (the "ICS Stockholders'
Agreement") dated as of April 9, 1998 and the Company, ICS, Nomura and MCI
entered into a Registration Rights Agreement (the "ICS Registration Rights
Agreement") dated as of April 9, 1998.

Under the ICS Stockholders' Agreement, (i) the transfer of the shares of
Common Stock owned by the ICS Group (collectively, the "ICS Shares") is
restricted, subject to certain exceptions, and (ii) the ICS Shares are subject
to drag-along rights if VPC (or GVL through the sale of its interests in VPC)
elects to sell equity interests representing 50% or more of the voting power of
the outstanding capital stock of the Company or 50% or more of the equity
interests held by VPC.

Pursuant to the ICS Registration Rights Agreement, following the
consummation of the Offering, the ICS Group has piggyback registration rights,
on three occasions, in registration statements filed by the Company for the sale
of its equity securities, subject to certain conditions, including customary
allocation and holdback provisions.

STOCKHOLDERS' AGREEMENT

In August 1997, CDPQ purchased the minority interest in the Company from
Vanguard Communications L.P. ("Vanguard"). In connection with the sale by
Vanguard of its minority stock position in the Company to CDPQ, the Company, VPC
and CDPQ entered into the Stockholders' Agreement and the Company and CDPQ
entered into a related Registration Rights Agreement (the "Registration Rights
Agreement"), under which CDPQ has certain rights and obligations relating to the
Company and VPC. CDPQ is also a party to the GVL Shareholders' Agreement
described below. The following is a summary of certain provisions of the
Stockholders' Agreement and the Registration Rights Agreement.

Designation of Directors. Under the Stockholders' Agreement, for as long as
CDPQ holds at least 5% of the Company's voting stock, CDPQ and VPC have agreed
to vote for nominees of CDPQ for a number of Directors of the Company and each
of its subsidiaries, and each committee of the Board and each of its
subsidiaries, which is proportionate (in relation to the total number of
Directors or committee members) to CDPQ's percentage ownership of the Company's
voting stock, but in no event less than one Director and one committee member.
This agreement supersedes the rights of Caisse to designate a Director of the
Company pursuant to the GVL Shareholders' Agreement; however, such rights are
subject to reinstatement in the event CDPQ ceases to be a stockholder of the
Company. Pursuant to the terms of the Stockholders' Agreement, CDPQ has
designated Lynn McDonald as a Director of the Company.

Rights in Connection with Other Financings; Tag-Along Rights. Pursuant to
the Stockholders' Agreement, VPC is obligated to cause the Company to afford
CDPQ rights equivalent to those afforded other purchasers of the Company's
capital stock to the extent they are more advantageous than the rights held by
CDPQ. Subject to certain exceptions (including a public offering of the
Company's equity securities) and waiver by CDPQ at VPC's request in connection
with certain events, the Company is obligated to afford CDPQ preemptive rights
to purchase equity securities which the Company proposes to sell in proportion
to CDPQ's ownership of the total outstanding equity securities of the Company
prior to the sale. In addition, pursuant to the Stockholders' Agreement, CDPQ
has certain tag-along rights in connection with sales by VPC of outstanding
shares of the Company's voting stock.

Registration Rights. Pursuant to the Registration Rights Agreement, nine
months after the consummation of the Offering and, subject to certain
conditions, CDPQ has the right, on two occasions, to require the Company to
register under the Securities Act certain shares of Common Stock. In addition,
CDPQ has

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<PAGE> 79

piggyback registration rights, on three occasions, to include such shares of
Common Stock in registration statements filed by the Company for the sale of
equity securities, subject to certain conditions, including customary allocation
and holdback provisions.

GVL SHAREHOLDERS' AGREEMENT

Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal
shareholders of GVL, and Andre Chagnon (the founder of GVL) are parties to an
amended and restated shareholders agreement, dated as of May 10, 1995 (the "GVL
Shareholders' Agreement"), which provides, among other things, that for so long
as GVL controls the Company, Caisse will be allowed to select one of GVL's
nominees to the Board and to have one representative on the Audit Committee of
the Company. While this right has been superseded by the Stockholders'
Agreement, it is subject to reinstatement in the event CDPQ ceases to be a
stockholder of the Company or the Stockholders' Agreement ceases to be
enforceable. See "-- Stockholders' Agreement."

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<PAGE> 80

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CONVERTIBLE NOTES AND SERIES A PREFERRED

The Company has financed a large portion of its capital needs by borrowing
from its majority stockholder, VPC. The Company borrowed approximately $17.8
million, $73.4 million and $23.7 million from VPC in the form of the GVL Notes
during the eight month period ended August 31, 1995, fiscal 1996 and fiscal
1997, respectively. The GVL Notes bore interest at a rate of 15% per annum,
payable concurrently with the payment of principal. Interest was added to
principal on an annual basis. Effective March 1, 1998, VPC exchanged all of the
GVL Notes for 6,962.21365 shares of the Series A Preferred.

Pursuant to the Conversion and Exchange Agreement, VPC is required, on or
before the earlier to occur of August 29, 1999 or the 90th day following the
consummation of the Offering, to convert all of the Series A Preferred then
outstanding into shares of Common Stock. The Conversion and Exchange Agreement
also provides that any party other than VPC or GVL can seek specific enforcement
of the Conversion and Exchange Agreement, and that GVL and VPC will indemnify
such parties against all liabilities and claims that may arise in the event of a
breach by GVL and VPC of the Conversion and Exchange Agreement, including those
arising under federal securities laws. See "Risk Factors -- Risks Associated
with GVL's Series A Preferred Stock."

VANGUARD-RELATED TRANSACTIONS

In August 1996, in connection with a negotiated settlement of certain
disputes between the Company and Vanguard, which then held a minority interest
in the Company, the Company granted Vanguard an option (the "Vanguard Option")
to purchase 48,937 shares of Class B Common at an exercise price of $53.55 per
share, subject to adjustment. On August 15, 1997, Vanguard exercised the option
prior to the sale of its minority interest in the Company to CDPQ.

In September 1996, the Company entered into a consulting agreement with
James A. Kofalt, a former Chairman of the Board and active participant in the
management of the Company and a limited partner of Vanguard, pursuant to which
the Company agreed to compensate Mr. Kofalt with a one time payment of $70,000.
In connection therewith, the Company also granted Mr. Kofalt a warrant (the
"Kofalt Warrant") to purchase up to 24,992 shares of Common Stock at an exercise
price of $53.55 per share, subject to adjustment. The Kofalt Warrant is
presently exercisable and expires on August 31, 1999. In addition, pursuant to
the terms of the Kofalt Warrant, Mr. Kofalt has piggyback registration rights in
registration statements filed by the Company for the sale of its equity
securities, subject to certain conditions, including customary allocation and
holdback provisions. See "Description of Capital Stock -- Registration Rights of
Certain Security Holders."

MANAGEMENT FEES

In connection with a negotiated settlement of certain disputes between the
Company and Vanguard, in August 1996, VPC and Vanguard agreed to provide, at the
specific request of the Board, such reasonable consultant, advisory and
management services as the Company might reasonably require. These arrangements
with Vanguard and VPC were terminated as of August 15, 1997, upon the sale of
Vanguard's minority interest in the Company to CDPQ. The Company has not
determined if the aggregate fees paid to VPC and Vanguard in connection with
such services were greater or less than the fees the Company would have been
required to pay if it had obtained such services from an unaffiliated third
party. The Company accrued a liability of $29,167 to each of VPC and Vanguard
for general consulting services during fiscal 1996. Vanguard was paid such
amount during fiscal 1997. In fiscal 1997, the Company accrued and paid Vanguard
$350,000 (plus travel expenses) for such services and accrued $350,000 to VPC
for similar services. None of such amounts have been paid to VPC.

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ACQUISITION OF CERTAIN ASSETS

Effective as of July 31, 1996, the Company purchased certain assets from
certain affiliates of VPC for an aggregate purchase price of approximately $3.9
million. The assets represented approximately 23,000 units passed. The
operations of the acquired assets are located in the San Francisco, California
and Tampa, Florida areas. The amounts paid represented the sellers' historical
costs. At the time of the purchase, the Board received a valuation report which
estimated the fair market value of such assets to be approximately equal to
their historical cost.

INSURANCE

The Company purchases certain insurance coverage through GVL, including
directors and officers liability insurance. The Company paid an aggregate of
approximately $478,000, $434,000 and $456,000 to GVL for this insurance coverage
in fiscal 1996, 1997 and 1998, respectively.

SERVICE AGREEMENTS

Pursuant to the terms of the Stockholders' Agreement, VPC and certain of
its affiliates provide certain strategic planning and treasury support services
to the Company and perform internal audits of the Company's operations.
Additional services may be provided as and when requested by the Company. The
Company is charged for such services based on an estimate of the actual cost of
the personnel engaged and materials used to provide such services (without an
allowance for profit). The Company paid VPC $310,000 for such services in fiscal
1998.

In addition, OpTel provides certain customer support and billing services
to certain affiliates of GVL which operate wireless cable systems using MMDS
technology. OpTel charges such affiliates based on the actual cost of the
personnel engaged and materials used to provide such services.

SHARED LITIGATION EXPENSES

GVL, the Company and certain other affiliates of GVL were named as
defendants in a lawsuit by a former employee of the Company. GVL and the Company
agreed to joint representation by a single law firm and to share the associated
expenses. The costs to the Company of the litigation, including defense and
settlement, were not material.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

Following the Offering, the authorized capital stock of the Company will
consist of shares of Common Stock, shares of Class B Common,
shares of Class C Common and shares of preferred stock. All
of the outstanding shares of Class C Common will be converted into Common Stock
upon consummation of the Offering, all of the Class B Common will be converted
into Common Stock prior to consummation of the Offering, all of the outstanding
shares of Series B Preferred will be converted into Common Stock promptly
following the Offering and all shares of Series A Preferred will be converted
into Common Stock on or before the earlier to occur of August 29, 1999 or the
90th day after the consummation of the Offering. See "Risk Factors -- Risks
Associated with GVL's Series A Preferred Stock." After giving effect thereto and
assuming the exercise of all outstanding options and warrants to acquire Common
Stock, there will be shares of Common Stock outstanding on a fully
diluted basis. Upon consummation of the Offering there will be no shares of
Class B Common or Class C Common issued and outstanding. All of the outstanding
shares of all classes of common stock and all series of preferred stock are
fully paid and nonassessable.

COMMON STOCK

The rights of the holders of shares of all classes of common stock are
identical in all respects except that holders of the Common Stock are entitled
to one vote for each issued and outstanding share, holders of the Class B Common
are entitled to 10 votes for each issued and outstanding share and holders of
the Class C Common, except as otherwise may be required by law, are not entitled
to notice of or to vote at any meetings of the stockholders or actions taken by
written consent. Holders of common stock do not have cumulative voting rights,
so that holders of more than 50% of the voting rights attached to the common
stock are able to elect all of the Company's Directors. Certain of the Company's
stockholders who, after consummation of the Offering, will own over % of the
Common Stock and voting power of the Company, have entered into a voting
agreement pursuant to which they have agreed to vote their shares for certain
nominees. See "Principal and Selling Stockholders -- Stockholders' Agreement"
and "Risk Factors -- Control by GVL." Holders of the Common Stock and the Class
B Common vote together as a single class on all matters submitted to a vote of
the stockholders, other than certain matters which may adversely affect the
rights of the individual class. Each share of Class B Common is convertible, at
the option of the holder and automatically and irrevocably upon the occurrence
of certain events, into one share of Common Stock.

There are no rights of redemption or sinking fund provisions with respect
to outstanding shares of any class of capital stock. The Company, VPC and CDPQ
have contractually agreed to certain preemptive rights with respect to any
future issuances of capital stock. Subject to certain exceptions (including a
public offering of the Company's equity securities), the Company is obligated to
afford CDPQ preemptive rights to purchase equity securities which the Company
proposes to sell in proportion to CDPQ's ownership of the total outstanding
equity securities of the Company prior to the sale. See "Principal and Selling
Stockholders -- Stockholders' Agreement."

This description is intended as a summary and is qualified in its entirety
by reference to the DGCL and the Company's Certificate of Incorporation and
Bylaws. Copies of the Company's Certificate of Incorporation and Bylaws have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.

PREFERRED STOCK

The preferred stock may be issued at any time or from time to time in one
or more series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions (including dividend, conversion and
voting rights) as may be fixed by the Board, without any further vote or action
by the stockholders. Although the Company has no present plans to issue any
additional shares of preferred stock, the ownership and control of the Company
by the holders of the Common Stock would be diluted if the Company were to issue
preferred stock that had voting rights or that was convertible into Common Stock
or Class B Common. In addition, the holders of preferred stock issued by the
Company would be entitled by law to vote

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<PAGE> 83

on certain transactions such as a merger or consolidation, and thus the issuance
of preferred stock could dilute the voting rights of the holders of the Common
Stock on such issues. The issuance of preferred stock could also have the effect
of delaying, deferring or preventing a change of control of the Company.

The Company currently has outstanding two series of preferred stock.
Pursuant to the terms of the Conversion and Exchange Agreement, VPC has agreed
to convert all of its shares of Series A Preferred, including accrued and unpaid
dividends thereon through the conversion date, into Common Stock on or before
the earlier to occur of August 29, 1999 or the 90th day following the
consummation of the Offering. The Company will cause all of the shares of Series
B Preferred to be converted into shares of Common Stock promptly
following the Offering. Thereafter, there will be no outstanding shares of any
series of preferred stock and the holders of the Common Stock will have all the
equity voting rights in the Company.

By its terms, the Series A Preferred is convertible into Class B Common, at
the option of the holder, during the period commencing on the date the Offering
is consummated and terminating on the earlier to occur of the 180th day
following the consummation of the Offering or August 29, 1999 (the "Series A
Conversion Period"). Shares of Series A Preferred may be converted by the holder
into Class B Common at the "conversion price" which is defined as the price per
share which is the highest of (i) $82.18, (ii) the price per share at which the
Common Stock is first sold to the public in the Offering, and (iii) the quotient
of $225 million divided by the number of shares of Common Stock outstanding, on
a fully diluted basis, subject to certain adjustments and exceptions. The number
of shares of Class B Common issuable upon conversion of each share of Series A
Preferred will be determined by dividing the sum of (i) the liquidation
preference ($20,000 per share) plus all accrued and unpaid dividends on such
share by (ii) the conversion price. Pursuant to the terms of the Conversion and
Exchange Agreement, VPC has agreed to convert all of its shares of Series A
Preferred, including accrued and unpaid dividends thereon through the conversion
date, into Class B Common and has agreed to immediately thereafter exchange the
Class B Common for Common Stock on a one-for-one basis. Based on an assumed
initial public offering price of $ per share, a total of approximately
shares of Common Stock will be issued upon conversion and exchange of
all the outstanding shares of Series A Preferred.

The Company will cause the conversion of all the outstanding shares of
Series B Preferred into Common Stock promptly after the consummation of the
Offering by delivering a notice to each holder of Series B Preferred. Such
notice will automatically become effective upon receipt thereof. The number of
shares of Common Stock issuable upon conversion of each share of Series B
Preferred will be determined by dividing the sum of (i) the liquidation
preference ($60,000 per share) plus all accrued and unpaid dividends on such
share by (ii) the initial public offering price. Based on an assumed initial
public offering price of $ per share, a total of shares of
Common Stock will be issued upon conversion of all of the outstanding shares of
Series B Preferred.

As of February 28, 1999, the Company had outstanding 7,301.62157 shares of
the Series A Preferred (having an aggregate liquidation preference of
approximately $146,032,000). Holders of the Series A Preferred are entitled to
receive cumulative dividends accruing at the annual rate of 9.75% of the
aggregate liquidation preference thereof. Until the expiration of the Series A
Conversion Period, dividends are payable annually, in arrears, by the issuance
of additional shares of Series A Preferred having an aggregate liquidation
preference equal to the amount of such dividends. Thereafter, dividends are
payable in cash. Unless full cumulative dividends on all outstanding shares of
Series A Preferred have been paid, the Company may not make dividend payments or
distributions on any securities junior to the Series A Preferred ("Series A
Junior Securities") (other than dividend payments or other distributions paid
solely in shares of Series A Junior Securities) or redeem or make sinking fund
or similar contributions for the redemption of any Series A Junior Securities.
Series B Preferred shares are Series A Junior Securities.

The Series A Preferred is redeemable, in whole or in part, at the option of
the Company, at any time after the Series A Conversion Period, at a price, in
cash, equal to the liquidation preference plus accrued and unpaid dividends to
the date of redemption. Subject to certain limited exceptions and except as
required by law, holders of the Series A Preferred have no voting rights.

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As of February 28, 1999, the Company had outstanding 1,042.60156 shares of
the Series B Preferred (having an aggregate liquidation preference $62,556,000).
Holders of the Series B Preferred are entitled to receive cumulative dividends
accruing at the annual rate of 8% of the aggregate liquidation preference
thereof. Dividends are payable quarterly, in arrears, by the issuance of
additional shares of Series B Preferred having an aggregate liquidation
preference equal to the amount of such dividends. Unless full cumulative
dividends on all outstanding shares of Series B Preferred have been paid, the
Company may not make dividend payments or distributions on any securities junior
to the Series B Preferred ("Series B Junior Securities") (other than dividend
payments or other distributions paid solely in shares of Series B Junior
Securities) or redeem or make sinking fund or similar contributions for the
redemption of any Series B Junior Securities.

This description is intended as a summary and is qualified in its entirety
by reference to the DGCL, to the certificates of designation setting forth the
rights of the holders of the Series A Preferred and Series B Preferred and to
the Conversion and Exchange Agreement.

OUTSTANDING OPTIONS AND WARRANTS

As of February 28, 1999, there were outstanding options to purchase
183,397.53 shares of the Common Stock pursuant to the Plan with a weighted
average exercise price of $92.41 per share. See "Management -- Incentive Stock
Plan." As of the same date, there were outstanding warrants to purchase
35,127.22 shares of the Common Stock with a weighted average exercise price of
$59.81 per share. Under the Kofalt Warrant, Mr. Kofalt has the right to purchase
up to 24,992 shares of Common Stock at an exercise price of $53.55 per share.
The Kofalt Warrant is presently exercisable and expires on August 31, 1999. Rory
Cole has the right to purchase up to 9,406.36 shares of Common Stock at an
exercise price of $74.42 per share (the "Cole Warrant"). The Cole Warrant is
presently exercisable and expires on July 11, 2002. Gordon Hecht has a warrant
to purchase up to 728.86 shares of Common Stock at an exercise price of $85.75
per share (the "Hecht Warrant"). The Hecht Warrant is presently exercisable and
expires on December 31, 2000. The Kofalt Warrant, the Cole Warrant and the Hecht
Warrant provide for adjustments to the number of exercisable shares and the
exercise price if the Company pays a common stock dividend or distribution to
its stockholders, subdivides its common stock, combines its common stock into a
smaller number of shares or issues by reclassification of its common stock other
securities, subject to certain exceptions and limitations.

REGISTRATION RIGHTS OF CERTAIN SECURITY HOLDERS

Pursuant to the Registration Rights Agreement, nine months after the
consummation of the Offering, CDPQ has the right, on two occasions, subject to
certain conditions, to require the Company to register under the Securities Act
shares of common stock to be issued to CDPQ upon the conversion of the Class B
Common. Pursuant to the Common Stock Registration Rights Agreement among the
Company, VPC, GVL, Salomon Brothers Inc, Merrill Lynch, Pierce Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A., dated as of February 14,
1997, holders of the Class C Common have the right after the 90th day following
the Offering, and subject to certain conditions, to require the Company to
effect one demand registration of the Common Stock to be issued upon conversion
of the Class C Common (the "Class C Registration Shares"). Such demand
registration rights only may be exercised upon the written request of holders of
at least one-third of the Class C Registration Shares. In lieu of filing and
causing to become effective a demand registration, the Company may satisfy its
obligation with respect to such demand registration by making and consummating
an offer to purchase all of the Class C Registration Shares at a price at least
equal to the fair market value.

The Company is party to several agreements pursuant to which certain
holders of the Company's securities have the right, under certain circumstances,
to require the Company to include their shares of Common Stock (or shares of
Common Stock issuable upon exercise or conversion of certain outstanding
warrants or convertible securities) in registration statements filed by the
Company under the Securities Act. The rights cover an aggregate of
shares of Common Stock. In addition, certain stockholders may exercise the right
to include certain shares of Common Stock in the Registration Statement of which
this Prospectus forms a part.

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TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock is .

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have outstanding
shares of Common Stock. Of these shares, the shares of Common Stock (and
any additional shares of Common Stock sold upon exercise of the Underwriters'
over-allotment option) will be freely tradeable without restriction or further
registration under the Securities Act. The remaining shares of Common Stock held
by the existing stockholders (including any shares of Common Stock issued upon
conversion of the Series A Preferred) are "restricted securities" under the
Securities Act. The restricted shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act and may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act ("Rule 144"). In general, under Rule 144 as currently in effect, beginning
90 days after the conclusion of the Offering, a person (or persons whose shares
are aggregated) who has beneficially owned restricted shares for at least one
year, including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares of Common Stock
that does not exceed the greater of: (i) 1% of the then outstanding shares of
Common Stock (approximately shares after giving effect to the Offering) or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 are also subject to
certain other requirements relating to manner of sale, notice and availability
of current public information about the Company. A person who has beneficially
owned restricted securities for at least two years and who is not, and has not
been at anytime during the three month period immediately preceding the sale, an
affiliate of the Company is entitled to sell restricted shares pursuant to Rule
144(k) without regard to the limitations described above.

Because there has been no public market for shares of the Common Stock of
the Company, the Company is unable to predict the effect that sales made under
Rule 144, pursuant to future registration statements or otherwise, may have on
the market price for the shares of Common Stock. Nevertheless, sales of a
substantial amount of Common Stock in the public market, or the perception that
such sales could occur, could adversely affect market prices.

FUTURE SALES OF STOCK TO EMPLOYEES

The Company plans to seek to attract and retain employees in part by
offering stock options and other purchase rights for a significant number of
shares of Common Stock. These plans may have the effect of diluting the
percentage of ownership in the Company of the then existing stockholders. See
"Management -- Incentive Stock Plan" and "-- Stock Purchase Plan."

CERTAIN PROVISIONS OF OPTEL'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF
DELAWARE LAW

General. The Certificate of Incorporation and Bylaws of OpTel and the DGCL
contain certain provisions that could make more difficult the acquisition of
OpTel by means of a tender offer, a proxy contest or otherwise. These provisions
are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
OpTel first to negotiate with OpTel. Although such provisions may have the
effect of delaying, deferring or preventing a change in control of OpTel, the
Company believes that the benefits of increased protection of OpTel's potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. See "Risk Factors -- Anti-Takeover
Provisions." The description set forth below is intended as a summary only and
is qualified in its entirety by reference to the Certificate of Incorporation
and Bylaws of OpTel.

Class B Common and Blank Check Preferred Stock. The Company's Certificate
of Incorporation authorizes the issuance of up to shares of Class B
Common and up to 1,000,000 shares of preferred stock from time to time in one or
more designated series. The approximately 7,302 outstanding shares of

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Series A Preferred and the approximately 1,043 outstanding shares of Series B
Preferred will revert to authorized but unissued status upon their conversion
into Common Stock. See "-- Preferred Stock." The Board, without approval of the
stockholders, is authorized to establish voting, dividend, redemption,
conversion, liquidation and other provisions of a particular series of preferred
stock. The issuance of shares of Class B Common or preferred stock could, among
other things, adversely affect the voting power or other rights of the holders
of Common Stock and, under certain circumstances, make it more difficult for a
third party to acquire, or discourage a third party from acquiring, control of
the Company. See "Risk Factors -- Control by GVL" and "-- Anti-Takeover
Provisions." The Board has no present intention to authorize the issuance of any
shares of Class B Common or any additional series of preferred stock.

Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Upon consummation of the Offering, OpTel's Bylaws will require
advance notice procedures with regard to stockholder proposals and the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors. These procedures
will provide that notice of stockholder proposals and stockholder nominations
for the election of directors at an annual meeting must be in writing and
received by the Company no earlier than 90 days and no later than 60 days prior
to the anniversary of the preceding year's annual meeting (or if the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, no earlier than the 90th day prior to such meeting
and no later than the close of business on the later of the 60th day prior to
such meeting or the tenth day following the date the annual meeting is
announced). Nominations for the election of directors at a special meeting must
be in writing and received by the Company no earlier than the 90th day prior to
such meeting and no later than the close of business on the later of the 60th
day prior to such meeting or the tenth day following the date such meeting is
announced. The notice of stockholder nominations for the election of directors
must set forth certain information with respect to each nominee who is not an
incumbent director.

Anti-Takeover Statute. Section 203 of the DGCL ("Section 203") prohibits
certain persons ("Interested Stockholders") from engaging in a "business
combination" with a Delaware corporation for three years following the date such
persons become Interested Stockholders. Interested Stockholders generally
include (i) persons who are the beneficial owners of 15% or more of the
outstanding voting stock of the corporation and (ii) persons who are affiliates
or associates of the corporation and who held 15% or more of the corporation's
outstanding voting stock at any time within three years before the date on which
such person's status as an Interested Stockholder is determined. Subject to
certain exceptions, a "business combination" includes, among other things (i)
mergers or consolidations, (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets having an aggregate market value equal
to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market value of
all the outstanding stock of the corporation, (iii) transactions that result in
the issuance or transfer by the corporation of any stock of the corporation to
the Interested Stockholder, except pursuant to a transaction that effects a pro
rata distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

Section 203 does not apply to a business combination if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (other than certain excluded shares) or (iii) concurrently
with or following a transaction in which the person became an Interested
Stockholder, the business combination is (a) approved by the board of directors
of the corporation and (b) authorized at an annual or special meeting of
stockholders (and not by written consent) by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.

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<PAGE> 87

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes the material United States federal
income tax considerations generally applicable to holders acquiring the Common
Stock in the Offering but does not purport to be a complete analysis of all
potential consequences. The discussion is based upon the Code, Treasury
regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now
in effect, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied retroactively
in a manner that could adversely affect a holder of the Common Stock. The
discussion assumes that the holders of the Common Stock will hold it as a
"capital asset" within the meaning of Section 1221 of the Code.

The tax treatment of a holder of the Common Stock may vary depending on
such holder's particular situation or status. Certain holders (including S
corporations, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, taxpayers subject to alternative minimum tax and
persons holding the Common Stock as part of a straddle, hedging or conversion
transaction) may be subject to special rules not discussed below. The following
discussion does not consider all aspects of United States federal income
taxation that may be relevant to the purchase, ownership and disposition of the
Common Stock by a holder in light of such holder's personal circumstances. In
addition, the discussion does not consider the effect of any applicable foreign,
state or local tax laws. PERSONS CONSIDERING THE PURCHASE OF COMMON STOCK SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED
STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.

For purposes of this discussion, a "U.S. Holder" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof, an estate whose income is includible in
gross income for United States federal income tax purposes regardless of its
source or a trust if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust. A "Non-U.S. Holder" means a
holder that is not a U.S. Holder.

TAX CONSEQUENCES TO U.S. HOLDERS

Distributions on the Common Stock

A cash distribution on the Common Stock will be taxable to the U.S. Holder
as ordinary dividend income to the extent that the amount of the distribution
does not exceed the Company's current or accumulated earnings and profits
allocable to such distribution (as determined for United States federal income
tax purposes). To the extent that the amount of the distribution exceeds the
Company's current or accumulated earnings and profits allocable to such
distribution, the distribution will be treated as a return of capital, thus
reducing the holder's adjusted tax basis in the Common Stock with respect to
which such distribution is made. The amount of any such excess distribution that
exceeds the U.S. Holder's adjusted tax basis in the Common Stock will be taxed
as capital gain and will be long-term capital gain if the U.S. Holder's holding
period for the Common Stock exceeds one year. There can be no assurance that the
Company will have sufficient earnings and profits to cause distributions on the
Common Stock to be treated as dividends for United States federal income tax
purposes. For purposes of the remainder of this discussion, the term "dividend"
refers to a distribution paid out of current or accumulated earnings and
profits, unless the context indicates otherwise.

Dividends received by corporate U.S. Holders will generally be eligible for
the 70% dividends-received deduction under Section 243 of the Code. There are,
however, many exceptions and restrictions relating to the availability of the
dividends-received deduction, such as restrictions relating to (i) the holding
period of the stock on which the dividends are received, (ii) debt-financed
portfolio stock, (iii) dividends treated as "extraordinary dividends" for
purposes of Section 1059 of the Code and (iv) taxpayers that pay alternative
minimum tax. Corporate U.S. Holders should consult their own tax advisors
regarding the extent, if any, to which such exceptions and restrictions may
apply to their particular factual situations. A corporate holder must satisfy a
separate 46-day (91-day, in the case of certain preferred stock dividends)
holding period

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requirement with respect to each dividend in order to be eligible for the
dividends-received deduction with respect to such dividend.

Sale or Other Taxable Disposition of Common Stock

Upon a sale or other taxable disposition of the Common Stock, the
difference between the sum of the amount of cash and the fair market value of
other property received and the holder's adjusted tax basis in the Common Stock
will be capital gain or loss. This gain or loss will be long-term capital gain
or loss if the U.S. Holder's holding period for the Common Stock exceeds one
year.

TAX CONSEQUENCES TO NON-U.S. HOLDERS

Distributions on the Common Stock

Dividends paid to a Non-U.S. Holder of Common Stock that are not
effectively connected with the conduct of a trade or business within the United
States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable
to a permanent establishment therein maintained by the Non-U.S. Holder) will be
subject to United States federal income tax, which generally will be withheld at
a rate of 30% of the gross amount of the dividends unless the rate is reduced by
an applicable income tax treaty. Under currently applicable Treasury
regulations, dividends paid to an address in a country other than the United
States are subject to withholding (unless the payor has knowledge to the
contrary).

Dividends paid to a Non-U.S. Holder of Common Stock that are effectively
connected with a United States trade or business conducted by such Non-U.S.
Holder will be taxed at the graduated rates applicable to United States
citizens, resident aliens and domestic corporations (the "Regular Federal Income
Tax") and will not be subject to withholding if the Non-U.S. Holder gives an
appropriate statement to the Company or its paying agent in advance of the
dividend payment. In addition to the Regular Federal Income Tax, effectively
connected dividends (or dividends attributable to a permanent establishment)
received by a Non-U.S. Holder that is a corporation may also be subject to an
additional branch profits tax at a rate of 30% (unless the rate is reduced by an
applicable income tax treaty).

Sale or Other Taxable Disposition of Common Stock

A Non-U.S. Holder generally will not be subject to United States federal
income tax or withholding on gain recognized upon a sale or other disposition of
Common Stock unless: (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-U.S. Holder (or, if
certain tax treaties apply, attributable to a permanent establishment therein
maintained by the Non-U.S. Holder), in which case the branch profits tax also
may apply if the Non-U.S. Holder is a corporation; (ii) in the case of a
Non-U.S. Holder who is a non-resident alien individual and holds the Common
Stock as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other conditions are met; or (iii) the
Common Stock constitutes a United States real property interest by reason of the
Company's status as a "United States real property holding corporation"
("USRPHC") for United States federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period for the Common Stock. The Company does not believe that
it is or will become a USRPHC for federal income tax purposes.

If a Non-U.S. Holder falls within clause (i) or (iii) in the preceding
paragraph, the holder will be taxed on the net gain derived from the sale under
the Regular Federal Income Tax and may be subject to withholding under certain
circumstances (and, in the case of a corporate Non-U.S. Holder, may also be
subject to the branch profits tax described above). If a Non-U.S. Holder falls
under clause (ii) in the preceding paragraph, the holder generally will be
subject to United States federal income tax at a rate of 30% on the gain derived
from the sale.

Federal Estate Tax

An individual Non-U.S. Holder who owns, or is treated as owning, Common
Stock at the time of his or her death or has made certain lifetime transfers of
an interest in Common Stock will be required to include the

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value of such Common Stock in his or her gross estate for United States federal
estate tax purposes, and therefore may be subject to United States federal
estate tax unless an applicable estate tax treaty provides otherwise.

New Withholding Regulations

The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules applicable to payments made to
Non-U.S. Holders (the "New Withholding Regulations"). In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations are generally effective for payments made after December 31, 1999,
subject to certain transition rules. NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW WITHHOLDING
REGULATIONS.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Generally, distributions on (and, in the case of U.S. Holders, proceeds
from the sale of) Common Stock will be reported annually to holders of Common
Stock and to the IRS.

A U.S. Holder of Common Stock may be subject to backup withholding at the
rate of 31% with respect to dividends paid on, or the proceeds of a sale or
exchange of, the Common Stock, unless such holder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates its
exemption or (b) provides a correct taxpayer identification number, certifies as
to no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. A U.S. Holder of Common
Stock that does not provide the Company with the holder's correct taxpayer
identification number may be subject to penalties imposed by the IRS. A Non-U.S.
Holder of Common Stock may also be subject to certain information reporting or
backup withholding if certain requisite certification is not received or other
exemptions do not apply. Any amount paid as backup withholding with respect to a
holder of Common Stock would be creditable against such holder's United States
federal income tax liability, provided that the required information is
furnished to the IRS.

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DESCRIPTION OF CERTAIN INDEBTEDNESS

THE 1998 NOTES

On July 7, 1998, the Company issued $200,000,000 principal amount of
11 1/2% Senior Notes due 2008. The 1998 Notes mature on July 1, 2008. Cash
interest on the 1998 Notes is payable semi-annually in arrears on each January 1
and July 1 at a rate of 11 1/2% per annum. Upon issuance of the 1998 Notes, the
Company deposited with an escrow agent an amount of cash and government
securities that, together with the proceeds from the investment thereof, were
estimated to be sufficient to pay when due the first two interest payments on
the 1998 Notes, with the balance to be retained by the Company. The 1998 Notes
and the 1997 Notes are collateralized by a first priority security interest in
such escrow account. The 1998 Notes may be redeemed at the Company's option at
any time after July 1, 2003 upon payment of the redemption price plus accrued
and unpaid interest, if any, to the date of redemption. In the event of a change
of control of the Company, holders of the 1998 Notes have the right to require
the Company to purchase their 1998 Notes, in whole or in part, at a price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase.

The Indenture governing the 1998 Notes (the "1998 Indenture") contains
certain covenants that, among other things, limit the ability of the Company and
its subsidiaries to make certain restricted payments, incur additional
indebtedness, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its subsidiaries,
issue or sell equity interests of the Company's subsidiaries or enter into
certain mergers and consolidations. In addition, under certain circumstances,
the Company is required to offer to purchase 1998 Notes at a price equal to 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase, with the proceeds of certain asset sales. The 1998
Indenture also provides for customary events of default. This description is
intended as a summary and is qualified in its entirety by reference to the 1998
Indenture, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

THE 1997 NOTES

The Company has outstanding $225,000,000 principal amount of 13% Senior
Notes due 2005. The 1997 Notes mature on February 15, 2005. Cash interest on the
1997 Notes is payable semi-annually in arrears on each February 15 and August 15
at a rate of 13% per annum. Upon issuance of the 1997 Notes, the Company
deposited with an escrow agent an amount of cash and government securities that,
together with the proceeds from the investment thereof, were estimated to be
sufficient to pay when due the first six interest payments on the 1997 Notes,
with the balance to be retained by the Company. The 1997 Notes are
collateralized by a first priority security interest in such escrow account. The
1997 Notes may be redeemed at the Company's option at any time after February
15, 2002 upon payment of the redemption price plus accrued and unpaid interest,
if any, to the date of redemption. In the event of a change of control of the
Company, holders of the 1997 Notes have the right to require the Company to
purchase their 1997 Notes, in whole or in part, at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase.

The Indenture governing the 1997 Notes (the "1997 Indenture") contains
certain covenants that, among other things, limit the ability of the Company and
its subsidiaries to make certain restricted payments, incur additional
indebtedness, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its subsidiaries,
issue or sell equity interests of the Company's subsidiaries or enter into
certain mergers and consolidations. In addition, under certain circumstances,
the Company is required to offer to purchase 1997 Notes at a price equal to 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase, with the proceeds of certain asset sales. The 1997
Indenture also provides for customary events of default. The covenants set forth
in the 1997 Indenture are similar, but more restrictive in some instances, to
those in the 1998 Indenture. This description is intended as a summary and is
qualified in its entirety by reference to the 1997 Indenture, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.

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UNDERWRITING

Subject to the terms and conditions set forth in an agreement between the
Underwriters, the Selling Stockholders and the Company (the "Underwriting
Agreement"), the Company and the Selling Stockholders have agreed to sell to
each of the Underwriters named below (the "Underwriters"), and each of the
Underwriters for whom Salomon Smith Barney Inc., Goldman, Sachs & Co., Bear,
Stearns & Co. Inc. and CIBC Oppenheimer Corp. are acting as representatives (the
"Representatives"), has severally agreed to purchase the number of shares of
Common Stock (the "Shares") set forth opposite its name below:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Salomon Smith Barney Inc....................................
Goldman, Sachs & Co.........................................
Bear, Stearns & Co. Inc.....................................
CIBC Oppenheimer Corp. .....................................
----------
Total.............................................
==========
</TABLE>

The Company and the Selling Stockholders have been advised by the
Representatives that the several Underwriters initially propose to offer such
Shares to the public at the Price to Public set forth on the cover page of this
Prospectus and part of the Shares to certain dealers at such price less a
concession not in excess of $ per Share under the Price to Public. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per Share to certain other dealers. After the Offering, the Price
to Public and such concessions may be changed.

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above Shares if any are purchased. The Shares are offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.

The Company granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to an aggregate
of additional shares of Common Stock from the Company at the Price to
Public less the Underwriting Discounts and Commissions, each as set forth on the
cover page of this Prospectus. If the Underwriters exercise such option in whole
or in part, then each Underwriter will be committed, subject to certain
conditions, to purchase such additional shares proportionate to such
Underwriter's initial commitment.

The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities and
expenses, including liabilities under the Securities Act, or will contribute to
payments that the Underwriters may be required to make in respect thereof.

Subject to certain exceptions, the Company, its directors, executive
officers and certain stockholders, including VPC and CDPQ, have agreed not to
offer, sell, contract to sell or otherwise dispose of, directly or indirectly,
or announce the offering of any shares of Common Stock, including any such
shares beneficially owned or controlled by any such person, or any securities
convertible into, or exchangeable or exercisable for, shares of the Common
Stock, for 180 days from the date of this Prospectus, without the prior written
consent of Salomon Smith Barney Inc.

The Underwriters will not confirm sales to any discretionary account
without the prior specific written approval of the customer.

At the Company's request, the Underwriters have reserved up to
Shares (the "Directed Shares") for sale at the Price to Public to persons who
are directors, officers or employees of, or otherwise associated with, the
Company and its affiliates and who have advised the Company of their desire to
purchase such Shares. The number of Shares available for sale to the general
public will be reduced to the extent of sales of Directed Shares to any of the
persons for whom they have been reserved. Any Shares not so purchased will be
offered by the Underwriters on the same basis as all other Shares offered
hereby.

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The following table shows the underwriting discounts and commissions to be
paid to the Underwriters by OpTel. These amounts are shown assuming both no
exercise and full exercise of the Underwriters' option to purchase additional
shares of common stock.

<TABLE>
<CAPTION>
PAID BY OPTEL
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>

The underwriting discounts and commissions to be paid by the Selling
Stockholders will be $ per share and $ total. The Underwriters have no
option to purchase additional shares from the Selling Stockholders.

During and after the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares sold in the Offering for their account
may be reclaimed by the syndicate if such Shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise prevail in the open
market. The Underwriters are not required to engage in these activities and may
end these activities at any time.

In addition, in connection with this offering, certain of the Underwriters
(and selling group members) may engage in passive market making transactions in
the Common Stock on the Nasdaq National Market, prior to the pricing and
completion of the Offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
must be discontinued when such limit is reached. Passive market making may cause
the price of the Common Stock to be higher than the price that otherwise would
exist in the open market in the absence of such transactions. If passive market
making is commenced, it may be discontinued at any time.

Prior to the Offering, there has been no public market for the Common
Stock. The Price to Public was determined by negotiations between the Company
and the Representatives. Among the factors considered in determining the Price
to Public were prevailing market conditions, the market values of publicly
traded companies that the Underwriters believed to be somewhat comparable to the
Company, the demand for the Shares and for similar securities of publicly traded
companies that the Underwriters believed to be somewhat comparable to the
Company, the future prospects of the Company and its industry in general, sales,
earnings and certain other financial and operating information of the Company in
recent periods and other factors deemed relevant. There can be no assurance that
the prices at which the Shares will sell in the public market after the Offering
will not be lower than the Price to Public.

Salomon Brothers Inc (an affiliate of Salomon Smith Barney Inc.), Goldman,
Sachs & Co. and CIBC Oppenheimer Corp. were initial purchasers in connection
with the Company's offering, in July 1998, of $200,000,000 aggregate principal
amount of the 1998 Notes, for which they received customary fees. Salomon
Brothers Inc was an initial purchaser in connection with the Company's offering,
in February 1997, of units consisting of $225,000,000 aggregate principal amount
of the 1997 Notes and 225,000 shares of the Class C Common, for which it
received customary fees. From time to time, Salomon Smith Barney Inc. (or
certain of its affiliates) has provided, and may in the future provide,
financial advisory services to the Company for which it has received, and
expects to continue to receive, customary fees. Canadian Imperial Bank of
Commerce, an affiliate of CIBC Oppenheimer Corp., acted as the administrative
agent for the syndicate of lenders and as a lender in connection with the Senior
Credit Facility, for which it received customary fees. Goldman Sachs

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Credit Partners, L.P., an affiliate of Goldman, Sachs & Co., arranged the Senior
Credit Facility and acted as a lender, for which it received customary fees.

CERTAIN MARKET INFORMATION

Prior to the Offering, no class of equity securities of the Company has
been traded in any public market. There can be no assurance that a public
trading market will develop for the Common Stock or, if one develops after the
completion of the Offering, that it will be sustained. See "Risk Factors -- Lack
of Prior Public Market; Possible Volatility of Stock Price."

The Company has applied for approval for quotation of the shares of Common
Stock through the Nasdaq National Market under the symbol "OTEL" upon the
effectiveness of this Registration Statement of which this Prospectus is a part.

LEGAL MATTERS

The validity of the securities offered hereby and certain other legal
matters in connection with the sale of securities offered hereby will be passed
upon for the Company by Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the
Americas, New York, New York 10036. Certain federal regulatory matters related
to the Offering or described herein will be passed upon for the Company by
Goldberg, Godles, Wiener & Wright, 1229 Nineteenth Street, N.W., Washington,
D.C. 20036, the Company's FCC counsel. Certain legal matters relating to the
sale of the securities offered hereby will be passed upon for the Underwriters
by Cahill Gordon & Reindel (a partnership including a professional corporation),
80 Pine Street, New York, New York 10005.

EXPERTS

The Consolidated Financial Statements of the Company as of August 31, 1997
and 1998 and for the years ended August 31, 1996, 1997 and 1998, and the
Financial Statement of the Assets and Liabilities of ICS Communications, LLC,
acquired by the Company for the year ended December 31, 1997, have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement or
the exhibits and schedules thereto, certain portions having been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits and
financial statement schedules thereto, which may be inspected without charge at
the public reference facility maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Seven World Trade Center, 13th Floor, New York, New York
10007 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Such Web site is
located at http://www.sec.gov. While the Company has disclosed all the
information material to an investment decision regarding the Common Stock,
statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a

90
<PAGE> 94

more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.

The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, a copy of any or all of the documents (other
than exhibits to such documents) which have been incorporated by reference in
the Registration Statement, upon the oral or written request of such person to
OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247 (telephone (214)
634-3800), Attention: Bertrand Blanchette.

91
<PAGE> 95

APPENDIX A
GLOSSARY

Access Charges -- The charges paid by an IXC to an ILEC or CLEC for the
origination or termination of the IXC's customer's long distance calls.

CAP (Competitive Access Provider) -- A service provider that competes with
local telephone companies for access traffic by providing to high-volume
customers private line access to IXCs. Although traditional CAPs did not provide
a complete package of local exchange services, some CAPs have begun to provide
local exchange services following the passage of the Telecom Act.

Central Office -- The switching center and/or central circuit termination
facility of a local telephone company.

CLEC (Competitive Local Exchange Carrier) -- A telephone service provider
(carrier) offering services similar to those offered by the former monopoly
local telephone company. A CLEC may also provide other types of
telecommunications services (e.g., long distance).

CLEC Certification -- Granted by a state public service commission or
public utility commission, this certification provides a telecommunications
services provider with the legal standing to offer local exchange telephone
services in direct competition with ILECs and other CLECs. Such certifications
are granted on a state-by-state basis.

Collocate or Collocation -- An interface point for the interconnection of a
CLEC's network to the network of an ILEC or another CLEC. Collocation can be 1)
physical, where the CLEC "builds" a fiber optic network extension into the
ILEC's or CLEC's central office, or 2) virtual, where the ILEC or CLEC leases a
facility, similar to that which it might build, to affect a presence in the
ILEC's or CLEC's central office.

Communications Act of 1934 -- Federal legislation that established rules
for broadcast and nonbroadcast communications, including both wireless and wire
line telephone service which continues, as amended, to be in effect today.

EBITDA -- represents earnings before interest expense (net of interest
income and amounts capitalized), income tax benefits, depreciation and
amortization. EBITDA is not intended to represent cash flow from operations or
an alternative to net loss, each as defined by generally accepted accounting
principles. In addition, the measure of EBITDA presented herein may not be
comparable to other similarly titled measures by other companies. The Company
believes that EBITDA is a standard measure commonly reported and widely used by
analysts, investors and other interested parties in the cable television and
telecommunications industries. Accordingly, this information has been disclosed
herein to permit a more complete comparative analysis of the Company's operating
performance relative to other companies in its industry.

FCC (Federal Communications Commission) -- The principal U.S. Government
agency charged with the oversight of all public communications media.

HDTV (High Definition Television) -- Digital signals used in television
broadcasting which have been the subject of recent federal legislation.

Head End -- Equipment necessary to receive video programming via satellite
transmission and combine the signals into a channel lineup for distribution.

Hertz, Megahertz and Gigahertz -- The dimensional unit for measuring the
frequency with which an electromagnetic signal cycles through the zero-value
state between lowest and highest states. One Hertz (abbreviated Hz) equals one
cycle per second. MHz (MegaHertz) stands for millions of Hertz. GHz (GigaHertz)
stands for billions of Hertz.

ICP (Integrated Communications Provider) -- A communications carrier that
provides packaged or integrated services from among a broad range of categories,
including local exchange services, long distance services, data services, cable
television services and other communications services.

A-1
<PAGE> 96

ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that
was the monopoly carrier prior to the opening of local exchange services to
competition.

Interconnection (co-carrier) Agreement -- A contract between an ILEC and a
CLEC for the interconnection of the two networks for the purpose of mutual
exchange of traffic between the networks, allowing customers of one of the
networks to call users served by the other network. These agreements set out the
financial and operational aspects of such interconnection.

Interexchange Services -- Telecommunications services that are provided
between two exchange areas, generally meaning between two cities (i.e., long
distance).

InterLATA -- Telecommunications services originating inside a LATA and
terminating outside of that LATA.

Internet -- A global collection of interconnected computer networks which
use a specific communications protocol.

ISDN (Integrated Services Digital Network) -- An information transfer
standard for transmitting digital voice and data over telephone lines at speeds
up to 128 KB per second.

ISP (Internet Service Provider) -- A service provider that provides access
to the Internet, normally for dial-access customers, by sharing communications
lines and equipment.

IXC (Interexchange Carrier) -- A provider of telecommunications services
that extend between exchanges or cities, also known as a long distance provider.

KB (Kilobits) per second -- A transmission rate. One kilobit equals 1,024
bits of information.

LATA (Local Access and Transport Area) -- A geographic area inside of which
a LEC can offer switched telecommunications services, including long distance
(known as local toll). The LATA boundaries were established at the divestiture
of the local exchange business of AT&T.

LEC (Local Exchange Carrier) -- Any telephone service provider offering
local exchange services. LECs include ILECs, RBOCs and CLECs.

LMDS (Local Multipoint Distribution Service) -- A wireless point to
multipoint communications service.

Local Exchange -- An area inside of which telephone calls are generally
completed without any toll or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.

Local Exchange Services -- Telephone services that are provided within a
local exchange. These usually refer to local calling services (e.g., dial tone
services).

MB (Megabits) per second -- A transmission rate. One megabit equals 1,024
kilobits.

MDU (Multiple Dwelling Unit) -- High density residential complexes such as
high- and low-rise apartment buildings, condominiums, cooperatives, townhouses
and mobile home communities.

MMDS (Multichannel Multipoint Distribution Service) -- A wireless point to
multipoint distribution system using microwave transmitting and receiving
equipment that broadcasts to individual subscribers in an omni-directional
manner.

Modem -- A device for transmitting digital information over an analog
telephone line.

Network Hubs -- Locations where the Company has installed Head End
equipment and telecommunications transmitting and receiving equipment for
distribution to MDUs.

Network Operations Center -- A facility where the Company monitors and
manages the Company's networks.

A-2
<PAGE> 97

PBX (Private Branch Exchange) -- A telephone switching system designed to
operate at the MDU. A PBX connects telephones to each other and to lines and
trunks that connect the PBX to the public network and/or private telephone
networks.

POP (Point of Presence) -- A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers or to customers.

RBOC (Regional Bell Operating Company) -- ILECs created by the divestiture
of the local exchange business of AT&T. These include BellSouth, Bell Atlantic,
Ameritech, US WEST, SBC Communications, Inc. and PacBell.

Reciprocal Compensation -- The compensation paid to and from one local
exchange carrier to another for termination of a local call on the other's
networks.

STS (Shared Tenant Services) -- The provision of telecommunications
services to multiple tenants by allowing these users to have shared access to
telephone lines and other telephone services.

SMATV (Satellite Master Antenna Television) -- Non-networked systems which
transmit video programming via Head Ends located at individual MDUs.

SONET (Synchronous Optical Network) -- Self-healing rings that provide high
speed redundant connections for the delivery of voice traffic.

Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is the process of
interconnecting circuits to form a transmission path between users. A switch
also captures information for billing purposes.

Switch-based -- A communications provider that delivers its services to the
end-user via owned switches and leased (or owned) transport.

T-1 -- A high-speed digital circuit typically linking high volume customer
locations to long distance carriers or other customer locations. Typically
utilized for voice transmissions as well as the interconnection of local area
networks, T-1 service accommodates transmission speeds of up to 1.544 MB per
second, which is equivalent to 24 voice grade equivalent circuits.

Trunk -- A dedicated circuit which concentrates subscriber lines. A trunked
system combines multiple channels with unrestricted access in such a manner that
user demands for channels are automatically "queued" and then allocated to the
first available channel.

A-3
<PAGE> 98

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
OPTEL, INC. AND SUBSIDIARIES:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of August 31, 1997 and 1998
and February 28, 1999 (unaudited)......................... F-3
Consolidated Statements of Operations for the years ended
August 31, 1996, 1997 and 1998, and the six months ended
February 28, 1998 and 1999 (unaudited).................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1996, 1997 and 1998 and the six
months ended February 28, 1998 and 1999 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1996, 1997 and 1998 and the six months ended
February 28, 1998 and 1999 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
ACQUIRED COMPANY:
Assets and Liabilities Acquired of ICS Communications, LLC
by OpTel, Inc.:
Independent Auditors' Report.............................. F-24
Statements of Revenues and Direct Expenses for the year
ended December 31, 1997 and the three months ended
March 31, 1998 (unaudited)............................. F-25
Notes to Financial Statements............................. F-26
</TABLE>

F-1
<PAGE> 99

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
OpTel, Inc.:

We have audited the accompanying consolidated balance sheets of OpTel, Inc.
and subsidiaries (the "Company") as of August 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended August 31, 1996, 1997 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OpTel, Inc. and subsidiaries as
of August 31, 1997 and 1998, and the results of their operations and their cash
flows for the years ended August 31, 1996, 1997 and 1998, in conformity with
generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
October 6, 1998

F-2
<PAGE> 100

OPTEL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
AUGUST 31,
-------------------- FEBRUARY 28,
1997 1998 1999
-------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 87,305 $ 123,774 $ 60,032
Restricted investments (Notes 6 and 12).................... 67,206 63,207 38,645
Accounts receivable (net of allowance for doubtful accounts
of $1,125, $1,803 and $2,359 respectively)............... 4,044 9,458 12,845
Prepaid expenses, deposits and other assets................ 1,836 2,317 2,593
Property and equipment, net (Note 4)....................... 160,442 268,044 308,289
Intangible assets, net (Note 5)............................ 82,583 160,370 159,055
-------- --------- ---------
TOTAL............................................ $403,416 $ 627,170 $ 581,459
======== ========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable, accrued expenses and other liabilities... $ 21,896 $ 31,842 $ 30,759
Deferred revenue and customer deposits..................... 2,978 5,274 5,685
Convertible notes payable to stockholder (Note 9).......... 129,604 -- --
Notes payable and long-term obligations (Note 6)........... 228,573 429,278 428,853
-------- --------- ---------
Total liabilities................................ 383,051 466,394 465,297
Commitments and contingencies (Notes 3 and 7)
Stockholders' equity (Notes 9, 10 and 13):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding............... -- -- --
Series A preferred stock, $.01 par value; 10,000 shares
authorized; none, 6,962 and 7,302 issued and
outstanding........................................... -- 146,115 153,341
Series B preferred stock, $.01 par value; 2,000 shares
authorized; none, 991 and 1,043 issued and
outstanding........................................... -- 61,343 63,827
Class A common stock, $.01 par value; 8,000,000 shares
authorized; none, 164,272 and 164,272 issued and
outstanding........................................... -- 2 2
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,353,498 issued and outstanding.......... 24 24 24
Class C common stock, $.01 par value; 300,000 shares
authorized; 225,000 issued and outstanding............ 2 2 2
Additional paid-in capital................................. 97,683 113,780 113,780
Accumulated deficit........................................ (77,344) (160,490) (214,814)
-------- --------- ---------
Total stockholders' equity....................... 20,365 160,776 116,162
-------- --------- ---------
TOTAL............................................ $403,416 $ 627,170 $ 581,459
======== ========= =========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 101

OPTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Cable television................................ $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095
Telecommunications.............................. 1,711 2,922 3,882 1,644 2,870
-------- -------- -------- -------- --------
Total revenues.......................... 27,604 39,837 64,963 26,891 40,965
OPERATING EXPENSES:
Programming, access fees and revenue sharing.... 11,868 19,202 28,825 12,419 18,689
Customer support, general and administrative.... 19,636 28,926 35,847 15,855 26,335
Depreciation and amortization................... 8,676 14,505 28,481 10,759 17,997
-------- -------- -------- -------- --------
Total operating expenses................ 40,180 62,633 93,153 39,033 63,021
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS.............................. (12,576) (22,796) (28,190) (12,142) (22,056)
OTHER INCOME (EXPENSE):
Interest expense on convertible notes payable to
stockholder (Notes 4 and 9).................. (5,342) (15,204) (9,640) (9,640) --
Other interest expense.......................... (657) (16,210) (38,837) (16,386) (25,837)
Interest and other income....................... 145 5,675 8,913 4,141 3,279
-------- -------- -------- -------- --------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM... (18,430) (48,535) (67,754) (34,027) (44,614)
INCOME TAXES (Note 8)............................. -- -- -- -- --
-------- -------- -------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM.................... (18,430) (48,535) (67,754) (34,027) (44,614)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT (Note
6).............................................. -- -- (6,644) -- --
-------- -------- -------- -------- --------
NET LOSS.......................................... (18,430) (48,535) (74,398) (34,027) (44,614)
EARNINGS ATTRIBUTABLE TO PREFERRED STOCK.......... -- -- (8,748) -- (9,710)
-------- -------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON EQUITY............ $(18,430) $(48,535) $(83,146) $(34,027) $(54,324)
======== ======== ======== ======== ========
BASIC AND DILUTED LOSS BEFORE EXTRAORDINARY ITEM
PER SHARE OF COMMON EQUITY...................... $ (8.30) $ (19.98) $ (28.94) $ (13.20) $ (19.81)
BASIC AND DILUTED EXTRAORDINARY LOSS PER SHARE OF
COMMON EQUITY................................... -- -- (2.51) -- --
-------- -------- -------- -------- --------
BASIC AND DILUTED LOSS PER SHARE OF COMMON EQUITY
(Notes 2 and 10)................................ $ (8.30) $ (19.98) $ (31.45) $ (13.20) $ (19.81)
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON EQUITY
OUTSTANDING (Notes 2 and 10).................... 2,220 2,430 2,644 2,578 2,743
======== ======== ======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 102

OPTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(DOLLARS AND SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A SERIES B CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------- ------------------------- ------------------- -------------------
SHARES LIQUIDATION SHARES LIQUIDATION SHARES PAR SHARES PAR
OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE
----------- ----------- ----------- ----------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1995... -- $ -- -- $ -- -- $-- 2,150 $21
Issuance of stock upon debt
conversion................ -- -- -- -- -- -- 171 2
Contribution and
cancellation of shares.... -- -- -- -- -- -- (16) --
Net loss.................... -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, AUGUST 31, 1996..... -- -- -- -- -- -- 2,305 23
Issuance of stock with
senior notes offering..... -- -- -- -- -- -- -- --
Stock options exercised..... -- -- -- -- -- -- 48 1
Net loss.................... -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, AUGUST 31, 1997..... -- -- -- -- -- -- 2,353 24
Earnings attributable to
preferred stock........... -- 6,871 -- 1,877 -- -- -- --
Issuance of stock upon debt
conversion................ 7 139,244 -- -- -- -- -- --
Issuance of stock to acquire
the ICS operations........ -- -- 1 59,466 164 2 -- --
Net loss.................... -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, AUGUST 31, 1998..... 7 146,115 1 61,343 164 2 2,353 24
Earnings attributable to
preferred stock
(unaudited)............... -- 7,226 -- 2,484 -- -- -- --
Net loss (unaudited)........ -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, FEBRUARY 28, 1999
(unaudited)................. 7 $153,341 1 $63,827 164 $ 2 2,353 $24
== ======== === ======= === === ===== ===

<CAPTION>
CLASS C
COMMON STOCK
------------------- ADDITIONAL
SHARES PAR PAID-IN ACCUMULATED
OUTSTANDING VALUE CAPITAL DEFICIT TOTAL
----------- ----- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1995... -- $-- $ 78,902 $ (10,379) $ 68,544
Issuance of stock upon debt
conversion................ -- -- 9,163 -- 9,165
Contribution and
cancellation of shares.... -- -- -- -- --
Net loss.................... -- -- -- (18,430) (18,430)
--- --- -------- --------- --------
BALANCE, AUGUST 31, 1996..... -- -- 88,065 (28,809) 59,279
Issuance of stock with
senior notes offering..... 225 2 6,998 -- 7,000
Stock options exercised..... -- -- 2,620 -- 2,621
Net loss.................... -- -- -- (48,535) (48,535)
--- --- -------- --------- --------
BALANCE, AUGUST 31, 1997..... 225 2 97,683 (77,344) 20,365
Earnings attributable to
preferred stock........... -- -- -- (8,748) --
Issuance of stock upon debt
conversion................ -- -- -- -- 139,244
Issuance of stock to acquire
the ICS operations........ -- -- 16,097 -- 75,565
Net loss.................... -- -- -- (74,398) (74,398)
--- --- -------- --------- --------
BALANCE, AUGUST 31, 1998..... 225 2 113,780 (160,490) 160,776
Earnings attributable to
preferred stock
(unaudited)............... -- -- -- (9,710) --
Net loss (unaudited)........ -- -- -- (44,614) (44,614)
--- --- -------- --------- --------
BALANCE, FEBRUARY 28, 1999
(unaudited)................. 225 $ 2 $113,780 $(214,814) $116,162
=== === ======== ========= ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 103

OPTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- -------------------
1996 1997 1998 1998 1999
-------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(18,430) $ (48,535) $ (74,398) $(34,027) $(44,614)
Adjustments to reconcile net loss to net cash flow
used in operating activities:
Depreciation and amortization................... 8,676 14,505 28,481 10,759 17,997
Noncash portion of extraordinary loss on debt
extinguishment................................ -- -- 5,349 -- --
Noncash interest expense........................ 5,661 15,107 10,950 10,291 691
Noncash interest earned on restricted
investments................................... -- (2,303) (3,466) (1,927) (1,180)
Increase (decrease) in cash from changes in
operating assets and liabilities, net of
effect of business combinations:
Accounts receivable........................... (1,370) (754) (4,003) (1,493) (3,387)
Prepaid expenses, deposits and other assets... (126) (785) (68) 118 (276)
Deferred revenue and customer deposits........ 906 640 1,081 653 411
Accounts payable, accrued expenses and other
liabilities................................. 4,230 6,190 9,806 411 (1,083)
-------- --------- --------- -------- --------
Net cash flows used in operating
activities................................ (453) (15,935) (26,268) (15,215) (31,441)
-------- --------- --------- -------- --------
INVESTING ACTIVITIES:
Purchases of businesses........................... (9,916) (6,717) (43,354) (37,018) --
Acquisition of intangible assets.................. (7,904) (10,112) (7,172) (4,274) (4,552)
Purchases and construction of property and
equipment....................................... (54,217) (61,393) (78,471) (33,626) (52,376)
Purchases of restricted investments............... -- (79,609) (21,785) -- --
Proceeds from maturity of restricted
investments..................................... -- 14,706 29,250 14,625 25,742
-------- --------- --------- -------- --------
Net cash flows used in investing
activities................................ (72,037) (143,125) (121,532) (60,293) (31,186)
-------- --------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from convertible notes payable........... 73,438 33,700 -- -- --
Repayments on convertible notes payable........... -- (10,000) -- -- --
Proceeds from senior notes payable................ -- 218,000 200,000 -- --
Financing costs of senior notes payable........... -- (5,738) (6,480) -- --
Proceeds from bank financing, net of transaction
costs........................................... -- -- 119,329 119,852 --
Repayment on bank financing....................... -- -- (125,000) -- --
Proceeds from issuance of common stock............ -- 9,620 -- -- --
Payment on notes payable and long-term
obligations..................................... (1,307) (894) (3,580) (2,107) (1,115)
-------- --------- --------- -------- --------
Net cash flows provided by (used in)
financing activities...................... 72,131 244,688 184,269 117,745 (1,115)
-------- --------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (359) 85,628 36,469 42,237 (63,742)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 2,036 1,677 87,305 87,305 123,774
-------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 1,677 $ 87,305 $ 123,774 $129,542 $ 60,032
======== ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(Notes 3 and 9):
Cash paid during the period for interest.......... $ 290 $ 15,059 $ 36,831 $ 15,997 $ 26,492
======== ========= ========= ======== ========
Increase in capital lease obligations............. $ 879 $ 1,630 $ 2,742 $ 1,306 $ --
======== ========= ========= ======== ========
Convertible debt issued for accrued interest...... $ 6,436 $ 16,490 $ 9,640 $ 9,640 $ --
======== ========= ========= ======== ========
Common stock issued for convertible debt.......... $ 9,166 $ -- $ -- $ -- $ --
======== ========= ========= ======== ========
Preferred stock issued for convertible debt....... $ -- $ -- $ 139,244 $ -- $ --
======== ========= ========= ======== ========
Preferred stock issued for purchase of business... $ -- $ -- $ 59,466 $ -- $ --
======== ========= ========= ======== ========
Common stock issued for purchase of business...... $ -- $ -- $ 16,099 $ -- $ --
======== ========= ========= ======== ========
Earnings attributable to preferred stock.......... $ -- $ -- $ 8,748 $ -- $ 9,710
======== ========= ========= ======== ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 104

OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED AUGUST 31, 1996, 1997 AND 1998 AND THE

SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1999 (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

1. DESCRIPTION OF BUSINESS

OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or
"OpTel") is the successor of the cable television and telecommunications
operations of Vanguard Communications, L.P. ("Vanguard"). Vanguard commenced
operations in April 1993. On December 20, 1994, Vanguard contributed its cable
television and telecommunications operations to its wholly owned subsidiary,
OpTel. The contribution to OpTel was recorded at Vanguard's historical cost.

OpTel is a developer, operator and owner of private cable television and
telecommunications systems that utilize advanced technologies to deliver cable
television and telecommunications services to customers in multiple dwelling
units ("MDUs"). The Company negotiates long-term, generally exclusive cable
television service agreements and nonexclusive telecommunications service
agreements with owners and managers of MDUs, generally for terms of up to 15
years. The Company's primary markets are major metropolitan areas in Arizona,
California, Colorado, Florida, Georgia, Illinois, Indiana, Texas and Washington,
D.C.

During the period from April 20, 1993 (date of inception) to March 31,
1995, the Company was wholly owned by Vanguard. On March 31, 1995, VPC
Corporation ("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee
("Videotron"), a Quebec corporation) acquired a 66.75% interest in the Company.
At August 31, 1998, VPC's interest in the Company was 70.13% (see Note 9).

2. SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information -- The accompanying unaudited interim
consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial information. In the opinion of management, all adjustments (consisting
only of normal recurring entries) considered necessary for a fair presentation
have been included. Operating results for the six month periods ended February
28, 1998 and 1999, are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.

Principles of Consolidation -- The consolidated financial statements
include the accounts of OpTel and its wholly owned and majority-owned
subsidiaries and limited partnerships. All significant intercompany accounts and
transactions have been eliminated. Amounts due to minority limited partners are
included in notes payable and long-term obligations.

Cash and Cash Equivalents -- Cash and cash equivalents of the Company are
composed of demand deposits with banks and highly liquid, short-term investments
with maturities of three months or less when purchased.

Restricted Investments -- Restricted investments of the Company are
composed of U.S. Treasury securities restricted for payment of interest on the
Company's Senior Notes. These investments are classified as held to maturity and
are carried at amortized cost.

Property and Equipment -- Property and equipment are stated at cost, which
includes amounts for construction materials, direct labor and overhead, and
capitalized interest. When assets are disposed of, the costs and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Cost of maintenance and repairs is charged
to operations as incurred; significant renewals and betterments are capitalized.

F-7
<PAGE> 105
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation is calculated using the straight-line method over the
estimated useful lives of the various classes of property and equipment as
follows:

<TABLE>
<S> <C>
Headends.................................................... 15 years
Telephone switches.......................................... 10 years
Distribution systems and enhancements....................... 15 years
Computer software and equipment............................. 2 to 4 years
Other....................................................... 5 to 10 years
</TABLE>

Management routinely evaluates its recorded investments for impairment in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," based on projected undiscounted cash flows and other methods
when events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Management believes the investments to be
recoverable.

Intangible Assets -- Costs associated with licensing fees, commissions and
other direct costs incurred in connection with the execution of rights-of-entry
agreements to provide cable television and telecommunications service to MDUs,
the excess of purchase price over the fair value of tangible assets acquired
(goodwill) and other intangible assets are amortized using the straight-line
method over the following estimated useful lives:

<TABLE>
<S> <C>
Goodwill.............................................. 20 years
Licensing fees and rights-of entry costs.............. Initial term of contract
Deferred financing costs.............................. Terms of indebtedness
Other................................................. 1 to 5 years
</TABLE>

Management routinely evaluates its recorded investments in intangible
assets for impairment in accordance with SFAS No. 121 based on projected
undiscounted cash flows and other methods when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and believes the investments to be recoverable. Amounts recorded as
goodwill have been acquired in the business combinations discussed in Note 3.
Such amounts are generally attributable to market entry or expansion.

Federal and State Income Taxes -- Prior to August 2, 1996, the Company and
its corporate subsidiaries filed a consolidated federal income tax return.
Beginning August 2, 1996, in connection with VPC's acquiring additional stock
from Vanguard, the Company was included in VPC's consolidated federal income tax
return. Effective February 14, 1997, as the result of issuing Class C Common
(see Notes 6 and 9), the Company was deconsolidated from VPC for tax purposes.
Beginning March 1, 1998, as the result of VPC's converting its convertible notes
payable to Series A Preferred, the Company will be included in VPC's
consolidated federal income tax return. Effective April 13, 1998, as the result
of issuing shares of Common Stock and Series B Preferred, the Company will again
be required to file a separate consolidated federal income tax return. During
the period in which the Company was consolidated with VPC, for purposes of
financial reporting, the Company recorded federal and state income tax as if it
were filing a separate return. Deferred tax assets and liabilities are recorded
based on the difference between the tax basis of the assets and liabilities and
their carrying amounts for financial reporting purposes, referred to as
"temporary differences." Provision is made or benefit recognized for deferred
taxes relating to temporary differences in the recognition of expense and income
for financial reporting purposes. To the extent a deferred tax asset does not
meet the criterion of "more likely than not" for realization, a valuation
allowance is recorded.

Revenue Recognition and Deferred Revenue -- The Company recognizes revenue
as cable television programming and telecommunications services are provided to
subscribers. OpTel typically bills customers in advance for monthly cable
television services, which results in the deferral of revenue until those
services are

F-8
<PAGE> 106
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provided. Installation revenue is recognized in the period installation services
are provided to the extent of direct selling costs. For all periods presented,
installation revenues have not exceeded direct selling costs. The Company
expenses all initial subscriber costs as incurred due to the short-term
subscriber lives associated with MDU service and because such costs do not
constitute additions to property and equipment.

Net Loss per Common Share -- The computation of basic and diluted loss per
common share is based on the weighted average number of common shares
outstanding during the period (see Note 10). Common stock equivalents are
included in the computation if they are dilutive. For the year ended August 31,
1996, the convertible notes payable to stockholder are excluded from the diluted
earnings per share calculation because of their antidilutive effect. For the
years ended August 31, 1997 and 1998, the convertible notes payable to
stockholder; the Series A and the Series B preferred stock; and 90,037 and
123,685 stock options and warrants, respectively, are excluded from the diluted
earnings per share calculation because of their antidilutive effect. As a
result, diluted loss per common share for the years ended August 31, 1996, 1997
and 1998, is considered to be the same as basic.

Derivative Financial Instruments -- Derivative financial instruments are
utilized by the Company to reduce interest rate risk and include interest rate
swaps. The Company does not hold or issue derivative financial instruments for
speculative or trading purposes. Gains and losses resulting from the termination
of derivative financial instruments are recognized over the shorter of the
remaining original contract lives of the derivative financial instruments or the
lives of the related hedged positions or, if the hedged positions are sold or
extinguished, are recognized in the current period as gain or loss.

Acquisitions -- The Company's acquisitions are accounted for using the
purchase method of accounting and include results of operations of the acquired
businesses in the accompanying consolidated financial statements from the dates
of acquisition. Identifiable tangible and intangible assets acquired and
liabilities assumed are recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the net assets acquired is
recorded as goodwill.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reporting amounts of certain assets,
liabilities, revenues and expenses. Actual results may differ from such
estimates. The Company is in the initial stages of entering new markets and
acquiring or constructing the infrastructure necessary to deliver cable
television and telecommunication services. The Company's network upgrades and
investment in central office switched telecommunications require significant
investment, a portion of which will not be recovered unless the Company's
customer base increases from current levels, as to which there can be no
assurance due to possible adverse effects of competition, regulatory changes,
technology changes, the ability to finance future expenditures or other
unforeseen factors. The carrying value of property, equipment and intangible
assets will be subject to ongoing assessment.

New Accounting Pronouncements -- In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share," which
established new standards for computing and presenting earnings per share and
was effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Prior periods presented have been restated
to reflect the adoption of SFAS No. 128, which did not have a significant impact
upon the Company's reported earnings per share.

Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting and display of
comprehensive income and its components in the financial statements. The Company
has no items of other comprehensive income to report in the periods presented.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
public companies disclose information about

F-9
<PAGE> 107
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operating segments, products and services, geographic areas and major customers.
The Company will adopt the disclosure requirements in the fiscal year ending
August 31, 1999.

Reclassifications -- Certain reclassifications of prior-year amounts have
been made to conform to the current-year presentation.

3. ACQUISITIONS

On December 28, 1994, the Company acquired the stock of the operating
subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC"). The
Company, as a result of the acquisition from IRPC, is a general partner in
limited partnership investments (the "Partnerships"). The operations of these
Partnerships have been consolidated with those of the Company. The Company had
the option to purchase the interest of each limited partner at defined amounts
ranging from 110% to 140% of each limited partner's initial capital contribution
for the first four years of the partnership agreements and was required to
purchase the interests at the end of the fifth year at 150% of the initial
capital contribution. During the periods ended August 31, 1996, 1997 and 1998,
OpTel paid $392, $0 and $753, respectively, to repurchase all of the partnership
obligations, including the appreciation described above (see Note 6). The
operations of the acquired subsidiaries and the partnerships are located in the
San Diego, California, and Phoenix, Arizona, areas.

On January 11, 1995, the Company purchased the assets of EagleVision for
$15,200 in cash, the assumption of approximately $110 of liabilities and a
deferred payment due to the seller of not less than $6,000 and not more than
$10,000 based on the profitability of OpTel's assets in the Houston, Texas,
market with certain adjustments. This deferred payment is payable at the
seller's option, either (a) following the sale of all or substantially all of
the EagleVision assets or the sale of a majority of the outstanding voting
capital of the OpTel subsidiary that acquired EagleVision assets to a third
party that is not an affiliate or (b) at the conclusion of the fifth or sixth
year following the acquisition. This deferred payment is carried on the
accompanying consolidated balance sheets in notes payable and long-term
obligations at the net present value of the estimated final payment with an
accretion of interest recorded to operations. As of the date of acquisition and
as of August 31, 1998, the estimated payment due was $6,000 with a net present
value at August 31, 1997 and 1998, of $4,903 and $5,338, respectively.
EagleVision's operations are located in the Houston, Texas, area.

On June 30, 1995, the Company purchased the stock of Sunshine Television
Entertainment, Inc. ("Sunshine") for $5,500 in cash and the assumption of
approximately $350 of liabilities. Sunshine's operations are located in the
Miami, Florida, area.

On July 31, 1995, the Company purchased the assets of Interface
Communications Group, Inc. and certain related entities ("Interface") for $8,900
in cash and the assumption of approximately $30 of liabilities. The operations
of Interface are located in the Denver, Colorado, area.

On August 31, 1995, the Company purchased the general and limited
partnership interests of Triax Associates V, L.P. ("Triax"), for $15,200 in cash
and the assumption of approximately $100 of liabilities. The operations of Triax
are located in the Chicago, Illinois, area.

On January 30, 1996, the Company purchased the assets of Telecom Master
L.P. and Telecom Satellite Systems Corporation ("Telecom") for approximately
$5,700 in cash and the assumption of $100 of liabilities. The operations of
Telecom are located in the Dallas, Texas, area.

F-10
<PAGE> 108
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On August 2, 1996, the Company purchased certain assets of certain
subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc.,
companies that are 50% and 80% owned and controlled by Videotron, respectively,
for approximately $3,880. The amount paid represents the sellers' historical
cost, which also approximates the acquired assets' estimated fair market value.
The operations of the acquired assets are located in the San Francisco,
California, and Tampa, Florida, areas.

On November 12, 1996, the Company purchased the assets of Malvey Cable
Company ("Nor-Cal") for approximately $2,500 in cash. The operations of Nor-Cal
are located in the San Francisco, California, area.

On March 14, 1997, the Company purchased the stock of Tara Communication
Systems, Inc. ("Tara") for $2,450 in cash and the assumption of approximately
$65 of liabilities. The operations of Tara are located in the Chicago, Illinois,
area.

On August 1, 1997, the Company purchased certain assets of Northgate
Communications, Inc. ("Northgate") for approximately $1,700 in cash. The
operations of Northgate are located in the Los Angeles and San Diego,
California, areas.

On October 27, 1997, the Company purchased the residential cable television
and associated fiber optic network assets of Phonoscope Ltd. and the stock of
several affiliated entities (collectively "Phonoscope"). The operations of
Phonoscope are in Houston, Texas. The purchase price consisted of $38 million in
cash and the assumption of $0.2 million of liabilities. The purchase price was
allocated $15.5 million to property and equipment, $5.4 million to
rights-of-entry and $17.3 million to goodwill.

On March 3, 1998, the Company entered into a definitive purchase agreement
to acquire certain cable television and telephone assets of Interactive Cable
Systems, Inc. ("ICS"). The total purchase price is approximately $83.4 million
and consists of approximately $4.8 million of cash, Series B Preferred with a
liquidation preference of $59.5 million, and 164,272 shares of Common Stock plus
assumed liabilities of $1.6 million and including transaction costs of
approximately $1.4 million. The Series B Preferred earns dividends at an annual
rate of 8%, payable in additional shares of Series B, and is convertible into
Common Stock based upon the liquidation preference plus any cumulative unpaid
dividends at the time of the conversion divided by the share price upon
consummation of an initial public offering. As of March 2, 1998, the Company had
received consents and accepted the transfer of legal title to approximately 90%
of the assets that are the subject of the aggregate acquisition. The Company
expects the resolution of legal title for the balance of the acquisition to be
completed during the balance of fiscal 1999 as ICS meets certain conditions.
Approximately 10% of the total purchase price remains escrowed until ICS meets
these conditions. The Company has included 100% of the assets and operating
results of the ICS operations in its consolidated financial statements since
April 13, 1998, because (i) although the transfer of legal title to the
remaining assets is subject to the receipt of certain third-party consents, the
Company may elect to waive the consent conditions, (ii) under the terms of a
management agreement, during the period that ICS has to secure the necessary
consents, the Company is managing these assets and receives all the revenues
associated with and incurs all the expenses associated with these units and
(iii) the entire purchase price was paid (although a portion of the purchase
price is being held in escrow for the protection of the Company, subject to the
receipt of the necessary consents). The assets being acquired are located in
Houston, Dallas/Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco,
Los Angeles, Miami-Ft. Lauderdale, Tampa-Orlando, Atlanta, Indianapolis and
greater Washington, D.C. At August 31, 1998, the allocation of the purchase
price is

F-11
<PAGE> 109
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded on a preliminary basis subject to third-party consents, as follows and
is subject to adjustment; however, management does not expect the impact of any
adjustments to be material:

<TABLE>
<S> <C>
Accounts receivable......................................... $ 1,333
Prepaid expenses, deposits and other assets................. 249
Property and equipment...................................... 30,000
Identifiable intangible assets (rights-of-entry)............ 9,325
Goodwill.................................................... 42,580
Deferred revenue and customer deposits...................... (842)
Capital lease obligations................................... (793)
-------
Total............................................. $81,852
=======
</TABLE>

The pro forma results presented below have been prepared to illustrate the
effects of the ICS acquisition as if it had occurred on the first day of the
periods presented. The pro forma financial information is not necessarily
indicative of either future results of operations or the results that might have
been achieved if such transactions had been consummated on the indicated dates.

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Total revenues.............................................. $ 56,465 $ 75,665
Loss from operations........................................ (33,166) (33,620)
Net loss.................................................... (59,047) (79,913)
Basic and diluted loss per common share of common equity.... (24.60) (33.38)
</TABLE>

The pro forma effect of the acquisition of Phonoscope would have had an
insignificant impact on the consolidated results of operations of the Company
for the years ended 1997 and 1998.

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
AUGUST 31
------------------- FEBRUARY 28
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Headends............................................ $ 53,088 $ 77,470 $ 82,335
Telephone switches.................................. 9,347 23,474 23,474
Distribution systems and enhancements............... 68,538 113,775 130,245
Computer software and equipment..................... 9,512 16,753 18,551
Other............................................... 8,762 12,813 13,815
Construction in progress............................ 26,177 57,748 85,981
-------- -------- --------
175,424 302,033 354,401
Less accumulated depreciation....................... (14,982) (33,989) (46,112)
-------- -------- --------
$160,442 $268,044 $308,289
======== ======== ========
</TABLE>

Included in property and equipment is $3,069 and $5,532 of equipment
acquired under capital leases at August 31, 1997 and 1998, respectively.
Interest expense of $2,256 and $2,753 was capitalized during 1997 and 1998,
respectively.

F-12
<PAGE> 110
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INTANGIBLE ASSETS

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
AUGUST 31
------------------- FEBRUARY 28
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................ $ 53,081 $112,485 $113,052
Licensing fees and rights-of-entry costs............ 30,833 53,030 56,350
Deferred financing costs............................ 5,784 12,264 12,877
Other............................................... 3,243 1,926 1,978
-------- -------- --------
92,941 179,705 184,257
Less accumulated amortization....................... (10,358) (19,335) (25,202)
-------- -------- --------
$ 82,583 $160,370 $159,055
======== ======== ========
</TABLE>

The Company's right-of-entry agreements represent the Company's agreement
to provide cable television and telecommunications service to MDUs and typically
have initial terms of 10 to 15 years. The right-of-entry agreements generally
provide for MDU owners to receive an up-front cash payment and payment of a
portion of revenues over the terms of the agreements.

6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS

Notes payable and long-term obligations consisted of the following:

<TABLE>
<CAPTION>
AUGUST 31
-------------------- FEBRUARY 28
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
13% Senior Notes Due 2005, Series B, net of
unamortized discount of $6,526, $5,651 and
$5,214.......................................... $218,474 $219,349 $219,786
11.5% Senior Notes Due 2008....................... -- 200,000 200,000
Installment notes payable bearing interest at
rates ranging from 7.75% to 13% per annum,
substantially all collateralized by certain
transportation equipment or private cable
television systems.............................. 280 167 94
Limited partner obligations....................... 714 -- --
Obligations under capital leases, net of amounts
representing interest of $581 and $941 for 1997
and 1998........................................ 2,185 4,424 3,382
Deferred acquisition liabilities.................. 6,920 5,338 5,591
-------- -------- --------
$228,573 $429,278 $428,853
======== ======== ========
</TABLE>

On February 14, 1997, the Company issued $225 million of 13% Senior Notes
Due 2005 ("2005 Notes"). The 2005 Notes require semiannual interest payments due
on August 15 and February 15 of each year until their maturity on February 15,
2005. The 2005 Notes are redeemable at the option of the Company generally at a
premium at any time after February 15, 2002, and can be redeemed, in part, also
at a premium, earlier upon the occurrence of certain defined events. In
addition, a transfer by VPC of its interest in OpTel, a transfer by Videotron of
its interest in VPC or an election by VPC to convert its Class B Common into
shares of Common Stock may result in a change of control under the indenture,
which could require the Company to purchase the 2005 Notes. The 2005 Notes are
unsecured.

F-13
<PAGE> 111
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the issuance of the 2005 Notes, the Company issued
225,000 shares of Class C Common. The portion of the net proceeds allocated to
the Class C Common is $7 million. Such amount has been recorded as stockholders'
equity and as a discount to the 2005 Notes.

Concurrent with the issuance of the 2005 Notes, the Company was required to
deposit in an escrow account $79.6 million in cash that, together with the
proceeds from such investment, will be sufficient to pay when due the first six
interest payments on the 2005 Notes. Such amount is reflected as restricted
investments on the accompanying consolidated balance sheets.

In December 1997, the Company, through subsidiaries, secured a $150 million
senior secured credit facility (the "Senior Facility") from a syndicate of
financial institutions. The Senior Facility consisted of a term loan in the
amount of $125 million (which was drawn on December 19, 1997, with an original
maturity of August 2004) bearing interest at LIBOR plus 3.5% and a $25 million
revolving credit commitment. The Senior Facility was secured by a first fixed
and floating lien on substantially all of the assets of the Company and its
subsidiaries. The Senior Facility contained financial maintenance requirements
and certain limitations on the Company's ability to incur indebtedness, incur
capital expenditures and pay dividends.

On July 7, 1998, the Company repaid and terminated the Senior Facility with
proceeds from a private placement of $200 million 11.5% Senior Notes Due 2008
(the "2008 Notes"). In connection with the repayment of the Senior Facility, the
Company was required to pay a prepayment penalty of $1.3 million. Additionally,
the Company wrote off debt issuance costs of $5.4 million related to the Senior
Facility. These amounts are included in extraordinary loss on debt
extinguishment in the accompanying statements of operations. The 2008 Notes
require semiannual interest payments on January 1 and July 1 of each year until
their maturity on July 1, 2008. The 2008 Notes are redeemable at the option of
the Company, generally at a premium, at any time after July 1, 2003, and can be
redeemed in part, also at a premium, earlier upon the occurrence of certain
defined events. Concurrent with the issuance of the 2008 Notes, the Company was
required to deposit in an escrow account $21.8 million in cash that, together
with the proceeds of the investment thereof, will be sufficient to pay when due
the first two interest payments on the 2008 Notes. Subsequent to year-end, the
Company has initiated an offer to exchange the 2008 Notes for registered
securities with substantially identical terms, including interest rate and
maturity (the "Offer to Exchange").

To comply with certain covenants of the Senior Facility and to reduce the
impact of changes in interest rates on the Senior Facility, the Company entered
into interest rate swap agreements with total notional amounts of $75 million in
which the Company had agreed to receive a variable rate equal to LIBOR and pay
fixed rates ranging from 5.96% to 6.00%. The swap agreements were terminated on
July 17, 1998, in exchange for cash payments of $578,000, which was expensed.

Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1998:

<TABLE>
<S> <C>
Fiscal year ending:
1999...................................................... $ 1,579
2000...................................................... 6,621
2001...................................................... 760
2002...................................................... 228
2003...................................................... 49
Thereafter.................................................. 420,041
--------
Totals............................................ $429,278
========
</TABLE>

F-14
<PAGE> 112
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMITMENTS AND CONTINGENCIES

Legal -- The Company is a defendant in certain lawsuits incurred in the
ordinary course of business. It is the opinion of the Company's management that
the outcome of the suits now pending will not have a material, adverse effect on
the operations, cash flows or consolidated financial position of the Company.

On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas, on behalf of all cable subscribers in
the United States that have paid late fees to either Phonoscope or the Company.
The action was dismissed without prejudice during the first quarter of fiscal
1999 and the Company believes it will be indemnified by Phonoscope for all its
costs and expenses associated with the defense of the action.

On April 27, 1998, a civil action was commenced against the Company in the
United States District Court for the Northern District of California by Octel
Communication Corp. ("Octel"), charging the Company with trademark infringement,
trade name infringement, trademark dilution and unfair competition based on its
use of the name "OpTel" (the "Civil Action") and seeking to enjoin the Company
from using the name "OpTel." The Civil Action follows a now-suspended
administrative proceeding in the Patent and Trademark Office ("PTO") relating to
registration of the "OpTel" mark by the Company. The PTO found the Company's
application for registration to be allowable; however, Octel commenced the PTO
proceeding claiming that the Company's mark is confusingly similar to the
"Octel" mark used by that party in a related field, and claiming that the
Company's application had procedural deficiencies. During the course of the PTO
proceeding, the Company acquired rights to the marks "Optel" and "Optel
Communications" in the telecommunications field, which are believed to predate
the rights of Octel to its trademark, and the Company commenced two further
proceedings against Octel in the PTO seeking cancellation of two of the
trademark registrations owned by Octel. The various proceedings in the PTO
between the Company and Octel were consolidated and thereafter suspended on May
15, 1998, in view of the commencement of the Civil Action. The Company believes
it has meritorious counterclaims in the Civil Action and intends to vigorously
defend against Octel's claims. Although the Company does not believe that its
use of the name "OpTel" infringes on the trademark or trade name rights of Octel
or any other person, there can be no assurance as to the outcome of the Civil
Action or the proceedings in the PTO (if reinstated) or that any such outcome
would not materially adversely affect the Company.

Employment and Consulting Agreements -- Employment agreements with certain
executive employees provide for separation payments ranging from 3 to 24 months
of the employee's annual salary if employment is terminated due to change of
control or without cause. However, stipulations for termination payment and
payment terms vary. The Company paid or accrued approximately $297, $278 and $0
in severance during 1996, 1997 and 1998, respectively, related to such
employment agreements.

The Company leases office space and certain equipment under operating
leases. The leases generally have initial terms of 3 to 20 years. Minimum future
obligations on operating leases at August 31, 1998, consist of the following:

<TABLE>
<S> <C>
Fiscal year ending:
1999...................................................... $ 3,579
2000...................................................... 3,258
2001...................................................... 2,806
2002...................................................... 2,337
2003...................................................... 1,996
Thereafter.................................................. 3,768
-------
Total minimum lease payments...................... $17,744
=======
</TABLE>

F-15
<PAGE> 113
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rental expense under operating leases for the years ending August 31, 1996,
1997 and 1998, was $2,158, $2,763 and $3,876, respectively. The Company's rental
expense under operating leases includes facility rentals as well as rental of
space for distribution purposes.

8. INCOME TAXES

Income tax expense (benefit) consists of the following for the years ended
August 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Current tax expense................................... $ -- $ -- $ --
Deferred tax expense (benefit)........................ (4,470) (13,213) (25,261)
Change in deferred tax valuation allowance............ 4,470 13,213 25,261
------- -------- --------
Total income tax expense (benefit).......... $ -- $ -- $ --
======= ======== ========
</TABLE>

A reconciliation of income taxes on reported pretax loss at statutory rates
to actual income tax expense (benefit) for the years ended August 31, 1996, 1997
and 1998, is as follows:

<TABLE>
<CAPTION>
1996 1997 1998
--------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates............ $(6,266) (34.0)% $(16,502) (34.0)% $(25,295) (34.0)%
State income taxes, net of federal tax
benefit................................ (1) -- 8 -- -- --
Valuation allowance...................... 4,470 24.0 13,213 27.0 25,261 34.0
Expenses (deductible) not deductible for
tax purposes........................... 1,797 10.0 (842) (2.0) 34 --
Utilization of net operating loss by
parent company in consolidated
return................................. -- -- 4,123 9.0 -- --
------- ----- -------- ----- -------- -----
Total income tax benefit....... $ -- --% $ -- --% $ -- --%
======= ===== ======== ===== ======== =====
</TABLE>

The net deferred tax assets consist of the tax effects of temporary
differences related to the following:

<TABLE>
<CAPTION>
AUGUST 31
-------------------
1997 1998
-------- --------
<S> <C> <C>
Allowance for uncollectible accounts receivable............. $ 381 $ 613
Equipment, furniture and fixtures........................... (10,694) (10,663)
Intangible assets........................................... 421 (246)
Accrued employee compensation............................... 214 505
Net operating loss carryforwards............................ 31,121 56,410
IRPC deferred tax liability................................. (480) (480)
Other....................................................... 59 144
-------- --------
Deferred tax asset before valuation allowance............... 21,022 46,283
Valuation allowance......................................... (21,022) (46,283)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>

Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. The Company is
unable to determine whether these accumulated losses will be utilized;
accordingly, a valuation allowance has been provided.

F-16
<PAGE> 114
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following are the expiration dates and the approximate net operating
loss carryforwards at August 31, 1998:

<TABLE>
<S> <C>
Expiration dates through:
2010...................................................... $ 1,346
2011...................................................... 11,521
2012...................................................... 26,161
2013...................................................... 47,921
2014...................................................... 78,965
</TABLE>

Certain of the Company's net operating losses were utilized by VPC while
the Company was included in VPC's consolidated tax return. Such losses will not
be available for future use by the Company, and accordingly, the deferred tax
benefit and valuation allowance were reduced. In connection with the revised
shareholder agreement (see Note 9), subsequent to August 31, 1997, the Company
will be reimbursed for any tax benefit generated by the Company and utilized by
VPC.

9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER

TRANSACTIONS WITH STOCKHOLDERS AND RELATED PARTIES

Transactions With VPC -- From December 22, 1994 through March 31, 1995, the
Company borrowed $60,000 from VPC under a Senior Secured Convertible Note
Agreement. The note was converted to 1,120,985 shares of Class B Common of OpTel
on March 31, 1995. Concurrently, VPC purchased 105,667 shares of OpTel's Class B
Common from Vanguard.

On July 26, 1995, VPC invested $25,000 in the Company, of which $16,688
represented VPC's purchase of an additional 311,652 shares of OpTel's Class B
Common, and $8,312 represented a convertible note payable that bore interest at
15% and was convertible to 155,229 shares of Class B Common at the option of
VPC. On April 1, 1996, VPC converted the $8,312 note and accrued interest of
$854 into 155,229 shares of Class B Common.

From August 1995 through August 1997, the Company issued a total of
$131,400 in convertible notes ("Convertible Notes") to VPC, all of which bore
interest at 15%, generally with principal and interest due on demand. Under the
terms of the Convertible Notes, any accrued interest on which there was no
demand for payment as of each August 31 automatically converted to additional
principal payable. On March 1, 1998, VPC converted its Convertible Notes
payable, including accrued interest, of $139.2 million into a like amount of
Series A Preferred. Such stock earns dividends at the annual rate of 9.75%,
payable in additional shares of Series A Preferred, and is convertible under
certain circumstances and at certain prices at the option of the holder of the
shares into shares of Class B Common upon consummation of an initial public
offering, or during the 90-day period commencing April 30, 1999.

Transactions With CDPQ -- In August 1997, in connection with a revised
shareholder agreement, Capital Communication CDPQ, Inc. ("CDPQ"), a minority
stockholder of Videotron, acquired all of Vanguard's interest in OpTel.
Immediately prior to the sale to CDPQ, Vanguard exercised an option to purchase
48,937 shares of Class B Common at an exercise price of $53.55 per share,
subject to adjustment, that had been granted to Vanguard in August 1996. The
option exercise resulted in the Company's receiving $2,620 in cash.

In connection with the sale by Vanguard of its minority stock position in
the Company to CDPQ, the Company, VPC and CDPQ entered into the Stockholders'
Agreement, and the Company and CDPQ entered into a related Registration Rights
Agreement (the "Registration Rights Agreement"), under which CDPQ has certain
rights and obligations relating to the Company and VPC.

F-17
<PAGE> 115
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under the Stockholders' Agreement, for as long as CDPQ holds at least 5% of
the Company's voting stock, CDPQ may designate a number of Directors of the
Company and each of its subsidiaries, and each committee of the Board and each
of its subsidiaries, which is proportionate (in relation to the total number of
Directors or committee members) to CDPQ's percentage ownership of the Company's
voting stock, but in no event less than one Director and one committee member.
Pursuant to the Stockholders' Agreement, VPC is obligated to cause the Company
to afford CDPQ rights equivalent to those afforded other purchasers of the
Company's capital stock to the extent they are more advantageous than the rights
held by CDPQ. Subject to certain exceptions (including a public offering of the
Company's equity securities) and waiver by CDPQ at VPC's request in connection
with certain events, the Company is obligated to afford CDPQ preemptive rights
to purchase equity securities that the Company proposes to sell in proportion to
CDPQ's ownership of the total outstanding equity securities of the Company prior
to the sale. In addition, pursuant to the Stockholders' Agreement, CDPQ has
certain tag-along rights in connection with sales by VPC of outstanding shares
of the Company's voting stock. Pursuant to the Registration Rights Agreement,
nine months after the consummation of the IPO and, subject to certain
conditions, CDPQ has the right, on two occasions, to require the Company to
register under the Securities Act shares of Common Stock issued to CDPQ upon the
conversion of the Class B Common. In addition, CDPQ has piggyback registration
rights, on three occasions, to include such shares of Common Stock held by it in
registration statements filed by the Company for the sale of its equity
securities, subject to certain conditions, including customary allocation and
holdback provisions.

Transactions With THI -- The Company has assigned substantially all of its
frequency licenses to THI, an entity owned by an employee of the Company and two
individuals who provide legal counsel to the Company, in exchange for a $1
million secured promissory note with interest at 8% due on February 14, 2007
(the "License Note"). The License Note contains covenants that restrict THI
from, among other things, incurring indebtedness other than to the Company or in
the ordinary course of business and merging or consolidating with another
entity.

The terms of the Company's continued and unencumbered use of the frequency
licenses are subject to a license and services agreement (the "THI Agreement")
pursuant to which THI agreed to provide to the Company all the transmission
capacity it requires or may in the future require, and the Company granted THI a
nonexclusive license to use all of the Company's facilities and related
equipment, such as microwave transmitting and receiving equipment, required to
provide such transmission capacity.

The Company received an option from THI to purchase all or, in certain
circumstances, some of the assets of THI at a price equal to the principal
balance on the License Note plus accrued interest at 10% per annum and a
separate option from each stockholder of THI to purchase all of such person's
shares of capital stock of THI at the lesser of (x) the book value of the shares
being purchased and (y) the price paid for such shares plus a 10% premium
compounded annually. The THI option and the individual options are exercisable
at any time prior to February 14, 2007, subject to FCC approval.

THI is included in the consolidated financial statements of the Company
based upon the Company's ability to control THI as a result of a combination of
the covenants contained in the License Note and the Company's ability to
exercise its option to purchase the assets or stock of THI. The option agreement
and the License Note are eliminated upon consolidation.

F-18
<PAGE> 116
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transactions With Other Related Parties -- Videotron is party to an
indenture that limits the aggregate amount of indebtedness that can be incurred
by Videotron and its subsidiaries, including the Company, taken as a whole
(based upon a ratio of total consolidated indebtedness to consolidated operating
cash flow).

In September 1996, the Company entered into a consulting agreement with a
former director of the Company who is a limited partner of Vanguard. In
connection therewith, the Company granted him a warrant to purchase up to 24,992
shares of Common Stock at an exercise price of $53.55 per share, subject to
adjustment, that is presently exercisable and expires on August 31, 1999.

VPC and an affiliate of Vanguard had each agreed to provide consultant,
advisory and management services for $350 per annum (plus travel expenses) per
party. This arrangement terminated in August 1997 with the sale of Vanguard's
interest in the Company.

The Company purchases certain insurance coverage through Videotron,
including directors' and officers' liability insurance. The Company paid an
aggregate of approximately $478,000, $434,000 and $456,000 to Videotron for this
insurance coverage in fiscal 1996, 1997 and 1998, respectively. OpTel provides
certain customer support and billing services to certain affiliates of Videotron
that operate wireless cable systems using MMDS technology. OpTel charges such
affiliates based on the actual cost of the personnel engaged and materials used
to provide such services.

Upon consummation of an initial public offering, each Director who is
neither an employee of the Company nor a designee of the Company's significant
stockholders will receive options to purchase shares of Common Stock having an
aggregate value of $150 (or, if such Director is not serving in such capacity
upon consummation of an initial public offering, on the date of his or her
election to the Board) with an exercise price equal to the initial public
offering price (or the fair market value on the date of grant). The options will
become exercisable in equal installments on each of the second, third, fourth
and fifth anniversaries of the effective date of the grant.

10. STOCKHOLDERS' EQUITY

The Common Stock, Class B Common and Class C Common of the Company are
identical in all respects and have equal powers, preferences, rights and
privileges except that each holder of Common Stock is entitled to one vote for
each share of Common Stock held, each holder of Class B Common is entitled to
ten votes for each share of Class B Common held, and each holder of Class C
Common does not possess any voting privileges. VPC and CDPQ are the only holders
of Class B Common, and upon any transfer other than to a permitted holder, the
Class B Common automatically converts to a like number of shares of Common
Stock.

On February 7, 1997, the Company approved a stock split effected in the
form of a stock dividend. Each share of outstanding Class B Common (the only
class of common stock then outstanding) received 17.3768 additional shares. The
number of authorized shares of Common Stock and Class B Common was increased to
8,000,000 and 6,000,000, respectively. The financial statements have been
restated to reflect the stock split as if it had occurred on December 20, 1994,
the date the Company reorganized as a corporation. Additionally, the Company
authorized the issuance of 300,000 shares of Class C Common.

The Series A Preferred (see Note 9) is convertible under certain
circumstances and at certain prices at the option of the holder of the shares
into shares of Class B Common upon consummation of an initial public offering,
or during the 90-day period commencing April 30, 1999.

The Series B Preferred (see Note 3) is convertible into Common Stock based
upon the liquidation preference plus any cumulative unpaid dividends at the time
of the conversion divided by the share price upon consummation of an initial
public offering.

F-19
<PAGE> 117
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following the consummation of an initial public offering, all of the
outstanding shares of the Company's Class C Common and Series B Preferred will
be converted to Common Stock.

On June 5, 1998, OpTel filed a registration statement on Form S-1 with the
Securities and Exchange Commission (the "SEC") with respect to a proposed
initial public offering (the "IPO") of $100 million of its Common Stock. No
assurance can be given that the IPO will be consummated or, if consummated, that
the proceeds received by the Company will be the amount currently contemplated.

11. EMPLOYEE BENEFIT PLAN

401(k) Plan -- The OpTel 401(k) Plan (the "401(k) Plan") conforms to the
provisions of the Employee Retirement Income Security Act of 1974. It is a
contributory tax deferred 401(k) Plan. All employees are required to have three
consecutive months of service to be eligible to participate in the 401(k) Plan.
Also, effective January 1, 1998, an employee must have one year of service with
the employer before being eligible to receive employer matching contributions.
The Company's matching contribution is a discretionary amount to be annually
determined by the Board of Directors of the Company. For the periods ended
August 31, 1996, 1997 and 1998, the Company's match of its employees' elective
contributions was $188, $289 and $349, respectively.

12. RESTRICTED INVESTMENTS

Concurrent with the issuance of the 2005 Notes, the Company was required to
deposit in an escrow account $79.6 million in cash that was subsequently
invested in U.S. Treasury securities. The securities are classified as
held-to-maturity and, at August 31, 1997 and 1998, have an amortized cost basis
of $67,206 and $41,422, respectively; an aggregate fair value of $67,233 and
$41,855, respectively; and gross unrealized holding gains of $27 and $432,
respectively. The contractual maturity of the securities correspond to the
semiannual interest payment dates required under the 2005 Notes through February
15, 2000.

Concurrent with the issuance of the 2008 Notes, the Company was required to
deposit in an escrow account $21.8 million in cash that was subsequently
invested in U.S. Treasury securities. The securities are classified as
held-to-maturity and, at August 31, 1998, have an amortized cost basis of
$21,785, an aggregate fair value of $22,002 and gross unrealized holding gains
of $217. The contractual maturity of the securities correspond to the semiannual
interest payment dates required under the 2008 Notes through July 1, 1999.

13. EMPLOYEE STOCK OPTIONS AND WARRANTS AND STOCK PURCHASE PLAN

During the year ended August 31, 1997, the Company adopted a stock option
and award plan (the "Incentive Stock Plan") for the benefit of officers and key
employees. The plan is administered by a committee of the Board of Directors.
The plan authorizes the Board to issue incentive stock options, as defined in
Section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
and stock options that do not conform to the requirements of that Code section.
The Board has discretionary authority to determine the types of options to be
granted, the persons to whom options shall be granted, the number of shares to
be subject to each option granted and the terms of the stock option agreements.
In fiscal 1998, the Company adopted amendments to the Incentive Stock Plan,
certain of which will become effective, subject to stockholder approval, on the
date an initial public offering is consummated (as so amended, the "Plan"). Five
percent of the Common Stock outstanding, on a fully diluted basis, on the date
an initial public offering is consummated, may be issued under the terms of the
Plan.

F-20
<PAGE> 118
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Unless otherwise specifically provided in the option agreement, (i) the
exercise price of an option will not be less than the fair market value, as
determined by the Board, of the Common Stock on the date of grant and (ii) the
options vest in equal installments on each of the second, third, fourth and
fifth anniversaries of the date of grant. The options issued as of August 31,
1998, expire ten years from the date of grant. In the event of a "change in
control," all options shall vest and become immediately exercisable. The Board
has authorized 241,086 shares of Common Stock to be issued under the Plan. Stock
option activity under the Plan and warrants issued (see Note 9) for the years
ended August 31, 1997 and 1998 and the six months ended February 28, 1999
(unaudited), was as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
--------- ---------------- ----------------
<S> <C> <C> <C>
Options and warrants outstanding at
September 1, 1996....................... -- -- $ --
Granted................................. 112,115 $53.55 to $85.75 $76.70
Exercised............................... -- -- --
Forfeited............................... (22,078) $53.55 to $85.75 $80.92
-------
Options and warrants outstanding at August
31, 1997................................ 90,037 $53.55 to $85.75 $75.66
Granted................................. 43,657 $74.42 to $85.75 $83.31
Exercised............................... -- -- --
Forfeited............................... (10,009) $85.75 $85.75
-------
Options and warrants outstanding at August
31, 1998 (including 35,127 warrants).... 123,685 $53.55 to $85.75 $77.54
Granted................................. 120,395 $98.00 $98.00
Exercised............................... -- -- --
Forfeited............................... (25,555) $85.75 to $98.00 $91.58
-------
Options and warrants outstanding at
February 28, 1999 (unaudited)........... 218,525 $53.55 to $98.00 $87.17
=======
Options and warrants exercisable at
February 28, 1999 (unaudited)........... 63,166 $53.55 to $98.00 $70.50
Options available for grant at February
28, 1999 (unaudited).................... 57,688
</TABLE>

The weighted average remaining contractual life of the stock options and
warrants outstanding at August 31, 1998, is seven years.

At August 31, 1998, the Company has reserved a total of 88,558 and 35,127
shares of Common Stock for issuance upon the exercise of stock options and stock
warrants, respectively. The Company has also granted stock warrants in
connection with an agreement to provide consulting services (see Note 9).

The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option and award plan and the stock
warrants. During 1997 and 1998, the exercise price of each option granted was
greater than or equal to the estimated fair value of the Company's stock on the
date of grant. Accordingly, no compensation expense has been recognized under
this plan. For the years ended August 31, 1997 and 1998, the difference between
actual net loss and loss per share and net loss and loss per share on a pro
forma basis as if the Company had utilized the accounting methodology prescribed
by SFAS No. 123, "Accounting for Stock-Based Compensation," would have been $44
and $.02 per share and $547 and $.21 per share, respectively.

F-21
<PAGE> 119
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The estimated weighted average grant date fair value of options and
warrants granted during 1997 and 1998 was $1.10 per share and $31.76 per share,
respectively. For purposes of determining fair value of each option, the Company
used the minimum value method using the following assumptions:

<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Risk-free interest rate.............................. 6.18% to 6.88% 5.47% to 6.92%
Expected life........................................ 3 to 10 years 2.5 to 10 years
</TABLE>

In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Stock Purchase Plan"), which is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. The Stock Purchase Plan will
become effective, subject to stockholder approval, on the date an initial public
offering is consummated. One percent of the Common Stock outstanding, on a fully
diluted basis, on the date an initial public offering is consummated, will be
issuable under the terms of the Stock Purchase Plan. As of August 31, 1998, no
stock has been issued under the Stock Purchase Plan.

14. FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirement of SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

<TABLE>
<CAPTION>
AUGUST 31, 1997 AUGUST 31, 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents........................ $ 87,305 $ 87,305 $123,774 $123,774
Restricted investments........................... 67,206 67,233 63,207 63,857
Accounts receivable.............................. 4,044 4,044 9,458 9,458
Liabilities:
Accounts payable, accrued expenses and other
liabilities................................... 21,896 21,896 31,842 31,842
Customer deposits and deferred revenue........... 2,978 2,978 5,274 5,274
Convertible notes payable to stockholder......... 129,604 129,605 -- --
Notes payable and long-term obligations.......... 228,573 235,570 429,278 440,367
</TABLE>

The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, and customer deposits and deferred revenue approximates fair
value. The fair values of convertible notes payable to stockholder, and certain
notes payable and long-term obligations are estimated based on present values
using applicable market discount rates or rates that approximate what the
Company could obtain from the open market. The fair value of restricted
investments and the 1997 and 1998 Notes are based on quoted market prices. The
fair value estimates presented herein are based on pertinent information
available to management as of August 31, 1997 and 1998. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since the date presented, and therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.

F-22
<PAGE> 120
OPTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations
for the years ended August 31, 1997 and 1998:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $ 9,076 $ 9,546 $ 10,495 $ 10,720
Operating expenses................................. 12,693 14,096 17,003 18,841
Other expense...................................... 3,277 4,849 8,867 8,746
Loss before extraordinary item..................... (6,894) (9,399) (15,375) (16,867)
Extraordinary loss on debt extinguishment.......... -- -- -- --
Net loss........................................... (6,894) (9,399) (15,375) (16,867)
Dividends on preferred stock....................... -- -- -- --
Net loss attributable to common equity............. (6,894) (9,399) (15,375) (16,867)
Basic and diluted loss per common share............ (2.99) (4.01) (6.08) (6.65)
Weighted average number of shares outstanding...... 2,305 2,342 2,530 2,538
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $ 12,252 $ 14,639 $ 18,025 $ 20,047
Operating expenses................................. 18,748 20,285 24,656 29,464
Other expense...................................... 9,774 12,112 7,574 10,104
Loss before extraordinary item..................... (16,270) (17,758) (14,205) (19,521)
Extraordinary loss on debt extinguishment.......... -- -- -- (6,644)
Net loss........................................... (16,270) (17,758) (14,205) (26,165)
Dividends on preferred stock....................... -- -- (4,068) (4,680)
Net loss attributable to common equity............. (16,270) (17,758) (18,273) (30,845)
Basic and diluted loss per common share............ (6.31) (6.89) (6.84) (11.24)
Weighted average number of shares outstanding...... 2,578 2,578 2,673 2,743
</TABLE>

F-23
<PAGE> 121

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
OpTel, Inc.

We have audited the accompanying statement of revenues and direct expenses
of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc.
("OpTel") for the year ended December 31, 1997. This financial statement is the
responsibility of OpTel's management. Our responsibility is to express an
opinion on this financial statement based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, such financial statement presents fairly, in all material
respects, the revenues and direct expenses of the Assets and Liabilities of ICS
Communications, LLC acquired by OpTel, Inc. for the year ended December 31, 1997
in conformity with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

May 15, 1998

Dallas, Texas

F-24
<PAGE> 122

ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.

STATEMENTS OF REVENUES AND DIRECT EXPENSES

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Cable television.......................................... $14,559,625 $4,028,128
Telecommunications........................................ 2,127,310 354,587
----------- ----------
Total revenues.................................... 16,686,935 4,382,715
OPERATING EXPENSES:
Programming, access fees and revenue sharing.............. 8,747,441 1,909,037
Customer support, general and administrative.............. 5,371,634 1,215,493
Depreciation and amortization............................. 8,088,727 1,988,608
----------- ----------
Total operating expenses.......................... 22,207,802 5,113,138
----------- ----------
LOSS FROM OPERATIONS........................................ (5,520,867) (730,423)
INTEREST EXPENSE............................................ (141,504) (35,376)
----------- ----------
EXCESS OF DIRECT EXPENSES OVER REVENUES..................... $(5,662,371) $ (765,799)
=========== ==========
</TABLE>

See notes to financial statements.

F-25
<PAGE> 123

ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements include the accounts of ICS
Communications, LLC (the "Company") only as they relate to the assets acquired
and liabilities assumed by OpTel, Inc. ("OpTel") on April 9, 1998. The statement
of revenues and direct expenses include only the results of operations for the
assets acquired and liabilities assumed and do not include any amounts
representing corporate overhead of the Company or interest incurred on
liabilities not assumed by OpTel. In preparation of the statement of revenues
and direct expenses, certain regional overhead costs were allocated to the
assets acquired. Such allocations were based upon subscriber counts, cable
passings or other criteria as considered appropriate.

The Company's operations are in a single business segment, the providing of
cable television and local and long distance telephone services to the high
density residential market, including apartment complexes, condominiums and
other multi-family residential properties (collectively "MDUs"). The Company
provides these services generally under exclusive, long-term contracts with
owners and managers of MDUs.

The assets acquired include long-term contracts to provide cable television
and telephone services to MDU properties, the property and equipment comprising
the cable television and telephone delivery systems for each of the contracts,
other prepaid assets specifically identified at the date of the purchase
(generally prepaid rent on delivery equipment) and customer receivables. In
connection with the purchase, certain liabilities were assumed, generally
capital lease obligations related to the property and equipment used in
telephone delivery systems.

The primary markets of the assets acquired are major metropolitan areas in
Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas, and
the greater Washington D.C. area.

Interim Financial Information -- The accompanying unaudited consolidated
financial statement of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial information. In
the opinion of management, all adjustments (consisting only of normal recurring
entries) considered necessary for a fair presentation have been included.

Property and Equipment -- Property and equipment, including equipment under
capital leases, is stated at cost, which includes amounts for construction
materials, direct labor and overhead and capitalized interest. Cost of
maintenance and repairs is charged to operations as incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
various classes of property and equipment as follows:

<TABLE>
<S> <C>
Installed cable and headend equipment............ 5-10 years
Telephone switches and equipment................. 5-10 years
</TABLE>

Intangible Assets -- Intangible assets includes costs associated with
licensing fees, commissions and other direct costs incurred in connection with
the execution of rights-of-entry agreements to provide cable television and
telecommunications service to MDUs. Intangible assets are amortized using the
straight-line method over the lesser of the term of the right-of-entry agreement
or 5 years.

Revenue Recognition -- Cable subscriber fees for basic monthly services and
premium channels are billed in advance and recorded as revenue in the month the
service is provided. Telecommunication service billings include residential
service fees billed in advance plus amounts based on minutes of use billed in
arrears. Telecommunications service revenues are recognized in the month the
service is provided.

F-26
<PAGE> 124
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires 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.
Significant estimates included in the accompanying financial statements include
the allowance for doubtful accounts, the recoverability of the carrying value of
property and equipment and intangible assets and the allocation of regional
overhead as it relates to the assets acquired. Actual results could differ from
those estimates.

2. CAPITAL LEASE OBLIGATIONS

During 1995 and 1996 the Company entered into capital leases for telephone
equipment with five year terms. The leases are payable in monthly installments
ranging from $1,267 to $2,121 bearing interest at rates ranging from 10.4% to
13.0%. Scheduled maturities on capital lease obligations are as follows:

<TABLE>
<S> <C>
Year ending:
1998........................................... $ 379,980
1999........................................... 379,980
2000........................................... 243,440
Thereafter..................................... --
----------
Total payments......................... 1,003,400
Less amounts representing interest............. (178,344)
----------
Capital lease obligation............... $ 825,056
==========
</TABLE>

3. RELATED PARTY TRANSACTIONS

The Company's largest shareholder is MCI Telecommunications Corporation
("MCI"). In the ordinary course of the Company's local and long distance
telephone services, the Company purchases certain services from MCI under terms
and rates that management believes are no more favorable to the Company than
those arranged with other parties.

F-27
<PAGE> 125

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

OPTEL, INC.

COMMON STOCK

[LOGO]

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

PROSPECTUS

, 1999

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

SALOMON SMITH BARNEY

GOLDMAN, SACHS & CO.

BEAR, STEARNS & CO. INC.

CIBC WORLD MARKETS

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 126

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following statement sets forth the expenses payable in connection with
this Registration Statement (estimated except for the registration fee and the
NASD filing fee), all of which will be borne by OpTel:

<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............... $ 29,500
NASD filing fee............................................. $ 10,500
National Market listing fee................................. $ 50,000
Legal fees and expenses..................................... $200,000
Accountant's fees and expenses.............................. $150,000
Printing costs.............................................. $150,000
Miscellaneous............................................... $160,000
--------
Total............................................. $750,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by the DGCL, indemnify all persons whom it may
indemnify pursuant thereto (i.e., directors and officers) and shall advance
expenses incurred in defending any proceeding for which such right to
indemnification is applicable, provided that, if the DGCL so requires, the
indemnitee provides the Company with an undertaking to repay all amounts
advanced if it is determined by a final judicial decision that such person is
not entitled to indemnification pursuant to this provision. The Company's
Certificate of Incorporation also contains a provision eliminating the personal
liability of the Company's directors for monetary damages for breach of any
fiduciary duty. By virtue of this provision, under the DGCL, a director of the
Company will not be personally liable for monetary damages for breach of his
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock purchases or redemptions that are
unlawful under the DGCL, and (iv) any transaction from which a director derives
an improper personal benefit. However, this provision of the Company's
Certificate of Incorporation pertains only to breaches of duty by directors as
directors and not in any other corporate capacity such as officers, and limits
liability only for breaches of fiduciary duties under the DGCL and not for
violations of other laws, such as the federal securities laws. As a result of
the inclusion of such provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with respect
to such actions. The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the Company and its stockholders.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During July 1998, the Company issued $200,000,000 principal amount of the
1998 Notes to qualified institutional buyers who purchased the securities in a
private placement pursuant to Rule 144A and/or buyers who purchased the
securities pursuant to Regulation S. The gross proceeds of this private
placement were approximately $194.5 million. In each instance, the offers and
sales were made without any public solicitation; the notes bear restrictive
legends; and appropriate stop transfer instructions have been or will be given
to the transfer agent. In connection with such offering, Salomon Brothers Inc
(an affiliate of Salomon Smith Barney Inc.), Goldman, Sachs & Co. and CIBC
Oppenheimer Corp. received customary commissions. All issuances

II-1
<PAGE> 127

of securities in this private placement were made in reliance on the exemptions
from registration provided by Section 4(2) of the Securities Act, and Rule 144A
and Regulation S promulgated thereunder, as transactions by an issuer not
involving a public offering.

On April 13, 1998, in connection with the acquisition of certain assets of
ICS, the Company issued 164,271.54 shares of Common Stock and 991.1039 shares of
the Series B Preferred. Such issuances were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering. All of the securities were
acquired by the recipients thereof for investment and with no view toward the
sale or redistribution thereof. The sales were made without any public
solicitation; the stock certificates bear restrictive legends and appropriate
stop transfer instructions have been or will be given to the transfer agent.

Effective March 1, 1998, VPC exchanged $139.2 million principal amount of
the GVL Notes, constituting all of the GVL Notes, for 6,962.21365 shares of the
Series A Preferred. The issuance of the shares of Series A Preferred in exchange
for the GVL Notes was made in reliance on the exemption from registration
provided by Section 3(a)(9) of the Securities Act for securities exchanged by an
issuer with its existing security holders exclusively. No commissions or other
remuneration was paid or given for soliciting such exchange.

In August 1997, immediately prior to CDPQ's purchase of Vanguard's minority
interest in the Company, Vanguard exercised the Vanguard Option and purchased
48,937 shares of the Class B Common at a price of $53.55 per share (aggregate
consideration of $2,620,392). The issuance of the shares of Class B Common
pursuant to Vanguard's exercise of the Vanguard Option was made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
as transactions by an issuer not involving a public offering. The securities
were acquired without any public solicitation; the securities bears a
restrictive legend and appropriate stop transfer instructions have been or will
be given to the transfer agent.

On July 11, 1997, the Company issued to Mr. Cole a warrant to purchase up
to 9,406.36 shares of Common Stock at an exercise price of $74.42 per share,
subject to adjustment, in consideration for Mr. Cole's separation agreement. The
warrant is exercisable until July 11, 2002. On July 3, 1997, the Company issued
to Mr. Hecht a warrant to purchase up to 728.86 shares of Common Stock at an
exercise price of $85.75 per share, subject to adjustment, in consideration for
Mr. Hecht's settlement agreement. The warrant is exercisable until December 31,
2000. The issuance of these securities was made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering. The securities were acquired by
the recipients thereof for investment and with no view toward the sale or
redistribution thereof. The securities were acquired without any public
solicitation; the securities bear restrictive legends and appropriate stop
transfer instructions have been or will be given to the transfer agent.

During February 1997, the Company issued $225,000,000 principal amount of
the 1997 Notes and 225,000 shares of the Class C Common to qualified
institutional buyers who purchased the securities in a private placement
pursuant to Rule 144A and/or buyers who purchased the securities pursuant to
Regulation D. The gross proceeds of this private placement were approximately
$220 million. In each instance, the offers and sales were made without any
public solicitation; the notes and stock certificates bear restrictive legends;
and appropriate stop transfer instructions have been or will be given to the
transfer agent. In connection with such offering, Salomon Brothers Inc and
Merrill Lynch, Pierce Fenner & Smith Incorporated received customary
commissions. All issuances of securities in this private placement were made in
reliance on the exemptions from registration provided by Section 4(2) of the
Securities Act, and Rule 144A and Regulation D promulgated thereunder, as
transactions by an issuer not involving a public offering.

During fiscal 1997, fiscal 1998 and fiscal 1999, the Company granted
options to purchase a total of 235,853.25 shares of Common Stock to certain
employees of the Company as part of their compensation packages. Such issuances
were made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering. All of the securities were acquired by the recipients thereof for
investment and with no view toward the sale or redistribution thereof.

II-2
<PAGE> 128

The securities were acquired without any public solicitation; the securities
bear restrictive legends; and appropriate stop transfer instructions have been
or will be given to the transfer agent.

On September 1, 1996, the Company issued to Mr. Kofalt a warrant to
purchase up to 24,992 shares of Common Stock at an exercise price of $53.55 per
share in consideration for Mr. Kofalt's separation agreement. The warrant is
exercisable until August 31, 1999. The issuance of this security was made in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
The security was acquired by the recipient thereof for investment and with no
view toward the sale or redistribution thereof. The security was acquired
without any public solicitation; the security bears a restrictive legend; and
appropriate stop transfer instructions have been or will be given to the
transfer agent.

In August 1996, in connection with a negotiated settlement of certain
disputes between the Company and Vanguard, which at such time held a minority
interest in the Company, the Company granted Vanguard an option to purchase
48,937 shares of Class B Common at an exercise price of $53.55 per share,
subject to adjustment. The issuance of this security was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The security was
acquired by the recipient thereof for investment and with no view toward the
sale or redistribution thereof. The Vanguard Option was subsequently exercised.

The Company issued GVL Notes to VPC in the amount of $23.7 million , $73.4
million and $17.8 million during fiscal 1997, fiscal 1996 and the eight-month
period ended August 31, 1995, respectively. All of the GVL Notes were
subsequently exchanged for shares of Series A Preferred, as described above. The
issuance of the GVL Notes was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act as transactions not
involving a public offering. The GVL Notes were acquired by VPC for investment
and with no view toward the sale or distribution thereof.

In addition, on July 26, 1995, VPC purchased from the Company (i) 311,652
shares of Class B Common for approximately $16.7 million and (ii) a 15%
convertible note having a principal amount of approximately $8.3 million. On
April 1, 1996, the note was converted into 155,229 shares of Class B Common
(after giving effect to the contribution, in connection with the settlement of
certain disputes between the then principal stockholders, of certain shares
received by VPC as accrued interest on the note). The issuance of these
securities was made in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act as transactions by an issuer not involving a
public offering. The securities were acquired by the recipient thereof without a
view toward the sale or redistribution thereof.

ITEM 16. EXHIBITS AND FINANCIAL DATA SCHEDULES.

(a) Exhibits

II-3
<PAGE> 129

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto.*
3.2 -- Amended and Restated Bylaws of OpTel.*
3.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.(4)
3.4 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.(4)
4.1 -- See the Amended and Restated Certificate of Incorporation
and amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and as
Escrow Agent.(1)
4.3 -- Form of 1997 Note (included in Exhibit 4.2).(1)
4.4 -- Escrow Agreement, dated as of February 14, 1997, between
OpTel and U.S. Trust Company of Texas, N.A., as Trustee
and as Escrow Agent.(1)
4.5 -- Indenture dated as of July 7, 1998 between OpTel and U.S.
Trust Company of Texas, N.A., as Trustee.(5)
4.6 -- Form of 1998 Note (included in Exhibit 4.5).(5)
4.7 -- Escrow Agreement, dated as of July 7, 1998 between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and
Escrow Agent.(5)
4.8 -- Form of Stock Certificate for the Common Stock.*
5.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP.*
8.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP re: Tax
matters (included in Exhibit 5.1).
10.1 -- Stockholders' Agreement dated as of August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.2 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.(4)
10.3 -- Common Stock Registration Rights Agreement, dated as of
February 14, 1997, among OpTel, VPC, GVL and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A.(1)
10.4 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
10.5 -- Registration Rights Agreement dated as of April 9, 1998,
between OpTel, ICS, Nomura and MCI.(4)
10.6 -- Warrant Agreement dated as of September 1, 1996, between
OpTel and James A. Kofalt.(1)
10.7 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
10.8 -- Lease Agreement dated July 25, 1995 between Space Center
Dallas, Inc. and OpTel.(1)
10.9 -- First Amendment to Lease Agreement dated August 8, 1996
between Space Center Dallas, Inc. and OpTel.(1)
10.10 -- Restated Incentive Stock Plan of OpTel, dated June 4,
1998, as amended on January 25, 1999.*
10.11 -- Annual Bonus Plan of OpTel.(1)
</TABLE>

II-4
<PAGE> 130

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.*
10.13 -- Employment Agreement between Bertrand Blanchette and
OpTel, dated June 17, 1996.(6)
10.14 -- Employment Agreement between Stephen Dube and OpTel,
dated November 19, 1996.(6)
10.15 -- Employment Agreement between Lynn Zera and OpTel, dated
November 7, 1995.(6)
10.16 -- Employment Agreement between Louis Brunel and OpTel dated
November 15, 1996.(1)
10.17 -- Employment Agreement between Michael Katzenstein and
OpTel dated September 18, 1995.(1)
10.17(a) -- Employment Agreement between Michael Katzenstein and
OpTel dated January 14, 1998.(6)
10.18 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.(4)
10.19 -- City of Houston, Texas, Ordinance No. 89-338 dated March
29, 1989 granting to PrimeTime Cable Partners I, Ltd. the
right to operate for 15 years a Community Antenna
Television System, and subsequent ordinances consenting
to assignment of rights to EagleVision and to TVMAX
Communications (Texas), Inc.(1)
10.20 -- City of Houston, Texas, Ordinance No. 97-285 dated March
19, 1997, granting TVMAX Communications (Texas), Inc. a
temporary permit to operate a Telecommunications
Network.(1)
10.21 -- City of Houston, Texas, Ordinance No. 97-1088 dated
September 3, 1997, extending to TVMAX Communications
(Texas), Inc. a temporary permit to operate a
Telecommunications Network (originally granted pursuant
to the permit referenced in Exhibit 10.20 hereto).(2)
10.22 -- City of Houston, Texas, Ordinance No. 97-1567 dated
December 23, 1997, granting to TVMAX Communications
(Texas), Inc. a franchise to operate a Telecommunications
Network (superseding and replacing the temporary permits
referenced in Exhibits 10.20 and 10.21 hereto).(4)
10.23 -- Amendment Number 001 to the Videotron/Lucent Agreement,
dated August 28, 1997, among Videotron Telecom Ltee and
Lucent Technologies Canada Inc. and TVMAX and Lucent
Technologies Inc.(2)
10.24 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
10.25 -- Residential Reseller Agreement dated as of May 29, 1998
by and between Teleport Communications Group Inc. and
TVMAX.(7)**
10.26 -- Strategic Alliance Agreement dated as of March 10, 1998
between I(3)S, Inc. and TVMAX.(6)**
10.27 -- EchoStar Satellite Corporation MDU Dealer Agreement,
dated as of January 14, 1999, by and between EchoStar and
TVMAX Telecom, Inc.*
10.28 -- Conversion and Exchange Agreement.*
21.1 -- List of subsidiaries of OpTel.*
23.1 -- Consent of Kronish Lieb Weiner & Hellman LLP (included in
exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.
</TABLE>

II-5
<PAGE> 131

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
24.1 -- Power of Attorney as set forth on the signature page of
this Registration Statement filed with the Commission on
June 5, 1998.
24.2 -- Power of Attorney.
</TABLE>

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

(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on April 10, 1997, and incorporated herein by
reference.

(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.

(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.

(4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed
with the Commission on June 5, 1998, and incorporated herein by reference.

(5) Filed as an exhibit to Amendment No. 2 to OpTel's registration statement on
Form S-1/A filed with the Commission on August 14, 1998, and incorporated
herein by reference.

(6) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on September 4, 1998, and incorporated herein by
reference.

(7) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on
Form S-4 filed with the Commission on October 9, 1998, and incorporated
herein by reference.

* To be filed by Amendment to this Registration Statement.

** The Commission granted the Company's request for confidential treatment of
portions of this document in an order dated October 9, 1998.

(b) The financial statements and financial statement schedules filed as
part of this Registration Statement are as follows:

1. Financial Statements. See Index to Financial Statements on page F-1
of the Prospectus included in this Registration Statement.

2. Financial Statement Schedule II.

All schedules, other than Schedule II, have been omitted as they are not
required under the related instructions, are inapplicable, or because the
information required is included in the financial statements and related notes
thereto.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by OpTel pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be initial bona fide offering thereof.

(3) To provide to the Underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-6
<PAGE> 132

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of OpTel
pursuant to the foregoing provisions, or otherwise, OpTel has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by OpTel of expenses incurred or paid by a director, officer or
controlling person of OpTel in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, OpTel will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

II-7
<PAGE> 133

SIGNATURES

Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment No. 4 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on this 24th day of March, 1999.

OPTEL, INC.

By: /s/ BERTRAND BLANCHETTE
----------------------------------
Bertrand Blanchette
Chief Financial Officer

Pursuant to the requirements of the Securities Act, this Amendment No. 4 to
the Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

Principal Executive Officer:

* President and Chief Executive March , 1999
- ----------------------------------------------------- Officer
Louis Brunel

Principal Financial and Accounting Officers:

/s/ BERTRAND BLANCHETTE Chief Financial Officer March 24, 1999
- -----------------------------------------------------
Bertrand Blanchette

* Controller March , 1999
- -----------------------------------------------------
Craig Milacek

Directors:

* Chairman of the Board March , 1999
- -----------------------------------------------------
Andre Chagnon

* Vice Chairman of the Board March , 1999
- -----------------------------------------------------
Alain Michel

* Director March , 1999
- -----------------------------------------------------
Louis Brunel

* Director March , 1999
- -----------------------------------------------------
Frederick W. Benn

* Director March , 1999
- -----------------------------------------------------
Christian Chagnon

* Director March , 1999
- -----------------------------------------------------
William O. Hunt

* Director March , 1999
- -----------------------------------------------------
R. Douglas Leonhard
</TABLE>

II-8
<PAGE> 134

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

* Director March , 1999
- -----------------------------------------------------
Lynn McDonald

* Director March , 1999
- -----------------------------------------------------
Jayne L. Stowell
</TABLE>

*By: /s/ BERTRAND BLANCHETTE
-------------------------------
Bertrand Blanchette
as attorney-in-fact

II-9
<PAGE> 135

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
OpTel, Inc.:

We have audited the financial statements of OpTel, Inc. and subsidiaries (the
"Company") as of August 31, 1997 and 1998, and for each of the three years in
the period ended August 31, 1998 and have issued our report dated October 6,
1998; such financial statements and report are included herein. Our audits also
included the financial statement schedule of OpTel, Inc., listed in Item 14.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas

October 6, 1998

S-1
<PAGE> 136

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)

<TABLE>
<CAPTION>
DEDUCTIONS,
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
PERIOD EXPENSES RECOVERIES PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>

ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended August 31, 1996..................... $ 473 $1,376 $(1,307) $ 542
Year ended August 31, 1997..................... 542 1,788 (1,205) 1,125
Year ended August 31, 1998..................... 1,125 2,707 (2,029) 1,803
Six months ended February 28, 1999
(unaudited)................................. 1,803 1,922 (1,366) 2,359
</TABLE>

S-2
<PAGE> 137

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed Form of Underwriting Agreement.*
2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among
OpTel, ICS and ICS Licenses, Inc., dated as of March 4,
1998.(4)
2.2 -- Amendment Number One to the ICS Purchase Agreement, dated
as of March 4, 1998.(4)
2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement"),
dated as of August 13, 1997, among OpTel, Phonoscope,
Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook
and Lee Cook Family Trust.(2)
2.4 -- Amendment Number One to the Phonoscope Purchase
Agreement, dated as of August 13, 1997.(4)
2.5 -- Amendment Number Two to the Phonoscope Purchase
Agreement, dated as of August 13, 1997.(4)
3.1 -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto.*
3.2 -- Amended and Restated Bylaws of OpTel.*
3.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.(4)
3.4 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.(4)
4.1 -- See the Amended and Restated Certificate of Incorporation
and amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and as
Escrow Agent.(1)
4.3 -- Form of 1997 Note (included in Exhibit 4.2).(1)
4.4 -- Escrow Agreement, dated as of February 14, 1997, between
OpTel and U.S. Trust Company of Texas, N.A., as Trustee
and as Escrow Agent.(1)
4.5 -- Indenture dated as of July 7, 1998 between OpTel and U.S.
Trust Company of Texas, N.A., as Trustee.(5)
4.6 -- Form of 1998 Note (included in Exhibit 4.5).(5)
4.7 -- Escrow Agreement, dated as of July 7, 1998 between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and
Escrow Agent.(5)
4.8 -- Form of Stock Certificate for the Common Stock.*
5.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP.*
8.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP re: Tax
matters (included in Exhibit 5.1).
10.1 -- Stockholders' Agreement dated as of August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.2 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.(4)
10.3 -- Common Stock Registration Rights Agreement, dated as of
February 14, 1997, among OpTel, VPC, GVL and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A.(1)
10.4 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
</TABLE>

<PAGE> 138

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5 -- Registration Rights Agreement dated as of April 9, 1998,
between OpTel, ICS, Nomura and MCI.(4)
10.6 -- Warrant Agreement dated as of September 1, 1996, between
OpTel and James A. Kofalt.(1)
10.7 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
10.8 -- Lease Agreement dated July 25, 1995 between Space Center
Dallas, Inc. and OpTel.(1)
10.9 -- First Amendment to Lease Agreement dated August 8, 1996
between Space Center Dallas, Inc. and OpTel.(1)
10.10 -- Restated Incentive Stock Plan of OpTel, dated June 4,
1998, as amended on January 25, 1999.*
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.*
10.13 -- Employment Agreement between Bertrand Blanchette and
OpTel, dated June 17, 1996.(6)
10.14 -- Employment Agreement between Stephen Dube and OpTel,
dated November 19, 1996.(6)
10.15 -- Employment Agreement between Lynn Zera and OpTel, dated
November 7, 1995.(6)
10.16 -- Employment Agreement between Louis Brunel and OpTel dated
November 15, 1996.(1)
10.17 -- Employment Agreement between Michael Katzenstein and
OpTel dated September 18, 1995.(1)
10.17(a) -- Employment Agreement between Michael Katzenstein and
OpTel dated January 14, 1998.(6)
10.18 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.(4)
10.19 -- City of Houston, Texas, Ordinance No. 89-338 dated March
29, 1989 granting to PrimeTime Cable Partners I, Ltd. the
right to operate for 15 years a Community Antenna
Television System, and subsequent ordinances consenting
to assignment of rights to EagleVision and to TVMAX
Communications (Texas), Inc.(1)
10.20 -- City of Houston, Texas, Ordinance No. 97-285 dated March
19, 1997, granting TVMAX Communications (Texas), Inc. a
temporary permit to operate a Telecommunications
Network.(1)
10.21 -- City of Houston, Texas, Ordinance No. 97-1088 dated
September 3, 1997, extending to TVMAX Communications
(Texas), Inc. a temporary permit to operate a
Telecommunications Network (originally granted pursuant
to the permit referenced in Exhibit 10.20 hereto).(2)
10.22 -- City of Houston, Texas, Ordinance No. 97-1567 dated
December 23, 1997, granting to TVMAX Communications
(Texas), Inc. a franchise to operate a Telecommunications
Network (superseding and replacing the temporary permits
referenced in Exhibits 10.20 and 10.21 hereto).(4)
10.23 -- Amendment Number 001 to the Videotron/Lucent Agreement,
dated August 28, 1997, among Videotron Telecom Ltee and
Lucent Technologies Canada Inc. and TVMAX and Lucent
Technologies Inc.(2)
</TABLE>

<PAGE> 139

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
10.25 -- Residential Reseller Agreement dated as of May 29, 1998
by and between Teleport Communications Group Inc. and
TVMAX.(7)**
10.26 -- Strategic Alliance Agreement dated as of March 10, 1998
between I(3)S, Inc. and TVMAX.(6)**
10.27 -- EchoStar Satellite Corporation MDU Dealer Agreement,
dated as of January 14, 1999, by and between EchoStar and
TVMAX Telecom, Inc.*
10.28 -- Conversion and Exchange Agreement.*
21.1 -- List of subsidiaries of OpTel.*
23.1 -- Consent of Kronish Lieb Weiner & Hellman LLP (included in
exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Power of Attorney as set forth on the signature page of
this Registration Statement filed with the Commission on
June 5, 1998.
24.2 -- Power of Attorney.
</TABLE>

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

(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on April 10, 1997, and incorporated herein by
reference.

(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.

(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.

(4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed
with the Commission on June 5, 1998, and incorporated herein by reference.

(5) Filed as an exhibit to Amendment No. 2 to OpTel's registration statement on
Form S-1/A filed with the Commission on August 14, 1998, and incorporated
herein by reference.

(6) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on September 4, 1998, and incorporated herein by
reference.

(7) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on
Form S-4 filed with the Commission on October 9, 1998, and incorporated
herein by reference.

* To be filed by Amendment to this Registration Statement.

** The Commission granted the Company's request for confidential treatment of
portions of this document in an order dated October 9, 1998.

<PAGE> 1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this amendment No. 4 to Registration Statement No.
333-56231 on Form S-1 of OpTel, Inc. of our reports dated October 6, 1998, on
the financial statements and financial statement schedule of OpTel, Inc. and to
the use of our report dated May 15, 1998 on the financial statement of the
Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc. for
the year ended December 31, 1997, appearing in the Prospectus or elsewhere in
this Registration Statement. We also consent to the reference to us under the
headings "Summary Consolidated Financial and Operating Data", "Selected
Historical Consolidated Financial and Operating Data" and "Experts" in such
Prospectus.

/s/ DELOITTE & TOUCHE LLP
- ------------------------------------

March 24, 1999

Dallas, Texas

<PAGE> 1

EXHIBIT 24.2

POWER OF ATTORNEY

Each director of OpTel, Inc., a Delaware corporation ("OpTel") whose signature
appears below constitutes and appoints Louis Brunel and Bertrand Blanchette or
either of them (with full power in each to act alone), his or her true and
lawful attorneys-in-fact, with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to OpTel's Registration
Statement on Form S-1, originally filed with the Securities and Exchange
Commission (the "Commission") on June 5, 1998, and to file the same, with all
exhibits thereto, and other documents in connection therewith including,
without limitation, any registration statements for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, with the Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ANDRE CHAGNON Chairman of the Board March 24, 1999
- -----------------------
Andre Chagnon

/s/ FREDERICK W. BENN Director March 24, 1999
- -----------------------
Frederick W. Benn

/s/ R. DOUGLAS LEONHARD Director March 24, 1999
- -----------------------
R. Douglas Leonhard

/s/ JAYNE L. STOWELL Director March 24, 1999
- -----------------------
Jayne L. Stowell
</TABLE>