MGC COMMUNICATIONS INC, S-1, 1998-04-01

MGC COMMUNICATIONS INC
S-1, 1998-04-01
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 1, 1998.

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

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) 479-6069
</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. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
==============================================================================================================================
TITLE OF CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock.................. (1) shares (1) $69,000,000 $20,355
==============================================================================================================================
</TABLE>

(1) The number of shares to be registered and the proposed offering price per
share have not yet been determined, but the proposed maximum aggregate
offering price has been determined to be $69,000,000, including shares that
may be sold pursuant to an over-allotment option granted to the
Underwriters.
------------------------

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 APRIL 1, 1998

PRELIMINARY PROSPECTUS

[LOGO]
MGC COMMUNICATIONS, INC.

COMMON STOCK

All the 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
$ and $ 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 "MGCC."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 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
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

[GRAPHIC INSERTED HERE]

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

SUMMARY OF PROSPECTUS

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.

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 February 28, 1998, the Company had 22,724
end user access lines sold of which 18,345 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 if
the Company built 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. 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 operations support 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 remote cities where the Company is located without the traditional
upfront investment in modem hardware in each remote location.

1
<PAGE> 6

believes will provide a significant competitive advantage. The Company's
operations support 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 telecommunications
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
telecommunications 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. The Company believes its only significant
switch-based competitor for these customers in these markets is the ILEC.

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.

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 backbone as an alternative long distance network transport
solution.

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.

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

2
<PAGE> 7

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 and post-installation residential inquiries and orders,
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
operations support 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 telephone
experience, most recently with ICG Communications, Inc. ("ICG"). Other
executives have held senior management positions at major telecommunications
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.

The Company was incorporated as NevTEL, Inc., a Nevada corporation in 1995.
In 1996, the Company changed its name to MGC Communications, Inc. Its principal
office is located at 3301 N. Buffalo Drive, Las Vegas, Nevada 89129. The
Company's telephone number is (702) 310-1000.

3
<PAGE> 8

THE OFFERING

Common Stock Offered by the Company
(1)................................. shares

Common Stock Outstanding After the
Offering (1)(2)..................... shares

Use of Proceeds..................... The Company intends to use the net
proceeds from the Offering for the
purchase and installation of
communications switches and associated
equipment and general corporate
purposes, including working capital
related to its expansion into new
markets. See "Use of Proceeds."

Proposed Nasdaq National Market
Symbol.............................. MGCC

Risk Factors........................ For a description of certain risks
inherent in an investment in the Common
Stock, see "Risk Factors."
- ---------------
(1) Excludes a 30-day option granted to the Underwriters (as defined herein) to
purchase up to additional shares of Common Stock. Unless otherwise
indicated, all references in this Prospectus to shares of Common Stock
outstanding after the Offering exclude any shares which may be issued
pursuant to such over-allotment option.

(2) Gives effect to the conversion of the outstanding 8% Series A Convertible
Preferred Stock (the "Series A Convertible Preferred Stock") into Common
Stock upon consummation of the Offering, but does not give effect to the
issuance of: (i) 1,997,200 shares of Common Stock issuable upon the exercise
of outstanding stock options granted to officers, employees and consultants
or (ii) 1,438,205 shares of Common Stock issuable upon the exercise of
outstanding Warrants (as defined herein) at $.01 per share. See "Management
-- Stock Option Plan" and "Description of Securities -- Outstanding
Warrants."

4
<PAGE> 9

SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

The following summary financial data of the Company as of and for the years
ended December 31, 1996 and 1997, under the captions "Statement of Operations
Data," "Other Financial Data" and "Balance Sheet Data" are derived from the
financial statements of the Company. The financial statements for the year ended
December 31, 1996 have been audited by KPMG Peat Marwick LLP and the financial
statements for the year ended December 31, 1997 have been audited by Arthur
Andersen LLP. These financial statements are included elsewhere in this
Prospectus. The following summary financial data of the Company for each quarter
during 1997 under the captions "Statement of Operations Data" and "Other
Financial Data" are derived from the unaudited financial statements of the
Company. The unaudited financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of its financial position and the results of operations for these
periods. The information presented below under the caption "Operating Data" is
unaudited. This data should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere in
this Prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED --------------------------------------------------- YEAR ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1997 1997 1997
------------ --------- -------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(1)
Operating revenues.......... $ 1 $ 212 $ 652 $ 1,060 $ 1,867 $ 3,791
Cost of operating revenues
(excluding depreciation
shown below).............. 305 539 821 1,152 1,416 3,928
Selling, general and
administrative............ 841 883 1,272 1,799 2,486 6,440
Depreciation and
amortization.............. 54 160 257 402 455 1,274
Write-off of purchased
software.................. 355 -- -- -- -- --
------- ------- ------- -------- -------- ---------
Loss from operations........ (1,554) (1,370) (1,698) (2,293) (2,490) (7,851)
Interest income............. 63 128 143 67 2,169 2,507
Interest expense............ -- -- -- (116) (5,376) (5,492)
------- ------- ------- -------- -------- ---------
Net loss.................... $(1,491) $(1,242) $(1,555) $ (2,342) $ (5,697) $ (10,836)
======= ======= ======= ======== ======== =========
Basic and diluted loss per
share of Common
Stock(2).................. $ (1.27) $ (.09) $ (.11) $ (.17) $ (.39) $ (.78)
======= ======= ======= ======== ======== =========
Weighted average shares
outstanding............... 1,179 13,464 14,133 14,147 14,666 14,098
OTHER FINANCIAL DATA:
EBITDA(3)................... $(1,145) $(1,210) $(1,441) $ (1,891) $ (2,035) $ (6,577)
Summary Cash Flow
Information:
Net cash used in operating
activities............. (942) (906) (1,030) (2,403) (151) (4,490)
Net cash used in investing
activities............. (2,287) (847) (2,750) (64,583) (67,311) (135,491)
Net cash provided by
financing activities... 11,126 5,484 12 154,516 17,126 177,138
Capital expenditures........ 3,659 848 6,121 8,938 6,734 22,641
</TABLE>

5
<PAGE> 10

<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED ---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (END OF PERIOD):
Total access lines in service(4)........ 50 3,801 9,002 12,710 15,590
Business.............................. -- 1,199 5,212 7,792 10,830
Residential........................... 50 2,602 3,790 4,918 4,760
Central office collocation sites........ 9 9 15 16 25
Employees............................... 24 49 81 111 145
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1995 1996 1997
---- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $-- $ 7,897 $ 45,054
Investments held to maturity................................ -- -- 57,710
Restricted investments...................................... -- -- 57,574
Property and equipment, net................................. -- 3,250 24,617
Total assets................................................ 1 12,339 191,977
Long-term debt, including current maturities................ -- -- 156,637
Series A Convertible Preferred Stock(5)..................... -- -- 16,665
Total stockholders' equity.................................. 1 10,792 8,976
</TABLE>

- ---------------
(1) Statement of operations data for the year ended December 31, 1995 has been
omitted as no revenues or expenses were recognized and no cash transactions
occurred between October 16, 1995 (inception) to December 31, 1995.

(2) Net loss per common share outstanding is calculated based on weighted
average shares outstanding of 1,178,932 and 14,098,318 for the years ended
December 31, 1996 and 1997, respectively. For the year ended December 31,
1997, net loss per common share includes $136,000 of accrued preferred stock
dividends.

(3) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. For the year ended December 31, 1996, EBITDA excludes a charge
of $355,000 related to the one-time write-off of purchased software. While
EBITDA is not an alternative indicator of operating performance or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by generally accepted accounting principles and EBITDA
may not be comparable to other similarly titled measures of other companies,
management believes EBITDA is a measure commonly used in the communications
industry to analyze and compare communications companies on the basis of
operating performance, leverage and liquidity. See the "Statements of Cash
Flows" included in the Company's financial statements and the notes thereto
appearing elsewhere in this Prospectus.

(4) A number of CLECs have begun reporting "Equivalent Access Lines" in lieu of
actual installed access lines in an attempt to give effect to differing
usage among access lines. Equivalent Access Lines are determined by
multiplying the number of Trunks in service by six and adding to the result
the number of separate lines in service. Computed on this basis, the Company
had 22,446 Equivalent Access Lines in service at December 31, 1997.

(5) All of the Series A Convertible Preferred Stock will convert on a one for
one basis to Common Stock upon consummation of the Offering.

6
<PAGE> 11

RISK FACTORS

Any investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following factors
together with the other information contained in this Prospectus.

LIMITED OPERATIONS; NET LOSSES

The Company began providing local exchange services in Las Vegas in
December 1996 and, to date, substantially all of the Company's revenues have
been derived from such services. The Company is expecting to significantly
increase the size of its operations in 1998 and beyond. Prospective investors,
therefore, have limited historical financial information about the Company upon
which to base an evaluation of the Company's performance. Although many of the
Company's managerial and supervisory personnel have had substantial
communications industry experience, the Company has a very limited operating
history. Accordingly, there is no firm basis, other than management's judgment,
on which to estimate the number of customers or the amount of revenues the
Company's planned operations will generate. Given the Company's limited
operating history, there is no assurance that it will be able to compete
successfully in the communications business.

The development and expansion of the Company's business will require
significant capital, operational and administrative expenditures, a substantial
portion of which are incurred before the realization of revenues. These capital
expenditures will result in negative cash flow until an adequate customer base
is established. Although its revenues have increased since its inception, the
Company has incurred significant increases in expenses associated with the
installation of switches and the expansion of its services and customer base.
The Company recorded a net loss of $10.8 million in 1997 and anticipates
recording significant net losses through 1999. There can be no assurance the
Company will achieve or sustain profitability or positive EBITDA in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISKS ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY

The expansion and development of MGC's operations will depend on, among
other things, the Company's ability to (i) purchase, install and operate
switches and obtain required interconnection agreements, (ii) identify, hire and
retain qualified personnel and (iii) provision local loops and lease access to
suitable transport networks, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions. In addition, MGC has experienced rapid growth
since its inception and management believes that sustained growth will place a
strain on operational, human and financial resources. The Company's ability to
manage its expansion effectively will also depend on the continued development
of plans, systems and controls for its operational, financial and management
needs. Given the Company's limited operating history, there can be no assurance
that the Company will be able to satisfy these requirements or otherwise manage
its growth effectively. The failure of MGC to satisfy these requirements could
have a material adverse effect on the Company's financial condition and its
ability to fully implement its expansion plans.

The Company's growth strategy also involves the following risks:

Implementation, Equipment and Suitable Interconnection and Collocation
Arrangements. An essential element of the Company's current strategy is the
provisioning of switched local service. In implementing its strategy, the
Company may utilize new technologies or may utilize existing technologies in new
applications. There can be no assurance that installation of the switches and
associated electronics necessary to implement the Company's business plan will
continue to be completed on a timely basis or that, during the testing of this
equipment, the Company will not experience technological problems that cannot be
resolved. In addition, the development and expansion of the Company's business
and its entry into new markets will be dependent on, among other things, its
ability to lease or purchase suitable sites, obtain equipment on a timely basis,
obtain sufficient blocks of telephone numbers, negotiate suitable
interconnection and collocation arrangements with ILECs on satisfactory terms
and conditions and finance such expansion. Collocation space is obtained from
the ILECs on a first come/first served basis. As a result, there can be no
assurance that the Company will be able to obtain collocation sites in the
markets it desires. These factors and others could adversely affect the
7
<PAGE> 12

expansion of the Company's customer base and commencement of operations in new
markets. If the Company is not able to expand its customer base or enter new
markets in accordance with its plans, the growth of its business would be
materially adversely affected.

Expansion Risk; Qualified Personnel. The Company expects to expand
rapidly. This growth will increase the operating complexity of the Company as
well as the level of responsibility for both existing and new management
personnel. In addition, the Company's business is managed by a small number of
key management and operating personnel, the loss of certain of whom could have a
material adverse impact on the Company's business. None of the Company's key
executives is a party to a long-term employment agreement and the Company does
not maintain key man insurance on its officers. The Company's ability to manage
its expansion effectively will require it to continue to implement and improve
its operational and financial systems and to expand, train and manage its
employee base. If the Company is unable to effectively manage its expansion or
attract and retain highly skilled and qualified personnel, the Company's
business could be materially adversely affected.

Reliance on Third Parties and Availability of UNEs. Because a key element
of its business and growth strategy is to lease transport capacity, the Company
is dependent upon the cooperation of ILECs and/or CAP/CLECs whose fiber optic
networks and local loops are being leased by the Company. The risks inherent in
this approach include, but are not limited to, negotiating and renewing
favorable interconnection and collocation agreements, timeliness of the ILECs or
CAP/CLECs in processing the Company's orders for customers who seek to utilize
the Company's service and maintenance of the unbundled network elements
("UNEs"). The ILECs have had little experience in providing UNEs and there can
be no assurance the ILECs will provide and maintain the UNEs in a prompt and
efficient manner. The Company's interconnection agreements currently provide for
the Company's connection and maintenance orders to receive attention at parity
with those of the ILEC's or other CAP/CLEC's customers and for the ILEC to
provide adequate trunking capacity to keep blockage within industry standards.
Accordingly, the Company and its customers are dependent on the ILEC and/or
CAP/CLEC to assure uninterrupted service. In Las Vegas, the Company has, from
time to time, experienced blockage in the delivery of calls from the ILEC to the
Company's switches due to inadequate trunk provisioning by the ILEC. Blocked
calls result in customer dissatisfaction which may result in the loss of
business. There can be no assurance that ILECs will comply with their network
provisioning requirements. Furthermore, there can be no assurance the rates to
be charged to the Company under the interconnection agreements will allow the
Company to offer low enough usage rates to attract a sufficient number of
customers and to operate the business on a profitable basis.

Information Systems and Automation. The Company employs a proprietary
management information system which the Company expects to be an important
factor in its success. If the management information system fails or is unable
to perform as expected, it would have a substantial adverse effect on the
Company. Furthermore, problems may be encountered with higher processing volumes
or with additional automation features, in which case, the Company might
experience system breakdowns, delays and additional unbudgeted expense to remedy
the defect or to replace the defective system with an alternative system.

Lack of New Service Acceptance by Customers. While CLECs targeting
business customers have had some success inducing customers to utilize an
alternative local exchange provider, the Company believes it is currently the
only ICP targeting residential customers in its markets. The success of the
Company will be dependent upon, among other things, the willingness of such
customers to accept the Company as an alternative provider of local, long
distance and data services. No assurance can be given that such acceptance will
occur and the lack of such acceptance could have a material adverse effect on
the Company.

Untested Collection Procedures. The Company has in the past experienced an
unacceptable level of uncollectible accounts and resulting bad debt expense. To
minimize its bad debt exposure, the Company has recently implemented a policy
generally requiring new customers to meet minimum credit standards or make
deposits. While the Company believes its current credit and deposit policies are
in line with industry standards, there can be no assurance that such policies
will be effective in achieving the desired reduction in uncollectible accounts.

8
<PAGE> 13

Products and Services. The Company currently focuses its efforts on
providing local and long distance communications services. In order to address
the needs of its target customers, the Company will be required to emphasize and
develop additional products and services, such as high speed data services. No
assurance can be given that the Company will be able to provide the range of
communication services that its target customers need or desire.

Acquisitions. The Company may acquire other businesses as a means of
expanding into new markets or developing new services. The Company is unable to
predict whether or when any prospective acquisitions will occur or the
likelihood of a material transaction being completed on favorable terms and
conditions. Such transactions involve certain risks including, but not limited
to: (i) difficulties assimilating acquired operations and personnel, (ii)
potential disruptions of the Company's ongoing business, (iii) the diversion of
resources and management time, (iv) the possibility that uniform standards,
controls, procedures and policies may not be maintained, (v) risks associated
with entering new markets in which the Company has little or no experience and
(vi) the potential impairment of relationships with employees or customers as a
result of changes in management. If an acquisition were to be made, there can be
no assurance that the acquired business would perform as expected.

SUBSTANTIAL LEVERAGE: INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES

The Company is highly leveraged. At December 31, 1997, the Company had
approximately $156.6 million in aggregate principal amount of indebtedness
outstanding. The degree to which the Company is leveraged could have important
consequences to stockholders of the Company, including the following: (i) a
substantial portion of the Company's cash flow from operations will be dedicated
to payment of the principal of and interest on its indebtedness, thereby
reducing funds available for other purposes, (ii) the Company's significant
degree of leverage could increase its vulnerability to changes in general
economic conditions or increases in prevailing interest rates, (iii) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes could
be impaired and (iv) the Company may be more leveraged than certain of its
competitors, which may be a competitive disadvantage.

For the year ended December 31, 1997, the Company had net losses of $10.8
million and incurred fixed charges of $5.7 million. The Company anticipates
earnings will be insufficient to cover fixed charges through 1999. In order for
the Company to meet its debt service obligations, the Company will need to
substantially improve its operating results. There can be no assurance the
Company's operating results will be of sufficient magnitude to enable the
Company to meet its debt service obligations. In the absence of such operating
results, the Company could face substantial liquidity problems and might be
required to seek additional financing through the issuance of debt or equity
securities; however, there can be no assurance the Company would be successful
in raising such financing, or the terms or timing thereof. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING

Expansion and development of the Company's business and services and the
development of new markets require significant capital expenditures. The Company
expects to fund its capital requirements through existing resources, debt or
equity financing and internally generated funds, including capital raised
through the sale of Common Stock in the Offering. The Company expects that to
continue to expand its business may require raising substantial additional
equity and/or debt capital. There can be no assurance, however, the Company will
be successful in raising sufficient debt or equity capital on terms it will
consider acceptable. In addition, the Company's future capital requirements will
depend upon a number of factors, including marketing expenses, staffing levels
and customer growth, as well as other factors that are not within the Company's
control, such as competitive conditions, government regulation and capital
costs. Failure to generate sufficient funds may require the Company to delay or
abandon some of its future expansion or expenditures, which would have a
material adverse effect on its growth and its ability to compete in the
communications industry.

9
<PAGE> 14

CONTROL OF THE COMPANY

As of March 20, 1998, Maurice J. Gallagher, Jr., Nield J. Montgomery,
Timothy P. Flynn and Robert L. and Carol A. Priddy owned, directly or
indirectly, in the aggregate, approximately 44.2% of the outstanding Common
Stock and voting power of the Company (assuming the conversion of the
outstanding Series A Convertible Preferred Stock into Common Stock).
Accordingly, such stockholders collectively will likely be able to control the
management policy of the Company, decide all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions and elect the Board
of Directors of the Company.

NORTEL CONTRACT

The Company is obligated to purchase 20 Nortel DMS 500 switches (three of
which have already been delivered) by the end of 1999. There can be no assurance
the Company will be able to utilize all of those switches in its business.

DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS

The Company's success in marketing its services to business and residential
users requires the Company to provide reliable service. The Company's networks
are subject to physical damage, power loss, capacity limitations, software
defects, breaches of security (by computer virus, break-ins or otherwise) and
other factors which may cause interruptions in service or reduced capacity for
the Company's customers. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on customer acceptance
and, therefore, on the Company's business, financial condition and results of
operations.

RAPID TECHNOLOGICAL CHANGES

The communications industry is subject to rapid and significant changes in
technology. While the Company believes that for the foreseeable future these
changes will not materially affect or hinder the Company's ability to acquire
necessary technologies, the effect of technological changes on the business of
the Company cannot be predicted. Thus, there can be no assurance technological
developments will not have a material adverse effect on the Company.

COMPETITION

In its existing markets and the markets into which it intends to expand,
the Company faces significant competition for its local telephone services,
including local exchange services, from ILECs, which currently dominate their
local telecommunications markets, and others. ILECs have long-standing
relationships with their customers which relationships may create competitive
barriers. Although CLECs as a whole tripled their customer lines in service in
1997 to 1.5 million lines, CLECs currently account for only 2.6% of all local
telephone revenues, according to FCC statistics. Furthermore, ILECs may have the
potential to subsidize competitive service from monopoly service revenues. In
addition, a continuing trend toward business combinations and alliances in the
communications industry may create significant new competitors to the Company.
The Company also faces and will face competition in the markets in which it
operates and in markets into which it intends to expand from one or more
CAP/CLECs and ICPs operating fiber optic networks and, possibly, from local
cable systems which may offer communication services. Many of the Company's
existing and potential competitors have financial, personnel and other resources
significantly greater than those of the Company.

The Company believes various legislative initiatives, including the
Telecommunications Act of 1996 (the "Act"), have removed most of the remaining
legislative barriers to local exchange competition. Nevertheless, in light of
the passage of the Act, regulators are also likely to provide ILECs with
increased pricing flexibility as competition increases. If ILECs are permitted
to lower their rates substantially or engage in excessive volume or term
discount pricing practices, the net income or cash flow of the Company could be
materially adversely affected.

10
<PAGE> 15

The Company competes with AT&T, MCI, Sprint and others in the long distance
services market. Additionally, recent federal legislation permits the Regional
Bell Operating Companies ("RBOCs") to provide in-region long distance services
once certain criteria are met. Once the RBOCs begin to provide such services,
they will be in a position to offer single source service similar to the service
the Company offers. In addition, AT&T, MCI and Sprint have entered, and other
interexchange carriers have announced their intention to enter, the local
exchange services market, which is facilitated by the Act's resale and UNE
provisions. AT&T recently has announced its intention to acquire a leading CLEC,
Teleport Communications Group, Inc., and MCI has agreed to be acquired by
WorldCom, which also has very substantial CLEC operations. 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 from the
RBOCs with respect to in-region long distance services or from AT&T, MCI, Sprint
or others with respect to local exchange services could have a material adverse
effect on the Company's business.

COMPETITIVE REACTION

Although the Company plans to offer rates for its services which are below
those currently charged by ILECs, ILECs or new competitors with greater capital
and resources than the Company may meet or undercut the Company's price
structure and prevent the Company from attaining the share of the local
communications market necessary to achieve profitable operations. The Company's
ability to meet price competition may depend on its ability to operate at costs
equal to or lower than its competitors or potential competitors. There is a risk
that competitors, perceiving the Company to lack capital resources, may undercut
the Company's rates or increase their services in an effort to force the Company
out of business. Competitors may also attempt to place their existing customer
base under long-term contractual agreements which may inhibit the Company's
ability to convert these users to its services. In addition, the success of the
Company will ultimately depend on management's ability to react expeditiously
and effectively to exigencies that have not been taken into account in the
Company's business plan.

REGULATION

The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of return
regulation, nor is it currently required to obtain FCC authorization for the
installation, acquisition or operation of its network facilities. The Company is
or will be generally subject to certification and tariff or price list filing
requirements for intrastate services by state regulators. Although passage of
the Act should result in increased opportunities for companies competing with
the ILECs, no assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the communications industry would not have a
material adverse effect on the Company. Furthermore, while the Act reduces
regulations 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. In
addition, although the Act provides incentives to ILECs to negotiate
interconnection agreements with local competitors, there can be no assurance the
ILECs will negotiate quickly with competitors such as the Company for the
required interconnection of the competitor's networks with those of the ILECs.

On December 31, 1997, a federal District Court in Texas ruled key sections
of the Act unconstitutional on the grounds that RBOCs were unfairly restricted
by the Act from providing interLATA service in the regions where they also
operate as ILECs until they could show that there was local exchange service
competition in those areas. This decision was immediately appealed by numerous
interexchange carriers ("IXCs") and has been stayed pending appeal. There can be
no assurance that these provisions of the Act, which are favorable to the
Company, will ultimately be determined to be constitutional.

The FCC may issue an order in 1998 permitting significant new pricing
flexibility to ILECs. In addition, the FCC has put in place access charge reform
rules which may over time result in a net decrease in the access charges paid by
IXCs to the ILEC for originating or terminating long distance traffic. To the
extent the ILECs are afforded increased pricing flexibility or access charges
are reduced, the ability of the Company to compete with ILECs for certain
services may be adversely affected. On May 8, 1997, the FCC issued an order
11
<PAGE> 16

establishing a new Universal Service support fund. The new Universal Service
support fund rules will be administered jointly by the FCC and state regulatory
authorities, many of which rules are still in the process of being formulated.
The net revenue effect on the Company of these rules is incalculable at this
time.

In some of the areas where the Company provides facilities based services,
the Company may be required to pay license or franchise fees based on a
percentage of gross revenues. There is no assurance that certain local
government authorities will not seek to impose such fees in the future.

LACK OF PRIOR PUBLIC MARKET

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

SUBSEQUENT REGISTRATION OF STOCK; SHARES ELIGIBLE FOR FUTURE SALE

The holders of the Warrants have demand registration rights which may be
exercised by at least 25% of such holders not earlier than 90 days following
consummation of the Offering and if so exercised could result in a registration
statement covering the 1,438,205 shares of Common Stock that may be issued upon
the exercise of such Warrants being filed. In addition, the holders of the
6,571,427 outstanding shares of Series A Convertible Preferred Stock have demand
registration rights which may be exercised by a majority in interest of such
holders not earlier than 180 days after the consummation of the Offering and if
so exercised could result in a registration statement covering the 6,571,427
shares of Common Stock issuable upon the conversion of the Series A Convertible
Preferred Stock being filed. The holders of the Warrants and the holders of the
Series A Convertible Preferred Stock also have the right to have the shares of
Common Stock issuable upon the exercise of the Warrants or upon the conversion
of the Series A Convertible Preferred Stock included in any registration
statement filed by the Company in the future. See "Description of Securities --
Registration Rights of Certain Security Holders." Sales of such securities may
have an adverse effect on the market price of the outstanding Common Stock.

During the period from August 1998 through January 1999, substantially all
of the Company's Common Stock that is not sold in the Offering and that is not
registered pursuant to the agreements described above will become eligible for
sale in the open market subject to the volume and manner of sale restrictions of
Rule 144 of the Securities Act. This includes the 6,571,427 shares of Common
Stock issuable upon conversion of the Series A Convertible Preferred Stock upon
consummation of the Offering. Sales and potential sales of substantial amounts
of the Company's Common Stock in the open market pursuant to Rule 144 of the
Securities Act, or otherwise could adversely affect the prevailing market prices
for the Common Stock. See "Description of Securities -- Shares Eligible for
Future Sale."

LACK OF DIVIDEND HISTORY

The Company has never declared or paid any cash dividends on its Common
Stock and does not currently expect to declare any such dividends. Payment of
any future dividends will depend upon the earnings and capital requirements of
the Company, the Company's debt facilities and other factors the Board of
Directors considers appropriate. The Company intends to retain its earnings, if
any, to finance the development and expansion of its business. The Company's
ability to declare and pay dividends on its Common Stock is restricted by
certain covenants in the Indenture governing the Company's 13% Senior Secured
Notes due 2004 (the "Senior Secured Notes").

12
<PAGE> 17

DILUTION

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

YEAR 2000 RISK

The Company has implemented a Year 2000 program to ensure that the
Company's computer systems and applications will function properly beyond 1999.
The Company does not expect to incur significant expenditures to address this
issue. The ability of third parties with whom the Company transacts business to
adequately address their Year 2000 issues is outside of the Company's control.
There can be no assurance that the failure of the Company or such third parties
to adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.

FORWARD LOOKING STATEMENTS

The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the reader of the
forward-looking statements (cautionary statements), such as the Company's plans
to expand to its existing network or to commence service in new areas, the
market opportunity presented by the Company's target markets, the Company's
anticipation of installation of switches or the provision of local exchange and
long distance services, and statements regarding the development of the
Company's business, that the estimate of market sizes and addressable markets
for the Company's services and products, the Company's anticipated capital
expenditures, the effect of regulatory reform and other statements contained in
this Prospectus regarding matters that are not historical facts, are only
estimates or predictions. No assurance can be given future results will be
achieved; actual events or results may differ materially as a result of risks
facing the Company or actual events differing from the assumptions underlying
such statements. Such risks and assumptions include, but are not limited to, the
Company's ability to successfully market its services to current and new
customers, generate customer demand for its services in the particular markets
where it plans to market services, access markets, obtain suitable locations for
its switches, install switches, negotiate suitable interconnect agreements with
the ILECs and secure adequate collocation in the COs of the ILECs in its
targeted markets, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions, as well as regulatory, legislative and
judicial developments that could cause actual results to vary materially from
the future results indicated, expressed or implied in such forward-looking
statements. All written and oral forward-looking statements made in connection
with this Prospectus which are attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by these cautionary
statements. The safe harbor for forward-looking statements provided in the
Private Securities Litigation Reform Act of 1995 does not apply to initial
public offerings.

13
<PAGE> 18

USE OF PROCEEDS

The net proceeds to the Company from the Offering (based on an assumed
initial public offering price of $ per share) are estimated to be
approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and other offering expenses payable by
the Company. The Company intends to use the net proceeds from the Offering for
capital expenditures related to the purchase and installation of
telecommunications switches and associated equipment and for general corporate
purposes, including working capital related to its expansion into new markets.
In addition, the Company may use a portion of the net proceeds from the Offering
for acquisitions, although the Company is not currently involved in any
acquisition discussions or negotiations. Pending such uses, the net proceeds
from the Offering will be invested in short-term, investment grade securities.

DIVIDEND POLICY

The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant. In addition, the Company's ability to declare and pay
dividends on the Common Stock is restricted by certain covenants in the
Indenture governing its outstanding Senior Secured Notes.

14
<PAGE> 19

CAPITALIZATION

The following table shows the total capitalization, cash and cash
equivalents, investments held to maturity and restricted investments of the
Company as of December 31, 1997 and as adjusted to give effect to the receipt of
the net proceeds of the Offering, the sale of 1,422,857 shares of Series A
Convertible Preferred Stock in January 1998 and the conversion of the Series A
Convertible Preferred Stock upon completion of the Offering. This table should
be read in conjunction with the financial statements and related notes appearing
elsewhere herein.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 45,054 $
Investments held to maturity................................ 57,710 57,710
Restricted investments...................................... 57,574 57,754
-------- --------
Total cash and investments............................. $160,338 $
======== ========
13% Senior Secured Notes due 2004........................... 156,118 156,118
Other long-term debt, including current maturities.......... 519 519
Series A Convertible Preferred Stock, $.001 par value;
5,148,570 issued and outstanding at December 31, 1997..... 16,665 --
Stockholders' equity
Common Stock, $.001 par value; 100,000,000 shares
authorized; 14,666,000 issued and outstanding at
December 31, 1997; issued and outstanding, as
adjusted............................................... 15
Additional paid in capital................................ 22,112
Notes receivable from stockholders for issuance of Common
Stock.................................................. (688) (688)
Accumulated deficit....................................... (12,463) (12,463)
-------- --------
Total stockholders' equity............................. 8,976
-------- --------
Total capitalization.............................. $182,278 $
======== ========
</TABLE>

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

(1) Gives effect to the issuance of Common Stock by the Company in the Offering,
to the issuance in January 1998 of 1,422,857 shares of Series A Convertible
Preferred Stock resulting in gross proceeds to the Company of approximately
$4,980,000 and the conversion of the outstanding Series A Convertible
Preferred Stock into Common Stock on a one for one basis upon consummation
of the Offering.

(2) Based on assumed offering price of $ , the midpoint of the range of
the prices set forth on the cover page of this Prospectus.

15
<PAGE> 20

DILUTION

DILUTION TO INVESTORS IN THE COMMON STOCK

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

On December 31, 1997, the Company's net tangible book value was
approximately $20.2 million and the per share net tangible book value based on
19,814,570 shares of Common Stock (which includes 5,148,570 shares of Series A
Convertible Preferred Stock which will be automatically converted into shares of
Common Stock upon consummation of the Offering) was approximately $1.02 per
share.

As of December 31, 1997, without taking into account any changes in the
Company's net tangible book value subsequent to that date other than to give
effect to the sale of the Common Stock offered hereby and the conversion of the
Series A Convertible Preferred Stock based on an assumed offering price of
$ per share (after deducting the estimated offering expenses, including
underwriting discounts and commissions), the pro forma net tangible book value
of each of the assumed outstanding shares of Common Stock would have been
$ per share after the Offering. Therefore, investors in the Common
Stock would have paid $ for a share of Common Stock having a net
tangible book value of approximately $ per share after the Offering;
that is, their investment would have been diluted by approximately $
per share. At the same time, existing stockholders would have realized an
increase in net tangible book value of $ per share after the Offering
without further cost or risk to themselves. The following table illustrates this
per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Common
Stock..................................................... $
Net tangible book value per share of Common Stock before
the Offering........................................... $1.02
Increase in net tangible book value per share of Common
Stock attributable to investors in the
Offering(1)(2)......................................... $
Pro forma net tangible book value per share of Common Stock
after the Offering(1)(2).................................. $
-------
Dilution to new investors(2)................................ $
=======
</TABLE>

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

(2) Assumes that none of the Company's outstanding options or warrants are
exercised and assumes the conversion of 6,571,427 shares of Series A
Convertible Preferred Stock which will be automatically converted into
shares of Common Stock upon consummation of the Offering. See "Management --
Stock Option Plan" and "Description of Securities -- Outstanding Warrants."

16
<PAGE> 21

COMPARISON OF CAPITAL CONTRIBUTIONS

The following table shows, on a pro forma basis as of December 31, 1997,
the number of shares purchased from the Company, the total cash and other
consideration paid to the Company and the average price paid per share based on
footnotes (1) and (2) on the preceding page.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ --------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE(1)
---------- ---------- ------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investors in the Offering............ % $ % $
---------- --- ------- --- -----
Current stockholders(2).............. 19,814,570 % $38,928 % $1.96
---------- --- ------- --- -----
Totals..................... 100% $ 100%
========== === ======= ===
</TABLE>

- ---------------
(1) The average price per share is calculated by dividing the total
consideration paid by the total number of shares purchased.

(2) Includes holders of the Series A Convertible Preferred Stock which will be
converted into Common Stock on a one for one basis upon consummation of the
Offering.

17
<PAGE> 22

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following selected financial data of the Company as of and for the
years ended December 31, 1996 and 1997, under the captions "Statement of
Operations Data," "Other Financial Data" and "Balance Sheet Data" are derived
from the financial statements of the Company. The financial statements for the
year ended December 31, 1996 have been audited by KPMG Peat Marwick LLP and the
financial statements for the year ended December 31, 1997 have been audited by
Arthur Andersen LLP. These financial statements are included elsewhere in this
Prospectus. The following selected financial data of the Company for each
quarter during 1997 under the captions "Statement of Operations Data" and "Other
Financial Data" are derived from the unaudited financial statements of the
Company. The unaudited financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of its financial position and the results of operations for these
periods. The information presented below under the caption "Operating Data" is
unaudited. This data should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere in
this Prospectus as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

18
<PAGE> 23

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
---------------------------
1995 1996 1997
---- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $-- $ 7,897 $ 45,054
Investments held to maturity................................ -- -- 57,710
Restricted investments...................................... -- -- 57,574
Property and equipment, net................................. -- 3,250 24,617
Total assets................................................ 1 12,339 191,977
Long-term debt, including current maturities................ -- -- 156,637
Series A Convertible Preferred Stock(5)..................... -- -- 16,665
Total stockholders' equity.................................. 1 10,792 8,976
</TABLE>

(4) The Company had 22,446 Equivalent Access Lines in service at December 31,
1997.

(5) All of the Series A Convertible Preferred Stock will convert on a one for
one basis to Common Stock upon consummation of the Offering.

19
<PAGE> 24

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

OVERVIEW

MGC began providing competitive local exchange services to small business
and residential users in December 1996, and in February 1998, began offering
long distance services in its existing markets. MGC's network strategy consists
of purchasing and deploying switching equipment, collocating equipment in ILECs'
COs and leasing fiber optic transmission capacity from ILECs and other providers
of communications transport services. Currently, the Company has switches fully
operational in Las Vegas and in selected suburban areas of Atlanta and Los
Angeles.

The Company's 1997 revenues were primarily generated from non-recurring
(principally installation charges) and recurring local phone service and
switched access billings. As a result of the introduction of long distance and
data services in late 1997, the Company expects that a meaningful portion of its
revenues will be generated from such services beginning in 1998.

The Company's principal operating expenses consist of: direct costs,
operating costs and depreciation. Direct costs consist of access charges, line
installation expenses, transport expenses, engineering costs and long distance
expenses. Operating costs are comprised of sales and marketing, customer service
and general and administrative expenses. As the Company expands into new
markets, both direct costs and selling, general and administrative costs
increase prior to achieving significant revenue. Significant levels of marketing
activity may be necessary in new markets in order for the Company to build a
customer base large enough to generate sufficient revenues to offset such
marketing expenses. In addition, selling, general and administrative costs may
increase in the short term after the Company enters a new market because many of
the fixed costs of providing service in new markets are incurred before
significant revenue can be expected from those markets.

The development and expansion of the Company's business will require
significant expenditures. The Company's capital expenditures primarily consist
of the purchase of communications switching and associated equipment, the
purchase of land for host switching sites and the construction of buildings or
leasehold improvements to house host switches. As part of its network strategy,
the Company has made the strategic decision to purchase and install Nortel DMS
500 switches in each of its target markets. This strategy initially increases
its level of capital expenditures and operating losses. However, over the long
term, the Company believes this will enhance the Company's financial
performance.

The Company has experienced operating losses and generated negative
operating cash flow since inception and expects to continue to generate negative
operating cash flow through the year 2000 and to incur significant operating
losses during the next several years while it installs and expands its networks
and develops its business. There can be no assurance the Company's revenue or
customer base will grow or that the Company will be able to achieve or sustain
positive cash flow.

RESULTS OF OPERATIONS

The Company's operations prior to December 1996 were limited to start-up
activities and, as a result, the Company's revenues prior to December 1996
(limited to interest earned on cash deposits) and expenditures for such period
are not indicative of anticipated revenues which may be attained or expenditures
which may be incurred by the Company in future periods. The Company did not
begin revenue generating operations until December 1996. As a result, any
comparison of the three months or year ended December 31, 1997 with the three
months or year ended December 31, 1996 would not be meaningful. Consequently,
the following is a comparison of the fourth quarter 1997 with the third quarter
1997.

Quarter over Quarter Comparison -- December 31, 1997 vs. September 30, 1997

Total operating revenues for the quarter ended December 31, 1997 were $1.9
million as compared to $1.1 million for the quarter ended September 30, 1997.
The increase from the third quarter 1997 to the fourth quarter 1997 is a result
of the increase in the number of lines placed in service during the fourth
quarter. The

20
<PAGE> 25

Company had 15,590 lines in service at the end of the fourth quarter as compared
to 12,710 lines in service at the end of the third quarter.

Cost of operating revenues for the quarter ended December 31, 1997 was $1.4
million as compared to $1.2 million for the quarter ended September 30, 1997.
The increase from quarter to quarter is due to the increased number of lines
placed in service during the fourth quarter 1997.

For the quarter ended December 31, 1997, selling, general and
administrative expenses totaled $2.5 million as compared to $1.8 million for the
quarter ended September 30, 1997. These expenses were incurred in connection
with the initial marketing of the Company's services and the continued buildout
of the Company's network. These expenses consisted primarily of payroll
expenses, provision for bad debts, professional fees and rents.

Depreciation and amortization expense includes depreciation on switching
equipment as well as general property and equipment. For the quarter ended
December 31, 1997 depreciation and amortization was $0.5 million as compared to
$0.4 million for the quarter ended September 30, 1997. This increase is a result
of the Company's placing additional assets in service during the fourth quarter
in accordance with the planned buildout of its network.

Interest expense for fourth quarter 1997 totaled $5.4 million as compared
to $0.1 million for third quarter 1997. This amount is attributable to interest
incurred on the Senior Secured Notes issued by the Company in late September
1997.

Interest income for the quarter ended December 31, 1997 was $2.2 million as
compared to $0.1 million for the quarter ended September 30, 1997. The increase
is attributable to earnings on investments made in late September 1997 with the
proceeds from the issuance of Senior Secured Notes.

The Company incurred net losses of $5.7 million and $2.3 million during
fourth quarter 1997 and third quarter 1997, respectively.

Year ended December 31, 1997

During the year ended December 31, 1997, the Company generated $3.8 million
in operating revenues, had cost of operating revenues of $3.9 million and
incurred selling, general and administrative expenses of $6.4 million in
connection with the initial marketing of its services and the continued buildout
of its network. These expenses consisted primarily of payroll expenses,
provision for bad debts, professional fees and rents.

During the year ended December 31, 1997, the Company recorded bad debt
expense of approximately $0.7 million primarily because its credit procedures
for residential customers were not sufficiently stringent. To begin remedying
the situation, a cash prepayment policy for prospective customers was introduced
in October 1997 and approximately 3,900 lines were disconnected for non-payment.
Effective January 1, 1998, the Company enhanced its credit procedures by
introducing credit scoring via a nationally recognized credit verification
service and, where appropriate, by requiring deposits prior to initiating
service. Additional personnel have been dedicated to collection and credit
monitoring to seek to improve the quality of the Company's accounts receivable.

Depreciation and amortization expense for the year was $1.3 million as a
result of the Company's assets placed in service in accordance with the planned
buildout of its network.

Interest expense for the year ended December 31, 1997 totaled $5.5 million.
This amount is attributable to interest incurred on the Senior Secured Notes
issued by the Company in late September 1997.

The Company had interest income of $2.5 million for the year ended December
31, 1997, as a result of earnings on investments made with the proceeds of its
private placements.

As a result, the Company incurred a net loss for the year of $10.8 million.
The loss is primarily attributable to the expenses incurred during the period in
connection with the continued development of the Company's business.

21
<PAGE> 26

Year ended December 31, 1996

During the year ended December 31, 1996, the Company generated $1,000 in
operating revenues as a result of commencing service during the month of
December. The Company had cost of operating revenues of $0.3 million which
represents primarily fixed costs. In addition, the Company incurred other
operating expenses, including depreciation and amortization, of $1.3 million in
connection with the commencement of operations and the buildout of its network.
These expenses consisted primarily of payroll expenses, professional fees,
expenses related to the introduction of initial service and a one-time write-off
of purchased software.

The Company earned interest income in the period of $0.1 million.

As a result, the Company incurred a net loss in the period of $1.5 million.
This loss is primarily attributable to the expenses incurred in connection with
the initial development of the Company's business.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operations have required substantial capital investment for
the purchase of communications equipment and the design and development of the
Company's networks. Capital expenditures for the Company were $3.7 million and
$22.6 million in 1996 and 1997, respectively. The Company expects it will
continue to have substantial capital requirements in connection with the (i)
purchase of switches necessary for expansion of local exchange services and
provisioning of long distance services, and (ii) development of new markets.
Management expects capital expenditures of $84.6 million for 1998.

The Company has funded a substantial portion of these expenditures through
the private sales of debt and equity securities. From its inception through
December 31, 1997, the Company raised approximately $17.1 million from private
sales of Common Stock.

In September 1997, the Company completed an offering of units consisting of
$160.0 million of Senior Secured Notes and warrants to purchase 1,438,205 shares
of Common Stock (after giving effect to certain anti-dilution adjustments). At
the closing of the sale of the Senior Secured Notes, the Company used
approximately $56.8 million of the net proceeds of the sale of the Senior
Secured Notes to purchase a portfolio of securities that has been pledged as
security to cover the first six interest payments on the Senior Secured Notes
and the Company used approximately $3.1 million of the net proceeds to pay
accounts payable incurred in connection with the acquisition of equipment. In
addition, the Company has granted the holders of the Senior Secured Notes a
security interest in certain of the Company's communications equipment.

In November 1997 and January 1998, the Company issued an aggregate of
6,571,427 shares of Series A Convertible Preferred Stock at $3.50 per share for
net proceeds of $21.7 million. Each share of Series A Convertible Preferred
Stock will be converted into one share of Common Stock upon consummation of the
Offering.

The substantial capital investment required to initiate the Company's
services and the funding of the Company's initial operations has resulted in
negative cash flow since the Company's inception. This negative cash flow is a
result of the need to establish the Company's switching network in anticipation
of connecting revenue generating customers. The Company expects to continue to
produce negative cash flow through the year 2000 due to expansion activities
associated with the development of the Company's markets. There can be no
assurance the Company will attain break-even cash flow in subsequent periods.
Until sufficient cash flow is generated, the Company will be required to utilize
its current and future capital resources to meet its cash flow requirements and
may be required to issue additional debt and/or equity securities. Based upon
its current business plan, the Company does not expect to require additional
financing before the year 2000. There can be no assurance the Company will not
require additional financing at an earlier date or as to the availability or the
terms upon which such financing might be available. Moreover, the indenture
governing the Senior Secured Notes imposes certain restrictions upon the
Company's ability to incur additional indebtedness or issue preferred stock.

22
<PAGE> 27

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.

The Company believes its internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company is in the process of contacting all of its significant suppliers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 is currently assessing the
impact on the financial statements for the year ended December 31, 1997 and for
the year ended December 31, 1996 and believes that SFAS No. 130 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.

23
<PAGE> 28

BUSINESS

THE COMPANY

The Company is a rapidly growing integrated communications services
provider 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 February
28, 1998, the Company had 22,724 end user access lines sold of which 18,345
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 of five incumbent local exchange carriers 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 if
the Company built its own fiber optic infrastructure. Further, upon receiving
state certification as a competitive local exchange carrier 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.

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 modems. The
Company has recently deployed a dedicated leased ATM network backbone connecting
its service territories and has installed Nortel's Internet Thruway hardware
product which eliminates the need for an Internet service provider 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 hardware product will also be able to offer its services in remote
cities where the Company is located without the traditional upfront investment
in modem hardware in each remote location.

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 operations support system is a
critical component of MGC's service goal, the Company has installed a fully
automated and proprietary operations support and management information system
which it believes will provide significant competitive advantage. The Company's
operations support 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.

24
<PAGE> 29

BUSINESS STRATEGY

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

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 backbone as an alternative long distance network
transport solution.

Provide Superior Customer Service. The Company utilizes a centralized team
of highly trained customer sales and service representatives to coordinate
initial residential inquiries and orders and post-

25
<PAGE> 30

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, personnel and related training than if call centers were maintained in
each market.

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 and BankServ. Nield J. Montgomery, CEO and President, has over
35 years of telephone experience, most recently with ICG Communication, Inc.
Other executives have held senior management positions at major
telecommunications companies, including, among others, Sprint, Centel, NYNEX,
Contel, GTE and MCI.

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 ("basic telephone services"). These
services are required by virtually all users of telecommunications. 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).

26
<PAGE> 31

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 business, including COCOT and
ISP, prospects. 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 nine markets in
1999. These markets were chosen in part because of their pro-competitive
regulatory environments.

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 February 28, 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.

27
<PAGE> 32

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 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
28
<PAGE> 33

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 loops 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 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 $4.4 million to
increase network capacity to approximately 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 premise 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
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<PAGE> 34

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 expects to expand its agreement with Sprint to cover its
operations in Chicago. 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 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
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<PAGE> 35

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 to build an exclusively
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.

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 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
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<PAGE> 36

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 telecommunications 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 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.

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GOVERNMENT REGULATIONS

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 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 its
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
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<PAGE> 38

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 February 28, 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 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

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<PAGE> 39

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 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.

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.

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<PAGE> 40

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 February 28, 1998, there were 160 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> 41

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.............................. 47 Director
Jack Hancock.................................. 67 Director
David Kronfeld................................ 50 Director
Thomas Neustaetter............................ 46 Director
Mitchell Allee................................ 56 Vice President -- Information Technology,
Chief Information Officer
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>

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 1989 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 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.

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<PAGE> 42

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 Co., 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 telecommunications 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.

MITCHELL ALLEE has served as Vice President -- Information Technology and
Chief Information Officer of the Company since July 1997. Although Mr. Allee is
expected to devote the majority of his time to the Company pursuant to an
independent contractor agreement with Palm Centre Drive, Inc. ("PCDI"), he will
continue to direct CMS Solutions ("CMS"), a company which he owns and serves as
president. Since its founding in 1985, CMS has been a software development
company specializing in high volume financial transaction software. CMS clients
have ranged from the smallest public utility district in California to Unocal
Corporation where CMS developed a nationwide chemical distribution and
accounting system. CMS also developed a ticketless reservation system for
ValuJet.

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 telecommunications 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 telecommunications 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.

38
<PAGE> 43

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. 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
39
<PAGE> 44

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.

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) -- 600,000 --
Thomas G. Keough........................ 1997 $105,769 $10,000 -- $21,713(2)
Vice President -- Sales 1996 -- -- 80,000 --
Michael E. Burke........................ 1997 $100,000 $10,000 -- $ 2,876(2)
Vice President -- Network Operations 1996 3,846 -- 60,000 $ 250(2)
Michael D. English (3).................. 1997 $100,000 -- -- --
Vice President -- Eastern Region 1996 11,923 -- 60,000 --
Kent F. Heyman.......................... 1997 $ 90,000 $10,000 -- --
Vice President and General Counsel 1996 48,462 -- 80,000 --
</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 800,000 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.

40
<PAGE> 45

Mitchell Allee. Mitchell Allee has exercised certain rights to acquire
200,000 shares of Common Stock at $2.00 per share and an additional 175,000
shares of Common Stock at $2.50 per share. The Company has agreed to finance
over a period of three years the purchase price of the shares purchased at $2.50
per share. A prorated portion of such shares is subject to repurchase at their
cost if Mr. Allee's engagement with the Company is terminated (other than as a
result of his death or disability) prior to June 2000.

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
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 $3.50 to $5.00 per share. 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 4,400,000 shares of Common Stock are reserved for issuance under the
Plan. As of March 20, 1998, options to purchase 2,136,200 shares have been
granted under the Plan. As of March 20, 1998, 12,000 options issued under the
Plan have been exercised and options to purchase 127,000 shares have lapsed. At
such date, options to purchase 1,997,200 shares were outstanding under the Plan
at an average exercise price of $1.90 per share. Options for up to 2,402,800
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.

41
<PAGE> 46

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................ -- -- 120,000E $ 277,200E
-- -- 480,000U $1,108,800U
Thomas G. Keough................... -- -- 16,000E $ 12,960E
-- -- 64,000U $ 51,840U
Michael E. Burke................... -- -- 12,000E $ 21,720E
-- -- 48,000U $ 86,880U
Michael D. English................. -- -- 12,000E $ 21,720E
-- -- 48,000U $ 86,880U
Kent F. Heyman..................... -- -- 16,000E $ 28,960E
-- -- 64,000U $ 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 $2.81 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.

42
<PAGE> 47

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of March 20, 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)................................ 5,311,500 24.3%
David Kronfeld(3)........................................... 1,714,286 7.8%
Timothy P. Flynn(4)......................................... 1,491,500 6.8%
Robert L. and Carol A. Priddy(5)............................ 1,482,500 6.8%
Nield J. Montgomery(6)...................................... 1,380,000 6.3%
Circle F Ventures, LLC(7)................................... 1,250,000 5.7%
Thomas Neustaetter(8)....................................... 1,142,857 5.2%
Wind Point Partners III, L.P.(9)............................ 1,142,857 5.2%
Jack L. Hancock(10)......................................... 54,000 *
All Executive Officers and Directors as a Group (19
persons)(2)(3)(4)(6)(8)(10)(11)........................... 12,946,372 58.6%
</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 20,000 shares of Common Stock which are
presently exercisable, 5,212,500 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 41,500 shares of Series A Convertible Preferred Stock which will be
converted into Common Stock on a one for one basis upon the consummation of
the Offering. Mr. Gallagher's address is 3301 N. Buffalo Drive, Las Vegas,
Nevada 89129.

(3) Includes 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"), which Series A Convertible Preferred Stock will be
converted into Common Stock on a one for one basis upon the consummation of
the Offering. JK&B Management Co., 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 Co., L.L.C., 205 North
Michigan, Suite 808, Chicago, Illinois 60601. Mr. Kronfeld is a general
partner of BCV.

(4) Includes options to purchase 4,000 shares which are presently exercisable.
Includes 170,000 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 45,000 shares of Series A Convertible Preferred
Stock which will be converted into Common Stock on a one for one basis upon
consummation of the Offering. Mr. Flynn's address is 6900 Westcliff Drive,
Suite 505, Las Vegas, Nevada 89128.

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

(6) Includes options to purchase 120,000 shares which are presently
exercisable. Mr. Montgomery's address is 3301 N. Buffalo Drive, Las Vegas,
Nevada 89129.

43
<PAGE> 48

(7) Includes 250,000 shares 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) Includes 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. The Series A Convertible
Preferred Stock will be converted into Common Stock on a one for one basis
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) Includes 1,142,857 shares of Series A Convertible Preferred Stock which
will be converted into Common Stock on a one for one basis 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 4,000 shares which are presently exercisable.

(11) Includes options to purchase 127,000 shares owned by Executive Officers not
named above which are presently exercisable.

44
<PAGE> 49

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 PCDI, a company owned and
operated by Mitchell Allee, an officer and stockholder of the Company, to
provide, support and maintain the Company's proprietary management information
computer system. Management believes that the terms of the agreement with PCDI
are at competitive prices and terms. During 1997, the Company paid $640,000 to
PCDI 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 150,000 shares of Common
Stock at $.01 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 $.01 per
share as follows: Gallagher -- 37,500 shares, Flynn -- 37,500 shares and
Priddy -- 37,500 shares.

In September 1997, Mitchell Allee purchased 200,000 shares of Common Stock
from the Company for cash in the amount of $400,000 and an additional 175,000
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 50,000 shares of Common Stock
from the Company for cash in the amount of $100,000 and an additional 100,000
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. -- 92,500 shares at a purchase price of $185,000;
Michael Burke -- 50,000 shares at a purchase price of $100,000; Thomas
Keough -- 100,000 shares at a purchase price of $200,000; and Kent
Heyman -- 25,000 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.
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.

45
<PAGE> 50

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................................. 20,000 -- $100,000
David S. Clark................................... 22,000 $ 10,000 $100,000
Kent F. Heyman................................... 30,000 $ 50,000 $100,000
James J. Hurley, III............................. 30,000 $ 50,000 $100,000
Thomas G. Keough................................. 31,000 $ 55,000 $100,000
James Mitchell................................... 75,000 $ 87,500 $175,000
Carol A. Mittwede................................ 30,000 $ 50,000 $100,000
Mark W. Peterson................................. 20,000 -- $100,000
David A. Rahm.................................... 20,000 -- $100,000
Walter J. Rusak.................................. 125,000 $250,000 $375,000
Linda M. Sunbury................................. 22,000 $ 10,000 $100,000
</TABLE>

The purchase price for all purchases was $5.00 per share except that James
Mitchell's shares were purchased at $3.50 per share. 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."

46
<PAGE> 51

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 100,000,000 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, 14,828,000
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.

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. Each share of the
Series A Convertible Preferred Stock will be automatically converted into one
share of Common Stock 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, there are outstanding warrants
("Warrants") to purchase 1,438,205 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 increased to 1,438,205
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.
Each Warrant entitles the holder to purchase the specified number of shares of
Common Stock at a price of $.01 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.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
shares of Common Stock. Of these shares, the 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 21,880,827 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

47
<PAGE> 52

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 21,880,827 shares of outstanding Common
Stock, 14,391,000 shares will qualify for sale under Rule 144 by September 30,
1998, and an additional 6,899,827 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 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 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 all 6,571,427 shares of Series A Convertible Preferred Stock
outstanding (all of which were purchased from the Company under private
placements of stock in November 1997 and January 1998) and the holders of
Warrants to purchase 1,438,205 shares of Common Stock (all of which were
acquired from the Company in a private placement during September 1997 of units
consisting of the Company's Senior Secured Notes and the Warrants) have certain
piggyback registration rights under agreements with the Company.

48
<PAGE> 53

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 .

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 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

49
<PAGE> 54

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.

50
<PAGE> 55

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.............................................
=========
</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 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.

The Company's current stockholders, holding an aggregate of shares
of Common Stock, have agreed pursuant to lock-up agreements not to sell or offer
to sell or otherwise dispose of any shares of Common Stock currently held by
them, any right to acquire any shares of Common Stock or any securities
exercisable for or convertible into any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Bear, Stearns & Co. Inc.

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

51
<PAGE> 56

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 "MGCC." 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 135,714 shares of Series A Convertible Preferred Stock
in the January 1998 Private Placement (such shares totaling less than 2.07% 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 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.

52
<PAGE> 57

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 60,000 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 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.

53
<PAGE> 58

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 December 31, 1997 and 1996............. F-4
Statements of Operations for the years ended December 31,
1997 and 1996............................................. F-5
Statements of Redeemable Preferred Stock and Stockholders'
Equity for the years ended December 31, 1997 and 1996..... F-6
Statements of Cash Flows for the years ended December 31,
1997 and 1996............................................. F-7
Notes to Financial Statements............................... F-8
</TABLE>

F-1
<PAGE> 59

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> 60

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> 61

MGC COMMUNICATIONS, INC.

BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,054 $ 7,897
Investments held to maturity.............................. 7,797 --
Restricted investments.................................... 18,482 --
Amounts receivable for shares issued...................... -- 1,153
Trade accounts receivable, less allowance for doubtful
accounts of $216 and $0 at December 31, 1997 and 1996,
respectively........................................... 1,200 10
Prepaid expenses.......................................... 277 23
-------- -------
Total current assets.............................. 72,810 9,083
Property and equipment, net................................. 24,617 3,250
Investments held to maturity................................ 49,913 --
Restricted investments...................................... 39,092 --
Deferred financing costs, net of amortization of $198....... 5,448 --
Other assets................................................ 97 6
-------- -------
Total assets...................................... $191,977 $12,339
======== =======
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 381 $ --
Accounts payable:
Trade.................................................. 462 76
Property and equipment................................. 3,123 1,372
Accrued interest.......................................... 5,328 --
Accrued other expenses.................................... 786 99
-------- -------
Total current liabilities......................... 10,080 1,547
Senior Secured Notes, net of unamortized discount of
$3,882.................................................... 156,118 --
Other long-term debt........................................ 138 --
-------- -------
Total liabilities................................. 166,336 1,547
-------- -------
Commitments and contingencies
Redeemable preferred stock:
8% Series A convertible preferred stock, 6,571,450 shares
authorized, 5,148,570 issued and outstanding........... 16,665 --
Stockholders' equity:
Preferred stock, 43,428,550 shares authorized but
unissued............................................... -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 14,666,000 and 11,960,000 shares issued and
outstanding............................................ 15 12
Additional paid-in capital................................ 22,112 12,271
Accumulated deficit....................................... (12,463) (1,491)
-------- -------
9,664 10,792
Notes receivable from stockholders for issuance of common
stock.................................................. (688) --
-------- -------
Total stockholders' equity........................ 8,976 10,792
-------- -------
Total liabilities, redeemable preferred stock and
stockholders' equity............................. $191,977 $12,339
======== =======
</TABLE>

See accompanying notes to financial statements.
F-4
<PAGE> 62

MGC COMMUNICATIONS, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
Telecommunication services:
Operating revenues........................................ $ 3,791 $ 1
---------- ---------
Operating expenses:
Cost of operating revenues (excluding depreciation)....... 3,928 305
Selling, general and administrative....................... 6,440 841
Depreciation and amortization............................. 1,274 54
Write-off of purchased software........................... -- 355
---------- ---------
11,642 1,555
---------- ---------
Loss from operations................................... (7,851) (1,554)
Other income (expense):
Interest income........................................... 2,507 63
Interest expense (net of amount capitalized).............. (5,492) --
---------- ---------
Net loss............................................... (10,836) (1,491)
Accrued preferred stock dividend............................ (136) --
---------- ---------
Net loss applicable to common stockholders.................. $ (10,972) $ (1,491)
========== =========
Basic and diluted loss per share of common stock............ $ (.78) $ (1.27)
========== =========
Basic and diluted weighted average shares outstanding....... 14,098,318 1,178,932
========== =========
</TABLE>

See accompanying notes to financial statements.
F-5
<PAGE> 63

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

See accompanying notes to financial statements.
F-6
<PAGE> 64

MGC COMMUNICATIONS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (10,836) $(1,491)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,274 54
Write-off of purchased software........................ -- 355
Amortization of debt discount.......................... 144 --
Amortization of deferred debt financing costs.......... 198 --
Stock issued for services rendered..................... -- 2
Changes in assets and liabilities:
Increase in accounts receivable, net................. (1,190) (9)
Increase in prepaid expenses......................... (254) (23)
Increase in other assets............................. (91) (5)
Increase in accounts payable -- trade................ 386 76
Increase in accrued expenses......................... 5,879 99
--------- -------
Net cash used in operating activities............. (4,490) (942)
--------- -------
Cash flows from investing activities:
Purchase of property and equipment, net of payables....... (20,207) (2,287)
Purchase of investments held to maturity.................. (57,710) --
Purchase of restricted investments........................ (57,574) --
--------- -------
Net cash used in investing activities............. (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............................................... (5,237) --
Proceeds from issuance of 8% Series A convertible
preferred stock, net of issuance costs................. 16,665 --
Proceeds from issuance of warrants........................ 3,885 --
Payments on other long term debt.......................... (164) --
Proceeds from issuance of common stock during 1996........ 1,153 11,126
Proceeds from issuance of common stock during 1997........ 4,862 --
--------- -------
Net cash provided by financing activities......... 177,138 11,126
--------- -------
Net increase in cash.............................. 37,157 7,897
Cash and cash equivalents at beginning of period............ 7,897 --
--------- -------
Cash and cash equivalents at the end of period.............. $ 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............. $ 1,751 $ 1,372
========= =======
Notes payable issued for property and equipment........... $ 683 $ --
========= =======
Stock issued for notes receivable......................... $ 688 $ --
========= =======
Warrants issued as consideration in debt offering
capitalized as deferred financing costs................ $ 409 $ --
========= =======
Other disclosures:
Cash paid for interest net of amounts capitalized......... $ 164 $ --
========= =======
</TABLE>

See accompanying notes to financial statements.
F-7
<PAGE> 65

MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997

(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. During the year ended December 31, 1997,
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.

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 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.

F-8
<PAGE> 66
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 life 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."

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.

F-9
<PAGE> 67
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 is currently assessing the
impact on the financial statements for the years ended December 31, 1997 and
1996, and believes that SFAS No. 130 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.

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 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

F-10
<PAGE> 68
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

(3) PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Building and property...................................... $ 278 $ --
Switching equipment........................................ 21,621 2,813
Leasehold improvements..................................... 956 429
Computer hardware and software............................. 1,404 51
Office equipment and vehicles.............................. 300 --
------- ------
24,559 3,293
Less accumulated depreciation.............................. (1,317) (43)
------- ------
23,242 3,250
Switching equipment under construction..................... 1,375 --
------- ------
Net property and equipment....................... $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>

F-11
<PAGE> 69
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 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 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.

F-12
<PAGE> 70
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

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

F-13
<PAGE> 71
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

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.

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.

(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

F-14
<PAGE> 72
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1997 and 1996, the Company has reserved 2,400,000 shares of common
stock 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
=========
Exercisable at December 31, 1996............................ 19,600 $2.00
=========
Exercisable at December 31, 1997............................ 276,200 $1.05
=========
</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>

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

F-15
<PAGE> 73
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

(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.

F-16
<PAGE> 74
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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.

(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.

F-17
<PAGE> 75
MGC COMMUNICATIONS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(12) SUBSEQUENT EVENTS

In January 1998, the Company completed a 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.

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.

F-18
<PAGE> 76

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

A-1
<PAGE> 77

telephones, fax machines, personal computers and other telecommunications
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.

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. The LATA boundaries were
established at the divestiture of the RBOCs.

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.

A-2
<PAGE> 78

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.

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> 79

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

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>
Summary of Prospectus................. 1
Risk Factors.......................... 7
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Historical Financial and
Operating Data...................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 37
Principal Stockholders................ 43
Certain Transactions.................. 45
Description of Securities............. 47
Underwriting.......................... 51
Certain Market Information............ 53
Legal................................. 53
Experts............................... 53
Additional Information................ 53
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.

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

SHARES
[LOGO]

MGC
COMMUNICATIONS, INC.
COMMON STOCK
-----------------------

PROSPECTUS
-----------------------
BEAR, STEARNS & CO. INC.
FURMAN SELZ
, 1998

======================================================
<PAGE> 80

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..................................
Blue Sky qualification fees and expenses*...................
Accounting fees and expenses*...............................
Legal fees and expenses*....................................
Transfer Agent and Registrar Fees*..........................
Printing costs*.............................................
Miscellaneous*..............................................
Total............................................. $
</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
1,200,000 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 14,141,000 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

II-1
<PAGE> 81

or will be given to the transfer agent. No underwriter was involved in the
transactions and no commissions were paid.

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 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 250,000 shares
of Common Stock from the Company for $500,000 in cash and also purchased an
additional 275,000 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 150,000 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 $.01 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 12,000 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.

II-2
<PAGE> 82

In March 1998, the Company issued 425,000 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 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 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.*
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)
</TABLE>

II-3
<PAGE> 83
<TABLE>
<S> <C>
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)
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 (included on signature page)
</TABLE>

- ---------------
* To be filed by amendment.

(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.

(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.

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-4
<PAGE> 84

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this 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 1st day of April, 1998.

MGC COMMUNICATIONS, INC.

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

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints MAURICE J. GALLAGHER, JR. and NIELD J. MONTGOMERY
and either of them (with full power in each to act alone), his true and lawful
attorneys-in-fact, with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith including, without limitation, any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.

<TABLE>
<C> <S> <C>
/s/ NIELD J. MONTGOMERY President (principal April 1, 1998
- --------------------------------------------------- executive officer) and
Nield J. Montgomery Director

/s/ LINDA M. SUNBURY Vice President (principal April 1, 1998
- --------------------------------------------------- financial and accounting
Linda M. Sunbury officer)

/s/ MAURICE J. GALLAGHER, JR. Chairman of the Board and April 1, 1998
- --------------------------------------------------- Director
Maurice J. Gallagher, Jr.

/s/ TIMOTHY P. FLYNN Director April 1, 1998
- ---------------------------------------------------
Timothy P. Flynn

/s/ JACK L. HANCOCK Director April 1, 1998
- ---------------------------------------------------
Jack L. Hancock

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

Director , 1998
- ---------------------------------------------------
Thomas Neustaetter
</TABLE>

II-5
<PAGE> 85

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 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.*
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)
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 (included on signature page)
</TABLE>

- ---------------
* To be filed by amendment.

(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.

<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.

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

Las Vegas, Nevada
March 27, 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 Financial Data" and "Selected Historical Financial
Data" in the prospectus.

KPMG Peat Marwick LLP

March 30, 1998