CAPROCK COMMUNICATIONS CORP, S-1/A, 1999-05-06

CAPROCK COMMUNICATIONS CORP
S-1/A, 1999-05-06
COMMUNICATIONS SERVICES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1999

REGISTRATION NO. 333-74735
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
CAPROCK COMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
TEXAS 1731 75-2765572
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>

CAPROCK COMMUNICATIONS CORP.
15601 DALLAS PARKWAY, SUITE 700
DALLAS, TX 75248
(972) 982-9500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
----------------------
MR. JERE W. THOMPSON, JR.
CHIEF EXECUTIVE OFFICER
CAPROCK COMMUNICATIONS CORP.
15601 DALLAS PARKWAY, SUITE 700
DALLAS, TX 75248
(972) 982-9500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------

Copies to:

<TABLE>
<S> <C>
A. MICHAEL HAINSFURTHER WILLIAM F. SCHWITTER
MARK A. KOPIDLANSKY KNUTE J. SALHUS
MUNSCH HARDT KOPF & HARR, P.C. PAUL, HASTINGS, JANOFSKY & WALKER LLP
1445 ROSS AVENUE, 4000 FOUNTAIN PLACE 399 PARK AVENUE
DALLAS, TEXAS 75202-2790 NEW YORK, NEW YORK 10022
(214) 855-7500 (212) 318-6000
</TABLE>

----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE 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 of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(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 the Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the 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 PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value....... 7,475,000 shares $25.94 $193,901,500 $53,904.62
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

The "Proposed Maximum Offering Price" and the "Price Per Share" includes
975,000 shares subject to the Underwriters' over-allotment option. All figures
used above are estimates solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) using the average of the high and low prices, on May
5, 1999 of the registrant common stock as reported on the Nasdaq National Market
System. Of the $53,904.62 filing fee, $35,721.68 was paid by the Registrant on
March 19, 1999 in connection with the initial filing of this Registration
Statement and the remaining $18,182.94 is being paid herewith.

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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

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

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 6, 1999

PROSPECTUS

6,500,000 SHARES
[CAPROCK COMMUNICATIONS LOGO]

CAPROCK COMMUNICATIONS CORP.

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

CapRock Communications Corp. is selling 5,000,000 shares of its Common
Stock and certain of our shareholders are selling collectively 1,500,000 shares
of their Common Stock. We will not receive any proceeds from the sale of shares
by the selling shareholders. Our Common Stock is traded on the Nasdaq National
Market under the symbol "CPRK." The last reported sales price of the Common
Stock on the Nasdaq National Market on May 5, 1999 was $26.00 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS, WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds, before expenses, to CapRock...................... $ $
Proceeds, before expenses, to the selling shareholders..... $ $
</TABLE>

The selling shareholders have granted the Underwriters the right to
purchase up to an additional 975,000 shares of Common Stock at the public
offering price, less the underwriting discount, to cover over-allotments. The
Underwriters are offering the shares when, as and if they purchase them. They
have the right to reject orders from potential investors in whole or in part.
The Common Stock will be ready for delivery to investors on or about
, 1999.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
CRUTTENDEN ROTH INCORPORATED
----------------------

The date of this Prospectus is , 1999.

<PAGE> 3

INSIDE COVER

[MAP OF SOUTHWEST REGION SHOWING EXISTING AND PROPOSED NETWORK]
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements.................................. 1
Summary..................................................... 3
Risk Factors................................................ 7
Use Of Proceeds............................................. 15
Market Information And Dividend Policy...................... 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations................................. 20
Business.................................................... 32
Regulation And Licenses..................................... 46
Management.................................................. 55
Certain Transactions........................................ 65
Principal And Selling Shareholders.......................... 67
Description Of Certain Indebtedness......................... 70
Description Of Capital Stock................................ 71
Shares Eligible For Future Sale............................. 72
Underwriting................................................ 74
Legal Matters............................................... 76
Experts..................................................... 76
Where You Can Find More Information......................... 77
Index To Consolidated Financial Statements.................. F-1
</TABLE>

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

FORWARD-LOOKING STATEMENTS

This Prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about CapRock including:

- our anticipated growth strategies,

- anticipated trends in our business, including trends in technology and
the growth of communications network products and services,

- future expenditures for capital projects, and

- our ability to continue to control costs and maintain quality.

These statements may be found in the sections of this Prospectus entitled
"Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and in
this Prospectus generally. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including all the risks discussed in "Risk Factors" and elsewhere in this
Prospectus and risks related to, among other things, building a fiber network
(including obtaining the necessary rights-of-way, permits and regulatory
approvals), supply and demand for data services, competition, the need for
additional capital, debt and interest payment obligations, restrictions in our
senior note indenture, rapid growth, dependence on local telephone companies and
long distance carriers, our information systems, retention of key personnel,
dependence on major customers, year 2000 problems, the continued integration of
our predecessor companies, service interruptions, potential liability as an
internet service provider and protection of our intellectual property.

1
<PAGE> 5

We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Because of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Prospectus might not occur.
----------------------

In making a decision about buying these securities, you should rely only on
the information contained in this Prospectus. We have not, and the Underwriters
have not, authorized anyone to provide you with information that is different
from the information contained in this Prospectus. This Prospectus is intended
to offer no securities other than the Common Stock of CapRock. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the Underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this Prospectus is accurate as
of the date on the front cover of this Prospectus only, regardless of the time
of delivery of this Prospectus or any sale of these securities. Our business,
financial condition, results of operations and prospects may have changed since
that date.
----------------------

We use market data and industry forecasts throughout this Prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of such information is not
guaranteed. Similarly, we believe that the surveys and market research we or
others have performed is reliable, but we have not independently verified this
information. Neither we, nor any of the Underwriters, represents that any such
information is accurate.

We are a Texas corporation. Our principal executive offices are located at
15601 Dallas Parkway, Suite 700, Dallas, Texas 75248, and our telephone number
is (972) 982-9500. We maintain a World Wide Web site at www.caprock.com. The
reference to our World Wide Web address does not constitute incorporation by
reference of the information contained at the site. In this Prospectus, the
"Company," "CapRock," "we," "us" and "our" refer to CapRock Communications Corp.
and its subsidiaries, including IWL Communications, Inc. ("IWL Communications"),
CapRock Telecommunications Corp. ("CapRock Telecommunications") and CapRock
Fiber Network Ltd. ("CapRock Fiber"), which are our three predecessor companies,
as well as CapRock Network Services, L.P., CapRock Telecommunications Leasing
Corp. and CapRock Design Services, L.P., unless the context otherwise requires.
In addition, "Common Stock" refers to our common stock, $.01 par value per
share. See "Description of Capital Stock." Unless otherwise stated, all
information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option to purchase up to 975,000 shares of Common
Stock from the selling shareholders. CapRock and CapRock Communications are
trademarks of CapRock. All other trade names or trademarks appearing in this
Prospectus are the property of their respective holders.

2
<PAGE> 6

SUMMARY

This summary highlights some information contained in this Prospectus and
may not contain all of the information that is important to you. You should read
this summary together with the more detailed information and our financial
statements and notes appearing elsewhere in this Prospectus. This summary is not
complete and may not contain all of the information that you should consider
before investing in our Common Stock. You should carefully consider, among other
things, the matters shown in "Risk Factors."

OUR BUSINESS

We own and operate a scalable long-haul fiber network which upon completion
is expected to cover approximately 5,500 route miles throughout the Southwest
region, which includes Texas, Louisiana, Arkansas, Oklahoma and New Mexico. This
fiber network supports the voice, data, bandwidth and dark fiber services we
provide to our carrier and retail customers. Our 1998 revenues were $121.8
million and earnings before interest, taxes, depreciation and amortization
("EBITDA") (exclusive of merger related expenses of $2.3 million) was $15.0
million. Over the past five years, our revenues have grown at a compound annual
growth rate of 55%. On May 3, 1999, we publicly announced our results for the
first quarter ended March 31, 1999. Operating revenue was $37.0 million in the
first quarter of 1999, an increase of 52% from $24.4 million reported in the
first quarter of 1998, while EBITDA was $2.1 million for the first quarter ended
March 31, 1999, compared with EBITDA of $3.7 million in the first quarter of
1998. Net loss for the first quarter of 1999 was $1.7 million, or $0.06 per
basic and diluted common share, which included net interest expense of $3.4
million (primarily relating to our senior notes issued in July 1998), as
compared to net interest expense of $450,000 for the first quarter of 1998. Net
income for the first quarter of 1998 was $1.4 million, or $0.05 per basic and
diluted common share.

We intend to be the premier provider of carriers' carrier services and the
leading facilities-based integrated communications provider in the Southwest
region. To measure our progress, we classify our revenues in three categories:
carriers' carrier, integrated services and systems services. Our carriers'
carrier revenues include domestic and international long distance, bandwidth and
dark fiber services sold to telecommunications carriers and other wholesale
customers. Currently, we have over 100 carrier customers, including AT&T, MCI
WorldCom, Sprint Corporation and Qwest Communications, as well as many regional
independent companies such as Century Telephone Enterprises, Inc. and Lufkin
Conroe Telephone. Our integrated services revenues reflect our local, long
distance, Internet, data and private line products provided to over 5,000 small
and medium-sized businesses on a single bundled bill. Lastly, our systems
services revenues represent the voice and data systems and services we provide
primarily to the oil and gas industry offshore in and along the Gulf of Mexico.

We are focused on the Southwest region because of this region's size and
attractive growth prospects and because we believe that as a region it is
currently underserved by other major telecommunications providers. We believe
our ability to offer integrated telecommunication services along with superior
customer service will be particularly attractive to small and medium-sized
businesses that desire simple bundled plans from a single provider. Many of the
smaller markets within our region do not have telecommunications alternatives to
the incumbent local telephone company. We also believe that a regional focus
enables us to achieve certain economies of scale due to the concentrated
deployment of network assets, our sales and marketing efforts and our
management. By maximizing the amount of traffic that remains on our network, we
can maximize our gross profit margins and returns on invested capital.

3
<PAGE> 7

OUR STRATEGY

Our business objectives are to establish ourselves as the premier carriers'
carrier and to be the dominant integrated communications provider in the
Southwest region. To achieve these objectives, we intend to:

- build the region's most advanced, scalable and extensive fiber optic
network,

- create a strategic, regionally focused asset,

- pursue a cost-effective network build out,

- focus on high value-added local switching infrastructure,

- provide bundled communications solutions to small and medium-sized
businesses,

- pursue acquisitions and strategic alliances,

- build market share through personalized sales and customer service, and

- leverage our advanced back office systems.

OUR NETWORK

By the end of the year 2000, we intend to build out our fiber optic network
to approximately 5,500 route miles throughout the Southwest region. We began
constructing and operating a regional fiber network in 1993. At the end of 1998,
the first 800 route miles of our scalable, regional fiber network were
substantially completed, linking San Antonio, Laredo, McAllen, Harlingen, Corpus
Christi, Victoria and Houston, Texas. Over the past two years, we have met
substantially all of our milestones with respect to our construction schedules
and budgets. We currently have approximately 1,870 route miles under
construction and expect to have approximately 3,000 route miles completed by the
end of 1999, linking south Texas, San Antonio, Houston, Austin, Waco, Dallas,
Fort Worth, and Amarillo, Texas, Oklahoma City and Tulsa, Oklahoma, Little Rock,
Arkansas and Monroe and New Orleans, Louisiana. We expect that the remainder of
the 5,500 mile fiber network will be completed by the end of the year 2000.
Given the increased demand for our fiber-based telecommunications services over
the past year, we increased our planned network build out from approximately
4,300 route miles to approximately 5,500 route miles. We also increased the
number of conduits being deployed along each route from three to four.

In addition to our extensive fiber network, our network facilities also
include eight local and long distance switches (seven which we own and one which
we manage), with another three local switches scheduled to be installed in the
second and third quarters of 1999. We plan to colocate our equipment in 20
central offices with incumbent local telephone companies (13 of which are
currently in process) for the provision of local services using unbundled
network elements, or UNEs, by the end of 1999. We also plan to purchase and
deploy in the second and third quarters of 1999 ten asynchronous transfer mode,
or ATM, data switches to support our Internet, frame relay and ATM services.

ISSUANCE OF NOTES

We intend to sell, through a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
senior unsecured notes in the aggregate principal amount of approximately $200.0
million. There is no assurance that the proposed notes will be offered or if
offered, will be sold, or that the aggregate offering amount will not change. We
expect that the proposed senior notes will have a maturity date of ten (10)
years after their issuance with interest payable semi-annually after the date of
issuance. The proposed notes will be senior unsecured obligations and as such
will rank pari passu in right of payment with our existing senior notes issued
in July 1998 and with all our future unsecured and unsubordinated indebtedness.
We anticipate that the indenture governing such notes will have restrictions
similar to those which currently exist for our existing senior notes. See "Risk
Factors -- The restrictions in our senior note indenture limit our ability to
effect transactions and

4
<PAGE> 8

restrict our operations." There is no assurance that the terms of the proposed
notes actually offered and sold will not vary significantly from those described
above.

OUR ADDRESS

The mailing address of our principal executive offices is 15601 Dallas
Parkway, Suite 700, Dallas, Texas 75248 and our telephone number at that address
is (972) 982-9500.

THE OFFERING

Common Stock offered:
By CapRock............... 5,000,000 shares
By the selling
shareholders............... 1,500,000 shares
Total............ 6,500,000 shares

Common Stock to be
outstanding after the
offering(1).............. 33,939,627 shares

Use of proceeds............ The net proceeds received by CapRock from this
offering (after deducting the underwriting
discounts and commissions and estimated offering
expenses) will be approximately $121,000,000. We
intend to use these net proceeds to fund the
development and growth of our business and for
potential business acquisitions, working capital
and general corporate purposes.

Risk factors............... See "Risk Factors" and other information included
in this Prospectus for a discussion of factors you
should carefully consider before deciding to invest
in our Common Stock.

Nasdaq National Market
symbol..................... CPRK
- ---------------

(1) If the Underwriters exercise the option granted to them in this offering to
purchase additional shares of our Common Stock to cover over-allotments,
then the total number of shares to be offered would be increased by up to
975,000 shares, all of which would be sold by the selling shareholders. The
number of shares outstanding excludes options that have been granted or may
be granted under our employee and director stock option plans. As of March
31, 1999, 2,402,525 options were outstanding under our employee and director
stock option plans.

5
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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth our summary consolidated financial data as
of and for the years ended December 31, 1994, 1995, 1996, 1997 and 1998. The
business combination among our predecessor companies was completed on August 26,
1998 and was accounted for as a pooling of interests. Accordingly, the
Consolidated Balance Sheets as of December 31, 1998 and the Consolidated
Statements of Operations, Stockholders' Equity and Comprehensive Income and Cash
Flows for each of the years in the three year period ended December 31, 1998
include our three predecessor companies (i.e., CapRock Telecommunications,
CapRock Fiber and IWL Communications) as though these entities were always part
of CapRock.

In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
The cash flow for IWL Communications for this six month period was added to the
1997 beginning balance in the Consolidated Statement of Cash Flows.

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $21,159 $29,407 $50,970 $ 75,349 $ 121,774
Cost of services and product resales........................ 15,295 21,185 39,357 52,471 83,221
------- ------- ------- -------- ---------
Gross profit........................................ 5,864 8,222 11,613 22,878 38,553
Operating expenses:
Selling, general and administrative....................... 5,565 7,326 8,983 14,074 23,528
Merger related expenses................................... -- -- -- -- 2,313
Depreciation and amortization............................. 631 1,186 1,536 3,346 4,887
------- ------- ------- -------- ---------
Total operating expenses............................ 6,196 8,512 10,519 17,420 30,728
------- ------- ------- -------- ---------
Operating income (loss)..................................... (332) (290) 1,094 5,458 7,825
Interest expense, net....................................... (224) (484) (585) (1,603) (6,441)
Other income................................................ 256 151 42 220 106
------- ------- ------- -------- ---------
Income (loss) before income taxes and extraordinary item.... (300) (623) 551 4,075 1,490
Income taxes................................................ 77 48 227 1,513 1,267
------- ------- ------- -------- ---------
Income (loss) before extraordinary item..................... (377) (671) 324 2,562 223
Extraordinary item -- extinguishment of debt................ -- 645 -- -- --
------- ------- ------- -------- ---------
Net income (loss)................................... $ (377) $ (26) $ 324 $ 2,562 $ 223
======= ======= ======= ======== =========
Pro forma net income (loss):
Income (loss) before income taxes and extraordinary
item.................................................... $ (300) $ (623) $ 551 $ 4,075 $ 1,490
Pro forma income taxes, as if CapRock Fiber were a C
corporation............................................. (131) (211) 143 1,475 1,267
------- ------- ------- -------- ---------
Income (loss) before extraordinary item................... (169) (412) 408 2,600 223
Extraordinary item, net of taxes.......................... -- 397 -- -- --
------- ------- ------- -------- ---------
Pro forma net income (loss)......................... $ (169) $ (15) $ 408 $ 2,600 $ 223
======= ======= ======= ======== =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item................... $ (0.01) $ (.002) $ 0.01 $ 0.09 $ 0.01
Extraordinary item, net of tax............................ -- .002 -- -- --
------- ------- ------- -------- ---------
Basic and diluted......................................... $ (0.01) $ -- $ 0.01 $ 0.09 $ 0.01
======= ======= ======= ======== =========
Weighted average shares outstanding:
Basic..................................................... 25,715 25,926 27,146 27,984 28,899
Diluted................................................... 25,715 25,936 27,156 28,481 30,028
OPERATING DATA:
EBITDA(1)................................................... $ 299 $ 896 $ 2,630 $ 8,804 $ 15,025
Cash flows provided by (used in) operations................. (593) 827 781 4,112 7,125
Cash flows used in investing activities..................... (1,366) (1,919) (9,350) (12,987) (134,350)
Cash flows provided by financing activities................. 2,324 903 8,605 12,113 123,989
Capital expenditures........................................ (1,822) (2,282) (10,212) (13,630) (36,855)
BALANCE SHEET DATA:
Working capital (deficit)................................... $ (441) $ (797) $(2,153) $ (305) $ 102,489
Property, plant and equipment, net.......................... 2,935 6,705 15,901 27,341 59,607
Total assets................................................ 9,596 13,198 28,522 49,389 191,966
Long-term debt and capital lease obligations................ 1,221 2,443 13,254 21,062 145,187
Stockholders' equity........................................ 2,829 3,552 3,886 14,086 16,062
</TABLE>

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

(1) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization and merger related expenses. EBITDA is a measure commonly used
in the communications industry to analyze companies on the basis of
operating performance. EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to net income as a measure of performance nor as an
alternative to cash flow as a measure of liquidity.

6
<PAGE> 10

RISK FACTORS

You should carefully consider the following risk factors and warnings
before making a decision to invest in our Common Stock. The risks described
below are not the only ones facing our company. Additional risks that we do not
yet know of, or that we currently think are immaterial, may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment. You should also refer to the other
information shown in this Prospectus, including our consolidated financial
statements and the related notes.

SUCCESSFUL COMPLETION AND UTILIZATION OF OUR FIBER NETWORK DEPENDS ON MANY
FACTORS

Meeting our business objectives will largely depend on our ability to
complete and efficiently utilize our fiber network. We must also achieve
substantial traffic volume over the expanded network in order to fully realize
the expected cash flows, operating efficiencies and cost benefits. The
successful completion of our fiber network depends upon many factors, some of
which are beyond our control, including:

- gaining access to sufficient capital,

- obtaining access to rights-of-way,

- the timely granting of franchise agreements,

- the availability of construction contractors,

- timing conflicts with other fiber projects which could increase
contractor costs,

- the pricing and availability of advanced fiber optic cable,

- construction delays, and

- cost overruns.

Although we believe that our cost estimates and build out schedule are
reasonable, we cannot assure you that the actual construction costs or time
required to complete the construction of our fiber network will match our
estimates.

INCREASING SUPPLY COULD EXCEED DEMAND AND REDUCE PRICES

We expect that prices for fiber, bandwidth and data services will decline
over the next several years as the deployment of new fiber networks add
substantially more supply than in the past. Additionally, technological advances
such as dense wave division multiplexing, high speed optical transmission
electronics and packet switching will substantially increase the transmission
capacity of fiber at much lower costs. We cannot assure you that we will be able
to achieve increased traffic volumes at acceptable prices and volumes to support
our expanded network. Our financial condition could be adversely affected if we
are unable to successfully market the capacity of our network or adequately
utilize our network capacity for internal traffic.

THE COMMUNICATIONS SERVICES INDUSTRY IS HIGHLY COMPETITIVE

The communications services industry is highly competitive, rapidly
evolving and subject to constant technological change. In particular, numerous
companies offer long distance, local, Internet, data and bandwidth services, and
we expect competition to increase in the future. We believe that existing
competitors will likely continue to expand their service offerings to appeal to
our existing or potential customers. Many of our existing competitors have
greater financial, personnel, brand and name recognition and other resources.
Moreover, we expect that new competitors will enter the communications market,
and that some of these new competitors may offer similar services to those
offered by us. In addition, the regulatory environment in which we operate is
undergoing significant change. As this regulatory environment evolves, changes
may occur that could create greater or unique competitive advantages for
7
<PAGE> 11

our current or potential competitors, or could make it easier for other new
entrants to provide services. Other providers currently offer one or more of
each of the services we offer, and many communications companies operate
generally in the same long distance, local, Internet, data and bandwidth service
submarkets as we do. As a service provider in the long distance communications
industry, we compete with several well established providers, as well as many
other long distance providers with less significant market share. See
"Business -- Competition."

WE MAY NEED ADDITIONAL CAPITAL AFTER THE YEAR 2000 TO FINANCE FURTHER EXPANSION
OF OUR FIBER NETWORK

We estimate that our total capital requirements for 1999 will be
approximately $250 million and approximately $160 million for 2000. We believe
that the estimated net proceeds from this offering and a credit facility that we
are currently negotiating, together with cash flow from operations, other
borrowings, sales of dark fiber and other sources of financing, will be
sufficient to fund our capital expenditures and working capital requirements
through the end of the year 2000. However, we cannot assure you that the
anticipated sources of working capital will continue to be available, that we
have anticipated all future costs, or that our expected financial resources will
be sufficient to cover future expenditures. Our revenues and costs are dependent
upon factors that are not within our control, such as regulatory changes,
changes in technology, and increased competition. Due to the uncertainty of
these factors, actual revenues and costs may vary from expected amounts, and
such variations are likely to affect our future capital requirements.

We expect to use working capital for, among other purposes:

- expansion of our fiber network,

- installation of additional voice and data switches,

- colocating in the central offices of local telephone companies,

- opening new sales offices,

- recruiting and training new personnel, and

- additional and increased marketing expenses.

We may need additional capital after the year 2000 to finance further
expansion of our fiber and switching networks. The actual amount and timing of
future capital requirements may differ from our estimates, depending on the
demand for services, regulatory, technological and competitive developments, new
market developments and new opportunities. We may also require additional
capital in the future, or sooner than we currently anticipate, for new business
activities related to our current and planned businesses or in the event we
decide to make additional acquisitions or enter into joint ventures and
strategic alliances. Sources of additional capital may include cash flow from
operations, public and private equity, debt financings, vendor financings and
sales of dark fiber. If we fail to generate or raise enough capital, some or all
of our future expansion plans may be delayed or abandoned, which could have a
material adverse effect on our company.

WE HAVE SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS

We are highly leveraged and have a significant amount of debt outstanding.
At December 31, 1998, we had approximately $145.2 million of long-term debt, net
of $4.8 million of unamortized debt issuance costs, and our debt-to-equity ratio
was approximately 9 to 1. See "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." This degree of leverage may have important consequences to
our shareholders, such as limiting our ability to finance our future operations,
to compete effectively against better capitalized companies, to be flexible in
planning for and reacting to changes in our business, to withstand downturns in
our business or the economy generally, and to pursue business opportunities.

Our ability to pay the principal and interest on our debt will depend upon
our future performance and the successful implementation of our business
strategy, which is subject to several uncertainties, many of

8
<PAGE> 12

which are beyond our control. We cannot assure you that we will have enough cash
flow in the future to let us meet our anticipated debt service requirements,
including with respect to our senior notes in the aggregate principal amount of
$150.0 million that we issued in 1998. If we fail to generate sufficient cash
flow may impair our ability to obtain additional equity or debt financing or to
meet our debt service requirements, including the payment of principal and
interest on our senior notes. In such circumstances, we may be required to
renegotiate the terms of our long-term debt or refinance all or a portion of our
long-term debt. We cannot assure you that we would be able to renegotiate
successfully those terms or refinance our debt when required or that the terms
of the refinancing or of any new financings would be acceptable to management.
If we are unable to refinance our debt or obtain new financing under these
circumstances, we would have to consider other options, such as the sale of
certain assets to meet our debt service obligations, the sale of equity, or
negotiations with our lenders to restructure our debt.

THE RESTRICTIONS IN OUR SENIOR NOTE INDENTURE LIMIT OUR ABILITY TO EFFECT
TRANSACTIONS AND RESTRICT OUR OPERATIONS

The indenture for our senior notes imposes significant operating and
financial restrictions on us and our subsidiaries. These restrictions may
significantly limit or prohibit us from engaging in certain transactions,
including the following:

- borrowing additional money,

- paying dividends or making other distributions to our shareholders,

- limiting the ability of subsidiaries to make payments to us,

- making certain investments,

- creating certain liens on our assets,

- selling certain assets and using the proceeds from those sales for
certain purposes,

- entering into transactions with affiliates, and

- engaging in certain mergers or consolidations.

We expect that the credit facility that we are currently negotiating will
contain similar restrictive covenants. These restrictions could limit our
ability to obtain future financing, make needed capital expenditures, withstand
a future downturn in our business or in the economy or otherwise conduct
necessary corporate activities.

Our failure to comply with the restrictions in the indenture and any senior
credit facilities that we have in place from time to time could lead to a
default under the terms of those agreements. We expect that the credit facility
will also require us to maintain specified financial ratios and satisfy certain
financial tests. Our ability to meet these financial ratios and tests may be
affected by events beyond our control and, as a result, we cannot assure you
that we will be able to meet such tests. In the event of a default under any of
our senior credit facilities, the applicable lenders could terminate their
commitments to lend money to us or accelerate the loans and declare all amounts
borrowed due and payable. Borrowings under other debt instruments that contain
cross-acceleration or cross-default provisions may also be accelerated and
become due and payable. If any of these events occurs, we cannot assure you that
we would be able to make the necessary payments to the lenders or be able to
find alternate financing. Even if we could obtain alternate financing, we cannot
assure you that it would be on terms that are favorable or acceptable to us.

OUR RAPID GROWTH MAY BE DIFFICULT TO MANAGE

Our company has experienced significant growth in recent years, which has
increased the level of responsibility on our management personnel. We intend to
continue growing so that we can pursue existing and potential market
opportunities. This continued growth will place a significant strain on our
management, as well as our financial and other resources. In order to manage our
growth effectively, we

9
<PAGE> 13

must continue to implement and improve our operational systems, procedures, and
controls. If we fail to implement these systems, our business, financial
condition, and results of operations will be materially and adversely affected.
As we continue to grow, it is important that our management information systems
provide adequate, accurate and timely financial information so management can
make effective and timely business decisions. Although we believe that our
current management information systems are adequate, they may need to be
upgraded eventually. If our current management information systems fail, or we
fail to hire and retain qualified sales, marketing, administrative, operating
and technical personnel, our business operations may be adversely affected.
Although we believe we are properly anticipating our needs, we cannot assure you
that we will be able to properly manage our rapid growth.

OUR ABILITY TO PROVIDE LOCAL TELEPHONE SERVICE IS DEPENDENT ON INCUMBENT LOCAL
TELEPHONE COMPANIES

In addition to providing local service utilizing total service resale
provided by the existing local telephone companies, or ILECs, we intend to
significantly expand our use of unbundled network elements. Unbundled network
elements constitute the components of the services customers purchase from local
telephone companies. We expect the resale of unbundled network elements and
services of incumbent local telephone companies to play an important part in our
local service business strategy. Although the 1996 Telecommunications Act
requires the ILECs to allow such resale, we cannot guarantee either:

(1) that the 1996 Telecommunications Act, certain provisions of which
ILECs have challenged in federal court, will be implemented on a timely
basis and on favorable terms, including specifically that the rules
governing which elements ILECs must provide and the cost methodology for
providing these elements, which are currently under FCC and judicial
review, will be upheld, or

(2) that we can successfully negotiate with ILECs the necessary
colocation, interconnection and resale agreements, particularly those
agreements that govern the purchase of the unbundled network elements.

Any substantial limitation on our ability to secure reasonable and timely
access to ILEC services and unbundled network elements, to obtain agreements on
as favorable terms as our competitors, or difficulties obtaining ILEC
cooperation in migrating our local service customers from ILEC facilities to our
facilities could have a material adverse effect on our financial condition,
results of operations and cash flow. See "Regulation and Licenses."

OUR ABILITY TO PROVIDE LONG DISTANCE SERVICE IS DEPENDENT ON OTHER LONG DISTANCE
CARRIERS

Our ability to provide long distance services to certain domestic and
international locations, especially those not on our network, depends on
agreements with many other carriers. The transmission rates under some of these
agreements are lower than the rates we would charge by terminating traffic
directly with the ILEC at tariffed rates. If we lost access to the services we
receive under these contracts, if the carriers providing these services raise
their rates or if the services we receive suffer a reduction in quality, it
could have a negative effect on our financial condition, results of operations
and cash flow.

OUR INFORMATION SYSTEMS ARE VITAL TO ALL ASPECTS OF OUR BUSINESS

Sophisticated operations support systems, or OSS systems, are vital to all
aspects of our business. Internally developed and externally purchased
information and support systems help to manage our growth and operations
efficiently. As part of our business, we transfer large amounts of electronic
data to and from ILECs and other local telephone companies that compete with the
ILECs, or CLECs. We will be at a competitive disadvantage if we fail to
establish Electronic Data Interfaces, or EDIs, with Southwestern Bell, GTE, Bell
South and other ILECs if our competitors successfully establish EDIs with those
carriers. Unanticipated problems in any of the above areas, or our inability to
implement solutions in a timely manner or our failure to establish or upgrade
systems as necessary, could have a material adverse impact on our ability to
reach our objectives and on our financial condition, results of operations and
cash flow. See "Business -- Customer Care and Support."

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<PAGE> 14

WE NEED TO RETAIN OUR KEY MANAGEMENT PERSONNEL AND HIRE ADDITIONAL QUALIFIED
PERSONNEL

We believe that our success largely depends on the continued involvement
and management of our executive management team and our ability to hire
additional qualified personnel. The competition for qualified managers and
employees in the telecommunications industry is intense. Accordingly, we cannot
assure you that we will be able to retain these key employees or that we will be
able to attract or retain skilled personnel in the future. The loss of the
services of any of these people could have a material adverse effect on our
business, results of operations and financial condition. See "Management --
Employment Agreements."

WE DEPEND ON OUR MAJOR CUSTOMERS

Our customers generally use more than one telecommunication service
provider. They can quickly switch from our services to other providers without
incurring significant expense. In addition, our customer agreements generally
provide that in the event of prolonged loss of service or for other good
reasons, customers may terminate our service without penalty. As a result, we
cannot assure you that we will be able to retain our customers. For the year
ended December 31, 1998, revenues from services provided to MCI WorldCom
accounted for more than 10% of our revenues. The loss or significant decrease of
business from any of our largest customers would have a material adverse effect
on our business. Customers in the oil and gas industry accounted for
substantially all of our offshore and project related sales in the fiscal year
ended December 31, 1998. Our oil and gas customers could develop their own
telecommunications facilities. A corresponding reduction in the demand for our
services could have a material adverse effect on our financial condition,
results of operations and cash flow.

THE REGULATORY ENVIRONMENT FOR TELECOMMUNICATIONS BUSINESSES CREATES RISKS

Significant regulations imposed at the international, federal, state and
local levels govern the provision of telecommunications services and affect our
business and our existing and potential competitors. Delays in receiving
required regulatory approvals or the enactment of new and adverse legislation,
regulations or regulatory requirements may have a material adverse effect on our
financial condition, results of operations and cash flow. In addition, future
legislative, judicial and regulatory agency actions could alter competitive
conditions in the markets in which we intend to operate, in ways not necessarily
to our advantage. See "Business -- Competition" and "Regulation and Licenses."

WE NEED RIGHTS-OF-WAY FRANCHISES AND PERMITS TO BUILD OUR FIBER NETWORK

We need certain rights-of-way, franchises and permits to install
underground conduits from railroads, utilities, state highway authorities, local
governments and transit authorities. We cannot assure you that we will be able
to get and keep all the additional rights, franchises and permits we need to
successfully implement our business plan. If we lose or fail to maintain certain
critical rights, franchises or permits necessary for the fiber network, there
may be a material adverse effect on our financial condition, results of
operations and cash flow.

WE MAY EXPERIENCE PROBLEMS ASSOCIATED WITH THE YEAR 2000

Some computers, software, and other equipment include computer codes in
which calendar year data is abbreviated to only two digits. Some of these
computer systems could fail to operate properly if they interpret "00" to mean
1900, rather than 2000. This problem is widely known as the "year 2000 problem."
We are highly dependent on our computer systems and those of third party
suppliers, vendors and customers. The year 2000 problem affects some of our
computers, software, and other equipment, including the computers which run our
product development, and administrative functions. If we fail to properly
identify, correct and test our computer systems for the year 2000 problem, our
business operations could be adversely affected.

We are taking steps to remediate our year 2000 problem. We do not believe
that the cost to remediate our year 2000 problem will have a material adverse
effect on our operations. We believe that
11
<PAGE> 15

our computer systems will be year 2000 compliant and will function adequately
by, during and after the year 2000. At this time, however, we cannot assure you
that our computer systems will not be affected to some degree by the year 2000
problem, in spite of our continuing efforts. More importantly, we cannot assure
you that the computer systems used by our service providers such as electric
companies, other telecommunications companies, our customers and other third
parties, will function properly by the year 2000. A failure of our service
providers to cause their computers systems to be year 2000 compliant could have
an adverse effect on our operations. Their year 2000 problem could become our
year 2000 problem. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."

THE CONTINUED INTEGRATION OF OUR THREE PREDECESSOR COMPANIES INVOLVES
UNCERTAINTY AND RISK

In August 1998, three predecessor companies combined to form our company.
The combination of these businesses involves assimilating the operations,
services, products and personnel of each business. We cannot assure you that the
benefits and revenue growth expected from the combination will be realized. We
are still managing the integration of portions of those businesses into our
company.

We expect to continue incurring costs from the ongoing integration of the
operations, financial reporting and accounting systems, and networks of our
three predecessor companies. Additional unexpected costs or delays could have a
material adverse effect on our financial condition, results of operations and
cash flow.

SERVICE INTERRUPTIONS COULD AFFECT OUR BUSINESS

Our equipment, facilities and service operations can be adversely affected
by any of the following factors: fiber cuts, fire, equipment failures, inclement
weather, hurricanes, power loss, service outages, failures or loss of
satellites, human error, unauthorized intrusion, natural disasters, acts of
sabotage and other similar events.

We currently have switches in Houston, Dallas and Victoria, Texas and
manage a switch in Jersey City, New Jersey. A switch in Phoenix, Arizona is
planned to be operational in May 1999. A substantial portion of our long
distance voice traffic currently passes through the Dallas switch, and thus we
are heavily reliant upon the operation of the Dallas switch. Any event that
negatively impacts the Dallas switch could have a material adverse effect on our
financial condition and our ability to continue our business.

We house a significant portion of the satellite communications equipment
and foreign circuits we use in international private-line services in a single
location in our Houston network operations center. We do not yet have complete
back-up equipment for these facilities. In addition, the equipment we own and
lease in the Gulf of Mexico is susceptible to hurricanes.

We cannot guarantee that fire, equipment failure or other events will not
disable our equipment. Loss or impairment of some or all of our key facilities
could have a material adverse effect on our financial condition, results of
operations and cash flow. Our networks and switching facilities experience
periodic service interruptions and equipment failures, and the operation of such
networks remain subject to international, national and regional
telecommunications outages or regulatory issues from time to time. As a result,
we may, from time to time, experience service interruptions or equipment
failures that could have a material adverse effect on our financial condition,
results of operations and cash flow.

WE MAY INCUR LIABILITY AS AN INTERNET SERVICE PROVIDER

We are an Internet service provider, or an ISP. The law governing the
liability of on-line service providers and Internet access providers for
participating in the hosting or transmission of objectionable materials or
information currently remains unsettled. Under the terms of the 1996
Telecommunications Act, courts can impose civil and criminal penalties for the
use of interactive computer services for the transmission of certain indecent or
obscene communications. The United States Supreme Court in 1997
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<PAGE> 16

held this provision unconstitutional as it relates to indecent, but not obscene,
communications. In October 1998, Congress enacted the Child Online Protection
Act, which requires that online material that is "harmful" to minors be
restricted. This law is currently being challenged and on February 1, 1999 a
U.S. District Court judge issued a preliminary injunction against enforcement of
portions of that act. The U.S. Justice Department has filed an appeal of the
February 1999 ruling. Also, some states have adopted or may adopt in the future
similar requirements. The constitutionality of such state requirements remains
unsettled at this time. In addition, several private parties have filed lawsuits
seeking to hold Internet service providers accountable for information that they
transmit, such as libelous material and copyrighted material. We cannot predict
the outcome of this litigation or the potential for the imposition of liability
on Internet service providers for information that they host, distribute or
transport. These suits and other regulations could materially change the way
ISPs must conduct business and could impact our determination to expand or
continue this business. To the extent that we become parties to future
litigation, such litigation could have a material adverse effect on our
financial condition, results of operations and cash flow.

OTHER COMPANIES HAVE NAMES SIMILAR TO OURS

Even though we have registered the mark "CapRock Communications" in the
United States, other companies in many different industries, particularly in
West Texas, have preexisting rights to the name "Caprock" within defined
territories. One specific company may have the right to use the name for
telecommunications services within an established area. If any of these other
companies are successful with their claims to our name, we may be required to
either obtain a license from them for the use of the name "CapRock," or be
required to change our name within certain defined territories. Either result
would cause us to incur additional expenses. If we are required to change our
name, we may lose the goodwill associated with the CapRock name in these
markets.

OUR STOCK PRICE CONSTANTLY CHANGES

A public market for our Common Stock has existed since August 27, 1998 on
the Nasdaq National Market, under the ticker symbol "CPRK." The price for our
stock on that trading market constantly changes. We expect that the market price
of our Common Stock will continue to change. The fluctuation in our stock price
is caused by a number of factors, some of which are beyond our control,
including:

- quarterly variations in operating results,

- changes in financial estimates by securities analysts,

- changes in market valuations of information technology service and
telecommunications companies,

- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures, or capital commitments,

- the loss or acquisition of major customers,

- additions or departures of key personnel, and

- sales of Common Stock.

In addition, the stock market, in general, experiences significant price
fluctuations, which may materially and adversely affect the market price of our
stock.

OUR OFFICERS AND DIRECTORS WILL OWN ENOUGH SHARES TO CONTROL CAPROCK AFTER THE
OFFERING

After this offering, our officers and directors together will beneficially
own approximately 67% of the outstanding shares of our Common Stock. As a
result, they will be able to exercise control over matters requiring shareholder
approval, including the election of directors, the approval of mergers,
consolidations and sales of all or substantially all of our assets. This may
prevent or discourage tender offers for our Common Stock.
13
<PAGE> 17

COMMUNICATIONS LAWS AND STATE CORPORATE LAWS MAY MAKE IT HARDER FOR SOMEONE TO
ACQUIRE CONTROL OF CAPROCK

In most instances, before we transfer control or assign any of our
intrastate certification authorities, international authority or FCC licenses
and authorizations we need regulatory approval by the FCC and various state
regulatory agencies. Certain communications laws also impose certain limits on
foreign ownership of domestic long distance carriers. In addition, our Articles
of Incorporation provide that Article 13.03 of the Texas Business Corporation
Act, which limits statutory takeovers, does not apply to us. Any of these
factors could have the effect of delaying, deferring or preventing a change in
control of CapRock. See "Regulation and Licenses" and "Description of Capital
Stock -- Preferred Stock" and "-- Certain Anti-Takeover Effects."

WE MAY NOT PAY DIVIDENDS

We do not expect to pay any cash dividends on our Common Stock in the
foreseeable future. We intend to retain any earnings for use in our business.

THE SALE OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS
MARKET PRICE

After consummation of this offering, 33,952,747 shares of Common Stock will
be outstanding. The shares of Common Stock which we are offering through this
Prospectus will be eligible for immediate resale in the public market without
restriction, unless any such shares are acquired by one or more of our
affiliates.

Following this offering, there will be approximately 5,000,000 additional
shares of Common Stock outstanding, excluding options outstanding to acquire
2,402,525 shares of Common Stock with a weighted average exercise price of
$5.61, 192,539 of which are currently exercisable with a weighted average
exercise price of $3.43. We believe that substantially all of these shares of
Common Stock and shares of Common Stock issuable upon the exercise of such
options will be freely tradeable under federal securities laws following this
offering, subject to some limitations. These limitations include vesting
provisions in option and restricted stock agreements, restrictions in lock-up
agreements and volume and manner-of-sale restrictions under Rule 144. The future
sale of a substantial number of shares of Common Stock in the public market
following this offering, or the perception that such sales could occur, could
adversely affect the prevailing market price of our Common Stock.

Shareholders holding collectively more than 89.9% of the outstanding Common
Stock and currently exercisable options to purchase Common Stock have executed
lock-up agreements that limit their ability to sell Common Stock. These
shareholders have agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of at least 120 days after the date of this Prospectus
without the prior written approval of the managing underwriter and us. The
managing underwriter and we may, in our sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."

THERE MAY BE SOME DILUTION FOR PURCHASERS OF OUR COMMON STOCK IN THIS OFFERING

To the extent options to purchase our Common Stock under our employee and
director stock option plans are exercised, investors participating in this
offering will incur dilution. If the net proceeds of this offering, together
with available funds and cash generated from operations, are insufficient to
satisfy our cash needs, we may be required to sell additional equity or
convertible debt securities. The sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

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<PAGE> 18

USE OF PROCEEDS

We estimate that the net proceeds that we will receive from the sale of the
Common Stock offered by us will be approximately $121,000,000, after deducting
the underwriting discounts and commissions and estimated offering expenses and
other related fees that we will pay. We will not receive any of the proceeds
from the sale of Common Stock by the selling shareholders.

We currently intend to use the net proceeds from this offering:

- to fund additional capital expenditures for the construction and
operation of our fiber optic network,

- to fund the installation of voice and data switches, including the cost
of colocations in the central offices of local telephone companies,

- to open sales offices and add sales support and customer service
personnel in markets throughout the Southwest region, and

- for potential acquisitions, additional working capital and other general
corporate purposes.

Our use of proceeds may vary significantly and will depend on a number of
factors described under "Risk Factors." Accordingly, our management has broad
discretion in the allocation of the net proceeds. Pending such uses, the net
proceeds of this offering will be invested in short-term, high grade investment
securities.

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<PAGE> 19

MARKET INFORMATION AND DIVIDEND POLICY

Our Common Stock has traded on the Nasdaq National Market under the symbol
"CPRK" since August 27, 1998, the day after the business combination of our
predecessor companies was completed. The following table sets forth, for the
periods indicated, the range of high and low sales prices for our common stock
as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
------- ------
<S> <C> <C>
1998:
Third Quarter (beginning on August 27, 1998).............. $10.00 $ 6.38
Fourth Quarter............................................ $ 8.75 $ 4.75
1999:
First Quarter............................................. $20.13 $ 7.25
Second Quarter (through May 5, 1999)...................... $28.88 $18.25
</TABLE>

On May 5, 1999, the last reported closing sales price of the common stock
was $26.00 per share. As of May 5, 1999, there were approximately 65
shareholders of record of our Common Stock.

Of the approximately 29.0 million shares of our Common Stock currently
outstanding, only approximately 3.0 million shares are held by non-affiliates
and thus freely tradeable without restrictions under the Securities Act of 1933.
Substantially all of these freely tradeable shares represent shares of Common
Stock issued to former shareholders of IWL Communications in connection with the
combination. We believe that the historical trading prices of our Common Stock
have been affected by the relatively limited number of shares, or "float,"
available in the open market to our existing and prospective investors. The
additional shares of Common Stock available to the public upon consummation of
this offering will represent more than two times the number of currently freely
tradeable shares. Accordingly, we believe that such increased float may result
in changes in our stock trading levels (both in terms of volume and price).

Since our company became a public company, we have not paid cash dividends
on our Common Stock. We currently anticipate that all of our earnings will be
retained for development of our business and do not anticipate paying any cash
dividends in the foreseeable future. Any future determination as to the payment
of dividends will be made in the discretion of our Board of Directors and will
depend upon our operating results, financial condition, capital requirements,
general business conditions and such other factors as the Board of Directors
deems relevant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

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<PAGE> 20

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1998
on an actual basis and on an as adjusted basis to give effect to our sale and
issuance of 5,000,000 shares of Common Stock at a public offering price of
$26.00, after deducting the underwriting discounts and commissions and estimated
offering expenses and fees totaling approximately $9,000,000. The table shown
below should be read in conjunction with our Consolidated Financial Statements
including the accompanying notes included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $ 97,314 $218,264
======== ========
Long-term debt:
12% Senior Notes, due 2008................................ $145,187 $145,187
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 200,000,000 shares
authorized; 28,932,395 shares issued and outstanding,
actual and 33,932,395 shares issued and outstanding, as
adjusted(1)............................................ 289 339
Additional paid-in capital................................ 10,522 131,422
Retained earnings......................................... 5,608 5,608
Currency translation adjustments.......................... 9 9
Unearned compensation..................................... (329) (329)
Treasury stock, at cost................................... (37) (37)
-------- --------
Total stockholders' equity........................ 16,062 137,012
-------- --------
Total capitalization.............................. $161,249 $282,199
======== ========
</TABLE>

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

(1) Excludes (1) 2,259,867 shares of Common Stock issuable upon exercise of
options outstanding on December 31, 1998, with a weighted average exercise
price of $5.51 per share, (2) 3,733,586 shares available for future issuance
under our employee and director stock option plans as of December 31, 1998
and (3) 145,000 shares of Common Stock subject to outstanding warrants. See
"Management -- Benefit Plans," "Description of Capital Stock," and Note 12
of Notes to Consolidated Financial Statements.

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<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our summary financial data as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998. The business
combination among our predecessor companies was completed on August 26, 1998 and
was accounted for as a pooling of interests. Accordingly, the Consolidated
Financial Statements include our three predecessor companies (i.e., CapRock
Telecommunications, CapRock Fiber and IWL Communications) as though these
entities were always a part of CapRock.

In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $21,159 $29,407 $50,970 $75,349 $121,774
Cost of services and product resales...... 15,295 21,185 39,357 52,471 83,221
------- ------- ------- ------- --------
Gross profit.................... 5,864 8,222 11,613 22,878 38,553
Operating expenses:
Selling, general and administrative..... 5,565 7,326 8,983 14,074 23,528
Merger related expenses................. -- -- -- -- 2,313
Depreciation and amortization........... 631 1,186 1,536 3,346 4,887
------- ------- ------- ------- --------
Total operating expenses........ 6,196 8,512 10,519 17,420 30,728
------- ------- ------- ------- --------
Operating income (loss)................... (332) (290) 1,094 5,458 7,825
Interest expense, net..................... (224) (484) (585) (1,603) (6,441)
Other income.............................. 256 151 42 220 106
------- ------- ------- ------- --------
Income (loss) before income taxes and
extraordinary item...................... (300) (623) 551 4,075 1,490
Income taxes.............................. 77 48 227 1,513 1,267
------- ------- ------- ------- --------
Income (loss) before extraordinary item... (377) (671) 324 2,562 223
Extraordinary item -- extinguishment of
debt.................................... -- 645 -- -- --
------- ------- ------- ------- --------
Net income (loss)............... $ (377) $ (26) $ 324 $ 2,562 $ 223
======= ======= ======= ======= ========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item................... $ (300) $ (623) $ 551 $ 4,075 $ 1,490
Pro forma income taxes, as if CapRock
Fiber were a C corporation........... (131) (211) 143 1,475 1,267
------- ------- ------- ------- --------
Income (loss) before extraordinary
item................................. (169) (412) 408 2,600 223
Extraordinary item, net of taxes........ -- 397 -- -- --
------- ------- ------- ------- --------
Pro forma net income (loss)..... $ (169) $ (15) $ 408 $ 2,600 $ 223
======= ======= ======= ======= ========
</TABLE>

18
<PAGE> 22

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Historical and pro forma income (loss) per
common share:
Income (loss) before extraordinary
item................................. $ (0.01) $ (.002) $ 0.01 $ 0.09 $ 0.01
Extraordinary item, net of tax.......... -- .002 -- -- --
------- ------- ------- ------- --------
Basic and diluted....................... $ (0.01) $ -- $ 0.01 $ 0.09 $ 0.01
======= ======= ======= ======= ========
Weighted average shares outstanding:
Basic................................... 25,715 25,926 27,146 27,984 28,899
Diluted................................. 25,715 25,936 27,156 28,481 30,028
OPERATING DATA:
EBITDA(1)................................. $ 299 $ 896 $ 2,630 $ 8,804 $ 15,025
Cash flows provided by (used in)
operations.............................. (593) 827 781 4,112 7,125
Cash flows used in investing activities... (1,366) (1,919) (9,350) (12,987) (134,350)
Cash flows provided by financing
activities.............................. 2,324 903 8,605 12,113 123,989
Capital expenditures...................... (1,822) (2,282) (10,212) (13,630) (36,855)
BALANCE SHEET DATA:
Working capital (deficit)................. $ (441) $ (797) $(2,153) $ (305) $102,489
Property, plant and equipment, net........ 2,935 6,705 15,901 27,341 59,607
Total assets.............................. 9,596 13,198 28,522 49,389 191,966
Long-term debt and capital lease
obligations............................. 1,221 2,443 13,254 21,062 145,187
Stockholders' equity...................... 2,829 3,552 3,886 14,086 16,062
</TABLE>

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

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<PAGE> 23

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

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto of CapRock contained
elsewhere in this Prospectus. This information is not necessarily indicative of
future operating results. Except for the historical information contained below,
the matters discussed in this section are forward-looking statements that
involve a number of risks and uncertainties, including those described in "Risk
Factors." Our actual liquidity needs, capital resources and operating results
may differ materially from the discussion shown below in these forward-looking
statements.

OVERVIEW

In August 1998, we announced that we had completed a business combination
transaction in which our predecessor companies combined to form our company as
it exists today. The combination was accounted for as a pooling of interests.
Accordingly, our consolidated results include our three predecessor companies
(i.e., CapRock Telecommunications, CapRock Fiber and IWL Communications) as
though these entities had always been a part of CapRock.

Our proximity to Mexico allows us to directly connect to the fiber networks
of multiple Mexican telecommunications carriers. Subject to compliance with
certain regulatory requirements, we are capable of providing dark fiber to these
carriers at several border crossings enabling them to close open fiber rings in
Mexico by using CapRock fiber on the U.S. side of the border. Additionally, our
direct connect agreements with foreign carriers position us to capture increased
levels of growing international traffic.

In addition, we recently announced our joint build agreement with Enron
Communications, Inc. to jointly build approximately 1,050 miles of fiber network
in Texas. Through this joint build arrangement, we will connect Amarillo,
Lubbock, Dallas, Fort Worth, Waco, Bryan, Austin, San Marcos, San Antonio and
Houston, Texas. The build plan includes four conduits to be placed throughout
the approximately 1,050 miles, with one and one-quarter conduits to be owned and
funded directly by us, one and one-quarter to be owned and funded by Enron
Communications and one and one-half to be owned and funded by a limited
partnership formed by us and Enron Communications. Our agreements with Enron
Communications provide that the partnership will install 192 fibers in the first
conduit and will sell 96 of the 192 fibers to be installed. Of the remaining 96
fibers, we will own 48 fibers and Enron Communications will own 48 fibers. The
joint build arrangement provides several benefits, including reduction of
construction costs, accelerated acquisition of right of way and franchise
agreements, the majority of which are essentially in place, and the freeing up
of resources to potentially accelerate the build of the remaining portion of the
network.

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<PAGE> 24

RESULTS OF OPERATIONS

CapRock recognizes revenue from the following sources: carriers' carrier,
integrated services, system services and product resales.

Carriers' Carrier. Carriers' carrier revenue includes all carrier revenues
generated from the sale of domestic and international switched services, from
the sale of T-1 and DS-3 broadband capacity and from the sale and lease of dark
fiber. The revenue generated from the international switched services represent
minutes of long distance traffic terminating in foreign countries, but generated
by domestic U.S.-based long distance carriers. Such revenues are recognized when
the services are provided. The cost of revenues associated with these services
is based primarily on the direct costs associated with owned and leased
transmission capacity and the cost of transmitting and terminating traffic on
other carriers' facilities. Commissions paid to sales representatives or agents
to acquire customer call traffic are expensed in the period when associated call
revenues are recognized.

We account for long-term construction contracts relating to the development
of telecommunications networks for customers using the percentage-of-completion
method, which would include the sale of fiber usage rights through indefeasible
right to use contracts, or IRUs, and the related construction services
associated with building the fiber network specified in the IRUs. Our revenues
from IRUs will be generated from the amount of fiber we build on our network in
excess of that which we intend to retain for our own use. As a result, we expect
that revenues from IRUs will diminish over time as our supply of excess fiber is
sold. Progress under the percentage-of-completion method is measured based upon
costs incurred to date compared with total estimated construction costs.
Customers are billed based upon contractual milestones.

Integrated Services. Integrated services revenue includes all revenues
generated from the sale of telecommunications products to business and
residential customers. These products include local, long distance, Internet,
data and private line services.

Systems Services. Systems services revenue includes revenues generated from
the design, installation, leasing and sale of voice and data systems and
products, primarily to companies in the oil and gas industry.

Product Resales. In 1997, CapRock provided services to a subsidiary of
Shell, which included the resale of a significant amount of Alcatel products.
The Shell project was substantially completed in May 1997 and, therefore, is not
expected to contribute in a material manner to CapRock's total sales in future
years.

The following table represents the various sources of revenue:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Carriers' carrier............................ $22,405 $41,805 $ 72,165
Integrated services.......................... 1,980 8,640 17,978
Systems services............................. 16,031 21,959 31,631
------- ------- --------
Total service revenue................ 40,416 72,404 121,774
Product resales.............................. 10,554 2,945 --
------- ------- --------
Total revenues....................... $50,970 $75,349 $121,774
======= ======= ========
Gross margin percent:
Gross margin -- service revenue.............. 27% 31% 32%
======= ======= ========
Gross margin -- product resales.............. 8% 20% --%
======= ======= ========
Gross margin -- total........................ 23% 30% 32%
======= ======= ========
</TABLE>

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<PAGE> 25

The following table sets forth for the periods indicated CapRock's
statement of operations as a percentage of its operating revenues:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................. 100% 100% 100%
Cost of services...................................... 58% 67% 68%
Cost of product resales............................... 19% 3% --%
--- --- ---
Gross profit.......................................... 23% 30% 32%
Operating expenses:
Selling, general and administrative................. 18% 19% 19%
Merger related expenses............................. --% --% 2%
Depreciation and amortization....................... 3% 4% 4%
--- --- ---
Total operating expenses.............................. 21% 23% 25%
--- --- ---
Operating income...................................... 2% 7% 7%
Interest expense...................................... (1)% (2)% (8)%
Interest income....................................... --% --% 2%
Other income.......................................... --% --% --%
--- --- ---
Income before income taxes............................ 1% 5% 1%
Income tax expense.................................... --% 2% 1%
--- --- ---
Net income............................................ 1% 3% --%
=== === ===
</TABLE>

YEAR ENDED 1997 COMPARED TO 1998

Revenues. Total revenues increased $46.5 million, or 62%, from $75.3
million in 1997 to $121.8 million in 1998. The 62% increase was attributable to
increases of 73% in carriers' carrier, 108% in integrated services and 44% in
systems services revenue.

Carriers' carrier revenue increased $30.4 million from $41.8 million in
1997 to $72.2 million in 1998. The 73% increase resulted primarily from the
rapid growth in domestic and international switched services sold to other
carriers and as a result of $9.5 million in IRUs in 1998; no such revenue from
IRUs was recorded before 1998.

Integrated services revenue increased $9.3 million from $8.6 million in
1997 to $18.0 million in 1998. The 108% increase was attributable to growth in
the number of business customers both from increased penetration in our existing
markets and from the deployment of our network into new markets.

Systems services revenue increased $9.7 million from $22.0 million in 1997
to $31.6 million in 1998. The 44% increase was attributable to growth associated
with the leasing and sale of voice and data systems products and projects
involving the engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment.

Product resale revenue was $2.9 million in 1997 as compared to no product
resales in 1998. The product resales to a single customer were substantially
complete in May 1997 and such revenues are not expected to contribute in a
material manner in future years.

Costs of Services and Product Resales. Cost of services increased $30.7
million, or 59%, from $52.5 million in 1997 to $83.2 million in 1998. The growth
in cost of services was primarily attributable to the continued growth in all
three revenue categories. The two percentage point increase in gross margin from
30% to 32% resulted primarily from favorable pricing attributable to the higher
traffic and new vendors and the sale of dark fiber. The increase in the gross
margin in 1998 was partially offset by lower margins attributable to Mexico and
other international traffic, which carry a lower gross margin percentage. Gross
margins may vary in future periods as a result of these and other factors.

22
<PAGE> 26

Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") includes salaries, benefits, occupancy costs,
commissions, sales and marketing expenses and administrative expenses. SG&A
increased $9.4 million, or 67%, from $14.1 million in 1997 to $23.5 million in
1998. The increase resulted primarily from the additional personnel required to
support CapRock's growth, advertising to increase name recognition and brand
awareness, and additional sales commission payments.

CapRock recorded merger related expenses of $2.3 million in 1998, as
compared to no such costs in 1997. The merger related costs relate to the
business combination of CapRock Telecommunications, CapRock Fiber and IWL
Communications, our predecessor companies. This combination was consummated on
August 26, 1998. The merger related expenses consist of fees for investment
bankers, attorneys, accountants, financial printing and other related charges.

Depreciation and amortization expense increased $1.5 million, or 46%, from
$3.3 million in 1997 to $4.9 million in 1998. This increase resulted primarily
from purchases of additional equipment and other fixed assets to accommodate
CapRock's growth. CapRock expects that depreciation and amortization expense
will continue to increase in subsequent periods as CapRock continues to expand
its facilities.

Interest Expense. Interest expense increased $7.8 million from $1.7 million
in 1997 to $9.5 million in 1998. The increase resulted from interest expense
related to its senior notes. See "-- Liquidity and Capital Resources."

Interest Income. Interest income increased $2.9 million from $133,000 in
1997 to $3.0 million in 1998. The increase was attributable to the interest and
investment accretion associated with the marketable securities purchased with
the proceeds from the senior notes. See " -- Liquidity and Capital Resources."

Income Taxes. Income tax expense of $1.5 million in 1997 was comparable to
the income tax expense of $1.3 million in 1998. The effective tax rate was 37%
in 1997 as compared to 85% in 1998. The increase in the effective tax rate was
primarily attributable to certain non-deductible merger related costs in the
amount of approximately $1.8 million.

Net Income. Net income decreased $2.3 million, or 91%, from $2.6 million in
1997 to $223,000 in 1998 as a result of the factors discussed above.

YEAR ENDED 1996 COMPARED TO 1997

Revenues. Total revenues increased $24.3 million from $51.0 million in 1996
to $75.3 million in 1997. The 48% increase was due to increases in revenues from
both domestic and international switched services and to growth in switched
services provided to small and medium-sized businesses and to consumers as a
result of the continued expansion of CapRock's direct and agent sales. The 48%
increase was attributable to increases of 87% in carriers' carrier, 336% in
integrated services and 37% in systems services revenue. Product resale revenue
was $10.6 million in 1996, as compared to $2.9 million in 1997. The product
resales were substantially complete in May 1997 and these revenues are not
expected to contribute in a material manner in future years after 1997.

Carriers' carrier revenue increased $19.4 million from $22.4 million in
1996 to $41.8 million in 1997. The 87% increase resulted primarily from the
rapid growth in domestic and international switched services sold to the other
carriers.

Integrated services revenue increased $6.7 million from $2.0 million in
1996 to $8.6 million in 1997. The 336% increase was attributable to growth in
the number of business customers.

Systems services revenue increased $6.0 million from $16.0 million in 1996
to $22.0 million in 1997. The 37% increase was attributable to growth associated
with the leasing and sale of voice and data systems products and projects
involving the engineering and integration of telecommunications systems and
sales, services and maintenance of telecommunication equipment.

23
<PAGE> 27

Costs of Services and Product Resales. Cost of services increased $13.1
million from $39.4 million in 1996 to $52.5 million in 1997. The growth in cost
of services was primarily attributable to the continued growth in all three
revenue categories. The seven percentage point increase in gross margin from 23%
to 30% resulted primarily from favorable pricing attributable to the higher
traffic and new vendors, as well as a more favorable mix of international and
domestic traffic. Additionally, the total margin increase was partially
attributable to the completion of the product resales to a single customer in
1997. Gross margins may vary in the future periods as a result of these factors.

Selling, General and Administrative Expenses. SG&A includes the cost of
salaries, benefits, occupancy costs, commissions, sales and marketing expenses
and administrative expenses. SG&A increased $5.1 million from $9.0 million in
1996 to $14.1 million in 1997. The increase resulted from additional personnel
needed to support CapRock's growth, additional sales commission payments and
from increases in travel and advertising expenses.

Depreciation and amortization expense increased $1.8 million from $1.5
million in 1996 to $3.3 million in 1997. This increase resulted primarily from
purchases of additional equipment and other fixed assets to accommodate
CapRock's growth. CapRock expects that depreciation and amortization expense
will continue to increase in subsequent periods as CapRock continues to expand
its facilities.

Interest Expense. Interest expense was approximately $631,000 in 1996, as
compared to $1.7 million in 1997.

Income Taxes. Income tax expense increased $1.3 million from $227,000 in
1996 to $1.5 million in 1997. This increase was attributable to the improved
profitability of CapRock.

Net Income. Net income increased $2.2 million from $324,000 in 1996 to
approximately $2.6 million in 1997 as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

CapRock's total assets increased $142.6 million, or 289%, from $49.4
million at December 31, 1997 to $192.0 million at December 31, 1998. The
increase was attributable to internal growth, build out of the fiber optic
network and the receipt of the proceeds from the senior notes issued in July
1998. CapRock had cash and cash equivalents of $3.5 million at December 31,
1997, as compared with $294,000 at December 31, 1998 and marketable securities
of $97.0 million at December 31, 1998 as compared to no marketable securities at
December 31, 1997. CapRock had a working capital deficit of $305,000 at December
31, 1997 as compared to working capital of $102.5 million at December 31, 1998.
The increase in the working capital was attributable to the issuance of the
senior notes and the repayment of CapRock's existing notes, which were repaid
using a portion of the proceeds from the senior notes.

CapRock's cash flow from operations in 1997 and 1998 was $4.1 million and
$7.1 million, respectively. The increase of $3.0 million, or 73%, was primarily
attributable to overall growth. Additionally, accounts payable and accrued
expenses increased $15.0 million from $11.9 million at December 31, 1997 to
$26.9 million at December 31, 1998. The increase was primarily attributable to
increased expenditures and amounts due to vendors relating to the fiber optic
network build out.

Cash used in investing activities in 1997 and 1998 was $13.0 million and
$134.3 million, respectively. The increase of $121.4 million, or 935%, primarily
relates to the net investment in marketable securities of $97.0 million from the
proceeds of the senior notes, the purchase of telecommunications equipment and
costs incurred with the build out of the fiber optic network.

In January 1998, CapRock completed the acquisition of Integrated
Communications and Engineering, Ltd., a communications systems integrator and
maintenance provider in Aberdeen, Scotland. CapRock paid a total purchase price
of approximately $2.2 million comprised of approximately $610,000 in cash and
207,266 shares of CapRock's Common Stock.

24
<PAGE> 28

In July 1998, CapRock issued $150.0 million aggregate principal amount of
its senior notes. Interest on the senior notes is payable semi-annually in
arrears on January 15 and July 15 of each year, commencing January 15, 1999, at
the rate of 12% per year. A portion of the net proceeds from the offering of the
senior notes was used to repay all existing debt obligations of CapRock
Telecommunications, CapRock Fiber and IWL Communications, our predecessor
companies. The proceeds used for the debt payoffs totaled $26.8 million. The
remaining proceeds, net of transaction costs, have been, or will be, used to
fund additional capital expenditures for the construction of CapRock's fiber
optic network, switching equipment and other capital expenditures to expand its
sales offices, for potential acquisitions and for general working capital
purposes. The funds are invested in high-grade liquid securities classified as
available for sale. The indenture governing the issuance of the senior notes
contains certain restrictive operating and financial covenants, including
restrictive covenants relating to borrowing additional money, paying dividends
or making other distributions to our shareholders, limiting the ability of
subsidiaries to make payments to us, making certain investments, creating
certain liens on our assets, selling certain assets and using the proceeds from
those sales for certain purposes, entering into transactions with affiliates,
and engaging in certain mergers or consolidations. All of the covenants are
subject to a number of important qualifications and exceptions. These covenants
may adversely affect CapRock's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the best
interests of CapRock. See "Risk Factors."

CapRock expects to require significant financing for future capital
expenditure and working capital requirements. By the end of the year 2000,
CapRock intends to build out its fiber optic network to approximately 5,500
route miles throughout the Southwest region. CapRock intends to use advanced
fiber capable of supporting dense wave division multiplexing with an OC-48
backbone scalable to OC-192, and intends to install 96 fibers throughout most of
its network and intends to retain on average 24 fiber strands. CapRock is
burying three to four conduits throughout its network. CapRock currently
estimates that its aggregate capital requirements will total approximately
$250.0 million for 1999 and approximately $160.0 million for 2000, including
expenditures to be made under the joint build arrangement with Enron
Communications. CapRock expects to make substantial capital expenditures
thereafter. Capital expenditures will be required to (1) fund the construction
and operation of the fiber optic network, including the portion to be
constructed through the joint build arrangement with Enron Communications, (2)
fund the installation of voice and data switches, and (3) open sales offices and
add sales support and customer service personnel in markets throughout Texas,
Louisiana, Oklahoma, Arkansas and New Mexico.

CapRock believes that its cash and marketable securities, cash flow from
operations and sales of dark fiber, together with either the expected net
proceeds from this offering, the senior unsecured notes it is anticipating
issuing or the bank credit facility that it is currently negotiating, will be
sufficient to fund its capital expenditures and working capital requirements for
at least the next 12 months. More specifically, with CapRock's cash and
marketable securities, cash flow from operations, and the expected net proceeds
from this offering, the planned completion of the network through the end of
1999 will be fully funded, and CapRock believes that those sources of capital
together with vendor financings, borrowings under the credit facility that it is
currently negotiating, the proceeds from its anticipated issuance of
approximately $200.0 million of senior unsecured notes and anticipated sales of
dark fiber will be sufficient to fully fund completion of the network as planned
and may provide funds for additional expansion. However, no assurances can be
made as to when or whether the offer and sale of the senior notes will occur or
when or whether the credit facility will be completed. If CapRock is unable to
complete the offer and sale of the senior notes or the credit facility, CapRock
will seek alternate sources of financing and, if Caprock is unable to obtain
them, CapRock may have to curtail or delay the build out of its fiber network
and its level of capital expenditures. CapRock is currently cash flow positive,
with EBITDA of $8.8 million in 1997 and EBITDA of $15.0 million in 1998
(exclusive of merger related expenses).

CapRock may require additional capital in the future for new business
activities related to its current and planned businesses, or in the event it
decides to make additional acquisitions or enter into joint venture and
strategic alliances. Sources of additional capital may include cash flow from
operations, public or private equity and debt financings, bank debt, vendor
financings and indefeasible right to use contracts.

25
<PAGE> 29

In addition, CapRock may enter into joint construction agreements with carriers,
thereby reducing its capital expenditure requirements. However, we cannot assure
you that CapRock will be successful in producing sufficient cash flow or raising
sufficient debt or equity capital to meet its strategic business objectives or
that such funds, if available, will be available on a timely basis and on terms
that are acceptable to CapRock. If CapRock is unable to obtain such capital, the
build out of portions of its expanded network may be significantly delayed,
curtailed or abandoned. In addition, CapRock may accelerate the rate of
deployment of its network, which in turn may accelerate CapRock's need for
additional capital. CapRock's actual capital requirements will also be affected,
possibly materially, by various factors, including the timing and actual cost of
the deployment of CapRock's network, the timing and cost of expansion into new
markets, the extent of competition and the pricing of dark fiber and
telecommunications services in its markets.

ISSUANCE OF NOTES

We intend to sell, through a private placement exempt from the registration
requirements of the Securities Act, senior unsecured notes in the aggregate
principal amount of approximately $200.0 million. There is no assurance that the
proposed notes will be offered or if offered, will be sold, or that the
aggregate offering amount will not change. We expect that the proposed senior
notes will have a maturity date of ten (10) years after their issuance with
interest payable semi-annually after the date of issuance. The proposed notes
will be senior unsecured obligations and as such will rank pari passu in right
of payment with our existing senior notes issued in July 1998 and with all our
future unsecured and unsubordinated indebtedness. We anticipate that the
indenture governing such notes will have restrictions similar to those which
currently exist for our existing senior notes. See "Risk Factors -- The
restrictions in our senior note indenture limit our ability to effect
transactions and restrict our operations." There is no assurance that the terms
of the proposed notes actually offered and sold will not vary significantly from
those described above.

CREDIT FACILITY

CapRock is currently negotiating with a bank to obtain a senior credit
facility in the amount of $100 million. The final terms and conditions of the
credit facility will depend on negotiation of definitive documentation for the
credit facility, however the credit facility is expected to have a five-year
term and is expected to contain standard and customary restrictive covenants,
including financial covenants. As our network build out proceeds and our
customer base expands, we will consider refinancing a portion of our borrowings
under the credit facility with long-term indebtedness.

NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 1998, CapRock adopted Statement of Accounting Standard No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income consists
of net income and currency translation adjustments and is presented in the
consolidated statements of stockholders' equity and comprehensive income. This
Statement requires changes in disclosure only and it does not affect results of
operations or financial position. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which CapRock adopted in 1998. CapRock identified operating segments based upon
how management allocated resources and assesses performance. SFAS No. 131
requires changes in disclosure only and does not affect results of operations or
financial position. Prior year comparative information has been restated to
conform to the requirements of SFAS No. 131.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133") which requires that all
derivatives be recognized in the statement of financial

26
<PAGE> 30

position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. SFAS 133 is effective for
fiscal years beginning after June 15, 1999. The adoption of SFAS 133 will not
have an impact on CapRock's results of operations, financial position or cash
flow.

CONTINGENCIES

CapRock is party to ordinary litigation incidental to its business. No
currently pending litigation is expected to have a material adverse effect on
our results of operations, financial condition or cash flow.

YEAR 2000

The year 2000 problem is the inability of a meaningful portion of the
world's computers, software applications and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. This issue can be traced to
the infancy of computing, when computer data and programs were designed to save
disk space by truncating the date field to just six digits (two for the day, two
for the month and two for the year). Therefore, information applications
automatically assumed that the two-digit year field represented a year within
the 1900's. As a result of this, systems could fail to operate or fail to
produce correct results when dates roll over to the year 2000.

STATE OF READINESS

The year 2000 problem affects computers, software, and other equipment
used, operated, or maintained by CapRock for itself and its customers. CapRock
has substantially completed the process of assessing the potential impact of,
and the costs of remediating, the year 2000 problem for its internal systems,
facilities systems and equipment.

CapRock's business depends upon the operation of computer systems. CapRock
has established a year 2000 committee made up of leaders from the operational
areas of CapRock to assess CapRock's year 2000 problem. The committee has the
involvement of senior management and the Board of Directors and its objectives
are a top priority. CapRock has undertaken various initiatives intended to
provide computer equipment and software that will function properly with respect
to dates in the year 2000 and thereafter. Computer equipment and software
include systems that are commonly thought of as Information Technology, or IT,
systems, including accounting, data processing, telephone/PBX systems, scanning
equipment and other miscellaneous systems, as well as systems that are not
commonly thought of as IT systems, such as alarm systems, fax machines or other
miscellaneous systems. Based upon its identification and assessment efforts to
date, CapRock believes that certain computer equipment and software it currently
uses will require replacement or modification. In addition, in the ordinary
course of replacing computer equipment and software, CapRock will obtain
replacements that are warranted to be year 2000 compliant. CapRock currently
estimates that the year 2000 identification, assessment, remediation and testing
efforts will be substantially complete by June 30, 1999 and that such efforts
will be completed before any currently anticipated impact on its computer
equipment and software. CapRock has substantially completed the identification
and assessment process. CapRock estimates that it currently has completed
approximately 80% of the initiatives that it believes will be necessary to
address potential year 2000 issues relating to its computer equipment and
software. The projects comprising the remaining 20% of the initiative are in
process and are expected to be completed on or about June 30, 1999.

<TABLE>
<CAPTION>
YEAR 2000 INITIATIVE TIME FRAME
- -------------------- ----------
<S> <C>
Identification and assessment regarding IT system issues.... Completed
Remediation and testing regarding critical system issues.... 6/98-5/99
Identification, assessment, remediation and testing
regarding desktop and individual system issues............ 6/98-6/99
Identification and assessment regarding non-IT system
issues.................................................... 8/98-5/99
Remediation and testing regarding non-IT systems............ 11/98-6/99
Contingency plans regarding critical systems................ 5/99-9/99
</TABLE>

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<PAGE> 31

CapRock has mailed questionnaires to its significant vendors, service
providers and customers with whom CapRock's systems electronically interface to
determine the extent to which such interfaces and system processes are
vulnerable to year 2000 issues and whether the products and services of such
entities are year 2000 compliant. Substantially all of the parties have
responded to the request and no significant matters were noted from these
responses. However, the information contained in a number of the responses was
generic in nature and did not specifically address the stage of their year 2000
initiatives. CapRock will continue seeking alternate vendors in advance of
December 31, 1999 in the event satisfactory responses are not received.

CapRock has evaluated its systems and has identified the following systems
and functions as mission critical:

- switching systems,

- network operations and fiber,

- satellite/microwave transmission equipment and satellite service
providers,

- billing and call record collection systems, and

- supply chain (vendor provider of switched services).

Switching Systems:

Switching equipment is used to connect calls to their destination, while
performing other advanced features and recording call record information for
future billing. The switch opens or closes circuits or selects the paths or
circuits to be used for the transmission of information. CapRock currently owns
seven switches, three of which are physically located in Dallas, Texas (two are
calling card platforms), two in Houston, Texas, one in Victoria, Texas and one
in Phoenix, Arizona. CapRock also manages a switch in Jersey City, New Jersey.
CapRock has completed the assessment and certain test procedures relating to the
switching equipment and has identified certain non-compliant features, which
were remediated through software upgrades provided by the respective
manufacturers.

The remainder of the testing procedures for the switching equipment were
substantially complete for all switches which were in service as of March 31,
1999. The switches which have not been placed in service will be subject to
integrated test procedures prior to being placed in service. The test will
incorporate the call collection processes and the interfaces with the billing
system. The test will involve simulating date changes with the switch, such that
the call records will be processed, rated and properly captured in the billing
system as a billable transaction.

The test procedures will consist of the following:

- process flow analysis,

- documentation of overall integrated test strategy,

- documentation and test case plans at an individual component level,

- committee agreement regarding the test plan,

- execution of the integrated test plan, and

- documentation regarding the results of test procedures.

Network Operations and Fiber:

CapRock currently owns and operates an 800-route mile fiber optic network,
which was substantially completed by December 31, 1998. Approximately 260 route
miles were completed and placed in service in January 1997. The network is
currently being expanded to 5,500 route miles (which CapRock expects to be
completed by the end of the year 2000). The fiber optic network is designed to
be scalable and will include network-advanced fiber, which is capable of
supporting dense wave division multiplexing with an
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OC-48 backbone scalable to OC-192. The fiber optic network will include
electronic equipment, which regenerates and transports the voice, data and other
information. A detailed assessment of the network operations and fiber equipment
has been performed and no significant non-compliant issues have been identified.

Satellite/Microwave Transmission Equipment and Satellite Service Providers:

CapRock utilizes satellite service providers to provide communications
services to certain customers in remote locations. CapRock has sent
correspondence to each of the three vendors supplying the satellite services.
Each of the satellite service providers has responded. None of them noted any
significant non-compliant issues. CapRock is continuing to pursue additional
information and test data from these providers and will seek new providers, if
necessary.

Billing and Call Record Collection Systems:

CapRock handles its provisioning, customer care, billing and traffic
reporting functions on a proprietary software platform developed by RiverRock
Systems, Ltd., a Texas limited partnership in which CapRock has a 49% ownership
interest. These operations support systems, or OSS systems, and other back
office systems are used to enter, schedule and track a customer's order from the
point of sale to the installation and testing of service. The systems also
include or interface with trouble management, inventory, billing, collection and
customer service systems. The test procedures relating to the billing system and
call record collection processes were performed in conjunction with the
switching equipment test procedures and are substantially completed.

CapRock believes that substantially all of the hardware, database platform
and operating systems impacting the billing system function will not be
materially affected by Year 2000 issues.

Supply Chain (Vendor Provider of Switch Services):

CapRock is dependent upon a number of telecommunications carriers during
the process of initiating and terminating calls to end-users. CapRock has sent
correspondence to each of the significant suppliers regarding their year 2000
status and has received responses from substantially all of these suppliers.
However, the information contained in a number of the responses was generic in
nature and did not specifically address the stage of their year 2000
initiatives. CapRock will seek alternate suppliers in advance of December 31,
1999 in the event satisfactory responses are not received.

Based upon CapRock's current assessment and responses from vendors, CapRock
believes that the risks associated with the year 2000 problem relating to
domestic traffic and terminations are not significant. CapRock is in the process
of evaluating the impact of year 2000 as it relates to the termination of
traffic in international locations, and specifically third world and developing
countries.

Non-IT Systems:

CapRock continues to evaluate non-information technology, or non-IT,
systems. Based on current results and other factors, CapRock does not anticipate
finding any material embedded system issues in its non-IT systems.

COSTS

CapRock anticipates that costs of replacing or remediating non-compliant
systems will not exceed $500,000 (remediation costs incurred to date have been
immaterial). Such expenditures represent less than 1% of 1999 projected capital
expenditures and will be funded out of cash flow from operations.

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<PAGE> 33

RISKS

CapRock has begun, but not yet completed, a comprehensive analysis of the
problems and costs, including loss of revenues, that would be reasonably likely
to result from the failure by CapRock or certain third parties to complete the
efforts necessary to achieve year 2000 compliance on a timely basis.

CapRock has not yet completed its identification of the most likely worst
case scenario. However, CapRock believes that the most reasonably likely worst
case scenario would involve loss of revenues relating to traffic terminating in
certain developing third world countries, which have not adequately prepared for
the year 2000. CapRock relies upon certain vendors to supply international
services and the possibility exists that some of the traffic in these developing
third world countries may not be able to be completed. The estimated loss of
revenue, if any, has not been determined, and we may not be able to identify the
amount of any loss by the year 2000. Depending on the systems affected, the
failure of any contingency plans developed by CapRock, if implemented, could
have a material adverse effect on CapRock's financial condition and results of
operations.

CONTINGENCY PLANS

The contingency plans include a proactive analysis of countries that are
actively pursuing year 2000 remediation. CapRock is using outside consultants to
assist with an analysis of countries that are not actively pursuing year 2000
compliance and remediation. Contingency plans include identifying these
countries noted with substantial risk and potentially redirecting the sales and
marketing efforts to other countries less likely to be affected by year 2000
problems.

CapRock is still formulating contingency plans relating to the use of the
satellite service providers. CapRock continues to actively pursue receiving test
data and procedures from these service providers regarding year 2000 compliance.
CapRock will consider utilizing other service providers if the current service
providers cannot demonstrate compliance to CapRock's satisfaction by June 30,
1999.

CapRock is still formulating contingency plans regarding significant
suppliers of telecommunication services, which may suffer a year 2000-related
failure. CapRock utilizes a number of different service providers and the
contingency plan will include re-routing traffic from a vendor which experiences
a year 2000 systems failure to one or more other vendors.

DISCLAIMER

The discussion of CapRock's efforts, and management's expectations,
relating to year 2000 compliance are forward-looking statements and the dates on
which CapRock believes it will complete such efforts are based upon management's
best estimates. These estimates were derived using numerous assumptions
regarding future events, including the continued availability of certain
resources and other factors. We cannot assure you that these estimates will
prove to be accurate, and our actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to the availability and cost of
personnel trained in year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology and
similar uncertainties. In addition, variability of definitions of "compliance
with year 2000" relating to products and services sold by CapRock may lead to
claims whose impact on CapRock is currently not estimable. We cannot assure you
that the aggregate cost of defending and resolving such claims, if any, will not
materially adversely affect our results of operations.

MARKET RISK

CapRock is exposed to market risk from changes in marketable securities
(which consist of money market and commercial paper). At December 31, 1998,
marketable securities of CapRock were recorded at a fair value of approximately
$97 million, with an overall weighted average return of approximately 5% and an
overall weighted average life of less than 1 year. The marketable securities
held by CapRock have exposure to price risk, which is estimated as the potential
loss in fair value due to a hypothetical change of

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<PAGE> 34

50 basis points (10% of CapRock's overall average return on marketable
securities) in quoted market prices. This hypothetical change would have an
immaterial effect on the recorded value of the marketable securities.

CapRock is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of its
long-term debt is at a fixed rate of December 31, 1998. The fair value of
CapRock's long-term debt at December 31, 1998 was estimated to be $144 million
based on the overall rate of the long-term debt of 12% and an overall maturity
of 9.5 years compared to terms and rates currently available in long-term
financing markets. Market risk is estimated as the potential decrease in fair
value of CapRock's long-term debt resulting from a hypothetical increase of 120
basis points in interest rates (ten percent of CapRock's overall borrowing
rate). Such an increase in interest rates would result in approximately a $9.6
million decrease in fair value of CapRock's long-term debt. To date, CapRock has
not entered into any derivative financial instruments to manage interest rate
risk and is currently not evaluating the future use of any such financial
instruments.

CapRock conducts business in Aberdeen, Scotland, through a wholly owned
subsidiary. However, the business transacted by this subsidiary is in the local
functional currency. Therefore, CapRock does not currently have any exposure to
foreign currency transaction gains or losses. All other business transactions
are in U.S. dollars. To date, CapRock has not entered into any derivative
financial instrument to manage foreign currency risk and is currently not
evaluating the future use of any such financial instruments.

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<PAGE> 35

BUSINESS

CapRock owns and operates a scalable long-haul fiber network which upon
completion is expected to cover approximately 5,500 route miles throughout the
Southwest region, which includes Texas, Louisiana, Arkansas, Oklahoma and New
Mexico. This fiber network supports the voice, data, bandwidth and dark fiber
services we provide to our carrier and retail customers. Our 1998 revenues were
$121.8 million and EBITDA (exclusive of merger related expenses of $2.3 million)
was $15.0 million. Over the past five years, our revenues have grown at a
compound annual growth rate of 55%.

We intend to build the most extensive alternative fiber network in the
Southwest region, which will allow us to serve nearly every primary, secondary
and tertiary city within the region. Our fiber network is scalable, and we are
deploying a minimum of 96 fibers and two to three spare conduits along each
route. Each fiber is capable of supporting dense wave division multiplexing, and
each conduit is capable of housing a cable with hundreds of additional fibers.
In order to reduce the cost of fiber retained for our own use, we intend to sell
excess fiber to other carriers. We are currently in discussions for the sale of
fiber over segments of our network with over 25 carriers. Consistent with our
planned network deployment schedule, approximately 800 route miles of the
long-haul fiber network were substantially completed at year-end 1998. We
currently have another 1,870 route miles under construction and expect to have
approximately 3,000 route miles completed by the end of 1999, with the remainder
of the 5,500 route mile network expected to be completed by the end of 2000. We
recently entered into an agreement with Enron Communications to jointly build
approximately 1,050 miles of fiber network in Texas. We believe that this
agreement and any other similar agreements we may execute in the future may
enable us to significantly lower the overall cost of network construction as
well as accelerate its deployment.

In addition to our extensive fiber network, our voice network facilities
include eight local and long distance switches (seven which we own and one which
we manage) with another three local switches scheduled to be installed in the
second and third quarters of 1999. We plan to colocate our equipment in 20
central offices with incumbent local telephone companies (13 of which are
currently in process) for the provision of local services using UNEs by the end
of 1999. We also plan to purchase and deploy in the second and third quarters of
1999 ten ATM data switches to support our Internet, frame relay and ATM
services.

providing dark fiber to these carriers at several border crossings enabling them
to close open fiber rings in Mexico by using CapRock fiber on the U.S. side of
the border. Additionally, our direct connect agreements with foreign carriers
position us to capture increased levels of growing international traffic. See
Note 18 to the Consolidated Financial Statements of CapRock included in this
Prospectus.

Our executive management team has extensive experience in developing
advanced telecommunications networks as well as significant executive managerial
experience. Jere W. Thompson, Jr., our Chief Executive Officer and Chairman of
the Board, founded CapRock Fiber in 1992, became President of CapRock
Telecommunications in 1994 and has overseen the development of our company since
that time. Ignatius W. Leonards, our President, founded IWL Communications and
has over 24 years of telecommunications industry experience. Kevin W. McAleer,
our Chief Financial Officer, has over 17 years of experience as the chief
financial officer of several publicly held companies. In addition, Scott L.
Roberts, our Executive Vice President of International Sales, Timothy W. Rogers,
our Executive Vice President of Retail Sales and Network Operations, and Timothy
M. Terrell, our Executive Vice President of Carrier Sales, were all co-founders
of CapRock Telecommunications and prior to that were employed as directors and
managers in the carrier sales divisions of Qwest and Sprint. Byron M. Allen,
Executive Vice President of International, has six years of experience in the
domestic and international telecommunications industry. After the offering, our
management team will continue to beneficially own approximately 67% of our
common stock.

MARKET OPPORTUNITY

We believe that a substantial market opportunity exists for us as a result
of the following factors:

- attractive growth dynamics of the Southwest region,

- rapidly developing telecommunications technologies,

- growing demand for data services and Internet access,

- need for integrated communications solutions for small and medium-sized
businesses,

- increasing traffic between the U.S. and Mexico, and

- the 1996 Telecommunications Act.

Attractive growth dynamics of the Southwest region. We believe that there
is a significant opportunity in the Southwest region. Incumbent local telephone
companies, or ILECs, still control almost 98% of the local service market, and
the population of the Southwest region is large and growing rapidly. Texas is
the second largest state in the U.S., and its population is expected to exceed
20 million in 1999. Over the past two years, Texas was the second fastest
growing state in terms of total population and, over the past ten years, was the
fastest growing state in terms of new job creation. The combined population of
the Dallas/ Ft. Worth, Houston and San Antonio metropolitan areas exceeds the
total populations of each of 43 other states. Based on statistics published by
the Federal Communications Commission (FCC), in 1998 there were over 5.4 million
business access lines, approximately 12.0 million residential access lines and a
total of approximately 17.4 million total access lines in the Southwest region.
We believe that access lines in this region will grow slightly more than 5%
annually.

Rapidly developing telecommunications technologies. Advances in various
telecommunications technologies, such as high speed optical transmission
electronics, dense wave division multiplexing, or DWDM, and packet-switches are
reducing the cost structure of newly-deployed telecommunications networks. High
speed OC-192 transmission electronics operate at approximately 10 billion pulses
of light per second, four times faster and far more cost effective than prior
generation electronics. Dense wave division multiplexing significantly increases
the transmission capacity of a single strand of fiber optic cable (it can
increase the carrying capacity of a single fiber 32 fold by allowing
simultaneous transmission of up to 32 optical channels per fiber). High
performance packet switches break up data into "packets." Compared to circuit
switches, packet switches are almost half the cost on a per port basis and
utilize bandwidth more than ten

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times as efficiently for the transmission of voice and data. These technologies
effectively combine to manufacture more bandwidth and to make it faster and
available to more locations and at lower costs than ever before.

Growing demand for data services and Internet access. Demand for bandwidth
is being fueled by the demand from data and Internet services. Although rapid
access to information and the ability to distribute it quickly through the use
of data connections are critical to businesses, many of the nation's businesses
do not have access to data services, especially small and medium-sized
businesses located in secondary and tertiary cities. Market studies estimate
that, in response to this demand, spending on end-user subscriptions for data
services will grow at an annual rate of 77% over the next four years. In
addition, the proliferation of local area networks, wide area networks, private
networks, Internet services, e-mail and other enhanced services has caused data
transmissions to become a significant and increasing portion of overall
telecommunications traffic. These services are expected to drive much of the
growth in the data communications market. As a result, the data services market
has been the fastest growing segment of the communications industry, expanding
at a rate five times faster than the voice services market, with an increase
from approximately $3.7 billion in revenues in 1994 to approximately $9.9
billion in revenues in 1997. Market studies estimate that the data
communications services market will grow to approximately $24.3 billion in
annual revenues by the end of 2001, representing a compound annual growth rate
of 25% from 1997.

Need for integrated communications solutions for small and medium-sized
businesses. Currently the vast majority of the nation's small and medium-sized
businesses need to deal with multiple communications providers to obtain their
communications needs. These businesses tend to use the incumbent local telephone
company for local services, long distance carriers for long distance services,
equipment integrators for on-premise voice and network systems, and Internet
service providers for Internet access. As a result, we believe that there exists
a significant and growing demand from businesses for the provision of advanced
telecommunications services from a single provider that can not only provide a
convenient bundled package of products and services, but also provide integrated
customer care and support.

Increasing traffic between the U.S. and Mexico. We believe that over half
of the traffic between Mexico and the U.S. passes through border crossings along
the Texas border. In 1997, Mexico was the second largest destination for U.S.
outbound telecommunications traffic, accounting for approximately 12.1% of the
total international traffic originating in the U.S. The U.S. is the largest
destination of outbound traffic from Mexico, accounting for approximately 89% of
its total international traffic. In 1997, the telecommunications traffic into
Mexico was approximately 2.9 billion minutes, while outgoing traffic amounted to
approximately 1.2 billion minutes. International calling tends to be price
elastic: as rates fall, volume increases. Rates into Mexico have steadily
dropped over the past four years, and traffic volume has increased
commensurately. CapRock has a direct connection into Mexico with a Mexican
carrier, which enables us to provide reliable, high quality terminations to our
customers. We are in discussions with several Mexican carriers regarding
potential sales or exchanges of dark fiber.

The 1996 Telecommunications Act. Competition in the telecommunications
industry has been impacted significantly by the 1996 Telecommunications Act.
This act allows competitive carriers to use the existing incumbent local carrier
infrastructure, as opposed to building a competing infrastructure at significant
cost. The 1996 Telecommunications Act requires all incumbent carriers to allow
competitive carriers to colocate their equipment along with incumbent carrier
equipment in incumbent carrier central offices. This enables competitive
carriers to access end users through existing telephone line connections. The
1996 Telecommunications Act creates an incentive for incumbent carriers that
were formerly part of the Bell system to cooperate with competitive carriers.
These incumbent carriers cannot provide long distance service until regulators
determine that there is competition in the incumbent carrier's local market.

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BUSINESS STRATEGY

- Build the region's most advanced, scalable and extensive fiber optic
network. We believe that existing fiber networks cannot meet the
bandwidth needs of businesses and carriers in the Southwest region. We
also believe that the secondary and tertiary markets located between the
major markets in this region are underserved, creating a significant
market opportunity. To address this need, we are currently expanding our
network to cover approximately 5,500 route miles throughout the Southwest
region. We intend to construct the most extensive and advanced fiber
network in the region. By installing multiple conduits, along with a
large number of advanced fiber strands in each conduit that are capable
of supporting dense wave division multiplexing, we are creating a robust
network that will have significant flexibility to add capacity to meet
future customer demand. The unused conduits allow us to add fiber and to
cost-effectively deploy future generations of optical networking
components, which will expand capacity and reduce per unit costs, without
new construction. Through our use of these technologies, we believe that
we can rapidly scale our network to support the demands for increased
bandwidth, that the bandwidth we utilize is lower in cost and that the
markets we can reach are greater in number. We intend to have our network
interconnect with the networks of selected Mexican carriers at multiple
border crossings, creating international synchronous optical network, or
SONET, ring connections between the United States and Mexico. Given the
strong demand for dark fiber over the past year, we increased our planned
network build out from approximately 4,300 route miles to approximately
5,500 route miles.

- Create a strategic, regionally focused asset. We are focused on the
Southwest region because of the region's size, attractive growth
prospects and its border with Mexico, and because we believe that as a
region it is currently underserved by other major telecommunications
providers. We believe that existing fiber networks cannot meet the fiber
and bandwidth needs of businesses and carriers in the Southwest region.
This creates a significant market opportunity for an alternative network
provider that offers communications services throughout this region. Our
network has been designed to complement existing major long haul-fiber
networks. To the extent possible, our routes are geographically diverse
from the existing fiber networks of AT&T, MCI WorldCom, Sprint, Qwest and
IXC. We also believe that the majority of communications traffic is
regional in nature. By concentrating our network build within a region,
we feel we can maximize the amount of traffic that originates and
terminates end-to-end on our network, which captures significant regional
traffic and allows us to maximize our gross profit margins and returns on
invested capital.

- Pursue a cost-effective network build out. While our fiber network
principally supports our voice, data and bandwidth products, we also
expect the network to provide us with significant financial benefits.
Demand for dark fiber is strong, so we intend to sell excess dark fiber
to third parties. Also, we may enter into arrangements with other
carriers, similar to our agreement with Enron Communications, to jointly
build certain segments of our fiber network. These dark fiber sales and
joint build arrangements may enable us to accelerate our construction
schedule and significantly lower the cost of fiber retained for our own
use. We believe that on a per fiber mile basis we will own one of the
lowest net cost networks in the Southwest region.

- Focus on high value-added local switching infrastructure. As we enter
markets, we initially provide local services by reselling the services of
the incumbent local telephone companies. As we obtain enough customers to
economically justify the deployment of local switches, we plan to migrate
our resale customers to our own switching facilities. We also intend to
reach our customers by utilizing either the unbundled network elements of
ILECs or the fiber facilities of other CLECs. We believe that this
"success-based capital deployment" strategy, whereby we deploy capital
incrementally and only in attractive markets with an existing customer
base, will enable us to construct a network and

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facilities that can serve customers in all of our markets, while
minimizing the risk of making substantial up-front capital expenditures
in unproven markets. We are constantly exploring alternative technologies
to provide local loop, or last-mile connectivity, to customers in our
target markets, such as digital subscriber lines (DSL) and local
multipoint distribution systems (LMDS).

- Provide bundled communications solutions to small and medium-sized
businesses. We believe that there is a strong desire among small and
medium-sized business customers to simplify their operations by dealing
with a single telecommunications provider for an integrated package of
communications services. We currently offer local, long distance,
Internet, data and private line services. In addition, we also offer
asynchronous transfer mode (ATM), frame relay, Integrated Services
Digital Network (ISDN), Web server hosting, and other enhanced services
not generally available from the ILECs (or available only at prices
higher than those that we intend to charge). We believe that our ability
to provide a wide array of integrated services, to invoice these services
on a single bundled bill, and to serve as a single point of contact for
sales and service will enable us to (1) better compete in and to rapidly
penetrate our targeted markets, (2) capture virtually all of our existing
and newly acquired customers' expenditures for telecommunications
services and equipment, (3) enhance our profit margins, (4) increase
customer satisfaction, and (5) maintain lower customer churn. In
addition, we believe that our cost structure in offering bundled local
and long distance services will allow us to offer those services at a
bundled price that will be substantially lower than those services
purchased separately.

- Pursue acquisitions and strategic alliances. As part of our growth plan,
we routinely engage in discussions with other companies considering
potential business ventures and combinations. In our target markets, a
large number of small private companies provide local, long distance,
data, and Internet services, as well as telecommunications equipment.
This fragmentation creates opportunities to acquire industry participants
that can provide additional management talent, customers and product
extensions. In addition, as part of our strategy to rapidly deploy our
network, we intend to pursue strategic relationships with cable
television companies, utilities, state transportation departments and
other governmental authorities. By utilizing strategic alliances, we
believe we will be able to enter our target markets quickly and
efficiently and will be able to reduce the up-front capital investment
required to develop our network. Our agreement with Enron Communications
to jointly build approximately 1,050 miles of fiber network in Texas is
an example of this strategy. This agreement and any other similar
agreements we may execute in the future may enable us to accelerate the
construction schedule for our network and significantly lower the cost of
fiber retained for our use.

- Build market share through personalized sales and customer service. We
focus on superior customer service and offer our integrated services
primarily to small and medium-sized businesses. Unlike large corporate,
government, or other institutions, small and medium-sized businesses
often do not have the necessary in-house personnel required to manage and
implement complex telecommunications solutions. As a result, we believe
that a consultative direct sales effort combined with a superior and
personalized customer care program that provides customers with a
comprehensive turn-key telecommunications solution will give us a
competitive advantage in capturing our customers' total
telecommunications traffic. As of March 31, 1999, our direct sales force
consisted of 118 account executives and managers in Dallas, Ft. Worth,
Houston, San Antonio, Austin and Victoria, Texas, as well as Lafayette,
Louisiana. In addition, we had 124 sales agents located throughout Texas.
We intend to recruit, train and deploy approximately an additional 80
account executives by the end of 1999. We believe that our low customer
attrition in 1998, which was less than 3% for the entire year, was
achieved because of our superior customer service.

- Leverage our advanced back office systems. We handle our provisioning,
customer care, billing and traffic reporting functions through a
proprietary software platform developed by RiverRock Systems, Ltd., a
Texas limited partnership in which we have a 49% ownership interest. The
system has been designed to be both scalable and flexible in order to
support our expected future back
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office requirements. We believe that this system provides us with a
significant competitive advantage by allowing us to creatively bundle and
price various telecommunication services, to process large order volumes,
and to provide superior customer service when compared to the incumbent
local telephone companies or other providers using legacy systems that
either outsource back-office services or that do not have an advanced
office support systems platform. The RiverRock system is part of a larger
back office organization which enables us to: (1) minimize the time
required to initiate services for new customers, (2) provide customer
bills, (3) respond quickly to customers' needs and information requests,
and (4) better monitor and analyze traffic, financial and operating
trends. We intend to continue to develop this system to meet increasing
demands for our services and to continue to provide our customers with
superior customer care.

NETWORK BUILD OUT AND FINANCING PLAN

By the end of the year 2000, we intend to build out our fiber optic network
to approximately 5,500 route miles throughout the Southwest region. We began
constructing and operating a regional fiber network in 1993. We completed
construction of the first 260 route miles of our fiber network in 1997, and at
the end of 1998, the first 800 route miles of our scalable, regional fiber
network were substantially completed, linking San Antonio, Laredo, McAllen,
Harlingen, Corpus Christi, Victoria and Houston, Texas. Over the past two years,
we have met substantially all of our milestones with respect to our construction
schedules and budgets. We currently have approximately 1,870 route miles under
construction and expect to have approximately 3,000 route miles completed by the
end of 1999, linking south Texas, San Antonio, Houston, Austin, Waco, Dallas,
Fort Worth and Amarillo, Texas, Oklahoma City and Tulsa, Oklahoma, Little Rock,
Arkansas and Monroe and New Orleans, Louisiana. We expect that the remainder of
the 5,500 route mile fiber network will be completed by the end of the year
2000. Given the increased demand for our fiber-based telecommunications services
over the past year, we increased our planned network build out from
approximately 4,300 route miles to approximately 5,500 route miles.

We believe that our network, once completed, will be the most extensive
alternative fiber network in the Southwest region and will enable us to serve
nearly every primary, secondary and tertiary city in the region. Our network is
designed to be scalable and will have significant excess capacity to meet future
demand and flexibility to accommodate new fiber technology and electronics. We
are burying three to four conduits throughout our network. We are installing in
a conduit a minimum combination of 96 Lucent Truewave and single-mode fibers.
Both Truewave and single-mode fiber are capable of supporting dense wave
division multiplexing. We intend to retain on average 24 fiber strands
throughout most of our network. The routes of the network are primarily
constructed on state highway and county road rights-of-way, and are planned to
be generally geographically diverse from the existing fiber networks of AT&T,
Sprint, MCI WorldCom, and IXC. The fiber network will also interconnect with the
fiber networks of selected Mexican carriers at multiple border crossings.

Through the continuing and successful integration of IWL Communications and
its personnel and network facilities, we have been able to continue developing
our fiber network and our switching facilities. In addition to our extensive
fiber network, our network facilities also include eight local and long distance
switches (seven which we own and one which we manage), with another three local
switches scheduled to be installed in the second and third quarters of 1999. We
plan to colocate our equipment in 20 central offices with incumbent local
telephone companies (13 of which are currently in process) for the provision of
local services using UNEs by the end of 1999. We also plan to purchase and
deploy in the second and third quarters of 1999 ten ATM data switches to support
our Internet, frame relay and ATM services.

We estimate total gross capital expenditures of approximately $410 million
to complete our planned regional network build out, including fiber,
transmission electronics, voice and data switches and corporate capital
expenditures.

To reduce the cost of fiber retained for our own use, we have sold in the
past, and intend to sell in the future, conduit and dark fiber to third parties.
In the past, we have jointly constructed segments with Teleport Communications
Inc., a competitive local phone company, and with TCI Communications Inc., a

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cable television company, and we recently announced our agreement with Enron
Communications to jointly build approximately 1,050 miles of fiber network in
Texas. Through this joint build arrangement, we will connect Amarillo, Lubbock,
Dallas, Fort Worth, Waco, Bryan, Austin, San Marcos, San Antonio and Houston,
Texas. The partnership we formed with Enron Communications is installing four
conduits throughout the approximate 1,050 miles. We intend to jointly market 96
of the 192 fibers installed. Of the remaining 96 fibers, we will own 48 fibers
and Enron Communications will own 48 fibers. The joint build arrangement
provides several benefits, including reduction of construction costs,
accelerated acquisition of right of way and franchise agreements, the majority
of which are essentially in place, and the freeing up of resources to
potentially accelerate the build of the remaining portion of the network. This
agreement and any similar agreements we may execute in the future may enable us
to accelerate our construction schedule and accelerate the rate of deployment of
our network, which in turn may accelerate our need for additional capital. Each
city-pair segment of our fiber network is operational upon completion of
construction. Should network construction be slowed or postponed, our existing
network is still operational and our integrated services strategy can continue
essentially unchanged.

By installing a large fiber count, advanced fiber capable of supporting
dense wave division multiplexing and spare conduits, the network will be
scalable and will have significant flexibility to add capacity to meet future
demand. The integrity and survivability of the network will be enhanced through
the design of multiple SONET rings, and its diverse location from existing
long-haul networks. The expanded network is expected to deliver the following
significant strategic and financial benefits to us: (1) substantial savings by
allowing us to move onto our own network a significant portion of the traffic
that we currently carry on circuits which we lease from other carriers; (2) high
capacity new routes allowing us to increase revenues by leasing additional
circuits to our customers, including high capacity circuits such as OC-3s,
OC-12s, and OC-48s; (3) lower underlying transmission and network operating
costs; (4) sufficient capacity to support increasing demand from Internet,
multimedia applications, frame relay and ATM; and (5) reduced capital costs
through sales and exchanges of excess fiber which we are including in our
network expansion specifically for that purpose.

We also provide services to our oil and gas company customers through a
satellite network consisting of leases for access to multiple satellites, a
microwave network, two-way radio licenses and carrier agreements for long
distance service combined with a switch-based network. Our microwave network
includes a system that has been built by us onshore in the Southwest region and
extends offshore into the Gulf of Mexico. We believe that the fiber and
microwave network we have created to support our oil and gas industry customers
has excess capacity and can readily support integrated communications'
activities in secondary and tertiary markets along the Texas and Louisiana Gulf
Coast, where we expect less competition for customers than in the larger
markets. We intend to leverage our project management skill set and expertise by
supplying communications services to customers outside of the oil and gas
industry, particularly customers with operations located near our existing and
planned communications infrastructure.

PRODUCTS AND SERVICES

Carriers' Carrier

We intend to establish ourself as the premier carriers' carrier within the
Southwest region, providing voice, data, broadband and dark fiber services over
the most extensive advanced fiber optic network in the Southwest region. Our
principal carriers' carrier products are: long distance terminating access,
calling cards, dark fiber, and bandwidth provision. Our carrier customer base
includes more than 100 carriers, including AT&T, IXC, MCI WorldCom, Qwest and
Sprint, and including regional independents such as Century Telephone
Enterprises, Inc. and Lufkin Conroe Telephone. For the year ended December 31,
1998, revenues from services provided to MCI WorldCom accounted for more than
10% of our revenues.

Long Distance Terminating Access. This service enables carrier customers to
terminate regional, domestic or international long distance calls through our
switches. We terminate calls over our own network and feature groups established
with incumbent local telephone companies or through other carriers

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providing services to us. We sell these services on a per-call basis, charging
by minutes of use, or MOUs, with payment due monthly after services are
rendered.

Bandwidth Provision. We offer T-1, DS-3, OC-3, OC-12 and OC-48 capacity and
individual wavelength channels to our carrier customers. Carriers utilize the
broadband capacity to support their voice and data traffic requirements and to
provide diverse routing as backup in the event of a fiber cut along their
primary routes. Services are provided generally through one year contracts,
requiring fixed monthly payments, generally in advance.

Dark Fiber. We lease and sell excess dark fiber to carrier customers over
our fiber network. We are burying three to four conduits and installing a cable
with a minimum of 96 fiber strands throughout our 5,500 route mile fiber
network. We intend to retain an average of 24 fibers for our own use and to
continue to lease or sell excess capacity to lower our net cost for fiber
retained for our own use. Dark fiber lease contracts are generally for a minimum
of ten years with multiple five year renewals at discounted rates. Dark fiber
sales are in the form of indefeasible right of use contracts for terms for 20
years and longer.

Integrated Services

We intend to become the dominant integrated communications provider in the
Southwest region, offering local, long distance, Internet, data and private line
services to end-user customers on an integrated basis invoiced on a single,
bundled bill. We believe that our ability to provide integrated services, and to
invoice these services on a single, bundled bill enables us to (1) better
compete in and rapidly penetrate our targeted markets, (2) capture virtually all
of our existing and newly acquired customers' expenditures for
telecommunications services and equipment, (3) increase customer satisfaction,
and (4) maintain low customer churn.

We offer (or, where indicated, intend to offer) the following products:

Local. These services offer customers local switched and enhanced services.
We intend to continue to obtain local telephone services from incumbent local
telephone companies on a total service resale, or TSR, basis and as demand
economically justifies, to install local switches and migrate customers to our
network utilizing unbundled network elements leased from incumbent local
telephone companies for last mile local lines. We believe this approach
significantly boosts our gross margins, maximizes our return on invested
capital, and reduces the time required to enter new markets.

One Plus Long Distance. This service offers customers the ability to make
outbound switched long distance calls by simply dialing a 1, plus the area code
and phone number. Customers can select us as their primary long distance
provider by placing an order with us. This service may be used for both domestic
and international calling.

Long Distance Dedicated Service. This service is designed for larger users
with sufficient long distance traffic volume to warrant the use of dedicated
lines directly to the customer to originate calls. Instead of long distance
calls switched through the ILEC, this service uses a dedicated line that
directly connects the end user and our switch. This eliminates ILEC originating
access fees and reduces per minute rates to the user.

Internet. We provide Internet services to approximately 800 customers. The
services include e-mail server, news server and hosting of customer web pages.

Data. Frame relay and ATM data services are currently provided on a resale
basis. Our fiber network has been designed to provide a platform to support high
capacity, bandwidth-intensive products. We intend to migrate our data services
onto our own data and fiber networks as these networks are built out.

Private Lines. This service provides customers dedicated broadband
capacity, typically T-1s and DS-3s. Private lines enable customers to connect
directly to their long distance carriers, bypassing the ILEC and thereby
reducing long distance rates. Private lines also enable customers to establish
virtual private wide area networks for data and voice transmissions between or
among multiple locations.
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Toll Free 800/888. This inbound service, where the receiving party pays for
the call, is accessed by dialing an 800/888 area code. This is used in a wide
variety of applications, many of which generate revenue for the user (such as
reservation centers or customer service centers).

Calling Card. These traditional, basic telephone calling cards allow the
user to place calls from anywhere in the United States or Canada. Later in 1999,
we plan to expand our service to include Mexico. We also offer additional
features including conference calling and speed dialing.

Prepaid Card. Prepaid cards allow a customer to purchase and pay in advance
for a card with a fixed amount of calling time. The card is then used as a
standard calling card from which time is deducted when used. Prepaid cards may
be purchased with enhanced features similar to those of calling cards and also
may be renewed by purchasing additional time.

System Services

We intend to maintain our position as a major provider of
telecommunications services to remote installations, primarily in the Gulf of
Mexico. Our principal products are offshore voice and data services, as well as
the sale and installation of equipment to carry those services.

Offshore Services. We provide offshore voice and data systems and services
to the oil and gas industry in the Gulf of Mexico. Satellite and microwave
transmission media are used depending on the type and location of the drilling
rig involved. Our communications systems are flexible and can be quickly
re-aligned as rigs move to new locations.

Customer Premise Equipment. We currently sell and install telephone and
switchboard equipment to our offshore customers. We intend to add office
switchboard and private branch exchange equipment for our small and medium-sized
business customers. We intend to continue to build our relationships with local
customer premise equipment installation companies in all of our markets for the
purpose of selling and installing customer premise equipment not otherwise
provided by us.

SALES AND MARKETING

Carriers' Carrier. We established a carrier services sales force in 1992.
We believe it competes effectively in this market based on a combination of
price, reliability, quality of service, route diversity, ease of ordering,
ability to obtain traffic information and superior customer service. We market
our carriers' carrier services primarily through eight direct sales personnel
and four support specialists located in our headquarters in Dallas. In general,
these sales professionals locate potential customers for our carrier services
through customer referrals, trade forums, trade shows and industry alliances.

Integrated Services. We focus our sales efforts on small to medium-sized
businesses in the Southwest region primarily through two channels: our direct
sales force and our network of independent sales agents. Our direct sales force
and our authorized agents are trained to emphasize our customer-focused sales
efforts, superior customer service and product value. We reinforce building
customer relationships by tying a portion of each account executive's and
agent's compensation directly to the longevity of their customer accounts.

As of March 31, 1999, our direct sales force consisted of 118 account
executives in Dallas, Fort Worth, Houston, San Antonio, Austin, and Victoria,
Texas, as well as Lafayette, Louisiana. We intend to hire and train
approximately 80 additional account executives by the end of 1999 and an
additional 100 account executives by the end of 2000.

Our sales personnel call on prospective and existing business customers,
conduct analyses of business customers' telecommunications usage histories and
service needs, and demonstrate how our various service packages will improve a
customer's communications capabilities in a cost-effective manner. Sales
personnel identify potential business customers by several methods, including
customer referral, marketing research, personal telemarketing and through other
networking alliances such as endorsement agreements with trade associations and
local chambers of commerce. We recruit new account executives by emphasizing our

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extensive and advanced fiber communications network, broad array of services
bundled on a single bill, superior customer service, attractive compensation and
commission plans, stock option programs and marketing support plans.

We also have 124 sales agents located throughout Texas. Our agent program
was established in 1996, and consists primarily of independent telephone
equipment vendors authorized by us to market our products and services.
Authorized agents receive recurring commissions based on product, pricing,
volume of usage and customer retention. We have four agent managers who actively
recruit new agents. We intend to add an additional 55 agents in 1999.

Our marketing strategy is built upon the belief that customers want to
reduce the number of providers, simplify the complexity and enhance the value of
their telecommunications needs. To address this strategy, we seek to be a single
source provider, offering the bulk of our customers' needs on single bills and
through single sales channels. We believe that our personalized attention to the
needs of our business customers, coupled with our ability to provide a fully
integrated bill, is appealing to both existing and prospective customers.

Project Management and Offshore Services. We target domestic customers that
require turnkey system solutions and other telecommunications services. Our
sales force sells frequency bandwidth and call completion and system solutions,
which allows us to further develop our own telecommunications infrastructure.

CUSTOMER CARE AND SUPPORT

We believe that our reputation has been built on outstanding customer care.
We strive to provide superior customer care and support for our customers and
believe that personal contact with our customers through knowledgeable, friendly
and efficient customer service representatives is a significant factor in
customer retention. We intend to significantly increase the number of our
customer service representatives as the number of direct and agent sales
representatives grows.

To support our carriers' carrier and integrated services customers, we
operate a call center in Dallas, Texas staffed by our customer service
representatives, who have completed a certification and training program
provided by us. To enhance their effectiveness, we provide ongoing training to
all customer service representatives. Our customer service department uses
on-line, real-time automated systems that provide notes from all prior contacts
with the customer, provide a complete account and payment history for customers
billed by us and enable the customer service representatives to provision new
services and modify existing services on all of our products.

We handle our provisioning, customer care, billing and traffic reporting
functions through a proprietary software platform developed by RiverRock
Systems, Ltd., a Texas limited partnership in which we have a 49% ownership
interest. The system has been designed to be both scalable and flexible in order
to support our expected future back office requirements. We believe that this
system provides us with a significant competitive advantage by allowing us to
creatively bundle and price various telecommunication services, to process large
order volumes, and to provide superior customer service when compared to the
incumbent local telephone companies using legacy systems and their competitors
that outsource back-office services or that do not have an advanced office
support systems platform. The RiverRock system is part of a larger back office
organization which enables us to: (1) minimize the time required to initiate
services for new customers, (2) provide customer bills, (3) respond quickly to
customers' needs and information requests, and (4) better monitor and analyze
traffic, financial and operating trends. We intend to continue to develop this
system to meet increasing demands for our services and to continue to provide
our customers with superior customer care. See "Certain Transactions."

We also provide customer support for our offshore products and services
through our full-service support teams in Friendswood, Texas, Lafayette and New
Orleans, Louisiana, Moscow, Russia and Aberdeen, Scotland. Support services
include: (1) on-site maintenance, with over 50 technical specialists on call for
immediate dispatch when customers' communications systems require maintenance;
(2) a

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network operations center in Friendswood, Texas where our professionals remotely
monitor customers' communications systems throughout the Gulf of Mexico and
around the world seven days a week, 24 hours a day; (3) customer support for our
wireless products; (4) training programs designed to maximize the customers'
communications investment through classroom training at customers' sites and
multimedia video training tools; and (5) research and development for unique
applications where our engineers can custom design or modify hardware to improve
our performance within a particular system.

COMPETITION

Overview. The communications services industry is highly competitive,
rapidly evolving and subject to constant technological change. In particular,
numerous companies offer long distance, local, Internet, data and bandwidth
services, and we expect competition to increase in the future. We compete in
these markets primarily on the basis of price, customer service and the ability
to provide a variety of communications products and services.

Fiber Networks. We intend to expand our fiber optic network to
approximately 5,500 route miles throughout the Southwest region. We expect to
compete with numerous established and start-up national and regional fiber optic
networks owned by long distance carriers, ILECs and competitive local exchange
carriers ("CLECs") throughout the Southwest region. These competitors include
very large companies such as:

- AT&T,

- MCI WorldCom,

- Sprint,

- Level 3,

- Williams,

- SBC, and

- Qwest.

Each of these companies has greater name recognition, financial, personnel,
technical and marketing resources than we have. We also anticipate that other
providers of local and long distance telecommunications services will plan and
construct fiber networks that could compete with our network. In addition to
long distance carriers and local telephone companies, entities potentially
capable of offering broadband services in competition with our existing and
planned network include:

- other facilities-based communications service providers,

- cable television companies,

- electric utilities,

- microwave carriers,

- satellite carriers,

- wireless telephone system operators, and

- large companies who build private networks.

Competing networks may also have advanced fiber and operating capabilities
similar to those of our network. Furthermore, we expect that some of our
competitors will compete in our geographic market and directly with us for many
of the same customers along a significant portion of the routes along which we
intend to operate.

Domestic and International Long Distance. We provide long distance services
using our own facilities and by reselling the facilities of other carriers, both
in the United States and between the United States and other countries. The long
distance communications industry is intensely competitive and the marketing and
pricing decisions of the larger industry participants such as AT&T, MCI
WorldCom, and Sprint have a significant impact on us. In addition, significant
consolidation in the industry has created and will
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continue to create numerous other entities with substantial resources to compete
for long distance business. Such entities include Excel Communications, Inc.,
Frontier Communications Service, Inc. and Qwest. In addition, as a result of the
Telecommunications Act of 1996 (the "1996 Telecommunications Act"), we
anticipate that the Federal Communications Commission ("FCC") may permit the
Regional Bell Operating Companies (the "RBOCs") and GTE Operating Companies
("GTOCs") to enter the long distance market in the future. These larger
competitors have significantly greater name recognition and greater personnel,
financial, technical, network and marketing resources. Many may also offer a
broader portfolio of services and have long standing relationships with
customers targeted by us. Moreover, we cannot guarantee that our competitors
cannot negotiate contracts with suppliers of telecommunications services to
obtain conditions of service more favorable than ours. Many of our competitors
enjoy economies of scale that can result in a lower cost structure for
transmission and related terminating costs. Those carriers could bring
significant pricing pressure to bear on us.

Customers frequently change long distance providers in response to lower
rates or promotional incentives by competitors. Prices for domestic and
international long distance calls have declined in recent years and we expect
them to continue to decrease further and more rapidly. Indeed, we expect
competition in all of our relevant markets to increase. This increased
competition could adversely affect our net revenue per minute and gross margins.
We cannot guarantee that we can compete effectively in the domestic or
international long distance markets.

Local Exchange Service. Our business objective is to expand significantly
our operations to provide local services. Regulation permitting us to compete in
the local service market has only recently been enacted into law, following
enactment of the 1996 Telecommunications Act. The services we intend to offer
will compete with those offered by ILECs, such as BellSouth, Southwestern Bell
and the GTOCs, as well as very large long distance carriers, such as AT&T, MCI
WorldCom, and Sprint. The ILECs currently dominate the provision of local
services in their respective markets, and the ILECs and the very large long
distance carriers have greater name recognition and greater financial,
technical, network, marketing and personnel resources than we do. Those entities
also hold longer standing relationships with regulatory authorities at the
federal and state levels than we do. We may also face competition from other
current and potential market entrants, including:

- other CLECs,

- cable TV companies,

- electric utilities,

- ILECs operating outside their current local service areas,

- other long distance carriers,

- wireless telephone system owners,

- microwave owners,

- satellite carriers,

- private networks built by large companies, and

- start-up telecommunications ventures.

We cannot guarantee that we can compete effectively in the local service
markets.

Internet Telephony. The FCC currently classifies Internet services as
enhanced services. As a result, federal and state common carrier regulations,
including long distance interstate and intra-state access fees, tariffing,
certification and rate regulation do not apply to the provision of Internet
services. Some Internet service providers, or ISPs, have recently announced
plans to use Internet protocol technologies ("IP Telephony") to introduce
domestic and international long distance services at rates 30% to 50% below
standard long distance rates. Although the FCC intends to review this issue, IP
Telephony could increase pressure on long-distance companies and other
communications companies to reduce prices and margins on domestic and
international long distance services. We cannot guarantee that either we or our
carrier customers will not experience substantial decreases in call volume,
pricing and/or margins due
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to IP Telephony. We also cannot guarantee that we can offer telecommunications
services to end users at prices that can compete with the IP Telephony services
offered by these new companies.

We also provide Internet services. We cannot guarantee that federal or
state regulators will not impose additional regulation on Internet services in
the future. We expect to compete by introducing IP Telephony shortly. The
Internet services market is highly competitive, in part because no substantial
barriers to entry exist. We expect that competition will continue to intensify.
Our competitors in this market include:

- Internet service providers,

- other telecommunications companies,

- online services providers, and

- Internet software providers.

Many of these competitors have greater personnel, financial, technical and
marketing resources than those available to us.

On April 5, 1999, US West filed a petition with the FCC asking the FCC to
find that IP telephony services are telecommunications services, not enhanced
services or information services, and therefore should be subject to access
charge and universal service obligations. We cannot predict how the FCC will
rule on US West's petition. If the FCC does ultimately determine that IP
telephony is subject to the FCC's access charge and universal service regimes,
such a ruling would likely substantially increase the costs of providing IP
telephony. US West filed similar requests before the Nebraska Public Service
Commission and the Colorado Public Utility Commission.

Technological Advances. Dense wave division multiplexing, high-speed OC-192
transmission electronics, advanced fiber technology and packet switching are
converging to increase significantly the supply of domestic and international
transmission capacity. Rapid and on-going technological advances have brought
new product and service offerings similar to the services we provide. The
introduction of new products or emergence of new technologies may cause capacity
to greatly exceed demand, reducing the pricing of certain services we provide.
We cannot guarantee that we can satisfy future customer needs, that our
technologies will not become obsolete because of future technological
developments, or that we will not have to make significant additional capital
investments to upgrade or replace our system and equipment. We cannot predict
the impact of these technological changes on our operations. If we fail to keep
pace with advances, it could have a material adverse effect on our financial
condition, results of operations and cash flow.

Offshore and Remote Telecommunications Services. Currently, we provide
telecommunications services to oil and gas customers in the Gulf of Mexico. In
the Gulf of Mexico, we compete directly principally with Autocomm Communications
Engineering Corp., Sola Communications, Inc., Datacom and Shell. Shell currently
provides competing services through its microwave network in the Gulf of Mexico
and has announced plans to become a full service telecommunications provider to
the oil and gas industry in the region. Although we believe that we compete
successfully in each of our markets today, we cannot guarantee that we can
continue to compete successfully in the future. We believe that most of our
larger competitors have generally not made it a priority to provide remote,
difficult-access telecommunications services. Should one or more of our
competitors decide to focus on such services, it could have a material adverse
effect on our financial condition, results of operations and cash flow.

EMPLOYEES

As of March 31, 1999, we employed approximately 425 people, including
approximately 138 in sales and marketing, approximately 124 in engineering and
technical services and approximately 163 in management, customer care,
provisioning, administration and finance. At that date, we also had an agent
sales force numbering approximately 124 independent agents throughout Texas. We
use the services of independent contractors for construction of our fiber
network. None of our employees is represented by a

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labor union or is subject to a collective bargaining agreement. We believe that
we have good relations with our employees.

PROPERTIES

We own or lease buildings that contain approximately 180,000 square feet of
floor space. Our primary headquarters are located in Dallas, Texas. We entered
into a lease agreement effective March 1999 for our new corporate headquarters
and expect to occupy an additional approximately 30,000 square feet at the new
headquarters in the year 2000. We own an office building in Friendswood, Texas
and an office building in Lafayette, Louisiana, and we lease the remainder of
our office space.

All of the fiber optic cable, fiber optic telecommunications equipment and
other properties and equipment used in the networks, are owned or leased by us.
We have entered into various franchise, rights of way and lease agreements for
network regeneration sites. These properties and agreements do not lend
themselves to description by character and location of principal units and are
not considered meaningful for this disclosure. Our principal facilities include:

<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET DESCRIPTION
- -------- ----------- -----------
<S> <C> <C>
Dallas, Texas........................ 80,000 Corporate headquarters for administration, finance
and carrier sales functions, sales, switching and
customer support personnel
Houston, Texas....................... 24,000 Division headquarters for administration, finance
and sales functions
Friendswood, Texas................... 24,000 Engineering, network operations center,
administration, production and warehouse
Phoenix, Arizona..................... 10,300 Switching facility and sales functions
</TABLE>

We consider our current facilities adequate for our current needs and
believe that suitable additional space will be available, as needed, to
accommodate further physical expansion of corporate operations and for
additional sales and service.

LEGAL PROCEEDINGS

We are a party to ordinary litigation incidental to our business from time
to time. Currently, we are not a party to any litigation that we expect would
have a material adverse effect on our results of operations, financial condition
or cash flow.

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REGULATION AND LICENSES

The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
existing federal, state and local legislation and regulations are currently the
subject of judicial proceedings, legislative hearings, and administrative
proposals which could change, in varying degrees, the manner in which this
industry operates. Neither the outcome of these proceedings, nor their impact
upon us or the telecommunications industry, can be predicted at this time. This
section also sets forth a brief description of regulatory and tariff issues
pertaining to our operations.

We provide domestic and international services subject to varying degrees
of U.S. federal, state and local regulation, and regulation by foreign
authorities. In the United States, the 1934 Communications Act, as amended,
including as amended by the 1996 Telecommunications Act and the regulations
promulgated by the FCC thereunder, as well as the applicable laws and
regulations of the various states and state regulatory commissions all govern
the provision of telecommunications services. The FCC exercises jurisdiction
under Title II of the 1934 Communications Act over all facilities of, and
services offered by, telecommunications common carriers to the extent such
services involve jurisdictionally interstate common carrier communications,
including international communications originating from or terminating in the
United States. State regulatory authorities retain jurisdiction over
jurisdictionally intrastate communications. Under Title III of the 1934
Communications Act, the FCC also regulates the licensing and use of the radio
frequency spectrum. Local governments sometimes impose franchise or licensing
requirements on local service competitors and/or facilities companies. Services
we provide in other countries remain subject to the telecommunications laws and
regulations of those countries.

The FCC and the state regulatory agencies impose and enforce regulatory
requirements applicable to our operations. The FCC and the state regulatory
agencies may address regulatory non-compliance with a variety of enforcement
mechanisms, including:

- monetary forfeitures,

- refund orders,

- injunctive relief,

- license conditions, and/or

- license revocation.

As a telecommunications carrier, we must also comply with the Federal
digital wiretapping administered by the U.S. Department of Justice and the FCC.
The telecommunications industry varies substantially from state to state and
continues to change rapidly. Moreover, as deregulation at the federal level
occurs, some states are reassessing the level and scope of regulation applicable
to carriers. Domestic or international regulators or third parties could raise
material issues with regard to our compliance or non-compliance with applicable
regulations. Future regulatory, judicial or legislative activities could have a
material adverse effect on our financial condition, results of operations or
cash flow.

U.S. Federal Regulation

Local Service Regulation Under The 1996 Telecommunications Act. The 1996
Telecommunications Act, which amended the 1934 Communications Act, provided for
comprehensive reform of the United States' telecommunications laws. In passing
the 1996 Telecommunications Act, Congress sought to increase local competition
from newer competitors such as long distance carriers, cable TV companies and

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public utility companies. The 1996 Telecommunications Act specifically requires
all local exchange carriers, or LECs (including ILECs and CLECs):

- not to prohibit or unduly restrict resale of their services,

- to provide dialing parity, number portability and nondiscriminatory
access to telephone numbers, operator services, directory assistance and
directory listings,

- to afford access to poles, ducts, conduits and rights-of-way, and

- to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.

In addition, ILECs must provide:

- interconnection on certain terms and conditions,

- unbundled network elements,

- resold local services at wholesale rates,

- reasonable public notice of any changes in the information needed for
transmission and routing services over their communications facilities,
and

- physical colocation of equipment necessary for interconnection and access
to unbundled network elements at the LECs' premises.

On March 31, 1999, the FCC released its Collocation Order which requires
ILECs to permit CLECs to collocate any equipment used for interconnection or
access to unbundled network elements even if that equipment includes switching
or enhanced service functions. Among other things, the Collocation Order also:

- prohibits ILECs from placing any limits on the use of switching or
enhanced features for collocated equipment; and

- requires ILECs to make cageless collocation available and permit CLECs to
construct their own cross-connect facilities.

Under the 1996 Telecommunications Act, Regional Bell Operating Companies,
or RBOCs, have the opportunity to provide out-of-region long distance and
certain cable TV services immediately and in-region long distance services after
the RBOCs meet certain conditions. Specifically, an RBOC can enter the market
for in-region long distance services within areas where the RBOC provides local
exchange service upon FCC approval based on a showing that facilities-based
competition and interconnection agreements meeting a 14-point checklist both
exist. Entry of RBOCs into the domestic and international long distance business
and the emergence of other new local competitors could subject us to substantial
competition and could have a material adverse effect on our financial condition,
results of operations and cash flow.

On August 8, 1996, the FCC released the Interconnection Decision, which
established a framework of minimum, national rules enabling state commissions
and the FCC to begin implementing many of the local competition provisions of
the 1996 Telecommunications Act. Among other things, the Interconnection
Decision:

- prescribed certain minimum points of interconnection,

- adopted a minimum list of unbundled network elements that ILECs must make
available to competitors, and

- adopted a methodology for states to use when setting prices for unbundled
network elements and for wholesale resale services.

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On January 25, 1999, the Supreme Court issued an opinion overturning prior
decisions issued by the U.S. Court of Appeals for the Eighth Circuit that had
vacated certain portions of the Interconnection Decision. The Supreme Court's
decision confirmed the FCC's authority to issue regulations implementing the
pricing and other provisions of the 1996 Telecommunications Act and reinstated
most of the challenged rules. However, the Supreme Court vacated a key FCC rule
that identified the network elements that incumbent LECs must unbundle. The
Eighth Circuit decisions and their recent reversal by the Supreme Court
perpetuate continuing uncertainty about the rules governing the pricing, terms
and conditions of interconnection agreements. During the pendency of the Eighth
Circuit proceedings, state public utilities commissions have continued to
conduct arbitrations, and to implement and enforce interconnection agreements.
However, the Supreme Court's recent ruling and further proceedings on remand may
affect the scope of the state commissions' authority to conduct such proceedings
or to implement or enforce interconnection agreements. The U.S. Supreme Court's
decision will likely result in new or additional rules being promulgated by the
FCC, and the FCC has initiated a proceeding to delineate the network elements
that must be provided by incumbent LECs. Given the general uncertainty
surrounding the effect of the Eighth Circuit decisions and the recent decision
of the Supreme Court reversing them, we cannot guarantee that we can continue to
obtain or enforce acceptable interconnection terms or interconnection terms
consistent with our business plans.

On August 7, 1998, the FCC released an Order denying requests by various
ILECs that the FCC use Section 706 of the 1996 Telecommunications Act to forbear
from regulating advanced telecommunications services. Instead, the FCC
determined that advanced services constitute telecommunications services and
that ILECs must comply with the unbundling and resale obligations and the
in-region inter-LATA restrictions of the 1996 Telecommunications Act in their
provision of advanced services. The FCC also proposed in a rulemaking to allow
ILECs to provide advanced services on an unregulated basis through separate
subsidiaries. We cannot predict the outcome of the FCC's proceeding. However, if
the FCC does forbear from regulating advanced telecommunications services, such
a decision would increase the ability of ILECs to compete against less
established carriers such as us.

Domestic Interstate Services. The FCC considers domestic interstate common
carriers (including us) that do not have market power as "nondominant." The FCC
subjects nondominant carriers to minimal regulation. However, interstate
carriers offering services to the public must comply with the federal statutory
and regulatory requirements of common carriage under the 1934 Communications Act
file various reports and pay various fees and assessments. Among other things,
interstate common carriers must offer service on a non-discriminatory basis at
just and reasonable rates. Nondominant carriers need not obtain specific prior
FCC approval to initiate or expand domestic interstate services, although they
must file a tariff with the FCC. Nondominant carriers remain subject to the
FCC's complaint jurisdiction. In particular, we may be subject to complaint
proceedings in conjunction with alleged noncompliance such as unauthorized
changes in a customer's preferred carrier. To date, one such complaint has been
filed at the FCC against us. In the event that the FCC finds that we have
violated an applicable rule or regulation, due to a complaint, noncompliance
with a fee payment or other reporting requirement or an internal investigation,
the FCC retains broad authority to impose various sanctions or penalties. The
complaint alleges that we participated with another carrier in a "slamming"
violation in which we improperly reassigned a toll free 800 number held by one
customer to a different customer. We are vigorously defending the complaint and
we have argued that no penalties or damages should be imposed because, among
other things, we complied with all applicable service change requirements at the
time we purchased the toll free number from the other codefendant carrier and
played no role in and had no prior knowledge of any alleged unauthorized change
by that carrier. We believe that the ultimate outcome of this matter will not
have a material adverse effect on our financial condition, results of operations
or cash flow. The FCC has issued an order eliminating the requirement that
nondominant carriers maintain tariffs for their domestic interstate services on
file at the FCC. Several carriers have appealed the FCC's order to the U.S.
Court of Appeals for the District of Columbia and that court has stayed the
FCC's order pending resolution of the appeal. If the FCC order becomes
effective, nondominant interexchange carriers will need to find new means of
providing notice to customers of prices, terms and conditions on which they
offer their interstate services. The FCC recently released an order specifying
how carriers should inform

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customers of their rates if detariffing occurs. Rate information is to be
provided to customers by such means as posting the rates on a carrier's World
Wide Web site. Elimination of tariffs will require that we secure with each of
our customers contractual agreements containing the terms of the services
offered. To the extent that disputes arise over such contracts, carriers,
including us, may no longer resort to the legal doctrine that the terms of a
filed tariff supersede individual contract language.

International Service Regulation. As a provider of international
telecommunications services, we must comply with the federal statutory and
regulatory requirements of common carriage under the 1934 Communications Act.
International common carriers must obtain authority from the FCC under Section
214 of the 1934 Communications Act and file a tariff containing the rates,
terms, and conditions applicable to their services before initiating their
international telecommunications services. We hold global authority from the FCC
to provide resale of switched services and private line services (where
permitted by the FCC) and to provide facilities-based services. We maintain an
international tariff on file with the FCC. International telecommunications
service providers must also file with the FCC:

- copies of their contracts with other carriers,

- foreign carrier agreements, and

- various reports regarding their international revenue, traffic flows and
use of international facilities.

Carriers holding Section 214 authority must also comply with FCC rules
requiring, among other things, prior approval for most transfers of control and
assignments.

Authorized international carriers must also comply with the FCC's
international service regulations, including the International Settlements
Policy ("ISPY") which governs:

- the payment settlements between U.S. common carriers and their foreign
correspondents for terminating traffic over each other's networks,

- the accounting rates for such settlements, and

- the permissible deviations from these policies.

The ISPY applies to both resale and facilities-based operations. To the
extent that we acquire or own facilities that permit us to carry international
traffic, the FCC may pay particular attention to our compliance with that
policy.

The FCC also recently approved significant reform of its ISPY, and
deregulated intercarrier settlement arrangements between U.S. carriers and
non-dominant foreign carriers on competitive routes. Specifically, the FCC
generally eliminated the ISPY and contract filing requirements for arrangements
with foreign carriers that lack market power.

The FCC maintains a private line resale policy that prohibits carriers from
reselling international private leased circuits to provide switched services to
or from a country unless the FCC has found that the country affords U.S.
carriers equivalent resale opportunities to engage in similar activities in that
country. The FCC revised this and other policies to accommodate the 1997 WTO
Agreement on basic services, a compact that addresses market access, foreign
investment, and procompetitive regulatory principles in areas currently
generating a vast majority of the world's telecommunications revenue. Currently,
the FCC's rules permit U.S. carriers to provide switched service over
international leased lines or facilities-based private lines between the U.S.
and WTO countries where the local telecommunications provider generally charges
U.S. carriers at or below an FCC-determined rate for terminating the U.S.
carriers' traffic or equivalent resale opportunities are available.

The FCC has adopted measures intended to overhaul the system of
international settlements by, among other things, establishing lower ceilings
("Benchmarks") for the rates that U.S. carriers will pay foreign carriers for
the termination of international services. The FCC's authority to establish such
Benchmarks was recently affirmed in federal court. The FCC recently streamlined
Section 214 license and

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related requirements. While these rule changes may provide carriers with more
flexibility to respond more rapidly to changes in the global telecommunications
market, they will also likely increase the level of competition in the
international telecommunications marketplace.

Wireless Services. We own and maintain a variety of telecommunications
infrastructures and we hold various FCC and international licenses to transmit
voice and data. We currently hold numerous FCC licenses to provide land mobile,
microwave and satellite communications services. See "-- Licenses."

FCC licensees authorized to provide microwave, satellite earth station and
land mobile service must comply with under Title III of the 1934 Communications
Act and a variety of detailed licensing, operational and technical requirements
specific to each service. Among other requirements, licensees seeking to alter
the technical or operational configurations of their equipment or to continue
operating beyond the expiration date of the licenses must seek additional prior
authority from the FCC. We recently became aware that some of our earth station
operations do not strictly comply with the licenses we hold. We recently filed
applications to modify our FCC licenses to ensure that they fully reflect our
operations. FCC rules also contain various other requirements such as
restrictions on proposed transfers of control or assignments and required
compliance with relevant Federal Aviation Administration rules on wireless tower
construction and operation. The FCC generally retains the right to sanction a
carrier or revoke its authorizations if a carrier violates applicable laws or
regulations.

The FCC continues to refine its wireless rules for each service area to
accommodate advances in technology, developing markets and new service
arrangements, to implement certain provisions of the 1996 Telecommunications
Act, and to eliminate confusing, outdated, redundant or otherwise burdensome
regulation. Opportunities to obtain new common carrier wireless licenses are
often limited by the FCC's auction process under which the FCC assigns wireless
licenses to the highest bidder.

The 1934 Communications Act generally limits direct foreign ownership of
wireless licenses to 20%, but provides for indirect foreign ownership holdings
above 25% upon FCC approval. In its order implementing the U.S. commitment under
the WTO Agreement, the FCC established new rules that effectively relax the
foreign ownership limits for common carrier wireless licenses. Specifically, the
new rules allow for up to 100% indirect ownership of wireless licenses by
foreign interests from countries that have participated in the WTO Agreement
upon FCC review and approval.

Access Charges. The cost of providing long distance and local exchange
services will be affected by changes in the "access charge" rates imposed by
ILECs on long-distance carriers for origination and termination of calls over
local facilities. The term "access service" describes the use of local exchange
facilities for the origination and termination of interexchange communications.
On May 8, 1997, the FCC released an order intended to reform the FCC's system of
interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act. The
FCC's access reform order adopts various changes to federal policies governing
interstate access service pricing designed to move access charges, over time, to
more economically efficient levels and rate structures. Among other things, the
FCC:

- modified rate structures for certain non-traffic sensitive access rate
elements, moving some costs from a per-minute-of-use basis to flat-rate
recovery, including one new flat rate element,

- changed its structure for interstate transport services, and

- affirmed interstate access charges do not apply to ISPs.

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In response to claims that existing access charge levels are excessive, the
FCC stated that it would rely on market forces first to drive prices for
interstate access to competitive levels but that a "prescriptive" approach might
be considered if necessary. In the absence of competition, the FCC stated that
it might specify the nature and timing of changes to existing access rate
levels. The FCC has indicated that it will promulgate additional rules sometime
in 1999 that may grant increased pricing flexibility to price cap LECs upon
demonstrations of increased competition (or potential competition) in relevant
markets. Price cap LECs include the RBOCs, GTE and certain independents that
must establish rates only at or below a designated price ceiling. The Eighth
Circuit has affirmed the FCC's access reform order.

Universal Service Charges. In 1997, the FCC released an order establishing
a significantly expanded federal universal service subsidy regime. Specifically,
the FCC established new universal service funds to support telecommunications
and information services provided to qualifying schools, libraries and rural
health care providers, and expanded the federal subsidies for local telephone
services provided to low-income consumers. The FCC collects money to fund this
expanded regime from interstate carriers and certain other entities. Our
payments for the schools and libraries and rural health care fund depend on
estimated quarterly intrastate, interstate and international gross end-user
telecommunications revenues. Contribution factors vary quarterly and the FCC
bills carriers on a monthly basis. Contribution factors for 1999 ranged from
3.08 to 3.19% for the high cost and low income funds (interstate and
international revenues); and 0.72 to 0.76% for the schools, libraries, and rural
health care funds (intrastate, interstate and international revenues). Because
the contribution factors do vary quarterly, we cannot currently accurately
determine the annualized impact on our annual performance. Several parties have
appealed the FCC's universal service order and those appeals remain pending
before the Fifth Circuit Court of Appeals.

The FCC may also issue new regulations governing the treatment of calls to
ISPs for the purposes of universal service obligations. In a recent report to
Congress, the FCC clarified that carriers must consider revenues earned from the
transmission services supplied to ISPs when calculating universal service
obligations. The FCC plans to address in the future the contribution
obligations, if any, of ISPs using their own facilities and ISPs providing
phone-to-phone IP telephony. We cannot predict the outcome of these proceedings
or their potential effect on our operations.

Internet Services. There are currently few U.S. laws or regulations which
specifically regulate communications or commerce over the Internet. One area in
which Congress did attempt to regulate information over the Internet involved
the dissemination of obscene or indecent materials. Certain provisions of the
1996 Telecommunications Act relating to indecent communication over the
Internet, generally referred to as the Communications Decency Act, were found to
be unconstitutional by the U.S. Supreme Court in 1997. In October 1998, Congress
enacted the Child Online Protection Act, which requires that on-line material
that is "harmful" to minors be restricted. This law is currently being
challenged in federal district court. On February 1, 1999, a U.S. District Court
judge issued a preliminary injunction against enforcement of portions of that
Act and the U.S. Department of Justice has appealed that decision.

It is possible that in the future laws and regulations could be adopted
which address matters such as user privacy, copyrights, pricing and the
characteristics and quality of Internet services, among other areas.
Internet-related legislation and regulatory policies are continuing to develop
and we could be subject to increased regulation in the future. Laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, increase our cost of doing business, or
otherwise adversely affect our business.

In addition, in 1998 Congress passed the Digital Millennium Copyright Act.
That act provides ISPs that comply with its requirements numerous protections
from certain types of copyright liability. To the extent that we have not met
those requirements, third parties could seek recovery from us for copyright
infringements caused by our Internet customers.

The law relating to the liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. It is possible that
claims could be made against ISPs for defamation,
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negligence, copyright or trademark infringement, or on other theories based on
the nature and content of the materials disseminated through their networks. We
could be required to implement measures to reduce our exposure to potential
liability, which may require, for instance, the expenditure of resources or the
discontinuance or modification of certain product or service offerings. Costs
that may be incurred as a result of contesting any claims relating to our
services or the consequent imposition of liability could have a material adverse
effect on our financial condition, results of operations and cash flow.

The Eighth Circuit recently found that the FCC has a reasonable basis for
not requiring ISPs to pay access charges. In June 1997, every RBOC advised CLECs
that they did not consider calls in the same local calling area from RBOC served
customers to CLEC served ISPs, to be local calls under the interconnection
agreements between the RBOCs and the CLECs. The RBOCs also claimed that the FCC
exempted these calls from access charges, and therefore that CLECs could not
recover compensation for transporting and terminating such calls. As a result,
the RBOCs threatened to withhold, and in many cases did withhold, reciprocal
compensation for the transport and termination of such calls. To date, numerous
state commissions have ruled on this issue in the context of state commission
arbitration proceedings or enforcement proceedings. In every state, to date, the
state commission has determined that RBOCs must pay reciprocal compensation for
such calls. Various RBOCs have appealed these cases. We cannot predict the
outcome of these appeals.

On February 26, 1999, the FCC determined that calls made to ISPs are
largely interstate in nature, and requested comments regarding how this traffic
should be regulated once existing interconnection agreements expire. However,
the FCC also determined that since federal law did not govern compensation for
this traffic when existing interconnection agreements were signed, the states
could determine whether carriers should pay reciprocal compensation for these
calls under existing agreements. There is a risk that state commissions which
previously considered this issue and ordered the payment of reciprocal
compensation could revisit this issue on their own volition or at the request of
an ILEC, and revise their prior decisions on this issue. To date, at least one
ILEC has filed suit seeking a refund from a carrier of reciprocal compensation
the ILEC has paid to that carrier.

State Regulation

Most states require carriers to obtain a certification or other
authorization before offering local exchange and long distance intrastate
services. These certifications generally require a showing that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. We hold long distance
authorization in most, but not all, of the states in which certificates are
required. In addition most states impose tariff requirements on carriers and
require that common carriers charge just and reasonable rates and not
discriminate among similarly situated customers. Some states also require the
filing of periodic reports, the payment of various regulatory fees and
surcharges, and compliance with service standards and consumer protection rules.
States often require prior approvals or notifications for certain transfers of
assets (such as fiber optic cable or other telecommunications facilities),
customers, or ownership. Some states also require approval or notice for the
issuance of securities or debt or for name changes. We have sought or expect to
seek various additional authority in some states. We cannot guarantee that we
will be able to successfully obtain such approvals. States generally retain the
right to sanction a carrier or to revoke certifications if a carrier violates
relevant laws and/or regulations. If any state regulatory agency concluded that
we provide intrastate service without the appropriate authority, or that we are
not otherwise in compliance with state public utility commission rules, that
agency could initiate enforcement actions, potentially including the imposition
of fines, the disgorging of revenues, or the refusal to grant the regulatory
authority necessary for the future provision of intrastate telecommunications
services. We hold authority to provide interexchange and competitive local
exchange services in certain service areas in Arkansas, Kansas, Louisiana,
Oklahoma and Texas, and have authority to provide interexchange service in at
least 35 states.

In addition, carriers providing intrastate services must comply with state
utility commission rules and policies with respect to ILEC and CLEC competition,
geographic build out, mandatory de-tariffing and other matters. Certain states
have adopted specific universal service funding obligations. Numerous other
states have also instituted proceedings to adopt state universal service funding
obligations rules. State
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commissions generally have authority to impose sanctions on carriers ranging
from fines to license revocation to address non-compliance with the states'
particular regulatory policies and requirements.

State regulatory agencies also regulate access charges and other pricing
for telecommunications services within each state. The RBOCs and other LECs have
sought reductions in state regulatory requirements, including greater pricing
flexibility. If regulators allow variable pricing of access charges based on
volume, we could face a competitive disadvantage in competing against larger
long distance carriers. We also could face increased price competition from the
RBOCs and other LECs for local and long distance services. In addition, the
removal of former restrictions on long distance service offerings by the RBOCs
as a result of the 1996 Telecommunications Act could further increase
competition. We cannot predict what impact of such rule changes might have on
our operations.

Local Government Authorizations

We also own telecommunications facilities that may be subject to certain
local government requirements. In particular, facilities-based companies must
generally obtain street use and construction permits and licenses and/or
franchises to install and expand fiber optic networks using municipal rights of
way. While regulation of municipal rights of way generally remains a matter
under local jurisdiction, some states have enacted or are considering enacting
measures that affect the ability of local governments to impose certain types of
restrictions on franchisees or to require certain types of concessions from
carriers seeking franchise agreements.

Termination of our existing franchise or license agreements before their
expiration dates or failure to renew those agreements and any resulting
requirement to remove facilities could have a material adverse effect on our
financial condition, results of operations and cash flow. In some municipalities
carriers must pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis, as well as post performance bonds or
letters of credit. We cannot guarantee that we can retain existing franchises or
that franchise fees will remain at their current levels.

The Texas Public Service Commission generally requires us to provide 911
service along with our CLEC offerings in Texas. As a condition to providing 911
service in the City of Dallas, the City of Dallas requires that service
providers obtain a municipal franchise, which, among other things:

- requires the franchise holder to pay a 4% gross revenue fee based on
operations in the City of Dallas,

- permits use of certain conduit by the City of Dallas without charge, and

- provides a single fiber pair in the franchisee's system for the City of
Dallas' exclusive use.

To date, we have not obtained a franchise. On May 26, 1998, we, along with
two other entities authorized to provide CLEC service in Texas, Golden Harbor of
Texas, Inc., and Westel, Inc., filed suit in the U.S. District Court for the
Northern District of Texas against the City of Dallas alleging that the
franchise requirements imposed by the City of Dallas violates the 1996
Telecommunications Act, particularly with respect to resellers of LEC services.
The Texas court has consolidated our action with a similar action brought by
AT&T Communications of the Southwest, Inc. ("AT&TSW"). Although AT&TSW has
obtained a preliminary injunction against the City of Dallas' imposition of
certain conditions on its franchise, we cannot guarantee that we will prevail in
our pending lawsuit against the City of Dallas.

Foreign Regulation

International telecommunications providers are subject to varying degrees
of regulation in each of the jurisdictions in which they provide service. Local
laws and regulations, and the interpretation of such laws and regulations,
differ significantly from country to country. To the extent that we provide, now
or in the future, services in non-U.S. countries, we must comply with the laws
and regulations of foreign countries. The nature and extent of
telecommunications regulation varies significantly from country to country and
may include requirements that reflect closed or limited market access and/or
requirements we may also face to obtain initial licensing, operational and rate
requirements in the relevant countries. For example,

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many countries, including Mexico, have international settlements policies
similar to the one imposed by the U.S. Such policies and their enforcement vary
between different countries. To the extent that we provide service between the
U.S. and other countries, various international settlement policies may apply.

Licenses

We have received authorization, by virtue of state certification, tariff,
registration, or on a deregulated basis, to provide resold long distance
services in at least 35 states. In order to provide wireless mobile services, we
own various radio systems that provide two-way voice communications and have
obtained approximately 35 FCC licenses with approximately 300 frequency pairs.
These licenses have varying terms that expire and will require renewal. As each
license comes due for renewal, we will evaluate the need for such license and
elect to either renew the license or let it expire where, for example, we expect
no further need to use a particular license. These licenses allow us to provide
two-way wireless radio services along the Texas and Louisiana Gulf Coast and
offshore to oil and gas-related companies. Each frequency pair allows two-way
transmission and reception. We hold approximately 20 microwave FCC licenses
providing voice and data services along the Texas and Louisiana Gulf Coast and
offshore to drilling, production and related companies. We hold approximately
five C band fixed earth station authorizations. We also hold seven
authorizations that permit us to own and operate a network of Very Small
Aperture Terminal ("VSAT") networks that operate in the Ku band. As noted
previously, we recently filed modification applications with the FCC earth
station licenses to ensure that those authorizations reflect our current
operations.

We also operate as an FCC certificated Section 214 carrier to provide
resold switched telecommunications services. We have obtained broader common
carrier authority from the FCC to provide global resale of switched and private
line services as well as global facilities-based service.

We currently provide international facilities-based private line service on
a private carrier basis into Bolivia, Bosnia, Croatia, Ecuador, Hungary and
Russia. As part of our plans to increase service offerings, we have obtained
authority to provide dedicated services in Louisiana and CLEC and long distance
services in Arkansas, Kansas, Louisiana and Texas. In addition, we have received
approval to have pole attachment rights to existing or future facilities of
Entergy, BellSouth and the State of Louisiana. Pole attachment rights allow us
to attach our own fiber optic cable to other parties' respective utility poles.
In addition, we own installed fiber optic cable placed under various public and
private rights-of-ways.

Digital Wiretapping

The Communications Assistance to Law Enforcement Act ("CALEA"), enacted in
1994, requires telecommunications carriers to make available certain
telecommunications capabilities to U.S. law enforcement officials to permit
those authorities to continue to intercept communications involving advanced
technologies such as digital and wireless transmission communications. CALEA
imposes certain obligations on carriers to ensure that their equipment,
facilities and services will meet capability and capacity requirements in order
to provide law enforcement agencies the ability to intercept wireline and
wireless communications transmitted over those carrier's networks. Courts may
impose fines of up to $10,000 per day on telecommunications carriers that fail
to meet the required capability functions, as determined by industry standards.
Under procedures specified in CALEA, the U.S. Department of Justice ("DOJ")
recently filed a petition at the FCC challenging the technical capability
standard developed by the telecommunications industry. Because of the disputed
standard, several carriers sought an FCC extension of the October 25, 1998
capability compliance deadline. The FCC recently extended the compliance date
for the CALEA capability requirements to June 30, 2000 to permit manufacturers
sufficient time to develop CALEA compliant equipment. In the meantime, we expect
the FCC to issue shortly an order identifying the capabilities carriers, such as
us, will have to provide to law enforcement officials in order to meet CALEA's
requirements. Telecommunications carriers must also meet CALEA capacity
requirement mandating that by March 12, 2001, carriers enable a specific number
of simultaneous interceptions determined on a geographic basis. We cannot
predict the nature and extent of the impact the CALEA requirements will have on
us or on telecommunications carriers in general.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors, officers and key employees as of the date of this Prospectus
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Jere W. Thompson, Jr. ... 42 Chairman of the Board, Chief Executive Officer and
Director
Ignatius W. Leonards..... 45 Vice Chairman of the Board, President and Director
Kevin W. McAleer......... 48 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Byron M. Allen........... 51 Executive Vice President of International
Timothy W. Rogers........ 36 Executive Vice President of Retail Sales and
Network Operations and Director
Timothy M. Terrell....... 36 Executive Vice President of Carrier Sales
Scott L. Roberts......... 37 Executive Vice President of International Sales
Matthew M. Kingsley...... 34 Corporate Controller
Mark Langdale............ 45 Director
Christopher J. Amenson... 48 Director
John R. Harris........... 50 Director
Richard G. Ellenberger... 46 Director
</TABLE>

Mr. Jere W. Thompson, Jr. has served as Chairman of the Board and Chief
Executive Officer of CapRock since its formation in February 1998. Mr. Thompson
also has served as President of CapRock Telecommunications, one of our
predecessor companies, since April 1994, and since July 1992, upon founding
CapRock Fiber, as the President of its general partner. In 1987, Mr. Thompson
joined The Thompson Company, an investment company, where he became a Vice
President and assisted in the acquisition and management of several of The
Thompson Company portfolio companies. From 1982 to 1986, Mr. Thompson worked in
commercial real estate as a broker and then with Trammell Crow Community
Development Company. Since 1989, Mr. Thompson has been a member of the board of
directors and since 1995 he has served as Chairman of the North Texas Tollway
Authority and its predecessor, the Texas Turnpike Authority. Mr. Thompson is
also a board member of Cistercian Preparatory School. Mr. Thompson has a B.A. in
Economics from Stanford University and a M.B.A. from The University of Texas
Graduate School of Business.

Mr. Ignatius W. Leonards has served as Vice Chairman of the Board and
President of CapRock since its formation in February 1998. Mr. Leonards served
as Chairman of the Board, Chief Executive Officer and a director of IWL
Communications since founding IWL Communications in 1981 and served as President
from 1981 until February 1997. Mr. Leonards has an industrial electronics degree
from the T.H. Harris Technical Institute in Opelousas, Louisiana.

Mr. Kevin W. McAleer has served as Senior Vice President and Chief
Financial Officer of CapRock since April 1998 and as Treasurer and Secretary
since August 1998. From 1996 to 1998, Mr. McAleer served as Chief Financial
Officer, Secretary and as a member of the Executive Management Committee of
American Pad and Paper Co., one of the largest manufacturers and marketers of
paper-based office products in North America. From 1990 to 1996, Mr. McAleer
served as Executive Vice President, Chief Financial Officer and as a member of
the Executive Management Committee of Rexene Corporation, which manufactures
plastic film and plastic resins. From 1985 to 1990, Mr. McAleer served as Senior
Vice President-Administration, Chief Financial Officer, Secretary and Treasurer,
and as a member of the Executive Management Committee and the Board of Directors
of Varo, Inc., which manufactures electronics supplied primarily to U.S.
military agencies, such as proprietary night vision systems, high-reliability
power systems and airborne missile launchers. From 1981 to 1985, Mr. McAleer
served as Vice President-Finance, Chief Financial Officer, Secretary and
Treasurer, and as a member of the Executive Management Committee of Tocom, Inc.,
which designs and manufactures high-technology communica-

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<PAGE> 59

tions products and services for the cable industry. Mr. McAleer is a certified
public accountant and is a member of the American Institute of Certified Public
Accountants and the Texas Society of Certified Public Accountants. Mr. McAleer
has a B.S. in Accounting/Economics from LaSalle University in Philadelphia,
Pennsylvania.

Mr. Byron M. Allen has served as Executive Vice President of International
of CapRock since its formation in February 1998. Mr. Allen served as a director
of CapRock from February 1998 until May 3, 1999, and served as President and a
director of IWL Communications since February 1997 and served as a Vice
President of IWL Communications from December 1993 until February 1997. From
1986 to 1993, Mr. Allen served as Executive Vice President of SBS Technologies,
Inc., a manufacturer of computer components. Mr. Allen was a co-founder of SBS
Technologies, Inc. Mr. Allen graduated from the University of Alabama with a
degree in Mathematics.

Mr. Timothy W. Rogers has served as Executive Vice President of Retail
Sales and Network Operations and as a director of CapRock since its formation in
February 1998. Mr. Rogers served as Executive Vice President of Retail Sales and
Network Operations and as a Director of CapRock Telecommunications since April
1994. In 1992, Mr. Rogers co-founded Synergy Telecommunications, Inc.
("Synergy"), a telecommunications company responsible for marketing a fiber
optic network in West Texas, Oklahoma, Colorado and New Mexico, and from
February 1992 to April 1994 served as one of its three executive officers. In
April 1994, CapRock Investors purchased half of Synergy and subsequently Synergy
changed its name to CapRock Telecommunications. From August 1989 to December
1991, Mr. Rogers was a sales manager of Qwest. From July 1988 to August 1989,
Mr. Rogers was a Senior Account Executive for Southwest Network Services. From
April 1987 to June 1988, Mr. Rogers was an account executive with Sprint. Mr.
Rogers has a B.B.A. in Marketing from Southwest Texas State University.

Mr. Timothy M. Terrell has served as Executive Vice President of Carrier
Sales of CapRock since its formation in February 1998. Mr. Terrell served as
Executive Vice President, Carrier Sales, and a Director of CapRock
Telecommunications since April 1994. In 1992, Mr. Terrell co-founded Synergy and
from February 1993 to April 1994 served as one of its three executive officers.
From February 1989 to January 1993, Mr. Terrell was Director of Sales of Qwest
and acted as Vice President of Sales during a transition period following
Qwest's buyout by MCI WorldCom. From July 1988 to January 1989, Mr. Terrell held
the same position at Metromedia Long Distance. Mr. Terrell has a B.B.A. in
Marketing from Southwest Texas State University.

Mr. Scott L. Roberts has served as Executive Vice President of
International Sales of CapRock since its formation in February 1998. Mr. Roberts
served as Executive Vice President, International Sales, and a Director of
CapRock Telecommunications since April 1994. In 1992, Mr. Roberts co-founded
Synergy and served as one of its three executive officers from February 1992 to
April 1994. From September 1989 to February 1992, Mr. Roberts was a carrier
sales manager of Qwest. From April 1987 to September 1989, Mr. Roberts was a
major account representative with Sprint. Mr. Roberts has a B.S. in Business
Administration from the University of Nebraska.

Mr. Matthew M. Kingsley has served as Corporate Controller of CapRock since
August 1998. From August 1996 to August 1998, Mr. Kingsley was an audit manager
for KPMG LLP and held various positions with such firm from January 1988 until
February 1992. From February 1992 until August 1996, Mr. Kingsley held various
positions, including Senior Manager of Financial Planning, with DSC
Communications Corporation, a telecommunications equipment manufacturer. Mr.
Kingsley is a certified public accountant and is a member of the American
Institute of Certified Public Accountants and the Texas Society of Certified
Public Accountants. Mr. Kingsley has a B.B.A. in Accounting from the University
of Wisconsin.

Mr. Mark Langdale has served as a director of CapRock since its formation
in February 1998. Mr. Langdale served as a Director of CapRock
Telecommunications since April 1994 and Secretary of the general partner of
CapRock Fiber since 1992. Mr. Langdale is President of Posadas USA, Inc., a
subsidiary of Grupo Posadas S.A. De C.V., a hotel management company domiciled
in Mexico, a position
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<PAGE> 60

he has held since 1989. From 1987 to 1989, he served as Vice President for
Thompson Realty Company, a real estate investment company. Mr. Langdale
currently serves as a member of the Board of Directors of Grupo Posadas S.A. De
C.V., a director of the Texas Department of Commerce Policy Board and as
Chairman of the Texas Department of Economic Development.

Mr. Christopher J. Amenson has served as a director of CapRock since
February 1998. Mr. Amenson has served as a director of IWL Communications since
June 1997. Mr. Amenson has served as President and Chief Operating Officer of
SBS Technologies, Inc., a manufacturer of computer components, since April 1992
and as a director since August 1992. In October 1996 he became the Chief
Executive Officer and in May 1997 he became Chairman of the Board of Directors
of SBS Technologies, Inc. For five years before joining SBS Technologies, Inc.,
Mr. Amenson was President of Industrial Analytics, Inc., a Boston-based
investment banking firm. Mr. Amenson holds a B.A. Degree in Government from the
University of Notre Dame and a Master's Degree in Business Management from the
Sloan Fellows Program at the Massachusetts Institute of Technology.

Mr. John R. Harris has served as a director of CapRock since August 1998.
Mr. Harris is currently an information technology services industry consultant.
Prior thereto, Mr. Harris served as a Corporate Vice President at Electronic
Data Systems Corporation, an information and technology outsourcing and data
processing company ("EDS"), from 1997 until March 31, 1999 (when he resigned
from EDS), where he was responsible for marketing and corporate strategy. From
1989 to 1997, he served as a Vice President of the Communications Industry Group
at EDS where he was responsible for four business units directed toward
wirelines, wireless, media and interactive services. Mr. Harris is on the Board
of Directors of Applied Graphics Technologies, Inc., an independent provider of
digital prepress services. Mr. Harris received his undergraduate and graduate
degrees in business administration from West Georgia University.

Mr. Richard G. Ellenberger was elected as a director of CapRock at
CapRock's 1999 Annual Meeting of Shareholders held on May 3, 1999. Mr.
Ellenberger has served as President and Chief Executive Officer of Cincinnati
Bell, Inc., a telecommunications company, since March 1, 1999, its Chief
Operating Officer since September 1, 1998, a director since November 1998 and as
President and Chief Executive Officer of Cincinnati Bell Telephone since June
1997. From 1996 to 1997, Mr. Ellenberger served as Chief Executive Officer of
XLConnect, a technical services company. From 1992 to 1996, Mr. Ellenberger
served in various capacities with MCI Telecommunications and was its President,
Business Services, from 1995 to 1996. Mr. Ellenberger served as Chief Operating
Officer of Entrade Corporation, a natural gas company, from 1990 to 1992. Mr.
Ellenberger currently serves on the Cincinnati Chamber of Commerce Board of
Directors and is a member of the Family Services Board of Greater Cincinnati.
Mr. Ellenberger is a graduate of Old Dominion University.

Our Board of Directors is currently composed of seven directors. Each
director serves until the next annual meeting of shareholders and until his
successor is duly elected and qualified. Byron Allen declined to stand for
re-election as a director at CapRock's 1999 Annual Meeting of Shareholders held
on May 3, 1999, and Richard Ellenberger was elected to fill the vacancy. Our
officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships among any of our directors or executive
officers.

BOARD COMMITTEES

We have established a Compensation Committee and an Audit Committee. The
Compensation Committee consists of Christopher J. Amenson, John R. Harris and
Richard G. Ellenberger (who was appointed to the committee upon being elected as
a director of CapRock on May 3, 1999). The Audit Committee consists of
Christopher J. Amenson, John R. Harris, Mark Langdale and Richard G. Ellenberger
(who was appointed to the committee upon being elected as a director of CapRock
on May 3, 1999). All members of the Compensation Committee are and will be
"Non-Employee Directors" within the meaning of Rule 16b-3 under the Exchange Act
and "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Audit Committee reviews our
internal accounting procedures and consults with and reviews the services
provided by our independent auditors. The Compensation Committee reviews and
recommends to the Board of Directors the compensation and benefits of all our
officers and establishes and reviews general policies relating to

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compensation and benefits of our employees, including the administering of our
1998 Equity Incentive Plan.

DIRECTOR COMPENSATION

We reimburse each member of our Board of Directors for out-of-pocket
expenses incurred for attending board meetings. Each non-employee director
receives a $10,000 annual retainer and a $1,000 fee for each meeting of the
Board of Directors and each meeting of any committee of the Board attended by
the director. No employee director on our Board of Directors currently receives
any additional cash compensation. Our non-employee directors are eligible to
participate in and receive nonqualified stock options under our 1998 Director
Stock Option Plan.

LIMITATION OF LIABILITY

Our Articles of Incorporation provide that our directors will not be liable
to us or our shareholders for monetary damages for an act or omission in the
director's capacity as a director. However, this provision does not authorize
the elimination or limitation of liability of a director to the extent the
director is found liable for (1) a breach of the director's duty of loyalty to
us or our shareholders, (2) any act or omission not in good faith that
constitutes a breach of duty of the director to us or an act or omission that
involves intentional misconduct or a knowing violation of law, (3) any
transaction from which the director derived any improper personal benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office or (4) any act or omission for which the liability of the
director is expressly provided by statute.

Because this provision is included in our Articles of Incorporation, we or
our shareholders may not be able to obtain monetary damages from a director for
breach of the duty of care. Although shareholders may continue to seek
injunctive or other equitable relief for an alleged breach of fiduciary duty by
a director, shareholders may not have any effective remedy against the
challenged conduct if equitable remedies are unavailable.

In addition, our Articles of Incorporation and Bylaws provide certain
rights of indemnification for all officers and directors.

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table shows the compensation that
we paid or awarded to our Chief Executive Officer and our other four most highly
compensated executive officers for the fiscal year ended December 31, 1998.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1998 ANNUAL ------------
COMPENSATION SHARES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY(1) BONUS(2) OPTIONS COMPENSATION
- ------------------------------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Jere W. Thompson, Jr. ....................... $194,583 $110,000 125,000 $ --
Chief Executive Officer and Chairman of the
Board
Kevin W. McAleer............................. 128,846 80,000 100,000 18,750(3)
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
Timothy M. Terrell........................... 135,555 107,500 55,000 --
Executive Vice President
Timothy W. Rogers............................ 138,555 100,000 62,500 --
Executive Vice President
Scott L. Roberts............................. 133,055 70,000 40,000 --
Executive Vice President
</TABLE>

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<PAGE> 62

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

(1) Under the terms of their employment agreements with CapRock (which were
entered into in February 1998), the annual base salary for Messrs. Thompson,
Terrell, Rogers and Roberts through December 31, 1998 was $180,000,
$133,333, $133,333, and $133,333, respectively, in each case subject to
increase upon review annually by the Board of Directors. Under the terms of
his employment agreement with CapRock (which was entered into in May 1998),
the annual base salary for Mr. McAleer through December 31, 1998 was
$200,000, subject to increase upon review annually by the Board of
Directors. Mr. McAleer became an employee of CapRock in May 1998.

(2) Represents bonus amount earned from CapRock in fiscal year 1998 and paid in
fiscal year 1999.

(3) Represents amounts paid to Mr. McAleer as a consultant prior to his
employment.

Option Grants in Last Fiscal Year. The following table contains information
concerning the stock option grants made to each of our executive officers who
are named in the "Summary Compensation Table" during the fiscal year ended
December 31, 1998.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
- ---- ----------- ------------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jere W. Thompson, Jr............ 125,000 7.26% $6.50 10/13/08 $510,977 $1,294,916
Kevin W. McAleer................ 100,000 5.81% 6.50 10/13/08 408,782 1,035,933
Timothy M. Terrell.............. 55,000 3.20% 6.50 10/13/08 224,830 569,763
Timothy W. Rogers............... 62,500 3.63% 6.50 10/13/08 255,488 647,458
Scott L. Roberts................ 40,000 2.32% 6.50 10/13/08 163,513 414,373
</TABLE>

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

(1) The options generally vest over a five-year period and expire on the tenth
anniversary of the date of grant.

(2) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Common Stock on the date of grant appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.

Fiscal Year-End Option Values. The following table contains information
through December 31, 1998 concerning options held by each of our executive
officers who are named in the "Summary Compensation Table."

<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
--------------------------------- ----------------------------
NAME EXERCISABLE(2) UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Jere W. Thompson, Jr...................... -- 125,000 -- $23,438
Kevin W. McAleer.......................... -- 100,000 -- 18,750
Timothy M. Terrell........................ -- 55,000 -- 10,313
Timothy W. Rogers......................... -- 62,500 -- 11,719
Scott L. Roberts.......................... -- 40,000 -- 7,500
</TABLE>

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

(1) Value is determined by subtracting the exercise price from the fair market
value of the Common Stock at December 31, 1998 ($6.6875 per share),
multiplied by the number of shares underlying the options.

(2) "Exercisable" refers to those options which were vested and exercisable at
December 31, 1998, while "Unexercisable" refers to those options which were
unvested at such time.

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<PAGE> 63

BENEFIT PLANS

The Equity Incentive Plan

Our 1998 Equity Incentive Plan was adopted and approved by our Board of
Directors and shareholders in 1998. The Equity Incentive Plan provides for the
awards of (1) stock options, (2) stock appreciation rights, (3) restricted
stock, (4) deferred stock, (5) stock reload options and (6) other stock-based
awards (collectively, "Awards"). Our employees and consultants and the employees
of and consultants to our subsidiaries are eligible to participate in the Equity
Incentive Plan.

Administration

The Equity Incentive Plan is administered by our Compensation Committee.
The Committee has full authority, subject to the provisions of the Equity
Incentive Plan, to determine the persons to whom from time to time Awards may be
granted ("Participants"), the specific type of Awards to be granted (e.g., stock
options, restricted stock, etc.), the number of shares subject to each Award,
share prices, any restrictions or limitations on such Awards and any vesting,
exchange, deferral, surrender, cancellation, acceleration, termination, exercise
or forfeiture provisions related to such Awards. The Committee has complete
discretion to make all decisions relating to the interpretation, administration
and operation of the Equity Incentive Plan.

Shares Subject to the Plan, General Terms

The Equity Incentive Plan authorizes the granting of Awards which allows up
to an aggregate of 5,000,000 shares of Common Stock to be acquired by the
Participants. The Equity Incentive Plan provides that a maximum of 2,500,000
shares of Common Stock may be issued to any one Participant. In order to prevent
dilution or enlargement of the rights of Participants under the Equity Incentive
Plan, the number of shares of Common Stock authorized by the Equity Incentive
Plan is subject to adjustment by the Board if any increase or decrease in the
number of shares of outstanding Common Stock results from a stock dividend,
stock split, reverse stock split, merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock. If any shares granted under the Equity Incentive Plan are forfeited or
terminated, these shares will again be available for distribution of Awards
subsequently granted. We have granted 1,681,600 options under the Plan and these
options generally vest over five years. As of December 31, 1998, 48,700 of the
options granted were forfeited and canceled and 1,632,900 options were
outstanding. We have also granted 3,514 shares of Restricted Stock to a former
director of one of our predecessor companies who is currently a consultant to
our Company. See "Certain Transactions." The remaining Awards available for
future grant as of December 31, 1998 was 3,363,586.

Eligibility

Subject to the provisions of the Equity Incentive Plan, Awards may be
granted to key employees, officers, directors, consultants and other persons who
have rendered or are expected to render significant services to us or our
subsidiaries. Incentive stock options may be awarded only to our employees or
employees of our subsidiaries at the time the award is granted.

Types of Awards

Stock Options. Options granted under the Equity Incentive Plan may be
either options that are intended to qualify for treatment as "incentive stock
options" under Section 422 of the Code or options that are not, which are
non-qualified stock options. The exercise price of incentive stock options must
be at least the fair market value of a share of the Common Stock on the date of
grant, and not less than 110% of the fair market value in the case of an
incentive stock option granted to an optionee owning 10% or more of the Common
Stock. The exercise price of non-qualified stock options may be less than 100%
of the fair market value of a share of the Common Stock on the date of grant.

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<PAGE> 64

The term of an option may not exceed ten years (or five years in the case
of an incentive stock option granted to an optionee owning 10% or more of the
Common Stock). Options may be granted that may be exercised in whole or in part
upon certain defined events causing a "change of control." The accelerated
vesting of outstanding options upon the occurrence of such a "change in control"
transaction could have the effect of delaying, deferring, or preventing a change
in control of our company.

Stock Appreciation Rights. The Committee may grant stock appreciation
rights ("SARs" or singularly "SAR") in conjunction with all or part of any stock
option granted under the Equity Incentive Plan or may grant SARs on a
freestanding basis. If granted in conjunction with non-qualified stock options,
SARs may be granted either at or after the time of the grant of the
non-qualified stock options. If granted in conjunction with incentive stock
options, SARs may be granted only at the time of the grant of an incentive stock
option. An SAR entitles the holder to receive an amount (payable in cash and/or
Common Stock, as determined by the Committee) equal to the fair market value of
one share of Common Stock over the SAR price or the exercise price of the
related Option, multiplied by the number of shares subject to the SAR.

Restricted Stock Awards. The Committee may award shares of restricted stock
("Restricted Stock") either alone or in addition to other Awards granted under
the Equity Incentive Plan. The Committee shall determine the restricted period
during which the shares of stock may be forfeited if, for example, the
Participant's employment is terminated. In order to enforce the forfeiture
provisions, the Equity Incentive Plan requires that all shares of Restricted
Stock awarded to the Participant remain in our physical custody until the
restrictions on these shares have terminated.

Deferred Stock. The Committee may award shares of deferred stock ("Deferred
Stock") either alone or in addition to other Awards granted under the Equity
Incentive Plan. The Committee shall determine the deferral period during which
time the receipt of the stock is deferred. The Award may specify, for example,
that the Participant must remain employed during the entire deferral period in
order to be issued the stock.

Stock Reload Options. The Committee may grant stock reload options with any
option granted under the Equity Incentive Plan. Stock reload options may be
granted only at the time of the grant of an incentive stock option or, in the
case of a non-qualified stock option, either at or after the time of the grant
of a non-qualified stock option. A stock reload option permits a Participant who
exercises an option by delivering already owned stock (i.e., the stock-for-stock
method) to receive back from us a new option, at the current market price, for
the same number of shares delivered to exercise the option. The new option may
not be exercised until one year after it was granted and expires on the date the
original option would have expired had it not been previously exercised.

Other Stock-Based Awards. The Committee may grant performance shares and
shares of stock valued by our performance. Performance grants may be made either
alone or in addition to or in tandem with stock options, restricted stock or
deferred stock. Subject to the terms of the Equity Incentive Plan, the Committee
has complete discretion to determine the terms and conditions applicable to any
such stock-based awards. Terms and conditions of Awards may require continued
employment or the attainment of specified performance objectives or both.

Termination of Awards

Generally, no option, or any portion thereof, granted under the Equity
Incentive Plan may be exercised by the holder later than three months following
the date of termination of such holder's employment or consulting relationship
with CapRock or any affiliate. However, if the holder's status as an employee
with or consultant to CapRock or its affiliates is terminated due to the death
or disability of the holder prior to termination of the holder's right to
exercise the option in accordance with the provisions of the holder's stock
option agreement, without having totally exercised the option, the option may be
exercised, to the extent to which the option could have been exercised by the
holder on the date of the holder's termination, by (1) the holder's estate or by
the person who acquired the right to exercise the option by bequest or
inheritance, in the event of the holder's death, or (2) the holder or his or her
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<PAGE> 65

personal representative, in the event of the holder's disability; provided in
either case that the option is exercised not more than twelve (12) months (or
such shorter period specified in the option agreement granting such option) from
the date of the holder's termination, but in no event later than the expiration
date of such option. If holder's disability is not a "disability" as such term
is defined in Section 22(e)(3) of the Code, then in the case of an incentive
stock option such incentive stock option will automatically cease to be treated
for tax purposes as an incentive stock option and will instead be treated for
tax purposes as a nonqualified option on the day that is three months and one
day following such termination.

Term and Termination of the Equity Incentive Plan

The Equity Incentive Plan became effective upon shareholder approval on
August 24, 1998. Unless terminated by the Board of Directors, the Equity
Incentive Plan shall continue to remain effective until no further Awards may be
granted and all Awards granted under the Equity Incentive Plan are no longer
outstanding. Grants of incentive stock options may only be made during the
ten-year period from August 24, 1998.

Amendments to the Plan

The Board of Directors may amend or terminate the Equity Incentive Plan as
long as no amendment or termination affects Awards previously granted. If the
Board of Directors amends the plan, shareholder approval will be sought only if
required by an applicable law.

The Director Stock Option Plan

Our Director Stock Option Plan was approved in 1998 by our Board of
Directors and our shareholders. The purpose of the Director Stock Option Plan is
to encourage ownership of Common Stock by our eligible non-employee directors.
Options will be granted to directors whose continued services are considered
essential to our future progress and to provide them with a further incentive to
remain as directors. All options granted under the Director Stock Option Plan
are non-qualified stock options. A total of 400,000 shares of Common Stock have
been reserved for issuance under the Director Stock Option Plan. As of December
31, 1998, we have granted 30,000 options under this Plan and all are
outstanding. There were 370,000 remaining options available for future grant as
of December 31, 1998.

The Director Stock Option Plan is administered by the Board of Directors.
The Board of Directors has full authority, subject to the provisions of the
Director Stock Option Plan, to determine the individuals to whom, and the time
or times at which, options will be granted and the number of shares of Common
Stock covered by each option. The Board of Directors has full authority to
construe and interpret the terms of the Director Stock Option Plan and the
options granted under it. We expect that each new non-employee director will
receive option grants under the Director Stock Option Plan upon becoming a
director. The Board of Directors will also have the authority to make additional
option grants to existing non-employee directors.

Each option will expire ten years from the date of grant. Outstanding
options will expire earlier if an optionee terminates service as a director
before the end of the first ten-year term. If an optionee terminates service as
a director for any reason, the option will automatically expire three months
after the date of termination, but in no event later than the expiration of the
ten-year term. Options are not assignable and may not be transferred other than
by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order. Upon a dissolution or liquidation of our company, each
outstanding option will terminate unless otherwise provided by the Board of
Directors. In the event of a proposed sale of all or substantially all of the
assets of our company or upon certain mergers in which the shareholders of
CapRock receive cash or securities of another issuer, the options may be either
assumed by the successor entity or substituted with an equivalent option.

The Board of Directors may amend or terminate the Director Stock Option
Plan except that any such amendment or termination will not affect options
previously granted. If the Board of Directors amends the Director Stock Option
Plan, shareholder approval will be sought only if required by an applicable law.
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<PAGE> 66

EMPLOYMENT AGREEMENTS

In February 1998 we entered into employment agreements with each of Jere W.
Thompson, Jr., Ignatius W. Leonards, Byron M. Allen, Scott L. Roberts, Timothy
W. Rogers and Timothy M. Terrell. In addition, on May 11, 1998, we entered into
an employment agreement with Kevin W. McAleer (collectively, the "Employment
Agreements"). The following is a summary of the principal terms of the
Employment Agreements.

Each Employment Agreement is for an initial term of three years, subject to
the right of either party to terminate their agreement upon 30 days' advance
written notice.

The Employment Agreements provide for Mr. Thompson to serve as Chief
Executive Officer and Mr. Leonards to serve as President of our company. Mr.
Thompson receives an annual base salary of $180,000 and Mr. Leonards receives
$168,000, both subject to increase upon review annually by the Board of
Directors.

The Employment Agreements provide for Mr. McAleer to serve as our Senior
Vice President and Chief Financial Officer (Mr. McAleer also serves as our
Treasurer and Secretary), and for Messrs. Allen, Roberts, Rogers and Terrell
each to serve as an Executive Vice President. Messrs. McAleer, Allen, Roberts,
Rogers and Terrell will receive annual salaries of $200,000, $125,000, $133,333,
$133,333 and $133,333, in each case subject to increase upon review annually by
the Board of Directors.

Each Employment Agreement provides that, at the discretion of the Board of
Directors, each employee may be paid bonus compensation or may be allowed to
participate in a management incentive bonus plan should we adopt one or both.
Each Employment Agreement also provides for certain insurance benefits and
provides that the employee be eligible to participate in all retirement and
other benefit plans generally available to employees of CapRock and any equity
or other employee benefit plan of CapRock that is generally available to senior
executive officers of such company. In addition, each Employment Agreement
provides for certain payments and benefits if the employee is terminated without
cause or due to death or permanent disability.

Each Employment Agreement generally provides that the employee will keep
confidential certain non-public information regarding our company and further
provides that, during the period after termination of employment specified
therein (generally two years), the employee will not, subject to certain
exceptions, own, manage, control, or participate in the ownership, management or
control of, or be employed by or otherwise associated with, or receive
compensation from or otherwise engage in any business in which we are engaged in
during such restricted period, including the provision of local and long
distance telecommunications services. The restricted territory under each
Employment Agreement is generally the entire United States, but in certain cases
is limited to certain Southern states. Each employee further agrees that during
the restricted period he will not (1) solicit or engage the business of any of
our clients or our clients of our affiliates or (2) solicit any of our employees
or employees of our affiliates to terminate any relationship that person may
have with us or our affiliates or engage, employ or compensate any of our
employees or employees of our affiliates.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors established a Compensation Committee, currently
consisting of Messrs. Amenson, Harris and Ellenberger, effective upon
consummation of our business combination (which occurred in August 1998). Before
that, during fiscal 1998, compensation decisions for executive officers of
CapRock Telecommunications were made by the Board of Directors of CapRock
Telecommunications, compensation decisions for the officers of CapRock Fiber's
general partner were made by its Board of Directors and compensation decisions
for executive officers of IWL Communications were made by Christopher J. Amenson
and Myron Goins, the sole members of IWL Communications' compensation committee.

Our business combination with our predecessor companies was completed on
August 26, 1998. During the last fiscal year, prior to the consummation of our
business combination, no executive officer of IWL
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<PAGE> 67

Communications served as a member of the Board of Directors or compensation
committee of CapRock Telecommunications or CapRock Fiber's general partner or
any entity that had one or more executive officers serving as a member of IWL
Communications' Board of Directors or compensation committee. During the last
fiscal year prior to the consummation of our business combination, no executive
officer of CapRock Telecommunications or CapRock Fiber's general partner served
as a member of the Board of Directors or compensation committee of IWL
Communications or any entity (other than CapRock Telecommunications or the
general partner of CapRock Fiber) that had one or more executive officers
serving as a member of their Board. During the last fiscal year after
consummation of our business combination, no executive officer of CapRock served
as a member of the Board of Directors or compensation committee of any entity
that has one or more executive officers serving as a member of CapRock's Board
of Directors or compensation committee.

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CERTAIN TRANSACTIONS

Caroline Fontenot, the sister of Mr. Leonards, our President, lent IWL
Communications, one of our predecessor companies, $75,000 on June 1, 1992 at an
interest rate of 12% per annum. We used a portion of the net proceeds from the
offering of our senior notes in July 1998 to repay the loan in full.

Our operations support system was developed by RiverRock Systems, Ltd.
CapRock owns a 49% limited partnership interest in RiverRock and David E.
Thompson, the brother of Jere W. Thompson, Jr., owns a 50% limited partnership
interest in RiverRock. Thompson Technology, Inc., a Texas corporation that is
owned by David E. Thompson, is the general partner and owns a 1% general
partnership interest in RiverRock. Although it is the intention of RiverRock to
market and sell licenses for the system to third parties, as of the date of this
Prospectus, no marketing or sales to third parties have been made. RiverRock was
formed when CapRock and TTI transferred all rights to the system developed by
CapRock and TTI into RiverRock. CapRock has been granted a royalty-free,
perpetual and non-exclusive license for the use of the system. CapRock also
receives upgrades, maintenance and other support from RiverRock for three years,
without the payment of any fees or royalties, which expires in June 2001.
Thereafter, CapRock will be required to pay the same fees and royalties for
system upgrades, maintenance and support as other licensees of RiverRock. During
the fiscal year ended December 31, 1998 and the fiscal quarter ended March 31,
1999, CapRock contributed a total of approximately $170,000 and $90,000 to
RiverRock for the development of the system and has committed to fund up to a
total of $700,000 as capital contributions to RiverRock, which will be used for
the continued development of the system.

Jere W. Thompson, Sr. is the president of The Williamsburg Corporation, a
Texas corporation. The Williamsburg Corporation lent CapRock Telecommunications,
one of our predecessor companies, $1,170,000 in 1995 at the rate of 13% per
annum and payable on demand, but no later than March 31, 1998. During the fiscal
year ended December 31, 1995, The Williamsburg Corporation converted $750,000 of
the outstanding principal and interest amount of such note into 727,925 shares
of CapRock Telecommunications common stock. The remaining principal balance of
the note, together with interest thereon, was repaid by CapRock
Telecommunications during the fiscal year ended December 31, 1997. Jere W.
Thompson, Sr. is the father of Jere W. Thompson, Jr.

CapRock currently leases private line services from TISP, Inc. ("TISP").
TISP is owned by Patrick J. Thompson, a brother of Jere W. Thompson, Jr. Total
payments to TISP in the fiscal year ended December 31, 1998 and the fiscal
quarter ended March 31, 1999, were approximately $1,176,000 and $331,000. We
believe that the prices charged for such services do not exceed prices charged
by unrelated parties for such services. Pricing of private line services is a
function of the capacity, term and distance of the circuit involved. Circuits
are usually available from multiple vendors, and vendors are selected on the
basis of price, speed of provisioning and circuit diversity. Rates are fixed and
payable monthly, generally in advance. The actual rates paid to TISP are
determined in the same manner as rates for unrelated parties.

In 1994, CapRock Telecommunications executed three promissory notes, one
payable to the order of each of Scott L. Roberts, Timothy M. Terrell and Timothy
W. Rogers, each an Executive Vice President of CapRock, relating to 334 shares
of common stock of CapRock Telecommunications repurchased from each of them with
such shares of stock pledged by CapRock Telecommunications to repay the notes.
The aggregate purchase price for the 334 shares from each individual was
$50,000. Each of the original notes were in the amount of $50,000 with no stated
interest rate. The notes were discounted using an interest rate of 5.8% and were
payable in three annual installments beginning April 1998. We used a portion of
the net proceeds from the offering of our senior notes in July 1998 to repay the
notes in full.

CapRock Telecommunications had a revolving credit facility with Bank One,
Texas, N.A. in the amount of $2,500,000, which was guaranteed by Jere W.
Thompson, Jr. We used a portion of the net proceeds from the offering of our
senior notes in 1998 to repay in full all amounts outstanding under the line of
credit, and at that time Mr. Thompson was released from his guaranty.

Mark Langdale, one of our directors, Joe C. Thompson, Jr., an uncle of Jere
W. Thompson, Jr., The Florida Company (which is owned by Joe C. Thompson), The
Hayden Company (which is owned by

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<PAGE> 69

John P. Thompson, an uncle of Jere W. Thompson, Jr.), and Jere W. Thompson, Sr.
guaranteed portions of the $10.0 million loan from Bank One, Texas, N.A. to
CapRock Fiber, one of our predecessor companies, in 1996, which was repaid on
August 27, 1998 totaling $439,602. Each guarantor received in exchange for each
$1 million of indebtedness guaranteed (1) a 2.67% limited partnership interest
in CapRock Fiber (which was converted into shares of our Common Stock in our
business combination in August 1998), (2) a commitment fee equal to 1% of the
amount guaranteed, which accrued interest at the rate of 12% per annum
commencing July 1, 1997 and increased 2% on each July 1 thereafter that the
commitment fee remained unpaid and (3) an annual loan guaranty fee equal to 7%
of the amount of each partner's guarantee multiplied by a fraction, the
numerator being the lesser of $8 million or the average outstanding daily
principal of the loan guaranteed and the denominator being $8 million. The
guarantees (other than the joint and several guarantees of Mark Langdale and
Jere W. Thompson, Jr.) were released in April 1997 and, therefore, no guaranty
fees have been accrued after April 1, 1997 other than the accrued interest. The
total commitment fees, loan guarantee fees, and accrued interest thereon, as of
December 31, 1996, 1997, and 1998 were approximately $208,000 and $406,000 and
$430,000. Additionally, in exchange for Mark Langdale remaining on his joint and
several guaranty, CapRock Fiber agreed to pay him $20,000 which was paid in
1998. We used a portion of the net proceeds from the offering of our senior
notes in 1998 to pay in full all of such commitment and guaranty fees.

CapRock entered into an agreement with CapRock Systems, which was the
general partner of CapRock Fiber prior to our business combination, to manage
the construction of the fiber optic network build out for the initial 260 route
miles, which was completed in 1997. Under this agreement, CapRock paid 4% of the
costs of constructing this portion of the network, payable monthly at a minimum
of $15,000 per month. CapRock paid management fees of $296,576 in 1997 and
$461,576, cumulative under the arrangement since construction of this segment
commenced. This arrangement ended in 1997.

In 1998, CapRock granted to Myron J. Goins, a former director of one of its
predecessor companies and currently one of CapRock's consultants, 3,514 shares
of "Restricted Stock" under the terms of a Restricted Stock Agreement under our
Equity Incentive Plan. The restriction period under the agreement with Mr. Goins
expired on February 28, 1999.

CapRock sold telecommunications services in the amount of approximately
$70,000 from June 1998 through December 1998 and $77,000 from January 1999
through March 1999 to Summit Communications, Inc., which is owned by Sherwood
Allen, a brother of Byron M. Allen. Byron Allen is an Executive Vice President
of CapRock.

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<PAGE> 70

PRINCIPAL AND SELLING SHAREHOLDERS

The following table shows information concerning the beneficial ownership
of our Common Stock as of March 31, 1999 and after giving effect to the sale of
the 6,500,000 shares of Common Stock in this offering and assuming no exercise
of the Underwriters' over-allotment option, by: (1) each director and director
nominee and each of our executive officers named in the "Summary Compensation
Table," (2) each person we know to beneficially own more than 5% of the
outstanding shares of our Common Stock; and (3) all of our officers and
directors as a group. The address for Messrs. Jere W. Thompson, Jr., Rogers,
Roberts, Terrell and McAleer, CapRock Investors and Greenway Holdings, L.P. is
15601 Dallas Parkway, Suite 700, Dallas, Texas 75248. The address for Messrs.
Leonards and Allen is 12000 Aerospace Ave., Suite 200, Houston, Texas 77034.

<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF PERCENT OF
OF COMMON SHARES OF NUMBER OF SHARES SHARES OF
STOCK COMMON STOCK SHARES OF OF COMMON STOCK COMMON STOCK
BENEFICIALLY OUTSTANDING COMMON STOCK BENEFICIALLY OUTSTANDING
OWNED BEFORE BEFORE BEING OFFERED OWNED AFTER AFTER
NAME AND ADDRESS OFFERING (1) OFFERING(1) IN THE OFFERING OFFERING(2) OFFERING(2)
- ---------------- ------------ ------------ --------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Jere W. Thompson, Jr.(3).... 10,775,218 37.2% -- 10,775,218 31.7%
Ignatius W. Leonards(4)..... 1,897,528 6.6% 125,000 1,772,528 5.2%
Timothy W. Rogers(5)........ 2,883,628 10.0% 125,000 2,758,628 8.1%
Scott L. Roberts............ 2,883,628 10.0% 125,000 2,758,628 8.1%
Timothy M. Terrell.......... 2,883,628 10.0% 125,000 2,758,628 8.1%
Byron M. Allen(6)........... 214,200 * -- 214,200 *
Kevin W. McAleer............ -- -- -- -- --
Mark Langdale(7)............ 11,224,352 38.8% 800,000 10,424,352 30.7%
5950 Berkshire, Suite 990
Dallas, TX 75225
Christopher J. Amenson(8)... 5,333 * -- 5,333 *
c/o SBS Technologies, Inc.
2400 Louisiana Blvd., N.E.
AFC Building 5, Suite 600
Albuquerque, NM 87110
John R. Harris.............. 7,000 * -- 7,000 *
4225 Versailles Avenue
Dallas, TX 75205
Richard G. Ellenberger...... -- -- -- -- --
c/o Cincinnati Bell, Inc.
201 East Fourth Street
Cincinnati, Ohio 45201
Jere W. Thompson, Sr.(9).... 10,647,930 36.8% 200,000 10,447,930 30.8%
Two Turtle Creek Village
3838 Oak Lawn Ave., Suite
1850
Dallas, TX 75219
Greenway Holdings,
L.P.(3)................... 2,014,082 7.0% -- 2,014,082 5.9%
CapRock Investors(3)........ 8,650,884 29.9% -- 8,650,884 25.5%
All executive officers and
directors as a group(8)
(eleven persons).......... 24,014,699 83.0% -- 22,714,699 66.9%
</TABLE>

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<PAGE> 71

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

* Less than 1% of the outstanding shares of the class.

(1) Based upon 28,952,747 shares of Common Stock issued and outstanding as of
March 31, 1999. The information contained in this table with respect to
beneficial ownership reflects "beneficial ownership" as defined in Rule
13d-3 under the Securities Exchange Act of 1934, which means generally any
person who, directly or indirectly, has or shares voting power or investment
power with respect to a security. Shares of Common Stock not outstanding but
deemed beneficially owned by virtue of the right of an individual or group
to acquire such shares within 60 days after March 31, 1999 are treated as
outstanding only when determining the amount and percentage of Common Stock
owned by such individual or group. All information with respect to the
beneficial ownership of any principal shareholder was furnished by such
principal shareholder and we believe that, except as otherwise noted or
pursuant to community property laws, each shareholder has sole voting and
investment power with respect to shares shown.

(2) The numbers in the above table assume no exercise of the Underwriters'
over-allotment option to acquire an additional 975,000 shares of Common
Stock from the selling shareholders listed below. If the over-allotment
option is exercised in full, Greenway Holdings, L.P. will sell 100,000
shares and will beneficially own after the offering 1,914,082 shares or 5.6%
of the total shares outstanding, Ignatius W. Leonards will sell an
additional 75,000 shares and will beneficially own after the offering
1,697,528 shares or 5.0% of the total shares outstanding, Timothy W. Rogers
will sell an additional 75,000 shares and will beneficially own after the
offering 2,683,628 shares or 7.9% of the total shares outstanding, Scott L.
Roberts will sell an additional 75,000 shares and will beneficially own
after the offering 2,683,628 shares or 7.9% of the total shares outstanding,
Timothy M. Terrell will sell an additional 75,000 shares and will
beneficially own after the offering 2,683,628 shares or 7.9% of the total
shares outstanding, Mark Langdale will sell an additional 525,000 shares
that he owns in his individual capacity and will beneficially own after the
offering 9,899,352 shares or 29.2% of the total shares outstanding, and Jere
W. Thompson, Sr. will sell an additional 50,000 shares that he owns in his
individual capacity and will beneficially own after the offering 10,397,930
shares or 30.6% of the total shares outstanding. If the Underwriters
over-allotment option is exercised in full, then after giving effect to the
sale by Greenway Holdings, L.P., Jere W. Thompson, Jr. will beneficially own
after the offering 10,675,218 shares or 31.4% of the total shares
outstanding. If the Underwriters over-allotment option is exercised in full,
all executive officers and directors as a group will beneficially own after
the offering 21,789,699 shares or 64.2% of the total shares outstanding.

(3) Includes 8,650,884 shares held of record by CapRock Investors, 108,932
shares held of record by CapRock Systems, Inc. and 2,014,082 shares held of
record by Greenway Holdings, L.P. CapRock Investors is a Texas joint
venture, of which Jere W. Thompson, Jr. is the managing venturer and in
which he owns a controlling interest. The Joint Venture Agreement of CapRock
Investors grants to Mr. Thompson, Jr. certain authority, including the
authority to decide and cast all votes on behalf of CapRock Investors as a
shareholder of CapRock. As a consequence, both CapRock Investors and Mr.
Thompson, Jr. may each be deemed to be the beneficial owner of all of the
shares. CapRock Systems, Inc. is a Texas corporation of which Mr. Thompson,
Jr. owns 50% of the outstanding common stock and is an officer and a
director; as a result he has shared voting, investment, and dispositive
power with respect to the 108,932 shares held by CapRock Systems, Inc.
Greenway Holdings, L.P. is a Texas limited partnership of which Mr.
Thompson, Jr. is the general partner and has sole voting, investment and
dispositive power; as a result, he may be deemed to be the beneficial owner
of all of the shares held of record by Greenway Holdings, L.P.

(4) Includes 20,166 shares held by Ignatius W. Leonards as custodian for minor
children.

(5) Includes 8,970 shares held by Neal S. Rogers as custodian for minor children
of Timothy W. Rogers. Neal S. Rogers is Timothy W. Roger's brother.

(6) Includes 7,300 shares held by Byron M. Allen as custodian for minor children
and 7,300 shares held by Mr. Allen's daughters, the voting, investment and
dispositive power of which are shared by Mr. Allen with his daughter.

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<PAGE> 72

(7) Includes 8,650,884 shares held of record by CapRock Investors and 108,932
shares held of record of CapRock Systems, Inc. Under the Joint Venture
Agreement of CapRock Investors, the approval of a majority-in-interest of
the venturers is required to approve the disposition of the shares. Because
of the ownership interest of Jere W. Thompson, Jr., Mark Langdale, and Jere
W. Thompson, Sr. (23.5%, 42.5% and 30.9%, respectively), two of the three
acting together can authorize or prevent a disposition of the shares. As a
result, each may be deemed to be the beneficial owner of all of the shares.
CapRock Systems, Inc. is a Texas corporation of which Mr. Langdale owns 50%
of the outstanding common stock and is an officer and a director; as a
result he has shared voting, investment and dispositive power with respect
to the 108,932 shares held by CapRock Systems, Inc.

(8) Includes 3,333 shares subject to currently exercisable options.

(9) Includes 1,302,283 shares held of record by The Williamsburg Corporation,
8,650,884 shares held of record by CapRock Investors and 289,677 shares held
of record by Jere W. Thompson, Sr.'s spouse. Under the Joint Venture
Agreement of CapRock Investors, the approval of a majority-in-interest of
the venturers is required to approve the disposition of the shares. Because
of the ownership interest of Jere W. Thompson, Jr., Mark Langdale, and Jere
W. Thompson, Sr. (23.5%, 42.5% and 30.9%, respectively), two of the three
acting together can authorize or prevent a disposition of the shares. As a
result, each may be deemed to be the beneficial owner of all of the shares.
The Williamsburg Corporation is a Texas corporation, of which Mr. Thompson,
Sr. is the president and a director; as a result he has shared voting,
investment, and dispositive power with respect to the 1,302,283 shares held
by The Williamsburg Corporation.

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DESCRIPTION OF CERTAIN INDEBTEDNESS

CapRock has outstanding $150.0 million of senior notes due 2008 bearing
interest at the rate of 12% per annum. The senior notes are subject to the terms
and conditions of an indenture dated July 10, 1998 between CapRock and PNC Bank,
as Trustee. The senior notes are subject to all of the terms and conditions of
the indenture. The following summary highlights some provisions of the
indenture.

The senior notes will mature on July 15, 2008. Interest on the senior notes
is payable semiannually in cash on January 15 and July 15 of each year,
commencing January 15, 1999. The senior notes are general senior unsecured
obligations of CapRock, and as such, rank pari passu in right of payment with
all existing and future unsecured and unsubordinated indebtedness of CapRock.
The senior notes are effectively subordinated in right of payment to all secured
indebtedness of CapRock to the extent of the value of the assets securing such
indebtedness. In addition, CapRock is a holding company, and the senior notes
are effectively subordinated to all existing and future indebtedness and other
liabilities (including trade payables) of CapRock's subsidiaries.

The senior notes are redeemable at CapRock's option, in whole or in part,
at any time on or after July 15, 2003 at the redemption prices shown in the
indenture together with accrued and unpaid interest, if any, to the date of
redemption.

Upon a change of control, each holder of senior notes may require CapRock
to make an offer to purchase all outstanding senior notes at a purchase price
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. There can be no assurance that
CapRock will have available, or will be able to acquire from alternative sources
of financing, funds sufficient to repurchase the senior notes in the event of a
change of control.

The indenture contains covenants that, among other things, limit or
prohibit us from engaging in certain transactions including the following:

- borrowing additional money,

- paying dividends or making other distributions to our shareholders,

- limiting the ability of subsidiaries to make payments to us,

- making certain investments,

- creating certain liens on our assets,

- selling certain assets and using the proceeds from those sales for
certain purposes,

- entering into transactions with affiliates, and

- engaging in certain mergers or consolidations.

The covenants also require CapRock to make an offer to purchase specified
amounts of senior notes in the event of certain asset sales. There can be no
assurance that CapRock will have sufficient funds to complete any purchase of
senior notes upon such a sale of assets.

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DESCRIPTION OF CAPITAL STOCK

The following summaries highlight certain provisions of our Articles of
Incorporation and By-Laws, as amended. Copies of our Articles and Bylaws are
available from us upon request. See "Where You Can Find More Information."

AUTHORIZED CAPITAL STOCK

Under our Articles, the total number of shares of all classes of stock that
we have authority to issue is 220,000,000 shares. Each share has a par value of
$.01 per share. Of the authorized amount, 200,000,000 of the shares are Common
Stock and 20,000,000 are shares of Preferred Stock. As of March 31, 1999, there
were 28,952,747 shares of Common Stock issued and outstanding, and no shares of
Preferred Stock were issued or outstanding.

COMMON STOCK

Each share of Common Stock has identical rights and privileges in every
respect. The holders of CapRock Common Stock are entitled to vote upon all
matters submitted to a vote of our shareholders and are entitled to one vote for
each share of Common Stock held.

Subject to the prior rights and preferences, if any, applicable to shares
of Preferred Stock or any series of Preferred Stock, the holders of Common Stock
are entitled to receive such dividends, payable in cash, stock or otherwise, as
may be declared by the Board out of any funds legally available for the payment
of dividends.

If CapRock voluntarily or involuntarily liquidates, dissolves or winds-up,
the holders of Common Stock will be entitled to receive after distribution in
full of the preferential amounts, if any, to be distributed to the holders of
Preferred Stock or any series of Preferred Stock, all of the remaining assets
available for distribution ratably in proportion to the number of shares of
Common Stock held by them.

Holders of Common Stock will have no preferences or any preemptive,
conversion or exchange rights.

PREFERRED STOCK

The Board is authorized to provide for the issuance of shares of CapRock
Preferred Stock in one or more series, and to fix for each series, voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof as are shown in a resolution
providing for the issuance of such series adopted by the Board. The Board may
authorize the issuance of shares of Preferred Stock with terms and conditions
which could discourage a takeover or other transaction that holders of some or a
majority of shares of CapRock Common Stock might believe to be in their best
interests or in which such holders might receive a premium for their shares of
stock over the then-current market price of such shares. As of the date hereof,
no shares of Preferred Stock are outstanding and the Board has no present
intention to issue any shares of Preferred Stock.

PREEMPTIVE RIGHTS

No holder of any shares of our stock has any preemptive or preferential
right to acquire or subscribe for any unissued shares of any class of stock or
any authorized securities convertible into or carrying any right, option or
warrant to subscribe for or acquire shares of any class of stock.

TRANSFER AGENT AND REGISTRAR

The principal transfer agent and registrar for our Common Stock is American
Securities Transfer & Trust, Inc.

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<PAGE> 75

CERTAIN ANTI-TAKEOVER EFFECTS

As of March 31, 1999, there were 171,047,253 authorized and unissued shares
of Common Stock and 20,000,000 authorized and unissued shares of Preferred
Stock. The Board of Directors can authorize the issuance of authorized but
unissued shares of its stock to render more difficult or to discourage an
attempt to obtain control of our company by means of a merger, tender offer,
proxy solicitation or otherwise. We are also subject to prior regulatory
approval by the FCC and various state regulatory agencies for a transfer of
control or for the assignment of our (or our subsidiaries') intrastate
certification authority, its international authority and other FCC licenses and
authorizations. The 1934 Communications Act generally limits direct foreign
ownership of wireless licenses to 20%, but provides for indirect foreign
ownership holdings above 25% upon FCC approval. In addition, because we (and our
subsidiaries) hold FCC authority to provide international service, the FCC will
scrutinize an ownership interest in our company of greater than 25%, or a
controlling interest at any level, by a dominant foreign carrier. International
carriers, such as we are, must notify the FCC 60 days in advance of an
acquisition by a foreign carrier or by an entity that controls a foreign carrier
of a 25% or greater or a controlling interest in such carriers. However, new
rules allow for up to 100% indirect ownership of wireless licenses by foreign
interests from countries that have participated in the 1997 WTO Agreement on
Basic Telecommunications Services, in which the United States and 68 other
countries committed to open their telecommunications markets to competition
starting in 1998. Furthermore, the indenture for our senior notes provides for a
mandatory purchase of the senior notes upon a change of control and we expect
that the credit facility that we are currently negotiating will provide that an
event of default or redemption event thereunder will occur if all or a
controlling interest in our capital stock is sold, assigned or otherwise
transferred. See "Description of Certain Indebtedness." Any of the foregoing
factors could have the effect of delaying, deferring or preventing a change of
control of CapRock. The Articles provide that Article 13.03 of the Texas
Business Corporation Act, which includes statutory anti-takeover measures, will
not apply to us.

WARRANTS AND REGISTRATION RIGHTS

As part of its initial public offering, IWL Communications, one of our
predecessor companies, issued warrants to purchase up to 145,000 shares of IWL
Communications common stock at an exercise price of $7.20 per share to
Cruttenden Roth, Incorporated or its designees for nominal consideration.
Following our business combination in August 1998, the Cruttenden warrants were
converted on a one-to-one ratio to warrants to purchase shares of our Common
Stock and are exercisable until July 16, 2002. Cruttenden Roth has certain
demand and piggyback registration rights associated with our Common Stock to be
issued upon the exercise of the warrants. Cruttenden Roth has waived their
registration rights with respect to this offering.

SHARES ELIGIBLE FOR FUTURE SALE

After the offering, we will have 33,952,747 shares of Common Stock
outstanding, assuming no exercise of outstanding options or warrants to purchase
Common Stock after March 31, 1999. All of these shares and any shares issued
upon exercise of outstanding stock options (there were 2,402,525 stock options
outstanding as of March 31, 1999) will be freely tradeable without restriction
or further registration under the Securities Act, except that any shares held by
an "affiliate" of ours, as that term is defined in Rule 144 under the Securities
Act ("Rule 144"), may generally only be sold in compliance with the limitations
of Rule 144 described below. We do not currently have outstanding any shares of
Common Stock that are "restricted securities" within the meaning of Rule 144 in
that they have not been registered under the Securities Act but we may in the
future. These restricted securities will generally be available for sale in the
open market after the offering, subject to the Lock-up Agreements (defined
below) and the applicable requirements of Rule 144.

In general, Rule 144 provides that after one year has elapsed between the
later of the date the restricted securities were acquired from us and the date
they were acquired from an affiliate of ours, the holder of such restricted
securities (including an affiliate) is entitled to sell a number of shares
within any

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<PAGE> 76

three-month period that does not exceed the greater of (1) one percent of the
then outstanding shares of the Common Stock or (2) the average weekly reported
volume of trading of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain requirements
pertaining to the manner of such sales, notice of such sales and the
availability of current public information concerning us. Affiliates may sell
shares not constituting restricted securities in accordance with the foregoing
volume limitations and other requirements of Rule 144 but without regard to the
one year holding period. Under Rule 144(k), after a period of two years has
elapsed between the later of the date on which restricted securities were
acquired from us and the date on which they were acquired from an affiliate, a
holder of such restricted securities who is not an affiliate of ours at the time
of the sale and has not been an affiliate for at least three months before the
sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions of Rule 144 described above.

The selling shareholders will be required to enter into agreements with the
underwriters (the "Lock-up Agreements"). These agreements will provide that,
until the expiration of 120 days after the date of this Prospectus, they will
not offer, sell, contract to sell or otherwise dispose of, any shares of Common
Stock or any securities of CapRock that are substantially similar to the Common
Stock or which are convertible into or exchangeable for, or represent the right
to receive, Common Stock without the prior written consent of the managing
underwriter. In addition, we have agreed not to sell or otherwise dispose of any
shares of Common Stock during the 120-day period following the date of the
Prospectus, except we may issue, and grant options to purchase, shares of Common
Stock under our Equity Incentive Plan and Director Stock Option Plan. In
addition, we may issue shares of Common Stock as part of any acquisition of
another company if the terms of such issuance provide that such Common Stock
will not be resold before the expiration of the 120-day period referenced in the
preceding sentence.

We assumed all of the outstanding options to acquire the common stock of
our predecessor companies pursuant to our business combination in August 1998,
and all of such options are covered by an effective Registration Statement on
Form S-8. In addition, we filed a Registration Statement on Form S-8 to register
the 5,400,000 shares of stock issuable under our Equity Incentive Plan and our
Director Stock Option Plan. The shares covered by the Registration Statements on
Form S-8 are currently or upon grant will be eligible for sale in the public
markets, subject to the Rule 144 limitations applicable to our "affiliates" as
well as to the limitations on sale and vesting described above. In addition,
Cruttenden Roth received demand and "piggy-back" registration rights under its
warrants. Registration of such shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act (except for shares purchased by affiliates) immediately upon the effective
date of such registration. If the holder or holders of the Cruttenden warrants
exercise a demand registration right, such sales could have an adverse effect on
the market price for CapRock's Common Stock. If we were to include in a
CapRock-initiated registration such shares pursuant to the exercise of
piggy-back registration rights, such sales may have an adverse effect on our
ability to raise additional capital. The Cruttenden warrants are currently
exercisable.

73
<PAGE> 77

UNDERWRITING

GENERAL

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.
and Cruttenden Roth Incorporated are acting as representatives of each of the
Underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement among us, the selling shareholders and the Underwriters, we
and the selling shareholders have agreed to sell to the Underwriters, and each
of the Underwriters severally and not jointly has agreed to purchase from us and
the selling shareholders, the number of shares of Common Stock shown opposite
its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 1,312,500
Bear, Stearns & Co. Inc..................................... 1,312,500
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,312,500
Goldman, Sachs & Co......................................... 1,312,500
Cruttenden Roth Incorporated................................ 200,000
CIBC World Markets Corp..................................... 100,000
A.G. Edwards & Sons, Inc.................................... 100,000
Hambrecht & Quist LLC....................................... 100,000
J.P. Morgan Securities Inc.................................. 100,000
NationsBanc Montgomery Securities LLC....................... 100,000
Salomon Smith Barney Inc.................................... 100,000
Hoak Breedlove Wesneski & Co................................ 100,000
Southcoast Capital L.L.C.................................... 100,000
Dain Rauscher Wassels, A division of Dain Rauscher
Incorporated.............................................. 50,000
First Southwest Company..................................... 50,000
Kaufman Bros., L.P.......................................... 50,000
Ormes Capital Markets, Inc.................................. 50,000
Brad Peery Inc.............................................. 50,000
---------
Total............................................. 6,500,000
=========
</TABLE>

In the purchase agreement, the several Underwriters have agreed, subject to
the terms and conditions shown therein, to purchase all of the shares being sold
pursuant to such agreement if any of the shares of Common Stock being sold
pursuant to such agreement are purchased. In the event of a default by an
Underwriter, the purchase agreement provides that, in certain circumstances, the
commitments of non-defaulting Underwriters may be increased or the purchase
agreement may be terminated.

We and the selling shareholders have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the Underwriters may be required to make in respect of
those liabilities.

The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us and the selling shareholders that the
Underwriters propose initially to offer the shares to the public at the public
offering price shown on the cover page of this prospectus, and to certain
dealers at such price less a concession not in excess of $. per share. The
74
<PAGE> 78

Underwriters may allow, and such dealers may reallow, a discount not in excess
of $. per share on sales to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.

The following table shows the per share and total underwriting discount to
be paid by us and the selling shareholders to the Underwriters. This information
is presented assuming either no exercise or full exercise by the Underwriters of
the over-allotment option.

<TABLE>
<CAPTION>
TOTAL TOTAL
WITHOUT WITH
PER SHARE OPTION OPTION
--------- -------- --------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount...........................
Proceeds, before expenses, to CapRock...........
Proceeds to selling shareholders................
</TABLE>

We will not receive any of the proceeds from the sale of shares by the
selling shareholders. The expenses of the offering are estimated at $
and are payable by us.

OVER-ALLOTMENT OPTION

The selling shareholders have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 975,000 additional shares at the public offering price shown on the
cover page of this Prospectus, less the underwriting discount. The Underwriters
may exercise this option solely to cover over-allotments, if any, made on the
shares offered hereby. To the extent that the Underwriters exercise this option,
each Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares proportionate to such Underwriter's initial amount
reflected in the foregoing table.

NO SALES OF SIMILAR SECURITIES

Each of our officers and directors and all the selling shareholders have
entered into lock-up agreements with the Underwriters which provide that, until
the expiration of 120 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of, any shares of Common
Stock or any of our other securities that are substantially similar to the
Common Stock or which are convertible into or exchangeable for, or represent the
right to receive, Common Stock without the prior written consent of Merrill
Lynch. In addition, we have agreed not to sell or otherwise dispose of any
shares of Common Stock during the 120-day period following the date of the
Prospectus, except we may issue, and grant options to purchase, shares of Common
Stock under our stock option plans.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the shares is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase Common Stock. As an exception to
these rules, the representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in the
offerings, i.e., if they sell more shares than are shown on the cover page of
this Prospectus, the representatives may reduce that short position by
purchasing shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above.

The representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the representatives purchase
shares in the open market to reduce the underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount

75
<PAGE> 79

of the selling concession from the Underwriters and selling group members who
sold those shares as part of the offering.

In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the shares.

Neither we nor any of the selling shareholders or Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Stock. In
addition, neither we nor any of the selling shareholders or Underwriters makes
any representation that the representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.

PASSIVE MARKET MAKING

In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market in accordance with Regulation M under the Securities
Exchange Act of 1934, as amended, during a period before the commencement of
offers or sales of the Common Stock hereunder.

OTHER RELATIONSHIPS

Some of the Underwriters have provided investment banking services to us in
the past and are likely to do so in the future. They receive customary fees and
commissions for these services. Both Merrill Lynch and Donaldson, Lufkin &
Jenrette Securities Corporation acted as initial purchasers in the offering of
our senior notes in July 1998 and received customary discounts and commissions
in connection therewith.

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for us and the selling shareholders by
Munsch Hardt Kopf & Harr, P.C., Dallas, Texas. Certain legal matters relating to
the offering will be passed upon for the Underwriters by Paul, Hastings,
Janofsky & Walker LLP.

EXPERTS

The consolidated financial statements of CapRock Communications Corp. as of
December 31, 1997 and 1998 and for each of the years in the three year period
ended December 31, 1998 are included in this Prospectus in reliance upon the
reports of KPMG LLP and Burds, Reed & Mercer, P.C., independent certified public
accountants, appearing elsewhere herein and upon the authority of said firms as
experts in accounting and auditing.

76
<PAGE> 80

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and, therefore, we file reports, proxy statements,
information statements and other information with the Securities and Exchange
Commission. You may inspect and copy this information (at prescribed rates) at
the Commission's public reference facilities at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the regional offices of the Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Please call the Commission at 1-800-SEC-0330 for more information on its
public reference rooms. The Commission also maintains an Internet Website at
http://www.sec.gov that contains reports, proxy statements, registration
statements, information statements and other information regarding registrants,
including us, that file electronically with the Commission. Our Common Stock is
quoted on the Nasdaq National Market. Reports, proxy statements, information
statements and other information about us may also be inspected at the office of
the National Association of Securities Dealers, Inc., located at 1735 K Street,
N.W., Washington, D.C. 20006.

We have filed with the Securities and Exchange Commission, Washington,
D.C., 20549, a Registration Statement on Form S-1 under the Securities Act of
1933, as amended, with respect to the Common Stock offered with this Prospectus.
This Prospectus does not contain all of the information shown in the
Registration Statement and the exhibits and schedules to the Registration
Statement. Certain items are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to us and
the Common Stock offered with this Prospectus, reference is made to the
Registration Statement and the exhibits and schedules files as a part of the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, is available as shown in the previous
paragraph.

77
<PAGE> 81

CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report of KPMG LLP.................... F-2
Independent Auditors' Reports of Burds, Reed and Mercer,
P.C....................................................... F-3, F-4
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-5
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended December 31,
1996, 1997 and 1998....................................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>

F-1
<PAGE> 82

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
CapRock Communications Corp.
(formerly IWL Holdings Corp.):

We have audited the accompanying consolidated balance sheets of CapRock
Communications Corp. and subsidiaries, as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the 1996 financial statements of certain consolidated subsidiaries,
which statements reflect total assets constituting 56 percent and total revenues
constituting 45 percent of the related 1996 consolidated totals. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts of these consolidated
subsidiaries, is based solely on the report of the other auditors.

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, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of CapRock Communications Corp. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

KPMG LLP

Dallas, Texas
February 19, 1999

F-2
<PAGE> 83

INDEPENDENT AUDITORS' REPORT

The Board of Directors
CapRock Telecommunications Corp.:
(formerly CapRock Communications Corp.)

We have audited the balance sheet of CapRock Telecommunications Corp.
(formerly CapRock Communications Corp.) as of December 31, 1996, and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

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

BURDS, REED AND MERCER, P.C.

Dallas, Texas
May 28, 1997

F-3
<PAGE> 84

INDEPENDENT AUDITORS' REPORT

The Partners of
CapRock Fiber Network, Ltd.:

We have audited the balance sheet of CapRock Fiber Network, Ltd., as of
December 31, 1996, and the related statements of operations, partners' capital,
and cash flows for the year then ended (not presented separately herein). These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

BURDS, REED AND MERCER, P.C.

Dallas, Texas
March 19, 1997

F-4
<PAGE> 85

CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998

ASSETS

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,520,017 $ 293,860
Marketable securities..................................... -- 97,019,789
Accounts receivable and unbilled services, less allowance
for doubtful accounts of $1,781,355 and $709,941 at
December 31, 1997 and 1998, respectively............... 15,143,525 19,936,214
Income tax receivable..................................... -- 1,405,000
Costs and estimated earnings in excess of billings........ -- 7,238,402
Inventory................................................. 1,022,927 1,301,726
Prepaid expenses and other................................ 1,022,319 706,775
Deferred income taxes..................................... 731,845 1,989,250
----------- ------------
Total current assets.............................. 21,440,633 129,891,016
Property, plant and equipment, net.......................... 27,340,599 59,606,752
Other assets................................................ 608,219 2,468,000
----------- ------------
Total assets...................................... $49,389,451 $191,965,768
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt......................... $ 8,116,424 $ --
Accounts payable and accrued expenses..................... 11,851,945 26,850,525
Accrued commitment and guarantor fees..................... 406,010 --
Current installments of obligations under capital
leases................................................. 239,672 --
Income taxes payable...................................... 589,514 --
Unearned revenue.......................................... 542,441 551,341
----------- ------------
Total current liabilities......................... 21,746,006 27,401,866
Long-term debt, excluding current portion................... 12,338,341 --
Senior notes, net of unamortized debt issuance costs........ -- 145,187,039
Deferred income taxes....................................... 851,307 3,314,568
Obligations under capital lease, excluding current
installments.............................................. 367,493 --
----------- ------------
Total liabilities................................. 35,303,147 175,903,473
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 200,000,000 shares
authorized; issued and outstanding, 28,677,743 and
28,932,395 shares at December 31, 1997 and 1998,
respectively........................................... 286,777 289,377
Additional paid-in capital................................ 8,810,627 10,521,713
Retained earnings......................................... 5,385,144 5,608,237
Accumulated other comprehensive income.................... -- 8,878
Unearned compensation..................................... (396,244) (329,070)
Treasury stock, at cost................................... -- (36,840)
----------- ------------
Total stockholders' equity........................ 14,086,304 16,062,295
----------- ------------
Total liabilities and stockholders' equity........ $49,389,451 $191,965,768
=========== ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 86

CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Carriers' carrier.................................. $22,405,158 $41,804,704 $ 72,165,460
Integrated services................................ 1,980,393 8,640,427 17,978,115
Systems services................................... 16,030,586 21,958,772 31,630,566
Product resales.................................... 10,553,846 2,945,563 --
----------- ----------- ------------
Total revenues............................. 50,969,983 75,349,466 121,774,141
Costs of services and product resales:
Services........................................... 29,684,388 50,124,257 83,221,102
Product resales.................................... 9,672,078 2,347,060 --
----------- ----------- ------------
Gross profit............................... 11,613,517 22,878,149 38,553,039
Operating expenses:
Selling, general and administrative................ 8,983,394 14,073,691 23,528,038
Merger related expenses............................ -- -- 2,312,973
Depreciation and amortization...................... 1,535,880 3,345,819 4,887,157
----------- ----------- ------------
Total operating expenses................... 10,519,274 17,419,510 30,728,168
----------- ----------- ------------
Operating income..................................... 1,094,243 5,458,639 7,824,871
Interest expense..................................... (630,952) (1,735,156) (9,458,895)
Interest income...................................... 46,300 132,634 3,017,816
Other income......................................... 41,148 219,211 105,789
----------- ----------- ------------
Income before income taxes................. 550,739 4,075,328 1,489,581
Income tax expense................................... 227,148 1,513,561 1,266,488
----------- ----------- ------------
Net income................................. $ 323,591 $ 2,561,767 $ 223,093
=========== =========== ============
Earnings per common share:
Basic.............................................. $ 0.01 $ 0.09 $ 0.01
Diluted............................................ $ 0.01 $ 0.09 $ 0.01
Weighted average shares outstanding:
Basic.............................................. 27,145,920 27,983,504 28,899,449
Diluted............................................ 27,156,471 28,480,968 30,027,569
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 87

CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER
--------------------- ----------------- PAID IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME
---------- -------- ------ -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 27,145,713 $271,457 -- $ -- $ 1,041,596 $2,239,378 $ --
Issuance of common stock............ 2,808 28 -- -- 9,968 -- --
Net income.......................... -- -- -- -- -- 323,591 --
---------- -------- ------ -------- ----------- ---------- ------
Balance at December 31, 1996........ 27,148,521 271,485 -- -- 1,051,564 2,562,969 --
Issuance of common stock............ 79,222 792 -- -- 777,058 -- --
Proceeds from initial public common
stock offering, net of expenses
(note 12).......................... 1,450,000 14,500 -- -- 6,982,005 -- --
Deferred compensation from
compensatory stock option grants
(note 12).......................... -- -- -- -- -- -- --
Amortization of deferred
compensation....................... -- -- -- -- -- -- --
Net income.......................... -- -- -- -- -- 2,561,767 --
Net income excluded from IWL
Communications for the six months
ended December 31, 1996 as a result
of conforming fiscal year end (note
2)................................. -- -- -- -- -- 260,408 --
---------- -------- ------ -------- ----------- ---------- ------
Balance at December 31, 1997........ 28,677,743 286,777 -- -- 8,810,627 5,385,144 --
Issuance of common shares under
stock option plans and restricted
stock awards....................... 52,641 527 -- -- 135,345 -- --
Acquisition of treasury shares under
stock option plans................. -- -- (5,255) (36,840) -- -- --
Issuance of stock relating to
acquisition (note 16).............. 207,266 2,073 -- -- 1,575,741 -- --
Amortization of deferred
compensation....................... -- -- -- -- -- -- --
Comprehensive income:...............
Net income......................... -- -- -- -- -- 223,093 --
Currency translation adjustment.... -- -- -- -- -- -- 8,878
---------- -------- ------ -------- ----------- ---------- ------
Total comprehensive income -- -- -- -- -- 223,093 8,878
---------- -------- ------ -------- ----------- ---------- ------
Balance at December 31, 1998........ 28,937,650 $289,377 (5,255) $(36,840) $10,521,713 $5,608,237 $8,878
========== ======== ====== ======== =========== ========== ======

CONSOLIDATED
UNEARNED STOCKHOLDERS'
COMPENSATION EQUITY
------------ -------------
<S> <C> <C>
Balance at December 31, 1995........ $ -- $ 3,552,431
Issuance of common stock............ 9,996
Net income.......................... -- 323,591
--------- -----------
Balance at December 31, 1996........ -- 3,886,018
Issuance of common stock............ -- 777,850
Proceeds from initial public common
stock offering, net of expenses
(note 12).......................... -- 6,996,505
Deferred compensation from
compensatory stock option grants
(note 12).......................... (417,100) (417,100)
Amortization of deferred
compensation....................... 20,856 20,856
Net income.......................... -- 2,561,767
Net income excluded from IWL
Communications for the six months
ended December 31, 1996 as a result
of conforming fiscal year end (note
2)................................. -- 260,408
--------- -----------
Balance at December 31, 1997........ (396,244) 14,086,304
Issuance of common shares under
stock option plans and restricted
stock awards....................... (32,500) 103,372
Acquisition of treasury shares under
stock option plans................. -- (36,840)
Issuance of stock relating to
acquisition (note 16).............. -- 1,577,814
Amortization of deferred
compensation....................... 99,674 99,674
Comprehensive income:...............
Net income......................... -- 223,093
Currency translation adjustment.... -- 8,878
--------- -----------
Total comprehensive income -- 231,971
--------- -----------
Balance at December 31, 1998........ $(329,070) $16,062,295
========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 88

CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 323,591 $ 2,561,767 $ 223,093
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,535,880 3,345,819 4,887,157
Amortization of discount on notes payable............... 7,338 7,338 --
Gain on sale of assets.................................. (67,021) (105,048) (51,361)
Deferred income taxes................................... (98,088) 384,247 1,205,856
Equity earnings of unconsolidated joint venture......... 25,873 (115,107) (46,075)
Amortization of debt issuance costs, included in
interest expense...................................... -- -- 202,158
Allowance for doubtful accounts......................... 356,223 1,382,119 1,649,773
Changes in operating assets and liabilities:
Accounts receivable and unbilled services............. (5,384,642) (7,876,944) (6,442,462)
Inventory............................................. (253,022) 1,631,929 (278,799)
Costs and earnings in excess of billings.............. (132,794) 83,265 (7,238,402)
Prepaid expenses and other............................ (275,987) (911,597) 407,325
Accounts payable and accrued liabilities.............. 4,746,639 3,378,009 14,592,570
Income taxes payable.................................. 37,418 553,739 (1,994,514)
Other................................................. (40,507) (207,851) 8,900
------------ ------------ -------------
Net cash provided by operating activities.......... 780,901 4,111,685 7,125,219
Cash flows from investing activities:
Purchases of property, plant and equipment................ (10,211,878) (13,630,464) (36,854,766)
Purchase of marketable securities......................... -- -- (145,000,000)
Proceeds from sale of marketable securities............... -- -- 47,980,211
Proceeds from note receivable............................. 659,972 -- --
Proceeds from disposal of property, plant and equipment... 201,550 643,836 303,805
Investment in unconsolidated subsidiary................... -- -- (169,166)
Purchase of ICEL.......................................... -- -- (609,822)
------------ ------------ -------------
Net cash used in investing activities.............. (9,350,356) (12,986,628) (134,349,738)
Cash flows from financing activities:
Proceeds from issuance of senior notes, net of debt
issuance................................................ 15,395,225 20,553,869 144,984,881
Principal payments on notes payable....................... (8,307,785) (14,608,429) (19,302,437)
Proceeds from line of credit.............................. 18,564,432 40,742,755 44,717,209
Principal payments on line of credit...................... (17,750,010) (40,404,848) (45,869,537)
Loan fees paid under long-term note agreement............. (135,749) (346,935) --
Net change in bank overdraft.............................. 957,497 (957,497) --
Purchase of treasury stock................................ -- -- (36,840)
Proceeds from issuance of common stock.................... 9,996 7,347,258 103,373
Principal payments under capital lease obligations........ (128,324) (212,695) (607,165)
------------ ------------ -------------
Net cash provided by financing activities.......... 8,605,282 12,113,478 123,989,484
Effect of exchange rate on cash and cash equivalents........ -- -- 8,878
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents........ 35,827 3,238,535 (3,226,157)
Cash and cash equivalents at beginning of year.............. 325,103 281,482 3,520,017
------------ ------------ -------------
Cash and cash equivalents at end of year.................... $ 360,930 $ 3,520,017 $ 293,860
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 550,332 $ 1,760,777 $ 1,344,441
============ ============ =============
Cash paid for income taxes................................ $ 150,866 $ 801,124 $ 1,861,656
============ ============ =============
Non-cash investing activity:
Issuance of stock for ICEL acquisition.................... $ -- $ -- $ 1,577,814
============ ============ =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE> 89

CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation and Nature of Business

The consolidated financial statements include CapRock Communications Corp.
("CapRock" or the "Company") and its majority owned subsidiaries. The Company
was formed on February 3, 1998, to serve as a holding company for the operations
of CapRock Telecommunications ("Telecommunications"), CapRock Fiber Network Ltd.
("Partnership") and IWL Communications, Inc. ("IWL") and its wholly owned
subsidiaries. All significant inter-company transactions are eliminated in
consolidation. The consolidated financial statements include the accounts of
Telecommunications, Partnership, IWL, Spacelink Systems, Inc., Spacelink
Systems, FSC, Inc., and IWL Communications Ltd. ("Russia") and Integrated
Communications and Engineering Ltd. ("ICEL") (note 16). The equity method is
used to account for unconsolidated investments in companies in which CapRock
exercises significant influences over operating and financial policies, but does
not have a controlling interest. On August 26, 1998, pursuant to the Plan of
Agreement of Merger and Plan of Exchange dated February 16, 1998, as amended,
the Company completed the mergers and interest exchange with Telecommunications,
Partnership and IWL (note 2).

The Company is a regional facilities-based integrated communications
provider offering local, long distance, Internet, data and private line services
to small and medium-sized businesses. The Company also provides switched and
dedicated access, regional and international long distance, private lines and
dark fiber to carrier customers. The Company is in the process of building an
advanced fiber network throughout Texas, Louisiana, Arkansas, New Mexico and
Oklahoma. Additionally, the Company, through its wholly owned subsidiary -- IWL,
provides communications solutions to customers with operations in remote,
difficult-access regions. The Company markets its services through its internal
sales representatives and a network of independent agents.

(b) Cash Equivalents and Short-Term Investments Available for Sale

The Company considers all cash in bank accounts as cash equivalents.
Marketable securities consist of U.S. government, money market and commercial
paper securities, with maturities of less than one year. Marketable securities
are stated at cost and are adjusted for discount accretion and premium
amortization, which approximate fair value. The Company's short-term investment
objectives are safety, liquidity and yield.

Inventory substantially consists of parts and equipment held for resale.
Inventory that can be specifically identified using a unique identification
number is stated at the lower of specified cost or market. Inventory that cannot
be specifically identified is stated at the lower of cost or market, where cost
is determined using the first in first out method. Market value, in all cases,
represents the lower of replacement cost or net realizable value.

(d) Property, Plant and Equipment

Property, plant and equipment are stated at cost and include certain costs,
which are capitalized during the installation and expansion of the
telecommunications network including interest costs, and payroll related to the
construction. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the shorter of the estimated useful lives of the
assets or the remaining terms of the leases. Assets under construction are not
depreciated until placed in service.

F-9
<PAGE> 90
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the process of building out its fiber network, the Company may enter
into Indefeasible Right to Use contracts ("IRUs") for the sale of fiber usage
rights and to provide the construction services for such fiber. The Company may
install additional conduits for these segments included in the IRUs for its own
use while performing the construction services. This additional conduit is
capitalized proportionately with the number of conduits placed, and depreciation
begins for these costs as the specific fiber segment is placed in service.

(e) Revenues and Cost of Revenues

The Company recognizes revenue from the following sources: Carriers'
Carrier, Integrated Services, System Services and Product Resale.

CARRIERS' CARRIER:

Carriers' carrier revenue includes all carrier revenues generated from the
sale of domestic and international switched services, from the sale of T-1 and
DS-3 broadband capacity and from the sale and lease of dark fiber. The revenue
generated from international switched services represent minutes of long
distance traffic terminating in foreign countries, but generated by domestic
U.S. based long distance carriers. Such revenues are recognized when the
services are provided. The cost of revenues associated with these services is
based primarily on the direct costs associated with owned and leased
transmission capacity and the cost of transmitting and terminating traffic on
other carriers' facilities. Commissions paid to sales representatives or agents
to acquire customer call traffic are expensed in the period when associated call
revenues are recognized.

The Company accounts for long-term construction contracts relating to the
development of telecommunications networks for customers using the
percentage-of-completion method, which would include the sale of fiber usage
rights through IRUs and the related construction services associated with
building the fiber network specified in the IRUs. Progress under the
percentage-of-completion is measured based upon costs incurred to date compared
with total estimated construction costs. Customers are billed based upon
contractual milestones.

INTEGRATED SERVICES:

Integrated services revenue includes all revenues generated from the sale
of telecommunications products to business and residential customers. These
products include local, long distance, Internet, data and private line services.
The Company records revenues for these telecommunications services at the time
of customer usage. The cost of revenues associated with services is based
primarily on the direct costs associated with owned and leased transmission
capacity and the cost of transmitting and terminating traffic on other carriers'
facilities. The cost of revenues for local services also includes payments to
local exchange carriers and interexchange carriers for access and transport
charges. Commissions paid to sales representatives or agents to acquire customer
call traffic are expensed in the period when associated call revenues are
recognized.

SYSTEMS SERVICES:

Systems services revenue includes revenues generated from the design,
installation, leasing and sale of voice and data systems and products, primarily
to companies in the oil and gas industry. The revenues associated with the
leasing and sale of voice and data systems products are recorded as the services
are provided. The revenue associated with the design and installation of voice
and data systems products primarily relates to communication system contracts
involving the engineering and integration of telecommunications systems and
sales, service and maintenance of telecommunications equipment. These

F-10
<PAGE> 91
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contracts are typically fixed price and such revenue is recognized based upon
the percentage-of-completion method, primarily based upon contract costs
incurred to date compared with total estimated contract costs.

PRODUCT RESALES:

In 1997, the Company provided services to a subsidiary of Shell, which
included the resale of a significant amount of Alcatel products. The Company
sold $2.9 million to the Shell subsidiary in 1997, relating to Alcatel products
and other equipment and hardware. The Shell project was substantially completed
in May 1997 and, therefore, is not expected to contribute in a material manner
to the Company's total sales in future periods.

(f) Business and Credit Concentration

Financial instruments which potentially expose the Company to a
concentration of credit risk, as defined by SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, consist primarily of
accounts receivable from carriers, retail and commercial customers. The Company
extends credit to customers on an unsecured basis with the risk of loss limited
to outstanding amounts.

(g) Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

(h) Stock-Based Compensation

The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). As
such, compensation expense is recorded on the date of grant to the extent the
current market price of the underlying stock exceeds the exercise price. The
Company has provided pro forma disclosures as if the fair value-based method of
accounting for these plans, as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), had been applied.

(i) Foreign Currency Translation

Results of operations for foreign investments are translated from the
designated functional currency to the U.S. dollar using average exchange rates
during the period, while assets and liabilities are translated at the exchange
rate in effect at the reporting date. Resulting gains and losses from
translating foreign currency financial statements are included in accumulated
other comprehensive income, a component of stockholders' equity.

(j) Intangible Assets

The Company recorded approximately $1.6 million of goodwill and $300,000
relating to other intangibles in connection with the acquisition of Integrated
Communications and Engineering Ltd. ("ICEL") (note 16). Goodwill represents the
excess of the purchase price over fair value of identifiable

F-11
<PAGE> 92
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net assets acquired and is amortized on a straight-line basis over the expected
periods to be benefited. Goodwill in connection with the acquisition of ICEL
will be amortized over 20 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows. The amount of goodwill impairment, if any, is measured based upon
projected discounted future operating cash flows using a discounted rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.

(k) Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. The Statement requires that
long-lived assets and certain identifiable intangibles be assessed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

(l) Fair Value of Financial Instruments

The Company believes that the carrying amounts of its financial instruments
included in current assets and current liabilities approximate the fair value of
such items due to their short-term nature. As of December 31, 1998, the
estimated fair value and the carrying amount of the Company's 12% Senior Notes
due 2008 was $144 million and $145.2 million, respectively.

(m) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

F-12
<PAGE> 93
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(n) Earnings per Share

In 1997, the Company adopted the Financial Accounting Standards Board
Statement No. 128 ("SFAS No. 128"), Earnings Per Share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to SFAS No. 128 requirements. All data in the table below is in
thousands, except for per share data.

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income........................................... $ 324 $ 2,562 $ 223
Denominator:
Denominator for basic earnings per share-weighted
average shares outstanding........................ 27,146 27,984 28,899
Effect of dilutive securities:
Employee stock options............................... 10 497 1,129
------- ------- -------
Denominator for diluted earnings per share-weighted
average shares outstanding........................... 27,156 28,481 30,028
======= ======= =======
Basic and diluted earnings per share................... $ 0.01 $ 0.09 $ 0.01
======= ======= =======
</TABLE>

(o) Comprehensive Income

On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net income and
currency translation adjustments and is presented in the consolidated statements
of stockholder's equity and comprehensive income. The Statement requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior to 1998,
the Company's comprehensive income only consisted of net income.

(2) BUSINESS COMBINATION

On August 26, 1998, pursuant to the Plan of Agreement of Merger and Plan of
Exchange dated February 16, 1998, as amended, the Company completed the mergers
with Telecommunications, Partnership and IWL. Accordingly, the Consolidated
Balance Sheets as of December 31, 1997 and 1998 and the Consolidated Statements
of Operations, Stockholders' Equity and Comprehensive Income and Cash Flows for
each of the years in the three year period ended December 31, 1998 include
Telecommunications, Partnership and IWL as though these entities had always been
a part of CapRock.

All previously outstanding shares of IWL common stock ceased to exist and
each such share was converted into and became exchangeable for one share of
CapRock common stock, and all previously outstanding shares of
Telecommunications common stock ceased to exist, and each such share was
converted into and became exchangeable for 1.789030878 shares of CapRock common
stock and each one percent (1%) of the Partnership interests issued and
outstanding was exchanged for 63,194.54 shares of CapRock common stock. The
Company issued 28,910,221 common shares in exchange for the outstanding common
share of Telecommunications, Partnership and IWL. Additionally, outstanding
employee stock options of IWL and Telecommunications were converted at the above
exchange factors into options to purchase shares of CapRock common stock. The
mergers and interest exchange constituted a tax-free reorganization and was
accounted for as a pooling of interests.

In May 1998, IWL changed its fiscal year end to coincide with the fiscal
years of CapRock, Telecommunications and the Partnership. The Consolidated
Statement of Operations for the year ended

F-13
<PAGE> 94
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1997 and 1998 combine the operating activity for all three entities
for these years. The Consolidated Statement of Operations for 1996 combine IWL's
operating activity for the year ended June 30, 1996 with Telecommunications and
the Partnership operating activity for the year ended December 31, 1996. The net
income of IWL for the six month period ended December 31, 1996 was excluded from
the Consolidated Statement of Operations for the year ended December 31, 1996 in
the amount of approximately $260,000 as a result of the non-conforming year ends
for such period. This amount was included as an adjustment to retained earnings
in the Consolidated Statement of Stockholders' Equity. IWL's cash flow for this
six month period was added to the 1997 beginning balance in the Consolidated
Statement of Cash Flows.

The transactions between CapRock, IWL and the Partnership have been
eliminated for all respective periods presented. Certain reclassifications were
made to IWL's financial statements to conform to CapRock's presentations.

(3) MARKETABLE SECURITIES

Investments in marketable securities at December 31, 1998 consist of money
market investments of $46,666,281 and commercial paper securities of
$50,353,508.

At December 31, 1998, the estimated fair value of the Company's money
market instruments and commercial paper securities approximated cost, and the
gross unrealized gains were not significant.

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including assets acquired under capital
leases of $1,732,000 as of December 31, 1997 (no capital leases as of December
31, 1998), is comprised of the following:

<TABLE>
<CAPTION>
USEFUL LIVES 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Land.......................................... -- $ 51,289 $ 299,752
Buildings..................................... 20-31 982,484 1,188,812
Leasehold improvements........................ Lease Term 330,468 1,191,277
Office equipment, furniture and other......... 5-7 4,264,606 9,706,840
Telecommunications network.................... 5-20 13,501,993 21,148,362
Equipment for rent/lease...................... 7-10 12,003,374 16,658,582
Construction in progress...................... -- 4,373,499 21,774,422
----------- -----------
Total property, plant and
equipment......................... 35,507,713 71,968,047
Less accumulated depreciation, including
amounts applicable to assets acquired under
capital leases of $721,667 and $0 as of
December 31, 1997 and 1998, respectively.... 8,167,114 12,361,295
----------- -----------
Net property, plant and equipment............. $27,340,599 $59,606,752
=========== ===========
</TABLE>

(5) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS

<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $381,074 $3,479,846
Estimated earnings.......................................... 281,869 6,119,136
-------- ----------
662,943 9,598,982
Less: billings to date...................................... 662,943 2,360,580
-------- ----------
$ -- $7,238,402
======== ==========
</TABLE>

F-14
<PAGE> 95
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INVESTMENT IN KENWOOD SYSTEMS GROUP

In September 1997, the Company sold its 50% ownership in Kenwood Systems
Group, Inc. ("KSG"), a California corporation. The remaining 50% of the voting
common stock is owned by Kenwood Americas Corporation ("KAC"). The results of
operations from January 1, 1997 through the date of sale (September 30, 1997) of
KSG have been reflected in the Company's operating results. The Company recorded
a gain on the sale of KSG of $66,226 in 1997.

The investment was recorded using the equity method in which the original
investment, adjusted for the Company's proportionate share of KSG's income,
losses and dividend distributions, was recorded as a long-term investment. The
Company's original investment in KSG was $200,000. An additional investment of
$50,000 was made during the year ended December 31, 1997. The Company's
proportionate share of KSG's (losses)/earnings for the years ended December 31,
1996 and 1997 were $(25,873) and $115,107, respectively.

The Company received a management fee of $58,253 and $76,995 from KSG for
the years ended December 31, 1996 and 1997, respectively. Billings by the
Company to KSG for the years ended December 31, 1996 and 1997 for insurance,
supplies, equipment and management fees totaled approximately $128,178 and
$174,500, respectively.

(7) LEASES

The Company leases equipment, office space, communication services and land
and buildings (used for transmission sites) under operating leases. Future
minimum lease payments under these lease agreements for each of the next five
years are summarized as follows:

<TABLE>
<S> <C>
Year ending December 31,
1999...................................................... $ 3,810,959
2000...................................................... 4,181,258
2001...................................................... 4,063,546
2002...................................................... 3,147,298
2003...................................................... 2,514,350
Thereafter................................................ 1,813,588
-----------
Total minimum lease payments...................... $19,530,999
===========
</TABLE>

As operating leases expire, it is expected that they will be replaced with
similar leases. Rent expense under operating leases totaled $768,108, $1,419,812
and $1,027,651 for each of the years ended December 31, 1996, 1997 and 1998,
respectively.

F-15
<PAGE> 96
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) DEBT

A summary of the lines of credit and the notes payable is as follows:

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Senior notes, 12%, due 2008....................... $ -- $145,187,039
Lines of credit, variable rates, 8.12% to 10.5%... 5,275,608 --
Notes to banks, variable rates, 8.12%............. 2,274,590 --
Notes to banks, fixed rates, 8.5% to 9.0%......... 1,968,674 --
Term construction loan, variable rate, 8.5%....... 9,550,892 --
Notes to financing companies, variable rates...... 180,328 --
Notes to financing companies, fixed rates......... 1,026,733 --
Shareholder notes, 5.8% imputed rate.............. 128,167 --
Other............................................. 49,773 --
----------- ------------
Total................................... 20,454,765 145,187,039
Less: current portion of long-term debt........... 8,116,424 --
----------- ------------
Long-term debt.......................... $12,338,341 $145,187,039
=========== ============
</TABLE>

In July 1998, the Company issued, through a private placement under Rule
144A under the Securities Act of 1998, as amended, $150 million aggregate
principal amount of its 12% Senior Notes due 2008 (the "Senior Notes"), which
closed on July 16, 1998. Interest on the Senior Notes is payable semi-annually
in arrears on January 15 and July 15 of each year, commencing on January 15,
1999, at the rate of 12% per annum. The Senior Notes are presented net of
unamortized debt issuance costs of $4,821,961. The amortization of debt issuance
cost is recorded to interest expense and such amount was $202,000 in 1998. The
net proceeds from the offering were used to repay existing debt obligations.
Such proceeds for debt payoffs totaled $26.8 million. The proceeds will be used
to fund capital expenditures for the construction of its fiber optic network, to
expand its sales offices, for potential acquisitions and for general working
capital purposes. The funds have been invested in high-grade liquid securities.

The Senior Notes contain certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions and
effectively prohibits the payment of cash dividends.

In March 1996, the Company entered into a revolving credit facility with a
bank for borrowings up to $15 million. In December 1997, the Company entered
into an amended agreement that provided for borrowings up to $25 million. The
line of credit was amended in June 1998 and was increased to $7.0 million. The
balance outstanding as of December 31, 1997 under the line of credit was
$1,152,329. The line of credit was paid off in August 1998 with the proceeds
from the Senior Notes.

The Company also entered into a secured revolving line of credit, which
allowed the Company to borrow up to a maximum of $5.0 million subject to
borrowing base limitations on accounts receivable and inventory. The Company
also secured a guidance line of credit, which allowed the Company to borrow up
to $5.0 million to finance certain purchases and subsequent leases of
communications equipment. These lines of credit were paid off in August 1998
with the proceeds from the Senior Notes.

The Company had a loan agreement with a bank ("Term Construction Loan")
whereby it borrowed $10.0 million used for the construction, start-up and
related expenses of the fiber optic network. The loan was initially secured by
the network, investment securities of a shareholder, accounts receivable and
guarantees of certain shareholders. The balance outstanding for this loan as of
December 31, 1997 was $9,550,892 and the loan was paid off in August 1998 with
the proceeds from the Senior Notes.

F-16
<PAGE> 97
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Certain shareholders guaranteed the Term Construction Loan. In
consideration, the Company agreed to pay a one-time commitment fee equal to 1%
of each shareholder's guarantee. The guarantors were also paid a loan guaranty
fee by the Company equal to 7% of the amount of the lesser of $8.0 million or
the average outstanding daily principal of the loan. The bank released the
guaranty requirement in April 1997 for certain limited partners. The total
accrued commitment fees and loan guarantor fees as of December 31, 1997 were
approximately $406,000. All commitment and guarantee fees were paid in full in
August 1998 with the proceeds from the Senior Notes. Such payments totaled
approximately $430,000.

In 1994, the Company entered into note payable agreements with three
officers of the Company ("Shareholder Notes") relating to stock repurchased by
the Company. The unamortized discount was $21,834 as of December 31, 1997. The
Shareholder Notes were repaid in August 1998 with the proceeds from the Senior
Notes.

(9) RELATED PARTIES

In 1996 the Company entered into an agreement with a related party to
manage the construction of the fiber optic network build out for the initial 260
route miles, which was completed in 1997. Under this agreement, the Company paid
4% of the costs of constructing this portion of the network, payable monthly at
a minimum of $15,000 per month. The Company paid management fees of $296,576 in
1997 and $461,576, cumulative under the arrangement since construction of this
segment commenced. This arrangement ceased to exist in 1997.

The Company currently leases private line services from affiliated
companies. Total payments to these affiliated companies for services totaled
$765,000 in 1997 and $1,176,000 in 1998. The Company believes that the prices
charged for such services do not exceed prices charged by unrelated parties.

The Company's billing and back office systems are being developed by
RiverRock Systems, Ltd. ("RiverRock"), a limited partnership formed in July
1998. The Company owns a 49% interest in the limited partnership and David E.
Thompson owns a 50% limited partnership interest. Thompson Technology, Inc.
(which is owned by David Thompson, a brother of Jere W. Thompson, Jr. -- CEO of
CapRock Communications Corp.) is the general partner and owns a 1% general
partnership interest. The Company contributed a total of $170,000 in 1998 for
the development of the systems and had committed to fund up to a total of
$700,000, as capital contributions to RiverRock. The investment balance of
$86,000 as of December 31, 1998 was included in other assets.

(10) ALLOWANCE FOR DOUBTFUL ACCOUNTS

The activity in the allowance for doubtful accounts for the years ended
December 31, 1997 and 1998 is as follows:

<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Allowance for doubtful accounts at beginning of year........ $ 399,216 $ 1,781,335
Additions charged to bad debt expense....................... 1,382,119 1,649,773
Write-downs charged against the allowance, net of
recoveries................................................ -- (2,721,167)
---------- -----------
Allowance for doubtful accounts at end of year.............. $1,781,335 $ 709,941
========== ===========
</TABLE>

(11) LEASE CONTRACTS

The Company provides telecommunications services to various customers under
operating leases. The services include agreements to lease capacity to customers
over the fiber optic line, communications equipment, line/satellite charges
and/or maintenance charges. These leases impose certain obligations on both the
lessor and lessee, which must be met during the term of the lease.

F-17
<PAGE> 98
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A significant portion of these services requires that the Company have
access to international communication satellites. The Company has contracted
with a Russian entity for rights to access its portion of an international
communications satellite. The Company has agreed to pay a recurring monthly fee
to the entity based on the amount of satellite space segment utilized by each
lessee. Additionally, the Company has sold communication equipment to the
entity. The Company utilizes those facilities to provide communication services
to various United States energy and oil and gas companies and other customers
doing business in Russia.

The following is a summary of expected revenue to be earned during the next
five years by the Company on lease agreements executed on or before December 31,
1998.

<TABLE>
<S> <C>
Year ending December 31:
1999.................................................. $ 8,051,952
2000.................................................. 7,243,418
2001.................................................. 4,569,128
2002.................................................. 3,622,862
2003.................................................. 3,182,282
Thereafter............................................ 5,244,940
-----------
Total......................................... $31,914,582
===========
</TABLE>

(12) STOCKHOLDERS' EQUITY

Initial Public Offering

The Company, through its wholly owned subsidiary -- IWL, completed an
initial public offering ("IPO") of common stock on June 12, 1997, issuing
1,450,000 shares at $6.00 per share. The proceeds, net of commissions and
expenses, from this IPO totaled $6,996,505. In July 1997, the underwriters
exercised an over allotment option and purchased an additional 62,496 shares
resulting in net proceeds of $337,473.

Common Stock

CapRock was incorporated as a Texas corporation on February 3, 1998, to
serve as a holding company for the operations of Telecommunications, Partnership
and IWL after completion of their business combination (note 2) in conformance
with the provisions of their Agreement and Plan of Merger dated February 16,
1998. The Company issued 28,910,221 common shares in exchange for the
outstanding common shares of Telecommunications, Partnership and IWL.

Telecommunications Employee Stock Option Plan

In September 1997, Telecommunications adopted a stock option plan (the
"Telecommunication Plan") pursuant to which the Company's Board of Directors may
grant nonqualified options to employees. The Telecommunications Plan authorized
grants of options to purchase up to 10% of the common shares outstanding. All
Telecommunications stock options have a ten-year term and cannot be exercised
prior to September 1, 1998. The options vest in 20% increments over a five-year
period. All options expire August 31, 2007. Upon consummation of the merger, the
outstanding stock options under this plan were converted at the exchange factor
(note 2) into options to purchase shares of CapRock common stock.

In 1997, Telecommunications granted 380,899 nonqualified stock options
under the Telecommunications Plan with an exercise price of $1.00 per share. The
Company recorded deferred compensation of $417,100 related to these stock option
grants, which will be recognized over the vesting period. As of

F-18
<PAGE> 99
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1998, 34,501 of the options previously granted were forfeited and
canceled, 17,504 options were exercised and 328,894 options were outstanding.

IWL Incentive Stock Option Plan

In 1996, IWL adopted an Employee Incentive Stock Option Plan ("IWL
Incentive Plan"). The option price per share could not be less than the fair
market value of a share on the date the option is granted. Options under such
plan generally vest at the rate of 20% per year over a five year period;
however; the Board at its discretion may accelerate the vesting schedule. All
options granted under the IWL Incentive Plan on or prior to the IPO date, June
12, 1997, vested in full on the offering date. IWL granted 342,214 options under
the plan. The stock options expire ten years from the date of grant. Upon
consummation of the merger, the outstanding stock options under this plan were
converted at a one to one ratio to purchase shares of CapRock common stock.

As of December 31, 1998, 24,000 of the options previously granted were
forfeited, 50,141 options were exercised and 268,073 options were outstanding.
No additional options are available for grant under the IWL Incentive Plan.

Warrants

The Company issued to its investment bankers warrants to purchase up to
145,000 shares of common stock, at an exercise price equal to 120% of the IPO
price. Upon consummation of the merger, the outstanding warrants were converted
at a one to one ratio to purchase shares of CapRock common stock. All of the
warrants were outstanding as of December 31, 1998.

The warrants have certain demand and "piggy-back" registration rights that
may require the Company to register for resale the shares of Common Stock
issuable under the warrants. The warrants are exercisable for a period of four
years, beginning June 12, 1998.

CapRock Equity Incentive Plan

On August 26, 1998, in connection with the approval of the merger, the
shareholders of the Company approved an equity incentive plan (the "CapRock
Plan"). The CapRock Plan authorized the granting of awards, which would allow up
to an aggregate of 5,000,000 share of common stock to be acquired by
participants and provides that a maximum of 2,500,000 shares of common stock may
be issued to any one participant. All prospective equity grants will be issued
from the CapRock Plan. The awards under the Plan may take the form of stock
options, stock appreciation rights, restricted stock awards, deferred stock,
stock reload options, stock appreciation rights, restricted stock awards,
deferred stock, stock related options and other stock based awards.

Stock options granted under the CapRock Plan may be either options that are
intended to qualify for treatment as incentive stock options under Section 422
of the IRS tax code or options that do not so qualify (non-qualified stock
options). Options under the Plan may be granted to any person who is an officer
or other employee or consultants of the Company or any of its subsidiaries. The
exercise price of incentive stock options must be at least the fair value of a
share of the common stock on the date of grant (and not less than 110% of the
fair market value of a share of the common stock on the date of grant). The
exercise price of non-qualified stock options may be less than 100% of the fair
market value of a share of the common stock on the date of grant. The term of
the option may not exceed 10 years (5 years in the case of incentive stock
options granted to an optionee owning 10% or more of the common stock).

During 1998, the Company granted 1,681,600 options under this plan and
these options vest over five years. As of December 31, 1998, 48,700 of the
options granted were forfeited and canceled, none of the options granted had
been exercised and 1,632,900 of the options were outstanding.
F-19
<PAGE> 100
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Director Stock Option Plan

On August 26, 1998, in connection with the approval of the merger, the
shareholders of the Company approved the Director Stock Option Plan (the
"CapRock Director Plan"). All options to be granted under the CapRock Director
Plan will be non-qualified stock options. A total of 400,000 shares of common
stock have been reserved for issuance under the CapRock Director Plan. Each
option will expire ten years from the date of grant and the options vest over
three years. Outstanding options will expire earlier if an optionee terminates
service as a director before the end of the first ten-year term. As of December
31, 1998, the Company granted 30,000 options under this plan and all were
outstanding as of December 31, 1998.

The remaining options available for future grant as of December 31, 1998
are 3,363,586 options under the CapRock Plan and 370,000 under the CapRock
Director Plan.

A summary of options activity under the plans described above is as
follows:

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance at December 31, 1996......................... 160,614 $3.62
Options granted.................................... 552,499 2.25
Options exercised.................................. (13,919) 3.56
Options forfeited.................................. (8,275) .56
--------- -----
Balance at December 31, 1997......................... 690,919 2.56
Options granted.................................... 1,721,600 6.58
Options exercised.................................. (53,726) 3.04
Options forfeited.................................. (98,926) 4.80
--------- -----
Balance at December 31, 1998......................... 2,259,867 $5.51
========= =====
</TABLE>

A summary of options outstanding as of December 31, 1998 is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE NUMBER OF
EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
- -------- ----------- --------------------- -----------
<S> <C> <C> <C>
$ .56 328,894 8.77 52,241
3.56 109,918 6.92 109,918
4.49 10,555 7.36 10,555
6.00 132,600 8.40 28,167
6.25 5,000 8.63 1,000
6.50 1,662,900 9.79 --
20.25 10,000 9.22 --
--------- ---- -------
2,259,867 9.40 201,881
========= ==== =======
</TABLE>

F-20
<PAGE> 101
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company applied the intrinsic value method prescribed by APB Opinion
No. 25 in accounting for its plans. SFAS No. 123 requires disclosure of the
compensation cost for stock-based incentives granted based upon the fair value
at grant date for awards. Applying SFAS No. 123 would result in pro forma net
income and earnings per share ("EPS") amounts as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- --------
<S> <C> <C> <C> <C>
Net income (loss)...................... As reported $323,591 $2,561,767 $223,093
Pro forma 319,000 2,385,000 (762,238)
Basic EPS.............................. As reported $ 0.01 $ 0.09 $ 0.01
Pro forma 0.01 0.09 (0.03)
Diluted EPS............................ As reported $ 0.01 $ 0.09 $ 0.01
Pro forma 0.01 0.08 (0.03)
</TABLE>

The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions: risk free interest rates of
5.8%, 5.8% and 5.75%; expected option lives of 2.5, 2.5 and 3 years; expected
volatility of 55%, 55% and 52%, and no expected dividend yield, in 1996, 1997
and 1998, respectively.

(13) INCOME TAXES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
U.S. FEDERAL FOREIGN STATE TOTAL
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
Current................................. $ 175,404 $149,832 $ -- $ 325,236
Deferred................................ (87,737) -- (10,351) (98,088)
---------- -------- -------- ----------
Total......................... $ 87,667 $149,832 $(10,351) $ 227,148
========== ======== ======== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------
U.S. FEDERAL FOREIGN STATE TOTAL
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
Current................................. $ 946,703 $112,659 $ 69,952 $1,129,314
Deferred................................ 364,993 -- 19,254 384,247
---------- -------- -------- ----------
Total......................... $1,311,696 $112,659 $ 89,206 $1,513,561
========== ======== ======== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
U.S. FEDERAL FOREIGN STATE TOTAL
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
Current................................. $ -- $ -- $ 60,632 $ 60,632
Deferred................................ 896,739 134,442 174,675 1,205,856
---------- -------- -------- ----------
Total......................... $ 896,739 $134,442 $235,307 $1,266,488
========== ======== ======== ==========
</TABLE>

Foreign income taxes results from taxes withheld on sales related to
Russian operations. Operating income (loss) from such operations for the years
ended December 31, 1996, 1997 and 1998 were $436,000 and $555,000 and
$(441,000), respectively.

F-21
<PAGE> 102
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income tax expense differs from the amount computed by applying the federal
income tax rate of 34% to earnings before taxes, as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Income tax provision at 34%....................... $187,251 $1,385,612 $ 506,458
Merger expenses not deductible for tax purposes... -- -- 612,000
Expenses not deductible for tax purposes.......... 11,990 33,094 28,488
State income tax expense, net of federal effect... (10,351) 89,206 155,303
Effect of foreign operations, including foreign
tax credits..................................... (53,071) (49,326) --
Exclusion of Partnership income tax benefit....... 84,000 39,000 --
Other............................................. 7,329 15,975 (35,761)
-------- ---------- ----------
Total................................... $227,148 $1,513,561 $1,266,488
======== ========== ==========
</TABLE>

Effective January 1, 1998, the Partnership elected to be taxed as a
corporation. As such, deferred taxes and tax provisions have been established in
1998. The pro forma tax benefit in 1996 and 1997 was approximately $84,000 and
$39,000, respectively, if the partnership would have been taxed as a C
corporation in those years.

The tax effects of temporary differences and carryforwards, which result in
a significant portion of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
1997 1998
---------------------- ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Effect on deferred taxes of
carryforwards......................... $116,958 $ -- $2,035,899 $ --
Foreign tax credit...................... 25,600 -- 207,235 --
Allowance for doubtful accounts......... 654,875 -- 245,263 --
Unearned compensation................... 7,717 -- -- 16,864
Deferred revenue........................ 7,142 -- -- 1,906,520
Accrued vacation pay.................... 27,200 -- 39,560 --
Property, plant and equipment........... -- 968,265 -- 1,960,602
Other................................... 9,311 -- 30,711 --
-------- -------- ---------- ----------
Total deferred taxes.......... $848,803 $968,265 $2,558,668 $3,883,986
======== ======== ========== ==========
</TABLE>

A net operating loss of $5,278,132 was generated in 1998 and the operating
loss will be used to offset future taxable income. The net operating loss
carryforward will expire in year 2013; however, management believes that this
carryforward will be utilized prior to expiration. No valuation allowance for
deferred taxes at December 31, 1997 and 1998 is considered necessary as
management has determined that it is more likely than not that these assets will
be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considered the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.

(14) COMMITMENTS

The Company has an agreement with various vendors, which require minimum
usage. In the event such monthly commitments are not met, the Company is
required to remit to the vendor the difference between the commitments and the
actual usage. Such amount, if necessary, would be recorded as cost of revenue in
the period incurred.

F-22
<PAGE> 103
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company entered into a volume purchase commitment of $13 million
relating to the purchase of telecommunications equipment. In the event the $13
million commitment is not fulfilled by CapRock, the Company shall pay the vendor
a penalty ranging from 3%-13% of the purchase commitment. The Company believes
that no penalties will be incurred under this contract.

(15) 401(k) PLANS

The Company and a subsidiary offer its qualified employees the opportunity
to participate in one of its defined contribution retirement plans qualifying
under the provisions of Section 401(k) of the Internal Revenue Code. Each
employee may contribute on a tax deferred basis a portion of annual earnings not
to exceed $9,500. The Company matches individual employee contributions in
certain plans, up to a maximum level, which in no case exceeds 6%. The Company's
matching contributions to the Plan (after forfeitures) for the years ended
December 31, 1996, 1997 and 1998 were $23,367, $30,287 and $81,086,
respectively.

(16) ACQUISITION

In January 1998, the Company completed the acquisition of Integrated
Communications and Engineering, Ltd. ("ICEL"), a communications systems
integrator and maintenance provider in Aberdeen, Scotland. The Company paid a
total purchase price of approximately $2.2 million comprised of approximately
$610,000 in cash and 207,266 shares of the Company's common stock. The
acquisition was accounted for as a purchase business combination, and
accordingly the purchase price was allocated to assets acquired and liabilities
assumed. Approximately $ 1.6 million was recorded as goodwill and $300,000 was
allocated to contracts as a result of the transaction.

The following summarizes the unaudited consolidated data as though the
acquisition of ICEL occurred as of the January 1, 1997:

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
Revenue.................................... $75,349,466 $78,676,598
Net income................................. 2,561,767 2,681,147
Earnings per share......................... 0.09 0.10
</TABLE>

(17) SUBSEQUENT EVENTS

In February 1999, the Company entered into a joint build arrangement with
Enron Communications, Inc., a wholly owned subsidiary of Enron Corp., to jointly
build approximately 1,050 miles of fiber optic network within the state of
Texas. The build plan includes four conduit ducts to be placed throughout the
1,050 miles, with one and one-quarter conduits to be owned and funded by CapRock
and one and one-quarter conduits to be owned and funded by Enron Communications,
Inc., and one and one-half conduits to be owned and funded by a limited
partnership formed by CapRock and Enron Communications, Inc. The limited
partnership will sell a specified amount of fiber usage rights and CapRock will
own 48 fibers.

The total required capital contributions will depend on the costs to
construct the segment. CapRock and Enron are committed to each contribute
equally to fund the construction. The total construction costs for the 1,050
miles are estimated at approximately $100 million.

(18) SEGMENT REPORTING AND CONCENTRATION OF CUSTOMERS

In June 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information, which
the Company has adopted in 1998. The

F-23
<PAGE> 104
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company identifies such segments based on management responsibility. The Company
measures segment profit as operating income, which is defined as income before
interest expense and income taxes. The service revenue from the
Telecommunications Division include all revenues generated from the sale of
telecommunications products to business and residential customers. These
products include local, long distance, Internet, data and private line services.
The Fiber Division includes the operating activity and the assets relating to
the fiber build out. The revenues for the Fiber Division primarily relate to the
sale of dark fiber through IRUs. The product and service revenue from the
Services Division include revenues generated from the design, installation,
leasing and sale of voice and data systems and products, primarily to companies
in the oil and gas industry. The Corporate Division includes certain general and
administrative functions and operating expenses and the merger related expenses
of $2.3 million, which comprise the segment operating loss of $3.5 million in
1998. The general and administrative expenses were allocated to each of the
respective divisions prior to 1998. Information regarding operating segments is
as follows (amounts are in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------ -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers..... $23,174 $-- $27,796 $-- $50,970
Depreciation and amortization....... 479 54 1,003 -- 1,536
Operating income.................... 44 (228) 1,278 -- 1,094
Total assets........................ 7,356 8,757 12,409 -- 28,522
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------ -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers..... $46,745 $1,945 $26,659 $-- $75,349
Depreciation and amortization....... 694 902 1,750 -- 3,346
Operating income.................... 3,226 671 1,562 -- 5,459
Total assets........................ 13,327 9,779 26,283 -- 49,389
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------
TELECOMMUNICATIONS FIBER SERVICES CORPORATE CONSOLIDATED
------------------ ------- -------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers.... $75,768 $11,930 $34,798 $(722) $121,774
Depreciation and amortization...... 1,113 744 2,993 37 4,887
Operating income................... 3,280 8,128 (55) (3,528) 7,825
Total assets....................... 26,929 39,175 34,064 91,798 191,966
</TABLE>

All significant transactions and agreements of the Company, with the
exception of the operations of ICEL (Scotland) are generated in U.S. dollars.
The pertinent data relating to foreign operations is as follows (amounts are in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
U.S. MEXICO RUSSIA INTERNATIONAL CONSOLIDATED
------- ------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue to external customers............. $44,285 $1,761 $2,281 $2,643 $50,970
Operating income (loss)................... 451 273 436 (66) 1,094
Long-lived assets......................... 15,901 -- -- -- 15,901
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
U.S. MEXICO RUSSIA INTERNATIONAL CONSOLIDATED
------- ------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue to external customers............. $57,706 $6,495 $1,905 $9,243 $75,349
Operating income.......................... 3,464 1,216 555 224 5,459
Long-lived assets......................... 27,341 -- -- -- 27,341
</TABLE>

F-24
<PAGE> 105
CAPROCK COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------
U.S. MEXICO INDIA RUSSIA SCOTLAND INTERNATIONAL CONSOLIDATED
------- ------- ------ ------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue to external
customers................... $79,185 $16,611 $4,766 $2,312 $5,207 $13,693 $121,774
Operating income (loss)....... 3,766 1,920 415 (441) 8 2,157 7,825
Long-lived assets............. 58,893 -- -- -- 2,508 -- 61,401
</TABLE>

All revenue was derived from unaffiliated customers. For the years ended
December 31, 1996 and 1997 one customer provided $11,681,000 (or 23%) and
$9,349,000 (or 12%) of the Company's revenue, respectively. For the year ended
December 31, 1998, one customer provided $13,985,000 (or 11%) and another
customer provided $12,344,000 (or 10%) of the Company's revenue.

(19) QUARTERLY RESULTS

The Company's unaudited quarterly results are as follows (amounts are in
thousands, except share data):

<TABLE>
<CAPTION>
FOR THE 1997 QUARTER ENDED
---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................................... $17,022 $18,649 $19,039 $20,640
Gross profit.......................................... 4,197 5,631 6,109 6,941
Net income............................................ 115 721 970 756
Basic and diluted earnings per share.................. -- 0.03 0.03 0.03
</TABLE>

<TABLE>
<CAPTION>
FOR THE 1998 QUARTER ENDED
---------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................................... $24,412 $27,008 $35,284 $35,070
Gross profit.......................................... 8,183 9,202 9,309 11,860
Net income (loss)..................................... 1,358 1,515 (1,650) (1,000)
Basic and diluted earnings (loss) per share........... 0.05 0.05 (0.06) (0.03)
</TABLE>

F-25
<PAGE> 106

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

6,500,000 SHARES

[CAPROCK COMMUNICATIONS LOGO]

CAPROCK COMMUNICATIONS CORP.

COMMON STOCK

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

PROSPECTUS
----------------------

MERRILL LYNCH & CO.

BEAR, STEARNS & CO. INC.

DONALDSON, LUFKIN & JENRETTE

GOLDMAN, SACHS & CO.

CRUTTENDEN ROTH INCORPORATED

, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 107

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 53,905
NASD filing fee............................................. $ 13,350
NASDAQ -- NMS listing fee................................... $ 17,500
Printing and engraving costs................................ $ 350,000
Legal fees and expenses..................................... $ 500,000
Accounting fees and expenses................................ $ 200,000
Blue Sky fees and expenses.................................. $ 20,000
Miscellaneous............................................... $ 95,245
----------
Total............................................. $1,250,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article XII of the Registrant's Articles of Incorporation provides the
following:

"A director of the Corporation shall not be liable to the corporation
or its shareholders for monetary damages for an act or omission in the
director's capacity as a director, except that this Article shall not
authorize the elimination or limitation of the liability of a director to
the extent the director is found liable for:

(1) a breach of the director's duty of loyalty to the Corporation
or its shareholders;

(2) an act or omission not in good faith that constitutes a breach
of duty of the director to the Corporation or an act or omission that
involves intentional misconduct or a knowing violation of the law;

(3) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken within
the scope of the director's office;

(4) an act or omission for which the liability of a director is
expressly provided by an applicable statute."

Article XI of the Registrant's Articles of Incorporation provides the
following:

"The directors and officers of the Corporation shall be indemnified by
the Corporation in a manner and to the maximum extent permitted by
applicable state or federal law as in effect from time to time."

Section 7.06 of the Registrant's Bylaws provides the following:

"The Corporation shall have the authority to an shall indemnify and
advance expenses to the Directors, officers, employees, and agents of the
Corporation or any other persons serving at the request of the Corporation
in such capacities in a manner and to the maximum extent permitted by
applicable state or federal law. The Corporation may purchase and maintain
liability insurance or make other arrangements for such obligations to the
extent permitted by the Texas Business Corporation Act."

II-1
<PAGE> 108

The Texas Business Corporation Act permits, and in some cases requires,
corporations to indemnify officers, directors, agents and employees who are or
have been a party to or are threatened to be made a party to litigation against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses under certain circumstances.

The Purchase Agreement (Exhibit 1.1 hereto) for this offering provides for
indemnification by the underwriters specified therein of the Registrant and its
officers and directors, and by the Registrant of the underwriters specified
therein, for certain liabilities arising under the Securities Act or otherwise.

The Registration Rights Agreement (Exhibit 4.3 hereto) provides for
indemnification by each of the Initial Purchasers of the Private Notes (as
defined therein), their successors, assigns and direct and indirect transferees,
and participating broker-dealers holding Exchange Notes (as defined therein), in
specified circumstances, of the Registrant, the other Initial Purchasers,
underwriters and the other selling holders of the Private Notes, and each of
their respective directors and officers and controlling parties, and by the
Registrant of Initial Purchasers of the Private Notes, their successors, assigns
and direct and indirect transferees, and participating broker-dealers holding
Exchange Notes, underwriters, and each person, if any controlling any such
underwriter or holder, in specified circumstances, for certain liabilities
arising under the Securities Act or otherwise.

The Note Purchase Agreement (Exhibit 10.43 hereto) provides for
indemnification by the initial purchasers specified therein of the Registrant
and its officers and directors, and by the Registrant of the initial purchasers
specified therein, for certain liabilities arising under the Securities Act or
otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following sets forth information regarding all sales of unregistered
securities of the Registrant or its predecessors during the past three years.
All such shares were issued in reliance upon an exemption from registration
under the Securities Act by reason of Section 4(2) or 3(b) of the Securities Act
and/or the rules and regulations promulgated thereunder. In connection with each
of these transactions, the shares were sold to a very limited number of persons,
such persons were provided access to all relevant information regarding the
Registrant or represented to the Registrant that they were "sophisticated"
investors, and such persons represented to the Registrant that the shares were
purchased for investment purposes only and with no view toward distribution.

On July 15, 1998, the Registrant issued an aggregate principal amount of
$150,000,000 of 12% Senior Notes due 2008 to certain investors. Such notes were
offered and issued pursuant to Section 4(2) and Rule 144A under the Securities
Act.

On June 12, 1997, IWL Communications, Incorporated ("IWL"), a predecessor
company to the Registrant, issued to Cruttenden Roth Incorporated, warrants to
purchase 145,000 shares of its Common Stock at an exercise price of $7.20 per
share.

In June 1996, Kelly Dean, an employee of IWL, purchased 2,808 shares of
Common Stock of IWL for $3.56 shares for an aggregate purchase price of
approximately $10,000.

In November 1996, Keith Johnson, Vice President -- Marketing of IWL,
purchased 2,808 shares of Common Stock of IWL for $3.56 per share for an
aggregate purchase price of approximately $10,000.

II-2
<PAGE> 109

ITEM 16. EXHIBITS

The following exhibits are filed herewith.

<TABLE>
<C> <S>
1.1 -- Form of Purchase Agreement.+
2.1 -- Agreement and Plan of Merger and Plan of Exchange, dated
as of February 16, 1998, by and among the Registrant, IWL
Communications, Incorporated ("IWL"), IWL Acquisition
Corp., CapRock Communications Corp. (n/k/a CapRock
Telecommunications Corp. ("CapRock Telecommunications")),
CapRock Acquisition Corp., and CapRock Fiber Network,
Ltd. ("CapRock Fiber" and collectively, the "Parties").
The schedules to the Agreement and Plan of Merger and
Plan of Exchange and the appendices thereto have been
omitted. The Registrant will furnish supplementally to
the Securities and Exchange Commission any of the
schedules or appendices upon request. (Incorporated by
reference to Exhibit 2.1 to the Registration Statement on
Form S-4, as amended, of the Registrant, File No.
333-57365.)
2.2 -- First Amendment to Agreement and Plan of Merger and Plan
of Exchange, dated as of April 30, 1998, by and among the
Parties. (Incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
2.3 -- Second Amendment to Agreement and Plan of Merger and Plan
of Exchange, dated as of June 19, 1998, by and among the
Parties. (Incorporated by reference to Exhibit 2.3 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
2.4 -- Third Amendment to Agreement and Plan of Merger and Plan
of Exchange, dated as of July 8, 1998, by and among the
Parties. (Incorporated by reference to Exhibit 2.4 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
3.1 -- Articles of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
3.2 -- Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-64699.)
4.1 -- Specimen Certificate for the Common Stock of the
Registrant (Incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365).
4.2 -- Indenture dated as of July 16, 1998, among the
Registrant, CapRock Telecommunications, CapRock Fiber,
IWL and PNC Bank, National Association, Trustee.
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.3 -- Registration Rights Agreement dated July 16, 1998, among
the Registrant, CapRock Telecommunications, CapRock
Fiber, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and BancOne Capital Markets, Inc.
(Incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.4 -- Form of Warrant Agreement between IWL and Cruttenden Roth
Incorporated. (Incorporated by reference to Exhibit 1.2
to the Registration Statement on Form S-1 of IWL, as
amended, File No. 333-22801.)
</TABLE>

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<PAGE> 110

<TABLE>
<C> <S>
4.5 -- Registration Rights Agreement dated January 22, 1998
between IWL and Nera Limited. (Incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
4.6 -- Registration Rights Agreement dated January 22, 1998 by
and among IWL, Thomas Norman Blair and Margaret Helen
Blair. (Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
5.1 -- Opinion of Munsch Hardt Kopf & Harr, P.C. regarding
validity of securities being registered.+
10.1 -- CapRock Communications Corp. 1998 Equity Incentive Plan.
(Incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.2 -- CapRock Communications Corp. 1998 Director Stock Option
Plan. (Incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.3 -- Employment Agreement between the Registrant and Ignatius
W. Leonards. (Incorporated by reference to Exhibit 10.5
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.4 -- Employment Agreement between the Registrant and Byron M.
Allen. (Incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.5 -- Employment Agreement between the Registrant and Errol
Olivier. (Incorporated by reference to Exhibit 10.7 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.6 -- Employment Agreement between the Registrant and Richard
H. Roberson. (Incorporated by reference to Exhibit 10.8
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.7 -- Employment Agreement between the Registrant and Bryan
Olivier. (Incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.8 -- Employment Agreement between the Registrant and Jere W.
Thompson, Jr. (Incorporated by reference to Exhibit 10.10
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.9 -- Employment Agreement between the Registrant and Scott L.
Roberts. (Incorporated by reference to Exhibit 10.11 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.10 -- Employment Agreement between the Registrant and Timothy
W. Rogers. (Incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.11 -- Employment Agreement between the Registrant and Timothy
M. Terrell. (Incorporated by reference to Exhibit 10.13
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.12 -- Employment Agreement between the Registrant and Kevin W.
McAleer. (Incorporated by reference to Exhibit 10.14 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.13 -- Office Lease Agreement dated May 22, 1996, by and between
Ellington Field, Ltd., a Texas limited partnership, and
IWL. (Incorporated by reference to Exhibit 10.5 to the
IWL Registration Statement on Form S-1, as amended, File
No. 333-22801.)
</TABLE>

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<PAGE> 111

<TABLE>
<C> <S>
10.14 -- Satellite Information Network Service Agreement dated May
1, 1994, by and between IWL and the Information
Telegraphy Agency of Russia ITAR-TASS.# (Incorporated by
reference to Exhibit 10.9 to the Registration Statement
on Form S-1, as amended, of IWL, File No. 333-22801.)
10.15 -- Reseller Agreement dated December 31, 1996, by and
between Alcatel Network Systems, Inc. and IWL.
(Incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1, as amended, of IWL,
File No. 333-22801.)#
10.16 -- Form of Service Agreement.+
10.17 -- Lease Agreement dated November 18, 1996, by and between
IWL and CLG, Inc. (Incorporated by reference to Exhibit
10.13 to the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
10.18 -- Promissory Note dated September 20, 1996 payable by IWL
to First Bank and Trust, Cleveland, Texas. (Incorporated
by reference to Exhibit 10.15 to the Registration
Statement on Form S-1, as amended, of IWL, File No.
333-22801.)
10.19 -- Loan Agreement and Security Agreement dated December 20,
1995 between IWL and Marine Midland Business Loans, Inc.
(Incorporated by reference to Exhibit 10.16 to the
Registration Statement on Form S-1, as amended, of IWL,
File No. 333-22801.)
10.20 -- Second Amendment to Loan and Security Agreement dated as
of May 7, 1997, between IWL and Marine Midland Business
Loans, Inc. (Incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-1, as amended, of
IWL, File No. 333-22801.)
10.21 -- Letter Agreement dated February 28, 1997, by and between
IWL and Marine Midland Bank as successor-in-interest to
Marine Midland Business Loans, Inc. (Incorporated by
reference to the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
10.22 -- Credit Agreement, dated August 1, 1997, executed by and
between IWL and Bank One, Texas, N.A. ("Bank One").
(Incorporated by reference to Exhibit 10.22 to the Form
10K for the year ending June 30, 1997 of IWL, File No.
0-22293.)
10.23 -- Promissory Note, dated August 1, 1997, in the principal
amount of $822,000.00, executed by IWL, and made payable
to Bank One. (Incorporated by reference to Exhibit 10.23
to the Form 10K of IWL for the year ending June 30, 1997,
File No. 0-22293.)
10.24 -- Promissory Note, dated August 1, 1997, in the principal
amount of $605,000.00, executed by IWL, and made payable
to Bank One. (Incorporated by reference to Exhibit 10.24
to the Form 10-K of IWL for the year ending June 30,
1997, File No. 0-22293.)
10.25 -- Collateral Assignment and Security Agreement, dated
August 1, 1997, executed by IWL, as assignor, and Bank
One, as assignee. (Incorporated by reference to Exhibit
10.25 to the Form 10K of IWL for the year ending June 30,
1997, File No. 0-22293.)
10.26 -- Revolving Credit Agreement, dated August 1, 1997,
executed by and between IWL and Bank One. (Incorporated
by reference to Exhibit 10.26 to the Form 10K of IWL for
the year ending June 30, 1997, File No. 0-22293.)
10.27 -- Promissory Note, dated August 1, 1997, in the principal
amount of $5,000,000.00, executed by IWL, and made
payable to Bank One. (Incorporated by reference to
Exhibit 10.27 to the Form 10K of IWL for the year ending
June 30, 1997, File No. 0-22293.)
</TABLE>

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<PAGE> 112
<TABLE>
<C> <S>
10.28 -- Security Agreement, dated August 1, 1997, executed by
IWL, as debtor, and Bank One, as secured party.
(Incorporated by reference to Exhibit 10.28 to the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)
10.29 -- Amended and Restated Credit Agreement, dated August 28,
1997, executed by and between IWL and Bank One.
(Incorporated by reference to Exhibit 10.29 to the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)
10.30 -- Promissory Note, dated August 28, 1997, in the principal
amount of $1,055,000.00, executed by IWL, and made
payable to Bank One. (Incorporated by reference to
Exhibit 10.30 to the Form 10K of IWL for the year ending
June 30, 1997, File No. 0-22293.)
10.31 -- Telecommunications Equipment Lease Agreement dated as of
June 1, 1997 between IWL and Diamond Offshore Company.
(Incorporated by reference to Exhibit 10.4 to the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)#
10.32 -- Sublease dated November 22, 1994 by and between CapRock
Telecommunications and Arkwright Mutual Insurance
Company. (Incorporated by reference to Exhibit 10.35 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.33 -- Loan and Security Agreement dated March 14, 1996 by and
between CapRock Telecommunications and Bank One, as
amended. (Incorporated by reference to Exhibit 10.36 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.34 -- Sixth Renewal Extension $2,500,000 Promissory Note dated
December 31, 1997 payable by CapRock Telecommunications
to Bank One. (Incorporated by reference to Exhibit 10.37
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.35 -- Form of CapRock Communications Corp. Commercial
Application. (Incorporated by reference to Exhibit 10.41
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.36 -- Form of CapRock Communications Corp. Commercial Agent
Application. (Incorporated by reference to Exhibit 10.42
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.37 -- Unlimited Guaranty dated March 9, 1996 by Jere W.
Thompson, Jr. for the benefit of Bank One. (Incorporated
by reference to Exhibit 10.43 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.38 -- Loan Agreement dated July 1, 1996 by and between CapRock
Fiber and Bank One. (Incorporated by reference to Exhibit
10.44 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.39 -- $10,000,000 Promissory Note dated July 1, 1996 by and
between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.45 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.40 -- Guaranty dated July 1, 1996 by CapRock Systems, Inc. in
favor of Bank One. (Incorporated by reference to Exhibit
10.46 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.41 -- Guaranty dated July 1, 1996 by Mark Langdale in favor of
Bank One. (Incorporated by reference to Exhibit 10.47 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
</TABLE>

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<PAGE> 113
<TABLE>
<C> <S>
10.42 -- Guaranty dated July 1, 1996 by Jere W. Thompson, Jr. in
favor of Bank One. (Incorporated by reference to Exhibit
10.48 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.43 -- Form of Note Purchase Agreement by and among the
Registrant and various initial purchasers. (Incorporated
by reference to Exhibit 10.49 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.44 -- Form of Contribution Agreement by the General Partner of
CapRock Fiber. (Incorporated by reference to Exhibit
10.50 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.45 -- First Amendment to Loan Agreement dated July 1, 1996 by
and between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.51 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.46 -- Second Amendment to Loan Agreement dated April 29, 1998
by and between CapRock Fiber and Bank One. (Incorporated
by reference to Exhibit 10.52 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.47 -- License Agreement dated June 16, 1998 by and between
CapRock Telecommunications and RiverRock Systems, Ltd.
(Incorporated by reference to Exhibit 10.53 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.48 -- Modification Agreement dated as of June 17, 1998 by and
between IWL and Bank One. (Incorporated by reference to
Exhibit 10.54 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.49 -- Promissory Note dated June 17, 1998 executed by IWL
payable to the order of Bank One, in the principal amount
of $4,000,000.00. (Incorporated by reference to Exhibit
10.55 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.50 -- Eighth Amendment to Loan and Security Agreement dated as
of June 18, 1998 by and between CapRock
Telecommunications and Bank One. (Incorporated by
reference to Exhibit 10.56 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.51 -- Renewal and Extension Promissory Note dated as June 18,
1998 executed by CapRock Telecommunications payable to
the order of Bank One, in the principal amount of
$7,000,000.00. (Incorporated by reference to Exhibit
10.57 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.52 -- Intercompany Promissory Note dated as of June 18, 1998
originally executed by CapRock Fiber payable to the order
of Telecommunications in the principal amount of
$2,500,000.00 and endorsed by CapRock Telecommunications
in favor of Bank One. (Incorporated by reference to
Exhibit 10.58 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.53 -- Ninth Amendment to Loan and Security Agreement dated as
July 9, 1998 by and between CapRock Telecommunications
and Bank One. (Incorporated by reference to Exhibit 10.59
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.54 -- Third Amendment to Loan Agreement dated as of June 18,
1998 by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.60 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
</TABLE>

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<PAGE> 114

<TABLE>
<C> <S>
10.55 -- Fourth Amendment to Loan Agreement dated as of July 9,
1998 by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.61 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.56 -- Form of Escrow Agreement. (Incorporated by reference to
Exhibit 10.62 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.57 -- Form of Exchange Agent Agreement by and between the
Registrant and PNC Bank, National Association.
(Incorporated by reference to Exhibit 10.57 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
10.58 -- Addison Circle One Office Lease Agreement between
Champion Addison One Limited Partnership, a limited
partnership, as Landlord and the Registrant, as Tenant.+
10.59 -- Form of Carrier Agreement.+
10.60 -- Amendment to Addison Circle One Office Lease Agreement.+
16.1 -- Letter re: Change in Accountants. (Incorporated by
reference to Exhibit 16.1 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
21.1 -- Subsidiaries of the Registrant.+
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of Burds Reed & Mercer, P.C.
23.3 -- Consent of Munsch Hardt Kopf & Harr, P.C. (Included in
the opinion filed as Exhibit 5.1 to this Registration
Statement).
24.1 -- Power of Attorney.+
24.2 -- Power of Attorney for Matthew M. Kingsley.+
24.3 -- Power of Attorney for Richard G. Ellenberger (included in
the signature page hereto).
27.1 -- Financial Data Schedule for 1996 and 1998.+
27.2 -- Amended Financial Data Schedule for 1997.+
99.1 -- Consent of Richard G. Ellenberger.+
</TABLE>

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

# Confidential treatment was granted.

+ Previously filed.

ITEM 17. UNDERTAKINGS

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

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than 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

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<PAGE> 115

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.

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

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

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<PAGE> 116

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas on the 6th day of May, 1999.

CAPROCK COMMUNICATIONS CORP.

By: /s/ JERE W. THOMPSON, JR.

----------------------------------
Jere W. Thompson, Jr.
Chief Executive Officer

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

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

/s/ JERE W. THOMPSON, JR. Chief Executive Officer, Chairman of May 6, 1999
- ----------------------------------------------------- the Board, and Director (Principal
Jere W. Thompson, Jr. Executive Officer)

/s/ KEVIN W. MCALEER Senior Vice President and Chief May 6, 1999
- ----------------------------------------------------- Financial Officer (Principal
Kevin W. McAleer Financial Officer)

/s/ IGNATIUS W. LEONARDS President, Vice Chairman of the May 6, 1999
- ----------------------------------------------------- Board, and Director
Ignatius W. Leonards

/s/ TIMOTHY W. ROGERS Executive Vice President and Director May 6, 1999
- -----------------------------------------------------
Timothy W. Rogers

* Executive Vice President May 6, 1999
- -----------------------------------------------------
Byron M. Allen

/s/ MATTHEW M. KINGSLEY Corporate Controller (Principal May 6, 1999
- ----------------------------------------------------- Accounting Officer)
Matthew M. Kingsley

/s/ MARK LANGDALE Director May 6, 1999
- -----------------------------------------------------
Mark Langdale

/s/ CHRISTOPHER J. AMENSON Director May 6, 1999
- -----------------------------------------------------
Christopher J. Amenson

/s/ JOHN R. HARRIS Director May 6, 1999
- -----------------------------------------------------
John R. Harris

/s/ RICHARD G. ELLENBERGER Director May 6, 1999
- -----------------------------------------------------
Richard G. Ellenberger**

*By: /s/ JERE W. THOMPSON, JR.
------------------------------------------------
Jere W. Thompson, Jr.
Attorney-in-Fact
</TABLE>

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<PAGE> 117

POWER OF ATTORNEY

**Richard G. Ellenberger hereby constitutes and appoints Jere W. Thompson,
Jr. and Kevin W. McAleer, and each of them, with full power to act without the
other and with full power of substitution and resubstitution, his true and
lawful attorneys-in-fact with full power to execute in his name and behalf in
the capacities indicated below any and all amendments (including post-effective
amendments and amendments thereto) to this Registration Statement, requests to
accelerate the effectiveness of this Registration Statement, and any
registration statement for the same offering that is to be effective under Rule
462(b) of the Securities Act, and to file the same, with all exhibits thereto
and other documents in connection therewith with the Securities and Exchange
Commission and hereby ratify and confirm all that such attorneys-in-fact, or
either of them, or their substitutes shall lawfully do or cause to be done by
virtue hereof.

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<PAGE> 118

EXHIBITS INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
1.1 -- Form of Purchase Agreement.+
2.1 -- Agreement and Plan of Merger and Plan of Exchange, dated
as of February 16, 1998, by and among the Registrant, IWL
Communications, Incorporated ("IWL"), IWL Acquisition
Corp., CapRock Communications Corp. (n/k/a CapRock
Telecommunications Corp. ("CapRock Telecommunications")),
CapRock Acquisition Corp., and CapRock Fiber Network,
Ltd. ("CapRock Fiber" and collectively, the "Parties").
The schedules to the Agreement and Plan of Merger and
Plan of Exchange and the appendices thereto have been
omitted. The Registrant will furnish supplementally to
the Securities and Exchange Commission any of the
schedules or appendices upon request. (Incorporated by
reference to Exhibit 2.1 to the Registration Statement on
Form S-4, as amended, of the Registrant, File No.
333-57365.)
2.2 -- First Amendment to Agreement and Plan of Merger and Plan
of Exchange, dated as of April 30, 1998, by and among the
Parties. (Incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
2.3 -- Second Amendment to Agreement and Plan of Merger and Plan
of Exchange, dated as of June 19, 1998, by and among the
Parties. (Incorporated by reference to Exhibit 2.3 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
2.4 -- Third Amendment to Agreement and Plan of Merger and Plan
of Exchange, dated as of July 8, 1998, by and among the
Parties. (Incorporated by reference to Exhibit 2.4 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
3.1 -- Articles of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
3.2 -- Bylaws of the Registrant. (Incorporated by reference to
Exhibit 3.2 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-64699.)
4.1 -- Specimen Certificate for the Common Stock of the
Registrant (Incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365).
4.2 -- Indenture dated as of July 16, 1998, among the
Registrant, CapRock Telecommunications, CapRock Fiber,
IWL and PNC Bank, National Association, Trustee.
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.3 -- Registration Rights Agreement dated July 16, 1998, among
the Registrant, CapRock Telecommunications, CapRock
Fiber, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and BancOne Capital Markets, Inc.
(Incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
4.4 -- Form of Warrant Agreement between IWL and Cruttenden Roth
Incorporated. (Incorporated by reference to Exhibit 1.2
to the Registration Statement on Form S-1 of IWL, as
amended, File No. 333-22801.)
</TABLE>

<PAGE> 119

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
4.5 -- Registration Rights Agreement dated January 22, 1998
between IWL and Nera Limited. (Incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
4.6 -- Registration Rights Agreement dated January 22, 1998 by
and among IWL, Thomas Norman Blair and Margaret Helen
Blair. (Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
5.1 -- Opinion of Munsch Hardt Kopf & Harr, P.C. regarding
validity of securities being registered.+
10.1 -- CapRock Communications Corp. 1998 Equity Incentive Plan.
(Incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.2 -- CapRock Communications Corp. 1998 Director Stock Option
Plan. (Incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.3 -- Employment Agreement between the Registrant and Ignatius
W. Leonards. (Incorporated by reference to Exhibit 10.5
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.4 -- Employment Agreement between the Registrant and Byron M.
Allen. (Incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.5 -- Employment Agreement between the Registrant and Errol
Olivier. (Incorporated by reference to Exhibit 10.7 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.6 -- Employment Agreement between the Registrant and Richard
H. Roberson. (Incorporated by reference to Exhibit 10.8
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.7 -- Employment Agreement between the Registrant and Bryan
Olivier. (Incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.8 -- Employment Agreement between the Registrant and Jere W.
Thompson, Jr. (Incorporated by reference to Exhibit 10.10
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.9 -- Employment Agreement between the Registrant and Scott L.
Roberts. (Incorporated by reference to Exhibit 10.11 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.10 -- Employment Agreement between the Registrant and Timothy
W. Rogers. (Incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.11 -- Employment Agreement between the Registrant and Timothy
M. Terrell. (Incorporated by reference to Exhibit 10.13
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.12 -- Employment Agreement between the Registrant and Kevin W.
McAleer. (Incorporated by reference to Exhibit 10.14 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
</TABLE>

<PAGE> 120

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.13 -- Office Lease Agreement dated May 22, 1996, by and between
Ellington Field, Ltd., a Texas limited partnership, and
IWL. (Incorporated by reference to Exhibit 10.5 to the
IWL Registration Statement on Form S-1, as amended, File
No. 333-22801.)
10.14 -- Satellite Information Network Service Agreement dated May
1, 1994, by and between IWL and the Information
Telegraphy Agency of Russia ITAR-TASS.# (Incorporated by
reference to Exhibit 10.9 to the Registration Statement
on Form S-1, as amended, of IWL, File No. 333-22801.)
10.15 -- Reseller Agreement dated December 31, 1996, by and
between Alcatel Network Systems, Inc. and IWL.
(Incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1, as amended, of IWL,
File No. 333-22801.)#
10.16 -- Form of Service Agreement.+
10.17 -- Lease Agreement dated November 18, 1996, by and between
IWL and CLG, Inc. (Incorporated by reference to Exhibit
10.13 to the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
10.18 -- Promissory Note dated September 20, 1996 payable by IWL
to First Bank and Trust, Cleveland, Texas. (Incorporated
by reference to Exhibit 10.15 to the Registration
Statement on Form S-1, as amended, of IWL, File No.
333-22801.)
10.19 -- Loan Agreement and Security Agreement dated December 20,
1995 between IWL and Marine Midland Business Loans, Inc.
(Incorporated by reference to Exhibit 10.16 to the
Registration Statement on Form S-1, as amended, of IWL,
File No. 333-22801.)
10.20 -- Second Amendment to Loan and Security Agreement dated as
of May 7, 1997, between IWL and Marine Midland Business
Loans, Inc. (Incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-1, as amended, of
IWL, File No. 333-22801.)
10.21 -- Letter Agreement dated February 28, 1997, by and between
IWL and Marine Midland Bank as successor-in-interest to
Marine Midland Business Loans, Inc. (Incorporated by
reference to the Registration Statement on Form S-1, as
amended, of IWL, File No. 333-22801.)
10.22 -- Credit Agreement, dated August 1, 1997, executed by and
between IWL and Bank One, Texas, N.A. ("Bank One").
(Incorporated by reference to Exhibit 10.22 to the Form
10K for the year ending June 30, 1997 of IWL, File No.
0-22293.)
10.23 -- Promissory Note, dated August 1, 1997, in the principal
amount of $822,000.00, executed by IWL, and made payable
to Bank One. (Incorporated by reference to Exhibit 10.23
to the Form 10K of IWL for the year ending June 30, 1997,
File No. 0-22293.)
10.24 -- Promissory Note, dated August 1, 1997, in the principal
amount of $605,000.00, executed by IWL, and made payable
to Bank One. (Incorporated by reference to Exhibit 10.24
to the Form 10-K of IWL for the year ending June 30,
1997, File No. 0-22293.)
10.25 -- Collateral Assignment and Security Agreement, dated
August 1, 1997, executed by IWL, as assignor, and Bank
One, as assignee. (Incorporated by reference to Exhibit
10.25 to the Form 10K of IWL for the year ending June 30,
1997, File No. 0-22293.)
10.26 -- Revolving Credit Agreement, dated August 1, 1997,
executed by and between IWL and Bank One. (Incorporated
by reference to Exhibit 10.26 to the Form 10K of IWL for
the year ending June 30, 1997, File No. 0-22293.)
</TABLE>

<PAGE> 121

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.27 -- Promissory Note, dated August 1, 1997, in the principal
amount of $5,000,000.00, executed by IWL, and made
payable to Bank One. (Incorporated by reference to
Exhibit 10.27 to the Form 10K of IWL for the year ending
June 30, 1997, File No. 0-22293.)
10.28 -- Security Agreement, dated August 1, 1997, executed by
IWL, as debtor, and Bank One, as secured party.
(Incorporated by reference to Exhibit 10.28 to the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)
10.29 -- Amended and Restated Credit Agreement, dated August 28,
1997, executed by and between IWL and Bank One.
(Incorporated by reference to Exhibit 10.29 to the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)
10.30 -- Promissory Note, dated August 28, 1997, in the principal
amount of $1,055,000.00, executed by IWL, and made
payable to Bank One. (Incorporated by reference to
Exhibit 10.30 to the Form 10K of IWL for the year ending
June 30, 1997, File No. 0-22293.)
10.31 -- Telecommunications Equipment Lease Agreement dated as of
June 1, 1997 between IWL and Diamond Offshore Company.
(Incorporated by reference to Exhibit 10.4 to the Form
10K of IWL for the year ending June 30, 1997, File No.
0-22293.)#
10.32 -- Sublease dated November 22, 1994 by and between CapRock
Telecommunications and Arkwright Mutual Insurance
Company. (Incorporated by reference to Exhibit 10.35 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.33 -- Loan and Security Agreement dated March 14, 1996 by and
between CapRock Telecommunications and Bank One, as
amended. (Incorporated by reference to Exhibit 10.36 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.34 -- Sixth Renewal Extension $2,500,000 Promissory Note dated
December 31, 1997 payable by CapRock Telecommunications
to Bank One. (Incorporated by reference to Exhibit 10.37
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.35 -- Form of CapRock Communications Corp. Commercial
Application. (Incorporated by reference to Exhibit 10.41
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.36 -- Form of CapRock Communications Corp. Commercial Agent
Application. (Incorporated by reference to Exhibit 10.42
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.37 -- Unlimited Guaranty dated March 9, 1996 by Jere W.
Thompson, Jr. for the benefit of Bank One. (Incorporated
by reference to Exhibit 10.43 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.38 -- Loan Agreement dated July 1, 1996 by and between CapRock
Fiber and Bank One. (Incorporated by reference to Exhibit
10.44 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.39 -- $10,000,000 Promissory Note dated July 1, 1996 by and
between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.45 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.40 -- Guaranty dated July 1, 1996 by CapRock Systems, Inc. in
favor of Bank One. (Incorporated by reference to Exhibit
10.46 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
</TABLE>
<PAGE> 122

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.41 -- Guaranty dated July 1, 1996 by Mark Langdale in favor of
Bank One. (Incorporated by reference to Exhibit 10.47 to
the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.42 -- Guaranty dated July 1, 1996 by Jere W. Thompson, Jr. in
favor of Bank One. (Incorporated by reference to Exhibit
10.48 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.43 -- Form of Note Purchase Agreement by and among the
Registrant and various initial purchasers. (Incorporated
by reference to Exhibit 10.49 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.44 -- Form of Contribution Agreement by the General Partner of
CapRock Fiber. (Incorporated by reference to Exhibit
10.50 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.45 -- First Amendment to Loan Agreement dated July 1, 1996 by
and between CapRock Fiber and Bank One. (Incorporated by
reference to Exhibit 10.51 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.46 -- Second Amendment to Loan Agreement dated April 29, 1998
by and between CapRock Fiber and Bank One. (Incorporated
by reference to Exhibit 10.52 to the Registration
Statement on Form S-4, as amended, of the Registrant,
File No. 333-57365.)
10.47 -- License Agreement dated June 16, 1998 by and between
CapRock Telecommunications and RiverRock Systems, Ltd.
(Incorporated by reference to Exhibit 10.53 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.48 -- Modification Agreement dated as of June 17, 1998 by and
between IWL and Bank One. (Incorporated by reference to
Exhibit 10.54 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.49 -- Promissory Note dated June 17, 1998 executed by IWL
payable to the order of Bank One, in the principal amount
of $4,000,000.00. (Incorporated by reference to Exhibit
10.55 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.50 -- Eighth Amendment to Loan and Security Agreement dated as
of June 18, 1998 by and between CapRock
Telecommunications and Bank One. (Incorporated by
reference to Exhibit 10.56 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
10.51 -- Renewal and Extension Promissory Note dated as June 18,
1998 executed by CapRock Telecommunications payable to
the order of Bank One, in the principal amount of
$7,000,000.00. (Incorporated by reference to Exhibit
10.57 to the Registration Statement on Form S-4, as
amended, of the Registrant, File No. 333-57365.)
10.52 -- Intercompany Promissory Note dated as of June 18, 1998
originally executed by CapRock Fiber payable to the order
of Telecommunications in the principal amount of
$2,500,000.00 and endorsed by CapRock Telecommunications
in favor of Bank One. (Incorporated by reference to
Exhibit 10.58 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
</TABLE>
<PAGE> 123

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.53 -- Ninth Amendment to Loan and Security Agreement dated as
July 9, 1998 by and between CapRock Telecommunications
and Bank One. (Incorporated by reference to Exhibit 10.59
to the Registration Statement on Form S-4, as amended, of
the Registrant, File No. 333-57365.)
10.54 -- Third Amendment to Loan Agreement dated as of June 18,
1998 by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.60 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.55 -- Fourth Amendment to Loan Agreement dated as of July 9,
1998 by and between CapRock Fiber and Bank One.
(Incorporated by reference to Exhibit 10.61 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-57365.)
10.56 -- Form of Escrow Agreement. (Incorporated by reference to
Exhibit 10.62 to the Registration Statement on Form S-4,
as amended, of the Registrant, File No. 333-57365.)
10.57 -- Form of Exchange Agent Agreement by and between the
Registrant and PNC Bank, National Association.
(Incorporated by reference to Exhibit 10.57 to the
Registration Statement on Form S-4, as amended, of the
Registrant, File No. 333-64699.)
10.58 -- Addison Circle One Office Lease Agreement between
Champion Addison One Limited Partnership, a limited
partnership, as Landlord and the Registrant, as Tenant.+
10.59 -- Form of Carrier Agreement.+
10.60 -- Amendment to Addison Circle One Office Lease Agreement.+
16.1 -- Letter re: Change in Accountants. (Incorporated by
reference to Exhibit 16.1 to the Registration Statement
on Form S-4, as amended, of the Registrant, File No.
333-57365.)
21.1 -- Subsidiaries of the Registrant.+
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of Burds Reed & Mercer, P.C.
23.3 -- Consent of Munsch Hardt Kopf & Harr, P.C. (Included in
the opinion filed as Exhibit 5.1 to this Registration
Statement).
24.1 -- Power of Attorney.+
24.2 -- Power of Attorney for Matthew M. Kingsley.+
24.3 -- Power of Attorney for Richard G. Ellenberger (included in
the signature page hereto).
27.1 -- Financial Data Schedule for 1996 and 1998.+
27.2 -- Amended Financial Data Schedule for 1997.+
99.1 -- Consent of Richard G. Ellenberger.+
</TABLE>

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

# Confidential treatment was granted.

+ Previously filed.

<PAGE> 1
EXHIBIT 23.1

The Board of Directors
CapRock Communications Corp.
(Formerly IWL Holdings, Inc.):

We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.

KPMG LLP

Dallas, Texas
May 6, 1999

<PAGE> 1
EXHIBIT 23.2

The Board of Directors
CapRock Communications Corp.

We consent to the use of our reports related to CapRock Telecommunications
Corp. and CapRock Fiber Network, Ltd. included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.

Burds, Reed and Mercer, P.C.

Dallas, Texas
May 6, 1999