MGC COMMUNICATIONS INC, S-1/A, 1998-05-11

MGC COMMUNICATIONS INC
S-1/A, 1998-05-11
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1998.

REGISTRATION NO. 333-49085
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

MGC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
NEVADA 4813 88-0360042
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

3301 N. BUFFALO DRIVE
LAS VEGAS, NEVADA 89129
(702) 310-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

KENT F. HEYMAN, ESQ.

3301 N. BUFFALO DRIVE
LAS VEGAS, NEVADA 89129
(702) 310-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
ROBERT B. GOLDBERG, ESQ. RALPH J. SUTCLIFFE, ESQ.
ELLIS, FUNK, GOLDBERG, LABOVITZ & DOKSON, P.C. KRONISH, LIEB, WEINER & HELLMAN LLP
SUITE 400 1114 AVENUE OF THE AMERICAS
3490 PIEDMONT ROAD, N.E. 46TH FLOOR
ATLANTA, GEORGIA 30305 NEW YORK, NEW YORK 10036
(404) 233-2800 (212) 479-6000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of 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, 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,
check the following box. [ ]
------------------------

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 THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

MGC COMMUNICATIONS, INC.

CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF
REGULATION S-K, SHOWING THE LOCATION
IN THE PROSPECTUS OF THE ITEMS ON FORM S-1

<TABLE>
<CAPTION>
NAME AND CAPTION IN FORM S-1
---------------------------- CAPTION OR LOCATIONS IN PROSPECTUS
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus Inside Front Cover Page; Additional Information;
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered Outside Front Cover Page; Prospectus Summary;
Description of Securities
10. Interests of Named Experts and Counsel Legal; Experts
11. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Capitalization;
Selected Historical Financial and Operating Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Stockholders; Description of Securities; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Description of Securities
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 11, 1998

PRELIMINARY PROSPECTUS

3,500,000 SHARES

[MGC LOGO]
MGC COMMUNICATIONS, INC.

COMMON STOCK

All the 3,500,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by MGC
Communications, Inc. ("MGC" or the "Company"). Prior to the Offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be in the range of $16.00
and $18.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application has
been made for quotation of the Common Stock on the Nasdaq National Market under
the symbol "MGCX."
------------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
==============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- --------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
==============================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $ .

(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock on the same terms and conditions
as set forth above to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered severally by the Underwriters,
subject to prior sale, when, as and if delivered and accepted by the
Underwriters, subject to certain conditions, including the approval of certain
legal matters by counsel. The Underwriters reserve the right to withdraw, cancel
or modify the Offering and to reject orders in whole or in part. It is expected
that delivery of the Common Stock will be made against payment therefor at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York on or
about , 1998.
------------------------------
BEAR, STEARNS & CO. INC. FURMAN SELZ
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 4

[U.S. MAP SETTING FORTH COMPANY LOCATIONS AND EXPANSION LOCATIONS]

The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined and reported on by its
independent auditors, and may in its discretion distribute interim reports to
its stockholders containing unaudited financial statements.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON
STOCK INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND
THE IMPOSITION OF PENALTY BIDS. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING
MAY ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET. SEE "UNDERWRITING."
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the information and financial statements (including the
notes thereto) included elsewhere in this Prospectus. Prospective investors
should carefully consider the factors set forth in "Risk Factors." References in
this Prospectus to the "Company" mean MGC Communications, Inc. and its
subsidiary. Certain terms used herein are defined in the Glossary attached
hereto as Annex A. Immediately prior to the effective date of the Registration
Statement of which this Prospectus is a part, the Company effected a six for ten
reverse split of its outstanding Common Stock. The Financial Statements have not
been restated to reflect the reverse split, but all other references in this
Prospectus to shares of Common Stock and per share amounts give effect to the
reverse split unless otherwise indicated.

THE COMPANY

MGC Communications, Inc. ("MGC" or the "Company") is a rapidly growing
integrated communications services provider ("ICP") offering switched local and
long distance voice and data services. The Company focuses on small business and
residential users, the largest segment of the national communications market,
based on access lines in service. The Company began operations in December 1996
in Las Vegas, Nevada as a switched local exchange service provider and
subsequently expanded service to selected suburban areas of Los Angeles,
California and Atlanta, Georgia. As of March 31, 1998, the Company had 25,624
end user access lines sold of which 20,924 lines were in service. MGC plans to
enter seven new markets by the end of 1998 in California, Illinois and Florida
and expects to be collocated in over 200 central offices ("COs") of five
incumbent local exchange carriers ("ILECs") by that date. This expansion will
allow MGC to access over 11 million customer lines.

MGC's network strategy consists of purchasing and deploying switching
equipment, collocating interconnection equipment in ILECs' COs and leasing fiber
optic transmission capacity from ILECs and other providers of communications
transport services. The Company believes its switch-based network architecture
represents a demand-driven approach requiring less capital deployment than
building its own fiber optic infrastructure. Further, upon receiving state
certification as a competitive local exchange carrier ("CLEC") in a particular
market, the Company can begin to offer services in that market in as little as
six months. Management believes the Company's network architecture and equipment
installation plan will enable it to (i) rapidly penetrate and expand its
addressable market, (ii) achieve cost effective network operations and economies
of scale in sales and marketing, (iii) secure a physical presence for
collocation in ILEC central offices before such space becomes more difficult to
obtain and (iv) maximize economic returns when compared to total service resale
and other network construction alternatives.

Management believes that the Company's network deployment strategy results
in a shortened timeframe to reach positive operating cash flow when compared to
a traditional fiber build strategy. For example, the Company's existing Las
Vegas operations generated positive EBITDA of $145,800 for the month of February
1998 (fifteen months after the initiation of service), based on 17,744 lines in
service as of February 28, 1998. Management believes that as it enters
additional markets it will achieve greater operating cost efficiencies as
corporate overhead and management information system costs are spread over a
larger number of markets.

In addition to providing basic voice services, the Company's network
platform can also be used to support high speed data services. During 1998, the
Company plans to introduce a portfolio of high speed data services for remote
LAN and Internet access utilizing new digital subscriber line ("DSL") modems.
The Company has recently deployed a dedicated leased ATM network backbone
connecting its service territories and has installed Nortel's Internet Thruway
("ITW") hardware product which eliminates the need for an Internet service
provider ("ISP") to install traditional terminating modem hardware. Moreover,
because of the transport capabilities of the Company's ATM network backbone, an
ISP who purchases the Company's ITW product will also be able to offer its
services in any other cities where the Company is located without the
traditional upfront investment in modem hardware in such remote location.

3
<PAGE> 6

The Company believes that superior customer service is critical to
capturing and retaining customers within its markets. The Company continually
enhances its service approach, which utilizes a highly trained team of customer
sales and service representatives to coordinate customer installation, billing
and service. Because a comprehensive and robust management information system is
a critical component of MGC's service goal, the Company has installed a fully
automated and proprietary system which it believes will provide MGC with a
significant competitive advantage. The Company's management information system
is designed to provide integrated functionality for all aspects of its business,
including order provisioning and monitoring, customer care, billing and
collection, general ledger, payroll, fixed asset management, purchasing and
personnel management.

BUSINESS STRATEGY

MGC's objective is to become the primary provider of communications
services to its existing and target customers. Key elements of the Company's
strategy include:

Target Small Business and Residential Users. The Company believes the
small business and residential customer base is the largest segment of the
communications market in the United States, based on access lines in service.
The Company is targeting suburban areas of Tier I Markets because these areas
have concentrated numbers of small businesses (3-50 lines), ISPs, pay phone
operators, multiple dwelling unit customers and single family residences. These
market segments generally require only basic communication services such as
local dialtone, common calling features (such as voice mail), long distance,
data services and Internet access. Further, the Company believes its only
significant switch-based competitor for its customers in these markets is the
ILEC.

Deploy a Capital Efficient Network. MGC is one of the first ICPs to
utilize a network strategy of purchasing and deploying switches, collocating in
the COs of the ILEC and leasing the necessary transport. The Company employs
three basic types of transport: (i) unbundled loops which connect a customer to
the Company's collocated facilities in an ILEC CO, (ii) local transport which
connects the Company's collocation equipment to its switching centers that house
its Nortel DMS 500 circuit-based local and long distance switches and data
switching equipment and (iii) long distance transport from its switching centers
which connects its customers' long distance calls to national and international
destinations. Management believes this network strategy provides for a
demand-driven capital deployment plan that will provide an attractive return on
invested capital. Recently, the Company implemented packetized voice over a
dedicated leased ATM network backbone as an alternative long distance transport
solution.

Implement Rapid Service Rollout. The Company's strategy is to address the
greatest percentage of its target market as quickly as possible. To accomplish
this, the Company has accelerated its ILEC CO collocation program and is rapidly
deploying its combined local and long distance switches, unbundled transport and
local loops and data services infrastructure in each of its markets.

Control Customer Elements of the Networks. The Company obtains control of
its customers through the acquisition of local loop connections. Upon leasing a
line from the ILEC, the Company effectively places the customer on its network.
This connection serves as the platform for delivering the Company's current and
future communication services to the customer. Any changes to the customer's
service profile, including service enhancements, are under the direct control of
the Company, with the exception of repairs which are infrequent and may require
the participation of the ILEC's network maintenance staff.

Ensure Timely and Accurate Provisioning Process. The Company believes one
of the keys to its success is managing the provisioning process so that new
customers are transferred from the ILEC's network to the Company's network
correctly and in a timely fashion. The Company has committed significant time
and resources to devising more efficient provisioning processes in each of its
markets. It closely monitors ILEC installation performance to assure
provisioning is in accordance with the standards set forth in the Company's
interconnection agreement with the ILEC. The Company is also working with ILECs
to create interfaces whereby orders are provisioned electronically, which should
further improve provisioning performance.

4
<PAGE> 7

Focus on Targeted Sales and Marketing Effort. The Company's sales programs
include direct sales to business customers, vendor and affinity programs, direct
mail, telemarketing and targeted advertising, particularly for residential
customers. The Company has both local and national sales personnel for business
customers and has centralized its sales order personnel for residential
customers. The Company's national sales group concentrates on large basic
telephone service users such as multi-tenant buildings, pay phone operators,
ISPs and wholesale customers. The local sales group solicits business customers
and coordinates activities with equipment vendors and affinity groups.

Provide Superior Customer Service. The Company utilizes a centralized team
of highly trained customer sales and service representatives ("CSRs") to
coordinate initial residential inquiries and orders and post-installation
billing and customer care related issues for all customers. The CSRs are able to
leverage the Company's proprietary management information system to gain
immediate access to the Company's customer data, enabling quick and effective
responses to customer requests and needs at any time. Furthermore, this system
permits the Company to present its customers with one fully integrated monthly
billing statement for all basic communication services. By having a centralized
call service center operated on a 24 hours a day, seven days a week basis in Las
Vegas, the Company is better able to control quality of service and personnel
and related training than if call centers were maintained in each market.

Leverage Sophisticated Management Information System. A comprehensive
management information system is a critical component to managing the Company's
business as well as offering superior customer service. The Company has
installed a fully automated, proprietary management information system designed
to provide comprehensive, integrated features addressing all aspects of its
business, including customer care, billing and collections, general ledger,
payroll, fixed asset management, purchasing and personnel. The Company believes
this system is adaptable to changing circumstances and multiple ILEC interfaces
and is scaleable to support the Company's operations throughout its expected
growth.

Capitalize on Management Expertise. The Company has recruited a team of
experienced business executives with entrepreneurial backgrounds. Maurice J.
Gallagher, Jr., Chairman, has been a founder of a number of start-up businesses,
including ValuJet Airlines, Inc. ("ValuJet") and BankServ, LLC ("BankServ").
Nield J. Montgomery, CEO and President, has over 35 years of experience in the
communications industry, most recently with ICG Communications, Inc. ("ICG").
Other executives have held senior management positions at major communications
companies, including, among others, Sprint Corporation ("Sprint"), Central
Telephone Company ("Centel"), NYNEX Corporation ("NYNEX"), Continental Telephone
Company ("Contel"), GTE Corporation ("GTE") and MCI Communications Corp.
("MCI").

Introduce Data Services. The Company plans to introduce a new class of
data products, specifically high speed Internet access, remote LAN access, DSL
technologies and voice products using data protocols to deliver voice traffic
over data networks. The Company believes the introduction of these services will
provide a distinct advantage in the marketing and sale of bundled packages of
local, long distance and data. These services are expected to provide
value-added product offerings to the Company's customers. In addition, the
proposed data-based voice product should constitute a competitive service
offering to customers seeking a lower cost alternative to voice services
currently provided over traditional circuit switched networks. The Company
believes these new service offerings, when implemented, should increase its
penetration of the traditional voice services market and provide improved
returns on the Company's invested capital.

RECENT RESULTS OF LAS VEGAS OPERATIONS

The following chart shows the quarter by quarter growth in the Company's
access lines in service, operating revenues, EBITDA and property and equipment,
net, attributable to its Las Vegas operations:

30
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PRODUCTS AND SERVICES

The Company focuses primarily on offering basic telephone services,
including switched local dialtone and enhanced calling features such as voice
mail, call waiting and call forwarding. These services are required by virtually
all users of communications. The Company also offers long distance services to
its local exchange customers in each of its markets and has recently begun
offering data services. The Company's specific product offerings include:

Business Lines
- Single line business (with optional feature packages), Centrex service,
access trunks and customer owned coin operated telephone lines
("COCOTs").

Residential Lines
- Single and second lines (including multiple dwelling unit lines) and
basic telephone service with optional feature packages.

Long Distance Services
- Outbound 1+.
- Inbound 800/888 and calling cards (to be introduced during the first
half of 1998).

Data Services
- Nortel's Internet Thruway product (ISP ports).
- Remote LAN and Internet Access utilizing DSL Modems (to be introduced
during 1998).

The Company has contracted for the use of IXC Communications Inc.'s fiber
optic network on a resale basis to provide long distance services. The Company
offers everyday prices to its customers at $.10 per minute or less for
continental United States direct dial long distance calls and more attractive
rates for customers with greater volumes. Moreover, the Company is able to bill
domestic calls in six second increments. To obtain the Company's long distance
rates, customers have to purchase the Company's switched local service. The
Company believes it can offer competitive long distance rates because calls
originating through the Company's switches eliminate a portion of the switched
access charges. The Company believes its low cost long distance will generate
business from all of the Company's customer segments.

The Company has made arrangements with each ILEC and other carriers in its
markets for the provision of interim number portability, operator and directory
services, 911 services and Yellow Page and White Page listings. Interim number
portability is available for a nominal fee to customers that desire to retain
existing telephone numbers by means of remote call forwarding. Operator services
are offered through a major long distance carrier or ILEC. Emergency 911
services are provisioned through links to the ILEC switch which, in turn, is
connected to a 911 service bureau. The Company's proprietary management
information system updates customer addresses and immediately supplies them to
the appropriate emergency authorities. In addition, the Company's
interconnection agreement with the ILEC in each of its markets contains a
provision requiring the ILEC to list each of the Company's business customers in
the Yellow Pages.

MARKETS

A key component of the Company's strategy is to concentrate on early market
entry into suburban areas of Tier I Markets. These suburban areas typically
contain large populations of residential and small businesses, including COCOTs
and ISPs. In addition to its currently operational markets of Las Vegas and
selected suburban areas of Atlanta and Los Angeles, during fiscal 1998, the
Company plans to enter seven additional markets in the states of California,
Florida and Illinois and expects to enter up to an additional eight markets in
1999. These markets were chosen in part because of their pro-competitive
regulatory environments.

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SALES AND MARKETING

The Company concentrates its sales and marketing efforts on users of basic
telephone services. The specific customer groups the Company targets are:

- Small business customers that typically have between three and 50 lines.

- Single family residential users.

- Customer owned coin operated telephone providers (COCOTs).

- Multi-dwelling unit owners and managers (MDUs).

- Internet Service Providers (ISPs).

The Company's highly focused marketing efforts seek to generate
well-managed, profitable growth through increased market share with minimal
customer churn. The Company's sales programs include direct sales efforts,
vendor and affinity programs, direct mail, telemarketing and targeted
advertising.

As of March 31, 1998, the Company employed twelve local sales personnel and
seven national sales personnel. Within each local market, the Company expects to
employ five sales personnel and two sales assistants. The national sales force
is responsible for identifying and soliciting prospective small business,
multi-dwelling unit owners and managers, COCOT and ISP customers. The local
sales personnel solicit business customers and coordinate activities with
equipment vendors and affinity groups.

To complement its local and national sales representatives, the Company
intends to use established telephone equipment vendors as agents to sell the
Company's local and long distance services in conjunction with equipment sales
to potential business customers. In Las Vegas, for instance, the Company is
currently selling local service through equipment vendors to whom it pays a
commission for each sale.

Affinity programs in which the Company and the selected organizations will
jointly promote the Company's services will be used to pursue members of
organizations such as schools, religious organizations, charities and local
chambers of commerce. The organizations will receive a royalty for each member
who purchases the Company's services.

Prior to service initiation and during the early stages of each market's
operation, the Company seeks to begin promoting its name and establishing
awareness of its presence through focused public relations activities. To date,
the Company's inauguration of service in each of its existing markets has
generated meaningful publicity in both the print and broadcast media.

Due to the fact the Company initiates service in each market in a limited
area, advertising activities employ geographically specific media during the
early phase of operation in each market. As a result, the Company uses targeted
media such as cable TV, zoned editions of neighborhood/business press and radio
(on a limited basis) as each new market opens. Direct mail and telemarketing are
employed to augment the Company's broadcast and print efforts. As a given market
reaches a critical mass of collocation expansion (expected to be within 9 to 12
months after initiation of service), the Company will employ more broad-based
general market media in order to achieve greater cost efficiencies in its
message delivery. These media options include the expanded use of radio and
utilization of broadcast TV and full-run print publications. Initially, the
advertising messages are created to establish name awareness and credibility for
the Company in each new market. After the initiation of service, the messages
are crafted to specifically promote the Company's service offerings.
Additionally, the Company works closely with a national directory clearinghouse
to insure timely and accurate placement of its directory advertising information
in each market.

The Company also seeks wholesale customers (i.e., IXCs) who desire to
resell the Company's local service product offerings. The Company is selling
this product through its national sales force and has extended these efforts
into each of its operational markets.

Customer Owned Coin Operated Telephone Providers. The Company has been
successful in targeting the COCOT segment in its markets because (i) the Company
offers such customers lower rates compared with the ILEC in each market, and
(ii) the Company provides its COCOT customers a sophisticated
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<PAGE> 35

management report that enables them to accurately bill IXCs for dial-around
compensation. The Company believes that in its markets it is the only ICP or
CLEC offering such management report. MGC currently has contracts with several
COCOT operators in Las Vegas and selected suburban areas of Atlanta and Los
Angeles.

Multi-Dwelling Unit Owners and Managers. The Company also targets
apartments and multi-dwelling units by offering owners and managers a turn-key
telephone product for its occupants. To initiate such service at an apartment
complex, the Company will initially utilize the ILEC's unbundled loop from each
apartment to the Company's collocated equipment in the ILEC central office. Once
installed, the service will remain active for future tenants. Under the
Company's multi-dwelling unit program, the tenant does not have to arrange for
the service independently, pay deposits (which can be managed through the
deposit process for the apartment) or wait for installation. Additionally,
installation charges may be reduced from traditional amounts charged to
individual customers. After the Company and the apartment complex complete the
initial installation, the apartment owner/manager will be able to offer new
tenants telephone service the day the lease is signed. A call from the apartment
manager or the tenant will provide the necessary customer information to begin
service. Larger complexes (100 or more lines) will allow the Company to
economically install hardware at the apartment site and lease T-1 spans to
transport the traffic directly to its switch, bypassing the ILEC's loops.

Internet Service Providers. The Company believes that ISPs provide a
significant opportunity for incremental line growth. In conjunction with the
introduction of the Company's ATM backbone, Nortel's Internet Thruway product
was introduced to MGC's ISP customers in February 1998. By replacing the need
for data modems, the Internet Thruway eliminates the need for ISPs to purchase
large amounts of capital equipment to expand their business. The product is sold
on a "per port" basis to the ISP and the technology available with the Internet
Thruway allows an ISP to operate in any of MGC's markets without requiring a
physical presence in such market. Further, the Company has deployed the
capability to shift ISP traffic off its voice network at the point of origin. As
a result, the Company optimizes the voice ports of its DMS-500 switches while
providing ISP customers with a high quality data connection. Additionally, the
Company gains access by contract to the ISP's Internet customer base allowing it
to market local and long distance service to that customer base.

NETWORK

Network Architecture. MGC has chosen to build an exclusively switch-based
network and to lease transport and local loops on an incremental basis, as
demand dictates, from ILECs, CAP/CLECs and other ICPs. As a result, the Company
is not and will not be burdened by the operating and financing expenses
associated with owning a fiber optic transport network. By using the ILEC's or
other communications services provider's fiber network, interconnecting central
offices and through collocation, the Company seeks to reach a broad market of
customers for a fraction of the cost of a constructed fiber network.

The Company believes the traditional copper loop connection from the ILEC
central office to the end user (the "last mile") is receiving considerable
attention from service providers looking for more economic solutions. Beyond the
traditional copper based T-1 span and the more recent direct fiber connections,
wireless radio, including 38GHz, 28GHz and 2.4GHz, is becoming practical and,
often, less costly. The Company believes "last mile" solutions, including an
array of new technologies (such as DSL) with significant bandwidth improvement,
are on the horizon. The Company's network architecture anticipates this
evolution and avoids capital investment that may become obsolete.

The Company believes it will be able to lease the necessary transport at
reasonable prices in all its planned markets. Prior to the passage of the Act in
February 1996, ILEC's fiber transport was subject to tariffs and usually priced
substantially higher than a competing CAP/CLEC's. With the passage of the Act,
ILECs were required to lease their network elements at cost based prices. MGC
seeks to find two or three competing transport suppliers in each of its markets
with competitive prices.

Las Vegas Network. MGC's Las Vegas network demonstrates its network
strategy. In 1996, the Company installed a Nortel DMS 500 digital switch with
approximately 7,000 lines of capacity and
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<PAGE> 36

connections (via leased transport from Sprint, the ILEC) to nine of the 19
Sprint COs in Las Vegas at an equipment cost of approximately $3.3 million. Such
investment gave MGC access to an addressable market of approximately 450,000
lines. This project was completed in seven months and the switch became
operational in December 1996. In response to its initial success in provisioning
access lines, the Company expanded its capacity. By the end of December 1997,
the Company had spent an additional $7.2 million to increase network capacity to
more than 20,000 lines and connected an additional seven COs (for a total of 16
of the 19 COs in the Las Vegas metropolitan area). The 1997 expansion increased
the Company's addressable market to approximately 90% of Las Vegas' 800,000
lines.

In Las Vegas, the Company has signed an interconnection agreement with
Sprint with a term of two years (expiring in November 1998). MGC utilizes
Sprint, NextLink Communications and American Communications Services for
transport. The Company seeks to select the transport provider that can best
interconnect the Company's customer locations through redundant network at the
lowest possible price.

Atlanta Network. MGC's Atlanta network initiated service in December 1997
with a DMS 500 switch in the Company's leased premises and collocation equipment
in three BellSouth Telecommunications Inc. ("BellSouth") COs with approximately
6,000 lines of capacity and access to 213,000 lines. By year end 1998, the
Company intends to be collocated in 27 COs with access to 1,525,000 lines and
have 32,000 lines of capacity in the Atlanta market.

In Atlanta, the Company has negotiated what it believes to be favorable
transport pricing with BellSouth and will continue to seek alternative transport
providers for greater cost efficiencies. The Company has signed an
interconnection agreement with BellSouth for the Atlanta market with a term of
two years (expiring in April 1999).

Los Angeles Network. In Los Angeles, the Company initiated service with a
DMS 500 switch installed in a Company owned building and collocation equipment
in six GTE COs. Service in this market commenced in December 1997, with
approximately 8,000 lines of capacity and access to 255,000 lines. By year end
1998, MGC plans to be collocated in 28 COs with access to 1,236,000 lines and
have 28,900 lines of capacity.

The Company utilizes both GTE and GST (a CAP transport provider) for
transport in Los Angeles and has signed an interconnection agreement with GTE
for the State of California with a term of three years (expiring in January
2000).

Switch Hardware. The Company's switching platform is the Nortel DMS 500.
MGC has executed a contract with Nortel providing for the purchase of 20 DMS 500
switches by the end of 1999 (three of which have already been delivered). The
contract specifies industry standard warranties. The DMS 500 system offers a
flexible and cost effective means of establishing a single point of presence in,
and the ability to provide revenue generating services to, both the local and
long distance services markets. The DMS 500 combines the DMS 100 local switch
functionality with long distance toll and tandem switching capability.

The Company's early-to-market strategy requires an accelerated switch
deployment schedule. Reducing the customization of the building to house the
switch is one method. With this in mind, the Company is purchasing prefabricated
buildings for use in its Chicago and Ft. Lauderdale markets built to
specifications which allow the actual switch installation to occur in a minimal
timeframe. This approach evolved from the Company's early efforts to design a
"switch in a box." Utilizing raw land and a prefabricated building approach
allows the switch to be installed at Nortel's factory in a series of
self-contained units, with all the necessary environmental, fire and other
elements pre-installed. By using this approach or other modifications to
traditional installation, the Company believes it can move quickly to open new
markets and be operational in as short as four months from the date of site
selection. The Company may employ more than one switch in a particular market.

Interconnection Agreements. The Company has interconnection agreements
with Sprint for operation in Las Vegas, BellSouth in Georgia, GTE in California,
Pacific Bell ("PacBell") in California and Ameritech Corp. ("Ameritech") in
Illinois. The Company believes it has secured favorable agreements which will
allow it to operate profitably in these jurisdictions, but there can be no
assurance to that effect. The Company has

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<PAGE> 37

authority to operate as a CLEC in Illinois, Georgia, Nevada, California, Florida
and Massachusetts. The Company will apply for additional CLEC authority in
additional states as necessary.

OPERATIONS

Customer Service. The Company strives to provide customer service superior
to the ILEC in each of its markets. This includes:

- Personnel. CSRs and sales personnel who are well trained and attentive
to customers' needs. CSRs are available 24 hours a day, seven days a week,
365 days a year.

- Phones. Prioritizing the response to customer phone calls such that
calls are answered and responded to with minimal (if any) wait time.

- Coordination. Coordinating service installation with both the customer
and the ILEC, if involved.

- Customer Information. Keeping the customer informed if there is an
installation or repair problem and dedicating the necessary resources to
resolve the problem as soon as possible.

- Billing. Providing the customer a timely bill which is comprehensive,
accurate and simple to read and understand.

Centralization. The Company has a centralized customer service center,
including a centralized call center in Las Vegas, which operates 24 hours a day,
seven days a week. Centralization allows the Company to control personnel and
their training to a greater degree than with call centers in each city and
thereby provides consistent, high quality customer service with lower overhead
costs.

Automation. The Company believes automation of internal processes
contributes greatly to the overall success of a service provider and billing is
a critical element of any telephone company's operation. The Company's
management information system has been designed to allow a CSR to quickly take
all the necessary information from a customer in a logical, conversational
manner, establish the appropriate billing and credit information and
electronically process the order with the ILEC for the local loop provisioning.
The system creates the correct emergency 911 address update for new customers
and supplies the information to the appropriate emergency authorities.
Concurrently, the system will establish the related cost elements with the order
to track the expense of the facility leased from the ILEC.

Thereafter, the system will track the progress of the order based on
electronic or facsimile updates from the ILEC. The installation desk will follow
the customer's order, ensuring the installation date is met. Additionally, CSRs
will be able to handle all other customer service inquiries, including billing
questions and repair calls. All this information is available in the integrated
system available to the CSR.

In addition, the Company's proprietary management information system has
been designed to track and bill all forms of local service, including line and
feature charges and long distance charges. Additionally, the billing system can
provide sophisticated solutions for business bills. Companies desiring a single
bill for many locations, summary bills only without detail or any other
combination can be accommodated. Lastly, the Company expects to be able to
deliver billing information in a number of media besides paper including
electronic files, Internet inquiry or on-line inquiry.

LOW COST FOCUS

To offer service to its targeted segments of the market and insure long
term profitability, the Company has created a low cost structure and focus. The
key components of this strategy are:

Low Cost Network Architecture. MGC has chosen exclusively to build a
switch-based network and to lease the necessary transport and local loops on an
incremental basis, as demand dictates, from ILECs, CAP/CLECs and other ICPs. As
a result, the Company will not be burdened by the carrying cost of a constructed
transport network. This approach allows the Company to precisely target its
capital expenditures to the specifics of each market and developing conditions.

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<PAGE> 38

Standardized Switch/Installation. The Company plans to use only Nortel
switches, all configured in the same manner for ease of installation into the
Company's prefabricated buildings (or existing building structures, as the case
may be). The Company believes this approach will reduce the time to install its
switches.

Basic Product. The Company offers basic voice and data services. This
simplified approach allows the Company to standardize training, order processing
and interfaces with the different ILECs. The Company does not expect to offer a
broad array of complex communications packages.

Automation. An important component in producing a low cost environment is
automation of the processes involved. The Company has installed a proprietary
management information system designed to be a comprehensive, integrated system
that addresses all aspects of its business, including customer care and billing,
general ledger, payroll, fixed asset management, purchasing and personnel. This
system is scaleable and has been designed to support the Company's operation as
it grows.

Credit Policy. To minimize its bad debt exposure, the Company has
implemented a policy generally requiring new customers to meet minimum credit
standards or make deposits for specified services and estimated usage prior to
the initiation of services. The Company's current credit and deposit policies
are in line with and in some instances more conservative than competing ILECs in
its markets. Additional personnel have been dedicated to collections and credit
monitoring to lower the Company's credit exposure.

Efficient Customer Service. The Company has a centralized customer service
center, including a call center located in Las Vegas, which operates 24 hours a
day, seven days a week. The centralized calling center handles all residential
inquiries and orders for new service. This centralization allows the Company to
control personnel and their training to a greater degree than with call centers
in each city.

Voice Over Data. The Company has deployed and is using its ATM network
backbone to interconnect all its territories. While using this network for data,
the Company is also making internal voice calls through this network. The
packetized voice transmission has been of good quality and the Company plans to
begin transporting interstate long distance calls via this network. The Company
currently expects the transport cost per minute for these calls to be less than
one cent.

COMPETITION

The Company believes the only significant switch-based competitor for its
targeted markets (small businesses and residential users in suburban areas of
large metropolitan markets) is the ILEC. However, the CAP/CLECs and other
communications suppliers in each of the metropolitan areas in which the Company
will be present could also elect to compete for the Company's targeted market.

General competition in each of the service categories provided by the
Company is discussed below.

Local Services. In each of its geographic markets, the Company faces
significant competition for the local services it offers from RBOCs and other
ILECs, which currently dominate their local communications markets. These
companies all have long-standing relationships with their customers and have
financial, personnel and technical resources substantially greater than those of
MGC.

The Company also faces competition in most markets in which it will operate
from one or more CAP/CLECs or ICP operating fiber optic networks. Other local
service providers have operations or are initiating operations within one or
more of the Company's service areas. MGC expects AT&T (through its pending
acquisition of Teleport Communications Group, Inc.), WorldCom (through its
pending acquisition of MCI), Sprint and certain cable television providers, all
of which are substantially larger and have substantially greater financial
resources than the Company, to enter some or all of the markets the Company
serves. MGC also understands other entities have indicated their desire to enter
the local exchange services market within specific metropolitan areas served or
targeted by MGC.

In addition, a continuing trend toward consolidation and strategic
alliances within the communications industry could result in significant new
competition for the Company. AT&T and MCI have begun to enter the local services
market through acquisitions and internal growth. Other potential competitors of
the
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<PAGE> 39

Company include utility companies, other long distance carriers and wireless
telephone systems. The Company cannot predict the number of competitors that
will emerge as a result of existing or new federal and state regulatory or
legislative actions.

Competition in all of the Company's market areas is based on quality,
reliability, customer service and responsiveness, service features and price.
The Company intends to keep its prices at levels below those of the ILECs while
providing, in the opinion of the Company, a higher level of service and
responsiveness to its customers. Innovative packaging and pricing of basic
telephone services is expected to provide competitive differentiation for the
Company in each of its markets.

Although the ILECs are generally subject to greater pricing and regulatory
constraints than other local network service providers, ILECs are achieving
increasing pricing flexibility for their local services as a result of recent
legislative and regulatory developments. The ILECs have continued to lower
rates, resulting in downward pressure on prices for certain services.

Long Distance Services. The Company competes with AT&T, MCI, Sprint and a
host of other second and third tier providers in the long distance services
market. Many of the Company's competitors have long-standing relationships with
their customers and have financial, personnel and technical resources
substantially greater than those of MGC. In providing these services, the
Company will focus on quality service and low cost to distinguish itself in a
very competitive marketplace. In addition, the Company may face additional
competitive challenges if the price of long distance minutes falls as a result
of decreased access charges. The Company believes the introduction of its ATM
backbone and Internet Thruway products will enable it to compete for ISP traffic
on the basis of the quality and low cost of its services; however, the market
for such ISP traffic is extremely competitive.

Data Products and Services. In its markets for data products and services,
specifically those directed at ISPs and end-users of Internet products and
services, the Company will face competition from a number of companies focused
on the data services market, including companies with significantly greater
financial resources, more extensive business experience and greater market and
service capabilities than the Company. In particular, the Company will be
required to compete with companies that design and manufacture products
exclusively for this market and large system integrators. Substantially all of
the Company's current and prospective competitors in the data services market
have substantially greater market presence and financial, technical, marketing
and other resources than the Company.

GOVERNMENT REGULATION

Overview. The Company's services are subject to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, communications common carriers such as
the Company, to the extent those facilities are used to provide, originate or
terminate interstate or international communications. The state regulatory
commissions retain jurisdiction over most of the same facilities and services to
the extent they are used to originate or terminate intrastate communications. In
addition, many of the regulations issued by these regulatory bodies may be
subject to judicial review, the result of which the Company is unable to
predict.

Federal Regulation. The Company must comply with the requirements of
common carriage under the Communications Act of 1934 (the "Communications Act"),
as amended. Comprehensive amendments to the Communications Act were made by the
Act, which was signed into law on February 8, 1996. The Act effected plenary
changes in regulation at both the federal and state levels that affect virtually
every segment of the communications industry. The stated purpose of the Act is
to promote competition in all areas of communications and to reduce unnecessary
regulation to the greatest extent possible. While it will take years for the
industry to feel the full impact of the Act, it is already clear the legislation
provides the Company with both opportunities and challenges.

The Act gives the FCC the authority to forebear from regulating companies
if it finds such regulation does not serve the public interest and directs the
FCC to review its regulations for continued relevance on a regular basis. As a
result of this directive, a number of the regulations that historically applied
to IXCs have

37
<PAGE> 40

been and may continue to be eliminated in the future. While it is therefore
expected that a number of regulations that were developed prior to the Act will
be eliminated in time, those which apply to the Company at present are discussed
below.

Pursuant to the Communications Act, the Company is subject to the general
requirement that its charges and regulations for communications services must be
"just and reasonable" and that it may not make any "unjust or unreasonable
discrimination" in its charges or regulations.

The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic common carrier service providers, only GTE,
the RBOCs and other ILECs are classified as dominant carriers, and all other
providers of domestic common carrier services, including the Company, are
classified as non-dominant carriers. The Act provides the FCC with the authority
to forebear from imposing any regulations it deems unnecessary, including
requiring non-dominant carriers to file tariffs. On November 1, 1996, in its
first major exercise of regulatory forbearance authority granted by the Act, the
FCC issued an order detariffing domestic interexchange services. The order
required mandatory detariffing and gave carriers, such as the Company, nine
months to withdraw federal tariffs and move to contractual relationships with
their customers. This order subsequently was stayed by a federal appeals court.
Until further action is taken by the FCC or the courts, the Company will
continue to maintain tariffs for these services.

Although the FCC does not directly regulate local exchange service, which
is within the jurisdiction of state regulatory authorities, its actions may
impact directly on such service. The Act greatly expands the FCC's
interconnection requirements on the ILECs. The Act requires the ILECs to: (i)
provide physical collocation, which allows companies such as MGC and other
interconnectors to install and maintain their own network termination equipment
in ILEC central offices, and virtual collocation only if requested or if
physical collocation is demonstrated to be technically unfeasible, (ii) unbundle
components of their local service networks so other providers of local service
can compete for a wider range of local services customers, (iii) establish
"wholesale" rates for their services to promote resale by CLECs and other
competitors, (iv) establish number portability, which will allow a customer to
retain its existing phone number if it switches from the ILEC to a competitive
local service provider, (v) establish dialing parity, which ensures customers
will not detect a quality difference in dialing telephone numbers or accessing
operators or emergency services, and (vi) provide nondiscriminatory access to
telephone poles, ducts, conduits and rights-of-way. In addition, the Act
requires ILECs to compensate competitive carriers for traffic originated by the
ILECs and terminated on the competitive carrier's networks. The FCC is charged
with establishing national guidelines to implement the Act. The FCC issued its
Interconnection Order on August 8, 1996, which established detailed rules
regarding rates, terms and conditions for interconnection between CLECs and
ILECs. The Interconnection Order was appealed to the U.S. Court of Appeals for
the Eighth Circuit. On July 18, 1997, the Court issued a final decision vacating
the interconnection pricing rules and "most favored nation" rules as well as
certain other interconnection rules. The FCC's and other parties' petitions to
the Supreme Court requesting review of these decisions have been granted. Even
though the Eighth Circuit's decision currently restricts the role of the FCC
with respect to pricing and other issues (pending review by the Supreme Court),
these issues currently remain subject to scrutiny and oversight by state
regulatory commissions which may exercise their discretion to adopt policies
similar to or different from those proposed by the FCC. Although it is not
possible at this time to determine how the Supreme Court will respond to these
appeals, MGC does not believe the Eighth Circuit decision will have any
significant impact on its operation. On October 14, 1997, the U.S. Court of
Appeals for the Eighth Circuit, in response to motions regarding its earlier
decision, ruled that ILECs are under no obligation to provide CLECs with a
rebundled package of individual network elements. The Company believes that the
impact of this ruling is neutral to the Company in light of the Company's switch
and collocation based network strategy employing unbundled network elements and
may be beneficial in the short-term by delaying entrance into the local service
market by IXCs such as AT&T.

As a result of provisions of the Act, the Company has taken the steps
necessary to be a provider of local exchange services. As of March 31, 1998, MGC
had obtained CLEC certification in six states. In addition, the Company has
successfully negotiated interconnection agreements with five ILECs and is in
negotiation for interconnection agreements with four additional ILECs. At the
same time, the Act also makes competitive

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<PAGE> 41

entry more attractive to RBOCs, other ILECs and interexchange carriers and other
companies, and likely will increase the level of competition the Company faces.

The Act's interconnection requirements also apply to interexchange carriers
and all other providers of communications services, although the terms and
conditions for interconnection provided by these carriers are not regulated as
strictly as interconnection provided by the ILECs. This may provide the Company
with the ability to reduce its own access costs by interconnecting directly with
non-ILECs, but may also cause the Company to incur additional administrative and
regulatory expenses in replying to interconnection requests from other carriers.

On May 16, 1997, the FCC released an order that fundamentally restructured
the "access charges" ILECs charge to interexchange carriers and end user
customers. The Company's analysis of the FCC's order leads it to believe the
FCC's new access charge rules do not adversely affect the Company's business
plan, and they do in fact present significant opportunities for new entrants,
including the Company. Aspects of the order may be changed and to the extent
access charges may be reduced in the future, competitors will have an increased
ability to offer low cost long distance services. At least ten parties have
filed appeals with federal courts, and numerous parties have asked the FCC to
reconsider portions of its new rules.

As part of its pro-competitive policies, the Act may free the RBOCs from
the judicial order that prohibited their provision of interLATA services.
Specifically, the Act permits RBOCs to provide long distance services outside
their local service regions immediately, and will permit them to provide
in-region interLATA service upon demonstrating to the FCC and state regulatory
agencies they have adhered to the FCC's interconnection regulations. As of
December 31, 1997, ILECs in four states have filed applications for in-region
long distance authority with the FCC, all of which have been denied by the FCC.
At least two of these decisions have been appealed. Additional applications are
being filed and will be considered by the FCC. On December 31, 1997, a federal
District Court in Texas ruled key sections of the Act unconstitutional on the
grounds that RBOCs were unfairly denied access to the in-region long distance
segment of the industry. This decision was immediately appealed by numerous IXCs
and the District Court has stayed its decision pending appeal.

While the Act reduces regulation to which non-dominant local exchange
carriers are subject, it also reduces the level of regulation that applies to
the ILECs and increases their ability to respond quickly to competition from the
Company and others. For example, in accordance with the Act, the FCC has applied
"streamlined" tariff regulation to the ILECs which greatly accelerates the time
required for changes to tariffed service rates to take effect and eliminates the
requirement that ILECs obtain FCC authorization before constructing new domestic
facilities. These actions will allow ILECs to change service rates more quickly
in response to competition. Similarly, the FCC is considering proposals that may
provide significant new pricing flexibility to ILECs. To the extent such
increased pricing flexibility is provided, the Company's ability to compete with
ILECs for certain service may be adversely affected.

On May 8, 1997, in compliance with the requirements of the Act, the FCC
released an order establishing a new Universal Service support fund, which
provides subsidies to carriers that provide service to under-served individuals
and customers in high cost areas, and to companies that provide communications
services and wiring for schools and libraries. The Company is required to
contribute into the Universal Service support fund, but may also be eligible to
obtain subsidies for services it provides. The new Universal Service rules will
be administered jointly by the FCC and state regulatory authorities, many of
which are still in the process of establishing their administrative rules. The
net financial effect of these regulations on the Company cannot be determined at
this time.

State Regulation. The Company has satisfied state requirements to provide
CLEC and intrastate long distance service in Nevada, Georgia, Illinois,
California, Florida and Massachusetts. State authorizations vary in their
regulatory intensity. State laws and regulations that prohibit, or have the
effect of prohibiting, local and intrastate long distance communications
competition have been preempted under the Act. Although the Act's prohibition of
state barriers to competitive entry took effect on February 8, 1996, various
legal and policy matters must be resolved before the Act's policies are fully
implemented. The Company continues to support

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<PAGE> 42

efforts at the state government level to encourage competition in its markets
under the federal law and to permit CLECs to operate on the same basis and with
the same rights as the ILECs.

In most states, the Company is required to file tariffs setting forth the
terms, conditions, and prices for services which are classified as intrastate.
In some states, the Company's tariff can list a range of prices for particular
services and in others such prices can be set on an individual customer basis.
The Company is not at this time subject to price cap or to rate of return
regulation in any of its current or planned expansion markets.

Since early 1997, several CAP/CLECs have entered into co-carrier agreements
with ILECs which address CLEC/ILEC interconnection issues such as reciprocal
compensation and number portability. While the Act mandates the implementation
of interconnection arrangements, there can be no assurance the Company will be
able to secure its desired co-carrier arrangements in a timely fashion or upon
reasonable rates and terms. State regulators retain primary authority in setting
rates for these interconnection agreements, and for enforcing the implementation
of such agreements once they are signed. All of the states in which the Company
operates or currently plans to operate have established rates and terms
governing interconnection agreements. While additional hearings are pending in
all of these states that may further impact the Company's interconnection
agreements, the Company does not expect that any such proceeding will have an
adverse impact on the Company.

Internet Regulation. The regulatory status of communications service over
the Internet is presently uncertain. Although specific statutes and regulations
addressing this service have not been adopted at this time, the extent to which
current laws and regulations at the state and federal levels will be interpreted
to include such Internet communications services has not been determined. The
FCC has recently indicated, for example, that voice communications carried over
the Internet between two telephone sets using the public switched network may be
subject to payment of access charges and Universal Service fund obligations,
while voice communications using computers rather than telephone sets may not be
subject to such obligations. There can be no assurance that new laws or
regulations relating to these services or a determination that existing laws are
applicable to them will not have a material adverse effect on the Company's
business.

PROPERTIES

In Las Vegas, the Company has a five year lease (expiring in 2001) with a
five year option for the 8,000 square feet housing its switch site. In addition,
the Company leases 24,125 square feet of additional space to house the Company's
corporate headquarters, national customer service operations, national sales
personnel, Las Vegas sales personnel and general administration. This lease
expires in 2003. This building is owned by a limited liability company which is
principally owned by two of the Company's principal stockholders and Directors,
Maurice J. Gallagher, Jr. and Timothy P. Flynn. See "Certain Transactions."
Management believes the terms and conditions of this transaction are equal to or
better than market rates. Additionally, Messrs. Gallagher and Flynn have agreed
to work with the Company to construct additional facilities when needed.

The Company leases or owns premises sufficient to house its switch
facilities and its local sales staff and administrative support in its existing
markets and has contracted to acquire properties in Ft. Lauderdale, suburban
Chicago, Long Beach and San Diego.

The Company places great importance on each switch facility and seeks to
insure maximum security and environmental control. MGC believes this can be
achieved through standalone structures. This approach minimizes the risk of fire
or other hazards from adjacent tenants or properties.

PERSONNEL

As of March 31, 1998, there were 179 employees of the Company, the majority
of whom were located in Las Vegas. The Company expects to substantially increase
its employee count as its business expands into new markets.

MGC has non-disclosure and non-compete agreements with all of its executive
employees. None of MGC's employees is represented by a collective bargaining
agreement.

LEGAL PROCEEDINGS

The Company is not a party to any pending legal proceedings of a material
nature.

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<PAGE> 43

MANAGEMENT

The following table sets forth, as of February 28, 1998, the name, age and
position within the Company of each Executive Officer and Director of the
Company. Their respective backgrounds are described following the table.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Maurice J. Gallagher, Jr. .................... 48 Chairman of the Board of Directors
Nield J. Montgomery........................... 53 Chief Executive Officer, President, Director
Timothy P. Flynn(1)........................... 47 Director
Jack Hancock(2)............................... 67 Director
David Kronfeld................................ 50 Director
Thomas Neustaetter(1)(2)...................... 46 Director
John Boersma.................................. 37 Vice President -- Operations
Michael E. Burke.............................. 53 Vice President -- Network Operations
David S. Clark................................ 37 Vice President -- Marketing
Kent F. Heyman................................ 42 Vice President and General Counsel
James J. Hurley, III.......................... 49 President -- Midwest Region
Thomas G. Keough.............................. 53 Vice President -- Sales
James Mitchell................................ 37 President -- Eastern Region
Carol A. Mittwede............................. 42 Vice President -- Human Resources
Mark W. Peterson.............................. 43 President -- Western Region
David A. Rahm................................. 43 Vice President -- Network Development
Walter J. Rusak............................... 49 Vice President -- Engineering
Linda M. Sunbury.............................. 36 Vice President -- Chief Financial Officer
</TABLE>

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

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

MAURICE J. GALLAGHER, JR. has served as the Chairman of the Board of
Directors since the Company's founding. Mr. Gallagher was instrumental in
organizing the Company with Mr. Montgomery. Mr. Gallagher was a founder of
ValuJet in 1993 and served as a Director of ValuJet from 1993 until November
1997. Mr. Gallagher also held prior positions (President and Chief Financial
Officer) with ValuJet from 1993 to 1994 and served as Vice Chairman from 1994 to
1997. Prior to that, Mr. Gallagher was a founder and President of WestAir
Holding, Inc. ("WestAir"), a commuter airline headquartered in Fresno,
California. WestAir was sold to Mesa Airlines ("Mesa") in June 1992. Mr.
Gallagher was a member of the Mesa Board of Directors from June 1992 through
March 1993 and served as a Director of Submicron Systems, Inc. from April 1997
until November 1997.

NIELD J. MONTGOMERY has been the Chief Executive Officer and President and
a member of the Board of Directors of the Company since he participated in its
founding. Mr. Montgomery has over 35 years of telephone experience, most
recently serving as a general manager for ICG from April 1994 to June 1995. In
that capacity, he was responsible for developing strategy and deploying
telephone switches nationally to position ICG to enter the local phone service
business. Prior to that, Mr. Montgomery served as General Marketing and Sales
Manager for Sprint/Centel (successor to Centel Nevada) ("Centel"). During his 13
year Centel career from 1980 to 1993, he served in senior executive positions
directing engineering, operations, business office, sales, and marketing
functions. Before joining Centel, Mr. Montgomery held a variety of management
positions with NYNEX from 1969 to 1980.

TIMOTHY P. FLYNN has served as Member of the Board of Directors of the
Company since 1996. Mr. Flynn served as a member of the Board of Directors of
ValuJet since he participated in its founding in 1993 until November 1997. Prior
to that, Mr. Flynn was Chairman of the Board and CEO of WestAir Holding, Inc. He
and Mr. Gallagher founded WestAir in 1983 and operated it through June 1992 when
it was

41
<PAGE> 44

sold to Mesa. Mr. Flynn was a member of the Board of Directors of Mesa from June
1992 through March 1993. Mr. Flynn and Mr. Gallagher are affiliated in a number
of other transactions.

JACK L. HANCOCK has served as a Member of the Board of Directors of the
Company since 1996. Mr. Hancock was Vice President of Systems Technology and
Executive Vice President, Product and Technology for PacBell (from 1988 to
1993). Prior to joining PacBell, Mr. Hancock was Executive Vice President for
Information Systems, Strategic Planning, and Human Resources at Wells Fargo Bank
(from 1982 to 1987). Before that, he was Senior Vice President for Management
Information Systems at Chemical Bank (from 1978 to 1981). He is a member of the
Boards of Directors of several public and private companies, including Union
Bank of California (from 1994 to present) and Wittaker Corporation (from 1994 to
present).

DAVID KRONFELD was elected to serve as a Director of the Company in
February 1998. Mr. Kronfeld is the founder of JK&B Management, L.L.C., a venture
capital firm, and has managed its affairs since 1995. Since 1989, Mr. Kronfeld
has also been a partner at Boston Capital Ventures, a venture capital firm where
he specialized in the communications and software industries. From 1984 to 1989,
Mr. Kronfeld was Vice President of Acquisitions and Venture Investments at
Ameritech. Mr. Kronfeld was a Senior Manager at Booz, Allen & Hamilton, an
international management consulting firm, from 1977 to 1982 and a systems
analyst at Electronic Data Systems from 1973 to 1975.

THOMAS NEUSTAETTER was elected to service as a Director in February 1998.
Since January 1996, Mr. Neustaetter has been a principal in The Chatterjee Group
("TCG"), an investment firm. Prior to that, he was managing director and founder
of Bancroft Capital (financial advisory services) from January 1996 to December
1996 and was a managing director at Chemical Bank from 1990 to 1995.

JOHN BOERSMA has served as Vice President -- Operations of the Company
since May 1997. He served as Vice President of Carrier Relations for ICG Telecom
Group, Inc. ("ICG Telecom") from 1996 to 1997. He was responsible for ICG
Telecom's relationship with local exchange carriers and implementation, purchase
agreements and service quality and served as Vice President, Northern California
Operations from April 1994 to September 1996. He joined Bay Area Teleport, now a
part of ICG Telecom, in 1986 and held various positions having responsibility
for overall financial and operational performance, marketing management, new
business development, regulatory affairs, and information systems development.
He served on the Association for Local Telecommunications Services (ALTS) Board
of Directors and served as the chairman of the association's Tariff Committee
from 1991 until 1993.

MICHAEL E. BURKE has served as Vice President -- Network Operations of the
Company since December 1996. Mr. Burke has over 27 years of engineering and
engineering project management experience in the communications industry, and
served from 1990 to 1995 as a member of the Board of Directors and as Vice
President -- Network Design for Contel of California. Mr. Burke also served in
various engineering management roles with Continental Telephone Company (from
1971 to 1995), California Pacific Utilities (from 1970 to 1971), and General
Telephone Company of California (from 1963 to 1970).

DAVID S. CLARK has served as Vice President -- Marketing of the Company
since May 1997. Mr. Clark has been in the communications industry for nine
years, with responsibilities including engineering, purchasing, product
development, client acquisition and maintenance, marketing and advertising. From
1989 to 1997, Mr. Clark was employed by North American InTeleCom, his last
position being Vice President of Communications Services. Prior to that, Mr.
Clark held various management positions with national advertising agencies.

KENT F. HEYMAN has served as Vice President and General Counsel of the
Company since June 1996. Mr. Heyman has 17 years of legal experience, most
recently as chairman of the litigation department and Senior Trial Counsel of
the Dowling, Magarian, Aaron & Heyman Law Firm. Mr. Heyman has served as a
California Superior Court Judge pro tempore presiding over trial, settlement
conference and other proceedings from 1990 to 1996.

JAMES J. HURLEY III has served as President -- Midwest Region of the
Company since March 1998. He previously served as Chief Operating Officer of
Wireless Works, Inc. in Chicago, Illinois from 1996 to 1998.
42
<PAGE> 45

From 1992 to 1996, Mr. Hurley was President and Chief Executive Officer of Inn
Room Systems, Inc. (a manufacturer of on-line room refreshment centers). From
1976 to 1992, he held various finance, administration and operations management
positions with Centel Corporation. Mr. Hurley began his career with Arthur
Andersen and Company from 1970 to 1976.

THOMAS G. KEOUGH has served as Vice President -- Sales of the Company since
December 1996 and is responsible for all sales of the Company. He has over 20
years experience as a marketing and sales executive, serving most recently as
Executive Vice President and Director of Sales for Jetstream Aircraft, a
subsidiary of British Aerospace from 1992 to 1996. Mr. Keough also served in
senior marketing and sales management roles with Beech Aircraft (from 1989 to
1992), Bombardier (from 1988 to 1989), Saab Aircraft of America (from 1983 to
1988), and DeHavilland (from 1976 to 1983).

JAMES MITCHELL has served as President -- Eastern Region of the Company
since February 1998. Mr. Mitchell has over eight years of telephone industry
experience, serving from 1990 to 1998 in various sales and marketing management
roles with MCI, his last position being Regional Sales and Marketing Manager for
the Southeast Region. Prior to joining MCI, Mr. Mitchell served as General
Partner and Chief Financial Officer of Oak Value Partners, (a private money
management firm) from 1987 to 1990. Mr. Mitchell began his career as an auditing
associate with Price Waterhouse in Philadelphia.

CAROL MITTWEDE has served as Vice President -- Human Resources since
January 1998. Her responsibilities include all aspects of human resource
management for MGC. Ms. Mittwede has spent the past 18 years working in the
casino industry in both human resources and operations. She was Vice President
of Human Resources for the 2,000 room Flamingo Hilton in Laughlin, Nevada from
1989 to 1994. From 1994 to 1997, she served as the Vice President and General
Manager of the Las Vegas Hilton.

MARK W. PETERSON has served as President -- Western Region of the Company
since March 1997. He previously served as head of corporate affairs for both
WestAir Holding, Inc. operating as United Express in Fresno, California from
1988 to 1992 and for AirCal Airlines in Newport Beach, California from 1978 to
1982. He also served as a marketing communications manager with Bank of America
in San Francisco, worked as marketing consultant in Northern California from
1985 to 1986, and was an instructor in business communications at California
State University, Chico.

DAVID A. RAHM has served as Vice President -- Network Development of the
Company since May 1996. Mr. Rahm served as general counsel of Chadmoore Wireless
Group, Inc. from 1995 to 1996. Prior to that, Mr. Rahm served as Director of
Administration, Acting Director of Production and General Counsel of Sigma Game,
Inc. from 1993 to 1994. Mr. Rahm also served as Assistant Vice President,
Manager of Marketing, Credit, Leasing and Administration for Lodgistix, Inc.
from 1980 to 1990.

WALTER J. RUSAK has served as Vice President -- Engineering of the Company
since March 1998. Mr. Rusak served as Chief Technical Officer of United Digital
Network, Inc. from 1996 to 1998. Previously, Mr. Rusak was Senior Vice President
and General Manager of California for ICG from 1995 to 1996. From 1991 to 1995,
he was Vice President of Operations for U.S. Long Distance, Inc. Mr. Rusak was
Director of Domestic Network Engineering for MCI from 1989 to 1991. From 1970 to
1989, Mr. Rusak held various engineering management positions with RBOCs and
IXCs.

LINDA M. SUNBURY has served as Vice President of the Company since June
1996 and Chief Financial Officer of the Company since February 1998. Ms. Sunbury
has over 12 years accounting and administrative experience, having held similar
positions in the airline industry. Most recently, Ms. Sunbury was Vice President
of Administration for Business Express, Inc. ("Business Express") dba the Delta
Connection from 1994 to 1996. While Ms. Sunbury was at Business Express,
creditors of Business Express filed an involuntary petition for bankruptcy in
January 1996. Business Express subsequently reorganized and emerged from
bankruptcy in April 1997. Prior to that, Ms. Sunbury served as Controller for
WestAir Holding Inc. operating as United Express from 1988 to 1994. Ms. Sunbury
began her career with the accounting firm of KPMG Peat Marwick LLP where she was
employed from 1983 to 1988.

43
<PAGE> 46

Messrs. Kronfeld and Neustaetter have been selected to serve on the Board
of Directors by holders of the Company's Series A Convertible Preferred Stock in
accordance with the terms of such Series A Convertible Preferred Stock.

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table shows, for the fiscal year ended December 31, 1997, the
cash compensation paid by the Company, as well as certain other compensation
paid or accrued for such year, for the Company's Chief Executive Officer and the
four highest paid other Executive Officers. No compensation was paid to any
Executive Officers of the Company prior to April 1, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Nield J. Montgomery..................... 1997 $139,424 $20,000 -- --
President and Chief Executive Officer 1996 45,077(1) -- 360,000 --
Thomas G. Keough........................ 1997 $105,769 $10,000 -- $21,713(2)
Vice President -- Sales 1996 -- -- 48,000 --
Michael E. Burke........................ 1997 $100,000 $10,000 -- $ 2,876(2)
Vice President -- Network Operations 1996 3,846 -- 36,000 $ 250(2)
Michael D. English (3).................. 1997 $100,000 -- -- --
Vice President -- Eastern Region 1996 11,923 -- 36,000 --
Kent F. Heyman.......................... 1997 $ 90,000 $10,000 -- --
Vice President and General Counsel 1996 48,462 -- 48,000 --
</TABLE>

- ---------------
(1) $2,000 of such compensation was paid in April 1996, prior to the
commencement of the Company's operations, in the form of 480,000 shares of
Common Stock in the Company.

(2) The amounts indicated were paid for reimbursement of moving and related
expenses.

(3) Mr. English's employment with the Company terminated in January 1998.

EMPLOYMENT AND STOCK PURCHASE/REPURCHASE AGREEMENTS

Nield J. Montgomery. The Company's employment agreement with Mr.
Montgomery provides for a base salary of $150,000 per year, effective September
1, 1997, and discretionary bonuses. Prior to the commencement of revenue
producing operations in December 1996, Mr. Montgomery's base salary was $5,000
per month. Mr. Montgomery is required to devote his full time and efforts to the
business of the Company during the term of his employment agreement which
expires in September 2000. Mr. Montgomery's employment may be terminated by
either the Company or Mr. Montgomery at any time. Mr. Montgomery has agreed not
to participate in a business offering local, long distance and related telephone
services during the term of his employment and for a period of 18 months
following termination. If Mr. Montgomery's employment is terminated by the
Company without cause, he will be entitled to severance pay of $150,000 payable
over a period of 12 months. Under the terms of Mr. Montgomery's employment
agreement, the other stockholders have certain rights to repurchase a portion of
Mr. Montgomery's stock in the Company if his employment is terminated on or
before April 1, 2001.

Other Executive Officers. The Company has entered into Employment/Stock
Repurchase Agreements with several of its Executive Officers (John Boersma,
Michael E. Burke, David S. Clark, Kent F. Heyman, James J. Hurley III, Thomas G.
Keough, James Mitchell, Carol A. Mittwede, Mark W. Peterson, David A. Rahm,
Walter J. Rusak and Linda M. Sunbury). These agreements establish base salaries
and provide that each employee may earn a bonus of up to 50% of his or her base
salary based on the employee's and the Company's performance. Each employee's
employment may be terminated at any time by either the Company or the employee.
Each of these Executive Officers has agreed not to participate in a business

44
<PAGE> 47

offering local, long distance and related telephone services in the area of his
or her employment during the term of employment and for a period of six months
following termination. Each of these Executive Officers has exercised rights to
acquire Common Stock at $5.83 to $8.33 per share (after giving effect to the
Reverse Split). All or a portion of such shares are subject to repurchase at
their cost if the Executive Officer's employment with the Company is terminated
within a three year period. The Company has financed the purchase price of
certain of these shares over a period of three years. See "Certain
Transactions."

STOCK OPTION PLAN

The Company has adopted the NevTEL, Inc. Stock Option Plan (the "Plan"). A
total of 2,640,000 shares of Common Stock are reserved for issuance under the
Plan. As of March 31, 1998, options to purchase 1,347,420 shares have been
granted under the Plan. As of March 31, 1998, 7,200 options issued under the
Plan have been exercised and options to purchase 77,100 shares have lapsed. At
such date, options to purchase 1,263,120 shares were outstanding under the Plan
at an average exercise price of $3.42 per share. Options for up to 1,376,880
additional shares may be granted under the Plan.

Options granted under the Plan may be either incentive stock options or
nonqualified options.

The Plan contemplates that options may be granted to directors, employees
and consultants of the Company. The exercise price of the options granted under
the Plan will be determined by the Company's Board of Directors or by the
Compensation Committee of the Board of Directors. The terms of the options and
the dates after which they become exercisable are established by the
Compensation Committee or the Board of Directors, subject to the terms of the
Plan. Options granted under the Plan generally vest over a five year period.

The Company has from time to time granted stock options under the Plan in
order to provide certain officers, directors, employees and consultants with a
competitive total compensation package and to reward them for their contribution
to the Company's performance. These grants of stock options are designed to
align the individual's interest with that of the Stockholders of the Company.

BONUS PLAN

The Company's Bonus Plan is predicated on established EBITDA targets and
individual goals and achievements of key corporate personnel.

OPTION GRANTS IN LAST FISCAL YEAR

During the 1997 fiscal year there were no options granted to any of the
Executive Officers of the Company named in the Compensation Table above.

45
<PAGE> 48

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

The following table shows aggregate exercises of options during 1997 and
the values of options held by the Company's Executive Officers named in the
Compensation Table above as of December 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
DECEMBER 31, 1997(#) DECEMBER 31, 1997(1)
SHARES ACQUIRED VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME ON EXERCISE REALIZED UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---- --------------- -------- -------------------- --------------------
<S> <C> <C> <C> <C>
Nield J. Montgomery................ -- -- 72,000E $ 277,200E
-- -- 288,000U $1,108,800U
Thomas G. Keough................... -- -- 9,600E $ 12,960E
-- -- 38,400U $ 51,840U
Michael E. Burke................... -- -- 7,200E $ 21,720E
-- -- 28,800U $ 86,880U
Michael D. English................. -- -- 7,200E $ 21,720E
-- -- 28,800U $ 86,880U
Kent F. Heyman..................... -- -- 9,600E $ 28,960E
-- -- 38,400U $ 115,840U
</TABLE>

- ---------------
(1) Amounts shown are based upon the estimated fair market value for the
Company's Common Stock on December 31, 1997, which was $4.68 per share.

DIRECTOR COMPENSATION

The Company's outside Directors receive meeting fees of $500 per meeting of
the Board of Directors or committees of the Board of Directors attended in
person in addition to reimbursement of their expenses in attending meetings of
the Board of Directors.

46
<PAGE> 49

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of March 31, 1998, certain information
with respect to the Company's Common Stock owned beneficially by each director,
by all Executive Officers and Directors as a group and by each person known by
the Company to be a beneficial owner of more than 5% of the outstanding Common
Stock of the Company. Except as noted in the footnotes, each of the persons
listed has sole investment and voting power with respect to the shares of Common
Stock included in the table.

<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED OWNERSHIP(1)
- ------------------------ ------------------ ------------
<S> <C> <C>
Maurice J. Gallagher, Jr.(2)................................ 3,186,900 24.3%
David Kronfeld(3)........................................... 1,028,571 7.8%
Timothy P. Flynn(4)......................................... 894,900 6.8%
Robert L. and Carol A. Priddy(5)............................ 889,500 6.8%
Nield J. Montgomery(6)...................................... 829,500 6.3%
Circle F Ventures, LLC(7)................................... 690,000 5.3%
Thomas Neustaetter(8)....................................... 685,714 5.2%
Wind Point Partners III, L.P.(9)............................ 685,714 5.2%
Jack L. Hancock(10)......................................... 32,400 *
All Executive Officers and Directors as a Group (18
persons)(2)(3)(4)(6)(8)(10)(11)........................... 7,302,823 55.1%
</TABLE>

- ---------------
* Less than 1% of total.

(1) The percent of outstanding Common Stock owned is determined by assuming the
conversion of all outstanding Series A Convertible Preferred Stock and by
assuming that in each case the person only, or group only, exercised his or
its rights to purchase all shares of Common Stock underlying presently
exercisable stock options.

(2) Includes options to purchase 12,000 shares of Common Stock which are
presently exercisable, 3,127,500 shares of Common Stock owned by the
various partnerships, trusts or corporations with respect to which Mr.
Gallagher is a general partner, beneficiary and/or controlling stockholder
and 24,900 shares of Common Stock into which 41,500 shares of Series A
Convertible Preferred Stock will be converted upon the consummation of the
Offering. Mr. Gallagher's address is 3301 N. Buffalo Drive, Las Vegas,
Nevada 89129.

(3) Reflects 957,143 shares of Series A Convertible Preferred Stock owned by
JK&B Capital, L.P. ("JK&B"), 471,429 shares of Series A Convertible
Preferred Stock owned by JK&B Capital II, L.P. ("JK&BII") and 285,714
shares of Series A Convertible Preferred Stock owned by Boston Capital
Ventures, L.P. ("BCV"). Such Series A Convertible Preferred Stock will be
converted into 1,028,571 shares of Common Stock in the aggregate upon the
consummation of the Offering. JK&B Management, L.L.C. ("JK&BM") is the
general partner of JK&B and JK&B II. David Kronfeld is the manager of
JK&BM. The address of these beneficial owners is c/o JK&B Management,
L.L.C., 205 North Michigan, Suite 808, Chicago, Illinois 60601. Mr.
Kronfeld is a general partner of BCV.

(4) Includes options to purchase 2,400 shares which are presently exercisable.
Includes 102,000 shares of Common Stock owned by various partnerships or
corporations with respect to which Mr. Flynn is a general partner and/or
controlling stockholder and 27,000 shares of Common Stock into which 45,000
shares of Series A Convertible Preferred Stock will be converted upon
consummation of the Offering. Mr. Flynn's address is 6900 Westcliff Drive,
Suite 505, Las Vegas, Nevada 89128.

(5) Includes 27,000 shares of Common Stock into which 45,000 shares of Series A
Convertible Preferred Stock will be converted upon consummation of the
Offering. The Priddys' address is 9410 Laguna Niguel Drive, Las Vegas,
Nevada 89134.

(6) Includes options to purchase 72,000 shares which are presently exercisable.
Mr. Montgomery's address is 3301 N. Buffalo Drive, Las Vegas, Nevada 89129.

47
<PAGE> 50

(7) Includes 90,000 shares beneficially owned by Hayden R. Fleming, the
managing member of Circle F Ventures, LLC. Mr. Fleming has voting and
dispositive power over the shares of Common Stock owned by Circle F
Ventures, LLC. The address of Hayden R. Fleming and Circle F Ventures, LLC
is 14988 N. 78th Way, Scottsdale, Arizona 85260.

(8) Reflects 571,429 shares of Series A Convertible Preferred Stock owned by
Strategic Investment Partners Limited ("SIP"), 357,142 shares of Series A
Convertible Preferred Stock owned by S-C Phoenix Holdings, L.L.C. ("SC"),
142,857 shares of Series A Convertible Preferred Stock owned by Winston
Partners II LDC ("Winston LDC") and 71,429 shares of Series A Convertible
Preferred Stock owned by Winston Partners II LLC ("Winston LLC"), entities
associated with Chatterjee Management Company. Such Series A Convertible
Preferred Stock will be converted into 685,714 shares of Common Stock in
the aggregate upon the consummation of the Offering. Mr. Neustaetter is an
officer of Chatterjee Management Company. Mr. Neustaetter disclaims
beneficial ownership of these shares over which he does not exercise
investment or voting power. Purnendu Chatterjee may be deemed to be the
person ultimately in control of Chatterjee Management Company and may be
deemed to have ownership of the shares set forth above. Mr. Neustaetter's
and Dr. Chatterjee's address is c/o Chatterjee Management Company, 888
Seventh Avenue, New York, New York 10106.

(9) Reflects 1,142,857 shares of Series A Convertible Preferred Stock which
will be converted into 685,714 shares of Common Stock upon the consummation
of the Offering. Wind Point Partners III, L.P. ("WPIII") is a private
equity investment limited partnership, for which Wind Point Investors,
L.L.C. ("WPI") is the general partner. Decisions with respect to investment
and voting of shares by WPI are made by a committee of managing directors.
WPI expressly disclaims beneficial ownership of shares owned by WPIII. The
address of this beneficial owner is 676 N. Michigan Avenue, Suite 3300,
Chicago, Illinois 60611.

(10) Includes options to purchase 2,400 shares which are presently exercisable.

(11) Includes options to purchase 76,200 shares owned by Executive Officers not
named above which are presently exercisable.

48
<PAGE> 51

CERTAIN TRANSACTIONS

The Company has entered into an agreement to lease 24,125 square feet of
office space from a limited liability company which is principally owned by two
of the Company's Directors and principal stockholders, Maurice J. Gallagher, Jr.
and Timothy P. Flynn. The rental rate is $1.65 per square foot per month which
includes common area maintenance charges of $.20 per square foot per month.
Management believes that the terms and conditions of this lease arrangement are
at least as favorable to the Company as those which the Company could have
received from an unaffiliated third party.

During 1997, the Company paid $68,000 to a corporation principally owned by
Messrs. Gallagher and Flynn for charter services in connection with the issuance
of the Senior Secured Notes.

The Company has entered into an agreement with a company owned and operated
by Mitchell Allee, a stockholder and former officer of the Company, to provide,
support and maintain the Company's proprietary management information computer
system. Management believes that the terms of the agreement are at competitive
prices and terms. During 1997, the Company paid $640,000 for these services,
including $600,000 for the design and installation of the Company's system.

Certain persons deposited an aggregate of $15.0 million in escrow (the
"Common Stock Commitment"), which funds were to have been applied to the
purchase of shares of Common Stock in the event the Company failed to sell at
least $15.0 million of preferred stock within a certain period of time. Since
sufficient preferred stock was issued within the time provided, the investors
received a return of their funds contributed in escrow. As a commitment fee for
the Common Stock Commitment, the Company issued to all such persons contributing
to the escrow fund warrants to purchase an aggregate of 90,000 shares of Common
Stock at approximately $.02 per share. Such warrants were exercised by all such
investors in January and February 1998.

A significant portion of the Common Stock Commitment was provided by the
following Directors and more than 5% stockholders of the Company: Maurice J.
Gallagher, Jr. -- $3.75 million, Timothy P. Flynn -- $3.75 million and Robert L.
Priddy -- $3.75 million. As a commitment fee for their Common Stock Commitment,
such persons received warrants to purchase shares of Common Stock at
approximately $.02 per share as follows: Gallagher -- 22,500 shares,
Flynn -- 22,500 shares and Priddy -- 22,500 shares.

In September 1997, Mitchell Allee purchased 120,000 shares of Common Stock
from the Company for cash in the amount of $400,000 and an additional 105,000
shares for a promissory note in the amount of $437,500. The promissory note is
payable on or before September 30, 2000, bears interest at the rate of 7.5% per
annum and is secured by a pledge of the shares of Common Stock purchased with
such promissory note. As of December 31, 1997, the promissory note had an
outstanding balance of $445,703 (principal plus accrued interest).

In September 1997, John Boersma purchased 30,000 shares of Common Stock
from the Company for cash in the amount of $100,000 and an additional 60,000
shares for a promissory note in the amount of $250,000. The promissory note is
payable on or before September 30, 2000, bears interest at the rate of 7.5% per
annum and is secured by the pledge of the shares of Common Stock purchased with
such promissory note. As of December 31, 1997, the promissory note had an
outstanding balance of $254,688 (principal plus accrued interest).

In the first five months of 1997, the following persons purchased shares of
Common Stock in the Company: certain partnerships and trusts affiliated with
Maurice J. Gallagher, Jr. -- 55,500 shares at a purchase price of $185,000;
Michael Burke -- 30,000 shares at a purchase price of $100,000; Thomas
Keough -- 60,000 shares at a purchase price of $200,000; and Kent
Heyman -- 15,000 shares at a purchase price of $50,000.

The following persons or entities purchased Series A Convertible Preferred
Stock in the Company for cash in a private placement of securities of the
Company in January 1998: (i) a corporation owned by Timothy P. Flynn -- 45,000
shares for $157,500, (ii) a corporation owned by Maurice J. Gallagher, Jr. --

49
<PAGE> 52

41,500 shares for $145,250, (iii) Thomas Keough -- 21,429 shares for $75,000,
and (iv) Robert L. Priddy -- 45,000 shares for $157,500.

During March 1998, the following Executive Officers purchased shares of
Common Stock from the Company for cash and a promissory note as follows:

<TABLE>
<CAPTION>
AMOUNT PAID
-------------------------
SHARES BY PROMISSORY
EXECUTIVE OFFICER PURCHASED IN CASH NOTE
- ----------------- --------- -------- -------------
<S> <C> <C> <C>
Michael E. Burke................................. 12,000 -- $100,000
David S. Clark................................... 13,200 $ 10,000 $100,000
Kent F. Heyman................................... 18,000 $ 50,000 $100,000
James J. Hurley, III............................. 18,000 $ 50,000 $100,000
Thomas G. Keough................................. 18,600 $ 55,000 $100,000
James Mitchell................................... 45,000 $ 87,500 $175,000
Carol A. Mittwede................................ 18,000 $ 50,000 $100,000
Mark W. Peterson................................. 12,000 -- $100,000
David A. Rahm.................................... 12,000 -- $100,000
Walter J. Rusak.................................. 75,000 $250,000 $375,000
Linda M. Sunbury................................. 13,200 $ 10,000 $100,000
</TABLE>

The purchase price for all purchases was $8.33 per share (after giving
effect to the Reverse Split) except that James Mitchell's shares were purchased
at $5.83 per share (after giving effect to the Reverse Split). In each case, the
promissory note is payable within three years, bears interest at 7.5% per annum
and is secured by the pledge of the shares of Common Stock purchased with such
promissory note. In each case, all or a portion of such shares are subject to
repurchase at their cost if the officer's employment with the Company is
terminated within three years. See "Management -- Employment and Stock
Purchase/Repurchase Agreements."

50
<PAGE> 53

DESCRIPTION OF SECURITIES

GENERAL -- CAPITAL STOCK

The description in this Prospectus of the capital stock of the Company is
qualified by and subject to the Nevada General Corporation Law and the Company's
Articles of Incorporation and By-laws, copies of which Articles and By-laws have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part and to which reference is made for the provisions thereof, which are
summarized below.

The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, $.001 par value per share, and 50,000,000 shares of preferred
stock, $.001 par value per share. As of the date of this Prospectus, after
giving effect to the Reverse Split, 9,185,640 shares of Common Stock and
6,571,427 shares of Series A Convertible Preferred Stock were outstanding. At
such time, there were approximately 100 holders of record of the Common Stock
and 50 holders of record of the Series A Convertible Preferred Stock.

In conjunction with the Offering, the Company implemented the Reverse Split
under which the number of shares of authorized Common Stock has been reduced
from 100,000,000 shares to 60,000,000 shares and all previously outstanding
shares of Common Stock have been converted into a reduced number of shares on a
six for ten basis. The Reverse Split became effective immediately prior to the
effective date of the Registration Statement of which this Prospectus is a part.
As a result of the Reverse Split, the number of shares of Common Stock issuable
upon conversion of the Series A Convertible Preferred Stock and exercise of the
Warrants has been adjusted proportionately.

Any preferred stock that may be issued shall have the rights, terms and
preferences delineated by the Company's Board of Directors in a certificate
filed with the Secretary of State of Nevada. As of the date of this Prospectus,
the Company has authorized the issuance of up to 6,571,427 shares of Series A
Convertible Preferred Stock with certain voting, dividend, liquidation and
conversion rights. The issuance of preferred stock by the Board of Directors in
the future could adversely affect the rights of holders of Common Stock. For
example, an issuance of preferred stock could result in a class of securities
outstanding with preferences over the Common Stock with respect to dividends and
liquidations, and that could (upon conversion or otherwise) enjoy all of the
rights appurtenant to Common Stock. See "Description of Securities -- Anti-
Takeover Provisions of Articles of Incorporation."

CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK

During November 1997 and January 1998, the Company issued an aggregate of
6,571,427 shares of Series A Convertible Preferred Stock. The Series A
Convertible Preferred Stock will be automatically converted into 3,942,856
shares of Common Stock in the aggregate upon the consummation of the Offering.
Thereafter, there will not be outstanding any Series A Convertible Preferred
Stock or rights to acquire Series A Convertible Preferred Stock and the holders
of the Common Stock will have all of the equity and voting rights in the
Company.

OUTSTANDING WARRANTS

As of the date of this Prospectus, after giving effect to the Reverse
Split, there are outstanding warrants ("Warrants") to purchase 862,923 shares of
Common Stock. These Warrants were originally issued in September 1997 to
purchasers of units consisting of the Company's Senior Secured Notes and the
Warrants. The Warrants initially represented rights to acquire 1,291,200 shares
of Common Stock, but the number of shares issuable upon exercise of the Warrants
has been adjusted to 862,923 as a result of anti-dilution provisions becoming
applicable in connection with the Company's issuance of Series A Convertible
Preferred Stock in November 1997 and in connection with the Reverse Split. Each
Warrant entitles the holder to purchase the specified number of shares of Common
Stock at a price of approximately $.02 per share. The Warrants may be exercised
at any time on or before October 1, 2004. After the expiration of the exercise
period, holders of Warrants will have no further rights to exercise such
Warrants.

51
<PAGE> 54

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
16,628,496 shares of Common Stock. Of these shares, the 3,500,000 shares sold in
the Offering plus any additional shares sold upon exercise of the Underwriters'
over-allotment option will be freely tradable without restriction or further
registration under the Securities Act except for any of such shares held by
"affiliates" of the Company.

The remaining 13,128,496 shares of Common Stock held by the existing
stockholders (which includes shares of Common Stock into which the Series A
Preferred Stock will be converted upon consummation of the Offering) 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. Of the remaining 13,128,496 shares of
outstanding Common Stock, 8,634,600 shares will qualify for sale under Rule 144
by September 30, 1998, and an additional 4,139,896 will qualify for sale under
Rule 144 by March 31, 1999. 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 that does
not exceed the greater of: (i) 1% of the then outstanding shares of Common Stock
(approximately 169,000 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
Securities and Exchange 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 (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the three months immediately preceding the
sale is entitled to sell restricted shares pursuant to Rule 144(k) without
regard to the limitations described above, provided that two years have expired
since the later of the date on which such restricted shares were first acquired
from the Company or from an affiliate of the Company.

Because there has been no public market for shares of 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 any
then prevailing market price for shares of the 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.

Prior to the commencement of the Offering, the Company, its executive
officers and Directors and all of its stockholders will have agreed not to
offer, sell or otherwise dispose of any of their shares of Common Stock (other
than the shares offered by the Company in the Offering) in the public market for
a period of 180 days after the consummation of the Offering (the "Lock-up
Period") without the prior consent of Bear, Stearns & Co. Inc. Following the
Lock-up Period, these shares will be eligible for sale in the public market upon
registration or subject to the holding period requirements and other conditions
and restrictions of Rule 144, as described above.

In accordance with the terms of the registration rights agreement governing
the Warrants, the holders of the Warrants have agreed not to sell any of the
Common Stock that may have been or may be acquired by them upon exercise of the
Warrants for a period of 180 days after the date of this Prospectus without
consent of Bear, Stearns & Co. Inc.

REGISTRATION RIGHTS OF CERTAIN SECURITY HOLDERS

The holders of at least a majority of the Company's outstanding Series A
Convertible Preferred Stock and the holders of at least 25% of the Warrants will
have the right to demand that the Common Stock into which the Series A
Convertible Preferred Stock is convertible and the Common Stock issuable upon
exercise of the Warrants, respectively, be registered with the Securities and
Exchange Commission. The demand rights may be exercised by the holders of the
Series A Convertible Preferred Stock two times (for registrations on Form S-1)
for registrations of at least $10 million of stock and unlimited times (for
short-form registrations on
52
<PAGE> 55

Form S-2 or S-3) for registrations of at least $500,000 of stock, subject to
certain restrictions. The demand rights may be exercised by the holders of the
Warrants one time, subject to certain restrictions. The holders of the Series A
Convertible Preferred Stock and the holders of the Warrants also have certain
piggyback registration rights under agreements with the Company.

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 the
Company's 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 -- Stock Option Plan" and "Management -- Employment and Stock
Purchase/Repurchase Agreements."

CONTROL SHARE ACQUISITIONS

Sections 78.378 - 78.393 of the Nevada Revised Statutes apply to any
acquisition of outstanding voting securities of a Nevada corporation which has
200 or more stockholders, at least 100 of which are stockholders of record and
Nevada residents, and conducts business in Nevada (an "Issuing Corporation")
(other than pursuant to the laws of descent and distribution, the enforcement of
a judgment, the satisfaction of a security interest or in connection with
certain mergers or reorganizations) resulting in ownership of one of the
following categories of an Issuing Corporation's then outstanding voting
securities: (i) twenty percent or more but less than thirty-three percent, (ii)
thirty-three percent or more but less than fifty percent or (iii) fifty percent
or more. The securities acquired in such acquisition are denied voting rights
unless a majority of the security holders approve the granting of such voting
rights. If an Issuing Corporation's Articles of Incorporation or By-laws in
effect on the tenth day following an acquisition provide: (i) voting securities
acquired are also redeemable in part or in whole by an Issuing Corporation at
the average price paid for the securities within 30 days if the acquiring person
has not given a timely information statement to an Issuing Corporation or if the
stockholders vote not to grant voting rights to the acquiring person's
securities and unless otherwise provided in the Issuing Corporation's Articles
of Incorporation or By-laws in effect on the tenth day following an acquisition:
(ii) if the acquiring person acquired securities with fifty percent or more of
the voting power of an Issuing Corporation's outstanding securities and the
security holders grant voting rights to such acquiring person, then any security
holder who voted against granting voting rights to the acquiring person may
demand the purchase from an Issuing Corporation, for fair value, all or any
portion of his securities.

The Company's Articles of Incorporation or By-laws currently in effect do
not limit the effect of these provisions.

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS

The right of the stockholders to sue any director for misconduct in
conducting the affairs of the Company is limited by the Company's Articles of
Incorporation and Nevada statutory law to cases for damages resulting from
breaches of fiduciary duties involving acts or omissions involving intentional
misconduct, fraud, knowing violations of the law or the unlawful payment of
dividends. Ordinary negligence is not a ground for such a suit. The statute does
not limit the liability of directors or officers for monetary damages under the
Federal securities laws.

The Company also has the obligation, pursuant to the Company's By-laws, to
indemnify any director or officer of the Company for all expenses incurred by
them in connection with any legal action brought or threatened against such
person for or on account of any action or omission alleged to have been
committed while acting in the course and scope of the person's duties, if the
person acted in good faith and in a manner which the person reasonably believed
to be in or not opposed to the best interests of the Company, and with
53
<PAGE> 56

respect to criminal actions, had no reasonable cause to believe the person's
conduct was unlawful, provided that such indemnification is made pursuant to
then existing provisions of Nevada General Corporation Law at the time of any
such indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable.

ANTI-TAKEOVER PROVISIONS OF ARTICLES OF INCORPORATION

The Company's Articles of Incorporation authorize the Board of Directors to
issue up to 50,000,000 shares of preferred stock from time to time in one or
more designated series or classes. The 6,571,427 shares of Series A Convertible
Preferred Stock which have been previously issued will revert to authorized but
unissued shares of preferred stock upon consummation of the Offering. The Board
of Directors, without approval of the stockholders, is authorized to establish
the voting, dividend, redemption, conversion, liquidation and other provisions
of a particular series of preferred stock. The issuance of 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. The Board of Directors has no present
intention to authorize the issuance of any additional series of preferred stock.

BOARD OF DIRECTORS

The Company's By-laws provide that the Board is divided into three classes
of directors, with each class having a number of directors as nearly equal as
possible and with the term of each class expiring in a different year. Because
only one class of directors stands for election or re-election each year,
classifying the Board prevents persons seeking to acquire control of the Company
from electing more than a minority of directors in any year, thereby delaying,
deferring or preventing a change in control. The Company's By-laws provide that
the Board shall consist of not less than three nor more than nine members, the
exact number to be determined from time to time by the Board. The Board has set
the number of directors at six and, as a result, the size of each class is two.

STOCKHOLDER ACTION AND SPECIAL MEETINGS

The Company's By-laws provide that (i) all action required or permitted to
be taken by the Company's stockholders must be effected at a duly called annual
or special meeting of stockholders and may not be effected by any consent in
writing, and (ii) the authorized number of directors may be changed only by
resolution of the Board. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.
The Company's By-laws provide that, subject to any rights of holders of any
series of preferred stock, special meetings of stockholders may be called by the
Board, the Chairman of the Board, the President or the holders of at least a
majority of the shares of Common Stock of the Company issued and outstanding and
entitled to vote.

54
<PAGE> 57

UNDERWRITING

Subject to the terms and conditions set forth in an agreement among the
Underwriters and the Company (the "Underwriting Agreement"), each of the
Underwriters named below (the "Underwriters"), through their representatives
Bear, Stearns & Co. Inc. and Furman Selz LLC (the "Representatives"), have
severally agreed to purchase from the Company the aggregate number of shares of
Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
Furman Selz LLC.............................................

---------
Total............................................. 3,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to 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 of Common Stock if any are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the Price to Public set forth on the cover page of this Prospectus
and at such price less a concession not in excess of $
per share of Common Stock to certain other dealers who are members of the
National Association of Securities Dealers, Inc. The Underwriters may allow, and
such dealers may reallow, concessions not in excess of $ per share to certain
other dealers. After the Offering, the offering price, concessions and other
selling terms may be changed by the Underwriters. The Common Stock is 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 has granted a 30-day over-allotment option to the Underwriters
to purchase up to an aggregate of 525,000 additional shares of Common Stock of
the Company exercisable 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 of the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table.

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

All of the Company's current stockholders have agreed pursuant to lock-up
agreements not to sell or offer to sell or otherwise dispose of any shares of
Common Stock, subject to certain exceptions, for a period of 180 days after the
date of this Prospectus without the prior written consent of Bear, Stearns & Co.
Inc. and the Company. In addition, certain officers of Bear, Stearns & Co. Inc.
who purchased shares of Series A Convertible Preferred Stock have agreed
pursuant to additional lock-up agreements not to sell or offer to sell or
otherwise dispose of any shares of Series A Convertible Preferred Stock or
shares of Common Stock issuable upon conversion of the Series A Convertible
Preferred Stock for a period of one year after the date of this Prospectus.

55
<PAGE> 58

In addition, the Company has agreed that for a period of 180 days after the
date of this Prospectus it will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of Common
Stock except for the shares of Common Stock offered hereby, the shares of Common
Stock issuable upon exercise of outstanding warrants and the shares issued and
options granted pursuant to the Company's existing Stock Option Plan or to newly
hired management level employees consistent with past practices of the Company.

Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial offering price for the Common Stock
was determined by negotiations between the Company and the Representatives of
the Underwriters. Among the factors considered in such negotiations were the
results of operations of the Company in recent periods, estimates of the
prospects of the Company and the industry in which the Company competes, an
assessment of the Company's management, the general state of the securities
markets at the time of the Offering and the prices of similar securities of
generally comparable companies. The Company has applied for the quotation of its
Common Stock on the Nasdaq National Market, under the symbol "MGCX." There can
be no assurance, however, that an active or orderly trading market will develop
for the Common Stock or that the Common Stock will trade in the public markets
subsequent to the Offering at or above the initial offering price.

In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company. The Underwriters may elect to cover any such
short position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment option granted to the Underwriters. In addition,
the Underwriters may stabilize or maintain the price of the Common Stock by
bidding for or purchasing shares of Common Stock in the open market and may
impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in the Offering are reclaimed if
shares of Common Stock previously distributed in the Offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Common Stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

Certain persons participating in the Offering may also engage in passive
market making transactions in the Common Stock on the Nasdaq National Market.
Passive market making consists of displaying bids on the Nasdaq National Market
limited by the prices of independent market makers and effecting purchases
limited by such prices and in response to order flow. Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission limits the amount of net
purchases that each passive market maker may make and the displayed size of each
bid. Passive market making may stabilize the market price of the Common Stock at
a level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.

Bear, Stearns & Co. Inc. and Furman Selz LLC acted as initial purchasers in
connection with the offering, in September 1997, of units consisting of Senior
Secured Notes and Warrants. Bear, Stearns & Co. Inc. and Furman Selz LLC also
acted as placement agents in connection with the sale of Series A Convertible
Preferred Stock in November 1997 (the "November 1997 Private Placement"), for
which they received customary fees. During January 1998, the Company sold
additional shares of Series A Convertible Preferred Stock (the "January 1998
Private Placement") for which neither Bear, Stearns & Co. Inc. nor Furman Selz
LLC received any commission. Certain officers of Bear, Stearns & Co. Inc.
purchased an aggregate of 142,857 shares of Series A Convertible Preferred Stock
in the January 1998 Private Placement (such shares totaling less than 2.17% of
the total outstanding Series A Convertible Preferred Stock following the January
1998 Private Placement) at the same price and subject to the same terms and
conditions as the Series A Convertible Preferred Stock sold to other purchasers
in the November 1997 Private Placement and the

56
<PAGE> 59

January 1998 Private Placement. In addition, an affiliate of Furman Selz LLC
provides cash management services to the Company for which it receives customary
fees.

CERTAIN MARKET INFORMATION

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

The Company has applied for the listing of the Common Stock on the Nasdaq
National Market.

LEGAL

Certain legal matters with respect to the Common Stock have been passed
upon for the Company by Ellis, Funk, Goldberg, Labovitz & Dokson, P.C., Atlanta,
Georgia. Kronish, Lieb, Weiner & Hellman LLP, New York, New York, is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the Common Stock. Certain shareholders of Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C. own 36,000 shares of Common Stock in the Company.

EXPERTS

The financial statements included in this Prospectus and elsewhere in the
Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP and KPMG Peat Marwick LLP,
independent certified public accountants, and are included herein in reliance
upon the authority of said firms as experts in giving said reports.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (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. 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
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, upon the oral or written request of such
person to MGC Communications, Inc., 3301 N. Buffalo Drive, Las Vegas, Nevada
89129 (telephone 702-310-1000), Attention: Kent F. Heyman, 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.

57
<PAGE> 60

INDEX TO FINANCIAL STATEMENTS

MGC COMMUNICATIONS, INC.

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Independent Auditors' Report................................ F-3
Balance Sheets as of March 31, 1998 (unaudited) and December
31, 1997 and 1996......................................... F-4
Statements of Operations for the three months ended March
31, 1998 and 1997 (unaudited) and for the years ended
December 31, 1997 and 1996................................ F-5
Statements of Redeemable Preferred Stock and Stockholders'
Equity for the three months ended March 31, 1998
(unaudited) and for the years ended December 31, 1997 and
1996...................................................... F-6
Statements of Cash Flows for the three months ended March
31, 1998 and 1997 (unaudited) and for the years ended
December 31, 1997 and 1996................................ F-7
Notes to Financial Statements............................... F-8
</TABLE>

F-1
<PAGE> 61

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and
Board of Directors of
MGC Communications, Inc.:

We have audited the accompanying balance sheet of MGC Communications, Inc. (the
"Company") as of December 31, 1997, and the related statements of operations,
redeemable preferred stock and stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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, the financial statements referred to above present fairly, in
all material respects, the financial position of MGC Communications, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Las Vegas, Nevada
March 4, 1998

F-2
<PAGE> 62

INDEPENDENT AUDITORS' REPORT

The Board of Directors
MGC Communications, Inc.:

We have audited the accompanying balance sheet of MGC Communications, Inc. as of
December 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MGC Communications, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Las Vegas, Nevada
August 18, 1997

F-3
<PAGE> 63

MGC COMMUNICATIONS, INC.

BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1998 1997 1996
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,411 $ 45,054 $ 7,897
Investments held to maturity.............................. 8,619 7,797 --
Restricted investments.................................... 28,449 18,482 --
Amounts receivable for shares issued...................... 163 -- 1,153
Trade accounts receivable, less allowance for doubtful
accounts of $239, $216 and $0.......................... 2,617 1,200 10
Prepaid expenses.......................................... 323 277 23
-------- -------- -------
Total current assets.............................. 79,582 72,810 9,083
Property and equipment, net................................. 34,421 24,617 3,250
Investments held to maturity................................ 49,367 49,913 --
Restricted investments...................................... 29,917 39,092 --
Deferred financing costs, net of amortization of $408, $198
and $0.................................................... 5,371 5,448 --
Other assets................................................ 149 97 6
-------- -------- -------
Total assets...................................... $198,807 $191,977 $12,339
======== ======== =======
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 387 $ 381 $ --
Accounts payable:
Trade.................................................. 1,908 462 76
Property and equipment................................. 3,999 3,123 1,372
Accrued interest.......................................... 10,528 5,328 --
Accrued other expenses.................................... 1,011 786 99
-------- -------- -------
Total current liabilities......................... 17,833 10,080 1,547
Senior Secured Notes, net of unamortized discount of $3,738,
$3,882 and $0............................................. 156,262 156,118 --
Other long-term debt........................................ 40 138 --
-------- -------- -------
Total liabilities................................. 174,135 166,336 1,547
-------- -------- -------
Commitments and contingencies
Redeemable preferred stock:
8% Series A convertible preferred stock, 6,571,450 shares
authorized, 6,571,427, 5,148,570 and 0 issued and
outstanding............................................ 21,645 16,665 --
Stockholders' equity:
Preferred stock, 43,428,550 shares authorized but
unissued............................................... -- -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 15,309,400, 14,666,000 and 11,960,000
shares issued and outstanding.......................... 15 15 12
Additional paid-in capital................................ 24,382 22,112 12,271
Accumulated deficit....................................... (19,197) (12,463) (1,491)
-------- -------- -------
5,200 9,664 10,792
Notes receivable from stockholders for issuance of common
stock.................................................. (2,173) (688) --
-------- -------- -------
Total stockholders' equity........................ 3,027 8,976 10,792
-------- -------- -------
Total liabilities, redeemable preferred stock and
stockholders' equity............................ $198,807 $191,977 $12,339
======== ======== =======
</TABLE>

See accompanying notes to financial statements.
F-4
<PAGE> 64

MGC COMMUNICATIONS, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS ENDED MARCH 31, DECEMBER 31,
---------------------------- -----------------------
1998 1997 1997 1996
------------ ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Telecommunication services:
Operating revenues..................... $ 2,846 $ 212 $ 3,791 $ 1
----------- ----------- ---------- ---------
Operating expenses:
Cost of operating revenues (excluding
depreciation)....................... 2,371 539 3,928 305
Selling, general and administrative.... 2,562 883 6,440 841
Depreciation and amortization.......... 867 160 1,274 54
Write-off of purchased software........ -- -- -- 355
----------- ----------- ---------- ---------
5,800 1,582 11,642 1,555
----------- ----------- ---------- ---------
Loss from operations................ (2,954) (1,370) (7,851) (1,554)
Other income (expense):
Interest income........................ 2,169 128 2,507 63
Interest expense (net of amount
capitalized)........................ (5,505) -- (5,492) --
----------- ----------- ---------- ---------
Net loss............................ (6,290) (1,242) (10,836) (1,491)
Accrued preferred stock dividend......... (444) -- (136) --
----------- ----------- ---------- ---------
Net loss applicable to common
stockholders........................... $ (6,734) $ (1,242) $ (10,972) $ (1,491)
=========== =========== ========== =========
Basic and diluted loss per share of
common stock........................... $ (.45) $ (.09) $ (.78) $ (1.27)
=========== =========== ========== =========
Basic and diluted weighted average shares
outstanding............................ 14,820,471 13,463,844 14,098,318 1,178,932
=========== =========== ========== =========
</TABLE>

See accompanying notes to financial statements.
F-5
<PAGE> 65

MGC COMMUNICATIONS, INC.

STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
NOTES
REDEEMABLE RECEIVABLE FROM
PREFERRED COMMON STOCK ADDITIONAL STOCKHOLDERS FOR TOTAL
-------------------- ------------------- PAID-IN ACCUMULATED ISSUANCE OF STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK EQUITY
---------- ------- ---------- ------ ---------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1996............... -- $ -- 400,000 $-- $ 1 $ -- $ -- $ 1
Common stock issued
for services
contributed by
stockholder........ -- -- 800,000 1 1 -- -- 2
Common stock issued
for cash........... -- -- 10,760,000 11 12,269 -- -- 12,280
Net loss............. -- -- -- -- -- (1,491) -- (1,491)
---------- ------- ---------- --- ------- -------- ------- --------
BALANCE AT DECEMBER
31, 1996........... -- -- 11,960,000 12 12,271 (1,491) -- 10,792
Common stock issued
for cash........... -- -- 2,431,000 3 4,859 -- -- 4,862
Common stock issued
for notes
receivable......... -- -- 275,000 -- 688 -- (688) --
Proceeds from
offering allocated
to warrants........ -- -- -- -- 3,885 -- -- 3,885
Warrants issued for
common stock
commitment......... -- -- -- -- 409 -- -- 409
Net loss............. -- -- -- -- -- (10,836) -- (10,836)
8% Series A
Convertible
Preferred Stock
issued for cash.... 5,148,570 16,665 -- -- -- -- -- --
Accrued preferred
stock dividend..... -- -- -- -- -- (136) -- (136)
---------- ------- ---------- --- ------- -------- ------- --------
BALANCE AT DECEMBER
31, 1997........... 5,148,570 16,665 14,666,000 15 22,112 (12,463) (688) 8,976
Common stock issued
for cash........... -- -- 166,400 -- 772 -- -- 772
Common stock issued
for notes
receivable......... -- -- 315,000 -- 1,485 -- (1,485) --
Warrants and options
exercised for
Common Stock....... -- -- 162,000 -- 13 -- -- 13
Net loss............. -- -- -- -- -- (6,290) -- (6,290)
8% Series A
Convertible
Preferred Stock
issued for cash.... 1,422,857 4,980 -- -- -- -- -- --
Accrued preferred
stock dividend..... -- -- -- -- -- (444) -- (444)
---------- ------- ---------- --- ------- -------- ------- --------
BALANCE AT MARCH 31,
1998 (UNAUDITED)... 6,571,427 $21,645 15,309,400 $15 $24,382 $(19,197) $(2,173) $ 3,027
========== ======= ========== === ======= ======== ======= ========
</TABLE>

See accompanying notes to financial statements.
F-6
<PAGE> 66

MGC COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED YEAR ENDED
------------------ DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
-------- ------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (6,290) $(1,242) $ (10,836) $(1,491)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 867 160 1,274 54
Write-off of purchased software.................. -- -- -- 355
Amortization of debt discount.................... 144 -- 144 --
Amortization of deferred debt financing costs.... 210 -- 198 --
Stock issued for services rendered............... -- -- -- 2
Changes in assets and liabilities:
Increase in accounts receivable, net.......... (1,442) (89) (1,190) (9)
Increase (decrease) in prepaid expenses....... (46) 10 (254) (23)
Increase in other assets...................... (52) (5) (91) (5)
Increase in accounts payable -- trade......... 1,446 235 386 76
Increase in accrued expenses.................. 4,981 25 5,879 99
-------- ------- --------- -------
Net cash used in operating activities....... (182) (906) (4,490) (942)
-------- ------- --------- -------
Cash flows from investing activities:
Purchase of property and equipment, net of
payables......................................... (9,795) (847) (20,207) (2,287)
Purchase of investments held to maturity........... (276) -- (57,710) --
Purchase of restricted investments................. (792) -- (57,574) --
-------- ------- --------- -------
Net cash used in investing activities....... (10,863) (847) (135,491) (2,287)
-------- ------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of Senior Secured Notes, net
of discount of $4,026............................ -- -- 155,974 --
Costs associated with issuance of Senior Secured
Notes and warrants............................... (133) -- (5,237) --
Proceeds from issuance of 8% Series A convertible
preferred stock, net of issuance costs........... 4,980 -- 16,665 --
Proceeds from issuance of warrants................. -- -- 3,885 --
Payments on other long term debt................... (92) -- (164) --
Proceeds from issuance of common stock during
1996............................................. -- 1,153 1,153 11,126
Proceeds from issuance of common stock during
1997............................................. -- 4,331 4,862 --
Proceeds from issuance of common stock during
1998............................................. 647 --
-------- ------- --------- -------
Net cash provided by financing activities... 5,402 5,484 177,138 11,126
-------- ------- --------- -------
Net (decrease) increase in cash............. (5,643) 3,731 37,157 7,897
Cash and cash equivalents at beginning of period..... 45,054 7,897 7,897 --
-------- ------- --------- -------
Cash and cash equivalents at the end of period....... $ 39,411 $11,628 $ 45,054 $ 7,897
======== ======= ========= =======
Supplemental schedule of non-cash investing and
financing activities:
Stock issued for services rendered................. $ -- $ -- $ -- $ 2
======== ======= ========= =======
Increase in property and equipment purchases
included in accounts payable -- property and
equipment........................................ $ 876 $ -- $ 1,751 $ 1,372
======== ======= ========= =======
Notes payable issued for property and equipment.... $ -- $ -- $ 683 $ --
======== ======= ========= =======
Stock issued for notes receivable.................. $ 1,485 $ -- $ 688 $ --
======== ======= ========= =======
Warrants issued as consideration in debt offering
capitalized as deferred financing costs.......... $ -- $ -- $ 409 $ --
======== ======= ========= =======
Other disclosures:
Cash paid for interest net of amounts
capitalized...................................... $ 305 $ -- $ 164 $ --
======== ======= ========= =======
</TABLE>

See accompanying notes to financial statements.

F-7
<PAGE> 67

MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND DECEMBER 31, 1997
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS
UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

DESCRIPTION OF BUSINESS

MGC Communications, Inc. (the Company), a Nevada Corporation, was organized
on October 16, 1995 as a competitive local exchange carrier to provide low cost
alternative communication services to residential and small business users
through the utilization of Company owned switches and network architecture
leased from incumbent local exchange carriers. The Company's revenue generating
operations commenced in December 1996. As of March 31, 1998, the Company
operated in Las Vegas, Nevada and in selected suburban areas of Atlanta,
Georgia; and Los Angeles, California with substantially all of its operating
revenues being derived from the Las Vegas operations.

PERIOD FROM OCTOBER 16, 1995 (INCEPTION) TO DECEMBER 31, 1995

Statements of operations and cash flows for the period from October 16,
1995 (inception) to December 31, 1995 have been omitted as no revenues or
expenses were recognized and no cash transactions occurred during the period.
One non-cash transaction occurred during the period ended December 31, 1995 in
which the Company issued 400,000 shares of $.001 par value common stock valued
at $.0025 per share to the founding shareholder as reimbursement for
incorporation costs.

As of December 31, 1996, the Company was a development stage company
wherein the Company's activities consisted primarily of acquiring communications
equipment, designing and developing the Company's networks, negotiating
agreements with incumbent local exchange carriers for the utilization of their
transport network architecture and raising capital. The Company began its
operations in December 1996 by operating its first telephone switch in Las
Vegas, Nevada. During the year ended December 31, 1997, the Company's planned
principal activities commenced. The Company emerged from the development stage
in September 1997 and the inception to date figures have been excluded from the
accompanying financial statements.

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

The financial statements for the three months ended March 31, 1998 and 1997
and the related amounts in the Notes to Financial Statements are unaudited, but
in the opinion of management reflect all normal and recurring adjustments
necessary for a fair presentation of the results of those periods.

REVENUE RECOGNITION

The Company recognizes operating revenues from communication services in
the period the related services are provided.

CASH AND CASH EQUIVALENTS

The Company considers short-term investments with a remaining maturity of
three months or less at the date of purchase to be cash equivalents.

RESTRICTED INVESTMENTS

Restricted investments consist of U.S. Treasury Notes which are restricted
in that they must be used for the repayment of interest on certain debt and are
stated at amortized cost plus accrued interest. Management designated these
investments as held-to-maturity securities in accordance with the provisions of
Statement of

F-8
<PAGE> 68
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The fair value of the restricted
investments approximates the carrying value.

ADVERTISING COSTS

The Company expenses advertising costs in the period incurred. As of
December 31, 1997 and 1996, the Company had expensed advertising costs of
$125,000 and $0, respectively.

INVESTMENTS HELD-TO-MATURITY

Investments held-to-maturity represent a contractual arrangement between
the Company and an investment banking firm whereby Company funds are invested in
various U.S. Government securities and Federal Agency securities for a
guaranteed return on investment. At December 31, 1997, the guaranteed minimum
return on the investment portfolio was 5.35% for the two year investment period
ending November 1999.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost, less accumulated depreciation.
Direct costs of construction are capitalized, and include $188,000 of interest
costs related to construction during 1997. There were no interest costs
capitalized prior to September 1997. Depreciation is computed using the
straight-line method over estimated useful lives beginning in the month an asset
is put into service.

Estimated useful lives of property and equipment are as follows:

<TABLE>
<S> <C>
Buildings........................................ 40 years
Telecommunications and other switching
equipment...................................... 5-10 years
Computer hardware and software................... 3-5 years
Office furniture & equipment..................... 3-5 years
Leasehold improvements........................... the lesser of the estimated
useful lives or term of lease
</TABLE>

DEFERRED FINANCING COSTS

Deferred financing costs are amortized to interest expense over the term of
the related financing using the effective interest method.

INCOME TAXES

The Company has applied the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities for the consequences of temporary differences between amounts
reported for financial reporting and income tax purposes. SFAS No. 109 requires
recognition of a future tax benefit of net operating loss carryforwards and
certain other temporary differences to the extent that realization of such
benefit is more likely than not; otherwise, a valuation allowance is applied.

LOSS PER SHARE

Basic and diluted loss per share were computed in accordance with SFAS No.
128, "Earnings Per Share."

F-9
<PAGE> 69
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. At December 31, 1997
and 1996, the carrying value of all financial instruments (accounts receivable,
accounts payable and long-term debt) approximates fair value due to the short
term nature of the instruments or interest rates, which are comparable with
current rates.

LONG-LIVED ASSETS

Management periodically evaluates the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized. Management believes no material impairment in the
value of long-lived assets exists at December 31, 1997 or 1996.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity sections of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. The Company has adopted SFAS No. 130,
during the three month period ended March 31, 1998 and has determined that such
adoption will not result in comprehensive income different from net income as
reported in the accompanying financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes additional
standards for segment reporting in financial statements and is effective for
fiscal years beginning after December 15, 1997. The Company currently operates
as one segment.

CONCENTRATION OF SUPPLIERS

The Company currently leases its transport capacity from a limited number
of suppliers and is dependent upon the availability of collocation space and
fiber optic transmission facilities owned by the suppliers. The Company is
currently vulnerable to the risk of renewing favorable supplier contracts,
timeliness of the supplier in processing the Company's orders for customers and
is at risk to regulatory agreements that govern the rates to be charged to the
Company.

F-10
<PAGE> 70
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

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

RECLASSIFICATION

Certain reclassifications, which have no effect on net income, have been
made in the 1996 financial statements to conform to the current period
presentation.

(2) PLAN OF OPERATIONS

During September 1997, the Company completed an offering of 160,000 units
consisting of $160 million of 13% Senior Secured Notes due in 2004 (the "Notes")
and warrants to purchase shares of common stock, as discussed in Note 4. The
Company expects to continue expansion and development of services and entering
into new markets. This expansion includes plans to be operational in an
additional fourteen suburban metropolitan areas by the end of 1999. The Company
expects to fund its capital requirements through existing resources, debt or
equity financing and internally generated funds.

Management recognizes that the Company must generate additional resources
or consider modifications to its expansion plans. To the extent the Company is
unable to achieve its funding plan, management has contingency plans which
include curtailing capital expenditure activities, reducing infrastructure costs
associated with expansion and development plans and achieving profitable
operations as soon as practicable. However, no assurance can be given that the
Company will be successful in raising additional capital, achieving profitable
results, or entering into new markets.

Management also recognizes that certain risks are inherent to the industry.
Such risks and assumptions include, but are not limited to, the Company's
ability to successfully offer its services to current and new customers,
generate customer demand for its services in the particular markets where it
plans to offer services, access markets, install switches and obtain suitable
locations for its switches and negotiate suitable interconnect agreements with
the incumbent local exchange carriers (ILECs), all in a timely manner, at
reasonable cost, and on satisfactory terms and conditions, as well as
regulatory, legislative and judicial developments that could cause actual
results to vary materially from any future results implied in these financial
statements.

F-11
<PAGE> 71
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(3) PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Building and property........................... $ 258 $ 278 $ --
Switching equipment............................. 23,326 21,621 2,813
Leasehold improvements.......................... 990 956 429
Computer hardware and software.................. 1,485 1,404 51
Office equipment and vehicles................... 348 300 --
------- ------- ------
26,407 24,559 3,293
Less accumulated depreciation and
amortization.................................. (2,184) (1,317) (43)
------- ------- ------
24,223 23,242 3,250
Switching equipment under construction.......... 10,198 1,375 --
------- ------- ------
Net property and equipment............ $34,421 $24,617 $3,250
======= ======= ======
</TABLE>

(4) DEBT

The Company had no long-term borrowings as of December 31, 1996. Long-term
borrowings at December 31, 1997 consist of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
13% Senior Secured Notes, due October 1, 2004, net of
unamortized discount of $3,882............................ $156,118
10% note payable in monthly installments through February
1999...................................................... 441
Other....................................................... 78
--------
156,637
Less current portion........................................ (381)
--------
$156,256
========
</TABLE>

Maturities of long-term debt for each of the next five years ending
December 31, consist of the following:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 381
1999........................................................ 117
2000........................................................ 21
2001........................................................ --
2002 and thereafter......................................... 156,118
--------
$156,637
========
</TABLE>

In September 1997, the Company completed an offering for 160,000 units
consisting of $160 million of 13% Senior Secured Notes due in 2004 and warrants
to purchase 1,291,200 shares of common stock (collectively the "Offering").

The Notes bear interest at the rate of 13% per annum, payable semi-annually
in arrears on April 1 and October 1, commencing April 1, 1998. As set forth in
the Indenture pursuant to which the Notes were issued, the Company is required
to hold in a trust account sufficient funds to provide for payment in full of
interest on the Notes through October 1, 2000. The accompanying financial
statements reflect approximately $57.6

F-12
<PAGE> 72
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

million as restricted investments as security for the interest payments on the
Notes. In addition, the Notes are secured by a security interest in certain
telecommunications equipment owned by the Company or which may be acquired in
the future. As of December 31, 1997, the Notes were secured by a security
interest in telecommunications equipment with a net book value of $11.1 million
and restricted investments of $57.6 million (at fair market value).

In conjunction with the Offering, the Company engaged an investment banking
firm which determined a value for each warrant and share of common stock.
Consistent with this determination, the Company has allocated a portion of the
Offering proceeds to the warrants based on a value of $2.81 per share of common
stock less the exercise price of $.01 per share for the warrant.

The warrants are exercisable at any time on or after the earlier to occur
of (i) October 1, 1998, or (ii) the date on which a change in control occurs.
The agreement pursuant to which the warrants were issued required an
antidilution adjustment for stock issued through December 31, 1997 if the
preferred stock offering was consummated at a price less than $5.00 per share.
As further discussed in Note 5, the Company completed the preferred stock
offering for $3.50 per share. Accordingly, the warrants issued in connection
with the Offering were increased from 1,291,200 to 1,438,205 and have been
reflected in the accompanying financial statements as of December 31, 1997.
Expenses allocated to the warrants in connection with the Offering were
$141,000. The warrants expire on October 1, 2004.

In conjunction with the Offering, certain persons deposited an aggregate of
$15.0 million in escrow (the Common Stock Commitment), which funds were to have
been applied to the purchase of shares of Common Stock in the event the Company
failed to sell at least $15.0 million of preferred stock within a certain period
of time. Since sufficient preferred stock was issued within the time period, the
investors received a return of their funds contributed to escrow. As a
commitment fee for the Common Stock Commitment, the Company issued to all such
persons contributing to the escrow funds warrants to purchase an aggregate of
150,000 shares of Common Stock at $.01 per share.

The Company has recorded the commitment fee as non-cash consideration in
connection with the Offering. The value of the warrants issued as a commitment
fee was determined based on a value of the Company's common stock at $2.81 per
share less the exercise price of $.01 per share for the warrant. All such
warrants were exercised in January and February 1998.

The Notes may be redeemed at the option of the Company, in whole or in
part, on or after October 1, 2001, at a premium declining to par in 2003, plus
accrued and unpaid interest and liquidated damages, if any, through the
redemption date as follows:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.............................................. 106.50
2002.............................................. 103.25
2003 and thereafter............................... 100.00
</TABLE>

In the event of a sale by the Company prior to October 1, 2000 of its
capital stock in one or more equity offerings, up to a maximum of 35% of the
aggregate principal amount of the Notes originally issued will, at the option of
the Company, be redeemed from the net cash proceeds at a redemption price equal
to 113% of the principal amount, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, provided at least 65% of the aggregate
principal amount of Notes originally issued remain outstanding immediately after
the occurrence of such redemption. As of the date of these financial statements,
management has no intention of redeeming the Notes prior to their stated
redemption date.

The Indenture contains certain covenants that among other things, limit the
ability of the Company and its restricted subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, acquire
an aggregate of more

F-13
<PAGE> 73
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

than 20 Switches until consolidated earnings before interest, taxes,
depreciation and amortization (EBITDA) is positive for two consecutive quarters
(with certain exceptions), engage in sale and lease back transactions, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company or its restricted subsidiaries, conduct certain lines of business,
issue or sell equity interests of the Company's restricted subsidiaries or enter
into certain mergers and consolidations. As of December 31, 1997, management
believes it is in compliance with all debt covenants.

In conjunction with the Offering, the authorized capital stock of the
Company was increased to 100,000,000 shares of common stock, $.001 par value per
share, and 50,000,000 share of preferred stock, $.001 par value per share.

In January 1998, the Company filed a registration statement offering to
exchange the Notes (discussed in Note 4) for 13% Series B Senior Secured Notes
Due 2004 under the Securities Act of 1933, as amended. Terms of the 13% Series B
Senior Secured Notes due 2004 are substantially the same as the Notes. The
exchange was consummated in March 1998.

Associated with the issuance of the Notes, expenses of $68,000 were paid to
a related party for charter services.

(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

COMMON STOCK

On December 6, 1996, the Board of Directors approved a four-hundred-for-one
stock split, effected in the form of a stock dividend distributed on December
31, 1996 to shareholders of record as of June 8, 1996. All share and per share
data presented in the financial statements and notes thereto have been
retroactively restated to give effect to this stock split.

During 1995, in exchange for expending cash to incorporate the Company, a
shareholder received 400,000 shares of $.001 par value common stock valued at
$.0025 per share. The Company capitalized the value of the issued shares as
organization costs included in other assets in the accompanying financial
statements, which costs are being amortized over 60 months using the
straight-line method.

In April 1996, the Company issued 800,000 shares of $.001 par value common
stock valued at $.0025 per share in exchange for services rendered by a
stockholder.

During 1996, NevTEL LLC (the "LLC") was formed for the purpose of funding
the development stage of MGC Communications, Inc. In June 1996, the Company and
LLC entered into an agreement whereby LLC would acquire 6,160,000 shares of
$.001 par value common stock of the Company for $.50 per share. The agreement
called for LLC to advance funds for operating expenses incurred by the Company
(to be applied against the purchase price of the stock) until the Company
produced operating revenues, at which time the remaining purchase price would be
remitted to the Company, the Company's common stock would be issued to LLC
owners and LLC would terminate. The agreement stipulated that the funds advanced
for operating expenses were to be paid back to LLC if the Company did not
generate operating revenue by December 31, 1996. The Company began revenue
generating activities in December 1996. The shares were issued to LLC owners on
December 31, 1996, at which time LLC terminated and the remaining purchase price
was owed to the Company. Such amount was transferred to the Company in February
1997 and is classified as amounts receivable for shares issued at December 31,
1996.

In December 1996, the Company offered 6,781,000 shares of $.001 par value
common stock at $2.00 per share through a private placement. In connection with
this offering, the Company issued 2,181,000 shares and 4,600,000 shares of $.001
par value common stock and received proceeds of $4,362,000 and $9,200,000 during
the years ended December 31, 1997 and 1996, respectively.

F-14
<PAGE> 74
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In June 1997, the Company approved agreements with two key members of
management granting them rights to purchase a total of 250,000 shares at $2.00
per share and 275,000 shares at $2.50 per share. In both cases, the Company
retains the right to repurchase these shares at their cost in the event of
termination of employment for any reason and has agreed to finance the purchase
price of the shares purchasable at $2.50 per share over a period of three years.
During September 1997, the members of management exercised their rights and the
respective aforementioned shares were issued. The Company received $500,000 for
the 250,000 shares issued at $2.00 per share. The $688,000 owed to the Company
for the 275,000 shares issued at $2.50 per share has been classified in the
accompanying statements of redeemable preferred stock and stockholders' equity
as notes receivable from stockholders for issuance of common stock.

During the three months ended March 31, 1998, the Company offered 166,400
shares of $.001 par value Common Stock at prices ranging from $3.50 to $5.00 per
share, for total proceeds to the Company of $772,000.

During the three months ended March 31, 1998, the Company approved
agreements with 12 key members of management to purchase a total of 315,000
shares of Common Stock. The purchase price of these shares ranged from $3.50 to
$5.00 per share. The $1,485,000 owed to the Company is classified in the
accompanying statements of redeemable preferred stock and stockholders' equity
as notes receivable from stockholders for issuance of common stock.

REDEEMABLE PREFERRED STOCK

The Company has authorized the issuance of up to 50,000,000 shares of
preferred stock. In November 1997, the Company designated 6,571,450 shares as 8%
Series A Convertible Preferred Stock (the "Preferred Stock").

In November 1997, the Company completed a private placement offering in
which 5,148,570 shares of the Preferred Stock were issued at $3.50 per share,
for total proceeds to the Company of approximately $16.7 million, net of
expenses. Each share of Preferred Stock is convertible into shares of Common
Stock at any time at the option of the holder. In addition, each share of
Preferred Stock is automatically converted into Common Stock at its then
applicable conversion rate in the event of a qualified firm-commitment
underwritten public offering, as defined.

In January 1998, the Company completed an additional private placement
offering in which 1,422,857 shares of Preferred Stock were issued at $3.50 per
share for total proceeds to the Company of approximately $5.0 million, net of
expenses. The terms of the offering were substantially identical to those of the
previous preferred stock offering.

Dividends on the Preferred Stock accumulate whether or not the Company has
earnings or profits, whether or not there are funds legally available for the
payment of such dividends and whether or not dividends are declared. Except as
may otherwise be required by law, holders of Preferred Stock are entitled to
vote together with the holders of the Common Stock and not as a separate class
and are entitled to elect two members of the Company's Board of Directors.

Commencing at any time on or after October 2, 2004, at the option and
written election of the holders of a majority of the outstanding shares of the
Preferred Stock, the Company shall, subject to applicable law, redeem all of the
outstanding shares of Preferred Stock at a price equal to the greater of (1)
$3.50, plus an amount equal to any unpaid dividends thereon, or (2) the market
value of the Preferred Stock, on an as converted basis, determined by an
independent appraiser.

F-15
<PAGE> 75
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(6) STOCK OPTION PLAN

In June 1996, the Company adopted a stock option plan which allows the
Board of Directors to grant incentives to employees in the form of incentive
stock options and non-qualified stock options. As of December 31, 1997 and 1996,
the Company has reserved 2,400,000 shares of common stock to be issued under the
plan. In April 1998, the Company reserved an additional 2,000,000 shares to be
issued under the Plan.

Under the plan, substantially all options have been granted to employees at
a price exceeding the then-current market price, as estimated by management, and
vest primarily over a 5-year period. All options expire within ten years of the
date of grant.

Stock option transactions during 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995............................ -- --
Granted..................................................... 1,353,100 $0.81
Canceled.................................................... (50,000) $1.00
---------
Outstanding at December 31, 1996............................ 1,303,100 $0.81
Granted..................................................... 457,600 $3.47
Canceled.................................................... (5,500) $3.05
---------
Outstanding at December 31, 1997............................ 1,755,200 $1.50
Granted..................................................... 435,000 $4.26
Exercised................................................... (12,000) $1.00
Canceled.................................................... (73,000) $1.87
---------
Outstanding at March 31, 1998 (unaudited)................... 2,105,200 $2.05
Exercisable at December 31, 1996............................ 19,600 $2.00
=========
Exercisable at December 31, 1997............................ 276,200 $1.05
=========
Exercisable at March 31, 1998 (unaudited)................... 311,100 $1.09
=========
</TABLE>

The weighted average fair value of each of the options issued during the
years ended December 31, 1997 and 1996, substantially all of which have been
granted at a price exceeding the then current market price as estimated by
management, was estimated to be $2.42 and $.55, respectively, using an option
pricing model with the following assumptions: dividend yield of 0%; expected
option life of 6.5 years; and risk free interest rate at December 31, 1997 and
1996 of 5.74% and 6.12%, respectively.

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OUT- AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF STANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1997 LIFE PRICE 1997 PRICE
- -------- ------------ ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.50 700,000 8.25 years $0.50 140,000 $0.50
$1.00 510,000 8.59 years $1.00 100,600 $1.00
$2.00 99,600 8.92 years $2.00 35,600 $2.00
$3.50 431,100 9.52 years $3.50 -- $3.50
$3.75 14,500 10.00 years $3.75 -- $3.75
--------- -------
$0.50 to
$3.75 1,755,200 8.71 years $1.49 276,200 $0.88
========= =======
</TABLE>

F-16
<PAGE> 76
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company applied Accounting Principles Board (APB) Opinion No. 25 in
accounting for its plan. No compensation expense was recognized for the years
ended December 31, 1997 and 1996. Had the Company determined compensation cost
based on the minimum value method under SFAS No. 123, the Company's net loss for
the years ended December 31, 1997 and 1996 would have increased by approximately
$7,000 and $10,000, respectively, which would have had no effect on the basic
and diluted loss per share of common stock as stated in the accompanying
statements of operations.

(7) LOSS PER SHARE

SFAS No. 128 "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the years ended December 31, 1997 and 1996
were computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of common stock.

The Company's warrants, preferred stock and stock options granted and
issued during 1997 and 1996, and outstanding as of December 31, 1997 and 1996,
are antidilutive and have been excluded from the diluted loss per share
calculation for the years ended December 31, 1997 and 1996. Had the Company
shown the effects of dilution, the warrants, preferred stock and options would
have added an additional 2.7 million and 0.8 million shares to the weighted
average shares outstanding for the years ended December 31, 1997 and 1996,
respectively.

(8) INCOME TAXES

The net deferred tax asset as of December 31, 1997 and 1996 is as follows
(in thousands):

<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Deferred Tax Asset
Net operating loss carry-forward.......................... $ 4,529 $ 276
Start-up expenditures..................................... 220 276
Other..................................................... 141 5
------- -----
4,890 557
Less: valuation allowance................................. (4,309) (522)
------- -----
Net deferred tax asset.................................... 581 35
------- -----
Deferred Tax Liability
Excess of tax depreciation over book...................... 481 32
Other..................................................... 100 3
------- -----
Net deferred tax liability................................ 581 35
------- -----
Net......................................................... $ -- $ --
======= =====
</TABLE>

SFAS No. 109 requires recognition of the future tax benefit of these assets
to the extent realization of such benefits is more likely than not; otherwise, a
valuation allowance is applied. At December 31, 1997 and 1996, the Company
determined that $4,309,000 and $522,000, respectively, of tax benefits did not
meet the realization criteria because of the Company's historical operating
results. Accordingly, a valuation allowance was applied to reserve against the
applicable deferred tax asset.

At December 31, 1997 and 1996, the Company had net operating loss
carry-forwards available for income tax purposes of approximately $12,940,000
and $788,000, respectively, which expire principally from 2011 to 2012.

F-17
<PAGE> 77
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES

LEASE OBLIGATIONS

The Company has entered into various leasing agreements for its switching
facilities and offices. The facility which houses the Company's headquarters in
Las Vegas is owned by two of the Company's principal stockholders and directors.
Management believes the terms and conditions of this agreement are equal to or
better than the terms which would be available from an unaffiliated lessor.

Future minimum lease obligations in effect as of December 31, 1997 are as
follows (in thousands):

<TABLE>
<S> <C>
Payments during the year ending December 31:
1998........................................................ $ 679
1999........................................................ 643
2000........................................................ 660
2001........................................................ 633
2002........................................................ 617
Thereafter.................................................. 478
------
$3,710
======
</TABLE>

Rent expense was $207,000 and $33,000 for the years ended December 31, 1997
and 1996, respectively.

PURCHASE COMMITMENTS

In the ordinary course of business, the Company enters into purchase
agreements with its vendors of telecommunications equipment. In May 1997, the
Company signed an agreement to purchase 20 Northern Telecom DMS-500 switches and
related Access Nodes from its primary vendor. As of December 31, 1997, the
Company had a total for all vendors of approximately $37.4 million of remaining
purchase commitments for purchases of switching equipment.

INTERCONNECTION AGREEMENTS

The Company has interconnection agreements with five incumbent local
exchange carriers. These agreements expire on various dates through July 2000.

The Company is dependent on the cooperation of the incumbent local exchange
carriers to provide access service for the origination and termination of its
local and long distance traffic. Historically, these access charges can make up
a significant percentage of the overall cost of providing these services. To the
extent the access services of the local exchange carriers are used, the Company
and its customers are subject to the quality of service, equipment failures and
service interruptions of the local exchange carriers.

(10) RISKS AND UNCERTAINTIES

Certain rates in the interconnection agreements have been established by
the Federal Communications Commission (FCC) and are subject to adjustment upon
final negotiations. The Company has recorded costs of sales related to the
Sprint (Nevada) interconnection agreement at amounts which are management's best
estimates of the probable outcome of the final negotiated rates, which are less
than the FCC established rates. The difference, which totals approximately $1.1
million at December 31, 1997, has not been recorded in the accompanying
financial statements. Management believes that the resolution of this matter
will not have an adverse effect on the Company's financial position, results of
operations, or liquidity.

F-18
<PAGE> 78
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(11) RELATED PARTY TRANSACTION

In May 1997, the Company entered into an agreement with a company, the
owner of which is an officer and stockholder of the Company, for the purchase of
certain computer software pursuant to which the Company paid the contract price
of $600,000 in six equal monthly installments beginning July 1, 1997. In
addition, the Company has paid $40,000 under such agreement to support and
maintain the Company's proprietary management information computer system.
Management believes the terms and conditions of this agreement are equal to or
better than the terms which would be available from an unaffiliated party.

(12) SUBSEQUENT EVENTS (UNAUDITED)

On April 3, 1998, the Company's Board of Directors approved a proposal to
effect a six for ten reverse stock split to be effective immediately prior to
the effective date of the registration statement relating to the initial public
offering of the Company's stock (the "split effective date"). The stock split
will affect stockholders of record as of the split effective date. The Company
intends to pay cash for the repurchase of any fractional shares created by the
reverse stock split. Because the reverse stock split is contingent upon a future
event, financial information contained elsewhere in these financial statements
has not been adjusted to reflect the impact of the reverse stock split.

Basic and diluted loss per share of common stock, after giving retroactive
effect to the six for ten reverse stock split, are presented below for all of
the per share amounts disclosed in the financial statements.

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31
---------------------- --------------------
1998 1997 1997 1996
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Basic and diluted loss per share of
Common Stock......................... $(.76) $(.15) $(1.30) $(2.11)
Basic and diluted weighted average
shares outstanding................... 8,892,283 8,078,306 8,458,991 707,359
</TABLE>

F-19
<PAGE> 79

ANNEX A

GLOSSARY

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

Access Line -- A circuit that connects a telephone user (customer) to the
public switched telephone network. The access line usually connects to a
telephone at the customer's end.

ATM Network (Asynchronous Transfer Mode) -- A digital network designed to
carry voice and data traffic at high speed due to the compression of traffic
allowing greater utilization of bandwidth.

CAP (Competitive Access Provider) -- A name for a category of local service
provider that appeared in the late 1980's, who competed with local telephone
companies by placing its own fiber optic cables in a city and sold various
private line communications services in direct competition to the local
telephone company.

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

CLEC (Competitive Local Exchange Carrier) -- A category of telephone
service provider (carrier) that offers services similar to the former monopoly
local telephone company, as recently allowed by changes in telecommunications
law and regulation.

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

COCOT -- Customer owned, coin operated telephone lines.

CSR (Customer Service Representative) -- an employee of the Company that
functions as the primary interface for service, billing and repair calls. CSRs
also take the majority of the Company's residential orders.

Communications Act of 1934 -- The first major federal legislation that
established rules for broadcast and nonbroadcast communications, including both
wireless and wired telephone service.

Dial-Around Compensation -- The federally mandated payment to pay phone
operators for calls placed around their presubscribed interexchange carrier by
dialing 800/888, 950 or 10XXX access numbers.

DS-0, DS-1, T-1 -- These are the standard circuit capacity classifications
which are distinguishable by bit rate. Each of these transmission services can
be provided using the same type of fiber optic cable or other transmission
medium, but offer different bandwidth (i.e., capacity), depending upon the
individual needs of the end-user. A DS-0 is a dedicated circuit that is
considered to meet the requirements of usual business communications, with
transmission capacity of up to 64 kilobits of bandwidth per second (i.e., a
voice grade equivalent circuit). This service offers a basic low capacity
dedicated digital line for connecting telephones, fax machines, personal
computers and other communications equipment. A DS-1 is 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, DS-1 service accommodates
transmission speeds of up to 1.544 megabits per second, which is equivalent to
24 DS-0 circuits or 24 voice grade equivalent circuits. T-1 is synonymous with
DS-1.

DSL (Digital Subscriber Line) -- A new technology which separates data from
voice traffic over a traditional copper loop, thus greatly increasing the
capacity of the existing line.

FCC (Federal Communications Commission) -- The US Government organization
charged with the oversight of all public communications media.

A-1
<PAGE> 80

ICP (Integrated Communications Provider) -- A communications company
offering more than one specified service, typically a combination of long
distance, local and data products packaged into a bundled offering to the end
user customer.

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

ILEC Collocation -- A location serving as the interface point for a CLEC's
network interconnection to the ILEC. Collocation can be (i) physical, in which
the CLEC "builds" a fiber optic network extension into the ILEC central office,
or (ii) virtual, in which the CLEC leases a facility, similar to that which it
might build, to affect a presence in the ILEC central office.

Interconnection (co-carrier) Agreement -- A contract between an ILEC and a
CLEC for the interconnection of the two networks, for the purpose of mutual
passing 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 -- Communications services that are provided between
two exchange areas, generally meaning between two cities, i.e. long distance.

Interim Number Portability -- A temporary technique that allows local
exchange service customers of an ILEC to keep their existing telephone number,
while moving their service to a CLEC. The interim technique uses a central
office feature called remote call forwarding. The permanent solution to number
portability is to be implemented over the next few years.

ISP (Internet Service Provider) -- A provider to end-users of access via a
phone line to the Internet.

ITW (Internet Thruway) -- A product developed and sold by Nortel which
allows the Company to sell lines via "ports" to ISPs. This product eliminates
the need for ISPs to purchase capital equipment in order to expand their
business.

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

LAN (Local Area Network) -- A system of personal computers, servers and
associated equipment which is networked for intra-office connection.

LATA (Local Access and Transport Area) -- A geographic area inside of which
an ILEC can offer switched communications services, even long distance (known as
local toll). There are 161 LATAs in the continental US.

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 (dial tone
services.) Business local exchange services include Centrex, access lines and
trunks and COCOT.

Nortel -- Northern Telecom.

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) -- One of the ILECs created by the
divestiture of the local exchange business by AT&T. These include BellSouth,
Bell Atlantic, Ameritech, U S West, SBC Communications, Inc. and PacBell.

Switch-based -- A communications provider that delivers its services to the
end-user via owned switches and leased (or owned) transport in contrast to a
reseller of an ILEC's services.

A-2
<PAGE> 81

Tier I Markets -- Major metropolitan areas of the United States, with a
minimum population of one million people.

Total Service Resale -- A communications company which only resells the
ILECs' products and services in its operating markets. A total service resale
provider does not own switching equipment or transport infrastructure.

Trunk -- A DS-0 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> 82

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

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Historical Financial and
Operating Data...................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 28
Management............................ 41
Principal Stockholders................ 47
Certain Transactions.................. 49
Description of Securities............. 51
Underwriting.......................... 55
Certain Market Information............ 57
Legal................................. 57
Experts............................... 57
Additional Information................ 57
Index to Financial Statements......... F-1
Glossary.............................. A-1
</TABLE>

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

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

3,500,000 SHARES

[MGC LOGO]

MGC
COMMUNICATIONS, INC.

COMMON STOCK
-----------------------

PROSPECTUS
-----------------------
BEAR, STEARNS & CO. INC.

FURMAN SELZ

, 1998
======================================================
<PAGE> 83

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The fees and expenses to be paid by the Company in connection with the
Offering are as follows:

<TABLE>
<S> <C>
SEC filing fee.............................................. $ 20,355.00
NASD filing................................................. 7,400.00
NASDAQ/National Market fee*................................. 95,000.00
Blue Sky qualification fees and expenses*................... 10,000.00
Accounting fees and expenses*............................... 100,000.00
Legal fees and expenses*.................................... 100,000.00
Printing costs and other miscellaneous expenses*............ 267,245.00
-----------
Total............................................. $600,000.00
</TABLE>

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

* Estimated

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Registrant's Amended Articles of Incorporation provide that directors
of the Registrant will not be personally liable for monetary damages to the
Registrant for certain breaches of their fiduciary duty as directors to the
fullest extent allowable by Nevada law. Under current Nevada law, directors
would remain liable for: (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, and (ii) approval of certain
illegal dividends or redemptions. In appropriate circumstances, equitable
remedies or nonmonetary relief, such as an injunction, will remain available to
a stockholder seeking redress from any such violation. In addition, the
provision applies only to claims against a director arising out of his role as a
director and not in any other capacity (such as an officer or employee of the
Registrant).

The Registrant also has the obligation, pursuant to the Registrant's
By-laws, to indemnify any director or officer of the Registrant for all expenses
incurred by them in connection with any legal action brought or threatened
against such person for or on account of any action or omission alleged to have
been committed while acting in the course and scope of the person's duties, if
the person acted in good faith and in a manner which the person reasonably
believed to be in or not opposed to the best interests of the Registrant, and
with respect to criminal actions, had no reasonable cause to believe the
person's conduct was unlawful, provided that such indemnification is made
pursuant to then existing provisions of Nevada General Corporation Law at the
time of any such indemnification.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In October 1995 and April 1996, the founder of the Company acquired 720,000
shares of Common Stock in exchange for $1,000 of expenses paid on behalf of the
Company and services valued at $2,000.

During the period from December 1996, through May 1997, a group of initial
investors in the Company (approximately 80 persons) purchased 8,484,600 shares
of Common Stock in the Company for cash in the aggregate amount of $16,645,000.
All such issuances of securities were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 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. In each instance, the purchaser was either a
founder of the Company, other Company insider as a result of his relationship
with the Company or otherwise had a pre-existing relationship with the Company
or its founders; the offers and 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. No underwriter
was involved in the transactions and no commissions were paid.

II-1
<PAGE> 84

During September 1997, the Company issued $160,000,000 of its Senior
Secured Notes and warrants to purchase 1,291,200 shares of Common Stock at $.01
per share (subsequently adjusted to 862,923 shares at approximately $.02 per
share) to qualified institutional buyers who purchased the securities in a
private placement pursuant to Rule 144A and to persons who purchased the
securities pursuant to offers and sales outside the United States in accordance
with Regulation S. The gross proceeds of this private placement were
$160,000,000, of which $159,300,000 was paid by qualified institutional buyers
under Rule 144A and $700,000 was paid by investors under Regulation S. In each
instance, the offers and sales were made without any public solicitation; the
note and warrant certificates bear restrictive legends; and appropriate stop
transfer instructions have been or will be given to the transfer agent. In
connection with such offering, Bear, Stearns & Co. Inc. and Furman Selz LLC
received customary commissions. All issuances of securities under 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 September 30, 1997, two officers of the Company purchased 150,000 shares
of Common Stock from the Company for $500,000 in cash and also purchased an
additional 165,000 shares of Common Stock for promissory notes in the amount of
$687,500. The Common Stock was purchased pursuant to rights granted to the
officers by letter agreements signed in May 1997 and June 1997. The promissory
notes are payable on or before September 30, 2000, provide for annual interest
payments based on an interest rate of 7.5% per annum and are secured by a pledge
of the shares of Common Stock purchased with such promissory notes. These
issuances of securities were made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 as transactions by an
issuer not involving a public offering; 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. No
underwriter was involved in these transactions and no commissions were paid.

During November 1997 and January 1998, the Company issued 6,571,427 shares
of its Series A Convertible Preferred Stock to 50 investors who purchased the
securities in a private placement. The gross proceeds of this private placement
were $23,000,000. All of the securities were acquired by the recipients thereof
for investment and with no view toward the sale or redistribution thereof. In
each instance, the offers and 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. In connection
with such private placement, Bear, Stearns & Co. Inc. and Furman Selz LLC
received customary commissions with respect to the sale of $18,020,000 of such
securities and no commissions were paid with respect to the sale of $4,980,000
of such securities. All issuances of securities under this private placement
were made in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933 as transactions by an issuer not involving a
public offering and Rule 506 under Regulation D promulgated under the Securities
Act of 1933.

In January and February 1998, the Company issued 90,000 shares of Common
Stock to four persons (two of whom are Directors of the Company and the other
two of whom are significant stockholders in the Company) who exercised warrants
at approximately $.02 per share for a total consideration of $1,500. These
warrants were issued in September 1997 to these persons in consideration for
their providing a commitment to purchase Common Stock of the Company in the
event the Company failed to raise at least $15.0 million through the sale of its
preferred stock within a certain period of time. All of the securities were
acquired by the recipients thereof for investment and with no view toward the
sale or redistribution thereof. In January 1998, a former officer exercised
options to purchase 7,200 shares of Common Stock for a total purchase price of
$12,000. These issuances of securities were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 as
transactions by an issuer not involving a public offering; 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. No underwriter was involved in these transactions and no
commissions were paid.

In March 1998, the Company issued 255,000 shares of Common Stock to 11
Executive Officers of the Company for a total consideration of $2,012,500,
consisting of $562,500 in cash and $1,450,000 in three-year

II-2
<PAGE> 85

promissory notes. All of the securities were acquired by the recipients thereof
for investment and with no view toward the sale or redistribution thereof. These
issuances of securities were made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 as transactions by an
issuer not involving a public offering; 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. No
underwriter was involved in these transactions and no commissions were paid.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibit Index

<TABLE>
<S> <C>
1.1 Proposed form of Underwriting Agreement
3.1 Articles of Incorporation and Amendments(1)
3.2 By-laws(3)
3.3 Stockholders Agreement dated as of November 26, 1997, among the Company, Maurice J. Gallagher, Jr., Nield
J. Montgomery and certain investors identified therein.(1)
4.1 See the Articles of Incorporation and amendments filed as Exhibit 3.1, the By-laws filed as Exhibit 3.2
and the Stockholders Agreement filed as Exhibit 3.3.
4.2 Certificate of MGC Communications, Inc. of the Rights, Preferences, Privileges and Restrictions of Series
A Convertible Preferred Stock.(1)
4.3 Indenture dated as of September 29, 1997, between the Company and Marine Midland Bank, as Trustee.(1)
4.4 Registration Rights Agreement dated as of September 29, 1997, among the Company, Bear, Stearns & Co. Inc.
and Furman Selz LLC.(1)
4.5 Security Agreement dated as of September 29, 1997, between the Company and Marine Midland Bank.(1)
4.6 Collateral Pledge and Security Agreement dated as of September 29, 1997, between the Company and Marine
Midland Bank.(1)
5.1 Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.(3)
10.1 Network Products Purchase Agreement dated May 21, 1997, between the Company and Northern Telecom, Inc.(1)
The Commission has granted confidential treatment with respect to certain portions of this Agreement.
10.2 Employment/Stock Repurchase Agreement dated as of June 1996 between the Company and Nield J. Montgomery,
as amended as of September 1, 1997.(1)
10.3 Employment and Stock Repurchase Agreement dated May 28, 1997, between the Company and John Boersma.(1)
10.4 Stock Purchase Agreement dated August 29, 1997, between the Company and Mitchell Allee.(1)
10.5 Stock Option Plan.(1)
10.6 Purchase Agreement dated September 24, 1997, among the Company, Bear, Stearns & Co. Inc. and Furman Selz
LLC.(1)
10.7 Warrant Agreement dated September 29, 1997, between the Company and Marine Midland Bank.(1)
10.8 Warrant Registration Rights Agreement dated as of September 29, 1997, among the Company, Bear, Stearns &
Co. Inc. and Furman Selz LLC.(1)
10.9 Private Placement Bank Escrow Agreement dated September 1997 among the Company, Bear, Stearns & Co. Inc.
and certain investors identified therein.(1)
10.10 Standard Office Lease Agreement dated July 1, 1997, between the Company and Cheyenne Investments L.L.C.(1)
</TABLE>

II-3
<PAGE> 86

<TABLE>
10.11 Securities Purchase Agreement dated as of November 26, 1997, among the Company and the
investors identified therein.(1)
<S> <C>
10.12 Securities Purchase Agreement dated as of January 8, 1998, among the Company and the
investors identified therein.(2)
10.13 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
Michael Burke and the Company.(3)
10.14 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
David Clark and the Company.(3)
10.15 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
Kent Heyman and the Company.(3)
10.16 Employment/Stock Repurchase Agreement and Promissory Note dated March 9, 1998 between
James J. Hurley, III and the Company.(3)
10.17 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
Tom Keough and the Company.(3)
10.18 Employment/Stock Repurchase Agreement and Promissory Note dated February 16, 1998
between James D. Mitchell and the Company.(3)
10.19 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
Carol Mittwede and the Company.(3)
10.20 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
Mark Peterson and the Company.(3)
10.21 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
David Rahm and the Company.(3)
10.22 Employment/Stock Repurchase Agreement and Promissory Note dated February 11, 1998
between Walter J. Rusak and the Company.(3)
10.23 Employment/Stock Repurchase Agreement and Promissory Note dated March 20, 1998 between
Linda M. Sunbury and the Company.(3)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. (included in Exhibit 5.1)
24 Powers of Attorney(3)
27 Financial Data Schedule(3)
</TABLE>

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

(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-38875) previously filed with the Commission.

(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, previously filed with the Commission.

(3) Previously filed as an Exhibit to this Registration Statement.

(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 Schedules.

All schedules 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.

II-4
<PAGE> 87

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes 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.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange 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 Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
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 Registrant 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 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 the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the 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.

II-5
<PAGE> 88

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Las Vegas, State
of Nevada on the 11th day of May, 1998.

MGC COMMUNICATIONS, INC.

By: /s/ NIELD J. MONTGOMERY
------------------------------------
President and Chief Executive
Officer
Nield J. Montgomery

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated below.

/s/ NIELD J. MONTGOMERY President (principal executive officer) May 11, 1998
- --------------------------------------------------- and Director
Nield J. Montgomery

/s/ LINDA M. SUNBURY Vice President (principal financial and May 11, 1998
- --------------------------------------------------- accounting officer)
Linda M. Sunbury

/s/ MAURICE J. GALLAGHER, JR. Chairman of the Board and Director May 11, 1998
- ---------------------------------------------------
Maurice J. Gallagher, Jr.

/s/ TIMOTHY P. FLYNN* Director May 11, 1998
- ---------------------------------------------------
Timothy P. Flynn

/s/ JACK L. HANCOCK* Director May 11, 1998
- ---------------------------------------------------
Jack L. Hancock

Director , 1998
- ---------------------------------------------------
David Kronfeld

Director , 1998
- ---------------------------------------------------
Thomas Neustaetter

*By: /s/ NIELD J. MONTGOMERY
---------------------------------------------
Nield J. Montgomery as
Attorney-in-fact
</TABLE>

II-6
<PAGE> 89

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement
3.1 Articles of Incorporation and Amendments(1)
3.2 By-laws(3)
3.3 Stockholders Agreement dated as of November 26, 1997, among
the Company, Maurice J. Gallagher, Jr., Nield J. Montgomery
and certain investors identified therein.(1)
4.1 See the Articles of Incorporation and amendments filed as
Exhibit 3.1, the By-laws filed as Exhibit 3.2 and the
Stockholders Agreement filed as Exhibit 3.3.
4.2 Certificate of MGC Communications, Inc. of the Rights,
Preferences, Privileges and Restrictions of Series A
Convertible Preferred Stock.(1)
4.3 Indenture dated as of September 29, 1997, between the
Company and Marine Midland Bank, as Trustee.(1)
4.4 Registration Rights Agreement dated as of September 29,
1997, among the Company, Bear, Stearns & Co. Inc. and Furman
Selz LLC.(1)
4.5 Security Agreement dated as of September 29, 1997, between
the Company and Marine Midland Bank.(1)
4.6 Collateral Pledge and Security Agreement dated as of
September 29, 1997, between the Company and Marine Midland
Bank.(1)
5.1 Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.(3)
10.1 Network Products Purchase Agreement dated May 21, 1997,
between the Company and Northern Telecom, Inc.(1) The
Commission has granted confidential treatment with respect
to certain portions of this Agreement.
10.2 Employment/Stock Repurchase Agreement dated as of June 1996
between the Company and Nield J. Montgomery, as amended as
of September 1, 1997.(1)
10.3 Employment and Stock Repurchase Agreement dated May 28,
1997, between the Company and John Boersma.(1)
10.4 Stock Purchase Agreement dated August 29, 1997, between the
Company and Mitchell Allee.(1)
10.5 Stock Option Plan.(1)
10.6 Purchase Agreement dated September 24, 1997, among the
Company, Bear, Stearns & Co. Inc. and Furman Selz LLC.(1)
10.7 Warrant Agreement dated September 29, 1997, between the
Company and Marine Midland Bank.(1)
10.8 Warrant Registration Rights Agreement dated as of September
29, 1997, among the Company, Bear, Stearns & Co. Inc. and
Furman Selz LLC.(1)
10.9 Private Placement Bank Escrow Agreement dated September 1997
among the Company, Bear, Stearns & Co. Inc. and certain
investors identified therein.(1)
10.10 Standard Office Lease Agreement dated July 1, 1997, between
the Company and Cheyenne Investments L.L.C.(1)
10.11 Securities Purchase Agreement dated as of November 26, 1997,
among the Company and the investors identified therein.(1)
10.12 Securities Purchase Agreement dated as of January 8, 1998,
among the Company and the investors identified therein.(2)
10.13 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between Michael Burke and the
Company.(3)
10.14 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between David Clark and the Company.(3)
10.15 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between Kent Heyman and the Company.(3)
</TABLE>

<PAGE> 90

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
10.16 Employment/Stock Repurchase Agreement and Promissory Note
dated March 9, 1998 between James J. Hurley, III and the
Company.(3)
10.17 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between Tom Keough and the Company.(3)
10.18 Employment/Stock Repurchase Agreement and Promissory Note
dated February 16, 1998 between James D. Mitchell and the
Company.(3)
10.19 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between Carol Mittwede and the
Company.(3)
10.20 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between Mark Peterson and the
Company.(3)
10.21 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between David Rahm and the Company.(3)
10.22 Employment/Stock Repurchase Agreement and Promissory Note
dated February 11, 1998 between Walter J. Rusak and the
Company.(3)
10.23 Employment/Stock Repurchase Agreement and Promissory Note
dated March 20, 1998 between Linda M. Sunbury and the
Company.(3)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
(included in Exhibit 5.1)
24 Powers of Attorney(3)
27 Financial Data Schedule(3)
</TABLE>

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

(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-38875) previously filed with the Commission.

(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997, previously filed with the Commission.

(3) Previously filed as an Exhibit to this Registration Statement.

<PAGE> 1
Exhibit 1.1

3,500,000 Shares

MGC COMMUNICATIONS, INC.

Common Stock

UNDERWRITING AGREEMENT

May __, 1998

BEAR, STEARNS & CO. INC.
FURMAN SELZ LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167

Ladies & Gentlemen:

MGC Communications, Inc., a Nevada corporation (the "Company"),
confirms its agreement with the Underwriters named in Schedule I hereto (the
"Underwriters"), for whom Bear, Stearns & Co. Inc. ("Bear Stearns") and Furman
Selz LLC have been duly authorized to act as representatives (the
"Representatives"), as follows:

1. Description of Securities. The Company proposes, upon the terms and
subject to the conditions set forth herein, to issue and sell to the
Underwriters an aggregate of 3,500,000 shares (the "Firm Shares") of the
Company's common stock, $0.001 par value per share (the "Common Stock"). The
Company also proposes to sell to the Underwriters, upon the terms and subject to
the conditions set forth in Section 3 hereof, up to an additional 525,000 shares
(the "Additional Shares"). The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares."

2. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations promulgated thereunder by the Commission
(the "Securities Act Regulations"; which together with the Exchange Act
Regulations (as defined below), are referred to herein as the "Regulations"), a
registration statement, as amended by certain amendments thereto, on Form S-1
(File No. 333-49085), including a preliminary prospectus, subject to completion,
relating to the Shares. The Company will next file with the Commission either
(i) prior to the effectiveness of such registration statement, a further
amendment thereto, including therein a final prospectus or (ii) after the
effectiveness of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b)(1) of the Securities Act Regulations, the documents
so filed in either case to include all Rule 430A Information (as defined below)
and
<PAGE> 2
to conform, in content and form, to the last printer's proof thereof furnished
to and approved by the Underwriters immediately prior to such filing. If the
Company files a registration statement to register a portion of the Shares and
relies on Rule 462(b) for such registration statement to become effective upon
filing with the Commission (the "Rule 462 Registration Statement"), then any
reference to "Registration Statement" herein shall be deemed to be both the
registration statement referred to above and the Rule 462 Registration
Statement, as each such registration statement may be amended pursuant to the
Act.

As used in this Underwriting Agreement (the "Agreement"), (i) the term
"Effective Date" means the later of the date the registration statement is
declared effective by the Commission, or, if a post-effective amendment is filed
with respect thereto, the date of such post-effective amendment's effectiveness,
(ii) the term "Registration Statement" means the registration statement, as
amended at the time when it becomes effective or, if a post-effective amendment
is filed with respect thereto, as amended by such post-effective amendment at
the time of its effectiveness, including in each case all information
incorporated by reference therein, all Rule 430A Information deemed to be
included therein at the Effective Date pursuant to Rule 430A of the Securities
Act Regulations and all financial statements and exhibits included or
incorporated by reference therein, (iii) the term "Rule 430A Information" means
information with respect to the Shares and the public offering thereof
permitted, pursuant to the provisions of paragraph (a) of Rule 430A of the
Securities Act Regulations, to be omitted from the form of prospectus included
in the Registration Statement at the time it is declared effective by the
Commission, (iv) the term "Prospectus" means the form of final prospectus
relating to the Shares first filed with the Commission pursuant to Rule 424(b)
of the Securities Act Regulations or, if no filing pursuant to Rule 424(b) is
required, the form of final prospectus included in the Registration Statement at
the Effective Date and (v) the term "preliminary prospectus" means any
preliminary prospectus (as described in Rule 430 of the Securities Act
Regulations) with respect to the Shares that omits Rule 430A Information. Any
reference herein to the Registration Statement, the Prospectus, any amendment or
supplement thereto or any preliminary prospectus shall be deemed to refer to and
include the documents incorporated by reference therein which were filed under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations of the Commission promulgated thereunder (the "Exchange
Act Regulations"), and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement or Prospectus shall be
deemed to refer to and include the filing after the execution hereof of any
document with the Commission deemed to be incorporated by reference therein. For
purposes of this Agreement the term "subsidiary" shall mean MGC Lease
Corporation, a Nevada corporation, and shall include those corporations,
partnerships and other business entities, whether domestic or foreign, which
are, or under generally accepted accounting principles should be, consolidated
for purposes of the Company's financial reporting.

3. Purchase and Sale of the Shares. Subject to all the terms and
conditions set forth herein (i) the Company agrees to issue and sell 3,500,000
Firm Shares and, upon the basis of the representations, warranties, covenants
and agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of

2
<PAGE> 3
$_____ per Share, the number of Firm Shares set forth opposite the name of such
Underwriter on Schedule I hereto (or such number of Firm Shares increased as set
forth in Section 12 hereof).

The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, solely for the purpose of covering
over-allotments in connection with sales of the Firm Shares, at a purchase price
per Share of $______, pursuant to an option (the "over-allotment option") which
may be exercised at any time and from time to time prior to 9:00 p.m., New York
City time, on the 30th day after the date of the Prospectus (or, if such 30th
day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the New York Stock Exchange is open for trading), up to an
aggregate of 525,000 Additional Shares. Upon any exercise of the over-allotment
option, each Underwriter, severally and not jointly, agrees to purchase from the
Company the number of Additional Shares (subject to such adjustments as the
Underwriters may determine in order to avoid fractional shares) that bears the
same proportion to the aggregate number of Additional Shares to be purchased by
the Underwriters as the number of Firm Shares set forth opposite the name of
such Underwriter on Schedule I hereto (or such number of Firm Shares increased
as set forth in Section 12 hereof) bears to the aggregate number of Firm Shares.

The Company shall, concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each of the directors and officers of the
Company, pursuant to which each such person agrees not to offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of any Common Stock
of the Company or any securities convertible into or exercisable or exchangeable
for such Common Stock, for a period of up to 180 days after the date of the
Prospectus and (ii) each stockholder and each holder of options to purchase
Common Stock listed on Schedule II hereto pursuant to which each such person
agrees not to offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any Common Stock of the Company or any securities
convertible into or exercisable or exchangeable for such Common Stock for a
period of up to 180 days after the date of the Prospectus, in each case, subject
to certain exceptions. Notwithstanding the foregoing, during such period the
Company may (i) issue shares of its Common Stock and grant stock options
pursuant to the Company's existing Stock Option Plan (the "Stock Option Plan"),
(ii) issue shares of its Common Stock upon the exercise of an option or warrant
or the conversion of a security outstanding on the date hereof and (iii) issue
shares of its Common Stock and grant options to newly hired management level
employees consistent with past practices of the Company.

4. Offering. It is understood that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in the
Representative's judgment is advisable and initially to offer the Shares for
sale to the public as set forth in the Prospectus.

3
<PAGE> 4
5. Delivery of the Shares and Payment Therefor. Delivery to the
Representatives of and payment for the Firm Shares shall be made at the office
of Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York,
NY 10036, at 10:00 a.m., New York City time, on May __, 1998 (the "Closing
Date"). The place of closing for the Firm Shares and the Closing Date may be
varied by agreement between the Representatives and the Company.

Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the office of Kronish,
Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, NY 10036 at
such time and on such date (the "Option Closing Date"), which may be the same as
the Closing Date but shall in no event be earlier than the Closing Date nor
earlier than two nor later than ten business days after the giving of the notice
hereinafter referred to, as shall be specified in a written notice from the
Representatives to the Company of the Representatives' determination to purchase
a number, specified in such notice, of Additional Shares. The place of closing
for any Additional Shares and the Option Closing Date for such Shares may be
varied by agreement between the Representatives and the Company.

Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as the Representatives shall request prior to 9:30 a.m., New York City time, on
the second business day preceding the Closing Date or the Option Closing Date,
as the case may be. Such certificates shall be made available to the
Representatives in New York City for inspection and packaging not later than
9:30 a.m., New York City time, on the business day next preceding the Closing
Date or the Option Closing Date, as the case may be. The certificates evidencing
the Firm Shares and any Additional Shares to be purchased hereunder shall be
delivered to the Representatives on the Closing Date or the Option Closing Date,
as the case may be, against payment of the purchase price therefor by wire
transfer of immediately available funds to the Company's account, provided that
the Company shall give at least two business days' prior written notice to the
Underwriters of the information required to effect such wire transfers.

6. Covenants of the Company. The Company covenants and agrees with each
of the Underwriters as follows:

(a) The Company will, if the Registration Statement has not
heretofore become effective under the Act, file an amendment to the
Registration Statement or, if necessary pursuant to Rule 430A of the
Securities Act Regulations, file a post-effective amendment to the
Registration Statement, as soon as practicable after the execution and
delivery of this Agreement, and will use its best efforts to cause the
Registration Statement or such post-effective amendment to become
effective at the earliest possible time. If the Registration Statement
has become or becomes effective pursuant to Rule 430A of the Securities
Act Regulations, or filing of the Prospectus is otherwise required
under Rule 424(b) of the Securities Act Regulations, the Company will
file the Prospectus, properly completed, pursuant to Rule 424(b) of the
Securities Act Regulations within the time period therein prescribed
and will provide evidence

4
<PAGE> 5
satisfactory to the Underwriters of such timely filing. The Company in
all other respects will comply fully and in a timely manner with the
applicable provisions of Rule 424 and Rule 430A of the Securities Act
Regulations and with Rule 462 of the Securities Act Regulations, if
applicable.

(b) The Company will promptly advise the Underwriters, and, if
requested by the Underwriters, confirm such advice in writing, (i) when
the Registration Statement, any Rule 462 Registration Statement or any
post-effective amendment thereto has become effective and if and when
the Prospectus is sent for filing pursuant to Rule 424(b) of the
Securities Act Regulations, (ii) of receipt by the Company or any
representative or attorney of the Company of any communications from
the Commission relating to the Company, the Registration Statement, any
preliminary prospectus, the Prospectus, any document incorporated by
reference therein, or the transactions contemplated by this Agreement,
including, without limitation, the receipt of a request by the
Commission for any amendment or supplement to the Registration
Statement or Prospectus, or any document incorporated by reference
therein, or the receipt of any comments from the Commission, (iii) of
the initiation or threatening of any proceedings for, or receipt by the
Company of any notice with respect to, the issuance by the Commission
of any stop order suspending effectiveness of the Registration
Statement or any post-effective amendment thereto or the issuance by
any state securities commission or other regulatory authority of any
order suspending the qualification or exemption from qualification of
the Shares for the offering or sale in any jurisdiction and (iv) during
the period when the Prospectus is required to be delivered under the
Act, of any material change in the Company's condition (financial or
otherwise), business, prospects, properties, assets, liabilities, net
worth, results of operations, cash flows or of the happening of any
event that makes any statement of a material fact made in the
Registration Statement untrue or that requires the making of any
additions to or changes in the Registration Statement in order to make
the statements therein not misleading or that makes any statement of a
material fact made in the Prospectus untrue or that requires the making
of any additions to or changes in the Prospectus necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The Company will use its best
efforts to prevent the issuance of an order by the Commission at any
time suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto, or by any state securities commission
or other regulatory authority suspending the qualification or exemption
from qualification of the Shares and, if any such order is issued, to
obtain its withdrawal or lifting at the earliest possible time.

(c) The Company will furnish to the Underwriters without
charge up to four signed copies of the Registration Statement
(including all exhibits and all documents incorporated by reference
therein, as filed with the Commission) and four signed copies of all
amendments thereto, and the Company will furnish without charge to
those persons designated by each Underwriter such number of conformed
copies of the Registration Statement, of each preliminary prospectus,
the Prospectus and all

5
<PAGE> 6
amendments of and supplements to such documents, if any, as such
Underwriter may reasonably request. The Company consents to the use of
the Prospectus and any amendments or supplements thereto by any
Underwriter or any dealer, both in connection with the offering or sale
of the Shares and for such period of time thereafter as delivery of a
Prospectus is required by the Act.

(d) The Company will not file any amendment or supplement to
the Registration Statement, or any document that upon filing is deemed
to be incorporated by reference in the Registration Statement or
Prospectus or any amendment of or supplement to the Prospectus, whether
before or after the Effective Date, unless the Underwriters shall
previously have been advised thereof and shall have not objected
thereto within a reasonable time after being furnished a copy thereof.
The Company shall promptly prepare and file with the Commission, upon
the Underwriters' request, any amendment to the Registration Statement
or any supplement to the Prospectus that may be necessary or advisable
in connection with the distribution of the Shares by the Underwriters.
The Company will use its best efforts to cause any such amendment or
supplement to become effective as promptly as possible.

(e) During the time that a prospectus relating to the Shares
is required to be delivered under the Act, the Company will (i) comply
with all requirements imposed upon it by the Act and by the
Regulations, as from time to time in force, so as to permit the
continuance of sales of or dealing in the Shares as contemplated by the
provisions hereof and the Prospectus, and (ii) will file promptly all
documents required to be filed with the Commission pursuant to Section
13 or 14 of the Exchange Act and the Exchange Act Regulations. If at
any time when a prospectus relating to the Shares is required to be
delivered under the Act any event shall have occurred as a result of
which the Registration Statement or the Prospectus as then supplemented
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary, in the judgment
of the Company or in the reasonable opinion of either counsel to the
Company or counsel to the Underwriters, at any time to amend or
supplement the Registration Statement or Prospectus to comply with the
Act or the Regulations, or to file under the Exchange Act, so as to
comply therewith, any document incorporated by reference in the
Registration Statement or Prospectus or in any amendment or supplement
thereto, the Company will notify the Underwriters promptly and prepare
and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to the Underwriters) so that the
statements in the Registration Statement and the Prospectus, as so
amended or supplemented, will not, in the light of the circumstances
existing as of the date the Prospectus is so delivered, be misleading,
or so to effect such compliance with the Act or the Exchange Act and
the Regulations, and the Company will use its best efforts to cause any
such amendment to the Registration Statement to be declared effective
as promptly as possible.

6
<PAGE> 7
(f) The Company will cooperate with the Underwriters and
Underwriters' counsel, at or prior to the time the Registration
Statement becomes effective, to qualify or register the Shares for
offering and sale and to determine the eligibility for investment of
the Shares under the securities laws of such jurisdictions as the
Underwriters may designate and to maintain such qualification or
registration in effect for so long as required for the distribution
thereof, provided, however, that the Company shall not be required in
connection therewith to register or qualify as a foreign corporation
where it is not now so qualified or to take any action that would
subject it to service of process in suits or taxation, in each case,
other than as to matters and transactions relating to the Registration
Statement, in any jurisdiction where it is not now so subject.

(g) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to the
Underwriters as soon as practicable, but not later than 60 days after
the close of the period covered thereby, an earnings statement,
covering a period of at least twelve consecutive full calendar months
commencing after the effective date of the Registration Statement (but
in no event commencing later than 90 days after such date), that
satisfies the provisions of Section 11(a) of the Act and Rule 158 of
the Securities Act Regulations.

(h) The Company will apply the proceeds from the sale of the
Shares as set forth under the heading "Use of Proceeds" in the
Prospectus.

(i) The Company will do and perform all things required or
necessary to be done and performed under this Agreement by it prior to
the Closing Date and to satisfy all conditions precedent on its part to
the delivery of the Shares.

(j) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared in the ordinary course
by the Company, copies of any unaudited interim financial statements of
the Company, for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.

(k) Neither the Company nor its subsidiary will take, directly
or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Shares. Except as permitted by the Act, the Company will not
distribute any Registration Statement, preliminary prospectus,
Prospectus or other offering material in connection with the offering
and sale of the Shares.

(l) The Company will cooperate and assist in any filings
required to be made with the National Association of Securities
Dealers, Inc. ("NASD") and in the performance of any due diligence
investigation by any broker/dealer participating in the sale of the
Shares.

7
<PAGE> 8
(m) For a period of five years from Closing Date the Company
will deliver without charge to the Representatives, promptly upon their
becoming available, copies of (i) all reports or other publicly
available information that the Company shall mail or otherwise make
available to its stockholders and (ii) all reports, financial
statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange and such other
publicly available information concerning the Company or its
subsidiaries, including without limitation, press releases.

(n) Except for (i) shares of Common Stock issuable upon
exercise of outstanding warrants of the Company or upon conversion of
outstanding convertible securities of the Company, (ii) shares of
Common Stock issued and options granted pursuant to the Stock Option
Plan or (iii) shares of Common Stock issued and options granted to
newly hired management level employees consistent with past practices
of the Company, the Company will not, directly or indirectly, sell,
offer to sell, solicit an offer to buy, contract to sell, grant any
option to purchase or otherwise transfer or dispose of or register or
announce the sale or offering of any shares of capital stock of the
Company, or any securities that are convertible into or exercisable or
exchangeable for capital stock of the Company, for a period of 180 days
after the date of the Prospectus, without the prior written consent of
Bear Stearns.

(o) The Company shall cause each officer and director and each
stockholder and each holder of options to purchase Common Stock listed
on Schedule II hereto to enter into an agreement substantially in the
form set forth in Exhibit C to the effect that he, she or it will not,
for a period of up to 180 days after date of the Prospectus, offer,
sell, contract to sell, grant any option to purchase or otherwise
dispose of any shares of Common Stock (or any securities convertible
into or exercisable or exchangeable for Common Stock) or grant any
options or warrants to purchase any shares of Common Stock, without the
prior written consent of Bear Stearns.

(p) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement under the heading
"Additional Information."

(q) Prior to the Closing Date or any Option Closing Date, as
the case may be, except as may be required by law, the Company will not
(i) issue any press release or other communications relating to the
sale of the Shares, or (ii) hold any press conferences with respect to
the Company or its financial condition, results of operation, business,
properties, assets or liabilities, or the sale of the Shares, without
the prior written consent of the Representatives.

7. Representations and Warranties. The Company represents and warrants
to each of the Underwriters that:

8
<PAGE> 9
(a) When the Registration Statement becomes effective, when
any post-effective amendment to the Registration Statement becomes
effective, when the Prospectus is first filed with the Commission
pursuant to Rule 424(b) of the Securities Act Regulations, when any
supplement to or amendment of the Prospectus is filed with the
Commission and at the Closing Date and during such longer period as the
Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement (which, as
defined, includes all documents incorporated by reference therein) and,
if filed at such time, the Prospectus (which, as defined, includes all
documents incorporated by reference therein) and any amendments thereof
and supplements thereto will comply in all material respects with the
applicable provisions of the Act, the Exchange Act and the Regulations,
and such Registration Statement did not and will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and such Prospectus or supplement
thereto did not and will not contain an untrue statement of a material
fact or not omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. When any
related preliminary prospectus was first filed with the Commission
(whether filed as part of the Registration Statement or an amendment
thereof or pursuant to Rule 424(a) of the Regulations) and when any
amendment or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendment or supplement thereto
complied in all material respects with the applicable provisions of the
Act and the Regulations and did not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. No
representation or warranty is made in this subsection (a), however,
with respect to any statements in or omissions from the Registration
Statement or the Prospectus or any related preliminary prospectus or
any amendment or supplement thereto based upon and conforming with
information furnished in writing by or on behalf of the Underwriters to
the Company expressly for use therein. The Company acknowledges for all
purposes under this Agreement (including Section 10 hereof) that the
statements set forth in the last paragraph on the cover page of the
Prospectus and in the second, eighth and ninth paragraphs and the third
sentence of the seventh paragraph below the table under the caption
"Underwriting" in the Prospectus constitute the only written
information furnished to the Company by the Underwriters for use in the
Prospectus or any preliminary prospectus (or any amendments or
supplements thereto).

(b) The documents incorporated by reference in the
Registration Statement, the Prospectus, any amendment or supplement
thereto or any Preliminary Prospectus and any further documents
incorporated by reference, when they became or become effective under
the Act or were or are filed with the Commission under the Exchange
Act, as the case may be, conformed or will conform in all material
respects with the requirements of the Act or the Exchange Act, as
applicable, and the Regulations; no such document when it was or is
filed (or, if an amendment with

9
<PAGE> 10
respect to any such document was or is filed, when such amendment was
filed), contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading.

(c) There are no contracts or documents of the Company or its
subsidiary that are required to be filed as exhibits to the
Registration Statement or to any of the documents incorporated by
reference therein by the Act, the Exchange Act or by the Regulations
that have not been so filed.

(d) No stop order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of any
preliminary prospectus has been issued and no proceedings for that
purpose have been commenced or are pending before or, to the best
knowledge of the Company, are contemplated by the Commission. No stop
order suspending the sale of the Shares in any jurisdiction designated
by the Underwriters has been issued and no proceedings for that purpose
have been commenced or are pending or, to the best knowledge of the
Company, are contemplated.

(e) Each of the Company and its subsidiary (A) has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, (B) has all
requisite corporate power and authority to carry on its business as it
is currently being conducted and as described in the Registration
Statement and to own, lease and operate its properties, and (C) is duly
qualified and in good standing as a foreign corporation authorized to
do business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification
except, with respect to this clause (C), where failure to be so
qualified or in good standing does not and could not reasonably be
expected to (x) individually or in the aggregate, result in a material
adverse effect on the properties, business, results of operations,
condition (financial or otherwise), affairs or prospects of the Company
and its subsidiary, taken as a whole, (y) interfere with or adversely
affect the issuance or marketability of the Shares pursuant hereto or
(z) in any manner draw into question the validity of this Agreement
(any of the events set forth in clauses (x), (y) or (z), a "Material
Adverse Effect"). All of the issued and outstanding shares of capital
stock of, or other ownership interests in, the subsidiary have been
duly authorized and validly issued, and are fully paid and
non-assessable and were not issued in violation of or subject to any
preemptive or similar rights and are owned by the Company directly,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or other restriction on transferability or voting.
Except for the capital stock of the subsidiary owned by the Company,
neither the Company nor the subsidiary owns or holds any interest in
any corporation partnership, trust or association, joint venture or
other entity.

(f) The authorized capital stock of the Company immediately
prior to the Closing Date will consist of the following: (i) 60,000,000
shares of Common

10
<PAGE> 11
Stock, of which 9,185,640 shares will be issued and outstanding
immediately prior to the Closing Date and (ii) 50,000,000 shares of
preferred stock, of which 6,571,450 have been designated as 8% Series A
Convertible Preferred Stock (the "Series A Preferred Stock"), and of
which 6,571,427 shares of the Series A Preferred Stock will be issued
and outstanding immediately prior to the Closing Date. All of the
outstanding shares of capital stock of the Company have been duly
authorized, validly issued, and are fully paid and nonassessable and
were not issued in violation of any preemptive or similar rights. The
authorized capital stock of the subsidiary consists of 5,000 shares of
common stock, $.10 par value per share, all of which are issued to, and
owned of record and beneficially by, the Company. Except as set forth
in the Prospectus, there are no outstanding subscriptions, rights,
warrants, calls, commitments of sale or options to acquire, or
instruments convertible or exchangeable or exercisable for, any capital
stock or other equity interest in the Company or its subsidiary other
than (x) options to purchase 1,263,120 shares of Common Stock, all of
which were issued under the Stock Option Plan, (y) warrants to purchase
862,923 shares of Common Stock issued in connection with the issuance
of the Company's 13% Senior Secured Notes due 2004, and (z) 3,942,856
shares of Common Stock issuable upon conversion of the Series A
Preferred Stock. The Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights. The
authorized capital stock of the Company conforms in all respects to the
description thereof in the Registration Statement and the Prospectus.

(g) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, and to consummate the transactions contemplated hereby,
including, without limitation, the corporate power and authority to
issue, sell and deliver the Shares as provided herein.

(h) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is the legal, valid and
binding agreement of the Company, enforceable against it in accordance
with its terms, except insofar as indemnification and contribution
provisions may be limited by applicable law or equitable principles and
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors
generally and subject to general principles of equity.

(i) Neither the Company nor the subsidiary is (A) in violation
of its charter or bylaws, (B) in default in the performance of any
bond, debenture, note, indenture, mortgage, deed of trust or other
agreement or instrument to which it is a party or by which it is bound
or to which any of its properties is subject, or (C) in violation of
any local, state or Federal law, statute, ordinance, rule, regulation,
requirement, judgment or court decree (including, without limitation,
the Communications Act and the rules and regulations of the FCC and
environmental laws, statutes, ordinances, rules, regulations, judgments
or court decrees) applicable

11
<PAGE> 12
to the Company or the subsidiary or any of their assets or properties
(whether owned or leased) other than, in the case of clauses (B) and
(C), any default or violation that could not reasonably be expected to
have a Material Adverse Effect. There exists no condition that, with
notice, the passage of time or otherwise, would constitute a default
under any such document or instrument.

(j) Neither (A) the execution, delivery or performance by the
Company of this Agreement nor (B) the issuance and sale of the Shares
will violate, conflict with or constitute a breach of any of the terms
or provisions of, or a default under (or an event that with notice or
the lapse of time, or both, would constitute a default), or require
consent under, or result in the imposition of a lien or encumbrance on
any properties of the Company or the subsidiary, or an acceleration of
any indebtedness of the Company or the subsidiary pursuant to, (i) the
charter or bylaws of the Company or the subsidiary, (ii) any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement
or instrument to which the Company or the subsidiary is or may be
bound, (iii) any statute, rule or regulation applicable to the Company
or the subsidiary or any of their respective assets or properties or
(iv) any judgment, order or decree of any court or governmental agency
or authority having jurisdiction over the Company or the subsidiary or
any of their assets or properties, except that the Company has not
received written approval from the Georgia Public Service Commission as
to the sale of the Shares and except in the case of clauses (ii), (iii)
and (iv) for such violations conflicts, breaches, defaults, consents,
impositions of liens or accelerations that would not singly, or in the
aggregate, have a Material Adverse Effect. Other than as described in
the Prospectus, no consent, approval, authorization or order of, or
filing, registration, qualification, license or permit of or with, (A)
any court or governmental agency, body or administrative agency
(including, without limitation, the FCC) or (B) any other person is
required for (1) the execution, delivery and performance by the Company
of this Agreement or (2) the issuance and sale of the Shares and the
consummation of the transactions contemplated hereby or by the
Prospectus, except (x) such as have been obtained and made under the
Act and state securities or Blue Sky laws and regulations or such as
may be required by the NASD or (y) where the failure to obtain any such
consent, approval, authorization or order of, or filing registration,
qualification, license or permit would not reasonably be expected to
result in a Material Adverse Effect.

(k) There is (i) no action, suit or proceeding before or by
any court, arbitrator or governmental agency, body or official,
domestic or foreign, now pending or, to the best knowledge of the
Company or the subsidiary, threatened or contemplated to which the
Company or the subsidiary is a party or to which the business or
property of the Company or the subsidiary is or may be subject, (ii) no
statute, rule, regulation or order that has been enacted, adopted or
issued by any governmental agency or that has been proposed by any
governmental body and (iii) no injunction, restraining order or order
of any nature by a federal or state court or foreign court of competent
jurisdiction to which the Company or the subsidiary is or may be
subject or to which the business, assets, or property of the Company or
the

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<PAGE> 13
subsidiary are or may be subject, that, in the case of clauses (i),
(ii) and (iii) above, (x) is required to be disclosed in the
Registration Statement or the Prospectus and is not so disclosed, (y)
could reasonably be expected to, individually or in the aggregate,
result in a Material Adverse Effect or (z) might interfere with,
adversely affect or in any manner question the validity of the issuance
and sale of the Shares or any of the other transactions contemplated by
this Agreement and the Registration Statement.

(l) There is (i) no significant unfair labor practice
complaint pending against the Company or the subsidiary nor, to the
best knowledge of the Company, threatened against any of them, before
the National Labor Relations Board, any state or local labor relations
board or any foreign labor relations board, and no significant
grievance or significant arbitration proceeding arising out of or under
any collective bargaining agreement is so pending against the Company
or the subsidiary or, to the best knowledge of the Company, threatened
against any of them, (ii) no significant strike, labor dispute,
slowdown or stoppage pending against the Company or the subsidiary nor,
to the best knowledge of the Company, threatened against the Company or
the subsidiary and (iii) to the best knowledge of the Company, no union
representation question existing with respect to the employees of the
Company or the subsidiary that, in the case of clauses (i), (ii) or
(iii), could reasonably be expected to result in a Material Adverse
Effect. To the best knowledge of the Company, no collective bargaining
organizing activities are taking place with respect to the Company or
the subsidiary. None of the Company or the subsidiary have violated (A)
any federal, state or local law or foreign law relating to
discrimination in hiring, promotion or pay of employees (except as set
forth in the Registration Statement), (B) any applicable wage or hour
laws or (C) any provision of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or the rules and regulations
thereunder, which in the case of clause (A), (B) or (C) above could
reasonably be expected to result in a Material Adverse Effect.

(m) No employee pension benefit plan (within the meaning of
Section 3(2) of ERISA, but excluding any "multiemployer plan" within
the meaning of Section 3(37) of ERISA) established or maintained by the
Company or the subsidiary or to which the Company or the subsidiary has
made contributions, which is subject to Part 3 or Subtitle B of Title I
of ERISA, or Section 412 of the Internal Revenue Code of 1986 (the
"Code"), had an accumulated funding deficiency (as such term is defined
in Section 302 of ERISA or Section 412 of the Code), whether or not
waived, as of the last day of the most recent plan year of such plan
heretofore ended for which an excise tax is due (or would be due if
such deficiency were not waived). Each of the Company and the
subsidiary has made all contributions required to be made by it to any
"multiemployer pension plan" (within the meaning of Section 3(37) of
ERISA). Neither the Company nor the subsidiary nor any Related Person
(as such term is defined below) has incurred, or is expecting to incur,
any withdrawal liability (determined under Section 4201 of ERISA) with
respect to any plan covered by Title IV of ERISA and in respect of
which the Company or the subsidiary or a Related Person is an
"employer" as defined in Section 3(5) of ERISA, and to the best of the

13
<PAGE> 14
Company's knowledge, there has not been any "reportable event" (within
the meaning of Section 4043 of ERISA and regulations thereunder, other
than an event for which the 30-day notice requirement has been waived),
or any other event or condition which presents a material risk of the
termination of any such plan, including, but not limited to, a
termination by action of the Pension Benefit Guaranty Corporation,
which termination would create a material liability of the Company or
the subsidiary or a Related Person to the Pension Benefit Guaranty
Corporation. "Related Person" shall mean any trade or business (whether
or not incorporated) which is under common control (as defined in
Section 414(b) and (c) of the Code) with the Company within the meaning
of Section 4001(b) of ERISA. As of the last day of the most recent plan
year heretofore ended of each employee benefit plan described in the
preceding sentence (other than a "multiemployer plan"), the present
value of all accrued benefits under each such employee benefit plan
(calculated on the basis of the actuarial assumptions specified in the
most recent actuarial valuation for each such plan) did not exceed the
fair market value of the assets of such plan allocable to such benefits
by more than $1,000,000. Neither any employee pension benefit plan
(excluding any "multiemployer plan" within the meaning of Section 3(37)
of ERISA) established or maintained by the Company or the subsidiary or
to which the Company or the subsidiary has made contributions, nor any
trust created thereunder, nor any trustee or administrator thereof
(including the Company), has engaged in any non-exempt prohibited
transaction (as described in Section 406 of ERISA or in Section 4975 of
the Code) that could subject the Company or the subsidiary either
directly or indirectly through an obligation to indemnify to any
material tax or material penalty on prohibited transactions imposed
under said Section 4975 of the Code or under ERISA. Each employee
benefit plan described in the preceding sentence is in compliance in
all material respects with all applicable provisions of ERISA and the
Code, except for plan amendments required or permitted by such statutes
as to which applicable grace periods for making such amendments have
not expired, and each of the Company and the subsidiary has made,
accrued or provided for all contributions heretofore required to be
made by the Company and the subsidiary and each of the Company and the
subsidiary has complied in all material respects with the continuation
coverage requirements of Title X of the Consolidated Omnibus Budget Act
of 1985, as amended. The execution and delivery of this Agreement and
the sale of the Shares will not involve any prohibited transaction
within the meaning of Section 406 of ERISA or Section 4975 of the Code.
Neither the Company nor the subsidiary has any material "expected
post-retirement benefit obligation" (within the meaning of Financial
Accounting Standards Board Statement No. 106). The consummation of the
transactions contemplated by this Agreement (including, without
limitation, the Use of Proceeds) will not result in any material
payment (including, without limitation, severance, golden parachute or
other) becoming due from the Company to any employee of the Company or
the subsidiary as a consequence of such transaction.

(n) Neither the Company nor the subsidiary has violated any
environmental, safety or similar law or regulation applicable to it or
its business or property relating to the protection of human health and
safety, the environment or

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<PAGE> 15
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), lacks any permit, license or other approval
required of it under applicable Environmental Laws or is violating any
term or condition of such permit, license or approval which could
reasonably be expected to, either individually or in the aggregate,
have a Material Adverse Effect. No facilities owned or leased by the
Company or the subsidiary, or to the best knowledge of the Company, any
facilities of any predecessor in interest of the Company or the
subsidiary, is listed or, to the best knowledge of the Company,
formally proposed for listing on the National Priorities List or the
Comprehensive Environmental Response, Compensation, and Liability
Information System, both as promulgated under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), or
on any comparable state list, or comparable local list, and the Company
has not received any written notification of potential or actual
liability, or any written request for information, pursuant to CERCLA
or any comparable state, local or foreign environmental law.

(o) Each of the Company and the subsidiary has (i) good and
marketable title to all of the properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the
Registration Statement or as would not have a Material Adverse Effect,
(ii) peaceful and undisturbed possession under all material leases to
which any of them is a party as lessee, (iii) all licenses,
certificates, permits, authorizations, approvals, franchises and other
rights from, and has made all declarations and filings with, all
federal, state and local authorities (including, without limitation,
the FCC), all self-regulatory authorities and all courts and other
tribunals (each an "Authorization") necessary to engage in the business
conducted by either of them in the manner described in the Prospectus,
except as described in the Prospectus or where failure to hold such
Authorizations would not, individually or in the aggregate, have a
Material Adverse Effect and, (iv) no reason to believe that any
governmental body or agency is considering limiting, suspending or
revoking any such Authorization. Except where the failure to be in full
force and effect would not have a Material Adverse Effect, all such
Authorizations are valid and in full force and effect and each of the
Company and the subsidiary is in compliance in all material respects
with the terms and conditions of all such Authorizations and with the
rules and regulations of the regulatory authorities having jurisdiction
with respect thereto. All material leases to which the Company or the
subsidiary is a party are valid and binding and no default by the
Company or the subsidiary has occurred and is continuing thereunder
and, to the best knowledge of the Company no material defaults by the
landlord are existing under any such lease that could reasonably be
expected to result in a Material Adverse Effect.

(p) Each of the Company and the subsidiary owns, possesses or
has the right to employ all patents, patent rights, licenses (including
all FCC, state, local or other jurisdictional regulatory licenses),
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential

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<PAGE> 16
information, software, systems or procedures), trademarks, service
marks and trade names, inventions, computer programs, technical data
and information (collectively, the "Intellectual Property") presently
employed by them in connection with the businesses now operated by them
or which are proposed to be operated by them free and clear of and
without violating any right, claimed right, charge, encumbrance,
pledge, security interest, restriction or lien of any kind of any other
person and neither the Company nor the subsidiary has received any
notice of infringement of or conflict with asserted rights of others
with respect to any of the foregoing except as could not reasonably be
expected to have a Material Adverse Effect. The use of the Intellectual
Property in connection with the business and operations of the Company
and the subsidiary does not infringe on the rights of any person,
except as could not reasonably be expected to have a Material Adverse
Effect.

(q) Neither the Company nor the subsidiary, or to the best
knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on
behalf of the Company or the subsidiary has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than
legal price concessions to customers in the ordinary course of
business) to any customer, supplier, employee or agent of a customer or
supplier, official or employee of any governmental agency (domestic or
foreign), instrumentality of any government (domestic or foreign) or
any political party or candidate for office (domestic or foreign) or
other person who was, is or may be in a position to help or hinder the
business of the Company or the subsidiary (or assist the Company or the
subsidiary in connection with any actual or proposed transaction) which
(i) might subject the Company or the subsidiary, or any other
individual or entity to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (ii) if
not given in the past, might have had a Material Adverse Effect or
(iii) if not continued in the future, might have a Material Adverse
Effect.

(r) All material tax returns required to be filed by the
Company or the subsidiary in all jurisdictions have been so filed. All
taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such
entities or that are due and payable have been paid, other than those
being contested in good faith and for which adequate reserves have been
provided or those currently payable without penalty or interest. To the
best knowledge of the Company, there are no material proposed
additional tax assessments against the Company, the subsidiary or the
assets or property of the Company or the subsidiary.

(s) Neither the Company nor the subsidiary is (i) an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), or (ii) a "holding company" or
a "subsidiary company" or an "affiliate" of a holding company within
the meaning of the Public Utility Holding Company Act of 1935, as
amended.

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<PAGE> 17
(t) Except as disclosed in the Prospectus, no holders of any
securities of the Company or the subsidiary or their respective
affiliates or of any options, warrants or other convertible or
exchangeable securities of the Company or the subsidiary or their
respective affiliates are entitled to include any such securities in or
to have such securities registered under the Registration Statement.

(u) Each of the Company and the subsidiary maintains a system
of internal accounting controls sufficient to provide reasonable
assurance that: (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect thereto.

(v) Each of the Company and the subsidiary maintains insurance
covering its properties, operations, personnel and businesses. Such
insurance insures against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company, the
subsidiary and their respective businesses. Neither the Company nor the
subsidiary has received notice from any insurer or agent of such
insurer that substantial capital improvements or other expenditures
will have to be made in order to continue such insurance. All such
insurance is outstanding and duly in force on the date hereof, subject
only to changes made in the ordinary course of business, consistent
with past practice, which do not, singly or in the aggregate,
materially alter the coverage thereunder or the risks covered thereby.

(w) Neither the Company nor the subsidiary has taken, directly
or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Shares. Except as permitted by the Act, the Company has not
distributed any Registration Statement, preliminary prospectus,
Prospectus or other offering material in connection with the offering
and sale of the Shares other than through the Underwriters.

(x) Subsequent to the respective dates as of which information
is given in the Registration Statement and up to the Closing Date,
except as set forth in the Registration Statement, there has not been
any material adverse change in the business, prospects, properties,
assets, liabilities, operations, condition (financial or otherwise),
results of operations or cash flows of the Company and the subsidiary,
taken as a whole, whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance
sheet included in the Registration Statement, neither the Company nor
the subsidiary has incurred or undertaken any liabilities or
obligations, direct or contingent, which are material to the Company
and the subsidiary, taken as a whole, except for liabilities or
obligations which were

17
<PAGE> 18
incurred or undertaken in the ordinary course of business or are
reflected in the Registration Statement and the Prospectus. Subsequent
to the dates as of which information is given in the Registration
Statement and the Prospectus, except as disclosed therein, there has
not been any decrease in the capital stock of the Company, any increase
in long-term indebtedness or any material increase in short-term
indebtedness of the Company or the subsidiary or any payment or
declaration to pay any dividends or any other distribution with respect
to the capital stock of the Company.

(y) To the best knowledge of the Company, KPMG Peat Marwick
LLC and Arthur Andersen LLP, whose reports are included or incorporated
by reference in the Registration Statement, are or have been
independent certified public accountants with regard to the Company as
required by the Act and the Securities Act Regulations.

(z) The historical financial statements of the Company and the
related notes and schedules included in the Registration Statement and
the Prospectus comply in all material respects with the requirements of
the Act and the Securities Act Regulations, including, without
limitation, Regulation S-X, and present fairly the financial position
of the Company or the Company and the subsidiary, as the case may be,
as of the dates indicated and the results of operations and cash flows
of the Company or the Company and the subsidiary, as the case may be,
for the periods therein specified. Such financial statements (including
the related notes and schedules) have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods therein specified, subject in the case of
interim statements to normal year-end audit adjustments. Since the date
of the latest of such financial statements, except as disclosed in the
Prospectus, there has been no material adverse change in the financial
position, results of operations or business of the Company and the
subsidiary, taken as a whole.

(aa) The financial information of the Company and the
subsidiary set forth in the Prospectus under the captions "Summary of
Prospectus -- Summary Historical Financial and Operating Data,"
"Capitalization," "Dilution," "Selected Historical Financial and
Operating Data," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" has been fairly stated in all
material respects in relation to the relevant financial statements of
the Company and the subsidiary and from which such information has been
derived.

(bb) The as adjusted financial information and the related
notes thereto included in the Registration Statement have been prepared
in accordance with the Commission's rules and guidelines with respect
to as adjusted financial statements, have been properly compiled on the
as adjusted basis described therein and, in the opinion of the Company,
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.

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<PAGE> 19
(cc) The Company's Common Stock has been designated for
inclusion on the National Association of Securities Dealers Automated
Quotations National Market System ("NASDAQ/NMS") at the time the
Registration Statement becomes effective under the Act, subject only to
official notice of issuance.

(dd) Except pursuant to this Agreement, there are no
contracts, agreements or understandings between the Company and any
other person that would give rise to a valid claim against the Company
or any of the Underwriters for a brokerage commission, finder's fee or
like payment in connection with the issuance, purchase and sale of the
Shares.

(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.

(ff) Each of the Shares and this Agreement, as or when
executed and delivered, will conform in all material respects to the
descriptions thereof contained in the Registration Statement and the
Prospectus.

(gg) Each holder of either (i) options to purchase in excess
of an aggregate of 5000 shares of Common Stock or (ii) options to
purchase in excess of an aggregate of 1000 shares (if such options are
vested or will be vested prior to 180 days after the date hereof) is
listed on Schedule II to this Agreement. The stockholders listed on
Schedule II hold in excess of 98% of the outstanding Common Stock and
in excess of 98% of the outstanding Series A Preferred Stock.

The Company acknowledges that each of the Underwriters and, for
purposes of the opinions to be delivered to the Underwriters pursuant to Section
9 hereof, counsel to the Company and counsel to the Underwriters, will rely upon
the accuracy and truth of the foregoing representations and hereby consents to
such reliance.

8. Payment of Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay and be responsible for all costs,
expenses, fees and taxes incident to the performance of the obligations of the
Company hereunder, including in connection with: (i) printing, duplicating,
filing and distributing the Registration Statement, as originally filed and all
amendments thereto (including, without limitation, financial statements and all
exhibits thereto), each preliminary prospectus, the Prospectus and any
amendments thereof or supplements thereto, the underwriting documents (including
this Agreement) and all other documents related to the public offering of the
Shares (including those supplied to the Underwriters in quantities as
hereinabove stated); (ii) the preparation (including, without limitation,
duplication costs) and delivery of all preliminary and final Blue Sky memoranda
prepared and delivered in connection herewith; (iii) the registration with the
Commission (including all filing fees incident thereto) and the issuance,
transfer and delivery of the Shares

19
<PAGE> 20
to the Underwriters, including, without limitation, the fees of the transfer
agent and registrar for the Company, the cost of its personnel and other
internal costs, the costs of printing and engraving the certificates
representing the Shares and any transfer or other taxes payable thereon; (iv)
the qualification or registration of the Shares for offering and sale under
state and foreign securities or Blue Sky laws, including, without limitation,
the costs of printing and mailing preliminary and final Blue Sky memoranda and
the reasonable fees and disbursements of Underwriters' counsel in relation
thereto; (v) the fees, disbursements and expenses of the Company's counsel and
accountants; (vi) the filing, registration, review and clearance of the terms of
the public offering of the Shares with and by the NASD including, in each case,
any filing fees and fees and disbursements of Underwriters' counsel in
connection therewith; and (vii) "roadshow" travel and other expenses incurred in
connection with the marketing and sale of the Shares (other than out-of-pocket
expenses incurred by the Underwriters for travel, meals and lodging).

9. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the absence from any
certificates, opinions, written statements or letters furnished pursuant to this
Section 9 to the Underwriters or to Underwriters' counsel of any misstatement or
omission and to the satisfaction of each of the following additional conditions,
except that with respect to the Additional Shares, references to the Closing
Date shall mean the Option Closing Date:

(a) All of the representations and warranties of the Company
contained herein shall be true and correct on the date hereof and on
the Closing Date with the same force and effect as if made on and as of
the date hereof and the Closing Date, respectively. The Company shall
have performed or complied with all of the agreements herein contained
and required to be performed or complied with by it at or prior to the
Closing Date.

(b) The Registration Statement shall have become effective (or
if a post-effective amendment is required to be filed pursuant to Rule
430A under the Securities Act Regulations, such post effective
amendment shall become effective) not later than 5:00 P.M., New York
City time, on the date of this Agreement or at such later time and date
as shall have been consented to in writing by the Representatives. At
or prior to the Closing Date no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereof
shall have been issued and no proceedings therefor shall have been
initiated or threatened by the Commission, and every request for
additional information on the part of the Commission (including,
without limitation, any request or comment with respect to the
Registration Statement, the Prospectus or any document incorporated by
reference therein) shall have been complied with in all material
respects. No stop order suspending the sale of the Shares in any
jurisdiction designated by the Representatives shall have been issued
and no proceedings for that purpose shall have been commenced or be
pending or, to the best knowledge of the Company, be contemplated.

20
<PAGE> 21
(c) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the
issuance of the Shares; and no action, suit or proceeding shall have
been commenced and be pending against or affecting or, to the best
knowledge of the Company, threatened against, the Company or the
subsidiary before any court or arbitrator or any governmental body,
agency or official that, if adversely determined, could reasonably be
expected to result in a Material Adverse Effect.

(d) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, and except as disclosed
therein or contemplated thereby, (i) there shall not have been any
material adverse change, or any development that is reasonably likely
to result in a material adverse change, in the capital stock or the
long-term debt, or material increase in the short-term debt, of the
Company and the subsidiary from that set forth in the Registration
Statement and the Prospectus, (ii) no dividend or distribution of any
kind shall have been declared, paid or made by the Company on any class
of its capital stock and (iii) neither the Company nor the subsidiary
shall have incurred any liabilities or obligations, direct or
contingent, that are material, individually or in the aggregate, to the
Company and the subsidiary, taken as a whole, and that are required to
be disclosed on a balance sheet or notes thereto in accordance with
generally accepted accounting principles and are not disclosed on the
latest balance sheet or notes thereto included in the Registration
Statement and the Prospectus. Since the date hereof and since the dates
as of which information is given in the Registration Statement and the
Prospectus, there shall not have occurred any Material Adverse Effect.

(e) The Underwriters shall have received a certificate, dated
the Closing Date, signed on behalf of the Company by (i) Nield J.
Montgomery, President and Chief Executive Officer and (ii) Linda M.
Sunbury, Chief Financial Officer of the Company in form and substance
reasonably satisfactory to the Underwriters, confirming, as of the
Closing Date, the matters set forth in paragraphs (a), (b), (c) and (d)
of this Section 9 and that, as of the Closing Date, the obligations of
the Company to be performed hereunder on or prior thereto have been
duly performed and stating that each signer of such certificate has
examined the Registration Statement and the Prospectus and (A) as of
the date of such certificate, such documents do not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein (in the case of the Prospectus, in the light of the
circumstances under which they were made) not misleading and (B) since
the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Registration Statement or
Prospectus in order to make the statements therein, in the light of the
circumstances under which they were made, not untrue or misleading in
any material respect, and (C) there has been no document required to be
filed under the Exchange Act and the Exchange Act Regulations that upon
such filing would be incorporated by reference into the Prospectus that
has not been so filed.

21
<PAGE> 22
(f) At the Closing Date, the Underwriters shall have received
the opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C., counsel
for the Company, dated the Closing Date, in form and substance
reasonably satisfactory to the Underwriters and Underwriters' counsel,
to the effect set forth in Exhibit A hereto.

(g) At the Closing Date, the Underwriters shall have received
the opinion of Kelley Drye & Warren LLP, special regulatory counsel for
the Company, dated the date of its delivery, addressed to the
Underwriters and in form and substance satisfactory to the
Underwriters' counsel, to the effect set forth in Exhibit B hereto.

(h) At the time this Agreement is executed and at the Closing
Date the Underwriters shall have received from Arthur Andersen LLP,
independent certified public accountants for the Company, dated as of
the date of this Agreement and as of the Closing Date, a customary
comfort letter addressed to the Underwriters and in form and substance
satisfactory to the Underwriters and counsel to the Underwriters with
respect to the financial statements and certain financial information
of the Company together with the subsidiary contained in the
Registration Statement and the Prospectus.

(i) Kronish, Lieb, Wiener & Hellman LLP shall have been
furnished with such documents, in addition to those set forth above, as
they may reasonably require for the purpose of enabling them to review
or pass upon the matters referred to in this Section 9 and in order to
evidence the accuracy, completeness or satisfaction in all material
respects of any of the representations, warranties or conditions herein
contained.

(j) On or prior to the Closing Date, the Underwriters shall
have received the executed agreements referred to in Section 6(o)
hereof.

(k) Prior to the Closing Date, the Company and the subsidiary
shall have furnished to the Underwriters such further information,
certificates and documents as the Underwriters may reasonably request.

If any of the conditions specified in this Section 9 shall not
have been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the
Underwriters or to Underwriters' counsel pursuant to this Section 9 shall not be
reasonably satisfactory in form and substance to the Underwriters and to
Underwriters' counsel, all of the obligations of the Underwriters hereunder may
be cancelled by the Underwriters at, or at any time prior to, the Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telecopy, telex or telegraph, confirmed in writing.

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<PAGE> 23
10. Indemnification.

(a) The Company agrees to indemnify and hold harmless (i) each
of the Underwriters, (ii) each person, if any, who controls any of the
Underwriters within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and (iii) the respective officers, directors,
partners, employees, representatives and agents of any of the
Underwriters or any controlling person to the fullest extent lawful,
from and against any and all losses, liabilities, claims, damages and
expenses whatsoever (including but not limited to attorneys' fees and
any and all expenses whatsoever incurred in investigating, preparing or
defending against any investigation or litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they
or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement as originally filed or any
amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein (in the case of the preliminary prospectus
or the Prospectus, in light of the circumstances under which they were
made) not misleading; provided, however, that the Company will not be
liable in any such case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is
based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of the Underwriters expressly for use therein. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have, including, under this Agreement.

(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against any losses, liabilities,
claims, damages and expenses whatsoever (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any investigation or
litigation, commenced or threatened, or any claim whatsoever and any
and all amounts paid in settlement of any claim or litigation), joint
or several, to which they or any of them may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be
stated therein or necessary to

23
<PAGE> 24
make the statements therein, in the light of the circumstances under
which they were made, not misleading, in each case to the extent, but
only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter expressly for use
therein; provided, however, that in no case shall any Underwriter be
liable or responsible for any amount in excess of the discounts and
commissions received by such Underwriter, as set forth on the cover
page of the Prospectus. This indemnity agreement will be in addition to
any liability which any Underwriter may otherwise have, including under
this Agreement.

(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection, notify
each party against whom indemnification is to be sought in writing of
the commencement thereof (but the failure so to notify an indemnifying
party shall not relieve it from any liability which it may have under
this Section 10 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may
otherwise have). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall
have the right to employ its or their own counsel in any such case (and
where the Underwriters are the indemnified parties, Bear Stearns shall
have the right to select such counsel for the Underwriters), but the
fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying parties in
connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to take charge of the defense
of such action within a reasonable time after notice of commencement of
the action, or (iii) such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all
of the indemnifying parties (in which case the indemnifying party or
parties shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events
such fees and expenses of counsel shall be borne by the indemnifying
parties; provided, however, that the indemnifying party under
subsection (a) or (b) above, shall only be liable for the legal
expenses of one counsel (in addition to any local counsel) for all
indemnified parties in each jurisdiction in which any claim or action
is brought. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its prior written
consent; provided, however, that such consent was not unreasonably
withheld.

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<PAGE> 25
11. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 10
is for any reason held to be unavailable from the Company or is
insufficient to hold harmless a party indemnified thereunder, the
Company and the Underwriters shall contribute to the aggregate losses,
claims, damages, liabilities and expenses of the nature contemplated by
such indemnification provision (including any investigation, legal and
other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted,
but after deducting in the case of losses, claims, damages, liabilities
and expenses suffered by the Company, any contribution received by the
Company from persons, other than the Underwriters, who may also be
liable for contribution, including persons who control the Company
within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act) to which the Company and any of the Underwriters may be
subject, in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Underwriters from the sale of
the Shares or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 10, in such
proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The relative
benefits received by the Company and the Underwriters shall be deemed
to be in the same proportion as (x) the total proceeds from the sale of
Shares (net of discounts but before deducting expenses) received by the
Company and (y) the underwriting discounts and commissions received by
the Underwriters, respectively, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company
and of the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined
by pro rata allocation or by any other method of allocation which does
not take into account the equitable considerations referred to above.
Notwithstanding the provisions of this Section 11, (i) in no case shall
any Underwriter be required to contribute any amount in excess of the
amount by which the underwriting discount applicable to the Shares
purchased by such Underwriter pursuant to this Agreement exceeds the
amount of any damages which such Underwriter has otherwise been
required to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 11, (A)
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act and (B) the
respective officers, directors, partners, employees, representatives
and agents of any of the Underwriters or any controlling person shall
have the same rights to contribution as such Underwriters, and each
person,

25
<PAGE> 26
if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 11. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this
Section 11, notify such party or parties from whom contribution may be
sought, but the failure to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 11 or otherwise.
No party shall be liable for contribution with respect to any action or
claim settled without its prior written consent; provided, however,
that such written consent was not unreasonably withheld.

12. Substitution of Underwriters.

(a) If any Underwriter shall default in its
obligation to purchase Shares hereunder, and if the total
number of Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made
pursuant to subsection (b) below) exceed 10% of the total
number of Shares which the Underwriters have agreed to
purchase hereunder, then such Shares to which the default
relates shall be purchased by the non-defaulting Underwriters.

(b) In the event that such default relates to more
than 10% of the total number of Shares, the non-defaulting
Underwriters may in their discretion arrange for themselves or
for another party or parties to purchase the Shares to which
such default relates on the terms contained herein. In the
event that within five (5) calendar days after such a default
the non-defaulting Underwriters do not arrange for the
purchase of the Shares to which such default relates as
provided in this Section 12, this Agreement and the
obligations of the Underwriters to purchase, and of the
Company to sell, the Shares shall thereupon terminate without
liability on the part of the Company with respect thereto
(except in each case as provided in Sections 8, 10(a) and 11)
or the Underwriters (except as provided in Sections 10(b) and
11), but nothing in this Agreement shall relieve a defaulting
Underwriter of its liability, if any, to the other
Underwriters and the Company for damages occasioned by its
default hereunder.

(c) In the event that the Shares to which the default
relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or
parties as aforesaid, the Underwriters or the Company shall
have the right to postpone the Closing Date for a period not
exceeding five (5) business days in order to effect whatever
changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the
Prospectus which, in the opinion of Underwriters' counsel,
may, thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any
party substituted

26
<PAGE> 27
under this Section 12 with like effect as if it had originally
been a party to this Agreement with respect to such Shares.

13. Effective Date of Agreement; Termination.

(a) This Agreement shall become effective when the
Underwriters and the Company shall have received notification
of the effectiveness of the Registration Statement. Until this
Agreement becomes effective as aforesaid, it may be terminated
by the Company by notifying the Underwriters or by the
Underwriters by notifying the Company. Notwithstanding the
foregoing, the provisions of this Section 13 and of Sections
8, 10 and 11 shall at all times be in full force and effect.

(b) The Underwriters shall have the right to
terminate this Agreement at any time prior to the Closing Date
by notice to the Company from the Underwriters, without
liability (other than with respect to Sections 10 and 11) on
the Underwriters' part to the Company if, on or prior to such
date, (i) the Company shall have failed, refused or been
unable to perform in any material respect any agreement on its
part to be performed hereunder, (ii) any other condition to
the obligations of the Underwriters hereunder as provided in
Section 9 is not fulfilled when and as required in any
material respect, (iii) in the reasonable judgment of the
Underwriters any material adverse change shall have occurred
since the respective dates as of which information is given in
the Registration Statement in the condition (financial or
otherwise), business, properties, assets, liabilities,
prospects, net worth, results of operations or cash flows of
the Company and the subsidiary taken as a whole, or (iv)(A)
any domestic or international event or act or occurrence has
materially disrupted, or in the opinion of the Underwriters
will in the immediate future materially disrupt, the market
for the Company's securities or for securities in general; or
(B) trading in securities generally on the New York or
American Stock Exchanges shall have been suspended or
materially limited, or minimum or maximum prices for trading
shall have been established, or maximum ranges for prices for
securities shall have been required, on such exchange, or by
such exchange or other regulatory body or governmental
authority having jurisdiction; or (C) a banking moratorium
shall have been declared by Federal or state authorities, or a
moratorium in foreign exchange trading by major international
banks or persons shall have been declared; or (D) there is an
outbreak or escalation of armed hostilities involving the
United States on or after the date hereof, or if there has
been a declaration by the United States of a national
emergency or war, the effect of which shall be, in the
Underwriters' judgment, to make it inadvisable or
impracticable to proceed with the offering or delivery of the
Shares on the terms and in the manner contemplated in the
Registration Statement; or (E) there shall have been such a
material adverse change in general economic, political or
financial conditions or if the effect of international
conditions on the financial markets in the United States

27
<PAGE> 28
shall be such as, in the Underwriters' judgment, makes it
inadvisable or impracticable to proceed with the delivery of
the Shares as contemplated hereby.

(c) Any notice of termination pursuant to this
Section 13 shall be by telephone, telex, telephonic facsimile,
or telegraph, confirmed in writing by letter.

(d) If this Agreement shall be terminated pursuant to
any of the provisions hereof (otherwise than pursuant to (i)
notification by the Underwriters as provided in Section 13(a)
or (ii) Section 12(b)), or if the sale of the Shares provided
for herein is not consummated because any condition to the
obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or
comply with any provision hereof, the Company will, subject to
demand by the Underwriters, reimburse the Underwriters for all
out-of-pocket expenses (including, without limitation, the
reasonable fees and expenses of Underwriters' counsel)
incurred by the Underwriters in connection herewith.

14. Survival of Representations and Agreements. All
representations and warranties, covenants and agreements of the
Underwriters and the Company contained in this Agreement, including the
agreements contained in Sections 8 and 13(d), the indemnity agreements
contained in Section 10 and the contribution agreements contained in
Section 11, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any
Underwriter, any controlling person thereof or by or on behalf of the
Company or any controlling person thereof, and shall survive delivery
of and payment for the Shares to and by the Underwriters. The
representations contained in Section 7 and the agreements contained in
Sections 8, 10, 11 and 13(d) shall survive the termination of this
Agreement, including any termination pursuant to Sections 12 and 13.

15. Notice. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if
sent to the Underwriters shall be mailed, delivered, or telexed,
telegraphed or telecopied and confirmed in writing c/o Bear, Stearns &
Co. Inc. and Furman Selz LLC, c/o Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention: Corporate Finance
Department, telecopy number: (212) 272-3092; and if sent to the
Company, shall be mailed, delivered or telexed, telegraphed or
telecopied and confirmed in writing to MGC Communications, Inc., 3301
N. Buffalo Drive, Las Vegas, Nevada 89129, Attention: General Counsel,
telecopy number: (702) 310-1111, with a copy to Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C., One Securities Centre, Suite 400, 3490
Piedmont Road, Atlanta, Georgia 30305, telecopy number: (404) 233-2188.

16. Parties. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the Underwriters and the Company and the
controlling persons and agents referred to in Sections 10 and 11, and
their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provision
herein

28
<PAGE> 29
contained. The term "successors and assigns" shall not include a
purchaser, in its capacity as such, of Shares from the Underwriters.

17. Construction. This Agreement shall be construed in
accordance with the internal laws of the State of New York.

18. Captions. The captions included in this Agreement are
included solely for convenience of reference and are not to be
considered a part of this Agreement.

19. Counterparts. This Agreement may be executed in various
counterparts which together shall constitute one and the same
instrument.

[Signature page to follow]

29
<PAGE> 30
If the foregoing correctly sets forth the
understanding among the Underwriters and the Company, please so
indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement between us.

Very truly yours,

MGC COMMUNICATIONS, INC.

By:________________________________
Name:
Title:

Accepted and agreed to as of the date first above written:

BEAR, STEARNS & CO. INC.
FURMAN SELZ LLC

Acting on their own behalf and as
Representatives of the several
Underwriters referred to in the
foregoing Agreement

By: BEAR, STEARNS & CO. INC.

By:_________________________________
Name:
Title:

By: FURMAN SELZ LLC

By:_________________________________
Name:
Title:
<PAGE> 31
Schedule I

Number of Shares
Underwriter to be Purchased

Bear, Stearns & Co. Inc. ________________

Furman Selz LLC ________________

[OTHERS]

Total: ________________

<PAGE> 32
Schedule II

Stockholders and Option holders subject to Lockup Agreements
<PAGE> 33
EXHIBIT A

Form of Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.

1. Each of the Company and the subsidiary is duly
organized and validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation, and has all requisite
corporate power and authority to carry on its business as it is being
conducted and as described in the Registration Statement and Prospectus
and to own, lease and operate its properties, and is duly qualified and
in good standing as a foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its ownership
or leasing of property requires such qualification. All of the issued
and outstanding shares of capital stock of, or other ownership
interests in, the subsidiary have been duly authorized and validly
issued, are fully paid and non-assessable and were not issued in
violation of or subject to any preemptive or similar rights under the
Nevada General Corporation Law, or known to such counsel, after
reasonable inquiry, and are owned by the Company of record, and to the
knowledge of such counsel, after reasonable inquiry, beneficially, free
and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or other restriction on transferability or voting.
Except for the capital stock of the subsidiary owned by the Company, to
such counsel's knowledge, neither the Company nor the subsidiary owns
or holds any interest in any corporation, partnership, trust or
association, joint venture or other entity.

2. All the outstanding shares of capital stock of the
Company and the subsidiary have been duly authorized, validly issued,
and are fully paid and nonassessable and were not issued in violation
of any preemptive or similar rights. The authorized, issued and
outstanding capital stock of the Company conforms in all respects to
the description thereof set forth in the Registration Statement and
Prospectus. Except as set forth in the Prospectus, there are no
outstanding subscriptions, rights, warrants, calls, commitments of sale
or options to acquire, or instruments convertible into or exercisable
or exchangeable for, any capital stock or other equity interest in the
Company or the subsidiary known to such counsel, after reasonable
inquiry. None of the outstanding shares of the capital stock of the
Company or the subsidiary were issued in violation of the registration
requirements of the Act or the registration or qualification
requirements of the applicable state securities or "Blue Sky" laws.

3. The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under the
Underwriting Agreement to consummate the transactions contemplated
thereby, including, without limitation, the corporate power and
authority to issue, sell and deliver the Shares as provided therein.
<PAGE> 34
4. The Underwriting Agreement has been duly and
validly authorized, executed and delivered by the Company and, assuming
due execution by the other parties thereto, is the legally valid and
binding agreement of the Company.

5. The Shares have been duly authorized and, when
issued and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and, to the knowledge of such counsel after
reasonable inquiry, free of any preemptive or similar rights that
entitle or will entitle any person to acquire any Shares upon the
issuance thereof by the Company.

6. The statements under the caption "Description of
Securities" in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein present a fair summary
thereof.

7. None of (A) the execution, delivery or performance
by the Company of the Underwriting Agreement or (B) the issuance and
sale of the Shares violates, conflicts with or constitutes a breach of
any of the terms or provisions of, or a default under (or an event that
with notice or the lapse of time, or both, would constitute a default),
or require consent under, or result in the imposition of a lien or
encumbrance on any properties of the Company or the subsidiary, or an
acceleration of any indebtedness of the Company or the subsidiary
pursuant to, (i) the charter or bylaws of the Company or the
subsidiary, (ii) any bond, debenture, note, indenture, mortgage, deed
of trust or other agreement or instrument known to such counsel to
which the Company or the subsidiary is a party or by which any of them
or their property is or may be bound, (iii) any local, state, federal
or administrative statute, rule or regulation applicable to the Company
or the subsidiary or any of their respective assets or properties
(except that such counsel need express no opinion as to the matters
addressed by the opinion of Kelley Drye & Warren LLP) or (iv) any
judgment, order or decree of any court or governmental agency or
authority having jurisdiction over the Company or the subsidiary or any
of their assets or properties known to such counsel (except that such
counsel need express no opinion as to the matters addressed by the
opinion of Kelley Drye & Warren LLP), except that the Company has not
received written approval from the Georgia Public Service Commission as
to the sale of the Shares and except in the case of clauses (ii), (iii)
and (iv) for such violations, conflicts, breaches, defaults, consents,
impositions of liens or accelerations that (x) would not, singly or in
the aggregate, have a Material Adverse Effect or (y) are disclosed in
the Registration Statement. Assuming compliance with applicable state
securities and Blue Sky laws, as to which such counsel need express no
opinion, and except for the filing of a registration statement under
the Act, no consent, approval, authorization or order of, or filing,
registration, qualification, license or permit of or with, any court or
governmental agency, body or administrative agency is required for (1)
the execution, delivery and performance by the Company of the
Underwriting Agreement or (2) the issuance and sale of the Shares
except such as have been obtained and made or have been disclosed in
the Registration Statement, and except where the failure to obtain such
consents or waivers would not, singly or in the aggregate, have a
Material Adverse Effect. To such counsel's knowledge, after reasonable
inquiry, no consents or waivers from any other person are
<PAGE> 35
required for the execution, delivery and performance by the Company of
the Underwriting Agreement or the issuance and sale of the Shares,
other than such consents and waivers as have been obtained and except
that such counsel shall not be required to express any opinion as to
the matters addressed in the opinion of Kelley Drye & Warren LLP.

8. Neither the Company nor the subsidiary is (i) an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended or (ii) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the Public
Utility Holding Company Act of 1935, as amended.

9. No holders of any securities of the Company or the
subsidiary or their respective affiliates or of any options, warrants
or other convertible or exchangeable securities of the Company or the
subsidiary or their respective affiliates are entitled to include any
such securities in or to have such securities registered under the
Registration Statement.

10. To such counsel's knowledge, after reasonable
inquiry, there is (i) no action, suit, investigation or proceeding
(other than proceedings with respect to pending license applications)
before or by any court, arbitrator or governmental agency, body or
official, domestic or foreign, now pending, or threatened or
contemplated to which either the Company or the subsidiary is or may be
a party or to which the business or property of the Company or the
subsidiary is or may be subject, (ii) no statute, rule, regulation or
order that has been enacted, adopted or issued by any governmental
agency or that has been proposed by any governmental body (except that
such counsel need express no opinion with respect Telecommunications
Laws) or (iii) no injunction, restraining order or order of any nature
by a federal or state court of competent jurisdiction to which either
the Company or the subsidiary is or may be subject or to which the
business, assets or property of the Company or the subsidiary are or
may be subject has been issued that, in the case of clauses (i), (ii)
and (iii) above, (x) is required to be disclosed in the Registration
Statement or the Prospectus and is not so disclosed, (y) could
reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect or (z) might interfere with,
adversely affect or in any manner question the validity of the issuance
and sale of the Shares or any of the other transactions contemplated by
the Underwriting Agreement or the Registration Statement and except
that such counsel shall not be required to express any opinion as to
the matters addressed in the opinion of Kelley Drye & Warren LLP.

11. Except for a grant of confidentiality with
respect to portions of certain documents which are exhibits to the
Registration Statement, such counsel is not aware of any order directed
to any document incorporated by reference in the Registration Statement
which has been issued by the Commission or any challenge that has been
made by the Commission as to the accuracy or adequacy of any such
document.
<PAGE> 36
12. The Registration Statement has become effective
under the Act and, to the knowledge of such counsel, so stop order has
been issued and no proceedings for that purpose have been instituted or
threatened.

13. The Registration Statement and the Prospectus
(not including the financial statements, notes and schedules thereto
and other financial and accounting information included or incorporated
by reference therein, as to which no opinion need be expressed) comply
as to form in all material respects with the applicable requirements of
the Act and the Regulations.

14. There are no contracts or documents of the
Company or the subsidiary known to such counsel, after reasonable
inquiry, that are required to be filed as exhibits to the Registration
Statement by the Act or by the Regulations that have not been so filed.
Insofar as statements in the Prospectus (other than statements
addressed in the opinion of Kelley Drye & Warren LLP) purport to
summarize the provisions of laws, rules, regulations, proposed rules,
proposed regulations, orders, judgments, decrees, contracts,
agreements, instruments, leases or licenses, such statements accurately
reflect the status of such provisions purported to be summarized and
are correct in all material respects.

15. The Company has authorized capital stock as set
forth in the Prospectus. All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares are duly and validly
authorized and issued, are fully paid and nonassessable and were not
issued in violation of or subject to any preemptive rights.

16. The form of certificates for the Shares conforms
to the requirements of the General Corporation Law of the State of
Nevada.

17. The Common Stock, including the Firm Shares and
the Additional Shares, is designated for inclusion on the NASDAQ/NMS.

18. The Preferred Stock has been converted into
3,942,856 shares of Common Stock.

Such counsel has participated in conferences
with officers and other representatives of the Company, representatives
of the independent certified public accountants of the Company and the
Underwriters and their representatives at which the contents of the
Prospectus and the Registration Statement and any amendment thereof or
supplement thereto and related matters were discussed and, although
such counsel has not undertaken to investigate or verify independently,
and need not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Prospectus and the
Registration Statement or any amendment thereof or supplement thereto
(except as indicated above), on the basis of the foregoing, no facts
have come to such counsel's attention which led such counsel to believe
that the Prospectus and the Registration Statement (or any amendment
thereof made prior to the Closing Date as of the date of such
amendment) as of its date or the Closing Date, contained an untrue
statement of a
<PAGE> 37
material fact or omitted to state any fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading (except as
to financial statements and related notes, the financial statement
schedules and other financial data included therein).

Such counsel are members of the Bar of the
State of Georgia, and such counsel does not herein express an opinion
as to any matters governed by any laws other than the laws of the State
of Georgia, the laws of the State of Nevada governing corporations and
the Federal laws of the United States of America. In rendering this
opinion, such counsel has relied on Kronish, Lieb, Weiner & Hellman LLP
as to the laws of the State of New York.
<PAGE> 38
EXHIBIT B

Form of Opinion of Kelley Drye & Warren LLP

1. All of the licenses, permits and
authorizations required by the FCC for the provision of
telecommunications services by the Company and the subsidiary, as such
counsel understands those services to be provided currently based upon
the attached certificate and the Registration Statement, have been
issued to and are validly held by the Company and the subsidiary. All
of the licenses, permits and authorizations required by any "state
commissions" as defined in Section 3 of the Communications Act of 1934,
as amended (the "State Telecommunications Agencies") for the provision
of telecommunications services by the Company and the subsidiary, as
such counsel understands those services to be provided currently based
upon the attached certificate and the Registration Statement, have been
issued to and, to the best knowledge of such counsel, are validly held
by the Company and the subsidiary, except where the failure to obtain
or hold such license, permit or authority would not have a Material
Adverse Effect. All such licenses, permits and authorizations are in
full force and effect.

2. Neither the Company nor the subsidiary is
the subject of any proceeding (including a rule making proceeding),
pending complaint or investigation, or, to the best of such counsel's
knowledge, any threatened complaint or investigation, before the FCC,
or, to the best of such counsel's knowledge after oral inquiry, of any
proceeding (including a rule making proceeding), pending complaint or
investigation, or any threatened complaint or investigation, before the
State Telecommunications Agencies based, in each case, on any alleged
violation of any statutes governing the FCC or the State
Telecommunications Agencies and the rules and regulations promulgated
thereunder (the "Telecommunications Laws") by the Company or the
subsidiary in connection with their provision of or failure to provide
telecommunications services of a character required to be disclosed in
the Registration Statement which is not disclosed in the Registration
Statement.

3. The statements in the Registration
Statement under the headings of "Risk Factors - Regulation" and
"Business - Regulation" regarding the Telecommunications Laws of the
FCC or the State Telecommunications Agencies fairly and accurately
summarize the matters therein described.

4. Each of the Company and the subsidiary
has the consents, approvals, authorizations, licenses, certificates,
permits, or orders of the FCC or the State Telecommunications Agencies,
if any is required, for the consummation of the transactions
contemplated in the Registration Statement, except where the failure to
obtain the consents, approvals, authorizations, licenses, certificates,
permits or orders would not have a Material Adverse Effect.
<PAGE> 39
5. Neither the execution and delivery of the
Underwriting Agreement nor the sale of the Shares contemplated thereby
will conflict with or result in a violation of any Telecommunications
Laws applicable to the Company or the subsidiary, except where the
conflict with or the violation of any Telecommunications Laws would not
have a Material Adverse Effect.

6. In connection with our representation of
the Company, except as disclosed in the Registration Statement or the
Prospectus, we have not become aware of any Telecommunications Laws
that could reasonably be expected to have a Material Adverse Effect on
the business of the Company as described in the Prospectus.
<PAGE> 40
EXHIBIT C

__________ __, 1998

Bear, Stearns & Co. Inc.
Furman Selz, LLC
c/o Bear, Stearns & Co, Inc.
245 Park Avenue
New York, NY 10167

MGC Communications, Inc.
3301 North Buffalo Drive
Las Vegas, Nevada 89103

Ladies and Gentlemen:

In order to induce Bear, Stearns & Co. Inc. ("Bear
Stearns") and Furman Selz, LLC (together with Bear Stearns, the
"Underwriters") and MGC Communications, Inc., a Nevada corporation (the
"Company"), to enter into an underwriting agreement (the "Underwriting
Agreement") pursuant to which the Underwriters will purchase, severally
but not jointly, shares of common stock, par value $.001 per share, of
the Company ("Common Stock"), the undersigned hereby agrees that for a
period of 180 days following the date on which the Company's
registration statement on Form S-1 filed in connection with the
Company's initial public offering of Common Stock shall become
effective by order of the United States Securities and Exchange
Commission (the "Effective Date"), the undersigned will not directly or
indirectly offer to sell, sell, contract to sell, grant an option for
the sale of, assign, transfer, pledge, hypothecate or otherwise
encumber or dispose of (either pursuant to Rule 144 of the regulations
under the Securities Act of 1933, as amended, or otherwise) any shares
of Common Stock or any other securities issued by the Company
("Securities") registered in the undersigned's name or beneficially
owned by the undersigned, including without limitation, any Securities
with respect to which the undersigned becomes the registered or
beneficial owner after the date hereof, or dispose of any beneficial
interest therein without the prior written consent of Bear Stearns and
the Company.

In order to enable you to enforce the aforesaid
agreement and grant of rights, the undersigned hereby consents to the
placing of legends and stop-transfer orders with the transfer agent of
the Company's Securities with respect to any of the Securities
registered in the undersigned's name or beneficially owned by the
undersigned.

This agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving
effect to conflict of law principles. Any legal action or proceeding
with respect to this agreement shall be brought exclusively in the
courts of the State of New York residing in the Borough of Manhattan or
of the United States of America for the Southern District of New York,
and, by execution and delivery
<PAGE> 41
of this agreement, the parties hereto hereby accept for themselves and
in respect of their property, generally and unconditionally, the
exclusive jurisdiction of the aforesaid courts.

This agreement shall be binding on the undersigned
and his, her or its respective heirs, personal representatives,
successors and assigns.

___________________________________
Signature

___________________________________
Print Name of Stockholder

___________________________________
Print Name and Title of Officer

___________________________________
Print Address

___________________________________
Print Social Security
Number or Taxpayer I.D. Number

<PAGE> 1
EXHIBIT 23.1

ARTHUR ANDERSEN LLP

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated March 4, 1998 and to all references to our Firm included in or made part
of this Registration Statement on Form S-1/A2.

/s/ Arthur Andersen LLP
-----------------------------------
ARTHUR ANDERSEN LLP

Las Vegas, Nevada
May 7, 1998

<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
MGC Communications, Inc.:

We consent to the use of our report, dated August 18, 1997 relating to the
financial statements of MGC Communications, Inc. as of and for the year ended
December 31, 1996, included herein and to the reference to our firm under the
headings "Experts", "Summary Historical Financial and Operating Data" and
"Selected Historical Financial and Operating Data" in the prospectus.

KPMG Peat Marwick LLP

May 11, 1998
Las Vegas, Nevada