U S ONLINE COMMUNICATIONS INC, SB-2/A, 1998-07-24

U S ONLINE COMMUNICATIONS INC
SB-2/A, 1998-07-24
CABLE & OTHER PAY TELEVISION SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998

REGISTRATION NO. 333-51781
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

U.S. ONLINE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 4841 74-2874568
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

10300 METRIC BOULEVARD
AUSTIN, TEXAS 78758
(512) 651-3767
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

ROBERT G. SOLOMON, CHIEF EXECUTIVE OFFICER
10300 METRIC BOULEVARD
AUSTIN, TEXAS 78758
(512) 651-3767
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
LAURA T. PUCKETT SHARI K. KROUNER
WILLIAM W. BARKER JAMES A. GRAYER
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S. KRAMER, LEVIN, NAFTALIS & FRANKEL
1001 FOURTH AVENUE PLAZA, SUITE 4500 919 THIRD AVENUE
SEATTLE, WASHINGTON 98154 NEW YORK, NEW YORK 10022
TEL: (206) 624-3600 TEL: (212) 715-9100
FAX: (206) 389-1708 FAX: (212) 715-8000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

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,
check the following box: [X]

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(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value(2) 5,866,667 $7.50 $44,000,003 $12,980
- -------------------------------------------------------------------------------------------------------------------------------
Representatives' Options(3)(4) 350,000 $9.00 $ 3,150,000 $ 929
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
underlying Representatives' Options 350,000 $9.00 $ 0(5) $ 0(5)
- -------------------------------------------------------------------------------------------------------------------------------
Total 6,216,667 $47,150,003 $13,909(5)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

(2) Includes 3,500,000 shares of Common Stock offered by the Company; 525,000
shares of Common Stock to cover over-allotment options, if any; 800,000
shares of Common Stock registered for resale by the LLC; 866,667 shares of
Common Stock registered for resale by purchasers in the Interim Financing;
and 175,000 shares of Common Stock issuable on exercise of the Warrants,
none of which shares are presently outstanding.

(3) Represents five-year Representatives' Options to purchase 350,000 shares of
Common Stock at an exercise price equal to 120% of the initial public
offering price.

(4) Pursuant to Rule 416, this Registration Statement also covers an
indeterminate number of shares of Common Stock that may be issued to cover
future anti-dilution adjustments under the terms of the Representatives'
Options.

(5) Pursuant to Rule 457(i) no filing fee is due with respect to the 350,000
shares of Common Stock issuable on exercise of the Representatives' Options.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

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

SUBJECT TO COMPLETION, DATED JULY 24, 1998

PROSPECTUS

3,500,000 SHARES

LOGO

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

U.S. OnLine Communications, Inc. (the "Company") hereby offers 3,500,000
shares of common stock, par value $.001 per share (the "Common Stock"), of the
Company (the "Offering"). Prior to the Offering, there has been no public market
for the Common Stock and there can be no assurance that a market for the Common
Stock will be sustained following the Offering. It is anticipated that the
initial public offering price for the Common Stock will be $7.50 per share. See
"Underwriting" for factors considered in determining the initial public offering
price of the Common Stock. The Company's Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "USOL." The Company has
also registered 1,841,667 shares of Common Stock on behalf of selling
stockholders (the "Selling Stockholders"), none of which shares are presently
being offered and all of which are subject to lock-up agreements with Barington
Capital Group, L.P. ("Barington"). See "Shares Eligible for Future Sale" and
"Underwriting."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES MATERIAL RISKS AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 9 AND "DILUTION."
------------------------

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

<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO PUBLIC UNDERWRITING DISCOUNT COMPANY(1)(2)
- ------------------------------------------------------------------------------------------------------------------
Per Share........................... $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Excludes a non-accountable expense allowance payable by the Company to
Barington and Cruttenden Roth Incorporated ("Cruttenden"), the
representatives of the several underwriters (the "Representatives"), in an
amount equal to 3% of the gross proceeds of the Offering, the value of
five-year options (the "Representatives' Options") to purchase 350,000
shares of Common Stock at an exercise price equal to 165% of the initial
public offering price being issued to the Representatives and certain other
compensation payable to the Underwriters. The Company has agreed to
indemnify the Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."

(2) Before deducting expenses payable by the Company, estimated to be
$1,285,000, including the Representatives' non-accountable expense
allowance.

(3) The Company has granted the Underwriters a 45-day option to purchase up to
525,000 additional shares of Common Stock at the Price to the Public less
Underwriting Discount to cover over-allotments, if any. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to the right to reject any order in whole or in part, and subject to the
conditions set forth in the Underwriting Agreement between the Company and the
Underwriters. It is expected that the delivery of certificates representing the
shares of Common Stock will be made against payment therefor at the offices of
Barington Capital Group, L.P., 888 Seventh Avenue, New York, New York 10019 or
through the facilities of The Depository Trust Company, on or about
, 1998.
------------------------

BARINGTON CAPITAL GROUP CRUTTENDEN ROTH
INCORPORATED
------------------------

THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3

[MAP OF STATES INDICATING SERVICE AREAS]

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

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."

The Company intends to furnish its stockholders annual reports containing
financial statements audited by independent accountants and such other periodic
reports as the Company may deem appropriate or as may be required by law.
<PAGE> 4

Unless otherwise indicated, (i) the information in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised, (ii) the
information in this Prospectus gives effect to the acquisition by the Company of
substantially all of the assets, and the assumption by the Company of certain
liabilities (the "Asset Acquisition"), of U.S. OnLine Communications L.L.C., a
Washington limited liability company formed in 1995 (the "LLC"), which
transaction was effected prior to consummation of the Offering, and (iii) the
"Company" includes U.S. OnLine Communications, Inc., the LLC, U.S. On-Line
Cable, L.L.C., a Texas limited liability company formed in 1994 ("Cable"), and
subsidiaries. See "Certain Transactions." Refer to the Glossary for industry
terms used in this Prospectus.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus.

THE COMPANY

GENERAL

The Company markets and provides cable television ("CATV") and enhanced
local and long distance telephone services, collectively referred to as
residential multi-tenant services ("RMTS"), to residents of apartment complexes
and other concentrated residential sites ("multifamily dwelling units" or
"MDUs"). It delivers these services under right of entry contracts ("ROE
Contracts") with MDU property owners and service agreements with MDU residents.
The Company offers property owners two significant incentives to enter into ROE
Contracts with it. First, because the Company enjoys cost benefits available to
it as a private cable operator, the Company is able to offer property owners a
share of the revenue generated by the residents who purchase services from the
Company. Second, the Company believes it offers superior customer service, which
enhances the owner's ability to attract tenants.

The Company currently has ROE Contracts with various property owners
including institutional property owners such as Amli Residential Properties
Trust, Gables Residential Trust, Lincoln Property Company and Equity Residential
Properties Trust. The Company targets demographically favorable MDUs clustered
in geographic regions with growing populations and currently services MDUs
located in Austin, Dallas-Fort Worth, Denver, San Antonio and the Washington,
D.C. metropolitan area (including the Virginia suburbs). After executing a ROE
Contract, the Company builds out "passings" on a property. A "passing" refers to
each service for which an apartment unit is wired, and, therefore, an apartment
unit wired for both CATV and telephony services counts as two passings. Once the
passings are operational, the Company markets its services directly to MDU
residents.

The Company has experienced significant growth in the total number of
properties covered by ROE Contracts, passings and subscribers. From December 31,
1996 to March 31, 1998, the number of properties covered by the Company's ROE
Contracts increased from 28 to 43 (an increase of 54%), the number of passings
increased from approximately 7,600 to approximately 18,000 (an increase of
approximately 135%), and the number of subscribers increased from approximately
3,600 to approximately 10,000 (an increase of approximately 180%).

GROWTH STRATEGY

The Company's primary objective is to become a leading provider of RMTS in
the United States. The Company believes it can achieve this objective by:

- targeting MDUs with favorable demographics,
- capturing the benefits of geographic clustering,
- offering competitive products and superior customer service, and
- utilizing a flexible and reliable technology platform.

3
<PAGE> 5

The key components of the Company's growth strategy include:

- generating additional ROE Contracts in existing markets,
- offering its services in new markets,
- cross-selling additional related products and services to its existing
subscriber base once a market has been developed, and
- pursuing acquisitions of other CATV and telephony service providers.

INDUSTRY AND MARKET OVERVIEW

The Company estimates that the potential market for its services in the
United States consists of approximately 10 million apartment units located in
MDU communities of 50 or more units. While all of these units are currently
served by some form of CATV and telephony service, the Company believes that
fewer than 15% are currently serviced by an RMTS provider. Due to consolidation
of ownership of MDUs, there has been downward pressure on cashflow returns to
property owners, creating added incentives on the part of property owners to
find new sources of revenue. In addition, as a result of the competitive nature
of the MDU industry, property owners are looking for more products and services
to distinguish their communities from those of their competitors.

PRODUCTS AND SERVICES

The Company currently provides CATV and telephony services to MDU residents
at competitive rates. The Company's CATV service offers a full range of popular
programming tailored specifically for each MDU or region. The Company obtains
its CATV programming through program access agreements with a number of
suppliers. The Company currently purchases standard and enhanced local and
long-distance telephony services in bulk and resells them over networked central
office telecommunications platforms. In 1996 and 1997, the Company derived 93%
and 69% of its revenues from CATV services, and 7% and 26% from telephony
services, respectively.

In addition to offering CATV and telephony services, in the near future the
Company intends to roll out related services such as paging, intrusion alarm,
Internet access, and high-speed data. The Company is also exploring additional
services including utility metering and financial and insurance products.

MARKETING AND SALES

The Company markets its services to two distinct customer groups. The first
group consists of property owners, some of which are the largest multifamily
property owners and developers in the industry, and the second group consists of
MDU residents. The Company markets its services to property owners to secure ROE
Contracts. Under a ROE Contract, the Company generally becomes the exclusive
provider of CATV services to that MDU and a non-exclusive provider of telephony
and related services. After entering into a ROE Contract, the Company builds out
its passings on the property and provides training and support to the property
owner's on-site leasing agents. Once the passings are operational, the on-site
leasing agents market the Company's services to MDU residents.

The Company believes that its ability to secure ROE Contracts is a key
component of its success and has contributed to its substantial growth to date.
ROE Contracts executed by the Company generally have a term of eight to fifteen
years and provide strong financial incentives to property owners. The Company
believes that its ROE Contracts align its interests with those of the property
owners. The Company also believes that it offers competitively priced CATV and
telephony products and superior customer service, which enhance the amenity
package offered by a property owner. The Company believes that these
enhancements increase occupancy and resident retention in MDUs served by the
Company.

OPERATING BENEFITS

The Company is considered to be a private cable operator and therefore is
subject to less regulatory oversight than traditional franchise cable operators.
The principal benefit of this regulatory status is that,

4
<PAGE> 6

unlike a traditional cable operator, the Company is not required to provide
universal access by building a network throughout its designated franchise area.
Instead, the Company constructs facilities only in those MDUs where it has
entered into a ROE Contract with the property owner. This situation allows the
Company to keep infrastructure development and maintenance costs at a minimum,
thereby enabling the Company to offer revenue-sharing arrangements that induce
property owners to enter into ROE Contracts with the Company. The Company also
benefits from the fact that it is not subject to uniform pricing restrictions
and, as a result, can create custom pricing packages and tiers for individual
properties, for groups of commonly owned properties and for particular
geographic markets.

HISTORY

The Company was incorporated in Delaware in March 1998 in anticipation of
the Offering. Prior to the Asset Acquisition, which will be consummated prior to
the Offering, the business operations of the Company were conducted through its
predecessors, the LLC, Cable and Cable's 50%-owned subsidiary U.S.-Austin Cable
Associates I, Ltd. ("USAC"). The Company's principal executive offices are
located at 10300 Metric Boulevard, Austin, Texas 78758, and its telephone number
is (512) 651-3767. The Company's Web site address is www.usolcomm.com.
Information accessed on or through the Company's Web site does not constitute a
part of this Prospectus.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.................. 3,500,000 shares
Common Stock outstanding:
Before the Offering(1)............................. 2,166,667 shares
After the Offering................................. 5,666,667 shares

Risk Factors......................................... The Common Stock offered hereby involves material
risks. Prospective investors should carefully
consider the risks described in "Risk Factors."

Use of Proceeds...................................... The net proceeds of the Offering will be used by the
Company for expansion of facilities and services,
enhancement to management information and billing
systems, repayment of indebtedness and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol........................ USOL
</TABLE>

- ---------------
(1) Includes 800,000 shares of Common Stock issued to the LLC in the Asset
Acquisition, 866,667 shares of Common Stock purchased by investors in
conjunction with an interim financing completed prior to the Offering, and
500,000 shares of Common Stock issued to key employees pursuant to the
Company's 1998 Restricted Stock Award Plan (the "1998 Restricted Stock
Plan"). Excludes shares of Common Stock issuable upon exercise of the
following warrants and options: (i) 175,000 shares of Common Stock issuable
upon exercise of two outstanding warrants to Aspen OnLine Investments, LLC
(100,000 shares) and Silicon Valley Bank (75,000 shares), respectively (the
"Warrants"); (ii) 1,000,000 shares of Common Stock reserved for issuance
under the Company's 1998 Non-Qualified Stock Option and Incentive Stock
Option Plan ("1998 Stock Option Plan"), of which options for 495,000 shares
have been granted as of the date of this Prospectus; and (iii) 350,000
shares of Common Stock issuable upon exercise of the Representatives'
Options. See "Certain Transactions," "Management--Benefit Plans,"
"Description of Capital Stock" and "Underwriting."

5
<PAGE> 7

SUMMARY FINANCIAL DATA

The pro forma financial data and the selected financial data of the LLC and
U.S. OnLine Communications, Inc. below should be read in conjunction with the
financial statements, Notes to Financial Statements, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and other
financial information included elsewhere in this Prospectus. The selected
financial data for the fiscal years ended December 31, 1996 and December 31,
1997 are derived from historical financial statements of the LLC. The LLC owned
a 50% interest in Cable during the year ended December 31, 1996 and, in the year
ended December 31, 1997, acquired the remaining interest in Cable. Therefore,
the unaudited pro forma statement of operations data for the LLC for the year
ended December 31, 1996 gives effect to the acquisition of the remaining 50% of
Cable as if that transaction had occurred on January 1, 1996. (See Note 2 of the
Notes to Financial Statements of the LLC.) The selected financial data for the
three months ended March 31, 1997 and March 31, 1998 are derived from the
unaudited financial statements of the LLC. The unaudited pro forma statement of
operations data for the LLC for the three months ended March 31, 1997 gives
effect to the acquisition of Cable as if that transaction had occurred on
January 1, 1997. The unaudited pro forma statement of operations data for the
Company for the year ended December 31, 1997 and for the three months ended
March 31, 1998 gives effect to the Interim Financing and the Asset Acquisition
(as defined below) as if those transactions had occurred on January 1, 1997 and
January 1, 1998, respectively.

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS L.L.C.
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MARCH 31, DECEMBER 31,
---------------------------------------- -----------------------------------------
1998 1997 1997 1997 1996 1996
ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO FORMA(2) ACTUAL
----------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................... $ 1,109,071 $ 385,000 $ 67,657 $ 2,721,293 $ 836,876 $ 58,407
Gross profit.................... 673,601 266,846 32,663 1,763,209 523,841 17,658
Loss from operations............ (1,608,023) (1,275,651) (776,081) (6,230,763) (4,118,677) (2,703,698)
Net loss........................ (2,283,804) (1,743,069) (1,381,603) (8,446,349) (5,107,494) (4,243,083)
OPERATING DATA(3):
CATV:
Operational Passings(i)......... 12,352 11,888(iii) 6,394
Basic Subscribers(ii)........... 8,261 7,592(iii) 3,333
Basic Penetration(iv)........... 67% 64% 52%
Premium Channel Subscriptions... 4,439 4,376 2,088
Premium-to-Basic Ratio(v)....... 54% 58% 63%
Average Monthly Revenue Per
Basic Subscriber(vi).......... $ 27.14 $ 25.81 $ N/A(xii)
TELEPHONY:
Operational Passing(vii)........ 5,217 4,985 1,190
Subscribers..................... 2,239 1,939 327
Subscriber Penetration.......... 43% 39% 27%
Average Monthly Revenue Per
Subscriber(viii):
Local Telephony Services.... $ 25.08 $ 24.39 N/A(xii)
Long-distance Telephony
Services.................. $ 32.54 $ 31.24 N/A(xii)
Lines(ix)....................... 2,804 2,392 409
Line Penetration(x)............. 54 48 34
Average Monthly Revenue Per
Line(xi)...................... $ 46.01 $ 45.09 $ N/A(xii)
</TABLE>

6
<PAGE> 8

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
PRO FORMA FOR THE
COMPLETED TRANSACTIONS(4)
--------------------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ 1,109,071 $ 2,721,293 $ 58,407
Gross profit................................................ 673,601 1,763,209 17,658
Loss from operations........................................ (1,646,695) (6,385,451) (2,858,386)
Net loss.................................................... (2,374,254) (8,036,764) (5,457,623)
Net loss per share:
Basic..................................................... $ (1.10) $ (3.71) $ (2.52)
----------- ----------- -----------
Diluted................................................... $ (0.84) $ (2.83) $ (1.92)
=========== =========== ===========
Weighted average shares used for computing net loss per
share:
Basic..................................................... 2,166,667 2,166,667 2,166,667
=========== =========== ===========
Diluted................................................... 2,836,667 2,836,667 2,836,667
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-------------------------------------------------
MARCH 31, 1998
-------------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA(5) AS ADJUSTED(5)(6)
------------ ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,648,500 $ 7,374,622 $26,724,622
Working capital (deficit)................................... 3,543,467 (5,423,611) 17,093,056
Total assets................................................ 7,067,714 23,575,850 42,428,212
Long-term obligations, net of current maturities............ 1,500,000 5,566,529 5,566,529
Stockholders' equity........................................ 3,462,681 4,222,637 26,241,666
</TABLE>

- ---------------
(1) Pro forma summary financial data gives effect to the LLC's acquisition of
Cable as if it had occurred on January 1, 1997.

(2) Pro forma summary financial data gives effect to the LLC's acquisition of
100% of Cable as if it had occurred on January 1, 1996.

(3) Operating data is included for purposes of additional analysis and is not
derived from the historical financial statements of the LLC.

(i) Operational passings represents the number of MDU units with respect to
which the Company has connected its CATV services.

(ii) Includes the number of basic subscribers and premium subscribers at such
date.

(iii) Excludes passings and subscribers in Atlanta, Georgia, which were sold on
March 6, 1998 pursuant to a purchase agreement with a third party.

(iv) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of operational passings.

(v) Premium-to-Basic Ratio is calculated by dividing the total number of
premium subscribers by the total number of basic subscribers.

(vi) Represents average monthly revenue from monthly service fees and
installation charges per the average number of basic subscribers for the
periods ended as of the date shown.

(vii) Represents the number of MDU units with respect to which the Company has
connected its telephony services.

(viii) Represents average monthly revenue from local and long-distance service
fees per the average number of subscribers for the periods ended as of
the date shown.

(ix) Lines represent the number of telephone lines currently being provided to
telephony service subscribers. A telephony service subscriber can
subscribe for more than one line.

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<PAGE> 9

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

(xi) Represents average monthly revenue per the average number of lines for the
periods ended as of the date shown.

(xii) Information not available.

(4) Pro forma summary financial data gives effect to: (i) the sale of 65 units
for the year ended December 31, 1997 and 18.3 units for the three months
ended March 31, 1998, each unit consisting of a 15% senior subordinated
promissory note in the principal amount of $50,000 (the "Interim Notes") and
13,333.33 shares of Common Stock, and the issuance of the 14% subordinated
promissory note (the "Aspen Note") (together, the "Interim Financing"); (ii)
the Asset Acquisition, including the 10% promissory note (the "Asset
Acquisition Note") and 800,000 shares of Common Stock issued in the Asset
Acquisition; and (iii) the merger of Cable into the LLC.

(5) Pro forma summary balance sheet data gives effect to the following as if
they occurred on March 31, 1998: (i) the proceeds from the issuance of the
remaining 18.3 units in the Interim Financing; (ii) the acquisition of
substantially all of the assets, and the assumption of certain liabilities,
of the LLC and the issuance of the Asset Acquisition Note and 800,000 shares
of Common Stock in the Asset Acquisition; and (iii) the issuance of 495,000
Common Stock options at an exercise price of $3.75 per share and deemed fair
value of $5.00 per share.

(6) Pro forma summary balance sheet data gives effect to the following as if
they occurred on March 31, 1998: (i) the proceeds from the issuance of
3,500,000 shares of Common Stock from the Offering (at the initial public
offering price of $7.50 per share), resulting in additions to stockholders'
equity of $26,250,000 reduced by estimated issuance costs of $2,650,000; and
(ii) payments by the Company of $3,250,000 to retire the Interim Notes (and
a related charge of $1,580,971 to expense related issuance and original
issue discount costs) and $1,000,000 to pay the first installment due under
the Asset Acquisition Note.

8
<PAGE> 10

RISK FACTORS

An investment in Common Stock involves material risks. Investors should
consider the following risks in addition to the other information in this
Prospectus.

This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. The words "anticipate," "believe,"
"estimate," "expect" and similar terms as they relate to the Company or its
management are intended to identify these forward-looking statements. The
Company's actual results and performance could differ materially from the
results and performance expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to material differences
include those discussed in "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business."

UNCERTAIN FUTURE PROFITABILITY; GOING CONCERN OPINION OF AUDITORS. The LLC
has incurred substantial net losses since its inception. The LLC reported a net
loss of $4,243,083 for the year ended December 31, 1996, and a net loss of
$8,446,349 for the year ended December 31, 1997. From inception through December
31, 1997, the LLC recorded an accumulated deficit of $14,909,214. Management
expects that the Company will continue to incur losses for the foreseeable
future, and there can be no assurance that the Company will achieve or sustain
profitability in the future. Coopers & Lybrand L.L.P., independent auditors of
the Company, the LLC and Cable, included an explanatory paragraph in their
reports on the financial statements of U.S. OnLine Communications, Inc., the LLC
and Cable, included in this Prospectus, expressing substantial doubt as to the
ability of U.S. OnLine Communications, Inc., the LLC and Cable to continue as
going concerns based on accumulated losses from operations, negative working
capital and negative cash flows. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to the
respective financial statements.

SUBSTANTIAL LEVERAGE; RESTRICTIONS IN CONNECTION WITH INDEBTEDNESS. To
date, the Company has financed its operations primarily through loans from
equity owners, the Interim Financing, equipment lease financing and borrowings
under its $7,200,000 secured credit facility with Silicon Valley Bank, which
expires on October 15, 1998. The Silicon Valley Bank credit facility, the Aspen
Note and the Asset Acquisition Note contain covenants which, among other things,
restrict the Company's ability to dispose of assets or merge, incur debt, pay
distributions or take certain other corporate actions. By October 15, 1998, the
Company will be required to renew the Silicon Valley Bank credit facility or
obtain financing from another lender. There can be no assurance that such
financing will be obtainable on favorable terms, or at all. The inability to
obtain financing when required would have a material adverse effect on the
Company and the implementation of its growth strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RISKS ASSOCIATED WITH RIGHT OF ENTRY CONTRACTS. The Company's strategy
relies in large part on its continuing ability to enter into long-term ROE
Contracts on satisfactory terms with owners of demographically favorable MDUs.
In addition, the Company depends upon third-party lenders to finance the
build-out of properties covered by ROE Contracts. The Company may not be able to
implement its growth plan as currently contemplated if the demographics or
occupancy rates of the MDUs served by the Company change, if in the future the
Company is unable to procure suitable ROE Contracts or finance the build-out of
properties covered by ROE Contracts, or if the cost of acquiring ROE Contracts
increases substantially as a result of increased competition or otherwise. The
ability of the Company to implement its growth plan could also be materially
adversely affected if lenders are unwilling to accept ROE Contracts as
collateral for debt financing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

The Company's ROE Contracts typically grant the Company the exclusive right
to provide CATV services, which the Company believes provides it with a
competitive advantage. Some states have adopted "mandatory access laws," which
could prevent alternative video providers, such as private cable operators, and
property owners from enforcing exclusivity provisions such as those included in
many of the Company's ROE Contracts. None of the states in which the Company
currently operates or plans to operate in the foreseeable future have mandatory
access laws. There can be no assurance that mandatory access laws will not be
adopted in states where the Company does business, or that the Company will not
expand its operations into states that
9
<PAGE> 11

have mandatory access laws. In addition, the Federal Communications Commission
("FCC") is reviewing the rights of various video programming service providers
to access private property, including MDUs, and is considering various
restrictions on the duration of contracts that grant exclusive access rights.
Thus, there can be no assurance that exclusive rights contained in the Company's
ROE Contracts will not be limited or abrogated, in whole or in part, by the
passage of mandatory access laws or regulatory action that may have a similar
effect. The inability to enforce the exclusivity provisions of ROE Contracts, in
whole or in part, could have a material adverse effect on the Company and its
ability to implement its current strategy. Moreover, even if the exclusivity
provisions of ROE Contracts remain fully enforceable, emerging technologies or
changing regulations may enable competitors of the Company to bypass property
owners entirely and market their products and services directly to MDU residents
via satellite broadcast, wireless transmission, telephone lines or otherwise,
which could reduce the competitive advantage provided by the Company's exclusive
ROE Contracts. See "Business--Government Regulation--CATV Regulatory Issues."

RISKS ASSOCIATED WITH MANAGEMENT INFORMATION AND BILLING SYSTEMS. The
Company's business requires a management information system ("MIS") and billing
system that can accurately and quickly process large amounts of data. Each
month, the Company processes over 150,000 individual phone calls and thousands
of other individual account transactions. Each of these must be properly billed
to the appropriate customer. On occasion, the Company experiences difficulties
with the ability of the MIS and billing system to track some types of billable
calls, in part due to technology limitations and in part due to the fact that
the current MIS and billing system is limited in the number of calls that it can
accurately process at one time. Errors and delays in processing customer calls
may undermine customer confidence and may result in customers switching their
telephone service to another company. While to date these difficulties and
limitations have not been material, the Company estimates that approximately
$750,000 will be required over the next twelve months to upgrade its MIS and
billing system to accurately handle the substantial additional transactions that
will be generated if the Company meets its business goals. The actual cost of
implementing such an upgrade may materially exceed management's estimates. The
Company has recently engaged a national management information system consulting
firm to assist it in its efforts to enhance its MIS and billing system.
Nonetheless, there can be no assurance that the Company will not encounter
material unforeseen difficulties and delays in upgrading its MIS and billing
system. Any such difficulties or delays could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company does not believe that the cost of implementing year 2000
compliant software and systems will have a material effect on the Company's
financial condition and results of operations; however, there can be no
assurance that the Company will not be impacted by year 2000 issues faced by
major distributors, suppliers and financial service organizations with which the
Company interacts.

COMPETITION. Both the CATV and telecommunications industries are highly
competitive and characterized by constant innovation. Competitors include major
domestic and international private cable, telephone and franchise cable
companies and their affiliates, many of which have resources that are
substantially greater than those of the Company. Many of such companies also
have names that are more recognizable by consumers than that of the Company,
which may provide such competitors with significant competitive advantages.
Entities with financial resources greater than those of the Company may be able
to offer greater incentives to property owners, and the amount of the payments
demanded by property owners may increase, impairing the Company's ability to
operate on a profitable basis. Some of the Company's competitors include private
cable and phone companies, local exchange carriers ("LECs"), competitive local
exchange carriers ("CLECs"), franchise cable companies, franchise cable company
joint ventures and LEC affiliates. The regulatory environment in which the
Company operates continues to undergo fundamental changes that may also lead to
increased competition. The trend in the telecommunications industry has been the
convergence of traditional telephone and data services with broadcast video
services. As part of this trend, service providers are attempting to converge
network components: cable television distribution equipment is being considered
for telephone services and vice versa, and wireless distribution equipment is
being considered for both broadcast video and telephone services. In broader
terms, the telephone, cable, wireless and computer industries are evolving to
provide fully integrated multimedia services to end-users. The opportunities
offered by such convergence will present risks for the Company due to enhanced
competition from competitors in

10
<PAGE> 12

various industries with much greater financial, technical, marketing and other
resources. Should rates decrease, the Company may be forced to lower its prices
or offer additional services or features to remain competitive. Wireless cable
and telephone services may also allow competitors to bypass property owners
altogether and market their services directly to residents of MDUs. To remain
competitive with other providers, the Company may be required to adopt new
technologies, which are likely to entail significant capital expenditures. See
"Business--Competition," "--Government Regulation--CATV Regulatory Issues" and
"--Government Regulation--Telephony Regulatory Issues."

RISKS ASSOCIATED WITH GROWTH STRATEGY. The expansion of the Company's
operations will depend to some extent on matters outside of the Company's
control including the ability of the Company to enter into ROE Contracts on
favorable terms, make attractive acquisitions, and obtain required governmental
permits in a timely manner, at reasonable costs and on satisfactory terms and
conditions. The Company intends to incur substantial additional indebtedness to
continue to upgrade its existing systems and to build new systems that will
enable the Company to offer its customers enhanced products and services.
Construction of new systems requires the Company to obtain qualified
subcontractors and may subject the Company to the risk of cost overruns and
delays. Delays also can be caused by weather, design changes, or material or
equipment shortages, as well as the need to obtain governmental approvals.
Failure to complete construction of new systems on a timely basis could impair
the ability of the Company to compete effectively in a particular area. In
addition, the Company relies on its reputation for providing superior customer
service to attract customers. The failure to continue to provide this level of
service may impair the Company's growth strategy and may result in the loss of
customers.

RAPID TECHNOLOGICAL CHANGES; EVOLVING MARKET. The cable and
telecommunications industries are subject to rapid and significant technological
changes and service innovations. The effect of these changes and innovations,
including those relating to emerging hardwire and wireless transmission and
switching technologies, cannot be predicted. The Company has formulated its
business plans and strategies based on management estimates regarding the market
size, the Company's anticipated share of the market, the estimated price and
acceptance of the Company's services, and a variety of other factors. There can
be no assurance that these estimates will prove to be correct.

CONCENTRATION OF REVENUES. Approximately 84% and 76% of the LLC's revenues
for fiscal year ended December 31, 1997 and the three months ended March 31,
1998, respectively, are derived in the Austin, Dallas and San Antonio, Texas
geographic areas. A sustained economic downturn or significant increases in
competition in that region could effect revenues.

DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon its senior
management, particularly Mr. Robert G. Solomon, its Chairman and Chief Executive
Officer, and Mr. Donald E. Barlow, its President and Chief Financial Officer.
The loss or unavailability of Mr. Solomon or Mr. Barlow could have a material
adverse effect on the business, prospects and viability of the Company. There
can be no assurance that the Company will be successful in retaining its
existing key personnel or in attracting and retaining additional key personnel.
The Company does not maintain key man life insurance on either Mr. Solomon or
Mr. Barlow. The loss of the services of one or more of the Company's key
personnel or the inability to add key personnel could have a material adverse
effect on the Company. See "Management--Executive Employment Agreements."

GOVERNMENT REGULATION. The business of the Company is subject to extensive
and changing laws and regulations, including those of the FCC, the Federal
Aviation Administration ("FAA") and state and local regulatory bodies such as
public utility commissions ("PUC"). Many of the operations of the Company are
subject to licensing requirements of federal, state and local law, including the
necessity to obtain FCC and PUC approvals for the Company's licenses. The United
States Congress, the FCC, the FAA and state and local regulatory bodies in the
past have adopted, and may in the future adopt, new laws, regulations and
policies regarding a wide variety of matters, including rule-making by the FCC
with respect to exclusive contractual rights to provide CATV service to a
property, that could affect the operations of the Company's business and its
ability to borrow money and pledge certain assets. No assurance can be given
that changes in current or future regulations adopted by the United States
Congress, the FCC, the FAA or state or local regulatory bodies or legislative
initiatives would not have a material adverse effect on the Company. See

11
<PAGE> 13

"Business--Government Regulation--CATV Regulatory Issues" and "--Government
Regulation--Telephony Regulatory Issues."

DILUTION. Purchasers of Common Stock in the Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock. At the initial public offering price of $7.50 per share,
dilution to new investors will be $3.94 per share of Common Stock. Additional
dilution will occur to the extent that outstanding warrants and options are
exercised. See "Dilution."

EFFECT OF FUTURE SALES OF COMMON STOCK. The Company will have 5,666,667
shares of Common Stock outstanding after consummation of the Offering. Shares of
Common Stock sold in the Offering to persons who are not "affiliates" of the
Company, as defined in Rule 144 under the Securities Act, are freely resalable
without restriction. Of the 5,666,667 shares of Common Stock outstanding after
consummation of the Offering, 500,000 shares will be "restricted securities," as
defined in Rule 144, that may be resold only after registration, through an
available exemption, or through compliance with Rule 144 beginning one year
after the shares were purchased. In addition, all of the shares of Common Stock
outstanding prior to the consummation of the Offering, and all of the shares of
Common Stock issuable upon exercise of the Warrants, are subject to a two-year
lock-up agreement with Barington, except any stockholder subject to such
agreement may sell shares of Common Stock commencing 12 months after the
completion of the Offering in the event the last trading price for the Common
Stock has been at least 200% of the price in the Offering for a period of 20
consecutive trading days ending within five days of the date of such sale, and
such sale is completed at a price in excess of 200% of the price in the
Offering. 2,191,667 shares of Common Stock (including 175,000 shares issuable
upon exercise of the Warrants and 350,000 shares issuable upon exercise of the
Representatives' Options) are being registered for sale under the Registration
Statement, which would permit the holders to sell these shares prior to the
expiration of the Rule 144 holding period if Barington were to release the lock-
up agreements. The lock-up agreements may be released by Barington on a
case-by-case basis. The Company has been advised by Barington that it has no
general policy with respect to granting releases from lock-up agreements, but it
has no plans, intentions or understandings to modify, shorten or waive the
lock-up agreements. There is, however, no assurance that the lock-up agreements
will not be released. Sales of substantial amounts of Common Stock after
consummation of the Offering could have a material adverse effect on the market
price for the Common Stock. See "Shares Eligible for Future Sale."

NASDAQ ELIGIBILITY REQUIREMENTS; LOW PRICED STOCKS. Continued quotation of
the Common Stock on the Nasdaq National Market is conditioned upon the Company
continuing to meet its eligibility requirements. In addition, if the trading
price of the Common Stock drops below $5.00 per share, sales of Common Stock
would be subject to Rule 15g-9 under the Securities Exchange Act of 1934 (the
"Exchange Act"), applicable to "low price stocks," which imposes additional
sales practice requirements on broker-dealers making sales of low-priced stock
to the public. For transactions covered by this rule, a broker-dealer must make
a special suitability determination respecting each purchaser and have received
each purchaser's written consent to the transaction prior to sale. If the
Company fails to meet the Nasdaq's eligibility requirements or the trading price
drops below $5.00 per share, the ability of holders to sell their Common Stock
in the secondary market could be adversely affected.

ONGOING INFLUENCE OF THE UNDERWRITER. For three years following
consummation of the Offering, Barington has the right to appoint two board
members to the Company's board of directors. Barington has advised the Company
that it may appoint one or more board members after the effective date. The
Company has also entered into a consulting agreement with Barington whereby
Barington will provide business and financial advice to the Company, including
advice regarding potential mergers, acquisitions and financings. Under the
consulting agreement, if the Company consummates a transaction within two years
of the second anniversary of the consulting agreement with a party introduced to
the Company by Barington prior to the date of the consulting agreement,
Barington is entitled to a fee equal to 10% of the gross proceeds of the
transaction. See "Underwriting." As a result, Barington will have an ongoing
relationship with the Company and may exercise significant influence over the
direction and control of the Company's business activities.

12
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby, at the initial public offering price of $7.50 per
share, after deducting underwriting discounts and the estimated expenses of the
Offering payable by the Company, including the Representatives' non-accountable
expense allowance, are estimated to be approximately $23,600,000 ($27,222,500,
if the Underwriters' over-allotment option is exercised in full). The Company
intends to use the net proceeds of the Offering as follows:

<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENT
------------ -------
<S> <C> <C>
Systems build-out........................................... $ 14,675,000 64.2%
Repayment of indebtedness................................... 4,380,000 19.1
Upgrades and enhancements to MIS and billing system......... 750,000 3.3
Sales and marketing......................................... 500,000 2.2
General corporate purposes and working capital.............. 3,295,000 11.2
------------ -----
Total............................................. $ 23,600,000 100.0%
============ =====
</TABLE>

The Company intends to use approximately $14,675,000 of the net proceeds of
the Offering in building out systems to deliver products to new MDUs and to
develop new product offerings, such as paging, intrusion alarm, Internet access
and high-speed data services. In building out new systems, the Company will
expend funds to purchase and install CATV headend equipment, telephony switching
equipment and wiring. In conjunction with these installation costs, the Company
will incur related customer service, licensing and administrative expenses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

The Company intends to use approximately $3,380,000 of the net proceeds of
the Offering to retire the Interim Notes, which bear interest at 15% per annum
and are due on the day following consummation of the Offering, and approximately
$1,000,000 of the proceeds of the Offering to pay the first installment due
under the Asset Acquisition Note, which bears interest at 10% and is due on the
day following consummation of the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."

The Company intends to use approximately $750,000 of the net proceeds of
the Offering to upgrade its MIS and billing system to enable such systems to
process the increase in the quantity of telephone calls and other customer
transactions which the Company expects to result from the buildout of new CATV
and telephony facilities.

The Company intends to use approximately $500,000 of the net proceeds of
the Offering to market its services to MDU property owners and to promote its
products to MDU residents by hiring additional sales personnel, increasing
advertising, participating in trade shows and pursuing direct marketing and
public relations efforts.

The Company intends to use the remaining approximately $3,295,000
($6,917,500, if the Underwriters' over-allotment option is exercised in full) of
net proceeds of the Offering for general corporate purposes and working capital.

The foregoing is an estimate of the Company's intended uses of net proceeds
of the Offering and is subject to readjustment due to changes in the Company's
plans, government regulations and industry conditions. Pending such uses, the
Company intends to invest the net proceeds of the Offering in short-term,
investment grade, interest-bearing securities.

DIVIDEND POLICY

The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in the foreseeable future. The Silicon Valley
Bank credit facility, the Aspen Note and the Asset Acquisition Note prohibit the
payment of dividends.

13
<PAGE> 15

DILUTION

Net tangible book value per share is determined by dividing the tangible
net worth (tangible assets less liabilities) of the Company by the total number
of shares of Common Stock outstanding. As of March 31, 1998, after giving pro
forma effect to (i) the issuance of the Interim Notes, 866,667 shares of Common
Stock and the Aspen Note in connection with the Interim Financing, which was
completed on April 15, 1998, and (ii) the sale of substantially all of the
assets of the LLC to the Company, the assumption by the Company of certain
liabilities of the LLC and the issuance of the Asset Acquisition Note and
800,000 shares of Common Stock in the Asset Acquisition, which will be completed
prior to consummation of the Offering, and (iii) the issuance of 500,000 shares
of Common Stock under the 1998 Restricted Stock Plan, the Company had a pro
forma net tangible book value (deficit) of approximately $(1,981,677) or $(0.91)
per share of Common Stock. After giving effect to the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at the initial public offering
price of $7.50 per share and receipt of the net proceeds therefrom, and the
application of the net proceeds of the Offering as set forth under "Use of
Proceeds," the Company's pro forma net tangible book value, as adjusted at March
31, 1998, would have been approximately $20,534,972 or $3.62 per share. This
represents an immediate increase in the pro forma net tangible book value of
$4.53 per share of Common Stock to present stockholders and an immediate
dilution of $3.88 per share of Common Stock to new investors. The following
table illustrates this dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $7.50
Pro forma net tangible book value (deficit) per share at
March 31, 1998(1)...................................... $(0.91)
Increase per share attributable to new investors.......... 4.53
------
Pro forma net tangible book value per share after the
Offering.................................................. 3.62
-----
Dilution per share to new investors......................... $3.88
=====
</TABLE>

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

(1) As of March 31, 1998, the LLC's actual net tangible book value (deficit) was
$(20,654,069).

The following table summarizes, at March 31, 1998, after giving pro forma effect
to (i) the issuance of the Interim Notes, 866,667 shares of Common Stock and the
Aspen Note in connection with the Interim Financing, which was completed on
April 15, 1998, and (ii) the sale of substantially all of the assets of the LLC
to the Company, the assumption by the Company of certain liabilities of the LLC
and the issuance of the Asset Acquisition Note and 800,000 shares of Common
Stock in the Asset Acquisition, and (iii) the issuance of 500,000 shares of
Common Stock under the 1998 Restricted Stock Plan, the differences between
existing stockholders and investors in the Offering with respect to the number
and percentage of shares of Common Stock purchased from the Company, the amount
and percentage of cash consideration paid, and the average price per share of
Common Stock, before deduction of expenses of the Offering and underwriting
discounts:

<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).............. 2,166,667 38.2% $22,034,405 45.6% $10.17
----------- ------ ------
New investors......................... 3,500,000 61.8 26,250,000 54.4 $ 7.50
--------- ----- ----------- ------
Total(1).................... 5,666,667 100.0% $48,284,405 100.0%
========= ===== =========== ======
</TABLE>

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

(1) Excludes 175,000 shares of Common Stock issuable upon exercise of the
Warrants, 1,000,000 shares of Common Stock reserved for issuance under the
1998 Stock Option Plan, and 350,000 shares of Common Stock issuable upon
exercise of the Representatives' Options. See "Prospectus Summary--The
Offering," "Certain Transactions," "Management--Benefit Plans," "Description
of Capital Stock" and "Underwriting."

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
March 31, 1998; (ii) as of March 31, 1998, on a pro forma basis, to reflect (a)
the Interim Financing completed in April 1998, and (b) the Asset Acquisition,
which will be completed prior to consummation of the Offering; and (iii) as of
March 31, 1998, on a pro forma, as adjusted basis, to reflect (a) the sale by
the Company of the 3,500,000 shares of Common Stock offered hereby at the
initial public offering price of $7.50 per share, and (b) the application of the
net proceeds of the Offering as set forth under "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Notes to Financial
Statements appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-------------------------------------------------
MARCH 31, 1998 PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
---------- ----------------- --------------
<S> <C> <C> <C>
Short-term debt:
Interim Notes...................................... $1,556,667 $ 2,166,667 $ --
Silicon Valley Bank credit facility................ -- 7,126,830 7,126,830
Asset Acquisition Note............................. -- 1,000,000 --
---------- ------------ ------------
Total short-term debt.............................. $1,556,667 $ 10,293,497 $ 7,126,830
========== ============ ============
Long-term debt:
Other long-term indebtedness....................... $ -- $ 2,066,529 $ 2,066,529
Asset Acquisition Note............................. -- 2,000,000 2,000,000
Aspen Note......................................... 1,500,000 1,500,000 1,500,000
---------- ------------ ------------
Total long-term debt............................... 1,500,000 5,566,529 5,566,529
---------- ------------ ------------
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares
authorized; none issued and outstanding......... -- -- --
Common Stock, $.001 par value, 20,000,000 shares
authorized; 1,121,333 shares issued and
outstanding, actual; 2,166,667 shares issued and
outstanding, pro forma; and 5,666,667 shares
issued and outstanding pro forma, as
adjusted(3)..................................... 1,123 2,167 5,667
Additional paid-in capital........................... 3,461,558 22,032,238 49,378,238
Deferred compensation................................ (618,750) (4,368,250)
Accumulated deficit.................................. (17,193,018) (18,773,989)
---------- ------------ ------------
Stockholders' equity............................... 3,462,681 4,222,637 26,241,666
---------- ------------ ------------
Total capitalization....................... $4,962,681 $ 9,789,166 $ 31,808,195
========== ============ ============
</TABLE>

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

(1) Pro forma to give effect to the second and third closings of the Interim
Financing (18.3 units), which was completed in April 1998, to the issuance
of 800,000 shares of Common Stock and the Asset Acquisition Note in the
Asset Acquisition and to the issuance of 495,000 shares of Common Stock
options at an exercise price of $3.75 per share and a deemed fair value of
$5.00 per share. In the Interim Financing, the Company issued 65 units, each
unit consisting of an Interim Note in the principal amount of $50,000 and
13,333.33 shares of Common Stock. The Interim Notes are due and payable on
the day following consummation of the Offering and, accordingly, have been
recorded as short-term debt on a pro forma basis as each has a term of the
shorter of 12 months or the consummation of the Offering.

(2) Pro forma, as adjusted, to give effect to (i) the sale by the Company of the
3,500,000 shares of Common Stock offered hereby at the initial public
offering price of $7.50 per share and the receipt of the net proceeds
therefrom; and (ii) the application of the net proceeds as set forth under
"Use of Proceeds," and the write-off of the deferred debt issuance costs
related to the Interim Notes.

(3) Excludes shares of Common Stock issuable on exercise of the following
warrants and options: (i) 175,000 shares of Common Stock issuable upon
exercise of the Warrants; (ii) 1,000,000 shares of Common Stock reserved for
issuance under the 1998 Stock Option Plan, of which options for 495,000
shares have been granted as of the date of this Prospectus; and (iii)
350,000 shares of Common Stock issuable upon exercise of the
Representatives' Options. See "Prospectus Summary--The Offering," "Certain
Transactions," "Management--Benefit Plans," "Description of Capital Stock"
and "Underwriting."

15
<PAGE> 17

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma financial information (the "Pro Forma
Financial Information") is based on the audited December 31, 1997 and 1996 and
unaudited March 31, 1998 historical financial statements of the LLC, the audited
historical balance sheet of U.S. OnLine Communications, Inc. as of March 31,
1998 and, in each case, the related notes included elsewhere in this Prospectus.

The unaudited pro forma balance sheet as of March 31, 1998 has been
prepared to give effect to the Asset Acquisition and Interim Financing
("Completed Transactions") and the Offering. The unaudited pro forma statements
of operations for the years ended December 31, 1997 and 1996 have been prepared
to illustrate the effects of the Completed Transactions and the Offering as if
each had occurred on January 1, 1997 and 1996 respectively. The unaudited pro
forma statement of operations for the three months ended March 31, 1998 has been
prepared to illustrate the effects of the Completed Transactions and the
Offering as if each had occurred at the beginning of the period presented. The
unaudited pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The Pro Forma Financial
Information and accompanying notes should be read in conjunction with the
financial statements and other financial information included elsewhere herein
pertaining to the Company and the LLC, including "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Pro Forma Financial Information is not necessarily indicative
of either future results of operations or the results that might have been
achieved if such transactions had been consummated on the indicated dates.

The Asset Acquisition given effect in the Pro Forma Financial Information
is accounted for at historical cost in a manner similar to a pooling of
interests, consistent with Interpretation No. 39 of Accounting Principles Board
opinion No. 16.

16
<PAGE> 18

U. S. ONLINE COMMUNICATIONS, INC.

UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998

The pro forma balance sheet below gives effect to the following as if they
occurred as of March 31, 1998: (i) issuance by U.S. OnLine Communications, Inc.
of 18.3 units and the Aspen Note in the Interim Financing; (ii) acquisition of
substantially all of the LLC's assets and assumption of certain liabilities of
the LLC and issuance of the Asset Acquisition Note and 800,000 shares of Common
Stock in the Asset Acquisition; (iii) grant of 495,000 Common Stock options at
an exercise price of $3.75 per share; (iv) issuance of 3,500,000 shares of
Common Stock and resulting issue costs from the Offering; (v) payments by the
Company to retire the Interim Notes and a charge to expense related issue costs;
and (vi) payment of the first installment due under the Asset Acquisition Note.

<TABLE>
<CAPTION>
U.S. ONLINE PRO FORMA
COMMUNICATIONS, FOR THE ADJUSTMENTS
INC. AS OF COMPLETED COMPLETED FOR THE PRO FORMA,
MARCH 31, 1998 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
----------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.......... $5,648,500 $ 1,647,000(a) $ 7,374,622 $23,600,000(d) $ 26,724,622
79,122(b) (4,250,000)(e)
Subscriber receivables, net........ -- 458,221(b) 458,221 458,221
Supply inventory................... -- 211,794(b) 211,794 211,794
Other current assets............... -- 62,992(b) 62,992 62,992
---------- ------------ ------------ ----------- ------------
Total current assets........ 5,648,500 2,459,129 8,107,629 19,350,000 27,457,629
Property and equipment, net........ -- 8,823,382(b) 8,823,382 8,823,382
Excess of cost over fair value of
net assets acquired, net......... -- 3,804,852(b) 3,804,852 3,804,852
Deferred loan costs................ 1,419,214 127,817(a) 2,399,462 (497,638)(e) 1,901,842
852,431(b)
Other assets....................... -- 440,525(b) 440,525 440,525
---------- ------------ ------------ ----------- ------------
Total assets................ $7,067,714 $ 16,508,136 $ 23,575,850 $18,852,362 $ 42,428,212
========== ============ ============ =========== ============
LIABILITIES:
Current liabilities:
Current portion of notes payable... $ -- $ 1,000,000(b) $ 8,126,830 $(1,000,000)(e) $ 7,126,830
7,126,830(b)
Accounts payable................... 292,641 1,928,434(b) 2,221,075 2,221,075
Accrued expenses................... 255,725 72,634(a) 690,001 690,001
361,642(b)
Deferred revenues.................. -- 326,667(b) 326,667 326,667
Interim Notes...................... 1,556,667 915,000(a) 2,166,667 (3,250,000)(e) --
(305,000)(a) 1,083,333(e)
---------- ------------ ------------ ----------- ------------
Total current liabilities... 2,105,033 11,426,207 13,531,249 (3,166,667) 10,364,573
Aspen Note........................... 1,500,000 1,500,000 1,500,000
Asset Acquisition Note............... -- 2,000,000(b) 2,000,000 2,000,000
Other liabilities.................... -- 2,066,529(b) 2,066,529 2,066,529
---------- ------------ ------------ ----------- ------------
Total liabilities........... 3,605,033 15,492,736 19,097,769 (3,166,667) 15,931,102
---------- ------------ ------------ ----------- ------------
Minority interest -- USAC............ -- 255,444(b) 255,444 255,444
STOCKHOLDERS' EQUITY:
Common Stock....................... 1,123 244(a) 2,167 3,500(d) 5,667
800(b)
Additional paid-in capital......... 3,461,558 1,219,756(a) 22,032,238 26,246,500(d) 49,378,238
618,750(c) (2,650,000)(d)
(127,817)(a) 3,749,500(f)
16,859,991(b)
Deferred compensation.............. (618,750)(c) (618,750) (3,749,500)(f) (4,368,250)
Accumulated deficit................ (17,193,018)(b) (17,193,018) (497,638)(e) (18,773,989)
(1,083,333)(d)
---------- ------------ ------------ ----------- ------------
Total stockholders'
equity.................... 3,462,681 759,956 4,222,637 22,019,029 26,241,666
---------- ------------ ------------ ----------- ------------
Total liabilities and
stockholders' equity...... $7,067,714 $ 16,508,136 $ 23,575,850 $18,852,362 $ 42,428,212
========== ============ ============ =========== ============
</TABLE>

17
<PAGE> 19

U.S. ONLINE COMMUNICATIONS, INC.

PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998

<TABLE>
<CAPTION>
U.S. ONLINE
COMMUNICATIONS,
INC.
FOR THE PERIOD PRO FORMA
ENDED FOR THE ADJUSTMENTS
MARCH 31, COMPLETED COMPLETED FOR THE PRO FORMA,
1998 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
--------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Service revenue:
Telephony revenue........... $ 386,287(g) $ 386,287 $ 386,287
Cable revenue............... 686,933(g) 686,933 686,933
Other income................ 35,851(g) 35,851 35,851
--------- ----------- ----------- -------- -----------
Total revenue............ 1,109,071 1,109,071 1,109,071
Cost of service:
Telephony................... 203,867(g) 203,867 203,867
Cable....................... 231,603(g) 231,603 231,603
--------- ----------- ----------- -------- -----------
Total cost of service.... 435,470 435,470 435,470
--------- ----------- ----------- -------- -----------
Gross profit.................. 673,601 673,601 673,601

Operating expenses:
Customer support............ 130,579(g) 130,579 130,579
Other operating expenses.... 889,398(g) 889,398 889,398
Sales and marketing......... 204,130(g) 204,130 204,130
General and
administrative........... 602,202(g) 640,874 640,874
38,672(c)
Depreciation and
amortization............. 455,315(g) 455,315 455,315
--------- ----------- ----------- -------- -----------
Total operating
expenses............... 2,320,296 2,320,296 2,320,296
--------- ----------- ----------- -------- -----------
Loss from operations.......... (1,646,695) (1,646,695) (1,646,695)
Other income (expense):
Interest income............. 13,805(g) 13,805 13,805
Interest expense............ (644,061)(g) (695,839) $413,959(j) (281,880)
(51,778)(g)
Other income (expense)...... (32,582)(g) (32,582) (32,582)
--------- ----------- ----------- -------- -----------
Total other income
(expense).............. (714,616) (714,616) 413,959 (300,657)
--------- ----------- ----------- -------- -----------
Loss before minority
interest.................... (2,361,311) (2,361,311) 413,959 (1,947,352)
Minority interest in income of
USAC........................ (12,943)(g) (12,943) (12,943)
--------- ----------- ----------- -------- -----------
Net loss................. $ -- $(2,374,254) $(2,374,254) $413,959 $(1,960,295)
========= =========== =========== ======== ===========
Net Loss Per Share(k):
Basic....................... $ (1.10) $ (0.72)
=========== ===========
Diluted..................... $ (0.84) $ (0.58)
=========== ===========
Weighted average shares used
for computing net loss per
share:
Basic....................... 2,166,667 2,733,334
=========== ===========
Diluted..................... 2,836,667 3,403,334
=========== ===========
</TABLE>

18
<PAGE> 20

U.S. ONLINE COMMUNICATIONS, INC.

PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
PREDECESSOR
(LLC)
FOR THE YEAR PRO FORMA
ENDED FOR THE ADJUSTMENTS
DECEMBER 31, COMPLETED COMPLETED FOR THE PRO FORMA,
1997 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Telephony revenue................ $ 705,193 $ 705,193 $ 705,193
Cable revenue.................... 1,888,280 1,888,280 1,888,280
Other revenue.................... 127,820 127,820 127,820
----------- ---------- ----------- -------- -----------
Total revenue.................. 2,721,293 2,721,293 2,721,293
Cost of service -- telephony..... 365,362 365,362 365,362
Cost of service -- cable......... 592,722 592,722 592,722
----------- ---------- ----------- -------- -----------
Total cost of service.......... 958,084 958,084 958,084
----------- ---------- ----------- -------- -----------
Gross profit..................... 1,763,209 1,763,209 1,763,209

Operating expenses:
Customer support............... 426,471 426,471 426,471
Other operating expenses....... 2,519,825 2,519,825 2,519,825
Sales and marketing............ 838,525 838,525 838,525
General and administrative..... 2,865,608 154,688(c) 3,020,296 3,020,296
Depreciation and
amortization................ 1,343,543 1,343,543 1,343,543
----------- ---------- ----------- -------- -----------
Total operating expenses.... 7,993,972 154,688 8,148,660 8,148,660
----------- ---------- ----------- -------- -----------
Loss from operations............. (6,230,763) 154,688 (6,385,451) (6,385,451)
Other income (expense):
Interest income................ 133,177 133,177 133,177
Interest expense............... (3,104,809) 1,475,468(h) (1,629,341) $843,333(j) (786,008)
Other income (expense)......... (111,712) (111,712) (111,712)
----------- ---------- ----------- -------- -----------
Total other income
(expense)................. (3,083,344) 1,475,468 (1,607,876) 843,333 (764,543)
----------- ---------- ----------- -------- -----------
Loss before minority interest.... (9,314,107) 1,320,780 (7,993,327) 843,333 (7,149,994)
Equity in losses of Cable........ 911,195 (911,195)(h) -- --
Minority interest in income of
USAC........................... (43,437) (43,437) (43,437)
----------- ---------- ----------- -------- -----------
Net loss.................... $(8,446,349) $ 409,585 $(8,036,764) $843,333 $(7,193,431)
=========== ========== =========== ======== ===========
Net loss per share(k):
Basic.......................... $ (3.71) $ (2.63)
=========== ===========
Diluted........................ $ (2.83) $ (2.11)
=========== ===========
Weighted average shares used for
computing net loss per share:
Basic.......................... 2,166,667 2,733,334
=========== ===========
Diluted........................ 2,836,667 3,403,334
=========== ===========
</TABLE>

19
<PAGE> 21

U.S. ONLINE COMMUNICATIONS, INC.

PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
PREDECESSOR
(LLC)
FOR THE YEAR PRO FORMA
ENDED FOR THE ADJUSTMENTS
DECEMBER 31, COMPLETED COMPLETED FOR THE PRO FORMA,
1996 TRANSACTIONS TRANSACTIONS OFFERING AS ADJUSTED
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Telephony revenue................ $ 57,010 $ $ 57,010 $ 57,010
Cable revenue.................... -- -- --
Other revenue.................... 1,397 1,397 1,397
----------- ----------- -----------
Total revenue.................. 58,407 58,407 58,407
----------- ----------- -----------
Cost of service -- telephony..... 40,749 40,749 40,749
Cost of service -- cable......... -- -- --
----------- ----------- -----------
Total cost of service.......... 40,749 40,749 40,749
----------- ----------- -----------
Gross profit..................... 17,658 17,658 17,658
----------- ----------- -----------
Operating expenses:
Customer support............... 53,331 53,331 53,331
Other operating expenses....... 292,564 292,564 292,564
Sales and marketing............ 181,888 181,888 181,888
General and administrative..... 1,983,862 154,688(c) 2,138,550 2,138,550
Depreciation and
amortization................ 209,711 209,711 209,711
----------- ----------- ----------- -----------
Total operating expenses.... 2,721,356 154,688 2,876,044 2,876,044
----------- ----------- ----------- -----------
Loss from operations............. (2,703,698) 2,858,386 2,858,386
Other income (expense):
Interest income................ 355,365 355,365 355,365
Interest expense............... (1,111,156) (1,059,852)(i) (2,171,008) $1,385,000(j) (786,008)
Other income (expense)......... -- -- --
----------- ----------- ----------- ---------- -----------
Total other income
(expense)................. (755,791) (1,059,852) (1,815,643) 1,385,000 430,643
----------- ----------- ----------- ---------- -----------
Loss before losses in equity
investees...................... (3,459,489) (1,214,540) (4,674,029) 1,385,000 (3,289,029)
Equity in losses of Cable........ (783,594) (783,594) (783,594)
Minority interest in income of
USAC........................... -- -- --
----------- ----------- ----------- ---------- -----------
Net loss.................... $(4,243,083) $(1,214,540) $(5,457,623) $1,385,000 $(4,072,623)
=========== =========== =========== ========== ===========
Net loss per share(k):
Basic.......................... $ (2.52) $ (1.49)
=========== ===========
Diluted........................ $ (1.92) $ (1.20)
=========== ===========
Weighted average shares used for
computing net loss per share:
Basic.......................... 2,166,667 2,733,334
=========== ===========
Diluted........................ 2,836,667 3,403,334
=========== ===========
</TABLE>

20
<PAGE> 22

U.S. ONLINE COMMUNICATIONS, INC.

NOTE TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENT

PRO FORMA ADJUSTMENTS

BALANCE SHEET

(a) Gives effect to the sale of 244,000 shares of Common Stock at $3.75 per
share (fair value of $5.00 per share) and the placement of $915,000 of the
Interim Notes (18.3 units), reduced by issuance costs of $255,634 and original
issue discount of $305,000.

(b) Gives effect to the acquisition of substantially all of the assets and
the assumption of certain liabilities of the LLC by U.S. OnLine Communications,
Inc. in the Asset Acquisition in exchange for 800,000 shares of Common Stock
valued at $5.00 per share and the issuance of the $3,000,000 Asset Acquisition
Note. The Asset Acquisition is being accounted for at historical cost in a
manner similar to a pooling of interests, consistent with Interpretation No. 39
of Accounting Principles Board Opinion No. 16. The LLC payable to related
parties of $18,873,000 has been excluded from liabilities assumed in the Asset
Acquisition and reflected as a credit to additional paid-in capital. U.S. OnLine
Communications, Inc. will not be contingently liable to the LLC or any related
party for any portion of this payable.

(c) Gives effect to the April 1, 1998 grant of options to purchase 495,000
shares of Common Stock at an exercise price of $3.75 per share and a deemed fair
value of $5.00 per share, resulting in $618,750 of deferred compensation under
APB Opinion No. 25. The deferred compensation will be amortized to expense in
accordance with FIN 28 over the 4 to 8 year vesting period of the related stock
options. Amortization of the deferred compensation included in the pro forma
statements of operations for the three months ended March 31, 1998 and for the
years ended December 31, 1997 and 1996 is $38,672, $154,688, and $154,688,
respectively.

(d) Gives effect to the issuance of 3,500,000 shares of Common Stock at the
initial public offering price of $7.50 per share by the Company in connection
with the Offering, resulting in additions to stockholders' equity of $26,250,000
reduced by related estimated issuance costs of $2,650,000.

(e) Gives effect to payments by the Company of $3,250,000 to retire the
Interim Notes along with a charge of $497,638 to expense related issuance costs
and a charge of $1,083,333 to expense the related original issue discount, and
$1,000,000 to pay the first installment due under the Asset Acquisition Note.
The pro forma statements of operations exclude an extraordinary charge of
$1,580,971 representing the write-off of deferred issuance costs in connection
with the redemption of the Interim Notes from the proceeds of the Offering.
Because the pro forma statements of operations assume the redemption of the
Interim Notes from the Offering proceeds, there is no interest expense reflected
in such statements.

(f) Gives effect to the issuance of 500,000 shares of Common Stock under
the 1998 Restricted Stock Plan at a purchase price of $0.001 per share and an
assumed market value at the effective date of the Offering of $7.50 per share.
The 1998 Restricted Stock Plan is treated as a variable plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Because a measurement date had not occurred on the date of the award, the
Company will record a charge for $3,749,500 at the effective date of the
Offering, if applicable.

STATEMENT OF OPERATIONS

(g) Gives effect to the Interim Financing and Asset Acquisition, resulting
in the addition of LLC's revenues and expenses for the three months ended March
31, 1998 with an increase in interest expense of $51,778 for the net effect of
the elimination of $18,873,000 of payable to related parties and the addition of
the Interim Notes (including amortization of the related original issue
discount), the Acquisition Note and the Aspen Note.

(h) Gives effect to the Interim Financing and Asset Acquisition, resulting
in a reduction in interest expense of $1,475,468 for the net effect of the
elimination of $18.423 million of payable to related parties and

21
<PAGE> 23

the addition of the Interim Notes (including amortization of the related
original issue discount), the Acquisition Note and the Aspen Note and
elimination of the equity in losses of Cable.

(i) Gives effect to the Interim Financing and Asset Acquisition resulting
in the addition of LLC's revenues and expenses for the year ended December 31,
1996 with a reduction in interest expense of $1,059,852 for the net effect of
the elimination of $18,873,000 of payable to related parties and the addition of
the Interim Notes (including amortization of the related original issue
discount), the Acquisition Note and the Aspen Note.

(j) Gives effect to the Offering, resulting in a reduction in interest
expense from the payment of the Interim Notes totaling $3,250,000 (and reversal
of the original issue discount amortization) with a reduction in interest
expense of $392,708, $758,333 and $1,300,000 for the three months ended March
31, 1998 and the years ended December 31, 1997 and 1996, respectively, and the
first installment of the Asset Acquisition Note totaling $1,000,000 with a
reduction of interest expense of $21,250, $85,000 and $85,000 for the three
months ended March 31, 1998 and the years ended December 31, 1997 and 1996,
respectively.

22
<PAGE> 24

(k) Pro Forma Net Loss Per Common Share.

Statement of Financial Accounting Standard No. 128, issued in February
1997, establishes new standards for computing and presenting earnings per share
("EPS") on a basis that is more comparable to international standards and
provides for the presentation of basic and diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares outstanding during
the period. Diluted EPS is computed using the weighted average number of shares
outstanding plus all dilutive potential common shares outstanding.

The following is the reconciliation of basic and diluted pro forma net loss
per share computations for the years ended December 31, 1997 and 1996 and the
three months ended March 31, 1998:

<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------
PRO FORMA PRO FORMA,
FOR THE COMPLETED AS
TRANSACTIONS ADJUSTED
----------------- -----------
<S> <C> <C>
Basic pro forma net loss per share:
Net loss.................................................. $(2,374,254) $(1,960,295)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
=========== ===========
Basic pro forma net loss per share........................ $ (1.10) $ (0.72)
=========== ===========
Diluted pro forma net loss per share:
Net loss.................................................. $(2,374,254) $(1,960,295)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
Effect of dilutive securities:
Options and warrants.................................... 670,000 670,000
----------- -----------
Diluted weighted average common shares outstanding........ 2,836,667 3,403,334
=========== ===========
Diluted pro forma net loss per share...................... $ (0.84) $ (0.58)
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
PRO FORMA PRO FORMA,
FOR THE COMPLETED AS
TRANSACTIONS ADJUSTED
----------------- -----------
<S> <C> <C>
Basic pro forma net loss per share:
Net loss.................................................. $(8,036,764) $(7,193,431)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
=========== ===========
Basic pro forma net loss per share........................ $ (3.71) $ (2.63)
=========== ===========
Diluted pro forma net loss per share:
Net loss.................................................. $(8,036,764) $(7,193,431)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
Effect of dilutive securities:
Options and warrants.................................... 670,000 670,000
----------- -----------
Diluted weighted average common shares outstanding........ 2,836,667 3,403,334
=========== ===========
Diluted pro forma net loss per share...................... $ (2.83) $ (2.11)
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------
PRO FORMA PRO FORMA,
FOR THE COMPLETED AS
TRANSACTIONS ADJUSTED
----------------- -----------
<S> <C> <C>
Basic pro forma net loss per share:
Net loss.................................................. $(5,457,623) $(4,072,623)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
=========== ===========
Basic pro forma net loss per share........................ $ (2.52) $ (1.49)
=========== ===========
Diluted pro forma net loss per share:
Net loss.................................................. $(5,457,623) $(4,072,623)
=========== ===========
Basic weighted average common shares outstanding.......... 2,166,667 2,733,334
Effect of dilutive securities:
Options and warrants.................................... 670,000 670,000
----------- -----------
Diluted weighted average common shares outstanding........ 2,836,667 3,403,334
=========== ===========
Diluted pro forma net loss per share...................... $ (1.92) $ (1.20)
=========== ===========
</TABLE>

23
<PAGE> 25

SELECTED CONSOLIDATED FINANCIAL DATA

The pro forma financial data of the LLC and the Company and the selected
financial data of the LLC below should be read in conjunction with the financial
statements, Notes to Financial Statements, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and other financial
information included elsewhere in this Prospectus. The selected financial data
for the fiscal years ended December 31, 1996 and December 31, 1997 are derived
from historical financial statements of the LLC. The LLC owned a 50% interest in
Cable during the year ended December 31, 1996 and, in the year ended December
31, 1997, acquired the remaining interest in Cable. Therefore, the unaudited pro
forma statement of operations data for the LLC for the year ended December 31,
1996 gives effect to the acquisition of Cable as if that transaction had
occurred January 1, 1996. (See Note 2 of the Notes to Financial Statements of
the LLC.) The selected financial data for the three months ended March 31, 1997
and March 31, 1998 are derived from the unaudited financial statements of the
LLC. The unaudited pro forma statement of operations data for the LLC for the
period ended March 31, 1997 gives effect to the acquisition of Cable as if that
transaction had occurred January 1, 1997. The unaudited pro forma statement of
operations data for the Company for the year ended December 31, 1997 and for the
three months ended March 31, 1998, gives effect to the Interim Financing and the
Asset Acquisition as if those transactions had occurred on January 1, 1997 and
January 1, 1998 respectively.

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS L.L.C.
-------------------------------------------------------------------------------------
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1997 1996 1996
ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO FORMA(2) ACTUAL
----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue:
Telephony revenue....................... $ 386,287 $ 67,498 $ 67,498 $ 705,193 $ 57,010 $ 57,010
Cable revenue........................... 686,933 300,809 -- 1,888,280 777,490 --
Other revenue........................... 35,851 16,693 159 127,820 2,376 1,397
----------- ----------- ----------- ----------- ----------- -----------
Total revenue.................. 1,109,071 385,000 67,657 2,721,293 836,876 58,407
Cost of service:
Telephony............................... 203,867 34,994 34,994 365,362 40,749 40,749
Cable................................... 231,603 83,160 -- 592,722 272,286 --
----------- ----------- ----------- ----------- ----------- -----------
Total cost of service.......... 435,470 118,154 34,994 958,084 313,035 40,749
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................... 673,601 266,846 32,663 1,763,209 523,841 17,658
Operating expenses:
Customer support...................... 130,579 64,293 11,218 426,471 319,254 53,331
Other operating expenses.............. 889,398 249,933 117,723 2,519,825 464,734 292,564
Sales and marketing................... 204,130 204,363 72,112 838,525 503,719 181,888
General and administrative............ 602,202 700,330 432,739 2,865,608 2,684,079 1,983,862
Depreciation and amortization......... 455,315 323,578 174,952 1,343,543 670,732 209,711
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 2,281,624 1,542,497 808,744 7,993,972 4,642,518 2,721,356
Loss from operations.................... (1,608,023) (1,275,651) (776,081) (6,230,763) (4,118,677) (2,703,698)
Other income (expense):
Interest income....................... 13,805 32,099 177,096 133,177 183,233 355,365
Interest expense...................... (644,061) (485,305) (481,990) (3,104,809) (1,133,936) (1,111,156)
Other income (expense)................ (32,582) (2,330) (1,329) (111,712) -- --
----------- ----------- ----------- ----------- ----------- -----------
Total other income (expense)... (622,838) (455,536) (306,223) (3,083,344) (950,703) (755,791)
----------- ----------- ----------- ----------- ----------- -----------
Loss before minority interest........... (2,270,861) (1,731,187) (1,082,304) (9,314,107) (5,069,380) (3,459,489)
Equity in losses of Cable............... -- (299,299) -- -- (783,594)
Minority interest in loss of Cable...... -- -- -- 911,195 -- --
Minority interest in income of
partnership........................... (12,943) (11,882) -- (43,437) (38,114) --
----------- ----------- ----------- ----------- ----------- -----------
Net loss....................... $(2,283,804) $(1,743,069) $(1,381,603) $(8,446,349) $(5,107,494) $(4,243,083)
=========== =========== =========== =========== =========== ===========
</TABLE>

24
<PAGE> 26

TELEPHONY:
Operational Passing(vii).............. 5,217 4,985 1,190
Subscribers........................... 2,239 1,939 327
Subscriber Penetration................ 43% 39% 27%
Average Monthly Revenue Per
Subscriber(viii)
Local Telephony Services............ $ 25.08 $ 34.39 N/A(xii)
Long-distance Telephony Services.... $ 32.54 $ 37.24 N/A(xii)
Lines(ix)............................. 2,804 2,392 409
Line Penetration(x)................... 54% 48% 34%
Average Monthly Revenue per
Line(xi)............................ $ 46.01 $ 45.09 $ N/A(xii)
</TABLE>

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
--------------------------------
PRO FORMA FOR THE
COMPLETED TRANSACTIONS(4)
--------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- -------------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue:
Telephony revenue........................................... $ 386,287 $ 705,193 $ 57,010
Cable revenue............................................... 686,933 1,888,280 --
Other revenue............................................... 35,851 127,820 1,397
----------- ----------- -----------
Total revenue....................................... 1,109,071 2,721,293 58,407
Cost of service:
Telephony................................................... 203,867 365,362 40,749
Cable....................................................... 231,603 592,722 --
----------- ----------- -----------
Total cost of service............................... 435,470 958,084 40,749
----------- ----------- -----------
Gross profit........................................ 673,601 1,763,209 17,658
Operating expenses:
Customer support.......................................... 130,579 426,471 53,331
Other operating expenses.................................. 889,398 2,519,825 292,564
Sales and marketing....................................... 204,130 838,525 181,888
General and administrative................................ 640,874 3,020,296 2,138,550
Depreciation and amortization............................. 455,315 1,343,543 209,711
----------- ----------- -----------
Total operating expenses............................ 2,320,296 8,148,660 2,876,044
Loss from operations........................................ (1,646,695) (6,385,451) (2,858,386)
Other income (expense):
Interest income........................................... 13,805 133,177 355,365
Interest expense.......................................... (695,839) (1,629,344) (2,171,008)
Other income (expense).................................... (32,582) (111,712) --
----------- ----------- -----------
Total other income (expense)........................ (714,616) (1,607,876) (1,815,643)
Loss before minority interest............................... (2,361,311) (7,993,327) (4,674,029)
Equity in losses of Cable................................... -- -- (783,594)
Minority interest in loss of Cable.......................... -- -- --
Minority interest in income of partnership.................. (12,943) (43,437) --
----------- ----------- -----------
Net loss............................................ $(2,374,254) $(8,036,764) $(5,457,623)
=========== =========== ===========
Net loss per share:
Basic..................................................... $ (1.10) $ (3.71) $ (2.52)
=========== =========== ===========
Diluted................................................... $ (0.84) $ (2.83) $ (1.92)
=========== =========== ===========
Weighted average shares used for computing net loss per
share:
Basic:.................................................... 2,166,667 2,166,667 2,166,667
=========== =========== ===========
Diluted:.................................................. 2,836,667 2,836,667 2,836,667
=========== =========== ===========
</TABLE>

25
<PAGE> 27

<TABLE>
<CAPTION>
U.S. ONLINE COMMUNICATIONS, INC.
-----------------------------------------------
MARCH 31, 1998
-----------------------------------------------
PRO FORMA,
AUDITED PRO FORMA(5) AS ADJUSTED(5)(6)
---------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $5,648,500 $ 7,374,622 $26,724,622
Working capital (deficit)................................... 3,543,467 (5,423,611) 17,093,056
Total assets................................................ 7,067,714 23,575,850 42,428,212
Long-term obligations, net of current maturities............ 1,500,000 5,566,529 5,566,529
Stockholders' equity........................................ 3,462,681 4,222,637 26,241,666
</TABLE>

- ---------------
(1) Pro forma summary financial data gives effect to the LLC's acquisition of
Cable as if it had occurred on January 1, 1997.
(2) Pro forma summary financial data gives effect to the LLC's acquisition of
100% of Cable as if it had occurred on January 1, 1996.
(3) Operating data is included for purposes of additional analysis and is not
derived from the historical financial statements of the LLC.

(i) Operational passings represents the number of MDU units with respect to
which the Company has connected its CATV services.

(ii) Includes the number of basic subscribers and premium subscribers at such
date.

(iii) Excludes passings and subscribers in Atlanta, Georgia, which were sold on
March 6, 1998 pursuant to a purchase agreement with a third party.

(iv) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of operational passings.

(v) Premium-to-basic ratio is calculated by dividing the total number of
premium subscribers by the total number of basic subscribers.

(vi) Represents average monthly revenue from monthly service fees and
installation charges per the average number of basic subscribers for the
periods ended as of the date shown.

(vii) Represents the number of MDU units with respect to which the Company has
connected its telephony services.

(viii) Represents average monthly revenue from local and long-distance service
fees per the average number of subscribers for the periods ended as of
the date shown.

(ix) Lines represent the number of telephone lines currently being provided to
telephony service subscribers. A telephony service subscriber can
subscribe for more than one line.

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

(xi) Represents average monthly revenue per the average number of lines for the
periods ended as of the date shown.

(xii) Information not available.

(4) Pro forma summary financial data gives effect to (i) the sale of 65 units
for the year ended December 31, 1997 and 18.3 units for the three months
ended March 31, 1998, each unit consisting of an Interim Note and 13,333.33
shares of Common Stock, and the Aspen Note; (ii) the Asset Acquisition,
including the issuance of the Asset Acquisition Note and 800,000 shares of
Common Stock issued in the Asset Acquisition; and (iii) the merger of Cable
into the LLC.

(5) Pro forma summary balance sheet data gives effect to the following as if
they occurred on March 31, 1998: (i) the proceeds from the issuance of 18.3
units in the Interim Financing, resulting in additions to stockholders'
equity of $1,220,000, issue costs of $127,817, Interim Notes of $915,000
and issue costs of $127,817 and an original issue discount of $305,000;
(ii) the acquisition of substantially all of the assets, and the assumption
of certain liabilities, of the LLC and the issuance of the Asset
Acquisition Note and 800,000 shares of Common Stock in the Asset
Acquisition; and (iii) the issuance of 495,000 Common Stock options at an
exercise price of $3.75 per share and a deemed fair value of $5.00 per
share.

(6) Pro forma summary balance sheet data gives effect to the following as if
they occurred on March 31, 1998: (i) the proceeds from the issuance of
3,500,000 shares of Common Stock in the Offering (at the initial public
offering price of $7.50 per share), resulting in additions to stockholders'
equity of $26,250,000 and issue costs of $2,650,000; and (ii) payments by
the Company of $3,250,000 to retire the Interim Notes and a related charge
of $497,638 to expense related issue costs and a charge of $1,083,333 to
expense the related original issue discount, and $1,000,000 to pay the
first installment due under the Asset Acquisition Note.

26
<PAGE> 28

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

The following discussion and analysis should be read in conjunction with
Selected Financial Data and the historical financial statements of the Company,
the LLC and Cable, and the Notes to Financial Statements thereto appearing
elsewhere in this Prospectus.

OVERVIEW

The Company markets and provides CATV and enhanced local and long distance
telecommunications services to MDUs such as apartment complexes and other
concentrated residential sites. The Company provides its services pursuant to
ROE Contracts with property owners and agreements with MDU residents.

The Company has experienced significant growth in the total number of
executed ROE Contracts, passings and subscribers. From December 31, 1996 to
March 31, 1998, the number of properties covered by ROE Contracts increased from
28 to 43 (an increase of 54%), the number of operational passings increased from
approximately 7,600 to approximately 18,000 (an increase of approximately 135%),
and the number of subscribers increased from approximately 3,600 to
approximately 10,000 (an increase of approximately 180%).

The Company derives revenues from delivering CATV and telephony services to
MDU residents and generally does not charge property owners for installing
passings on properties. The Company derived 93% and 69% of its revenues from
CATV services, and 7% and 26% from telephony services, in 1996 and 1997,
respectively. The Company intends to offer related services such as paging,
intrusion alarm and Internet access, although revenues attributable to these new
services are not expected to be material in the near future.

Revenue from subscribers is recognized in the month that service is
provided. The Company also recognizes installation fees from subscribers as
revenue upon the origination of service to a subscriber. Costs incurred in
obtaining subscribers are expensed as incurred.

The LLC has incurred substantial losses since its inception. At March 31,
1998, the LLC had a working capital deficit of $8,722,610 and an accumulated
deficit of $17,193,018. Management expects that the Company will continue to
incur losses for the foreseeable future. The audit opinions on the financial
statements of U.S. OnLine Communications, Inc., the LLC and Cable express
substantial doubt as to the ability of these companies to continue as going
concerns due to the accumulated losses from operations, negative working capital
and negative cash flows. The Company's operations to date have been funded
primarily through borrowings under its Silicon Valley Bank credit facility,
equipment lease financing, loans from affiliates and private financings.

RESULTS OF OPERATIONS

The results of operations described below are based upon two different
presentations: (i) comparison of the historical results of operations of the LLC
for each of the two years ended December 31, 1996 and 1997 and for the three
months ended March 31, 1998 and 1997, and (ii) comparison of the unaudited pro
forma statement of operations for the LLC for the year ended December 31, 1996
and the three months ended March 31, 1997 to the historical results of
operations of the LLC for the year ended December 31, 1997 and the three months
ended March 31, 1998. Cable was an unconsolidated subsidiary of the LLC during
1996, and in 1997 the LLC acquired the remaining interest in Cable. The pro
forma financial statements for the year ended December 31, 1996 and the three
months ended March 31, 1997 give effect to the LLC's acquisition of 100% of
Cable as if it had occurred on January 1, 1996 and January 1, 1997,
respectively. This pro forma presentation is intended to provide a meaningful
comparison in analyzing the Company's results of operations.

QUARTER ENDED MARCH 31, 1998 (HISTORICAL) COMPARED TO QUARTER ENDED MARCH 31,
1997 (HISTORICAL)

Revenues. Revenues increased from $67,657 in the first quarter of 1997 to
$1,109,071 in the first quarter of 1998, resulting from the increase of
subscribers in six telephony properties in the first quarter of 1997 and the
addition of 37 new CATV and telephony properties through the first quarter of
1998. CATV service
27
<PAGE> 29

revenues of $300,809 were not included in the first quarter of 1997 since the
LLC was using the equity method of accounting during that period. CATV service
revenues for the first quarter of 1998 were $686,933. Telephony service revenues
increased from $67,498 in the first quarter of 1997 to $386,287 in the first
quarter of 1998, primarily due to growth in operational passings of
approximately 153% (from 2,059 to 5,217) coupled with an increase in subscribers
of approximately 352% (from 504 to 2,276).

Gross Profit. Gross profit increased from $32,663 in the first quarter of
1997 to $673,601 in the first quarter of 1998, primarily due to the substantial
increase in revenues and the addition of higher margin CATV services into the
service mix. Gross margin in the first quarter 1998 was 61% of revenues compared
to 48% of revenues in the first quarter 1997. The increase in gross margin was
primarily attributable to the addition of CATV services into the product mix.
$217,649 of CATV gross profit in the first quarter of 1997 was not reflected in
the LLC's financial statements since the equity method of accounting was used in
1997. Gross profit for telephony services increased from $32,504 in the first
quarter of 1997 to $182,420 in the first quarter of 1998. Gross profit for CATV
services was $455,330 for the first quarter of 1998. Gross margin for telephony
services in the first quarter of 1998 was 47% of revenues compared to 48% of
revenues in the first quarter of 1997. Gross margin for CATV services was 66% of
revenues for the first quarter of 1998.

Customer Support Expenses. Customer support expenses increased from $11,218
in the first quarter of 1997 to $130,579 in the first quarter of 1998. Since the
LLC employed the equity method of accounting for Cable in the first quarter of
1997, $53,076 of the increase in customer support expense is attributable to the
fact that customer support, general and administrative expenses incurred by
Cable were not included in 1997. The increase was also attributable to the
increase in customer support for a greater number of passings (17,500 passings
at March 31, 1998 compared to 10,562 passings at March 31, 1997). Customer
support expenses consist primarily of the national customer call center
expenses, operating and maintenance expense and engineering expenses.

Other Operating Expenses. Other operating expenses increased from $117,723
for the first quarter in 1997 to $889,398 for the same period in 1998. The
increase was principally attributable to lease expense of $472,144 in connection
with operating lease arrangements for equipment and an increase in fixed
telephony delivery costs, specifically, T-1 cost in the amount of $63,209
associated with increased facilities based telephony service in 1998. $132,209
of the increase is attributable to other operating expense associated with CATV
not being included in the LLC's financial statements in 1997 due to the use of
the equity method of accounting in 1997. The remaining increase in the
approximate amount of $104,000 included maintenance, contract labor, mileage,
billing and other operating expenses.

Sales and Marketing Expenses. Sales and marketing expenses increased from
$72,112 in the first quarter of 1997 to $204,130 in the first quarter of 1998.
Approximately $132,000 of this increase was attributable to sales and marketing
expenses related to Cable's operations. Since the LLC employed the equity method
of accounting for Cable in 1997, sales and marketing expenses were not included
in the LLC's financial statements in 1997. The remaining portion of the increase
is attributable to growth in passings and subscriber base.

General and Administrative Expenses. General and administrative expenses
increased from $432,739 in the first quarter of 1997 to $602,202 in the first
quarter of 1998. This increase was primarily attributable to increases in
accounting and finance expenses, corporate management and other administrative
expenses related to the LLC's growth and marketing activities. General and
administrative expenses related to CATV operations were not included in the
LLC's financial statements due to the use of the equity method of accounting in
the first quarter of 1997.

Depreciation and Amortization. Depreciation and amortization expense
increased from $174,952 in the first quarter of 1997 to $455,315 in the first
quarter of 1998. Approximately $88,182 of this increase was attributable to the
depreciation expense incurred by Cable in the first quarter of 1997. Since the
LLC employed the equity method of accounting for Cable in 1997, depreciation and
amortization expense were not included in the LLC's financial statements in
1997. An additional $62,160 of the increase is attributable to amortization of
goodwill recognized in the first quarter of 1998. The remaining $130,021 of the
increase was attributable to capitalized project costs associated with the
increased number of executed ROE contracts and

28
<PAGE> 30

the plant and equipment associated with the delivery of the telephony and CATV
services in the first quarter of 1998.

Interest Income. Interest income decreased from $177,096 in the first
quarter of 1997 to $13,805 in the first quarter of 1998. This decrease is a
result of interest income associated with CATV operations not being included in
the LLC's financial statements in the first quarter of 1997 due to the use of
the equity method of accounting during that period.

Interest Expense. Interest expense increased from $481,990 in the first
quarter of 1997 to $644,060 in the first quarter of 1998. The increase in
interest expense was primarily due to an increase in borrowings from the Silicon
Valley Bank credit facility and other lenders to support expansion activities
during 1997.

Other Expenses. Other expenses for the first quarter of 1998 were $32,582,
whereas the LLC incurred nominal expenses in the first quarter of 1997. These
expenses for 1998 resulted primarily from losses on the disposal of equipment.

Net Loss. As a result of the foregoing factors, the Company's net loss
increased from $1,381,603 in the first quarter of 1997 to $2,283,804 in the
first quarter of 1998. $598,598 of the increase in net loss was attributable to
the LLC's use of the equity method of accounting for Cable in the first quarter
of 1997.

QUARTER ENDED MARCH 31, 1998 (HISTORICAL) COMPARED TO QUARTER ENDED MARCH 31,
1997 (PRO FORMA)

Revenues. Revenues increased by 188% from $385,000 in the first quarter of
1997 to $1,109,071 in the first quarter of 1998. The increase in revenues was
primarily attributable to the continuing increase in subscribers resulting from
the addition of 6 new properties in the first quarter of 1997 and an additional
13 new properties through the first quarter of 1998. CATV service revenues
increased 128% from $300,809 in the first quarter of 1997 to $686,933 in the
first quarter of 1998. Telephony service revenues increased 472%, from $67,498
in the first quarter of 1997 to $386,287 in the first quarter of 1998.

Gross Profit. Gross profit increased by 152% from $266,846 to $673,601 in
the first quarter of 1997 and 1998, respectively. This increase was primarily
due to the increase in the number of passings in the same period. Telephony
gross profit increased 461% from $32,504 in the first quarter of 1997 to
$182,420 in the first quarter of 1998. The increase in gross profit is primarily
attributable to a 472% growth in revenues due to the addition of more telephony
passings. Gross profit for CATV services grew 109% from $217,649 in the first
quarter of 1997 to $455,330 in the first quarter of 1998. This increase is
primarily attributable to a 128% growth in CATV revenues in the same period.
Gross margin in the first quarter of 1997 was 69% of revenues compared to 61% of
revenues in the first quarter of 1998. This decrease in gross margin was
primarily due to the increase in telephony revenues as a percentage of all
revenues. Gross margin for CATV services in the first quarter of 1997 was 70% of
revenues compared to 66% of revenues in the first quarter of 1998. This decrease
in gross margin for CATV services was primarily due to the increase in
programming costs in the first quarter of 1998.

Customer Support Expenses. Customer support expenses increased by 103% from
$64,293 in the first quarter of 1997 to $130,579 in the first quarter of 1998.
This increase is primarily attributable to the increased cost of servicing the
higher number of passings, which grew from 10,562 in the first quarter of 1997
to 17,569 in the first quarter of 1998.

Other Operating Expenses. Other operating expenses increased by 256% from
$249,933 for the first quarter of 1997 to $889,398 in the first quarter of 1998.
The increase was principally attributable to lease expense of $472,144 in
connection with operating lease arrangements for equipment and an increase in
fixed telephony delivery costs, specifically T-1 cost in the amount of $63,209
associated with increased facilities-based telephony services in 1998. The
remaining other operating expenses in the approximate amount of $104,000
included maintenance, contract labor, mileage, billing and other operating
expenses.

Sales and Marketing. Sales and marketing expenses remained constant at
approximately $200,000 from the first quarter of 1997 to the first quarter of
1998. The Company incurred a $71,000 increase in royalty expense attributable to
the growth in the number of passings. This increase is offset by a $67,000
reduction in

29
<PAGE> 31

salary expense coinciding with the streamlining and reorganization of the
Company's sales and marketing effort.

General and Administrative Expenses. General and administrative expenses
decreased by 14% from $700,330 in the first quarter of 1997 to $602,202 in the
first quarter of 1998.

Depreciation and Amortization. Depreciation and amortization increased by
74% from $401,601 in the first quarter of 1997 to $455,315 in the first quarter
of 1998. This increase is attributable to capitalized project costs associated
with the increased number of executed ROE Contracts and the plant and equipment
associated with the delivery of telephony and CATV services in 1998.

Interest Income. Interest income decreased by 57% from $32,099 in the first
quarter of 1997 compared to $13,805 in the first quarter of 1998.

Interest Expense. Interest expense increased by 33% from $485,305 in the
first quarter of 1997 to $644,061 in the first quarter of 1998. The increase is
attributable to borrowings from Silicon Valley Bank and other lenders to fund
expansion.

Net Loss. As a result of the foregoing, the Company's net loss increased by
65% from $1,821,092 in the first quarter of 1997 compared to $2,283,804 in the
first quarter of 1998.

FISCAL YEAR ENDED DECEMBER 31, 1997 (HISTORICAL) COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996 (HISTORICAL)

Revenues. Revenues increased from $58,407 in 1996 to $2,721,293 in 1997,
primarily due to the continuing increase of subscribers in four new properties
in 1996 and the addition of 16 new properties in 1997. CATV service revenues of
$777,490 were not included in 1996 revenues because the LLC was using the equity
method of accounting during 1996. CATV service revenues for 1997 were
$1,888,280. Telephony service revenues for 1997 increased from $57,010 in 1996
to $705,193 in 1997, due to the acquisition of the remaining 50% ownership
interest of Cable. The operating results for 1997 have been consolidated, with
the elimination of the 50% interest in Cable's earnings for the period from
January 1, 1997 to September 7, 1997. The LLC began using the consolidation
method of accounting in September 1997, and continued to use this method through
1997.

Gross Profit. Gross profit increased from $17,658 in 1996 to $1,763,209 in
1997, primarily due to the substantial increase in revenues and the addition of
higher margin CATV services into the service mix. Gross margin in 1997 was 65%
of revenues compared to 30% of revenues in 1996. The increase in gross margin
was primarily attributable to the addition of CATV services into the product
mix. $506,183 of CATV gross profit in 1996 was not reflected in the LLC's
financial statements because the equity method of accounting was used in 1996.
Gross profit for telephony services increased from $16,261 in 1996 to $339,831
in 1997. Gross profit for CATV services was $1,295,558 in 1997. Gross margin for
telephony services in 1997 was 48% of revenues compared to 29% of revenues in
1996, and gross margin for CATV services, first introduced into the product mix
in 1997, was 69% of revenues for 1997.

Customer Support Expenses. Customer support expenses increased from $53,331
in 1996 to $426,471 in 1997. Since the LLC employed the equity method of
accounting for Cable in 1996, $265,923 of the increase to customer support
expense is attributable to the fact that customer support, general and
administrative expenses incurred by Cable were not included in 1996. The
increase was also attributable to the increase in customer support for a greater
number of passings (17,500 passings in 1997 compared with 7,584 passings in
1996). Customer support expenses consist primarily of the national customer call
center expenses, operating and maintenance expenses, and engineering expenses.

Other Operating Expenses. Other operating expenses increased from $292,564
in 1996 to $2,519,825 in 1997. The increase was primarily attributable to lease
expense of $746,358 in connection with operating lease arrangements for
equipment, and an increase in fixed telephony delivery costs, specifically, T-1
costs in the amount of $487,012 associated with increased facilities-based
telephony services in 1997. $172,170 of the

30
<PAGE> 32

increase is attributable to other operating expense associated with CATV not
being included in 1996 due to the equity method of accounting used in 1996. The
remaining other operating expenses in the approximate amount of $821,721
included maintenance expense, contract labor, mileage expense, billing expenses,
and other miscellaneous operating expenses.

Sales and Marketing Expenses. Sales and marketing expenses increased from
$181,888 in 1996 to $838,525 in 1997. $321,831 of this increase was attributable
to sales and marketing expenses related to Cable's operations. Since the LLC
employed the equity method of accounting for Cable in 1996, sales and marketing
expenses were not included in the LLC's financial statements in 1996. The
remaining portions of the increase are attributable to growth in passings and
subscriber base. Sales and marketing expenses consist of salaries, royalties,
commissions, and promotional expenses.

General and Administrative Expenses. General and administrative expenses
increased from $1,983,862 in 1996 to $2,865,608 in 1997. $700,217 of this
increase was due to CATV operations not being included in the LLC's financial
statements in 1996 due to the LLC's use of the equity method of accounting. The
remaining $181,529 of this increase was primarily attributable to increases in
accounting and finance expenses, corporate management and other administrative
expenses related to the LLC's growth and market penetration.

Depreciation and Amortization. Depreciation and amortization increased from
$209,711 in 1996 to $1,343,543 in 1997. $461,000 of this increase was
attributable to the depreciation expense incurred by Cable during 1996. Since
the LLC employed the equity method of accounting for Cable in 1996, depreciation
and amortization expense were not included in the LLC's financial statements in
1996. An additional $267,740 of the increase is attributable to amortization of
goodwill recognized in 1997. During 1997, the LLC revised the estimated lives
used to depreciate the costs of operational assets. The effect of this change
was to decrease depreciation expense by approximately $423,000. The remaining
$828,071 of the increase was attributable to capitalized project costs
associated with the increased number of executed ROE Contracts and the plant and
equipment associated with the delivery of telephony and CATV services in 1997.

Interest Income. Interest income decreased from $355,365 in 1996 to
$133,177 in 1997. $183,233 of the decrease is the result of interest income
associated with CATV operations not being included in 1996 due to the equity
method of accounting used during 1996.

Interest Expense. Interest expense increased from $1,111,156 in 1996 to
$3,104,809 in 1997. $12,502 of the increase is due to CATV operations not being
included in the LLC's financial statements in 1996 due to the LLC's use of the
equity method of accounting. The increase in interest expense was primarily due
to an increase in borrowings from the Silicon Valley Bank credit facility and
other lenders to support expansion activities during 1997.

Other Expenses. Other expenses for 1997 were $111,712, whereas the LLC did
not incur any other expenses in 1996. These expenses for 1997 consisted
primarily of disposal of obsolete equipment.

Net Loss. As a result of the foregoing factors, the Company's net loss
increased from $4,234,083 in 1996 to $8,446,349 in 1997. $832,408 of the
increase in net loss was attributable to the LLC's use of the equity method of
accounting for Cable in 1996.

FISCAL YEAR ENDED DECEMBER 31, 1997 (HISTORICAL) COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996 (PRO FORMA)

Revenues. Revenues increased by 225% from $836,876 in 1996 to $2,721,293 in
1997. The increase in revenues was primarily attributable to the continuing
increase in subscribers resulting from the addition of four new properties in
1996 and the addition of 16 new properties in 1997. CATV service revenues
increased 143% from $777,490 in 1996 to $1,888,280 in 1997. Telephony service
revenues increased 1,137% from $57,010 in 1996 to $705,193 in 1997. The
operating results for 1997 have been consolidated, with the elimination of the
50% interest in Cable's earnings for the period from January 1, 1997 to
September 7, 1997. The LLC began using the consolidation method of accounting in
September, 1997, and continued to use this method through 1997.

31
<PAGE> 33

Gross Profit. Gross profit increased by 237% from $523,841 in 1996 to
$1,763,209 in 1997. This increase in gross profit was primarily attributable to
the increase in CATV revenue from $777,490 in 1996 to $1,888,280 in 1997. Gross
margin for 1997 was 65% of revenues compared with 63% of revenues for 1996.
Gross margin for CATV was 65% and 69% in 1996 and 1997, respectively, and gross
margin for telephony services was 29% and 48% for the same periods,
respectively.

Customer Support Expenses. Customer support expenses increased by 34% from
$319,254 in 1996 to $426,471 in 1997. This increase is primarily attributable to
the increased cost of servicing the increased number of passings, which
increased from 7,584 in 1996 to 17,500 in 1997.

Other Operating Expenses. Other operating expenses increased by 442% from
$464,734 in 1996 to $2,519,825 in 1997. This increase was primarily attributable
to lease expense of $746,358 in connection with operating lease arrangements for
equipment, and an increase in fixed telephony delivery costs, specifically T-1
costs in the amount of $487,012, associated with increased facilities-based
telephony services in 1997. The remaining other operating expenses in the
approximate amount of $821,721 included maintenance expenses, contract labor,
mileage expenses, billing expenses and other operating expenses.

Sales and Marketing Expenses. Sales and marketing expenses increased by 66%
from $503,719 in 1996 to $838,525 in 1997. In connection with the growth of ROE
Contracts, sales and marketing expenses increased, the number of passings
increased, and the subscriber base expanded.

General and Administrative Expenses. General and administrative expenses
increased by 7% from $2,684,079 in 1996 to $2,865,608 in 1997, primarily due to
the increase in services provided by the Company.

Depreciation and Amortization. Depreciation and amortization increased by
100% from $670,732 in 1996 to $1,343,543 in 1997. $267,740 of the increase is
attributable to amortization of goodwill recognized in 1997. During 1997, the
LLC revised the estimated lives used to depreciate the costs of operational
assets. The effect of this change was to decrease depreciation expense by
approximately $423,000. The remaining $828,071 of the increase was attributable
to capitalized project costs associated with the increased number of executed
ROE Contracts and the plant and equipment associated with the delivery of
telephony services and CATV in 1997.

Interest Income. Interest income decreased by 38% from $183,233 in 1996 to
$133,177 in 1997.

Interest Expense. Interest expense increased by 174% from $1,133,936 in
1996 to $3,104,809 in 1997. The increase is attributable to increased borrowings
under the Silicon Valley Bank credit facility and from other lenders to fund
expansion.

Other Expenses. Other expenses for 1997 were $111,712, whereas the LLC did
not incur any other expenses in 1996. These expenses for 1997 consisted
primarily of disposal of obsolete equipment.

Net Loss. As a result of the foregoing, the Company's net loss increased by
65% from $5,107,494 in 1996 to $8,446,349 in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Since inception in May 1994, the LLC has incurred cumulative losses
aggregating $14,909,214 and has not experienced a single quarter of profitable
operations. The Company, following the Asset Acquisition, expects to continue to
incur operating losses for the foreseeable future until it achieves more
significant sales of its CATV, telephony and other services. During the past
three years, the LLC has satisfied its cash requirements principally from
borrowings under the Silicon Valley Bank credit facility, equipment lease
financing and loans from affiliates. The LLC and Cable are current in their
obligations under the Silicon Valley Bank credit facility. The Company has
negotiated a new credit facility with Silicon Valley Bank on substantially the
same terms and conditions as the old credit facility by and among Silicon Valley
Bank, the LLC and Cable.

At December 31, 1997, the LLC had cash and cash equivalents of
approximately $949,471, and a working capital deficit of $7,501,719. As of April
30, 1998, the Company's total debt obligations (exclusive of

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<PAGE> 34

trade debt) consists primarily of the $7,126,830 note to Silicon Valley Bank,
$3,250,000 in principal amount of the Interim Notes, $1,500,000 under the Aspen
Note and $3,000,000 under the Asset Acquisition Note. See "Certain
Transactions." The Company intends to use a portion of the net proceeds from the
Offering to retire the Interim Notes. See "Use of Proceeds."

Net cash used in operating activities for 1997 and 1996 totaled
approximately $4,287,575 and $3,101,711, respectively. Net cash used in
investing activities for 1997 and 1996 totaled approximately $467,763 and
$12,900,942, respectively. Net cash provided by financing activities for 1997
and 1996 totaled approximately $5,417,994 and $16,007,235, respectively,
reflecting, in part, the proceeds from related party advances of $12,635,195 and
borrowings under the Silicon Valley Bank credit facility of $4,400,000 in 1996,
and the increase in leasing arrangements of $2,279,623 and borrowings under the
Silicon Valley Bank credit facility of $2,969,000 in 1997.

In March and April 1998, the Company issued the Interim Notes in the
aggregate principal amount of $3,250,000, which Interim Notes are due
immediately following the Offering. In the event that the Company fails to pay
the Interim Notes when due, the Interim Notes may be converted into such pro
rata portion of the Common Stock sufficient to give holders thereof an aggregate
of 75% voting control of the Company on a fully diluted basis.

In connection with the sale of substantially all of the assets of the LLC
to the Company and the assumption of certain liabilities of the LLC by the
Company, the Company issued a $3,000,000 10% promissory note to the LLC, payable
in three installments. The first installment is to be paid upon the day after
the consummation of the Offering and the remaining two installments are to be
paid on the first and second anniversaries of the first payment.

In connection with the Interim Financing, the Company issued to Aspen
OnLine Investments, L.L.C. a $1,500,000 14% subordinated promissory note,
maturing in March 2001. See Note 3 of the Notes to the Company's financial
statements.

The Silicon Valley Bank credit facility permits the LLC and Cable to borrow
a maximum of $7,200,000. As of December 31, 1997, the interest on the Silicon
Valley Bank credit facility was prime plus 1%, and the Company's outstanding
principal balance was $7,126,830. See Note 6 of the Notes to the LLC's financial
statements.

The LLC and Cable lease equipment from T&W on a continuous basis pursuant
to standard form T&W capital equipment lease agreements, none of which,
individually, is believed to be material. As of January 1, 1998, the LLC and
Cable together had received advances of $6,478,853 and had obligations for all
T&W leases totaling $7,114,467.

Over the next 12 to 18 months the Company intends to build-out
approximately 33,000 additional passings, in 23,000 units, at an estimated cost
of $14,000,000 to $16,000,000. The Company intends to finance the cost of this
construction through a combination of proceeds of the Offering, internally
generated funds and bank borrowings.

Like other companies in the telecommunications industry, the Company relies
upon its MIS and billing system to accurately and quickly process large amounts
of data, which includes over 150,000 individual telephone calls and thousands of
other individual account transactions each month. The Company estimates that
$750,000 in capital expenditures will be required over the next 12 months to
upgrade the MIS and billing systems to be better able to track calls and to
process the substantial additional number of calls expected to be generated if
the Company meets its business goals.

The Company does not believe that the cost of implementing year 2000
compliant software and systems will have a material effect on the Company's
financial condition or results of operations.

The Company believes that the net proceeds from the Offering, together with
its existing resources and revenues from continuing operations, will be
sufficient to satisfy its capital requirements for at least twelve months
following consummation of the Offering. In the event that the Company's plans
change or the proceeds of the Offering are insufficient to fund operations due
to unanticipated delays, problems, expenses or

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<PAGE> 35

otherwise, the Company would be required to seek additional funding sooner than
anticipated. Further, depending upon the Company's progress in marketing its
services, the Company may determine that it is advisable to raise additional
capital sooner than anticipated.

INFLATION

Inflation has not had a significant effect on the Company's business to
date and the Company believes that inflation will not have a material effect on
its business in the foreseeable future.

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<PAGE> 36

BUSINESS

BACKGROUND

The Company markets and provides CATV and enhanced local and long distance
telephone services to MDUs. It delivers these services under ROE Contracts with
MDU property owners and service agreements with MDU residents. The Company
offers property owners two significant incentives to enter into ROE Contracts
with it. First, because the Company enjoys the cost benefits available to it as
a private cable operator, the Company is able to offer property owners a share
of the revenue generated by the residents who purchase services from the
Company. Second, the Company believes it offers superior customer service, which
enhances the owner's ability to attract tenants.

The Company targets demographically appealing MDUs clustered in geographic
regions with growing populations and currently services MDUs located in Austin,
Dallas-Fort Worth, Denver, San Antonio, and the Washington, D.C. metropolitan
area (including the Virginia suburbs). The Company currently has ROE Contracts
with various property owners including institutional property owners such as
Amli Residential Properties Trust, Gables Residential Trust, Lincoln Property
Company and Equity Residential Properties Trust. Since inception, the Company
has experienced significant growth in the total number of passings, subscribers
and properties covered by ROE Contracts. From December 31, 1996 to March 31,
1998, the number of properties covered by the Company's ROE Contracts increased
from 28 to 43 (an increase of 54%), the number of passings increased from
approximately 7,600 to approximately 18,000 (an increase of approximately 135%),
and the number of subscribers increased from approximately 3,600 to
approximately 10,000 (an increase of approximately 180%).

The Company currently provides CATV and telephony services to MDU residents
at competitive rates. The Company's CATV service offers a full range of popular
programming tailored specifically for each MDU or region. The Company obtains
its CATV programming through program access agreements with suppliers. The
Company currently purchases standard and enhanced local and long-distance
telephony services in bulk and resells them over networked central office
telecommunications platforms.

As of March 31, 1998, the Company had approximately 18,000 operational
passings and approximately 10,000 subscribers, representing a penetration rate
for all units covered by its ROE Contracts of 57% and a penetration rate for
occupied units of 75%. Since many of the Company's operational passings are
located in newly constructed buildings in the initial lease-up phase, the
penetration rate for all units is expected to increase as units are occupied.
The Company maintains business interruption insurance in an amount that it
believes to be adequate.

INDUSTRY OVERVIEW

As a result of technological and regulatory changes that have occurred over
the past few years, smaller companies have been able to compete more effectively
in the CATV and telephony markets traditionally dominated by larger companies.
This shift has enabled the RMTS industry to evolve as an early stage competitor
in the CATV and telephony markets. The potential market for RMTS remains largely
undeveloped, creating significant opportunities for companies with the
technological, operational and administrative ability to manage growth
effectively. First, there are few competitors relative to the size of the
potential market, which is estimated to be approximately 10 million units across
the United States located in MDUs of 50 units or more. Second, RMTS providers
can offer their services selectively and at rates below those offered by
traditional CATV and telecommunications companies. Due to their lower cost
structure, reduced regulatory oversight, and economies of scale realized from an
increased range of products and services offered, RMTS providers can generally
offer revenue-sharing agreements to property owners to induce them to enter into
long-term ROE Contracts.

The regulatory environment in the telecommunications industry has changed
dramatically over the past few years. In 1990, the FCC mandated that states act
to shift the ownership of telephone wiring in customer premises from RBOCs to
property owners. This decision relieved regulated local telephone companies of
the burden of wire maintenance and allowed property owners to decide how to use
existing wiring. This regulatory
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<PAGE> 37

development created the opportunity for private telecommunications operators to
serve MDUs as resellers of local telephone network services. In the past,
however, the cost of switching equipment and tariffs in local and long distance
exchange markets prevented private telecommunications operators from taking
advantage of this opportunity.

Recent changes in the telecommunication industry have enabled private
telephone operators to package and resell all types of telecommunications
services to MDU residents at competitive prices. These changes include (i) the
development of highly reliable, efficient, low-cost private branch exchange and
switching equipment, (ii) the proliferation of fiber optic transmission capacity
and (iii) the gradual decrease in barriers to entry into local markets. While
these changes have created opportunities for private telephone operators, they
have also created pricing pressures which may depress profit margins for such
private telephone operators in the future.

THE MARKET

The potential market for RMTS in the United States consists of
approximately 10 million apartment units located in MDU communities of 50 or
more units. While all of these units are currently served by some form of
telephony or CATV service, the Company believes that fewer than 15% are
currently served by an RMTS provider. The Company believes that it can increase
its penetration of this market by virtue of the revenue-sharing provisions in
its ROE Contracts, its ability to cross-market multiple products and services at
competitive prices, its point-of-sale marketing arrangements with property
owners, and by offering competitive products and superior customer service. The
Company believes that it is important to enter target markets as quickly as
practicable to establish an early market presence and to gain critical operating
mass in advance of competitors. Prior to signing new ROE Contracts, the Company
conducts a thorough review of each property, including engineering and cost
analyses, to determine if the Company's facilities can be installed on a cost-
effective basis. Once the Company selects a property, it closely monitors the
construction process so that the appropriate infrastructure is installed on a
timely basis and within budget. Management estimates that 70% of the Company's
future core passings will come from developed properties and the remaining 30%
will come from new construction.

PRODUCTS AND SERVICES

The Company offers standard and enhanced local and long distance
telecommunications and/or CATV services to MDU residents. In many properties,
primarily newly constructed MDUs, the Company also wires the buildings for
intrusion alarm services, which in the future may permit the Company to provide
security services, either directly or through a third party. Although the
Company's products and services are nearly identical to the telephone and CATV
services that apartment residents already purchase in large numbers, the Company
believes it offers comparable features at competitive prices with superior
customer service.

CATV SERVICES. The Company typically delivers its CATV services by
retransmitting programming signals via antenna and principal headend electronic
equipment that receive and process signals from satellites. The Company obtains
its programming through program access agreements with suppliers of programming.
The Company's private cable systems also process and distribute off-air
transmission signals from local network affiliates and independent television
stations. The Company's cable system architecture generally eliminates the need
for set-top converter boxes when it is connected to cable-ready television sets,
and enables the Company to activate service for subscribers without entering
into an apartment. Many of the Company's systems currently use 18 GHz microwave
relays to link more than one apartment community to a single headend, enabling
the Company to realize greater economies of scale. In the future, management
plans to employ whatever technology provides the most attractive return on
invested capital without compromising its service. In some instances, the
Company may simply resell the services of the local franchise cable operator.
The Company is also currently analyzing and/or beta testing other technologies
including fiber optics and interdiction (automated work order processing) to
provide expanded and enhanced services.

The Company offers its subscribers a full range of popular CATV programming
at competitive prices. Its basic MDU programming package is generally priced
below the rate charged by incumbent franchise CATV

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<PAGE> 38

operators. The Company also offers premium television services, including
uninterrupted full-length motion pictures, regional sports channels, sporting
events, concerts and other entertainment programming. Premium channels,
including HBO, Cinemax, Showtime and The Disney Channel, are generally offered
individually or in discounted packages with basic or other services. The Company
also offers movies, sporting events, concerts and other special events on a
pay-per-view basis. In addition, the Company offers each property its own
dedicated channel, called "Community Link," that provides on-site management
with the ability to communicate electronically with residents. In 1996 and 1997,
CATV services to customers accounted for 93% and 69% of the revenues of the
Company, respectively.

TELEPHONY SERVICES. The Company currently purchases standard and enhanced
local and long-distance telephony services in bulk from LECs, CLECs and
interexchange carriers ("IXCs"). The Company resells local and long-distance
telephony services to customers through networked central office
telecommunications platforms. Telephony services offered by the Company include
call waiting, call forwarding, caller ID, last number redial, three-party
conferencing, emergency 911 and a variety of other services. The Company does
not permit its customers to place 900-number calls or to accept collect calls,
in part to limit the potential credit risk associated with such calls, and in
part because of the additional expense associated with tracking such calls. The
Company's switching systems are software-driven and capable of feature
enhancement and efficient, remote servicing through software interfaces. In 1996
and 1997, telephony services to customers accounted for 7% and 26% of revenues
of the Company, respectively.

OTHER SERVICES. In addition to offering CATV and telephony services, in the
near future the Company intends to roll out related services such as paging,
intrusion alarm, Internet access and high-speed data. The Company is also
exploring additional services including utility metering and financial and
insurance products.

MARKETS AND INSTALLED BASE

The Company currently provides CATV and telecommunications services in
Austin, Dallas-Fort Worth, Denver, San Antonio and the Washington, D.C.
metropolitan area (including the Virginia suburbs). The Company plans to expand
the telecommunications component of its business by increasing the number of
MDUs to which it provides telecommunications services and by expanding the
number of telecommunications services it provides.

As of March 31, 1998, the installed base of the Company included nearly
18,000 operational passings, of which approximately 31% were telephony and
approximately 69% were CATV. The installed base includes over 10,000
subscribers, which represents a total penetration rate of 57% of all units and a
penetration rate of 75% of occupied units. Since many of the Company's
operational passings are located in newly constructed buildings in the initial
lease-up phase, the penetration rate for all units is expected to increase as
units are occupied.

The table below summarizes the operational passings and subscriber base of
the Company as of March 31, 1998.

<TABLE>
<CAPTION>
OPERATIONAL PASSINGS SUBSCRIBERS
----------------------------- ----------------------------
MARKETS CATV TELEPHONY TOTAL CATV TELEPHONY TOTAL
------- ------ --------- ------ ----- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Austin.............................. 3,436 1,371 4,807 2,315 644 2,959
Dallas-Fort Worth................... 2,374 2,374 4,748 1,422 971 2,393
Denver.............................. 1,424 496 1,920 982 136 1,118
San Antonio......................... 4,494 352 4,846 3,096 218 3,314
Washington, D.C. area............... 624 624 1,248 446 270 716
------ ----- ------ ----- ----- ------
Totals.................... 12,352 5,217 17,569 8,261 2,239 10,500
</TABLE>

MARKETING AND SALES

While revenue-sharing arrangements encourage property owners to enter into
service agreements with the Company, management believes that delivery of
competitive products and superior customer service is essential in retaining
such relationships.

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<PAGE> 39

The Company's first objective is to acquire ROE Contracts. This requires a
two-tier strategy. First, the Company concentrates on entering into ROE
Contracts with the large national owners of high quality multi-family housing.
These property owners are generally partnerships, real estate investment trusts
("REITs"), insurance companies and other specialized forms of owners that
control 20,000 or more units. Second, the Company markets its services to
smaller owners whose properties typically lie within a single geographic market.

ROE Contracts with the Company offer property owners an attractive
additional revenue source in the form of fees and commissions. Under the
Company's revenue sharing arrangements, property owners generally are paid a
percentage of gross monthly receipts collected for services delivered by the
Company to subscribers on a property. The percentage paid to property owners
under this arrangement varies depending upon the total number of subscribers to
the Company's services in relation to the total number of dwelling units. A
commission is also paid to the property owner for each new subscriber. Fees
based on gross receipts are paid directly to the property owner. Sales
commissions may be paid either directly to the property owner or through a
leasing agent. The Company negotiates long-term ROE Contracts with owners of
large MDU portfolios because it believes that strategic relationships with these
owners are critical to its market penetration and long-term success. These ROE
Contracts generally provide for a term of eight to fifteen years and give the
Company the right to be the exclusive provider of CATV services and a
non-exclusive provider of telephony and related services. The property owner
typically agrees to market and promote the Company's telephony services
exclusively.

The process of signing on new residents rests largely with the property
owner's leasing agent, who is paid a commission by the Company or through the
property owner's management company for signing up existing residents and new
residents at the time a lease is executed. The leasing agents are trained by the
Company and are provided with marketing and other support literature to
facilitate sales of the Company's products and services.

Efficiencies obtained through regulatory advantages and carefully selected
technology deployments enable the Company to compete on a cost-effective basis
and, therefore, to share revenues with property owners. Due to increasing
competition in the MDU market, property owners are facing pressure to find new
ways to generate profits. As a result, revenue-sharing with the property owner
based on subscriber penetration and gross revenues for the owner's property has
become the standard in the RMTS market. The Company benefits from the fact that
it is generally not subject to the regulations that impose substantial
additional costs on typical franchise CATV operators. These additional costs
result from universal access requirements, universal pricing requirements, "must
carry" regulations and franchise fees. In addition, the Company builds out only
the MDUs that it serves, and implements the most efficient delivery systems
appropriate for a particular geographic area. Accordingly, the Company faces
significantly lower capital expenditures than traditional cable operators and
LECs. The Company uses a scaleable telephone switch that enables it to provide
telephony service economically to smaller MDU properties. Management believes
many of the Company's RMTS competitors employ technology that can be
cost-prohibitive in providing telephony in MDUs consisting of fewer than 400
units.

In addition, competition in the housing market has forced property owners
to find new ways to differentiate their properties to attract new residents and
retain residents. The Company believes that its competitive products and
superior customer service provide MDU owners with an amenity package that helps
distinguish their properties from the competition.

A significant number of MDUs to which the Company provides CATV and
telephony services are "retrofits," or existing units where hard-wiring is
already in place. Retrofits save the Company a substantial part of the cost of
building out passings, and generally have higher occupancy rates at the
commencement of the ROE Contract. The Company's objective is to convert as many
residents as possible to the Company's services through various marketing
promotions before the system goes "live," and then to continue marketing efforts
after the system is installed. To encourage residents to use the Company's
products, the Company invites them to attend pre-opening parties at which it
demonstrates its services and offers inducements, such as free cable service for
two to four weeks. The Company considers a property stabilized approximately

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<PAGE> 40

12 months following activation of the Company's services on that property. The
Company's overall stabilized penetration rate for CATV service is 77%, and its
overall stabilized penetration rate for telephony service is 60%.

CUSTOMERS

The Company constructs passings on MDU properties, some of which are owned
by institutional property owners including Amli Residential Properties Trust,
Gables Residential Trust, Lincoln Property Company and Equity Residential
Properties Trust, and provides services to MDU residents. All of the revenues of
the Company are derived from providing CATV, telephony and other services to MDU
residents. The Company's goal is to secure ROE Contracts in demographically and
geographically favorable MDUs and to become the exclusive provider of CATV
services and a non-exclusive provider of telephony services to the residents of
those properties. No customer accounts for more than 10% of the Company's
revenues. Six of the eight properties in the Company's joint venture in Austin,
U.S.-Austin Cable Associates I, Ltd., are, however, commonly managed by an
affiliate of the Company's joint venture partner, Ocampo Partners, Ltd., a Texas
limited partnership. See Note 3 of Notes to Consolidated Financial Statements of
the LLC.

MDU residents may subscribe to a combination of services provided by the
Company. Customers of the Company typically receive equal or greater CATV
channel selection and more favorable pricing than they would from the incumbent
franchise cable operator. To assure access to MDU residents, the Company
typically enters into an exclusive marketing relationship with the property
owners and their on-site leasing agents regarding telephony services. While
residents have the ability to choose either the Company or the local telephone
company to provide telephone service, residents receive marketing materials
describing the Company as a high-quality, lower-cost alternative to the local
phone company.

GROWTH STRATEGY

The Company's primary objective is to become a leading RMTS provider in the
United States. The Company's plan to meet this objective is to:

- target MDUs with favorable demographics;
- capture the benefits of geographic clustering;
- offer competitive products and superior customer service; and
- use a flexible and reliable technology platform.

The Company's growth strategy requires the Company to accomplish the
following:

- generate additional ROE Contracts in existing markets;
- offer products in new markets;
- cross-sell additional related products and services to its existing
subscriber base once a market has been developed; and
- pursue acquisition of other CATV and telephony service providers.

The Company does not have any current plans, agreements or understandings
with respect to any specific acquisition.

CUSTOMER SERVICE

Superior customer service is a significant element of the Company's
marketing strategy, and the Company believes that its customer service typically
exceeds expectations. The Company's representatives answer calls 24 hours a day,
365 days a year. Customers call a single toll-free number for all customer
service issues. Service personnel can typically deliver desired service at a
time that is convenient for the customer, including evenings and Saturdays. The
Company's customer service bureau utilizes account tracking and management
software developed by the Company. The Company's telephony server and software
packages provide a complete complement of call handling, routing and tracking
features. For example, when a customer service agent answers a customer's call,
the customer's file appears on the agent's screen.

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<PAGE> 41

The Company believes that it offers a competitively-priced range of
products and a level of customer service that is superior to that of its
competitors. Its networks and support systems ensure reliable, high-quality
delivery of a range of CATV and telecommunications services, and they have the
capacity to offer a broader scope of value-added telecommunications services
over time. With increases in the Company's subscriber base, management believes
that the customer service bureau will be able to achieve greater economies of
scale while providing reliable and attentive customer service and support.

TECHNOLOGY PLATFORM

The Company has installed a broad infrastructure in preparation for
pursuing its growth strategy. It has selected and installed network technology
that enables it to deliver competitive CATV and telephony services to customers
on a cost-effective basis. Management believes that many of the Company's RMTS
competitors currently employ technology that can be cost-prohibitive in
providing telephony in MDUs consisting of fewer than 400 units. By comparison,
the Company currently uses a scaleable central office telephone switch that
provides efficient telephony service to smaller MDU communities. In addition,
the Company is exploring alternative means of delivering telephony services to
MDU residents on a cost-effective and competitive basis, including resale
agreements with LECs and CLECs. The Company provides CATV services using a
variety of delivery methods, including a combination of satellite master antenna
television ("SMATV") headends, 18 GHz analog broadcast microwave systems, direct
broadcast satellite ("DBS") systems, and resale agreements with cable operators.

CATV SERVICES. The Company's standard cable lineup offers a wide selection
of programming, including the traditional local affiliate network channels,
property information and security channels, and a mix of popular basic and
premium satellite channels. The channel lineup generally offers between 50 and
150 channels, depending upon market demographics, deployment technology and
customer demand. The Company provides its cable services using a variety of
established delivery methods that allow the Company the flexibility to deploy
the most efficient and cost-effective CATV system to a particular MDU without
sacrificing features, quality or reliability of service.

A SMATV headend operates by receiving programming signals, either locally
or via satellite, and re-transmitting the signal throughout the cable system.
Satellite dishes, located at each headend, receive signals from several specific
satellites. These signals are processed by electronic equipment and then
modulated to a designated channel frequency. An antenna network is also located
at each headend to receive off-air VHF/UHF signals from the local broadcast
networks. With the use of 18 GHz microwave systems, the Company is able to
transmit this headend signal to multiple MDUs to link the network and achieve
greater economies of scale. The Company uses local franchise cable programming
to deliver cable services to MDUs in strategic locations where headend
facilities are not feasible or accessible. Resale delivery enables the Company
to defer capital expense costs until these costs can be allocated among more
passings.

All CATV services are provided at each property through an underground,
coaxial cable distribution system. The CATV signals are controlled at a pedestal
or wall-mounted junction box outside of each building, which enables the Company
to activate, modify and monitor service for its subscribers without having to
enter an apartment.

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<PAGE> 42

The following diagram illustrates the Company's typical CATV services
delivery system:

[DIAGRAM]

TELEPHONY SERVICES. The Company has selected a scaleable central office
telephone switch ("DXC") designed and manufactured by Digital
Telecommunications, Inc. Management believes the Company has established a
flexible technology platform that allows it to provide high quality telephony
services on a cost-effective basis to small MDU communities. Management further
believes that many of the Company's RMTS competitors employ technology that may
be cost-prohibitive in providing telephony in MDUs consisting of fewer than 400
units.

The Company provides its telephone subscribers with bundled local and long
distance dial tone, as well as various additional features such as call waiting,
call forwarding, caller ID, last number redial, three-party conferencing,
emergency 911 and a variety of other services. All services provided by the
Company are comparable to, and priced competitively with, those offered by the
respective LEC, although the Company does not permit its customers to place
900-number calls or to accept collect calls.

The Company's telephone facilities equipment is usually located on-site at
each apartment complex. The DXC is strategically placed and Line Interface
Modules ("LIMs") are deployed on-site at each surrounding MDU serviced by the
respective DXC. All calls placed by the Company's customers are processed by the
on-site LIM, and then hauled back to the DXC by a local loop. The DXC processes
all inbound and outbound traffic and connects the calls via Primary Rate
Interface T-1s (i.e. ISDN circuits transmitting at T-1 speed) to the local
exchange or long distance provider, dependent on the call type. The Company
believes this structure provides a cost-effective and competitive solution for
delivering facilities-based telecommunications services to its MDU residents. In
addition, the Company is exploring alternative means of delivering telephony
services to MDU residents on a cost-effective and competitive basis, including
resale agreements with LECs and CLECs.

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<PAGE> 43

The following diagram illustrates the Company's typical facilities-based
telephony delivery system:

[DIAGRAM]

COMPETITION

The market for CATV and telephony services is highly competitive. The
Company competes for ROE Contracts with other private cable operators and
telecommunications providers. Under the terms of its ROE Contracts, the Company
generally is required to provide products and services that are competitive with
products and services offered by other cable and telecommunications providers.
The Company competes for customers on the basis of price, services offered and
customer service. Franchise CATV operators, referred to as multiple system
operators ("MSOs"), and local telecommunications companies, known as regional
bell operating companies ("RBOCs"), represent the Company's principal
competition. These competitors are typically very large companies with
significantly greater resources than those of the Company. The Company competes
directly in every market for ROE Contracts with these companies. The
Telecommunications Act of 1996 (the "1996 Act") allows RBOCs to enter the cable
business as well. The principal RMTS competitors of the Company are GE/RESCOM,
OpTel, Inc., Cable Plus Group Company, LP, and OnePoint Communications, L.L.C.

GOVERNMENT REGULATION--CATV REGULATORY ISSUES

Regulatory Status and Regulation of Private Cable Operators. Franchise
cable operators are subject to a wide range of FCC regulations regarding such
matters as the rates charged for certain services, transmission of local
television broadcast signals, customer service standards/procedures, performance
standards and system testing requirements. In addition, the operator's
franchise, which can be issued at the municipal, county or state level,
typically imposes additional requirements for operation. These relate to such
matters as system design and construction, provision of channel capacity and
production facilities for public educational and

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<PAGE> 44

government use, and the payment of franchise fees and the provision of other "in
kind" benefits to the city. See "--Regulation of Franchise Cable Television
Rates."

The operator of a video distribution system that serves subscribers without
using any public right-of-way, referred to generally as a private cable
operator, is exempt from the majority of FCC regulations applicable to
franchised systems which do use public rights-of-way. Moreover, a state or local
government cannot impose a franchise requirement on such operators.

To remain exempt from extensive FCC regulation and local franchising
requirements, the Company intends to confine its video distribution facilities
to contiguous private property and obtain programming primarily via SMATV
facilities. The Company intends to rely on 18 GHz microwave links to cross
public rights-of-way where necessary and technically feasible. The use of
microwave frequencies to transmit video signals across a public right-of-way is
not considered a "use" of the right-of-way sufficient to trigger a local
franchising requirement or FCC regulation applicable to franchised operators.
The Company is considered a private cable operator in all of the markets that it
serves.

The Company's use of 18 GHz microwave links to connect properties in the
Washington, D.C. area is limited by a recent FCC order establishing a zone in
the D.C. area where, to protect sensitive government operations, new facilities
will not be authorized. The use of 18 GHz microwave links nationwide could also
be affected generally by two ongoing proceedings at the FCC. In the first
proceeding, the FCC is considering whether to provide for routine "blanket"
licensing of large numbers of small antenna earth stations in a range of
frequency bands including the 18 GHz band. If the proposed operations are
allowed, it is possible that the Company would be required to use more
sophisticated and more expensive equipment to maintain signal quality in its
point-to-point 18 GHz microwave links. It is also possible that the proposed
operations would cause interference with these links that could not be remedied
entirely. In the second proceeding, initiated on April 1, 1998, the FCC has been
asked to authorize the use of the 12 GHz band for transmission of video
programming. Such action would expand the general availability of microwave
links. More importantly, a 12 GHz link can cover approximately twice the
distance of an 18 GHz link and consequently would allow the Company to integrate
systems over a larger area.

Even structuring its operations in the foregoing manner, the Company must
comply with various FCC rules including the following: the FCC's signal leakage
rules, which require monitoring and testing of its facilities, various Equal
Employment Opportunity requirements (including annual reports and implementation
of a non-discrimination policy and a positive program to encourage equal
opportunity), requirements that the Company obtain the consent of commercial
broadcast stations for retransmission of the stations' signals and rules
requiring the closed captioning of programming.

Access to Property. Federal law provides franchise cable operators access
to public rights-of-way and certain private easements. These provisions
generally have been limited by the courts to apply only to external easements
and franchise operators have not been able to use these rights to access the
interior of MDUs without owner consent. In some jurisdictions, franchise
operators have been able to use state or local access laws to gain access to
property over the owner's objection and in derogation of a competing provider's
exclusive contractual right to serve the property. These statutes, referred to
as "mandatory access" provisions, typically empower only franchise cable
operators to force access to an MDU to provide service to the residents
regardless of whether the owner objects or has entered into a contract with an
alternative provider of video services such as the Company. Thus, in
jurisdictions where a mandatory access provision has been enacted, a franchise
operator would be able to access an MDU and provide service in competition with
the Company regardless of whether the Company has an exclusive ROE Contract with
the owner. The ability of franchise operators to force access to an MDU and take
a portion of the subscriber base could negatively affect the Company's operating
margin at a particular property. The District of Columbia has enacted a
mandatory access provision, and other jurisdictions have done so or may do so in
the future. It is often the case, particularly at the local level, that the
mandatory access provision is suspect under constitutional principles because,
for example, it does not provide for the MDU owner to be compensated for the
"taking" of its property which results. While the Commonwealth of Virginia has
not enacted a mandatory access statute, it does prohibit a landlord from
accepting payment from a video services provider in exchange for access to an
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<PAGE> 45

MDU, which limits the Company's ability to induce the owner to enter into ROE
Contracts. See "--Inside Wiring."

An ongoing FCC proceeding raises the possibility that DBS and multichannel,
multipoint distribution service ("MMDS") operators will be granted rights on a
national basis similar to the mandatory access provided to franchise cable
operators in some state and local jurisdictions. The FCC recently adopted rules
prohibiting homeowners associations, manufactured housing parks and state and
local governments from imposing any restriction on a property owner that impairs
the owner's installation, maintenance or use of DBS and MMDS antennas one meter
or less in diameter or diagonal measurement. The FCC has sought comment on the
possibility of adopting rules that would prohibit MDU owners from imposing such
restrictions on residents of their rental properties. If the FCC were to adopt
such rules, DBS and MMDS operators, through tenant choice, presumably would be
able to gain access to serve individual residential units within MDUs without
the owner's consent.

Both the access rights of competitors and restrictions such as the Virginia
restriction on payments to owners could have a material adverse effect on the
Company's business, financial condition and results of operations.

Inside Wiring. Last year, the FCC issued new rules governing the
disposition of inside wiring by incumbent operators in MDUs upon termination of
service when the incumbent operator owns the wiring. In some instances, a new
provider such as the Company faces difficulty in taking over a property because
the ownership of the wiring is uncertain or contested and the property owner is
hesitant to allow installation of additional wiring. The new rules address this
issue and facilitate competition from new providers by requiring the incumbent
operator to choose between sale, removal or abandonment of the wiring within
certain time constraints and by allowing installation of wiring within an
incumbent's molding in certain instances. The rules are currently the subject of
petitions for reconsideration at the FCC and at least one judicial challenge in
the Eighth Circuit Court of Appeals.

In conjunction with the issuance of the inside wiring provisions, the FCC
sought comment on a number of related issues which it will address in new rules.
It is considering, among other things, whether to (i) adopt a cap on the
duration of exclusive contracts equal to the amount of time reasonably necessary
to recover capital costs (the FCC has proposed a cap of seven years); (ii) limit
the ability of multichannel video programming distributors ("MVPDs") with market
power (typically the local franchisee) to enter into exclusive contracts; (iii)
take action to address the anti-competitive effects of perpetual exclusive
contracts (those continuing through all future renewals of the franchise), such
as by allowing MDU owners to void these contracts pursuant to a "fresh look"
mechanism; (iv) require competing providers to share a single system of wiring;
(v) extend existing rules on cable home wiring (that wiring within residential
units up to twelve inches outside each unit) to all MVPDs and not just franchise
operators; and/or (vi) extend rights of subscribers to install their own cable
wiring within MDUs. The comments filed in this proceeding are divided on many of
the key issues regarding treatment of exclusive and perpetual contracts.

Given the limited subscriber base at MDUs, it is important for the Company
to be able to rely upon exclusive contracts as a means of maximizing its revenue
at a particular property. Thus, if in implementing rules to address the
foregoing issues, the FCC imposes too short a cap on exclusive contracts or
otherwise unduly limits their use, it could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the perpetual contracts often utilized by franchise operators inhibit
competition from alternative providers such as the Company or stifle it
altogether if such contracts are exclusive. If the FCC does not grant MDU owners
broad enough powers to extricate themselves from perpetual contracts with
franchise operators, the number of MDUs at which the Company could compete would
be diminished, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

Regulation of DBS Providers. Congress is considering legislation that, if
enacted, could make it easier for the Company to use DBS as a source of
programming while at the same time making it easier for DBS providers to
compete. The proposals would greatly expand the areas in which DBS providers can
distribute local TV stations and network signals and would reduce the license
fees that DBS providers must pay for
44
<PAGE> 46

carrying broadcast signals. Finally, proposed FCC regulations could limit the
ability of MDU owners to deny tenants the right to subscribe to DBS service. See
"--Access to Property."

Regulation of Franchise Cable Television Rates. The FCC regulates the rates
that franchise cable systems charge for basic monthly service, expanded basic
service and certain customer premises equipment. As an exception to the general
uniform rate requirement, the regulations allow certain "bulk" discounts to MDU
customers, enabling franchise cable systems to be more competitive with private
operators such as the Company. In addition, rate regulation does not apply if
the franchise operator is subject to "effective competition" as defined by the
FCC or if the operator qualified for the "small operator" exemption. The FCC is
currently considering revisions to the uniform rate regulations and the
foregoing exemptions, which revisions may affect the level of protection the
regulations afford private operators. More generally, the regulations do not
prohibit discriminatory pricing for services other than rate regulated services
and associated installation and equipment costs. Although regulation of rates
for expanded basic service is scheduled to be eliminated in March 1999, recent
cable rate increases have resulted in pressure on Congress to extend this
"sunset" date.

Actions by the FCC that expand the freedom of franchise operators to set
rates or the termination of rate regulation altogether could allow franchise
operators to subsidize competition at MDUs through their city-wide operations.
This could have a material adverse effect on the Company's business, financial
condition and results of operations.

Copyright. The broadcast programming distributed by the Company contains
copyrighted material. Accordingly, the Company must pay copyright fees for its
use of that material (copyright liability for satellite-delivered programming is
typically assumed by the supplier). The U.S. Copyright Office recently ruled
that private systems located in "contiguous communities" (or operating from one
headend) will be treated as one system and that the revenue for such systems
must be combined in the calculation of copyright fees. If the combined revenue
figure is high enough, it results in more complicated fee calculations and
higher fees. The Company intends to structure its programming to minimize the
revenue associated with retransmission of television and radio broadcasts in an
effort to maintain a simplified filing status and to reduce its copyright
liability in the event it must file under the more complicated formula.

GOVERNMENT REGULATION--TELEPHONY REGULATORY ISSUES

In providing telecommunications services to its customers, the Company will
operate as either a shared tenant service ("STS") provider or a CLEC, as well as
an IXC. Fewer than a dozen states impose certification and/or tariffing
requirements on STS providers, while virtually all states do so with respect to
CLECs. While the FCC and a majority of states impose certification and/or
tariffing requirements on IXCs, federal and state regulation of IXCs has been
relaxed substantially over the past few years. CLECs remain subject to a wide
array of regulatory constraints and obligations. By contrast, regulation of STS
providers is minimal. The Company is certified as a CLEC in the States of
Colorado and Texas and intends to seek like authority when it enters other
states. The Company also has authority to operate as an IXC in Colorado and
Texas and will seek authority to act as an IXC to the extent such authority is
required when the Company enters new states.

The Company purchases wholesale long distance services from IXCs, STS from
LECs (e.g., Southwestern Bell Telephone and U.S. West Communications) on a
tariffed basis, and plans to resell local telephony service as a CLEC. As a
CLEC, the Company has the statutory right to collocate and interconnect its
switching and other equipment with, and/or obtain unbundled access to, the
network facilities of incumbent LECs, and to secure from the incumbent LEC
retail services at wholesale rates for resale. Over the next one to two years,
incumbent LECs are also required by statute to provide customers with the
ability to (i) retain their telephone numbers when switching local service
providers (i.e. "local number portability") and (ii) access all communications
within Local Access Transport Area ("intra LATA") IXCs on a "1+" basis without
use of access codes (i.e. dialing parity), thereby eliminating two critical
barriers to local telecommunications competition.

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<PAGE> 47

The 1996 Act opened the local telecommunications market to competition by
mandating the elimination of legal, regulatory, economic and operational
barriers to competitive entry. These changes provided the Company with new
opportunities to provide local telephone services on a more cost effective
basis. The 1996 Act, however, also provides the RBOCs with a means to enter the
long distance market, which introduced a number of substantial new competitors
in that market. On balance, management believes that the Company will benefit
significantly from the market-opening provisions of the 1996 Act.

SUPPLIERS

The Company is not materially dependent upon any suppliers of goods or
services.

PROPERTIES

The corporate headquarters and national customer services bureau of the
Company are currently located at 10300 Metric Boulevard in Austin, Texas, in
approximately 25,000 square feet of commercial office space under a long-term
lease. The Company also maintains leased facilities in Farmer's Branch and San
Antonio, Texas, and McLean, Virginia.

EMPLOYEES

The Company has 67 full-time employees and one part-time employee. The
Company believes that its relations with its employees are good.

LEGAL PROCEEDINGS

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

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<PAGE> 48

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The directors, executive officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert G. Solomon 36 Chairman; Chief Executive Officer; Director
Donald E. Barlow 51 President; Chief Financial Officer
Rudy D. Belton 51 Director
Marc S. Seriff 50 Director
Chris B. Tyson 42 Director
David Smith 35 Director of Sales
Joseph R. Jarmusch 43 Director of Engineering & Construction
Robert J. Walentynowicz, Jr. 37 Director of Customer Service Operations
</TABLE>

Set forth below is information regarding the business experience during the
last five years for each of the above-named persons. There are currently three
vacancies on the board of directors of the Company to be filled after
consummation of the Offering.

ROBERT G. SOLOMON has served as President of Cable since 1994, as President
of the LLC since 1995, and as Chairman and CEO of the Company since March 1998.
Since 1987, Mr. Solomon has been a Senior Vice President and principal
stockholder of CS Management, Inc., a firm that develops and manages apartment
communities and commercial properties throughout the South and Central Texas.
Although Mr. Solomon remains a stockholder and officer of CS Management, Inc.,
he is not active in its day-to-day operations. Mr. Solomon serves on the
Executive Board of the Independent Cable and Telecommunications Association, the
leading industry trade association and lobby coalition. Mr. Solomon received his
B.B.A. in Business Administration from the University of Texas in 1984.

DONALD E. BARLOW has served as Chief Financial Officer of the LLC since
1996 and as President of the LLC and the Company since March 1998. From 1973 to
1978, Mr. Barlow served as a commercial manager with Southwestern Bell Telephone
Company. Mr. Barlow served as Senior Vice President and General Counsel
(1978-1980) and as Senior Vice President of Business Development (1982-1983) for
Perry Gas Companies, and from 1980 to 1982, he served as President and Chief
Operating Officer for Perry Gas Processors. From 1983 to 1994, he served as
Chief Financial Officer, General Counsel and Chief Operating Officer for Capitan
Enterprises, Inc. Mr. Barlow received both his B.A. and J.D. degrees from the
University of Texas, in 1969 and 1972, respectively, and his M.B.A. from
Southern Methodist University in 1973. Mr. Barlow is a Certified Public
Accountant.

RUDY D. BELTON is a director of the Company. Mr. Belton founded Belco
Equities, Inc. and has served as its President since 1984. Mr. Belton founded
Bouldin Development, Inc. and has served as its President since 1984. Mr. Belton
also founded D.R. Management, Inc. and has served as its President since 1983.
In addition, Mr. Belton has served as Vice President of Boulder Financial Group,
Inc. since 1996, and as President of Belton Real Estate, Inc. since 1979. Belco
Equities, Inc. owns a 1% general partnership interest in, and Mr. Belton owns a
99% limited partnership interest in Ocampo Partners, Ltd. Ocampo Partners, Ltd.
owns a 50% limited partnership interest in USAC. Cable owns a 50% limited
partnership interest in USAC. Mr. Belton received his B.A. from the University
of Kansas and a J.D. from Whittier College.

MARC S. SERIFF is a director of the Company. Mr. Seriff served as Chief
Executive Officer of Eos Management, LLC from January to June 1998, and as a
director of InteliHome, which merged with Global Converging Technologies, from
August 1997 to May 1998. Mr. Seriff co-founded America Online, Inc. in 1985 and
served as a Senior Vice President until 1996. From 1974 to 1985, Mr. Seriff
served as an executive officer of several audio and data communications
companies, including GTE Corporation, Control Video Corp., Venture Technology,
Digital Music, Inc., and Telenet Communications. Mr. Seriff received his B.S. in

47
<PAGE> 49

Mathematics and Computer Science from the University of Texas at Austin in 1971
and an M.S. in Electrical Engineering and Computer Science from Massachusetts
Institute of Technology in 1974.

CHRIS B. TYSON is a director of the Company. Mr. Tyson has served as
President and Chief Executive Officer of World Satellite Network since mid-1997.
In 1994, Mr. Tyson founded TeleVentures, Inc. and currently serves as its
President and Chief Executive Officer. Mr. Tyson also founded Healthway
Interactive Corporation in 1990, and currently serves as a Director. Mr. Tyson
attended the University of Houston from 1975 to 1977.

DAVID SMITH, DIRECTOR OF SALES. Mr. Smith came to the Company in January of
1997 from Southwestern Bell Telephone ("SWBT"), where he worked from January
1996 to January 1997 to establish key MDU owner relationships in the SWBT
five-state service area. At SWBT, Mr. Smith was instrumental in securing
contracts with large apartment owners. Prior to joining SWBT, Mr. Smith served
as Director of Marketing and Customer Service at Multi-Technology Services from
April 1994 to January 1996, and as Director of Marketing and Sales with Times
Mirror Cable Television from October 1982 to April 1994. Mr. Smith attended the
University of Central Arkansas, where he majored in marketing.

JOSEPH R. JARMUSCH, DIRECTOR OF ENGINEERING & CONSTRUCTION. Mr. Jarmusch
joined the Company in January 1995. From October 1993 to December 1994, Mr.
Jarmusch was President of J. Russell Corporation Int'l, which procured and
managed telecommunications contracts throughout North America. Mr. Jarmusch was
General Manager of Progressive Communications Services from August 1988 to
September 1993. Mr. Jarmusch graduated from RETS Electronics Engineering
Institute in 1979, and obtained a Lifetime General Class Radio and Telephone
Operator License from the FCC in 1980.

ROBERT J. WALENTYNOWICZ JR., DIRECTOR OF CUSTOMER SERVICE OPERATIONS. Mr.
Walentynowicz joined the Company in April 1997. He is responsible for the
development and operations of the Company's customer service bureau. Prior to
joining the Company, Mr. Walentynowicz worked for Electronic Data Systems, Inc.
("EDS") for twelve years as an account manager, purchasing manager, project
manager, and security manager. Mr. Walentynowicz also served as the director of
service operations for Premisys Corporation, a wholly owned subsidiary of EDS.
He graduated cum laude with a B.S. in Business Administration from Strayer
College and is a Certified Protection Professional with the American Society of
Industrial Security.

TERM AND COMPENSATION OF DIRECTORS

Directors of the Company serve for a term of one year and hold office until
their successors are elected and qualified. Directors are not entitled to fees
for serving on the board of directors or on committees of the board of
directors. All directors, however, are reimbursed for their reasonable expenses
incurred in attending board of directors or committee meetings. In addition,
directors may receive options under the terms of the 1998 Stock Option Plan. To
date, each director who is not an executive officer of the Company has received
an option to purchase 20,000 shares of Common Stock at an exercise price of
$6.00 per share, half of which shares are currently exercisable and half of
which become exercisable after twelve months of service.

BOARD COMMITTEES

The functions of the Audit Committee are to make recommendations to the
board of directors regarding the selection of independent auditors, to review
the results and scope of the audit and other services provided by the
independent auditors of the Company and to evaluate the internal controls of the
Company. The members of the Audit Committee are Marc S. Seriff and Chris B.
Tyson.

The functions of the Compensation Committee are to review and approve the
compensation and benefits for the executive officers of the Company, and, if
requested by the Company's board of directors, to administer the 1998 Stock
Option Plan and 1998 Restricted Stock Plan and to make recommendations to the
board of directors regarding such matters. The members of the Compensation
Committee are Marc S. Seriff, Chris B. Tyson and Rudy D. Belton.

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<PAGE> 50

VOTING AGREEMENT

The Company, Mr. Solomon, Mr. Barlow, the LLC and Aspen OnLine Investments,
LLC have entered into a Voting Agreement respecting representation on the
Company's board of directors. Each party has agreed to vote its/his shares for
one nominee selected by Aspen OnLine Investments, LLC (until the Aspen Note is
paid in full) and one nominee selected by the LLC.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation
received by the Chief Executive Officer and by each executive officer of the
Company whose salary and bonus paid by the LLC and Cable exceeded $100,000 in
1997 ("Named Executive Officers") for services rendered to the LLC and Cable in
all capacities during the year ended December 31, 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Robert G. Solomon(1)........................................ $127,884
Chief Executive Officer
</TABLE>

- ---------------
(1) Includes $19,167 accrued but not paid in 1997.

EXECUTIVE EMPLOYMENT AGREEMENTS

The Company has entered into Employment and Noncompetition Agreements with
Mr. Solomon, its Chief Executive Officer, and with Mr. Barlow, its President and
Chief Financial Officer. Mr. Solomon's employment agreement has an initial term
of five years and provides for 1998 base compensation of $150,000. Mr. Barlow's
employment agreement has an initial term of three years and provides for 1998
base compensation of $125,000. Both Mr. Solomon and Mr. Barlow will be eligible
for performance bonuses of up to 50% of their base salaries in the event that
performance criteria set by the board of directors are met. The performance
criteria set by the board of directors to award bonuses have not yet been
determined. The agreements provide severance benefits, including payments upon a
"change in control" and indemnification. Under the agreements, a "change in
control" means the acquisition by a person or group of 35% or more of the
Company's outstanding securities or sale of all or substantially all of the
Company's assets. In the event of termination for any reason, Mr. Solomon and
Mr. Barlow have agreed not to compete with the Company for a period of twelve
months following termination. Courts may determine to enforce, not enforce or
partially enforce noncompetition agreements. In the event of termination other
than "for cause" (as defined in the agreements), all stock options and stock
awards become fully vested and exercisable. Substantially all of Mr. Solomon and
Mr. Barlow's time is spent managing the Company.

BENEFIT PLANS

1998 NON-QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLAN. The 1998
Stock Option Plan was adopted by the board of directors and approved by the
stockholders of the Company in March 1998. The board of directors supervises and
administers the plan, which provides for the grant of incentive and
non-qualified options to employees, officers, directors and consultants. Powers
exercised by the board may also be exercised by committee. 1,000,000 shares of
Common Stock have been reserved for issuance under the 1998 Stock Option Plan,
and options to purchase 495,000 shares of Common Stock have been granted at an
exercise price of $3.75 per share. Of the options granted, options for 250,000
shares have been granted to the Chief Executive Officer and options for 125,000
shares have been granted to the President and Chief Financial Officer. No
options have been exercised. Options granted under the 1998 Stock Option Plan
generally vest over six years, and the vesting for some is subject to
acceleration upon the occurrence of specified performance criteria. All options
granted become immediately exercisable upon the occurrence of certain events
including, without limitation, a merger, acquisition or change in control of the
Company.

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<PAGE> 51

1998 RESTRICTED STOCK AWARD PLAN. The 1998 Restricted Stock Plan was
adopted by the board of directors to provide incentives to attract and retain
highly competent persons as officers and key employees. The board of directors
administers the plan. Powers exercised by the board may also be exercised by
committee. Under the plan, the Company can issue up to 500,000 shares of Common
Stock to key employees designated by the board of directors, with the Company
generally having a right to repurchase a declining number of the shares at a
price of $0.001 per share if the employee terminates his or her employment
before March 10, 2001. The number of shares subject to repurchase decreases by
one-third on each of the first, second and third anniversary dates following the
date of the award; however, for accounting reasons, the board of directors has
determined to accelerate vesting of these shares upon completion of the
Offering. As of March 10, 1998, all 500,000 shares of Common Stock under the
plan had been awarded. Of the 250,000 shares of Common Stock granted to the
Chief Executive Officer, 100,000 shares are no longer subject to repurchase by
the Company, and of the 50,000 shares of Common Stock granted to the President
and Chief Financial Officer, 20,000 shares are no longer subject to repurchase
by the Company.

All shares of Common Stock issued under the 1998 Restricted Stock Plan are
also subject to repurchase by the majority member of the LLC, Paul H. Pfleger,
under a Shareholders Agreement dated March 30, 1998 by and among Paul Pfleger,
the Company and the holders of the shares under the 1998 Restricted Stock Plan,
at a price of $0.01 per share, solely upon the Company's failure to complete a
public offering of its Common Stock on or before September 30, 1998.

INDEMNIFICATION

The Certificate of Incorporation and Bylaws of the Company provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted under Delaware General Corporation Law ("Delaware Corporation Law").
As permitted by the Delaware Corporation Law, the Company's Certificate of
Incorporation provides that directors of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for any breach of
fiduciary duty as a director. As a result, the Company and its stockholders may
be unable to obtain monetary damages from a director for breach of his or her
duty of care. The Company has obtained directors' and officers' insurance.

50
<PAGE> 52

CERTAIN TRANSACTIONS

The following is a summary of certain related party transactions to which
the Company was or is a party or in which certain executive officers, directors
or stockholders of the Company had or have a direct or indirect interest. See
also Note 1 and Note 7 of Notes to Financial Statements. The Company believes
that each of the following transactions was made, and future transactions will
be made, on terms at least as fair to the Company as could have been obtained
from unaffiliated third parties.

In connection with the Interim Financing, the Company issued to Aspen
OnLine Investments, LLC (i) a $1,500,000 14% senior subordinated promissory note
(Aspen Note), maturing in March 2001, (ii) a warrant to purchase 100,000 shares
of Common Stock at a purchase price of $3.75 per share, and (iii) 25 units
consisting of 333,333.25 shares of Common Stock and Interim Notes in the
aggregate principal amount of $1,250,000, for a total purchase price of
$2,500,000. The terms of the Aspen Note give Aspen OnLine Investments, LLC the
right, at its election, to designate one representative on the Company's board
of directors, until the Aspen Note is paid in full. Aspen has advised the
Company that it does not presently intend to designate a representative.

Following the Interim Financing, the Company extended $7,200,000 from the
proceeds of the Interim Financing to fund the operations of the LLC. The
indebtedness is evidenced by a 15% senior subordinated promissory note (the
"Pre-Acquisition Note"), which will be canceled upon closing of the Asset
Acquisition.

In the Asset Acquisition, the Company will purchase substantially all of
the assets and assume certain liabilities of the LLC, and the LLC will receive
800,000 shares of Common Stock, a promissory note in the principal amount of
$3,000,000 (Asset Acquisition Note), and cancellation of all indebtedness under
the Pre-Acquisition Note. The Asset Acquisition Note will bear interest at the
rate of 10% and will be payable in three installments. The first installment
will be due the day immediately following consummation of the Offering and the
remaining two installments will be due on the first and second anniversaries of
the first payment. Following the Asset Acquisition, the LLC will have no
independent business operations. Mr. Solomon, the Company's Chief Executive
Officer, has a 3.59% interest in the LLC.

Mr. Solomon has a 7.5% interest in Highpoint Apartments, a property located
in San Antonio, Texas, which is served by the Company and which has
approximately 260 residential units. The property is owned by Highpoint
Holdings, Ltd. Mr. Solomon serves as the Vice President of Regional Holdings,
Inc., the General Partner of Highpoint Holdings, Ltd. CS Management, Inc., a
company which is 25% owned by Mr. Solomon, manages the Highpoint Apartments. CS
Management, Inc. also manages another of the Company's customers, Springwood
Apartments, located in San Antonio, Texas.

Until May 1998, the Company subleased approximately 2,630 square feet for
its corporate offices at 8307 Shoal Creek Boulevard in Austin, Texas. The
property is owned by ZAJA Holdings, Ltd. ("ZAJA"). The General Partner of ZAJA
is MAZA Holdings, Inc., a corporation 100% owned by Mr. Solomon. In addition,
Mr. Solomon is a 49% limited partner in ZAJA. The Company entered into a
sublease with CS Management, Inc., a company 25% owned by Mr. Solomon. The
sublease had a 36-month term and a rental rate of approximately $13.20 per
square foot plus triple net expenses.

Mr. Belton, one of the Company's directors, owns and operates Belco
Equities, Inc. Belco Equities, Inc. owns a 1% general partnership interest in,
and Mr. Belton owns a 99% limited partnership interest in, Ocampo Partners, Ltd.
Ocampo Partners, Ltd. owns a 50% limited partnership interest in USAC. The
Company owns a 50% limited partnership interest in USAC.

Pursuant to a Shareholders Agreement entered into on March 30, 1998 between
the Company and the holders of 500,000 shares of Common Stock granted pursuant
to the 1998 Restricted Stock Plan, such shareholders have agreed not to transfer
their shares to any person other than Paul H. Pfleger and, in addition, if the
Offering is not consummated by September 30, 1998, such shareholders have
granted Mr. Pfleger the option, but not the obligation, to purchase their shares
at $.01 per share as described in the Shareholders Agreement. Pursuant to the
Shareholders Agreement, the LLC has the right to designate one representative on
the Company's board of directors. The LLC has advised the Company that it has
not decided whether or not it will do so.

51
<PAGE> 53

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the ownership of
Common Stock as of June 1, 1998, by (i) each person known to be the beneficial
owner of more than five percent of the Common Stock, (ii) each director and
executive officer, and (iii) all executive officers and directors of the Company
as a group.

<TABLE>
<CAPTION>
NUMBER OF PERCENT BEFORE PERCENT AFTER
NAME SHARES(1) THE OFFERING THE OFFERING
---- --------- -------------- -------------
<S> <C> <C> <C>
U.S. OnLine Communications L.L.C.(2)... 800,000 37% 14%
Aspen OnLine Investments, LLC(3)....... 433,333 20% 7%
Robert G. Solomon(4)................... 250,000 12% 4%
Donald E. Barlow(4).................... 50,000 2% .9%
Rudy D. Belton(4)...................... 10,000 .5% .2%
Marc S. Seriff(4)...................... 10,000 .5% .2%
Chris B. Tyson(4)...................... 10,000 .5% .2%
All directors and executive officers as
a group (5 persons).................. 330,000 15% 6%
</TABLE>

- ---------------
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission") and includes shares
over which the indicated beneficial owner exercises voting and/or investment
power. Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days are deemed outstanding for computing the
percentage ownership of the person holding the options but are not deemed
outstanding for computing the percentage ownership of any other person.
Except as indicated, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.

(2) Paul H. Pfleger is beneficial owner of 78% of the LLC, Robert G. Solomon is
beneficial owner of 3.59% of the LLC, and the remaining 18.41% is
beneficially owned by nonaffiliated private individuals. The business
address of the LLC is 1201 Third Avenue, Suite 5400, Seattle, Washington
98101.

(3) The principal beneficial owners of Aspen OnLine Investments, LLC are Aspen
Enterprises, Ltd. (45%) and Elsa A. Prince Living Trust, Elsa A. Prince,
Trustee (37%). The business address of Aspen Enterprises, Ltd. and Aspen
OnLine Investments, LLC is 2757 44th Street, S.W., Suite 306, Grand Rapids,
Michigan 49500. Includes warrants and shares owned of record by Aspen OnLine
Investments, LLC.

(4) The business address of Messrs. Barlow, Belton, Seriff, Solomon and Tyson is
c/o U.S. OnLine Communications, Inc., 10300 Metric Blvd., Austin, Texas
78758.

52
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $.001 par value, and 1,000,000 shares of preferred stock, $.001
par value.

COMMON STOCK

The Company has 20,000,000 shares of Common Stock authorized, of which
2,166,667 were issued and outstanding prior to the Offering. 500,000 shares have
been issued to key employees of the Company, with a declining number of these
shares subject to repurchase by the Company, at a price of $0.01 per share, if
the employee terminates his or her employment with the Company before March 10,
2001.

There are 109 owners of record of Common Stock. Holders of Common Stock are
entitled to receive dividends when, as and if declared by the board of directors
from funds legally available therefor. Upon liquidation, holders of Common Stock
are entitled to share pro rata in any distribution to holders of Common Stock
following payment to creditors. Holders of shares of Common Stock have one vote
per share and have no cumulative voting or preemptive rights.

PREFERRED STOCK

The Company has 1,000,000 shares of preferred stock authorized, none of
which are issued and outstanding. The Company's Certificate of Incorporation
authorizes the board of directors to issue the preferred stock in series and to
designate the rights and preferences of each such series.

WARRANTS

The Company has granted Silicon Valley Bank and Aspen OnLine Investments,
LLC warrants to purchase 75,000 and 100,000 shares of Common Stock,
respectively, at an exercise price of $3.75 per share. The warrants are
exercisable for a period of five years.

REGISTRATION RIGHTS

Subject to lock-up agreements with Barington, the Company has granted
rights to registration under the Securities Act with respect to (i) the
Representatives' Options, (ii) 350,000 shares of Common Stock issuable upon
exercise of the Representatives' Options, (iii) 866,667 shares of Common Stock
purchased by investors in the Interim Financing, (iv) 800,000 shares of Common
Stock issued to the LLC in the Asset Acquisition, and (v) 175,000 shares
issuable upon exercise of the Warrants (collectively, the "Registrable
Securities"). Subject to specified conditions and limitations, the registration
rights generally grant to the holders of Registrable Securities "piggyback"
registration rights. In addition, the Representatives and the holders of the
Warrants have "demand" registration rights with respect to the shares issuable
upon exercise of the Representatives' Options and Warrants.

LOCK-UP AGREEMENTS

Pursuant to the terms of the Underwriting Agreement, for a period of two
years after consummation of the Offering, the Company may not sell or otherwise
dispose of any shares of Common Stock without the prior written consent of
Barington, except in connection with the sale of: (i) 525,000 shares of Common
Stock to cover the Underwriters' over-allotment option; (ii) the
Representatives' Options; (iii) 350,000 shares of Common Stock underlying the
Representatives' Options; (iv) 1,000,000 shares of Common Stock that may be
issued pursuant to the 1998 Stock Option Plan, of which options to purchase
495,000 shares of Common Stock have been granted; and (v) securities in
connection with mergers approved by a majority of the independent directors of
the Company. In addition, all of the 2,166,667 shares of Common Stock
outstanding prior to the Offering and all of the shares of Common Stock issuable
upon exercise of the Warrants are subject to two-year lock-up agreements with
Barington, except that any stockholder subject to such an agreement may sell
shares of Common Stock commencing 12 months after consummation of the Offering
in the event that the last trading price for the Common Stock has been at least
200% of the price in the Offering for a period of

53
<PAGE> 55

20 consecutive trading days ending within five days of the date of such sale,
and such sale is completed at a price in excess of 200% of the price in the
Offering. Barington has no plans, arrangements or understandings to modify,
shorten or waive the lock-up agreements.

TRANSFER AGENT AND REGISTRAR

Continental Stock Transfer & Trust Company, New York, New York, will act as
transfer agent and registrar for the Common Stock.

DELAWARE ANTI-TAKEOVER LAW

Section 203 of the Delaware General Corporation Law. The Company is subject
to the provisions of Section 203 of the Delaware Corporation Law ("Section 203")
regulating corporate takeovers. Section 203 prevents certain Delaware
corporations, including those whose securities are quoted on the Nasdaq, from
engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of a corporation's assets) with any
"interested stockholder" (a stockholder who acquired 15% or more of a
corporation's outstanding voting stock without the prior approval of a
corporation's board of directors) for three years following the date that such
stockholder became an "interested stockholder." A Delaware corporation may "opt
out" of Section 203 with an express provision in its original certificate of
incorporation, or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a majority
of the outstanding voting shares. The Company has not "opted out" of the
application of Section 203.

Charter Provisions with Anti-Takeover Effects. The Company's Certificate of
Incorporation contains provisions that may have the effect of discouraging
certain transactions involving an actual or threatened change in control of the
Company. The Certificate of Incorporation grants to the board of directors the
authority to issue shares of preferred stock in one or more series without
stockholder approval. The ability to issue such preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to commence such an acquisition.

54
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have 5,666,667 shares
of Common Stock outstanding (assuming no exercise of outstanding warrants or
stock options). Of these shares, the 3,500,000 shares sold in the Offering will
be freely tradeable without restriction unless they are held by "affiliates" of
the Company, as that term is defined in Rule 144 promulgated under the
Securities Act. The remaining 2,166,667 shares will be "restricted securities"
as defined in Rule 144 ("Restricted Shares"). All of the Restricted Shares are
subject to lock-up agreements with Barington. As a result of the lock-up
agreements and the provisions of Rule 144 generally, including Rule 144(k), all
currently outstanding shares will be available for sale in the public market
upon expiration of the lock-up agreements two years after the date of this
Prospectus. Barington has advised the Company that it has no specific policy
regarding early release of lock-ups generally, but that Barington has no current
or future plans, proposals, arrangements or understandings to modify, shorten or
waive the lock-up arrangements. See "Underwriting."

In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year is entitled to sell, within any three-month period, a
number of such shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the common stock and (ii) the average weekly trading
volume during the four calendar weeks preceding such sale. Sales under Rule 144
are also currently subject to certain requirements as to the manner of sale,
notice and availability of current public information about the Company. Rule
144 also provides that affiliates who own securities that are not "restricted
securities" must nonetheless comply with the same restrictions applicable
thereunder to "restricted securities," as if such securities were "restricted
securities," with the exception of the one-year holding period requirement. A
person who has not been an affiliate of the Company at any time within three
months prior to the sale and has beneficially owned the "restricted securities"
for at least two years is entitled to sell such shares under Rule 144(k) without
regard to the volume limitations or the other general requirements described
above.

An employee, officer or director of, or consultant to, the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 promulgated under the Securities Act, which permits
affiliates and non-affiliates to sell their Rule 701 shares without having to
comply with the holding period restrictions of Rule 144, in each case commencing
90 days after the date of this Prospectus. In addition, non-affiliates may sell
Rule 701 shares without complying with the public information, volume and notice
provisions of Rule 144.

The Company intends to file with the Commission a registration statement on
Form S-8 under the Securities Act to register the issuance of Common Stock
reserved under the 1998 Stock Option Plan and 1998 Restricted Stock Plan, thus
permitting the resale of shares issued under such plans by non-affiliates in the
public market without restriction under the Securities Act.

Any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of Common Stock offered hereby. See "Risk
Factors--Effect of Future Sales of Common Stock."

55
<PAGE> 57

UNDERWRITING

Subject to the terms and conditions set forth in the underwriting agreement
("Underwriting Agreement"), the form of which has been filed as an exhibit to
the registration statement of which this Prospectus forms a part, Barington,
Cruttenden and each of the underwriters for whom Barington and Cruttenden are
acting as representatives have severally agreed to purchase from the Company the
aggregate number of shares of Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Barington Capital Group, L.P................................
Cruttenden Roth Incorporated................................

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

The Common Stock is being sold on a firm commitment basis. The Underwriting
Agreement provides, however, that the obligations of the Underwriters are
subject to certain conditions precedent. The Representatives and the
Underwriters are committed to purchase all the Common Stock offered hereby if
any is purchased.

The Representatives have advised the Company that they propose to offer the
shares of Common Stock offered hereby to the public at the initial offering
price set forth on the cover page of this Prospectus. The Underwriters may allow
to certain dealers, who are members of the National Association of Securities
Dealers (the "NASD"), concessions not in excess of $ per share of Common
Stock, of which not in excess of $ may be reallowed to other dealers
who are members of the NASD. After consummation of the Offering, the offering
price, the concessions and the reallowance may be changed. The Representatives
will not make sales to any discretionary accounts over which they have
authority.

The Company has granted an over-allotment option to the Underwriters,
exercisable during the 45-day period after consummation of the Offering, to
purchase up to an aggregate of 525,000 additional shares of Common Stock at the
initial offering price, less underwriting discounts and commissions. The
Underwriters may exercise such option only for the purpose of covering any
over-allotments made in connection with the sale of the Common Stock offered
hereby.

The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.

The Company has agreed to pay the Representatives a non-accountable expense
allowance of three percent of the aggregate offering price of the shares of
Common Stock offered hereby (including any shares of Common Stock purchased
pursuant to the Underwriters' over-allotment option), of which $55,000 has been
paid to date.

The Company has also agreed to sell to the Representatives, or their
designees, the Representatives' Options to purchase 350,000 shares at a price of
$.001 per option. The Representatives' Options will be exercisable for a period
of five years, commencing on consummation of the Offering, at an initial per
share exercise price equal to 165% of the offering price. Neither the
Representatives' Options nor the shares of Common Stock underlying the
Representatives' Options may be transferred, assigned or hypothecated, in whole
or in part, for one year from the effective date of the registration statement
of which this Prospectus forms a part, except to any successor, officer or
partner of a Representative (or to officers or partners of any such successor or
partner), any other Underwriter or member of the selling group which
participated in the Offering, any purchaser of substantially all of the assets
of a Representative or otherwise by operation of law. The Representatives'
Options may be exercised on one or a number of occasions as to all or a portion
of the shares covered by the option, and contain certain registration rights and
anti-dilution provisions for appropriate

56
<PAGE> 58

adjustment of the exercise price and number of shares that may be purchased upon
exercise upon the occurrence of certain events.

The Company also has agreed, for a period of three years following
consummation of the Offering, to use its best efforts (including the
solicitation of proxies) to elect two designees of Barington to the board of
directors of the Company, if Barington so chooses to nominate such designees.
Barington has advised the Company that it may appoint one or more board members
after the effective date. The Company has also entered into a consulting
agreement with Barington whereby Barington will provide business and financial
advice to the Company, including advice regarding potential mergers,
acquisitions and financings. Under the consulting agreement, if the Company
consummates a transaction within two years of the second anniversary of the
consulting agreement with a party introduced to the Company by Barington prior
to the date of the consulting agreement, Barington is entitled to a fee equal to
10% of the gross proceeds of the transaction. A transaction shall mean any
transaction in which the Company or any subsidiary or affiliate of the Company
may be involved including, but not limited to, mergers, acquisitions, joint
ventures, sales of securities of the Company or its subsidiaries or affiliates
or sales of all or substantially all of the assets of the Company or any
subsidiary or affiliate of the Company, sales or other issuances of any
securities in connection with an acquisition or disposition or other business
combination transaction. The Company has also agreed to indemnify Barington in
connection with its consulting activities on behalf of the Company.

Pursuant to agreements between the Company, the existing stockholders and
Barington, the Company and all of the existing stockholders of the Company as of
the effective date of the Registration Statement have agreed not to offer,
issue, sell, contract to sell, grant any option for or otherwise dispose of any
securities of the Company for a period of two years from the consummation of the
Offering without the prior written consent of Barington. Notwithstanding these
lock-up agreements, any stockholder subject to such agreement may sell shares of
Common Stock commencing 12 months after the consummation of the Offering in the
event the last sale price for the Common Stock on its principal exchange has
been at least 200% of the initial public offering price for a period of 20
consecutive trading days ending within five days of the date of such sale, and
such sale is completed at a price in excess of 200% of the initial public
offering price.

The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the detailed
provisions of the Underwriting Agreement.

The Underwriters may engage in certain transactions which may stabilize,
maintain or otherwise affect the price of the Common Stock. Such transactions
may include over-allotments of Common Stock and purchases of the Common Stock.

Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the offering price of the shares of Common Stock offered
and sold in the Offering has been determined by arm's-length negotiations
between the Company and the Representatives and does not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition or other established criteria of value. Factors considered
in determining such price include an assessment of the Company's recent
financial results and current financial condition, future prospects of the
Company, the qualifications of the Company's management and other relevant
factors.

LEGAL MATTERS

The validity of the shares of Common Stock being sold in the Offering is
being passed upon for the Company by Graham & James LLP/Riddell Williams P.S.,
Seattle, Washington. Certain legal matters in connection with the Offering will
be passed upon for the Underwriters by Kramer, Levin, Naftalis & Frankel, New
York, New York.

57
<PAGE> 59

EXPERTS

The balance sheet of U.S. OnLine Communications, Inc. at March 31, 1998,
the consolidated balance sheet of U.S. OnLine Communications L.L.C. at December
31, 1997, and the related consolidated statements of operations, changes in
members' deficit and cash flows for the years ended December 31, 1997 and 1996,
and the consolidated statements of operations, changes in members' equity
(deficit) and cash flows of U.S. On-Line Cable, L.L.C. for the year ended
December 31, 1996, included in this Prospectus, have been included herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed a registration statement on Form SB-2, together with
all exhibits and amendments thereto ("Registration Statement"), of which this
Prospectus ("Prospectus") is a part, under the Securities Act with the
Commission with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain portions of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus concerning
documents, while complete in material respects, are nonetheless summaries.
Reference is made to each exhibit for a full description of each such document,
and in each case summary descriptions are qualified by reference to complete
exhibits. For further information with respect to the Company and its Common
Stock, reference is made to the Registration Statement and the exhibits and
schedules thereto, which may be inspected without charge at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located in New York (Seven World Trade Center, 13th Floor, New York,
New York 10048) and Chicago (Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661). The Commission also maintains a Web site
at http://www.sec.gov at which filings may be obtained. Copies of these
documents may be obtained at prescribed rates from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of these documents are also available for
inspection at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.

58
<PAGE> 60

GLOSSARY OF INDUSTRY TERMS

CATV.......................... Cable television.

CLEC.......................... Competitive Local Exchange Carrier: A company
that provides its customers with an
alternative to the local telephone company for
local and interstate transport of private
lines, special access and switched access
telecommunications services, as well as
switched local telecommunications services.
CLECs are sometimes also referred to as
"co-carriers."

DBS........................... Direct Broadcast Satellite: A facility that
retransmits video programming via satellite
directly to a subscriber's home.

DXC........................... A scaleable central office telephone switch
designed and manufactured by Digital
Telecommunications, Inc.

FAA........................... Federal Aviation Administration.

FCC........................... Federal Communications Commission: The federal
agency that oversees the implementation and
enforcement of federal communications policy,
including the 1992 Cable Act and the 1996 Act.
Cable-related rules are generally issued and
enforced by two divisions within the FCC: the
cable services bureau (which contains a
competition, cable rates and programming
division) and the office of plans and policy.

HEADEND....................... The point(s) of a cable system where various
antennae are located to receive off-air,
satellite and other signals distributed to
subscribers. The location of the principal
headend is used to determine the applicability
of must-carry rules to the cable system. The
principal headend designated by a cable
operator must be based on whether:

- it serves the majority of a system's
population;
- it contains the majority of the system's
population;
- it contains the majority of the system's
signal processing equipment; or
- it is the closest headend to the cable
system's geographic center.

If a cable system has only one headend, that
is its principal headend.

INTRALATA..................... Communication within a Local Access Transport
Area.

ISDN.......................... Integrated services digital network.

IXC........................... Interexchange Carrier.

LEC........................... Local Exchange Carrier: The local or regional
telephone company that owns and operates lines
to customer locations and switches.

LIM........................... Line Interface Modules.

MDU........................... Multiple Dwelling Unit: A housing structure
containing several units. For purposes of the
1992 Cable Act, each unit is treated as a
separate household.

MMDS.......................... Multichannel multipoint distribution service:
an alternative video provider that analogizes
to numerous microwave broadcast stations
transmitting from a central location.

59
<PAGE> 61

MSO........................... Multiple System Operator: A cable operator
that owns or operates more than one cable
system.

MUST-CARRY.................... Provisions of the 1996 Communications Act that
require cable operators to carry certain local
commercial and noncommercial, educational
television broadcast stations on their
systems, as well as allow broadcasters to
demand advance permission and, in some cases,
compensation, from multichannel video
programming distributors for the ability to
carry their programming.

MVPD.......................... Multichannel video programming distributors.

PBX........................... Private (automatic) branch telephone exchange
system providing telephone switching in an
office or building.

PUC........................... Public Utility Commission.

RBOC.......................... Regional Bell Operating Company: The acronym
used for local telephone companies created in
1984 as part of the breakup of AT&T. The six
RBOCs are Ameritech, Bell Atlantic, Bell
South, Pacific Telesis Group, Southwestern
Bell Telephone and U.S. West Communications.

RMTS.......................... Residential Multi-Tenant Services: Services
provided to an MDU by a private operator.
Services include, but are not limited to,
cable, telephone, intrusion alarm, Internet
access and utility metering.

ROE CONTRACTS................. Right of Entry Contracts: Agreements between
property owners and RMTS providers which
govern the terms under which the RMTS
providers will offer their services to
residents of the MDUs.

SMATV......................... Satellite Master Antenna Television System.

STS........................... Shared Tenant Service: The provision of local
telephone services to multiple customers
located in the same building or group of
buildings.

T-1........................... High-speed leased line used for the
transmission of voice and data.

18 GHZ SYSTEMS................ A wireless method of transmitting or
retransmitting video and audio signals from a
headend to an MDU.

WAN........................... Wide area network: Remote computer
communications system that allows file sharing
among geographically distributed workgroups.

60
<PAGE> 62

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. ONLINE COMMUNICATIONS, INC.
Report of Independent Accountants........................... F-2
Balance Sheet as of March 31, 1998.......................... F-3
Notes to the Financial Statement............................ F-4

U.S. ONLINE COMMUNICATIONS L.L.C.
Report of Independent Accountants........................... F-9
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998 (unaudited)................................ F-10
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and for the three months ended
March 31, 1998 (unaudited) and 1997 (unaudited)........... F-11
Consolidated Statements of Changes in Members' Deficit for
the years ended December 31, 1997 and 1996 and for the
three months ended March 31, 1998 (unaudited)............. F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 and for the three months ended
March 31, 1998 (unaudited) and 1997 (unaudited)........... F-13
Notes to Consolidated Financial Statements.................. F-14

U.S. ON-LINE CABLE, L.L.C.
Report of Independent Accountants........................... F-24
Consolidated Statement of Operations for the year ended
December 31, 1996......................................... F-25
Consolidated Statement of Changes in Members' Equity
(Deficit) for the year ended December 31, 1996............ F-26
Consolidated Statement of Cash Flows for the year ended
December 31, 1996......................................... F-27
Notes to Consolidated Financial Statements.................. F-28
</TABLE>

F-1
<PAGE> 63

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
U.S. ONLINE COMMUNICATIONS, INC.

We have audited the accompanying balance sheet of U.S. OnLine Communications,
Inc. (the "Company") as of March 31, 1998. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 balance sheet referred to above presents fairly, in all
material respects, the financial position of U.S. OnLine Communications, Inc. as
of March 31, 1998 in conformity with generally accepted accounting principles.

The accompanying financial statement has been prepared assuming that the Company
will continue as a going concern. As discussed in Notes 1 and 5 to the financial
statement, the Company has agreed to acquire substantially all of the assets and
assume certain liabilities of U.S. OnLine Communications L.L.C. This entity has
incurred losses and negative cash flows from operations and has negative working
capital, which raise substantial doubt about the Company's ability to continue
as a going concern following the acquisition. Management's plans in regard to
these matters are also described in the Notes to the financial statement. The
financial statement does not include any adjustments that might result from the
outcome of this uncertainty.

COOPERS & LYBRAND L.L.P.

Austin, Texas
June 23, 1998

F-2
<PAGE> 64

U.S. ONLINE COMMUNICATIONS, INC.

BALANCE SHEET
MARCH 31, 1998

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $5,648,500
----------
Total current assets.............................. 5,648,500
Deferred loan costs, net.................................... 1,419,214
----------
Total assets...................................... $7,067,714
==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 292,641
Accrued expenses.......................................... 255,725
Convertible shareholder notes payable..................... 1,556,667
----------
Total current liabilities......................... 2,105,033
Noncurrent liabilities:
Note payable.............................................. 1,500,000
----------
Total liabilities................................. 3,605,033
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized; no shares issued or outstanding............ --
Common stock, $.001 par value; 20,000,000 shares
authorized; 1,122,667 shares issued and outstanding.... 1,123
Additional paid-in capital................................ 3,461,558
----------
Total stockholders' equity........................ 3,462,681
----------
Total liabilities and stockholders' equity........ $7,067,714
==========
</TABLE>

The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 65

U.S. ONLINE COMMUNICATIONS, INC.

NOTES TO THE FINANCIAL STATEMENT

1. FORMATION AND BUSINESS DESCRIPTION:

U.S. OnLine Communications, Inc. (the "Company"), a Delaware corporation,
was incorporated on March 5, 1998 in anticipation of an initial public offering
of the Company's common stock (the "Offering"). Prior to consummation of the
Offering, the Company will acquire substantially all of the assets and certain
of the liabilities of U.S. OnLine Communications L.L.C. (the "LLC"), a
Washington limited liability company, and its subsidiaries (the "Asset
Acquisition").

Following the Asset Acquisition, the Company will market and provide cable
television and enhanced local and long distance telecommunications services,
collectively referred to as residential multi-tenant services to multifamily
dwelling units ("MDUs") such as apartment complexes and other concentrated
residential sites. The Company will target demographically favorable MDUs
clustered in growing geographic regions and serve MDUs located in Austin, San
Antonio, Dallas-Fort Worth, Denver and the Washington, D.C. metropolitan area.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH EQUIVALENTS

The Company considers all highly liquid investments and time deposits with
an original maturity at time of purchase of three months or less to be cash
equivalents.

USE OF ESTIMATES

The preparation of the financial statement 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 as of the date of the financial
statement. Actual results could differ from those estimates.

CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of cash and cash equivalents. From time to
time, the Company's demand deposit accounts and money market accounts exceed
existing federally insured limits. The Company has not experienced any losses on
these accounts.

DEFERRED LOAN COSTS, NET

Deferred loan costs, net, at March 31, 1998, consists of loan costs
amounting to $308,000 (the fair value of a warrant issued to a commercial bank
determined using the Black-Scholes model, see Note 7), which will be amortized
using the interest method over the term of the related loan after assumption of
the debt from the LLC as part of the Asset Acquisition and $1,111,213 of debt
issuance costs associated with 15% senior subordinated promissory notes and the
14% subordinated promissory note (see Note 3), which have been recognized as
original issue discount and are being amortized using the interest method over
the lives of the related indebtedness.

YEAR 2000

F-4
<PAGE> 66
U.S. ONLINE COMMUNICATIONS, INC.

NOTES TO THE FINANCIAL STATEMENT (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
information systems changes necessary to address year 2000 issues by the end of
fiscal 1998. Moreover, the Company could be adversely impacted by year 2000
issues faced by major distributors, suppliers and financial service
organizations with which the Company interacts.

3. INTERIM FINANCING:

On March 31, 1998, the Company closed on the sale of 622,667 shares of
common stock at $3.75 per share and the placement of $2,335,000 of 15%
Convertible Senior Subordinated Promissory Notes (the "Interim Notes"), for
total proceeds of $4,670,000, with associated issuance costs of $739,641. The
Company has recorded an original issue discount of $778,333 for the difference
between the deemed fair value of the Common Stock and $3.75 share price, which
will be amortized using the interest method over the life of the related
indebtedness. Subsequent to March 31, 1998, the Company closed on the sale of
244,000 additional shares of common stock at $3.75 per share and the placement
of $915,000 of Interim Notes, for total proceeds of $1,830,000, reduced by
issuance costs of $255,634 and an original issue discount of $305,000
(collectively, the "Interim Financing").

The Interim Notes mature on the earlier of (i) March 29, 1999, (ii) the day
after an initial public offering of the Company's common shares, or (iii) the
date of closing of a sale of the Company's common stock with gross proceeds of
at least 125% of the principal balance outstanding of the Interim Notes.
Interest on the Interim Notes is payable quarterly commencing on July 1, 1998.
If the Company fails to consummate an initial public offering of its equity
securities within twelve months from the date of issuance of the Interim Notes,
the holders have the right to convert the Interim Notes into 75% of the common
stock of the Company on a fully-diluted basis, according to each holder's pro
rata ownership. The Interim Notes will be subordinated to bank debt following
the Asset Acquisition, and will rank pari passu with the $3,000,000 10%
promissory note (the "Asset Acquisition Note") owed to the LLC as part of the
Asset Acquisition. If the Company fails to make principal payments when due, the
holders of the Interim Notes may convert their holdings into common stock of the
Company such that the holders of the Interim Notes will have at least 75%, on a
fully diluted basis, of the total voting and economic control in the Company.

In connection with the Interim Financing, the Company issued to Aspen
OnLine Investments, L.L.C. ("Aspen") (i) a $1,500,000 14% subordinated
promissory note (the "Aspen Note"), maturing in March 2001, and (ii) a warrant
to purchase 100,000 shares of common stock at a purchase price of $3.75 per
share, which the Company has valued at $410,667. Total issuance costs, including
the warrant value, for the Aspen Note aggregate $741,392. Interest is payable
quarterly beginning July 1, 1998. The terms of the Aspen Note give Aspen the
right, at its election, to designate two representatives on the Company's board
of directors prior to the consummation of the Offering, and one representative
after consummation of the Offering, until the Aspen Note is paid in full.

4. LOAN COMMITMENT TO THE LLC:

Between the date of the closing of the Interim Financing and the effective
date of the Offering, the Company agreed to loan up to $7,200,000 of the
proceeds of the Interim Financing to fund the operations of the LLC, evidenced
by a 15% convertible promissory note (the "Pre-Acquisition Note") maturing on
March 30, 1999. Borrowings under the agreement are convertible at the holder's
option at any time while an Event of Default (as defined in the promissory note)
has occurred and is continuing into interests in the LLC such that the Company
will have at least 75%, on a fully diluted basis, of the total voting and
economic control in the LLC. The Pre-Acquisition Note will be canceled upon
closing of the Asset Acquisition. Through May 1998, approximately $7.2 million
has been advanced to the LLC.

F-5
<PAGE> 67
U.S. ONLINE COMMUNICATIONS, INC.

NOTES TO THE FINANCIAL STATEMENT (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

The Company has agreed to purchase substantially all of the assets and to
assume certain liabilities of the LLC pursuant to an asset acquisition agreement
dated March 27, 1998, in exchange for 800,000 shares of the Company's common
stock (valued at $4,000,000), the Asset Acquisition Note (principal amount of
$3,000,000), and cancellation of all indebtedness under the Pre-Acquisition
Note. The Asset Acquisition Note bears interest at the rate of 10% per annum and
is payable in three equal installments. The first installment is to be paid the
day after consummation of the Offering and the remaining two installments are to
be paid on the first and second anniversaries of the first payment. Following
the Asset Acquisition, the LLC will have no independent business operations. The
acquisition will be accounted for at historical cost in a manner similar to a
pooling of interests, consistent with Interpretation No. 39 of AFB16.

The Company will assume the LLC's operating leases for office space, roof
rentals, head ends and transmission facilities.

6. RELATED PARTY TRANSACTIONS:

During March 1998, the Company entered into employment and noncompetition
agreements with certain officers of the Company. The Chief Executive Officer's
employment agreement has an initial term of five years and provides for 1998
base compensation of $150,000. The President and Chief Financial Officer's
employment agreement has an initial term of three years and provides for 1998
base compensation of $125,000. These officers will be eligible for performance
bonuses of up to 50% of their base salary in the event that performance criteria
set by the board of directors are met. The performance criteria set by the board
of directors to award bonuses have not yet been determined. The agreements
provide severance benefits, including payments upon a "change in control" and
indemnification. Under the agreements, a "change in control" means the
acquisition by a person or group of 35% or more of the Company's outstanding
securities or sale of all or substantially all of the Company's assets. In the
event of termination for any reason, these officers have agreed not to compete
with the Company for a period of twelve months following termination. Courts may
determine to enforce, not enforce or partially enforce noncompetition
agreements. In the event of termination other than "for cause" (as defined in
the agreements), all stock options and stock awards become fully vested and
exercisable. Substantially all of these officers' time is spent managing the
Company.

The Company's Chief Executive Officer has beneficial ownership interest in
two multiple dwelling units served by the LLC. The properties are owned by
separate limited partnerships; the Company's Chief Executive Officer is an
officer of the general partner of the partnerships and is a limited partner of
one of the partnerships. Both properties are managed by a company partially
owned by the Company's Chief Executive Officer.

The LLC subleased space for its corporate offices in Austin, Texas. The
property was owned by a limited partnership, the general partner of which is a
corporation owned by the Company's Chief Executive Officer. The Company's Chief
Executive Officer is also a limited partner in the partnership. The LLC
subleased a portion of the space from a company partially owned by the Company's
Chief Executive Officer.

7. CAPITAL STOCK:

The authorized capital stock of the Company consists of 20,000,000 shares
of common stock, and 1,000,000 shares of preferred stock, $.001 par value. At
March 31, 1998, there are no shares of preferred stock outstanding.

1998 RESTRICTED STOCK AWARD PLAN

The 1998 Restricted Stock Award Plan (the "1998 Restricted Stock Plan") was
adopted on March 10, 1998 by the board of directors of the Company to provide
incentives to attract and retain highly competent
F-6
<PAGE> 68
U.S. ONLINE COMMUNICATIONS, INC.

NOTES TO THE FINANCIAL STATEMENT (CONTINUED)

7. CAPITAL STOCK: (CONTINUED)
persons as officers and key employees. The board of directors administers the
plan. Powers exercised by the board may also be exercised by committee. Under
the plan, the Company can issue up to 500,000 shares of common stock to key
employees designated by the board of directors, with the Company generally
having a right to repurchase a declining number of the shares at a price of
$0.001 per share if the employee terminates his or her employment before March
10, 2001. Generally, common stock issued under the 1998 Restricted Stock Plan
vests ratably over three years, with one-third of any shares granted vesting on
each of the first, second and third anniversary dates following the date of the
award; however, for accounting reasons, the Board of Directors has determined to
accelerate vesting of these shares upon completion of an initial public offering
of the Company's common stock. The number of shares subject to repurchase
decreases by one-third on each of the first, second and third anniversary dates
following the date of the award. During the restricted period, shares subject to
restriction may not be sold, exchanged, transferred, pledged, hypothecated or
otherwise disposed of, unless they have been offered to the Company for
repurchase at the original issuance price ($.001). At March 10, 1998, all
500,000 shares had been awarded under the 1998 Restricted Stock Plan, of which
120,000 shares were fully vested at the date of award and are no longer subject
to repurchase by the Company. All shares of Common Stock issued under the 1998
Restricted Stock Plan are also subject to repurchase by the majority member of
the LLC under a Shareholders Agreement dated March 30, 1998 among the majority
member of the LLC, the Company, and the holders of the restricted shares, at a
price of $0.01 per share, solely upon the Company's failure to complete a public
offering of its common stock on or before September 30, 1998.

The 1998 Restricted Stock Plan is treated as a variable plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Since a measurement date had not occurred on the date of the award,
the Company will record a charge for $3,749,500 at effective date of the
Offering, if applicable.

1998 NON-QUALIFIED STOCK OPTION AND INCENTIVE STOCK OPTION PLAN

Under the Company's 1998 Non-Qualified Stock Option and Incentive Stock
Option Plan (the "1998 Stock Option Plan"), which was adopted in March 1998, up
to 1,000,000 options may be granted for the purchase of common stock, pursuant
to actions by the board of directors, to eligible participants. Options granted
are either incentive stock options or nonstatutory stock options and are
exercisable within the times or upon the events determined by the board of
directors as specified in each option agreement. Incentive stock options granted
under the 1998 Stock Option Plan are at prices not less than 100% of the fair
value at the date of grant, as determined by the board of directors.
Nonstatutory options granted under the 1998 Stock Option Plan are at prices not
less than 85% of the fair value on the date of the grant, as determined by the
board of directors. Incentive stock options granted to a 10% stockholder shall
not be less than 110% of the fair value at the date of grant. Options granted
generally vest over a period of six years, and the vesting for some is subject
to acceleration upon the occurrence of specified performance criteria. All
options granted become immediately exercisable upon the occurrence of certain
events including, without limitation, a merger, acquisition or change in
control. The term of the 1998 Stock Option Plan is ten years.

The Company has reserved 1,000,000 shares of common stock for issuance
under the 1998 Stock Option Plan. Options to purchase 495,000 shares of common
stock were granted at an exercise price of $3.75 per share on April 1, 1998. The
Company will apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for the
1998 Stock Option Plan. Accordingly, the Company will record $618,750 of
deferred compensation for the difference between the deemed fair value for
accounting purposes and the option price as determined by the Company at the
date of grant. This amount will be presented as a reduction of stockholders'
equity and will be amortized over the 4 to 8 year vesting period of the related
stock options. If deferred compensation cost for the April 1, 1998 grants

F-7
<PAGE> 69
U.S. ONLINE COMMUNICATIONS, INC.

NOTES TO THE FINANCIAL STATEMENT (CONTINUED)

7. CAPITAL STOCK: (CONTINUED)

had been determined consistent with the provisions of Statement of Financial
Accounting Standards No. 123, the amount deferred would have been $2,321,550.

A summary of the status of the Company's fixed stock option plan for grants
subsequent to March 31, 1998 is presented below:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
------------- -------- ----------------
<S> <C> <C>
Granted..................................................... 495,000 $ 3.75
Exercised................................................... -- --
Forfeited................................................... -- --
-------- ------
Outstanding and exercisable................................. 495,000
Weighted-average fair value of options granted during the
period.................................................... $ 5.00
</TABLE>

The following table summarizes information about fixed stock options
outstanding:

<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------ -----------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
--------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$3.75.................................................... 495,000 10 yrs. 495,000
-------- ------- --------
Number outstanding....................................... 495,000 495,000
======== ========
</TABLE>

WARRANTS

In connection with a lending arrangement between the LLC and a commercial
bank, the Company granted the lender a warrant on March 30, 1998 to purchase an
aggregate of 75,000 shares of the Company's common stock at an exercise price of
$3.75 per share. The warrant is exercisable for a period of five years. Deferred
loan costs of $308,000, approximating the fair value of the warrant determined
using the Black-Scholes model, will be recorded as an asset pending the Asset
Acquisition, including the Company's assumption of the bank debt from the LLC.

F-8
<PAGE> 70

REPORT OF INDEPENDENT ACCOUNTANTS

To the Members,
U.S. ONLINE COMMUNICATIONS L.L.C.

We have audited the accompanying consolidated balance sheet of U.S. OnLine
Communications L.L.C. and Subsidiaries (the "LLC") as of December 31, 1997 and
the related consolidated statements of operations, changes in members' deficit
and cash flows for the years ended December 31, 1997 and 1996. These
consolidated financial statements are the responsibility of the LLC's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U.S.
OnLine Communications L.L.C. and Subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the LLC will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the LLC has incurred losses and negative cash
flows from operations and has negative working capital, which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

COOPERS & LYBRAND L.L.P.

Austin, Texas
April 22, 1998

F-9
<PAGE> 71

U.S. ONLINE COMMUNICATIONS L.L.C.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 79,122 $ 949,471
Subscriber receivables -- net of allowance for doubtful
accounts of $39,143 and $29,072........................ 458,221 457,911
Receivable from U.S. OnLine Communications, Inc........... 208,834 --
Receivable from SP Investments............................ -- 17,439
Supply inventory.......................................... 211,794 223,961
Other current assets...................................... 62,992 65,994
------------ ------------
Total current assets.............................. 1,020,963 1,714,776
Property and equipment, net................................. 8,823,382 9,502,270
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $530,172 and $421,796...... 3,804,852 3,913,228
Deferred loan and organization costs, net of accumulated
amortization of $395,423 and $322,201..................... 852,431 890,818
Other assets................................................ 440,525 444,237
------------ ------------
Total assets...................................... $ 14,942,153 $ 16,465,329
============ ============

LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Note payable to bank...................................... $ 7,126,830 $ 7,126,830
Accounts payable.......................................... 1,928,434 1,595,643
Accrued expenses.......................................... 285,721 202,417
Accrued interest.......................................... 75,921 --
Deferred revenue.......................................... 326,667 291,605
------------ ------------
Total current liabilities......................... 9,743,573 9,216,495
------------ ------------
Noncurrent liabilities:
Other noncurrent liabilities.............................. 2,066,529 2,279,623
Payable to related parties................................ 18,873,393 18,423,069
------------ ------------
Total noncurrent liabilities...................... 20,939,922 20,702,692
------------ ------------
Total liabilities................................. 30,683,495 29,919,187
------------ ------------
Commitments and contingencies (Note 8)
Minority interest -- USAC (Note 1).......................... 255,444 259,124
Members' deficit:
Contributed capital....................................... 1,196,232 1,196,232
Accumulated deficit....................................... (17,193,018) (14,909,214)
------------ ------------
Total members' deficit............................ (15,996,786) (13,712,982)
------------ ------------
Total liabilities and members' deficit............ $ 14,942,153 $ 16,465,329
============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE> 72

U.S. ONLINE COMMUNICATIONS L.L.C.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service revenue:
Telephony revenue........................... $ 386,287 $ 67,498 $ 705,193 $ 57,010
Cable revenue............................... 686,933 -- 1,888,280 --
Other revenue............................... 35,851 159 127,820 1,397
----------- ----------- ----------- -----------
Total revenue..................... 1,109,071 67,657 2,721,293 58,407
----------- ----------- ----------- -----------
Cost of service:
Cost of service -- telephony................ 203,867 34,994 365,362 40,749
Cost of service -- cable.................... 231,603 -- 592,722 --
----------- ----------- ----------- -----------
Total cost of service............. 435,470 34,994 958,084 40,749
----------- ----------- ----------- -----------
Gross profit (loss)............... 673,601 32,663 1,763,209 17,658
----------- ----------- ----------- -----------
Operating expenses:
Customer support.......................... 130,579 11,218 426,471 53,331
Other operating expenses.................. 889,398 117,723 2,519,825 292,564
Sales and marketing....................... 204,130 72,112 838,525 181,888
General and administrative................ 602,202 432,739 2,865,608 1,983,862
Depreciation and amortization............. 455,315 174,952 1,343,543 209,711
----------- ----------- ----------- -----------
Total operating expenses.......... 2,281,624 808,744 7,993,972 2,721,356
----------- ----------- ----------- -----------
Loss from operations........................ (1,608,023) (776,081) (6,230,763) (2,703,698)
----------- ----------- ----------- -----------
Other income (expense):
Interest income........................... 13,805 177,096 133,177 355,365
Interest expense.......................... (644,061) (481,990) (3,104,809) (1,111,156)
Other income (expense).................... (32,582) (1,329) (111,712) --
----------- ----------- ----------- -----------
Total other income (expense)...... (662,838) (306,223) (3,083,344) (755,791)
----------- ----------- ----------- -----------
Loss before losses in equity investees and
minority interests........................ (2,270,861) (1,082,304) (9,314,107) (3,459,489)
Equity in losses of U.S. On-Line Cable,
L.L.C..................................... -- (299,299) -- (783,594)
Minority interest in losses of U.S. On-Line
Cable, L.L.C.............................. -- -- 911,195 --
Minority interest in net income of
subsidiary................................ (12,943) -- (43,437) --
----------- ----------- ----------- -----------
Net loss.......................... $(2,283,804) $(1,381,603) $(8,446,349) $(4,243,083)
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE> 73

U.S. ONLINE COMMUNICATIONS L.L.C.

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED ACCUMULATED MEMBERS'
CAPITAL DEFICIT DEFICIT
----------- ------------ ------------
<S> <C> <C> <C>
Balances, January 1, 1996.......................... $1,196,232 $ (2,219,782) $ (1,023,550)
Net loss........................................... -- (4,243,083) (4,243,083)
---------- ------------ ------------
Balances, December 31, 1996........................ 1,196,232 (6,462,865) (5,266,633)
Net loss........................................... -- (8,446,349) (8,446,349)
---------- ------------ ------------
Balances, December 31, 1997........................ $1,196,232 $(14,909,214) $(13,712,982)
Net loss........................................... -- (2,283,804) (2,283,804)
---------- ------------ ------------
Balance, March 31, 1998............................ $1,196,232 $(17,193,018) $(15,996,786)
========== ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE> 74

U.S. ONLINE COMMUNICATIONS L.L.C.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(2,283,804) $(1,381,603) $(8,446,349) $ (4,243,083)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 455,316 174,952 1,343,543 209,711
Provision for doubtful accounts..................... 10,071 -- 25,121 --
Minority interest in losses of U.S. On-Line Cable,
L.L.C............................................. -- -- (911,195) --
Minority interest in net income of subsidiary....... 12,943 -- 43,437 --
Equity loss -- U.S. On-Line Cable, L.L.C............ -- -- -- 783,594
Gain on dissolution of joint venture................ -- 299,300 (23,629) --
Loss on sale of contracts and equipment............. 26,108 -- -- --
Changes in operating assets and liabilities:
Interest receivable -- U.S. On-Line Cable,
L.L.C.......................................... -- (177,096) -- (350,346)
Subscriber receivables............................ (10,381) -- (304,992) (15,976)
Receivable from affiliates........................ (191,395) 63,106 89,228 (106,667)
Supply inventory.................................. 12,167 -- (223,961) --
Other current assets.............................. 3,002 (8,505) 236,852 (4,044)
Accounts payable and accrued expenses............. 416,095 (376,716) 560,951 74,635
Deferred revenue.................................. 35,064 -- 206,168 --
Accrued interest.................................. 75,921 -- -- --
Interest payable to related parties............... 450,324 357,828 3,117,251 550,465
----------- ----------- ----------- ------------
Net cash used in operating activities.......... (988,569) (1,048,734) (4,287,575) (3,101,711)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment........... 405,034 -- -- --
Purchase of property and equipment..................... (25,974) (175,042) (258,016) (4,817,897)
Change in other assets................................. (12,911) -- (209,747) --
Payments for organization costs........................ -- (49,877) -- (43,257)
Loan to U.S. On-Line Cable, L.L.C...................... -- (1,284,325) -- (6,002,143)
Deferred acquisition costs............................. -- -- -- 22,348
Purchase of 50% interest in U.S. On-Line Cable,
L.L.C............................................... -- -- -- (2,059,993)
----------- ----------- ----------- ------------
Net cash provided by (used in) investing
activities................................... 366,149 (1,509,244) (467,763) (12,900,942)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Advances from related parties.......................... -- 671,396 519,516 12,635,195
Net change in obligations under leasing arrangement.... (213,094) -- 2,279,623 --
Borrowings under note payable to bank.................. -- 1,882,000 2,969,000 4,400,000
Payments on note payable to bank....................... -- -- (242,170) --
Loan costs............................................. (34,835) -- (107,975) (1,027,960)
----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities................................... (247,929) 2,553,396 5,417,994 16,007,235
----------- ----------- ----------- ------------
Net increase in cash and cash equivalents................ (870,349) (4,582) 662,656 4,582
Cash and cash equivalents, beginning of period........... 949,471 4,582 286,815 --
----------- ----------- ----------- ------------
Cash and cash equivalents, end of period................. $ 79,122 $ -- $ 949,471 $ 4,582
=========== =========== =========== ============
Supplemental cash flow information:
Cash paid for interest................................. $ 111,000 $ 124,161 $ 406,000 $ 26,000
Acquisition of 50% interest in U.S. On-Line Cable,
L.L.C. (Note 2)..................................... $ -- $ -- $ 2,486,387 $ --
Dissolution of Austin Cable Venture.................... $ -- $ -- $ 117,424 $ --
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE> 75

U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of U.S. OnLine
Communications L.L.C. (the "LLC") and entities over which it has voting control.
As described in Note 2, in 1997 the LLC gained voting control over U.S. On-Line
Cable, L.L.C. ("Cable"). The LLC's investment in Cable is accounted for under
the equity method for the year ended December 31, 1996. For the three months
ended March 31, 1997, the statement of operations includes equity in losses of
Cable. For the year ended December 31, 1997, the consolidated statement of
operations includes revenues and expenses and the consolidated statement of cash
flows includes sources and uses of cash of Cable as though voting control had
been acquired at the beginning of the year and the minority interest in the
losses of Cable is recognized from January 1, 1997 to September 7, 1997, the
date the LLC gained voting control over Cable. For the year ended December 31,
1996, the consolidated statements of operations include equity in losses of
Cable from February 23, 1996 through December 31, 1996. Intercompany accounts
and transactions are eliminated in consolidation.

Minority interest in net income of subsidiary in 1997 represents the
limited partner's proportionate share of the equity in the earnings of
U.S.-Austin Cable Associates I, Ltd. ("USAC"), a subsidiary of Cable. Although
Cable does not have a majority ownership interest in USAC, USAC's financial
statements have been fully consolidated with the financial statements of Cable
to reflect the exercise of control by Cable. All significant intercompany
balances have been eliminated in consolidation.

GOING CONCERN

The LLC has incurred losses from operations since inception and management
expects that the LLC will continue to incur operating losses for the foreseeable
future. Revenues in 1998 will not be sufficient to fund the LLC's operating
expenses, capital investment and other working capital needs.

The accompanying consolidated financial statements have been prepared
assuming the LLC will continue as a going concern. Losses, negative working
capital and negative cash flows from operating and investing activities raise
substantial doubt about the LLC's ability to continue as a going concern. The
LLC's ability to make scheduled payments of principal of, or interest on, or to
refinance its indebtedness depends on the availability of borrowing capacity,
the success of its growth strategy and its future performance, and its ability
to raise additional equity capital, each of which is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond the LLC's control.

As of December 31, 1997 and March 31, 1998, the LLC's bank indebtedness
approximated $7.2 million under the Silicon Valley Bank credit facility. At
December 31, 1997 and March 31, 1998, the LLC had failed to comply with certain
restrictive covenants under the Silicon Valley Bank credit facility. Subsequent
to the balance sheet date, the loan agreement was renegotiated. As amended, the
Silicon Valley Bank credit facility requires repayment of all amounts
outstanding plus accrued but unpaid interest on October 15, 1998 and contains a
number of significant covenants which, among other things, restrict the ability
of the LLC and its subsidiaries to dispose of assets or merge, incur debt, pay
distributions, repurchase or redeem capital stock, create liens, make capital
expenditures and make certain investments or acquisitions and otherwise engage
in certain corporate activities. The breach of any of these covenants could
result in a default under the Silicon Valley Bank credit facility. In the event
that any such default is not cured, the bank could elect to declare all amounts
borrowed under the Silicon Valley Bank credit facility, together with accrued
interest and other fees, to be due and payable. There can be no assurance that
the assets of the LLC would be sufficient to repay all borrowings under the
Silicon Valley Bank credit facility and the other creditors of the LLC in full.

The LLC had failed to make the required payments under operating lease
agreements with T&W Funding Company V, L.L.C. ("T&W"), but the LLC obtained a
deferment of all amounts due until

F-14
<PAGE> 76
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
GOING CONCERN (CONTINUED)
March 31, 1998. On March 31, 1998, the LLC made payments totaling $393,375 to
T&W, thereby bringing the LLC current with all amounts due under the respective
leasing agreements.

Successful implementation of the LLC's business plan will require
significant expenditures to enable the LLC to compete with other cable
television and telecommunications technologies and providers. In addition, if
the LLC underestimates its capital or other expenditure requirements or
overestimates future results of operations, the need for additional debt or
equity financing may increase. By October 15, 1998, the LLC expects that it will
need to renegotiate or replace the Silicon Valley Bank credit facility, if it
has not previously done so, or to obtain additional financing. The LLC's ability
to secure additional debt or equity financing will be restricted by the terms of
its outstanding indebtedness, including the Silicon Valley Bank credit facility.
The inability to obtain financing when required would have a material adverse
effect on the LLC and the implementation of its growth strategy. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. On March 30, 1998, U.S. OnLine
Communications, Inc., a company formed to acquire substantially all the assets
and assume certain liabilities of the LLC, extended credit of up to $7,200,000
from the proceeds of its completed private placement to the LLC in the form of a
15% convertible promissory note ("Pre-Acquisition Note") maturing on March 30,
1999. Through May 1998, the LLC has borrowed approximately $7.2 million of the
available $7.2 million. Upon the closing of the Asset Acquisition, the
Pre-Acquisition Note will be cancelled.

In connection with an asset acquisition agreement dated March 27, 1998, the
LLC has agreed to sell substantially all of its assets to U.S. OnLine
Communications, Inc., and U.S. OnLine Communications, Inc. has agreed to assume
certain liabilities of the LLC. The LLC will receive a 10% promissory note in
the amount of $3,000,000 and 800,000 shares of U.S. OnLine Communications, Inc.
common stock. The consummation of this transaction is dependent upon receipt of
consents from various governmental regulatory bodies and certain entities with
which the LLC has continuing commitments. The LLC has also entered into a merger
agreement dated March 27, 1998 with Cable. Under the merger agreement,
intercompany indebtedness owed by Cable to the LLC will be eliminated.

THE LLC

The LLC was formed under a Limited Liability Company Agreement (the "LLC
Agreement") dated June 21, 1995, as a Washington limited liability company for
the purpose of providing telecommunications, cable television and related
services to multi-unit housing developments, apartment complexes and other
similar residential developments. The LLC Agreement, as amended, terminates on
December 14, 2025. The LLC provides services to subscribers in Austin, San
Antonio and Dallas, Texas, Washington, D.C., including the Virginia suburbs, and
Denver, Colorado and, prior to March 6, 1998, to subscribers in Atlanta, Georgia
(Note 12).

The LLC was capitalized on October 31, 1995 with 1,666,667 shares of MIDCOM
Communications Inc. ("MIDCOM") common stock with a market value of $25 million
at October 31, 1995, valued for financial reporting purposes at approximately
$1.2 million based upon the historical cost basis of the contributing members.
The stock was contributed by Black Creek Limited Partnership (zero basis) and
Madrona Ridge Limited Partnership ($1.2 million basis) (collectively, the
"Contributing Members"). Prior to amendment on September 7, 1997, member
interests were issued to certain persons or entities whose efforts in
originating the business concept of the LLC or whose continued services to the
LLC were considered to be essential to its economic success. Of the original
1,666,667 MIDCOM shares, 300,000 shares were transferred to a nominee for Black
Creek Limited Partnership, on December 19, 1996, and 1,366,667 shares remain as
contributed

F-15
<PAGE> 77
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
capital at December 31, 1996. At December 31, 1996, the Contributing Members'
interests accounted for the total amount in members' equity.

In general, and as described in greater detail in the LLC Agreement,
through September 6, 1997, losses were allocated to the Class A members to the
extent of their initial capital contributions with losses in excess of such
investment allocated to the Class B members. On September 7, 1997, the remaining
1,366,667 MIDCOM shares were distributed to the Contributing Members, who
thereafter ceased to be members of the LLC.

As amended and restated on September 7, 1997, the LLC Agreement provides
for a single class of members. In general, as described in greater detail in the
amended LLC Agreement, income and losses are allocated to the members in an
amount equal to the excess, if any, of the cumulative income over losses for all
prior years, with the remaining difference, if any, to the members in accordance
with their percentage interests, as defined in the LLC Agreement. A member will
not be personally liable, solely by reason of being a member, for any debts or
losses of the LLC beyond the member's debts or contributions, except as
otherwise provided by law.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, which includes amounts for
construction materials and direct labor. Depreciation is provided for using the
straight-line method over ten years for cable systems and telephone equipment
and five years for furniture and other equipment. When property and equipment is
disposed of, the costs and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is reflected in income for the period.
Cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.

CHANGE IN ESTIMATE

During 1997, the LLC revised the estimated lives used to depreciate the
costs of operational assets. The effect of this change in accounting estimates
was to decrease depreciation expense and net loss for 1997 by approximately
$423,000.

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED

Excess of cost over fair value of net assets acquired consists of goodwill
related to the purchase of 100% of the membership interests of Cable during 1996
and 1997. The purchase price of $2,059,993 exceeded the fair value of net assets
acquired in the amount of $4,335,024. Excess of cost over fair value of net
assets acquired is being amortized on a straight-line basis over the estimated
future periods benefited of ten years.

The LLC periodically evaluates whether events and circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable. An
impairment of goodwill is recognized when estimated undiscounted future cash
flows generated by acquired businesses are determined to not be sufficient to
recover goodwill. The amount of goodwill impairment, if any, is measured based
on forecasted discounted cash flows using a discount rate reflecting the LLC's
average cost of funds.

DEFERRED LOAN AND ORGANIZATION COSTS, NET

Deferred loan and organization costs, net, at December 31, 1997 and March
31, 1998, consists of loan costs amounting to $819,734 and $756,653,
respectively, which are being amortized using the interest method

F-16
<PAGE> 78
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
over the four-year term of the loan, and FCC license and organizational costs
amounting to $71,084 and $75,675, respectively, which are being amortized using
the straight-line method over five years.

SUPPLY INVENTORY

Supply inventory consisted of various service and maintenance type items
related to the LLC's transmission systems and are stated at the lower of cost
(determined by the first-in, first-out method) or market.

INCOME TAXES

The LLC is organized as a limited liability company and is classified as a
partnership for federal, state and local income tax purposes. The members are
responsible for their respective tax liabilities, if any, related to their share
of income and expenses of the LLC.

USE OF ESTIMATES

The preparation of 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 as of the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates. The LLC evaluates the
recoverability and useful lives of its system-related assets based upon current
conditions. Because of the current stage of development of the LLC's business
and technological nature of such assets, it is reasonably possible that the
LLC's asset recoverability and useful life estimates will change in the near
term.

REVENUE RECOGNITION

Revenue from subscribers is recognized in the month that service is
provided. Installation fees are recognized as revenue upon origination of
service to subscribers. Costs incurred to obtain the subscriber are expensed as
incurred.

ADVERTISING

The LLC expenses the cost of advertising as it is incurred or the first
time the advertising takes place. Advertising expense was approximately $5,000
for the three months ended March 31, 1998, and $92,000 and $26,000 for 1997 and
1996, respectively.

FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially expose the LLC to concentrations of
credit risk consist primarily of cash and cash equivalents, subscriber
receivables and amounts due from affiliates and related parties. The LLC
generally maintains its cash balances below federally insured limits. The
collectibility of subscriber receivables can be impacted by economic trends
within the LLC's markets.

Financial instruments for which fair value approximates carrying value
include cash and cash equivalents, receivables and accounts payable. The
carrying value of the LLC's notes payable to bank and related party approximate
fair value as they are subject to interest rates which increase and decrease
with changes in market rates.

Approximately 84% and 76% of the LLC's revenues for the year ended December
31, 1997 and the three months ended March 31, 1998, respectively, are derived in
Austin, Dallas and San Antonio, Texas. A

F-17
<PAGE> 79
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
sustained economic downturn or significant increases in competition in this
region could impact revenues derived from this region.

CASH EQUIVALENTS

The LLC considers all highly liquid investments and time deposits with
original maturity at time of purchase of three months or less to be cash
equivalents. Cash and cash equivalents at the beginning of period are not the
same as cash and cash equivalents at the end of the period due to the
consolidation of Cable effective January 1, 1997.

YEAR 2000

Many computer systems experience problems handling dates beyond the year
1999. Some computer software may need to be modified prior to the year 2000 in
order to remain functional. The Company is assessing the readiness of its
internal computer systems for handling the year 2000 issue. The Company does not
believe that the cost of implementing year 2000 compliant software and systems
will have a material effect on the Company's financial condition or results of
operation. The Company expects to implement the internal information systems
changes necessary to address the year 2000 issues by the end of fiscal 1998.
Moreover, the Company could be adversely impacted by year 2000 issues faced by
major distributors, suppliers and financial service organizations with which the
Company interacts.

INTERIM FINANCIAL STATEMENTS

The accompanying unaudited financial statements as of and for the three
months ended March 31, 1998 and 1997 are unaudited and have been prepared on
substantially the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein.

2. INVESTMENT IN CABLE:

On November 30, 1995, the LLC entered into an investment agreement (the
"Agreement") with Cable, a Texas limited liability company, to purchase a 50%
membership interest in Cable. Cable provides cable television services to
multiple dwelling units primarily in Texas. As part of the Agreement, the LLC
also acquired the rights and title to the U.S. OnLine name and service mark. On
February 23, 1996, the LLC completed its purchase of a 50% membership interest
in Cable under the Agreement for $2,000,000 plus acquisition expenses of
$59,993.

Under the Agreement, on September 7, 1997, the original members of Cable
exercised an option to sell their remaining interest in Cable to the LLC in
exchange for a 13% interest of the membership of the LLC, $1,157,000 (through
the forgiveness of an existing $1,000,000 loan from Cable to such members plus
8.5% of such amount per annum from February 15, 1996 through the date of
exercise) and any interests in ventures affiliated with the LLC, as specified in
the option agreement. Upon exercise of this option, the LLC acquired the
remaining 50% member interest in Cable, making it a wholly-owned subsidiary as
of the exercise date. The acquisition was accounted for as a purchase.

The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1997 and 1996, which are based on certain
estimates, assume the acquisition of Cable occurred on January 1, 1997 and 1996,
respectively. This unaudited pro forma financial information has been prepared
for comparative purposes only and does not purport to be indicative of future
operating results.

F-18
<PAGE> 80
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. INVESTMENT IN CABLE: (CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net revenue..................................... $ 2,721,293 $ 836,876
Net loss........................................ $(9,876,764) $(5,107,494)
</TABLE>

Cable and the LLC entered into a credit facility ("Credit Facility
Agreement") on November 30, 1995 in the amount of $13 million whereby the LLC
agreed to provide Cable with funding to build out additional cable systems.
Interest compounds annually on the loan at 8.5%. Cable granted the LLC a
security interest in its assets as collateral. Advances totaled $10,055,173 as
of March 31, 1998 and December 31, 1997. The advances are eliminated in
consolidation at March 31, 1998 and December 31, 1997.

The excess of the cost of the LLC's investment over its share of the fair
value of the reported underlying net assets of Cable, after eliminations, is
being amortized over the estimated life of Cable's franchises of ten years. The
amortized balance of such excess at March 31, 1998 and December 31, 1997 was
approximately $3,804,852 and $3,913,000, respectively.

3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS:

In 1996, Cable formed USAC, a limited partnership of which Cable is the
general partner and Ocampo Partners, Ltd. ("Ocampo"), a Texas limited
partnership, is the limited partner. Both partners have a 50% interest in the
partnership. The partnership was established to design, develop, own, construct
and manage private cable television receiving equipment and related services to
serve eight apartment complexes located in Austin, Texas. Upon completion of the
transmission system's construction and installation during 1996, the assets were
contributed by Cable to the partnership, and Cable received a non-recourse note
in the amount of $279,310 from Ocampo for Ocampo's portion of the required
capital contribution. The note is collateralized by the assets of the
partnership and has a term of five years. Principal and interest payments on the
note were made during 1997 with Ocampo's portion of the cash distributions of
the partnership. The balance due under the note is $235,172 at December 31, 1997
and $255,410 at March 31, 1998.

The financial statements of USAC have been consolidated with those of Cable
to reflect Cable's full control of USAC.

4. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following at March 31, 1998 and
December 31, 1997:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Cable systems..................................... $ 7,139,597 $ 7,138,295
Telephone switch equipment........................ 2,144,427 2,144,127
Furniture and fixtures............................ 789,452 788,237
----------- -----------
10,073,476 10,070,659
Accumulated depreciation.......................... (1,595,813) (1,322,096)
Construction in progress.......................... 345,719 753,707
----------- -----------
$ 8,823,382 $ 9,502,270
=========== ===========
</TABLE>

Depreciation expense was approximately $274,000, $778,000 and $177,000 for the
three months ended March 31, 1998 and for the years ended December 31, 1997 and
1996, respectively.

F-19
<PAGE> 81
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INVESTMENT IN MIDCOM COMMUNICATIONS INC.:

The LLC was capitalized through the initial contribution of shares of
MIDCOM common stock by its contributing members (Black Creek Limited Partnership
and Madrona Ridge Limited Partnership). Ownership of the MIDCOM stock enabled
the LLC, indirectly through its members, to exercise significant influence over
the operating and financial policies of MIDCOM. Although less than 10% of
MIDCOM's outstanding common stock was held by the LLC, generally accepted
accounting principles require that the equity method of accounting be used.
Under the equity method, the carrying amount of the investment would be adjusted
to report the LLC's proportionate share of the investee's earnings and losses.
The amount of the adjustment would then be included in operations. The LLC's
proportionate share of MIDCOM's net loss for the year ended December 31, 1995
exceeded the balance of the LLC's related investment account, thus the
investment in MIDCOM was carried at zero at December 31, 1995. No losses have
been reported in the LLC's statements of operations subsequent to December 31,
1995, as the LLC does not guarantee the debt or losses of MIDCOM. In 1997,
MIDCOM filed for bankruptcy protection.

6. NOTE PAYABLE TO BANK:

As of March 31, 1998 and December 31, 1997, the LLC had approximately $7.2
million outstanding under the Silicon Valley Bank credit facility, with interest
at the bank's prime rate (8.5% at March 31, 1998 and December 31, 1997) plus two
percent (2%). The Silicon Valley Bank credit facility is collateralized by
substantially all of the assets of the LLC, and the indebtedness is backed by
certain personal guarantees, including that of the majority member. In 1998, the
agreement was amended requiring the LLC to obtain an aggregate of $6.0 million
in new equity and/or debt by March 31, 1998, and an aggregate of $19.0 million
in new equity and/or debt (inclusive of the $6.0 million by March 31, 1998) by
August 15, 1998. All such indebtedness must be subordinated to the Silicon
Valley Bank credit facility. All principal and outstanding interest under the
Silicon Valley Bank credit facility is due and payable on October 15, 1998. As
further consideration for the bank's entering into the revised loan agreement,
U.S. OnLine Communications, Inc. granted the bank a warrant to purchase up to
75,000 shares of its common stock with an exercise price of $3.75 per share.
U.S. Online Communications, Inc. expects to record original issue discount
associated with the warrant of approximately $308,000, which will be amortized
to interest expense over the expected term of the debt.

At March 31, 1998 and December 31, 1997, the LLC was not in compliance with
certain restrictive covenants under the Silicon Valley Bank credit facility.
Although the LLC has received contingent waivers of these violations based on
the LLC's ability to raise additional capital of $6.0 million, the entire
balance outstanding to the bank has been classified as a current liability in
the balance sheet due to the uncertainty concerning the LLC's ability to raise
the capital.

7. RELATED PARTY TRANSACTIONS:

The LLC entered into various promissory note agreements with Paul H.
Pfleger, a majority member of the LLC, to fund start up costs. Interest accrued
at a rate of The Wall Street Journal prime (8.5% at March 31, 1998 and December
31, 1997) plus 2% compounded annually. As of March 31, 1998 and December 31,
1997, the LLC had borrowed $13,854,988 under these note agreements. Such amounts
plus $2,442,826 and $2,070,753 of accrued interest as of March 31, 1998 and
December 31, 1997, respectively, have been included in payable to related
parties. The entire principal balance, together with all accrued unpaid
interest, are to be paid in full on or before November 1, 2000.

Mr. Pfleger has entered into a guaranty and subordination agreement with
the LLC whereby he has guaranteed the repayment of the loans under the Silicon
Valley Bank credit facility (see Note 6). In addition, Mr. Pfleger has agreed
that repayment of amounts due him are subordinate to the loans under the Silicon
Valley Bank credit facility. Under the terms of such guaranty and subordination
agreement, Mr. Pfleger
F-20
<PAGE> 82
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. RELATED PARTY TRANSACTIONS: (CONTINUED)

receives a fee equal to .125% of the average daily outstanding balance of the
Silicon Valley Bank credit facility during such month and 6% of the amount of
principal and interest outstanding on the promissory notes to Mr. Pfleger as of
December 2 of each year during which the agreement is in effect. Under the terms
of the agreement, $1,566,215 and $1,539,871 was due at March 31, 1998 and
December 31, 1997, respectively.

An affiliate of the LLC provided management, administrative and consulting
services to the LLC. These services include management consulting, risk
management, employee benefit administration, legal, accounting and tax,
management information systems and general office operations. The amounts paid
to the affiliate for these services was $66,667, $170,071 and $354,083 for the
three months ended March 31, 1998 and for the years ended 1997 and 1996,
respectively. At March 31, 1998 and December 31, 1997, $11,208 and $113,004
related to such services was included in payable to related parties.

The LLC's CEO has a beneficial ownership interest in two multiple dwelling
units served by the LLC. The properties are owned by separate limited
partnerships; the LLC's CEO is an officer of the general partner of the
partnerships and is a limited partner of one of the partnerships. Both
properties are managed by a company partially owned by the LLC's CEO. Service
revenues received by the LLC from these two properties was approximately
$19,000, $69,000 and $64,000 for the three months ended March 31, 1998 and for
the years ended December 31, 1997 and 1996, respectively.

The LLC currently leases space for its corporate offices in Austin, Texas.
The property is owned by a limited partnership, the general partner of which is
a corporation owned by the LLC's CEO. The LLC's CEO is also a limited partner in
the partnership. The LLC subleases a portion of the space to a company partially
owned by the LLC's CEO. Net lease expense under the lease agreements was
approximately $15,000, $49,000 and $42,000 for the three months ended March 31,
1998 and for the years ended December 31, 1997 and 1996, respectively.

8. COMMITMENTS AND CONTINGENCIES:

On July 14, 1995, the LLC entered into a $15 million purchase agreement
(the "Purchase Agreement") with Digital Telecommunications, Inc. ("DTI") whereby
the LLC acquired the exclusive right to purchase DTI's Digital Cross Connect
equipment, Line Interface Modules and other equipment for multi-family
applications. The Purchase Agreement, which expires July 31, 1998, was amended
on August 1, 1996 to reduce the minimum required purchase amounts under the
Purchase Agreement (the "Amended Agreement"). The LLC has purchased the majority
of its equipment from this vendor and at December 31, 1997 had fulfilled its
commitments under the Amended Agreement.

The LLC has entered into various operating lease agreements for office and
warehouse space, towers, microwave and headend equipment and office equipment.
Future minimum rental commitments under all noncancelable operating leases are
as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
FISCAL YEAR 1998 1997
----------- ---------- ------------
<S> <C> <C>
1998............................................. $1,870,392 $2,047,828
1999............................................. 2,354,250 2,015,627
2000............................................. 1,522,948 1,321,538
2001............................................. 839,719 701,483
2002............................................. 739,120 685,977
Thereafter....................................... 610,860 607,137
---------- ----------
$7,937,289 $7,379,590
========== ==========
</TABLE>

F-21
<PAGE> 83
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)

Rental expense incurred in connection with these leases approximated
$517,000, $940,000 and $115,000 for the three months ended March 31, 1998 and
for the years ended December 31, 1997 and 1996, respectively.

REGULATORY MATTERS

Regulatory Status and Regulation of Private Cable Operators

Franchise cable operators are subject to a wide range of FCC regulations
regarding such matters as the rates charged for certain services, transmission
of local television broadcast signals, customer service standards/procedures,
performance standards and system testing requirements. In addition, the
operator's franchise, which can be issued at the municipal, county or state
level, typically imposes additional requirements for operation. These relate to
such matters as system design and construction, provision of channel capacity
and production facilities for public educational and government use, and the
payment of franchise fees and the provision of other "in kind" benefits to the
city.

To remain exempt from extensive FCC regulation and local franchising
requirements, the LLC intends to confine its video distribution facilities to
contiguous private property and obtain programming primarily via SMATV
facilities. The LLC intends to rely on 18 GHz microwave links to cross public
rights-of-way where necessary and technically feasible. The use of microwave
frequencies to transmit video signals across a public right-of-way is not
considered a "use" of the right-of-way sufficient to trigger a local franchising
requirement or FCC regulation applicable to franchised operators. The LLC is
considered a private cable operator in all of the markets that it serves.

Telecommunications Act of 1996

The Telecommunications Act of 1996 (the "1996 Act") opened the local
telecommunications market to competition by mandating the elimination of legal,
regulatory, economic and operational barriers to competitive entry, providing
the LLC with new opportunities to provide local telephone services on a more
cost effective basis. The 1996 Act, however, also provides the RBOCs with a
means to enter the long distance market, introducing a number of substantial new
competitors to the LLC in that market. On balance, management believes that the
market-opening provisions of the 1996 Act are favorable to the LLC.

9. EMPLOYEE BENEFIT PLAN:

The LLC offers a Profit Sharing and 401(k) Salary Deferral Plan (the
"Plan") to its employees. The Plan, available to all employees, permits them to
defer a portion of their salary until future years. The LLC may make
discretionary contributions to the Plan equal to 50% of the amount of each
eligible employee's contribution up to 6% of the employee's compensation.
Contributions to the Plan are available to employees upon termination,
retirement, death or disability. The LLC contributed $238 to the Plan in 1996.
The LLC did not make a contribution to the Plan as of March 31, 1998 or during
1997.

10. INCOME TAXES:

The LLC is organized as a limited liability company and is classified as a
partnership for federal income tax purposes. The members are responsible for
their respective tax liabilities, if any, related to their share of income and
expenses of the LLC. Accordingly, the LLC's financial statements include no
provision for income taxes.

F-22
<PAGE> 84
U.S. ONLINE COMMUNICATIONS L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES: (CONTINUED)
Cable is subject to state taxes and utilizes the liability method of
accounting for such taxes. Deferred taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.

At March 31, 1998 and December 31, 1997, Cable had deferred tax assets of
approximately $239,000 and $211,000, respectively, primarily from net operating
loss carryforwards, which expire within 3 to 5 years. In accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," the deferred tax assets have been fully reserved due to the
uncertainty of realization of the assets.

11. SALE OF ATLANTA CONTRACTS AND EQUIPMENT:

On March 6, 1998, the LLC executed a purchase agreement in which it agreed
to sell its rights, title and interest in and to certain telecommunications
agreements with multi-dwelling units in Atlanta, Georgia, including certain
equipment and infrastructure for $400,000 in cash.

12. RECENTLY ISSUED ACCOUNTING STANDARDS:

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). Adoption is required for interim and annual periods
beginning after December 15, 1997. SFAS No. 130 requires that comprehensive
income and its components, as defined in the Statement, be reported in the LLC's
financial statements. Management does not believe that the adoption of this
standard will have a significant impact on the LLC.

Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). Adoption is required for interim and annual
periods beginning after December 15, 1997. SFAS No. 131 requires certain
information about operating segments to be reported in addition to disclosures
related to products and services, geographic areas and major customers.
Management has not yet determined the impact this standard will have on the LLC.

F-23
<PAGE> 85

REPORT OF INDEPENDENT ACCOUNTANTS

To the Members,
U.S. ON-LINE CABLE, L.L.C.

We have audited the accompanying consolidated statements of operations, changes
in members' equity (deficit) and cash flows of U.S. On-Line Cable, L.L.C. and
Subsidiaries ("Cable") for the year ended December 31, 1996. These consolidated
financial statements are the responsibility of Cable's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of U.S. On-Line Cable, L.L.C. and Subsidiaries for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that Cable will continue as a going concern. As discussed in Note 1 to the
financial statements, Cable has suffered recurring losses from operations and
has a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

COOPERS & LYBRAND L.L.P.

Austin, Texas
February 21, 1997, except as to Notes 5
through 8 for which the date is
February 27, 1998, and Note 9, for which
the date is March 27, 1998

F-24
<PAGE> 86

U.S. ON-LINE CABLE, L.L.C.

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
Service revenue:
Cable revenue............................................... $ 777,490
Other revenue............................................... 979
-----------
Total revenue..................................... 778,469
Cost of service............................................. 272,286
-----------
Gross profit...................................... 506,183
-----------
Operating expenses:
Customer support.......................................... 265,923
Other operating expenses.................................. 272,322
Sales and marketing....................................... 321,831
General and administrative................................ 700,217
Depreciation and amortization............................. 274,968
-----------
Total operating expenses.......................... 1,835,261
-----------
Loss from operations........................................ (1,329,078)
-----------
Other income (expense):
Interest income........................................... 183,233
Interest expense and other................................ (378,145)
Management fees........................................... 100,152
-----------
Total other income (expense)...................... (94,760)
-----------
Loss before minority interest............................... (1,423,838)
Minority interest in net income of subsidiary............... (38,114)
-----------
Net loss.......................................... $(1,461,952)
===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE> 87

U.S. ON-LINE CABLE, L.L.C.

CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
NOTES TOTAL
ACCUMULATED RECEIVABLE MEMBERS'
CONTRIBUTED PREFERRED ACCUMULATED FROM EQUITY
CAPITAL RETURN DEFICIT MEMBERS (DEFICIT)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996...... $ 1,238,000 $(115,000) $ (612,419) $(1,000,000) $ (489,419)
Contributions from members....... 2,000,000 -- -- -- 2,000,000
Accumulated preferred return..... -- (32,455) -- -- (32,455)
Distributions to members......... (1,852,545) -- -- -- (1,852,545)
Transfer of preferred return to
deficit upon distribution...... -- 147,455 (147,455) -- --
Net loss......................... -- -- (1,461,952) -- (1,461,952)
----------- --------- ----------- ----------- -----------
Balances at December 31, 1996.... $ 1,385,455 $ -- $(2,221,826) $(1,000,000) $(1,836,371)
=========== ========= =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE> 88

U.S. ON-LINE CABLE, L.L.C.

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,461,952)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 274,968
Loss from disposal of asset............................ --
Minority interest in net income of subsidiary.......... 38,114
Changes in operating assets and liabilities:
Subscriber receivables, net.......................... (148,557)
Interest receivable.................................. (90,356)
Other current assets................................. (130,115)
Receivable -- U.S. OnLine Communications L.L.C....... (1,038,847)
Accounts payable and accrued expenses................ 458,200
Subscriber deposits and deferred revenue............. 84,167
Interest payable..................................... 352,828
-----------
Net cash used in operating activities............. (1,661,550)
-----------
Cash flows from investing activities:
Increase in notes receivable from members................. --
Receipts on notes receivable -- other..................... 28,230
Purchase of property and equipment........................ (4,222,069)
Change in other assets, net............................... 18,446
-----------
Net cash used in investing activities............. (4,175,393)
-----------
Cash flows from financing activities:
Advances under credit facility -- U.S. Online
Communications L.L.C................................... 6,002,526
Payments of installment indebtedness -- Austin Cable
Venture................................................ (5,452)
Contributions from members................................ 2,000,000
Distribution to members................................... (1,852,545)
Distribution to minority partner in U.S. -- Austin Cable
Associates I, Ltd...................................... (52,995)
Distribution of accumulated preferred return.............. (147,455)
-----------
Net cash provided by financing activities......... 5,944,079
-----------
Net increase in cash and cash equivalents................... 107,136
Cash and cash equivalents, beginning of year................ 175,097
-----------
Cash and cash equivalents, end of year...................... $ 282,233
===========
Noncash investing and financing activities:
Increase in preferred return payable...................... $ 32,455
===========
Investment in Austin Cable Venture (and related
installment indebtedness).............................. $ 3,190
===========
Notes receivable -- other in exchange for assets
contributed to U.S. Austin Cable Associates I, Ltd. on
behalf of minority partner (Note 3).................... $ 279,310
===========
Transfer of property and equipment to U.S. OnLine
Communications L.L.C................................... $ 867,874
===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 89

U.S. ON-LINE CABLE, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. FORMATION AND BUSINESS DESCRIPTION:

U.S. On-Line Cable, L.L.C. ("Cable") was formed effective May 11, 1994 as a
limited liability company under the Texas Limited Liability Company Act to
construct, own, maintain, improve, manage and operate microwave and satellite
master antenna television systems. Cable currently provides service to
subscribers in Austin, San Antonio and Dallas, Texas, Atlanta, Georgia and
Denver, Colorado. Under its current charter, Cable's life is limited to 30 years
from the effective date of the formation.

GOING CONCERN

Cable has incurred losses from operations since inception and management
expects that revenues for the foreseeable future will not be sufficient to fund
its operating expenses, capital investments and other working capital needs.

The accompanying financial statements have been prepared assuming Cable
will continue as a going concern. Losses, negative working capital and negative
cash flows from operating and investing activities raise substantial doubt about
Cable's ability to continue as a going concern. Management is currently in the
process of negotiating equity financing for Cable. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Cable and its
subsidiaries, San Antonio Cable Associates I ("SACA") in 1995 and U.S. -- Austin
Cable Associates I, Ltd. ("USAC") in 1996. Although Cable does not have a
majority interest in either of these entities, their financial statements have
been fully consolidated with the financial statements of Cable to reflect the
exercise of control by Cable. All significant intercompany balances and
transactions have been eliminated in consolidation.

Minority interest in 1996 represents the limited partner's proportionate
share of the equity in the earnings of USAC.

Cable accounts for its investment in Austin Cable Venture under the equity
method of accounting. The investment is being amortized over the seven year life
of the underlying assets.

See Note 3 for further information regarding joint ventures and
partnerships.

CASH EQUIVALENTS

Cable considers all highly liquid investments and time deposits with an
original maturity at time of purchase of three months or less to be cash
equivalents.

PROPERTY AND EQUIPMENT

Cable television distribution systems are accounted for at cost and are
depreciated using the composite method over a seven year life. All other
property and equipment is depreciated using the straight-line method over the
estimated useful lives of the assets. When property and equipment is disposed
of, the costs and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is reflected in income for the period.
Cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.

Construction in progress is reclassified to a particular system as that
system is completed and placed in service. Construction in progress includes
internal and external costs incurred in the construction of the cable television
distribution systems. Internal costs include direct labor and construction
overhead costs.

F-28
<PAGE> 90
U.S. ON-LINE CABLE, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of expense during the reporting
period. Actual results could differ from those estimates. Cable evaluates the
recoverability and useful lives of its system related assets based upon current
conditions. Because of the current stage of development of Cable's business and
technological nature of such assets, it is reasonably possible that Cable's
asset recoverability and useful life estimates will change over time.

YEAR 2000

Cable is taking actions to ensure that their computer systems are capable
of processing for the periods beginning January 1, 2000 and beyond. The costs
associated with this matter are not expected to materially affect operating cash
flow.

3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS:

On February 4, 1995, Cable entered into a joint venture agreement with
Apartment Multimedia I, L.L.C. ("Multimedia") for equal 50% ownership interests
in SACA, a general partnership. SACA was established to design, develop, own,
construct and manage private cable television equipment and services for three
apartment complexes in San Antonio, Texas. Cable transferred $196,812 in newly
constructed cable television and video system assets to SACA in exchange for a
non-recourse note receivable from SACA. Expenses for the operation and
management of the system are accrued and paid by SACA. These expenses include
management fees which were paid to Cable for various operational and
administrative costs. The intercompany note, income and expense were eliminated
from these financial statements. Any excess cash flow, as defined in the joint
venture agreement, is applied to service the debt to Cable. The financial
statements of SACA have been fully consolidated with Cable to reflect the
exercise of control and the extent of risk retained by Cable with respect to the
contributed assets.

SACA was dissolved on February 2, 1996. The contractual rights to provide
cable service were distributed to Multimedia and then transferred to the
separate owners of each of the apartment locations receiving cable service. As
part of the transaction, the existing cable service agreement was canceled. The
apartment owners subsequently entered into separate service agreements with
Cable for a percentage of the gross revenues. All assets other than the contract
rights were distributed to Cable upon dissolution of SACA. Cable assumed all
liabilities and obligations of SACA.

In May 1995, Cable and Multitechnology Services, L.P. ("MTS") formed the
Austin Cable Venture to construct, own, maintain, improve, manage, operate,
lease, and otherwise use a transmission system in the Austin, Texas area. MTS
made the initial capital contributions of $6,380 and $247,774 during 1996 and
1995, respectively, to fund the construction of the transmission system, which
was substantially completed during December 1995. For use of the transmission
system, Cable is obligated to pay 50% of the initial capital costs amortized
over 180 monthly installments at a 10% interest rate. Cable will also be charged
for 50% of the operating/managing costs incurred and any agreed upon upgrades to
the system. The transmission system is solely for the partners and their
affiliates use in their operations. Cable has accounted for the Austin Cable
Venture using the equity method, recognizing 50% of the initial capital cost as
an investment and installment
F-29
<PAGE> 91
U.S. ON-LINE CABLE, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS IN JOINT VENTURES AND PARTNERSHIPS: (CONTINUED)
indebtedness. The investment will be amortized over the seven year life of the
underlying assets. As the assets were not completed until the end of 1995, no
amortization expense was recognized in 1995. Amortization expense recognized in
1996 was $18,154.

In 1996, Cable formed USAC, a limited partnership of which Cable is the
general partner and Savannah, Ltd. ("Savannah"), a California limited
partnership, is the limited partner. Both partners have a 50% interest in the
partnership. The partnership was established to design, develop, own, construct
and manage private cable television receiving equipment and related services to
serve eight apartment complexes located in Austin, Texas. Upon completion of the
transmission system's construction and installation during 1996, the assets were
contributed by Cable to the partnership, and Cable received a non-recourse note
in the amount of $279,310 from Savannah for Savannah's portion of the required
capital contribution. The note is collateralized by the assets of the
partnership and has a term of five years. Principal and interest payments on the
note were made during 1996 with Savannah's portion of the cash distributions of
the partnership. The balance due under the note at December 31, 1996 is
$251,080.

The financial statements of USAC have been consolidated with those of Cable
to reflect Cable's full control of USAC.

4. INCOME TAXES:

Cable is organized as a limited liability company and is classified as a
partnership for federal income tax purposes. The members are responsible for
their respective tax liabilities, if any, related to their share of income and
expenses of Cable. Accordingly, Cable's financial statements include no
provision for income taxes.

Cable is, however, subject to state taxes and utilizes the liability method
of accounting for such taxes. Deferred taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.

5. COMMITMENTS AND CONTINGENCIES:

Cable also has operating leases for office space, roof rentals, head ends
and transmission facilities. Rental expenses incurred in connection with these
leases approximated $91,000 and $42,000 for the years ended December 31, 1996
and 1995.

Future minimum lease payments due under noncancelable operating leases are
as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1996
------------------------ --------
<S> <C>
1997.............................................. $164,016
1998.............................................. 113,832
1999.............................................. 81,934
2000.............................................. 30,750
2001.............................................. 14,280
Thereafter........................................ 10,800
--------
$415,612
========
</TABLE>

F-30
<PAGE> 92
U.S. ON-LINE CABLE, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
PROGRAMMING

Cable has various contracts to obtain basic and premium programming from
program suppliers whose compensation is typically based on a fixed fee per
subscriber. Cable has negotiated programming agreements with premium service
suppliers that offer cost incentives to Cable under which premium unit prices
decline as certain premium service growth thresholds are met. In addition to
volume pricing discounts, some program suppliers offer marketing support to
Cable in the form of advertising funds, promotional materials, rebates and other
incentives. Cable's programming contracts are generally for a fixed period of
time, typically three to five years, and are subject to negotiated renewal.

REGULATORY MATTERS

Regulatory Status and Regulation of Private Cable Operators

To remain exempt from extensive FCC regulation and local franchising
requirements, Cable intends to confine its video distribution facilities to
contiguous private property and obtain programming primarily via SMATV
facilities. Cable intends to rely on 18 GHz microwave links to cross public
rights-of-way where necessary and technically feasible. The use of microwave
frequencies to transmit video signals across a public right-of-way is not
considered a "use" of the right-of-way sufficient to trigger a local franchising
requirement or FCC regulation applicable to franchised operators. Cable is
considered a private cable operator in all of the markets that it serves.

Telecommunications Act of 1996

The Telecommunications Act of 1996 (the "1996 Act") opened the local
telecommunications market to competition by mandating the elimination of legal,
regulatory, economic and operational barriers to competitive entry, providing
Cable with new opportunities to provide local telephone services on a more cost
effective basis. The 1996 Act, however, also provides the RBOCs with a means to
enter the long distance market, introducing a number of substantial new
competitors to Cable in that market. On balance, management believes that
market-opening provisions of the 1996 Act are favorable to Cable.

6. CAPITAL AND ALLOCATION OF EARNINGS/LOSSES:

On November 30, 1995, Cable entered into an investment agreement with U.S.
OnLine Communications L.L.C. (the "LLC"). During February of 1996, regulatory
approval was obtained and the LLC transferred $2 million to Cable in exchange
for a 50% interest in Cable. In accordance with the investment agreement, Cable
distributed the proceeds as follows: $1,779,513 went to the original members as
return of capital, $147,455 was paid to an original member in satisfaction of
his accumulated preferred return, and $73,032 was

F-31
<PAGE> 93
U.S. ON-LINE CABLE, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. CAPITAL AND ALLOCATION OF EARNINGS/LOSSES: (CONTINUED)
used to cover the legal expenses associated with the transaction. The annual
accumulated preferred return was paid to a certain original member in the amount
of 12% of his initial capital contribution adjusted for available cash in
accordance with the First Amended and Restated Regulations of Cable. At December
31, 1995, $115,000 was accrued for payment of this preferred return.

Upon closing of the investment agreement, an Option/Put Agreement was
executed granting the original members of Cable an option (the "Option") to
purchase from the LLC 15% of the original members' interest of the LLC owned at
the time of exercise. The Option was exercised during 1997, through the transfer
to the LLC of the original members' interests aggregating 50% of Cable. In
addition to the LLC interests, the original members will be entitled to receive
$1,000,000 at 8.5% compounded annually from the date of the Option/Put
Agreement. This payment will be required to repay all outstanding amounts
remaining under the loan to the original members discussed in Note 7.

Capital accounts are maintained for each member and adjusted for
contributions, distributions, and allocations of profits and losses. Profits are
allocated first to members who have been allocated losses to the extent of those
losses; next to the extent of any cumulative priority return; and last to the
members in accordance with their ownership ratios. Losses are allocated first to
the members to the extent of the accumulated profits allocated to each member.
The balance is allocated to the members having positive capital account balances
in accordance with their ownership ratios. Any losses that cannot be allocated
due to insufficient positive capital account balances will be allocated to
members in accordance with their ownership ratios.

7. RELATED PARTY TRANSACTIONS:

During 1996 and 1995, Cable incurred management fees from CS Management,
Inc. ("CSM") for management and other administrative functions. Certain of
Cable's original members are equitable owners and/or officers of CSM. In
addition, Cable subleases office space from CSM. Rent expense paid to CSM during
1996 and 1995 was $32,000 and $13,000, respectively.

Cable's CEO has a beneficial ownership interest in two multiple dwelling
units served by the LLC. The properties are owned by separate limited
partnerships; Cable's CEO is an officer of the general partner of the
partnerships and is a limited partner of one of the partnerships. Both
properties are managed by a company partially owned by Cable's CEO.

As stipulated by the investment agreement, discussed in Note 6, the initial
advance of $1 million under the Credit Facility was subsequently loaned to the
original members during 1995 at an interest rate of 8.5% per annum and recorded
as a note receivable on Cable's books. This initial advance under the Credit
Facility was jointly and severally guaranteed by the original members. The
Option discussed in Note 6 was exercised by the original members in 1997, and
effective September 7, 1997, the LLC acquired the remaining 50% member interests
in Cable, making Cable a wholly-owned subsidiary of the LLC as of that date.

During 1996, Cable began providing administrative, operational and sales
and marketing on behalf of the LLC. Cable records a receivable for expenses
incurred directly related to the LLC. Expenses that are incurred on behalf of
both companies are allocated to the LLC based on ratios agreed upon by
management of both companies. Expenses allocated to the LLC, net of direct
expenses charged, amounted to $969,689 for the year ended December 31, 1996. As
such, the results of operations presented herein may not reflect actual results
of operations of Cable had Cable operated autonomously from the LLC. As of
December 31, 1996, the receivable from the LLC was approximately $1,907,000. In
addition, Cable signed a consulting agreement with the LLC whereby Cable
provides services of certain executives of Cable to the LLC in exchange for a
fee. Management fees recorded during 1996 in conjunction with this consulting
agreement were approximately $90,000.
F-32
<PAGE> 94
U.S. ON-LINE CABLE, L.L.C.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. SALE OF ATLANTA CONTRACTS AND EQUIPMENT:

On March 6, 1998, Cable executed a purchase agreement in which it agreed to
sell its rights, title and interest in and to certain telecommunications
agreements with multi-dwelling units in Atlanta, Georgia, including certain
equipment and infrastructure for $400,000 in cash. The Company does not expect
the sale of these agreements to have a material effect on future operating
results, liquidity or cash flows.

9. MERGER WITH U.S. ONLINE COMMUNICATIONS L.L.C.:

On March 27, 1998, Cable agreed to merge with and into the LLC and
following the merger, will cease to exist as a separate entity.

F-33
<PAGE> 95

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

No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any of the
Underwriters. This Prospectus does not constitute an offer to sell or
solicitation of an offer to buy any security other then the securities offered
by this Prospectus or any offer to sell or a solicitation of an offer to buy the
securities in any jurisdiction to any person to whom it is unlawful to make such
an offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that information contained herein is correct as of any time
subsequent to the date hereof.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 9
Use of Proceeds............................ 13
Dividend Policy............................ 13
Dilution................................... 14
Capitalization............................. 15
Unaudited Pro Forma Financial
Information.............................. 16
Selected Consolidated Financial Data....... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 27
Business................................... 35
Management................................. 47
Certain Transactions....................... 51
Principal Stockholders..................... 52
Description of Capital Stock............... 53
Shares Eligible for Future Sale............ 55
Underwriting............................... 56
Legal Matters.............................. 57
Experts.................................... 58
Additional Information..................... 58
Glossary of Industry Terms................. 59
Index to Financial Statements.............. F-1
</TABLE>

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

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

3,500,000 SHARES

U.S. ONLINE COMMUNICATIONS, INC.

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

PROSPECTUS
------------------------
BARINGTON CAPITAL GROUP

CRUTTENDEN ROTH
INCORPORATED
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 96

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware Corporation Law ("Delaware Corporation Law")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended ("Securities Act"). The Registrant's Certificate of Incorporation and
Bylaws provide for indemnification of the Registrant's directors, officers,
employees and other agents to the maximum extent permitted by Delaware
Corporation Law. In addition, the Registrant intends to enter into
Indemnification Agreements with its officers and directors. The Underwriting
Agreement also provides for cross-indemnification among the Company and the
Underwriters with respect to certain matters, including matters arising under
the Securities Act.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee*........ $ 15,234
NASD Filing Fee*............................................ $ 5,664
Nasdaq Listing Fee *........................................ $ 48,750
Legal Fees and Expenses..................................... $200,000
Accountants' Fees and Expenses.............................. $120,000
Blue Sky Filing and Counsel Fees and Expenses............... $ 5,000
Printing and Engraving Expenses............................. $ 75,000
Transfer Agent and Registrar Fees........................... $ 2,500
Directors' and Officers' Insurance Expenses................. $ 28,000
Miscellaneous Expenses...................................... $ 49,852
--------
Total............................................. $550,000
========
</TABLE>

- ---------------
* All expenses other than the Commission registration fee, the NASD filing fee
and the Nasdaq National Market fee are estimated.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Since its incorporation on March 5, 1998, the Registrant has sold the
following unregistered securities:

(1) On March 10, 1998, pursuant to its 1998 Restricted Stock Award
Plan, the Company sold 500,000 shares of Common Stock to 30 persons who are
officers, directors of employees of the Company, for an aggregate
consideration of $500.00. These shares were sold pursuant to the 1998
Restricted Stock Award Plan in reliance upon Rule 701 of the Securities
Act, as described in the rule. Each recipient purchased the securities
pursuant to a written contract between such person and the Company and was
provided a copy of the plan.

(2) On March 27, 1998, as part of the consideration paid in the Asset
Acquisition, the Company entered into an agreement pursuant to which the
Company will issue 800,000 shares of Common Stock to the LLC at $3.75 per
share. The Company relied upon Section 4(2) for the sale.

(3) On March 30, 1998, the Company completed an interim financing to
Aspen OnLine Investments, LLC, an accredited investor, consisting of a 14%
subordinated promissory note and warrants to purchase 100,000 shares of
Common Stock at an exercise price of $3.75 per share. The Company received
$1,500,000 in exchange for the note. The Company relied upon Section 4(2)
and Rule 506 for the sale.

(4) On March 30, 1998, as part of the interim financing of the
Company, in consideration for services rendered, Aspen OnLine Investments,
LLC received a warrant to purchase 100,000 shares of

II-1
<PAGE> 97

Common Stock at an exercise price of $3.75 per share. The Company relied
upon Section 4(2) for the sale.

(5) On March 30, 1998, Silicon Valley Bank, an accredited investor, in
consideration for banking services rendered, received a warrant to purchase
75,000 shares of Common Stock at an exercise price of $3.75 per share. The
Company relied upon Section 4(2) for the sale.

(6) On April 15, 1998, the Company completed an interim financing of
65 Units to 79 accredited investors, in reliance upon Section 4(2) and Rule
506. Each Unit consists of one 15% subordinated promissory note and
13,333.33 shares of Common Stock. The aggregate amount received for sale of
these securities was $6,500,000.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1+ Form of Underwriting Agreement
1.2** Form of Representatives' Option
1.3+ Form of Consulting Agreement with Barington
2.1** Agreement and Plan of Merger between Cable and the LLC,
dated March 27, 1998
2.2** Asset Acquisition Agreement between the LLC, as seller, and
the Company, as buyer, dated March 27, 1998
3.1** Certificate of Incorporation
3.2** Bylaws
4.1** Specimen of Common Stock Certificate
5.1** Opinion and Consent of Graham & James LLP/Riddell Williams
P.S.
9.1** Voting Agreement between the Company, the LLC, Donald E.
Barlow, Robert G. Solomon and Aspen OnLine Investments, LLC
dated March 30, 1998
10.1** 1998 Non-Qualified Stock Option and Incentive Stock Option
Plan
10.2** 1998 Restricted Stock Award Plan
10.3** Form of 10% Convertible Subordinated Promissory Note in the
principal amount of $3,000,000 provided by the Company to
the LLC
10.4** Form of 15% Promissory Note in the principal amount of up to
$7,200,000 provided by the LLC to the Company
10.5** 14% Convertible Promissory Note in the principal amount of
$1,500,000 provided by the Company to Aspen OnLine
Investments, LLC, dated March 30, 1998
10.6** Form of 15% Convertible Promissory Notes issued by the
Company in the Interim Financing
10.7** Aspen Online Investments, LLC warrant to purchase 100,000
shares of Common Stock, dated March 30, 1998
10.8** Form of Barington Capital Group, L.P. warrant to purchase
shares of Common Stock
10.9** Form of Registration Rights Agreement between the Company
and certain stockholders
10.10+ Silicon Valley Bank credit facility dated July 21, 1998
10.11** Form of Subordination Agreement between Silicon Valley Bank
and creditors
10.12** Employment and Noncompetition Agreement between the Company
and Robert G. Solomon, dated March 26, 1998
10.13** Employment and Noncompetition Agreement between the Company
and Donald E. Barlow, dated March 26, 1998
</TABLE>

II-2
<PAGE> 98

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.14** Form of Registration Rights Agreement between the Company
and the LLC
10.16** Form of T&W Funding Company V, L.L.C. Equipment Lease
10.17** Shareholders Agreement dated March 27, 1998
10.18** Form of Standard Video Right of Entry Agreement
10.19** Form of Standard Telecommunications Right of Entry Agreement
21.1** Subsidiaries of the Company
23.1** Consent of Graham & James LLP/Riddell William P.S. (included
in Exhibit 5.1)
23.2.1+ Consent of PricewaterhouseCoopers (Cable)
23.2.2+ Consent of PricewaterhouseCoopers (LLC)
23.2.3+ Consent of PricewaterhouseCoopers (U.S. OnLine
Communications, Inc.)
24.1** Power of Attorney (included on page II-5)
27.1** Financial Data Schedule
</TABLE>

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

** Previously filed.

+ Filed herewith.

(b) FINANCIAL STATEMENT SCHEDULE

Attached as Exhibit 27.1

ITEM 28. UNDERTAKINGS

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

The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

The undersigned Registrant hereby undertakes:

(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a
part of this Registration Statement as of the time it was declared
effective.

(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 99

The undersigned Registrant hereby undertakes:

(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in this Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of Prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate Offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the Registration Statement is on Form S-3 (sec. 239.13 of this
chapter) or Form S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.

(4) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.

(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.

II-4
<PAGE> 100

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on July 24, 1998.

U.S. ONLINE COMMUNICATIONS, INC.

By: /s/ ROBERT G. SOLOMON
------------------------------------
Robert G. Solomon
Chief Executive Officer

Each person whose signature appears below constitutes and appoints Robert
G. Solomon and Donald E. Barlow, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement and a new Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.

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

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>

/s/ ROBERT G. SOLOMON Chairman of the Board Chief July 24, 1998
- ----------------------------------------------------- Executive Officer, Director
Robert G. Solomon

/s/ DONALD E. BARLOW President Chief Financial July 24, 1998
- ----------------------------------------------------- Officer (Principal Financial and
Donald E. Barlow Accounting Officer)

/s/ RUDY D. BELTON Director July 24, 1998
- -----------------------------------------------------
Rudy D. Belton

/s/ MARC S. SERIFF Director July 24, 1998
- -----------------------------------------------------
Marc S. Seriff

/s/ CHRIS B. TYSON Director July 24, 1998
- -----------------------------------------------------
Chris B. Tyson
</TABLE>

II-5
<PAGE> 101

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<C> <S> <C>
1.1+ Form of Underwriting Agreement..............................
1.2** Form of Representatives' Option.............................
1.3+ Form of Consulting Agreement with Barrington................
2.1** Agreement and Plan of Merger between Cable and the LLC,
dated March 27, 1998........................................
2.2** Asset Acquisition Agreement between the LLC, as seller, and
the Company, as buyer, dated March 27, 1998.................
3.1** Certificate of Incorporation................................
3.2** Bylaws......................................................
4.1** Specimen of Common Stock Certificate........................
5.1** Opinion and Consent of Graham & James LLP/Riddell Williams
P.S.........................................................
9.1** Voting Agreement between the Company, the LLC, Donald E.
Barlow, Robert G. Solomon and Aspen OnLine Investments, LLC
dated March 30, 1998........................................
10.1** 1998 Non-Qualified Stock Option and Incentive Stock Option
Plan........................................................
10.2** 1998 Restricted Stock Award Plan............................
10.3** Form of 10% Convertible Subordinated Promissory Note in the
principal amount of $3,000,000 provided by the Company to
the LLC.....................................................
10.4** Form of 15% Promissory Note in the principal amount of up to
$7,200,000 provided by the LLC to the Company...............
10.5** 14% Convertible Promissory Note in the principal amount of
$1,500,000 provided by the Company to Aspen OnLine
Investments, LLC, dated March 30, 1998......................
10.6** Form of 15% Convertible Promissory Notes issued by the
Company in the Interim Financing............................
10.7** Aspen Online Investments, LLC warrant to purchase 100,000
shares of Common Stock, dated March 30, 1998................
10.8** Form of Barington Capital Group, L.P. warrant to purchase
shares of Common Stock......................................
10.9** Form of Registration Rights Agreement between the Company
and certain stockholders....................................
10.10+ Silicon Valley Bank credit facility dated July 21, 1998.....
10.11** Form of Subordination Agreement between Silicon Valley Bank
and creditors...............................................
10.12** Employment and Noncompetition Agreement between the Company
and Robert G. Solomon, dated March 26, 1998.................
10.13** Employment and Noncompetition Agreement between the Company
and Donald E. Barlow, dated March 26, 1998..................
10.14** Form of Registration Rights Agreement between the Company
and the LLC.................................................
10.16** Form of T&W Funding Company V, L.L.C. Equipment Lease.......
10.17** Shareholders Agreement dated March 27, 1998.................
10.18** Form of Standard Video Right of Entry Agreement.............
10.19** Form of Standard Telecommunications Rights of Entry
Agreement...................................................
21.1** Subsidiaries of the Company.................................
</TABLE>

<PAGE> 102

<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ------------
<C> <S> <C>
23.1** Consent of Graham & James LLP/Riddell William P.S. (included
in Exhibit 5.1).............................................
23.2.1+ Consent of PricewaterhouseCoopers (Cable)...................
23.2.2+ Consent of PricewaterhouseCoopers (LLC).....................
23.2.3+ Consent of PricewaterhouseCoopers (U.S. OnLine
Communications, Inc.).......................................
24.1** Power of Attorney (included on page II-5)...................
27.1** Financial Data Schedule
</TABLE>

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

** Previously filed.

+ Filed herewith.

<PAGE> 1
EXHIBIT 1.1

FORM OF UNDERWRITING AGREEMENT

3,500,000 Shares of Common Stock

U.S. ONLINE COMMUNICATIONS, INC.

UNDERWRITING AGREEMENT

___________, 1998

Barington Capital Group, L.P. and
Cruttenden Roth Incorporated
as Representatives of the several
Underwriters named in Schedule I
attached hereto
c/o Barington Capital Group, L.P.
888 Seventh Avenue
New York, New York 10019

Dear Sirs:

The undersigned, U.S. OnLine Communications, Inc., a Delaware
corporation (the "Company"), hereby confirms its agreement with Barington
Capital Group, L.P. and Cruttenden Roth Incorporated (collectively, the
"Representatives") and the other Underwriters named in Schedule I hereto (you
and the other underwriters being herein collectively called the "Underwriters")
in connection with the proposed offering of certain of its securities to the
public (the "Offering") as follows:

1. Introductory. The Company proposes to issue and sell to the
Underwriters 3,500,000 shares of common stock, par value $.001 per share, of the
Company (the "Common Stock"). In addition, solely for the purpose of covering
over-allotments, the Company proposes to grant the Underwriters the option to
purchase from it up to an additional 525,000 shares of Common Stock (the
"Additional Stock") identical to the Common Stock. The Common Stock is more
fully described in the Prospectus referred to below.

2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:

(a) The Company has filed with the Securities and

<PAGE> 2
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"), a registration statement, and may have
filed one or more amendments thereto, on Form SB-2 (Registration No.
333-51781), including in such registration statement and each such
amendment and related preliminary prospectus (a "Preliminary
Prospectus") for the registration of (i) 3,500,000 shares of Common
Stock (the "Firm Stock"), (ii) the Additional Stock, (iii) the common
stock purchase options (the "Representatives' Options") referred to in
Section 5(s), (iv) the shares of Common Stock (the "Representatives'
Stock") issuable upon exercise of the Representatives' Options, (v)
the shares of Common Stock (the "Bridge Stock") issued to investors in
connection with the bridge financing in which Barington Capital Group,
L.P. acted as placement agent, (vi) the shares of Common Stock issued
to U.S. OnLine Communications L.L.C. (the "LLC Stock"), and (vii) the
shares of Common Stock issuable on exercise of the warrants granted to
Silicon Valley Bank and Aspen OnLine Investments, LLC, respectively
(the "Warrants") (the Firm Stock, the Additional Stock, the
Representatives' Options, the Representatives' Stock, the Bridge
Stock, the LLC Stock and the Warrants are collectively referred to as
the "Registered Securities" or the "Securities"). As used in this
Agreement, the term "Registration Statement" means such registration
statement, as amended, on file with the Commission at the time such
registration statement becomes effective (including the prospectus,
financial statements, exhibits, and all other documents filed as a
part thereof), provided that such Registration Statement, at the time
it becomes effective, may omit such information as is permitted to be
omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A of the General Rules and Regulations promulgated
under the Act (the "Regulations"), which information ("Rule 430
Information") shall be deemed to be included in such Registration
Statement when a final prospectus is filed with the Commission in
accordance with Rules 430A and 424(b)(1) or (4) of the Regulations;
the term "Preliminary Prospectus" means each prospectus included in
the Registration Statement, or any amendments thereto, before it
becomes effective under the Act, the form of prospectus omitting Rule
430A Information included in the Registration Statement when it
becomes effective, if applicable (the "Rule 430A Prospectus"), and any
prospectus filed by the Company with your consent pursuant to Rule
424(a) of the Regulations; and the term "Prospectus" means the final
prospectus included as part of the Registration Statement, except that
if the prospectus relating to the securities covered by the
Registration Statement in the form first filed on behalf of the
Company with the Commission pursuant to Rule 424(b) of the Regulations
shall differ from such final prospectus, the term "Prospectus" shall
mean the prospectus as filed pursuant to Rule 424(b) from and after
the date on which it shall have first been used.

-2-

<PAGE> 3
(b) When the Registration Statement becomes effective, and at
all times subsequent thereto and including the Closing Date (as
defined in Section 3) and each Additional Closing Date (as defined in
Section 3), and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriters
or a dealer, and during such longer period until any post-effective
amendment thereto shall become effective, the Registration Statement
(and any post-effective amendment thereto) and the Prospectus (as
amended or as supplemented if the Company shall have filed with the
Commission any amendment or supplement to the Registration Statement
or the Prospectus) will contain all statements which are required to
be stated therein in accordance with the Act and the Regulations, will
comply with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no event will have occurred which should
have been set forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not then been set forth in such
an amendment or supplement; if a Rule 430A Prospectus is included in
the Registration Statement at the time it becomes effective, the
Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will
contain all Rule 430A Information and all statements which are
required to be stated therein in accordance with the Act or the
Regulations, will comply with the Act and the Regulations, and will
not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading; and each Preliminary
Prospectus, as of the date filed with the Commission, did not include
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; except that no representation or warranty is
made in this Section 2(b) with respect to statements or omissions made
in reliance upon and in conformity with written information furnished
to the Company as stated in Section 8(b) with respect to any
Underwriter by or on behalf of such Underwriter through the
Representatives expressly for inclusion in any Preliminary Prospectus,
the Registration Statement, or the Prospectus, or any amendment or
supplement thereto.

(c) Neither the Commission nor the "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement,

-3-

<PAGE> 4
or suspending the registration or qualification of any of the
Registered Securities, nor has any of such authorities instituted or
threatened to institute any proceedings with respect to a Stop Order.

(d) Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract,
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to the Registration Statement.

(e) The Company has no subsidiaries (as defined in the
Regulations) other than as properly described in the Registration
Statement. The Company and each of its subsidiaries is a corporation
or other entity duly organized, validly existing, and in good standing
under the laws of its jurisdiction of organization with full power and
authority, and all necessary and material consents, authorizations,
approvals, orders, licenses, certificates, and permits of and from,
declarations with, and all necessary and material filings with, all
federal, state, local, and other governmental authorities and all
courts and other tribunals, to own, lease, license, and use its
properties and assets and to carry on its business in the manner
described in the Prospectus. The Company and each of its subsidiaries
is duly qualified to do business and is in good standing in every
jurisdiction in which its ownership, leasing, licensing, or use of
property and assets or the conduct of its business makes such
qualification necessary, except where the failure to be so qualified
does not now have and is not, based on the business and prospects of
the Company described in this Prospectus, expected in the future, to
have a material adverse effect on the operations, business,
properties, or assets of the Company.

(f) As of the Closing of the sale of the Firm Stock, the
authorized capital stock of the Company will consist of 20,000,000
shares of Common Stock, of which __________ shares will be issued and
outstanding and 1,000,000 shares of preferred stock, par value $.001
per share, none of which are issued and outstanding. Each outstanding
share of Common Stock is validly authorized, validly issued, fully
paid, and nonassessable, without any personal liability attaching to
the ownership thereof, and has not been issued and is not owned or
held in violation of any preemptive rights of stockholders. There is
no commitment, plan, or arrangement to issue, and no outstanding
option, warrant, or other right calling for the issuance of, any share
of capital stock of the Company or any security or other instrument
which by its terms is convertible into, exercisable for, or
exchangeable for, capital stock of the Company, except as

-4-

<PAGE> 5
described in the Prospectus. There is outstanding no security or other
instrument which by its terms is convertible into or exchangeable for
capital stock of the Company, except as described in the Prospectus.
As of the Closing (as hereinafter defined), there shall be outstanding
no indebtedness of the Company other than (i) trade payables incurred
and unpaid in the ordinary course of business consistent with past
practice, (ii) capital lease obligations properly described in the
Prospectus, (iii) an aggregate principal amount of indebtedness for
borrowed money outstanding to a bank or other financial institution of
not exceeding $7.2 million, (iv) the 10% Subordinated Promissory Note
issued to U.S. OnLine Communications L.L.C., in an aggregate principal
amount of $3 million, and (v) the 14% Subordinated Promissory Note
issued to Aspen OnLine Investments, L.L.C., in an aggregate principal
amount of $1.5 million.

(g) The financial statements of the Company included in the
Registration Statement and the Prospectus fairly present in all
material respects the financial position, the results of operations,
and the other information purported to be shown therein at the
respective dates and for the respective periods to which they apply.
Such financial statements have been prepared in accordance with
generally accepted accounting principles (except to the extent that
certain footnote disclosures regarding any period may have been
omitted in accordance with the applicable rules of the Commission
under the Securities Exchange Act of 1934 (the "Exchange Act"))
consistently applied throughout the periods involved, are correct and
complete, and are in accordance with the books and records of the
Company in all material respects. The accountants whose report on the
audited financial statements is filed with the Commission as a part of
the Registration Statement are, and during the periods covered by
their report(s) included in the Registration Statement and the
Prospectus were, independent certified public accountants within the
meaning of the Act and the Regulations. No other financial statements
are required by Form SB-2 or otherwise to be included in the
Registration Statement or the Prospectus. There has not been a
material adverse change in the financial condition, results of
operations, business, properties, assets, liabilities or prospects of
the Company from the latest information set forth in the Registration
Statement or the Prospectus, except as described in the Prospectus.

(h) There is no litigation, arbitration, claim, governmental
or other proceeding (formal or informal) or investigation pending or
threatened (or, to the knowledge of the Company, any basis therefor)
with respect to the Company or any of its subsidiaries, or any of its
operations, businesses, properties, assets or liabilities or future
prospects,

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<PAGE> 6
except as described in the Prospectus or except as individually or in
the aggregate do not now have and are not reasonably expected in the
future (assuming the Company or any of its subsidiaries does not
effect a cure thereof) to have a material adverse effect upon the
operations, business, properties, or assets of the Company and its
subsidiaries, taken as a whole. Neither the Company nor any of its
subsidiaries is in violation of, or in default with respect to, any
law, rule, regulation, order, judgment, or decree, except as may be
properly described in the Prospectus or such as in the aggregate do
not now have and are not reasonably expected in the future to have a
material adverse effect upon the operations, business, properties,
assets, liabilities or prospects, of the Company or its subsidiaries,
taken as a whole.

(i) Neither the Company nor any of its subsidiaries owns any
real property. The Company and its subsidiaries have good title to all
properties and assets which the Prospectus indicates are owned by it,
free and clear of all liens, security interests, pledges, charges,
encumbrances, and mortgages (except as may be properly described in
the Prospectus). No real property owned, leased, licensed, or used by
the Company or any subsidiary lies in an area which is, or to the
knowledge of the Company will be, subject to zoning, use, or building
code restrictions which would prohibit, and no state of facts known to
the Company relating to the actions or inaction of another person or
entity or his or its ownership, leasing, licensing, or use of any real
or personal property exists or is currently expected to exist which
would prevent, the continued effective ownership, leasing, licensing
or use of such real property in the business of the Company or its
subsidiaries as presently conducted or as the Prospectus indicates it
contemplates conducting (except as may be properly described in the
Prospectus).

(j) The Company and its subsidiaries are not, nor to the
knowledge of the Company is any other party, now or currently expected
by the Company in the future to be in violation or breach of, or in
default with respect to, complying with any material provision of any
contract, agreement, instrument, lease, license, arrangement, or
understanding which is material to the Company or any subsidiary, and
each such contract, agreement, instrument, lease, license,
arrangement, and understanding is in full force and is the legal,
valid, and binding obligation of the Company or any subsidiary, and to
the Company's knowledge, the other parties thereto, and is enforceable
as to the Company or any subsidiary, and to the Company's knowledge,
the other parties thereto, in accordance with its terms. The Company
and its subsidiaries enjoy peaceful and undisturbed possession under
all leases and licenses under which

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<PAGE> 7
they are operating. Neither the Company nor any subsidiary is a party
to or bound by any contract, agreement, instrument, lease, license,
arrangement, or understanding, or subject to any charter or other
restriction, which has had or may reasonably be expected in the future
to have a mate- rial adverse effect on the financial condition,
results of operations, business, properties, assets, liabilities, or
prospects of the Company or its subsidiaries, taken as a whole.
Neither the Company nor any subsidiary is in violation or breach of,
or in default with respect to, any term of its articles of
incorporation (or other charter document) or by-laws.

(k) The Company or its subsidiaries own, possess or have the
right to employ all patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, software,
systems or procedures), trademarks, service marks and trade names,
inventions, computer programs, technical data and information
(collectively, the "Intangibles") presently employed by them in
connection with the businesses now operated by them or that the
Company or its subsidiaries own or have pending or have licensed, free
and clear of and without violating any right, claimed right, charge,
encumbrance, pledge, security interest, restriction or lien of any
kind of any other person and are in good standing, and, except as
disclosed in the Registration Statement and the Prospectus, neither
the Company nor any subsidiary has received any notice of infringement
of or conflict with asserted rights of others with respect to any of
the foregoing and, to the knowledge of the Company, their rights to
the foregoing are uncontested. The use of the Intangibles in
connection with the business and operations of the Company and its
subsidiaries does not infringe on the rights of any person. There is
no right under any Intangible necessary to the business of the Company
and its subsidiaries as presently conducted or as the Prospectus
indicates it contemplates conducting, except as may be so designated
in the Prospectus. Neither the Company nor any of its subsidiaries has
infringed, is infringing, or has received notice of infringement with
respect to, asserted Intangibles of others. To the knowledge of the
Company, there is no infringement by others of Intangibles of the
Company or any of its subsidiaries. To the knowledge of the Company,
there is no Intangible of others which has had or may reasonably be
expected to have in the future a material adverse effect on the
financial condition, results of operations, business, properties,
assets, liabilities, or prospects of the Company or its subsidiaries,
taken as a whole.

(l) Neither the Company nor any of its subsidiaries or any of
their directors, officers, agents, employees, or any

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<PAGE> 8
other person associated with or acting on behalf of the Company or its
subsidiaries has, directly or indirectly, used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful
expenses relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns from corporate funds; violated
any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.

(m) The Company and each of its subsidiaries has all
requisite corporate power and authority to execute, deliver, and
perform its obligations under each of (i) this Agreement, and (ii) the
certificates evidencing the Representatives' Options (the
"Representatives' Option Agreements" and, collectively with this
Agreement the "Company Documents"). All necessary corporate
proceedings of the Company have been duly taken to authorize the
execution, delivery, and performance of each of the Company Documents
by the Company. This Agreement has been duly authorized, executed, and
delivered by the Company, is the legal, valid, and binding obligation
of the Company, and assuming due authorization, execution and delivery
by the other party hereto, is enforceable as to the Company in
accordance with its terms. Each of the other Company Documents has
been duly authorized by the Company, and is or, when executed and
delivered by the Company and the other parties hereto, will be the
legal, valid, and binding obligation of the Company, enforceable
against the Company in accordance with their respective terms. No
consent, authorization, approval, order, license, certificate, or
permit of or from, or declaration or filing with, any federal, state,
local, or other governmental authority or any court or other tribunal
is required by the Company for the execution, delivery, or performance
by the Company of any of the Company Documents (except filings under
the Act which have been or will be made before the Closing Date and
such consents or approvals consisting only of consents or approvals
under "blue sky" or state securities laws). No consent of any party to
any contract, agreement, instrument, lease, license, arrangement, or
understanding to which the Company or any of its subsidiaries is a
party, or to which any of their properties or assets are subject, is
required for the execution, delivery, or performance of the Company
Documents (except for those consents which have been obtained); and
the execution, delivery, and performance of any of the Company
Documents will not violate, result in a breach of, conflict with, or
(with or without the giving of notice or the passage of time or both)
entitle any party to terminate or call a default under any such
contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate or result

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<PAGE> 9
in a breach of any term of the certificate of incorporation (or other
charter document) or by-laws of the Company or violate, result in a
breach of, or conflict with any law, rule, regulation, order,
judgment, or decree binding on the Company or any of its subsidiaries
or to which any of their operations, businesses, properties or assets
are subject.

(n) The Firm Stock and the Additional Stock are validly
authorized and, when issued and delivered in accordance with this
Agreement (and against payment therefor), will be validly issued,
fully paid, and nonassessable, without any personal liability
attaching to the ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders. The Company will
convey to the Underwriters good title to the Firm Stock and Additional
Stock purchased by them, respectively, free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements, and voting trusts.

(o) The Representatives' Stock is validly authorized and
reserved for issuance and, when issued and delivered upon exercise of
the Representatives' Options in accordance with the Representatives'
Option Agreements, including payment of the exercise price therefor,
will be validly issued, fully paid and nonassessable, without any
personal liability attaching to ownership thereof, and will not be
issued in violation of any preemptive rights of stockholders. The
Company will convey to the Representatives or their designees good
title to the Representatives' Options and, upon exercise of the
Representatives' Options, the Company will convey to the holders of
the Representatives' Options good title to the Representatives' Stock
purchased by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, stockholders' agreements,
and voting trusts.

(p) The Securities conform to all statements relating thereto
contained in the Registration Statement or the Prospectus. The
descriptions of any litigation, contract, agreement, instrument, lease
or license required to be described in the Registration Statement or
the Prospectus are correct in all material respects. Any litigation
documents, contract, agreement, instrument, lease, license or other
documents required to be filed as an exhibit to the Registration
Statement has been so filed.

(q) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
and except as may otherwise be properly described in the Prospectus,
the Company has not (i) issued any securities or incurred any
liability or obligation, primary or contingent, for borrowed money,
(ii) entered into any transaction not in the ordinary course of
business, or

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<PAGE> 10
(iii) declared or paid any dividend on its capital stock.

(r) Neither the Company nor any of its subsidiaries or any of
their officers, directors, or affiliates (as defined in the
Regulations), has taken or will take, directly or indirectly, prior to
the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of
any security of the Company, or which has caused or resulted in, or
which might in the future reasonably be expected to cause or result
in, stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of any of the Firm Stock or
Additional Stock, as the case may be.

(s) The Company has delivered to you the agreement of each of
its directors, officers and affiliates (as defined in the
Regulations), and from each other person or entity who beneficially
owned as of the effective date of the Registration Statement shares of
Common Stock of the Company (each an "Original Stockholder"), an
enforceable written agreement, in form and substance satisfactory to
counsel for the Underwriters, that for a period of 24 months from the
Closing Date such Original Stockholder will not, without your prior
written consent, offer, pledge, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the
Company, including, without limitation, any shares of Common Stock
issuable under any outstanding stock options. Such agreements shall
provide that any such Original Stockholder may sell shares of Common
Stock commencing 12 months after the offering is completed in the
event that the last sales price for the Common Stock on its principal
exchange has been at least 200% of the initial public offering price
per share hereunder for a period of 20 consecutive trading days ending
within 5 days of the date of such sale, and such sale is completed at
a price in excess of 200% of such initial public offering price.

(t) Except as may have been registered in the Registration
Statement, already been exercised or waived or described in the
Registration Statement and the Prospectus, no person or entity has the
right to require registration of shares of Common Stock or other
securities of the Company because of the filing or effectiveness of
the Registration Statement.

(u) Except as set forth in the Prospectus, the Company has
not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker

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<PAGE> 11
or finder in connection with the transactions contemplated by this
Agreement.

(v) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any
person or affiliate located in Cuba within the meaning of Section
517.075 of the Florida Statutes. If, at any time after the date that
the Registration Statement is declared effective with the Commission
or with the Florida Department of Banking and Finance (the "Florida
Department"), whichever date is later, and prior to the end of the
period referred to in the first clause of Section 2(b), the Company
commences engaging in business with the government of Cuba or with any
person or affiliate located in Cuba, the Company will so inform the
Florida Department within ninety days after such commencement of
business in Cuba, and during the period referred to in Section 2(b)
will inform the Florida Department within ninety days after any change
occurs with respect to previously reported information.

(w) The Registered Securities have been approved for
quotation on the Nasdaq National Market, subject to official notice of
issuance.

(x) Except as contemplated herein or as may have been waived,
no person or entity has any right of first refusal, preemptive right,
right to any compensation, or other similar right or option, in
connection with the Offering, this Agreement, or the Representatives'
Options, or any of the transactions contemplated hereby or thereby.

3. Purchase, Sale, and Delivery of the Firm Stock and the Additional
Stock. On the basis of the representations, warranties, covenants, and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the several
Underwriters, and the Underwriters, severally and not jointly agree to purchase
from the Company, the numbers of shares of Firm Stock set forth opposite the
respective names of the Underwriters on Schedule I hereto.

The purchase price per share of Firm Stock to be paid by the
Underwriters shall be $_____. The initial public offering price per share of
Firm Stock shall be $_____.

Payment for the Firm Stock by the Underwriters shall be made
by wire transfer in immediately available funds to the account or accounts
designated by the Company by written notice to the Representatives at the
offices of Barington Capital Group, L.P., 888 Seventh Avenue, New York, New York
10019, or at such other place in the New York City Metropolitan Area as you
shall determine and advise the Company by at least two full business days'
notice in writing, upon delivery of the Firm Stock to you

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<PAGE> 12
for the respective accounts of the Underwriters. Such delivery and payment shall
be made at 10:00 A.M., New York City Time, on the third business day following
the commencement of the initial public offering, as defined in Section 11(a)
(unless such time and date is postponed in accordance with the provisions of
Section 9(c)), or at such other time as shall be agreed upon between you and the
Company. Such delivery and payment are herein called the "Closing," and the time
and date of such delivery and payment are herein called the "Closing Date."

Certificates for the Firm Stock shall be registered in such
name or names and in such authorized denominations as you may request in writing
at least two full business days prior to the Closing Date. The Company shall
permit you to examine and package such certificates for delivery at least one
full business day prior to the Closing Date.

In addition, the Company hereby grants to the Underwriters
the option to purchase all or a portion of the Additional Stock as may be
necessary to cover over-allotments, at the same purchase price per share to be
paid by the several Underwriters to the Company for the Firm Stock as provided
for in this Section 3. The Additional Stock shall be purchased by the several
Underwriters from the Company as provided herein, in the same proportion as the
ratio which the number of shares set forth opposite such Underwriter's name on
Schedule I hereto bears to the total number of shares of Firm Stock, subject to
adjustment to avoid fractional shares. This option may be exercised only to
cover over-allotments in the sale of shares of Common Stock by the several
Underwriters. This option may be exercised by you on the basis of the
representations, warranties, covenants, and agreements of the Company herein
contained, but subject to the terms and conditions herein set forth, at any time
and from time to time on or before the forty-fifth day following the effective
date of the Registration Statement, by written notice by you to the Company.
Such notice shall set forth the aggregate number of shares of Additional Stock
as to which the option is being exercised and the time and date, as determined
by you, when such shares of Additional Stock are to be delivered (such delivery
herein being called an "Additional Closing," and such time and date are herein
called an "Additional Closing Date"); provided, however, that no Additional
Closing Date shall be earlier than the Closing Date nor earlier than the third
business day after the date on which the notice of the exercise of the option
shall have been given nor later than the eighth business day after the date on
which such notice shall have been given.

Payment for the Additional Stock by the Underwriters shall be
made by wire transfer in immediately available funds to the account or accounts
designated by the Company by written notice to the Representatives at the
offices of Barington Capital Group, L.P., 888 Seventh Avenue, New York, New York
10019, or at such other place in the New York City Metropolitan Area as you

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<PAGE> 13
shall determine and advise the Company by at least two full days' notice in
writing, upon delivery of the Additional Stock to you for the respective
accounts of the Underwriters.

Certificates for the Additional Stock shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date
with respect thereto. The Company shall permit you to examine and package such
certificates for delivery at least one full business day prior to the Additional
Closing Date with respect thereto.

4. Offering. The Underwriters are to make a public offering of the
Firm Stock as soon, on or after the effective date of the Registration
Statement, as you deem it advisable so to do. The Firm Stock is to be initially
offered to the public at the initial public offering price as provided for in
Section 3 (such price being herein called the "public offering price"). After
the consummation of the initial public offering, you may from time to time trade
above or below the public offering price, in your sole discretion, by reason of
changes in general market conditions or otherwise.

5. Covenants of the Company. The Company covenants that it will:

(a) Use its best efforts to cause the Registration Statement
to become effective as promptly as possible. If the Registration
Statement has become or becomes effective with a form of prospectus
omitting Rule 430A Information, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will file the
Prospectus, properly completed, pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to you
of such timely filing.

(b) Notify you immediately, and confirm such notice in
writing, (i) when the Registration Statement and any post-effective
amendment thereto become effective, (ii) of the receipt of any
comments from the Commission or the "blue sky" or securities authority
of any jurisdiction regarding the Registration Statement, any
post-effective amendment thereto, the Prospectus, or any amendment or
supplement thereto, and (iii) of the receipt of any notification with
respect to a Stop Order or the initiation or threatening of any
proceeding with respect to a Stop Order. The Company will use its best
efforts to prevent the issuance of any Stop Order and, if any Stop
Order is issued, to obtain the lifting thereof as promptly as
possible.

(c) During the time when a prospectus relating to the Firm
Stock and the Additional Stock is required to be delivered hereunder
or under the Act or the Regulations, comply

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<PAGE> 14
so far as it is able with all requirements imposed upon it by the Act,
as now existing and as hereafter amended, and by the Regulations, as
from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Firm Stock or the
Additional Stock, as the case may be, in accordance with the
provisions hereof and the Prospectus. If, at any time when a
prospectus relating to the Firm Stock and the Additional Stock is
required to be delivered hereunder or under the Act or the
Regulations, any event shall have occurred as a result of which, in
the reasonable opinion of counsel for the Company or counsel for the
Underwriters, the Registration Statement or the Prospectus as then
amended or supplemented contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, or if, in
the opinion of either of such counsel, it is necessary at any time to
amend or supplement the Registration Statement or the Prospectus to
comply with the Act or the Regulations, the Company will immediately
notify you and promptly prepare and file with the Commission an
appropriate amendment or supplement (in form and substance
satisfactory to you) which will correct such statement or omission or
which will effect such compliance and will use its best efforts to
have any such amendment declared effective as soon as possible.

(d) Deliver without charge to each of the several
Underwriters such number of copies of each Preliminary Prospectus as
may reasonably be requested by the Underwriters and, as soon as the
Registration Statement, or any amendment thereto, becomes effective or
a supplement is filed, deliver without charge to you two signed copies
of the Registration Statement, including exhibits, or such amendment
thereto, as the case may be, and two copies of any supplement thereto,
and deliver without charge to each of the several Underwriters such
number of copies of the Prospectus, the Registration Statement, and
amendments and supplements thereto, if any, without exhibits, as you
may request for the purposes contemplated by the Act.

(e) Endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes effective, to
qualify the Firm Stock and the Additional Stock for offering and sale
under the "blue sky" or securities laws of such jurisdictions as you
may designate; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is
not then subject. In each jurisdiction where such qualification shall
be effected, the Company will, unless you agree, in writing, that such
action is not at the time necessary or advisable, file and make such

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<PAGE> 15
statements or reports at such times as are or may be required by the
laws of such jurisdiction.

(f) Use its best efforts to keep the Prospectus and the
Registration Statement current and effective by filing post-effective
amendments, as necessary.

(g) Make generally available (within the meaning of Section
11(a) of the Act and the Regulations) to its security holders as soon
as practicable, but not later than _________, 199_, an earnings
statement (which need not be certified by independent certified public
accountants unless required by the Act, the Regulations, the Exchange
Act or the rules and regulations promulgated under the Exchange Act
but which shall satisfy the provisions of Section 11(a) of the Act and
the Regulations) covering a period of at least twelve months beginning
after the effective date of the Registration Statement.

(h) For the period of twenty four months after the date of
the Prospectus, not, without your prior written consent, offer, issue,
sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or
other securities of the Company (or any security or other instrument
which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the
Company) except as provided in Section 3 and except for (i) the grant
of options to purchase an aggregate of up to 1,000,000 shares of
Common Stock under the Company's 1998 Non-Qualified Stock Option and
Incentive Stock Option Plan (the "1998 Stock Option Plan"), which plan
is properly described in the Prospectus, (ii) the issuance of Common
Stock issuable upon the exercise of stock options and warrants and
conversion of other convertible securities outstanding on the date
hereof (and as described in the Prospectus) or subsequently issued
pursuant to clause (i) hereof, (iii) the issuance of the Securities,
(iv) the issuance of any securities in connection with any merger or
acquisition approved by a majority of the independent directors of the
Company, or (v) the issuance, commencing twelve months after the
closing of the Offering, of shares of Common Stock to unaffiliated
third parties at fair market value pursuant to a private placement
approved by a majority of the independent directors of the Company.

(i) For a period of five years after the effective date of
the Registration Statement, furnish you, without charge, the
following:

(i) within 90 days after the end of each fiscal
year, three copies of financial statements certified by
independent certified public accountants, including a

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<PAGE> 16
balance sheet, statement of income, and statement of cash
flows of the Company and its then existing subsidiaries,
with supporting schedules, prepared in accordance with
generally accepted accounting principles, as at the end of
such fiscal year and for the 12 months then ended, which may
be on a consolidated basis;

(ii) as soon as practicable after they have been
sent to stockholders of the Company or filed with the
Commission, three copies of each annual and interim financial
and other report or communication sent by the Company to its
stockholders or filed with the Commission;

(iii) as soon as practicable, two copies of every
press release and every material news item and article in
respect of the Company or its affairs which was released by
the Company; and

(iv) such additional documents and information with
respect to the Company and its affairs and the affairs of any
of its subsidiaries as you may from time to time reasonably
request; provided, however, that the provision of such
documentation does not violate any confidentiality agreement
in effect as of the date hereof.

(j) Apply the net proceeds received by it from the offering
in the manner set forth under "Use of Proceeds" in the Prospectus.

(k) Furnish to you as early as practicable prior to the
Closing Date and any Additional Closing Date, as the case may be, but
no less than two full business days prior thereto, a copy of the
latest available unaudited interim consolidated financial statements
of the Company and its consolidated subsidiaries which have been read
by the Company's independent certified public accountants, as stated
in their letters to be furnished pursuant to Section 7(f).

(l) File no amendment or supplement to the Registration
Statement or Prospectus at any time, after the effective date of the
Registration Statement, unless such filing shall comply with the Act
and the Regulations and unless you shall previously have been advised
of such filing and furnished with a copy thereof, and you and counsel
for the Underwriters shall have a reasonable period of time prior to
such filing to review such filing.

(m) Comply with all registration, filing, and reporting
requirements of the Exchange Act which may from time to time be
applicable to the Company.

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<PAGE> 17
(n) Comply with all provisions of all undertakings contained
in the Registration Statement.

(o) Prior to the Closing Date or any Additional Closing Date,
as the case may be, issue no press release or other communication,
directly or indirectly, and hold no press conference with respect to
the Company, the financial conditions, results of operations,
business, properties, assets, liabilities of the Company, or this
Offering, without the Representatives being given a reasonable period
of time to review such press release, communication or topics to be
discussed at any press conference and comment thereon.

(p) File timely with the Commission an appropriate form to
register the Common Stock pursuant to Section 12(b) under the Exchange
Act.

(q) File timely and accurate reports with the Commission in
accordance with Rule 463 of the Regulations or any successor
provision.

(r) Cause the application for quotation of the Registered
Securities on the Nasdaq National Market to be approved prior to the
Closing.

(s) On or prior to the Closing Date, sell to the
Representatives (or their designees), individually and not as
representatives of the Underwriters, the Representatives' Options to
purchase an aggregate of 350,000 shares of Common Stock, which
Representatives' Options shall be evidenced by the Representatives'
Option Agreements, substantially in the form set forth as an exhibit
to the Registration Statement.

(t) Until expiration of the Representatives' Options, keep
reserved sufficient shares of Common Stock, for issuance upon exercise
of the Representatives' Options.

(u) Until the expiration of three years from the Closing
Date, if you, individually and not as representatives of the
Underwriters, shall so request in writing, use its best efforts,
including, without limitation, the solicitation of proxies, to cause
two individuals selected from time to time by Barington Capital Group,
L.P. to be elected as directors of the Company.

(v) Deliver to you, without charge, within a reasonable
period after the last Additional Closing Date or the expiration of the
period in which the Underwriters may exercise the over-allotment
option, three bound volumes of the Registration Statement and all
related materials.

(w) For a period of five years after the Closing Date,

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<PAGE> 18
supply to the appropriate parties such information as may be necessary
or desirable, and otherwise use its best efforts, so that the Company
will be listed and will maintain its listing in the Corporation
Records Service published by Standard & Poor's Corporation and that at
all times during such period such listing will, at a minimum, contain
the names of the Company's officers and directors, a balance sheet as
of a date not more than 18 months prior to such time, and a statement
of operations for either the fiscal year preceding such date or the
most recent fiscal year of operations.

(x) Use its best efforts to maintain the quotation on the
Nasdaq National Market of the Common Stock issued hereunder.

(y) Prior to the date the Registration Statement becomes
effective, procure and maintain Director and Officer Liability
Insurance in the amount no less than $_____ million with a reputable
insurance carrier.

(z) From the Closing Date, retain a transfer agent reasonably
acceptable to the Representatives. Upon the Representatives' request,
the Company shall, for three years from the Closing Date, provide the
Representatives with copies of the Company's daily stock transfer
sheets and lists of the beneficial holders, if available, and record
holders of the Company, from such transfer agent and from the
Depository Trust Company, at the Company's sole cost and expense.

(aa) From the date the Registration Statement becomes
effective and until three years from such date, the Company shall
retain a public relations firm reasonably acceptable to the
Representatives.

6. Payment of Expenses. Except as otherwise provided in Section 11,
the Company hereby agrees to pay all expenses (other than fees of counsel for
the Underwriters, except as provided in Sections 6(c) and 6(e)) in connection
with (a) the preparation, printing, filing, distribution, and mailing of the
Registration Statement, the Prospectus and the certificates and agreements
representing the Securities and the printing, filing, distribution, and mailing
of this Agreement, any Agreement Among Underwriters, any selected dealers
agreement, any Blue Sky Surveys, and if appropriate, any Underwriter's
Questionnaire and Power of Attorney, the certificates representing any of the
Securities, and related documents, including the cost of all copies thereof and
of the Preliminary Prospectuses and of the Prospectus and any amendments or
supplements thereto supplied to the Underwriters in quantities as hereinabove
stated, (b) the issuance, sale, transfer, and delivery of the Firm Stock and the
Additional Stock, including any transfer or other taxes payable

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<PAGE> 19
thereon, (c) the qualification of the Firm Stock and the Additional Stock under
state or foreign "blue sky" or securities laws, including the costs of printing
and mailing the preliminary and final "Blue Sky Survey" and the reasonable fees
of counsel for the Underwriters and the disbursements in connection therewith,
(d) the filing fees payable to the Commission, the National Association of
Securities Dealers, Inc. (the "NASD"), and the jurisdictions in which such
qualification is sought, (e) the reasonable fees and disbursements of the
Underwriters relating to all filings with the NASD, (f) the application fee and
fees for the quotation of the Common Stock on the Nasdaq National Market, (g)
the fees and expenses of the Company's transfer agent and registrar, (h) the
fees and expenses of the Company's legal counsel and accountants, (i) the fees
of an investigative search firm designated by the Representatives to conduct a
background check of the principals of the Company, (j) the costs (up to a
maximum of $15,000) of placing "tombstone" advertisements in the national
edition of The Wall Street Journal or other publication acceptable to Barington,
and (k) the costs of preparing a reasonable number of transaction "bibles" or
"mementos." In addition, the Company hereby agrees to pay to the Representatives
a non-accountable expense allowance equal to 3% of the aggregate gross proceeds
received by the Company from the sale of the Firm Stock and the Additional Stock
which amounts (less $_____ previously paid to you in respect of such
non-accountable expense allowance) shall be paid to you on the Closing Date
(with respect to Common Stock sold by the Company on the Closing Date) and, if
applicable, on any Additional Closing Date (with respect to Additional Stock
sold by the Company on such Additional Closing Date).

7. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Stock and the Additional Stock, as
provided herein, shall be subject, in their discretion, to the continuing
accuracy of the representations and warranties of the Company contained herein
and in each certificate and document contemplated under this Agreement to be
delivered to you, as of the date hereof and as of the Closing Date (or the
Additional Closing Date, as the case may be), to the performance by the Company
of its obligations hereunder, and to the following conditions:

(a) The Registration Statement shall have become effective
not later than 6:00 P.M., New York City Time, on the date of this
Agreement or such later date and time as shall be consented to in
writing by you.

(b) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received the favorable opinion of
Graham & James LLP/Riddell William P.S., counsel for the Company,
dated the date of delivery, addressed to the Underwriters, and in form
and scope satisfactory to counsel for the Underwriters, with such
number of reproduced copies or signed counterparts thereof for each of

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<PAGE> 20
the Underwriters as shall be satisfactory to the Underwriters, to the
effect that:

(i) the Company and each of its subsidiaries is a
corporation or other entity, duly organized and validly existing, and
in good standing under the laws of its jurisdiction of organization
with full power and authority to own, lease, license, and use its
properties and assets and to conduct its or their business in the
manner described in the Prospectus. The Company and each of its
subsidiaries is duly qualified to do business and is in good standing
in every jurisdiction in which its ownership, leasing, licensing, or
use of property and assets or the conduct of its or their business
makes such qualification necessary except where the failure to be so
qualified does not now have and is not reasonably expected in the
future to have a material adverse effect of the operations, business,
properties or assets of the Company and its subsidiaries, taken as a
whole. The Company and each of its subsidiaries has all necessary and
material consents, authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all federal, state,
local and other governmental authorities and all court and other
tribunals necessary to own, lease, license and use its properties and
assets and to conduct its business in the manner described in the
Prospectus, except where the failure to have any such authorizations,
approvals, orders, licenses, certificates, franchises and permits,
individually or in the aggregate, have not and cannot be reasonably
expected in the future to have a material adverse effect upon the
operations, business, properties, or assets of the Company or its
subsidiaries, taken as a whole.

(ii) the authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, of which, without
taking into account the shares offered pursuant hereto, 2,166,667
shares are outstanding, and 1,000,000 shares of preferred stock, par
value $.001 per share, none of which are outstanding. Each outstanding
share of Common Stock is duly authorized, validly issued, fully paid,
and nonassessable, without any personal liability attaching to the
ownership thereof and to knowledge of such counsel, has not been
issued and is not owned or held in violation of any preemptive right
of stockholders. To the knowledge of such counsel, except for (A) the
1,000,000 shares of Common Stock reserved for issuance upon exercise
of stock options under the Company's 1998 Stock Option Plan, (B) the
shares of Common Stock issuable upon exercise of the Representatives'
Options, (C) the Additional Stock, (D) the 175,000 shares of Common
Stock issuable upon exercise of outstanding options, warrants, rights
or agreements for the purchase or acquisition from the Company of
shares of Common Stock, not otherwise included in items A through C
above; each of which has

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<PAGE> 21
been described in the Prospectus, there is no commitment, plan, or
arrangement to issue, and no outstanding option, warrant, or other
right calling for the issuance of, any share of capital stock of the
Company, or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for, capital stock
of the Company or any outstanding security or other instrument which
by its terms is convertible into or exchangeable for capital stock of
the Company;

(iii) to the knowledge of such counsel, except as
described in the Prospectus, there is no litigation, arbitration,
claim, governmental or other proceeding (formal or informal), or
investigation pending or threatened with respect to the Company or any
subsidiary, or any of their operations, business, properties, or
assets which if determined adversely to the Company would,
individually or in the aggregate, have a material adverse effect upon
the operations, business, properties, or assets of the Company and its
subsidiaries, taken as a whole. To the knowledge of such counsel,
neither the Company nor any subsidiary is in violation of, or in
default with respect to, any law, rule, regulation, or to the
knowledge of such counsel, any order, judgment, or decree, except as
may be described in the Prospectus or such as in the aggregate do not
now have and cannot reasonably be expected in the future to have a
material adverse effect upon the operations, business, properties, or
assets of the Company and its subsidiaries, taken as a whole, nor is
the Company or any of its subsidiaries required to take any action in
order to avoid any such violation or default;

(iv) to the knowledge of such counsel, neither the
Company nor any of its subsidiaries nor any other party is now, nor is
the Company, any of its subsidiaries or any other such party expected
by the Company to be in violation or breach of, or in default with
respect to, complying with any material provision of any contract,
agreement, instrument, lease, license, arrangement, or understanding
known to such counsel which is material to the Company or any of its
subsidiaries, and each such contract, agreement, instrument, lease,
license, arrangement or understanding (in the case of parties other
than the Company or any of its subsidiaries, assuming due
authorization, execution and delivery by such parties) is in full
force and is the legal, valid and binding obligation of the parties
thereto and is enforceable as to them in accordance with its terms;

(v) neither the Company nor any of its subsidiaries
is in violation or breach of, or in default with respect to, any term
of its certificate of incorporation (or other charter document) or
by-laws (or other similar document);

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<PAGE> 22
(vi) the Company has all requisite corporate power and
authority to execute, deliver, and perform each of the Company
Documents. All necessary corporate proceedings of the Company have
been taken to authorize the execution, delivery, and performance by
the Company of the Company Documents. Assuming due authorization,
execution and delivery by each of the other parties thereto, each
Company Document has been duly executed and delivered by the Company.
Each Company Document is the legal, valid, and binding obligation of
the Company, and (subject to applicable bankruptcy, insolvency, and
other laws affecting the enforceability of creditors' rights
generally) is or will be enforceable as to the Company in accordance
with its terms. No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with, any
federal, state, local, or other governmental authority or any court or
other tribunal is required by the Company for the execution, delivery,
or performance by the Company of any of the Company Documents (except
filings under the Act which have been made prior to the Closing Date
and consents consisting only of consents under "blue sky" or state
securities laws, as to which such counsel need not express any
opinion). No consent of any party to any contract, agreement,
instrument, lease, license, arrangement, or understanding known to
such counsel and listed as an exhibit to the Registration Statement,
to which the Company or any of its subsidiaries is a party, or to
which any of its or their properties or assets are subject, is
required for the execution, delivery, or performance of any of the
Company Documents; and the execution, delivery, and performance of the
Company Documents will not violate, result in a breach of, conflict
with, or (with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license, arrangement, or
understanding known to such counsel upon due inquiry, or violate or
result in a breach of any term of the certificate of incorporation (or
other charter document) or by-laws of the Company or any of its
subsidiaries, or violate, result in a breach of, or conflict with, any
law, rule or regulation, or any order, judgment or decree known to
such counsel upon due inquiry and binding on the Company or any of its
subsidiaries or to which any of its or their operations, business,
properties, or assets are subject (assuming compliance with all
applicable "blue sky" or state securities laws);

(vii) the Firm Stock and the Additional Stock are
validly authorized. Such opinion delivered at the Closing Date or any
Additional Closing Date shall state that, upon payment therefor in
accordance with this Agreement each share of Firm Stock or Additional
Stock, as the case may be, to be delivered on that date is validly
issued, fully paid, and nonassessable, with no personal liability
attaching to

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<PAGE> 23
the ownership thereof, and is not issued in violation of any
preemptive rights of stockholders known to such counsel, and the
Company will convey to the Underwriters good and marketable title to
the Firm Stock and Additional Stock purchased by them, respectively,
free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements, and voting trusts;

(viii) the Representatives' Stock has been duly and
validly reserved for issuance. Such opinion delivered at the Closing
Date shall state that the Representatives' Options have been duly and
validly issued and delivered. The Representatives' Stock, when issued
and delivered in accordance with the terms of the Representatives'
Option Agreements, including payment of the exercise price therefor,
will be validly authorized, validly issued, fully paid, and
nonassessable, with no personal liability attaching to the ownership
thereof, and will not have been issued in violation of any preemptive
rights of stockholders known to counsel; and the Company will convey
to the Representatives or their designees good title to the
Representatives' Options purchased by them, and, upon exercise of
the Representatives' Options, the Company will convey to the holders
of the Representatives' Options good and marketable title to the
Representatives' Stock, in each case, free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements, and voting trusts;

(ix) the Common Stock and the Securities conform to
all statements relating thereto contained in the Registration
Statement or the Prospectus;

(x) to the knowledge of such counsel, the
descriptions of any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus are correct in all material respects. To the knowledge of
such counsel, any contract, agreement, instrument, lease, or license
required to be filed as an exhibit to the Registration Statement has
been filed with the Commission as an exhibit to the Registration
Statement;

(xi) insofar as statements in the Prospectus purport
to summarize the status of litigation or the provisions of laws,
rules, regulations, orders, judgments, decrees, contracts, agreements,
instruments, leases, or licenses, such statements have been prepared
or reviewed by such counsel and accurately reflect the status of such
litigation and provisions purported to be summarized and are correct
in all material respects;

(xii) the conditions for use of Form SB-2 have been
satisfied with respect to the Registration Statement;

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<PAGE> 24
(xiii) the Common Stock has been approved for quotation on
the Nasdaq National Market, subject to official notice of issuance;

(xiv) to the knowledge of such counsel, no person or
entity has the right to require registration of shares of Common Stock
or other securities of the Company because of the filing or
effectiveness of the Registration Statement, other than persons or
entities which have waived such rights or whose rights have been
satisfied;

(xv) the Registration Statement has become effective
under the Act. To the knowledge of such counsel, no Stop Order has
been issued and no proceedings for that purpose have been instituted
or threatened;

(xvi) the Registration Statement, any Rule 430A
Prospectus, and the Prospectus, and any amendment or supplement
thereto (other than financial statements, statistical information and
other financial data and schedules contained therein, as to which such
counsel need express no opinion), comply as to form in all material
respects with the require- ments of the Act and the Regulations;

(xvii) to the knowledge of such counsel, since the
effective date of the Registration Statement, no event has occurred
which is required to be described in an amendment or supplement to the
Registration Statement or the Prospectus which has not been set forth
in such an amendment or supplement; and

(xviii) nothing has come to the attention of such counsel
that would lead them to believe that the Registration Statement, any
Rule 430A Prospectus, or the Prospectus, or any amendment or
supplement thereto (other than financial statements, statistical data
and other financial data and schedules which are or should be
contained therein, as to which such counsel need express no opinion),
at the time it or they become effective or at the Closing Date or
Additional Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus, at the Closing Date or
Additional Closing Date, as the case may be, included or includes an
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading (in each case other than the financial statements, and
supporting schedules and notes thereto and other financial or
statistical information included therein, as to which no opinion need
be rendered) and such counsel does not know of any amendment to the
Registration Statement required to be

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<PAGE> 25
filed.

In rendering such opinion, counsel for the Company (A) may rely as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company; and (B) may rely to the extent they deem proper, upon written
statements or certificates of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such opinions, statements or
certificates shall be delivered to counsel for the Underwriters.

(c) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received the favorable opinion of
Arent, Fox, Kintner, Plotkin & Kahn, cable regulatory counsel for the
Company, dated the date of delivery, addressed to the Underwriters,
and in form and scope satisfactory to counsel for the Underwriters,
with such number of reproduced copies or signed counterparts thereof
for the Underwriters as shall be satisfactory to the Underwriters, to
the effect that:

(i) the statements in the Prospectus and the
Registration Statement under "Prospectus Summary--Operating
Benefits," "Risk Factors--Government Regulation" and
"Business--Government Regulation--CATV Regulatory Issues"
insofar as such statements constitute summaries of matters
relating to cable television regulation which are referred to
therein, fairly and adequately present the information called
for with respect to such legal matters and accurately
summarize the matters referred to therein;

(ii) the discussion of cable regulatory matters set
forth in the Prospectus and the Registration Statement are
complete and accurate in all material respects;

(iii) such counsel has reviewed the Registration
Statement, any Rule 430A Prospectus or the Prospectus or any
amendment or supplement thereto at the time it or they become
effective or at the Closing Date or Additional Closing Date,
as the case may be, relating to the regulation of the Company
in the cable television industry and such statements have
been and are approved by such counsel and are accurate in all
material respects and fairly present the information set
forth therein; and

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<PAGE> 26
Rule 430 Prospectus, or the Prospectus, or any amendment or
supplement thereto, at the time it or they become effective
or at the Closing Date or Additional Closing Date, as the
case may be, contained an untrue statement of a material
fact with respect to the status of the Company under any
federal or state cable television laws or omitted to state a
material fact relating to the status of the Company under
any federal or state cable television laws required to be
stated therein or necessary to make the statements therein
not misleading or that the Prospectus, at the Closing Date
or Additional Closing Date, as the case may be, included or
includes an untrue statement of a material fact with respect
to the status of the Company under any federal or state
telecommunications laws or omitted or omits to state a
material fact with respect to the status of the Company
under any federal or state cable television laws necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading and
such counsel does not know of any amendment to the
Registration Statement required to be filed.

(d) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received the favorable opinion of
Hunter Communications Law Group, telecommunications counsel for the
Company, dated the date of delivery, addressed to the Underwriters,
and in form and scope satisfactory to counsel for the Underwriters,
with such number of reproduced copies or signed counterparts thereof
for the Underwriters as shall be satisfactory to the Underwriters, to
the effect that:

(i) the statements in the Prospectus and the
Registration Statement under "Prospectus Summary--Operating
Benefits," "Risk Factors--Government Regulation" and
"Business--Government Regulation--Telephony Regulatory
Issues" insofar as such statements constitute summaries of
legal matters referred to therein, fairly and adequately
present the information called for with respect to such legal
matters and accurately summarize the matters referred to
therein;

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<PAGE> 27
(ii) the discussion of regulatory matters set forth
in the Prospectus and the Registration Statement are complete
and accurate in all material respects;

(iii) such counsel has reviewed the Registration
Statement, any Rule 430A Prospectus or the Prospectus or any
amendment or supplement thereto at the time it or they become
effective or at the Closing Date or Additional Closing Date,
as the case may be, relating to the regulation of the Company
in the telecommunications industry and such statements have
been and are approved by such counsel and are accurate in all
material respects and fairly present the information set
forth therein; and

(iv) nothing has come to the attention of such counsel
that would lead them to believe that the Registration
Statement, any Rule 430A Prospectus, or the Prospectus, or
any amendment or supplement thereto any Rule 430 Prospectus,
or the Prospectus, or any amendment or supplement thereto, at
the time it or they become effective or at the Closing Date
or Additional Closing Date, as the case may be, contained an
untrue statement of a material fact with respect to the
status of the Company under any federal or state
telecommunications laws or omitted to state a material fact
relating to the status of the Company under any federal or
state telecommunications laws required to be stated therein
or necessary to make the statements therein not misleading
or that the Prospectus, at the Closing Date or Additional
Closing Date, as the case may be, included or includes an
untrue statement of a material fact with respect to the
status of the Company under any federal or state
telecommunications laws or omitted or omits to state a
material fact with respect to the status of the Company
under any federal or state telecommunications laws necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading and
such counsel does not know of any amendment to the
Registration Statement required to be filed.

(e) On or prior to the Closing Date and any Additional

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<PAGE> 28
Closing Date, as the case may be, the Representatives shall have been
furnished such information, documents, certificates, and opinions as
they may reasonably require for the purpose of enabling them to review
the matters referred to in Sections 7(b) and 7(c), and in order to
evidence the accuracy, completeness, or satisfaction of any of the
representations, warranties, covenants, agreements, or conditions
herein contained, or as you may reasonably request.

(f) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received a certificate of the chief
executive officer and of the chief financial officer of the Company,
dated the Closing Date or such Additional Closing Date, as the case
may be, to the effect that the condition set forth in Section 7(a) has
been satisfied, that as of the date of this Agreement and as of the
Closing Date or such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein were
and are accurate, and that as of the Closing Date or such Additional
Closing Date, as the case may be, the obligations to be performed by
the Company hereunder on or prior thereto have been fully performed.

(g) At the time this Agreement is executed and at the Closing
Date and any Additional Closing Date, as the case may be, you shall
have received a letter from Coopers & Lybrand L.L.P., certified public
accountants, dated the date of delivery, and addressed to the
Underwriters, and in form and substance satisfactory to you, with
reproduced copies or signed counterparts thereof for the Underwriters.

(h) All proceedings taken in connection with the issuance,
sale, transfer, and delivery of the Firm Stock and the Additional
Stock shall be satisfactory in form and substance to you and to
counsel for the Underwriters, and the Underwriters shall have received
from such counsel for the Underwriters a favorable opinion, dated as
of the Closing Date and the Additional Closing Date, as the case may
be, with respect to such of the matters set forth under Section 7(b),
and with respect to such other related matters, as you may reasonably
request.

(i) The National Association of Securities Dealers, Inc. upon
review of the terms of the public offering of the Firm Stock and the
Additional Stock, shall not have objected to the Underwriters'
participation in such offering.

(j) Prior to or on the Closing Date, the Company shall have
entered into the Representatives' Option Agreements with the
Representatives.

(k) Prior to or on the Closing Date, the Company shall have
provided to you copies of the agreements referred to in

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<PAGE> 29
Section 2(s).

(l) The Representatives and their counsel shall have received
any additional documents, instruments or certificates which they
reasonably request from the Company.

Any certificate or other document signed by any officer of the Company
and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company hereunder to the Underwriters as to
the statements made therein. If any condition to the Underwriters' obligations
hereunder to be fulfilled prior to or at the Closing Date or any Additional
Closing Date, as the case may be, is not so fulfilled, you may on behalf of the
several Underwriters terminate this Agreement or, if you so elect, in writing
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.

8. Indemnification and Contribution.

(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Underwriter, its respective
officers, directors, partners, employees, agents, and counsel, and
each person, if any, who controls each Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all loss, liability, claim, damage, and expense (which shall
include, for all purposes of this Section 8, but not be limited to,
reasonable attorneys' fees and any and all expense incurred in
investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation) as and when
incurred arising out of, based upon, or in connection with (i) any
untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, any Rule 430A Prospectus,
the Registration Statement, or the Prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto or
(B) in any application or other document or communication (in this
Section 8 collectively called an "application") executed by or on
behalf of the Company or based upon written information furnished by
or on behalf of the Company filed in any jurisdiction in order to
qualify any of the Registered Securities under the "blue sky" or
securities laws thereof or filed with the Commission or any securities
exchange; or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to
the Company as stated in Section 8(b) with respect to any Underwriter
by or on behalf of such Underwriter through the Representatives
expressly for inclusion in any Preliminary Prospectus, any Rule 430A
Prospectus, the

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<PAGE> 30
Registration Statement, or the Prospectus, or any amendment or
supplement thereto, or in any application, as the case may be, or (ii)
any breach of any representation, warranty, covenant, or agreement of
the Company contained in this Agreement. The foregoing agreement to
indemnify shall be in addition to any liability the Company may
otherwise have, including liabilities arising under this Agreement.

If any action is brought against an Underwriter or any of its
respective officers, directors, partners, employees, agents, or
counsel, or any controlling persons of an Underwriter (an "indemnified
party") in respect of which indemnity may be sought against the
Company pursuant to the foregoing paragraph, such indemnified party or
parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not
relieve the Company from any liability it may have other than pursuant
to this Section 8(a), except to the extent it may have been prejudiced
in any material respect by such failure) and the Company shall
promptly assume the defense of such action, including the employment
of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses in connection with such defense. Such
indemnified party or parties shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such indemnified party or parties
unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action
or the Company shall not have in a timely manner employed counsel
reasonably satisfactory to such indemnified party or parties to have
charge of the defense of such action or such indemnified party or
parties shall have reasonably concluded on advice of counsel that
there may be one or more legal defenses available to it or them or to
other indemnified parties which are different from or additional to
those available to the Company, in any of which events such fees and
expenses shall be borne by the Company and the Company shall not have
the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this paragraph to the
contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written
consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that
is not released as described in this sentence, settle or compromise
any action, or permit a default or consent to the entry of judgment in
or otherwise seek to terminate any pending or threatened action, in
respect of which indemnity may be sought hereunder, unless such
settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in
respect of such action. The Company agrees promptly to notify the
Underwriters of the

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<PAGE> 31
commencement of any litigation or proceedings against the Company or
any of its officers or directors in connection with the sale of the
Firm Stock or the Additional Stock, any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement, or the Prospectus,
or any amendment or supplement thereto, or any application.

(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each director of the Company,
each officer of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the
Company to such Underwriter in Section 8(a), but only with respect to
(i) statements or omissions, if any, made in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or
the Prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application in reliance
upon and in conformity with written information furnished to the
Company as stated in this Section 8(b) with respect to any Underwriter
by or on behalf of such Underwriter through the Representatives or
their counsel expressly for inclusion in any Preliminary Prospectus,
any Rule 430A Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or in any
application, as the case may be; provided, however, that the
obligation of each Underwriter to provide indemnity under the
provisions of this Section 8(b) shall be limited to the amount which
represents the underwriting discounts received by such Underwriter
hereunder. For all purposes of this Agreement, the information
provided in the first, third and eleventh paragraphs of the
"Underwriting" section and the stabilization language on the inside
front cover set forth in the Prospectus constitute the only
information furnished in writing by or on behalf of any Underwriter
expressly for inclusion in any Preliminary Prospectus, any Rule 430A
Prospectus, the Registration Statement, or the Prospectus (as from
time to time amended or supplemented), or any amendment or supplement
thereto, or in any application (excluding applications to the National
Association of Securities Dealers, Inc. and the Nasdaq Stock Market),
as the case may be. If any action shall be brought against the Company
or any other person so indemnified based on any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement, or
the Prospectus, or any amendment or supplement thereto, or in any
application, and in respect of which indemnity may be sought against
any Underwriter pursuant to this Section 8(b), such Underwriter shall
have the rights and duties given to the Company, and the Company and
each other person so indemnified shall have the rights and duties
given to the indemnified parties, by the provisions

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<PAGE> 32
of Section 8(a).

(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to
Section 8(a) or 8(b) (subject to the limitations thereof) but it is
found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case,
even though this Agreement expressly provides for indemnification in
such case or (ii) any indemnified or indemnifying party seeks
contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by or on
behalf of any director of the Company, any officer of the Company who
signed the Registration Statement, and any controlling person of the
Company), as one entity, and the Underwriters, in the aggregate
(including for this purpose any contribution by or on behalf of an
indemnified party), as a second entity, shall contribute to the
losses, liabilities, claims, damages, and expenses whatsoever to which
any of them may be subject, so that the Underwriters are responsible
for the proportion thereof equal to the percentage which the
underwriting discount per share of Firm Stock set forth on the cover
page of the Prospectus represents of the initial public offering price
per share set forth on the cover page of the Prospectus and the
Company is responsible for the remaining portion; provided, however,
that if applicable law does not permit such allocation, then other
relevant equitable considerations such as the relative fault of the
Company and the Underwriters in the aggregate, in con- nection with
the facts which resulted in such losses, liabilities, claims, damages,
and expenses shall also be considered. The relative fault, in the case
of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such
statement, alleged statement, omission, or alleged omission relates to
information supplied by the Company or by the Underwriters, and the
parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement, alleged statement,
omission, or alleged omission. The Company and the Underwriters agree
that it would be unjust and inequitable if the respective obligations
of the Company and the Underwriters for contribution were determined
by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Underwriters
and the other indemnified parties were treated as one entity for such
purpose) or by any other method of allocation that does not reflect
the equitable considerations referred to in this Section 8(c). In no
case shall any Underwriter be responsible for a portion of the
contribution obligation imposed on all Underwriters in excess of its
pro rata share based on the number of shares underwritten by it as
compared to the number of shares underwritten by all Underwriters who
do not default

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<PAGE> 33
in their obligations under this Section 8(c). No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this
Section 8(c), each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act and each officer, director, partner, employee, agent, and counsel
of any Underwriter shall have the same rights to contribution as such
Underwriter and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed the
Registration Statement, and each director of the Company shall have
the same rights to contribution as the Company, subject in each case
to the provisions of this Section 8(c). In no case shall any
Underwriter be liable or responsible for any amount in excess of the
Underwriting discount applicable to the Firm Stock purchased by such
Underwriter hereunder. Anything in this Section 8(c) to the contrary
notwithstanding, no party shall be liable for contribution with
respect to the settlement of any claim or action effected without its
written consent. This Section 8(c) is intended to supersede any right
to contribution under the Act, the Exchange Act, or otherwise.

9. Default by an Underwriter.

(a) If any Underwriter or Underwriters shall default in its
or their obligation to purchase Firm Stock or Additional Shares
hereunder, and if the number of Firm Stock or Additional Shares to
which the defaults of all Underwriters in the aggregate relate does
not exceed 10% of the number of Firm Stock or Additional Shares, as
the case may be, which all Underwriters have agreed to purchase
hereunder, then such Firm Stock or Additional Shares to which such
defaults relate shall be purchased by the non-defaulting Underwriters
in proportion to their respective commitments hereunder.

(b) If such defaults exceed in the aggregate 10% of the
number of Firm Stock or Additional Shares, as the case may be, which
all Underwriters have agreed to purchase hereunder, you may in your
discretion arrange for yourself or for another party or parties to
purchase such Firm Stock or Additional Shares, as the case may be, to
which such default relates on the terms contained herein. If you do
not arrange for the purchase of such Firm Stock or Additional Shares,
as the case may be, within one business day after the occurrence of
defaults relating to in excess of 10% of the Firm Stock or the
Additional Shares, as the case may be, then the Company shall be
entitled to a further period of one business day within which to
procure another party or parties satisfactory to you to purchase such
Firm Stock or

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<PAGE> 34
Additional Shares, as the case may be, on such terms. If you or the
Company do not arrange for the purchase of the Firm Stock or
Additional Shares, as the case may be, to which such defaults relate
as provided in this Section 9(b), this Agreement may be terminated by
you or by the Company without liability on the part of the Company
(except that the provisions of Sections 6, 8, 9, 10, and 13 shall
survive such termination) or the several Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter of its
liability, if any, to the other several Underwriters and to the
Company for any damages occasioned by its default hereunder.

(c) If the Firm Stock or Additional Shares to which such
defaults relate are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as
aforesaid, you or the Company shall have the right to postpone the
Closing Date or the Additional Closing Date, as the case may be, for a
reasonable period but not in any event more than seven days in order
to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements with respect to the Firm Stock or the Additional Shares,
and the Company agrees to prepare and file promptly any amendment or
supplement to the Registration Statement or the Prospectus which in
the opinion of counsel for the Underwriters may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall
include any party substituted under this Section 9 as if such party
had originally been a party to this Agreement and had been allocated
the number of Firm Stock and Additional Shares actually purchased by
it as a result of its original commitment to purchase Firm Stock and
Additional Shares and its purchase of Firm Stock or Additional Shares
pursuant to this Section 9.

10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriters and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any indemnified person,
or by or on behalf of the Company or any person or entity which is entitled to
be indemnified under Section 8(b), and shall survive termination of this
Agreement or the delivery of the Firm Stock and the Additional Stock to the
several Underwriters. In addition, the provisions of Sections 6, 8, 9, 10, 11,
and 13 shall survive termination of this Agreement, whether such termination
occurs before or after the Closing Date or any Additional Closing Date.

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<PAGE> 35
11. Effective Date of This Agreement and Termination Thereof.

(a) This Agreement shall become effective at 9:30 A.M., New
York City Time, on the first full business day following the day on
which the Registration Statement becomes effective or at the time of
the initial public offering by the Underwriters of the Firm Stock,
whichever is earlier. The time of the initial public offering shall
mean the time, after the Registration Statement becomes effective, of
the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the shares
or the time, after the Registration Statement becomes effective, when
the Firm Stock are first released by you for offering by the
Underwriters or dealers by letter or telegram, whichever shall first
occur. You or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except as
noted below in this Section 11, by giving the notice indicated in
Section 11(c) before the time this Agreement becomes effective.

(b) In addition to the right to terminate this Agreement
pursuant to Sections 7 and 9 hereof, you shall have the right to
terminate this Agreement at any time prior to the Closing Date or any
Additional Closing Date, as the case may be, by giving notice to the
Company if any domestic or international event, act, or occurrence has
materially disrupted, or in your opinion will in the immediate future
materially disrupt, the securities markets; or if there shall have
been a general suspension of, or a general limitation on prices for,
trading in securities on the New York Stock Exchange, the Nasdaq
National Market, the American Stock Exchange, or in the
over-the-counter market; or if there shall have been an outbreak of
major hostilities or other national or international calamity; or if a
banking moratorium has been declared by a state or federal authority;
or if a moratorium in foreign exchange trading by major international
banks or persons has been declared; or if there shall have been a
material interruption in the mail service or other means of
communication within the United States; or if the Company shall have
sustained a material or substantial loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage, or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in
your opinion, make it inadvisable to proceed with the offering, sale,
or delivery of the Firm Stock or the Additional Stock, as the case may
be; or if there shall have been such change in the market for
securities in general or in political, financial, or economic
conditions as in your judgment makes it inadvisable to proceed with
the offering, sale, and delivery of the Firm Stock or the Additional

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<PAGE> 36
Stock, as the case may be, on the terms contemplated by the
Prospectus.

(c) If you elect to prevent this Agreement from becoming
effective, as provided in this Section 11, or to terminate this
Agreement pursuant to Section 7, 9, or this Section 11, you shall
notify the Company promptly by telephone, telex, facsimile or
telegram, confirmed by letter. If the Company elects to prevent this
Agreement from becoming effective, as provided in this Section 11, or
to terminate this Agreement pursuant to Section 9 of this Agreement,
the Company shall notify you promptly by telephone, telex, facsimile,
or telegram, confirmed by letter.

(d) Anything in this Agreement to the contrary
notwithstanding other than Section 11(e), if this Agreement shall not
become effective by reason of an election pursuant to this Section 11
or if this Agreement shall terminate or shall otherwise not be carried
out within the time specified herein by reason of any failure on the
part of the Company to perform any covenant or agreement or satisfy
any condition of this Agreement by it to be performed or satisfied,
the sole liability of the Company to the Underwriters, in addition to
the obligations the Company assumed pursuant to Section 6, will be to
reimburse the several Underwriters for such out-of-pocket expenses
(including the reasonable fees and disbursements of their counsel) as
shall have been incurred by them in connection with this Agreement or
the proposed offer, sale, and delivery of the Firm Stock and the
Additional Stock, and the Company agrees to pay promptly upon demand
the full amount thereof, to you for the account of the Underwriters
less amounts previously paid to you on account for or in reimbursement
of such expenses.

(e) Notwithstanding any election hereunder or any termination
of this Agreement, and whether or not this Agreement is otherwise
carried out, the provisions of Sections 6, 8, 10, and 15 shall not be
in any way affected by such election or termination or failure to
carry out the terms of this Agreement or any part hereof.

12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telecopied and confirmed by letter,
to such Underwriter, to Barington Capital Group, L.P., 888 Seventh Avenue, New
York, New York 10019, telecopier number (212) 974-3923, Attention: Carl G.
Kleidman; or if sent to the Company, shall be mailed, delivered, or telecopied
and confirmed by letter, to the Company, 10300 Metric Blvd., Austin, Texas
78758, telecopier number (512) 451- 8732, Attention: Chief Executive Officer.
All notices hereunder shall be effective upon receipt by the party to which it
is addressed.

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<PAGE> 37
13. Parties. You represent that you are authorized to act on behalf of
the several Underwriters named in Schedule I hereto, and the Company shall be
entitled to act and rely on any request, notice, consent, waiver, or agreement
purportedly given on behalf of the Underwriters when the same shall have been
given by you on such behalf. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the several Underwriters and the Company and the
persons and entities referred to in Section 8 who are entitled to
indemnification or contribution, and their respective successors, legal
representatives, and assigns (which shall not include any buyer, as such, of the
Firm Stock or the Additional Stock), and no other person shall have or be
construed to have any legal or equitable right, remedy, or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
Notwithstanding anything contained in this Agreement to the contrary, all of the
obligations of the Underwriters hereunder are several and not joint.

14. Construction. This Agreement shall be construed in
accordance with the laws of the State of New York, without giving effect to
conflict of laws. TIME IS OF THE ESSENCE IN THIS AGREEMENT.

15. Consent to Jurisdiction. Each party hereto irrevocably consents
to the jurisdiction of the courts of the State of New York and of any federal
court located in such State in connection with any action or proceeding arising
out of or relating to this Agreement, any document or instrument delivered
pursuant to, in connection with or simultaneously with this Agreement, or a
breach of this Agreement or any such document or instrument. In any such action
or proceeding, each party hereto waives personal service or any summons,
complaint or other process and agrees that service thereof may be made in
accordance with Section 12. Within 30 days after such service, or such other
time as may be mutually agreed upon in writing by the attorneys for the parties
to such action or proceeding, the Company or the Underwriters, as the case may
be, shall appear or answer such summons, complaint or other process.

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<PAGE> 38
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between us.

Very truly yours,

U.S. ONLINE COMMUNICATIONS, INC.

By:____________________________
Name: Robert G. Solomon
Title: Chief Executive Officer

Accepted as of the date first above written.
New York, New York

BARINGTON CAPITAL GROUP, L.P.
By: LNA CAPITAL CORP.,
General Partner

By:____________________________________
Name: Carl G. Kleidman
Title: Managing Director
Investment Banking

CRUTTENDEN ROTH INCORPORATED

By:____________________________________
Name:
Title:

-38-

<PAGE> 39
SCHEDULE I

<TABLE>
<CAPTION>
Number of
Shares to
be
Name of Underwriter Purchased
- ------------------- ---------
<S> <C>
Barington Capital Group, L.P.............................
Cruttenden Roth Incorporated.............................

TOTAL.................................................... 3,500,000
=========
</TABLE>

-39-

<PAGE> 1
EXHIBIT 1.3

AMENDED AND RESTATED CONSULTING AGREEMENT

This Amended and Restated Consulting Agreement (the "Agreement") made
on this ____ day of July, 1998, by and between U.S. OnLine Communications, Inc.,
a Delaware corporation (the "Company") and Barington Capital Group, L.P.
("Barington"), amends and restates, in its entirety, the Consulting Agreement,
dated March 30, 1998, between the Company and Barington (the "Initial
Agreement").

WHEREAS, the Company granted to Barington pursuant to the terms and
conditions of the Initial Agreement an irrevocable preferential right for a
period of three (3) years from the date of such agreement to purchase for its
account or sell for the account of the Company or any subsidiary of or successor
to, the Company, any securities of the Company or any such subsidiary of, or
successor to, the Company, which the Company or any such subsidiary or successor
may seek to sell, whether pursuant to registration under the Securities Act of
1933, as amended, or otherwise (the "Right of First Refusal");

WHEREAS, the Company and Barington desire to eliminate in its entirety
the Right of First Refusal;

NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements hereinafter set forth, the Company agrees to retain Barington and
Barington agrees to be retained by the Company under the terms and conditions
set forth below:

1. The Company hereby retains Barington to perform consulting services
related to corporate finance and other financial services matters, and Barington
hereby accepts such retention, for a term commencing on the date of the Initial
Agreement and ending on the first anniversary thereof. In this regard, subject
to the terms set forth below, Barington shall furnish to the Company advice and
recommendations with respect to such aspects of the business and affairs of the
Company as the Company shall, from time to time, reasonably request upon
reasonable notice.

2. As compensation for the services described in paragraph 1 above,
the Company shall pay to Barington a fee of $500,000 (exclusive of any
accountable out-of-pocket expenses)(the "Consulting Fee"), payable on the nine
month anniversary of the Initial Agreement. In the event that Barington is the
lead managing underwriter in connection with an initial public offering of the
equity securities of the Company and such offering is consummated prior to the
due date for the Consulting Fee, the fees payable to Barington in connection
with such public offering shall be credited dollar for dollar against

<PAGE> 2
the Consulting Fee. In the event that Barington is unable or unwilling to
complete an initial public offering of the Common Stock of the Company
substantially on the terms and conditions set forth in that certain Engagement
Letter, dated February 3, 1998, by and between Barington and the Company within
six months of the date of the Initial Agreement, other than as a result of any
actions taken by the Company or any material adverse change in the business,
results of operations or prospects of the Company, then the Company may elect
not to proceed with an initial public offering in which Barington is the lead or
co- lead underwriter and, if so, Barington shall waive the Consulting Fee.

In addition, if within two years immediately following the
date of the Initial Agreement, the Company consummates a Transaction (as defined
below) with any party introduced by Barington to the Company prior to the date
of the Initial Agreement, the Company shall pay to Barington a fee equal to ten
percent (10%) of the gross proceeds of such Transaction. A "Transaction" shall
mean any transaction in which the Company or any subsidiary or affiliate of the
Company may be involved, including, but not limited to, mergers, acquisitions,
joint ventures, sales of securities of the Company or its subsidiaries or
affiliates or sales of all or substantially all of the assets of the Company or
any subsidiary or affiliate of the Company, sales or other issuances of any
securities in connection with an acquisition or disposition or other business
combination transaction.

3. In addition, Barington shall hold itself ready to assist the
Company in evaluating and negotiating particular contracts or projects, if
requested to do so by the Company, upon reasonable notice, and will undertake
such evaluations and negotiations under prior written agreement as to additional
compensation to be paid by the Company to Barington with respect to such
evaluations and negotiations.

4. All obligations of Barington contained herein shall be subject to
Barington's reasonable availability for such performance, in view of the nature
of the requested service and the amount of notice received. Barington shall
devote such time and effort to the performance of its duties hereunder as
Barington shall determine is reasonably necessary for such performance.
Barington may look to such others for such factual information, investment
recommendations, economic advice and/or research, upon which to base its advice
to the Company hereunder, as it shall deem appropriate. The Company shall
furnish to Barington all information available to it and requested by Barington
which Barington determines is relevant to the performance by Barington of its
obligations under this Agreement, or particular projects as to which Barington
is acting as advisor, which will permit Barington to have access to all material
information available to the Company, reasonably requested by Barington. In the
event

<PAGE> 3
that the Company fails or refuses to furnish any such material or information
reasonably requested by Barington, and thus prevents or impedes Barington's
performance hereunder, any inability of Barington to perform shall not be a
breach of its obligations hereunder.

5. Subject to Section 6, nothing contained in this Agreement shall
limit or restrict the right of Barington or of any partner, employee, agent or
representative of Barington, to be a partner, director, officer, employee, agent
or representative of, or to engage in, any other business, whether or not of a
similar nature to the Company's business, nor to limit or restrict the right of
Barington to render services of any kind to any other corporation, firm,
individual or association.

6. Barington will hold, and will use its commercially reasonable
efforts to cause its officers, directors, employees, consultants, advisors, and
agents to hold, in confidence any confidential information which the Company
provides to Barington pursuant to this Agreement. Barington may disclose such
information to its officers, directors, employees, consultants, advisors and
agents, in connection with the services to be rendered as contemplated by this
Agreement, so long as such persons are informed by Barington of the confidential
nature of such information and are directed by Barington to treat such
information confidentially in accordance herewith. Notwithstanding the
foregoing, Barington shall not be required to maintain confidentiality with
respect to information (i) which is or becomes part of the public domain
(through no breach of this Agreement by Barington or any of its officers,
directors, employees, consultants and advisors); (ii) of which Barington can
show it had independent knowledge prior to disclosure to it by the Company;
(iii) which comes into the possession of Barington in the normal and routine
course of its own business from and through independent non-confidential
sources; or (iv) which is required to be disclosed by Barington by governmental
requirements. If Barington is requested or required (by oral questions,
interrogatories, requests for information or document subpoenas, civil
investigative demands, or similar process) to disclose any confidential
information supplied to it by the Company, or the existence of other
negotiations in the course of its dealings with the Company or its
representatives, Barington shall, unless prohibited by law, promptly notify the
Company of such request(s) so that the Company may seek an appropriate
protective order. In the event that a protective order or similar remedy is not
obtained, Barington will disclose only that portion of the confidential
information, as, in the opinion of its counsel, is legally required.

7. Because Barington will be acting on your behalf, it is its practice
to receive indemnification. A copy of Barington's standard indemnification
provisions (the "Indemnification

<PAGE> 4
Provisions") is attached to this Agreement and is incorporated herein and made a
part hereof.

8. This Agreement may not be transferred, assigned or delegated by any
of the parties hereto without the prior written consent of the other party
hereto.

9. The failure or neglect of the parties hereto to insist, in any one
or more instances, upon the strict performance of any of the terms or conditions
of this Agreement, or their waiver of strict performance of any of the terms or
conditions of this Agreement, shall not be construed as a waiver or
relinquishment in the future of such term or condition, but the same shall
continue in full force and effect.

10. This Agreement may not be terminated by the Company. This
Agreement may be terminated by Barington at any time upon thirty (30) days'
prior written notice, without liability or continuing obligation to you or to us
(except for any compensation earned by us up to the date of termination,
including compensation to be paid subsequent to such termination). Neither
termination nor completion of this assignment shall affect the provisions of
Section 2 hereof, including, but not limited to, the compensation due to
Barington pursuant to such Section or the Indemnification Provisions which are
incorporated herein, which shall remain operative and in full force and effect.

11. Any notices hereunder shall be sent to the Company and to
Barington at their respective addresses set forth above. Any notice shall be
given by hand delivery, facsimile transmission or overnight delivery or courier
service, against receipt therefor, and shall be deemed to have been given when
received. Either party may designate any other address to which notice shall be
given, by giving written notice to the other of such change of address in the
manner herein provided.

12. This Agreement has been made in the State of New York and shall be
construed and governed in accordance with the laws thereof without giving effect
to principles governing conflicts of law.

13. This Agreement contains the entire agreement between the parties,
may not be altered or modified, except in writing and signed by the party to be
charged thereby, and supersedes any and all previous agreements between the
parties relating to the subject matter hereof.

14. This Agreement shall be binding upon the parties hereto and their
respective heirs, administrators, successors and permitted assigns.

<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this agreement to
be duly executed as of the date first written above.

BARINGTON CAPITAL GROUP, L.P.

By:__________________________
Name: Carl Kleidman
Title: Managing Director

U.S. ONLINE COMMUNICATIONS, INC.

By: ___________________________
Name: Donald Barlow
Title: President

<PAGE> 6
INDEMNIFICATION PROVISIONS

U.S. OnLine Communications, Inc. (the "Company") agrees to indemnify
and hold harmless Barington Capital Group, L.P. ("Barington") against any and
all losses, claims, damages, obligations, penalties, judgments, awards,
liabilities, costs, expenses and disbursements (and any and all actions, suits,
proceedings and investigations in respect thereof and any and all legal and
other costs, expenses and disbursements in giving testimony or furnishing
documents in response to a subpoena or otherwise), including, without
limitation, the costs, expenses and disbursements, as and when incurred, of
investigating, preparing or defending any such action, suit, proceeding or
investigation (whether or not in connection with litigation in which Barington
is a party), directly or indirectly, caused by, relating to, based upon, arising
out of, or in connection with Barington's acting for the Company, including,
without limitation, any act or omission by Barington in connection with its
acceptance of or the performance or non-performance of its obligations under the
Agreement, dated March 30, 1998, between the Company and Barington to which
these indemnification provisions are attached and form a part (the "Agreement").
The Company also agrees that Barington shall not have any liability (whether
direct or indirect, in contract or tort or otherwise) to the Company for or in
connection with the engagement of Barington, except to the extent that any such
liability is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) to have resulted primarily and directly from
Barington's gross negligence or willful misconduct.

These indemnification provisions shall be in addition to any liability
which the Company may otherwise have to Barington or the persons indemnified
below in this sentence and shall extend to the following: Barington, its
affiliated entities, partners, employees, legal counsel, agents and controlling
persons (within the meaning of the federal securities laws), and the officers,
directors, employees, legal counsel, agents and controlling persons of any of
them. All references to Barington in these indemnification provisions shall be
understood to include any and all of the foregoing.

If any action, suit, proceeding or investigation is commenced, as to
which Barington proposes to demand indemnification, it shall notify the Company
with reasonable promptness; provided, however, that any failure by Barington to
notify the Company shall not relieve the Company from its obligations hereunder,
except to the extent that the Company is materially prejudiced thereby. If the
Company so elects, or is requested by Barington, the Company will assume the
defense of such action, suit, proceeding or investigation, including the
employment of counsel reasonably acceptable to Barington, and

<PAGE> 7
the payment of the fees and disbursements of such counsel. In the event,
however, that the Company fails to promptly assume the defense thereof with
counsel reasonably acceptable to Barington, or Barington determines in its
reasonable judgement that it has one or more defenses different than or in
addition to those of the Company, then Barington shall have the right to retain
counsel (in addition to any local counsel) of its own choice to represent it,
and the Company shall pay the reasonable fees, expenses and disbursements of
such counsel; and such counsel shall, to the extent consistent with its
professional responsibilities, cooperate with the Company and any counsel
designated by the Company. The Company shall be liable for any settlement of any
claim against Barington made with the Company's written consent, which consent
shall not be unreasonably withheld. The Company shall not, without the prior
written consent of Barington, settle or compromise any claim, or permit a
default or consent to the entry of any judgment in respect thereof, unless such
settlement, compromise or consent includes, as a unconditional term thereof, the
giving by the claimant to Barington of an unconditional release from all
liability in respect of such claim.

In order to provide for just and equitable contribution, if a claim
for indemnification pursuant to these indemnification provisions is made but it
is found in a final judgment by a court of competent jurisdiction (not subject
to further appeal) that such indemnification may not be enforced in such case,
even though the express provisions hereof provide for indemnification in such
case, then the Company, on the one hand, and Barington, on the other hand, shall
contribute to the losses, claims, damages, obligations, penalties, judgments,
awards, liabilities, costs, expenses and disbursements to which the indemnified
persons may be subject in accordance with the relative benefits received by the
Company, on the one hand, and Barington, on the other hand, and also the
relative fault of the Company, on the one hand, and Barington, on the other
hand, in connection with the statements, acts or omissions which resulted in
such losses, claims, damages, obligations, penalties, judgments, awards,
liabilities, costs, expenses or disbursements and the relevant equitable
considerations shall also be considered. No person found liable for a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
also found liable for such fraudulent misrepresentation. Notwithstanding the
foregoing, Barington shall not be obligated to contribute any amount hereunder
that exceeds the amount of fees previously received by Barington pursuant to the
Agreement.

Neither termination nor completion of the engagement of Barington
referred to above shall affect these indemnification provisions which shall then
remain operative and in full force and effect.

-2-

<PAGE> 1
EXHIBIT 10.10

SILICON VALLEY BANK

LOAN AND SECURITY AGREEMENT

BORROWER: U.S. OnLine Communications, Inc.

ADDRESS: 10300 Metric Boulevard
Austin, TX 78758

DATE: July 21, 1998

THIS LOAN AND SECURITY AGREEMENT is entered into as of the above date
between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054 and the borrower named above (the "Borrower"),
whose chief executive office are located at the above address ("Borrower's
Address"). This Agreement replaces that certain Loan and Security Agreement
between U.S. OnLine Communications, L.L.C., U.S. On-Line Cable, L.L.C., and
Silicon, dated as of December 2, 1996, as amended and modified from time to time
(the "Original Agreement"). Borrower is the successor, pursuant to an Asset
Acquisition Agreement dated as of March 27, 1998, to the limited liability
companies identified above, and Borrower has agreed to assume all obligations of
the limited liability companies under the Original Agreement.

1. LOANS.

1.1 Loans. Silicon will make one or more loans to the Borrower (the
"Loans") up to the amounts (the "Credit Limits") shown on the Schedule to this
Agreement (the "Schedule") as the Credit Limit for such loans. The terms of the
Loans are stated in this Agreement and in the Schedule. The terms of the
Schedule are incorporated into this Agreement. The Borrower is responsible for
monitoring the total amount of Loans and other Obligations outstanding from time
to time, and the Borrower shall not permit the amount of any Loan to exceed at
any time the applicable Credit Limit for such Loan. The Borrower shall not
permit the total amount of Loans and all other Obligations to exceed at any time
the aggregate Credit Limit for the Loans. If at any time the total of all
outstanding Loans and all other Obligations exceeds the aggregate Credit Limit,
the Borrower shall immediately pay the amount of the excess to Silicon, without
notice or demand.

1.2 Interest; Debit to Deposit Accounts. All Loans and all other
monetary Obligations shall bear interest at the applicable rates shown on the
Schedule. Interest shall be payable monthly, on the due date shown on the
monthly billing from Silicon to the Borrower. The Borrower hereby requests and
authorizes Silicon to debit any of the Borrower's accounts with Silicon,
including without limitation account no. xxxxxxxxxx, for payments of interest
and principal due on the Loans and all other obligations owing by the Borrower
to Silicon. Silicon shall promptly notify the Borrower of all debits which
Silicon makes against the Borrower's accounts. Any such debit against the
Borrower's accounts shall in no way be deemed a setoff by Silicon.

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1.3 Fees. The Borrower shall pay to Silicon at closing a commitment fee
and other fees in the amounts shown on the Schedule. These fees are in addition
to all interest and other sums payable to Silicon and are not refundable.

1.4 Additional Costs. In case of any change (after the date of this
Agreement) in any law, regulation, treaty or official directive or the
interpretation or application thereof by any court or any governmental authority
charged with the administration thereof or the compliance with any guideline or
request of any central bank or other governmental authority (whether or not
having the force of law) which:

(a) subjects Silicon to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by the Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income or net assets or net capital of Silicon imposed by the
United States of America, any state or any political subdivision thereof);

(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Silicon; or

and the result of such change is to increase the cost to Silicon, reduce the
income receivable by Silicon or impose any expense upon Silicon with respect to
the Loans, Silicon shall notify the Borrower thereof. Borrower agrees to pay to
Silicon the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or determined,
upon presentation by Silicon of a statement of the amount and setting forth
Silicon's calculation thereof, all in reasonable detail, which statement shall
be deemed true and correct absent manifest error.

2. GRANT OF SECURITY INTEREST.

2.1 Obligations. The term "Obligations" as used in this Agreement means
the following: the obligation to pay all Loans and all interest on the Loans
when due, and to pay and perform when due all other present and future
indebtedness, liabilities, obligations, guarantees, covenants, agreements,
warranties and representations of the Borrower to Silicon, whether joint or
several, monetary or non-monetary, and whether created pursuant to this
Agreement or any other present or future agreement (such as future agreements
relating to letters of credit issued by Silicon) or otherwise. Silicon may, in
its discretion, require that the Borrower pay monetary Obligations in cash to
Silicon, or charge them to the Borrower's Loan account, in which event they
shall bear interest at the rates applicable to the Loan to which such amounts
are charged.

2.2 Collateral. As security for all Obligations, Borrower hereby grants
Silicon a continuing security interest in all of Borrower's assets, including
but not limited to all of the Borrower's interest in the types of property
described below, whether now owned or hereafter acquired, and wherever located
(collectively, the "Collateral"): (a) all accounts, contract rights, chattel
paper, letters of credit, documents, securities, money, and instruments, and all
other obligations now or in the future owing to the Borrower; (b) all inventory,
goods, merchandise, materials, raw materials, work in process, finished

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goods, farm products, advertising, packaging and shipping materials, supplies,
and all other tangible personal property which is held for sale or lease or
furnished under contracts of service or consumed in the Borrower's business, and
all warehouse receipts and other documents; (c) all equipment, including without
limitation all machinery, fixtures, trade fixtures, vehicles, furnishings,
furniture, materials, tools, machine tools, office equipment, computers and
peripheral devices, appliances, apparatus, parts, dies, and jigs; (d) all
general intangibles including, but not limited to, deposit accounts, goodwill,
names, trade names, trademarks and the goodwill of the business symbolized
thereby, trademark applications, trade secrets, drawings, blueprints, customer
lists, patents, patent applications, copyrights, copyright applications,
security deposits, loan commitment fees, federal, state and local tax refunds
and claims, all rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all rights to purchase or sell real or personal
property, all rights as a licensor or licensee of any kind, all royalties,
licenses, processes, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance), and all other rights,
privileges and franchises of every kind; (e) all books and records, whether
stored on computers or otherwise maintained; (f) all of the Borrower's cash; and
(g) all substitutions, additions and accessions to any of the foregoing, and all
products, proceeds and insurance proceeds of the foregoing, and all guaranties
of and security for the foregoing; and all books and records relating to any of
the foregoing. Silicon's security interest in any present or future technology
(including patents, trade secrets, and other technology) shall be subject to any
licenses or rights now or in the future granted by the Borrower to any third
parties, or by third parties to the Borrower in the ordinary course of the
Borrower's business; provided that if the Borrower proposes to sell, license or
grant any other rights with respect to any technology in a transaction that, in
substance, conveys a major part of the economic value of that technology,
Silicon shall first be requested to release its security interest, and Silicon
may withhold such release in its discretion. The Borrower shall not, either
directly or through any agent, employee, licensee or designee, (a) file an
application for the registration of any patent, trademark, or copyright with the
U.S. Patent and Trademark Office, the U.S. Copyright Office, or any similar
office or agency in any other country, state, or any political subdivision (the
"Offices"), or (b) file any assignment of any patent, trademark, or copyright
which the Borrower may acquire from a third party with any one of the Offices
unless the Borrower shall, on or prior to the date of such filing, notify
Silicon of such filing, and, upon request of Silicon, execute and deliver any
and all assignments, agreements, instruments, documents and papers as Silicon
may request to evidence Silicon's interest in such patents, trademarks, or
copyrights, as the case may be, including the goodwill and general intangibles
of the Borrower relating thereto or represented thereby. The Borrower authorizes
Silicon to amend any applicable notice of security interest or assignment
executed pursuant to Section 4.9 of this Agreement without first obtaining the
Borrower's approval of or signature to such amendment and to record such
assignment with one or more of the Offices, on terms and conditions consistent
with this Agreement.

3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.

Borrower represents and warrants to Silicon as follows, and Borrower
covenants that the following representations shall continue to be true, and that
each Borrower shall comply with all of the following covenants:

3.1 Existence and Authority. Borrower is and shall continue to be duly
incorporated and validly existing under the laws of the state of its formation,
as identified on the copy of the Borrower's Certificate of Incorporation
delivered to Silicon. The Borrower is and shall continue to be qualified and

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<PAGE> 4

licensed to do business in all jurisdictions in which any failure to do so would
have a material adverse effect on the Borrower. The execution, delivery and
performance by the Borrower of this Agreement, and all other documents executed
by the Borrower in connection with the Loans have been duly and validly
authorized, are enforceable against the Borrower in accordance with their terms,
and do not violate any law or any provision of, and are not grounds for
acceleration of any indebtedness under the Borrower's Certificate of
Incorporation, Bylaws or any other agreement or instrument that is binding upon
the Borrower.

3.2 Name, Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on an Exhibit to the
Schedule are all prior names of the Borrower and all of the Borrower's present
and prior trade names. Borrower shall give Silicon 15 days' prior written notice
before changing its name or doing business under any other name. The Borrower
has complied, and shall in the future comply, with all laws relating to the
conduct of business under a fictitious business name.

3.3 Place of Business; Location of Collateral. The Austin, Texas
address set forth in the heading to this Agreement is the chief executive office
for U.S. OnLine Communications, Inc. In addition, the Borrower has places of
business only at, and Collateral of the Borrower is located only at, the
locations set forth on the Schedule. Borrower shall give Silicon at least 15
days' prior written notice before changing its chief executive office or moving
Collateral (other than inventory sold or otherwise disposed of in the ordinary
course of business) to any location outside of the states identified on the
Schedule. The Borrower shall supplement the Schedule by informing Silicon in
writing on a quarterly basis as to the location of Collateral not listed on the
Schedule.

3.4 Title to Collateral; Permitted Liens. The Borrower is now, and
shall at all times in the future be, the sole owner of all the Collateral,
except for items of equipment that are leased by the Borrower. The Collateral
now is and shall remain free and clear of any and all liens, charges, security
interests, encumbrances and adverse claims, except for the following ("Permitted
Liens"): (a) purchase money security interests in specific items of equipment,
other than equipment financed by the Loans; (b) leases of specific items of
equipment; (c) liens for taxes not yet payable and mechanics', materialmens' and
other similar liens which arise by operation of law for obligations which are
not yet payable; (d) additional security interests and liens consented to in
writing by Silicon in its sole discretion; and (e) security interests being
terminated substantially concurrently with this Agreement. Notwithstanding the
foregoing clause (c), Borrower may challenge the validity of liens described in
clause (c), pursuant to proceedings diligently pursued in good faith, provided
that the Borrower shall establish adequate reserves for the satisfaction and
discharge of such liens in the event such proceedings are determined adversely
to Borrower. Silicon shall have the right to require, as a condition to its
consent under subparagraph (d) above, that the holder of the additional security
interest or lien sign an intercreditor agreement on terms satisfactory to
Silicon in its sole discretion, acknowledge that the holder's security interest
is subordinate to Silicon's security interest. Silicon now has, and shall
continue to have, a first priority, perfected and enforceable security interest
in all of the Collateral. The Collateral shall not be subject to any other liens
or security interests of any type except for the Permitted Liens. The Borrower
shall at all times defend Silicon and the Collateral against all claims of
others. None of the Collateral (other than cable, wiring, conduit or leasehold
improvements) now is or shall be affixed to any real property in such a manner,
or with such intent, as to become a fixture. Notwithstanding anything to the
contrary in this Section 3.4, the unregistered trademark "U.S. OnLine
Communications and design" and unregistered copyright for the "CTM Software"
(each as described in the Intellectual Property Security

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<PAGE> 5

Agreement), shall be as follows: Borrower represents that to the best of its
knowledge, it is the sole owner of such trademark and copyright, and shall use
commercially reasonable efforts to save and protect such rights free and clear
of any and all liens, charges, security interests, encumbrances and adverse
claims other than Permitted Liens.

3.5 Maintenance of Collateral. The Borrower shall maintain the
Collateral in good working condition. The Borrower shall not use the Collateral
for any unlawful purpose. The Borrower shall immediately advise Silicon in
writing of any material loss or damage to the Collateral.

3.6 Books and Records. The Borrower has maintained and shall maintain
at such Borrower's Address complete and accurate books and records, comprising
an accounting system in accordance with generally accepted accounting
principles.

3.7 Financial Condition and Statements. All financial statements now or
in the future delivered to Silicon have been, and shall be, prepared in
conformity with generally accepted accounting principles and now and in the
future shall completely and accurately reflect the financial condition of the
Borrower, at the times and for the periods therein stated. Since the last date
covered by any such statement, there has been no material adverse change in the
financial condition or business of the Borrower. The Borrower is now and shall
continue to be solvent.

3.8 Tax Returns and Payments; Pension Contributions. The Borrower has
timely filed, and shall timely file, all material tax returns and reports
required by foreign, federal, state and local law. The Borrower has timely paid,
and shall timely pay, all material foreign, federal, state and local taxes,
assessments, deposits and contributions now or in the future owed by the
Borrower. The Borrower may, however, defer payment of any contested taxes,
provided that the Borrower (a) in good faith contests the Borrower's obligation
to pay the taxes by appropriate proceedings promptly and diligently instituted
and conducted, (b) notifies Silicon in writing of the commencement of, and any
material development in, the proceedings, and (c) posts bonds or takes any other
steps required to keep the contested taxes from becoming a lien upon any of the
Collateral. The Borrower is unaware of any claims or adjustments proposed for
any of the Borrower's prior tax years which could result in additional taxes
becoming due and payable by the Borrower. The Borrower has paid, and shall
continue to pay all amounts necessary to fund all present and future pension,
profit sharing and deferred compensation plans in accordance with their terms.
The Borrower has not and shall not withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any such plan which could result in any liability of the
Borrower, including, without limitation, any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.

3.9 Compliance with Law. Except as disclosed in the Schedule, the
Borrower has complied, and shall comply, in all material respects, with all
provisions of all material foreign, federal, state and local laws and
regulations relating to the Borrower, including, but not limited to, those
relating to ownership of real or personal property, conduct and licensing of the
Borrower's business, and environmental matters.

3.10 Litigation. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to best of the
Borrower's knowledge) threatened by or against or affecting the Borrower in any
court or before any governmental agency (or any basis therefor known to the
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in

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<PAGE> 6

the financial condition or business of the Borrower, or in any material
impairment in the ability of the Borrower to carry on its business in
substantially the same manner as it is now being conducted. The Borrower shall
promptly inform Silicon in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or against the Borrower
involving amounts in excess of $100,000.

3.11 Use of Proceeds. All proceeds of all Loans shall be used solely
for lawful business purposes.

3.12 No Patents or Trademarks. The Borrower does not own, and the
Borrower does not have pending any application for the registration of, any
patent or trademark with the U.S. Patent and Trademark Office or any similar
office or agency of any state, of the United States of America or of any foreign
jurisdiction except as disclosed in the Schedule.

3.13 Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in this
Agreement, shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, 42
U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to any
of the foregoing. The Borrower represents and warrants that: (a) the Borrower
has no knowledge of (i) any use, generation, manufacture, storage, treatment,
disposal, release, or threatened release of any hazardous waste or substance by
any prior owners or occupants of any of the real properties owned or operated by
the Borrower except in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such matters; (b)
neither the Borrower nor any subtenant, contractor, agent or other user
authorized by Borrower of any of the real properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste or
substance on, under, or about any of the real properties owned or operated by
the Borrower except in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Any inspections or tests made by
Silicon shall be for Silicon's purposes only and shall not be construed to
create any responsibility or liability on the part of Silicon to the Borrower or
to any other person. The Borrower hereby (a) releases and waives any future
claims against Silicon for indemnity or contribution in the event the Borrower
becomes liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Silicon against any and all claims, losses,
liabilities, damages, penalties, and expenses which Silicon may directly or
indirectly sustain or suffer resulting from a breach of this Section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to the Borrower's
ownership or interest in the real properties, whether or not the same was or
should have been known to the Borrower. The provisions of this Section of the
Agreement, including the obligation to indemnify, shall survive the payment of
the obligations and the termination or expiration of this Agreement and shall
not be affected by Silicon's acquisition of any interest in any of the real
properties, whether by foreclosure or otherwise.

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4. ADDITIONAL DUTIES OF THE BORROWER.

4.1 Financial and Other Covenants. The Borrower shall at all times
comply with the financial and other covenants set forth in the Schedule.

4.2 Overadvance; Proceeds of Accounts. If for any reason the total of
all outstanding Loans and all other Obligations exceeds the total Credit Limit,
as stated in the Schedule, without limiting Silicon's other remedies, during
such time as an Event of Default continues, the Borrower shall remit to Silicon
all checks and other proceeds of the Borrower's accounts and general
intangibles, in the same form as received by the Borrower, within one day after
the Borrower's receipt of the same, to be applied to the Obligations in such
order as Silicon shall determine in its discretion.

4.3 Insurance. The Borrower shall at all times insure all of the
tangible personal property Collateral and carry such other business insurance,
with insurers reasonably acceptable to Silicon, in such form and amounts as
Silicon may reasonably require. All such insurance policies shall name Silicon
as an additional loss payee, and shall contain a lenders loss payee endorsement
in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any
such insurance, Silicon shall apply such proceeds in reduction of the
Obligations as Silicon shall determine in its sole and absolute discretion,
except that, provided no Event of Default has occurred, Silicon shall release to
the Borrower insurance proceeds with respect to equipment totaling less than
$100,000, which shall be utilized by the Borrower for the replacement of the
equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released shall be so
used. If the Borrower fails to provide or pay for any insurance, Silicon may,
but is not obligated to, obtain the same at the Borrower's expense. The Borrower
shall promptly deliver to Silicon copies of all reports made to insurance
companies. Statutory notice regarding insurance:

WARNING

Unless you provide us with evidence of the insurance coverage as
required by our contract or loan agreement, we may purchase insurance at your
expense to protect our interest. This insurance may, but need not, also protect
your interest. If the collateral becomes damaged, the coverage we purchase may
not pay any claim you make or any claim made against you. You may later cancel
this coverage by providing evidence that you have obtained property coverage
elsewhere.

You are responsible for the cost of any insurance purchased by us. The
cost of this insurance may be added to your contract or loan balance. If the
cost is added to your contract or loan balance, the interest rate on the
underlying contract or loan will apply to this added amount. The effective date
of coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage.

This coverage we purchase may be considerably more expensive than
insurance you can obtain on your own and may not satisfy any need for property
damage coverage or any mandatory liability insurance requirements imposed by
applicable law.

4.4 Report. The Borrower shall provide Silicon with such written
reports with respect to the Borrower as Silicon shall from time to time
reasonably specify, including but not limited to the financial reports required
as stated in the Schedule.

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4.5 Access to Collateral, Books and Records. At all reasonable times,
and upon one business day notice, Silicon, or its agents, shall have the right
to inspect the Collateral, and the right to audit and copy the Borrower's
accounting books, records, ledgers, journals, or registers and the Borrower's
books and records relating to the Collateral, provided that no prior notice is
required upon the occurrence and continuation of an Event of Default. Silicon
shall take reasonable steps to keep confidential all information obtained in any
such inspection or audit, but Silicon shall have the right to disclose any such
information to its auditors, regulatory agencies and attorneys, and pursuant to
any subpoena or other legal process. The Borrower shall reimburse Silicon for
Silicon's actual costs for conducting two such audits per year, in an amount not
to exceed $5,000 per year. Silicon may debit the Borrower's deposit accounts
with Silicon for the cost of such audits, in which event Silicon shall send
notification thereof to the Borrower.

4.6 Negative Covenants. Except as may be expressly permitted in the
Schedule, the Borrower shall not, without Silicon's prior written consent, do
any of the following: (a) merge or consolidate with another corporation,
partnership or limited liability company, except that Borrower may merge or
consolidate with another corporation, partnership or limited liability company
if the Borrower is the surviving company in the merger and the aggregate value
of the assets acquired in the merger does not exceed 25% of the Borrower's
Tangible Net Worth (as defined in the Schedule) as of the end of the month prior
to the effective date of the merger, and the assets of the entity acquired in
the merger are not subject to any liens or encumbrances, except Permitted Liens;
(b) acquire any assets, including stock of any other entity, outside the
ordinary course of business for an aggregate purchase price (whether paid in
cash, in stock of the Borrower or other consideration) exceeding 25% of the
Borrower's Tangible Net Worth (as defined in the Schedule) as of the end of the
month prior to the effective date of the acquisition; (c) enter into any other
transaction outside the ordinary course of business; (d) sell or transfer any
Collateral, except for the sale of finished inventory in the ordinary course of
the Borrower's business or in connection with the disposition of obsolete or
worn goods, equipment or inventory; (e) make any loans of any money or any other
assets to shareholders, employees or any other person except in the ordinary
course of business; (f) incur any debts (other than indebtedness that is
subordinated to the Obligations pursuant to a written subordination agreement in
form and substance satisfactory to Silicon) that are outside the ordinary course
of business or that would have a material, adverse effect on the Borrower or on
the prospect of repayment of the Obligations; (g) guarantee or otherwise become
liable with respect to the obligations of another party or entity; (h) pay or
declare any distributions to shareholders of the Borrower (except for
distributions payable solely in stock of the Borrower); (i) redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of the stock of the
Borrower other than amounts not to exceed $250,000 in the aggregate per year
pursuant to an equity option plan or other similar agreement for the benefit of
employees of the Borrower; (j) make any change in the Borrower's capital
structure which has a material adverse effect on that Borrower or on the
prospect of repayment of the Obligations; or (k) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Event of Default and no event which (with notice or passage of
time or both) would constitute an Event of Default would occur as a result of
such transaction. Notwithstanding the foregoing, the Borrower shall be permitted
to repay subordinated indebtedness as provided in the Subordination Agreements
executed by the Borrower for the benefit of Silicon.

4.7 Litigation Cooperation. Should any third-party suit or proceeding
be instituted by or against Silicon with respect to any Collateral or in any
manner relating to the Borrower, the Borrower shall, without expense to Silicon,
make available the Borrower and its officers, employees and agents

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and the Borrower's books and records to the extent that Silicon may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.

4.8 Verification. Silicon may, from time to time, following prior
notification to the Borrower, verify directly with the respective account
debtors the amount and other matters relating to the Borrower's accounts, by
means of mail, telephone or otherwise, either in the name of the Borrower or
Silicon or such other name as Silicon may reasonably choose, provided that no
prior notification shall be required following an Event of Default. Silicon
shall not be required to obtain the Borrower's consent prior to any such
verification of accounts, whether or not an Event of Default has occurred.

4.9 Execute Additional Documentation. The Borrower agrees, at its
expense, on request by Silicon, to execute from time to time all documents in
form satisfactory to Silicon, as Silicon may deem reasonably necessary or useful
in order to perfect and maintain Silicon's perfected security interest in the
Collateral, and in order to fully consummate all of the transactions
contemplated by this Agreement.

4.10 Registration of Intellectual Property Rights. The Borrower shall
use commercially reasonable efforts to register or cause to be registered (to
the extent not already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those intellectual
property rights listed on an exhibit to the Intellectual Property Security
Agreement delivered to Silicon by the Borrower in connection with this Agreement
within thirty (30) days of the date of this Agreement, provided that Borrower
shall not be requested to register the CTM Software copyright. Borrower shall
register or cause to be registered with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those additional
intellectual property rights developed or acquired by Borrower from time to time
in connection with any product prior to the sale or licensing of such product to
any third party, including without limitation revisions or additions to the
intellectual property rights listed on such exhibit to the Intellectual Property
Security Agreement. Borrower shall execute and deliver such additional
instruments and documents from time to time as Silicon shall reasonably request
to perfect Silicon's security interest in such additional intellectual property
rights.

5. TERM.

5.1 Maturity Date. This Agreement shall continue in effect until the
payment in full of the Obligations, provided, however, that the Borrower shall
repay in full each Loan described on the Schedule, with all accrued but unpaid
interest on that Loan, on or before the Maturity Date stated on the Schedule for
such Loan.

5.2 Early Termination. Subject to Section 5.3, this Agreement may be
terminated, without penalty, prior to the Maturity Date as follows: (a) by the
Borrower, effective three business days after written notice of termination is
given to Silicon; or (b) by Silicon at any time after the occurrence of an Event
of Default, without notice, effective immediately.

5.3 Payment of Obligations. On the due dates stated in the Schedule, or
on any earlier effective date of termination, the Borrower shall pay and perform
in full all Obligations, whether evidenced by installment notes or otherwise,
and whether or not all or any part of such Obligations are otherwise then due
and payable. Notwithstanding any termination of this Agreement, all of Silicon's
security interests in all of the Collateral and all of the terms and provisions
of this Agreement shall continue in full force and effect until all Obligations
have been paid and performed in full; provided that,

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<PAGE> 10

Silicon may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Silicon, nor shall any such termination relieve the Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations, Silicon
shall promptly deliver to the Borrower termination statements, requests for
reconveyances and such other documents as may be required to fully terminate any
of Silicon's security interests.

6. EVENTS OF DEFAULT AND REMEDIES.

6.1 Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and the Borrower
shall give Silicon immediate written notice thereof: (a) any warranty,
representation, statement, report or certificate made or delivered to Silicon by
the Borrower or any of the Borrower's officers or employees, now or in the
future, shall be untrue or misleading in any material respect; or (b) the
Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total outstanding balance of any Loan
exceeds the applicable Credit Limit, or the total Loans and other Obligations
outstanding at any time exceed the aggregate Credit Limit for all Loans; or (d)
the Borrower shall fail to comply with any of the financial covenants set forth
in the Schedule or shall fail to perform any other non-monetary Obligation which
by its nature cannot be cured; or (e) the Borrower shall fail to pay or perform
any other non-monetary Obligation, under this Agreement or any other agreement
or document relating to the Loans; or (f) any levy, assessment, attachment,
seizure, lien or encumbrance is made on all or any part of the Collateral; or
(g) dissolution, termination of existence, insolvency or business failure of the
Borrower, or appointment of a receiver, trustee or custodian for all or any part
of the property of, assignment for the benefit of creditors by, or the
commencement of any proceeding by the Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect;
or (h) the commencement of any proceeding against the Borrower or any guarantor
of any of the Obligations under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 60 days after the date commenced; or (i) revocation or
termination of, or limitation of liability upon, any guaranty of the
Obligations; or (j) commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or (k) the Borrower makes
any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, unless such payment is permitted in the
applicable subordination agreement, or if any person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or (l) the Borrower shall generally not pay its debts as they become
due, except for customary cash management practices; or (m) the Borrower shall
conceal, remove or transfer any part of its property, with intent to hinder,
delay or defraud its creditors, or make or suffer any transfer of any of its
property which may be fraudulent under any bankruptcy, fraudulent conveyance or
similar law; or (n) either the Borrower or any other party thereto shall breach
any subordination agreement executed in connection with the Loans; or (o) if
there occurs (i) a material adverse change in the business, operations or
condition (financial or otherwise) of Borrower, or (ii) a material impairment of
the prospect of repayment of any portion of the Obligations, or (iii) a material
impairment of the value or priority of Silicon's security interests in the
Collateral. If any of the foregoing defaults, other than a failure to pay money
and breach of a financial covenant (other than the Maximum Senior Funded Debt
covenant) set forth in the Schedule, is curable, it may be cured (and no Event
of Default shall have occurred) if the Borrower cures the default within fifteen
days (or within five business days in the case of a cure of a default in the
Maximum Senior

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<PAGE> 11

Funded Debt covenant set forth in the Schedule, or sixty days in the case of
clause (h) of this Section 6.1). Silicon may cease making any Loans hereunder
during the above cure periods, and thereafter if an Event of Default has
occurred.

6.2 Remedies. Upon the occurrence of any Event of Default and the
expiration of any applicable cure period under Section 6.1, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by the Borrower), may do any one or
more of the following: (a) cease making Loans or otherwise extending credit to
the Borrower under this Agreement or any other document or agreement; (b)
accelerate and declare all or any part of the Obligations to be immediately due,
payable, and performable, notwithstanding any deferred or installment payments
allowed by any instrument evidencing or relating to any Obligation; (c) take
possession of any or all of the Collateral wherever it may be found, and for
that purpose the Borrower hereby authorizes Silicon without judicial process to
enter onto any of the Borrower's premises without interference to search for,
take possession of, keep, store, or remove any of the Collateral, and remain on
the premises or cause a custodian to remain on the premises in exclusive control
thereof without charge for so long as Silicon deems it reasonably necessary in
order to complete the enforcement of its rights under this Agreement or any
other agreement; provided, however, that should Silicon seek to take possession
of any or all of the Collateral by Court process, the Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any requirement that Silicon
retain possession of and not dispose of any such Collateral until after trial or
final judgment; (d) require the Borrower to assemble any or all of the
Collateral and make it available to Silicon at places designated by Silicon
which are reasonably convenient to Silicon and the Borrower, and to remove the
Collateral to such locations as Silicon may deem advisable; (e) require the
Borrower to deliver to Silicon, in kind, all checks and other payments received
with respect to all accounts and general intangibles, together with any
necessary indorsements, within one day after the date received by the Borrower;
(f) complete the processing, manufacturing or repair of any Collateral prior to
a disposition thereof and, for such purpose and for the purpose of removal,
Silicon shall have the right to use the Borrower's premises, vehicles, hoists,
lifts, cranes, equipment and all other property without charge; (g) sell, lease
or otherwise dispose of any of the Collateral in its condition at the time
Silicon obtains possession of it or after further manufacturing, processing or
repair, at any one or more public and/or private sales, in lots or in bulk, for
cash, exchange or other property, or on credit, and to adjourn any such sale
from time to time without notice other than oral announcement at the time
scheduled for sale; Silicon shall have the right to conduct such disposition on
the Borrower's premises without charge, for such time or times as Silicon deems
reasonable, or on Silicon's premises, or elsewhere and the Collateral need not
be located at the place of disposition; Silicon may directly or through any
affiliated company purchase or lease any Collateral at any such public
disposition, and if permissible under applicable law, at any private
disposition; any sale or other disposition of Collateral shall not relieve the
Borrower of any liability the Borrower may have if any Collateral is defective
as to title or physical condition or otherwise at the time of sale; (h) demand
payment of, and collect any accounts and general intangibles comprising
Collateral and, in connection therewith, the Borrower irrevocably authorizes
Silicon to endorse or sign the Borrower's name on all collections, receipts,
instruments and other documents, to take possession of and open mail addressed
to the Borrower and remove therefrom payments made with respect to any item of
the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant
extensions of time to pay, compromise claims and settle accounts and the like
for less than face value; (i) offset against any sums in any general, special or
other deposit accounts maintained by the Borrower with Silicon; and (j) demand
and receive

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<PAGE> 12

possession of any of the Borrower's federal and state income tax returns and the
books and records utilized in the preparation thereof or referring thereto. All
reasonable fees of professionals (including attorneys' fees), expenses, costs,
liabilities and obligations incurred by Silicon with respect to the foregoing
shall be added to and become part of the Obligations, shall be due on demand,
and shall bear interest at a rate equal to the highest interest rate applicable
to any of the Obligations. Without limiting any of Silicon's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional two
percent per annum above the rate otherwise applicable.

6.3 Standards for Determining Commercial Reasonableness. The Borrower
and Silicon agree that a Sale or other disposition (collectively, "Sale") of any
Collateral which complies with the following standards shall conclusively be
deemed to be commercially reasonable: (a) notice of the Sale is given to the
Borrower at least seven days prior to the Sale, and, in the case of a public
Sale, notice of the Sale is published at least seven days before the Sale in a
newspaper of general circulation in the county where the Sale is to be
conducted; (b) notice of the Sale describes the Collateral in general,
non-specific terms; (c) the Sale is conducted at a place designated by Silicon,
with or without the Collateral being present; (d) the Sale commences at any time
between 8:00 a.m. and 6:00 p.m; (e) payment of the purchase price in cash or by
cashier's check or wire transfer is required; (f) with respect to any Sale of
any of the Collateral, Silicon may (but is not obligated to) direct any
prospective purchaser to ascertain directly from the Borrower any and all
information concerning the same. Silicon may employ other methods of noticing
and selling the Collateral, in its discretion, if they are commercially
reasonable.

6.4 Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, the Borrower hereby irrevocably appoints
Silicon (and any of Silicon's designated officers, or employees) as the
Borrower's true and lawful attorney to: (a) send requests for verification of
accounts or notify account debtors of Silicon's security interest in the
accounts; (b) endorse the Borrower's name on any checks or other forms of
payment or security that may come into Silicon's possession; (c) sign the
Borrower's name on any invoice or bill of lading relating to any account, drafts
against account debtors, schedules and assignments of accounts, verifications of
accounts, and notices to account debtors; (d) make, settle, and adjust all
claims under and decisions with respect to the Borrower's policies of insurance;
and (e) settle and adjust disputes and claims respecting the accounts directly
with account debtors, for amounts and upon terms which Silicon determines to be
reasonable; provided Silicon may exercise such power of attorney to sign the
name of the Borrower on any of the documents described in Section 4.9 regardless
of whether an Event of Default has occurred. The appointment of Silicon as the
Borrower's attorney in fact, and each and every one of Silicon's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Silicon's obligation to
provide advances hereunder is terminated.

6.5 Application of Proceeds. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Silicon in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Silicon shall determine in its sole discretion. Any surplus shall be paid to the
Borrower or other persons legally entitled thereto; the Borrower shall remain
liable to Silicon for any deficiency. If Silicon, in its sole discretion,
directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale or other disposition of Collateral,
Silicon shall have the option, exercisable at any time, in its sole discretion,
of either reducing the Obligations by the principal amount of purchase price or
deferring the

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<PAGE> 13

reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.

6.6 Remedies Cumulative. In addition to the rights and remedies set
forth in this Agreement, Silicon shall have all the other rights and remedies
accorded a secured party under the Uniform Commercial Code of California and
each state in which any Collateral is located, and under all other applicable
laws, and under any other instrument or agreement now or in the future entered
into between Silicon and the Borrower, and all of such rights and remedies are
cumulative and none is exclusive. Exercise or partial exercise by Silicon of one
or more of its rights or remedies shall not be deemed an election, nor bar
Silicon from subsequent exercise or partial exercise of any other rights or
remedies. The failure or delay of Silicon to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been fully
paid and performed.

7. GENERAL PROVISIONS.

7.1 Notices. All notices to be given under this Agreement shall be in
writing and shall be given personally, by regular first-class mail, by certified
mail return receipt requested, or by facsimile (with a copy by overnight
courier) addressed to Silicon or the Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. In addition, Borrower shall send a copy of any notice
to Silicon to the following address: 3003 Tasman Drive, Santa Clara, California
95054, Attention: William B. Broyles (Phone: 408-919-0320; Fax: 408-496-2412).
All notices shall be deemed to have been given upon delivery in the case of
notices personally delivered to the Borrower or to Silicon, or at the expiration
of three business days following the deposit thereof in the United States mail,
with postage prepaid.

7.2 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.

7.3 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between the Borrower and Silicon and
supersede all prior and contemporaneous negotiations and oral representations
and agreements (including agreements between Silicon and Borrower's
predecessors, U.S. OnLine Cable, L.L.C. and U.S. OnLine Communications, L.L.C.),
all of which are merged and integrated in this Agreement.

7.4 Waivers. The failure of Silicon at any time or times to require the
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between the Borrower and Silicon shall not
waive or diminish any right of Silicon later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect any
other default, whether prior or subsequent thereto. None of the provisions of
this Agreement or any other agreement now or in the future executed by the
Borrower and delivered to Silicon shall be deemed to have been waived by any act
or knowledge of Silicon or its agents or employees, but only by a specific
written waiver signed by an officer of Silicon and delivered to the Borrower.
The Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, general

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<PAGE> 14

intangible, document or guaranty at any time held by Silicon on which the
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.

7.5 No Liability for Ordinary Negligence. Neither Silicon, nor any of
its directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by the Borrower or any other party claiming through or on behalf of Borrower
through the ordinary negligence of Silicon, or any of its directors, officers,
employees, agents, attorneys or any other person affiliated with or representing
Silicon.

7.6 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by the Borrower and a duly
authorized officer of Silicon.

7.7 Time of Essence. Time is of the essence in the performance by the
Borrower of each and every obligation under this Agreement.

7.8 Attorneys' Fees and Costs. The Borrower shall reimburse Silicon for
all reasonable attorneys' fees and fees of other professionals, and all filing,
recording, search, title insurance, appraisal, audit, and other reasonable costs
incurred by Silicon, pursuant to, or in connection with, or relating to this
Agreement (whether or not a lawsuit is filed), including, but not limited to,
any reasonable attorneys' fees and costs Silicon incurs in order to do the
following: prepare and negotiate this Agreement and the documents relating to
this Agreement; obtain legal advice in connection with this Agreement; enforce,
or seek to enforce, any of its rights; prosecute actions against, or defend
actions by, account debtors; commence, intervene in, or defend any action or
proceeding (including any appeal or review); initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of the Borrower's books and
records; or protect, obtain possession of, lease, dispose of, or otherwise
enforce Silicon's security interest in, the Collateral and otherwise represent
Silicon in any litigation relating to the Borrower. If either Silicon or the
Borrower files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable costs and professionals' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment, and in any appeal or
review by an appellate court. All fees and costs to which Silicon may be
entitled pursuant to this Section shall immediately become part of the
Borrower's Obligations, shall be due on demand, and shall bear interest at a
rate equal to the highest interest rate applicable to any of the Obligations.

7.9 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of the parties hereto; provided,
however, that the Borrower may not assign or transfer any of its rights under
this Agreement without the prior written consent of Silicon, and any prohibited
assignment shall be void. No consent by Silicon to any assignment shall release
the Borrower from its liability for the Obligations. The Borrower agrees and
consents to Silicon's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers, whether related
or unrelated to Silicon. Silicon may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Silicon may have about the Borrower or about any other matter relating
to the Loans and the Borrower hereby waives any rights to privacy it may have
with

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<PAGE> 15

respect to such matters, provided, however, that Silicon shall instruct the
recipient of such information to abide by the confidentiality provisions of
Section 4.5. The Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. The Borrower also agrees that the purchasers of any
such participation interests shall be considered as the absolute owners of such
interests in the Loans and shall have all the rights granted under the
participation agreement or agreements governing the sale of such participation
interests. Notwithstanding the foregoing, the Borrower shall not have any
obligation to deal with or send notices to more than a single lender or agent as
a result of the sale of such participation interest.

7.10 Section Headings; Construction. Section headings are only used in
this Agreement for convenience. The Borrower acknowledges that the headings may
not describe completely the subject matter of the applicable section, and the
headings shall not be used in any manner to construe, limit, define or interpret
any term or provision of this Agreement. This Agreement has been fully reviewed
and negotiated between the parties and no uncertainty or ambiguity in any term
or provision of this Agreement shall be construed strictly against Silicon or
the Borrower under any rule of construction or otherwise.

7.11 Mutual Waiver of Jury Trial. THE BORROWER AND SILICON EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND THE BORROWER, OR ANY CONDUCT, ACTS
OR OMISSIONS OF SILICON OR THE BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR THE
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.

7.12 Governing Law; Jurisdiction; Venue. This Agreement and all acts
and transactions hereunder and all rights and obligations of Silicon and the
Borrower shall be governed by, and construed in accordance with, the laws of the
State of California. Any undefined term used in this Agreement that is defined
in the California Uniform Commercial Code shall have the meaning assigned to
that term in the California Uniform Commercial Code. As a material part of the
consideration to Silicon to enter into this Agreement, the Borrower (i) agrees
that all actions and proceedings relating directly or indirectly hereto shall at
Silicon's option, be litigated in courts located within California, and that the
exclusive venue therefor shall be, at Silicon's option, the County of Santa
Clara, State of California; (ii) consents to the jurisdiction and venue of any
such court and consents to service of process in any such action or proceeding
by personal delivery or any other method permitted by law; and (iii) waives any
and all rights the Borrower may have to object to the jurisdiction of any such
court, or to transfer or change the venue of any such action or proceeding.

BORROWER:

U.S ONLINE COMMUNICATIONS, INC.

By:
---------------------------------
Title:
------------------------------

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<PAGE> 16

SILICON:

SILICON VALLEY BANK

By:
---------------------------------
Title:
------------------------------

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<PAGE> 1

EXHIBIT 23.2.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2
(Registration No. 333-51781) of our report, which includes an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, dated February 21, 1997, except as to Notes 5 through 8 for
which the date is February 27, 1998, and Note 9, for which the date is March 27,
1998, on our audit of the consolidated financial statements of U.S. On-Line
Cable, L.L.C. We also consent to the reference to our firm under the caption
"Experts".

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Austin, Texas

July 23, 1998

<PAGE> 1

EXHIBIT 23.2.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2
(Registration No. 333-51781) of our report, which includes an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, dated April 22, 1998, on our audit of the consolidated
financial statements of U.S. OnLine Communications L.L.C. We also consent to the
reference to our firm under the caption "Experts".

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Austin, Texas

July 23, 1998

<PAGE> 1

EXHIBIT 23.2.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2
(Registration No. 333-51781) of our report, which includes an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern, dated June 23, 1998, on our audit of the balance sheet of
U.S. OnLine Communications, Inc. We also consent to the reference to our firm
under the caption "Experts".

/s/ PRICEWATERHOUSECOOPERS LLP

PRICEWATERHOUSECOOPERS LLP

Austin, Texas

July 23, 1998