MGC COMMUNICATIONS INC
S-3/A, 1999-12-28
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1


   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1999.



                                                      REGISTRATION NO. 333-91353

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

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


                               AMENDMENT NO. 1 TO

                                    FORM S-3
                             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.)

       171 SULLYS TRAIL, SUITE 202                                                               KENT F. HEYMAN, ESQ.
        PITTSFORD, NEW YORK 14534                                                            171 SULLYS TRAIL, SUITE 202
              (716) 218-6540                                                                  PITTSFORD, NEW YORK 14534
      (ADDRESS, INCLUDING ZIP CODE,                                                                 (716) 218-6540
     AND TELEPHONE NUMBER, INCLUDING                                                     (NAME, ADDRESS, INCLUDING ZIP CODE,
        AREA CODE, OF REGISTRANT'S                                                         AND TELEPHONE NUMBER, INCLUDING
       PRINCIPAL EXECUTIVE OFFICES)                                                        AREA CODE, OF AGENT FOR SERVICE)
</TABLE>


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

                                   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
          3490 PIEDMONT ROAD, N.E., SUITE 400                    1114 AVENUE OF THE AMERICAS, 46TH FLOOR
                 ATLANTA, GEORGIA 30305                                  NEW YORK, NEW YORK 10036
                     (404) 233-2800                                           (212) 479-6000
</TABLE>

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

    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The sale of
securities under this Registration Statement will begin as soon as practicable
after the effective date of this Registration Statement.

    If the only securities being registered on this Form are being offered in
connection with dividend or interest reinvestment plans, please check the
following box: [ ]

    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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, please 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 the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
                            ------------------------

                        CALCULATION OF REGISTRATION FEE


<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                PROPOSED MAXIMUM       PROPOSED MAXIMUM
       TITLE OF EACH CLASS OF                 AMOUNT             OFFERING PRICE           AGGREGATE              AMOUNT OF
     SECURITIES TO BE REGISTERED         TO BE REGISTERED          PER SHARE          OFFERING PRICE(1)       REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                    <C>                    <C>                    <C>
Common Stock, $.001 par value........       765,829(1)               $41.06              $31,444,939
Series D Convertible Preferred Stock,                                                                            $14,241.46
  $.001 par value....................       450,000(1)               $50.00              $22,500,000
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>



(1) Up to 5,175,000 shares of common stock and up to 3,450,000 shares of Series
    D Convertible Preferred Stock may be sold in this offering. Of such shares,
    the registration fee with respect to 4,409,171 shares of common stock and
    3,000,000 shares of Series D Convertible Preferred Stock has been previously
    paid.

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

    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

                                EXPLANATORY NOTE

     This registration statement contains two prospectuses. The first prospectus
relates to a common stock offering and is produced in its entirety. The second
prospectus relates to a preferred stock offering and is created by substituting
the pages numbered "S-" for corresponding pages in the common stock prospectus.
<PAGE>   3

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


                 SUBJECT TO COMPLETION, DATED DECEMBER 28, 1999


PRELIMINARY PROSPECTUS


                                4,500,000 SHARES


                                   MGC COMMUNICATIONS, INC.
                                  COMMON STOCK

                              $         PER SHARE

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


     We are selling 4,438,594 shares of common stock and the selling
stockholders named in this prospectus are selling 61,406 shares of common stock.



     The common stock is quoted on the Nasdaq National Market under the symbol
"MGCX". The last reported sale price of the common stock on the Nasdaq National
Market, on December 27, 1999, was $41.06 per share.



     Concurrently with this offering, and by a separate prospectus, we are
offering to sell 3,000,000 shares of Series D convertible preferred stock. The
completion of this offering and the concurrent offering are not dependent on one
another.



     The underwriters named in this prospectus may purchase up to 675,000
additional shares of common stock from us solely to cover over-allotments.


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


     INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.


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

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


<TABLE>
<CAPTION>
                                                               PER SHARE         TOTAL
                                                              ------------    ------------
<S>                                                           <C>             <C>
Public Offering Price                                         $               $
Underwriting Discount                                         $               $
Proceeds to MGC Communications (before expenses)              $               $
Proceeds to the Selling Stockholders (before expenses)        $               $
</TABLE>



     The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
  , 2000.


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


SALOMON SMITH BARNEY                                    BEAR, STEARNS & CO. INC.

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

GOLDMAN, SACHS & CO.
                                      ING BARINGS
                                                         WARBURG DILLON READ LLC


                         , 2000

[MGC LOGO]
<PAGE>   4


                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    3
Risk Factors................................................    7
How We Intend to Use the Proceeds of this Offering..........   18
Dividend Policy.............................................   18
Capitalization..............................................   19
Dilution....................................................   20
Selected Consolidated Financial and Operating Data..........   21
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   22
Business....................................................   28
Management..................................................   47
Principal and Selling Stockholders..........................   50
Description of Securities...................................   52
Description of the Series D Convertible Preferred Stock.....   60
Underwriting................................................   72
Legal Matters...............................................   74
Experts.....................................................   74
Where You Can Find More Information.........................   74
Index to Consolidated Financial Statements..................  F-1
</TABLE>

<PAGE>   5

                               PROSPECTUS SUMMARY


     This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors," our financial statements and the
notes related to our financial statements. Unless otherwise specified, all
information in this prospectus assumes no exercise of the underwriters'
over-allotment option.


                               MGC COMMUNICATIONS


     We are a growing communications company currently offering a single source
solution including Internet access, voice over digital subscriber line or DSL,
local dialtone, long distance and other voice and data services. We market these
services primarily to small and medium size business customers. We have launched
bundled voice and high-speed data services using DSL technology in all of our
current markets. DSL technology allows us to use our existing network to
simultaneously carry up to 24 voice calls or multiple voice calls and high-speed
data traffic on a single standard telephone line.



     - By installing our own equipment in space we rent at 288 incumbent carrier
       central office or "collocation" sites, we had access to approximately 16
       million addressable lines at the end of third quarter 1999. These 288
       collocation sites represent one of the broadest geographic service areas
       of any competitive carrier providing local, long distance and data
       products.



     - We have developed a sophisticated, proprietary operations support system
       designed to manage all aspects of our business, including timely and
       accurate provisioning to place our customers on our network. Our
       operations support system is fully integrated and fully capable of
       accommodating our growth plans.



     - We have an experienced and proven management team led by our president
       and chief executive officer, Rolla P. Huff.


     - We currently deliver our services in the metropolitan areas of Atlanta,
       Chicago, Las Vegas, southern Florida and selected areas of southern
       California, including Los Angeles and San Diego.

     - We have established working relationships with five incumbent local
       exchange carriers: Ameritech, BellSouth, GTE, PacBell and Sprint.

     - At the end of the third quarter of 1999, we had 138,400 customer lines
       sold, of which 117,210 lines were in service.


     - To rollout our network and services on a national basis, during 2000, we
       plan to aggressively expand our network to include over 800 central
       office collocation sites providing access to more than 35 million
       addressable lines.



     - In connection with the expansion of our network, we plan to increase the
       size of our sales force from 128 sales personnel at the end of the third
       quarter of 1999 to over 350 by the end of 2000.



     - We plan to build data centers and enter into co-marketing agreements with
       "e-commerce" providers.



     We were one of the first competitive carriers to implement a strategy of
building and owning the network equipment that controls how voice and data
transmissions originate and terminate, which we refer to as switches, while
leasing the telephone lines and cable over which the voice calls and data
traffic are transmitted, which we refer to as transport, from incumbent
carriers. We believe this strategy has allowed us to serve a broad geographical
area at a comparatively low cost while maintaining control of the access to our
customers. Having executed this strategy, we are well-

                                        3
<PAGE>   6

positioned to serve the growing demand from small and medium size business
customers for communications services.


     Since launching our services, we have experienced operating losses and
generated negative cash flow from operations. We expect to continue to generate
negative cash flow from operations for the foreseeable future while we continue
to expand our network and develop our product offerings and customer base.
However, by implementing DSL technology and using a single telephone line to
deliver a bundled voice and high-speed data product, we expect to significantly
reduce the per line costs of provisioning customer lines and the associated
recurring costs of leasing telephone lines. These savings should allow us to
improve our cash flow from operations and offer a value-priced package of
services to our customers.



BUSINESS STRATEGY


     Our goal is to become a leading national communications provider of bundled
voice and data solutions to the small and medium size business market. We intend
to implement the following strategies in an effort to achieve our goal:


     - rollout our national network and service rapidly;



     - expand our sales force significantly;



     - complete the deployment of DSL equipment throughout our network;



     - control access to our customers;



     - employ a capital efficient network strategy;



     - capitalize on our sophisticated operations support system; and



     - develop e-commerce data centers.



PRINCIPAL EXECUTIVE OFFICES



     Our principal executive offices are at 171 Sullys Trail, Suite 202,
Pittsford, New York 14534. Our telephone number is (716) 218-6540.

                                        4
<PAGE>   7

                                  THE OFFERING


Common stock offered by
us(1).........................       4,438,594 shares



Common stock offered by the
selling stockholders..........       61,406 shares



Common stock to be outstanding
  after this offering(2)......       27,669,962 shares


Use of proceeds...............       Capital expenditures related to the
                                     purchase and installation of DSL and other
                                     communications equipment, market expansion
                                     and for general corporate purposes,
                                     including working capital to fund our
                                     expanding sales, marketing and product
                                     development efforts.

Nasdaq National Market symbol
for common stock..............       MGCX


Concurrent offering...........       Concurrently with this offering, and by
                                     separate prospectus, we are offering to
                                     sell 3,000,000 shares of Series D
                                     convertible preferred stock. The completion
                                     of this offering and the concurrent
                                     offering are not dependent on one another.

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

(1) The underwriters have an over-allotment option to purchase an additional
    675,000 shares solely to cover over-allotments.


(2) The number of shares outstanding excludes:


     - 3,178,000 shares of common stock which may be issued upon the exercise of
       stock options outstanding as of December 27, 1999 with a weighted average
       exercise price of $13.92 per share;



     - approximately 285,815 shares of common stock which may be issued upon the
       exercise of outstanding warrants with an exercise price of approximately
       $.02 per share;



     - the conversion of the 5,277,779 shares of Series B convertible preferred
       stock outstanding and 1,250,000 shares of Series C convertible preferred
       stock, which are expected to be issued in December 1999, all of which
       shares may be converted into shares of common stock on a one-for-one
       basis;



     - the conversion of the shares of the Series D convertible preferred stock
       which may be issued in the concurrent offering; and


     - any shares which may be issued if the underwriters exercise their
       over-allotment option.
                                        5
<PAGE>   8

               SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA


<TABLE>
<CAPTION>
                                                                                        NINE MONTHS
                                                                                           ENDED
                                                     YEAR ENDED DECEMBER 31,           SEPTEMBER 30,
                                                 -------------------------------    --------------------
                                                  1996        1997        1998        1998        1999
                                                  ----        ----        ----        ----        ----
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>        <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...........................    $     1    $  3,791    $ 18,249    $ 11,772    $ 34,922
Cost of operating revenues, excluding
  depreciation...............................        305       3,928      17,129      10,575      31,449
Selling, general and administrative
  expenses...................................        841       6,440      17,877      11,250      27,469
Loss from operations.........................     (1,554)     (7,851)    (21,995)    (13,202)    (36,402)
Net loss.....................................     (1,491)    (10,836)    (32,065)    (22,293)    (44,744)
Basic and diluted loss per share of common
  stock......................................    $ (2.11)   $  (1.30)   $  (2.26)   $  (1.69)   $  (2.50)
</TABLE>



<TABLE>
<CAPTION>
                                                                  AS OF SEPTEMBER 30, 1999
                                                    ----------------------------------------------------
                                                     ACTUAL     AS ADJUSTED(1)    AS FURTHER ADJUSTED(2)
                                                    --------    --------------    ----------------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                 <C>         <C>               <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments
  available-for-sale, excluding restricted
  investments.....................................  $178,961      $  351,540            $  531,073
Restricted investments............................    30,375          30,375                30,375
Property and equipment, net.......................   151,159         151,159               151,159
Total assets......................................   381,814         554,393               733,926
Long-term debt....................................   157,677         157,677               157,677
Series B convertible preferred stock..............    46,663          46,663                46,663
Series C convertible preferred stock..............        --              --                34,500
Series D convertible preferred stock..............        --              --               145,033
Stockholders' equity..............................   134,394         306,973               306,973
</TABLE>



<TABLE>
<CAPTION>
                                                                                        NINE MONTHS
                                                                                           ENDED
                                                     YEAR ENDED DECEMBER 31,           SEPTEMBER 30,
                                                 -------------------------------    --------------------
                                                  1996        1997        1998        1998        1999
                                                  ----        ----        ----        ----        ----
                                                                 (DOLLARS IN THOUSANDS)
<S>                                              <C>        <C>         <C>         <C>         <C>
OTHER FINANCIAL DATA:
EBITDA(3)....................................    $(1,145)   $ (6,577)   $(16,757)   $(10,053)   $(23,996)
Cash flows used in operating activities......       (942)     (4,490)    (24,184)     (9,073)    (29,226)
Cash flows used in investing activities......     (2,287)   (135,491)    (77,715)    (92,948)    (54,784)
Cash flows provided by financing
  activities.................................     11,126     177,138      68,731      68,387     165,348
Capital expenditures.........................      3,659      22,641      97,101      67,136      47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service................         50      15,590      47,744      35,246     117,210
Central office collocation sites.............          9          25         207          85         288
Switches in service..........................          1           3           7           4           7
Number of sales personnel
  Field sales................................          7          23          50          39          95
  Inside sales...............................         --          --          31          53          33
                                                 -------    --------    --------    --------    --------
         Total sales personnel...............          7          23          81          92         128
</TABLE>


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

(1) Gives effect to the sale of 4,438,594 shares of common stock in this
offering.



(2) Gives effect to the sale of 1,250,000 shares of Series C convertible
    preferred stock, which are expected to be issued in December 1999, the sale
    of 4,438,594 shares of common stock in this offering and the sale of
    3,000,000 shares of Series D convertible preferred stock in the concurrent
    offering.



(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. EBITDA
    does not represent funds available for management's discretionary use and is
    not intended to represent cash flow from operations. EBITDA should not be
    considered as an alternative to loss from operations as an indicator of our
    operating performance or as an alternative to cash flows as a measure of
    liquidity. In addition, EBITDA is not a term defined by generally accepted
    accounting principles and, as a result, the measure of EBITDA may not be
    comparable to similarly titled measures used by other companies. We believe
    that EBITDA is often reported and widely used by analysts, investors and
    other interested parties in the communications industry. Accordingly, we are
    including this information to permit a more complete comparison of our
    operating performance relative to other companies in the industry.

                                        6
<PAGE>   9

                                  RISK FACTORS


     You should carefully consider the following factors, in addition to other
information in this prospectus, before purchasing the securities being offered.



IT IS DIFFICULT TO PREDICT OUR FUTURE OPERATING RESULTS FROM OUR PREVIOUS
PERFORMANCE SINCE OUR BUSINESS MODEL IS STILL EVOLVING AND WE HAVE A LIMITED
OPERATING HISTORY



     Our limited operating history makes predicting future results difficult.
Because some of our services are new, we cannot be sure businesses will buy
them. In addition, we have recently hired a new chief executive officer who may
realign our operations into regional service areas to support our expanding
geographic markets or make other changes which could increase the cost of
providing our services.


WE EXPECT OUR LOSSES TO CONTINUE


     We recorded net losses of $44.7 million in the first nine months of 1999,
$32.1 million in 1998, and $10.8 million in 1997. In addition, we had negative
cash flow from operations of $29.2 million in the first nine months of 1999,
$24.2 million in 1998 and $4.5 million in 1997. We expect to record significant
net losses and generate negative cash flow from operations for the foreseeable
future. We cannot assure you we will achieve or sustain profitability or
generate sufficient positive cash flow from operations to meet our planned
capital expenditures, working capital and debt service requirements.


WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS THAT WE MAY NOT BE ABLE TO OBTAIN


     We require significant amounts of capital to fund the development and
expansion of our business and services as well as operating costs and debt
service. If we cannot generate or otherwise access sufficient funds, we may be
required to delay or abandon some of our future expansion plans. This would
likely have a negative impact on our growth and our ability to compete in the
communications industry. We expect to fund our capital requirements through
existing resources, debt or equity financing and internally generated funds,
including the proceeds of this offering, the concurrent offering and the
issuance of Series C convertible preferred stock. We cannot assure you we will
be successful in completing the concurrent offering or the proposed sale of
Series C convertible preferred stock or otherwise raising sufficient debt or
equity financing on acceptable terms.


OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK


     As of September 30, 1999, we had approximately $157.7 million of total debt
outstanding. Our level of debt could have important consequences to you,
including the following:



     - a substantial portion of our cash flow from operations will be dedicated
       to paying principal and interest on our debt, thereby reducing funds
       available for expansion or other purposes;


     - our significant amount of debt could make us more vulnerable to changes
       in general economic conditions or increases in prevailing interest rates;


     - our ability to obtain additional financing for working capital, capital
       expenditures, acquisitions, general corporate purposes or other purposes
       could be impaired;



     - our failure to comply with the restrictions contained in any of our
       financing agreements could lead to a default which could result in our
       being required to repay all of our outstanding debt; and


     - we may be more leveraged than some of our competitors, which may result
       in a competitive disadvantage.

                                        7
<PAGE>   10


OUR DEBT COVENANTS AND PREFERRED STOCK TERMS COULD LIMIT HOW WE CONDUCT OUR
BUSINESS AND OUR ABILITY TO RAISE ADDITIONAL FUNDS


     Our debt indenture contains covenants that restrict our ability to:

     - incur additional debt;

     - pay dividends and make other distributions;

     - prepay subordinated debt;

     - make investments and other restricted payments;

     - create liens;

     - sell assets; and

     - engage in transactions with affiliates.


     In addition, the terms of our outstanding preferred stock require us to
obtain the approval of the holders before we take specified actions. Please see
"Description of Securities -- Series B Convertible Preferred Stock" and
"Description of Securities -- Series C Convertible Preferred Stock."


     Our future financing arrangements will likely contain similar or more
restrictive covenants. As a result of these restrictions, we may be:

     - limited in how we conduct our business;

     - unable to raise additional debt or equity financing to operate during
       general economic or business downturns; and

     - unable to compete effectively or to take advantage of new business
       opportunities.


These restrictions may affect our ability to grow as we currently plan and our
ability to operate our business in the interests of our stockholders.



OUR SUCCESS DEPENDS ON THE EFFECTIVENESS OF OUR MANAGEMENT AND WE HAVE A NEW
CHIEF EXECUTIVE OFFICER AND ARE SEEKING TO MAKE OTHER CHANGES TO OUR MANAGEMENT
TEAM



     Our business is managed by a small number of key management personnel, the
loss of some of whom could impair our ability to carry out our planned
expansion. We believe our future success will depend in large part on our
ability to attract and retain highly skilled and qualified personnel. None of
our key executives other than Rolla P. Huff is a party to a long-term employment
agreement and we do not maintain key man insurance on our officers.



     We have recently hired a new chief executive officer, chief financial
officer and other new members of our senior management team. We cannot assure
you that our new senior officers will be effective in managing our company or
will successfully work with our existing management team.



IF OUR EQUIPMENT DOES NOT PERFORM AS WE EXPECT, IT COULD DELAY OUR EXPANSION
INTO NEW MARKETS AND OUR INTRODUCTION OF NEW SERVICES



     In implementing our strategy, we may use new or existing technologies to
offer additional services. We also plan to use equipment manufactured by
multiple vendors to offer our current services and future services in each of
our new markets. If we cannot successfully install and integrate the technology
and equipment necessary to deliver our current services and any future services
within the time frame and with the cost effectiveness we currently contemplate,
we could be forced to delay or abandon a portion of our expansion plans or the
introduction of new services. This could also affect our ability to attract and
retain customers.


                                        8
<PAGE>   11


THE FAILURE OF OUR OPERATIONS SUPPORT SYSTEM TO PERFORM AS WE EXPECT COULD
IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS OR RESULT IN
INCREASED CAPITAL EXPENDITURES



     We employ a proprietary operations support system which is expected to be
an important factor in our success. If the operations support system fails or is
unable to perform as expected, we could suffer customer dissatisfaction, loss of
business or the inability to add customers on a timely basis, any of which would
adversely affect our revenues. Furthermore, problems may arise with higher
processing volumes or with additional automation features, which could
potentially result in system breakdowns and delays and additional, unanticipated
expense to remedy the defect or to replace the defective system with an
alternative system.



OUR FAILURE TO MANAGE GROWTH COULD RESULT IN INCREASED COSTS AND OUR INABILITY
TO ACHIEVE OUR EXPANSION GOALS



     We may be unable to manage our growth effectively. This could increase the
costs of expansion and impair our ability to fully implement our expansion
plans. The development and expansion of our business and our entry into new
markets will depend on, among other things, our ability to achieve the following
goals in a timely manner, at reasonable costs and on satisfactory terms and
conditions:



     - purchase, install and operate switches and other equipment, including DSL
       equipment;


     - accurately assess potential new markets;


     - negotiate suitable interconnection and collocation arrangements with
       incumbent carriers on satisfactory terms and conditions, including
       incumbent carriers in markets we plan to enter;


     - hire and retain qualified personnel;

     - lease suitable access to transport networks;

     - lease or purchase suitable sites; and

     - obtain required government authorizations.

     We have experienced rapid growth since our inception, and we believe
sustained growth will place a strain on our operational, human and financial
resources. Our growth will also increase our operating complexity as well as the
level of responsibility for both existing and new management personnel. Our
ability to manage our expansion effectively will depend on the continued
development of plans, systems and controls for our operational, financial and
management needs and on our ability to expand, train and manage our employee
base.

OUR SERVICES MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE TO BECOME PROFITABLE


     To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. Our success will depend upon the
willingness of our target customers to accept us as an alternative provider of
local, long distance, high-speed data and Internet services. Although we are in
the process of rolling out high-speed data and Internet services and developing
additional products and services, we might not be able to provide the range of
communication services our target business customers need or desire. In
addition, the lack of willingness by e-commerce providers to accept us as a
marketing, sales and distribution partner would have a negative impact on our
ability to deliver additional products and services to our target customers.


OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW

     Prices for data communication services have fallen historically, a trend we
expect will continue. Accordingly, we cannot predict to what extent we may need
to reduce our prices to remain

                                        9
<PAGE>   12


competitive or whether we will be able to sustain future pricing levels as our
competitors introduce competing services or similar services at lower prices.
Our ability to meet price competition may depend on our ability to operate at
costs equal to or lower than our competitors or potential competitors. There is
a risk competitors, perceiving us to lack capital resources, may undercut our
rates or increase their services or take other actions in an effort to force us
out of business. Our failure to achieve or sustain market acceptance at desired
pricing levels could impair our ability to achieve profitability or positive
cash flow.



IF WE ARE UNABLE TO NEGOTIATE AND ENFORCE FAVORABLE INTERCONNECTION AND
COLLOCATION AGREEMENTS, WE COULD HAVE DIFFICULTY OPERATING PROFITABLY IN OUR
EXISTING MARKETS AND ENTERING NEW MARKETS



     We must negotiate and renew favorable interconnection and collocation
agreements with other companies, including incumbent carriers, in markets we
plan to enter. The rates charged to us under the interconnection agreements
might not continue to be low enough for us to attract a sufficient number of
customers and to operate the business on a profitable basis. In addition, our
interconnection agreements provide for our connection and maintenance orders to
receive attention on the same basis as the incumbent carrier's customers and for
the incumbent carriers to provide adequate capacity to keep blockage within
industry standards. However, from time to time, we have experienced excessive
blockage in the delivery of calls to and from the incumbent carriers due to
inadequate trunk provisioning by the incumbent carriers between their switches
and our switches. Blocked calls result in customer dissatisfaction which may
result in the loss of business.



DELAYS BY THE INCUMBENT CARRIERS IN CONNECTING OUR CUSTOMERS TO OUR NETWORK
COULD RESULT IN CUSTOMER DISSATISFACTION AND LOSS OF BUSINESS



     We rely on the timeliness of incumbent carriers and competitive carriers in
processing our orders for customers switching to our service and in maintaining
the customer's standard telephone lines to assure uninterrupted service. The
incumbent carriers have had little experience leasing standard telephone lines
to other companies. Therefore, the incumbent carriers might not be able to
continue to provide and maintain leased standard telephone lines in a prompt and
efficient manner as the number of standard telephone lines requested by
competitive carriers increases.



WE MAY NOT BE ABLE TO SERVICE OUR CUSTOMERS IF WE CANNOT SECURE SUFFICIENT
TRANSPORT CAPACITY TO MEET OUR FUTURE NEEDS



     We may not be able to lease adequate transport capacity in markets we want
to enter or renew our lease arrangements or obtain comparable arrangements from
other carriers in our existing markets. Because we lease rather than build local
transport capacity in each of our markets, we would be unable to service our
customers if we cannot obtain adequate transport capacity. Insufficient capacity
of leased communications transport could result in the loss of customers, the
inability to add new customers and limitations on our ability to enter new
markets.



OUR RELIANCE ON A LIMITED NUMBER OF EQUIPMENT SUPPLIERS COULD RESULT IN
ADDITIONAL EXPENSES OR DELAYS IN OUR EXPANSION



     We currently rely and expect to continue to rely on a limited number of
third party suppliers to manufacture the equipment we require to implement our
DSL technology. If our suppliers enter into competition with us, or if our
competitors enter into exclusive or restrictive arrangements with our suppliers,
it may materially and adversely affect the availability and pricing of the
equipment we purchase. Our reliance on third-party vendors involves a number of
additional risks, including the absence of guaranteed capacity and reduced
control over delivery schedules, quality assurance, production yields and costs.


                                       10
<PAGE>   13


     We cannot assure you that our vendors will be able to meet our needs in a
satisfactory and timely manner in the future or that we will be able to obtain
alternative vendors when and if needed. It could take a significant period of
time to establish relationships with alternative suppliers for critical
technologies and to introduce substitute technologies into our network. As a
result, the use of alternative vendors could delay our expansion plans. In
addition, if we change vendors, we may need to replace all or a portion of the
DSL equipment deployed within our network at significant expense in terms of
equipment costs and loss of revenues in the interim.



BECAUSE WE COMPETE AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH SUBSTANTIALLY
GREATER RESOURCES, WE MAY NOT BE ABLE TO ACHIEVE OUR OPERATING AND FINANCIAL
OBJECTIVES



     The market in which we operate is highly competitive and most of our
competitors and potential competitors have substantially greater resources than
we have. Our failure to compete effectively could prevent us from obtaining
sufficient market share to become profitable. For more information regarding the
competitive environment in which we operate, please see
"Business -- Competition."



IF WE ARE NOT ABLE TO OBTAIN OR IMPLEMENT NEW TECHNOLOGIES, WE MAY LOSE BUSINESS
AND LIMIT OUR ABILITY TO ATTRACT NEW CUSTOMERS



     We may be unable to obtain access to new technology on acceptable terms or
at all. We may be unable to adapt to new technologies and offer services in a
competitive manner. If these events occur, we may lose customers to competitors
offering more advanced services and our ability to attract new customers would
be hindered. Rapid and significant changes in technology are expected in the
communications industry. We cannot predict the effect of technological changes
on our business. Our future success will depend, in part, on our ability to
anticipate and adapt to technological changes, evolving industry standards and
changing needs of our current and prospective customers.



A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS AND RESULT IN CUSTOMER DISSATISFACTION



     Interruptions in service, capacity limitations or security breaches could
have a negative effect on customer acceptance and, therefore, on our revenues
and ability to attract new customers. Our networks may be affected by physical
damage, power loss, capacity limitations, software defects, breaches of security
by computer viruses, break-ins or otherwise and other factors which may cause
interruptions in service or reduced capacity for our customers.



IF WE ARE UNABLE TO EFFECTIVELY DELIVER DSL SERVICES TO A SUBSTANTIAL NUMBER OF
CUSTOMERS, WE MAY NOT ACHIEVE OUR REVENUE GOALS



     We cannot guarantee our network will be able to connect and manage a
substantial number of customers at high transmission speeds. If we cannot
achieve and maintain digital transmission speeds that are otherwise available in
the market, we may lose customers to competitors with higher transmission speeds
and we may not be able to attract new customers. While digital transmission
speeds of up to 1.5 Mbps are possible on portions of our network, that speed may
not be available over a majority of our network. Actual transmission speeds on
our network will depend on a variety of factors many of which are beyond our
control, including the distance an end user is located from a central office,
the quality of the telephone lines, the presence of interfering transmissions on
nearby lines and other factors.


                                       11
<PAGE>   14


WE MAY LOSE CUSTOMERS OR POTENTIAL CUSTOMERS BECAUSE THE TELEPHONE LINES WE
REQUIRE MAY BE UNAVAILABLE OR IN POOR CONDITION



     Our ability to provide DSL services to potential customers depends on the
quality, physical condition, availability and maintenance of telephone lines
within the control of the incumbent carriers. If the telephone lines are not
adequate, we may not be able to provide DSL services to many of our target
customers and our expected revenues will be diminished. We believe the current
condition of telephone lines in many cases may be inadequate to permit us to
fully implement our DSL services. In addition, the incumbent carriers may not
maintain the telephone lines in a condition that will allow us to implement our
DSL services effectively or may claim they are not of sufficient quality to
allow us to fully implement or operate our DSL services. Further, some customers
use technologies other than copper lines to provide telephone services, and as a
result, DSL services might not be available to these customers.



INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR RESULT IN
CUSTOMER DISSATISFACTION



     Interference, or claims of interference by the incumbent carriers, if
widespread, could adversely affect our speed of deployment, reputation, brand
image, service quality and customer satisfaction and retention. All transport
technologies deployed on copper telephone lines have the potential to interfere
with, or to be interfered with by, other transport technologies on the copper
telephone lines. Interference could degrade the performance of our services or
make us unable to provide service on selected lines and the customers served by
those lines. Although we believe our DSL technologies, like other transport
technologies, do not interfere with existing voice services, incumbent carriers
may claim the potential for interference permits them to restrict or delay our
deployment of DSL services. The procedures to resolve interference issues
between competitive carriers and incumbent carriers are still being developed.
We may be unable to successfully resolve interference issues with incumbent
carriers.


OUR FUTURE SUCCESS WILL DEPEND ON GROWTH IN THE DEMAND FOR INTERNET ACCESS AND
HIGH-SPEED DATA SERVICES


     If the markets for the services we offer, including Internet access and
high-speed data services, fail to develop, grow more slowly than anticipated or
become saturated with competitors, we may not be able to achieve our projected
revenues. The markets for business Internet and high-speed data services are in
the early stages of development. Demand for Internet services is highly
uncertain and depends on a number of factors, including the growth in consumer
and business use of new interactive technologies, the development of
technologies that facilitate interactive communication between organizations and
targeted audiences, security concerns and increases in data transport capacity.


     In addition, the market for high-speed data transmission via DSL technology
is relatively new and evolving. Various providers of high-speed digital services
are testing products from various suppliers for various applications, and no
industry standard has been broadly adopted. Critical issues concerning
commercial use of DSL for Internet and high-speed data access, including
security, reliability, ease of use and cost and quality of service, remain
unresolved and may impact the growth of these services.


THE DESIRABILITY AND MARKETABILITY OF OUR INTERNET SERVICE MAY BE ADVERSELY
AFFECTED IF WE ARE NOT ABLE TO MAINTAIN RECIPROCAL RELATIONSHIPS WITH OTHER
INTERNET SERVICE PROVIDERS



     The Internet is comprised of many Internet service providers and underlying
transport providers who operate their own networks and interconnect with other
Internet service providers at various points. As we commence the operation of
Internet services, connections to the Internet will be


                                       12
<PAGE>   15


provided through wholesale carriers. We anticipate as our volume increases, we
will enter into reciprocal agreements with other Internet service providers. We
cannot assure you other national Internet service providers will maintain
reciprocal relationships with us. If we are unable to maintain these
relationships, our Internet services may not be attractive to our target
customers, which would impair our ability to retain and attract customers. In
addition, the requirements associated with maintaining relationships with the
major national Internet service providers may change. We cannot assure you we
will be able to expand or adapt our network infrastructure to meet any new
requirements on a timely basis, at a reasonable cost, or at all.



WE MAY INCUR LIABILITIES AS A RESULT OF OUR INTERNET SERVICE OFFERINGS


     United States law relating to the liability of on-line service providers
and Internet service providers for information carried on, disseminated through,
or hosted on their systems is currently unsettled. If liability is imposed on
Internet service providers, we would likely implement measures to minimize our
liability exposure. These measures could require us to expend substantial
resources or discontinue some of our product or service offerings. In addition,
increased attention to liability issues, as a result of litigation, legislation
or legislative proposals could adversely affect the growth and use of Internet
services.


CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE
OPERATE OUR BUSINESS AND NEGATIVELY AFFECT OUR COSTS AND COMPETITIVE POSITION



     A significant number of the services we offer are regulated at the federal,
state and/or local levels. If these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, there could
be an adverse impact on our costs and competitive position. In addition, we may
expend significant financial and managerial resources to participate in
administrative proceedings at either the federal or state level, without
achieving a favorable result. We believe incumbent carriers and others may work
aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. We expect incumbent carriers and others to continue to
pursue litigation in courts, institute administrative proceedings with the
Federal Communications Commission or FCC and other regulatory agencies and lobby
the United States Congress, all in an effort to affect laws and regulations in a
manner favorable to them and against the interest of competitive carriers. For
more details about our regulatory situation, please see "Business -- Government
Regulations."



WE MAY NOT BE ABLE TO COLLECT ALL OF THE ACCESS CHARGES WE HAVE BILLED TO LONG
DISTANCE CARRIERS



     When our facilities are used to originate a customer's long distance call
and deliver it to the long distance carrier designated by the customer, or to
terminate a long distance call received from a long distance carrier by
delivering it to a telephone number connected to our network, the long distance
carrier is required to pay us for access to our network and the use of our
facilities. These charges are called "access charges." Access charges
represented a significant portion of revenues in 1998 and 1999. The long
distance carriers responsible for generating a significant portion of our access
charge revenues have refused to pay the full amount of access charges billed to
them under our tariffs. The law applicable to our disputes with these carriers
is unclear and we may not be able to collect the full amount of the access
charges owed to us. Until these disputes are resolved and access charge
receivables are collected on a timely basis, we cannot rely on these revenues as
a source of cash flow. As a result, we may be required to raise additional
capital sooner than we currently anticipate. See "-- We will need significant
additional funds that we may not be able to obtain," and "Business -- Legal
Proceedings."


                                       13
<PAGE>   16


THE PRICES WE CHARGE FOR OUR SERVICES AND PAY FOR THE USE OF SERVICES OF
INCUMBENT CARRIERS AND OTHER COMPETITIVE CARRIERS MAY BE NEGATIVELY AFFECTED IN
REGULATORY PROCEEDINGS, WHICH COULD RESULT IN DECREASED REVENUES, INCREASED
COSTS AND LOSS OF BUSINESS



     If we were required to decrease the prices we charge for our services or to
pay higher prices for services we purchase from incumbent carriers and other
competitive carriers, it would have an adverse effect on our ability to achieve
profitability, our costs and our ability to offer competitively priced services.
We must file tariffs with state and federal regulators which indicate the prices
we charge for our services. In addition, we purchase some tariffed services from
incumbent carriers and/or competitive carriers. The rate we pay for other
services we purchase from incumbent carriers and other competitive carriers are
set by negotiations between the parties. All of the tariffed prices may be
challenged in regulatory proceedings by customers, including incumbent carriers,
competitive carriers and long distance carriers who purchase these services.
These negotiated rates are also subject to regulatory review. In August 1999,
the FCC initiated a proceeding which is considering the reasonableness of
competitive carrier access charges and is seeking comments on whether the FCC
should regulate the access charges set by competitive carriers. While the
outcome of this proceeding cannot be predicted, if we were required to decrease
our access charges it could have an adverse effect on our expected revenues.



ONE OF OUR INTERCONNECTION AGREEMENTS REQUIRES A RETROACTIVE ADJUSTMENT TO THE
RATE WE PAY FOR CERTAIN SERVICES WHICH MAY INCREASE OUR LOSSES



     One of our interconnection agreements requires a retroactive adjustment to
the rates we pay for leased telephone lines and installation services when the
state regulatory commission makes a final determination of the appropriate
rates. The state regulatory commission has recently released its determination
of the appropriate rates. The final rate for leased telephone lines, a recurring
expense, was below the rate we previously estimated. The final rate for
non-recurring installation services was above the rate we previously estimated.
We are in the process of determining the aggregate impact to our cost of
operating revenues. Our best estimate of the probable outcome is that it may be
necessary to expense approximately $1.2 million of additional cost of operating
revenues in 1999.



WE WILL FACE ADDITIONAL RISKS IF WE ACQUIRE OTHER BUSINESSES


     We may acquire other businesses as a means of expanding into new markets or
developing new services. We are unable to predict whether or when any
prospective acquisitions will occur or the likelihood of any acquisition being
completed on favorable terms and conditions. Acquisitions of other businesses
involve risks including:

     - difficulties assimilating acquired operations and personnel;

     - potential disruptions of our ongoing business;

     - the diversion of resources and management time;

     - the possibility uniform standards, controls, procedures and policies may
       not be maintained;

     - risks associated with entering new markets in which we have little or no
       experience; and

     - the potential impairment of relationships with employees or customers as
       a result of changes in management.

     Any business we might acquire might not perform as expected.

                                       14
<PAGE>   17

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE

     The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could fluctuate widely in response to a variety of
factors, including:

     - actual or anticipated variations in quarterly operating results;

     - announcements of technological innovations;

     - new products or services offered by us or our competitors;

     - changes in financial estimates by securities analysts;

     - significant acquisitions, strategic partnerships, joint ventures or
       capital commitments;

     - additions or departures of key personnel;

     - sales of common stock; and

     - other events or factors that may be beyond our control.

     In addition, the Nasdaq National Market, where many publicly held
communications companies like us are traded, has recently experienced extreme
price and volume fluctuations. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance.


BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, YOUR ABILITY TO MAKE A PROFIT FROM AN
INVESTMENT IN OUR STOCK WILL DEPEND SOLELY ON AN INCREASE IN ITS MARKET PRICE



     We have never paid and do not intend to pay any dividends on our common
stock. Payment of any future dividends on our common stock will depend upon our
earnings and capital requirements, our debt facilities and other factors our
board of directors considers appropriate. Our ability to declare and pay cash
dividends on our common stock is restricted by covenants in our debt indenture
and the terms of our outstanding preferred stock.


FUTURE SALES OF OUR STOCK BY EXISTING STOCKHOLDERS MAY ADVERSELY AFFECT OUR
STOCK PRICE


     Our stock price will likely decline if the supply of our stock being sold
in the open market exceeds the demand for our stock. Substantially all of our
common stock is currently eligible for sale in the open market. The shares of
common stock which may be issued upon conversion of or as dividends on the
Series D convertible preferred stock which may be issued in the concurrent
offering will also be freely tradeable. In addition, shares of our common stock
issued upon exercise of stock options are freely tradeable under a currently
effective registration statement. See "Description of Securities -- Shares
Eligible for Future Sale."


     The holders of some of our outstanding shares of common stock and
convertible securities have demand registration rights which if exercised could
result in a registration statement covering shares of common stock being filed
by us. These holders also have the right to have shares of common stock included
in any registration statement filed by us in the future. See "Description of
Securities -- Registration Rights of Security Holders."

                                       15
<PAGE>   18


INVESTORS IN THIS OFFERING WILL PAY MORE PER SHARE THAN THE NET ASSET VALUE OF
OUR STOCK



     Investors who purchase shares in this offering will:



     - pay a price that substantially exceeds the per share value of our assets
       less liabilities



     - contribute 43% of the total amount we have received for our common stock
       but will only own approximately 16% of our outstanding shares of common
       stock. See "Dilution."


OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS

     For a discussion of risks presented by our ability and the ability of
others on whom we rely to successfully make computer systems and other
technology Year 2000 compliant, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Year 2000" in this
prospectus.


INVESTORS IN THIS OFFERING WILL NOT BE ABLE TO CONTROL DECISIONS MADE BY US
SINCE OUR MANAGEMENT OWNS A SIGNIFICANT PERCENTAGE OF OUR COMPANY AND WILL BE
ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR ACTIONS



     We are controlled by our officers and directors, who in the aggregate
directly or indirectly control before this offering 40.3% of our outstanding
common stock and voting power assuming conversion of all Series B convertible
preferred stock and Series C convertible preferred stock. After this offering,
these stockholders collectively will likely be able to continue to control our
management policy, decide all fundamental corporate actions, including mergers,
substantial acquisitions and dispositions and elect our board of directors.



SOME PROVISIONS OF NEVADA LAW AND OUR ARTICLES OF INCORPORATION AND BY-LAWS
COULD DISCOURAGE A TAKEOVER OF OUR COMPANY AND ADVERSELY AFFECT THE PRICE OF OUR
STOCK



     After completion of this offering and the concurrent offering, our board of
directors will have the authority to issue up to 40,022,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of our capital stock
may be adversely affected by the rights of the holders of any class of preferred
stock that may be issued in the future. The issuance of future classes of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Other than the
Series C convertible preferred stock and Series D convertible preferred stock,
we have no current plans to issue shares of preferred stock.



     We are also subject to provisions of Nevada law which could have the effect
of delaying, deterring or preventing a change of control of our company. In
addition, our articles of incorporation and by-laws contain provisions that
could discourage potential takeover attempts and make attempts by stockholders
to change management more difficult. See "Description of Securities -- Control
Share Acquisitions," "-- Anti-Takeover Provisions of Articles of Incorporation,"
"-- Board of Directors," and "-- Stockholder Action and Special Meetings."



YOU CANNOT BE CERTAIN AS TO HOW THE PROCEEDS OF THIS OFFERING WILL BE APPLIED


     Our management will have broad discretion over the use of the proceeds
raised in this offering, and you must rely on the judgment of management in the
application of the proceeds. Please see "How We Intend to Use the Proceeds of
this Offering" for more information related to our financing plan.

                                       16
<PAGE>   19


OUR FAILURE TO OBTAIN STATE REGULATORY APPROVAL BEFORE THIS OFFERING IS
COMPLETED MAY HAVE ADVERSE CONSEQUENCES TO US



     Before issuing any equity, we must obtain the approval of the State of
Georgia. Because of time constraints, we will not have obtained approval from
the State of Georgia before closing this offering. After consultation with
counsel, we believe the approval will be granted and that seeking approval after
this offering should not result in any material adverse consequences to us,
although we cannot assure you of a favorable result.


OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS


     This prospectus contains "forward-looking statements," which you can
generally identify by our use of forward-looking words including "believe,"
"expect," "intend," "may," "will," "should," "could," "anticipate" or "plan" or
the negative or other variations of these terms or comparable terminology, or by
discussion of strategies that involve risks and uncertainties. We often use
these types of statements when discussing



     - our plans and strategies;



     - our anticipation of profitability or cash flow from operations;



     - the development of our business;



     - the expected market for our services and products;



     - our anticipated capital expenditures;



     - changes in regulatory requirements; and



     - other statements contained in this prospectus regarding matters that are
       not historical facts.



     We caution you these forward-looking statements are only predictions and
estimates regarding future events and circumstances. We cannot assure you we
will achieve the future results reflected in these statements. The risks we face
that could cause us not to achieve these results include, but are not limited
to, those described above.


                                       17
<PAGE>   20

               HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING


     The net proceeds we receive from the sale of the 4,438,594 shares of common
stock we are offering are estimated to be approximately $172.6 million, based on
an assumed offering price of $41.06 per share, the closing price of our common
stock on December 27, 1999, and after deducting estimated underwriting discounts
and other offering expenses payable by us. We will receive approximately $198.9
million if the over-allotment option granted to the underwriters is exercised in
full. We will not receive any proceeds from the sale of any shares sold by the
selling stockholders.



     The net proceeds we receive from the sale of the Series D convertible
preferred stock being offered concurrently with this offering are estimated to
be approximately $145.0 million after deducting estimated underwriting discounts
and other offering expenses payable by us. We will receive $166.9 million if the
over-allotment granted to the underwriters with respect to the Series D
convertible preferred stock is exercised in full.



     Neither this offering nor the concurrent offering of Series D convertible
preferred stock are conditioned on the other and one offering may be completed
without the other.



     We intend to use the net proceeds from both offerings as follows:



<TABLE>
<S>                                                           <C>
Capital expenditures related to the purchase and
  installation of DSL and other communications equipment      $157.0 million
                                                              --------------
Market expansion and general corporate purposes, including
working capital to fund expanded sales, marketing and
product development efforts                                   $160.6 million
                                                              --------------
</TABLE>



     However, management will have broad discretion in determining the uses and
exact amounts for each use of the net proceeds. In addition, we may use a
portion of the net proceeds for acquisitions, although we are not involved in
any acquisition negotiations at this time. See "Risk Factors -- We will face
additional risks if we acquire other businesses" and "Risk Factors -- You cannot
be certain as to how the proceeds of this offering will be applied."


     Pending use of the net proceeds as described above, we intend to invest
them in short-term, investment grade securities.

                                DIVIDEND POLICY


     We have never paid cash dividends on our capital stock and we do not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations,
capital requirements and other factors our board of directors considers
relevant. In addition, the terms of our outstanding indebtedness and preferred
stock restrict our ability to pay cash dividends on our common stock and
preferred stock.


                                       18
<PAGE>   21

                                 CAPITALIZATION


     The following table shows our capitalization as of September 30, 1999, (A)
on an actual basis, (B) as adjusted to reflect the sale of the 4,438,594 shares
of common stock we are offering by means of this prospectus, and (C) as further
adjusted to reflect the sale of the 4,438,594 shares of common stock we are
offering by means of this prospectus, the sale of 1,250,000 shares of Series C
convertible preferred stock which is expected to close in December 1999, and the
sale of the 3,000,000 shares of Series D convertible preferred stock in the
concurrent offering.


     You should read this table with our financial statements and the related
notes appearing elsewhere in this prospectus.


<TABLE>
<CAPTION>
                                                               SEPTEMBER 30, 1999
                                              ----------------------------------------------------
                                               ACTUAL     AS ADJUSTED(1)    AS FURTHER ADJUSTED(2)
                                              --------    --------------    ----------------------
                                                             (DOLLARS IN THOUSANDS)
<S>                                           <C>         <C>               <C>
Cash and cash equivalents and investments
  available-for-sale, excluding restricted
  investments...............................  $178,961      $ 351,540             $ 531,073
Restricted investments......................    30,375         30,375                30,375
                                              --------      ---------             ---------
  Total cash and cash equivalents,
     investments available-for-sale and
     restricted investments.................  $209,336      $ 381,915             $ 561,448
                                              ========      =========             =========
13% senior secured notes due 2004...........  $157,125      $ 157,125             $ 157,125
Other long-term debt........................       552            552                   552
Series B convertible preferred stock........    46,663         46,663                46,663
Series C convertible preferred stock........        --             --                34,500
Series D convertible preferred stock........        --             --               145,033
Stockholders' equity:
  Common stock, $0.001 par value, 60,000,000
     shares authorized, 22,800,920
     outstanding and 27,239,514 outstanding
     as adjusted and as further adjusted....        23             27                    27
  Additional paid-in-capital................   227,955        400,530               400,530
  Accumulated deficit.......................   (91,062)       (91,062)              (91,062)
  Less: treasury stock......................       (76)           (76)                  (76)
  Accumulated other comprehensive income....      (360)          (360)                 (360)
  Notes receivable from stockholders for
     issuance of common stock...............    (2,086)        (2,086)               (2,086)
                                              --------      ---------             ---------
  Total stockholders' equity................   134,394        306,973               306,973
                                              --------      ---------             ---------
Total capitalization........................  $338,734      $ 511,313             $ 690,846
                                              ========      =========             =========
</TABLE>


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

(1) Gives effect to the sale of 4,438,594 shares of common stock in this
    offering.



(2) Gives effect to the sale of 4,438,594 shares of common stock in this
    offering, the sale of 1,250,000 shares of Series C convertible preferred
    stock, which are expected to be issued in December 1999, and the sale of
    3,000,000 shares of Series D convertible preferred stock in the concurrent
    offering.


                                       19
<PAGE>   22

                                    DILUTION


     The net tangible book value of a share of our common stock is the
difference between our tangible assets and our liabilities, divided by the
number of shares of common stock outstanding. For investors in the common stock,
dilution is the difference between the assumed $41.06 per share offering price
of the common stock and the net tangible book value per share of common stock
immediately after completing this offering. Dilution in this case results from
the fact that the per share offering price of the common stock is substantially
higher than the per share price paid by our existing stockholders for our
presently outstanding stock.



     On September 30, 1999, our net tangible book value was approximately $176.8
million and the per share net tangible book value of each of the assumed
outstanding shares of common stock, assuming the outstanding Series B
convertible preferred stock had been converted into 5,277,779 shares of common
stock, was approximately $6.30 per share.



     As of September 30, 1999, without taking into account any changes in our
net tangible book value after that date other than to give effect to the sale of
the common stock offered in this offering, based on an assumed offering price of
$41.06 per share, and the estimated offering expenses, including the
underwriting discount, the net tangible book value of each of the assumed
outstanding shares of common stock would have been $10.74 per share. Therefore,
you would have paid $41.06 for a share of common stock having a net tangible
book value of approximately $10.74 per share; that is, your investment would
have been diluted by approximately $30.32 per share. At the same time, existing
stockholders would have realized an increase in net tangible book value of $4.44
per share without further cost or risk to themselves. The following table
illustrates this per share dilution:



<TABLE>
<S>                                                      <C>      <C>
Assumed price per share of common stock in this
  offering...........................................             $41.06
Net tangible book value per share of common stock
before this offering.................................    $6.30
  Increase in net tangible book value per share of
     common stock attributable to investors in this
     offering(1)(2)..................................     4.44
                                                         -----
  Net tangible book value per share of common stock
     after this offering(1)(2).......................              10.74
                                                                  ------
Dilution to new investors in common stock(2)(3)......             $30.32
</TABLE>


- -------------------------
(1) After deducting the estimated offering expenses payable by us, including the
    underwriting discount.


(2) Assumes that none of our outstanding options or warrants are exercised and
    assumes the conversion of 5,277,779 shares of Series B convertible preferred
    stock which are convertible into shares of common stock on a one-for-one
    basis.



(3) If we were to give effect to the sale of 1,250,000 shares of Series C
    convertible preferred stock, which are expected to be issued in December
    1999, the sale of the Series D convertible preferred stock concurrently
    herewith and the conversion of all shares of Series C and D convertible
    preferred stock into common stock, the dilution to new investors in common
    stock would have been $     and the increase in net tangible book value per
    share of common stock attributable to investors in this offering would have
    been $     .


                                       20
<PAGE>   23

               SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA


     You should read the following selected consolidated financial and operating
data with our consolidated financial statements and the related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each of which can be found elsewhere in this prospectus. The
selected consolidated statement of operations data presented below for the years
ended December 31, 1996, 1997 and 1998 are derived from our consolidated
financial statements, which have been audited by KPMG LLP (1996) and Arthur
Andersen LLP (1997 and 1998), independent auditors.



<TABLE>
<CAPTION>
                                                                                                   NINE MONTHS ENDED
                                                                  YEAR ENDED DECEMBER 31,            SEPTEMBER 30,
                                                              --------------------------------    --------------------
                                                              1996(1)      1997         1998        1998        1999
                                                              -------    ---------    --------    --------    --------
                                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>        <C>          <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..........................................  $     1    $   3,791    $ 18,249    $ 11,772    $ 34,922
Cost of operating revenues, excluding depreciation..........      305        3,928      17,129      10,575      31,449
Selling, general and administrative
  expenses..................................................      841        6,440      17,877      11,250      27,469
Loss from operations........................................   (1,554)      (7,851)    (21,995)    (13,202)    (36,402)
Net loss....................................................   (1,491)     (10,836)    (32,065)    (22,293)    (44,744)
Basic and diluted loss per share of common stock............  $ (2.11)   $   (1.30)   $  (2.26)   $  (1.69)   $  (2.50)
</TABLE>



<TABLE>
<CAPTION>
                                                   AS OF DECEMBER 31,                      AS OF SEPTEMBER 30, 1999
                                              -----------------------------   --------------------------------------------------
                                              1996(1)     1997       1998      ACTUAL    AS ADJUSTED(2)   AS FURTHER ADJUSTED(3)
                                              -------   --------   --------   --------   --------------   ----------------------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                           <C>       <C>        <C>        <C>        <C>              <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments,
  excluding restricted investments..........  $ 7,897   $102,764   $ 84,949   $178,961     $ 351,540            $ 531,073
Restricted investments......................       --     57,574     39,379     30,375        30,375               30,375
Property and equipment, net.................    3,250     24,617    116,380    151,159       151,159              151,159
Total assets................................   12,339    191,977    252,119    381,814       554,393              733,926
Long-term debt..............................       --    156,637    157,295    157,677       157,677              157,677
Series A convertible preferred stock........       --     16,665         --         --            --                   --
Series B convertible preferred stock........       --         --         --     46,663        46,663               46,663
Series C convertible preferred stock........       --         --         --         --            --               34,500
Series D convertible preferred stock........       --         --         --         --            --              145,033
Stockholders' equity........................   10,792      8,976     63,260    134,394       306,973              306,973
</TABLE>



<TABLE>
<CAPTION>
                                                                                                   NINE MONTHS ENDED
                                                                  YEAR ENDED DECEMBER 31,            SEPTEMBER 30,
                                                              --------------------------------    --------------------
                                                              1996(1)      1997         1998        1998        1999
                                                              -------    ---------    --------    --------    --------
                                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>          <C>         <C>         <C>
OTHER FINANCIAL DATA:
EBITDA(4)...................................................  $(1,145)   $  (6,577)   $(16,757)   $(10,053)   $(23,996)
Cash flows used in operating activities.....................     (942)      (4,490)    (24,184)     (9,073)    (29,226)
Cash flows used in investing activities.....................   (2,287)    (135,491)    (77,715)    (92,948)    (54,784)
Cash flows provided by financing activities.................   11,126      177,138      68,731      68,387     165,348
Capital expenditures........................................    3,659       22,641      97,101      67,136      47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service...............................       50       15,590      47,744      35,246     117,210
Central office collocation sites............................        9           25         207          85         288
Switches in service.........................................        1            3           7           4           7
Number of sales personnel
    Field sales.............................................        7           23          50          39          95
    Inside sales............................................       --           --          31          53          33
                                                              -------    ---------    --------    --------    --------
        Total...............................................        7           23          81          92         128
</TABLE>


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

(1) No data is presented for periods before 1996 since we commenced our
    operations in December 1996 and no revenues or expenses were recognized and
    no cash transactions occurred between our inception on October 16, 1995 and
    December 31, 1995.



(2) Gives effect to the sale of 4,438,594 shares of common stock in this
    offering.



(3) Gives effect to the sale of 1,250,000 shares of Series C convertible
    preferred stock, which are expected to be issued in December 1999, the sale
    of 4,438,594 shares of common stock in this offering and the sale of
    3,000,000 shares of Series D convertible preferred stock in the concurrent
    offering.



(4) 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. EBITDA
    does not represent funds available for management's discretionary use and is
    not intended to represent cash flow from operations. EBITDA should not be
    considered as an alternative to loss from operations as an indicator of our
    operating performance or to cash flows as a measure of liquidity. In
    addition, EBITDA is not a term defined by generally accepted accounting
    principles and, as a result, the measure of EBITDA may not be comparable to
    similarly titled measures used by other companies. We believe that EBITDA is
    often reported and widely used by analysts, investors and other interested
    parties in the communications industry. Accordingly, we are including this
    information to permit a more complete comparison of our operating
    performance relative to other companies in the industry.


                                       21
<PAGE>   24

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


     You should read the following discussion together with our financial
statements and the notes related to our financial statements, each of which can
be found elsewhere in this prospectus.


OVERVIEW

     We began providing competitive local dialtone services to small business
and residential customers in December 1996 and began offering long distance
services by February 1998. In third quarter 1999, we began to offer high-speed
data and Internet services in our Las Vegas market. Currently, we have switches
fully operational in Las Vegas, Atlanta, Chicago, southern Florida, and in
selected areas of southern California, including Los Angeles and San Diego.

     Our 1997 revenues were generated from sales of communications services
consisting primarily of local phone service, switched access billings and
non-recurring charges, principally installation charges. In 1998 and the first
nine months of 1999, long distance services also contributed to our revenue
base.

     Our principal operating expenses consist of cost of operating revenues,
selling, general and administrative expenses and depreciation and amortization
expense. Cost of operating revenues consists primarily of access charges, line
installation expenses, transport expenses, compensation expenses of technical
personnel, long distance expenses and collocation lease expenses. Selling,
general and administrative expenses consist primarily of compensation expenses,
advertising, provision for bad debts, professional fees and office rentals.
Depreciation and amortization expense includes depreciation of switching and
collocation equipment as well as general property and equipment.

     During 1998, we expanded significantly with the installation of four
additional switches and the build-out of 182 additional collocation sites.
During the first nine months of 1999, we have continued this expansion with the
build-out of 81 additional collocation sites. As expected, both cost of
operating revenues and selling, general and administrative expenses increased as
many of the fixed costs of providing service in new markets are incurred before
significant revenue can be generated from those markets. In addition, we
incurred significant marketing costs to build our initial base of customers in
our new markets.


     Building and expanding our business has required and will continue to
require us to incur significant capital expenditures primarily consisting of the
costs of purchasing switches, associated equipment and land for switching sites
and constructing buildings or improving leased buildings to house our switching
and collocation facilities. As part of our network growth strategy, we purchased
and installed host switches in each of our markets while leasing the means of
transporting voice and data traffic from these switches to our customers'
telephones or other equipment. We believe this facilities-based strategy, while
initially increasing our level of capital expenditures and operating losses,
will enhance our long-term financial performance in comparison to a resale
strategy.


     We have experienced operating losses and generated negative cash flow from
operations since inception and expect to continue to generate negative cash flow
from operations for the foreseeable future while we continue to expand our
network and develop our product offerings and customer base. There can be no
assurance our revenue or customer base will grow or that we will be able to
achieve or sustain positive cash flow from operations. See "Risk Factors -- We
expect our losses to continue."

                                       22
<PAGE>   25

RESULTS OF OPERATIONS

NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 VS. SEPTEMBER 30, 1998


     Total operating revenues increased to $34.9 million for the nine months
ended September 30, 1999 as compared to $11.8 million for the nine months ended
September 30, 1998. The 196% increase was primarily the result of the increase
in the number of lines in service. Total lines in service increased 233% from
35,246 at September 30, 1998 to 117,210 at September 30, 1999. In addition, long
distance service, which was added to our product offerings in February 1998,
contributed to the revenue base for the full nine month period in 1999, but only
for seven full months in the similar period in 1998. Our switched access
revenues, which represented 35% of our total operating revenues for the nine
months ended September 30, 1999, increased $6.8 million or 128% from the nine
month period ended September 30, 1998 to the nine month period ended September
30, 1999.


     Cost of operating revenues for the nine months ended September 30, 1999 was
$31.4 million as compared to $10.6 million for the nine months ended September
30, 1998. The 196% increase is due to the increased number of lines in service
and installation and operational expenses associated with the expansion of our
network.

     For the nine months ended September 30, 1999, selling, general and
administrative expenses totaled $27.5 million, a 143% increase over the $11.3
million for the nine months ended September 30, 1998. The increase is a result
of increased costs attributable to marketing and delivering our service and
supporting our continued network expansion.

     For the nine months ended September 30, 1999, depreciation and amortization
was $12.4 million as compared to $3.1 million for the nine months ended
September 30, 1998. This increase is a result of placing additional assets in
service in accordance with the planned build-out of our network.


     Gross interest expense during each nine month period ended September 30,
1999 and 1998 totaled $16.7 million. Interest capitalized for the nine months
ended September 30, 1999 increased to $2.9 million as compared to $0.6 million
for the nine months ended September 30, 1998. The increase in interest
capitalized is due to the increase in switching equipment under construction.
Gross interest expense is primarily attributable to the 13% Senior Secured Notes
due 2004 we issued in September 1997.



     Interest income was $5.2 million during the nine months ended September 30,
1999 compared to $7.0 million for the nine months ended September 30, 1998. The
26% decrease is a result of the decrease in cash and investments since September
30, 1998. Cash and investments have been used to purchase switching equipment,
pay interest on the senior secured notes and fund operating losses.


     We incurred net losses of $44.7 million and $22.3 million for the nine
month periods ended September 30, 1999 and 1998, respectively.

YEAR ENDED DECEMBER 31, 1998 VS. 1997

     Total operating revenues for the year ended December 31, 1998 were $18.2
million as compared to $3.8 million for the year ended December 31, 1997. The
381% increase is a result of the installation of four additional switches, an
increase in the number of lines in service and the introduction of long distance
service in early 1998. We provided communications services in only Las Vegas
until December 1997 when we initiated service in Atlanta and southern
California. As a result of our network expansion, during 1998 we began to offer
service in Chicago and additional areas of southern California, including Los
Angeles and San Diego. We had 47,744 lines in service as of December 31, 1998 as
compared to 15,590 lines in service as of December 31, 1997, a 206% increase.


     Cost of operating revenues for the year ended December 31, 1998 was $17.1
million as compared to $3.9 million for the year ended December 31, 1997. The
336% increase is due to the increased number of lines in service during 1998,
network expenses associated with initiation of long distance


                                       23
<PAGE>   26


service in February 1998, and installation and operational expenses associated
with the significant expansion of our network.


     For the year ended December 31, 1998, selling, general and administrative
expenses totaled $17.9 million, a 178% increase over the $6.4 million for the
year ended December 31, 1997. The increase in expenses resulted from increased
costs attributable to marketing of services, delivering our service and
supporting our continued network expansion.


     For the year ended December 31, 1998, depreciation and amortization was
$5.2 million as compared to $1.3 million for the year ended December 31, 1997.
This increase is a result of placing additional assets in service during the
period to support our planned build-out of our network. As of December 31, 1998
we had seven operational switches and 207 collocation sites built out as
compared to three switches and 25 collocation sites as of December 31, 1997.



     Interest expense for fiscal 1998 totaled $19.1 million as compared to $5.5
million for fiscal 1997. The increase is primarily attributable to a full year
of interest incurred on the senior secured notes we issued in September 1997.



     Interest income was $8.8 million for the year ended December 31, 1998
compared to $2.5 million for the year ended December 31, 1997. The income is
attributable to earnings on investments made with the proceeds from the issuance
of the senior secured notes and with the proceeds from the sale of our common
and preferred stock.


     We incurred net losses of $32.1 million during 1998 and $10.8 million
during 1997.

YEAR ENDED DECEMBER 31, 1996

     Our operations before December 1996 were limited to start-up activities
and, as a result, our revenues and expenditures for the period were not
indicative of anticipated revenues which may be attained or expenditures which
may be incurred by us in future periods. We did not begin revenue-generating
operations until December 1996. As a result, any comparison of the year ended
December 31, 1997 with the year ended December 31, 1996 would not be meaningful.

     During the year ended December 31, 1996, we generated $1,000 in operating
revenues as a result of commencing service during the month of December. We had
cost of operating revenues of $0.3 million which represents primarily fixed
costs. In addition, we incurred other operating expenses, including depreciation
and amortization, of $1.3 million in connection with the commencement of
operations and the build-out of our 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.

     We earned interest income in the period of $0.1 million.

     As a result, we 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 our business.

LIQUIDITY AND CAPITAL RESOURCES


     Our operations require substantial capital investment for the purchase of
communications equipment and the development and installation of our network.
Capital expenditures were $47.1 million for the nine months ended September 30,
1999, $97.1 million for the year ended December 31, 1998 and $22.6 million for
the year ended December 31, 1997. We expect we will continue to require
substantial amounts of capital to fund the purchase of the equipment necessary
to continue expanding the geographic coverage of our network in our existing
markets and to develop new products and services. In addition, we expect to
enter new markets during 2000. We expect capital expenditures of approximately
$550 million over the next five years, including approximately $25.0 million of
capital expenditures expected during the last three months of 1999.


                                       24
<PAGE>   27

     From our inception through September 1997, we raised approximately $17.8
million from private sales of common stock.


     In September 1997, we completed a $160.0 million offering of senior secured
notes and warrants to purchase 862,923 shares of common stock after giving
effect to anti-dilution adjustments. At the closing of the sale of the senior
secured notes, we used approximately $56.8 million of the net proceeds from 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. In addition, we have granted the holders of the senior secured
notes a security interest in a significant portion of our communications
equipment.



     In November 1997 and January 1998, we issued an aggregate of 6,571,427
shares of Series A convertible preferred stock at $3.50 per share for net
proceeds of $21.6 million.


     We completed our initial public offering of common stock on May 15, 1998.
We sold a total of 4,025,000 shares of our common stock to the public and
received net proceeds of $63.0 million. In connection with the initial public
offering of our common stock, we reduced the number of authorized and
outstanding shares of our common stock by 40%. Our outstanding shares of
preferred stock were converted into 3,942,856 shares of common stock upon our
initial public offering.


     In May 1999, we issued 5,277,779 shares of Series B convertible preferred
stock at $9.00 per share for net proceeds of approximately $46.7 million.



     In July 1999, we issued 5,000,000 shares of common stock and received net
proceeds, after expenses, of approximately $118.1 million. In the offering,
existing stockholders sold an additional 587,695 shares of common stock for
which we did not receive any proceeds.



     In November 1999, we entered into an agreement with Providence Equity
Partners III, L.P., JK&B Capital III, L.P. and their affiliates under which we
agreed to sell 1,250,000 shares of newly issued Series C convertible preferred
stock at $28.00 per share for a total consideration of $35.0 million. Of the
total consideration, $4.9 million is to be paid by an interest bearing
promissory note due in March 2000. This issuance of Series C convertible
preferred stock is expected to close in December 1999. The closing is to occur
after satisfaction of customary conditions. We cannot assure you that these
conditions will be met. The Series C convertible preferred stock may be
converted into common stock on a one-to-one basis. See "Description of
Securities -- Series C Convertible Preferred Stock."



     As of September 30, 1999, we had outstanding receivables of approximately
$12.3 million attributable to access charges billed to AT&T, Sprint, MCI
WorldCom and other long distance carriers. AT&T, Sprint and MCI WorldCom refused
to pay the full amount of the access charges billed to them. We have since
settled our dispute with MCI WorldCom; however, our disputes with AT&T and
Sprint have yet to be resolved. Our failure to collect from these long distance
carriers could have a material impact on our financial condition. See
"Business -- Legal Proceedings" and "Risk Factors -- We may not be able to
collect all of the access charges we have billed to long distance carriers."


     The substantial capital investment required to initiate services and fund
our initial operations has exceeded our operating cash flow. This negative cash
flow from operations results from the need to establish our network in
anticipation of connecting revenue-generating customers. We expect to continue
recording negative cash flow from operations for a period of time because we are
continuing network expansion activities. We cannot assure you we will attain
break-even cash flow from operations in subsequent periods. Until sufficient
cash flow from operations is generated, we will need to use our current and
future capital resources to meet our cash flow requirements and may be required
to issue additional debt and/or equity securities. We expect our available cash
and the

                                       25
<PAGE>   28


proceeds of the issuance of Series C convertible preferred stock, this offering
and the concurrent offering as well as future cash flow from operations should
be adequate to fund our operations and planned capital expenditures. We cannot
assure you that we will be successful in completing the concurrent offering or
the proposed sale of Series C convertible preferred stock. If any of these
offerings are not successful or if future cash flow from operations is not
sufficient, management intends to consider alternate forms of financing or to
delay or modify some of our expansion plans. Depending on market conditions, we
may raise additional capital at any time. However, we cannot assure you that we
will be successful in raising additional debt or equity financing on terms
acceptable to us, if at all. The indenture governing the senior secured notes
and the terms of our preferred stock impose restrictions upon our ability to
incur additional debt or issue preferred stock.


IMPACT OF YEAR 2000

     The year 2000 issue, commonly referred to as Y2K, is a result of the way
some computer systems store dates. In many cases, when a date is stored by a
computer, a two digit field has been used to store the year (i.e., 01/01/98 =
January 1, 1998). The system assumes that the first two digits in the year field
are "19." With the end of the century approaching, those same systems should
reflect 01/01/00 as being "January 1, 2000." However, a non-compliant system
will read 01/01/00 as January 1, 1900.

     We have been focused on year 2000 issues since our inception in 1996. In
recognition of the priority associated with the year 2000 issue, we have
established a Year 2000 Project Team at the corporate level to lead the year
2000 effort. Since we are young, much of the hardware and software currently in
place was purchased with Y2K readiness in mind. However, in most cases, we have
relied on representations of our vendors as to the Y2K compliance of the
hardware and software we have purchased. We cannot assure you the vendor
representations we relied upon are accurate or complete or that we will have
recourse against any vendors whose representations prove misleading.

     Our Y2K plans include a number of phases designed to evaluate the Y2K
readiness of our network and computer systems. We have completed the inventory
and assessment of all network and information systems and have begun the
renovation and testing phases. Renovations of mission critical components of our
network and operations support system for Year 2000 compliance were completed in
June 1999. We will continue integration testing throughout the remainder of
1999. Subject to additional compliance testing, we believe our essential
processes, systems and business functions will be ready for the 1999 to 2000
transition.

     Our significant vendors, including our major communications equipment
suppliers, have assured us their applications are year 2000 compliant. Our
business also relies on other third parties. The ability of third parties upon
whom we rely to adequately address their year 2000 issues is outside our
control. However, we are coordinating efforts with these parties to minimize the
extent to which our business will be vulnerable to their failure to remediate
their own year 2000 issues. We cannot assure you the systems of the third
parties will be modified on a timely basis. Our business, financial condition
and results of operations could be materially adversely affected by the failure
of the systems and applications of third parties to properly operate after 1999.

     We are continuously evaluating our contingency plans should mission
critical systems fail as a result of Y2K issues.


     As of November 30, 1999, we had incurred less than $100,000 of expenses in
connection with our preparation for Y2K issues and we do not expect to incur any
significant additional expenses.


     In a recent SEC release regarding year 2000 disclosure, the SEC stated that
public companies must disclose the most reasonably likely worst case year 2000
scenario. Although it is not possible to assess the likelihood of any of the
following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical, gas and similar suppliers serving
us; widespread

                                       26
<PAGE>   29

disruption of the services provided by common carriers; similar disruption to
the means and modes of transportation for our employees, contractors, suppliers
and customers; significant disruption to our ability to gain access to, and
remain working in, office buildings and other facilities; the failure of
substantial numbers of our critical computer hardware and software systems,
including both internal business systems and systems controlling operational
facilities such as electrical generation, transmission and distribution systems;
and the failure of outside entities' systems, including systems related to
banking and finance.

     If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers or loss of revenue due to
service interruptions, inability to fulfill contractual obligations or to bill
customers accurately and on a timely basis, as well as increased expenses
associated with litigation, stabilization of operations following critical
system failures and the execution of contingency plans. We could also experience
an inability by customers and others to pay, on a timely basis or at all,
obligations owed to us. Under these circumstances, the adverse effects, although
not quantifiable at this time, could be material.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



     All of our long-term debt bears fixed interest rates. However, the fair
market value of this debt is sensitive to changes in prevailing interest rates.
We run the risk that market rates will decline and the required payments on our
outstanding debt will exceed those based on the current market rate. We do not
use interest rate derivative instruments to manage our exposure to interest rate
changes.


IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS


     The American Institute of Certified Public Accountants recently issued
Statement of Position or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires start-up costs, as defined, to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. We currently expense all start-up costs as incurred and
consequently, the application of SOP 98-5 will have no material impact on our
financial statements.



     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivatives be recognized at fair value as either assets or
liabilities. SFAS No. 133 also requires an entity that elects to apply hedge
accounting to establish the method to be used in measuring the effectiveness of
the hedging derivatives and the measurement approach for determining the
ineffectiveness of the hedge at the inception of the hedge. The methods chosen
must be consistent with the entity's approach to managing risk. The standard is
effective for our 2000 fiscal year. We have adopted SFAS No. 133 during 1999.
Adoption of SFAS No. 133 has not had a material effect on us since we do not
currently use derivatives or participate in hedging activities.


                                       27
<PAGE>   30

                                    BUSINESS

MGC COMMUNICATIONS


     We are a growing communications company currently offering Internet access,
voice over DSL, local dialtone, long distance and other voice and data services
primarily to small and medium size business customers. We have launched bundled
voice and high-speed data services using DSL technology in all of our current
markets. We have one of the broadest geographic service areas of any competitive
carrier providing local, long distance and data services, with 288 central
office collocation sites providing us access to approximately 16 million
addressable lines at the end of third quarter 1999. Over 200 of our central
office collocation sites are DSL capable. We currently deliver our services in
the metropolitan areas of Atlanta, Chicago, Las Vegas, southern Florida and
selected areas of southern California, including Los Angeles and San Diego. We
have interconnection agreements with five incumbent carriers: Ameritech,
BellSouth, GTE, PacBell and Sprint. At the end of the third quarter of 1999, we
had 138,400 customer lines sold, of which 117,210 lines were in service. To
rollout our network and services on a national basis, during 2000, we plan to
aggressively expand our network to include over 800 central office collocation
sites providing access to more than 35 million addressable lines.



     We were one of the first competitive carriers to implement a strategy of
building and owning the network equipment that controls how voice and data
transmissions originate and terminate, which we refer to as switches, while
leasing the telephone lines and cable over which the voice and data traffic are
transmitted, which we refer to as transport, from incumbent carriers. We install
our network equipment at the site of the incumbent carrier from whom we rent
standard telephone lines. These sites are referred to as collocation sites
within the telecommunications industry. We believe this strategy has allowed us
to serve a broad geographic area at a comparatively low cost while maintaining
control of the access to our customers. Having executed our strategy in the
markets we currently serve, we are well-positioned to serve the growing demand
from small and medium size business customers for communications services. For
an explanation of terms used in this prospectus to describe our network and its
components, please read the section entitled "-- Network Architecture and
Technology."



     The rapid growth of the Internet has fueled demand from small and medium
size businesses for access to high-speed data services. To meet this growing
demand, we are using our current network infrastructure and DSL technology to
offer a bundled voice and high-speed data product over a single standard
telephone line. On average, DSL technology increases the transport capacity of
standard telephone lines by 24 times. By using a single standard telephone line
which we lease from the incumbent carrier to deliver a bundled voice and
high-speed data product, we expect to significantly reduce the per line costs of
providing our services. These savings should allow us to offer a value-priced
package of services to our customers.


MARKET OPPORTUNITY

     We believe we have a significant market opportunity as a result of the
following factors:

  Impact of the Telecommunications Act of 1996


     The Telecommunications Act of 1996 allows competitive carriers to use the
existing infrastructure established by incumbent carriers, as opposed to
building a competing infrastructure at significant cost. The Telecommunications
Act requires all incumbent carriers to allow competitive carriers to collocate
their equipment in the incumbent carrier's central offices. This enables
competitive carriers to access customers through existing telephone line
connections. The Telecommunications Act creates an incentive for incumbent
carriers that were formerly part of the Bell


                                       28
<PAGE>   31


system to cooperate with competitive carriers by precluding each of these
incumbent carriers from providing long distance service in its region until
regulators determine there is a significant level of competition in the
incumbent carrier's local market. See "-- Government Regulations."


  Needs of Small and Medium Size Businesses for Integrated Communications
Solutions


     Many small and medium size businesses have no cost-effective alternative to
dial-up modems for Internet access. As a result, these businesses must contend
with productivity limitations associated with slow transmission speeds. In
addition, to meet their communications needs, small and medium size businesses
are subject to the cost and complexity of using multiple service providers:
local dialtone providers, long distance carriers, Internet service providers and
equipment integrators. We believe these businesses can benefit significantly
from an integrated cost-effective communications solution delivered by a single
provider.


  Growing Market Demand for High-Speed Data Services and E-commerce Solutions


     The popularity of the Internet with consumers and the development of the
Internet as a commercial medium have driven the demand for high-speed data
services. Businesses are increasingly establishing Web sites and corporate
intranets and extranets to expand their customer reach and improve their
communications efficiency. To remain competitive, small and medium size
businesses increasingly need high-speed data and Internet connections to access
critical business information and communicate more effectively with employees,
customers, vendors and business partners. This is commonly referred to as
"e-commerce". High-speed digital connections are also becoming increasingly
important to businesses and consumers as more information and applications
become available on the Internet.


  Emergence of DSL Technology

     DSL technology emerged in the early 1990's and is now commercially
available. DSL technology dramatically increases the data, voice and video
carrying capacity of standard copper telephone lines. Because DSL technology
uses existing copper telephone lines, a broad network deployment can be
implemented rapidly and requires a lower initial fixed investment than some
existing alternative technologies. In addition, since a significant portion of
the expense associated with a DSL network is incurred only when a new customer
is added to the network, capital is efficiently deployed.

THE MGC SOLUTION

     We believe we offer an attractive communications solution to small and
medium size business customers. In developing our solution, we have attempted to
include elements intended to create customer loyalty. Key aspects of our
solution include:


     Complete Communications Solutions.  We offer a value-priced complete
communications solution, including voice over DSL and high-speed Internet access
services, all on a single bill. We offer this package in all of our markets and
we plan to offer additional Internet-based e-commerce products in 2000. Our
customers have a single point of contact for a complete package of services,
eliminating the need for our customers to manage multiple vendors.



     Service Reliability.  We are able to offer our customers a high degree of
service reliability through efficient, timely execution of provisioning
telephone lines due to our mature relationships with five incumbent carriers in
the markets we currently serve. We believe our continued rollout of DSL
technology will enable us to further improve our service reliability by
simplifying the provisioning process. Moreover, our customer service center is
staffed to respond promptly to customer inquiries 24 hours a day, seven days a
week. See "-- Network Architecture and Technology."


                                       29
<PAGE>   32

BUSINESS STRATEGY

     Rapid National Service Rollout.  Our strategy is to address the greatest
percentage of our targeted customers as quickly as possible and gain market
share. To create a national presence during 2000, we plan to aggressively expand
our network to include over 800 central office collocation sites. Our central
office collocation build-out program is designed to allow us extensive coverage
in all the markets we enter. By positioning ourselves to be the first provider
of bundled voice and data services targeted to small and medium size business
customers in our markets, we expect to attract many "early adopter" customers
that are interested in high-speed Internet access and data services. See
"-- Markets."


     Focused Sales and Marketing Effort.  To date, we have demonstrated an
ability to sell and provision our services to small and medium size business
customers. We achieved this through a direct sales force, vendor programs,
telemarketing and targeted advertising. We plan to significantly increase our
direct sales force to provide sales coverage for our expanding geographic
market. We plan to grow our direct sales force from 128 at September 30, 1999 to
over 350 by year end 2000. Additionally, we will continue developing
relationships with third party agents or vendors as a complement to our direct
sales channels. Our simplified, packaged product set enables us to easily train
our sales force and decreases the time required to market and sell our services.
With our bundled voice and data solution, our sales force can target the small
and medium size business market segment with our total communications solution.



     Completion of DSL Deployment.  We are in the process of deploying our
high-speed data solution within our existing network. We have over 200 central
office collocations equipped to offer DSL services. In addition, all of our new
collocation sites will be equipped with DSL technology upon implementation. Our
physical presence in incumbent carriers' facilities allows us access to
telephone lines which is critical to deploying our DSL product set. The
integration of DSL into our existing network is accomplished by installing
advanced equipment in our host switch sites, collocation sites and customer
sites.



     Targeting Small and Medium Size Businesses.  Based on telephone lines in
service, we believe the small and medium size business customer base is a large
and rapidly growing segment of the communications market in the United States.
We target suburban areas of large metropolitan markets because these areas have
high concentrations of small and medium size businesses. By introducing a
package of voice and data services and focusing on small and medium size
business sales, we believe we will gain a competitive advantage over the
incumbent carrier, our primary competitor for these customers.



     Customer Access Control.  By connecting the standard telephone line
originating at our customer's site to our central office collocation, we
effectively place the customer on our network. This connection serves as the
platform for delivering our current and future communications services to our
customers. Any future changes our customers want to make to their services,
including purchasing more services from us, are under our direct control. The
one exception is for repairs, which are infrequent but may require the
participation of the incumbent carrier's network maintenance staff.



     Capital Efficient Network.  We were one of the first competitive local
exchange carriers to implement a network strategy of purchasing and installing
switches, collocating in the central offices of the incumbent carrier and
leasing local telephone lines and cable. We believe this network deployment
strategy provides a capital efficient build-out plan and an attractive return on
our invested capital. We have installed DSL technology across a substantial
portion of our existing network which


                                       30
<PAGE>   33


will allow us to reduce significantly the number of telephone lines we lease. We
are currently evaluating alternative switching devices which are significantly
smaller and less expensive than the switches we have deployed to date. We
believe these switches may permit us to move the intelligence that determines
where to route traffic closer to our customers. We expect this decentralized
switching approach will allow us greater efficiencies in our network.



     Sophisticated Operations Support System.  We have developed a
comprehensive, proprietary operations support system to manage our business. Our
proprietary system provides integrated features addressing substantially all
aspects of our business, including customer care, billing and collections,
general ledger, payroll, fixed asset tracking, and personnel management. We
believe our system is adaptable to changing circumstances and multiple incumbent
carrier provisioning systems, and can be enhanced to support our operations
throughout our planned growth.



     Timely and Accurate Provisioning for Our Customers.  We believe one of the
keys to our success is effectively managing the provisioning process for new
customers. Towards this goal, we have committed significant time and resources
to designing more efficient provisioning processes, both internally and with
each of the incumbent carriers. We are in final testing of our internal
automation process whereby all new orders are provisioned through our operations
support system on a real-time basis. Since 1998, we have been developing and
implementing electronic order interfaces with all of the incumbent carriers with
which we work designed to improve provisioning performance by eliminating manual
keying of information and the need to fax paper orders back and forth. As an
illustration, we are currently provisioning the majority of our orders in Las
Vegas through an electronic interface with Sprint. This type of interface, also
known as "electronic bonding," substantially reduces the time, number of steps
and duplication of work typically involved in the provisioning process,
substantially lowering our costs and providing a more attractive solution to our
customers.



     As we deploy DSL technology throughout our network, we expect the
provisioning process will become easier for us and more transparent for our
customers. With DSL technology in place, one standard telephone line will
provide enough capacity for multiple voice and data connections at the
customer's premises. Therefore, we will be provisioning fewer lines per
customer, making us significantly less dependent on the incumbent carrier for
placing our customers in service.


     Co-marketing Arrangements with E-commerce Providers.  To expand our product
offerings, we have begun to partner with e-commerce providers. We recently
entered into an agreement to co-market PurchasePro.com's e-business solution to
our small and medium size business customers. We believe co-marketing
arrangements will allow us to further solidify our position as a single source
provider of communications services.

     Develop E-commerce Data Centers.  We believe we will be able to provide an
attractive opportunity for e-commerce providers to use our network facilities to
access our customer base. To exploit this opportunity, we plan to build regional
data centers to host the servers used by e-commerce providers. To support these
data centers, we expect to offer basic security and monitoring services. We
believe by offering these services we will be able to attract e-commerce
partners and enhance the service offerings available to our customers.

     Quality Customer Service.  We believe providing quality customer service is
essential to offering a superior product to our customers and creating customer
loyalty. A service representative is assigned to each business customer to
coordinate conversion of service and handle any post-installation issues. In
addition, we have a centralized call service center operating 24 hours a day,
seven days a week which handles general billing, customer care and related
issues for all of our customers. The service representatives use our proprietary
operations support system to gain immediate access to our customers' data,
enabling quick responses to customer requests and needs at

                                       31
<PAGE>   34

any time. This system allows us to present our customers with one fully
integrated monthly billing statement for all communication services.

PRODUCTS AND SERVICES


     To date, we have focused on offering basic telephone and data services to
our small business and residential customers. These services include our
Internet access portal known as MGCi.com, switched local dialtone, long distance
services and custom calling features such as voice mail, call waiting and call
forwarding. To capitalize on the growing demand of small and medium size
business customers for Internet and data services, we have recently introduced
our "Total Solution" package, a bundled offering of high-speed data access using
DSL technology, in all of our markets. The chart below shows the component
features of our "Total Solution" package for small and medium size business
customers:


<TABLE>
<CAPTION>
                             "TOTAL SOLUTION" PACKAGE
                             ------------------------
<S>                                         <C>
8 voice lines                               MGC Long Distance
Internet access at speeds up to 1.5 Mbps    500 minute increments
Unlimited custom calling features           Free local calling
MGCi.com                                    Customer premise equipment
  Web Hosting                               Single bill and single point of contact
  10 e-mail boxes
</TABLE>

MARKETS


     We currently operate in Las Vegas, Atlanta, Chicago, southern Florida and
selected areas of southern California, including Los Angeles and San Diego. As
of September 30, 1999, we had 288 central office collocation sites providing
access to approximately 16 million addressable lines in these markets. The table
below shows the distribution of our central office collocation sites within
these markets.


<TABLE>
<CAPTION>
MARKET AREA                              COLLOCATION SITES    ADDRESSABLE LINES
- -----------                              -----------------    -----------------
<S>                                      <C>                  <C>
Southern California....................         147              8.3 Million
Atlanta................................          37              2.0 Million
Chicago................................          50              2.5 Million
Southern Florida.......................          36              2.2 Million
Las Vegas..............................          18              1.0 Million
                                                ---             ------------
          TOTALS.......................         288             16.0 MILLION
</TABLE>


     To achieve a national presence, we plan to collocate in over 450 incumbent
carrier central offices during 2000. All of these collocations will be located
within the 50 largest metropolitan areas of the country, primarily in the
surrounding suburban areas. When evaluating new markets, we consider:


     - The importance of the geographic area to our national presence; and


     - The demographics of the market, specifically the presence of clusters of
       incumbent carrier central offices with high concentrations of small and
       medium size business lines.



     Based on the criteria outlined above, the table below indicates the number
of collocated central office sites and approximate addressable lines we have
identified for expansion during 2000. The timing of our entering into new
markets will depend on market conditions, incumbent carrier


                                       32
<PAGE>   35


cooperation and other factors. We cannot assure you we will be able to add
collocation sites at the times indicated below.



<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL   ADDRESSABLE          PLANNED
 COLLOCATION SITES        LINES        OPERATIONAL DATE
- --------------------   -----------     ----------------
<C>                    <C>            <S>
         50             2.0 million   First Quarter 2000
         60             2.4 million   Second Quarter 2000
         70             2.8 million   Third Quarter 2000
        270            10.8 million   Fourth Quarter 2000
        ---            ------------
        450            18.0 million
</TABLE>


SALES AND MARKETING

     Our highly focused marketing efforts seek to generate well-managed,
profitable growth through increased market share with minimal customer turnover.
Our current sales programs include direct sales efforts, programs with agents
and vendors, telemarketing and targeted advertising directed at the small and
medium size business customer. Due to the simplicity of our bundled voice and
data solution, we will not need to incur extensive costs to train our expanding
sales force.


     As of September 30, 1999, we employed 95 field sales personnel and 33
inside sales personnel. We expect the size of our sales force to increase
substantially during 2000 as we expand the geographic coverage of our network to
a national scale. During the fourth quarter of 1998, we implemented a "team"
sales approach in our Las Vegas market. We are in the process of implementing
this approach in each of our local markets. Each team consists of two field
sales representatives, one business service representative, one inside sales
representative and one field technician. The field sales representatives work
from lead lists which specifically identify small and medium size business
prospects located within our geographic service area. The inside sales
representative solicits leads and schedule appointments and, when practical,
close sales over the phone. Our business service representative acts as the
liaison between the small business customer and our operational personnel to
effect a coordinated transfer of service from the incumbent carrier's network to
our network. The field technician is responsible for the installation of the
customer premise equipment. These teams report to the city managers and
ultimately the presidents of their respective regions.



     To complement our sales force, we use established telephone equipment
vendors to market our services in conjunction with equipment sales to business
customers. We believe this distribution channel will become more productive for
us in the near future with the continued rollout of our bundled voice and
high-speed data solution.


NETWORK ARCHITECTURE AND TECHNOLOGY


     In building our network we have implemented a strategy where we own the
hardware that routes voice calls and data traffic, which we refer to as
switches, while leasing the telephone lines and cable over which the voice calls
and data traffic are actually transmitted, which we refer to as transport. We
use three basic types of transport to transmit our voice calls and data traffic.
First, we lease the standard telephone line from the incumbent carrier. This
allows us to move voice calls and data traffic from a customer's location to the
nearest central office owned by the incumbent carrier. Inside these central
offices, we have installed equipment that allows us to deliver the services we
sell to our customers. Second, we lease cable from other communications
companies which connect the equipment we have installed in the central office of
the incumbent carrier to our switches. Third, we lease additional cable from
other communications companies, which connect our switches to each


                                       33
<PAGE>   36


other and allow us to complete our customers' long distance calls to national
and international destinations. We believe this network strategy provides us an
efficient capital deployment plan and an attractive return on our invested
capital.



     We believe that leasing the standard telephone line from the incumbent
carrier's central office to the end-user provides a cost-efficient solution for
gaining control of access to our customers. Leasing costs are not incurred until
we have acquired a customer and revenue can be generated. It is our experience
that the cable required to connect our collocation equipment located at an
incumbent carriers' central office to our switching hardware and the cable
required to connect our customers' voice calls and data traffic to the Internet
and other telephones is available at reasonable prices in all of our current and
planned markets. Because the cable required to transport voice calls and data
traffic has become a readily available service from numerous other
communications companies, we have focused our efforts on owning and installing
the hardware that determines where to route voice calls and data traffic and on
selling and delivering our services to our customers.



     In 1996, we installed our first switch in Las Vegas. By the end of 1998, we
had seven operational switches. All of our current switches are DMS-500 switches
manufactured by Northern Telecom. These switches offer a flexible and cost
efficient way for us to provide local and long distance services to our
customers. We are currently testing smaller and less expensive switches that
would allow us to move the hardware that determines where to route voice calls
and data traffic closer to our customers. This decentralized approach to
determining where to route voice calls and data traffic should allow us to make
more efficient use of the cable we lease to transport voice calls and data
traffic. We envision our planned expansion in the second half of 2000 and beyond
to utilize these smaller and less expensive switches which will be installed in
the central office space we rent from the incumbent carrier and will interact
fully with the DSL equipment we are currently installing.



     Once we have installed equipment in the collocation sites we rent from the
incumbent carrier, we initiate service to a customer by arranging for the
incumbent carrier to physically disconnect a standard telephone line from their
equipment and reconnect the same standard telephone line to our equipment. When
the standard telephone line has been connected to our equipment, we have direct
access to the customer and can deliver our current voice and data services. Any
future changes the customer wishes to make, such as purchasing more services
from us, are under our direct control. The one exception is for certain types of
repairs, which are infrequent, but which may require the participation of the
incumbent carrier's maintenance staff.



     We have increased the number of collocation sites where we have installed
equipment from nine as of December 31, 1996 to 288 as of September 30, 1999. We
believe the expertise we have developed in successfully applying for space in
these central offices, installing our equipment and maintaining the equipment
once it is installed will allow us to efficiently handle our planned expansion.



     Our seven switches are connected to each other by cable which allows us to
transmit voice calls and data traffic using asynchronous transfer mode
technology. Asynchronous transfer mode technology allows both voice calls and
data traffic to be transported in digital form over a single cable connection at
high speeds and reasonable costs. The introduction of DSL technology into our
network will allow us to transport both voice calls and data traffic in digital
form on a single telephone line from a customer's location to one of our
switches.


                                       34
<PAGE>   37


     The diagram below depicts how our network is configured with DSL technology
in our existing markets.



                          [DSL technology Flow Chart]



     We install DSL equipment at our collocation sites, at our switch sites and
at our customers' locations. The DSL equipment we use is manufactured by Copper
Mountain, Turnstone and Tollbridge Technologies. Where installed, this equipment
allows us to deliver multiple voice calls and data traffic over a single,
standard telephone line and is expected to provide us with substantial cost
savings. Using DSL technology, we can increase the amount of information we
carry on a standard telephone line, which we refer to as bandwidth, to up to 1.5
million bits per second or "Mbps". This bandwidth is the equivalent of 24
regular voice telephone lines. Our DSL equipment is programmed to allocate the
available bandwidth. For example, voice calls are carried at 64 thousand bits
per second or "Kbps"; if a customer has eight phone lines and all are in use at
the same time, then 512 Kbps (eight phone lines multiplied by 64 Kbps each) of
the total 1.5 Mbps are allocated for the voice calls. The remaining bandwidth,
988 Kbps, is available to carry the data traffic.



     We believe this technology, when fully implemented, will significantly
reduce our customers' potential for service outages when the incumbent carrier
moves the standard telephone line from their equipment to ours. Additionally, we
believe this technology will reduce our costs since we will lease a reduced
number of standard telephone lines per customer from the incumbent carrier. For
example, if a customer today has eight voice lines, we must order from and
provision through the incumbent carrier eight individual standard telephone
lines. If the same customer were to buy our service offering which uses DSL
technology, we would only order and provision one standard telephone line from
the incumbent carrier. Also, we expect that future products and services
designed to take advantage of the increased bandwidth provided by DSL technology
will allow us to generate incremental revenue with attractive margins.



     Interconnection Agreements and Competitive Carrier Certifications.  We have
interconnection agreements with Sprint for Nevada, BellSouth for Georgia and
Florida, GTE and PacBell for California, Ameritech for Illinois, Bell Atlantic
for Massachusetts, New York and Pennsylvania and SBC for Texas. These agreements
expire on various dates through July 2000. In some cases, one or both parties
may be entitled to demand renegotiation of particular provisions in an existing
interconnection agreement based on intervening changes in the law. We are
certified as a competitive carrier in Illinois, Georgia, Nevada, California,
Florida and Massachusetts and have applied for competitive carrier certification
in Ohio, Texas, Michigan, Wisconsin, Indiana, North Carolina and Tennessee.


                                       35
<PAGE>   38

SERVICE DEPLOYMENT AND OPERATIONS

     Customer Service.  We strive to provide high quality customer service
through:

     - Personnel.  Our customer service representatives and sales personnel are
       well trained and attentive to our customers' needs.

     - Call Center.  Our centralized customer service center in Las Vegas
       operates 24 hours a day, seven days a week. Calls from our customers are
       answered and responded to with minimal wait time.


     - Coordination of Service Provisioning.  We coordinate service installation
       with our customer and the incumbent carrier to ensure a smooth transition
       of services from the incumbent carrier to us.


     - Close Customer Contact.  We proactively monitor our network and keep our
       customers informed of installation or repair problems and allocate the
       necessary resources to resolve any problems.

     - Billing.  We provide our customers with accurate, timely and easily
       understood bills.


     Process Automation.  We have developed a comprehensive, proprietary
operations support system to manage our business. Our proprietary system
provides integrated features addressing substantially all aspects of our
business including customer care, billing and collections, general ledger,
payroll, fixed asset tracking and personnel management. Additionally, customer
service representatives are able to handle all customer service inquiries,
including billing questions and repair calls, with the information available
from our integrated system.



     We believe our system is adaptable to changing circumstances and multiple
incumbent carrier provisioning systems and will be able to support our
operations throughout our planned growth. We are in final testing of our
internal automation process whereby all new orders are provisioned through our
operations support system on a real-time basis. Since 1998, we have been
developing and implementing electronic order interfaces with all of the
incumbent carriers with whom we work designed to improve provisioning
performance by eliminating manual keying of information and the need to fax
paper orders back and forth. As an illustration, we are currently provisioning
the majority of our orders in Las Vegas through an electronic interface with
Sprint. This type of interface, also known as "electronic bonding,"
substantially reduces the time, number of steps and duplication of work
typically involved in the provisioning process, substantially lowering our costs
and providing a more attractive solution to our customers.


     The billing component of our operations support system is designed to track
and bill all forms of local service, including line and feature charges as well
as long distance charges. We can accommodate business customers desiring a
single bill for many locations, summary bills without detail or a number of
other types of customized bills. We can deliver bills to our customers in a
number of alternative media including electronic files and on-line inquiry
through our Website.

GOVERNMENT REGULATIONS

  Overview


     Our services are regulated at the federal, state and local level. The FCC
exercises jurisdiction over all facilities of, and services offered by,
communications common carriers like us, as long as those facilities are used in
connection with interstate or international communications. State regulatory
commissions have some jurisdiction over most of the same facilities and services
if they are used in connection with communications within states. In recent
years, there has been a dramatic change in the regulation of telephone services
at both federal and state levels as both legislative and


                                       36
<PAGE>   39


regulatory bodies seek to enhance competition in both the local exchange and
interexchange services. These efforts are ongoing and many of the legislative
measures and regulations adopted are subject to judicial review. We cannot
predict the impact on us of the results of these ongoing legislative and
regulatory efforts or the outcome of any judicial review.


  Federal Regulation


     The FCC regulates interstate and international communications services,
including access to local telephone facilities to place and receive interstate
and international calls. We provide these services as a common carrier. The FCC
also imposes regulations on common carriers that have some degree of market
power, including incumbent carriers. The FCC imposes less regulation on common
carriers without market power including competitive carriers like us. The FCC
grants automatic authority to carriers for interstate long distance service, but
requires common carriers to receive an authorization to construct and operate
communications facilities, and to provide or resell communications services,
between the United States and international points. Both domestic and
international carriers must file tariffs for their services. With respect to our
domestic and international service offerings, we have filed tariffs with the FCC
stating the rates, terms and conditions for our interstate and international
services. Our interstate tariffs are subject to "streamlined" tariff regulations
and are generally not reviewed by the FCC before becoming effective. Our tariffs
can be amended on one day's notice. Carriers subject to the jurisdiction of the
FCC must charge just and reasonable rates and must not discriminate among like
customers for like services. The FCC imposes numerous other regulations on
carriers subject to its jurisdiction some of the most important of which are
discussed below. It also hears complaints against carriers filed by customers or
other carriers and levies various charges and fees.



     The Telecommunications Act permits virtually any entity, including cable
television companies and electric and gas utilities, to enter any communications
market. The Telecommunications Act takes precedence over inconsistent state
regulation. However, entities that enter communications markets must follow
state regulations relating to safety, quality, consumer protection and other
matters. Implementation of the Telecommunications Act continues to be affected
by numerous federal and state policy rulemaking proceedings and review by
courts. We are uncertain as to how our business may be affected by these
proceedings.



     The Telecommunications Act is intended to promote competition. The
Telecommunications Act opens the local services market to competition by
requiring incumbent carriers to permit interconnection to their networks and by
establishing incumbent carrier and competitive carrier obligations with respect
to:



          Reciprocal Compensation.  All incumbent carriers and competitive
     carriers are currently required to complete calls originated by each other
     under reciprocal arrangements at prices based on tariffs or negotiated
     prices.



          Resale.  All incumbent carriers and competitive carriers are required
     to permit resale of their communications services without unreasonable
     restrictions or conditions. In addition, incumbent carriers are required to
     offer wholesale versions of all retail services to other common carriers
     for resale at discounted rates, based on the costs avoided by the incumbent
     carrier by offering these services at wholesale rates.



          Interconnection.  All incumbent carriers and competitive carriers are
     required to permit their competitors to interconnect with their facilities.
     All incumbent carriers are required to permit interconnection at any
     feasible point within their networks, on nondiscriminatory terms, at prices
     based on cost, which may include a reasonable profit. At the option of the
     carrier


                                       37
<PAGE>   40


     requesting interconnection, collocation of the requesting carrier's
     equipment in the incumbent carriers' premises must be offered.



          Unbundled Access.  All incumbent carriers are required to provide
     access to specified individual components of their networks, which are
     sometimes referred to as unbundled network elements, on nondiscriminatory
     terms and at prices based on cost, which may include a reasonable profit.



          Number Portability.  All incumbent carriers and competitive carriers
     are required to permit users of communications services to retain their
     existing telephone numbers without impairment of quality, reliability or
     convenience when switching from one common carrier to another.



          Dialing Parity.  All incumbent carriers and competitive carriers are
     required to provide "l+" equal access to competing providers of long
     distance service, and to provide nondiscriminatory access to telephone
     numbers, operator services, directory assistance and directory listing,
     with no unreasonable dialing delays.



          Access to Rights-of-Way.  All incumbent carriers and competitive
     carriers are required to permit competing carriers access to their poles,
     ducts, conduits and rights-of-way at regulated prices.



     Incumbent carriers are required to negotiate in good faith with carriers
requesting any or all of the above arrangements. If the negotiating carriers
cannot reach agreement within a predetermined amount of time, either carrier may
request arbitration of the disputed issues by the state regulatory commission.
Where an agreement has not been reached, incumbent carriers continue to have
interconnection obligations established by the FCC and state regulatory
commissions.



     In August 1996, the FCC established rules to implement the incumbent
carrier interconnection obligations described above. On July 18, 1997, a United
States appeals court overturned portions of these rules and narrowly interpreted
the FCC's power to establish and enforce rules implementing the
Telecommunications Act. On January 25, 1999, the United States Supreme Court
reversed the appeals court decision and confirmed the FCC's broad authority to
issue rules implementing the Telecommunications Act. Specifically, the Supreme
Court decided that:


     - the FCC has jurisdiction over pricing of unbundled network elements; and


     - the FCC has authority to make rules allowing a competitive carrier to
       "pick and choose" among the most favorable terms from existing agreements
       between an incumbent carrier and other competitive carriers.



     On the other hand, the Supreme Court vacated an FCC rule which described
the network elements the incumbent carriers must provide to competitors on an
unbundled basis. This required the FCC to re-examine its rules regarding which
unbundled network elements must be made available to competitors.



     On November 5, 1999, the FCC released an order reaffirming and clarifying
the obligation of incumbent carriers to provide those network elements which we
currently lease from incumbent carriers, including standard telephone lines
which are also known as local loops, network interface devices and operations
support systems. These rules are subject to appeal and many require implementing
action by state regulatory agencies. We cannot predict the outcome of any
further proceedings or predict whether the incumbent carriers will challenge
this ruling.



     On March 31, 1999, the FCC issued an order requiring incumbent carriers to
provide alternatives to traditional physical collocation, including providing
carriers with their own dedicated spaces in which to install their equipment. In
addition, the FCC ruled that incumbent carriers must


                                       38
<PAGE>   41


allow competitive carriers to collocate advanced services equipment and perform
their own labor in connecting their equipment within the incumbent carrier
central office.



     On November 18, 1999, the FCC ordered incumbent carriers to share their
telephone lines with providers of high speed Internet access and other data
services. The FCC has indicated that it permits competitive carriers to obtain
access to the high-frequency portion of a standard telephone line from the
incumbent carriers. As a result, competitive carriers will be able to provide
DSL-based services over the same telephone lines simultaneously used by the
incumbent carrier to provide voice services, and will no longer need to purchase
a separate telephone line from the incumbent carrier to provide DSL services.
The ruling could have an unfavorable effect on our business by making it easier
for some of our competitors to provide DSL services.



     The Telecommunications Act also contains special provisions that replace
prior antitrust restrictions that prohibited the regional Bell operating
companies from providing long distance services and engaging in communications
equipment manufacturing. Before the passage of the Telecommunications Act, the
regional Bell operating companies and the dominant incumbent carriers were
restricted to providing services within a distinct geographical area known as a
local access and transport area. The Telecommunications Act permits the regional
Bell operating companies to provide long distance service immediately in areas
outside of their market regions and within their market region once they have
satisfied several procedural and substantive requirements, including:



     - a showing that the regional Bell operating company is subject to
       meaningful competition in the area in which it seeks to offer long
       distance service; and


     - a determination that the regional Bell operating company's entry into
       long distance markets is in the public interest.


     In December 1999, the FCC approved Bell Atlantic's request to provide long
distance service to its New York customers. Additional requests will likely be
filed in the near future. One or more of these requests may be approved. If
regional Bell operating companies are allowed to offer long distance services in
one or more of our markets, our business will be unfavorably affected.



     The FCC has initiated a rulemaking proceeding to consider whether to permit
regional Bell operating companies to eventually offer high-speed data services
between local access and transport areas through a separate subsidiary, without
first having to demonstrate that they have met the FCC procedural and
substantive requirements referred to above. Although the FCC has not acted in
this rulemaking, in approving the merger of SBC Communications and Ameritech, it
authorized the merged entity to provide advanced data services using a separate
subsidiary provided specific conditions are met.



     On November 9, 1999, the FCC released a decision which concluded that
advanced services, such as DSL, sold by incumbent carriers to Internet service
providers and bundled by the Internet service provider with its other services
are not subject to the resale obligations of the Act. This decision will allow
incumbent carriers to provide Internet service providers with special rate
packages for DSL on terms and conditions not available to us.



     In two orders released on December 24, l996 and May 16, 1997, the FCC made
major changes in the structure of the access charges incumbent carriers impose
for the use of their facilities to originate or complete interstate and
international calls. The December 24th order permitted incumbent carriers to
lower access charges. The May 16th order granted incumbent carriers subject to
the FCC's price cap rules increased pricing flexibility upon demonstrations of
increased competition or potential competition in their markets. The manner in
which these changes are implemented could have a material effect on the amount
of switched access charges we collect from long distance carriers.


                                       39
<PAGE>   42


     At present we are in litigation with AT&T and Sprint over the access
charges we have billed to them. The FCC released a decision in July 1999
requiring AT&T to pay us the charges at our tariffed rate through March 1999,
with interest, but this decision is subject to further administrative and
judicial review.



     In August 1999 the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. Some of the actions taken by the FCC would immediately
eliminate rate scrutiny for "new services" and permit the establishment of
additional geographic zones within a market that would have separate rates.
Additional and more substantial pricing flexibility will be given to incumbent
carriers as specified levels of competition in a market are reached through the
collocation of competitive carriers and their use of competitive transport. This
flexibility will include, among other items, customer specific pricing, volume
and term discounts for some services and streamlined tariffing.



     As part of the same August 1999 order, the FCC initiated another proceeding
to consider additional pricing flexibility proposals for incumbent carriers.
This proceeding also will consider the reasonableness of competitive carrier
access charges and seeks comment on whether the FCC should adopt rules to
regulate competitive carrier access charges. In addition, the FCC's rulemaking
is examining whether any statutory or regulatory constraints prevent long
distance carriers from declining to accept a competitive carrier's access
services, and if so, under what circumstances. The outcome of the rulemaking is
not possible to predict and may have an unfavorable effect on our business.



     In addition, on May 21, 1999, a United States court of appeals reversed an
FCC order that had established the factors that are currently used to set annual
price caps. The court ordered the FCC to further explain the methodology it used
in establishing those factors.



     Incumbent carriers have been contesting whether their obligation to pay
reciprocal compensation to competitive carriers should apply to local telephone
calls from an incumbent carrier's customers to Internet service providers served
by competitive carriers. The incumbent carriers claim this traffic is interstate
in nature and should be exempt from reciprocal compensation arrangements
applicable to local and intrastate calls. Competitive carriers have contended
that their interconnection agreements with incumbent carriers provide no
exception for local calls to Internet service providers and reciprocal
compensation is applicable.



     On February 26, 1999, the FCC ruled that Internet service provider traffic
is interstate in nature and within the FCC's jurisdiction but that its current
rules neither require nor prohibit the payment of reciprocal compensation for
these calls. The FCC also requested comment on federal rules to govern
compensation for these calls in the future.



     Most, but not all, state commissions and several federal and state courts
have ruled that reciprocal compensation arrangements under interconnection
agreements existing prior to the FCC decision apply to calls to Internet service
providers. There are, however, ongoing disputes concerning the appropriate
treatment of Internet service provider traffic under new interconnection
agreements.



     Internet service providers may be among our potential customers and adverse
decisions regarding reciprocal compensation could limit our ability to service
this group of customers profitably. While some competitive carriers target
Internet service providers in order to generate additional revenues from
reciprocal compensation charges, at the present time we do not focus our
marketing efforts on Internet service providers. In addition, given the
uncertainty as to whether reciprocal compensation is payable in connection with
calls to Internet service providers, we do not recognize revenue from calls to
Internet service providers. Therefore, the outcome of this dispute in favor of
either the incumbent carrier or competitive carrier will have minimal impact on
us.


                                       40
<PAGE>   43


     On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. The FCC's May 8, 1997 order
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.25 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded federal subsidies for local dialtone
services provided to low-income consumers. Providers of interstate
telecommunications service, including us, must contribute to these programs. On
July 30, 1999, the United States appeals court issued a decision partially
upholding the FCC order but precluding the FCC from basing the amount a carrier
must contribute to the subsidy program on a carrier's intrastate revenues.
Currently, the FCC is assessing contributions to these programs at 5.8% of a
provider's interstate and international revenue for the previous year. We intend
to recover our share of these costs through charges assessed directly to our
customers and participation in federally subsidized programs. On November 2,
1999, the FCC revised its proposed methodology for subsidizing service provided
by non-rural carriers in high cost areas. This action may result in further
substantial increases in the cost of the subsidy program. The net financial
effect of these regulations on us cannot be determined at this time.



     In 1994, Congress adopted the Communications Assistance for Law Enforcement
Act to insure that law enforcement agencies would be able to conduct properly
authorized electronic surveillance over the new digital and wireless media as
well as traditional wireline carriers. An interim technical standard was
released in 1997 and the FCC recently required carriers to have additional
capabilities requested by law enforcement authorities and directed that the
interim standard be revised. Some in the industry believe that the cost of
providing these additional capabilities is unreasonably high and the FCC's
decision has been appealed. We are not able to predict the outcome of this
litigation or the cost of compliance with whatever standards are ultimately
developed.


  State Regulation

     The implementation of the Telecommunications Act is subject to numerous
state rulemaking proceedings. As a result, it is currently difficult to predict
how quickly full competition for local services, including local dialtone, will
be introduced.


     To provide services within a state, we generally must obtain a certificate
of public convenience and necessity from the state regulatory agency and comply
with state requirements for telecommunications utilities, including state
tariffing requirements. To date, we have satisfied state requirements to provide
local and intrastate long distance service in Nevada, Georgia, Illinois,
California, Florida and Massachusetts and have applied for competitive carrier
certification in Ohio, Texas, Michigan, Wisconsin, Indiana, North Carolina and
Tennessee.



     State regulatory agencies have jurisdiction over our facilities and
services used to provide intrastate services. State agencies require us to file
periodic reports, pay various fees and assessments and comply with rules
governing quality of service, consumer protection and similar issues. These
agencies may also have to approve the transfer of assets or customers located in
the state, a change in control of our company or our issuance of securities or
assumption of debt. The specific requirements vary from state to state. Price
cap or rate of return regulation does not apply in any of our current or planned
expansion markets. However, we cannot assure you that the imposition of new
regulatory burdens in a particular state will not affect the profitability of
our services in that state.


  Local Regulation

     Our networks must comply with numerous local regulations such as building
codes, municipal franchise requirements and licensing. These regulations vary on
a city by city and county by county basis. In some of the areas where we provide
service, we may have to comply with municipal franchise requirements and may be
required to pay license or franchise fees based on a percentage of

                                       41
<PAGE>   44

gross revenue or other factors. Municipalities that do not currently impose fees
may seek to impose fees in the future. We cannot assure you fees will remain at
their current levels following the expiration of existing franchises.

COMPETITION


     The communications industry is highly competitive. We believe the principal
competitive factors affecting our business will be:



     - pricing levels and policies,



     - transmission speed,



     - customer service,



     - breadth of service availability,



     - network security,



     - ease of access and use,



     - bundled service offerings,



     - brand recognition,



     - operating experience,



     - capital availability,



     - exclusive contracts,



     - accurate billing, and



     - variety of services.


To maintain our competitive posture, we believe we must be in a position to
reduce our prices to meet any reductions in rates by our competitors. Any
reductions could adversely affect us. Many of our current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than ours, as well as other competitive
advantages over us. In addition, competitive alternatives may result in
substantial customer turnover in the future. Many providers of communications
and networking services experience high rates of customer turnover.


     A continuing trend toward consolidation of communications companies and the
formation of strategic alliances within the communications industry, as well as
the development of new technologies, could give rise to significant new
competitors. For example, WorldCom has merged with MCI Communications and now
proposes to merge with Sprint. AT&T has acquired Teleport Communications Group
Inc., a competitive carrier, and Tele-Communications, Inc., a cable,
communications and high-speed Internet services provider, and has announced its
intent to merge with MediaOne. Ameritech Corporation recently merged with SBC
Communications and Bell Atlantic has agreed to merge with GTE Corporation. These
types of consolidations and other strategic alliances could put us at a
competitive disadvantage.


  LOCAL DIALTONE SERVICES


  Incumbent Carriers



     In each of the markets we target, we will compete principally with the
incumbent carrier serving that area. We believe the regional Bell operating
companies are aggressively seeking to be able to offer long distance service in
their service territories. In December 1999, Bell Atlantic received approval to
offer long distance service in New York and has announced that it intends to
offer


                                       42
<PAGE>   45


interstate long distance service beginning in January 2000. Many experts expect
one or more of the other regional Bell operating companies to be successful in
entering the long distance market in early 2000. We believe the regional Bell
operating companies expect to offset losses of market share in their local
markets by attempting to capture a large percentage of the long distance market
in their market areas, especially among residential users where their strong
regional brand names and extensive advertising campaigns may be very successful.
In addition, a continuing trend toward business combinations and alliances in
the communications industry may create significant new competitors for us.



     We have not achieved and do not expect to achieve a significant market
share for any of our services. The incumbent carriers have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours and have the potential to subsidize
competitive services with revenues from a variety of businesses. While recent
regulatory initiatives which allow competitive carriers to interconnect with
incumbent carrier facilities provide increased business opportunities for us,
interconnection opportunities have been and likely will continue to be
accompanied by increased pricing flexibility for, and relaxation of regulatory
oversight of, the incumbent carriers.



     Incumbent carriers have long-standing relationships with regulatory
authorities at the federal and state levels. The FCC recently proposed a rule
that would provide for increased pricing flexibility for incumbent carriers and
deregulation for competitive access services, either automatically or after
competitive levels are reached. If the incumbent carriers are allowed by
regulators to offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for their
customers, and/or seek to charge competitors excessive fees for interconnection
to their networks, our operating margins could be materially adversely affected.
Future regulatory decisions which give the incumbent carriers increased pricing
flexibility or other regulatory relief could also have a material adverse effect
on us.



  Competitive Carriers/Long Distance Carriers/Other Market Entrants.



     We face, and expect to continue to face, competition from long distance
carriers, including AT&T, MCI WorldCom, and Sprint, seeking to enter, reenter or
expand entry into the local exchange market. We also compete with other
competitive carriers, resellers of local dialtone services, cable television
companies, electric utilities, microwave carriers and wireless telephone system
operators.



     The Telecommunications Act includes provisions which impose regulatory
requirements on all incumbent carriers and competitive carriers but grants the
FCC expanded authority to reduce the level of regulation applicable to these
common carriers. The manner in which these provisions of the Telecommunications
Act are implemented and enforced could have a material adverse effect on our
ability to successfully compete against incumbent carriers and other
communications service providers.



     The Telecommunications Act radically altered the market opportunity for
competitive carriers. Many existing competitive carriers which entered the
market before 1996 had to build a fiber infrastructure before offering services.
With the Telecommunications Act requiring unbundling of the incumbent carrier
networks, competitive carriers are now able to more rapidly enter the market by
installing switches and leasing standard telephone lines and cable.



     A number of competitive carriers have entered or announced their intention
to enter one or more of our markets. We believe that not all competitive
carriers, however, are pursuing the same target customers we pursue. We intend
to keep our prices at levels below those of the incumbent carriers while
providing, in our opinion, a higher level of service and responsiveness to our
customers.


                                       43
<PAGE>   46

Innovative packaging and pricing of basic telephone services is expected to
provide competitive differentiation for us in each of our markets.

  LONG DISTANCE SERVICES

     The long distance services industry is very competitive and many long
distance providers experience a high average turnover rate as customers
frequently change long distance providers in response to offerings of lower
rates or promotional incentives by competitors. Prices in the long distance
market have declined significantly in recent years and are expected to continue
to decline. We expect to face increasing competition from companies offering
long distance data and voice services over the Internet. Companies offering
these services over the Internet could enjoy a significant cost advantage
because they do not currently pay common carrier access charges or universal
service fees.

  DATA AND INTERNET SERVICES

     We expect the level of competition with respect to data and Internet
services to intensify in the future. We expect significant competition from:


     - Incumbent Carriers.  Most incumbent carriers have announced deployment of
       commercial DSL services. Some incumbent carriers have announced they
       intend to aggressively market these services to their residential
       customers at attractive prices. In addition, most incumbent carriers are
       combining their DSL service with their own Internet service provider
       businesses. We believe incumbent carriers have the potential to quickly
       overcome many of the issues that have delayed widespread deployment of
       DSL services in the past. The incumbent carriers have an established
       brand name in their service areas, possess sufficient capital to deploy
       DSL services rapidly and are in a position to offer service from central
       offices where we may be unable to secure collocation space. When the
       regional Bell operating companies begin providing long distance service,
       they may be able to offer "one stop shopping" that would be competitive
       with our offerings.



     - Traditional Long Distance Carriers.  Many of the leading traditional long
       distance carriers, including AT&T, MCI WorldCom and Sprint, are expanding
       their capabilities to support high-speed, end-to-end networking services.
       We expect them to offer combined data, voice and video services over
       their networks. These carriers have extensive fiber networks in many
       metropolitan areas that primarily provide high-speed data and voice
       services to large companies. They could deploy DSL services in
       combination with their current fiber networks. They also have
       interconnection agreements with many incumbent carriers and have secured
       collocation space from which they could begin to offer competitive DSL
       services.



     - Newer Long Distance Carriers.  The newer long distance carriers,
       including Williams Communications, Qwest Communications International and
       Level 3 Communications, are building and managing high-speed networks
       nationwide. They are also building direct sales forces and partnering
       with Internet service providers to offer services directly to business
       customers. They could extend their existing networks and offer high-speed
       services using DSL, either alone or in partnership with others.



     - Cable Modem Service Providers.  Cable modem service providers, like @Home
       Networks and its cable partners, are offering, or are preparing to offer,
       high-speed Internet access over cable networks to consumers. @Work has
       positioned itself to do the same for businesses. These networks provide
       high-speed data services similar to our services, and in some cases at
       higher speeds. These companies use a variety of new and emerging
       technologies, including point-to-point and point-to-multipoint wireless
       services, satellite-based networking and high-speed wireless digital
       communications.

                                       44
<PAGE>   47


     - Internet Service Providers.  Internet service providers, including Yahoo,
       Earthlink, PSINet, Concentric and Verio, offer Internet portal services
       which compete with our MGCi.com service. We offer basic web hosting and
       e-mail services and anticipate offering an enhanced set of Internet
       products in the future. The competitive Internet service providers
       generally provide more features and functions than our current Internet
       portal.


     - Wholesale DSL Carriers.  Carriers, including Covad Communications Group,
       Inc., Rhythms NetConnections Inc. and NorthPoint Communications, Inc.,
       have begun offering DSL services and have significant strategic equity
       investors, marketing alliances and product development partners.


     Many of these competitors are offering, or may soon offer, DSL technologies
and services that will directly compete with us. Please see "Risk
Factors -- Because we compete against established industry competitors with
substantially greater financial resources, we may not be able to achieve our
operating and financial objectives."


PROPERTY


     In Las Vegas, we have a five year lease, expiring in 2001, with a five year
option for the site housing our switch. We also lease space in Las Vegas for our
national customer service operations, national sales personnel, Las Vegas sales
personnel and general administration functions. This lease expires in 2004. This
facility is owned by a limited liability company which is principally owned by
two of our principal stockholders and directors, Maurice J. Gallagher, Jr. and
Timothy P. Flynn.



     We have recently leased office space in the Rochester, New York area and we
have moved our corporate headquarters to the Rochester area.


     We also own property housing our switch facilities in Ontario, Long Beach
and San Diego, California, Chicago, Illinois, and Fort Lauderdale, Florida. Our
switch site in Atlanta, Georgia has been leased for a term expiring in 2007 with
renewal options. We have leased facilities to house our local sales and
administration staff in each market.


     We place great importance on each switch facility and seek to insure
maximum security and environmental control. We believe this can be achieved most
effectively through stand-alone structures. This approach minimizes the risk of
fire or other hazards from adjacent tenants or properties.


PERSONNEL


     As of December 27, 1999, we had approximately 850 employees, most of whom
were located in Las Vegas. We expect to substantially increase the number of our
employees over the next two years.


     We have non-disclosure and non-compete agreements with all of our executive
employees. None of our employees are represented by a collective bargaining
agreement.

LEGAL PROCEEDINGS


     We are party to numerous state and federal administrative proceedings. In
these proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:



     - the cost and provisioning of those network elements we lease;


     - the establishment of customer care and provisioning;

     - the allocation of subsidies; and

     - collocation costs and procedures.

                                       45
<PAGE>   48


The outcome of these proceedings will establish the rates and procedures by
which we obtain and provide leased network elements and could have a material
effect on our operating costs.



     We are also involved in legal proceedings in which we are seeking to
enforce our tariffed rates for originating and terminating long distance calls.
AT&T, Sprint, MCI WorldCom and other long distance carriers refused to pay the
full amount of the long distance access charges billed to them. Access charges
represented 41% of our operating revenues in 1998 and 35% of our operating
revenues in the first nine months of 1999. Access charge revenues from AT&T,
Sprint and MCI WorldCom represented 81% of our total access charge revenues in
1998 and 75% of our access charge revenue in the first nine months of 1999. As
of September 30, 1999, we had outstanding receivables of approximately $12.3
million attributable to access charges from AT&T, Sprint, MCI WorldCom and other
long distance carriers, as compared to $8.1 million as of June 30, 1999. We have
recently settled our dispute with MCI WorldCom; however, our disputes continue
with AT&T and Sprint. We initiated proceedings against AT&T at the FCC under an
FCC procedure for expedited settlement of disputes between common carriers. On
July 16, 1999, the FCC released a decision ordering AT&T to pay us the full
amount we billed to them for originating switched access charges from August
1998 through March 1999 at our tariffed rate, plus interest. AT&T has asked the
FCC to review the order and the final FCC decision is subject to appeal to a
federal appeals court. We have filed a complaint before the FCC to obtain an
order compelling Sprint to pay our tariff rate for access charges. The final
outcome of the disputes with AT&T and Sprint is uncertain. If we are unable to
collect from these long distance carriers, it could have a material impact on
our financial condition. See "Risk Factors -- We may not be able to collect all
of the access charges we have billed to long distance carriers."



     From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of our business. We do not believe any other
pending litigation or governmental proceeding will have a material adverse
effect on our results of operations or financial condition.


                                       46
<PAGE>   49

                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS


     Our executive officers and directors, and their respective ages as of
December 27, 1999, are as follows:



<TABLE>
<CAPTION>
NAME                             AGE                            POSITION
- ----                             ---                            --------
<S>                              <C>   <C>
Maurice J. Gallagher, Jr.......  50    Chairman of the Board of Directors
Rolla P. Huff..................  43    Chief Executive Officer, President, Director
Timothy P. Flynn(1)............  49    Director
Jack L. Hancock(2).............  69    Director
David Kronfeld.................  52    Director
Mark J. Masiello...............  32    Director
Thomas Neustaetter(1)(2).......  47    Director
Paul J. Salem(1)(2)............  36    Director
James Ball.....................  37    President -- Midwest Region
John Boersma...................  39    Senior Vice President -- Operations
David S. Clark.................  39    Senior Vice President -- Investor Relations
S. Gregory Clevenger(3)........  36    Senior Vice President -- Corporate Development
Michael R. Daley...............  38    Executive Vice President and Chief Financial Officer
Kent F. Heyman.................  44    Senior Vice President and General Counsel
George Longyear................  30    President -- Southwestern Region
Mark D. Magarian(3)............  33    Senior Vice President -- Human Resources
James Mitchell.................  38    President -- Eastern Region
Mark W. Peterson...............  45    President -- Western Region
Linda M. Sunbury...............  38    Senior Vice President -- Finance
</TABLE>


- -------------------------
(1) Member of Audit Committee.

(2) Member of Compensation Committee.


(3) To commence employment in January 2000.



     MAURICE J. GALLAGHER, JR. has served as the chairman of our board of
directors since our inception. Mr. Gallagher was a founder of ValuJet Airlines,
Inc. in 1993 and served as a director of ValuJet from 1993 until November 1997
and served as vice chairman from 1994 to 1997.



     ROLLA P. HUFF was elected as our chief executive officer and president and
as a member of our board of directors as of November 1, 1999. From March 1999 to
September 1999, Mr. Huff served as president and chief operating officer of
Frontier Corporation and served as executive vice president and chief financial
officer of that corporation from May 1998 to March 1999. From July 1997 to May
1998, Mr. Huff was president of AT&T Wireless for the Central U.S. region and
Mr. Huff served as senior vice president and chief financial officer of that
company from March 1995 to July 1997. From July 1994 to March 1995, Mr. Huff was
financial vice president of mergers and acquisitions for AT&T.



     TIMOTHY P. FLYNN has served as a member of our board of directors since
1996. Mr. Flynn served as a member of the board of directors of ValuJet Airlines
since he participated in its founding in 1993 until November 1997. Mr. Flynn and
Mr. Gallagher are affiliated in a number of other transactions.



     JACK L. HANCOCK has served as a member of our board of directors since
1996. Mr. Hancock was vice president of systems technology and executive vice
president, product and technology for


                                       47
<PAGE>   50


PacBell from 1988 to 1993. He has served as a member of the boards of directors
of Union Bank of California and Wittaker Corporation since 1994.



     DAVID KRONFELD was elected to serve as a member of our board of directors
in February 1998. Mr. Kronfeld is the founder of JK&B Management, L.L.C., a
venture capital firm, and has managed its affairs since 1995. Since 1989, Mr.
Kronfeld has also been a partner at Boston Capital Ventures, a venture capital
firm where he specialized in the telecommunications and software industries.



     MARK J. MASIELLO was elected to serve as a member of our board of directors
in November 1999. Mr. Masiello is a principal of Providence Equity Partners,
Inc., which provides investment management services to Providence Equity
Partners III L.P. ("PEP") and has since its founding in 1998 served as a member
of Providence Equity Partners III LLC, the general partner of PEP. Mr. Masiello
has been with Providence since 1989 and he currently serves as a director of VIA
NET.WORKS, Inc., Netcom Internet Limited and Netcom Canada Inc.



     THOMAS NEUSTAETTER was elected to serve as a member of our board of
directors in February 1998. Since March 1999, Mr. Neustaetter has been an
executive member of JK&B Capital. From January 1996 to December 1999, Mr.
Neustaetter was a partner of The Chatterjee Group, an investment firm which is
an affiliate of Soros Fund Management. Before joining The Chatterjee Group, he
was the president and founder of Bancroft Capital, a general consulting firm,
from December 1994 to December 1996. Mr. Neustaetter also serves as a director
of 21st Century Telecom Group, Inc., Gloss.com, Update Marketing, Selectica,
Inc. and Vector Holdings.



     PAUL J. SALEM was elected to serve as a member of our board of directors in
May 1999. Since 1997, Mr. Salem served as a managing director of Providence
Equity Partners, Inc., which provides investment management services to PEP and
has since its founding in 1998 served as a member of Providence Equity Partners
III LLC, the general partner of PEP. Mr. Salem also served as a vice president
of Providence Ventures Inc. from 1992 to 1996. Mr. Salem has served as a
director of MetroNet Communications Corp. since July 1996 and as a director of
Verio, Inc. since 1996.



     JAMES BALL joined our company as president -- midwest region in November
1999. From September 1998 until November 1999, Mr. Ball served as regional vice
president for a 12-city region with Chicago-based Level 3 Communications. Before
September 1998, Mr. Ball held senior management positions at Epoch Internet from
November 1997 to August 1998 and MFS Telecom from August 1993 to October 1997.



     JOHN BOERSMA has served as our vice president -- operations since May 1997
and was designated senior vice president -- operations in May 1999. He served as
vice president of carrier relations for ICG Telecom Group, Inc. from 1996 to
1997. In that capacity, he was responsible for ICG Telecom's relationship with
local exchange carriers and implementation, purchase agreements and service
quality. Mr. Boersma served as vice president, northern California operations of
ICG Telecom from April 1994 to September 1996.



     DAVID S. CLARK has since December 1999 served as our senior vice
president -- investor relations. Mr. Clark served as our vice
president -- marketing from May 1997 until May 1999 when he was designated
senior vice president -- sales and marketing. Mr. Clark has been in the
telecommunications industry for 11 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 Telecom, his last position being vice president of
communications services.



     S. GREGORY CLEVENGER will join our company as senior vice
president -- corporate development in January 2000. From March 1997 to December
1999, Mr. Clevenger was vice president of investment banking at Goldman, Sachs &
Co. in the communications, media and entertainment group in Singapore and New
York. From September 1992 to March 1997, Mr. Clevenger was an associate and vice
president in the investment banking division of Morgan Stanley & Co.
Incorporated in New


                                       48
<PAGE>   51


York, Hong Kong and Singapore in a variety of groups including the global
telecommunications group and the global project finance and leasing group. From
May 1990 to September 1992, Mr. Clevenger was an associate and vice president at
Argent Group Ltd. in New York.



     MICHAEL R. DALEY joined our company as executive vice president and chief
financial officer in November 1999. From November 1998 to November 1999, Mr.
Daley served as executive vice president and chief financial officer of
Concentrix Corporation. From 1984 through ACC Corp.'s merger with Teleport
Communications Group, Inc. in 1998, Mr. Daley served in various capacities at
ACC Corp., including as executive vice president and chief financial officer
from March 1994 to October 1998 with responsibilities including operations
support, investor relations, human resources, legal, mergers and acquisitions
and business development.



     KENT F. HEYMAN has served as our vice president and general counsel since
June 1996 and was designated senior vice president in December 1999. Mr. Heyman
has 18 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.



     GEORGE LONGYEAR has served as our president -- southwestern region since
October 1999. From April 1998 until October, 1999, Mr. Longyear served as branch
director in our Atlanta office. Mr. Longyear has over nine years telephone
industry experience, most recently with MCI Communications from 1991 to 1997
where he held various senior sales and management positions in their local
service group and state government and university segment.



     MARK D. MAGARIAN will join our company as senior vice president -- human
resources in January 2000. Mr. Magarian practiced law and specialized in labor
and employment law from 1993 until December 1999.



     JAMES MITCHELL has served as our president -- eastern region since February
1998. Mr. Mitchell has over nine 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.



     MARK W. PETERSON has served as our president -- western region since March
1997. From 1993 to 1996, Mr. Peterson was a marketing and communications
consultant and a law student. He previously served as head of corporate affairs
for WestAir Holding, Inc. from 1988 to 1992.



     LINDA M. SUNBURY has served as our vice president and principal accounting
officer since June 1996 and served as our chief financial officer from January
1998 to November 1999. Ms. Sunbury was designated senior vice president in May
1999 and since December 1999 has served as senior vice president -- finance. Ms.
Sunbury has over 15 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. dba the Delta Connection
from 1994 to 1996. While Ms. Sunbury was at Business Express, creditors of
Business Express filed an involuntary petition for bankruptcy in January 1996.
Business Express subsequently reorganized and emerged from bankruptcy in April
1997. Before that, Ms. Sunbury served as controller for WestAir Holding, Inc.
from 1988 to 1994.



     Messrs. Kronfeld and Neustaetter were initially selected to serve on our
board of directors by the holders of our Series A convertible preferred stock.
The Series A convertible preferred stock was automatically converted into common
stock upon our initial public offering.



     Messrs. Salem and Masiello were selected to serve on our board of directors
by the purchasers of our Series B convertible preferred stock and by the
entities who have agreed to purchase our Series C convertible preferred stock.


                                       49
<PAGE>   52

                       PRINCIPAL AND SELLING STOCKHOLDERS

SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERS


     The following table shows information known to us with respect to
beneficial ownership of common stock as of December 27, 1999, by (A) each
director, (B) all executive officers and directors as a group and (C) each
person known by us to be a beneficial owner of more than 5% of our outstanding
common stock.



<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES        PERCENT OF
NAME OF BENEFICIAL OWNER                                 BENEFICIALLY OWNED(1)    OWNERSHIP(1)
- ------------------------                                 ---------------------    ------------
<S>                                                      <C>                      <C>
Providence Equity Partners III LLC(2)..................        5,003,969              17.7%
Maurice J. Gallagher, Jr., chairman of the board and
  director(3)..........................................        3,300,608              14.2%
David Kronfeld, director(4)............................        2,061,070               8.5%
Timothy P. Flynn, director(5)..........................          898,500               3.9%
Rolla P. Huff, president, chief executive officer and
  director.............................................          150,000                 *
Jack L. Hancock, director(6)...........................           37,200                 *
Thomas Neustaetter, director...........................            8,800                 *
Mark J. Masiello, director(7)..........................               --                --
Paul J. Salem, director(7).............................               --                --
All executive officers and directors as a group (19
  persons) (3)(4)(5)(6)(7)(8)..........................        6,975,982              28.7%
</TABLE>


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

 *  Less than 1% of total.

(1) In accordance with the Commission's rules, each beneficial owner's holdings
    have been calculated assuming the full exercise of options and the
    conversion of all shares of convertible preferred stock held by the holder
    which are currently exercisable or convertible or which will become
    exercisable or convertible within 60 days after the date indicated and no
    exercise of options or conversion of preferred stock held by any other
    person.


(2) Includes 4,111,112 shares of Series B convertible preferred stock and
    892,857 shares of Series C convertible preferred stock subject to an
    agreement to purchase. The shares of Series B convertible preferred stock
    are, and the shares of Series C convertible preferred stock will be,
    convertible into common stock on a one-for-one basis. The address of this
    beneficial owner is 901 Fleet Center, 50 Kennedy Plaza, Providence, Rhode
    Island 02903.


(3) Includes options to purchase 40,000 shares of common stock which are
    presently exercisable and 3,170,878 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.
    Also includes 44,730 shares owned by a trust for the benefit of Mr.
    Gallagher's minor children with respect to which Mr. Gallagher disclaims any
    beneficial ownership interest. Mr. Gallagher's address is 3291 N. Buffalo
    Drive, Las Vegas, Nevada 89129.


(4) Includes 1,139,571 shares of common stock, 555,556 shares of Series B
    convertible preferred stock and 357,143 shares of Series C convertible
    preferred stock subject to an agreement to purchase, all of which are owned
    by partnerships in which Mr. Kronfeld is a general partner or manager of a
    general partner. The shares of Series B convertible preferred stock are, and
    the shares of Series C convertible preferred stock will be, convertible into
    common stock on a one-for-one basis. Mr. Kronfeld's address is JK&B
    Management, L.L.C., 205 North Michigan, Suite 808, Chicago, Illinois 60601.



(5) Includes options to purchase 7,200 shares which are presently exercisable or
    will become exercisable within 60 days after the date of this prospectus and
    102,000 shares of common stock


                                       50
<PAGE>   53

    owned by various partnerships or corporations with respect to which Mr.
    Flynn is a general partner and/or controlling stockholder.


(6) Includes options to purchase 7,200 shares that are presently exercisable or
    will become exercisable within 60 days after the date of this prospectus.



(7) Excludes 4,111,112 shares of Series B convertible preferred stock owned by,
    and 892,857 shares of Series C convertible preferred stock subject to an
    agreement to purchase by, Providence Equity Partners III L.P. and its
    affiliates. Mr. Masiello and Mr. Salem disclaim beneficial ownership of
    these shares except to the extent of their pecuniary interest in the general
    partner of Providence Equity Partners III L.P.



(8) Includes options to purchase 94,200 shares owned by executive officers not
    named above which are presently exercisable or which will become exercisable
    within 60 days after the date of this prospectus.


SELLING STOCKHOLDERS

     The selling stockholders listed in the table below have agreed to sell the
number of shares of common stock indicated opposite their respective names. The
table sets forth information about common stock held of record by the selling
stockholders as of the date of this prospectus and as adjusted to reflect the
sale of shares of common stock in this offering. Information with respect to
ownership has been furnished by the respective selling stockholders. There is
and has been no material relationship during our history between us or any
affiliate of ours and any selling stockholder except as described in the
footnotes appearing at the end of the following table.


<TABLE>
<CAPTION>
                                                SHARES OWNED       SHARES       SHARES OWNED
                                                BEFORE THIS     SOLD IN THIS     AFTER THIS
SELLING STOCKHOLDER(1)                            OFFERING        OFFERING        OFFERING
- ----------------------                          ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Wellington Management Company, LLP............     18,870          18,870              --
FamCo Value Income Partners L.P...............     10,786          10,786              --
Pilgrim High Yield Fund.......................     10,178          10,178              --
DFG Corporation...............................      8,090           8,090              --
FamCo Income Partners L.P. ...................      6,741           6,741              --
FamCo Offshore Ltd. ..........................      5,393           5,393              --
ZPG Securities................................      1,348           1,348              --
</TABLE>


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

(1) Each selling stockholder currently owns warrants to purchase the number of
    shares indicated.


                                       51
<PAGE>   54

                           DESCRIPTION OF SECURITIES

GENERAL -- CAPITAL STOCK


     The following description is a summary of the material terms of our capital
stock. It is not a complete description of all of the terms of our capital
stock. You should read this description of our capital stock as well as the
Nevada Revised Statutes, our articles of incorporation, including the
certificates of designation of our preferred stock, and our by-laws. Copies of
our articles and by-laws have been filed as exhibits to the registration
statement of which this prospectus is a part.



     Our authorized capital stock consists of 60,000,000 shares of common stock,
$.001 par value per share, and 50,000,000 shares of preferred stock, $.001 par
value per share. As of December 27, 1999, 23,231,368 shares of common stock and
5,277,779 shares of Series B convertible preferred stock were outstanding and
3,463,815 shares of common stock were subject to outstanding options and
warrants. As of December 27, 1999, there were approximately 180 holders of
record of the common stock and five holders of record of the Series B
convertible preferred stock. We have agreed to issue 1,250,000 shares of Series
C convertible preferred stock to two of our significant stockholders and their
affiliates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."



     If we issue preferred stock in the future, the preferred stock will have
the rights, terms and preferences specified by our board of directors in a
certificate filed with the Secretary of State of Nevada. As of the date of this
prospectus, we have authorized the issuance of up to 5,278,000 shares of Series
B convertible preferred stock and have agreed to authorize up to 1,250,000
shares of Series C convertible preferred stock with the voting, dividend,
liquidation and conversion rights described below. The issuance of preferred
stock by the board of directors in the future could adversely affect the rights
of holders of our then outstanding capital 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/or a class of securities with voting rights equal to or greater than those
of the common stock. We have no present plan to issue any additional series of
preferred stock other than the Series C convertible preferred stock and Series D
convertible preferred stock. See "-- Anti-Takeover Provisions of Articles of
Incorporation."


SERIES B CONVERTIBLE PREFERRED STOCK


     The Series B convertible preferred stock has the following rights and
preferences:



     Dividends accrued at the rate of 10% per year from their issuance on May 4,
1999, until November 21, 1999 and must be paid before any dividends may be paid
on our common stock. Effective as of November 22, 1999, we elected to terminate
the accrual of dividends since our common stock price per share exceeded $27.00
for 20 consecutive trading days. Except as described below, accrued dividends
will be paid in common stock at the time the Series B convertible preferred
stock is converted into common stock if the dividends have not been paid before
that time.



     On any matter submitted to our stockholders, holders of shares of Series B
convertible preferred stock will be treated as if they hold the number of shares
of common stock into which their shares of Series B convertible preferred stock
could be converted and will be allowed to vote those shares along with the
holders of our common stock. In addition, the holders of shares of Series B
convertible preferred stock will have the right to approve any action to:



     - issue preferred stock ranking equal or senior to the Series B convertible
       preferred stock;


     - dispose of assets in excess of a fixed dollar amount, merge or
       consolidate or sell our company;

     - liquidate our company;

                                       52
<PAGE>   55


     - alter the terms of the Series B convertible preferred stock;



     - pay dividends on common stock or other securities junior to the Series B
       convertible preferred stock other than dividends payable in common stock;


     - enter into transactions with our affiliates other than transactions
       covered by specified exceptions;

     - make acquisitions in excess of a fixed dollar amount;

     - incur additional debt in excess of fixed amounts;

     - make material changes to our business plan;

     - hire a chief executive officer;

     - organize subsidiaries or enter into joint ventures unless specified
       conditions are met; and


     - issue additional common stock that would result in an increase in the
       number of shares of common stock into which the Series B convertible
       preferred stock may be converted.



     If we were to take one of these restricted actions without the approval of
the holders of the Series B convertible preferred stock, the holders of the
Series B convertible preferred stock may have the right to require us to seek a
sale of our company. To avoid having to sell our company if one of the
restricted actions described above is not approved, we have the right to redeem
the Series B convertible preferred stock at predetermined prices. If we elect
not to redeem the Series B convertible preferred stock and the required sale of
our company is not effected within six months, then the holders of the Series B
convertible preferred stock, along with the holders of the Series C convertible
preferred stock if they then have similar rights, would be entitled to elect a
majority of our board of directors.



     The approval rights described above will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding and the shares
of Series B convertible preferred stock outstanding constitute less than 5% of
the outstanding common stock assuming conversion of all outstanding shares of
Series B convertible preferred stock. Based on the number of shares of common
stock to be outstanding after this offering, 5% of the common stock would be
approximately 1,650,000 shares.



     The holders of the Series B convertible preferred stock have approved the
issuance of the Series C convertible preferred stock and Series D convertible
preferred stock, each of which will rank equal to the Series B convertible
preferred stock.



     The holders of the Series B convertible preferred stock have the right to
representation on our board of directors as discussed below under "-- Series B
and C Preferred Stock Board Representation."



     Upon our liquidation, the holders of the Series B convertible preferred
stock are entitled to receive their liquidation amount on a pro rata basis with
the holders of any series of preferred stock which ranks equally with the Series
B convertible preferred stock and before any amounts may be paid to holders of
our common stock or other junior securities. The liquidation amount will be the
greater of (a) $9.00 per share plus accrued and unpaid dividends or (b) the
amount the holders of Series B convertible preferred stock would have received
if the Series B convertible preferred stock had been converted into common
stock. The holders of the Series B convertible preferred stock have the right to
elect that a sale of our company be treated as a liquidation for these purposes.
If the liquidation or sale occurs before May 4, 2002, the accrued dividends will
not be paid to the extent the holders of Series B convertible preferred stock
will receive more than $22.50 per share.


                                       53
<PAGE>   56


     A holder of shares of Series B convertible preferred stock may convert
those shares into common stock at any time. Initially, each share of Series B
convertible preferred stock may be converted into one share of common stock. The
number of shares of common stock into which each share of Series B convertible
preferred stock can be converted may be adjusted as a result of stock splits,
stock dividends and other issuances of additional stock.



     After the earlier of May 24, 2000 or the date on which the holders of
Series B convertible preferred stock or Series C convertible preferred stock
exercise their demand registration rights, which are discussed below, we have
the right to require the conversion of the Series B convertible preferred stock
if our common stock price exceeds $27.00 per share for 20 consecutive trading
days. If we require conversion before May 4, 2002, no accrued dividends will be
paid.



     The holders of Series B convertible preferred stock have the right to
require us to redeem the Series B convertible preferred stock after May 4, 2005
or upon a sale of our company. The redemption price will be equal to the greater
of:


     - $9.00 per share plus accrued and unpaid dividends; or


     - the value of the common stock into which the Series B convertible
       preferred stock is then convertible.



     If we fail to redeem all shares of Series B convertible preferred stock
within six months of the date specified by the holders of the Series B
convertible preferred stock, then the holders of the Series B convertible
preferred stock, along with the holders of the Series C convertible preferred
stock if they then have similar rights, will have the right to elect a majority
of our board of directors.



     The purchasers of Series B convertible preferred stock have demand and
piggyback registration rights.


SERIES C CONVERTIBLE PREFERRED STOCK


     The Series C convertible preferred stock after issuance, which is expected
in December 1999, will have the following rights and preferences:



     Dividends will accrue at the rate of 10% per year, are cumulative and must
be paid before any dividends may be paid on our common stock. Except as
described below, accrued dividends will be paid in common stock at the time the
Series C convertible preferred stock is converted into common stock if the
dividends have not been paid before that time.



     On any matter submitted to our stockholders, holders of shares of Series C
convertible preferred stock will be treated as if they hold the number of shares
of common stock into which their shares of Series C convertible preferred stock
could be converted and will be allowed to vote those shares along with the
holders of our common stock. In addition, the holders of shares of Series C
convertible preferred stock will have the right to approve any action to:



     - issue preferred stock ranking equal or senior to the Series C convertible
       preferred stock;


     - dispose of assets in excess of a fixed dollar amount, merge or
       consolidate or sell our company;

     - liquidate our company;


     - alter the terms of the Series C convertible preferred stock;



     - pay dividends on common stock or other securities junior to the Series C
       convertible preferred stock other than dividends payable in common stock;


     - enter into transactions with our affiliates other than transactions
       covered by specified exceptions;

                                       54
<PAGE>   57

     - make acquisitions in excess of a fixed dollar amount;

     - incur additional debt in excess of fixed amounts;

     - make material changes to our business plan;


     - hire a chief executive officer;



     - organize subsidiaries or enter into joint ventures unless specified
       conditions are met; and



     - issue additional common stock that would result in an increase in the
       number of shares of common stock into which the Series C convertible
       preferred stock may be converted.



     If we were to take one of these restricted actions without the approval of
the holders of the Series C convertible preferred stock, the holders of the
Series C convertible preferred stock may have the right to require us to seek a
sale of our company. To avoid having to sell our company if one of the
restricted actions described above is not approved, we have the right to redeem
the Series C convertible preferred stock at predetermined prices. If we elect
not to redeem the Series C convertible preferred stock and the required sale of
our company is not effected within six months, then the holders of the Series C
convertible preferred stock, along with the holders of the Series B convertible
preferred stock if they then have similar rights, would be entitled to elect a
majority of our board of directors.



     The approval rights described above will terminate if fewer than 416,667
shares of Series C convertible preferred stock remain outstanding.



     Concurrently with the issuance of the Series C convertible preferred stock,
the purchasers of the Series C convertible preferred stock will consent to the
issuance of the Series D convertible preferred stock, which will rank equally
with the Series B convertible preferred stock and Series C convertible preferred
stock.



     The holders of the Series C convertible preferred stock have the right to
representation on our board of directors as discussed below under "-- Series B
and C Preferred Stock Board Representation."



     Upon our liquidation, the holders of the Series C convertible preferred
stock are entitled to receive their liquidation amount on a pro rata basis with
the holders of any series of preferred stock which ranks equally with the Series
C convertible preferred stock and before any amounts may be paid to holders of
our common stock or other junior securities. The liquidation amount will be the
greater of (a) $28.00 per share plus the greater of $2.80 per share or the
accrued and unpaid dividends or (b) the amount the holders of Series C
convertible preferred stock would have received if the Series C convertible
preferred stock had been converted into common stock. The holders of the Series
C convertible preferred stock have the right to elect that a sale of our company
be treated as a liquidation for these purposes. If the liquidation or sale
occurs before 30 months after issuance, the accrued dividends will not be paid
to the extent the holders of Series C convertible preferred stock will receive
more than $58.80 per share.



     A holder of shares of Series C convertible preferred stock may convert
those shares into common stock at any time. Initially, each share of Series C
convertible preferred stock may be converted into one share of common stock. The
number of shares of common stock into which each share of Series C convertible
preferred stock can be converted may be adjusted as a result of stock splits,
stock dividends and other issuances of additional stock.



     After the earlier of 386 days after the issuance of the Series C
convertible preferred stock or the date on which the holders of Series B
convertible preferred stock or Series C convertible preferred stock exercise
their demand registration rights, which are discussed below, we have the right
to require the conversion of the Series C convertible preferred stock if our
common stock price exceeds


                                       55
<PAGE>   58

$56.00 per share for 20 consecutive trading days. If we require conversion
within 30 months after issuance, no accrued dividends in excess of $2.80 per
share will be paid.


     The holders of Series C convertible preferred stock have the right to
require us to redeem the Series C convertible preferred stock after six years
after issuance or upon a sale of our company. The redemption price will be equal
to the greater of:


     - $28.00 per share plus the greater of $2.80 per share or accrued and
       unpaid dividends; or


     - the value of the common stock into which the Series C convertible
       preferred stock is then convertible.



     If we fail to redeem all shares of Series C convertible preferred stock
within six months of the date specified by the holders of the Series C
convertible preferred stock, then the holders of the Series C convertible
preferred stock (along with the holders of the Series B convertible preferred
stock if they then have similar rights) will have the right to elect a majority
of our board of directors.



     The purchasers of Series C convertible preferred stock have demand and
piggyback registration rights.


SERIES B AND C PREFERRED STOCK BOARD REPRESENTATION


     The purchasers of the Series B convertible preferred stock and Series C
convertible preferred stock have the right to nominate two or more directors
depending on the size of our board of directors and the percentage of our stock
represented by the purchasers' Series B convertible preferred stock, Series C
convertible preferred stock and common stock received upon conversion of the
Series B convertible preferred stock or Series C convertible preferred stock.
The purchasers of the Series B convertible preferred stock and Series C
convertible preferred stock also have the right to have one of their board
representatives serve on each committee of our board of directors and on the
board of each of our subsidiaries. After the issuance of the Series C
convertible preferred stock, the holders of the Series B convertible preferred
stock and Series C convertible preferred stock will be entitled to nominate two
directors. Paul J. Salem and Mark J. Masiello have been elected to the board of
directors after being designated by the holders of Series B convertible
preferred stock and those entities which have agreed to purchase the Series C
convertible preferred stock.



     The right to nominate directors will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding, fewer than
416,667 shares of Series C convertible preferred stock remain outstanding and
the shares of Series B convertible preferred stock, Series C convertible
preferred stock and common stock issued upon conversion of the Series B
convertible preferred stock or Series C convertible preferred stock constitute
less than 5% of the outstanding common stock assuming conversion of all
outstanding shares of Series B convertible preferred stock and Series C
convertible preferred stock.


SERIES D CONVERTIBLE PREFERRED STOCK


     For a description of the terms of the Series D convertible preferred stock,
see "Description of Series D Convertible Preferred Stock."


OUTSTANDING WARRANTS


     As of December 27, 1999, there are outstanding warrants to purchase
approximately 285,815 shares of common stock. These warrants were originally
issued in September 1997 to purchasers of units consisting of our senior secured
notes and the warrants. Each holder of a warrant may purchase shares of common
stock at a price of $.02 per share at any time on or before October 1, 2004.


                                       56
<PAGE>   59

SHARES ELIGIBLE FOR FUTURE SALE


     Upon completion of this offering and the concurrent offering, we will have
outstanding 27,669,962 shares of common stock. The estimated 4,438,594 shares of
common stock and the estimated        shares which may be issued upon conversion
of the Series D convertible preferred stock to be sold in this offering and the
concurrent offering, any additional shares sold upon exercise of the
over-allotment option granted to the underwriters, any shares of common stock
which may be issued as dividends on our Series D convertible preferred stock,
the 9,612,695 shares sold in our prior public offerings, approximately 337,720
shares issued upon exercise of stock options and any common stock issued on
future stock option exercises will be freely tradable without restriction or
further registration under the Securities Act unless those shares are held by
our "affiliates" as defined by the Securities Act.



     The remaining 13,280,953 shares of our common stock, plus 6,527,779 shares
of common stock which may be issued upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock, are "restricted
securities" under the Securities Act because they were issued and sold by us in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted securities may not be sold except in compliance with
the registration requirements of the Securities Act or under an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. After sale under Rule 144 under the Securities Act, these shares will be
freely tradable without restriction or registration under the Securities Act.
Substantially all of our restricted securities, other than the 6,527,779 shares
of common stock which may be issued upon conversion of the Series B convertible
preferred stock and Series C convertible preferred stock, currently qualify for
sale under Rule 144.



     The holders of:



     - approximately 7,874,505 shares of our common stock;



     - 5,277,779 shares of the Series B convertible preferred stock;



     - warrants to purchase approximately 285,815 shares of common stock,
       excluding holders including those shares for sale in this offering; and



     - the rights to acquire the 1,250,000 shares of Series C convertible
       preferred stock to be issued by us



have agreed that, for a period of 90 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of common stock or any securities convertible
into or exchangeable for common stock, except for the shares offered by this
prospectus. See "Underwriting." After the 90 day period, all of these securities
other than the 5,277,779 shares of the Series B convertible preferred stock and
1,250,000 shares of Series C convertible preferred stock will be eligible for
sale in the public market upon compliance with Rule 144 under the Securities
Act.


     Sales of a substantial amount of common stock in the public market, or the
perception that sales could occur, could reduce the price of our stock.

REGISTRATION RIGHTS OF SECURITY HOLDERS


     The holders of the 5,277,779 shares of our outstanding Series B convertible
preferred stock, the holders of the 1,250,000 shares of Series C convertible
preferred stock to be issued, the holders of approximately 684,691 shares of
common stock that have been or may be acquired upon exercise of the warrants and
the holders of 2,634,480 shares of common stock received upon conversion of the
Series A convertible preferred stock upon our initial public offering have the
right to demand that their common stock be registered with the SEC.


                                       57
<PAGE>   60


     The holders of the 5,277,779 shares of our outstanding Series B convertible
preferred stock, the holders of the 1,250,000 shares of Series C convertible
preferred stock to be issued, the holders of approximately 684,691 shares of
common stock that have been or may be acquired upon exercise of the warrants and
the holders of an additional 2,661,481 shares of common stock have piggyback
registration rights under agreements with us. Some of these holders have elected
to include shares in this offering.


FUTURE SALE OF STOCK TO EMPLOYEES

     We plan to seek to attract and retain employees in part by offering stock
options and other purchase rights for a significant number of our shares of
common stock. These plans may dilute the percentage of ownership of our then
existing stockholders.

CONTROL SHARE ACQUISITIONS


     Sections 78.3791 through 78.3793 of the Nevada Revised Statutes generally
apply to any acquisition of outstanding voting securities of an issuing
corporation which results in the acquiror owning more than 20% of the issuing
corporation's then outstanding voting securities. An issuing corporation is any
Nevada corporation with at least 200 stockholders, at least 100 of which are
stockholders of record and Nevada residents, and which conducts business in
Nevada.



     The securities acquired in a covered acquisition are denied voting rights
unless a majority of the security holders of the issuing corporation approve the
granting of voting rights. If permitted by the issuing corporation's articles of
incorporation or by-laws then in effect, voting securities acquired in the
covered acquisition are redeemable by the issuing corporation at the average
price paid for the securities by the acquiror if the acquiring person has not
given timely notice to the issuing corporation or if the stockholders of the
issuing corporation vote not to grant voting rights to the acquiring person's
securities.



     Unless the issuing corporation's articles of incorporation or by-laws then
in effect provide otherwise, if the acquiring person acquired securities having
50% or more of the voting power of the issuing corporation's outstanding
securities and the stockholders of the issuing corporation grant voting rights
to the acquiring person, then any stockholders of the issuing corporation who
voted against granting voting rights to the acquiring person may demand that the
issuing corporation purchase, for fair value, all or any portion of his
securities.



     Our articles of incorporation and by-laws do not limit the effect of these
provisions.


TRANSFER AGENT


     The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.


LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS


     The right of the stockholders to sue any director for misconduct in
conducting our affairs is limited by our articles of incorporation and Nevada
statutes 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 grounds for suit. The statute does not limit the liability of directors
or officers for monetary damages under the federal securities laws.



     We also have the obligation, under our by-laws, to indemnify any director
or officer of ours for expenses incurred in connection with any legal action
brought or threatened which relates to any action or omission alleged to have
been committed while acting in the scope of the person's duties.


                                       58
<PAGE>   61


This indemnification is to be provided only if the person acted in good faith
and in a manner which the person reasonably believed to be in or not opposed to
our best interests. With respect to criminal actions, the indemnification is to
be provided only if the person had no reasonable cause to believe the person's
conduct was unlawful.


     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or other controlling persons under
the foregoing provisions, we have been informed that in the opinion of the SEC
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.

ANTI-TAKEOVER PROVISIONS OF ARTICLES OF INCORPORATION


     Our articles of incorporation authorize our 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. As of December 27, 1999, 5,278,000 shares of
preferred stock have been designated as Series B convertible preferred stock,
5,277,779 shares of Series B convertible preferred stock were outstanding and we
have agreed to authorize and issue 1,250,000 shares of Series C convertible
preferred stock. We may also issue up to 3,450,000 shares of Series D
convertible preferred stock in the concurrent offering. We previously issued
6,571,427 shares of Series A convertible preferred stock which reverted to
authorized but unissued shares of preferred stock when we closed our initial
public offering of common stock. Our 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, which could, among other things, adversely affect the voting power or
other rights of the holders of common stock and, under some circumstances, make
it more difficult for a third party to acquire, or discourage a third party from
acquiring, control of our company. Our board of directors has no present
intention to authorize the issuance of any additional series of preferred stock
other than the Series C convertible preferred stock and the Series D convertible
preferred stock being offered concurrently with this offering.


BOARD OF DIRECTORS


     Our by-laws provide that our board of directors 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 our board of directors prevents persons seeking to acquire
control of our company from electing more than a minority of directors in any
year, thereby delaying, deferring or preventing a change in control. Our by-laws
provide that our board of directors shall consist of between three and nine
members, with the exact number to be determined from time to time by our board
of directors. Our board of directors currently consists of eight directors and,
as a result, the size of each class is two or three.


STOCKHOLDER ACTION AND SPECIAL MEETINGS


     Our by-laws provide that:


     - all action required or permitted to be taken by our 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


     - the number of directors is set by resolution of our board of directors.



These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. Our by-laws provide that
special meetings of stockholders may be called by the board of directors, the
chairman of the board, the president or the holders of at least a majority of
the shares of our common stock issued and outstanding and entitled to vote.


                                       59
<PAGE>   62

            DESCRIPTION OF THE SERIES D CONVERTIBLE PREFERRED STOCK


     The following is a summary of the material provisions of the certificate of
designation and the Series D convertible preferred stock. Copies of the
certificate of designation and the form of Series D convertible preferred stock
share certificate are available upon request at our address set forth under
"Where You Can Find More Information." This summary is not intended to be
complete and is subject to, and is qualified in its entirety by reference to,
the certificate of designation. The definitions of capitalized terms used in the
following summary that are not defined herein are defined in the certificate of
designation.


GENERAL


     At the consummation of this offering, we will issue 3,000,000 shares of our
     % Series D Cumulative Convertible Preferred Stock, $0.001 par value per
share. When issued, the Series D convertible preferred stock will be validly
issued, fully paid and nonassessable. The holders of the Series D convertible
preferred stock will have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants or any other of our securities of any
class. We have applied to have the Series D convertible preferred stock approved
for listing on the Nasdaq National Market.


RANKING


     The Series D convertible preferred stock will, with respect to dividend
rights and rights on liquidation, dissolution or winding-up, rank:



     - junior to all our existing and future debt obligations;



     - junior to "Senior Stock," which is each class of our capital stock or
       series of preferred stock established after the Series D convertible
       preferred stock by our board of directors that has terms which expressly
       provide that the class or series will rank senior to the Series D
       convertible preferred stock;



     - on a parity with "Parity Stock," which is our Series B convertible
       preferred stock and Series C convertible preferred stock and each class
       of capital stock or series of preferred stock established after the
       Series D convertible preferred stock by our board of directors that has
       terms which expressly provide that the class or series will rank on a
       parity with the Series D convertible preferred stock; and



     - senior to "Junior Stock," which is our common stock and any other class
       of our capital stock established after the Series D convertible preferred
       stock by our board of directors whose terms do not expressly provide that
       the class or series ranks senior to, or on a parity with, our Series D
       convertible preferred stock.



     While any shares of Series D convertible preferred stock are outstanding,
we may not authorize, create or increase the authorized amount of any class or
series of capital stock that ranks senior to the Series D convertible preferred
stock with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding-up without the consent of the holders of at least 66 2/3%
of the outstanding shares of Series D convertible preferred stock. We may,
however, without the consent of any holder of Series D convertible preferred
stock, create additional classes of common stock, increase the authorized number
of shares of preferred stock or issue series of preferred stock that ranks on a
parity with, or junior to, the Series D convertible preferred stock with
respect, in each case, to the payment of dividends and amounts upon liquidation,
dissolution and winding-up. See "-- Voting Rights."


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<PAGE>   63

DIVIDENDS


     Subject to the rights of any holders of Senior Stock and Parity Stock,
holders of shares of Series D convertible preferred stock will be entitled to
receive, when, as and if declared by our board of directors out of our funds
which are legally available for payment, cumulative dividends at the annual rate
of      % of the liquidation preference of $50 per share of Series D convertible
preferred stock. This is equivalent to $     per share annually.



     Dividends on the Series D convertible preferred stock will be payable
quarterly on                ,                ,                and
               of each year commencing        , 2000. Dividends will accrue from
the most recent date as to which dividends have been paid or, if no dividends
have been paid, from the date of the original issuance of the Series D
convertible preferred stock. Each dividend will be payable to holders of record
as they appear on our stock records at the close of business on the record date
next preceding the quarterly dividend payment date. Each record date will be
established by our board of directors and will be not more than 60 days nor less
than 15 days before the respective quarterly dividend payment date.



     Dividends will be cumulative from the quarterly dividend payment date,
whether or not in any dividend period or periods we have funds legally available
for the payment of dividends. Accumulations of dividends on shares of Series D
convertible preferred stock will not bear interest. Dividends payable on the
Series D convertible preferred stock for any period greater or less than a full
quarterly dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months.



     At our option, any dividend on the Series D convertible preferred stock
will be payable:



     - in cash, or



     - in shares of our common stock.



     If we pay dividends in shares of common stock, the number of shares of
common stock to be issued on each dividend payment date will be determined by
dividing the total dividend to be paid on all of the outstanding shares of
Series D convertible preferred stock by the product of (x) 95% and (y) the
average of the daily closing prices of the common stock for the five consecutive
trading days ending on and including the fourth trading day before the dividend
payment date.



     The transfer agent is authorized and directed in the certificate of
designation to:



     - aggregate any fractional shares of common stock that are distributable as
       dividends;



     - sell them at the best available price; and



     - distribute the proceeds to the holders of the Series D convertible
       preferred stock in proportion to their respective interests.



     We will pay the expenses of the transfer agent with respect to any sale of
the aggregated fractional shares, including brokerage commissions. If the sale
by the transfer agent of the aggregated fractional interests would be
restricted, we will agree with the transfer agent on other appropriate
arrangements for the cash realization of fractional interests.



     All shares of common stock distributed on the related dividend payment date
in payment of dividends on the Series D convertible preferred stock will be
freely transferable without restriction under the Securities Act.



     We will not declare or pay, or set apart any sum for the payment of
dividends on any outstanding share of the Series D convertible preferred stock
for any dividend period unless all dividends for all preceding dividend periods
have been declared and paid, or declared and a sufficient


                                       61
<PAGE>   64


sum set apart for the payment of the dividend, on all outstanding shares of
Series D convertible preferred stock.



     We will not:



          (1) declare, pay or set apart funds for the payment of any dividend or
     other distribution with respect to any Junior Stock; or



          (2) redeem, purchase or otherwise acquire for consideration any Junior
     Stock through a sinking fund or otherwise; unless:



             (a) all accrued and unpaid dividends with respect to the Series D
        convertible preferred stock at the time these actions are taken have
        been paid or funds have been set apart for payment of these dividends;
        and



             (b) sufficient funds have been paid or set apart for the payment of
        the dividend for the current dividend period with respect to the Series
        D convertible preferred stock.



     We will not declare or pay any dividend on any Parity Stock unless full
cumulative dividends have been paid on the Series D convertible preferred stock
for all prior dividend periods unless the dividend declared on any Parity Stock
is declared ratably in proportion to accrued and unpaid dividends on the Series
D convertible preferred stock and the Parity Stock.



     Notwithstanding anything herein to the contrary, we may:



     - declare and pay dividends on Parity Stock which are payable solely in
       shares of Parity Stock or Junior Stock;



     - declare and pay dividends on Junior Stock which are payable solely in
       shares of Junior Stock;



     - declare and pay dividends on Parity Stock or Junior Stock by increasing
       the liquidation value of the Parity Stock or Junior Stock, as applicable;



     - repurchase, redeem or otherwise acquire Junior Stock in exchange for
       Junior Stock; or



     - repurchase, redeem or otherwise acquire Parity Stock in exchange for
       Parity Stock or Junior Stock.



     For the foreseeable future, we intend to pay all dividends on the Series D
convertible preferred stock in shares of our common stock, other than cash paid
instead of fractional shares. If, in the future, we were to consider paying cash
dividends on the Series D convertible preferred stock we would have to comply
with the restrictions contained in our debt indenture and the terms of our
outstanding series of preferred stock. See "Risk Factors--Our debt covenants and
preferred stock could limit how we conduct our business and our ability to raise
additional funds."


REDEMPTION

  Mandatory Redemption


     On                , 2012, subject to legal availability of funds, we will
be required to redeem all of the outstanding shares of the Series D convertible
preferred stock at a redemption price, payable in cash, equal to the liquidation
preference plus accumulated and unpaid dividends, if any, whether or not
declared, to the date of redemption. We will not be required to make sinking
fund payments with respect to the Series D convertible preferred stock. The
certificate of designation for the Series D convertible preferred stock will
provide that we will take all actions required or permitted under Nevada law to
permit the redemption.


                                       62
<PAGE>   65

  Provisional Redemption


     On or after                , 2002 but before                , 2003, if the
closing price of our common stock equals or exceeds 150% of the Conversion Price
for at least 20 trading days within any 30 trading day period, we may redeem
Series D convertible preferred stock (a "Provisional Redemption"). If we redeem
the Series D convertible preferred stock, the redemption price will be      % of
the liquidation preference, plus accumulated and unpaid dividends, if any,
whether or not declared, to the redemption date (the "Provisional Redemption
Date").



     If we undertake a Provisional Redemption, the holders of shares of Series D
convertible preferred stock called for redemption also will receive an
"additional payment" in an amount equal to the present value of the dividends
that would have been payable on the Series D convertible preferred stock for the
period from the Provisional Redemption Date to                , 2003. The
present value will be calculated using a formula set forth in the certificate of
designation.



     We may pay the redemption price, including any additional payment, at our
option, in cash, in shares of common stock or a combination thereof. However, we
may not pay in common stock unless we satisfy conditions specified in the
certificate of designation before the Provisional Redemption Date.



     We will notify the holders of Series D convertible preferred stock not less
than 30 nor more than 60 days before any Provisional Redemption Date.


LIQUIDATION PREFERENCE


     Upon our voluntary or involuntary liquidation, dissolution or winding-up,
and subject to the rights of our creditors and holders of Senior Stock and
Parity Stock, each holder of Series D convertible preferred stock will be
entitled to be paid, out of our assets available for distribution to
stockholders, an amount equal to the liquidation preference of $50 per share of
Series D convertible preferred stock held by the holder, plus accumulated and
unpaid dividends thereon to the date fixed for liquidation, dissolution or
winding-up, before any distribution is made on any Junior Stock, including our
common stock. If, upon our voluntary or involuntary liquidation, dissolution or
winding-up, there are not sufficient assets to pay the amounts payable with
respect to the Series D convertible preferred stock and all other Parity Stock
in full, all accumulated and unpaid dividends on the Series D convertible
preferred stock and all Parity Stock will be paid in full and then the holders
of the Series D convertible preferred stock and the Parity Stock will share
equally and ratably in any distribution of our assets in proportion to the other
respective amounts to which they are entitled. After payment of the full amount
of the liquidation preference of the Series D convertible preferred stock and
any accrued and unpaid dividends, the holders of shares of Series D convertible
preferred stock will not be entitled to any further participation in any
distribution of our assets.



     Neither the sale, conveyance, exchange or transfer, whether for cash,
shares of stock, securities or other consideration, of all or substantially all
of our property or assets nor our consolidation or merger with or into, one or
more entities will be deemed to be a liquidation, dissolution or winding-up.



     The certificate of designation will not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Series D
convertible preferred stock even though it is substantially in excess of the par
value thereof.


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<PAGE>   66

VOTING RIGHTS


     The holders of Series D convertible preferred stock have no voting rights,
except as otherwise required under Nevada law or as provided in the certificate
of designation.



     If:



          (1) dividends on the Series D convertible preferred stock are in
     arrears and unpaid for six or more dividend periods, whether or not
     consecutive;



          (2) we fail to redeem all of the Series D convertible preferred stock
     in cash on the Mandatory Redemption Date; or



          (3) we fail to offer to repurchase or, if the offer to repurchase is
     accepted, to repurchase shares of Series D convertible preferred stock if a
     Non-Stock Change of Control occurs (each a "Voting Rights Triggering
     Event");



then the holders of the outstanding shares of Series D convertible preferred
stock, voting separately and as a class together with the holders of any Parity
Stock upon which like rights have been conferred and are exercisable, will be
entitled to elect to serve on our board of directors the lesser of:



     (a) two additional members to the board of directors, or



     (b) that number of directors constituting at least 25% of the members of
the board of directors,



and the number of members of the board of directors will be immediately and
automatically increased by that number. The voting rights of the Series D
convertible preferred stock will continue until all Voting Rights Triggering
Events are cured or waived, at which time the term of any directors elected
pursuant to the provisions of this paragraph will terminate and the number of
directors constituting the board of directors will be immediately and
automatically decreased by that number.



     Without the approval of the holders of at least 66 2/3% of the then
outstanding shares of Series D convertible preferred stock, we may not amend the
Change of Control provisions of the Series D convertible preferred stock.



     Without the approval of the holders of at least a majority of the then
outstanding shares of Series D convertible preferred stock, we may not:



     - amend the certificate of designation so as to affect adversely the
       specified rights, preferences, privileges or voting rights of holders of
       shares of the Series D convertible preferred stock;



     - authorize the issuance of any additional shares of Series D convertible
       preferred stock; or



     - waive any Voting Rights Triggering Event or compliance with any provision
       of the Series D convertible preferred stock.



     Except as expressly set forth above,



          (1) the creation, authorization or issuance of any shares of Junior
     Stock or Parity Stock, including the designation of a series thereof within
     the existing class of preferred stock, or



          (2) the increase or decrease in the amount of authorized capital stock
     of any class, including any preferred stock,



will not require the consent of the holders of Series D convertible preferred
stock and will not be deemed to affect adversely the rights, preferences,
privileges or voting rights of shares of Series D convertible preferred stock.


                                       64
<PAGE>   67

CONVERSION RIGHTS


     Shares of Series D convertible preferred stock will be convertible, in
whole or in part, at any time after the issue date, at the option of the holders
thereof, into shares of common stock initially at the conversion price of
$       per share, subject to adjustment as described below ("Conversion
Price"). The right to convert shares of Series D convertible preferred stock
called for redemption will terminate at the close of business on the relevant
redemption date.



     Conversion of shares of Series D convertible preferred stock, or a
specified portion thereof, may be effected by delivering certificates evidencing
the shares being converted, together with written notice of conversion and a
proper assignment of the certificates to us or in blank, to the office or agency
to be maintained by us for that purpose. Initially, Continental Stock Transfer &
Trust Company will maintain that office for us.



     Each conversion will be deemed to have been effected immediately before the
close of business on the date on which the certificates for shares of Series D
convertible preferred stock have been surrendered to, and, if applicable,
payment of an amount equal to the dividends payable on the shares received by,
us. We will issue a certificate evidencing the common stock distributed upon
conversion as soon as reasonably practical after the conversion date.


     All shares of common stock distributed upon conversion will be freely
transferable without restriction under the Securities Act.


     Holders of shares of Series D convertible preferred stock at the close of
business on a record date will be entitled to receive the dividend payable on
the corresponding dividend payment date notwithstanding the conversion of the
shares following the record date and before the dividend payment date. However,
shares of Series D convertible preferred stock surrendered for conversion during
the period between the close of business on any record date and the opening of
business on the corresponding payment date, must be accompanied by payment of an
amount equal to the dividend payable on the shares on the dividend payment date
unless the shares are converted after the issuance of a notice of redemption
with respect to a redemption date during the period between the record date and
the dividend payment date. A holder of shares of Series D convertible preferred
stock on a record date who tenders the shares for conversion on the dividend
payment date will receive the dividend payable on the dividend payment date and
the converting holder need not include payment of the amount of the dividend
upon surrender of the shares for conversion. Except as provided above, we will
make no payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares.



     Fractional shares of common stock will not be issued upon conversion but,
instead, we will pay a cash adjustment based on the closing price of the common
stock on the business day before the conversion date.


     The Conversion Price is subject to adjustment upon certain events,
including:


          (1) any redemption payment or payment of a dividend or other
     distribution payable in shares of common stock to all holders of any class
     of our capital stock, other than the issuance of shares of common stock in
     connection with the payment:



             (a) in redemption for, of dividends on or on the conversion of the
        Series D convertible preferred stock,



             (b) in redemption for, of dividends on or on the conversion of the
        Series B preferred stock or Series C preferred stock, in accordance with
        the terms thereof as in effect on the issue date of the Series D
        convertible preferred stock, or


                                       65
<PAGE>   68


             (c) to all holders of the Series D convertible preferred stock
        based on the number of shares of common stock into which the Series D
        convertible preferred stock is then convertible;



          (2) any issuance to all holders of shares of our common stock of
     rights, options or warrants entitling them to subscribe for or purchase
     shares of common stock or securities convertible into or exchangeable for
     shares of our common stock at less than market value as of the date of
     conversion or exchange; provided no adjustment will be made if the holder
     of shares of the Series D convertible preferred stock would be entitled to
     receive the rights, options or warrants upon conversion of the Series D
     convertible preferred stock into common stock and, provided further, if the
     rights, options or warrants are only exercisable if certain triggering
     events occur, then the Conversion Price will not be adjusted until the
     triggering events occur;


          (3) any subdivision, combination or reclassification of common stock;


          (4) any distribution to all holders of our common stock consisting
     exclusively of cash that, when aggregated with:



             (a) all other cash distributions made within the then preceding 12
        months in respect of which no adjustment has been made, and



             (b) any cash and the fair market value of other consideration paid
        or payable in respect of any tender offer by us or any of our
        subsidiaries for shares of our common stock concluded within the then
        preceding 12 months in respect of which no adjustment has been made,



     exceeds 15% of our market capitalization, after excluding any cash
     distributed in a transaction involving:



                (x) our merger or consolidation,



                (y) the sale or transfer to another corporation of substantially
           all of our assets, or



                (z) any statutory exchange of securities with another
           corporation, in which no adjustment to the Conversion Price is made
           pursuant to the last paragraph under the caption Conversion Rights;



          (5) the completion of a tender or exchange offer by us or any of our
     subsidiaries for shares of our common stock that involves an aggregate
     consideration that, together with:



             (a) any cash and other consideration payable in a tender or
        exchange offer by us or any of our subsidiaries for shares of our common
        stock expiring within the then preceding 12 months in respect of which
        no adjustment has been made, and



             (b) the aggregate amount of any cash distributions referred to in
        clause 4 above to all holders of shares of our common stock within the
        then preceding 12 months in respect of which no adjustments have been
        made,



     exceeds 15% of our market capitalization immediately before the expiration
     of the tender offer where the tender offer price or exchange offer price
     per share of our common stock is less than the closing price per share of
     our common stock on the date after the tender offer or exchange offer
     expires; or



          (6) a distribution to all holders of our common stock of evidences of
     indebtedness, shares of capital stock other than our common stock or
     assets, including securities, but excluding those dividends and those
     issuances of rights, options, warrants and other distributions for which an
     adjustment to the Conversion Price as referred to above is applicable.


                                       66
<PAGE>   69

     No adjustment of the Conversion Price will be required to be made:


        - until cumulative adjustments amount to one percent of the Conversion
          Price, or



        - with respect to rights, options or warrants issued pursuant to certain
          of our employee benefit plans.



     We also may from time to time decrease the Conversion Price by any amount
for any period of at least 20 days, so long as the decrease is irrevocable
during the period. We will give at least 15 days' notice of any such decrease.
In addition, we will be permitted to reduce the Conversion Price in order to
make any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock not taxable to the recipients. If we elect to reduce the
Conversion Price, we will comply with the requirements of Rule 14e-1 under the
Exchange Act, and any other securities laws and regulations, if and to the
extent they are applicable.



     If at any time we distribute property to our stockholders and the
distribution would be taxable as a dividend for federal income tax purposes and,
pursuant to the antidilution provisions described above or under the caption
"-- Change of Control," the Conversion Price of the Series D convertible
preferred stock is reduced, the reduction may be deemed to be the receipt of
taxable income by holders of the Series D convertible preferred stock.



     If we distribute rights, options or warrants, other than those referred to
in clause 2 above, to all holders of common stock, so long as the rights,
options or warrants have not expired or been redeemed, the holder of any shares
of Series D convertible preferred stock surrendered for conversion will be
entitled to receive a number of rights, options or warrants equal to:



          (1) for each share of common stock issued upon conversion of the
     Series D convertible preferred stock, the number of rights, options or
     warrants which a holder of a share of common stock is then entitled, if the
     conversion occurs on or before the distribution of separate certificates
     evidencing the rights, options or warrants, and



          (2) the number of rights, options or warrants which the holder of
     Series D Convertible Preferred Stock would have received had the holder
     converted the Series D convertible preferred stock into common stock
     immediately before the distribution of certificates, if the conversion
     occurs after the distribution of certificates evidencing the rights,
     options or warrants.



     Except as stated above or under the caption "-- Change of Control," the
Conversion Price will not be adjusted for the issuance of common stock or any
securities convertible into or exchangeable for common stock or carrying the
right to purchase any of the foregoing, in exchange for cash, property or
services.


     In case of:


          (1) our merger or consolidation;



          (2) any sale or transfer to another corporation of our property as an
     entirety or substantially as an entirety; or



          (3) any statutory exchange of securities with another corporation,
     other than in connection with a merger or acquisition (each of the above,
     an "Exchange Event");



there will be no adjustment of the Conversion Price unless the Exchange Event
causes a Common Stock Change of Control (as defined under the caption "-- Change
of Control").



     Upon the occurrence of an Exchange Event, other than a merger or
consolidation in which:



          (1) we are the continuing corporation, and


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<PAGE>   70


          (2) the common stock outstanding immediately before the merger or
     consolidation is not exchanged for cash, securities or other property of
     another corporation,



and subject to any adjustment to the Conversion Price if the Exchange Event
causes a Common Stock Change of Control, each share of the then outstanding
Series D convertible preferred stock will, without the consent of the holder,
become convertible only into the kind and amount of securities, cash or other
property receivable upon the Exchange Event by a holder of the number of shares
of common stock into which the Series D convertible preferred stock was
convertible immediately before the Exchange Event, assuming the holder of common
stock failed to exercise any rights of election as to the kind or amount of
securities, cash or other property receivable upon the Exchange Event.



     In the case of a cash merger of us into another company or any other cash
transaction of the type mentioned above, the effect of these provisions would be
that after the transaction each share of Series D convertible preferred stock
would be convertible at the Conversion Price then in effect into the amount of
cash a holder of a share of Series D convertible preferred stock would have been
entitled to receive had the share of Series D convertible preferred stock been
converted into common stock immediately before the effective date of the cash
merger or transaction. Depending upon the terms of the cash merger or
transaction, this amount could be more or less than the liquidation preference
of the Series D convertible preferred stock.


EXPIRATION OF CONVERSION RIGHTS


     On or after           , 2003, we may, at our option, cancel the conversion
rights of the Series D convertible preferred stock. We may exercise this option
if the closing price of our common stock equals or exceeds 140% of the
Conversion Price for at least 20 trading days within any 30 trading day period.
In order for us to exercise this option, we must issue a press release for
publication on the Dow Jones News Service, or a comparable news service, before
the opening of business on the second trading day after any period in which the
condition in the preceding sentence has been met. The press release will
announce that we are canceling the conversion rights of the Series D convertible
preferred stock and the date the conversion rights will expire. The press
release will also provide the Conversion Price and the closing price of our
common stock, each as of the close of business of the previous day.



     We must notify the holders of the Series D convertible preferred stock of
the expiration of their conversion rights by first-class mail not more than four
business days after we issue the press release. We will select the date upon
which the conversion rights will expire, which date will be not less than 30 nor
more than 60 days after the date we issue the press release. The conversion
rights will terminate at the close of business on the expiration date.


CHANGE OF CONTROL


  Definitions



     A "Change in Control" shall be deemed to have occurred at the time of:



          (1) the sale, lease, transfer, conveyance or other disposition, other
     than by way of merger or consolidation, in one or a series of related
     transactions, of all or substantially all our assets to any "person," as
     that term is used in Section 13(d)(3) of the Exchange Act;



          (2) the adoption of a plan relating to our liquidation, dissolution or
     winding-up;



          (3) the closing of any transaction, including any merger or
     consolidation, as a result of which any "person" (as defined above) other
     than any Permitted Holder becomes the beneficial owner (as that term is
     defined in Rules 13d-3 and 13d-5 promulgated under the Exchange Act,


                                       68
<PAGE>   71


     except that a person will be deemed to have beneficial ownership of all
     shares the person has the right to acquire whether the right is exercisable
     immediately or only after the passage of time), directly or indirectly, of
     more than 50% of our voting stock; or



          (4) the first day on which a majority of the members of our board of
     directors are not Continuing Directors, as defined in the certificate of
     designation.



     "Permitted Holders" means:



          (1) Providence Equity Partners Inc., JK&B Capital, L.P. or any of
     their affiliates;



          (2) any of Maurice J. Gallagher, Jr., Timothy P. Flynn, Rolla P. Huff
     or their respective spouses or lineal descendants and their respective
     spouses (collectively, the "Individual Family Holders") whether acting in
     their own name or as a majority of persons having the power to exercise the
     voting rights attached to, or having investment power over, shares held by
     others;



          (3) any affiliate of any member of the Individual Family Holders;



          (4) any trust principally for the benefit of one or more members of
     the Individual Family Holders, whether or not any member of the Individual
     Family Holders is a trustee of the trust; and



          (5) any charitable foundation whose majority of members, trustees or
     directors, as the case may be, are persons referred to in (2) above.



     The term "Common Stock Change in Control" means any Change in Control in
which more than 50% of the value of the consideration received by holders of our
common stock, as determined in good faith by our board of directors, consists of
common stock of another company that for each of the 10 consecutive trading days
ending on and including the record date of the transaction resulting in the
Change of Control has been admitted for listing or admitted for listing subject
to notice of issuance on a national securities exchange or quoted on the Nasdaq
National Market; provided a Change in Control will not be a Common Stock Change
in Control unless either:



          (1) we continue to exist after the occurrence of the Change in Control
     and the outstanding shares of Series D convertible preferred stock continue
     to exist as outstanding shares of Series D convertible preferred stock; or



          (2) not later than the occurrence of the Change in Control, the
     outstanding shares of Series D convertible preferred stock are converted
     into or exchanged for shares of convertible preferred stock of a
     corporation succeeding to our business, which convertible preferred stock
     has powers, preferences and relative, participating, optional or other
     rights, and qualifications, limitations and restrictions, substantially
     similar to those of the Series D convertible preferred stock.


     The term "Non-Stock Change in Control" means any Change in Control other
than a Common Stock Change in Control.


  Non-Stock Change of Control



     If a Non-Stock Change of Control occurs, each holder of Series D
convertible preferred stock will have the right, at the holder's option, to
require us to repurchase all of its shares of Series D convertible preferred
stock. Within 30 days after the occurrence of a Non-Stock Change of Control, we
are obligated to give to all holders of shares of Series D convertible preferred
stock notice (the "Company Notice") of the occurrence of the Non-Stock Change of
Control and of the repurchase right arising as a result thereof. We must also
deliver a copy of the Company Notice to our transfer agent.


                                       69
<PAGE>   72


     The Company Notice will specify:



     - the date, which must be no earlier than 30 nor later than 60 days after
       the date of the notice, on which we will repurchase any validly tendered
       shares of Series D convertible preferred stock (the "Repurchase Date");
       and



     - that any validly tendered shares will be repurchased at a price equal to
       100% of the liquidation preference of the Series D convertible preferred
       stock, together with accumulated and unpaid dividends, if any, whether or
       not declared, to the Repurchase Date (the "Repurchase Price").



     We may, at our option, instead of paying the Repurchase Price in cash, pay
the Repurchase Price in common stock valued at 95% of the average of the daily
closing prices of the common stock for the five trading days immediately
preceding and including the third day before the Repurchase Date; provided that
we may not pay in common stock unless we satisfy conditions specified in the
certificate of designation prior to the Repurchase Date.



     To exercise the repurchase right, a holder of shares of Series D
convertible preferred stock must deliver, on or before the 30(th) day after the
date of the Company Notice, written notice to the transfer agent of the holder's
exercise of the repurchase right, together with the shares of Series D
convertible preferred stock with respect to which the right is being exercised.



  Common Stock Change of Control



     If a Common Stock Change in Control occurs, each share of the Series D
convertible preferred stock will be convertible solely into common stock of the
kind received by holders of our common stock as the result of the Common Stock
Change in Control and the Conversion Price in effect will be adjusted
immediately after the Change in Control as described below.



     If:



          (1) a Common Stock Change in Control occurs;



          (2) 100% of the consideration received by a holder of our common stock
     is common stock of the successor, acquiror or other third party, with cash,
     if any, being paid only with respect to any fractional interests resulting
     from the Common Stock Change in Control; and



          (3) all our common stock is exchanged for, converted into, or acquired
     for, common stock (and cash with respect to fractional interests) of the
     successor, acquiror or other third party;



then, the Conversion Price will be adjusted by multiplying the Conversion Price
by a fraction, of which the numerator will be one and the denominator will be
the number of shares of common stock of the successor, acquiror, or other third
party received by a holder of one share of our common stock as a result of the
Common Stock Change in Control.



     If a Common Stock Change of Control occurs and all the conditions listed in
the previous paragraph are not met, the Conversion Price will be adjusted by
multiplying the Conversion Price by a fraction, of which the numerator will be
the Purchaser Stock Price and the denominator will be the average of the closing
prices for our common stock during the 10 trading days ending on and including
the record date for determining the holders of common stock entitled to receive
cash, securities, property or other assets in connection with the Common Stock
Change in Control, as adjusted in good faith by our board of directors to
appropriately reflect any of the events referred to in clauses (1) through (6)
under the heading "-- Conversion Rights."



     The term "Purchaser Stock Price" means the product of (x) the number of
shares of common stock received as consideration for each share of our common
stock, and (y) the average of the closing prices for the common stock received
as consideration for the ten consecutive trading days ending on and including
the record date for the determination of the holders of our common stock


                                       70
<PAGE>   73


entitled to receive consideration in the Common Stock Change of Control, or, if
there is no record date, the date on which the holders of our common stock have
the right to receive the consideration, in each case, as adjusted in good faith
by our board of directors to appropriately reflect any of the events referred to
in clauses (1) through (6) under the heading "-- Conversion Rights"; provided,
if no closing prices exist, then the Purchaser Stock Price will be set at a
price determined in good faith by our board of directors.



     The foregoing Conversion Price adjustments will apply in situations where
more than 50% of the value received by holders of our common stock consists of
common stock of another company that has been admitted for listing on a national
securities exchange or quoted on the Nasdaq National Market. If consideration
for our common stock is solely common stock of another company, each share of
Series D convertible preferred stock will be convertible into the same number of
shares of common stock of the other company receivable by a holder of the number
of shares of our common stock into which a share of Series D convertible
preferred stock was convertible immediately before the transaction. If
consideration for the common stock consists only partly of common stock of
another company, each share of Series D convertible preferred stock will be
convertible into shares of common stock of the other company with a value equal
to the value of the shares of our common stock into which a share of Series D
convertible preferred stock was convertible immediately before the transaction.


CONSOLIDATION, MERGER AND SALE OF ASSETS


     Without the consent of the holders of at least a majority of the
outstanding shares of Series D convertible preferred stock, we may not
consolidate with or merge with or into any other person or convey, transfer or
lease our properties and assets substantially as an entirety to any person
unless certain conditions are met and:



          (1)(a) the successor, transferee or lessee is organized under the laws
     of the United States, any state thereof or the District of Columbia or (b)
     the shares of Series D convertible preferred stock will become shares of
     the successor, transferee or lessee, having in respect of the successor,
     transferee or lessee the same powers, preferences and relative,
     participating, optional or other special rights and the qualifications,
     limitations or restrictions thereon, as the Series D convertible preferred
     stock had immediately before the transaction; or



          (2)(a) the consideration received by holders of our common stock
     consists entirely of cash or (b) each share of Series D convertible
     preferred stock is converted into the right to receive an amount of cash at
     least equal to the greater of:



             (x) the liquidation preference, plus accumulated and unpaid
        dividends thereon, if any, whether declared or undeclared, to the date
        the transaction is completed; and



             (y) the amount of cash which would have been received by the holder
        if the share of Series D convertible preferred stock had been converted
        into common stock immediately before the completion of the transaction.



SEC REPORTS AND REPORTS TO HOLDERS



     Whether or not we are required to file reports with the SEC, if any shares
of Series D convertible preferred stock are outstanding, we will file with the
SEC all reports and other information we would be required to file with the SEC
by Sections 13(a) or 15(d) under the Exchange Act. See "Where You Can Find More
Information." We will supply each holder of Series D convertible preferred
stock, upon request, without cost to the holder, copies of these reports or
other information.


TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT


     The transfer agent, registrar, dividend disbursing agent and redemption
agent for the shares of Series D convertible preferred stock will be Continental
Stock Transfer & Trust Company.


                                       71
<PAGE>   74

                                  UNDERWRITING


     Under the terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has severally agreed
to purchase, and we and the selling stockholders have agreed to sell to each
underwriter named below, the number of shares set forth opposite the name of the
underwriter.



<TABLE>
<CAPTION>
                                                               NUMBER
                            NAME                              OF SHARES
                            ----                              ---------
<S>                                                           <C>
Salomon Smith Barney Inc. ..................................
Bear, Stearns & Co. Inc.....................................
Goldman, Sachs & Co. .......................................
ING Barings LLC.............................................
Warburg Dillon Read LLC ....................................
                                                              ---------
  Total.....................................................  4,500,000
                                                              =========
</TABLE>



     The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.



     The underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc., Goldman, Sachs & Co., ING Barings LLC and Warburg Dillon Read LLC are
acting as representatives, propose to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $     per share. The underwriters may
allow, and these dealers may reallow, a concession not in excess of $     per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and the other selling terms.



     We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 675,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to the underwriter's initial purchase commitment.



     Our officers and directors, the selling stockholders and certain other
stockholders have agreed that, for a period of 90 days from the date of this
prospectus, they will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock, except for the shares offered
by this prospectus.



     In addition, we have agreed that, for a period of 90 days from the date of
this prospectus, we will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock, except for:



     - the shares of common stock offered by this prospectus;



     - the shares of Series D convertible preferred stock offered in the
       concurrent offering;



     - any shares of common stock which may be issued by us upon exercise of
       outstanding warrants and conversion of outstanding convertible preferred
       stock;


                                       72
<PAGE>   75


     - any shares of common stock which may be issued as dividends on or upon
       the conversion of the Series D convertible preferred stock offered in the
       concurrent offering; and



     - shares issued and options granted under our existing stock option plan.



     Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.



     The common stock is quoted on the Nasdaq National Market under the symbol
"MGCX".


     The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us and by the selling stockholders in connection
with this offering. With respect to the underwriting discounts and commissions
to be paid by us, these amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.

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


     In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed to cover syndicate short
positions. Stabilizing transactions consist of certain bids or purchases of
common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress.


     The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.


     Any of these activities may cause the price of the common stock to be
higher than the price that otherwise would exist in the open market in the
absence of these transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.



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


                                       73
<PAGE>   76


     We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $568,000.



     The underwriters named herein are also acting as underwriters of the
concurrent offering. An affiliate of ING Barings LLC provides cash management
services to us for which it receives customary fees. Bear, Stearns & Co. Inc.
issued a fairness opinion in connection with the issuance of the Series C
convertible preferred stock for which they received a customary fee. The
representatives have performed certain other investment banking and advisory
services for us for which they have received customary fees. The representatives
may, from time to time, engage in transactions with and perform services for us
in the ordinary course of business.



     Our company and the selling stockholders have agreed to indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.


                                 LEGAL MATTERS


     Various legal matters regarding the validity of the common stock offered by
this prospectus will be passed upon for us by Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., Atlanta, Georgia. Shareholders of Ellis, Funk, Goldberg, Labovitz
& Dokson, P.C. own approximately 21,600 shares of our common stock. Kronish Lieb
Weiner & Hellman LLP, New York, New York, is acting as counsel to the
underwriters in connection with various legal matters relative to the common
stock offered by this prospectus.


                                    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 LLP, independent
public accountants, and are included herein in reliance upon the authority of
these firms as experts in giving said reports.


                      WHERE YOU CAN FIND MORE INFORMATION

     We must comply with the periodic reporting and other informational
requirements of the Exchange Act and file reports, proxy statements and other
information with the SEC. Copies of our periodic reports and proxy statements
and of other information filed by us with the SEC may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10007. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding us. The address of the SEC's Web site is
http://www.sec.gov. Our Internet address is http://www.mgci.com.

     We have filed with the SEC a registration statement on Form S-3 under the
Securities Act covering the securities being offered. This prospectus does not
contain all the information included in the registration statement, parts of
which are omitted as allowed by the rules of the SEC. For further information
about us and the securities offered, please refer to the registration statement.
The registration statement may be inspected and copied, at prescribed rates, at
the SEC's public reference facilities at the addresses shown above. Statements
made in this prospectus concerning the contents of any document referred to in
this prospectus are not necessarily complete. With respect to each document
filed with the SEC as an exhibit to the registration statement, you should refer
to the exhibit for a more complete description of the matter involved.

                                       74
<PAGE>   77

     The following documents filed by us with the SEC are incorporated into this
prospectus by reference:

     - our Annual Report on Form 10-K for the fiscal year ended December 31,
       1998;

     - our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
       June 30, 1999 and September 30, 1999;


     - our Current Reports on Form 8-K dated July 19, 1999 and October 14, 1999;
       and


     - all reports filed by us to comply with Section 13(a) or 15(d) of the
       Exchange Act since the end of the quarter covered by our Quarterly Report
       on Form 10-Q for our quarter ended September 30, 1999.

     All documents filed by us as required by Section 13(a), 13(c), 14, or 15(d)
of the Exchange Act after the date of this prospectus are incorporated by
reference in this prospectus and are made a part of this prospectus from the
date of filing of these documents.

     Any statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
other subsequently filed document which also is incorporated by reference
modifies or supersedes an earlier statement. Any earlier statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.


     THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS PROSPECTUS. THESE DOCUMENTS ARE AVAILABLE TO YOU
WITHOUT CHARGE UPON YOUR WRITTEN OR ORAL REQUEST. TO REQUEST THESE DOCUMENTS,
PLEASE CONTACT KENT F. HEYMAN, ESQ., SENIOR VICE PRESIDENT AND GENERAL COUNSEL,
MGC COMMUNICATIONS, INC., 171 SULLYS TRAIL, SUITE 202, PITTSFORD, NEW YORK 14534
(TELEPHONE 716-218-6540).


                                       75
<PAGE>   78

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                            MGC COMMUNICATIONS, INC.

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................  F-2
Independent Auditors' Report................................  F-3
Consolidated Balance Sheets as of September 30, 1999
  (unaudited) and December 31, 1998 and 1997................  F-4
Consolidated Statements of Operations for the nine months
  ended September 30, 1999 and 1998 (unaudited) and for the
  years ended December 31, 1998, 1997 and 1996..............  F-5
Consolidated Statements of Redeemable Preferred Stock and
  Stockholders' Equity for the nine months ended September
  30, 1999 (unaudited) and for the years ended December 31,
  1998, 1997 and 1996.......................................  F-6
Consolidated Statements of Cash Flows for the nine months
  ended September 30, 1999 and 1998 (unaudited) and for the
  years ended December 31, 1998, 1997 and 1996..............  F-7
Notes to Consolidated Financial Statements..................  F-8
</TABLE>

                                       F-1
<PAGE>   79

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

     We have audited the accompanying consolidated balance sheets of MGC
Communications, Inc. (a Nevada corporation) and subsidiary (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' equity and cash flows
for the years 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 audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MGC Communications, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

                                          ARTHUR ANDERSEN LLP

Las Vegas, Nevada
March 2, 1999

                                       F-2
<PAGE>   80

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
MGC Communications, Inc.

     We have audited the accompanying statements of operations, stockholders'
equity and cash flows of MGC Communications, Inc. for the year ended December
31, 1996. 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 results of operations and the cash flows of MGC
Communications, Inc. for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.

                                          /s/ KPMG LLP

Las Vegas, Nevada
August 18, 1997

                                       F-3
<PAGE>   81

                            MGC COMMUNICATIONS, INC.

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

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                              SEPTEMBER 30,    --------------------
                                                                  1999           1998        1997
                                                              -------------    --------    --------
<S>                                                           <C>              <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................   $   93,224      $ 11,886    $ 45,054
  Investments held-to-maturity..............................           --            --       7,797
  Investments available-for-sale............................       50,177         9,851          --
  Restricted investments....................................       30,375        20,797      18,482
  Accounts receivable, less allowance for doubtful accounts
    of $478, $257 and $216..................................       16,145         6,360       1,200
  Prepaid expenses..........................................          599           208         277
                                                               ----------      --------    --------
         Total current assets...............................      190,520        49,102      72,810
Property and equipment, net.................................      151,159       116,380      24,617
Investments held-to-maturity................................           --            --      49,913
Investments available-for-sale..............................       35,560        63,212          --
Restricted investments......................................           --        18,582      39,092
Deferred financing costs, net of accumulated amortization of
  $1,686, $1,065 and $198...................................        4,093         4,714       5,448
Other assets................................................          482           129          97
                                                               ----------      --------    --------
         Total assets.......................................   $  381,814      $252,119    $191,977
                                                               ==========      ========    ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
  AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................   $      283      $    332    $    381
Accounts payable:
  Trade.....................................................        8,912         5,314         462
  Property and equipment....................................       15,276        18,577       3,123
Accrued interest............................................       10,400         5,200       5,328
Accrued other expenses......................................        8,492         2,473         786
                                                               ----------      --------    --------
         Total current liabilities..........................       43,363        31,896      10,080
Senior Secured Notes, net of unamortized discount of $2,875,
  $3,307 and $3,882.........................................      157,125       156,693     156,118
Other long-term debt........................................          269           270         138
                                                               ----------      --------    --------
         Total liabilities..................................      200,757       188,859     166,336
                                                               ----------      --------    --------
Commitments and contingencies
Redeemable preferred stock:
  8% Series A Convertible Preferred Stock, 6,571,450 shares
    authorized, 5,148,570 issued and outstanding at December
    31, 1997................................................           --            --      16,665
  10% Series B Convertible Preferred Stock, 5,278,000 shares
    authorized and 5,277,779 issued and outstanding.........       46,663            --          --
Stockholders' equity:
  Preferred stock, 44,722,221 shares authorized but
    unissued................................................           --            --          --
  Common stock, $0.001 par value, 60,000,000 shares
    authorized, 22,810,060, 17,190,428 and 8,799,600 issued,
    22,800,920, 17,190,428 and 8,799,600 shares
    outstanding.............................................           23            17           9
  Additional paid-in capital................................      227,955       108,991      22,118
  Accumulated deficit.......................................      (91,062)      (44,392)    (12,463)
  Less: treasury stock......................................          (76)           --          --
                                                               ----------      --------    --------
                                                                  136,840        64,616       9,664
  Accumulated other comprehensive income....................         (360)          817          --
  Notes receivable from stockholders for issuance of common
    stock...................................................       (2,086)       (2,173)       (688)
                                                               ----------      --------    --------
         Total stockholders' equity.........................      134,394        63,260       8,976
                                                               ----------      --------    --------
         Total liabilities, redeemable preferred stock and
           stockholders' equity.............................   $  381,814      $252,119    $191,977
                                                               ==========      ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       F-4
<PAGE>   82

                            MGC COMMUNICATIONS, INC.

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


<TABLE>
<CAPTION>
                                           NINE MONTHS                    YEAR ENDED
                                       ENDED SEPTEMBER 30,               DECEMBER 31,
                                     -----------------------   --------------------------------
                                        1999         1998         1998        1997       1996
                                     ----------   ----------   ----------   ---------   -------
                                           (UNAUDITED)
<S>                                  <C>          <C>          <C>          <C>         <C>
Operating revenues:
Telecommunication services.........  $   34,922   $   11,772   $   18,249   $   3,791   $     1
                                     ----------   ----------   ----------   ---------   -------
Operating expenses:
  Cost of operating revenues
     (excluding depreciation)......      31,449       10,575       17,129       3,928       305
  Selling, general and
     administrative................      27,469       11,250       17,877       6,440       841
  Depreciation and amortization....      12,406        3,149        5,238       1,274        54
  Write-off of purchased
     software......................          --           --           --          --       355
                                     ----------   ----------   ----------   ---------   -------
                                         71,324       24,974       40,244      11,642     1,555
                                     ----------   ----------   ----------   ---------   -------
     Loss from operations..........     (36,402)     (13,202)     (21,995)     (7,851)   (1,554)
Other income (expense):
  Gain on sale of investments......         252           --          223          --        --
  Interest income..................       5,228        6,989        8,771       2,507        63
  Interest expense.................     (13,822)     (16,080)     (19,064)     (5,492)       --
                                     ----------   ----------   ----------   ---------   -------
     Net loss......................     (44,744)     (22,293)     (32,065)    (10,836)   (1,491)
Accrued preferred stock dividend...      (1,926)          --           --        (136)       --
                                     ----------   ----------   ----------   ---------   -------
Net loss applicable to common
  stockholders.....................  $  (46,670)  $  (22,293)  $  (32,065)  $ (10,972)  $(1,491)
                                     ==========   ==========   ==========   =========   =======
Basic and diluted loss per share of
  common stock.....................  $    (2.50)  $    (1.69)  $    (2.26)  $   (1.30)  $ (2.11)
                                     ==========   ==========   ==========   =========   =======
Basic and diluted weighted average
  shares outstanding...............  18,670,645   13,171,681   14,178,729   8,458,991   707,359
                                     ==========   ==========   ==========   =========   =======
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       F-5
<PAGE>   83

                            MGC COMMUNICATIONS, INC.

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

<TABLE>
<CAPTION>

                                         REDEEMABLE
                                       PREFERRED STOCK         COMMON STOCK       ADDITIONAL                 TREASURY STOCK
                                    ---------------------   -------------------    PAID-IN     ACCUMULATED   ---------------
                                      SHARES      AMOUNT      SHARES     AMOUNT    CAPITAL       DEFICIT     SHARES   AMOUNT
                                    ----------   --------   ----------   ------   ----------   -----------   ------   ------
<S>                                 <C>          <C>        <C>          <C>      <C>          <C>           <C>      <C>
BALANCE AT JANUARY 1, 1996........          --   $     --      240,000    $--      $      1     $     --         --    $ --
Common stock issued for services
  contributed by stockholder......          --         --      480,000      1             1           --         --      --
Common stock issued for cash......          --         --    6,456,000      6        12,274           --         --      --
Net loss..........................          --         --           --     --            --       (1,491)        --      --
                                    ----------   --------   ----------    ---      --------     --------     ------    ----
BALANCE AT DECEMBER 31, 1996......          --         --    7,176,000      7        12,276       (1,491)        --      --
Common stock issued for cash......          --         --    1,458,600      2         4,860           --         --      --
Common stock issued for notes
  receivable......................          --         --      165,000     --           688           --         --      --
Proceeds from offering allocated
  to warrants.....................          --         --           --     --         3,885           --         --      --
Warrants issued for common stock
  commitment......................          --         --           --     --           409           --         --      --
Net loss..........................          --         --           --     --            --      (10,836)        --      --
8% Series A Convertible Preferred
  Stock issued for cash...........   5,148,570     16,665           --     --            --           --         --      --
Accrued preferred stock
  dividend........................          --         --           --     --            --         (136)        --      --
                                    ----------   --------   ----------    ---      --------     --------     ------    ----
BALANCE AT DECEMBER 31, 1997......   5,148,570     16,665    8,799,600      9        22,118      (12,463)        --      --
Common stock issued for cash......          --         --      100,680     --           774           --         --      --
Common stock issued for notes
  receivable......................          --         --      189,000     --         1,485           --         --      --
Warrants and options exercised for
  common stock....................          --         --      133,309     --            14           --         --      --
8% Series A Convertible Preferred
  Stock issued for cash...........   1,422,857      4,980           --     --            --           --         --      --
Accrued preferred stock
  dividend........................          --         --           --     --            --         (654)        --      --
Common stock issued for cash......          --         --    4,025,000      4        62,959           --         --      --
Conversion of preferred stock to
  common stock....................  (6,571,427)   (21,645)   3,942,839      4        21,641          790         --      --
Unrealized gain on investments
  available-for-sale..............          --         --           --     --            --           --         --      --
Net loss..........................          --         --           --     --            --      (32,065)        --      --
                                    ----------   --------   ----------    ---      --------     --------     ------    ----
BALANCE AT DECEMBER 31, 1998......          --         --   17,190,428     17       108,991      (44,392)        --      --
Unrealized loss on investments
  available-for-sale..............          --         --           --     --            --           --         --      --
Common stock issued...............          --         --    5,027,001      5       118,309           --         --      --
Warrants and options exercised for
  common stock....................          --         --      592,631      1           655           --         --      --
Payments on stockholder's note....          --         --           --     --            --           --         --      --
Repurchase of common stock........          --         --       (9,140)    --            --           --      9,140     (76)
10% Series B Convertible Preferred
  Stock issued for cash...........   5,277,779     46,663           --     --            --           --         --      --
Accrued preferred stock
  dividend........................          --         --           --     --            --       (1,926)        --      --
Net loss..........................          --         --           --     --            --      (44,744)        --      --
                                    ----------   --------   ----------    ---      --------     --------     ------    ----
BALANCE AT SEPTEMBER 30, 1999
  (unaudited).....................   5,277,779   $ 46,663   22,800,920    $23      $227,955     $(91,062)     9,140    $(76)
                                    ==========   ========   ==========    ===      ========     ========     ======    ====

<CAPTION>
                                          NOTES
                                     RECEIVABLE FROM     ACCUMULATED
                                    STOCKHOLDERS FOR        OTHER           TOTAL
                                       ISSUANCE OF      COMPREHENSIVE   STOCKHOLDERS'
                                      COMMON STOCK         INCOME           EQUITY
                                    -----------------   -------------   --------------
<S>                                 <C>                 <C>             <C>
BALANCE AT JANUARY 1, 1996........       $    --           $    --         $      1
Common stock issued for services
  contributed by stockholder......            --                --                2
Common stock issued for cash......            --                --           12,280
Net loss..........................            --                --           (1,491)
                                         -------           -------         --------
BALANCE AT DECEMBER 31, 1996......            --                --           10,792
Common stock issued for cash......            --                --            4,862
Common stock issued for notes
  receivable......................          (688)               --               --
Proceeds from offering allocated
  to warrants.....................            --                --            3,885
Warrants issued for common stock
  commitment......................            --                --              409
Net loss..........................            --                --          (10,836)
8% Series A Convertible Preferred
  Stock issued for cash...........            --                --               --
Accrued preferred stock
  dividend........................            --                --             (136)
                                         -------           -------         --------
BALANCE AT DECEMBER 31, 1997......          (688)               --            8,976
Common stock issued for cash......            --                --              774
Common stock issued for notes
  receivable......................        (1,485)               --               --
Warrants and options exercised for
  common stock....................            --                --               14
8% Series A Convertible Preferred
  Stock issued for cash...........            --                --               --
Accrued preferred stock
  dividend........................            --                --             (654)
Common stock issued for cash......            --                --           62,963
Conversion of preferred stock to
  common stock....................            --                --           22,435
Unrealized gain on investments
  available-for-sale..............            --               817              817
Net loss..........................            --                --          (32,065)
                                         -------           -------         --------
BALANCE AT DECEMBER 31, 1998......        (2,173)              817           63,260
Unrealized loss on investments
  available-for-sale..............            --            (1,177)          (1,177)
Common stock issued...............            --                --          118,314
Warrants and options exercised for
  common stock....................            --                --              656
Payments on stockholder's note....            11                --               11
Repurchase of common stock........            76                --               --
10% Series B Convertible Preferred
  Stock issued for cash...........            --                --               --
Accrued preferred stock
  dividend........................            --                --           (1,926)
Net loss..........................            --                --          (44,744)
                                         -------           -------         --------
BALANCE AT SEPTEMBER 30, 1999
  (unaudited).....................       $(2,086)          $  (360)        $134,394
                                         =======           =======         ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>   84

                            MGC COMMUNICATIONS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                  NINE MONTHS
                                                                     ENDED                       YEAR ENDED
                                                                 SEPTEMBER 30,                  DECEMBER 31,
                                                              --------------------    ---------------------------------
                                                                1999        1998        1998        1997         1996
                                                              --------    --------    --------    ---------    --------
                                                                  (UNAUDITED)
<S>                                                           <C>         <C>         <C>         <C>          <C>
Cash flows from operating activities:
Net loss....................................................  $(44,744)   $(22,293)   $(32,065)   $ (10,836)   $ (1,491)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................    12,406       3,149       5,238        1,274          54
    Write-off of purchased software.........................        --          --          --           --         355
    Gain on sale of investments.............................      (252)         --        (223)          --          --
    Amortization of debt discount...........................       432         431         575          144          --
    Amortization of deferred financing costs................       621         658         867          198          --
    Stock issued for services rendered......................        --          --          --           --           2
  Changes in assets and liabilities:
    Increase in accounts receivable, net....................    (9,785)     (2,531)     (5,160)      (1,190)         (9)
    (Increase) decrease in prepaid expenses and other.......      (391)         47          69         (254)        (23)
    Increase in other assets................................      (403)        (40)        (32)         (91)         (5)
    Increase in accounts payable -- trade...................     3,598       2,862       4,852          386          76
    Increase in accrued interest and other expenses.........     9,292       8,644       1,695        5,879          99
                                                              --------    --------    --------    ---------    --------
      Net cash used in operating activities.................   (29,226)     (9,073)    (24,184)      (4,490)       (942)
                                                              --------    --------    --------    ---------    --------
Cash flows from investing activities:
  Purchase of property and equipment, net of payables.......   (46,888)    (58,681)    (81,597)     (20,207)     (2,287)
  Decrease in accounts payable-property
    and equipment...........................................    (3,301)         --          --           --          --
  Purchase of investments held-to-maturity..................        --     (42,622)    (42,622)     (57,710)         --
  Sale (purchase) of investments available-for-sale, net....   (13,599)         --      28,309           --
  Sale (purchase) sale of restricted investments............     9,004       8,355      18,195      (57,574)         --
                                                              --------    --------    --------    ---------    --------
      Net cash used in investing activities.................   (54,784)    (92,948)    (77,715)    (135,491)     (2,287)
                                                              --------    --------    --------    ---------    --------
Cash flows from financing activities:
  Proceeds from issuance of Senior Secured Notes net of
    discount of $4,026......................................        --          --          --      155,974          --
  Costs associated with issuance of Senior Secured Notes and
    warrants................................................        --        (133)       (133)      (5,237)         --
  Proceeds from issuance of 8% Series A Convertible
    Preferred Stock, net of issuance costs..................        --       4,980       4,980       16,665          --
  Proceeds from issuance of 10% Series B Convertible
    Preferred Stock, net of issuance costs..................    46,663          --          --           --          --
  Proceeds from issuance of warrants........................        --          --          --        3,885          --
  (Payments) proceeds on other long term debt, net..........      (296)       (210)        133         (164)         --
  Proceeds received on stockholders note....................        11          --          --           --          --
  Proceeds from issuance of common stock....................   118,970      63,750      63,751        6,015      11,126
                                                              --------    --------    --------    ---------    --------
      Net cash provided by financing activities.............   165,348      68,387      68,731      177,138      11,126
                                                              --------    --------    --------    ---------    --------
      Net (decrease) increase in cash.......................    81,338     (33,634)    (33,168)      37,157       7,897
Cash and cash equivalents at beginning of period............    11,886      45,054      45,054        7,897          --
                                                              --------    --------    --------    ---------    --------
Cash and cash equivalents at the end of period..............    93,224      11,420    $ 11,886    $  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/notes payable -- property and equipment........  $    247    $  8,455    $ 15,504    $   2,434    $  1,372
                                                              ========    ========    ========    =========    ========
  Stock issued (repurchased) for notes receivable...........  $    (76)   $  1,485    $  1,485    $     688    $     --
                                                              ========    ========    ========    =========    ========
  Warrants issued as consideration in debt offering
    capitalized as deferred financing costs.................  $     --    $     --    $     --    $     409    $     --
                                                              ========    ========    ========    =========    ========
  Increase in accrued preferred stock dividends.............  $  1,926    $     --    $     --    $     136    $     --
                                                              ========    ========    ========    =========    ========
  Other disclosures:
  Cash paid for interest net of amounts capitalized.........  $  7,570    $ 10,996    $ 19,192    $     164    $     --
                                                              ========    ========    ========    =========    ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       F-7
<PAGE>   85

                            MGC COMMUNICATIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 IS
                                   UNAUDITED)

(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

DESCRIPTION OF BUSINESS

     The accompanying consolidated financial statements of MGC Communications,
Inc. (the "Company"), a Nevada corporation, include the accounts of the Company
and its wholly-owned subsidiaries, MGC Lease Corporation and MGC LJ.Net, Inc.
All significant inter-company balances have been eliminated.

     The Company 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.
During the year ended December 31, 1998, the Company operated in Las Vegas,
Atlanta, Chicago, southern Florida, and selected areas of southern California
including Los Angeles and San Diego with substantially all of its operating
revenues being derived from the Las Vegas, southern California, and Atlanta
operations.

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

     The financial statements for the nine months ended September 30, 1999 and
1998 and the related amounts in the Notes to Consolidated Financial Statements
are unaudited, but in the opinion of management reflect all normal and recurring
adjustments necessary for a fair presentation of the results of those periods.

REVENUE RECOGNITION


     The Company recognizes operating revenues from the sale of communication
services including local dialtone, long distance, Internet access and data
services. Operating revenues are also recognized from installation charges as
well as from access charges billed to other long distance carriers for utilizing
the Company's network. Telecommunication revenues and accounts receivable are
recognized when calls are terminated or when the installation services are
completed. Accounts receivable include both billed and unbilled amounts and are
reduced by an estimate for uncollectible amounts. Due to current disputes and
pending arbitration and litigation, the Company has recognized switched access
revenues based on management's best estimate of the probable collections from
such revenue. For the nine months ended September 30, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, the Company has recognized in
operating revenues switched access revenues of approximately $12.1 million, $5.3
million, $7.4 million, $.7 million and $0, respectively. Included in trade
accounts receivable in the accompanying balance sheets as of September 30, 1999
and December 31, 1998 and 1997 are receivables related to switched access of
approximately $12.3 million, $3.6 million and $.7 million, respectively.


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.

                                       F-8
<PAGE>   86
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 carrying value of the
restricted investments approximates the fair value.

ADVERTISING COSTS

     The Company expenses advertising costs in the period incurred. For the
years ended December 31, 1998, 1997 and 1996, the Company had expensed
advertising costs of $810,000, $125,000 and $0, respectively.

INVESTMENTS

     Investments classified as available-for-sale at December 31, 1998 were
classified as held-to-maturity as of December 31, 1997. During the fourth
quarter of 1998, the Company sold investments, previously classified as
held-to-maturity, prior to their maturity date. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
classification of these investments has been appropriately changed in the
accompanying consolidated financial statements.

     Available-for-sale securities represent investments principally in
commercial paper and government securities. The commercial paper reflected as of
December 31, 1998 matures in March of 1999 and the government securities mature
periodically through September 30, 2001. The unamortized cost basis of these
investments at December 31, 1998 is approximately $72,246,000. The cost basis
for which the realized gain was calculated on available-for-sale securities was
$72,023,000 using the specific identification method.

PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost, less accumulated depreciation
and amortization. Direct and indirect costs of construction are capitalized, and
include $3,175,000 and $188,000 of interest costs related to construction during
1998 and 1997, respectively. 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>


     The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal


                                       F-9
<PAGE>   87
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


software costs generally include personnel and related costs incurred in the
enhancement and implementation of purchased software packages. Capitalized
internal labor costs for the years ending December 31, 1997 and December 31,
1998 were not material.


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.

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, 1998
and 1997, the carrying value of all financial instruments (accounts receivable,
accounts payable and long-term debt) approximates fair value due to the short
term nature of the instruments or interest rates, which are comparable with
current rates.

LONG-LIVED ASSETS


     Management periodically evaluates the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value of the assets may
exceed the undiscounted future net cash flow expected to be generated by such
assets. 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 down to the asset's fair value based on the
present value of the discounted cash flows of the related asset or other
relevant measures. Management believes no material impairment in the value of
long-lived assets exists at December 31, 1998 or 1997.


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 is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company has adopted SFAS No. 130 as
reflected in the accompanying consolidated financial statements.


     In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes additional
standards for segment reporting in


                                      F-10
<PAGE>   88
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


financial statements and is effective for fiscal years beginning after December
15, 1997. The Company currently operates in only one segment, communications
services, and hence, separate segment reporting is not applicable.


     The American Institute of Certified Public Accountants recently issued
Statement of Position ("SOP") 98-5, "Reporting the Costs of Start-Up
Activities." SOP 98-5 requires start-up costs, as defined, to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company currently expenses all start-up costs as
incurred and the application of SOP 98-5 will have no material impact on the
Company's consolidated financial statements.

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 with regard 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 prior period financial statements to conform to the current
presentation.

(2) PLAN OF OPERATIONS

     In September 1997, the Company completed an offering of units consisting of
in the aggregate $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. During May and June 1998, the Company sold an aggregate of 4,025,000 shares
of common stock at $17.00 per share as discussed in Note 5. The Company expects
to continue its expansion into new markets and its development of new services.
The Company expects to fund its capital requirements through existing resources,
debt or equity financing and internally generated funds.

     Management recognizes 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 the
Company will be successful in raising additional capital, achieving profitable
results, or entering into new markets.

     Management also recognizes certain risks are inherent to the industry. Such
risks and assumptions include, but are not limited to, the Company's ability to
successfully market its existing

                                      F-11
<PAGE>   89
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


and proposed services to current and new customers in existing and planned
markets, successfully develop commercially viable data and Internet offerings,
access markets, install switches and obtain suitable locations for its switches,
negotiate suitable interconnect agreements with the incumbent carriers, obtain
an acceptable level of cooperation from the incumbent carriers, all in a timely
manner, at reasonable cost and on satisfactory terms and conditions, as well as
competitive, regulatory, legislative and judicial developments that could
materially affect the Company's future results.


(3) PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                               SEPTEMBER 30,    -------------------
                                                   1999           1998       1997
                                               -------------    --------    -------
<S>                                            <C>              <C>         <C>
Buildings and property.......................    $  5,298       $  2,653    $   278
Switching equipment..........................     113,132         57,045     21,621
Leasehold improvements.......................         860            740        956
Computer hardware and software...............       3,629          2,218      1,404
Office equipment and vehicles................       1,532            901        300
                                                 --------       --------    -------
                                                  124,451         63,557     24,559
Less accumulated depreciation and
  amortization...............................     (18,834)        (6,555)    (1,317)
                                                 --------       --------    -------
                                                  105,617         57,002     23,242
Switching equipment under construction.......      45,542         59,378      1,375
                                                 --------       --------    -------
  Net property and equipment.................    $151,159       $116,380    $24,617
                                                 ========       ========    =======
</TABLE>

(4) DEBT

     Long-term borrowings at December 31, 1998 and 1997 consist of the
following:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                            --------------------
                                                              1998        1997
                                                            --------    --------
                                                               (IN THOUSANDS)
<S>                                                         <C>         <C>
13% Senior Secured Notes, due October 1, 2004, net of
unamortized discount of $3,307 and $3,882.................  $156,693    $156,118
10% note payable in monthly installments through February
  1999....................................................       225         441
Other.....................................................       377          78
                                                            --------    --------
                                                             157,295     156,637
Less current portion......................................      (332)       (381)
                                                            --------    --------
                                                            $156,963    $156,256
                                                            ========    ========
</TABLE>

                                      F-12
<PAGE>   90
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                            (IN THOUSANDS)
<S>                                                         <C>
1999......................................................     $    332
2000......................................................          174
2001......................................................           96
2002......................................................           --
2003......................................................           --
2004......................................................      156,693
                                                               --------
                                                               $157,295
                                                               ========
</TABLE>

     In September 1997, the Company completed an offering of units consisting of
in the aggregate $160 million of 13% Senior Secured Notes due in 2004 and
warrants to purchase 774,720 shares of common stock (collectively the "1997
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 consolidated
financial statements reflect approximately $39.4 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,
1998, the Notes were secured by a security interest in telecommunications
equipment with a net book value of $85.3 million.


     The Company has recorded the commitment fee as non-cash consideration in
connection with the 1997 Offering. The value of the warrants issued as a
commitment fee was determined based on a value of the Company's common stock at
$4.68 per share less the exercise price of $.02 per share specified in the
warrant agreement. All such warrants were exercised in January and February
1998.

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

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

     In the event of a sale by the Company prior to October 1, 2000 of its
capital stock in one or more equity offerings, up to a maximum of 35% of the
aggregate principal amount of the Notes originally issued may, 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 remains outstanding immediately
after the occurrence of such redemption. As of the date of these consolidated
financial statements, management has no intention of redeeming the Notes prior
to their stated redemption date.

                                      F-13
<PAGE>   91
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 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, 1998, management believes it is in compliance
with all debt covenants.


     In January 1998, the Company filed a registration statement offering to
exchange the Notes 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.



     In conjunction with the 1997 Offering, the Company engaged an
investment-banking firm that determined a value for each warrant and share of
common stock. Consistent with this determination, the Company has allocated a
portion of the 1997 Offering proceeds to the warrants based on a value of $4.68
per share of common stock less the exercise price of $.02 per share specified in
the warrant agreement.



     The warrants are currently exercisable and expire on October 1, 2004. The
agreement pursuant to which the warrants were issued required an anti-dilution
adjustment if the November 1997 preferred stock offering was consummated at a
price less than $5.00 per share. As further discussed in Note 5, the Company
completed the November 1997 preferred stock offering for $3.50 per share.
Accordingly, the number of shares issuable upon exercise of the warrants was
increased from 774,200 to 862,923. This increase has been reflected in the
accompanying consolidated financial statements as of December 31, 1998 and 1997.
Expenses allocated to the warrants in connection with the 1997 Offering were
$141,000.



     In conjunction with the 1997 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 90,000 shares of Common Stock at $.02 per share.


     In conjunction with the 1997 Offering, the authorized capital stock of the
Company was increased to 60,000,000 shares of common stock, $.001 par value per
share, and 50,000,000 shares of preferred stock, $.001 par value per share.


     Associated with the 1997 Offering, expenses of $68,000 were paid to a
related party for charter services in 1997.


(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 consolidated financial statements and notes thereto have
been retroactively restated to give effect to this stock split.

                                      F-14
<PAGE>   92
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 1995, in exchange for expending cash to incorporate the Company, a
shareholder received 240,000 shares of $.001 par value common stock valued at
$.0042 per share. The Company capitalized the value of the issued shares as
organization costs included in other assets in the accompanying consolidated
financial statements, which costs are being amortized over 60 months using the
straight-line method.

     In April 1996, the Company issued 480,000 shares of $.001 par value common
stock valued at $.0042 per share in exchange for services rendered by a
stockholder.

     During 1996, NevTEL LLC ("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 3,696,000 shares of $.001
par value common stock of the Company for $.83 per share. The agreement called
for LLC to advance funds for operating expenses incurred by the Company (to be
applied against the purchase price of the stock) until the Company produced
operating revenues, at which time the remaining purchase price would be remitted
to the Company, the Company's common stock would be issued to LLC owners and LLC
would terminate. The agreement stipulated that the funds advanced for operating
expenses were to be paid back to LLC if the Company did not generate operating
revenue by December 31, 1996. The Company began revenue generating activities in
December 1996. The shares were issued to LLC owners on December 31, 1996, at
which time LLC terminated and the remaining purchase price was owed to the
Company. Such amount was transferred to the Company in February 1997 and is
classified as amounts receivable for shares issued at December 31, 1996.

     In December 1996, the Company offered 4,068,600 shares of $.001 par value
common stock at $3.33 per share through a private placement. In connection with
this offering, the Company issued 1,308,600 shares and 2,760,000 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 150,000 shares at $3.33
per share and 165,000 shares at $4.17 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 purchased at $4.17 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 150,000 shares issued at $3.33 per share. The $688,000 owed to the Company
for the 165,000 shares issued at $4.17 per share has been classified in the
accompanying consolidated statements of redeemable preferred stock and
stockholders' equity as notes receivable from stockholders for issuance of
common stock.

     During 1998, the Company issued 100,680 shares of $.001 par value common
stock at prices ranging from $5.83 to $8.33 per share, for total proceeds to the
Company of $774,000.

     During 1998, the Company approved agreements with 11 key members of
management to purchase a total of 189,000 shares of common stock. The purchase
price of these shares ranged from $5.83 to $8.33 per share. In each case, 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 a portion
of the purchase price of the shares over a period of three years. The $1,485,000
owed to the Company is classified in the accompanying statements of redeemable
preferred stock and stockholders' equity as notes receivable from stockholders
for issuance of common stock.

                                      F-15
<PAGE>   93
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During May and June 1998, the Company sold 4,025,000 shares of common stock
at $17.00 per share pursuant to a registration statement on Form S-1, which was
declared effective by the Securities and Exchange Commission on May 11, 1998. In
connection with the initial public offering of the Company's common stock, the
Company effected a six for ten reverse stock split, which has been reflected in
the accompanying consolidated financial statements. In addition to the reverse
stock split, the Company's 6,571,427 outstanding shares of 8% Series A
Convertible Preferred Stock (the "Series A Preferred Stock") as discussed below,
were converted to 3,942,839 shares of the Company's common stock upon completion
of the initial public offering. The conversion of the Series A Preferred Stock
has been reflected in the accompanying consolidated financial statements.

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.

     In November 1997, the Company completed a private placement offering in
which 5,148,570 shares of the Series A Preferred Stock were issued at $3.50 per
share, for total proceeds to the Company of approximately $16.7 million, net of
expenses.

     In January 1998, the Company completed an additional private placement
offering in which 1,422,857 shares of Series A 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.

     Each share of Series A Preferred Stock was automatically converted into
common stock on a six for ten basis upon the consummation of the Company's IPO.
In accordance with the terms of the Series A Preferred Stock, the accrued
dividends were reversed at the time of conversion.

(6) STOCK OPTION PLAN

     In June 1996, the Company adopted a stock option plan which allows the
Board of Directors to grant incentives to employees in the form of incentive
stock options and non-qualified stock options. As of December 31, 1997, the
Company had reserved 1,440,000 shares of common stock to be issued under the
plan. In March 1998, the Board of Directors approved an additional 1,200,000
shares of common stock to be issued under the plan.

     In July 1998, the Company filed a registration statement on Form S-8 to
register the shares of the Company's common stock reserved for issuance under
the MGC Communications, Inc. Stock Option Plan.

     Under the plan, substantially all options have been granted to employees at
a price equal to 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.

                                      F-16
<PAGE>   94
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Stock option transactions during 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                         WEIGHTED
                                                                         AVERAGE
                                                             NUMBER      EXERCISE
                                                            OF SHARES     PRICE
                                                            ---------    --------
<S>                                                         <C>          <C>
Outstanding at December 31, 1995..........................         --        --
Granted...................................................    811,860     $1.35
Canceled..................................................    (30,000)    $1.67
                                                            ---------
Outstanding at December 31, 1996..........................    781,860     $1.35
Granted...................................................    274,560     $5.78
Canceled..................................................     (3,300)    $5.08
                                                            ---------
Outstanding at December 31, 1997..........................  1,053,120     $2.50
Granted...................................................    865,700     $8.48
Exercised.................................................     (7,380)    $1.77
Canceled..................................................    (85,240)    $5.84
                                                            ---------
Outstanding at December 31, 1998..........................  1,826,200     $5.18
                                                            =========
Exercisable at December 31, 1996..........................     11,760     $3.33
                                                            =========
Exercisable at December 31, 1997..........................    165,720     $1.47
                                                            =========
Exercisable at December 31, 1998..........................    378,660     $2.07
                                                            =========
</TABLE>

     For options granted during the year ended December 31, 1998, the weighted
average fair value of options on the date of grant, estimated using the
Black-Scholes option pricing model, was $6.70 using the following assumptions:
dividend yield of 0%; expected option life of 6.5 years; and risk free interest
rate of 5.06% and an expected volatility of 80.5%.

     The weighted average fair value of the options issued during the years
ended December 31, 1997 and 1996, substantially all of which were granted at a
price equal to the then current market price as estimated by management, was
estimated to be $4.03 and $.92, 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 5.06% and
6.12%, respectively.

     The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                                 WEIGHTED
                    NUMBER        AVERAGE     WEIGHTED     NUMBER      WEIGHTED
                  OUTSTANDING    REMAINING    AVERAGE    EXERCISABLE   AVERAGE
    RANGE OF      AT DEC. 31,   CONTRACTUAL   EXERCISE   AT DEC. 31,   EXERCISE
 EXERCISE PRICE      1998          LIFE        PRICE        1998        PRICE
- ----------------  -----------   -----------   --------   -----------   --------
<S>               <C>           <C>           <C>        <C>           <C>
  $0.83 to $3.50     745,980    7.38 years     $ 1.33      320,400      $1.37
  $5.00 to $6.50     488,920    8.97 years     $ 5.99       56,760      $5.84
 $7.50 to $10.00     496,800    9.58 years     $ 8.45        1,500      $8.33
$12.50 to $17.00      94,500    9.44 years     $14.10           --      $  --
                   ---------                               -------
 $0.83 to $17.00   1,826,200    8.51 years     $ 5.18      378,660      $2.07
                   =========                               =======
</TABLE>

     The Company applied Accounting Principles Board Opinion No. 25 in
accounting for its plan. No compensation expense was recognized for the years
ended December 31, 1998, 1997 and 1996.

                                      F-17
<PAGE>   95
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Had the Company determined compensation expense using the fair value based
method defined in SFAS No. 123, the Company's loss for the years then ended
would have increased by $565,000, $7,000 and $10,000, respectively.

(7) LOSS PER SHARE

     SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the years ended December 31, 1998, 1997 and
1996 were computed by dividing net loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding.

     The Company's warrants, preferred stock and stock options granted and
issued during 1998, 1997 and 1996, and outstanding as of December 31, 1998 and
1997, are antidilutive and have been excluded from the diluted loss per share
calculation for the years ended December 31, 1998, 1997 and 1996. Had the
Company shown the effects of dilution, the warrants, preferred stock and options
would have added an additional 1.8 million, 1.6 million and 0.5 million shares
to the weighted average shares outstanding for the years ended December 31,
1998, 1997 and 1996, respectively.

(8) INCOME TAXES

     The net deferred tax asset as of December 31, 1998 and 1997 is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                               1998       1997
                                                             --------    -------
<S>                                                          <C>         <C>
Deferred Tax Asset
Net operating loss carry-forward...........................  $ 17,804    $ 4,529
  Start-up expenditures....................................       164        220
  Other....................................................       534        141
                                                             --------    -------
                                                               18,502      4,890
  Less: valuation allowance................................   (15,517)    (4,309)
                                                             --------    -------
  Net deferred tax asset...................................     2,985        581
                                                             --------    -------
Deferred Tax Liability
  Excess of tax depreciation over book.....................     2,769        481
  Other....................................................       216        100
                                                             --------    -------
  Net deferred tax liability...............................     2,985        581
                                                             --------    -------
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, 1998 and 1997, the Company
determined that $15,517,000 and $4,309,000, 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, 1998 and 1997, the Company had net operating loss
carry-forwards available for income tax purposes of approximately $50,869,000
and $12,940,000, respectively, which expire principally from 2011 to 2018.

                                      F-18
<PAGE>   96
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES

LEASE OBLIGATIONS

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

     Future minimum lease obligations in effect as of December 31, 1998 are as
follows (in thousands):

<TABLE>
<S>                                                           <C>
Payments during the year ending December 31:
  1999......................................................  $1,389
  2000......................................................   1,272
  2001......................................................   1,166
  2002......................................................     977
  2003......................................................     159
  Thereafter................................................     342
                                                              ------
                                                              $5,305
                                                              ======
</TABLE>

     Rent expense was $850,000, $207,000 and $33,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, of which $614,000 was paid to a
related party during 1998.

PURCHASE COMMITMENTS

     In the ordinary course of business, the Company enters into purchase
agreements with its vendors of telecommunications equipment. As of September 30,
1999 and December 31, 1998, the Company had a total for all vendors of
approximately $53.4 million and $15.4 million, respectively, of remaining
purchase commitments for purchases of switching equipment.

LITIGATION

     The Company is party to various legal proceedings, most of which relate to
routine matters incidental to its business. Management does not believe that the
outcome of such proceedings will have a material adverse effect on the Company's
financial position or results of operations.

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.

                                      F-19
<PAGE>   97
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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 operating revenues 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 $3.4 million, $1.7 million and $1.1 million at September
30, 1999, December 31, 1998 and 1997, respectively, has not been recorded in the
accompanying consolidated financial statements. Management believes that the
resolution of this matter will not have an adverse effect on the Company's
consolidated 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 a former officer and current 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 $656,000 and $40,000 during 1998 and
1997, respectively, under such agreement to support and maintain the Company's
proprietary operations support system. Management believes the terms and
conditions of this agreement are equal to the terms which would be available
from an unaffiliated party.

(12) SUBSEQUENT EVENTS (UNAUDITED)

PREFERRED STOCK OFFERINGS


     On April 5, 1999, the Company entered into a Securities Purchase Agreement
with Providence Equity Partners III L.P. ("Providence"), JK&B Capital III L.P.
("JK&B III") and Wind Point Partners III L.P. ("Wind Point") under which
Providence, JK&B III and Wind Point and their affiliates (the "Purchasers")
agreed to purchase 5,277,779 shares of newly issued Series B Convertible
Preferred Stock ("Series B Preferred Stock") at $9.00 per share(the
"Transaction") for a total consideration of $47.5 million. The Transaction was
consummated on May 4, 1999. Net proceeds to the Company were approximately $46.5
million.



     Dividends accrued on the Series B Preferred Stock at the rate of 10% per
annum from the issue date until November 21, 1999 and are payable in preference
to any dividends that may be paid with respect to the Company's Common Stock.
Effective as of November 22, 1999, the Company elected to terminate the accrual
of dividends since the Company's stock price exceeded $27.00 per share for 20
consecutive trading days (the "Market Threshold").



     The Series B Preferred Stock is convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price is $9.00 per share
and each share of Series B Preferred Stock is convertible into one share of
Common Stock. The conversion price is subject to adjustment as a result of stock
splits, stock dividends and certain other issuances of additional stock.


     After the earlier of May 24, 2000 or the date on which the holders of
Series B Preferred Stock exercise their demand registration rights, the Company
has the right to require the conversion of the Series B Preferred Stock if the
Company's stock price exceeds the Market Threshold referenced above. If the
Company requires conversion within three years after closing, no accrued
dividends will be paid.

                                      F-20
<PAGE>   98
                            MGC COMMUNICATIONS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     The holders of Series B Preferred Stock have the right to require us to
redeem the Series B Preferred Stock after May 4, 2005 or upon a sale of the
Company. The redemption price will be equal to the greater of (x) $9.00 per
share plus accrued and unpaid dividends, or (y) the value of the common stock
into which the Series B Preferred Stock is then convertible. If the Company
fails to redeem all shares of Series B Preferred Stock within six months of the
date specified by the holders of the Series B Preferred Stock, then the holders
of the Series B Preferred Stock, along with the holders of the Series C
Preferred Stock if they then have similar rights, will have the right to elect a
majority of the Company's Board of Directors.



     In November 1999, the Company entered into an agreement with Providence,
JK&B III and their affiliates (the "Purchasers") under which the Purchasers are
to purchase 1,250,000 shares of newly issued Series C Convertible Preferred
Stock at $28.00 per share for a total consideration of $35.0 million. Of the
total consideration, $4.9 million may be paid by an interest-bearing promissory
note due in March 2000.



     Dividends will accrue on the Series C Preferred Stock at the rate of 10%
per annum, are cumulative and are payable in preference to any dividends that
may be paid with respect to the Company's Common Stock. No accrued dividends in
excess of $2.80 per share will be paid if the Company requires conversion of the
Series C Preferred Stock within 30 months of issuance. Conversion may be
required by the Company if the Company's stock price exceeds $56.00 per share
for 20 consecutive trading days.



     The Series C Preferred Stock is convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price is $28.00 per share
and each share of Series C Preferred Stock is convertible into one share of
Common Stock. The conversion price is subject to adjustment as a result of stock
splits, stock dividends and certain other issuances of additional stock.



     The holders of Series C Preferred Stock have the right to require the
Company to redeem the Series C Preferred Stock after six years after issuance or
upon a sale of the Company. The redemption price will be equal to the greater of
(x) $28.00 per share plus the greater of $2.80 per share or accrued and unpaid
dividends, or (y) the value of the Common Stock into which the Series C
Preferred Stock is then convertible.



     If the Company fails to redeem all shares of Series C Preferred Stock
within six months of the date specified by the holders of the Series C Preferred
Stock, then the holders of the Series C Preferred Stock, along with the holders
of the Series B Preferred Stock if they then have similar rights, will have the
right to elect a majority of the Company's Board of Directors.



     The Series B Preferred Stock and Series C Preferred Stock will vote along
with the Common Stock on an as-converted basis. The holders of the Series B
Preferred Stock and Series C Preferred Stock have the right to nominate two or
more directors depending on the size of the Company's Board of Directors and the
percentage of the Company's stock represented by the outstanding Series B
Preferred Stock and Series C Preferred Stock. The holders of the Series B
Preferred Stock and Series C Preferred Stock also have the right to have their
Board representative serve on each committee of the Company's Board and on the
Board of each of the Company's subsidiaries.


COMMON STOCK OFFERING

     In July 1999, the Company issued 5,000,000 shares of common stock and
received net proceeds, after expenses, of approximately $118.1 million. In this
offering, existing shareholders sold an additional 587,695 shares of common
stock for which the Company did not receive any proceeds.

                                      F-21
<PAGE>   99


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

<PAGE>   100

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


                                4,500,000 SHARES


                            MGC COMMUNICATIONS, INC.

                                  COMMON STOCK

                                   [MGC LOGO]

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

                                   PROSPECTUS


                                        , 2000


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

                              SALOMON SMITH BARNEY

                            BEAR, STEARNS & CO. INC.

                              GOLDMAN, SACHS & CO.

                                  ING BARINGS

                            WARBURG DILLON READ LLC
                            ------------------------

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

- --------------------------------------------------------------------------------
<PAGE>   101

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


                 SUBJECT TO COMPLETION, DATED DECEMBER 28, 1999


PRELIMINARY PROSPECTUS

<TABLE>
<S>          <C>

[MGC LOGO]                         3,000,000 SHARES
                               MGC COMMUNICATIONS, INC.
                        % SERIES D CONVERTIBLE PREFERRED STOCK
</TABLE>

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


     We are selling 3,000,000 shares of our      % Series D convertible
preferred stock, liquidation preference $50 per share. Each share of Series D
convertible preferred stock is convertible at the option of the holder into
     shares of our common stock at a conversion price of $     per share,
subject to adjustments in certain circumstances. Other terms of the Series D
convertible preferred stock described in this prospectus include:


     - The quarterly dividend will be $     per share, payable at our option in
       cash or shares of our common stock, beginning           , 2000.


     - On           , 2012, we will be required to redeem the Series D
       convertible preferred stock at a redemption price equal to the
       liquidation preference plus unpaid dividends.



     - On or after           , 2002 but before           , 2003, if the price of
       our common stock equals or exceeds 150% of the conversion price for a
       specific period, we may redeem, for cash, shares of our common stock or
       both, the Series D convertible preferred stock at a redemption price of
            % of the liquidation preference, plus (1) unpaid dividends and (2) a
       make whole payment for future dividends.



     - On or after             , 2003, we may cause the conversion rights on the
       Series D convertible preferred stock to expire if the trading price of
       our common stock equals or exceeds 140% of the conversion price for a
       specific period.



     We have applied to have the Series D convertible preferred stock listed on
the Nasdaq National Market. Our common stock is quoted on the Nasdaq National
Market under the symbol "MGCX". The last reported price of the common stock, on
December 27, 1999, was $41.06 per share.



     Concurrently with this Series D convertible preferred stock offering, and
by a separate prospectus, we are offering 4,438,594 shares of our common stock.
The completion of the Series D convertible preferred stock offering and the
common stock offering are not dependent on one another.



     The underwriters named in this prospectus may purchase up to 450,000
additional shares of Series D convertible preferred stock from us solely to
cover over-allotments.

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


      INVESTING IN THE SERIES D CONVERTIBLE PREFERRED STOCK INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 7.


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


<TABLE>
<CAPTION>
                                                               PER SHARE         TOTAL
                                                              ------------    ------------
<S>                                                           <C>             <C>
Public Offering Price                                         $               $
Underwriting Discount                                         $               $
Proceeds to MGC Communications (before expenses)              $               $
</TABLE>



     The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
  , 2000.


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


SALOMON SMITH BARNEY                                    BEAR, STEARNS & CO. INC.

                               ------------------
GOLDMAN, SACHS & CO.

                                          ING BARINGS
                                                         WARBURG DILLON READ LLC

                    , 2000

                                    Page S-1
<PAGE>   102


                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    3
Risk Factors................................................    7
How We Intend to Use the Proceeds of this Offering..........   18
Dividend Policy.............................................   18
Capitalization..............................................   19
Selected Consolidated Financial and Operating Data..........  21A
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................   22
Business....................................................   28
Management..................................................   47
Principal Stockholders......................................   50
Description of Securities...................................   52
Description of the Series D Convertible Preferred Stock.....   60
Federal Tax Considerations..................................  71B
Underwriting................................................   72
Legal Matters...............................................   74
Experts.....................................................   74
Where You Can Find More Information.........................   74
Index to Consolidated Financial Statements..................  F-1
</TABLE>


                                    Page S-2
<PAGE>   103

                                  THE OFFERING


Series D convertible preferred
stock offered by us...........   3,000,000 shares



Over-allotment option.........   We have granted the underwriters an option to
                                 purchase up to 450,000 additional shares of
                                 Series D convertible preferred stock to cover
                                 over-allotments.



Dividends.....................   Holders of Series D convertible preferred stock
                                 will be entitled to receive cumulative
                                 dividends at an annual rate of      % of the
                                 liquidation preference payable quarterly on
                                 each                ,                ,
                                                , and                ,
                                 commencing on                , 2000. Dividends
                                 will accrue from the date of the original
                                 issuance of the Series D convertible preferred
                                 stock. Any dividend on the Series D convertible
                                 preferred stock shall be, at our option,
                                 payable in cash or through the issuance of a
                                 number of shares of our common stock equal to
                                 the dividend amount divided by 95% of the
                                 average closing prices for our common stock
                                 during a specified period before the dividend
                                 payment date.



                                 For the foreseeable future, we intend to pay
                                 these dividends solely in shares of common
                                 stock. If, in the future, we were to consider
                                 paying cash dividends on the Series D
                                 convertible preferred stock we would have to
                                 comply with the restrictions contained in our
                                 debt indenture and the terms of our outstanding
                                 preferred stock. See "Description of the Series
                                 D Convertible Preferred Stock -- Dividends."



Conversion into common
stock.........................   Series D convertible preferred stock is
                                 convertible at the option of its holder, unless
                                 previously redeemed, at any time after the
                                 issue date, into shares of our common stock at
                                 a conversion rate of        shares of common
                                 stock for each share of Series D convertible
                                 preferred stock, representing a conversion
                                 price of $     per share of common stock,
                                 subject to adjustment in certain events. On or
                                 after                , 2003, we may cause the
                                 conversion rights on the Series D convertible
                                 preferred stock to expire if the trading price
                                 of our common stock equals or exceeds 140% of
                                 the conversion price for a specific trading
                                 period. See "Description of the Series D
                                 Convertible Preferred Stock -- Expiration of
                                 Conversion Rights."


Liquidation preference........   $50 per share. See "Description of the Series D
                                 Convertible Preferred Stock -- Liquidation
                                 Preference."


Redemption....................   We are required to redeem the Series D
                                 convertible preferred stock on                ,
                                 2012, at a redemption price equal to the
                                 liquidation preference plus accumulated and
                                 unpaid dividends, if any, whether or not
                                 declared to the date of redemption. On or after
                                           , 2002 but before           , 2003,
                                 if the closing price of our common stock equals
                                 or exceeds 150% of the conversion price,
                                 currently equal to

                                    Page S-5A
<PAGE>   104


                                 $     per share, for a specified trading
                                 period, we may redeem the Series D convertible
                                 preferred stock for cash, shares of our common
                                 stock or both at a redemption price of      %
                                 of the liquidation preference, plus accumulated
                                 and unpaid dividends to the redemption date. In
                                 addition to the payments in the previous
                                 sentence, holders will receive a payment equal
                                 to the present value of the dividends that
                                 would have been payable on the Series D
                                 convertible preferred stock from the redemption
                                 date to                , 2003. See "Description
                                 of the Series D Convertible Preferred
                                 Stock -- Redemption."



Voting rights.................   Except as required by law or as specified in
                                 the certificate of designation, the holders of
                                 the Series D convertible preferred stock will
                                 not be entitled to any voting rights.



                                 If:



                                 - payments of dividends on the Series D
                                   convertible preferred stock are in arrears
                                   and unpaid for an aggregate of six or more
                                   quarterly dividend payments;



                                 - the Series D convertible preferred stock is
                                   not redeemed as required on              ,
                                   2012; or



                                 - the Series D convertible preferred stock is
                                   not repurchased as required following a
                                   Non-Stock Change of Control;



                                 then, the holders of the Series D convertible
                                 preferred stock, together with holders of other
                                 series of preferred stock having similar
                                 rights, will be entitled to elect the lesser of
                                 two directors to our board of directors or that
                                 number of directors constituting at least 25%
                                 of our board of directors, until all dividend
                                 arrearages have been paid or the Series D
                                 convertible preferred stock is redeemed. See
                                 "Description of the Series D Convertible
                                 Preferred Stock -- Voting Rights."



Change of control.............   Following a Non-Stock Change of Control, we
                                 must offer to repurchase the Series D
                                 convertible preferred stock at 100% of the
                                 liquidation preference plus accumulated and
                                 unpaid dividends to the date of repurchase.
                                 Upon the occurrence of a Common Stock Change of
                                 Control, we will adjust the conversion price.
                                 The terms "Non-Stock Change of Control" and
                                 "Common Stock Change of Control" are defined in
                                 "Description of the Series D Convertible
                                 Preferred Stock -- Change of Control."



Ranking.......................   The Series D convertible preferred stock will
                                 be, with respect to dividends and upon
                                 liquidation, dissolution or winding-up:



                                 - junior to all our existing and future debt
                                   obligations;



                                 - junior to each class of capital stock or
                                   series of preferred stock, the terms of which
                                   expressly provide that it ranks senior to the
                                   Series D convertible preferred stock;

                                    Page S-5B
<PAGE>   105


                                 - on a parity with the Series B convertible
                                   preferred stock and Series C convertible
                                   preferred stock and each other class of
                                   capital stock or series of preferred stock,
                                   the terms of which expressly provide that it
                                   ranks on a parity with the Series D
                                   convertible preferred stock; and



                                 - senior to all classes of our common stock and
                                   each other class of capital stock or series
                                   of preferred stock, the terms of which do not
                                   expressly provide that it ranks senior to or
                                   on a parity with the Series D convertible
                                   preferred stock.


                                 See "Description of the Series D Convertible
                                 Preferred Stock--Ranking."


Proposed Nasdaq National
Market symbol.................   MGCD


Use of proceeds...............   Capital expenditures related to the purchase
                                 and installation of DSL and other
                                 communications equipment, market expansion and
                                 for general corporate purposes, including
                                 working capital to fund our expanding sales,
                                 marketing and product development efforts.


Concurrent offering...........   Concurrently with this offering, and by
                                 separate prospectus, we are offering to sell
                                 4,438,594 shares of common stock and some of
                                 our stockholders are offering to sell 61,406
                                 shares of common stock. The completion of this
                                 offering and the concurrent offering are not
                                 dependent on one another.

                                    Page S-5C
<PAGE>   106

               SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA


<TABLE>
<CAPTION>
                                                                                   NINE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,         SEPTEMBER 30,
                                                   ----------------------------   --------------------
                                                    1996      1997       1998       1998        1999
                                                    ----      ----       ----       ----        ----
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>       <C>       <C>        <C>         <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...............................  $     1   $ 3,791   $ 18,249   $ 11,772    $ 34,922
Cost of operating revenues, excluding
  depreciation...................................      305     3,928     17,129     10,575      31,449
Selling, general and administrative expenses.....      841     6,440     17,877     11,250      27,469
Loss from operations.............................   (1,554)   (7,851)   (21,995)   (13,202)    (36,402)
Net loss.........................................   (1,491)  (10,836)   (32,065)   (22,293)    (44,744)
Basic and diluted loss per share of common
  stock..........................................  $ (2.11)  $ (1.30)  $  (2.26)  $  (1.69)   $  (2.50)
</TABLE>



<TABLE>
<CAPTION>
                                                                      AS OF SEPTEMBER 30, 1999
                                                         --------------------------------------------------
                                                          ACTUAL    AS ADJUSTED(1)   AS FURTHER ADJUSTED(2)
                                                         --------   --------------   ----------------------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                      <C>        <C>              <C>
BALANCE SHEET DATA:
Cash and cash equivalents and investments
  available-for-sale, excluding restricted
  investments..........................................  $178,961     $  323,994           $  531,073
Restricted investments.................................    30,375         30,375               30,375
Property and equipment, net............................   151,159        151,159              151,159
Total assets...........................................   381,814        526,847              733,926
Long-term debt.........................................   157,677        157,677              157,677
Series B convertible preferred stock...................    46,663         46,663               46,663
Series C convertible preferred stock...................        --             --               34,500
Series D convertible preferred stock...................        --        145,033              145,033
Stockholders' equity...................................   134,394        134,394              306,973
</TABLE>



<TABLE>
<CAPTION>
                                                                                   NINE MONTHS ENDED
                                                    YEAR ENDED DECEMBER 31,          SEPTEMBER 30,
                                                 ------------------------------   --------------------
                                                  1996       1997        1998       1998        1999
                                                  ----       ----        ----       ----        ----
                                                                (DOLLARS IN THOUSANDS)
<S>                                              <C>       <C>         <C>        <C>         <C>
OTHER FINANCIAL DATA:
EBITDA(3)......................................  $(1,145)  $  (6,577)  $(16,757)  $(10,053)   $(23,996)
Cash flows used in operating activities........     (942)     (4,490)   (24,184)    (9,073)    (29,226)
Cash flows used in investing activities........   (2,287)   (135,491)   (77,715)   (92,948)    (54,784)
Cash flows provided by financing activities....   11,126     177,138     68,731     68,387     165,348
Insufficiency of earnings to cover combined
  fixed charges and preferred stock
  dividends(4).................................    1,491      11,024     35,104     22,593      43,818
Capital expenditures...........................    3,659      22,641     97,101     67,136      47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service..................       50      15,590     47,744     35,246     117,210
Central office collocation sites...............        9          25        207         85         288
Switches in service............................        1           3          7          4           7
Number of sales personnel
  Field sales..................................        7          23         50         39          95
  Inside sales.................................       --          --         31         53          33
                                                 -------   ---------   --------   --------    --------
         Total sales personnel.................        7          23         81         92         128
</TABLE>


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

(1) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering.



(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
    preferred stock in this offering, the sale of 1,250,000 shares of Series C
    convertible preferred stock, which are expected to be issued in December
    1999 and the sale of 4,438,594 shares of common stock in the concurrent
    offering.



(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. EBITDA
    does not represent funds available for management's discretionary use and is
    not intended to represent cash flow from operations. EBITDA should not be
    considered as an alternative to loss from operations as an indicator of our
    operating performance or as an alternative to cash flows as a measure of
    liquidity. In addition, EBITDA is not a term defined by generally accepted
    accounting principles and, as a result, the measure of EBITDA may not be
    comparable to similarly titled measures used by other companies. We believe
    that EBITDA is often reported and widely used by analysts,

                                    Page S-6A
<PAGE>   107

    investors and other interested parties in the communications industry.
    Accordingly, we are including this information to permit a more complete
    comparison of our operating performance relative to other companies in the
    industry.


(4) For purposes of calculating the insufficiency of earnings to cover combined
    fixed charges and preferred stock dividends: earnings consist of loss before
    income taxes plus fixed charges excluding capitalized interest and preferred
    stock dividends and fixed charges consist of interest expensed and
    capitalized, plus amortization of deferred financing costs, debt discount,
    preferred stock dividends and a portion of rent expense under operating
    leases deemed by us to represent an interest factor.

                                    Page S-6B
<PAGE>   108


OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE


     The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could fluctuate widely in response to a variety of
factors, including:

     - actual or anticipated variations in quarterly operating results;

     - announcements of technological innovations;

     - new products or services offered by us or our competitors;

     - changes in financial estimates by securities analysts;

     - significant acquisitions, strategic partnerships, joint ventures or
       capital commitments;

     - additions or departures of key personnel;

     - sales of common stock; and

     - other events or factors that may be beyond our control.


     In addition, the Nasdaq National Market, where many publicly held
communications companies like us are traded, has recently experienced extreme
price and volume fluctuations. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. Broad market
and industry factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance. The volatility of
the trading price of our common stock may impact the trading price of our Series
D convertible preferred stock.



FUTURE SALES OF OUR STOCK BY EXISTING STOCKHOLDERS MAY ADVERSELY AFFECT OUR
STOCK PRICE



     Our stock price will likely decline if the supply of our stock being sold
in the open market exceeds the demand for our stock. Substantially all of our
common stock is currently eligible for sale in the open market. The shares of
common stock which may be issued in the concurrent offering or upon conversion
of or as dividends on the Series D convertible preferred stock will also be
freely tradeable. In addition, shares of our common stock issued upon exercise
of stock options are freely tradeable under a currently effective registration
statement. Sales and potential sales of substantial amounts of our common stock
in the open market could cause the market price for our common stock and
preferred stock to fall. See "Description of Securities -- Shares Eligible for
Future Sale."



     The holders of some of our outstanding shares of common stock and
convertible securities have demand registration rights which if exercised could
result in a registration statement covering shares of common stock being filed
by us. These holders also have the right to have shares of common stock included
in any registration statement filed by us in the future. See "Description of
Securities -- Registration Rights of Security Holders."


                                    Page S-15
<PAGE>   109


OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS



     For a discussion of risks presented by our ability and the ability of
others on whom we rely to successfully make computer systems and other
technology Year 2000 compliant, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Year 2000" in this
prospectus.



SOME PROVISIONS OF NEVADA LAW AND OUR ARTICLES OF INCORPORATION AND BY-LAWS
COULD DISCOURAGE A TAKEOVER OF OUR COMPANY AND ADVERSELY AFFECT THE PRICE OF OUR
STOCK



     After completion of this offering and the concurrent offering, our board of
directors will have the authority to issue up to 40,022,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of our capital stock
may be adversely affected by the rights of the holders of any class of preferred
stock that may be issued in the future. The issuance of future classes of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. Other than the
Series C convertible preferred stock and Series D convertible preferred stock,
we have no current plans to issue shares of preferred stock.



     We are also subject to provisions of Nevada law which could have the effect
of delaying, deterring or preventing a change of control of our company. In
addition, our articles of incorporation and by-laws contain provisions that
could discourage potential takeover attempts and make attempts by stockholders
to change management more difficult. See "Description of Securities -- Control
Share Acquisitions," "-- Anti-Takeover Provisions of Articles of Incorporation,"
"-- Board of Directors," and "-- Stockholder Action and Special Meetings."



YOU CANNOT BE CERTAIN AS TO HOW THE PROCEEDS OF THIS OFFERING WILL BE APPLIED


     Our management will have broad discretion over the use of the proceeds
raised in this offering, and you must rely on the judgment of management in the
application of the proceeds. Please see "How We Intend to Use the Proceeds of
this Offering" for more information related to our financing plan.


OUR FAILURE TO OBTAIN STATE REGULATORY APPROVAL BEFORE THIS OFFERING IS
COMPLETED MAY HAVE ADVERSE CONSEQUENCES TO US



     Before issuing any equity, we must obtain the approval of the State of
Georgia. Because of time constraints, we will not have obtained approval from
the State of Georgia before closing this offering. After consultation with
counsel, we believe the approval will be granted and that seeking approval after
this offering should not result in any material adverse consequences to us,
although we cannot assure you of a favorable result.



PAYMENT OF DIVIDENDS IN SHARES OF COMMON STOCK MAY NOT RESULT IN STATED DIVIDEND
YIELD



     We expect to pay dividends in the form of our common stock. The number of
shares of common stock to be issued on each dividend payment date will be
determined by dividing the total dividend to be paid on all outstanding shares
of Series D convertible preferred stock by 95% of the average closing prices for
our common stock during a specified period before the dividend payment date. If
the market price of common stock during the specified period is higher than the
market price for the common stock on the dividend payment date and you sell your
common stock at the lower price, your actual dividend yield could be lower than
the stated dividend yield on the Series D convertible preferred stock. In
addition, you are likely to incur commissions and other transaction costs in
connection with the sale of the common stock.


                                    Page S-16
<PAGE>   110


THE SERIES D CONVERTIBLE PREFERRED STOCK IS SUBORDINATED TO ALL OUR LIABILITIES
AND RANKS EQUALLY WITH OUR OUTSTANDING PREFERRED STOCK



     If we file for bankruptcy, liquidate or wind up our business, our assets
will be available to pay obligations on the Series D convertible preferred stock
only after all indebtedness and other liabilities, including our existing senior
secured notes, have been paid. In addition, any remaining assets will be, after
payment of any accrued and unpaid dividends, shared ratably among the holders of
our Series D convertible preferred stock, Series B convertible preferred stock
and, when issued, our Series C convertible preferred stock and any other parity
security. There may not be sufficient assets remaining to pay amounts due on any
or all of the Series D convertible preferred stock, Series B convertible
preferred stock, Series C convertible preferred stock and any other parity
security then outstanding. As of September 30, 1999, the Series D convertible
preferred stock would have been junior in right of payment to our $157.7 million
of long-term debt and would have ranked equally in right of payment with $84.4
million of liquidation preference of Series B convertible preferred stock and
Series C convertible preferred stock (assuming the Series C convertible
preferred stock had been issued on that date).



OUR SERIES D CONVERTIBLE PREFERRED STOCK IS A NEW ISSUE OF SECURITIES AND HAS
NEVER BEEN PUBLICLY TRADED



     Before this offering, there has been no trading market for the Series D
convertible preferred stock. We have applied to have the Series D convertible
preferred stock listed for quotation on the Nasdaq National Market; however, no
assurance can be given as to the liquidity of, or trading market for, the Series
D convertible preferred stock. If an active market for the Series D convertible
preferred stock fails to develop or be sustained, the trading price of the
Series D convertible preferred stock could be materially adversely affected.



OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS



     This prospectus contains "forward-looking statements," which you can
generally identify by our use of forward-looking words including "believe,"
"expect," "intend," "may," "will," "should," "could," "anticipate" or "plan" or
the negative or other variations of these terms or comparable terminology, or by
discussion of strategies that involve risks and uncertainties. We often use
these types of statements when discussing:



     - our plans and strategies;



     - our anticipation of profitability or cash flow from operations;



     - the development of our business;



     - the expected market for our services and products;



     - our anticipated capital expenditures;



     - changes in regulatory requirements; and



     - other statements contained in this prospectus regarding matters that are
       not historical facts.



     We caution you these forward-looking statements are only predictions and
estimates regarding future events and circumstances. We cannot assure you we
will achieve the future results reflected in these statements. The risks we face
that could cause us not to achieve these results include, but are not limited
to, those described above.


                                    Page S-17
<PAGE>   111

               HOW WE INTEND TO USE THE PROCEEDS OF THIS OFFERING


     The net proceeds we receive from the sale of the Series D convertible
preferred stock we are offering are estimated to be approximately $145.0
million, after deducting estimated underwriting discounts and other offering
expenses payable by us. We will receive $166.9 million if the over-allotment
granted to the underwriters with respect to the Series D convertible preferred
stock is exercised in full.



     The net proceeds we receive from the sale of the 4,438,594 shares of common
stock being offered concurrently with this offering are estimated to be
approximately $172.6 million, based on an assumed offering price of $41.06 per
share, the closing price of our common stock on December 27, 1999, and after
deducting estimated underwriting discounts and other offering expenses payable
by us. We will receive approximately $198.9 million if the over-allotment option
granted to the underwriters with respect to the common stock is exercised in
full.


     Neither this offering nor the concurrent offering of common stock are
conditioned on the other and one offering may be completed without the other.


     We intend to use the net proceeds from both offerings, as follows:



<TABLE>
<S>                                                     <C>
Capital expenditures related to the purchase and
  installation of DSL and other communications
  equipment                                             $157.0 million
                                                        --------------
Market expansion and general corporate purposes,
including working capital to fund expanded sales,
marketing and product development efforts               $160.6 million
</TABLE>



     However, management will have broad discretion in determining the uses and
exact amounts for each use of the net proceeds. In addition, we may use a
portion of the net proceeds for acquisitions, although we are not involved in
any acquisition negotiations at this time. See "Risk Factors -- We will face
additional risks if we acquire other businesses" and "Risk Factors -- You cannot
be certain as to how the proceeds of this offering will be applied."


     Pending use of the net proceeds as described above, we intend to invest
them in short-term, investment grade securities.

                                DIVIDEND POLICY


     We have never paid cash dividends on our capital stock and we do not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will depend on our financial condition, results of operations,
capital requirements and other factors our board of directors considers
relevant. In addition, the terms of our outstanding indebtedness and preferred
stock restrict our ability to pay cash dividends on our common stock and
preferred stock.


                                    Page S-18
<PAGE>   112

                                 CAPITALIZATION


     The following table shows our capitalization as of September 30, 1999, (A)
on an actual basis, (B) as adjusted to reflect the sale of the 3,000,000 shares
of Series D convertible preferred stock we are offering by means of this
prospectus, and (C) as further adjusted to reflect the sale of the 3,000,000
shares of Series D convertible preferred stock we are offering by means of this
prospectus, the sale of 1,250,000 shares of Series C convertible preferred stock
which is expected to close in December 1999, and the sale of 4,438,594 shares of
common stock we are offering in the concurrent offering.


     You should read this table with our financial statements and the related
notes appearing elsewhere in this prospectus.


<TABLE>
<CAPTION>
                                                               SEPTEMBER 30, 1999
                                               --------------------------------------------------
                                                ACTUAL    AS ADJUSTED(1)   AS FURTHER ADJUSTED(2)
                                               --------   --------------   ----------------------
                                                             (DOLLARS IN THOUSANDS)
<S>                                            <C>        <C>              <C>
Cash and cash equivalents and investments
  available-for-sale, excluding restricted
  investments................................  $178,961     $ 323,994            $ 531,073
Restricted investments.......................    30,375        30,375               30,375
                                               --------     ---------            ---------
  Total cash and cash equivalents,
     investments available-for-sale and
     restricted investments..................  $209,336     $ 354,369            $ 561,448
                                               ========     =========            =========
13% senior secured notes due 2004............  $157,125     $ 157,125            $ 157,125
Other long-term debt.........................       552           552                  552
Series B convertible preferred stock.........    46,663        46,663               46,663
Series C convertible preferred stock.........        --            --               34,500
Series D convertible preferred stock.........        --       145,033              145,033
Stockholders' equity:
  Common stock, $0.001 par value, 60,000,000
     shares authorized, 22,800,920
     outstanding actual and as adjusted and
     27,239,514 as further adjusted..........        23            23                   27
  Additional paid-in-capital.................   227,955       227,955              400,530
  Accumulated deficit........................   (91,062)      (91,062)             (91,062)
  Less: treasury stock.......................       (76)          (76)                 (76)
  Accumulated other comprehensive income.....      (360)         (360)                (360)
  Notes receivable from stockholders for
     issuance of common stock................    (2,086)       (2,086)              (2,086)
                                               --------     ---------            ---------
  Total stockholders' equity.................   134,394       134,394              306,973
                                               --------     ---------            ---------
Total capitalization.........................  $338,734     $ 483,767            $ 690,846
                                               ========     =========            =========
</TABLE>


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

(1) Gives effect to the sale of 3,000,000 shares of Series D convertible
    preferred stock in this offering.



(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
    preferred stock in this offering, the sale of 1,250,000 shares of Series C
    convertible preferred stock, which are expected to be issued in December
    1999 and the sale of 4,438,594 shares of common stock in the concurrent
    offering.

                                    Page S-19
<PAGE>   113

                           [INTENTIONALLY LEFT BLANK]

                                    Page S-20
<PAGE>   114

               SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA


     You should read the following selected consolidated financial and operating
data with our consolidated financial statements and the related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each of which can be found elsewhere in this prospectus. The
selected consolidated statement of operations data presented below for the years
ended December 31, 1996, 1997 and 1998 are derived from our consolidated
financial statements, which have been audited by KPMG LLP (1996) and Arthur
Andersen LLP (1997 and 1998), independent auditors.



<TABLE>
<CAPTION>
                                                                                             NINE MONTHS ENDED
                                                              YEAR ENDED DECEMBER 31,          SEPTEMBER 30,
                                                            ----------------------------   ----------------------
                                                            1996(1)    1997       1998       1998         1999
                                                            -------   -------   --------   ---------    ---------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S>                                                         <C>       <C>       <C>        <C>          <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues........................................  $     1   $ 3,791   $ 18,249   $  11,772    $  34,922
Cost of operating revenues, excluding depreciation........      305     3,928     17,129      10,575       31,449
Selling, general and administrative expenses..............      841     6,440     17,877      11,250       27,469
Loss from operations......................................   (1,554)   (7,851)   (21,995)    (13,202)     (36,402)
Net loss..................................................   (1,491)  (10,836)   (32,065)    (22,293)     (44,744)
Basic and diluted loss per share of common stock..........  $ (2.11)  $ (1.30)  $  (2.26)  $   (1.69)   $   (2.50)
</TABLE>



<TABLE>
<CAPTION>
                                           AS OF DECEMBER 31,                      AS OF SEPTEMBER 30, 1999
                                      -----------------------------   --------------------------------------------------
                                      1996(1)     1997       1998      ACTUAL    AS ADJUSTED(2)   AS FURTHER ADJUSTED(3)
                                      -------   --------   --------   --------   --------------   ----------------------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                   <C>       <C>        <C>        <C>        <C>              <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
investments, excluding restricted
investments.........................  $ 7,897   $102,764   $ 84,949   $178,961     $ 323,994            $ 531,073
Restricted investments..............       --     57,574     39,379     30,375        30,375               30,375
Property and equipment, net.........    3,250     24,617    116,380    151,159       151,159              151,159
Total assets........................   12,339    191,977    252,119    381,814       526,847              733,926
Long-term debt......................       --    156,637    157,295    157,677       157,677              157,677
Series A convertible preferred
  stock.............................       --     16,665         --         --            --                   --
Series B convertible preferred
  stock.............................       --         --         --     46,663        46,663               46,663
Series C convertible preferred
  stock.............................       --         --         --         --            --               34,500
Series D convertible preferred
  stock.............................       --         --         --         --       145,033              145,033
Stockholders' equity................   10,792      8,976     63,260    134,394       134,394              306,973
</TABLE>



<TABLE>
<CAPTION>
                                                                                             NINE MONTHS ENDED
                                                             YEAR ENDED DECEMBER 31,           SEPTEMBER 30,
                                                          ------------------------------   ----------------------
                                                          1996(1)     1997        1998       1998         1999
                                                          -------   ---------   --------   ---------    ---------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>         <C>        <C>          <C>
OTHER FINANCIAL DATA:
EBITDA(4)...............................................  $(1,145)  $  (6,577)  $(16,757)  $ (10,053)   $ (23,996)
Cash flows used in operating activities.................     (942)     (4,490)   (24,184)     (9,073)     (29,226)
Cash flows used in investing activities.................   (2,287)   (135,491)   (77,715)    (92,948)     (54,784)
Cash flows provided by financing activities.............   11,126     177,138     68,731      68,387      165,348
Insufficiency of earnings to cover combined fixed
  charges and preferred stock dividends(5)..............    1,491      11,024     35,104      22,593       43,818
Capital expenditures....................................    3,659      22,641     97,101      67,136       47,135
OPERATING DATA AT END OF PERIOD:
Total access lines in service...........................       50      15,590     47,744      35,246      117,210
Central office collocation sites........................        9          25        207          85          288
Switches in service.....................................        1           3          7           4            7
Number of sales personnel
    Field sales.........................................        7          23         50          39           95
    Inside sales........................................       --          --         31          53           33
                                                          -------   ---------   --------   ---------    ---------
         Total..........................................        7          23         81          92          128
</TABLE>


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


(1) No data is presented for periods before 1996 since we commenced our
    operation in December 1996 and no revenues or expenses were recognized and
    no cash transactions occurred between our inception on October 16, 1995 and
    December 31, 1995.



(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
    preferred stock in this offering.


                                   Page S-21A
<PAGE>   115


(3) Gives effect to the sale of 3,000,000 shares of Series D convertible
    preferred stock in this offering, the sale of 1,250,000 shares of Series C
    convertible preferred stock, which are expected to be issued in December
    1999, and the sale of 4,438,594 shares of common stock in the concurrent
    offering.



(4) 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. EBITDA
    does not represent funds available for management's discretionary use and is
    not intended to represent cash flow from operations. EBITDA should not be
    considered as an alternative to loss from operations as an indicator of our
    operating performance or to cash flows as a measure of liquidity. In
    addition, EBITDA is not a term defined by generally accepted accounting
    principles and, as a result, the measure of EBITDA may not be comparable to
    similarly titled measures used by other companies. We believe that EBITDA is
    often reported and widely used by analysts, investors and other interested
    parties in the communications industry. Accordingly, we are including this
    information to permit a more complete comparison of our operating
    performance relative to other companies in the industry.



(5) For purposes of calculating the insufficiency of earnings to cover combined
    fixed charges and preferred stock dividends: earnings consist of loss before
    income taxes plus fixed charges excluding capitalized interest and preferred
    stock dividends and fixed charges consist of interest expensed and
    capitalized, plus amortization of deferred financing costs, debt discount,
    preferred stock dividends and a portion of rent expense under operating
    leases deemed by us to represent an interest factor.


                                   Page S-21B
<PAGE>   116

                             PRINCIPAL STOCKHOLDERS

SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERS


     The following table shows information known to us with respect to
beneficial ownership of common stock as of December 27, 1999, by (A) each
director, (B) all executive officers and directors as a group and (C) each
person known by us to be a beneficial owner of more than 5% of our outstanding
common stock.



<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES        PERCENT OF
NAME OF BENEFICIAL OWNER                                 BENEFICIALLY OWNED(1)    OWNERSHIP(1)
- ------------------------                                 ---------------------    ------------
<S>                                                      <C>                      <C>
Providence Equity Partners III LLC(2)..................        5,003,969              17.7%
Maurice J. Gallagher, Jr., chairman of the board and
  director(3)..........................................        3,300,608              14.2%
David Kronfeld, director(4)............................        2,061,070               8.5%
Timothy P. Flynn, director(5)..........................          898,500               3.9%
Rolla P. Huff, president, chief executive officer and
  director.............................................          150,000                 *
Jack L. Hancock, director(6)...........................           37,200                 *
Thomas Neustaetter, director...........................            8,800                 *
Mark J. Masiello, director(7)..........................               --                --
Paul J. Salem, director(7).............................               --                --
All executive officers and directors as a group (19
  persons) (3)(4)(5)(6)(7)(8)..........................        6,975,982              28.7%
</TABLE>


- -------------------------
  *  Less than 1% of total.
 (1) In accordance with the Commission's rules, each beneficial owner's holdings
     have been calculated assuming the full exercise of options and the
     conversion of all shares of convertible preferred stock held by the holder
     which are currently exercisable or convertible or which will become
     exercisable or convertible within 60 days after the date indicated and no
     exercise of options or conversion of preferred stock held by any other
     person.


 (2) Includes 4,111,112 shares of Series B convertible preferred stock and
     892,857 shares of Series C convertible preferred stock subject to an
     agreement to purchase. The shares of Series B convertible preferred stock
     are, and the shares of Series C convertible preferred stock will be,
     convertible into common stock on a one-for-one basis. The address of this
     beneficial owner is 901 Fleet Center, 50 Kennedy Plaza, Providence, Rhode
     Island 02903.


 (3) Includes options to purchase 40,000 shares of common stock which are
     presently exercisable and 3,170,878 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.
     Also includes 44,730 shares owned by a trust for the benefit of Mr.
     Gallagher's minor children with respect to which Mr. Gallagher disclaims
     any beneficial ownership interest. Mr. Gallagher's address is 3291 N.
     Buffalo Drive, Las Vegas, Nevada 89129.


 (4) Includes 1,139,571 shares of common stock, 555,556 shares of Series B
     convertible preferred stock and 357,143 shares of Series C convertible
     preferred stock subject to an agreement to purchase, all of which are owned
     by partnerships in which Mr. Kronfeld is a general partner or manager of a
     general partner. The shares of Series B convertible preferred stock are,
     and the shares of Series C convertible preferred stock will be, convertible
     into common stock on a one-for-one basis. Mr. Kronfeld's address is JK&B
     Management, L.L.C., 205 North Michigan, Suite 808, Chicago, Illinois 60601.



 (5) Includes options to purchase 7,200 shares which are presently exercisable
     or will become exercisable within 60 days after the date of this prospectus
     and 102,000 shares of common stock owned by various partnerships or
     corporations with respect to which Mr. Flynn is a general partner and/or
     controlling stockholder.


                                    Page S-50
<PAGE>   117


 (6) Includes options to purchase 7,200 shares that are presently exercisable or
     will become exercisable within 60 days after the date of this prospectus.



 (7) Excludes 4,111,112 shares of Series B convertible preferred stock owned by,
     and 892,857 shares of Series C convertible preferred stock subject to an
     agreement to purchase by, Providence Equity Partners III L.P. and its
     affiliates. Mr. Masiello and Mr. Salem disclaim beneficial ownership of
     these shares except to the extent of their pecuniary interest in the
     general partner of Providence Equity Partners III L.P.



(8) Includes options to purchase 94,200 shares owned by executive officers not
    named above which are presently exercisable or which will become exercisable
    within 60 days after the date of this prospectus.


                                    Page S-51
<PAGE>   118


This indemnification is to be provided only if the person acted in good faith
and in a manner which the person reasonably believed to be in or not opposed to
our best interests. With respect to criminal actions, the indemnification is to
be provided only if the person had no reasonable cause to believe the person's
conduct was unlawful.



     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or other controlling persons under
the foregoing provisions, we have been informed that in the opinion of the SEC
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.


ANTI-TAKEOVER PROVISIONS OF ARTICLES OF INCORPORATION


     Our articles of incorporation authorize our 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. As of November 19, 1999, 5,278,000 shares of
preferred stock have been designated as Series B preferred stock, 5,277,779
shares of Series B preferred stock were outstanding and we have agreed to
authorize and issue 1,250,000 shares of Series C preferred stock. We may also
issue up to 3,450,000 shares of Series D convertible preferred stock in this
offering. We previously issued 6,571,427 shares of Series A convertible
preferred stock which reverted to authorized but unissued shares of preferred
stock when we closed our initial public offering of common stock. Our 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, which could, among other things, adversely
affect the voting power or other rights of the holders of our outstanding
capital stock and, under some circumstances, make it more difficult for a third
party to acquire, or discourage a third party from acquiring, control of our
company. Our board of directors has no present intention to authorize the
issuance of any additional series of preferred stock other than the Series C
preferred stock and the Series D convertible preferred stock being offered.


BOARD OF DIRECTORS


     Our by-laws provide that our board of directors 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 our board of directors prevents persons seeking to acquire
control of our company from electing more than a minority of directors in any
year, thereby delaying, deferring or preventing a change in control. Our by-laws
provide that our board of directors shall consist of between three and nine
members, with the exact number to be determined from time to time by our board
of directors. Our board of directors currently consists of eight directors and,
as a result, the size of each class is two or three.


STOCKHOLDER ACTION AND SPECIAL MEETINGS


     Our by-laws provide that:


     - all action required or permitted to be taken by our 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


     - the number of directors is set by resolution of our board of directors.



These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. Our by-laws provide that
special meetings of stockholders may be called by the board of directors, the
chairman of the board, the president or the holders of at least a majority of
the shares of our common stock issued and outstanding and entitled to vote.


                                    Page S-59
<PAGE>   119


     No adjustment of the Conversion Price will be required to be made:



        - until cumulative adjustments amount to one percent of the Conversion
          Price, or



        - with respect to rights, options or warrants issued pursuant to certain
          of our employee benefit plans.



     We also may from time to time decrease the Conversion Price by any amount
for any period of at least 20 days, so long as the decrease is irrevocable
during the period. We will give at least 15 days' notice of any such decrease.
In addition, we will be permitted to reduce the Conversion Price in order to
make any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock not taxable to the recipients. If we elect to reduce the
Conversion Price, we will comply with the requirements of Rule 14e-1 under the
Exchange Act, and any other securities laws and regulations, if and to the
extent they are applicable. See "Federal Tax Considerations."



     If at any time we distribute property to our stockholders and the
distribution would be taxable as a dividend for federal income tax purposes and,
pursuant to the antidilution provisions described above or under the caption
"-- Change of Control," the Conversion Price of the Series D convertible
preferred stock is reduced, the reduction may be deemed to be the receipt of
taxable income by holders of the Series D convertible preferred stock. See
"Federal Tax Considerations."



     If we distribute rights, options or warrants, other than those referred to
in clause 2 above, to all holders of common stock, so long as the rights,
options or warrants have not expired or been redeemed, the holder of any shares
of Series D convertible preferred stock surrendered for conversion will be
entitled to receive a number of rights, options or warrants equal to:



          (1) for each share of common stock issued upon conversion of the
     Series D convertible preferred stock, the number of rights, options or
     warrants which a holder of a share of common stock is then entitled, if the
     conversion occurs on or before the distribution of separate certificates
     evidencing the rights, options or warrants, and



          (2) the number of rights, options or warrants which the holder of
     Series D Convertible Preferred Stock would have received had the holder
     converted the Series D convertible preferred stock into common stock
     immediately before the distribution of certificates, if the conversion
     occurs after the distribution of certificates evidencing the rights,
     options or warrants.



     Except as stated above or under the caption "-- Change of Control," the
Conversion Price will not be adjusted for the issuance of common stock or any
securities convertible into or exchangeable for common stock or carrying the
right to purchase any of the foregoing, in exchange for cash, property or
services.



     In case of:



          (1) our merger or consolidation;



          (2) any sale or transfer to another corporation of our property as an
     entirety or substantially as an entirety; or



          (3) any statutory exchange of securities with another corporation,
     other than in connection with a merger or acquisition (each of the above,
     an "Exchange Event");



there will be no adjustment of the Conversion Price unless the Exchange Event
causes a Common Stock Change of Control (as defined under the caption "-- Change
of Control").



     Upon the occurrence of an Exchange Event, other than a merger or
consolidation in which:



          (1) we are the continuing corporation, and


                                    Page S-67
<PAGE>   120

                           FEDERAL TAX CONSIDERATIONS


     The following is a summary of the material U.S. federal tax considerations
relevant to the purchase, ownership and disposition of our Series D convertible
preferred stock and common stock. This summary is based on the current
provisions of the Internal Revenue Code of 1986, as amended, Treasury
regulations and judicial and administrative authority, all of which are subject
to change, possibly on a retroactive basis. This summary applies only to
investors who hold our Series D convertible preferred stock or common stock as
capital assets, within the meaning of section 1221 of the Internal Revenue Code.
This summary does not discuss the tax consequences to special classes of
investors, including:



     - brokers or dealers in securities or currencies,



     - financial institutions,



     - tax-exempt entities,



     - life insurance companies,



     - persons holding our Series D convertible preferred stock or common stock
       as a part of a hedging, short sale or conversion transaction or a
       straddle,



     - investors whose functional currency is not the United States dollar,



     - persons who hold our Series D convertible preferred stock or common stock
       through partnerships or other pass-through entities, or



     - except as specifically noted, foreign holders and certain U.S.
       expatriates.



     State, local and foreign tax consequences of ownership of our Series D
convertible preferred stock and common stock are not summarized.



     We have not requested, and do not intend to request, any rulings from the
Internal Revenue Service concerning the federal tax consequences of an
investment in our Series D convertible preferred stock or common stock. You are
advised to consult with your own tax advisor regarding the consequences of
acquiring, holding or disposing of our Series D convertible preferred stock or
common stock in light of current tax laws, your particular investment
circumstances, and the application of state, local and foreign tax laws.



     When we refer in the summary to a "United States Holder," we mean a
beneficial owner of Series D convertible preferred stock or common stock that
is:



     - a citizen or resident of the United States for United States federal
       income tax purposes;



     - a corporation created or organized in the United States or under the laws
       of the United States or of any political subdivision thereof;



     - an estate whose income is includible in gross income for United States
       federal income tax purposes regardless of its source; or



     - a trust if a court within the United States is able to exercise primary
       supervision of the administration of the trust and one or more United
       States persons have the authority to control all substantial decisions of
       the trust.



     When we refer in the summary to a "Non-United States Holder," we mean a
beneficial owner of Series D convertible preferred stock or common stock that is
not a United States Holder.


                                   Page S-71B
<PAGE>   121

UNITED STATES HOLDERS

  Distributions


     We have the right to pay distributions on the Series D convertible
preferred stock in cash or in shares of our common stock. If we distribute our
common stock, the distribution will be subject to federal income tax to the same
extent as a cash distribution. The amount of the distribution for federal income
tax purposes will be the fair market value of the common stock on the date the
distribution is paid, which may be different than the price we used to determine
the number of shares of common stock to be distributed in payment of the
dividend.



     A cash distribution on the Series D convertible preferred stock or common
stock will be treated as a dividend to the extent of our current or accumulated
earnings and profits allocable to the distribution as determined under U.S.
federal income tax principles. The amount of our earnings and profits at any
time will depend upon our future actions and financial performance. If the
amount of the distribution exceeds our current and accumulated earnings and
profits allocable to the distribution, the distribution will be treated as a
nontaxable return of capital and will be applied against and reduce your
adjusted tax basis in the stock, but not below zero. The reduction in tax basis
will increase the amount of any gain, or reduce the amount of any loss, which
you would otherwise realize on the sale or other taxable disposition of the
stock. If the distribution exceeds both our current and accumulated earnings and
profits allocable to the distribution and your adjusted tax basis in your stock,
the excess will be treated as capital gain and will be either long-term or
short-term capital gain depending on your holding period for the stock.



     Corporate investors in our Series D convertible preferred stock or common
stock generally should be eligible for the 70% dividends-received deduction with
respect to the portion of any distribution on the stock taxable as a dividend.
However, corporate investors should consider certain provisions that may limit
the availability of the dividends-received deduction, including:



     - the 46-day holding period required by section 246(c) of the Internal
       Revenue Code,



     - the rules in section 246A of the Internal Revenue Code that reduce the
       dividends-received deduction for dividends on certain debt-financed
       stock, and



     - the rules in section 1059 of the Internal Revenue Code that reduce the
       basis of stock in respect of certain extraordinary dividends.



Corporate investors should also consider the effect of the dividends-received
deduction on the determination of alternative minimum tax liability.



  Redemption for cash or common stock



     If we redeem our Series D convertible preferred stock for cash, the
redemption will be taxable to you. The redemption generally will be treated as a
sale or exchange if you do not own, actually or constructively within the
meaning of section 318 of the Internal Revenue Code, any of our stock other than
the redeemed Series D convertible preferred stock. If you do own, actually or
constructively, other stock of ours, a cash redemption of your Series D
convertible preferred stock may be taxable in accordance with the treatment
described above for distributions. The treatment as a distribution will not
apply if the redemption:


     (1) is "substantially disproportionate" with respect to you under section
         302(b)(2) of the Internal Revenue Code, or

     (2) is "not essentially equivalent to a dividend" under section 302(b)(1)
         of the Internal Revenue Code.

                                   Page S-71C
<PAGE>   122


A distribution to you will be "not essentially equivalent to a dividend" if it
results in a meaningful reduction in your stock interest in us, which should be
the case if:



     - your proportionate ownership interest, taking into account any actual
       ownership of stock and any stock constructively owned, is reduced,



     - your relative stock interest in us is minimal, and



     - you exercise no control over our business affairs.



     If a cash redemption of your Series D convertible preferred stock is
treated as a sale or exchange, it will result in capital gain or loss equal to
the difference between the amount of cash received and your adjusted tax basis
in the Series D convertible preferred stock redeemed, except to the extent that
the redemption price includes unpaid dividends which we declare before the
redemption. The capital gain or loss will be long term if you have held the
Series D convertible preferred stock for more than one year. Any cash you
receive in discharge of dividend arrearages on the Series D convertible
preferred stock will be treated as a distribution on the Series D convertible
preferred stock to the extent of the dividends in arrears, taxable in accordance
with the treatment described above for distributions.



     If the cash you receive on redemption of your Series D convertible
preferred stock is taxed as a dividend, your tax basis (reduced for amounts, if
any, treated as return of capital) in the redeemed Series D convertible
preferred stock will be transferred to any remaining other stock of ours you
own, subject, in the case of a corporate taxpayer, to reduction or possible gain
recognition under section 1059 of the Internal Revenue Code in an amount equal
to the nontaxed portion of the dividend. If you do not actually own any other of
our stock, having a remaining stock interest only constructively, you may lose
the benefit of your tax basis in the Series D convertible preferred stock but
the tax basis may be shifted to the stock of the related person whose stock you
constructively own.



     If we redeem our Series D convertible preferred stock for common stock, the
exchange should constitute a recapitalization within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code. You will not recognize gain or loss
on the exchange unless some of the common stock is received in discharge of
dividend arrearages, in which case the redemption will be treated as a
distribution on the Series D convertible preferred stock to the extent of the
dividends in arrears. The amount constituting a distribution will be taxed as a
dividend to the extent of our current or accumulated earnings and profits
allocable to the distribution, in accordance with the treatment described above
for distributions. Your tax basis in our common stock received pursuant to the
redemption generally will equal your tax basis in the Series D convertible
preferred stock surrendered in exchange, and your holding period for the common
stock generally will include the period you held your Series D convertible
preferred stock. However, the tax basis of common stock received in discharge of
dividend arrearages will be its fair market value on the date received and the
holding period of that stock will commence on the day after its receipt. If you
receive cash instead of a fractional share of common stock, you will be treated
for federal income tax purposes as if you had received the fractional share and
then we redeemed it for cash. That deemed redemption should result in capital
gain or loss equal to the difference between the amount of cash received and
your adjusted tax basis in the fractional share of common stock redeemed.



     If we redeem our Series D convertible preferred stock for common stock and
cash (other than cash paid instead of a fractional share of common stock), you
will not recognize any loss on the exchange. You may recognize gain on the
exchange to the extent the amount of cash and the fair market value of the
common stock received (other than any amount treated as received in discharge of
dividend arrearages) exceeds your adjusted tax basis in the Series D convertible
preferred stock redeemed; however, the gain you recognize will be limited to the
amount of cash you receive. This


                                   Page S-71D
<PAGE>   123


gain should generally be capital gain, but it may be treated as dividend income
if a redemption of your Series D convertible preferred stock for cash would have
been treated as "essentially equivalent to a dividend" as described above.



     Under certain circumstances, section 305(c) of the Internal Revenue Code
requires that any excess of the redemption price of preferred stock over its
issue price be treated as constructively distributed on a periodic basis prior
to actual receipt. These rules will apply to the mandatory redemption if the
liquidation preference of the Series D convertible preferred stock exceeds the
issue price by more than .25% of the liquidation preference multiplied by the
number of complete years to the mandatory redemption date. The constructive
distribution rules will not apply to our provisional redemption rights if:



     - you are not "related" to us within the meaning of Treasury regulations
       under section 305(c),



     - there are no plans, arrangements or agreements that effectively require
       or are intended to compel us to exercise our provisional redemption
       rights, and



     - our exercise of the right to redeem would not reduce the yield of the
       Series D convertible preferred stock, as determined under the
       regulations.


We intend to take the position that the existence of our provisional redemption
rights does not result in a constructive distribution under section 305(c).

  Conversion


     You generally will not recognize gain or loss on conversion of shares of
Series D convertible preferred stock into our common stock, except with respect
to any cash paid for fractional shares of common stock. However, you may
recognize gain or dividend income to the extent there are dividends in arrears
on your stock at the time of conversion into common stock. Your tax basis in the
common stock received upon conversion of Series D convertible preferred stock
generally will be equal to your tax basis in the Series D convertible preferred
stock converted and the holding period of the common stock generally will
include your holding period for the Series D convertible preferred stock.
However, the tax basis of any common stock received on conversion which is
treated as a dividend will be equal to its fair market value on the date of the
distribution and the holding period of that common stock will commence on the
day after its receipt.



     You may be deemed to have received a constructive distribution of stock
taxable as a dividend if the conversion ratio of the Series D convertible
preferred stock is adjusted to reflect a cash or property distribution on our
common stock or to prevent dilution in the case of certain issuances of rights
or warrants to purchase common stock at below market prices. Although an
adjustment to the conversion price made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of your
interest in our company generally will not be considered to result in a
constructive distribution of stock, some of the possible adjustments could
trigger this rule. If a nonqualifying adjustment is made, or if we fail to make
an adjustment in certain cases, you might be deemed to have received a taxable
stock dividend. If so, the amount of the dividend to be included in income would
be the fair market value of the additional common stock to which you would be
entitled by reason of the increase in your proportionate equity interest in our
company.


  Sale or other taxable disposition


     If you sell or dispose of your Series D convertible preferred stock or
common stock in a taxable transaction other than a redemption or conversion by
us, you will recognize capital gain or loss equal to the difference between the
amount of cash and the fair market value of property received and your tax basis
in the Series D convertible preferred stock or common stock. The gain or loss
will be long-term capital gain or loss if your holding period for the stock
exceeds one year. For corporate


                                   Page S-71E
<PAGE>   124


taxpayers, long-term capital gains are taxed at the same rate as ordinary
income. For individual taxpayers, net capital gains -- the excess of the
taxpayer's net long-term capital gains over his net short-term capital
losses -- are subject to a maximum tax rate of 20%.


NON-UNITED STATES HOLDERS

  Distributions


     Distributions received by you as a Non-United States Holder in respect of
the Series D convertible preferred stock, whether in cash or shares of common
stock, and distributions in respect of common stock, to the extent considered
dividends for U.S. federal income tax purposes, generally will be subject to
withholding of United States federal income tax at a 30% rate or at a lower rate
specified by an applicable income tax treaty, unless the dividend is effectively
connected with your conduct of a trade or business within the United States or,
where a tax treaty applies, is attributable to a United States permanent
establishment you maintain. For distributions of common stock, any amounts we
withhold will reduce the value of the common stock distributed to you. If the
dividend is effectively connected with your conduct of a trade or business
within the United States or, where a tax treaty applies, is attributable to your
United States permanent establishment, the dividend will be subject to federal
income tax on a net income basis at applicable graduated individual or corporate
rates and will be exempt from the 30% withholding tax.



     In addition to the graduated rate described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business or, where a tax treaty applies, are attributable to
your United States permanent establishment may, under some circumstances, be
subject to an additional "branch profits tax" at a 30% rate or at a lower rate
specified by an applicable income tax treaty.



     For purposes of obtaining a reduced rate of withholding under an income tax
treaty, you will be required to provide information concerning your country of
residence and entitlement to tax treaty benefits. If you claim exemption from
withholding with respect to dividends effectively connected with your conduct of
a business within the United States, you must provide appropriate certification,
currently Internal Revenue Service Form 4224, to us or our paying agent. If you
are eligible for a reduced rate of U.S. federal withholding tax, you may obtain
a refund of any excess withheld amounts by timely filing an appropriate claim
for refund.



     If a distribution exceeds our current and accumulated earnings and profits
allocable to the distribution, it will be treated first as a return of your tax
basis in the stock to the extent of your basis and then as gain from the sale of
a capital asset, which would be taxable as described below. Any withholding tax
on distributions in excess of our current and accumulated earnings and profits
is refundable to you upon the timely filing of an appropriate claim for refund
with the Internal Revenue Service.



     Under currently applicable Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of that
country, unless the payor has knowledge to the contrary, for purposes of the
withholding discussed above, and, under the current interpretation of these
Treasury regulations, for purposes of determining the applicability of a tax
treaty rate. Under Treasury regulations currently scheduled to be effective with
respect to dividends paid after December 31, 2000, a Non-United States Holder of
our stock who wishes to claim the benefit of an applicable treaty rate, and to
avoid backup withholding as discussed below, will be required to satisfy
applicable certification and other requirements. However, under either set of
regulations, some payments to foreign partnerships and other fiscally
transparent entities may not be eligible for a reduced rate of withholding tax
under an applicable income tax treaty.


                                   Page S-71F
<PAGE>   125


  Disposition of Series D convertible preferred stock or common stock



     Generally, you will not be subject to United States federal income tax on
any gain recognized upon the sale or other disposition of Series D convertible
preferred stock or common stock. However, you will be subject to federal income
tax on the gain if:


          (1) the gain is effectively connected with your United States trade
     or, if a tax treaty applies, attributable to your United States permanent
     establishment;


          (2) you are an individual who is a former citizen of the United States
     who lost United States citizenship within the preceding ten-year period, or
     a former long-term resident of the United States who relinquished United
     States residency on or after February 6, 1995, and the loss of citizenship
     or permanent residency had as one of its principal purposes the avoidance
     of United States tax; or


          (3) you are a non-resident alien individual, you are present in the
     United States for 183 or more days in the taxable year of disposition and
     either (a) you have a "tax home" in the United States for United States
     federal income tax purposes or (b) the gain is attributable to an office or
     other fixed place of business you maintain in the United States.


     You will also be subject to federal income tax on any gain from the sale of
our Series D convertible preferred stock or common stock if we are or have been
a "United States real property holding corporation" within the meaning of
section 897(c)(2) of the Internal Revenue Code at any time you held the stock,
or within the 5-year period preceding the sale of the stock if you hold the
stock for more than five years. We believe:



     - we are not now a "United States real property holding corporation,"



     - we have not been a "United States real property holding corporation" at
       any time since we were formed, and



     - it is unlikely we will become a "United States real property holding
       corporation."



If we were a "United States real property holding corporation" or were to become
a "United States real property holding corporation," you would be subject to
U.S. income tax on any gain from your sale of Series D convertible preferred
stock or from your sale of common stock if you beneficially own, or owned at any
time during the specified 5-year period, more than 5 percent of the total fair
market value of the class of stock you sold.



  Redemption and conversion of Series D convertible preferred stock



     As a Non-United States Holder, you generally will not recognize any gain or
loss for United States federal income tax purposes upon conversion of Series D
convertible preferred stock into common stock, except with respect to any cash
paid instead of fractional shares of common stock, which would be subject to the
rules described under "Disposition of Series D convertible preferred stock or
common stock." However, you may recognize gain or dividend income to the extent
there are dividends in arrears on the Series D convertible preferred stock at
the time of conversion into common stock.



     A redemption of Series D convertible preferred stock may result in a
capital gain or loss or dividend income. See "United States
Holders -- Redemption for cash or common stock." To the extent the redemption
results in a dividend, the tax consequences are described in "Non-United States
Holders -- Distributions." To the extent the redemption results in capital gain,
the tax consequences are described in "Non-United States Holders -- Disposition
of Series D convertible preferred stock or common stock."


                                   Page S-71G
<PAGE>   126

  Federal estate taxes


     If you are an individual Non-United States Holder, Series D convertible
preferred stock or common stock you hold or are treated as owning at the time of
your death will be included in your United States gross estate for United States
federal estate tax purposes and may be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.


INFORMATION REPORTING AND BACKUP WITHHOLDING


     We generally will be required to report to certain holders of our Series D
convertible preferred stock or common stock and to the Internal Revenue Service
the amount of any dividends paid to the holder in each calendar year and the
amounts of tax withheld, if any, with respect to the dividend payments. Copies
of the information returns reporting the dividends and withholding may also be
made available to the tax authorities in the country in which a Non-United
States Holder resides under the provisions of an applicable income tax treaty.



     Each holder of Series D convertible preferred stock or common stock, other
than an exempt holder such as:



     - a corporation, tax-exempt organization, qualified pension or
       profit-sharing trust,



     - an individual retirement account, or



     - a nonresident alien individual who provides certification as to his or
       her status as a nonresident,



will be required to provide, under penalties of perjury, a certification setting
forth:



     - the holder's name, address, correct federal taxpayer identification
       number, and



     - a statement that the holder is not subject to backup withholding.


     If a nonexempt holder fails to provide the required certification, we will
be required to withhold 31% of the amount otherwise payable to the holder, and
remit the withheld amount to the Internal Revenue Service as a credit against
the holder's federal income tax liability. However, no backup withholding will
be required with respect to any payment subject to the 30% United States
withholding tax discussed above. You should consult your own tax advisor
regarding your qualification for exemption from backup withholding and the
procedure for obtaining any applicable exemption.

     The Internal Revenue Service has finalized Treasury regulations regarding
the backup withholding and information rules which are effective for payments
made after December 31, 2000, subject to certain transition rules. In general,
these regulations unify certification procedures and forms and clarify and
modify reliance standards. Among other provisions, these regulations also
include the new provisions discussed below regarding sales of stock outside the
United States by or for a broker. A Non-United States Holder should consult its
own tax advisor regarding the application of the new regulations.


     Payment of the proceeds of a sale of Series D convertible preferred stock
or common stock by or through a United States office of a broker is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-United States Holder or
otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Series D convertible preferred stock or common stock by or through a foreign
office of a broker. If, however, the broker is, for United States federal income
tax purposes:



     - a United States person,



     - a "controlled foreign corporation,"


                                   Page S-71H
<PAGE>   127


     - a foreign person that derives 50% or more of its gross income for a
       certain period from the conduct of a trade or business in the United
       States, or



     - for taxable years beginning after December 31, 2000, a foreign
       partnership in which one or more United States persons, in the aggregate,
       own more than 50% of the income or capital interests in the partnership
       or if the partnership is engaged in a trade or business in the United
       States,



payment of the proceeds will be subject to information reporting, but not backup
withholding, unless



     - the broker has documentary evidence in its records that the beneficial
       owner is a Non-United States Holder and certain other conditions are met,
       or



     - the beneficial owner otherwise establishes an exemption.



     For payments after December 31, 2000, certification will be required in the
case of the disposition of shares of Series D convertible preferred stock or
common stock held in an offshore account if the disposition is made through a
foreign broker described in the immediately preceeding paragraph.


     Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's United States federal income tax
liability provided the required information is furnished to the Internal Revenue
Service.


     The foregoing discussion is for general information and is not tax advice.
Accordingly, each prospective holder of Series D convertible preferred stock or
common stock should consult its tax advisor as to the particular tax
consequences to it of the Series D convertible preferred stock and common stock,
including the applicability and effect of any state, local or foreign income tax
laws, and any recent or prospective changes in applicable tax laws.


                                   Page S-71I
<PAGE>   128

                                  UNDERWRITING


     Under the terms and conditions stated in the underwriting agreement dated
the date of this prospectus, each underwriter named below has severally agreed
to purchase, and we have agreed to sell to each underwriter named below, the
number of shares set forth opposite the name of the underwriter.


<TABLE>
<CAPTION>
                                                               NUMBER
                            NAME                              OF SHARES
                            ----                              ---------
<S>                                                           <C>
Salomon Smith Barney Inc. ..................................
Bear, Stearns & Co. Inc. ...................................
Goldman, Sachs & Co. .......................................
ING Barings LLC.............................................
Warburg Dillon Read LLC.....................................
                                                              ---------
  Total.....................................................  3,000,000
                                                              =========
</TABLE>


     The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.



     The underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc., Goldman, Sachs & Co., ING Barings LLC and Warburg Dillon Read LLC are
acting as representatives, propose to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $     per share. The underwriters may
allow, and these dealers may reallow, a concession not in excess of $     per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public offering
price and the other selling terms.



     We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 450,000 additional shares of
Series D convertible preferred stock at the public offering price less the
underwriting discount. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent this option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to the underwriter's initial purchase commitment.



     Our officers and directors and certain other stockholders have agreed that,
for a period of 90 days from the date of this prospectus, they will not, without
the prior written consent of Salomon Smith Barney Inc., dispose of or hedge any
shares of common stock or any securities convertible into or exchangeable for
common stock, except for the shares offered by this prospectus.



     In addition, we have agreed that, for a period of 90 days from the date of
this prospectus, we will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock, except for:



     - the shares of Series D preferred stock offered by this prospectus;



     - the shares of common stock offered in the concurrent offering;



     - any shares of common stock which may be issued by us upon exercise of
       outstanding warrants and conversion of outstanding convertible preferred
       stock;


                                    Page S-72
<PAGE>   129


     - any shares of common stock which may be issued as dividends on or upon
       the conversion of the Series D convertible preferred stock offered by
       this prospectus; and



     - shares issued and options granted under our existing stock option plan.



     Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.



     The common stock is quoted on the Nasdaq National Market under the symbol
"MGCX". We have applied to have the Series D convertible preferred stock listed
on the Nasdaq National Market under the symbol "MGCD".



     The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of Series D convertible preferred stock.


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


     In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of Series D convertible preferred
stock and/or common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of Series D convertible preferred stock
in excess of the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the Series D convertible preferred stock in
the open market after the distribution has been completed to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of Series D convertible preferred stock and/or common stock made for the purpose
of preventing or retarding a decline in the market price of the Series D
convertible preferred stock and/or common stock while the offering is in
progress.


     The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.


     Any of these activities may cause the price of the Series D convertible
preferred stock and/or common stock to be higher than the price that otherwise
would exist in the open market in the absence of these transactions. These
transactions may be effected on the Nasdaq National Market or in the
over-the-counter market, or otherwise and, if commenced, may be discontinued at
any time.



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


                                    Page S-73
<PAGE>   130


the open market in the absence of these transactions. If passive market making
is commenced, it may be discontinued at any time.



     We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $467,000.



     The underwriters named herein are also acting as the underwriters of the
concurrent offering. An affiliate of ING Barings LLC provides cash management
services to us for which it receives customary fees. Bear, Stearns & Co. Inc.
issued a fairness opinion in connection with the issuance of the Series C
convertible preferred stock for which they received a customary fee. The
representatives have performed certain other investment banking and advisory
services for us for which they have received customary fees. The representatives
may, from time to time, engage in transactions with and perform services for us
in the ordinary course of business.



     We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.


                                 LEGAL MATTERS


     Various legal matters regarding the validity of the preferred stock offered
by this prospectus will be passed upon for us by Ellis, Funk, Goldberg, Labovitz
& Dokson, P.C., Atlanta, Georgia. Shareholders of Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C. own approximately 21,600 shares of our common stock.
Kronish Lieb Weiner & Hellman LLP, New York, New York is acting as counsel to
the underwriters in connection with various legal matters relative to the
preferred stock offered by this prospectus.


                                    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 LLP, independent
public accountants, and are included herein in reliance upon the authority of
these firms as experts in giving said reports.


                      WHERE YOU CAN FIND MORE INFORMATION

     We must comply with the periodic reporting and other information
requirements of the Exchange Act and file reports, proxy statements and other
information with the SEC. Copies of our periodic reports and proxy statements
and of other information filed by us with the SEC may be inspected at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10007. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding us. The address of the SEC's Web site is
http://www.sec.gov. Our Internet address is http://www.mgci.com.


     We have filed with the SEC a registration statement on Form S-3 under the
Securities Act covering the securities being offered. This prospectus does not
contain all the information included in the registration statement, parts of
which are omitted as allowed by the rules of the SEC. For further information
about us and the securities offered, please refer to the registration statement.
The registration statement may be inspected and copied, at prescribed rates, at
the SEC's public reference facilities at the addresses shown above. Statements
made in this prospectus concerning the contents of any document referred to in
this prospectus are not necessarily complete. With respect to each document
filed with the SEC as an exhibit to the registration statement, you should refer
to the exhibit for a more complete description of the matter involved.


                                    Page S-74
<PAGE>   131

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

                                3,000,000 SHARES

                            MGC COMMUNICATIONS, INC.

                     % SERIES D CONVERTIBLE PREFERRED STOCK

                                   [MGC LOGO]

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

                                   PROSPECTUS


                                        , 2000


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

                              SALOMON SMITH BARNEY

                            BEAR, STEARNS & CO. INC.

                              GOLDMAN, SACHS & CO.

                                  ING BARINGS

                            WARBURG DILLON READ LLC

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                                      S-BC1
<PAGE>   132

                            MGC COMMUNICATIONS, INC.

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

     The fees and expenses to be paid in connection with this offering are as
follows:


<TABLE>
<S>                                                           <C>
SEC filing fee..............................................    $104,591
NASD filing fee.............................................      30,500
NASDAQ listing fee*.........................................      35,000
Accounting fees and expenses*...............................     150,000
Legal fees and expenses*....................................     200,000
Printing expenses*..........................................     350,000
Miscellaneous*..............................................     164,909
                                                              ----------
          Total.............................................  $1,035,000
                                                              ==========
</TABLE>


- ---------------
* Estimated

ITEM 15.  INDEMNIFICATION OF DIRECTORS AND OFFICERS


     The articles of incorporation of the Company provide that directors of the
Company will not be personally liable for monetary damages to the Company 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 Company).



     The Company also has the obligation, pursuant to its 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.


                                      II-1
<PAGE>   133

ITEM 16.  EXHIBITS

EXHIBIT INDEX


<TABLE>
<CAPTION>
       EXHIBIT NO. AND DESCRIPTION
       ---------------------------
<S>    <C>
1.1    Underwriting Agreement.*
 4.1   Articles of Incorporation and Amendments.(1)
 4.2   By-laws.(2)
 4.3   Stockholders' Agreement dated as of November 26, 1997, among
       the Company, Maurice J. Gallagher, Jr., Nield J. Montgomery
       and certain investors identified therein.(1)
 4.4   Indenture dated as of September 29, 1997, between the
       Company and Marine Midland Bank, as Trustee.(1)
 4.5   Warrant Registration Rights Agreement dated as of September
       29, 1997, among the Company, Bear, Stearns & Co. Inc. and
       Furman Selz LLC.(1)
 4.6   Form of Amended and Restated Certificate of Designation of
       Series B Convertible Preferred Stock.
 4.7   Form of Amended and Restated Registration Rights Agreement
       dated             , 1999, among the Company and the
       purchasers of Series B Convertible Preferred Stock and
       Series C Convertible Preferred Stock.
 4.8   Form of Amended and Restated Securityholders' Agreement
       dated             , 1999, among the Company, the purchasers
       of Series B Convertible Preferred Stock and certain
       stockholders of the Company.
 4.9   Certificate of Change in Authorized Capital of MGC
       Communications, Inc.(3)
 4.10  Form of Certificate of Designation of Series C Convertible
       Preferred Stock.
 4.11  Certificate of Designation of Series D Convertible Preferred
       Stock.*
 5.1   Legal Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
       P.C.*
12.1   Ratio of earnings to fixed charges and preferred
       dividends(4)
23.1   Consent of Arthur Andersen LLP.
23.2   Consent of KPMG LLP
24.1   Power of Attorney(4)
</TABLE>


- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
    S-4, registration number 333-33837, filed with the Commission on August 18,
    1997, and amendments thereto.

(2) Incorporated by reference to the Company's Registration Statement on Form
    S-1, registration statement number 333-49085, filed with the Commission on
    April 1, 1998, and amendments thereto.


(3) Incorporated by reference to the Company's Registration Statement on Form
    S-3, registration statement number 333-79963, filed with the Commission on
    June 3, 1999, and amendments thereto.



(4) Previously filed with this registration statement.


 *  To be filed by amendment.

                                      II-2
<PAGE>   134

ITEM 17.  UNDERTAKINGS.

     The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933:

          (1) 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 Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.

          (2) 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 the initial bona fide offering thereof.

          (3) each filing of the Registrant's annual report pursuant to Section
     13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
     applicable, each filing of an employee benefit plan's annual report
     pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
     incorporated by reference in the registration statement 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 the
     initial bona fide offering thereof.


     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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. If 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, then 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.


                                      II-3
<PAGE>   135

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Rochester, State of New York on the 27th day of December, 1999.


                                          MGC COMMUNICATIONS, INC.

                                          By: /s/ ROLLA P. HUFF
                                          --------------------------------------
                                          Rolla P. Huff, President and
                                          Chief Executive Officer


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated.



<TABLE>
<S>                                                    <C>                           <C>

/s/ ROLLA P. HUFF                                                                    December 27, 1999
- ---------------------------------------------------
Rolla P. Huff, President
(Chief Executive Officer) and Director

/s/ MICHAEL R. DALEY                                                                 December 27, 1999
- ---------------------------------------------------
Michael R. Daley, Executive Vice President (Chief
Financial Officer)

/s/ LINDA M. SUNBURY                                                                 December 27, 1999
- ---------------------------------------------------
Linda M. Sunbury, Senior Vice President
(Principal Accounting Officer)

/s/ MAURICE J. GALLAGHER, JR.*                                                       December 27, 1999
- ---------------------------------------------------
Maurice J. Gallagher, Jr., Director
(Chairman of the Board)

/s/ TIMOTHY P. FLYNN*                                                                December 27, 1999
- ---------------------------------------------------
Timothy P. Flynn, Director

                                                                                     December   , 1999
- ---------------------------------------------------
Jack L. Hancock, Director

/s/ DAVID KRONFELD*                                                                  December 27, 1999
- ---------------------------------------------------
David Kronfeld, Director

                                                                                     December   , 1999
- ------------------------------------------
Mark J. Masiello, Director

/s/ THOMAS NEUSTAETTER*                                                              December 27, 1999
- ------------------------------------------
Thomas Neustaetter, Director

                                                                                     December   , 1999
- ------------------------------------------
Paul J. Salem, Director

* /s/ MICHAEL R. DALEY
- ------------------------------------------
By: Michael R. Daley as Attorney-in-fact
</TABLE>


                                      II-4
<PAGE>   136

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
                      EXHIBIT NO. AND DESCRIPTION                   PAGE
                      ---------------------------                   ----
<S>   <C>                                                           <C>
1.1   Underwriting Agreement.*
 4.1  Articles of Incorporation and Amendments.(1)
 4.2  By-laws.(2)
 4.3  Stockholders' Agreement dated as of November 26, 1997, among
      the Company, Maurice J. Gallagher, Jr., Nield J. Montgomery
      and certain investors identified therein.(1)
 4.4  Indenture dated as of September 29, 1997, between the
      Company and Marine Midland Bank, as Trustee.(1)
 4.5  Warrant Registration Rights Agreement dated as of September
      29, 1997, among the Company, Bear, Stearns & Co. Inc. and
      Furman Selz LLC.(1)
 4.6  Form of Amended and Restated Certificate of Designation of
      Series B Convertible Preferred Stock.
 4.7  Form of Amended and Restated Registration Rights Agreement
      dated             , 1999, among the Company and the
      purchasers of Series B Convertible Preferred Stock and
      Series C Convertible Preferred Stock.
 4.8  Form of Amended and Restated Securityholders' Agreement
      dated             , 1999, among the Company, the purchasers
      of Series B Convertible Preferred Stock and certain
      stockholders of the Company.
 4.9  Certificate of Change in Authorized Capital of MGC
      Communications, Inc.(3)
4.10  Form of Certificate of Designation of Series C Convertible
      Preferred Stock.
4.11  Certificate of Designation of Series D Convertible Preferred
      Stock.*
 5.1  Legal Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
      P.C.*
12.1  Ratio of earnings to fixed charges and preferred
      dividends.(4)
23.1  Consent of Arthur Andersen LLP.
23.2  Consent of KPMG LLP.
24.1  Power of Attorney.(4)
</TABLE>


- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
    S-4, registration number 333-33837, filed with the Commission on August 18,
    1997, and amendments thereto.

(2) Incorporated by reference to the Company's Registration Statement on Form
    S-1, registration statement number 333-49085, filed with the Commission on
    April 1, 1998, and amendments thereto.

(3) Incorporated by reference to the Company's Registration Statement on Form
    S-3, registration statement number 333-79963, filed with the Commission on
    May   , 1999, and amendments thereto.


(4) Previously filed with this registration statement.


 *  To be filed by amendment.

<PAGE>   1
                                                                    Exhibit 4.6



                            MGC COMMUNICATIONS, INC.

                      SERIES B CONVERTIBLE PREFERRED STOCK
                              AMENDED AND RESTATED
                           CERTIFICATE OF DESIGNATION

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

                Pursuant to [SECTIONS 78.195 AND 78.1955] of the
                 General Corporation Law of the State of Nevada

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

      MGC Communications, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Nevada, does hereby
certify that pursuant to the authority vested in the Board of Directors of the
Corporation by its Articles of Incorporation, as amended, and pursuant to the
provisions of [SECTIONS 78.195 AND 78.1955] of the General Corporation Law of
the State of Nevada, said Board of Directors, by unanimous written consent or at
a meeting duly called and held, adopted the following resolution which remains
in full force and effect as of the date hereof:

      RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation (the "Board of Directors") by its Articles of Incorporation,
as amended (hereinafter referred to as the "Articles of Incorporation") and
having obtained the consent of the holders of a majority of the outstanding
shares of Series B Preferred (as defined below), the Board of Directors does
hereby amend and restate in its entirety its resolution providing for the
creation and issuance of Series B Convertible Preferred Stock, par value $.001
per share, consisting of 5,278,000 shares, which shares shall have the following
designations, preferences and relative and other special rights, qualifications,
limitations and restrictions:

      1. Designation. The designation of such series is "Series B Convertible
Preferred Stock" (hereinafter in this Certificate of Designation called the
"Series B Preferred") and the number of shares constituting such series shall be
5,278,000, which number may be decreased (but not increased) by the Board of
Directors without a vote of stockholders; provided, however, that such number
may not be decreased below the number of then currently outstanding shares of
Series B Preferred, plus shares issuable upon the exercise of any then
outstanding options, warrants or rights to acquire Series B Preferred. All
capitalized terms used in this Certificate of Designation and not otherwise
defined shall have the meaning given to such terms in Section 12 hereof.

      2.  Dividend Rights.

            (a) Holders of Series B Preferred, prior to and in preference to the
holders of Junior


<PAGE>   2


Securities, will be entitled to receive, out of funds legally available for such
purpose, cumulative dividends as provided in this Section 2. Dividends on each
share of Series B Preferred shall accrue at the rate of 10% per annum on the sum
of (i) the Series B Liquidation Value and (ii) all accrued and unpaid dividends
on such share of Series B Preferred from the date of issuance. Such dividends
will be calculated and compounded annually on December 31 of each year (each a
"dividend date") in respect of the prior twelve month period (the initial such
calculation to be made at the same rate for the number of days elapsed from the
date of issue of Series B Preferred to and including the 31st day of December,
1999). Such dividends shall commence to accrue on each share of Series B
Preferred from the date of issuance thereof whether or not declared by the Board
of Directors, and whether or not there are profits, surplus or other funds of
the Corporation legally available for the payment of dividends, and shall
continue to accrue thereon until the earlier of (x) the date the Series B
Liquidation Value of such share (plus all accrued and unpaid dividends thereon)
is paid in full and (y) a proper election of the Board of Directors pursuant to
Section 2(b) below. For purposes of determining the amount of dividends accrued
on the Series B Preferred pursuant to this Section 2(a) in connection with the
sale, conversion, redemption or repurchase of any Series B Preferred which may
occur between two dividend dates, the applicable dividend rate for such period
shall be multiplied by a fraction, the numerator of which is the actual number
of days elapsed in the then current annual period and the denominator of which
is the total number of days comprising such annual period. Except as otherwise
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to the Series C Preferred and Series B
Preferred, such payment shall be distributed ratably among the holders of Series
C Preferred, Series B Preferred and such other class or series of the
Corporation's Preferred Stock which by its terms is then entitled to receive
dividends on a parity with the Series B Preferred and Series C Preferred in
proportion to the full dividend amount each such holder would be entitled to
receive upon payment of all accrued dividends on the Series C Preferred, Series
B Preferred and such other Preferred Stock.

            (b) At any time on or after November 21, 1999, upon the written
election of the Board of Directors through delivery of the Threshold Notice to
each holder of Series B Preferred within two (2) business days after the date of
such election, dividends will no longer accrue on the Series B Preferred (but
those dividends which had accumulated to the date of such election will be
preserved) if the Market Threshold has been reached. In the Threshold Notice,
the Board shall certify its calculation of the Market Threshold, and provide
each holder with such supporting documentation as such holder may reasonably
request.

      3. Voting Rights.

            (a) Voting Generally. Except as otherwise required by law or as
provided in this Section 3, the Series B Preferred will vote together with the
Common Stock, and not as a separate class, at any annual or special meeting of
stockholders, and may act by written consent in the same manner as the Common
Stock. In either case, each holder of shares of Series B Preferred will be
entitled to such number of votes as will be equal to the number of whole shares
of Common Stock into which such holder's aggregate number of shares of Series B
Preferred are convertible pursuant to Section 5 hereof (assuming only for
purposes of this calculation that


                                      -2-
<PAGE>   3


accrued and unpaid dividends on such shares are not subject to conversion)
immediately after the close of business on the record date fixed for such
meeting or the effective date of such written consent.

            (b) Separate Vote of Series B Preferred. So long as (i) not less
than one-third of the number of shares of Series B Preferred initially issued
remain outstanding or (ii) the number of shares of Series B Preferred
outstanding represents not less than five percent (5%) of the outstanding Common
Stock, assuming conversion of all outstanding shares of Series B Preferred, the
vote or written consent of a Majority of the Series B Holders shall be necessary
for effecting or validating the following actions (each a "Restricted Action"):

                  (i)   increase or decrease (other than by redemption or
                        conversion) the total number of authorized shares of, or
                        issue any series of, Preferred Stock which is senior in
                        respect of dividends, liquidation or otherwise to or on
                        a pari passu basis with the Series B Preferred;

                  (ii)  permit the Corporation or any Subsidiary to sell, convey
                        or otherwise dispose of assets having a value in excess
                        of $5,000,000; or merge into or consolidate with any
                        other Person (other than the Corporation or a
                        Subsidiary); or effect a Sale of the Company;

                  (iii) voluntarily liquidate, dissolve or wind up the
                        Corporation;

                  (iv)  alter or change the rights, preferences or privileges of
                        the shares of Series B Preferred so as to affect
                        adversely such shares;

                  (v)   declare or pay any dividends or make other distribution
                        on any Junior Securities except for (x) the repurchase
                        of any Common Stock subject to a repurchase right for
                        terminated employees or independent contractors and (y)
                        issuances of Common Stock in satisfaction of accrued and
                        unpaid dividends on Junior Securities; provided, such
                        issuances shall not affect the antidilution rights of
                        the holders of Series B Preferred provided for in
                        Section 5 hereof;

                  (vi)  permit the Corporation or any Subsidiary to enter into
                        any transaction or series of related transactions with
                        any Affiliate of the Corporation, other than those
                        directly related to (1) pay or benefits (including stock
                        options) provided to Affiliates who are employees or
                        Directors in accordance with existing agreements or past
                        practices or approved with Required Board Approval; (2)
                        the lease of additional office space in the Las Vegas
                        metropolitan area on terms consistent with the existing
                        leases to which the Corporation is a party, and as
                        approved by the Required Board Approval; or (3) any
                        other arms-length, commercially reasonable transactions
                        approved by the disinterested Directors in an amount not
                        to exceed $100,000 in any year;


                                      -3-
<PAGE>   4


                  (vii) permit the Corporation or any Subsidiary to acquire the
                        assets or securities of any Person except for
                        acquisitions involving cash, securities or other
                        property with an aggregate Fair Market Value of less
                        than (x) $10 million for any single acquisition and (y)
                        $20 million in the aggregate for all such acquisitions
                        during any 12-month period;

                  (viii) permit the Corporation or any Subsidiary to incur
                        additional Indebtedness (other than Indebtedness
                        incurred as a result of the refinancing of existing
                        Indebtedness, provided the total outstanding
                        Indebtedness does not increase as a result of such
                        refinancing) in excess of (x) an aggregate at any one
                        time outstanding for the Corporation and its
                        Subsidiaries of up to $100,000,000 until May 5, 2000
                        plus accrued and unpaid interest on such Indebtedness,
                        and (y) thereafter any Indebtedness in addition to the
                        highest amount outstanding during the 12 month period
                        ending May 5, 2000 of an aggregate at any one time
                        outstanding in excess of $20,000,000 (plus accrued and
                        unpaid interest thereon) for the Corporation and its
                        Subsidiaries, provided that for the purposes of this
                        Section 3(b)(viii), Indebtedness shall not be deemed to
                        include purchase money financing for capital
                        expenditures in a budget approved by the Required Board
                        Approval;

                  (ix)  make any material changes to the Corporation's then
                        current business plan;

                  (x)   hire a chief executive officer of the Corporation;

                  (xi)  organize any new direct or indirect Subsidiaries of the
                        Corporation other than wholly-owned Subsidiaries or any
                        joint ventures between the Corporation and a third party
                        that involve the diversion of assets or business of the
                        Corporation to the joint venture entity, amend or modify
                        any such joint venture or partnership agreement to which
                        the Corporation or any Subsidiary is a party or
                        restructure any Subsidiary, partnership or such joint
                        venture involving the Corporation or any Subsidiary; or

                  (xii) issue Additional Shares of Common Stock (or issue other
                        rights that, pursuant to Section 5(k), are deemed to
                        constitute Additional Shares of Common Stock) to the
                        extent that as a result of such issuance (or deemed
                        issuance) the Series B Conversion Price would be reduced
                        to a price less than the Series B Liquidation Value.

            (c) The holders of the requisite percentage of Series B Preferred
shall either approve or reject a Restricted Action described in Section
3(b)(vii)-(xii) (a "Special Restricted Action") within twenty (20) business days
of receipt by the holders of Series B Preferred of written notice


                                      -4-
<PAGE>   5


and a reasonably detailed description of the proposed Restricted Action;
provided that the failure of the holders of Series B Preferred to approve or
reject the Special Restricted Action within such time period shall not be deemed
to be an approval thereof.

            (d) In the event the Series B Holders shall reject a Special
Restricted Action, the Corporation shall have the right, at the written election
of the Board, notice of which (the "Company Redemption Notice") shall be
promptly sent to the Series B Holders, to initiate an Optional Redemption, which
will be subject to the terms and conditions contained in Section 6. In the
Company Redemption Notice, the Corporation shall specify the Optional Redemption
Date for purposes of Section 6, which Optional Redemption Date shall not be more
than sixty (60) days from the date of the Company Redemption Notice. Within ten
(10) business days of the receipt of the Company Redemption Notice by the Series
B Holders, a Majority of the Series B Holders shall either (i) acknowledge and
agree in writing to the Optional Redemption or (ii) approve the Special
Restricted Action that is the subject of the Optional Redemption, in which event
the Optional Redemption shall be terminated. In the event the Special Restricted
Action is rejected by the Series B Holders but such Special Restricted Action is
not effected by the Corporation within ninety (90) days of the delivery of the
Company Redemption Notice, and the Optional Redemption has not yet been
consummated, a Majority of the Series B Holders may elect in writing to void the
Optional Redemption and return to the status quo ante.

            (e) In the event the Corporation takes any Restricted Action without
obtaining the approval of the holders of the Series B Preferred as required by
Section 3(b) (an "Event of Non-Compliance") and a Majority of the Series B
Holders gives written notice to the Board of Directors of the Corporation of
such an Event of Non-Compliance, the Corporation shall then have thirty (30)
days to take such action as is necessary to cure such default to the
satisfaction of a Majority of the Series B Holders. If the Corporation is unable
to cure the Event of Non-Compliance, a Majority of the Series B Holders may then
elect to initiate a Sale of the Company by submitting written notice of that
election to the Board of Directors of the Corporation (a "Sale Notice"). The
Board of Directors will then have an obligation to use its best efforts to
effect a Sale of the Company; provided that within twenty (20) business days of
its receipt of a Sale Notice electing a Sale of the Company, the Board may elect
to initiate an Optional Redemption pursuant to and subject to the terms and
conditions of Section 6 hereof in lieu of a Sale of the Company by providing a
Company Redemption Notice to the Series B Holders. In the Company Redemption
Notice, the Corporation shall specify the Optional Redemption Date for purposes
of Section 6, which Optional Redemption Date shall not be more than sixty (60)
days from the date of the Company Redemption Notice.

            (f) In the event a Sale of the Company has not been consummated
within six (6) months of a Sale Notice electing a Sale of the Company (and the
Corporation had not elected to initiate an Optional Redemption in lieu of a Sale
of the Company within the time period set forth in Section 3(e)), the Series B
Holders, voting as a separate class, will then have the right to elect that
number of the Directors of the Corporation as shall constitute a majority of the
total number of Directors of the Corporation as shall from time to time
constitute the Board; provided, however, in the event a Majority of Series C
Holders has also initiated a Sale of the Company pursuant to Section 3(e) of the
Series C Certificate, then the Series B Holders and Series C


                                      -5-
<PAGE>   6


Holders, voting together as a single class, will have the right to elect that
number of Directors of the Corporation as shall constitute a majority of the
total number of Directors as shall from time to time constitute the Board. A
special meeting of the stockholders shall be called by the Corporation from time
to time at the written instruction of a Majority of the Series B Holders or a
Majority of the Series C Holders for the purpose of electing such Directors.

      4. Liquidation Rights. Upon any liquidation, dissolution or winding up of
the Corporation, voluntary or involuntary:

            (a) The holders of Series B Preferred will be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the Corporation to the holders of the Junior Securities by reason of
their ownership thereof, but subsequent to the repurchase or payment in full or
other satisfaction of the Senior Secured Notes, an amount per share of Series B
Preferred equal to the greater of (A) the Series B Liquidation Value plus
accrued but unpaid dividends on each share of Series B Preferred then held by
such holder or (B) the amount such holder would have received in such
liquidation, dissolution, winding up, merger or Sale of the Company if each
share of Series B Preferred had been converted to Common Stock pursuant to
Section 5 immediately prior to such event. For the avoidance of doubt, in
determining the amount a holder of Series B Preferred would have received in any
liquidation, dissolution, winding up, merger or Sale of the Company under clause
(B) of the preceding sentence, except as set forth in the immediately succeeding
sentence hereof, all accrued dividends on the Series B Preferred shall be
assumed to have been paid to the holders thereof immediately prior to such event
in the manner provided for in Section 5(e) hereof. Notwithstanding the
foregoing, all or a portion of accrued but unpaid dividends shall be
extinguished and shall not be payable upon any liquidation, dissolution or
winding up if, and to the extent that, (i) such liquidation, dissolution or
winding up occurs on or before May 4, 2002, and (ii) the payment of dividends
would result in each holder of Series B Preferred receiving cash and/or Freely
Tradeable Securities with a Fair Market Value in an amount that exceeds on a per
share basis 2.5 times the Series B Liquidation Value (a "Qualified Return").

            If the assets of the Corporation are insufficient to make payment
in full to all holders of Series B Preferred, Series C Preferred and any other
class or series of the Corporation's Preferred Stock which by its terms is on a
parity upon a liquidation, dissolution or winding up with the Series B Preferred
and Series C Preferred ("Parity Preferred") of the full preferential amounts to
which they may be entitled upon any liquidation, dissolution or winding up
(including a Sale of the Company deemed a liquidation pursuant to Section 4(b)
hereof and Section 4(b) of the Series C Certificate), such assets shall be
distributed ratably (A) first, to satisfy all accrued and unpaid dividends on
the Series B Preferred, Series C Preferred and Parity Preferred (the "Accrued
Dividend Amounts"), and if such assets are insufficient to satisfy the Accrued
Dividend Amounts in full, then said assets shall be distributed among holders of
Series B Preferred, Series C Preferred and Parity Preferred Stock in proportion
to the full amount each such holder would otherwise be entitled to receive in
respect of the Accrued Dividend Amounts and (B) after the payment or
satisfaction in full of the Accrued Dividend Amounts, the balance of such assets
shall be distributed ratably among the holders of Series B Preferred, Series C
Preferred and Parity Preferred in proportion to the full preferential amounts
(exclusive of accrued dividends) each such


                                      -6-
<PAGE>   7


holder would otherwise be entitled to receive. In any distribution of assets of
the Corporation in connection with any liquidation, dissolution, winding up,
merger or Sale of the Company, the preferential amounts distributable to the
holders of Series B Preferred and Series C Preferred shall, unless a Majority of
the Series B Holders and a Majority of the Series C Holders agree otherwise, be
satisfied to the maximum extent possible with cash, or to the extent there is
insufficient cash available, cash to the maximum extent available and the
balance in Freely Tradeable Securities.

            (b) At the written election of the holders of a Majority of the
Series B Preferred, a Sale of the Company shall be deemed to be a liquidation,
dissolution or winding up of the Corporation, as those terms are used in this
Section 4. In the event a Majority of the Series B Holders elect to treat such
Sale of the Company as a liquidation, dissolution or winding up of the
Corporation, the holders of shares of Series B Preferred shall have the right to
preference (on a pari passu basis with holders of Series C Preferred) upon the
distribution of assets or the proceeds to be received as provided in this
Section 4.

            (c) After setting apart or paying in full the preferential amounts
due to the holders of Series B Preferred, Series C Preferred and Parity
Preferred pursuant to subparagraph (a) of this Section 4, the remaining assets
of the Corporation available for distribution to shareholders, if any, shall be
distributed to the other stockholders of the Corporation as their respective
interests may appear.

            (d) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the Corporation shall, within ten
(10) days after the date the Board of Directors approves such action, or twenty
(20) days prior to any shareholders' meeting called to approve such action, or
twenty (20) days after the commencement of an involuntary proceeding, whichever
is earlier, give each holder of shares of Series B Preferred initial written
notice of the proposed action, including a description of the stock, cash and
property to be received by the holders of shares of Series B Preferred upon
consummation of the proposed action and the date of delivery thereof.

            (e) The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation before the
expiration of thirty (30) days after the mailing of the initial notice or ten
(10) days after the mailing of any subsequent written notice, whichever is
later.

            (f) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation (other than a deemed liquidation
upon a Sale of the Company pursuant to Section 4(b)) which will involve the
distribution of assets other than cash and Freely Tradeable Securities, the
Corporation shall promptly determine the Fair Market Value of such other assets
to be distributed to the holders of shares of Series B Preferred, Series C
Preferred and the holders of shares of Common Stock.

      5. Conversion Rights.


                                      -7-
<PAGE>   8


            The holders of the Series B Preferred will have the following rights
with respect to the conversion of the Series B Preferred into shares of Common
Stock:

            (a) Optional Conversion. Subject to and in compliance with the
provisions of this Section 5, any shares of Series B Preferred may, at the
option of the holder, be converted at any time into fully-paid and nonassessable
shares of Common Stock (an "Optional Conversion"). The number of shares of
Common Stock to which a holder of Series B Preferred will be entitled upon
conversion will be the product obtained by multiplying the "Series B Conversion
Rate" then in effect (determined as provided in Section 5(c)), by the number of
shares of Series B Preferred being converted.

            (b) Mandatory Conversion.

                  (1) At any time commencing on the earlier of (i) May 24, 2000,
or (ii) the date on which either the Series B Holders or Series C Holders
exercise demand registration rights under Section 2.1(a) of that certain Amended
and Registration Rights Agreement dated the date hereof, as such agreement may
be amended from time to time, upon the written election of the Board of
Directors of the Corporation, each share of Series B Preferred shall be
automatically converted into shares of Common Stock at the then-effective Series
B Conversion Rate if the Market Threshold has been achieved, and the Board makes
this election and provides the Threshold Notice to the Series B Holders within
60 days of the first day as of which the Market Threshold had been achieved (a
"Mandatory Conversion"). In the Threshold Notice, the Board shall certify its
calculation of the Market Threshold, and provide each holder with such
supporting documentation as such holder may reasonably request.

                  (2) Upon the occurrence of the events specified in paragraph
(1) above, the outstanding shares of Series B Preferred will be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation will
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Series B Preferred are either delivered to the Corporation or its transfer agent
as provided in Section 5(e) below.

            (c) Conversion Rate. The conversion rate in effect at any time for
conversion of the Series B Preferred (the "Series B Conversion Rate") will be
the quotient obtained by dividing Nine Dollars ($9.00) by the "Series B
Conversion Price," calculated as provide in Section 5(d).

            (d) Series B Conversion Price. (i) The conversion price for the
Series B Preferred will initially be Nine Dollars ($9.00) (the "Series B
Conversion Price"). Such initial Series B Conversion Price will be adjusted from
time to time in accordance with this Section 5. All references to the Series B
Conversion Price herein will mean the Series B Conversion Price, as so adjusted.

            (e) Mechanics of Conversion. Each holder of Series B Preferred who
desires or is obligated to convert the same into shares of Common Stock pursuant
to this Section 5 will


                                      -8-
<PAGE>   9


surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or any transfer agent for the Series B Preferred and will
give written notice to the Corporation at such office that such holder elects or
is obligated to convert the same. Such notice will state the number of shares of
Series B Preferred being converted. Thereupon, the Corporation will promptly
issue and deliver at such office to such holder a certificate or certificates
for the number of shares of Common Stock which equals the number of shares of
Common Stock to which such holder is entitled under the then-effective Series B
Conversion Rate. In addition, upon any such conversion the holder of the shares
of Series B Preferred being converted shall be issued that number of shares of
Common Stock as is equal to the greater of (i) the number of shares of Common
Stock whose Fair Market Value equals the amount of all accrued but unpaid
dividends on the shares of Series B Preferred being converted and (ii) the
number of shares of Common Stock obtained by dividing the aggregate amount of
accrued but unpaid dividends on the shares of Series B Preferred being converted
by the Series B Conversion Price then in effect; provided, however, that (A) all
of the accrued but unpaid dividends shall be extinguished and shall not be
payable with respect to shares of Series B Preferred in the event such shares
are being converted on or before May 4, 2002 pursuant to (x) a Mandatory
Conversion or (y) an Optional Conversion within 60 days of the first day as of
which the Market Threshold had been achieved; and (B) the accrued but unpaid
dividends shall be extinguished and shall not be payable in an Optional
Conversion that takes place on or before May 4, 2002 as part of a Sale of the
Company if, and to the extent that, the payment of dividends would result in
each holder receiving an amount of cash and/or Freely Tradeable Securities with
a Fair Market Value that exceeds a Qualified Return. In addition, the
Corporation shall promptly deliver to the holder of Series B Preferred being
converted a certificate representing those shares of Series B Preferred, if any,
that were not converted. Such conversion will be deemed to have been made at the
close of business on the date of such surrender of the certificates representing
the shares of Series B Preferred to be converted in the event of a conversion
pursuant to Section 5(a) hereof or, in the case of a Mandatory Conversion, upon
the occurrence of the events specified in Section 5(b)(1) hereof, and the Person
entitled to receive the shares of Common Stock issuable upon such conversion
will be treated for all purposes as the record holder of such shares of Common
Stock on such date.

            (f) Adjustment for Stock Splits and Combinations. If the Corporation
at any time or from time to time after the Original Issue Date effects a
subdivision of the outstanding Common Stock, the Series B Conversion Price, in
effect immediately before that subdivision will be proportionately decreased.
Conversely, if the Corporation at any time or from time to time after the
Original Issue Date combines the outstanding shares of Common Stock into a
smaller number of shares, the Series B Conversion Price in effect immediately
before the combination will be proportionately increased. Any adjustment under
this Section 5(f) will become effective at the close of business on the record
date as of which subdivision or combination becomes effective.

            (g) Adjustment for Common Stock Dividends and Distributions. If the
Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, in each such event the Series B Conversion Price that is
then in effect will be decreased as of the time of such issuance or, in the
event such record date is fixed, as of the close of business on such record
date, by multiplying the Series B


                                      -9-
<PAGE>   10


Conversion Price then in effect by a fraction (1) the numerator of which is the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(2) the denominator of which is the total number of shares of Common Stock
issued and outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of Common Stock
issuable in payment of such dividend or distribution; provided, however, that if
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Series B
Conversion Price will be recomputed accordingly as of the close of business on
such record date and thereafter the Series B Conversion Price will be adjusted
pursuant to this Section 5(g) to reflect the actual payment of such dividend or
distribution.

            (h) Adjustments for Other Dividends and Distributions. If the
Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, in each such event provision
will be made so that the holders of the Series B Preferred will receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of the other securities of the Corporation
which they would have received had their Series B Preferred been converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 5 with respect to the rights of the holders of the Series B Preferred or
with respect to such other securities by their terms.

            (i) Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series B Preferred is changed into the same
or a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 5), in
any such event each holder of Series B Preferred will have the right thereafter
to convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or the change
by holders of the maximum number of shares of Common Stock into which such
shares of Series B Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.

            (j) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Original Issue Date there is a
merger, consolidation, recapitalization, reclassification, sale of all or
substantially all of the Corporation's assets or reorganization involving the
Common Stock (collectively, a "capital reorganization") (other than a Sale of
the Company provided for in Section 4(b) or a merger, consolidation, sale of
assets, recapitalization, subdivision, combination, reclassification, exchange
or substitution of shares provided for elsewhere in this Section 5), as a part
of such capital reorganization, provision will be made so that the holders of
the Series B Preferred will thereafter be entitled to receive upon conversion of


                                      -10-
<PAGE>   11


the Series B Preferred the number of shares of stock or other securities or
property of the Corporation to which a holder of the number of shares of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment will be made in the
application of the provisions of this Section 5 with respect to the rights of
the holders of Series B Preferred after the capital reorganization to the end
that the provisions of this Section 5 (including adjustment of the Series B
Conversion Price then in effect and the number of shares issuable upon
conversion of the Series B Preferred) will be applicable after that event and be
as nearly equivalent as practicable.

            (k) Sale of Shares Below Series B Conversion Price.

                  (1) If at any time or from time to time after the Original
Issue Date, the Corporation issues or sells, or is deemed by the provisions of
this Section 5(k) to have issued or sold, Additional Shares of Common Stock (as
hereinafter defined), other than as a dividend or other distribution on any
class of stock as provided in Section 5(g) above, and other than a subdivision
or combination of shares of Common Stock as provided in Section 5(f) above for
an Effective Price (as hereinafter defined) less than the then effective Series
B Conversion Price, then and in each such case, the then existing Series B
Conversion Price will be reduced, as of the opening of business on the date of
such issue or sale, to a price (but in no event to a price less than the Series
B Liquidation Value) determined by dividing (a) the sum of (1) the product
derived by multiplying (i) the Series B Conversion Price in effect immediately
prior to such issue or sale times (ii) the number of shares of Common Stock
deemed outstanding (as defined below) immediately prior to such issue or sale,
plus (2) the consideration, if any, received (or deemed received pursuant to
subsection (k)(2)) by the Corporation upon such issue or sale, by (b) the number
of shares of Common Stock deemed outstanding (as defined below) immediately
after such issue or sale. For the purposes of the preceding sentence, the number
of shares of Common Stock deemed to be outstanding as of a given date will be
the sum of (a) the number of shares of Common Stock actually outstanding, (b)
the number of shares of Common Stock into which the then outstanding Series B
Preferred could be converted if fully converted on the day immediately preceding
the given date, and (c) the number of shares of Common Stock that could be
obtained through the exercise or conversion in full of all other rights,
options, warrants and convertible securities on the day immediately preceding
the given date, regardless of whether or not such securities are fully
exercisable for or convertible into Common Stock at such time.

                  (2) For the purpose of making any adjustment required under
this Section 5(k), the consideration received by the Corporation for any issue
or sale of securities will (a) to the extent it consists of cash, be computed at
the net amount of cash received by the Corporation after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Corporation in connection with such issue or sale but without deduction
of any expenses payable by the Corporation, (b) to the extent it consists of
property other than cash, be computed at the Fair Market Value of that property,
and (c) if Additional Shares of Common Stock, Convertible Securities (as
hereinafter defined) or rights or options to purchase either Additional Shares
of Common Stock or Convertible Securities are issued or sold together with other
stock or securities or other assets of the Corporation for a consideration that


                                      -11-
<PAGE>   12


covers both, be computed as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors with
Required Board Approval to be allocable to such Additional Shares of Common
Stock, Convertible Securities or rights or options.

                  (3) For the purpose of the adjustment required under this
Section 5(k), if the Corporation issues or sells any rights or options for the
purchase of, or stock or other securities exchangeable for or convertible into,
Additional Shares of Common Stock (such exchangeable or convertible stock or
securities being herein referred to as "Convertible Securities") and if the
Effective Price of such Additional Shares of Common Stock is less than the
Series B Conversion Price in effect, the Corporation will be deemed to have
issued at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable upon
exercise or conversion or exchange thereof and to have received consideration
for the issuance of such shares an amount equal to the total amount of
consideration, if any, received by the Corporation for the issuance of such
rights or options or Convertible Securities, plus, in the case of such rights or
options, the minimum amounts of consideration, if any, payable to the
Corporation upon the exercise of such rights or options, plus in the case of
Convertible Securities, the minimum amounts of consideration, if any, payable to
the Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion or exchange
thereof; provided that if in the case of Convertible Securities the minimum
amount of such consideration cannot be ascertained, but are a function of
antidilution or similar protective clauses, the Corporation shall be deemed to
have received the minimum amounts of consideration without references to such
clauses; provided further that if the minimum amount of consideration payable to
the Corporation upon the exercise or conversion of rights, options or
Convertible Securities is reduced over time or on the occurrence or
non-occurrence of specified events, including by reason of antidilution
adjustments, the Effective Price will be recalculated using the figure to which
such minimum amount of consideration is reduced; provided further that if the
minimum amount of consideration payable to the Corporation upon the exercise or
conversion of such rights, options or Convertible Securities is subsequently
increased, the Effective Price will be again recalculated using the increased
minimum amount of consideration payable to the Corporation upon the exercise or
conversion of such rights, options or Convertible Securities. No further
adjustment of the Series B Conversion Price, as adjusted in each case upon the
issuance of such rights, options or Convertible Securities, will be made as a
result of the actual issuance of Additional Shares of Common Stock on the
exercise of any such rights or options or the exchange or conversion of any such
Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire without
having been exercised, the Series B Conversion Price, as adjusted upon the
issuance of such rights, options or Convertible Securities, will be readjusted
to the Series B Conversion Price that would have been in effect had an
adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or options or upon such conversion
and that such Additional Shares of Common Stock, if any, were issued or sold for
the consideration, if any, actually received by the Corporation for the granting
of all such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually converted,
plus the consideration, if any, actually received by the Corporation (other than
by cancellation of liabilities or obligations evidenced by such Convertible


                                      -12-
<PAGE>   13


Securities) on the conversion of such Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series B Preferred.

                  (4) "Additional Shares of Common Stock" means all shares of
Common Stock issued by the Corporation or deemed to be issued pursuant to this
Section 5(k) whether or not subsequently reacquired or retired by the
Corporation other than (A) shares of Common Stock issued upon conversion of
Series B Preferred and Series C Preferred, (B) options to purchase up to Two
Million Six Hundred Forty Thousand (2,640,000) shares of Common Stock granted to
employees, officers or directors of or consultants or advisors to the
Corporation or any Subsidiary pursuant to the Stock Option Plan and the shares
of Common Stock issuable upon exercise of such options, or such increased number
of shares of Common Stock as has been approved by the Required Board Approval,
(C) Convertible Securities outstanding as of the Original Issue Date and the
shares of Common Stock issuable upon exercise or conversion of such Convertible
Securities and (D) Common Stock issued in satisfaction of accrued and unpaid
dividends on the Series B Preferred, Series C Preferred and any other class or
series of the Corporation's Preferred Stock the rights, privileges and other
terms of which have been approved in writing by the Majority of the Series B
Holders. The "Effective Price" of Additional Shares of Common Stock means the
quotient determined by dividing (i) the aggregate consideration received, or
deemed to have been received by the Corporation under this Section 5(k), for the
issuance of such Additional Shares of Common Stock, by (ii) the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold, by the Corporation under this Section 5(k).

            (l) Accountants' Certificate of Adjustment. In each case of an
adjustment or readjustment of the Series B Conversion Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series B Preferred, the Corporation, at its expense, will compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and will mail such
certificate, by first class mail, postage prepared, to each registered holder of
Series B Preferred at the holder's address as shown in the Corporation's books.
The certificate will set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based, including
a statement of (1) the Series B Conversion Price at the time in effect, and (2)
the type and amount, if any, of other property that at the time would be
received upon conversion of the Series B Preferred.

            (m) Notices of Record Date. Upon (1) any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution (other than in connection with the declaration and payment or
regular quarterly dividends in Common Stock on the Corporation's Series D
Convertible Preferred Stock), or (2) any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital stock of
the Corporation, any merger or consolidation of the Corporation with or into any
other corporation, or any other Sale of the Company, or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation will mail to each holder of Series B Preferred at least twenty (20)
days prior to the record date specified therein a notice specifying (1) the date
on which any such record is to be taken for the purpose of such dividend or
distribution and a description of such


                                      -13-
<PAGE>   14


dividend or distribution, (2) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, Sale of the Company,
dissolution, liquidation or winding up is expected to become effective, and (3)
the date, if any, that is to be fixed as to when the holders of record of Common
Stock (or other securities) will be entitled to exchange their shares of Common
Stock (or other securities) for securities or other property deliverable upon
such reorganization, reclassification, transfer, consolidation, merger, Sale of
the Company, dissolution, liquidation or winding up.

            (n) Fractional Shares. No fractional shares of Common Stock will be
issued upon conversion of Series B Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series B Preferred by a holder thereof will be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional shares. If, after the aforementioned aggregation, the conversion
would result in the issuance of any fractional share, the Corporation will, in
lieu of issuing any fractional share, pay cash equal to the product of such
fraction multiplied by the Common Stock's Fair Market Value on the date of
conversion.

            (o) Reservation of Stock Issuable Upon Conversion. The Corporation
will at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series B Preferred, such number of its shares of Common Stock
as will from time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred. If at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all then outstanding shares of Series B Preferred, the Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as will be sufficient for such purpose.

            (p) Notices. Any notice required by the provisions of this
Certificate of Designation to be given to the holders of shares of the Series B
Preferred will be deemed given upon the earlier of actual receipt or seventy-two
(72) hours after the same has been deposited in the United States mail, by
certified or registered mail, return receipt requested, postage prepaid, and
addressed to each holder of record at the address of such holder appearing on
the books of the Corporation.

            (q) Payment of Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series B Preferred excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series B Preferred
so converted were registered.

      6. Optional Redemption.

            (a) At any time after May 4, 2005, or upon a Sale of the Company
(but in no event prior to the Corporation's repurchase or payment or
satisfaction in full of the Senior Secured


                                      -14-
<PAGE>   15


Notes), a Majority of the Series B Holders may require the Corporation to redeem
all, but not less than all, of the outstanding shares of Series B Preferred (an
"Optional Redemption") by notifying the Corporation in writing of their intent
to exercise the rights afforded by this Section 6(a) and specifying a date not
less than 90 nor more than 120 days from the date of such notice on which the
outstanding shares of Series B Preferred shall be redeemed (the "Optional
Redemption Date"). Upon receipt of such notice, the Corporation shall promptly
notify the remaining holders of Series B Preferred of the Optional Redemption
Date. The recipients of such notice shall be required to participate in the
Optional Redemption. The Corporation shall redeem on the Optional Redemption
Date all the shares of Series B Preferred. Each share of Series B Preferred to
be redeemed shall be redeemed for an amount in cash and/or Freely Tradeable
Securities with a Fair Market Value equal to, the greater of (A) the sum of the
Series B Liquidation Value and all accrued dividends (provided that all or a
portion of the accrued but unpaid dividends shall be extinguished and shall not
be payable if, and to the extent that (x) the redemption occurs on or before May
4, 2002 and (y) the payment of dividends would result in each holder of Series B
Preferred receiving in cash an amount that exceeds a Qualified Return), and (B)
the Fair Market Value of the Common Stock into which the Series B Preferred is
then convertible pursuant to Section 5 hereof, including shares of Common Stock
issuable upon conversion in respect of accrued dividends to the extent provided
in Section 5(e) hereof (the "Optional Redemption Price").

            (b) In the event the Optional Redemption is occurring pursuant to
Section 3(d) or Section 3(e), each share of Series B Preferred to be redeemed
shall be redeemed for an amount in cash and/or Freely Tradeable Securities with
a Fair Market Value equal to, the greater of (i) the Optional Redemption Price
and (ii) the price per share set forth in the table below, based on the year
during which the redemption occurs (the year number being the time period prior
to an anniversary of the Original Issue Date) and calculated as a multiple of
the Series B Liquidation Value:

<TABLE>
<CAPTION>
                  Year                      Price
                  ----                      -----
                  <S>                       <C>
                   1                         2.5
                   2                         2.5
                   3                           3
                   4                         3.5
                   5                           4
                   6                         4.5
</TABLE>

            Notwithstanding anything herein to the contrary, an Optional
Redemption pursuant to Section 3(d) or Section 3(e) shall not take place prior
to the Corporation's repurchase or payment or satisfaction in full of the Senior
Secured Notes, or the Corporation's compliance with, or its receipt of the
requisite consent from the holders of the Senior Secured Notes under, the
Indenture.

            (c) If the funds of the Corporation legally available for redemption
of shares of Series B Preferred on an Optional Redemption Date and, if
applicable, the shares of Series C Preferred entitled to redemption as of such
date pursuant to Section 6 of the Series C Certificate


                                      -15-
<PAGE>   16


and/or shares of Parity Preferred then entitled to redemption are insufficient
to redeem the total number of outstanding shares of Series B Preferred and, if
applicable, the shares of Series C Preferred and Parity Preferred entitled to
redemption, the holders of shares of Series B Preferred and, if applicable, the
shares of Series C Preferred and Parity Preferred entitled to redemption shall
share ratably in any funds legally available for redemption of such shares
according to the respective amounts that would be payable with respect to the
full number of shares owned by them if all such outstanding shares were redeemed
in full. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of such shares of Series B Preferred and,
if applicable, the shares of Series C Preferred and Parity Preferred, such funds
will be used at the earliest permissible time, to redeem the balance of such
shares, or such portion thereof for which funds are then legally available. The
Corporation shall be obligated to use its best efforts to take such actions as
may be necessary (including, without limitation, the issuance of additional
equity securities, the revaluation or recapitalization of the Corporation or the
consummation of a Sale of the Company) in order to permit the full and timely
redemption of the shares of Series B Preferred and Series C Preferred entitled
to redemption.

            (d) If, for any reason, the Corporation fails to redeem all shares
of Series B Preferred entitled to redemption on an Optional Redemption Date, and
such failure continues for a period of six (6) months from the Optional
Redemption Date, then the Series B Holders, voting as a separate class, shall
have the right to elect that number of Directors of the Corporation as shall
constitute a majority of the total number of Directors of the Corporation as
shall from time to time constitute the Board; provided, if the Corporation has
also failed to redeem shares of Series C Preferred in accordance with Section 6
of the Series C Certificate and the holders of Series C Preferred would
otherwise have the right to elect a majority of the Corporation's Directors,
then the Series B Holders and Series C Holders, voting together as a single
class, shall have the right to elect that number of Directors of the Corporation
as shall constitute a majority of the total number of Directors of the
Corporation as shall from time to time constitute the Board. A special meeting
of the stockholders shall be called by the Corporation from time to time at the
written instruction of a Majority of the Series B Holders or a Majority of the
Series C Holders for the purpose of electing such Directors.

            (e) Shares of Series B Preferred that have been issued and
reacquired in any manner, including shares purchased or redeemed or exchanged or
converted, shall (upon compliance with any applicable provisions of the General
Corporation Law of the State of Nevada) have the status of authorized but
unissued shares of Preferred Stock of the Corporation undesignated as to series
and may, subject to the requirements of Section 3(b), be designated or
redesignated and issued or reissued, as the case may, as part of any series of
Preferred Stock of the Corporation, other than as Series B Preferred.

      7. Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Series B Preferred shall not have any preferences or relative,
participating, optional or other special rights, other than those specifically
set forth in this Certificate of Designation. The shares of Series B Preferred
shall have no preemptive or subscription rights pursuant to this Certificate of
Designation.


                                      -16-
<PAGE>   17


      8. Rank. The Series B Preferred shall rank senior in right as to dividends
and upon liquidation, dissolution or winding up to all Junior Securities,
whenever issued.

      9. Identical Rights. Each share of the Series B Preferred shall have the
same relative rights and preferences as, and shall be identical in all respects
with, all other shares of the Series B Preferred.

      10. Certificates. So long as any shares of the Series B Preferred are
outstanding, there shall be set forth on the face or back of each stock
certificate issued by the Corporation a statement that the Corporation shall
furnish without charge to each shareholder who so requests, a full statement of
the designation and relative rights, preferences and limitations of each class
of stock or series thereof that the Corporation is authorized to issue and of
the authority of the Board of Directors to designate and fix the relative
rights, preferences and limitations of each series.

      11. Amendments. Any provision of these terms of the Series B Preferred
Stock may be amended, modified or waived if and only if a Majority of the Series
B Holders have consented in writing or by an affirmative vote to such amendment,
modification or waiver of any such provision of this Certificate of Designation
and upon receipt of such written consent or the obtaining of such affirmative
vote, such amendment, modification or waiver shall be binding on all holders of
Series B Preferred.

      12. Definitions.

          "Additional Shares of Common Stock" shall have the meaning given such
term in Section 5(k)(4) of this Certificate of Designation.

          "Affiliate" or "Affiliates" shall mean with respect to any Person, any
other Person that would be considered to be an affiliate of such Person under
Rule 144(a) of the Rules of Regulations of the Securities and Exchange
Commission, as in effect on the date hereof, if the Corporation were issuing
securities.

          "Articles of Incorporation" shall have the meaning given such term on
the cover page of this Certificate of Designation.

          "Board" or "Board of Directors" means the Board of Directors of the
Corporation.

          "Company Redemption Notice" shall have the meaning given to such term
in Section 3(d) of this Certificate of Designation.

          "Convertible Securities" shall have the meaning given such term in
Section 5(k)(3) of this Certificate of Designation.

          "Corporation" means MGC Communications, Inc., a Nevada corporation.

          "Common Stock" means the Corporation's Common Stock, $.001 par value.


                                      -17-
<PAGE>   18


          "Effective Price" shall have the meaning given such term in Section
5(k)(4) of this Certificate of Designation.

          "Event of Non-Compliance" shall have the meaning given such term in
Section 3(e) of this Certificate of Designation.

          "Fair Market Value" of the assets or shares of capital stock at issue
shall mean the price that would be paid by a willing buyer of all of the assets
or shares of capital stock of the Corporation, as applicable, in a sale process
designed to attract all possible participants and to maximize value in an arm's
length transaction, such price to include a control premium and to exclude any
minority, illiquidity or other discounts. The determination of Fair Market Value
shall be made by (i) the Board of Directors of the Corporation, or (ii) if at
the written election of a Majority of the Series B Holders after presentation of
the Board's determination of Fair Market Value, by a nationally recognized
investment banking firm mutually agreeable to the Corporation and a Majority of
the Series B Holders, provided, however, in the event a firm cannot be agreed
upon such amount shall be determined by a nationally recognized investment
banking firm selected by two other such firms, one selected by the Corporation
and the other by a Majority of the Series B Holders. The determination of Fair
Market Value by such investment banking firm shall be final and binding on the
parties. The fees and expenses of such firm shall be paid for by the
Corporation. In the event a determination of Fair Market Value is being made
under this Certificate of Designation and contemporaneously under the Series C
Certificate for a substantially similar purpose, the investment banking firm to
be approved or selected hereunder by a Majority of the Series B Holders shall
instead be approved of or selected, as applicable, by the holders of a majority
of the outstanding Series C Preferred and Series B Preferred.

          "Freely Tradeable Securities" shall mean shares of a common stock of a
public company listed for trading on the New York Stock Exchange or Nasdaq
National Market that are free of any and all restrictions on sale, including
under Rule 144 or 145 under the Securities Act of 1933, as amended.

          "GAAP" shall mean generally accepted accounting principles applied on
a consistent basis.

          "Indebtedness" shall mean all obligations, contingent (to the extent
required to be reflected in financial statements prepared in accordance with
GAAP) and otherwise, which in accordance with GAAP should be classified on the
obligor's balance sheet as liabilities, including, without limitation, in any
event and whether or not so classified: (i) all debt and similar monetary
obligations, whether direct or indirect; (ii) all liabilities secured by any
mortgage, pledge, security interest, lien, charge or other encumbrance existing
on property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; (iii) all guarantees, endorsements and
other contingent obligations whether direct or indirect in respect of
Indebtedness or performance of others, including any obligation to supply funds
to or in any manner to invest in, directly or indirectly, the debtor, to
purchase Indebtedness, or to assure the owner of Indebtedness against loss,
through an agreement to purchase goods, supplies or services for the purpose of
enabling the debtor to make payment of the Indebtedness held by such owner


                                      -18-
<PAGE>   19


or otherwise; (iv) obligations to reimburse issuers of any letters of credit;
and (v) purchase money financing for capital expenditures.

          "Indenture" shall mean that Indenture dated as of September 29, 1997
pursuant to which the Senior Secured Notes have been issued.

          "Junior Securities" shall mean any of the Corporation's Common Stock
and all other equity securities of the Corporation other than (x) the Series B
Preferred, (y) the Series C Preferred, and (z) any other shares of the
Corporation's preferred stock which (a) by their terms, state that they are not
Junior Securities or provide the holders thereof with rights pari passu with or
senior to those of the holders of Series B Preferred and (b) are approved for
issuance in accordance with Section 3 hereof.

          "Majority of the Series B Holders" shall mean the holders of more than
fifty percent (50%) of the then outstanding Series B Preferred.

          "Majority of the Series C Holders" shall mean the holders of more than
fifty percent (50%) of the then outstanding Series C Preferred.

          "Mandatory Conversion" shall have the meaning given such term in
Section 5(b) of this Certificate of Designation.

          "Market Threshold" shall mean when the average closing sales price of
the Common Stock on the Nasdaq Stock Market or the New York Stock Exchange for
the twenty (20) trading days during the sixty (60) day period preceding the
Threshold Notice has exceeded the amount which equals 3.0 times the Series B
Liquidation Value (as adjusted from time to time to take into account stock
splits, stock dividends and similar events).

          "Optional Conversion" shall have the meaning given such term in
Section 5(a) of this Certificate of Designation.

          "Optional Redemption" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.

          "Optional Redemption Date" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.

          "Optional Redemption Price" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.

          "Original Issue Date" means May 4, 1999.

          "Person" shall mean an individual, partnership, corporation,
association, trust, joint venture, unincorporated organization and any
government, governmental department or agency or political subdivision thereof.


                                      -19-
<PAGE>   20


          "Qualified Return" shall have the meaning given to such term in
Section 4(a).

          "Required Board Approval" shall have the meaning given to such term in
the Securityholders Agreement.

          "Restricted Action" shall have the meaning given such term in Section
3(b) of this Certificate of Designation.

          "Sale Notice" shall have the meaning given such term in Section 3(e)
of the Certificate of Designation.

          "Sale of the Company" shall mean a single transaction or series of
transactions between the Corporation and/or its stockholders and any Person or
group of Persons (as such term is used in Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended) pursuant to which such Person or
group of Persons will (i) acquire shares of capital stock of the Corporation
possessing more than 50% of the voting power of the Corporation, including by
way of merger or consolidation or otherwise, or (ii) acquire all or
substantially all of the assets of the Corporation and its Subsidiaries
(determined on a consolidated basis); notwithstanding the foregoing definition,
a single transaction or series of transactions shall not be deemed a Sale of the
Company unless such transaction or series of transactions is also deemed a
"Change of Control", as defined in the Indenture.

          "Securityholders Agreement" shall mean that certain Amended and
Restated Securityholders Agreement of even date herewith among the Corporation,
the Series B Holders, the Series C Holders and certain other parties, as amended
from time to time.

          "Senior Secured Notes" means the $160,000,000 principal amount of 13%
Senior Secured Notes due 2004 that have been issued pursuant to the Indenture.

          "Series B Conversion Price" shall have the meaning given such term in
Section 5(d) of this Certificate of Designation.

          "Series B Conversion Rate" shall have the meaning given such term in
Section 5(c) of this Certificate of Designation.

          "Series B Holders" shall mean the holders of Series B Preferred.

          "Series B Liquidation Value" means Nine Dollars ($9.00), provided if
the Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) the Series B Preferred into a greater number of
shares or if the Corporation at any time combines (by reverse stock split or
otherwise) the outstanding shares of the Series B Preferred into a smaller
number of shares, then the Series B Liquidation Value in effect immediately
prior to such subdivision or combination shall be proportionately adjusted.


                                      -20-
<PAGE>   21


          "Series B Preferred" shall have the meaning given such term in Section
1 of this Certificate of Designation.

          "Series C Certificate" shall mean the Certificate of Designation
establishing the designation, preferences and relative and other special rights,
qualifications, limitations and restrictions of the Series C Preferred.

          "Series C Holders" means the holders of Series C Preferred.

          "Series C Preferred" shall mean the Corporation's Series C Convertible
Preferred Stock, par value $.001 per share.

          "Special Restricted Action" shall have the meaning given such term in
Section 3(c) of this Certificate of Designation.

          "Stock Option Plan" shall mean the Corporation's Stock Option Plan, as
adopted by the Board of Directors on June 30, 1996, and as amended to date.

          "Subsidiary" shall mean any Person as to which the Corporation owns,
directly or indirectly, either (a) 50% or more of such Person's stock (or
similar voting interests) entitled to vote generally in the election of
directors (or other governing body) or (b) 50% or more of the capital or profits
interest of such Person.

          "Threshold Notice" shall mean a written notice from the Corporation to
the holders of Series B Preferred stating that the Market Threshold has been
achieved and providing reasonable evidence thereof.

      13. Severability of Provisions. If any right, preference or limitation of
the Series B Preferred set forth in this Certificate of Designation (as such
Certificate of Designation may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule, law or public
policy, all other rights preferences and limitations set forth in this
Certificate of Designation (as so amended) which can be given effect without
implicating the invalid, unlawful or unenforceable right, preference or
limitation shall, nevertheless, remain in full force and effect, and no right,
preference or limitation herein set forth shall be deemed dependent upon any
other right, preference or limitation unless so expressed herein.

                     [SIGNATURES ARE ON THE FOLLOWING PAGE.]


                                      -21-
<PAGE>   22


      IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its President, and attested to by its Secretary, on
____________________________, 19___.

                                           MGC COMMUNICATIONS, INC.

                                           By
                                             Name: Rolla Huff
                                             Title: President


Attest:


Name:
Title: Secretary


STATE OF NEVADA       )
ss.:                  )
COUNTY OF CLARK       )

          On the ___ day of _____________, 1999, before me personally came
Rolla Huff to me known, who, being by me duly sworn, did depose and say he
resides at [], [] 14 Moraine Point, Victor, NY 14564 and that he is the
President of MGC Communications, Inc., the corporation described in and which
executed the above instrument; and that he acknowledged said instrument to be
the free act and deed of said corporation.



Notary Public
My Commission Expires:


                                      -22-


<PAGE>   1
                                                                  Exhibit 4.7


                              AMENDED AND RESTATED
                          REGISTRATION RIGHTS AGREEMENT

      THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement"),
entered into this _____ day of _____, 1999 is made by and among (i) MGC
Communications, Inc., a Nevada corporation (the "Company") and (ii) each person
listed on Exhibit A hereto (collectively, the "Investors").

      WHEREAS, pursuant to the Securities Purchase Agreement dated as of April
5, 1999 (the "Series B Purchase Agreement"), among the Company and the
Investors, the Company issued on May 4, 1999 to the Investors 5,277,779 shares
of the Company's Series B Convertible Preferred Stock, par value $.001 per share
(the "Series B Preferred Stock"); and

      WHEREAS, as a condition to the Investors' consummation of the transactions
contemplated by the Series B Purchase Agreement, the Company agreed to provide
the Investors with registration rights with respect to the shares of Common
Stock, par value $.001 per share (the "Common Stock") issuable upon conversion
of the Series B Preferred Stock, pursuant to the Series B Preferred Stock
Registration Rights Agreement dated as of May 4, 1999 between the Company and
the Investors (the "Original Agreement");

      WHEREAS, pursuant to the Securities Purchase Agreement dated as of the
date hereof among the Company and certain of the Investors (the "Series C
Purchase Agreement"), the Company shall issue on the date hereof to such
Investors (the "Series C Investors") 1,250,000 shares of the Company's Series C
Convertible Preferred Stock, par value $.001 per share (the "Series C Preferred
Stock"); and

      WHEREAS, as a condition to the Series C Investors' consummation of the
transactions contemplated by the Series C Purchase Agreement, the Company and
the Investors have agreed to amend and restate the Original Agreement and
provide the Series C Investors registration rights with respect to the Common
Stock issuable upon conversion of the Series C Preferred Stock; and

      NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the receipt and sufficiency of which are
acknowledged, the parties hereto, each intending to be legally bound hereby,
agree that the Original Agreement shall be amended and restated to read in its
entirety as follows:

                                   ARTICLE I.

                                   DEFINITIONS

      SECTION 1.1 Definitions.


<PAGE>   2


      As used herein, the following terms shall have the respective meanings set
forth below:

      "Common Stock" means the Company's Common Stock, par value $.001 per
share.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "Holders" means the Investors, for so long as the Investors own any Series
B Preferred Stock or Series C Preferred Stock or any Registrable Securities, and
their successors, assigns and direct and indirect transferees who become
registered owners of Series B Preferred Stock or Series C Preferred Stock or
Registrable Securities.

      "Person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.

      "Registrable Securities" means (i) any Common Stock issued or issuable
from the Company to the Investors, whether directly or by conversion of
securities convertible into Common Stock, and (ii) any other securities issued
or issuable directly or indirectly with respect to the securities referred to in
clause (i) above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, conversion, consolidation or
other reorganization. As to any particular shares constituting Registrable
Securities, such shares will cease to be Registrable Securities when they have
been (x) effectively registered under the Securities Act and disposed of in
accordance with a registration statement covering them, or (y) sold to the
public pursuant to Rule 144 or a similar provision under the Securities Act. For
purposes of this Agreement, a Person will be deemed to be a holder of
Registrable Securities whenever such Person has the right to acquire directly or
indirectly such Registrable Securities (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.

      "SEC" means the Securities and Exchange Commission.

      "Securities Act" means the Securities Act of 1933, as amended.

                                   ARTICLE II.

                               REGISTRATION RIGHTS

      SECTION 2.1 Demand Registrations.

      (a)   Requests for Registration. Any Holder or number of Holders at any
time after the date hereof may request registration under the Securities Act of
all or part of their Registrable Securities on Form S-1, or any similar
long-form registration ("Long-Form Registration"), or, if available, at the
Company's option, on Form S-2 or S-3 or any similar short-form registration
("Short-Form Registration"); provided that the aggregate offer price of all such
Registrable Securities being registered is at least $1,000,000. Each request for
a Demand Registration shall specify the number of Registrable Securities
requested to be registered, and the proposed underwriter. Within ten days after
receipt of any such request, the Company will give written


                                      -2-
<PAGE>   3


notice of such requested registration to all other holders (if any) of
Registrable Securities and, subject to Section 2.1(d) below, will include in
such registration all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 15 days after the
receipt of the Company's notice. All registrations requested pursuant to this
Section 2.1 are referred to herein as "Demand Registrations."

      (b)   Long-Form Registrations. The Holders will be entitled to request two
(2) Long-Form Registrations in which the Company will pay all Registration
Expenses; provided that Holders other than Providence Equity Partners III L.P.
and Providence Equity Operating Partners III L.P. will be entitled to request no
more than one (1) of such Long-Form Registrations. A registration will not count
as one of such two (2) Long-Form Registrations until it has become effective or
the demanding Holders withdraw their request (unless such withdrawal is due to a
material adverse change in the business, operations, prospects or condition
(financial or otherwise) of the Company since the date of such demand). The
Company will pay all Registration Expenses in connection with any initiated
registration whether or not it has become effective unless the respective
Holders withdraw their request (unless such withdrawal is pursuant to the
provisions of Section 2.1(e) hereunder or due to a material adverse change in
the business, operations, prospects or condition (financial or otherwise) of the
Company since the date of such demand).

      (c)   Short-Form Registrations. In addition to the Long-Form Registrations
provided pursuant to Section 2.1(b), the Holders will be entitled to request
unlimited Short-Form Registrations, provided that the aggregate offering value
of the Registrable Securities requested to be registered in any Short-Form
Registration must equal at least $1,000,000 and that the Holders may only
request two (2) Short-Form Registrations in any 12-month period. After the
Company has become subject to the reporting requirements of the Exchange Act,
the Company will use its best efforts to make Short-Form Registrations available
for the sale of Registrable Securities. The Company will pay all Registration
Expenses with respect to Short-Form Registrations. The rights of a holder of
Registrable Securities under this Section 2.1(c) shall expire at such time as
the Registrable Securities of such holder are transferable without restriction
as to volume under Rule 144 under the Securities Act.

      (d)   Priority on Demand Registrations. If a Demand Registration is an
underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering,
exceeds the number of Registrable Securities and other securities, if any, which
can be sold therein without adversely affecting the marketability of the
offering (the "Offering Quantity"), the Company will include in such
registration securities in the following priority:

            (i)   first, before including any securities which are not
      Registrable Securities held by the Holders, the Company will include all
      of the Registrable Securities requested to be included by such Holders,
      and if the number of Registrable Securities requested to be included
      exceeds the Offering Quantity, then the Company shall include only each
      such requesting Holder's pro rata share of the Offering Quantity, based on
      the amount of Registrable Securities held by such


                                      -3-
<PAGE>   4


      Holder (provided that any Registrable Securities thereby allocated to any
      such Holder that exceed such Holder's request shall be reallocated among
      the remaining requesting Holders in like manner); and

            (ii)  second, to the extent (and only to the extent) that the
      Offering Quantity exceeds the aggregate amount of Registrable Securities
      which are requested to be included in such registration, the Company shall
      include in such registration any other securities requested to be included
      in the offering.

Any Persons other than holders of Registrable Securities who participate in
Demand Registrations which are not at the Company's expense must pay their share
of the Registration Expenses as set forth in Section 2.5 hereof unless the
Company has agreed to bear such expense.

      (e)   Restrictions on Demand Registrations. The Company will not be
obligated to effect any Demand Registration within 90 days after the effective
date of a previous Demand Registration. The Company may postpone upon one
occasion in any 365 day period for up to 120 days the filing or the
effectiveness of a registration statement for a Demand Registration if the
Company determines in its good faith judgment that such Demand Registration
would reasonably be expected to have a material adverse effect on any proposal
or plan by the Company or any of its subsidiaries to engage in any acquisition
of assets or shares of unrelated companies (other than in the ordinary course of
business) or any merger, consolidation, tender offer or similar transaction. In
such event, the holders of a majority of Registrable Securities requesting such
Demand Registration will be entitled to withdraw such request and, if such
request is withdrawn, such Demand Registration will not count as one of the
permitted Demand Registrations hereunder and the Company will pay all
Registration Expenses in connection with such registration.

      (f)   Selection of Underwriters. The holders of a majority of the
Registrable Securities initiating any Demand Registration will have the right to
select the investment banker(s) and manager(s) to administer the offering,
subject to the Company's approval which will not be unreasonably withheld.

      (g)   Other Registration Rights. Except as provided in this Agreement, the
Company will not grant to any Person the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, which contains terms or
conditions more favorable than the terms or conditions contained in this
Agreement, without the prior written consent of the Holders of a majority of the
Registrable Securities.

      SECTION 2.2 Piggyback Registrations.

      (a)   Right to Piggyback. Whenever the Company proposes to register any of
its securities under the Securities Act (other than pursuant to a Demand
Registration or a registration on Form S-4 or S-8 or any successor or similar
forms) and the registration form to be used may be used for the registration of
Registrable Securities (a "Piggyback Registration"), whether or not for sale for
its own account, the Company will give prompt written notice to all holders of
Registrable Securities of its intention to effect such a registration and will
include in such


                                      -4-
<PAGE>   5


registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the receipt
of the Company's notice. The rights of a holder of Registrable Securities under
this Section 2.2 shall expire at such time as the Registrable Securities of such
holder are transferable without restriction as to volume under Rule 144 under
the Securities Act.

      (b)   Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.

      (c)   Priority on Registrations. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company or an underwritten
offering undertaken by the Company pursuant to a demand registration exercised
by a Person other than the Investors (a "Demanding Party"), and the managing
underwriters advise the Company in writing (with a copy to each party hereto
requesting registration of Registrable Securities) that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without adversely affecting the
marketability of such offering (the "Company Offering Quantity"), the Company
will include in such registration securities in the following priority:

            (i)   first, the securities the Company proposes to sell and the
      securities requested to be included by the Demanding Party in accordance
      with any agreement between the Company and the Demanding Party; and

            (ii)  second, the Company will include all Registrable Securities
      requested to be included by any holders thereof and all other holders of
      registrable securities, and if the number of such holders' securities
      requested to be included exceeds the balance of the Company Offering
      Quantity, then the Company shall include only each such requesting
      holder's pro rata share of such balance of the Company Offering Quantity,
      based on the amount of securities held by such holder.

      (d)   Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to
Section 2.1 or pursuant to this Section 2.2, and if such previous registration
has not been withdrawn or abandoned, the Company will not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-4 or S-8 or any successor form), whether on
its own behalf or at the request of any holder or holders of such securities,
until a period of at least 90 days has elapsed from the effective date of such
previous registration statement.

      SECTION 2.3 Holdback Agreements.

      (a)   To the extent not inconsistent with applicable law, each Investor
agrees not to effect any public sale or distribution (including sales pursuant
to Rule 144) of equity securities of the Company, or any securities, options or
rights convertible into or exchangeable or exercisable for such securities that
such Investor owns prior to the effective date of any underwritten


                                      -5-
<PAGE>   6

registration, during the seven days prior to and the 120-day period beginning on
the effective date of any underwritten registration, unless the underwriters
managing the registered public offering otherwise agree; provided that such
restrictions shall not be more restrictive in duration or scope than
restrictions imposed on (i) any Person which has been granted registration
rights by the Company, (ii) any officer or director of the Company or (iii) any
5% holder of securities of the Company that is a party to the underwriting
agreement with the underwriters managing such offering.

      (b)   The Company agrees (i) not to effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
120-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-4 or S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) to cause each holder of its Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering or pursuant to a stock option plan adopted
by the Company or upon the exercise of warrants outstanding as of the date of
this Agreement unless such holder is a party to this Agreement) to agree not to
effect any public sale or distribution (including sales pursuant to Rule 144) of
any such securities during such period (except as part of such underwritten
registration, if otherwise permitted), unless the underwriters managing the
registered public offering otherwise agree.

      SECTION 2.4 Registration Procedures. Whenever Holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:

      (a)   prepare and within 60 days (or 45 days with respect to any
Short-Form Registration) after the end of the period within which requests for
registration may be given to the Company file with the Securities and Exchange
Commission a registration statement with respect to such Registrable Securities
and thereafter use its best efforts to cause such registration statement to
become effective (provided that before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company will furnish to
the counsel selected by the holders of a majority of the Registrable Securities
initiating such registration statement copies of all such documents proposed to
be filed, which documents will be subject to review of such counsel);

      (b)   prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of either (i) not less than 180 days (subject
to extension pursuant to Section 2.7(b)) or, if such registration statement
relates to an underwritten offering, such longer period as in the opinion of
counsel for the underwriters a prospectus is required by law to be delivered in
connection with sales of Registrable Securities by an underwriter or dealer or
(ii) such shorter period as will terminate


                                      -6-
<PAGE>   7


when all of the securities covered by such registration statement have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such registration statement (but in any event
not before the expiration of any longer period required under the Securities
Act), and to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement until
such time as all of such securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in
such registration statement;

      (c)   furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;

      (d)   use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);

      (e)   notify each seller of such Registrable Securities, and the Managing
Underwriters, if any, promptly (1)(A) when a prospectus or any prospectus
supplement or post-effective amendment is proposed to be filed, and (B) with
respect to a registration statement or any post-effective amendment, when the
same has become effective, (2) of any request by the SEC or any other Federal or
state governmental authority for amendments or supplements to a registration
statement or related prospectus or for additional information, (3) of the
issuance by the SEC, any state securities commission, any other governmental
agency or any court of any stop order, order or injunction suspending or
enjoining the use of a prospectus or the effectiveness of a registration
statement or the initiation of any proceedings for that purpose, (4) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
proceeding for such purpose, and (5) of the happening of any event (a "Changing
Event") as a result of which, the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and, at the request of any such
seller, the Company will as soon as possible prepare and furnish to such seller
(a "Correction Event") a reasonable number of copies of a supplement or
amendment to such Prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such Prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made;

      (f)   use its best efforts to cause all such Registrable Securities to be
listed on each


                                      -7-
<PAGE>   8


securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system;

      (g)   provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;

      (h)   enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities;

      (i)   make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement, any accountant or other agent retained by any such
seller or underwriter and one firm of attorneys representing the holders of
Registrable Securities, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors, employees and independent accountants to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement;

      (j)   otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;

      (k)   in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;

      (l)   use its best efforts to obtain one or more comfort letters, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), signed by the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by comfort letters as the holders of a majority of the Registrable
Securities being sold reasonably request;

      (m)   use its best efforts to provide a legal opinion of the Company's
outside counsel, dated the effective date of such registration statement (or, if
such registration includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), with respect to the registration
statement, each amendment and supplement thereto, the prospectus included
therein (including the preliminary prospectus) and such other documents relating
thereto in customary form and covering such matters of the type customarily
covered by


                                      -8-
<PAGE>   9


legal opinions of such nature.

      (n)   in connection with any sale or transfer of Registrable Securities
that will result in such securities no longer being Registrable Securities,
cooperate with the Holders thereof and the managing underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall not bear any
restrictive legends and shall be in a form eligible for deposit with The
Depository Trust Company and to enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters, if any,
or such Holders may request at least two business days prior to any sale of
Registrable Securities;

      (o)   make available for inspection by a representative of any underwriter
participating in any such disposition of Registrable Securities, and any
attorney, consultant or accountant retained by such selling Holders or
underwriter, at the offices where normally kept, during reasonable business
hours, all pertinent financial and other records, corporate documents and
properties of the Company and its subsidiaries (including with respect to
businesses and assets acquired or to be acquired to the extent that such
information is available to the Company), and cause the officers, directors,
agents and employees of the Company and its subsidiaries (including with respect
to businesses and assets acquired or to be acquired to the extent that such
information is available to the Company) to supply all information in each case
reasonably requested by any such representative, underwriter, attorney,
consultant or accountant in connection with such Registration Statement;

      (p)   cooperate with each seller of Registrable Securities covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the NASD; and

      (q)   if requested by the selling Holders or the managing underwriters, if
any, (x) promptly incorporate in a prospectus supplement or post-effective
amendment such information as the selling Holders or the managing underwriters,
if any, reasonably believe is required to be included therein, and (y) make all
required filings of such prospectus supplement or such post-effective amendment
under the Act as soon as practicable after the Company has received notification
of the matters to be incorporated in such prospectus supplement or
post-effective amendment.

The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.

      SECTION 2.5 Registration Expenses.

      (a)   All expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of counsel
for the Company and all independent certified public


                                      -9-
<PAGE>   10


accountants, underwriters (excluding discounts and commissions, which will be
paid by the sellers of Registrable Securities) and other Persons retained by the
Company (all such expenses being herein called "Registration Expenses"), will be
borne as provided in this Agreement, and the Company will, in any event, pay its
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), the expense
of any annual audit or quarterly review, the expense of any liability insurance
and the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed or on the NASD automated quotation system.

      (b)   In connection with each Demand Registration and each Piggyback
Registration, the Company will reimburse the Holders covered by such
registration for the reasonable fees and disbursements of one counsel chosen by
the holders of a majority of the Registrable Securities initiating such
registration.

      SECTION 2.6 Indemnification.

      (a)   The Company agrees to indemnify and hold harmless, to the extent
permitted by law, each Holder and each Person who controls such Holder within
the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act and the respective officers, directors, partners, employees, representatives
and agents of any such party or any controlling Person to the fullest extent
lawful, from and against any and all losses, liabilities, claims, damages and
expenses whatsoever, joint or several, to which they or any of them may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon (i) any untrue or
alleged untrue statement of material fact contained in any registration
statement, prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or, (ii) any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and the Company will reimburse such Holder and each such director,
officer and controlling person for any legal or any other expenses incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided, however, that the Company shall not
be liable in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises out of
or is based upon an untrue statement or alleged untrue statement, or omission or
alleged omission, made in such registration statement, any such prospectus or
preliminary prospectus or any amendment or supplement thereto, or in any
application, in reliance upon, and in conformity with, written information
prepared and furnished to the Company by such Holder expressly for use therein
or by such Holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such Holder with a sufficient number of copies of the same. In
connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the Holders.

      (b)   In connection with any registration statement in which a Holder is
participating, each such Holder will furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such registration statement or


                                      -10-
<PAGE>   11


prospectus and, to the extent permitted by law each such Holder, severally, for
itself only, will indemnify and hold harmless the Company and each other Person
who controls the Company within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act and the respective officers, directors,
partners, employees, representatives and agents of any such party or any
controlling Person to the fullest extent lawful, from and against any and all
losses, liabilities, claims, damages and expenses whatsoever, joint or several,
to which they or any of them may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) or expenses
arise out of or are based upon (i) the purchase or sale of Registrable
Securities during any period beginning upon a Changing Event (as defined in
Section 2.4(e)) and ending on a Correction Event (as defined in Section 2.4(e)),
provided such Holder received proper written notice of such Changing Event
pursuant to Section 2.4(e), (ii) any untrue or alleged untrue statement of
material fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or in any application,
or (iii) any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statement therein not misleading, but,
with respect to clauses (ii) and (iii) above, only to the extent that such
untrue statement or omission is made in such registration statement, any such
prospectus or preliminary prospectus or any amendment or supplement thereto, or
in any application, in reliance upon and in conformity with written information
prepared and furnished to the Company by such Holder expressly for use therein,
and such Holder will reimburse the Company and each such director, officer and
controlling Person for any legal or any other expenses incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided, however, that the obligation to indemnify will
be individual to each Holder and will be limited to the net amount of proceeds
received by such Holder from the sale of Registrable Securities pursuant to such
registration statement.

      (c)   Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder to the extent
such failure has not materially prejudiced the indemnifying party) and (ii)
unless in such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with respect to such
claim, permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party. Such indemnifying
party shall not, however, enter into any settlement with a party without
obtaining an unconditional release of each indemnified party by such party with
respect to any and all claims against each indemnified party. If such defense is
assumed, the indemnifying party will not be subject to any liability for any
settlement made by the indemnified party without its consent (but such consent
will not be unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim will not be obligated to pay
the fees and expenses of more than one counsel for all parties indemnified by
such indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.

      (d)   The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or


                                      -11-
<PAGE>   12


controlling Person of such indemnified party or any of the respective officers,
directors, partners, employees, representatives and agents of any such party or
any controlling Person, and will survive the transfer of securities. The Company
also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.

      SECTION 2.7 Participation in Underwritten Registrations.

      (a)   No Person may participate in any registration hereunder which is
underwritten unless such Person (i) agrees to sell such Person's securities on
the basis provided in any underwriting arrangements approved by the Person or
Persons entitled hereunder to approve such arrangements (including, without
limitation, pursuant to the terms of any overallotment or "green shoe" option
requested by the managing underwriter(s), provided that no Investor will be
required to sell more than the number of Registrable Securities that such holder
has requested the Company to include in any registration) and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements.

      (b)   Each Person that is participating in any registration hereunder
agrees that, upon receipt of any notice from the Company of a Changing Event (as
defined in Section 2.4(e)), such Person will forthwith discontinue the
disposition of its Registrable Securities pursuant to the registration statement
until such Person's receipt of the copies of a supplemented or amended
prospectus as contemplated by such Section 2.4(e). In the event the Company
shall give any such notice of a Changing Event, the applicable time period
mentioned in Section 2.4(b) during which a Registration Statement is to remain
effective shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to this paragraph to
and including the date when each seller of a Registrable Security covered by
such registration statement shall have received the copies of the supplemented
or amended prospectus contemplated by Section 2.4(e).

      SECTION 2.8 Current Public Information. At all times after the Company has
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company will file all reports required to be filed by it under
the Securities Act and the Securities Exchange Act and the rules and regulations
adopted by the Securities and Exchange Commission thereunder, and will use
commercially reasonable best efforts to take such further action as any Holder
may reasonably request, all to the extent required to enable such Holders to
sell Registrable Securities pursuant to Rule 144 adopted by the Securities and
Exchange Commission under the Securities Act (as such rule may be amended from
time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission.

      SECTION 2.9 Adjustment Affecting Registrable Securities. Except as
otherwise provided herein, the Company will not take any action, or permit any
change to occur, with respect to its securities which would materially and
adversely affect the ability of the Holders to include such Registrable
Securities in a registration undertaken pursuant to this Agreement or which
would adversely affect the marketability of such Registrable Securities in any
such


                                      -12-
<PAGE>   13


registration.

                                  ARTICLE III.

                                  MISCELLANEOUS

      SECTION 3.1 Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against any party hereto unless such modification, amendment or waiver
is approved in writing by Holders holding a majority of the Registrable
Securities, and upon receipt of such written approval, such modification,
amendment or waiver shall be binding upon all parties to this Agreement.

      SECTION 3.2 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or the effectiveness or validity of such provision in any
other jurisdiction, and this Agreement shall be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.

      SECTION 3.3 Entire Agreement. Except as otherwise expressly set forth
herein, this Agreement embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.

      SECTION 3.4 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, and to the extent applicable heirs,
executors, administrators and legal representatives and any subsequent holders
of Registrable Securities and the respective successors and assigns of each of
them, so long as they hold Registrable Securities; provided, that (i) a Person
acquiring Registrable Securities in a public market transaction (including a
sale to such Person in the Nasdaq Stock Market) shall not be considered a
successor or assignee of the seller of such Registrable Securities as a result
thereof, and (ii) the Investors shall give prompt written notice to the Company
of the name and address of their respective successors and assigns.

      SECTION 3.5 Counterparts; Fax Signatures. This Agreement may be executed
in separate counterparts each of which shall be an original and all of which
taken together shall constitute one and the same agreement. Signatures sent by
telecopy shall be deemed to constitute original signatures.

      SECTION 3.6 Remedies. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that the parties hereto shall have the right to injunctive relief,
in addition to all of its rights and remedies at law or in equity, to enforce
the provisions of this Agreement. Nothing contained in


                                      -13-
<PAGE>   14


this Agreement shall be construed to confer upon any Person who is not a
signatory hereto any rights or benefits, as a third party beneficiary or
otherwise.

      SECTION 3.7 Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when personally delivered
or received by certified mail, return receipt requested, confirmed telecopy or
sent by guaranteed overnight courier service. Such notices, demands and other
communications will be sent to the parties at the addresses set forth in the
Series B Purchase Agreement, or to any party (including any new party) at such
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.

      SECTION 3.8 Governing Law. The General Corporation Law of the State of
Nevada will govern all issues concerning the relative rights of the Company and
its stockholders. All other issues concerning this Agreement shall be governed
by and construed in accordance with the laws of the State of Rhode Island,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of Rhode Island or any other jurisdiction) that would
cause the application of the law of any jurisdiction other than the State of
Rhode Island.

      SECTION 3.9 Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.

               [THE REST OF THE PAGE IS LEFT BLANK INTENTIONALLY]


                                      -14-
<PAGE>   15


      IN WITNESS WHEREOF, the parties, by their respective officers duly
authorized, have caused this Agreement to be duly executed and delivered as of
the date hereof.

                                 MGC COMMUNICATIONS, INC.

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:

                                 PROVIDENCE EQUITY PARTNERS III L.P.
                                 By: Providence Equity Partners III L.L.C., its
                                     general partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:

                                 PROVIDENCE EQUITY OPERATING PARTNERS III L.P.
                                 By: Providence Equity Partners III L.L.C., its
                                     general partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:

                                 J K & B CAPITAL III L.P.
                                 By: JK&B Capital, LLC, its general partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:



                                      -15-
<PAGE>   16


                                 JK&B CAPITAL, L.P.
                                 By:                      , its general partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:

                                 JK&B CAPITAL II, L.P.
                                 By:                      , its general partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:

                                 JK&B CAPITAL III QIP, L.P.
                                 By:                      , its general partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:

                                 WIND POINT PARTNERS III, L.P.
                                 By: Wind Point Investors L.L.C., its general
                                     partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:


                                      -16-
<PAGE>   17


                                 WIND POINT EXECUTIVE ADVISER PARTNERS III, L.P.
                                 By: Wind Point Investors L.L.C., its general
                                     partner

                                 By:
                                    --------------------------------------------
                                      Name:
                                      Title:




                                      -17-
<PAGE>   18


                                    EXHIBIT A

                                    INVESTORS

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
                                                  Number of Shares of                  Number of Shares of
                                               Series B Preferred Stock              Series C Preferred Stock
                Name                             held by such Investor                held by such Investor
- ----------------------------------------------------------------------------------------------------------------
<S>   <C>                                      <C>                                   <C>
1.    Providence Equity                                4,135,875                             886,259
         Partners III L.P.
      Suite 900, Fleet Center
      50 Kennedy Plaza
      Providence, RI  02903

2.    Providence Equity Operating                       30,792                                6,598
         Partners III L.P.
      Suite 900, Fleet Center
      50 Kennedy Plaza
      Providence, RI  02903

3.    JK&B Capital III L.P.                             555,556                              225,000
      205 N. Michigan Avenue
      Suite 808
      Chicago, IL  60601

4.    JK&B Capital, L.P.                                  -0-                                 59,524
      205 N. Michigan Avenue
      Suite 808
      Chicago, IL  60601

5.    JK&B Capital II, L.P.                               -0-                                 29,762
      205 N. Michigan Avenue
      Suite 808
      Chicago, IL  60601

6.    JK&B Capital III QIP, L.P.                          -0-                                 42,857
      205 N. Michigan Avenue
      Suite 808
      Chicago, IL  60601
</TABLE>


                                      -18-
<PAGE>   19


<TABLE>
<S>   <C>                                      <C>                                   <C>
7.    Wind Point Partners III, L.P.                     550,513                                 __
      One Towne Square
      Suite 780
      Southfield, MI 48076

8.    Wind Point Executive                               5,043                                  __
      Advisor Partners III, L.P.
      One Towne Square
      Suite 780
      Southfield, MI 48076
- ----------------------------------------------------------------------------------------------------------------
</TABLE>







                                      -19-


<PAGE>   1

                                                                     Exhibit 4.8


                              AMENDED AND RESTATED
                           SECURITYHOLDERS' AGREEMENT


            THIS AMENDED AND RESTATED SECURITYHOLDERS' AGREEMENT is made as of
________, 1999, by and among MGC Communications, Inc., a Nevada corporation (the
"Company"), the Institutional Investors (as defined herein), and each of the
securityholders from time to time a party hereto (the "Securityholders") (as
amended from time to time, this "Agreement").

            WHEREAS, the parties hereto are parties to that certain
Securityholders' Agreement dated as of April 5, 1999 (the "Original Agreement");
and

            WHEREAS, Providence Equity Partners III L.P. ("PEP"), Providence
Equity Operating Partners III L.P. ("PEOP"), JK&B Capital III L.P. ("JK&B"),
Wind Point Partners III, L.P. and Wind Point Executive Advisor Partners III,
L.P., and the Company are parties to that certain Securities Purchase Agreement
dated April 5, 1999 (the "Original Purchase Agreement"); and

            WHEREAS, PEP, PEOP, JK&B, JK&B Capital, L.P. ("JK&BCLP"), JK&B
Capital II, L.P. ("Capital II") and JK&B Capital III QIP, L.P. ("QIP") are
concurrently herewith purchasing shares of the Company's Series C Convertible
Preferred Stock, $.001 par value (the "Series C Preferred"), pursuant to a
Securities Purchase Agreement dated _____, 1999 (the "Securities Purchase
Agreement"); and

            WHEREAS, the execution and delivery of this Agreement is a condition
to the purchase of the Series C Preferred by PEP, PEOP, JK&B, JK&BCLP, Capital
II and QIP pursuant to the Securities Purchase Agreement; and

            WHEREAS, capitalized terms used herein but not otherwise defined
herein have the meaning given such terms in the Original Purchase Agreement; and

            WHEREAS, the parties hereto desire to amend and restate in its
entirety the Original Agreement;

            NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement, intending to be
legally bound, hereby agree as follows:

            Section 1.  Certain Definitions.

            "Board" means the Company's Board of Directors.

            "Institutional Investors" means those Persons holding Investor
Shares.


<PAGE>   2

            "Investor Designees" means those member(s) of the Board or Sub Board
that have been designated by the Required Investor Approval.

            "Investor Shares" means the "Purchased Securities" as defined in the
Original Purchase Agreement and the "Purchased Securities" as defined in the
Securities Purchase Agreement.

            "Original Agreement" has the meaning given such term in the
recitals.

            "Original Purchase Agreement" has the meaning given such term in the
recitals.

            "Preferred Shares" means shares of Series B Preferred and Series C
Preferred.

            "Required Board Approval" means the majority vote or written consent
of a majority of the directors of the Board or the Sub Board, as applicable,
including the approval of the Investor Designee, or, if there is more than one
Investor Designee, that Investor Designee that has been designated in writing by
the Required Investor Approval as the person whose approval is necessary for
purposes of this definition.

            "Required Investor Approval" means, at any time, the affirmative
vote of the holders of more than fifty percent (50%) of the outstanding Investor
Shares held of record by the Institutional Investors at such time.

            "Securities Purchase Agreement" has the meaning given such term in
the recitals.

            "Series B Preferred" means the Company's Series B Convertible
Preferred Stock, $.001 par value per share.

            "Series C Preferred" has the meaning given such term in the
recitals.

            "Subject Securities" has the meaning given to such term in Section 2
hereof.

            Section 2. Board Composition.

                  (a)   From and after the date hereof, and until the provisions
of this Section 2 cease to be effective, each Securityholder and Institutional
Investor shall vote all of its Common Stock, Investor Shares and other voting
securities of the Company over which such holder has voting control ("Subject
Securities") and shall take all other necessary or desirable actions within its
control (in its capacity as a securityholder or stockholder and, subject to any
fiduciary obligation owed by such Securityholder or Institutional Investor to
the Company, in its capacity as a director, member of a board committee or
officer of the Company or otherwise, and including, without limitation,
attendance at meetings in person or by proxy for purposes of obtaining a quorum
and execution of written consents in lieu of meetings), and the Company shall
take all necessary or desirable actions within its control (including, without
limitation, calling special Board and stockholder meetings), so that the
following shall occur:



                                     - 2 -
<PAGE>   3

                  (i)   subject to the limitations contained in Section
                        2(a)(vi), there shall be elected to the Board such
                        number of representatives designated by Required
                        Investor Approval as are necessary to result in the
                        percentage representation by Investor Designees on the
                        Board equaling at least the Institutional Investors'
                        percentage ownership of outstanding Common Stock of the
                        Company arising out of their record ownership of (x)
                        Preferred Shares (assuming the conversion of all
                        outstanding shares of Series B Preferred and Series C
                        Preferred) and (y) shares of Common Stock that have been
                        issued on conversion of shares of Series B Preferred and
                        Series C Preferred; provided, subject to the limitations
                        contained in Section 2(a)(vi), in no event shall the
                        initial number of Investor Designees to the Board be
                        less than two (2);

                  (ii)  the governing body of each of the Company's Subsidiaries
                        (each a "Sub Board") shall have at least one Investor
                        Designee;

                  (iii) any committees of the Board or a Sub Board (to the
                        extent not yet created) shall be created only upon
                        Required Board Approval and each committee shall have at
                        least one Investor Designee;

                  (iv)  the removal from the Board or a Sub Board or any
                        committee thereof without cause of any Investor Designee
                        shall be conditional on the Required Investor Approval;

                  (v)   in the event that any Investor Designee ceases to serve
                        as a member of the Board or a Sub Board or any committee
                        thereof during his term of office, the resulting vacancy
                        on the Board or the Sub Board, and on each committee
                        thereof, shall be filled by an Investor Designee;

                  (vi)  notwithstanding the provisions of Section 2(a)(i), the
                        number of Investor Designees on the Board shall not
                        exceed the whole number obtained by multiplying (A) the
                        Institutional Investors' percentage ownership of
                        outstanding Common Stock of the Company arising out of
                        their record ownership of (x) Preferred Shares (assuming
                        the conversion of all outstanding Series B Preferred and
                        Series C Preferred) and (y) shares of Common Stock that
                        have been issued on conversion of shares of Series B
                        Preferred and Series C Preferred by (B) the total number
                        of directors on the Board (it being understood that for
                        purposes of determining the whole number, any decimal
                        beginning with 0-4 shall be rounded down to the nearest
                        whole number and any decimal beginning with 5-9 shall be
                        rounded up to the nearest whole number); and

                  (vii) in no event shall the number of directors on the Board
                        be less than seven (7).

                        (b)   The Company shall pay the reasonable out-of-pocket
expenses incurred by each director in connection with attending (i) the meetings
of the Board, any Sub Board and any



                                     - 3 -
<PAGE>   4

committee thereof and (ii) any other meetings at the request of any Company or
any of its Subsidiaries. So long as any Investor Designee serves on the Board or
a Sub Board and for six years thereafter, the Company shall maintain directors
and officers indemnity insurance coverage as currently in place or as otherwise
approved by the Required Investor Approval, and the constituent documents of the
Company and each of its Subsidiaries, as appropriate, shall provide for
indemnification and exculpation of directors to the fullest extent permitted
under applicable law.

            (c)   If any party or parties fail(s) (but is otherwise entitled) to
designate a representative to fill a directorship pursuant to the terms of this
Section 2, the election of an individual to such directorship shall be
accomplished in accordance with the Company's or the applicable Subsidiary's
constituent documents and applicable law; provided that the parties shall take
all necessary actions to remove such individual if the party or parties which
failed (and are otherwise entitled) to designate such director so directs.

      Section 3. Approval of Transaction. In the event a meeting of the
Company's stockholders is required under the General Corporation Law of the
State of Nevada or otherwise, including under the regulations of the Nasdaq
Stock Market (the "Nasdaq Rules"), for the approval of any aspect of the
transactions contemplated by the Securities Purchase Agreement, including the
issuance of shares of Series C Preferred (the "Stockholder Approval"), (i) the
Company shall promptly take all action necessary to convene a meeting of its
stockholders in accordance with the Nevada General Corporation Law and the
Company's Articles of Incorporation and By-laws, and shall provide to its
stockholders all proxy materials required by the Nasdaq Rules and the
regulations under the Securities Exchange Act of 1934, as amended, in order to
obtain the Stockholder Approval and (ii) each Securityholder shall promptly take
all necessary or desirable action within such Securityholder's control
(including, without limitation, attendance at stockholders' meetings in person
or by proxy for the purposes of obtaining a quorum and the execution of written
consents in lieu of meetings) to ensure that (i) all voting securities of the
Company (including the Common Stock) over which such Securityholder has control
shall be voted in favor of the Stockholder Approval and (ii) that any transferee
of any voting securities of the Company now held by such Securityholder (other
than a transferee who acquires such voting securities pursuant to public sale in
the Nasdaq Stock Market by such Securityholder, including sales made in
accordance with Rule 144 of the Securities Act) shall be obligated to vote in
favor of the Stockholder Approval.

      Section 4. Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or any of the Institutional Investors unless such
modification, amendment or waiver is approved in writing by the Company and the
Required Investor Approval, and upon receipt of such written approval, such
modification, amendment or waiver shall be binding upon all parties to this
Agreement. The failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.



                                     - 4 -
<PAGE>   5

      Section 5. Representations and Warranties of the Securityholders. Each
Securityholder represents and warrants to each Institutional Investor (as to
itself but not as to any other party) upon becoming a party hereto as follows:

            (a)   Authorization; No Breach. The execution, delivery and
performance by such Securityholder of this Agreement has been duly authorized by
or on behalf of such Securityholder. This Agreement constitutes a valid and
binding obligation of such Securityholder, enforceable in accordance with its
terms. The execution and delivery by such Securityholder of this Agreement, and
the fulfillment of and compliance with the terms hereof by such Securityholder,
do not and will not (a) conflict with or result in a breach of the terms,
conditions or provisions of, (b) result in a violation of, or (c) require any
consent that has not been obtained or made of, from, with or to, any Person
pursuant to, the constituent documents of such Securityholder, or any material
agreement, instrument or other documents, or any applicable material requirement
of law to which such Securityholder or any Affiliate is bound or to which any of
such Persons or its assets is subject.

            (b)   Record Owner; Proxy. Such Securityholder (i) is the record
owner of the number of Subject Securities set forth opposite its name on
Schedule A attached to this Agreement and (ii) is not a party to any proxy,
voting trust or other agreement which is inconsistent with, conflicts with or
violates any provision of this Agreement. No Securityholder shall grant any
proxy or become party to any voting trust or other agreement which is
inconsistent with, conflicts with or violates any provision of this Agreement.

      Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Institutional Investor as follows:

            (a)   Authorization; No Breach. The execution, delivery and
performance of this Agreement has been duly authorized by or on behalf of the
Company. This Agreement constitutes a legal, valid and binding obligation of the
Company, enforceable in accordance with its terms. The execution and delivery by
the Company of this Agreement, and the fulfillment of and compliance with the
terms hereof by the Company, does not and will not (a) conflict with or result
in a breach of the terms, conditions or provisions of, (b) result in a violation
of, or, (c) require any consent that has not been obtained or made of, from,
with or to, any Person pursuant to, the constituent documents of the Company or
any or its Subsidiaries, or any agreement, instrument or other document, or any
applicable material requirement of law to which the Company or any of its
Subsidiaries or any of its Affiliates is bound or to which any of such Persons
or its assets is subject.

      Section 7. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this
Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal



                                     - 5 -
<PAGE>   6

or unenforceable provision had not been contained herein.

      Section 8. Successors and Assigns. Except as otherwise provided herein,
this Agreement shall bind and inure to the benefit of and be enforceable by the
Company and the Institutional Investors and their respective successors and
assigns; provided that (i) a Person acquiring Investor Shares in a public market
transaction including a sale by an Institutional Investor of Investor Shares in
the Nasdaq Stock Market shall not be considered a successor or assignee of the
selling Institutional Investor as a result thereof, (ii) the Institutional
Investors shall give prompt written notice to the Company of the name and
address of their respective successors and assigns and (iii) the Company may not
assign any of its obligations under this Agreement without the Required Investor
Approval. This Agreement shall be binding upon the Securityholders and
Institutional Investors so long as they hold Subject Securities.

      Section 9. Counterparts; Fax Signatures. This Agreement may be executed in
multiple counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same agreement. Signatures sent by
telecopy shall be deemed to constitute original signatures.

      Section 10. Remedies. Each party to this Agreement shall be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that money damages would not be an adequate remedy for any breach of the
provisions of the Agreement and that the Company or any Institutional Investor
may in its sole discretion apply to any court of law or equity or competent
jurisdiction for specific performance and/or injunctive relief (without posting
a bond or other security) in order to enforce or prevent any violation of the
provisions of this Agreement.

      Section 11. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) or sent by telecopy to the Company at the address set forth below and
to any other recipient at the address indicated on the Schedule attached hereto
or at such address or to the attention of such other Person as the recipient
party has specified by prior written notice to the sending party. Notices shall
be deemed to have been given hereunder when delivered personally, when delivery
is confirmed by telecopy, three days after deposit in the U.S. mail and one day
after deposit with a reputable overnight courier service.

                  MGC Communications, Inc.
                  3301 North Buffalo Drive
                  Las Vegas, Nevada  89129
                  Attention:  Maurice J. Gallagher, Jr.
                  Facsimile:  (702) 310-5715
                  Telephone:  (702) 310-1000

      Section 12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Rhode Island, without
giving effect to any choice of law



                                     - 6 -
<PAGE>   7

or conflict of law rules or provisions (whether of the State of Rhode Island or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Rhode Island; provided that the General
Corporation Law of the State of Nevada shall govern all issues concerning the
voting of the Subject Securities.

      Section 13. Descriptive Headings; Interpretation. The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. Reference to any agreement, document or
instrument means such agreement, document or instrument as amended or otherwise
modified from time to time in accordance with the terms thereof and, if
applicable, hereof. The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. Unless otherwise
specified herein, the term "or" has the inclusive meaning represented by the
term "and/or" and the term "including" is not limiting. All references as to
"Sections", "Subsections", "Articles", "Schedules" and "Exhibits" shall be to
Section, Subsections, Articles, Schedules and Exhibits, respectively, of this
Agreement unless otherwise specifically provided.

      Section 14. No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.

      Section 15. No Third Party Beneficiaries. This Agreement is not intended
to confer any rights or remedies upon any Person other than the parties hereto
and their successors and permitted assigns.

      Section 16. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.

      Section 17. Termination. This Agreement shall terminate upon the earlier
to occur of (i) seven (7) years from the date hereof or (ii) the date upon which
(A) less than one-third (1/3) of both (x) the number of shares of Series B
Preferred initially issued remains outstanding and (y) the number of shares of
Series C Preferred initially issued remains outstanding and (B) the number of
Investor Shares outstanding represents less than five percent (5%) of the
outstanding Common Stock, assuming conversion of all outstanding shares of
Series B Preferred and Series C Preferred.

            [THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY.]




                                     - 7 -
<PAGE>   8



      IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.

                               MGC COMMUNICATIONS, INC.


                               By:
                                  ----------------------------------
                               Name:
                                    -------------------------------
                               Title:
                                     --------------------------------


                               PROVIDENCE EQUITY PARTNERS III L.P.
                               By:  Providence Equity Partners III LLC,
                                       its general partner


                               By:
                                  ---------------------------------
                                       Managing Director


                               PROVIDENCE EQUITY OPERATING PARTNERS III L.P.
                               By:  Providence Equity Partners III LLC,
                                       its general partner


                               By:
                                  ----------------------------------
                               Name:
                                    -------------------------------
                               Title:
                                     --------------------------------


                               J K & B CAPITAL III L.P.
                               By:  JK&B Capital, LLC, its general partner

                               By:
                                  ----------------------------------
                               Name:
                                    -------------------------------
                               Title:
                                     --------------------------------



                 [SIGNATURE PAGE TO SECURITYHOLDERS' AGREEMENT]




                                     - 8 -
<PAGE>   9




                                        WIND POINT PARTNERS III, L.P.


                                        By:
                                        Name:
                                        Title:

                                        WIND POINT EXECUTIVE ADVISOR
                                        PARTNERS III, L.P.


                                        By:
                                        Name:
                                        Title:


                                        By:
                                        Name:
                                        Title:



                                        By:
                                        Name:
                                        Title:



                                        By:
                                        Name:
                                        Title:



                                        By:
                                        Name:
                                        Title:

                 [SIGNATURE PAGE TO SECURITYHOLDERS' AGREEMENT]




                                     - 9 -
<PAGE>   10




                                          By:
                                          Name:
                                          Title:



                                          By:
                                          Name:
                                          Title:



                                          By:
                                          Name:
                                          Title:


                 [SIGNATURE PAGE TO SECURITYHOLDERS' AGREEMENT]



                                     - 10 -
<PAGE>   11




                             JK&B CAPITAL, L.P.
                             By:                        , its general partner



                             By:
                                  -----------------------------
                                     Name:
                                     Title:


                             JK&B CAPITAL II, L.P.
                             By:                        , its general partner



                             By:
                                  -----------------------------
                                     Name:
                                     Title:



                             JK&B CAPITAL III QIP, L.P.
                             By:                        , its general partner


                             By:
                                  -----------------------------
                                     Name:
                                     Title:











                 [SIGNATURE PAGE TO SECURITYHOLDERS' AGREEMENT]



                                     - 11 -
<PAGE>   12




                    SCHEDULE A TO SECURITYHOLDERS' AGREEMENT

<TABLE>
<CAPTION>
                                                                                            TOTAL NUMBER OF SHARES OF
                                                                                            COMMON STOCK OR PREFERRED
     STOCKHOLDER                       DETAIL                                                     SHARES OWNED
     -----------                       ------                                                     ------------
                                                                                   COMMON                               PREFERRED
                                                                                   ------                               ---------

<S>                              <C>                                            <C>                              <C>
Maurice Gallagher                Direct ownership - 22,500                          3,190,546                                 -0-
                                 Various trusts (1) - 1,478,146
                                 Gallagher Family Investments, LP -
                                 1,650,000
                                 Gallagher Corp. - 39,900

[NIELD MONTGOMERY]                                                                  [736,500]                                 -0-

Timothy Flynn                    Direct ownership - 790,500                           892,500                                 -0-
                                 Flynn Family Investments, LP - 60,000
                                 Flynn Corp. - 42,000

                                                                                                                 555,556 Series B
David Kronfeld                   JK&B Capital and affiliates (2) - 968,143          1,145,371                    357,143 Series C
                                 Boston Capital Ventures III, L.P. -
                                 171,428
                                 Direct ownership - 5,800

Thomas Neustaetter               Strategic Investment
                                 Partners Limited - 342,856                         [694,512]                                 -0-
                                 S-C Phoenix Holdings, LLC - 214,285
                                 Winston Partners II LDC - 85,714
                                 Winston Partners II LLC - 42,857
                                 Direct Ownership - 8,800

Wind Point Executive
Advisor Partners III, L.P.                                                          [      ]                      5,043 Series B

Wind Point Partners III, L.P.
(Jim TenBroek)                                                                     [685,714]                    550,513 Series B

Robert L./Carol A. Priddy                                                            889,500                                 -0-

Hayden & Ladonna Fleming
Revocable Trust                                                                      140,369                                 -0-

Hayden Fleming IRA                                                                     4,000                                 -0-

Ladonna Fleming IRA                                                                    6,500                                 -0-

Circle F Ventures, LLC                                                               664,400                                 -0-
</TABLE>



                                     - 12 -
<PAGE>   13

<TABLE>
<S>                                                                                  <C>                                      <C>
Mitch Allee                                                                          470,500                                 -0-

John Boersma                                                                          64,000                                 -0-
</TABLE>




                                     - 13 -
<PAGE>   14





<TABLE>
<CAPTION>


                                                                                                 TOTAL NUMBER OF
                                                                                                SHARES OF COMMON
                                                                                                STOCK OR PREFERRED
                STOCKHOLDER                          DETAIL                                       SHARES OWNED
                -----------                          ------                                       ------------

                                                                                         COMMON                           PREFERRED
                                                                                         ------                           ---------

<S>                                                  <C>                                 <C>                   <C>
Dave Clark                                                                               13,620                                 -0-

Providence Equity Partners III                                                                                   4,080,320 Series B
L.P.                                                                                        -0-                    886,259 Series C

Providence Equity Operating
Partners III L.P.                                                                           -0-                     30,792 Series B
                                                                                                                     6,598 Series C


                                                                       TOTAL:               [ ]
                                                           TOTAL OUTSTANDING:               [ ]
                                                                  PERCENTAGE:               [ ]
</TABLE>

(1)   Gallagher Stock Trust dated 4/2/94
      Gallagher Trust dated 10/20/92

(2)   JK&B Capital, L.P.
      JK&B Capital II, L.P.



                                     - 14 -

<PAGE>   1
                                                                    Exhibit 4.10



                            MGC COMMUNICATIONS, INC.

                      SERIES C CONVERTIBLE PREFERRED STOCK
                           CERTIFICATE OF DESIGNATION

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

                 Pursuant to Sections 78.195 and 78.1955 of the
                 General Corporation Law of the State of Nevada

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

     MGC Communications, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Nevada, does hereby
certify that pursuant to the authority vested in the Board of Directors of the
Corporation by its Articles of Incorporation, as amended, and pursuant to the
provisions of Sections 78.195 and 78.1955 of the General Corporation Law of the
State of Nevada, said Board of Directors, by unanimous written consent or at a
meeting duly called and held, adopted the following resolution which remains in
full force and effect as of the date hereof:

     RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation (the "Board of Directors") by its Articles of Incorporation,
as amended (hereinafter referred to as the "Articles of Incorporation"), the
Board of Directors does hereby create, authorize and provide for the issuance of
Series C Convertible Preferred Stock, par value $.001 per share, consisting of
1,250,000 shares, having the following designations, preferences and relative
and other special rights, qualifications, limitations and restrictions:

     1.   Designation. The designation of such series is "Series C Convertible
Preferred Stock" (hereinafter in this Certificate of Designation called the
"Series C Preferred") and the number of shares constituting such series shall be
1,250,000, which number may be decreased (but not increased) by the Board of
Directors without a vote of stockholders; provided, however, that such number
may not be decreased below the number of then currently outstanding shares of
Series C Preferred, plus shares issuable upon the exercise of any then
outstanding options, warrants or rights to acquire Series C Preferred. All
capitalized terms used in this Certificate of Designation and not otherwise
defined shall have the meaning given to such terms in Section 12 hereof.

     2.   Dividend Rights.

          Holders of Series C Preferred, prior to and in preference to the
holders of Junior Securities, will be entitled to receive, out of funds legally
available for such purpose, cumulative dividends as provided in this Section 2.
Dividends on each share of Series C Preferred shall
<PAGE>   2
accrue at the rate of 10% per annum on the sum of (i) the Series C Liquidation
Value and (ii) all accrued and unpaid dividends on such share of Series C
Preferred from the date of issuance. Such dividends will be calculated and
compounded annually on December 31 of each year (each a "dividend date") in
respect of the prior twelve month period (the initial such calculation to be
made at the same rate for the number of days elapsed from the date of issue of
Series C Preferred to and including the 31st day of December, 1999). Such
dividends shall commence to accrue on each share of Series C Preferred from the
date of issuance thereof whether or not declared by the Board of Directors, and
whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends, and shall continue to accrue
thereon until the date the Series C Liquidation Value of such share (plus all
accrued and unpaid dividends thereon) is paid in full. For purposes of
determining the amount of dividends accrued on the Series C Preferred pursuant
to this Section 2 in connection with the sale, conversion, redemption or
repurchase of any Series C Preferred which may occur between two dividend dates,
the applicable dividend rate for such period shall be multiplied by a fraction,
the numerator of which is the actual number of days elapsed in the then current
annual period and the denominator of which is the total number of days
comprising such annual period. All dividends shall be payable only as, when and
in the manner provided for in, Sections 4 and 5 hereof. Except as otherwise
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to the Series C Preferred and Series B
Preferred, such payment shall be distributed ratably among the holders of Series
C Preferred, Series B Preferred and such other class or series of the
Corporation's Preferred Stock which by its terms is then entitled to receive
dividends on a parity with the Series B Preferred and Series C Preferred in
proportion to the full dividend amount each such holder would be entitled to
receive upon payment of all accrued dividends on the Series C Preferred, Series
B Preferred and such other Preferred Stock.

     3.   Voting Rights.

          (a)  Voting Generally. Except as otherwise required by law or as
provided in this Section 3, the Series C Preferred will vote together with the
Common Stock, and not as a separate class, at any annual or special meeting of
stockholders, and may act by written consent in the same manner as the Common
Stock. In either case, each holder of shares of Series C Preferred will be
entitled to such number of votes as will be equal to the number of whole shares
of Common Stock into which such holder's aggregate number of shares of Series C
Preferred are convertible pursuant to Section 5 hereof (assuming only for
purposes of this calculation that accrued and unpaid dividends on such shares
are not subject to conversion as described in Section 5 (e)) immediately after
the close of business on the record date fixed for such meeting or the effective
date of such written consent.

          (b)  Separate Vote of Series C Preferred. So long as not less than
one-third of the number of shares of Series C Preferred initially issued remain
outstanding, the vote or written consent of a Majority of the Series C Holders
shall be necessary for effecting or validating the following actions (each a
"Restricted Action"):

               (i)    increase or decrease (other than by redemption or
                      conversion) the total number of authorized shares of, or
                      issue any series of, Preferred Stock


                                      - 2 -
<PAGE>   3
                      which is senior in respect of dividends, liquidation or
                      otherwise to or on a pari passu basis with the Series C
                      Preferred ("Restricted Preferred Stock");

               (ii)   permit the Corporation or any Subsidiary to sell, convey
                      or otherwise dispose of assets having a value in excess of
                      $5,000,000; or merge into or consolidate with any other
                      Person (other than the Corporation or a Subsidiary); or
                      effect a Sale of the Company;

               (iii)  voluntarily liquidate, dissolve or wind up the
                      Corporation;

               (iv)   alter or change the rights, preferences or privileges of
                      the shares of Series C Preferred so as to affect adversely
                      such shares;

               (v)    declare or pay any dividends or make other distribution on
                      any Junior Securities except for (x) the repurchase of any
                      Common Stock subject to a repurchase right for terminated
                      employees or independent contractors and (y) issuances of
                      Common Stock in satisfaction of accrued and unpaid
                      dividends on Junior Securities; provided such issuances
                      shall not affect the antidilution rights of the holders of
                      Series C Preferred provided for in Section 5 hereof;

               (vi)   permit the Corporation or any Subsidiary to enter into any
                      transaction or series of related transactions with any
                      Affiliate of the Corporation, other than those directly
                      related to (1) pay or benefits (including stock options)
                      provided to Affiliates who are employees or Directors in
                      accordance with existing agreements or past practices or
                      approved with Required Board Approval; (2) the lease of
                      additional office space in the Las Vegas metropolitan area
                      on terms consistent with the existing leases to which the
                      Corporation is a party, and as approved by the Required
                      Board Approval; or (3) any other arms-length, commercially
                      reasonable transactions approved by the disinterested
                      Directors in an amount not to exceed $100,000 in any year;

               (vii)  permit the Corporation or any Subsidiary to acquire the
                      assets or securities of any Person except for acquisitions
                      involving cash, securities or other property with an
                      aggregate Fair Market Value of less than (x) $50 million
                      for any single acquisition and (y) $100 million in the
                      aggregate for all such acquisitions during any 12-month
                      period;

               (viii) permit the Corporation or any Subsidiary to incur
                      additional Indebtedness (other than Indebtedness incurred
                      as a result of the refinancing of existing Indebtedness,
                      provided the total outstanding Indebtedness does not
                      increase as a result of such refinancing) in excess of (x)
                      an aggregate at any one time outstanding for the
                      Corporation and


                                     - 3 -
<PAGE>   4
                      its Subsidiaries of up to $100,000,000 until May 5, 2000
                      plus accrued and unpaid interest on such Indebtedness, (y)
                      after May 5, 2000 until May 5, 2001 an aggregate at any
                      one time outstanding for the Corporation and its
                      subsidiaries of up to $200,000,000 plus accrued and unpaid
                      interest on such Indebtedness and (z) thereafter an
                      aggregate at any one time outstanding for the Corporation
                      and its subsidiaries of $250,000,000 plus accrued and
                      unpaid interest thereon provided that for the purposes of
                      this Section 3(b)(viii), (A) the amount of additional
                      Indebtedness otherwise permitted by this Section 3(b)
                      (viii) shall be reduced by the aggregate liquidation value
                      of all outstanding Restricted Preferred Stock other than
                      up to $200 million of the Corporation's Series D
                      Convertible Preferred Stock ("Series D Preferred") and (B)
                      Indebtedness shall not be deemed to include purchase money
                      financing for capital expenditures in a budget approved by
                      the Required Board Approval;

               (ix)   make any material changes to the Corporation's then
                      current business plan;

               (x)    hire a chief executive officer of the Corporation;

               (xi)   organize any new direct or indirect Subsidiaries of the
                      Corporation other than wholly-owned Subsidiaries or any
                      joint ventures between the Corporation and a third party
                      that involve the diversion of assets or business of the
                      Corporation to the joint venture entity, amend or modify
                      any such joint venture or partnership agreement to which
                      the Corporation or any Subsidiary is a party or
                      restructure any Subsidiary, partnership or such joint
                      venture involving the Corporation or any Subsidiary; or

               (xii)  issue Additional Shares of Common Stock (or issue other
                      rights that, pursuant to Section 5(k), are deemed to
                      constitute Additional Shares of Common Stock) to the
                      extent that as a result of such issuance (or deemed
                      issuance) the Series C Conversion Price would be reduced
                      to a price less than the Series C Liquidation Value.

          (c)  The holders of the requisite percentage of Series C Preferred
shall either approve or reject a Restricted Action described in Section
3(b)(vii)-(xi) (a "Special Restricted Action") within twenty (20) business days
of receipt by the holders of Series C Preferred of written notice and a
reasonably detailed description of the proposed Restricted Action; provided that
the failure of the holders of Series C Preferred to approve or reject the
Special Restricted Action within such time period shall not be deemed to be an
approval thereof.

          (d)  In the event the Series C Holders shall reject a Special
Restricted Action, the Corporation shall have the right, at the written election
of the Board, notice of which (the


                                     - 4 -
<PAGE>   5
"Company Redemption Notice") shall be promptly sent to the Series C Holders, to
initiate an Optional Redemption, which will be subject to the terms and
conditions contained in Section 6. In the Company Redemption Notice, the
Corporation shall specify the Optional Redemption Date for purposes of Section
6, which Optional Redemption Date shall not be more than sixty (60) days from
the date of the Company Redemption Notice. Within ten (10) business days of the
receipt of the Company Redemption Notice by the Series C Holders, a Majority of
the Series C Holders shall either (i) acknowledge and agree in writing to the
Optional Redemption or (ii) approve the Special Restricted Action that is the
subject of the Optional Redemption, in which event the Optional Redemption shall
be terminated. In the event the Special Restricted Action is rejected by the
Series C Holders but such Special Restricted Action is not effected by the
Corporation within ninety (90) days of the delivery of the Company Redemption
Notice, and the Optional Redemption has not yet been consummated, a Majority of
the Series C Holders may elect in writing to void the Optional Redemption and
return to the status quo ante.

          (e)  In the event the Corporation takes any Restricted Action without
obtaining the approval of the holders of the Series C Preferred as required by
Section 3(b) (an "Event of Non-Compliance") and a Majority of the Series C
Holders gives written notice to the Board of Directors of the Corporation of
such an Event of Non-Compliance, the Corporation shall then have thirty (30)
days to take such action as is necessary to cure such default to the
satisfaction of a Majority of the Series C Holders. If the Corporation is unable
to cure the Event of Non-Compliance, a Majority of the Series C Holders may then
elect to initiate a Sale of the Company by submitting written notice of that
election to the Board of Directors of the Corporation (a "Sale Notice"). The
Board of Directors will then have an obligation to use its best efforts to
effect a Sale of the Company; provided that within twenty (20) business days of
its receipt of a Sale Notice electing a Sale of the Company, the Board may elect
to initiate an Optional Redemption pursuant to and subject to the terms and
conditions of Section 6 hereof in lieu of a Sale of the Company by providing a
Company Redemption Notice to the Series C Holders. In the Company Redemption
Notice, the Corporation shall specify the Optional Redemption Date for purposes
of Section 6, which Optional Redemption Date shall not be more than sixty (60)
days from the date of the Company Redemption Notice.

          (f)  In the event a Sale of the Company has not been consummated
within six (6) months of a Sale Notice electing a Sale of the Company (and the
Corporation had not elected to initiate an Optional Redemption in lieu of a Sale
of the Company within the time period set forth in Section 3(e)), the Series C
Holders, voting as a separate class, will then have the right to elect that
number of the Directors of the Corporation as shall constitute a majority of the
total number of Directors of the Corporation as shall from time to time
constitute the Board; provided, however, in the event a Majority of Series B
Holders has also initiated a Sale of the Company pursuant to Section 3(e) of the
Series B Certificate, then the Series B Holders and Series C Holders, voting
together as a single class, will have the right to elect that number of
Directors of the Corporation as shall constitute a majority of the total number
of Directors as shall from time to time constitute the Board. A special meeting
of the stockholders shall be called by the Corporation from time to time at the
written instruction of a Majority of the Series B Holders or a Majority of the
Series C Holders for the purpose of electing such Directors.


                                     - 5 -
<PAGE>   6
     4.   Liquidation Rights. Upon any liquidation, dissolution or winding up of
the Corporation, voluntary or involuntary:

          (a)  The holders of Series C Preferred will be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the Corporation to the holders of the Junior Securities by reason of
their ownership thereof, but subsequent to the repurchase or payment in full or
other satisfaction of the Senior Secured Notes, an amount per share of Series C
Preferred equal to the greater of (i) the Series C Liquidation Value plus the
greater of (x) the Minimum Dividend Amount and (y) all accrued but unpaid
dividends on such share of Series C Preferred at the rate of 10% per annum,
compounding annually, from the Original Issue Date and (ii) the amount the
holder of one share of Series C Preferred would have received in such
liquidation, dissolution, winding up, merger or Sale of the Company if such
share of Series C Preferred had been converted to Common Stock pursuant to
Section 5 immediately prior to such event ; provided if such event occurs prior
to the first anniversary of the Original Issue Date, such conversion shall be
deemed to have occurred on such first anniversary of the Original Issue Date.
For the avoidance of doubt, in determining the amount a holder of Series C
Preferred would have received in any liquidation, dissolution, winding up,
merger or Sale of the Company under clause (ii) of the preceding sentence,
except as set forth in the immediately succeeding sentence hereof, all accrued
dividends on the Series C Preferred shall be assumed to have been paid to the
holders thereof immediately prior to such event in the manner provided for in
Section 5(e) hereof. Notwithstanding the foregoing, all or a portion of accrued
but unpaid dividends shall be extinguished and shall not be payable or deemed
payable upon any liquidation, dissolution or winding up (or Sale of the Company
deemed a liquidation pursuant to Section 4(b) hereof) if, and only to the extent
that, (i) such liquidation, dissolution or winding up occurs on or before the
thirty (30) month anniversary of the Original Issue Date and (ii) the payment of
dividends would result in each holder of Series C Preferred receiving cash
and/or Freely Tradeable Securities with a Fair Market Value in an amount that
exceeds on a per share basis the sum of (x) 2.0 times the Series C Liquidation
Value and (y) the Minimum Dividend Amount (a "Qualified Return").

          If the assets of the Corporation are insufficient to make payment in
full to all holders of Series B Preferred, Series C Preferred and any other
class or series of the Corporation's Preferred Stock which by its terms is on a
parity upon a liquidation, dissolution or winding up with the Series C Preferred
and Series B Preferred ("Parity Preferred") of the full preferential amounts to
which they may be entitled upon any liquidation, dissolution or winding up
(including a Sale of the Company deemed a liquidation pursuant to Section 4(b)
hereof and Section 4(b) of the Series B Certificate), such assets shall be
distributed (A) first to satisfy all accrued and unpaid dividends on the Series
C Preferred, Series B Preferred and Parity Preferred (the "Accrued Dividend
Amounts"), and if such assets are insufficient to satisfy the Accrued Dividend
Amounts in full, then such assets shall be distributed ratably among the holders
of Series B Preferred, Series C Preferred and Parity Preferred in proportion to
the full amount each such holder would otherwise be entitled to receive in
respect of the Accrued Dividend Amounts and (B) after the payment or
satisfaction in full of the Accrued Dividend Amounts, the balance of such assets
shall be distributed ratably among the holders of Series B Preferred, Series C
Preferred and Parity Preferred in proportion to the full preferential amounts
(exclusive of accrued dividends) each such


                                     - 6 -
<PAGE>   7
holder would otherwise be entitled to receive. In any distribution of assets of
the Corporation in connection with any liquidation, dissolution, winding up,
merger or Sale of the Company, the preferential amounts distributable to the
holders of Series B Preferred and Series C Preferred shall, unless the Majority
of the Series B Holders and the Majority of the Series C Holders agree
otherwise, be satisfied to the maximum extent possible with cash, or to the
extent there is insufficient cash available, cash to the maximum extent
available and the balance in Freely Tradeable Securities.

          (b)  At the written election of the holders of a Majority of the
Series C Preferred, a Sale of the Company shall be deemed to be a liquidation,
dissolution or winding up of the Corporation, as those terms are used in this
Section 4. In the event a Majority of the Series C Holders elect to treat such
Sale of the Company as a liquidation, dissolution or winding up of the
Corporation, the holders of shares of Series C Preferred shall have the right to
preference (on a pari passu basis with holders of Series B Preferred) upon the
distribution of assets or the proceeds to be received as provided in this
Section 4.

          (c)  After setting apart or paying in full the preferential amounts
due the holders of Series B Preferred, Series C Preferred and Parity Preferred
pursuant to subparagraph (a) of this Section 4, the remaining assets of the
Corporation available for distribution to shareholders, if any, shall be
distributed to the other stockholders of the Corporation as their respective
interests may appear.

          (d)  In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the Corporation shall, within ten
(10) days after the date the Board of Directors approves such action, or twenty
(20) days prior to any shareholders' meeting called to approve such action, or
twenty (20) days after the commencement of an involuntary proceeding, whichever
is earlier, give each holder of shares of Series C Preferred initial written
notice of the proposed action, including a description of the stock, cash and
property to be received by the holders of shares of Series C Preferred upon
consummation of the proposed action and the date of delivery thereof.

          (e)  The Corporation shall not consummate any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation before the expiration
of thirty (30) days after the mailing of the initial notice or ten (10) days
after the mailing of any subsequent written notice, whichever is later.

          (f)  In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation (other than a deemed liquidation
upon a Sale of the Company pursuant to Section 4(b)) which will involve the
distribution of assets other than cash and Freely Tradeable Securities, the
Corporation shall promptly determine the Fair Market Value of such other assets
to be distributed to the holders of shares of Series B Preferred, Series C
Preferred and the holders of shares of Common Stock.

     5.   Conversion Rights.


                                     - 7 -
<PAGE>   8
          The holders of the Series C Preferred will have the following rights
with respect to the conversion of the Series C Preferred into shares of Common
Stock:

          (a)  Optional Conversion. Subject to and in compliance with the
provisions of this Section 5, any shares of Series C Preferred may, at the
option of the holder, be converted at any time into fully-paid and nonassessable
shares of Common Stock (an "Optional Conversion"). The number of shares of
Common Stock to which a holder of Series C Preferred will be entitled upon
conversion (other than in respect of accrued dividends thereon, which shall be
payable as provided in Section 5(e) hereof) will be the product obtained by
multiplying the "Series C Conversion Rate" then in effect (determined as
provided in Section 5(c)), by the number of shares of Series C Preferred being
converted.

          (b)  Mandatory Conversion.

               (1)  At any time commencing on the earlier of (i) the date that
is 386 days after the Original Issue Date or (ii) the date on which either the
Series B Holders or the Series C Holders exercise demand registration rights
under Section 2.1(a) of that certain Amended and Restated Registration Rights
Agreement dated the Original Issue Date, upon the written election of the Board
of Directors of the Corporation given after such earlier date, each share of
Series C Preferred shall be automatically converted into shares of Common Stock
at the then-effective Series C Conversion Rate if the Market Threshold has been
achieved and the Board makes this election and provides the Threshold Notice to
the Series C Holders within 60 days of the first day as of which the Market
Threshold had been achieved (a "Mandatory Conversion"). Payment of accrued
dividends on the Series C Preferred being converted pursuant to a Mandatory
Conversion shall be made as provided in Section 5(e) hereof. In the Threshold
Notice, the Board shall certify its calculation of the Market Threshold, and
provide each holder with such supporting documentation as such holder may
reasonably request.

               (2)  Upon the occurrence of the events specified in paragraph (1)
above, the outstanding shares of Series C Preferred will be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation will
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Series C Preferred are either delivered to the Corporation or its transfer agent
as provided in Section 5(e) below.

          (c)  Conversion Rate. The conversion rate in effect at any time for
conversion of the Series C Preferred (the "Series C Conversion Rate") will be
the quotient obtained by dividing Twenty-eight Dollars ($28.00) by the "Series C
Conversion Price," calculated as provide in Section 5(d).

          (d)  Series C Conversion Price. (i) The conversion price for the
Series C Preferred will initially be Twenty-eight Dollars ($28.00) (the "Series
C Conversion Price"). Such initial Series C Conversion Price will be adjusted
from time to time in accordance with this Section 5. All references to the
Series C Conversion Price herein will mean the Series C Conversion Price, as


                                     - 8 -
<PAGE>   9
so adjusted.

          (e)  Mechanics of Conversion. Each holder of Series C Preferred who
desires or is obligated to convert the same into shares of Common Stock pursuant
to this Section 5 will surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
C Preferred and will give written notice to the Corporation at such office that
such holder elects or is obligated to convert the same. Such notice will state
the number of shares of Series C Preferred being converted. Thereupon, the
Corporation will promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock which
equals the number of shares of Common Stock to which such holder is entitled
under the then-effective Series C Conversion Rate. In addition, upon any such
conversion the holder of the shares of Series C Preferred being converted shall
be issued, in satisfaction of the accrued dividends on the Series C Preferred
being converted, that number of shares of Common Stock as is equal to the
greater of (i) the number of shares of Common Stock whose Fair Market Value
equals the amount of all accrued but unpaid dividends (calculated at the rate of
10% per annum, compounded annually, from the Original Issue Date, but in no
event less than the Minimum Dividend Amount) on the shares of Series C Preferred
being converted and (ii) the number of shares of Common Stock obtained by
dividing the aggregate amount of accrued but unpaid dividends on the shares of
Series C Preferred being converted (but not less than the Minimum Dividend
Amount) by the Series C Conversion Price then in effect; provided, however, that
(A) all of the accrued but unpaid dividends in excess of the Minimum Dividend
Amount shall be extinguished and shall not be payable with respect to shares of
Series C Preferred in the event such shares are being converted on or before the
thirty (30) month anniversary of the Original Issue Date pursuant to (x) a
Mandatory Conversion or (y) an Optional Conversion within 60 days of the first
day as of which the Market Threshold had been achieved; and (B) the accrued but
unpaid dividends shall be extinguished and shall not be payable in an Optional
Conversion that takes place on or before the thirty (30) month anniversary of
the Original Issue Date as part of a Sale of the Company if, and to the extent
that, the payment of dividends in connection with such Sale of the Company would
result in each holder receiving an amount of cash and/or Freely Tradeable
Securities with a Fair Market Value that exceeds a Qualified Return. In
addition, the Corporation shall promptly deliver to the holder of Series C
Preferred being converted a certificate representing those shares of Series C
Preferred, if any, that were not converted. Such conversion will be deemed to
have been made at the close of business on the date of such surrender of the
certificates representing the shares of Series C Preferred to be converted in
the event of a conversion pursuant to Section 5(a) hereof or, in the case of a
Mandatory Conversion, upon the occurrence of the events specified in Section
5(b)(1) hereof, and the Person entitled to receive the shares of Common Stock
issuable upon such conversion will be treated for all purposes as the record
holder of such shares of Common Stock on such date.

          (f)  Adjustment for Stock Splits and Combinations. If the Corporation
at any time or from time to time after the date that the Original Issue Date
effects a subdivision of the outstanding Common Stock, the Series C Conversion
Price, in effect immediately before that subdivision will be proportionately
decreased. Conversely, if the Corporation at any time or from time to time after
the Original Issue Date combines the outstanding shares of Common Stock into a
smaller number of shares, the Series C Conversion Price in effect immediately
before the


                                     - 9 -
<PAGE>   10
combination will be proportionately increased. Any adjustment under this Section
5(f) will become effective at the close of business on the record date as of
which the subdivision or combination will become effective.

          (g)  Adjustment for Common Stock Dividends and Distributions. If the
Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, in each such event the Series C Conversion Price that is
then in effect will be decreased as of the time of such issuance or, in the
event such record date is fixed, as of the close of business on such record
date, by multiplying the Series C Conversion Price then in effect by a fraction
(1) the numerator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (2) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Series C Conversion Price will be recomputed accordingly as
of the close of business on such record date and thereafter the Series C
Conversion Price will be adjusted pursuant to this Section 5(g) to reflect the
actual payment of such dividend or distribution.

          (h)  Adjustments for Other Dividends and Distributions. If the
Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock, in each such event provision
will be made so that the holders of the Series C Preferred will receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of the other securities of the Corporation
which they would have received had their Series C Preferred been converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 5 with respect to the rights of the holders of the Series C Preferred or
with respect to such other securities by their terms.

          (i)  Adjustment for Reclassification, Exchange and Substitution. If at
any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series C Preferred is changed into the same
or a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 5), in
any such event each holder of Series C Preferred will have the right thereafter
to convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or the change
by holders of the maximum number of shares of Common Stock into which such
shares of Series C Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to


                                     - 10 -
<PAGE>   11
such other securities or property by the terms thereof.

          (j)  Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Original Issue Date there is a
merger, consolidation, recapitalization, reclassification, sale of all or
substantially all of the Corporation's assets or reorganization involving the
Common Stock (collectively, a "capital reorganization") (other than a Sale of
the Company provided for in Section 4(b) or a merger, consolidation, sale of
assets, recapitalization, subdivision, combination, reclassification, exchange
or substitution of shares provided for elsewhere in this Section 5), as a part
of such capital reorganization, provision will be made so that the holders of
the Series C Preferred will thereafter be entitled to receive upon conversion of
the Series C Preferred the number of shares of stock or other securities or
property of the Corporation to which a holder of the number of shares of Common
Stock deliverable upon conversion would have been entitled on such capital
reorganization, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment will be made in the
application of the provisions of this Section 5 with respect to the rights of
the holders of Series C Preferred after the capital reorganization to the end
that the provisions of this Section 5 (including adjustment of the Series C
Conversion Price then in effect and the number of shares issuable upon
conversion of the Series C Preferred) will be applicable after that event and be
as nearly equivalent as practicable.

          (k)  Sale of Shares Below Series C Conversion Price.

               (1)  If at any time or from time to time after the Original Issue
Date, the Corporation issues or sells, or is deemed by the provisions of this
Section 5(k) to have issued or sold, Additional Shares of Common Stock (as
hereinafter defined), other than as a dividend or other distribution on any
class of stock as provided in Section 5(g) above, and other than a subdivision
or combination of shares of Common Stock as provided in Section 5(f) above or in
connection with the antidilution provisions set forth in subsection 5(k)(5)
hereof, for an Effective Price (as hereinafter defined) less than the then
effective Series C Conversion Price, then and in each such case, the then
existing Series C Conversion Price will be reduced, as of the opening of
business on the date of such issue or sale, to a price (but in no event to a
price less than the Series C Liquidation Value) determined by dividing (a) the
sum of (1) the product derived by multiplying (i) the Series C Conversion Price
in effect immediately prior to such issue or sale times (ii) the number of
shares of Common Stock deemed outstanding (as defined below) immediately prior
to such issue or sale, plus (2) the consideration, if any, received (or deemed
received pursuant to subsection (k)(2)) by the Corporation upon such issue or
sale, by (b) the number of shares of Common Stock deemed outstanding (as defined
below) immediately after such issue or sale. For the purposes of the preceding
sentence, the number of shares of Common Stock deemed to be outstanding as of a
given date will be the sum of (a) the number of shares of Common Stock actually
outstanding, (b) the number of shares of Common Stock into which the then
outstanding Series C Preferred could be converted if fully converted on the day
immediately preceding the given date, and (c) the number of shares of Common
Stock that could be obtained through the exercise or conversion in full of all
other rights, options, warrants and convertible securities on the day
immediately preceding the given date, regardless of whether or not such
securities are fully exercisable for or convertible into Common Stock at such
time.


                                     - 11 -
<PAGE>   12
               (2)  For the purpose of making any adjustment required under this
Section 5(k), the consideration received by the Corporation for any issue or
sale of securities will (a) to the extent it consists of cash, be computed at
the net amount of cash received by the Corporation after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Corporation in connection with such issue or sale but without deduction
of any expenses payable by the Corporation, (b) to the extent it consists of
property other than cash, be computed at the Fair Market Value of that property,
and (c) if Additional Shares of Common Stock, Convertible Securities (as
hereinafter defined) or rights or options to purchase either Additional Shares
of Common Stock or Convertible Securities are issued or sold together with other
stock or securities or other assets of the Corporation for a consideration that
covers both, be computed as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors with
Required Board Approval to be allocable to such Additional Shares of Common
Stock, Convertible Securities or rights or options.

               (3)  For the purpose of the adjustment required under this
Section 5(k), if the Corporation issues or sells any rights or options for the
purchase of, or stock or other securities exchangeable for or convertible into,
Additional Shares of Common Stock (such exchangeable or convertible stock or
securities being herein referred to as "Convertible Securities") and if the
Effective Price of such Additional Shares of Common Stock is less than the
Series C Conversion Price in effect, the Corporation will be deemed to have
issued at the time of the issuance of such rights or options or Convertible
Securities the maximum number of Additional Shares of Common Stock issuable upon
exercise or conversion or exchange thereof and to have received consideration
for the issuance of such shares an amount equal to the total amount of
consideration, if any, received by the Corporation for the issuance of such
rights or options or Convertible Securities, plus, in the case of such rights or
options, the minimum amounts of consideration, if any, payable to the
Corporation upon the exercise of such rights or options, plus in the case of
Convertible Securities, the minimum amounts of consideration, if any, payable to
the Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the conversion or exchange
thereof; provided that if in the case of Convertible Securities the minimum
amount of such consideration cannot be ascertained, but are a function of
antidilution or similar protective clauses, the Corporation shall be deemed to
have received the minimum amounts of consideration without references to such
clauses; provided further that if the minimum amount of consideration payable to
the Corporation upon the exercise or conversion of rights, options or
Convertible Securities is reduced over time or on the occurrence or
non-occurrence of specified events, including by reason of antidilution
adjustments, the Effective Price will be recalculated using the figure to which
such minimum amount of consideration is reduced; provided further that if the
minimum amount of consideration payable to the Corporation upon the exercise or
conversion of such rights, options or Convertible Securities is subsequently
increased, the Effective Price will be again recalculated using the increased
minimum amount of consideration payable to the Corporation upon the exercise or
conversion of such rights, options or Convertible Securities. No further
adjustment of the Series C Conversion Price, as adjusted in each case upon the
issuance of such rights, options or Convertible Securities, will be made as a
result of the actual issuance of Additional Shares of Common Stock on the
exercise of any such rights or options or the exchange or conversion of any such
Convertible Securities. If any such


                                     - 12 -
<PAGE>   13
rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the Series C
Conversion Price, as adjusted upon the issuance of such rights, options or
Convertible Securities, will be readjusted to the Series C Conversion Price that
would have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of Common
Stock, if any, actually issued or sold on the exercise of such rights or options
or upon such conversion and that such Additional Shares of Common Stock, if any,
were issued or sold for the consideration, if any, actually received by the
Corporation for the granting of all such rights or options, whether or not
exercised, plus the consideration received for issuing or selling the
Convertible Securities actually converted, plus the consideration, if any,
actually received by the Corporation (other than by cancellation of liabilities
or obligations evidenced by such Convertible Securities) on the conversion of
such Convertible Securities, provided that such readjustment shall not apply to
prior conversions of Series C Preferred.

               (4)  "Additional Shares of Common Stock" means all shares of
Common Stock issued by the Corporation or deemed to be issued pursuant to this
Section 5(k) whether or not subsequently reacquired or retired by the
Corporation other than (A) shares of Common Stock issued upon conversion of
Series B Preferred and Series C Preferred, (B) options to purchase up to Four
Million Six Hundred Forty Thousand (4,640,000) shares of Common Stock granted to
employees, officers or directors of or consultants or advisors to the
Corporation or any Subsidiary pursuant to the Stock Option Plan and the shares
of Common Stock issuable upon exercise of such options, or such increased number
of shares of Common Stock as has been approved by the Required Board Approval,
(C) Convertible Securities outstanding as of the Original Issue Date and the
shares of Common Stock issuable upon exercise or conversion of such Convertible
Securities, (D) Common Stock issued in satisfaction of accrued and unpaid
dividends on the Series B Preferred, Series C Preferred and any other class or
series of Preferred Stock the rights, privileges and other terms of which have
been approved in writing by the majority of the Series C Holders, and (E) for
purposes of Section 5(k)(5), shares of Common Stock and options to purchase
Common Stock issued prior to the eighteen (18) month anniversary of the Original
Issue Date to the extent that the aggregate Fair Market Value of such shares of
Common Stock issued and as to which options are granted, valued as of the
issuance of such shares and options, do not exceed a total of $5.0 million. The
"Effective Price" of Additional Shares of Common Stock means the quotient
determined by dividing (i) the aggregate consideration received, or deemed to
have been received by the Corporation under this Section 5(k), for the issuance
of such Additional Shares of Common Stock, by (ii) the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold, by the Corporation under this Section 5(k).

               (5)  Notwithstanding the adjustments to the Series C Conversion
Price otherwise provided for in this Section 5(k), in the event the Corporation
at any time or from time to time issues or sells, or is deemed by the provisions
of this Section 5(k) to have issued or sold, Additional Shares of Common Stock
prior to the eighteen (18) month anniversary of the Original Issue Date (other
than as a dividend or other distribution on any class of stock as provided in
Section 5(g) above and other than a subdivision or combination of shares of
Common Stock as provided in Section 5(f) above) for an Effective Price that is
less than the Series C Conversion Price in effect immediately prior to such
issuance or sale (or deemed issuance or sale), then and in


                                     - 13 -
<PAGE>   14
each such event the Series C Conversion Price shall be reduced (but in no event
below the Series C Liquidation Value), concurrently with such issuance or sale
or deemed issuance or sale, as applicable, of such Additional Shares of Common
Stock, to such Effective Price (but in no event shall the then effective Series
C Conversion Price be increased).

               (6)  Notwithstanding any provision of this Section 5 to the
contrary, in no event shall the aggregate number of shares of Common Stock
issuable upon conversion of the Series C Preferred exceed twenty percent (20%)
of the voting power of the Corporation's outstanding capital stock as of the
Original Issue Date, determined in accordance with Rule 4310(H) of the National
Association of Securities Dealers, Inc.

          (l)  Accountants' Certificate of Adjustment. In each case of an
adjustment or readjustment of the Series C Conversion Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series C Preferred, the Corporation, at its expense, will compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and will mail such
certificate, by first class mail, postage prepared, to each registered holder of
Series C Preferred at the holder's address as shown in the Corporation's books.
The certificate will set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based, including
a statement of (1) the Series C Conversion Price at the time in effect, and (2)
the type and amount, if any, of other property that at the time would be
received upon conversion of the Series C Preferred.

          (m)  Notices of Record Date. Upon (1) any taking by the Corporation of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution (other than in connection with the declaration and payment of
regular quarterly dividends in Common Stock on the Series D Preferred), or (2)
any capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation with or into any other corporation, or any
other Sale of the Company, or any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, the Corporation will mail to each
holder of Series C Preferred at least twenty (20) days prior to the record date
specified therein a notice specifying (1) the date on which any such record is
to be taken for the purpose of such dividend or distribution and a description
of such dividend or distribution, (2) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, Sale of the Company,
dissolution, liquidation or winding up is expected to become effective, and (3)
the date, if any, that is to be fixed as to when the holders of record of Common
Stock (or other securities) will be entitled to exchange their shares of Common
Stock (or other securities) for securities or other property deliverable upon
such reorganization, reclassification, transfer, consolidation, merger, Sale of
the Company, dissolution, liquidation or winding up.

          (n)  Fractional Shares. No fractional shares of Common Stock will be
issued upon conversion of Series C Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series C Preferred by a holder thereof will be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional shares. If, after the aforementioned aggregation, the conversion
would result in the


                                     - 14 -
<PAGE>   15
issuance of any fractional share, the Corporation will, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction multiplied by
the Common Stock's Fair Market Value on the date of conversion.

          (o)  Reservation of Stock Issuable Upon Conversion. The Corporation
will at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series C Preferred, such number of its shares of Common Stock
as will from time to time be sufficient to effect the conversion of all
outstanding shares of Series C Preferred. If at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all then outstanding shares of Series C Preferred, the Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as will be sufficient for such purpose.

          (p)  Notices. Any notice required by the provisions of this
Certificate of Designation to be given to the holders of shares of the Series C
Preferred will be deemed given upon the earlier of actual receipt or seventy-two
(72) hours after the same has been deposited in the United States mail, by
certified or registered mail, return receipt requested, postage prepaid, and
addressed to each holder of record at the address of such holder appearing on
the books of the Corporation.

          (q)  Payment of Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series C Preferred excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series C Preferred
so converted were registered.

          (r)  No Implied Approval. Notwithstanding any other provision hereof
to the contrary, the provisions of this Section 5, including those providing for
adjustments to the Series C Conversion Price, shall not be construed as a waiver
of the requirements of Section 3(b), and any issuance of Additional Shares of
Common Stock (or deemed issuance thereof) which would reduce the Series C
Conversion Price to an amount less than the Series C Liquidation Value shall
require the prior approval of the Majority of the Series C Holders pursuant to
Section 4(b)(xii).

     6.   Optional Redemption.

          (a)  At any time after the sixth anniversary of the Original Issue
Date, or upon a Sale of the Company (but in no event prior to the Corporation's
repurchase or payment or satisfaction in full of the Senior Secured Notes), a
Majority of the Series C Holders may require the Corporation to redeem all, but
not less than all, of the outstanding shares of Series C Preferred (an "Optional
Redemption") by notifying the Corporation in writing of their intent to exercise
the rights afforded by this Section 6(a) and specifying a date not less than 90
nor more than 120 days from the date of such notice on which the outstanding
shares of Series C Preferred shall be redeemed (the "Optional Redemption Date").
Upon receipt of such notice, the Corporation shall



                                     - 15 -
<PAGE>   16
promptly notify the remaining holders of Series C Preferred of the Optional
Redemption Date. The recipients of such notice shall be required to participate
in the Optional Redemption. The Corporation shall redeem on the Optional
Redemption Date all the shares of Series C Preferred. Each share of Series C
Preferred to be redeemed shall be redeemed for an amount in cash and/or Freely
Tradeable Securities with a Fair Market Value equal to the greater of (A) the
sum of the Series C Liquidation Value and the greater of the Minimum Dividend
Amount and all accrued dividends on such share of Series C Preferred (provided
that all or a portion of the accrued but unpaid dividends shall be extinguished
and shall not be payable if, and to the extent that (x) the redemption occurs on
or before the thirty (30) month anniversary of the Original Issue Date and (y)
the payment of dividends would result in each holder of Series C Preferred
receiving in cash an amount that exceeds a Qualified Return), and (B) the Fair
Market Value of the Common Stock into which the Series C Preferred is then
convertible pursuant to Section 5 hereof, including shares of Common Stock
issuable upon conversion in respect of accrued dividends to the extent provided
in Section 5(e) hereof (the "Optional Redemption Price").

          (b)  In the event the Optional Redemption is occurring pursuant to
Section 3(d) or Section 3(e), each share of Series C Preferred to be redeemed
shall be redeemed for an amount in cash and/or Freely Tradeable Securities with
a Fair Market Value equal to, the greater of (i) the Optional Redemption Price
and (ii) the price per share set forth in the table below based on the year
during which the redemption occurs (the year number being the time period prior
to an anniversary of the Original Issue Date) and calculated as a multiple of
the Series C Liquidation Value:

<TABLE>
<CAPTION>
                        Year                                  Price
                        ----                                  -----
                        <S>                                   <C>
                         1                                     2.5
                         2                                     2.5
                         3                                       3
                         4                                     3.5
                         5                                       4
                         6                                     4.5
</TABLE>

          Notwithstanding anything herein to the contrary, an Optional
Redemption pursuant to Section 3(d) or Section 3(e) shall not take place prior
to the Corporation's repurchase or payment or satisfaction in full of the Senior
Secured Notes, or the Corporation's compliance with, or its receipt of the
requisite consent from the holders of the Senior Secured Notes under, the
Indenture.

          (c)  If the funds of the Corporation legally available for redemption
of shares of Series C Preferred on an Optional Redemption Date and, if
applicable, the shares of Series B Preferred entitled to redemption as of such
date pursuant to Section 6 of the Series B Certificate and/or shares of Parity
Preferred then entitled to redemption are insufficient to redeem the total
number of outstanding shares of Series C Preferred and, if applicable, the
shares of Series B Preferred and Parity Preferred entitled to redemption, the
holders of shares of Series C Preferred and, if applicable, the shares of Series
B Preferred and Parity Preferred entitled to redemption shall share ratably in
any funds legally available for redemption of such shares according to the
respective


                                     - 16 -
<PAGE>   17
amounts that would be payable with respect to the full number of shares owned by
them if all such outstanding shares were redeemed in full. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of such shares of Series C Preferred and, if applicable, the
shares of Series B Preferred and Parity Preferred, such funds will be used at
the earliest permissible time, to redeem the balance of such shares, or such
portion thereof for which funds are then legally available. The Corporation
shall be obligated to use its best efforts to take such actions as may be
necessary (including, without limitation, the issuance of additional equity
securities, the revaluation or recapitalization of the Corporation or the
consummation of a Sale of the Company) in order to permit the full and timely
redemption of the shares of Series C Preferred and Series B Preferred entitled
to redemption.

          (d)  If, for any reason, the Corporation fails to redeem all shares of
Series C Preferred entitled to redemption on an Optional Redemption Date, and
such failure continues for a period of six (6) months from the Optional
Redemption Date, then the Series C Holders, voting as a separate class, shall
have the right to elect that number of Directors of the Corporation as shall
constitute a majority of the total number of Directors of the Corporation as
shall from time to time constitute the Board; provided, if the Corporation has
also failed to redeem shares of Series B Preferred in accordance with Section 6
of the Series B Certificate and the holders of Series B Preferred would
otherwise have the right to elect a majority of the Corporation's Directors,
then the Series B Holders and Series C Holders, voting together as a single
class, shall have the right to elect that number of Directors of the Corporation
as shall constitute a majority of the total number of Directors of the
Corporation as shall from time to time constitute the Board. A special meeting
of the stockholders shall be called by the Corporation from time to time at the
written instruction of a Majority of the Series C Holders for the purpose of
electing such Directors.

          (e)  Shares of Series C Preferred that have been issued and reacquired
in any manner, including shares purchased or redeemed or exchanged or converted,
shall (upon compliance with any applicable provisions of the General Corporation
Law of the State of Nevada) have the status of authorized but unissued shares of
Preferred Stock of the Corporation undesignated as to series and may, subject to
the requirements of Section 3(b), be designated or redesignated and issued or
reissued, as the case may, as part of any series of Preferred Stock of the
Corporation, other than as Series C Preferred.

     7.   Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Series C Preferred shall not have any preferences or relative,
participating, optional or other special rights, other than those specifically
set forth in this Certificate of Designation. The shares of Series C Preferred
shall have no preemptive or subscription rights pursuant to this Certificate of
Designation.

     8.   Rank. The Series C Preferred shall rank senior in right as to
dividends and upon liquidation, dissolution or winding up to all Junior
Securities, whenever issued.

     9.   Identical Rights. Each share of the Series C Preferred shall have the
same relative rights and preferences as, and shall be identical in all respects
with, all other shares of the Series C Preferred.


                                     - 17 -
<PAGE>   18
     10.  Certificates. So long as any shares of the Series C Preferred are
outstanding, there shall be set forth on the face or back of each stock
certificate issued by the Corporation a statement that the Corporation shall
furnish without charge to each shareholder who so requests, a full statement of
the designation and relative rights, preferences and limitations of each class
of stock or series thereof that the Corporation is authorized to issue and of
the authority of the Board of Directors to designate and fix the relative
rights, preferences and limitations of each series.

     11.  Amendments. Any provision of these terms of the Series C Preferred
Stock may be amended, modified or waived if and only if a Majority of the Series
C Holders have consented in writing or by an affirmative vote to such amendment,
modification or waiver of any such provision of this Certificate of Designation,
and upon receipt of such written consent or the obtaining of such affirmative
vote, such amendment, modification or waiver shall be binding on all holders of
Series C Preferred.

     12.  Definitions.

          "Additional Shares of Common Stock" shall have the meaning given such
term in Section 5(k)(4) of this Certificate of Designation.

          "Affiliate" or "Affiliates" shall mean with respect to any Person, any
other Person that would be considered to be an affiliate of such Person under
Rule 144(a) of the Rules of Regulations of the Securities and Exchange
Commission, as in effect on the date hereof, if the Corporation were issuing
securities.

          "Articles of Incorporation" shall have the meaning given such term on
the cover page of this Certificate of Designation.

          "Board" or "Board of Directors" means the Board of Directors of the
Corporation.

          "Company Redemption Notice" shall have the meaning given to such term
in Section 3(d) of this Certificate of Designation.

          "Convertible Securities" shall have the meaning given such term in
Section 5(k)(3) of this Certificate of Designation.

          "Corporation" means MGC Communications, Inc., a Nevada corporation.

          "Common Stock" means the Corporation's Common Stock, $.001 par value.

          "Effective Price" shall have the meaning given such term in Section
5(k)(4) of this Certificate of Designation.

          "Event of Non-Compliance" shall have the meaning given such term in
Section 3(e) of this Certificate of Designation.


                                     - 18 -
<PAGE>   19
          "Fair Market Value" of the assets or shares of capital stock at issue
shall mean the price that would be paid by a willing buyer of all of the assets
or shares of capital stock of the Corporation, as applicable, in a sale process
designed to attract all possible participants and to maximize value in an arm's
length transaction, such price to include a control premium and to exclude any
minority, illiquidity or other discounts. The determination of Fair Market Value
shall be made by (i) the Board of Directors of the Corporation, or (ii) if at
the written election of a Majority of the Series C Holders after presentation of
the Board's determination of Fair Market Value, by a nationally recognized
investment banking firm mutually agreeable to the Corporation and a Majority of
the Series C Holders, provided, however, in the event a firm cannot be agreed
upon such amount shall be determined by a nationally recognized investment
banking firm selected by two other such firms, one selected by the Corporation
and the other by a Majority of the Series C Holders. The determination of Fair
Market Value by such investment banking firm shall be final and binding on the
parties. The fees and expenses of such firm shall be paid for by the
Corporation. In the event a determination of Fair Market Value is being made
under this Certificate of Designation and contemporaneously under the Series B
Certificate for a substantially similar purpose, the investment banking firm to
be approved or selected hereunder by a Majority of the Series C Holders shall
instead be approved of or selected, as applicable, by the holders of a majority
of the outstanding Series B Preferred and Series C Preferred.

          "Freely Tradeable Securities" shall mean shares of a common stock of a
public company listed for trading on the New York Stock Exchange or Nasdaq
National Market that are free of any and all restrictions on sale, including
under Rule 144 or 145 under the Securities Act of 1933, as amended.

          "GAAP" shall mean generally accepted accounting principles applied on
a consistent basis.

          "Indebtedness" shall mean all obligations, contingent (to the extent
required to be reflected in financial statements prepared in accordance with
GAAP) and otherwise, which in accordance with GAAP should be classified on the
obligor's balance sheet as liabilities, including, without limitation, in any
event and whether or not so classified: (i) all debt and similar monetary
obligations, whether direct or indirect; (ii) all liabilities secured by any
mortgage, pledge, security interest, lien, charge or other encumbrance existing
on property owned or acquired subject thereto, whether or not the liability
secured thereby shall have been assumed; (iii) all guarantees, endorsements and
other contingent obligations whether direct or indirect in respect of
Indebtedness or performance of others, including any obligation to supply funds
to or in any manner to invest in, directly or indirectly, the debtor, to
purchase Indebtedness, or to assure the owner of Indebtedness against loss,
through an agreement to purchase goods, supplies or services for the purpose of
enabling the debtor to make payment of the Indebtedness held by such owner or
otherwise; (iv) obligations to reimburse issuers of any letters of credit; and
(v) purchase money financing for capital expenditures.

          "Indenture" shall mean that Indenture dated as of September 29, 1997
pursuant to which the Senior Secured Notes have been issued.


                                     - 19 -
<PAGE>   20
          "Junior Securities" shall mean any of the Corporation's Common Stock
and all other equity securities of the Corporation other than (x) the Series B
Preferred, (y) the Series C Preferred and (z) any other shares of the
Corporation's preferred stock which (a) by their terms state that they are not
Junior Securities or provide the holders thereof with rights pari passu with or
senior to those of the holders of Series C Preferred and (b) are approved for
issuance in accordance with Section 3 hereof.

          "Majority of the Series B Holders" shall mean the holders of more than
fifty percent (50%) of the then outstanding Series B Preferred.

          "Majority of the Series C Holders" shall mean the holders of more than
fifty percent (50%) of the then outstanding Series C Preferred.

          "Mandatory Conversion" shall have the meaning given such term in
Section 5(b) of this Certificate of Designation.

          "Market Threshold" shall mean when the closing sales price of the
Common Stock on the Nasdaq Stock Market or the New York Stock Exchange for
twenty (20) consecutive trading days ending within the sixty (60) day period
preceding the Threshold Notice has exceeded the amount which equals 2.0 times
the Series C Liquidation Value (as adjusted from time to time to take into
account stock splits, stock dividends and similar events).

          "Minimum Dividend Amount" means in respect of each share of Series C
Preferred, $2.80; provided if the Corporation at any time subdivides (by stock
split, stock dividend, recapitalization or otherwise) the Series C Preferred
into a greater number of shares or if the Corporation at any time combines (by
reverse stock split or otherwise) the outstanding shares of Series C Preferred
into a smaller number of shares, then the Minimum Dividend Amount in effect
immediately prior to such subdivision or combination shall be proportionately
adjusted. In determining the Minimum Dividend Amount as of any given date, the
amount dividends actually paid, if any, prior to such date on such share of
Series C Preferred shall reduce the Minimum Dividend Amount.

          "Optional Conversion" shall have the meaning given such term in
Section 5(a) of this Certificate of Designation.

          "Optional Redemption" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.

          "Optional Redemption Date" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.

          "Optional Redemption Price" shall have the meaning given such term in
Section 6(a) of this Certificate of Designation.

          "Original Issue Date" means __________________, 1999.


                                     - 20 -
<PAGE>   21
          "Person" shall mean an individual, partnership, corporation,
association, trust, joint venture, unincorporated organization and any
government, governmental department or agency or political subdivision thereof.

          "Qualified Return" shall have the meaning given to such term in
Section 4(a).

          "Required Board Approval" shall have the meaning given to such term in
the Securityholders Agreement.

          "Restricted Action" shall have the meaning given such term in Section
3(b) of this Certificate of Designation.

          "Sale Notice" shall have the meaning given such term in Section 3(e)
of the Certificate of Designation.

          "Sale of the Company" shall mean a single transaction or series of
transactions between the Corporation and/or its stockholders and any Person or
group of Persons (as such term is used in Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended) pursuant to which such Person or
group of Persons will (i) acquire shares of capital stock of the Corporation
possessing more than 50% of the voting power of the Corporation, including by
way of merger or consolidation or otherwise, or (ii) acquire all or
substantially all of the assets of the Corporation and its Subsidiaries
(determined on a consolidated basis); notwithstanding the foregoing definition,
a single transaction or series of transactions shall not be deemed a Sale of the
Company unless such transaction or series of transactions is also deemed a
"Change of Control", as defined in the Indenture.

          "Securityholders Agreement" shall mean that certain Amended and
Restated Securityholders Agreement of even date herewith among the Corporation,
the Series B Holders, the Series C Holders and certain other parties, as amended
from time to time.

          "Senior Secured Notes" means the $160,000,000 principal amount of 13%
Senior Secured Notes due 2004 that have been issued pursuant to the Indenture.

          "Series B Certificate" means the Certificate of Designation of the
Series B Preferred as amended.

          "Series B Holders" shall mean the holders of Series B Preferred.

          "Series B Preferred" shall mean the Corporation's Series B Convertible
Preferred Stock, par value $.001 per share.

          "Series C Conversion Price" shall have the meaning given such term in
Section 5(d) of this Certificate of Designation.

          "Series C Conversion Rate" shall have the meaning given such term in
Section 5(c) of this


                                     - 21 -
<PAGE>   22
Certificate of Designation.

          "Series C Holders" shall mean the holders of Series C Preferred.

          "Series C Liquidation Value" means Twenty-Eight Dollars ($28.00),
provided if the Corporation at any time subdivides (by any stock split, stock
dividend, recapitalization or otherwise) the Series C Preferred into a greater
number of shares or if the Corporation at any time combines (by reverse stock
split or otherwise) the outstanding shares of the Series C Preferred into a
smaller number of shares, then the Series C Liquidation Value in effect
immediately prior to such subdivision or combination shall be proportionately
adjusted.

          "Series C Preferred" shall have the meaning given such term in Section
1 of this Certificate of Designation.

          "Special Restricted Action" shall have the meaning given such term in
Section 3(c) of this Certificate of Designation.

          "Stock Option Plan" shall mean the Corporation's Stock Option Plan, as
adopted by the Board of Directors on June 30, 1996, and as amended to date.

          "Subsidiary" shall mean any Person as to which the Corporation owns,
directly or indirectly, either (a) 50% or more of such Person's stock (or
similar voting interests) entitled to vote generally in the election of
directors (or other governing body) or (b) 50% or more of the capital or profits
interest of such Person.

          "Threshold Notice" shall mean a written notice from the Corporation to
the holders of Series C Preferred stating that the Market Threshold has been
achieved and providing reasonable evidence thereof.

     13.  Severability of Provisions. If any right, preference or limitation of
the Series C Preferred set forth in this Certificate of Designation (as such
Certificate of Designation may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule, law or public
policy, all other rights, preferences and limitations set forth in this
Certificate of Designation (as so amended) which can be given effect without
implicating the invalid, unlawful or unenforceable right, preference or
limitation shall, nevertheless, remain in full force and effect, and no right,
preference or limitation herein set forth shall be deemed dependent upon any
other right, preference or limitation unless so expressed herein.

                     [SIGNATURES ARE ON THE FOLLOWING PAGE.]


                                     - 22 -
<PAGE>   23
     IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its President, and attested to by its Secretary, on
____________________________, 19___.


                                            MGC COMMUNICATIONS, INC.


                                            By
                                                  Name:  Rolla Huff
                                                  Title:  President

Attest:



Name:
Title: Secretary


STATE OF NEVADA         )
ss.:                    )
COUNTY OF CLARK         )

     On the ___ day of _____________, 1999, before me personally came Rolla Huff
to me known, who, being by me duly sworn, did depose and say he resides at 14
Moraine Point, Victor, NY 14564 and that he is the President of MGC
Communications, Inc., the corporation described in and which executed the above
instrument; and that he acknowledged said instrument to be the free act and deed
of said corporation.

Notary Public
My Commission Expires:


                                     - 23 -

<PAGE>   1
                                                                    EXHIBIT 23.1

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



As independent public accountants, we hereby consent to the use of our report
included in this Registration Statement and to the incorporation by reference in
this Registration Statement of our report dated March 2, 1999 included in MGC
Communications, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998 and to all references to our Firm included in this Registration
Statement.


                                        ARTHUR ANDERSEN LLP



Las Vegas, Nevada
December 27, 1999


<PAGE>   1
                                                                    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
statements of operations, stockholders' equity and cash flows of MGC
Communications, Inc. for the year ended December 31, 1996, included in the Form
S-3 Registration Statement of MGC Communications, Inc., to be filed on or about
December 27, 1999, and to the reference to our firm under the heading "Selected
Consolidated Financial and Operating Data" and "Experts" in the Registration
Statement.



                                                      KPMG LLP

Las Vegas, Nevada
December 27, 1999




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