MGC COMMUNICATIONS INC, S-3/A, 2000-01-19

MGC COMMUNICATIONS INC
S-3/A, 2000-01-19
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 2000.

REGISTRATION NO. 333-91353
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2 TO

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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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 SULLY'S TRAIL, SUITE 202 KENT F. HEYMAN, ESQ.
PITTSFORD, NEW YORK 14534 171 SULLY'S 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>

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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. [ ]
------------------------

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.

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<PAGE> 2

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

SUBJECT TO COMPLETION, DATED JANUARY 18, 2000

PRELIMINARY PROSPECTUS

4,500,000 SHARES

MGC COMMUNICATIONS, INC.
COMMON STOCK

$54.94 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
"MPWR." The last reported sale price of the common stock on the Nasdaq National
Market, on January 14, 2000, was $54.94 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.

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SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC.
------------------

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

, 2000
[MGC LOGO]
[MPOWER LOGO]
<PAGE> 3

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................................. 23
Business.................................................... 29
Management.................................................. 48
Principal and Selling Stockholders.......................... 52
Description of Securities................................... 54
Description of the Series D Convertible Preferred Stock..... 62
Underwriting................................................ 75
Legal Matters............................................... 77
Experts..................................................... 77
Where You Can Find More Information......................... 77
Index to Consolidated Financial Statements.................. F-1
</TABLE>

<PAGE> 4

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 package
of services 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. 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.

- By installing our own equipment in space we rent at 288 incumbent carrier
central office sites, we had access to approximately 16 million
addressable lines at the end of third quarter 1999. These 288 incumbent
carrier central office 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. This allows
us to control access to our customers. Our operations support system is
fully integrated and fully capable of accommodating our growth plans.

- We use a capital efficient network consisting of our own switches,
placing our equipment in the central offices of incumbent carriers and
leasing local telephone lines and cables.

- 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 incumbent
carrier central office sites providing access to more than 35 million
addressable lines.

- We have announced that we intend to change our name to "Mpower
Communications Corp." in connection with the national rollout of our
services.

- 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.
3
<PAGE> 5

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

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.

PRINCIPAL EXECUTIVE OFFICES

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

4
<PAGE> 6

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)...... 27,686,011 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 effective
January 18, 2000............ MPWR (previously 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:

- 3,724,070 shares of common stock which may be issued upon the exercise of
stock options outstanding as of January 10, 2000 with a weighted average
exercise price of $18.27 per share;

- approximately 285,546 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 outstanding, 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> 7

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) $ (2.65)
</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 $ 439,573 $ 584,679
Restricted investments...................................... 30,375 30,375 30,375
Property and equipment, net................................. 151,159 151,159 151,159
Total assets................................................ 381,814 642,426 787,532
Long-term debt.............................................. 157,677 157,677 157,677
Series B convertible preferred stock........................ 49,452 49,452 49,452
Series C convertible preferred stock........................ -- 29,600 29,600
Series D convertible preferred stock........................ -- -- 145,106
Stockholders' equity........................................ 131,605 362,617 362,617
</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 at an assumed price of $54.94 per share, the closing price of our
stock on January 14, 2000, and the sale of 1,250,000 shares of Series C
convertible preferred stock at $28.00 per share in December 1999 for cash
and a $4.9 million promissory note.

(2) Gives effect to the sale of 4,438,594 shares of common stock in this
offering at an assumed price of $54.94 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note and the sale of
3,000,000 shares of Series D convertible preferred stock at $50.00 per share
in the concurrent offering. The assumed price of the shares of common stock
is equal to the closing price of our common stock on January 14, 2000. The
price per share paid for the Series C convertible preferred stock was based
on the trading price for our common stock immediately before the purchasers'
commitment to purchase that stock. The price per share to be paid for the
Series D convertible preferred stock has been established at $50.00 with the
conversion price to be based on the market price for our common stock at the
time the Series D convertible preferred stock is issued and negotiations
between our underwriters and us.

(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.

Our financial information presented above as of and for the nine month
period ended September 30, 1999 has been restated to reflect the accretion of
the Series B convertible preferred stock to its anticipated redemption value.
See "Notes to Consolidated Financial Statements -- Note(12)."

6
<PAGE> 8

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 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.

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<PAGE> 9

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.

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<PAGE> 10

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 agreements with, and arrangements for
installing our equipment at the central offices of, 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.

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<PAGE> 11

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 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 AGREEMENTS
AND ARRANGEMENTS FOR INSTALLING OUR EQUIPMENT, WE COULD HAVE DIFFICULTY
OPERATING PROFITABLY IN OUR EXISTING MARKETS AND ENTERING NEW MARKETS

We must negotiate and renew favorable interconnection agreements and
arrangements for installing our equipment 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 the insufficient number of phone lines installed 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
TELEPHONE LINES AND CABLE TO MEET OUR FUTURE NEEDS

We may not be able to lease sufficient telephone lines and cable 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 construct telephone lines and cable in each of our markets, we would
be unable to service our customers if we cannot obtain sufficient telephone
lines and cable. Our inability to lease sufficient telephone lines and cable
could result in the loss of customers, the inability to add new customers and
limitations on our ability to enter new markets.

10
<PAGE> 12

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 supply and reduced control
over delivery schedules, quality assurance, production yields and costs.

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

11
<PAGE> 13

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.

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. Technologies
deployed on copper telephone lines, such as DSL, have the potential to interfere
with other 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 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.

12
<PAGE> 14

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 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.
13
<PAGE> 15

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."

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> 16

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> 17

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 50% 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
CAUSE US TO LOSE CUSTOMERS

We may lose customers if service interruptions are caused by our failure or
the failure of third parties to be Year 2000 compliant. 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 40.6% 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 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."

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

16
<PAGE> 18

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.

17
<PAGE> 19

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 $231.0 million, based on
an assumed offering price of $54.94 per share, the closing price of our common
stock on January 14, 2000, and after deducting estimated underwriting discounts
and other offering expenses payable by us. We will receive approximately $266.2
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 $145.1 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 $219.1 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."

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> 20

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 the sale of
1,250,000 shares of Series C convertible preferred stock in December 1999, 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 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 $ 439,573 $ 584,679
Restricted investments...................... 30,375 30,375 30,375
-------- --------- ---------
Total cash and cash equivalents,
investments available-for-sale and
restricted investments................. $209,336 $ 469,948 $ 615,054
======== ========= =========
13% senior secured notes due 2004........... $157,125 $ 157,125 $ 157,125
Other long-term debt........................ 552 552 552
Series B convertible preferred stock........ 49,452 49,452 49,452
Series C convertible preferred stock........ -- 29,600 29,600
Series D convertible preferred stock........ -- -- 145,106
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................ 227,955 472,244 472,244
Accumulated deficit....................... (93,851) (107,132) (107,132)
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................ 131,605 362,617 362,617
-------- --------- ---------
Total capitalization........................ $338,734 $ 599,346 $ 744,452
======== ========= =========
</TABLE>

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

(1) Gives effect to the sale of 4,438,594 shares of common stock in this
offering and the sale of 1,250,000 shares of Series C convertible preferred
stock in December 1999 for cash and a $4.9 million promissory note. Also
gives effect to a $13.3 million beneficial conversion feature recognized at
the date of commitment in November 1999.

(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 in December 1999 for cash and a $4.9 million promissory note, and the
sale of 3,000,000 shares of Series D convertible preferred stock in the
concurrent offering. Also gives effect to a $13.3 million beneficial
conversion feature recognized at the date of commitment in November 1999.

19
<PAGE> 21

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 $54.94 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 $206.4
million after giving effect to the sale of 1,250,000 shares of Series C
convertible preferred stock in December 1999, 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 and the outstanding Series C convertible
preferred stock had been converted into 1,250,000 shares of common stock, was
approximately $7.04 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 Series C convertible preferred stock and the sale of the common stock
offered in this offering, based on an assumed offering price of $54.94 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 $12.95 per share. Therefore, you would have paid $54.94
for a share of common stock having a net tangible book value of approximately
$12.95 per share; that is, your investment would have been diluted by
approximately $41.99 per share. At the same time, existing stockholders would
have realized an increase in net tangible book value of $5.91 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........................................... $54.94
Net tangible book value per share of common stock
before this offering(1).............................. $7.04
Increase in net tangible book value per share of
common stock attributable to investors in this
offering(2)(3).................................. 5.91
-----
Net tangible book value per share of common stock
after this offering(2)(3)....................... 12.95
------
Dilution to new investors in common stock(3)(4)...... $41.99
</TABLE>

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

(1) After giving effect to the sale of 1,250,000 shares of Series C convertible
preferred stock in December 1999, assuming conversion to common stock on a
one-for-one basis.

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

(3) Assumes that none of our outstanding options or warrants are exercised,
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 and assumes the conversion of 1,250,000 shares of Series C convertible
preferred stock which are convertible into shares of common stock on a
one-for-one basis.

(4) If we were to give effect to the sale of the Series D convertible preferred
stock concurrently herewith and the conversion of all shares of Series 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> 22

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) $ (2.65)
</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 $ 439,573 $ 584,679
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.............................. 12,339 191,977 252,119 381,814 642,426 787,532
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...... -- -- -- 49,452 49,452 49,452
Series C convertible preferred stock...... -- -- -- -- 29,600 29,600
Series D convertible preferred stock...... -- -- -- -- -- 145,106
Stockholders' equity...................... 10,792 8,976 63,260 131,605 362,617 362,617
</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 at an assumed price of $54.94 per share, the closing price of our
stock on January 14, 2000, and the sale of 1,250,000 shares of Series C
convertible preferred stock at $28.00 per share in December 1999 for cash
and a $4.9 million promissory note.

(3) Gives effect to the sale of 4,438,594 shares of common stock in this
offering at an assumed price of $54.94 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note, and the sale of
3,000,000 shares of Series D convertible preferred stock at $50.00 per share
in the concurrent offering. The assumed price of the shares of common stock
is equal to the closing price of our common stock on January 14, 2000. The
price per share paid for the Series C convertible preferred stock was based
on the trading price for our common stock immediately before the purchasers'
commitment to purchase that stock.

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<PAGE> 23

The price per share to be paid for the Series D convertible preferred stock
has been established at $50.00 with the conversion price to be based on the
market price for our common stock at the time the Series D convertible
preferred stock is issued and negotiations between our underwriters and us.

(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.

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<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. Local services and long distance services are generally provided and
billed as a bundled offering under which customers pay a fixed amount for a
package of combined local and long distance services. As a result, the portion
of our revenues attributable to each kind of service is not identifiable and,
therefore, we do not record or report these amounts separately.

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 lease expenses for our "collocation"
sites, the space we rent from the incumbent carriers for the purpose of
installing our equipment to deliver our services to our customers. 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."

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<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 $7.4 million or 157% from the nine
month period ended September 30, 1998 to the nine month period ended September
30, 1999. As of September 30, 1999, 46% of our switched access receivable
balances are subject to dispute. Until these disputes are resolved and our
access charge receivables are collected, we cannot rely on these revenues as a
source of cash flow.

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

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<PAGE> 26

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 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

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<PAGE> 27

$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. We anticipate that the proceeds from the sale of the Series C convertible
preferred stock, this offering and the concurrent offering and our cash
currently on hand will fully fund our projected capital expenditures over the
next five years.

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. The Series
C convertible preferred stock was issued in December 1999. Of the total
consideration, $4.9 million was paid by an interest bearing promissory note due
in March 2000. 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. Of our outstanding access charge receivables as
of September 30, 1999, 46% remains in dispute. 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."

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<PAGE> 28

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 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. If the concurrent offering is 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." At the end of the century, those same systems should reflect 01/01/00
as being "January 1, 2000." However, a non-compliant system would read 01/01/00
as January 1, 1900.

We have been focused on year 2000 issues since our inception in 1996. 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. Although we have not experienced any significant
year 2000 problems to date, 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 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.

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.

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,

27
<PAGE> 29

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.

As of the date of this prospectus, we have not experienced any material
year 2000 problems, either in our systems or in the systems of third parties
with whom we deal.

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.

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<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 have announced that we plan to change our name to "Mpower Communications
Corp." in connection with our national rollout. We have commenced doing business
under the name "Mpower Communications," however, the name change is subject to
formal approval by our stockholders.

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

29
<PAGE> 31

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 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

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<PAGE> 32

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."

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

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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 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

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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 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

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<PAGE> 35

timing of our entering into new markets will depend on market conditions,
incumbent carrier 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

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<PAGE> 36

lease additional cable from other communications companies, which connect our
switches to each 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.

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<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.

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<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

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<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

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<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.

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

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<PAGE> 41

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 competitive carriers may 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. SBC Communications recently filed a
similar request to provide long distance service to its customers in Texas and
additional requests will likely be filed in the near future. One or more of
these requests also 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 relating to the status of competition
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.

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

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<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, including our rates. 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 of control of our company or our
issuance of securities or assumption of debt. The specific requirements vary
from state to state. State regulatory agencies also must approve our
interconnection agreements with incumbent carriers. 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.

Prior to 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 and the concurrent offering.
We believe the approval will be granted and that seeking approval after

42
<PAGE> 44

this offering should not result in any material adverse consequences to us,
although we cannot assure you of a favorable result.

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 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

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<PAGE> 45

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 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.

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<PAGE> 46

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. 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
45
<PAGE> 47

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.

- 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 January 10, 2000, we had approximately 883 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.

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<PAGE> 48

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.

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. AT&T asked the FCC to review the order and in December
1999 the FCC decided not to review its previous decision. The FCC decision is
subject to appeal to a federal appeals court.

We have also filed a complaint before the FCC to obtain an order compelling
Sprint to pay our tariff rate for access charges. In January 2000, Sprint filed
a complaint against us before the FCC seeking a declaration that Sprint should
be entitled to recover any amounts it may be ordered to pay to us under our
complaint on the basis that our charges are unjust and unreasonable.

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.

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<PAGE> 49

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, and their respective ages as of
January 14, 2000, 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........... 36 Senior Vice President -- Corporate Development
Michael R. Daley............... 38 Executive Vice President and Chief Financial Officer
Neil Hediger................... 41 Senior Vice President -- Marketing
Kent F. Heyman................. 44 Senior Vice President and General Counsel
George Longyear................ 30 President -- Southwestern Region
Mark D. Magarian............... 33 Senior Vice President -- People Services
James Mitchell................. 38 President -- Eastern Region
Mark W. Peterson............... 45 President -- Western Region
Michele Sadwick................ 33 Vice President -- Corporate Communications
Linda M. Sunbury............... 38 Senior Vice President -- Finance
</TABLE>

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

(2) Member of Compensation Committee.

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.

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<PAGE> 50

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 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.

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<PAGE> 51

S. GREGORY CLEVENGER joined 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 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.

NEIL HEDIGER joined our company as senior vice president -- marketing in
January 2000. From September 1995 to November 1999, Mr. Hediger served as vice
president of business communications for BellSouth and as vice president of
marketing for BellSouth business systems. From April 1991 to September 1995, he
served as director of marketing for MCI -- business markets.

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 joined our company as senior vice president -- people
services 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.

MICHELE SADWICK joined our company as vice president -- corporate
communications in December 1999. From April 1994 to November 1999, Ms. Sadwick
held various positions in public relations with Frontier Corporation.

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

50
<PAGE> 52

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 Series C
convertible preferred stock.

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<PAGE> 53

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 January 10, 2000, 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 (21
persons) (3)(4)(5)(6)(7)(8).......................... 7,079,193 29.0%
</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. The shares of Series
B convertible preferred stock and Series C convertible preferred stock are
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, 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 and Series C convertible preferred
stock are 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

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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 and
892,857 shares of Series C convertible preferred stock owned 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 188,266 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 OFFERING OFFERING OFFERING
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Wellington Management Company, LLP(1)......... 18,870 18,870 --
FamCo Value Income Partners L.P............... 10,786 10,786 --
Pilgrim High Yield Fund(1).................... 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) This selling stockholder currently owns warrants to purchase the number of
shares indicated.

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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 January 10, 2000, 23,247,417 shares of common stock,
5,277,779 shares of Series B convertible preferred stock and 1,250,000 shares of
Series C convertible preferred stock were outstanding and 4,009,616 shares of
common stock were subject to outstanding options and warrants. As of January 10,
2000, there were approximately 180 holders of record of the common stock, six
holders of record of the Series B convertible preferred stock and six holders of
record of Series C convertible preferred stock.

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 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 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;

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

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<PAGE> 56

- 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.

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

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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, which was issued in December
1999, has 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;

- make acquisitions in excess of a fixed dollar amount;

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<PAGE> 58

- 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 June 30, 2002, 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 January 19, 2001, 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 $56.00 per share for 20 consecutive trading
days.

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If we require conversion before June 30, 2002, 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 December 30,
2005 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. The holders of the Series B convertible
preferred stock and Series C convertible preferred stock are 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 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 January 10, 2000, there are outstanding warrants to purchase
approximately 285,546 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.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and the concurrent offering, we will have
outstanding 27,686,011 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 348,700
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 13,286,022 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 7,772,041 shares of our common stock;

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

- 1,250,000 shares of Series C convertible preferred stock; and

- warrants to purchase approximately 285,546 shares of common stock,
excluding holders including those shares for sale in this offering.

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 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, the holders of approximately 684,183 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of 1,080,470 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.

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<PAGE> 61

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, the holders of approximately 684,183 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of an additional 1,107,471 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.

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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 January 10, 2000, 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
1,250,000 shares of preferred stock have been designated as Series C convertible
preferred stock and all 1,250,000 shares of Series C convertible preferred stock
were outstanding. 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 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 of 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.

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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 the concurrent offering, we will issue 3,000,000
shares of our % Series D Convertible Redeemable 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, increase the authorized number of shares of, issue
additional shares of 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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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

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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, or a
sufficient number of shares of common stock have been reserved 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.

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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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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.

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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 convertible preferred stock, Series C convertible preferred
stock or Parity Stock, in accordance with the terms thereof as in effect
on the issue date of the Series D convertible preferred stock, or

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(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.

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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 and do not distribute them to
the holders of the Series D convertible preferred 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").

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

(1) we are the continuing corporation, and

(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 of 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;

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(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),
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 of Control" means any Change of 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 of Control will not be a Common Stock Change
of Control unless either:

(1) we continue to exist after the occurrence of the Change of 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 of 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 of Control" means any Change of Control other
than a Common Stock Change of 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. If the terms of our outstanding indebtedness restrict our ability to
repurchase the Series D convertible preferred stock following a Non-Stock Change
of Control, each holder of shares of Series D convertible preferred stock will
have the right to convert the shares of Series D convertible preferred stock
into shares of common stock at the conversion price specified below.

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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 or conversion right arising as a result
thereof. We must also deliver a copy of the Company Notice to our transfer
agent.

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 or convert any
validly tendered shares of Series D convertible preferred stock (the
"Repurchase Date"); and

- the repurchase price or conversion price.

In the event of a repurchase, 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.

The conversion price for each share of Series D convertible preferred stock
tendered on the Repurchase Date will be determined by dividing 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, by 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.

To exercise the repurchase right or conversion 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 or conversion 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 of 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 of Control and the Conversion Price in effect will be adjusted
immediately after the Change of Control as described below.

If:

(1) a Common Stock Change of 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 of 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 of 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

72
<PAGE> 74

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 of 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
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 and (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 and (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;
or

73
<PAGE> 75

(3)(a) the consideration received by holders of our common stock in
respect of each share of our common stock has a value which, for any five
trading days during the period of ten consecutive trading days after we
publicly announce the consolidation, merger, transfer or lease, equals or
exceeds 140% of the conversion price in effect on the date we publicly
announce the consolidation, merger, transfer or lease, and (b) the
consolidated net worth of the successor, transferee or lessee immediately
before the consolidation, merger, transfer or lease equals or exceeds two
times our consolidated net worth immediately before the consolidation,
merger, transfer or lease.

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.

74
<PAGE> 76

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;

75
<PAGE> 77

- 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
"MPWR" (previously "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.

76
<PAGE> 78

We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $641,000.

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.

77
<PAGE> 79

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 SULLY'S TRAIL, SUITE 202, PITTSFORD, NEW YORK
14534 (TELEPHONE 716-218-6540).

78
<PAGE> 80

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> 81

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> 82

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> 83

MGC COMMUNICATIONS, INC.

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

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1999 1998 1997
------------- -------- --------
(UNAUDITED)
(AS RESTATED)
<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......... 49,452 -- --
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....................................... (93,851) (44,392) (12,463)
Less: treasury stock...................................... (76) -- --
---------- -------- --------
134,051 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......................... 131,605 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> 84

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
---------- ---------- ---------- --------- -------
(AS
RESTATED)
(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) --
Accretion of preferred stock to
redemption value................. (2,789) -- -- -- --
---------- ---------- ---------- --------- -------
Net loss applicable to common
stockholders..................... $ (49,459) $ (22,293) $ (32,065) $ (10,972) $(1,491)
========== ========== ========== ========= =======
Basic and diluted loss per share of
common stock..................... $ (2.65) $ (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> 85

MGC COMMUNICATIONS, INC.

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

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) -- --
Accretion of preferred stock to
redemption value................ -- 2,789 -- -- -- (2,789) -- --
Net loss.......................... -- -- -- -- -- (44,744) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (As Restated)....... 5,277,779 $ 49,452 22,800,920 $23 $227,955 $(93,851) 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)
Accretion of preferred stock to
redemption value................ -- -- (2,789)
Net loss.......................... -- -- (44,744)
------- ------- --------
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (As Restated)....... $(2,086) $ (360) $131,605
======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 86

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> 87

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, $4.7
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> 88
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.

During 1998, the Company sold $28.3 million in investments held for sale
and recorded $0.8 million in unrealized gains as part of other comprehensive
income for the year ended December 31, 1998. The Company was not able to
continue to hold these securities to maturity and was required to sell these
securities to fund capital expenditures in 1998.

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.

F-9
<PAGE> 89
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the nine months ended September 30, 1999 and for the years ended December
31, 1998 and 1997 were $826,000, $0 and $0, respectively.

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

F-10
<PAGE> 90
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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

F-11
<PAGE> 91
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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>

F-12
<PAGE> 92
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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>

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.

F-13
<PAGE> 93
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

In the event of a sale by the Company prior to October 1, 2000 of its
capital stock in one or more equity offerings, up to a maximum of 35% of the
aggregate principal amount of the Notes originally issued 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.

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

F-14
<PAGE> 94
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-15
<PAGE> 95
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-16
<PAGE> 96
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-17
<PAGE> 97
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. 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.

F-18
<PAGE> 98
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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.

(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.

F-19
<PAGE> 99
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

(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.

F-20
<PAGE> 100
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Each balance sheet date, the Company records a pro rata accretion of the
Series B Preferred Stock to its anticipated redemption value. Such accretion is
based on the market value of the common stock at the balance sheet date, not to
exceed $27 per share based on the Market Threshold. For the nine months ended
September 30, 1999, the Company recorded accretion of $2.8 million which has
been recorded as an increase in redeemable preferred stock.

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

F-21
<PAGE> 101
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 was paid by an interest-bearing promissory
note due in March 2000. The transaction was consummated on December 30, 1999.

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 Series C Preferred Stock was committed in November 1999 with a
beneficial conversion feature totaling $13.3 million measured as the difference
between the conversion price of $28 per share and the fair value of the
underlying common stock at the time of commitment. The beneficial conversion
feature will be recorded as additional paid-in capital in fourth quarter 1999.
The Company will record a pro rata accretion of the Series C Preferred Stock to
its anticipated redemption value. Such accretion will be based on the market
value of the common stock at the balance sheet date, not to exceed $56 per share
based on the Market Threshold.

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.

The Company's previously reported financial statements for the nine months
ended September 30, 1999 have been restated to reflect the above accretion of
anticipated redemption value with

F-22
<PAGE> 102
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respect to the Series B Preferred Stock. The effect of the restatement was to
increase the net loss applicable to common stockholders and basic and diluted
loss per share of common stock as follows:

<TABLE>
<CAPTION>
BASIC AND DILUTED
NET LOSS APPLICABLE TO LOSS PER SHARE
COMMON STOCKHOLDERS OF COMMON STOCK
---------------------- -----------------
<S> <C> <C>
As previously reported..................................... $(46,670) $(2.50)
Accretion of Series B Preferred Stock...................... (2,789) (0.15)
-------- ------
As restated................................................ $(49,459) $(2.65)
======== ======
</TABLE>

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-23
<PAGE> 103

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> 104

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

4,500,000 SHARES

MGC COMMUNICATIONS, INC.

COMMON STOCK

[MGC LOGO] [MPOWER(TM) COMMUNICATIONS LOGO]

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

PROSPECTUS

, 2000

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

SALOMON SMITH BARNEY

BEAR, STEARNS & CO. INC.

GOLDMAN, SACHS & CO.

ING BARINGS

WARBURG DILLON READ LLC
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 105

SUBJECT TO COMPLETION, DATED JANUARY 18, 2000

PRELIMINARY PROSPECTUS

3,000,000 SHARES
[MPOWER(TM) COMMUNICATIONS LOGO]

MGC COMMUNICATIONS, INC.
% SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
[MGC LOGO]
------------------
We are selling 3,000,000 shares of our % Series D Convertible
Redeemable 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 and expiration of conversion rights in certain
circumstances. The quarterly dividend will be $ per share, payable at our
option in cash or shares of our common stock, beginning , 2000.

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 "MPWR." The last reported price of our common stock, on
January 14, 2000, was $54.94 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 10.

<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> 106

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 10
How We Intend to Use the Proceeds of this Offering.......... 21
Dividend Policy............................................. 21
Capitalization.............................................. 22
Selected Consolidated Financial and Operating Data.......... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 31
Management.................................................. 50
Principal Stockholders...................................... 54
Description of Securities................................... 56
Description of the Series D Convertible Preferred Stock..... 64
Federal Tax Considerations.................................. 77
Underwriting................................................ 85
Legal Matters............................................... 87
Experts..................................................... 87
Where You Can Find More Information......................... 87
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE> 107

PROSPECTUS SUMMARY

MGC COMMUNICATIONS

- We use a capital efficient network consisting of our own switches,
placing our equipment in the central offices of incumbent carriers and
leasing local telephone lines and cables.

- 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.

- We have announced that we intend to change our name to "Mpower
Communications Corp." in connection with the national rollout of our
services.

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

PRINCIPAL EXECUTIVE OFFICES

Our principal executive offices are at 171 Sully's Trail, Suite 202,
Pittsford, New York 14534. Our telephone number is (716) 218-6540.
4
<PAGE> 109

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
5
<PAGE> 110

$ 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 or converted as required
following a 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 change of control, we must either

- 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 or permit
a conversion of the Series D convertible
preferred stock; or

- adjust the conversion price.

Whether we are required to offer to repurchase
or permit a conversion of the Series D
convertible preferred stock or adjust the
conversion price of the Series D convertible
preferred stock following a change of control
depends on the consideration received in
connection with a change of control. See
"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;
6
<PAGE> 111

- 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;

- 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................. MPWRP

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.
7
<PAGE> 112

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) $ (2.65)
</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 $ 353,667 $ 584,679
Restricted investments................................. 30,375 30,375 30,375
Property and equipment, net............................ 151,159 151,159 151,159
Total assets........................................... 381,814 556,520 787,532
Long-term debt......................................... 157,677 157,677 157,677
Series B convertible preferred stock................... 49,452 49,452 49,452
Series C convertible preferred stock................... -- 29,600 29,600
Series D convertible preferred stock................... -- 145,106 145,106
Stockholders' equity................................... 131,605 131,605 362,617
</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 at $50.00 per share and the sale of
1,250,000 shares of Series C convertible preferred stock at $28.00 per share
in December 1999 for cash and a $4.9 million promissory note.

(2) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering at $50.00 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note and the sale of
4,438,594 shares of common stock in the concurrent offering at an assumed
price of $54.94 per share, the closing price of our stock on January 14,
2000. The price per share to be paid for the Series D convertible preferred
stock has been established at $50.00 with the conversion price to be based
on the market price for our common stock at the time the Series D
convertible preferred stock is issued and negotiations between our
underwriters and us. The price per share paid for the Series C convertible
preferred stock was based on the trading price
8
<PAGE> 113

for our common stock immediately before the purchasers' commitment to
purchase that stock. The assumed price of the shares of common stock is
equal to the closing price of our common stock on January 14, 2000.

(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.

Our financial information presented above as of and for the nine month
period ended September 30, 1999, has been restated to reflect the accretion of
the Series B convertible preferred stock to its anticipated redemption value.
See "Notes to Consolidated Financial Statements -- Note(12)."
9
<PAGE> 114

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

WE EXPECT OUR LOSSES TO CONTINUE

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

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.

10
<PAGE> 115

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.

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

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

11
<PAGE> 116

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

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

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

- accurately assess potential new markets;

- hire and retain qualified personnel;

- lease suitable access to transport networks;

- lease or purchase suitable sites; and

- obtain required government authorizations.

OUR SERVICES MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE TO BECOME PROFITABLE

12
<PAGE> 117

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

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

WE MAY NOT BE ABLE TO SERVICE OUR CUSTOMERS IF WE CANNOT SECURE SUFFICIENT
TELEPHONE LINES AND CABLE TO MEET OUR FUTURE NEEDS

13
<PAGE> 118

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

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

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

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

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

14
<PAGE> 119

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

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

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

15
<PAGE> 120

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

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

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

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

16
<PAGE> 121

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

WE WILL FACE ADDITIONAL RISKS IF WE ACQUIRE OTHER BUSINESSES

- 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.

17
<PAGE> 122

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.

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."

18
<PAGE> 123

OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
CAUSE US TO LOSE CUSTOMERS

We may lose customers if service interuptions are caused by our failure or
the failure of third parties to be Year 2000 compliant. 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

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.

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,
Series C convertible preferred stock and any other parity security that may be
issued in the future. 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

19
<PAGE> 124

right of payment with $84.4 million of liquidation preference of Series B
convertible preferred stock and Series C convertible preferred stock.

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.

20
<PAGE> 125

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 $145.1
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 $231.0 million, based on an assumed offering price of $54.94 per
share, the closing price of our common stock on January 14, 2000, and after
deducting estimated underwriting discounts and other offering expenses payable
by us. We will receive approximately $266.2 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 $219.1 million
--------------
</TABLE>

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

DIVIDEND POLICY

21
<PAGE> 126

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 the sale of 1,250,000 shares of Series C convertible preferred
stock in December 1999, 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 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 $ 353,667 $ 584,679
Restricted investments............................. 30,375 30,375 30,375
-------- --------- ---------
Total cash and cash equivalents, investments
available-for-sale and restricted
investments.................................... $209,336 $ 384,042 $ 615,054
======== ========= =========
13% senior secured notes due 2004.................. $157,125 $ 157,125 $ 157,125
Other long-term debt............................... 552 552 552
Series B convertible preferred stock............... 49,452 49,452 49,452
Series C convertible preferred stock............... -- 29,600 29,600
Series D convertible preferred stock............... -- 145,106 145,106
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....................... 227,955 241,236 472,244
Accumulated deficit.............................. (93,851) (107,132) (107,132)
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....................... 131,605 131,605 362,617
-------- --------- ---------
Total capitalization............................... $338,734 $ 513,440 $ 744,452
======== ========= =========
</TABLE>

- -------------------------
(1) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering and the sale of 1,250,000 shares of Series
C convertible preferred stock in December 1999 for cash and a $4.9 million
promissory note. Also gives effect to a $13.3 million beneficial conversion
feature recognized at the date of commitment in November 1999.

(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 in December 1999 for cash and a $4.9 million
promissory note and the sale of 4,438,594 shares of common stock in the
concurrent offering. Also gives effect to a $13.3 million beneficial
conversion feature recognized at the date of commitment in November 1999.

Our financial information presented above as of and for the nine month period
ended September 30, 1999, has been restated to reflect the accretion of the
Series B convertible preferred stock to its anticipated redemption value. See
"Notes to Consolidated Financial Statements -- Note(12)."

22
<PAGE> 127

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

<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) $ (2.65)
</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 $ 353,667 $ 584,679
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........................ 12,339 191,977 252,119 381,814 556,520 787,532
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............................. -- -- -- 49,452 49,452 49,452
Series C convertible preferred
stock............................. -- -- -- -- 29,600 29,600
Series D convertible preferred
stock............................. -- -- -- -- 145,106 145,106
Stockholders' equity................ 10,792 8,976 63,260 131,605 131,605 362,617
</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 at $50.00 per share and the sale of
1,250,000 shares of Series C convertible preferred stock at $28.00 per share
in December 1999 for cash and a $4.9 million promissory note.

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(3) Gives effect to the sale of 3,000,000 shares of Series D convertible
preferred stock in this offering at $50.00 per share, the sale of 1,250,000
shares of Series C convertible preferred stock at $28.00 per share in
December 1999 for cash and a $4.9 million promissory note, and the sale of
4,438,594 shares of common stock in the concurrent offering at an assumed
price of $54.94 per share, the closing price of our stock on January 14,
2000. The price per share to be paid for the Series D convertible preferred
stock has been established at $50.00 with the conversion price to be based
on the market price for our common stock at the time the Series D
convertible preferred stock is issued and negotiations between our
underwriters and us. The price per share paid for the Series C convertible
preferred stock was based on the trading price for our common stock
immediately before the purchasers' commitment to purchase that stock. The
assumed price of the shares of common stock is equal to the closing price of
our common stock on January 14, 2000.

(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.

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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

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RESULTS OF OPERATIONS

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

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

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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.

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

YEAR ENDED DECEMBER 31, 1996

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

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

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.

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.

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IMPACT OF YEAR 2000

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.

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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.

As of the date of this prospectus, we have not experienced any material
year 2000 problems, either in our systems or in the systems of third parties
with whom we deal.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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BUSINESS

MGC COMMUNICATIONS

MARKET OPPORTUNITY

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

Impact of the Telecommunications Act of 1996

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Needs of Small and Medium Size Businesses for Integrated Communications
Solutions

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

Emergence of DSL Technology

THE MGC SOLUTION

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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."

BUSINESS STRATEGY

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

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PRODUCTS AND SERVICES

MARKETS

- 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

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SALES AND MARKETING

NETWORK ARCHITECTURE AND TECHNOLOGY

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

[DSL technology Flow Chart]

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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.

GOVERNMENT REGULATIONS

Overview

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Federal Regulation

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

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.

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

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

- 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.

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implemented could have a material effect on the amount of switched access
charges we collect from long distance carriers.

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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.

State Regulation

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Local Regulation

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.

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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

Competitive Carriers/Long Distance Carriers/Other Market Entrants.

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ability to successfully compete against incumbent carriers and other
communications service providers.

LONG DISTANCE SERVICES

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:

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PROPERTY

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

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PERSONNEL

As of January 10, 2000, we had approximately 883 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.

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.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, and their respective ages as of
January 14, 2000, are as follows:

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

(2) Member of Compensation Committee.

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MARK D. MAGARIAN joined our company as senior vice president -- people
services in January 2000. Mr. Magarian practiced law and specialized in labor
and employment law from 1993 until December 1999.

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

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PRINCIPAL STOCKHOLDERS

SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERS

- -------------------------
* 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. The shares of
Series B convertible preferred stock and Series C convertible preferred
stock are 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, 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 and Series C convertible preferred
stock are 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.

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(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.

(8) Includes options to purchase 188,266 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.

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DESCRIPTION OF SECURITIES

GENERAL -- CAPITAL STOCK

SERIES B CONVERTIBLE PREFERRED STOCK

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

- 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;

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

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- 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.

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."

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

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- $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.

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, which was issued in December
1999, has the following rights and preferences:

- 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;

- make acquisitions in excess of a fixed dollar amount;

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- 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.

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

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."

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If we require conversion before June 30, 2002, no accrued dividends in excess of
$2.80 per share will be paid.

- $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.

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

SERIES B AND C PREFERRED STOCK BOARD REPRESENTATION

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

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SHARES ELIGIBLE FOR FUTURE SALE

The holders of:

- approximately 7,772,041 shares of our common stock;

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

- 1,250,000 shares of Series C convertible preferred stock; and

- warrants to purchase approximately 285,546 shares of common stock,
excluding holders including those shares for sale in this offering.

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

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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, the holders of approximately 684,183 shares of common stock
that have been or may be acquired upon exercise of the warrants and the holders
of an additional 1,107,471 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

CONTROL SHARE ACQUISITIONS

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

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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 January 10, 2000, 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 1,250,000 shares of
preferred stock have been designated as Series C convertible preferred stock and
all 1,250,000 shares of Series C preferred stock were outstanding. 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 D
convertible preferred stock being offered.

BOARD OF DIRECTORS

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.

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DESCRIPTION OF THE SERIES D CONVERTIBLE PREFERRED STOCK

GENERAL

At the consummation of this offering, we will issue 3,000,000 shares of our
% Series D Convertible Redeemable 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;

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DIVIDENDS

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

- in cash, or

- in shares of our common stock.

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.

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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:

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.

REDEMPTION

Mandatory Redemption

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Provisional Redemption

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

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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

(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,

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,

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CONVERSION RIGHTS

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

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

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

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(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;

(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

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:

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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.

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").

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

(1) we are the continuing corporation, and

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

EXPIRATION OF CONVERSION RIGHTS

CHANGE OF CONTROL

Definitions

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

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

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(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;

(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 "Non-Stock Change of Control" means any Change of Control other
than a Common Stock Change of Control.

Non-Stock Change of Control

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The Company Notice will specify:

- the repurchase price or conversion price.

Common Stock Change of Control

If:

(1) a Common Stock Change of Control occurs;

(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;

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

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CONSOLIDATION, MERGER AND SALE OF ASSETS

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

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SEC REPORTS AND REPORTS TO HOLDERS

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.

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FEDERAL TAX CONSIDERATIONS

The following summary of all material federal income tax consequences
relevant to the purchase, ownership and disposition of our Series D convertible
preferred stock and common stock is based on the opinion of Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., our counsel. A copy of the opinion has been
filed as an exhibit to this registration statement. The following summary is not
binding on the Internal Revenue Service and we cannot assure you the Internal
Revenue Service will take a similar view with respect to the tax consequences
described below. The opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
states that the following summary accurately describes the material federal
income tax considerations in this prospectus.

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

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<PAGE> 182

- 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.

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

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<PAGE> 183

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.

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

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<PAGE> 184

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 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

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<PAGE> 185

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 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

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<PAGE> 186

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.

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.

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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."

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

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<PAGE> 188

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,"

- 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.

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<PAGE> 189

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>

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.

- 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;

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<PAGE> 190

- 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
"MPWR" (previously "MGCX"). We have applied to have the Series D convertible
preferred stock listed on the Nasdaq National Market under the symbol "MPWRP".

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.

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.

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<PAGE> 191

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 $394,000.

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

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.

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<PAGE> 192

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.

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<PAGE> 193

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

MGC COMMUNICATIONS, INC.

F-1
<PAGE> 194

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

ARTHUR ANDERSEN LLP

Las Vegas, Nevada
March 2, 1999

F-2
<PAGE> 195

INDEPENDENT AUDITORS' REPORT

The Board of Directors
MGC Communications, Inc.

/s/ KPMG LLP

Las Vegas, Nevada
August 18, 1997

F-3
<PAGE> 196

MGC COMMUNICATIONS, INC.

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

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 197

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
------------- ---------- ---------- --------- -------
(AS RESTATED)
(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) --
Accretion of preferred stock to
redemption value................ (2,789) -- -- -- --
---------- ---------- ---------- --------- -------
Net loss applicable to common
stockholders.................... $ (49,459) $ (22,293) $ (32,065) $ (10,972) $(1,491)
========== ========== ========== ========= =======
Basic and diluted loss per share
of common stock................. $ (2.65) $ (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> 198

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) -- --
Accretion of preferred stock to
redemption value................ -- 2,789 -- -- -- (2,789) -- --
Net loss.......................... -- -- -- -- -- (44,744) -- --
---------- -------- ---------- --- -------- -------- ------ ----
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (as restated)....... 5,277,779 $ 49,452 22,800,920 $23 $227,955 $(93,851) 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)
Accretion of preferred stock to
redemption value................ -- -- (2,789)
Net loss.......................... -- -- (44,744)
------- ------- --------
BALANCE AT SEPTEMBER 30, 1999
(unaudited) (as restated)....... $(2,086) $ (360) $131,605
======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 199

MGC COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 200

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

NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

REVENUE RECOGNITION

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> 201
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTRICTED INVESTMENTS

ADVERTISING COSTS

INVESTMENTS

PROPERTY AND EQUIPMENT

F-9
<PAGE> 202
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Estimated useful lives of property and equipment are as follows:

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

LONG-LIVED ASSETS

F-10
<PAGE> 203
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

CONCENTRATION OF SUPPLIERS

USE OF 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

F-11
<PAGE> 204
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) PROPERTY AND EQUIPMENT

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

F-12
<PAGE> 205
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT

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

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

F-13
<PAGE> 206
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-14
<PAGE> 207
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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.

F-15
<PAGE> 208
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

(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.

F-16
<PAGE> 209
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-17
<PAGE> 210
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(7) LOSS PER SHARE

F-18
<PAGE> 211
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) INCOME TAXES

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

(9) COMMITMENTS AND CONTINGENCIES

LEASE OBLIGATIONS

F-19
<PAGE> 212
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

LITIGATION

INTERCONNECTION AGREEMENTS

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

(10) RISKS AND UNCERTAINTIES

F-20
<PAGE> 213
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(12) SUBSEQUENT EVENTS (UNAUDITED)

PREFERRED STOCK OFFERINGS

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

F-21
<PAGE> 214
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's previously reported financial statements for the nine months
ended September 30, 1999 have been restated to reflect the above accretion of
anticipated redemption value with
F-22
<PAGE> 215
MGC COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respect to the Series B Preferred Stock. The effect of the restatement was to
increase the net loss applicable to common stockholders and basic and diluted
loss per share of common stock as follows:

<TABLE>
<CAPTION>
BASIC AND DILUTED
NET LOSS APPLICABLE TO LOSS PER SHARE
COMMON STOCKHOLDERS OF COMMON STOCK
---------------------- -----------------
<S> <C> <C>
As previously reported...................................... $(46,670) $(2.50)
Accretion of Series B Preferred Stock....................... (2,789) (0.15)
-------- ------
As restated................................................. $(49,459) $(2.65)
======== ======
</TABLE>

COMMON STOCK OFFERING

F-23
<PAGE> 216

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

3,000,000 SHARES

MGC COMMUNICATIONS, INC.

% SERIES D CONVERTIBLE PREFERRED STOCK

[MGC LOGO] [MPOWER COMMUNICATIONS LOGO]

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

PROSPECTUS

, 2000

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

SALOMON SMITH BARNEY

BEAR, STEARNS & CO. INC.

GOLDMAN, SACHS & CO.

ING BARINGS

WARBURG DILLON READ LLC

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 218

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 Revised Statutes at the time of any such indemnification.

II-1
<PAGE> 219

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.(3)
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.(3)
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.(3)
4.9 Certificate of Change in Authorized Capital of MGC
Communications, Inc.(4)
4.10 Form of Certificate of Designation of Series C Convertible
Preferred Stock.(3)
4.11 Certificate of Designation of Series D Convertible Preferred
Stock.*
5.1 Legal Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.*
8.1 Tax Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.*
12.1 Ratio of earnings to fixed charges and preferred
dividends.(3)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
24.1 Power of Attorney.(3)
</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) Previously filed with this registration statement.

(4) 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.

* To be filed by amendment.

II-2
<PAGE> 220

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> 221

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. 2 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Rochester, State of New York on the 18th day of January, 2000.

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.

/s/ ROLLA P. HUFF January 18, 2000
- ---------------------------------------------------
Rolla P. Huff, President
(Chief Executive Officer) and Director

/s/ MICHAEL R. DALEY January 18, 2000
- ---------------------------------------------------
Michael R. Daley, Executive Vice President (Chief
Financial Officer)

/s/ LINDA M. SUNBURY January 18, 2000
- ---------------------------------------------------
Linda M. Sunbury, Senior Vice President
(Principal Accounting Officer)

/s/ MAURICE J. GALLAGHER, JR.* January 18, 2000
- ---------------------------------------------------
Maurice J. Gallagher, Jr., Director
(Chairman of the Board)

/s/ TIMOTHY P. FLYNN* January 18, 2000
- ---------------------------------------------------
Timothy P. Flynn, Director

January , 2000
- ---------------------------------------------------
Jack L. Hancock, Director

/s/ DAVID KRONFELD* January 18, 2000
- ---------------------------------------------------
David Kronfeld, Director

January , 2000
- ---------------------------------------------------
Mark J. Masiello, Director

/s/ THOMAS NEUSTAETTER* January 18, 2000
- ---------------------------------------------------
Thomas Neustaetter, Director

January , 2000
- ---------------------------------------------------
Paul J. Salem, Director

* /s/ MICHAEL R. DALEY
- ---------------------------------------------------
By: Michael R. Daley as Attorney-in-fact
</TABLE>

II-4
<PAGE> 222

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.(3)
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.(3)
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.(3)
4.9 Certificate of Change in Authorized Capital of MGC
Communications, Inc.(4)
4.10 Form of Certificate of Designation of Series C Convertible
Preferred Stock.(3)
4.11 Certificate of Designation of Series D Convertible Preferred
Stock.*
5.1 Legal Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.*
8.1 Tax Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson,
P.C.*
12.1 Ratio of earnings to fixed charges and preferred
dividends.(3)
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
24.1 Power of Attorney.(3)
</TABLE>

(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) Previously filed with this registration statement.

(4) 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.

* To be filed by amendment.

<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
January 18, 2000

<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/A Registration Statement of MGC Communications, Inc., to be filed on or
about January 17, 2000, 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
January 17, 2000