SPLITROCK SERVICES INC, S-1, 1998-09-04

SPLITROCK SERVICES INC
S-1, 1998-09-04
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1998

REGISTRATION NO. 333-
================================================================================

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

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------

SPLITROCK SERVICES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 4825 76-0529757
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

8665 NEW TRAILS DRIVE, SUITE 200
THE WOODLANDS, TEXAS 77381
(281) 465-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

PATRICK J. MCGETTIGAN, JR., ESQ.
SENIOR VICE PRESIDENT
8665 NEW TRAILS DRIVE, SUITE 200
THE WOODLANDS, TEXAS 76381
(281) 465-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies to:
ARTHUR S. BERNER, ESQ.
WINSTEAD SECHREST & MINICK P.C.
910 TRAVIS, SUITE 2400
HOUSTON, TEXAS 77002
(713) 650-2729

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ---------------

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

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED
MAXIMUM OFFERING PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11 3/4% Series B Senior Notes due
2008................................. $ 11,000,000 100% $11,000,000 $3,245
- --------------------------------------------------------------------------------------------------------------------------
Warrants to purchase Common Stock...... 261,000 $1.09 $ 284,490 $ 84
- --------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per
share................................ 2,642,613(2) $ .01 $ 26,426 $ 8
- --------------------------------------------------------------------------------------------------------------------------
Total.................................. -- -- $11,310,916 $3,337
==========================================================================================================================
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2), (g) and (i) of the Securities Act, based on
the book value of the Notes, the book value of the Warrants registered
hereunder and the amount payable on exercise of such Warrants.

(2) The number of shares of common stock registered hereby is subject to
adjustment to prevent dilution resulting from stock splits, stock dividends
or similar transactions.

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 it is not soliciting an offer to buy these
securities in any state where the offer and sale is not permitted.

SUBJECT TO COMPLETION, DATED SEPTEMBER 4, 1998
PRELIMINARY PROSPECTUS

[SPLITROCK LOGO]

SPLITROCK SERVICES, INC.

<TABLE>
<S> <C> <C>
261,000 WARRANTS 2,642,613 SHARES OF COMMON STOCK $11,000,000
TO PURCHASE SHARES OF ($.001 PAR VALUE) 11 3/4% SERIES B
COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS SENIOR NOTES DUE 2008
</TABLE>

Certain security holders of Splitrock Services, Inc., a Delaware
corporation ("Splitrock" or the "Company"), are hereby offering, upon the terms
and subject to the conditions set forth in this prospectus (the "Prospectus"),
up to 261,000 warrants of the Company (the "Warrants"), up to 2,642,613 shares
(the "Warrant Shares") of common stock, $.001 par value per share, of the
Company (the "Common Stock") issuable upon exercise of the Warrants and up to an
aggregate principal amount of $11,000,000 of the Company's 11 3/4% Series B
Senior Notes due 2008 (the "Notes"). The Warrants and Notes were originally
issued and sold on July 24, 1998 (the "Issue Date") to Chase Securities Inc.
(the "Initial Purchaser") pursuant to an offering (the "Unit Offering") by the
Company of 261,000 units (the "Units"), each Unit consisting of one 11 3/4%
Senior Note due 2008 in the principal amount of $1,000 (the "Original Notes")
and one Warrant to purchase 10.125 shares of Common Stock at an exercise price
of $.01 per share (the "Exercise Price"). The Warrants are exercisable at any
time on or after the first anniversary of the Issue Date and will expire on July
15, 2008. The number of shares of Common Stock issuable upon the exercise of the
Warrants and the Exercise Price are subject to adjustment in certain events. See
"Description of the Warrants -- Adjustments." The Initial Purchaser placed
250,000 Units with qualified institutional buyers and 11,000 Units with Linsang
Partners L.L.C., an affiliate of the Company ("Linsang"). The Company has filed
a registration statement on Form S-4 to register an aggregate principal amount
of $250,000,000 of its 11 3/4% Series B Senior Notes due 2008 (the "Exchange
Notes"), to be offered to holders (other than Linsang) of the Original Notes in
exchange (the "Exchange Offer") for such Original Notes. In a concurrent private
exchange, the Company has exchanged $11,000,000 in aggregate principal amount of
its 11 3/4% Series B Senior Notes due 2008, which constitute the Notes being
offered pursuant to this Prospectus, for the Original Notes held by Linsang.

The holders of the Warrants and the Notes (together with their transferees,
pledgees, donees and successors, the "Selling Holders") have advised the Company
that they may sell the securities offered hereby directly or through agents,
underwriters, brokers or dealers, from time to time on the open market at prices
and on terms then prevailing, as negotiated or otherwise fixed. In addition, any
securities covered by this Prospectus that qualify for sale pursuant to Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"), may be sold
thereunder rather than pursuant to this Prospectus. If required, the names of
any such agents or underwriters involved in the sale of the Warrants, the
Warrant Shares or the Notes and the agent's commission, dealer's purchase price
or underwriter's discount, if any, will be set forth in an accompanying
supplement to this Prospectus. The Company will not receive any of the proceeds
from the sale of the Warrants, the Warrant Shares or the Notes. The Company has
agreed to pay all expenses incident to the registration of the Warrants, the
Warrant Shares and the Notes offered by the Selling Holders pursuant to this
Prospectus. See "Plan of Distribution."

(Continued on following page)

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING ANY INVESTMENT IN SUCH
SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is , 1998.
<PAGE> 3

There is no established trading market for the Warrants, the Warrant Shares
or the Notes and the Company does not intend to list the Warrants, the Warrant
Shares or the Notes on any securities exchange or to seek approval for quotation
through any automated quotation system. There can be no assurance that an active
market for the Warrants, the Warrant Shares or the Notes will develop. To the
extent that a market for the Warrants, the Warrant Shares and the Notes does
develop, the market value of the Warrants, the Warrant Shares and the Notes will
depend on market conditions, general economic conditions, the Company's
financial condition and other conditions.

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.

THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS
OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION
STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, STRATEGY,
PROJECTED COSTS AND PLANS, OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND
STATEMENTS REGARDING "YEAR 2000" COMPLIANCE, MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS
("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. ALL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON THEIR BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

ii
<PAGE> 4

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments, annexes, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Warrants,
Warrant Shares and Notes offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information,
exhibits and undertakings contained in the Registration Statement with respect
to the Company and the Warrants, Warrant Shares and Notes offered hereby. For
further information, reference is made to the Registration Statement, including
the exhibits and financial schedules filed as a part thereof. Statements made in
this Prospectus concerning the contents of any document referred to herein are
not necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the document or matter involved and
each such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement, including the exhibits thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the regional offices
of the Commission at Seven World Trade Center, Suite 1300, New York, New York
10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained by mail from the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Electronic filings filed through the Commission's
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR") are publicly
available through the Commission's home page on the Internet at
http://www.sec.gov.

As a result of the Exchange Offer and the Registration Statement, the
Company will be subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As long as the Company is subject to such periodic reporting and
informational requirements, the Company will furnish all reports and other
information required thereby to the Commission and, pursuant to the indenture
under which the Notes have been issued (the "Indenture"), will furnish copies of
such reports and other information to the indenture trustee.

The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes, or the
notes issued in the Exchange Offer, remain outstanding, the Company will furnish
to the holders of such notes and the Notes offered hereby (excluding exhibits,
which will be available upon request) and file with the Commission (unless the
Commission will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants, and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, for so long as any
such notes remain outstanding, the Company has agreed to make available, upon
request, to any prospective purchaser of such notes and beneficial owner of such
notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act. Information may be obtained from the
Company at 8665 New Trails Drive, Suite 200, The Woodlands, Texas 77381
(telephone number: (281) 465-1200), Attention: Patrick J. McGettigan, Jr.,
Senior Vice President and Secretary.

iii
<PAGE> 5

SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto included elsewhere in this Prospectus. Unless the context
otherwise requires, references to the "Company" or "Splitrock" refer to
Splitrock Services, Inc., references to "Prodigy" refer to Prodigy, Inc.,
references to "Lucent" refer to Lucent Technologies, Inc. and references to
"Yurie" refer to Yurie Systems, Inc. Yurie was acquired by Lucent in May 1998.
Certain industry data provided herein have been provided by International Data
Corporation ("IDC") or Forrester Research, Inc. ("Forrester"), private market
research firms. In addition, certain Internet Service Provider ("ISP")
performance data have been provided by Inverse Network Technology Inc., an
independent Internet testing group ("Inverse"). Capitalized terms used in this
Prospectus which are not otherwise defined herein have the respective meanings
assigned thereto under the heading "Glossary." The Company effected a 100-for-1
stock split on June 3, 1997 and a 10-for-1 stock split on August 8, 1997. All
share amounts included in this Prospectus have been adjusted to reflect the
effect of these stock splits. All information contained in this Prospectus
relating to percentage ownership of the Common Stock does not take into account
the Warrant Shares.

THE COMPANY

GENERAL

The Company is a provider of telecommunications services, including high
speed Internet access services, on an advanced nationwide network based on ATM
switching technology which is deployed in every operational point of presence
("POP") of the network (the "Splitrock Network" or the "Network"). The pervasive
deployment of ATM switches throughout the Network ("ATM-to-the-edge") enables
the Company to serve as a broad-based ISP through the creation of a
multi-service platform which efficiently delivers IP, frame relay and other
Internet services. This flexibility will allow the Company to expand its service
offerings to provide fully integrated data, video and voice services and to
incorporate future technological innovations into its Network architecture with
a lower incremental investment than that required by other, less flexible,
networks. The Company currently provides nationwide Internet dial access and
related services to Prodigy, the third largest U.S. ISP measured in minutes
on-line, for its subscribers. In addition, the Company is providing Internet
transit services to Orbis Internet Services Inc., an Internet connection service
provider to businesses ("Orbis"), and expects to begin providing virtual private
network ("VPN") services to NetworkTwo Communications Group, a value added
network service provider ("NetworkTwo"), during the third or fourth quarter of
1998. For the six months ended June 30, 1998, the Company had revenues of $32.2
million.

The Splitrock Network currently reaches more than 55% of U.S. households by
a local call with 56k modem access (currently the fastest modem speed
commercially available over residential phone lines), including households in
every market with a population of at least 100,000 as well as several second
tier markets. From September 1997 to April 1998, the Company deployed the
Splitrock Network infrastructure, primarily targeting densely populated markets
(the "Phase I Buildout"). The Phase I Buildout resulted in the deployment of the
nationwide ATM backbone portion of the Splitrock Network and POPs in 70
metropolitan areas across the nation. The Company is currently in the process of
constructing approximately 330 new POPs, deploying advanced processing equipment
and software to enhance and accelerate its ability to offer value added
services, such as ISDN video, web hosting and VPN, and augmenting its network
management infrastructure (the "Phase II Expansion"). The Company believes that
the Phase II Expansion will be substantially completed in the second quarter of
1999. Upon completion of the Phase II Expansion, the Network will have
approximately 400 active POPs with a physical presence in all 50 states,
reaching over 90% of U.S. households with a local call.

In order to provide services to Prodigy while the Splitrock Network was
being deployed, on July 1, 1997 the Company acquired Prodigy's existing legacy
network infrastructure (the "Legacy Network") and began immediately providing
Internet dial access and related services to Prodigy for its subscribers. See
"Risk Factors -- Reliance on Prodigy; Recent Discussions with Prodigy."
Additionally, the Company has an

1
<PAGE> 6

agreement with IBM to use IBM's network (the "IBM Global Services Network") to
cover market areas that are served neither by the Splitrock Network nor the
Legacy Network. The Company currently handles more than 800 million minutes of
Internet traffic per month for Prodigy (currently the Company's only Internet
dial access customer), with over 60% of the traffic flowing on the Splitrock
Network, approximately 30% on the IBM Global Services Network and the remainder
on the Legacy Network. As the Phase II Expansion progresses, Legacy Network POPs
will be decommissioned and access to specific IBM Global Services Network POPs
will be terminated when appropriate. Substantially all Legacy Network POPs are
expected to be decommissioned by the end of 1998 and usage of the IBM Global
Services Network is expected to be terminated by the end of the second quarter
of 1999.

INDUSTRY OVERVIEW

The Company believes that it is well-positioned to capture revenue
opportunities in the growing Internet services market. As a broad-based ISP, the
Company utilizes an advanced ATM-to-the-edge Network to offer services that
either directly address Internet connectivity (dial access and transit) or which
leverage Internet technology to provide cost-effective alternatives to
traditional corporate network solutions (VPN). While the Company is considering
broadening its service offerings to optimize Network utilization, the Company
believes that a significant amount of its revenues for the foreseeable future
will continue to be derived from Internet related applications.

The Internet services industry is one of the fastest growing segments of
the global telecommunications market. Forrester estimates that the U.S. market
for Internet and related services, including advanced Internet applications such
as VPN, voice communications, fax and video conferencing, was approximately $6.2
billion in 1997 and will grow to approximately $49.7 billion in 2002, reflecting
a compound annual growth rate of over 50%. The Company believes that Internet
dial access and transit services, VPN services and enhanced business services
represent three of the fastest growing segments of the industry.

Internet access services represent the means by which ISPs interconnect
either businesses or individual consumers to the Internet's resources or to
corporate intranets and extranets. Access services include dial-up access for
individuals and small businesses and high-speed dedicated access (transit
services) used primarily by mid-sized and larger organizations. According to
Forrester, business access services are projected to grow at a compound annual
growth rate of approximately 75%, from approximately $1.0 billion in 1997 to
approximately $16.0 billion in 2002.

In addition, the Company believes that many businesses desire to utilize
VPNs as a lower-cost alternative to certain traditional telecommunications
services. Historically, many corporations established and maintained their own
private wide-area networks ("WANs") to provide network-based services, such as
transaction processing, to their customers and to coordinate operations between
employees, suppliers and business partners. These networks, which have
traditionally required the use of leased telephone lines with dedicated
bandwidth and the purchase of vendor-specific networking equipment and software,
are inherently expensive to set up, operate and maintain. The Company believes
that VPNs present a cost-effective alternative to WANs since VPNs (i) eliminate
the need to invest significant amounts in proprietary equipment and software,
(ii) securely and efficiently connect multiple, geographically dispersed
locations, (iii) provide global remote access capabilities and (iv) offer a full
range of value added services, such as videoconferencing, that meet a company's
particular networking needs.

In addition to Internet access and VPN services, business customers
increasingly are seeking a variety of enhanced products and applications to take
full advantage of the Internet. The principal enhanced services currently
available to companies are Web hosting, including hosting of intranet sites,
e-mail outsourcing, e-mail broadcast and security. Forrester forecasts that
enhanced business services revenues will grow from approximately $0.4 billion in
1997 to approximately $10.5 billion in 2002, representing a compound annual
growth rate of 92%. See "Industry Overview."

2
<PAGE> 7

COMPETITIVE ADVANTAGES

Since July 1997, the Company has provided Internet dial access services to
Prodigy for its subscribers. The Company believes it benefits from the following
competitive advantages which will assist it in implementing its business
strategy:

Flexible and Efficient New Network Infrastructure. The Splitrock Network is
designed to provide reliable, flexible and efficient services to the Company's
current and future customers. Since the Splitrock Network is newly-designed (and
not based on or an upgrade to an older network), the Company believes the
Network contains many features that are not present in older networks and is
able to flexibly incorporate future developments and innovations. Older networks
were typically designed to provide one type of service, such as voice or data,
and are less efficient at carrying other traffic. Unlike many networks which
deploy ATM technology only along the core sites in the backbone, the Splitrock
Network deploys ATM-to-the-edge at every core site, hub site and remote site.
See "Business -- Splitrock's Network." Each POP is supported by the Lucent
LDR200 switch, which the Company believes provides significant quality of
service advantages over typical ATM backbone switches. Management believes that
the Network contains more ATM-based switches than that of any other commercial
network. This pervasive use of ATM technology and the Lucent LDR200 switch
enables the Company to create a multi-service platform which delivers IP, frame
relay and other Internet services. In addition, ATM-to-the-edge provides
additional capabilities to expand the Company's service offerings to provide
fully integrated data, video and voice services and to incorporate future
technological innovations into the Splitrock Network architecture with a lower
incremental investment than that required by other, less flexible, networks.

Provider of Wholesale Internet Dial Access and International Services. The
Company currently provides wholesale Internet dial access services to Prodigy
for its subscribers. The Company intends to market Internet dial access services
directly to ISPs rather than to individual end-users. As a result, unlike many
providers of network services, the Company does not intend to compete against
its ISP customers, thereby broadening the potential customer base to include
those ISPs unwilling to strengthen their competitors with their own network
business. Furthermore, the Company believes it will be viewed as a non-competing
vendor and, thus a potential partner, by major foreign and regional
telecommunications carriers, providing an alternative to their primary U.S.
competitors for delivering data, video and voice services.

Experienced Management Team. The Company's co-founders, Kwok L. Li,
Chairman of the Board and Chief Technical Officer, and William R. Wilson,
President and Chief Executive Officer, have assembled a management team with
significant data and voice communications experience. The 10 most senior
executives and managers of the Company have an average of over 12 years
experience in the data and voice communications industry. Previously, Mr. Li and
Mr. Wilson were both senior executives at the predecessor corporation of WilTel
Communications LLC ("WilTel"), a wholesale provider of telecommunications
services. During their tenure WilTel designed, constructed, developed and
managed modern packet switched networks (including frame relay and ATM) and
marketed related services. At the time of the sale of Yurie to Lucent in May
1998, Mr. Li was a Director, Vice Chairman and Chief Technical Officer at Yurie,
where he created and designed the Lucent LDR200 switch which is a key component
of the Splitrock Network.

BUSINESS STRATEGY

Key elements of the Company's business strategy include:

the Company's network management infrastructure. Of these amounts, the Company
has spent $1.5 million since June 30, 1998. The Company believes that having
ATM-to-the-edge results in: (i) a more easily upgradeable network; (ii) the
ability to efficiently add new services at a lower incremental investment; (iii)
improved network reliability; (iv) interoperability with other network
platforms; and (v) improved network manageability.

Offer a Comprehensive Range of Services to Optimize Network
Utilization. Given the fixed cost nature of the Splitrock Network's
infrastructure, the Company seeks to increase total network utilization
primarily by targeting providers of business services (daytime intensive
traffic) and, to a lesser extent, providers of consumer services (evening
intensive traffic) to balance the Network's usage throughout a 24-hour period.
The Network's flexibility will provide for service innovation (including data,
video and voice services) with lower incremental investment than less flexible
networks. To offer new services, the Company will only need to add the
appropriate protocol processors and billing and service management systems
without changes to the core ATM switching platform. Therefore, the Company
believes it will be able to maximize Network utilization by offering both
daytime business-oriented services (such as video conferencing and VPN services)
and evening-time consumer-oriented services (such as Internet dial access
services). The ability of the Company to offer a wide range of services will
enhance its ability to optimize traffic at all times of the day, thereby
increasing revenue and profitability. As its business strategy is implemented,
the Company will evaluate offering complementary services as they are required
by its customer base.

Development of Advanced Business Support Systems. Through the development
of scalable business support systems, the Company believes that it has the
opportunity to establish a competitive advantage relative to traditional network
service providers. Traditional network service providers typically operate
extensive legacy business support systems with compartmentalized architectures
that limit their ability to scale rapidly and introduce enhanced services and
features. In connection with the expansion of the Splitrock Network the Company
is creating business support systems with an architecture designed to maximize
both reliability and scalability. All database and billing systems will run on a
PC or UNIX distributed architecture rather than centralized mainframe systems.

Expand Target Market Opportunities. IDC estimates that the total number of
U.S. companies with Internet access will grow from an estimated 1.5 million, or
20.0% of total U.S. companies, in 1996 to 4.1 million, or 53.0% of total U.S.
companies, in 2000. IDC also estimates that the number of U.S. households with a
personal computer and a modem will grow from an estimated 8.8 million, or 24.0%
of all U.S. households with a personal computer in 1996, to 39.4 million, or
58.0% of all U.S. households with a personal computer, in 2000. IDC estimates
that there are currently over 4,000 ISPs in the U.S., consisting of national,
regional and local providers, of which the Company believes only a small
percentage have access to their own nationwide backbone network infrastructure.
The Company intends to capitalize on this expected growth in demand for network
services by aggressively marketing its services through a variety of
distribution channels and evaluating strategic alliances and acquisitions as
they present themselves. The Company believes that utilizing a range of
distribution channels will enable it to cost-effectively reach a broad base of
potential customers. The Company currently intends to develop and use a direct
sales force (which it expects to begin hiring late in the second half of 1998)
to attract ISPs, carriers, value added service providers and medium and large
businesses. In addition, the Company intends to use alternative distribution
channels, including agents, resellers and wholesalers, to gain access to a
substantially larger base of potential customers than the Company could
otherwise initially address through its direct sales force. Through the
combination of a direct sales force and alternative distribution channels, the
Company will seek to rapidly increase revenue-producing traffic on its Network.

The Company also intends to evaluate strategic alliances and acquisitions
that could provide additional traffic over the Splitrock Network. While the
Company is primarily focused on the domestic services market, it believes the
demand for Internet services outside the U.S. will grow over the next few years.
As a result, the Company will evaluate opportunities, primarily in Latin
America, to partner with strong, established telecommunications service
providers. For example, the Company will consider entering into international
alliances to originate and terminate international traffic on the Splitrock
Network.

4
<PAGE> 9

Provide Superior Comprehensive Customer Service. Splitrock believes that
superior customer service is a critical element in attracting and retaining
customers, and expanding value added services to existing customers. In
particular, the Company believes it is critical to maintain two geographically
dispersed Network Operations Centers ("NOCs"), each of which is able to monitor
the entire Network and provide rapid problem resolution. The Company has
established a 24-hours per day, seven days per week NOC at its Yorktown, NY
facility. In addition, a new 24-hours per day, seven days per week NOC recently
became fully operational at The Woodlands, TX facility.

RECENT DEVELOPMENTS

During the three months ended June 30, 1998, the Company began the Phase II
Expansion, the Company's largest build-out initiative to date. Until the
completion of the Phase II Expansion (expected in the second quarter of 1999),
the Company will continue to utilize the IBM Global Services Network. The
decrease in revenues between the first and second quarters of 1998 was primarily
the result of the switch in the calculation of charges for Prodigy services from
the Usage-Based Rate (as defined) to the Subscriber-Based Rate (as defined)
caused by an increase in average hourly use of subscribers and a decline in
total number of subscribers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The larger EBITDA deficit and
net loss compared to the first quarter of 1998 was primarily the result of the
lower revenues and the increased usage charges related to the IBM Global
Services Network described above and increased line and telecommunications
charges relating to the expansion of Splitrock Network. The Company expects to
continue to incur negative EBITDA and net loss through the completion of the
Phase II Expansion. Thereafter, the Company's ability to generate positive
EBITDA and net income will depend on the successful implementation of its
business strategy.

In cooperation with Telefonos de Mexico, S.A. de C.V. ("Telmex"), Mexico's
primary phone company, the Company expects to install a POP in Monterrey, Mexico
in the third or fourth quarter of 1998. This POP is currently intended only to
test connectivity between the Splitrock Network and Telmex's data network.
Should testing prove successful, the Company will consider entering into formal
negotiations to provide services to Telmex, including carrying all or a portion
of Telmex's U.S. bound data traffic over the Splitrock Network.

Carso Global Telecom, S.A. de C.V. ("Carso") is the controlling stockholder
of Prodigy and a significant stockholder of Telmex. Orient Star Holdings
("Orient Star"), a wholly owned subsidiary of Carso, owns 20.0 million shares,
or 25.7%, of the Common Stock of the Company and holds a warrant, exercisable
through September 18, 1998, to acquire an additional 5.0 million shares which
would result, if exercised, in Orient Star holding approximately 30.2% of the
Common Stock of the Company. The Company expects that this warrant will be
exercised, although no assurance can be given in this regard. See
"Management -- Certain Relationships and Related Transactions."

THE OFFERING

GENERAL

The Warrants and the Notes were originally issued by the Company pursuant
to the Unit Offering, in which 261,000 Units were offered and sold. Each Unit
consisted of a Warrant and an Original Note. The Warrants and Original Notes are
not separately transferable until the earliest of (i) October 22, 1998, (ii) a
Change in Control (as defined), (iii) the occurrence of an Event of Default (as
defined), (iv) the date on which a registration statement with respect to the
Warrants or an exchange offer for the Original Notes is declared effective or
(v) such earlier date as determined by the Initial Purchaser in its sole
discretion (any such date, the "Separation Date"). On August 12, 1998, the
Company filed a Registration Statement relating to the exchange of $250.0
million Original Notes for a like amount of Exchange Notes. Such Registration
Statement has not as yet been declared effective by the Commission. This
Prospectus (and the Registration Statement of which it is a part) applies solely
to the Warrants, the Warrant Shares and the Notes. The registration of the
Warrants and the Warrant Shares is intended to satisfy certain obligations of
the Company under that certain warrant agreement dated the Issue Date (the
"Warrant Agreement") between the Company and the Bank of Montreal Trust Company
(the "Warrant Agent"). The registration of the Notes is

5
<PAGE> 10

intended to satisfy certain obligations of the Company under an exchange and
registration rights agreement dated the Issue Date between the Company and the
Initial Purchaser. The Company will receive no proceeds from the sale of
Warrants, Warrant Shares or Notes.

THE WARRANTS

Issuer..................... Splitrock Services, Inc.

Warrants Offered........... 261,000 Warrants which, when exercised, will
entitle the holders thereof to acquire an aggregate
of 2,642,613 shares of Common Stock.

Exercise Price............. $.01 per share of Common Stock.

Expiration................. The Warrants are exercisable at any time on or
after July 24, 1999 and will expire on July 15,
2008.

Anti-Dilution Provisions... The Warrants have customary anti-dilution
provisions.

Voting Rights.............. Warrant holders have no voting rights.

Warrant Shares............. The Warrants entitle the holders thereof to acquire
shares of Common Stock of the Company. Shares of
Common Stock of the Company or any successor entity
and any other securities issuable or deliverable
upon exercise of the Warrants are collectively
referred to herein as the "Warrant Shares."

For additional information regarding the Warrants and Warrant Shares, see
"Description of the Warrants" and "Description of Capital Stock."

THE NOTES

The Notes.................. $11,000,000 in aggregate principal amount of
11 3/4% Series B Senior Notes due 2008 issued under
the Indenture dated as of July 24, 1998 between the
Company and the Bank of Montreal Trust Company as
trustee (the "Trustee"). The form and terms of the
Notes are the same as the form and terms of the
$250,000,000 in aggregate principal amount of
Exchange Notes issued pursuant to the Exchange
Offer and any general description of the Notes
included in this Prospectus refers to all 11 3/4%
Series B Senior Notes due 2008 issued by the
Company.

Maturity................... July 15, 2008.

Interest Payment Dates..... January 15 and July 15 of each year, commencing on
January 15, 1999.

Escrow Proceeds............ The Company has deposited with the Escrow Agent an
amount of cash or Temporary Cash Investments
(approximately $56.6 million), that, together with
the interest received thereon, will be sufficient
to pay when due the first four semi-annual interest
payments on the Notes, with any remaining balance
to be retained by the Company. The Notes are
collateralized by a first priority and exclusive
security interest in the Escrow Account. See
"Description of the Notes -- Disbursement of Funds;
Escrow Account."

Sinking Fund............... None.

Guarantees................. The Notes will be fully and unconditionally
guaranteed on a senior, unsecured basis by each of
the Company's future Restricted Subsidiaries that
incurs indebtedness. See "Description of the
Notes -- Certain

6
<PAGE> 11

Covenants -- Future Subsidiary Guarantors." The
Company does not currently have any subsidiaries.

Optional Redemption........ Except as described below, the Company may not
redeem the Notes prior to July 15, 2003. On or
after such date, the Company may redeem the Notes,
in whole or in part, at the redemption prices set
forth herein, together with accrued and unpaid
interest and liquidated damages, if any, to the
date of redemption. In addition, at any time and
from time to time prior to July 15, 2001, the
Company may, subject to certain requirements,
redeem up to 35% of the original aggregate
principal amount of the Notes (calculated after
giving effect to any issuance of Additional Notes,
as defined) with the Net Cash Proceeds of one or
more Equity Offerings by the Company, at a
redemption price equal to 111.75% of the principal
amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, to the date of
redemption; provided, however, that at least 65% of
the original aggregate principal amount of the
Notes remains outstanding immediately after each
such redemption (calculated after giving effect to
any issuance of Additional Notes). See "Description
of the Notes -- Optional Redemption."

Change of Control.......... Upon the occurrence of a Change of Control, each
holder of the Notes will have the right to require
the Company to repurchase all or any part of such
holder's Notes at a price equal to 101% of the
aggregate principal amount of the Notes plus
accrued and unpaid interest and liquidated damages
thereon, if any, to the date of repurchase. See
"Description of the Notes -- Change of Control."

Ranking.................... The Notes will be Senior Indebtedness of the
Company, will rank pari passu with all existing and
future Senior Indebtedness of the Company and will
rank senior to all future Subordinated Obligations
of the Company. The Notes will be unsecured (except
that the Trustee will have a security interest in
the Escrow Account for the benefit of the Holders
of the Notes) and will therefore be effectively
subordinated to all secured indebtedness of the
Company. At June 30, 1998, after giving pro forma
effect to the offering of the Notes and the
application of the proceeds therefrom, the Company
would have had $21.2 million of indebtedness
outstanding (other than the Notes), all of which
would have been Senior Indebtedness and all of
which would have been secured. See "Description of
the Notes -- Ranking."
---------------------

Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors under "Risk Factors" for risks involved with an investment in the
Warrants, Warrant Shares and Notes.
---------------------

The Company's principal executive offices are located at 8665 New Trails
Drive, Suite 200, The Woodlands, Texas 77381. The Company's telephone number is
(281) 465-1200.

7
<PAGE> 12

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

The following table sets forth summary historical and unaudited pro forma
financial data of the Company. The historical statement of operations and other
financial data for the period from inception (March 5, 1997) through December
31, 1997 and the historical balance sheet data as of December 31, 1997 have been
derived from, should be read in conjunction with and are qualified in their
entirety by reference to the audited financial statements, including the notes
thereto, included elsewhere in this Prospectus. The historical statement of
operations and other financial data for the period from inception (March 5,
1997) through June 30, 1997 and for the six months ended June 30, 1998 and the
historical balance sheet data as of June 30, 1998 have been derived from, should
be read in conjunction with and are qualified in their entirety by reference to
the unaudited condensed financial statements, including the notes thereto,
included elsewhere in this Prospectus which have been prepared on a basis
consistent with the audited financial statements and in the opinion of
management include all adjustments, consisting solely of normal, recurring
adjustments, necessary to present fairly the information contained therein. The
historical quarterly statement of operations data for the three months ended
June 30, 1997, September 30, 1997, December 31, 1997, March 31, 1998 and June
30, 1998 have been derived from the Company's accounting records and have been
prepared on a basis consistent with the audited financial statements and in the
opinion of management include all adjustments, consisting solely of normal,
recurring adjustments, necessary to present fairly the information contained
therein. The summary historical financial data are not necessarily indicative of
the operating results to be expected in future periods.

The following table also presents certain summary unaudited pro forma
financial data of the Company for the period from inception (March 5, 1997) to
December 31, 1997 and the six months ended and as of June 30, 1998, which give
effect to the Unit Offering and the application of the proceeds therefrom as if
they had occurred on March 5, 1997 and January 1, 1998, respectively, in the
case of the statement of operations data, and June 30, 1998, in the case of the
balance sheet data. The summary unaudited pro forma financial data do not
purport to be indicative of the results that actually would have been obtained
had the Unit Offering been consummated on the assumed dates and they are not
necessarily indicative of operating results to be expected in future periods.

The following summary historical and unaudited pro forma financial data
should be read in conjunction with the historical financial statements of the
Company and the notes thereto included elsewhere in this Prospectus, "Selected
Historical and Unaudited Pro Forma Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

8
<PAGE> 13

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

<TABLE>
<CAPTION>
PERIOD FROM INCEPTION PERIOD FROM INCEPTION SIX MONTHS
(MARCH 5, 1997) (MARCH 5, 1997) ENDED
THROUGH THROUGH JUNE 30,
DECEMBER 31, 1997 JUNE 30, 1997 1998
--------------------- --------------------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 22,708 $ -- $ 32,214
Operating expenses:
Network personnel costs.................... 437 -- 2,156
Network operating costs.................... 1,925 -- 9,402
Legacy Network costs....................... 25,341 -- 27,090
Severance costs(1)......................... 463 -- --
Selling, general and administrative........ 1,276 125 1,628
Depreciation and amortization.............. 3,500 -- 4,907
-------- ------- --------
Total operating expenses........... 32,942 125 45,183
-------- ------- --------
Loss from operations......................... (10,234) (125) (12,969)
Other income (expense):
Interest income............................ 348 30 183
Interest expense........................... (235) -- (842)
-------- ------- --------
Loss before income taxes..................... (10,121) (95) (13,628)
Provision for income taxes................... -- -- --
-------- ------- --------
Net loss..................................... $(10,121) $ (95) $(13,628)
======== ======= ========
Loss per share -- basic and diluted.......... $ (0.24) $ (0.01) $ (0.18)
======== ======= ========
Weighted average shares -- basic and
diluted.................................... 42,824 11,525 76,888
======== ======= ========
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
1997 JUNE 30, 1998
------------ ----------------------
ACTUAL ACTUAL PRO FORMA(2)
------------ ------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(3).............................. $ 7,710 $ 5,177 $187,456
Restricted cash(4)........................................ 3,472 -- 56,604
Property and equipment, net............................... 38,504 43,148 43,148
Total assets.............................................. 54,388 57,630 306,183
Short term note payable(3)................................ -- 1,477 --
Long term debt and capital lease obligations (including
current portion)(3)..................................... 25,120 32,219 279,339
Stockholders' equity(5)................................... 20,407 7,879 10,759
</TABLE>

9
<PAGE> 14

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1998 1998
-------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS
DATA:
Revenue............................... $ -- $ 10,729 $11,979 $16,494 $15,720
Operating expenses:
Network personnel costs............. -- 95 342 1,051 1,105
Network operating costs............. -- 561 1,364 3,127 6,275
Legacy Network costs................ -- 13,119 12,222 12,295 14,795
Severance costs(1).................. -- -- 463 -- --
Selling, general and
administrative................... 125 471 680 657 971
Depreciation and amortization....... -- 1,708 1,792 2,820 2,087
------- ---------- ------- ------- -------
Total operating expenses.... 125 15,954 16,863 19,950 25,233
------- ---------- ------- ------- -------
Loss from operations.................. (125) (5,225) (4,884) (3,456) (9,513)
Other income (expense):
Interest income..................... 30 137 181 107 76
Interest expense.................... -- (113) (122) (349) (493)
------- ---------- ------- ------- -------
Loss before income tax................ (95) (5,201) (4,825) (3,698) (9,930)
Provision for income tax.............. -- -- -- -- --
------- ---------- ------- ------- -------
Net loss.............................. $ (95) $ (5,201) $(4,825) $(3,698) $(9,930)
------- ---------- ------- ------- -------
Loss per share -- basic and diluted... $ (0.01) $ (0.11) $ (0.06) $ (0.05) $ (0.13)
======= ========== ======= ======= =======
Weighted average shares -- basic and
diluted............................. 14,648 48,991 76,800 76,800 76,976
======= ========== ======= ======= =======
OTHER QUARTERLY DATA:
EBITDA(7)............................. $ (125) $ (3,517) $(2,629) $ (636) $(7,426)
======= ========== ======= ======= =======
Cash provided by (used in):
Operating activities................ $(1,554) $ 103 $(2,333) $(4,874) $ 1,162
Investing activities................ (377) (12,242) (2,878) (2,740) (4,974)
Financing activities................ 10,026 19,750 (3,387) 3,253 5,640
</TABLE>

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

(1) Prior to January 1998, certain staffing positions were filled by Prodigy
employees who were subcontracted to the Company. In the fourth quarter of
1997, the Company recorded a severance charge related to the elimination of
13 of these positions.

(2) Pro forma balance sheet data assumes the Unit Offering and the application
of the net proceeds therefrom had occurred on June 30, 1998.

(3) As of June 30, 1998, the Company owed Ericsson $1.5 million, which was
repaid with the proceeds of the Unit Offering, and a stockholder $11.0
million, which was refinanced in connection with the Unit Offering. After
giving effect to such repayment and refinancing, pro forma cash and cash
equivalents would have been $187.5 million. Pro forma long term debt and
capital lease obligations is net of $2.9 million discount to the principal
amount of the Notes attributable to the Company's estimate of the value of
the Warrants issued in connection with the Unit Offering.

(4) As of December 31, 1997, the Company had an outstanding letter of credit in
the amount of $3.5 million. This letter of credit was secured by the amount
in the restricted cash account. In the first quarter of 1998, the Company
exercised its early purchase option with regard to the related capital lease
and the letter of credit was retired. Pro forma amount represents escrowed
funds that, together with interest received thereon, will be sufficient to
pay when due the first four semi-annual interest payments on the Notes.

10
<PAGE> 15

December 31, 1997 by a third party valuation firm. See
"Management -- Aggregated Fiscal Year-End Option Values." No assurance can
be given that the value allocated to the Warrants is indicative of the price
at which the Warrants may actually trade.

(6) Capital expenditures include equipment purchased through capital leases of
$26.2 million and $4.1 million for the period from inception (March 5, 1997)
through December 31, 1997 and for the period from inception (March 5, 1997)
to June 30, 1997 and for the six months ended June 30, 1998, respectively.
These capital leases include $5.3 million of equipment leases assumed from
Prodigy and $3.5 million of equipment leases subsequently liquidated through
an early purchase option.

(7) EBITDA is defined as net income (loss) plus net interest expense, provision
for income taxes, depreciation and amortization and severance costs. EBITDA
is presented as it is commonly used by certain investors to analyze and
compare operating performance and to determine a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other income or
cash flow data or as a measure of a company's profitability or liquidity and
is not a measure in accordance with generally accepted accounting
principles. EBITDA is not necessarily comparable with similarly titled
measures reported by other companies.

(8) Pro forma interest expense assumes that the Unit Offering and the
application of the net proceeds therefrom had occurred on the first day of
the period presented. In addition to the stated interest rate on the Notes,
pro forma interest expense includes amortization of deferred issuance costs
and discount on the Notes related to the Warrants. Pro forma interest
expense does not include the pro forma effect of interest income which would
have been earned on excess cash for the period from inception (March 5,
1997) through December 31, 1997 and for the period from inception (March 5,
1997) to June 30, 1997 and for the six months ended June 30, 1998.

11
<PAGE> 16

RISK FACTORS

An investment in the Exchange Notes involves a high degree of risk. In
addition to the other information set forth elsewhere in this Prospectus, the
following factors relating to the Company and this Exchange Offer should be
considered carefully by prospective investors when evaluating an investment in
the Exchange Notes.

LIMITED OPERATING HISTORY; OPERATING LOSSES

The Company was formed in March 1997 and has a limited history of
operations. Thus, historical information set forth herein may not be indicative
of the Company's future operating results and financial condition. In view of
the limited operating history of the Company, the Company remains vulnerable to
a variety of business risks generally associated with start-up companies, some
of which are beyond the control of the Company. Failure to continue to upgrade
operating and financial controls or systems or unexpected difficulties
encountered during expansion could adversely affect the Company's business,
financial condition and results of operation. Since June 1997, the Company has
recruited and hired key members of management in the areas of operations and
administration. As a result, the key members of the Company's management team
have worked together for only a short time. See "Management."

The Company reported EBITDA (as defined) of approximately $(6.3) million
and $(8.1) million for the period from inception (March 5, 1997) to December 31,
1997 and the six months ended June 30, 1998, respectively (net losses amounted
to $10.1 million and $13.6 million for the same periods). On a pro forma basis
after giving effect to the offering of the Original Notes and the application of
the net proceeds therefrom, the Company would have reported net losses of $36.3
million and $29.1 million for the period from inception (March 5, 1997) to
December 31, 1997 and the six months ended June 30, 1998, respectively. The
Company expects such net losses to continue as the Company focuses on increasing
its customer base, implementing its business strategy and developing new
services which will require it to incur significantly increased expenses for
marketing, network infrastructure, accounting, billing and other financial
control systems and personnel. Such expenses are expected to adversely impact
cash flow and operating performance. See "Summary -- Recent Developments." There
can be no assurance that the Company will generate sufficient revenues such that
the Company's operations will become profitable or generate positive cash flows
in the future. If the Company cannot achieve operating profitability or positive
cash flows from operating activities, it may not be able to meet its working
capital or debt service requirements, including its obligations under the Notes,
which would cause an event of default under the Indenture. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

DIFFICULTIES IN EXPANDING AND OPERATING THE SPLITROCK NETWORK

The Company's ability to generate positive cash flows from operations will
depend upon the successful, timely and cost-effective expansion of the Splitrock
Network, the successful operation of the Splitrock Network and the Company's
ability to continue to attract customers. The expansion of the Splitrock Network
is subject to a variety of uncertainties and contingencies, including site and
facility acquisitions, the purchase and installation of network equipment, the
timely performance by its suppliers and third-party contractors of their
obligations, obtaining local telecommunications connections, and network
testing. Although the Company believes that its cost estimates and the expansion
schedule are reasonable, there can be no assurance that the actual construction
costs or time required to expand the Splitrock Network will not substantially
exceed current estimates. The inability of the Company to complete the Phase II
Expansion or obtain the necessary third-party telecommunication connections on a
timely or cost-efficient basis would have a material adverse effect on the
Company's financial condition and results of operations.

The Company has limited experience managing a telecommunications network.
The operation of the Splitrock Network is a significant undertaking.
Administrative, technical, operational and other problems that could arise,
including as a result of increasing traffic volume and equipment and software
failures, may be more difficult to address and solve due to the significant size
and complexity of the Network. The Company has experienced technical problems
which have led to significant service interruptions and failures. See
"-- Reliance on Prodigy; Recent Discussions with Prodigy." The inability of the
Company to effectively

12
<PAGE> 17

operate the Network and to quickly respond to problems as they occur would have
a material adverse effect on the Company's financial condition and results of
operations.

The Company's financial performance will further depend on its ability to
generate significant customer traffic. The Company currently derives
substantially all of its revenues from Prodigy. Although the Company has begun
receiving revenues from two additional customers, the Company expects that for
the foreseeable future Prodigy will remain its dominant customer and a small
number of customers will continue to account for all the Company's revenue. See
"Business -- Customers." In order to broaden its customer base, the Company will
need to expand its marketing and sales efforts and staff. See "-- Ability to
Manage Growth." The inability to significantly increase customer traffic would
have a material adverse effect on the Company.

The Company anticipates that even after the Phase II Expansion, future
expansions and adaptations of the Network's infrastructure, including the
electronic and software components used therein, will be necessary in order to
respond to growth in the number of customers served, increased demands to
transmit larger amounts of data, changes in its customers' service requirements
and technological advances by competitors. The expansion and adaptation of the
Splitrock Network will require substantial financial, operational and managerial
resources. There can be no assurance that the Company will be able to expand or
adapt the Splitrock Network to meet the evolving standards, demands and
requirements of its customers or technological advances of its competitors on a
timely basis and at a commercially reasonable cost, if at all, or that the
Company will be able to deploy successfully any expanded and adapted Network
infrastructure. The Company believes, based on current plans and assumptions
relating to its operations, that the net proceeds of the Offering, together with
its existing financial resources and future borrowings from a stockholder, if
any, will be sufficient to fund the Company's growth and operations. In the
event that the Company's plans or assumptions change or prove to be inaccurate,
the Company may be required to seek alternative sources of financing. There can
be no assurance that the Company would be able to obtain additional financing on
acceptable terms, or at all. Any failure by the Company to expand or adapt the
Splitrock Network to the needs of its customers could have a material adverse
effect on the Company's financial condition and results of operations.

RELIANCE ON PRODIGY; RECENT DISCUSSIONS WITH PRODIGY

Pursuant to the Prodigy Agreement (as defined), the Company currently
provides certain network and related services, including Internet dial access
services, to Prodigy for its subscribers. Substantially all of the Company's
revenue to date has been derived from Prodigy under this agreement. Although the
Company has recently begun providing services to two additional customers and
expects to attract additional customers in the short-term, the Company expects
that for the foreseeable future Prodigy will remain its dominant customer and a
small number of customers will continue to account for all the Company's
revenue.

Prodigy is currently the third largest U.S. ISP measured in minutes
on-line. Launched in 1984 as a joint venture between IBM and Sears, Prodigy is
currently controlled by Carso, which indirectly owns 20.0 million shares, or
25.7%, of the Common Stock of the Company and a warrant, exercisable through
September 18, 1998, to acquire an additional 5.0 million shares, which, if
exercised, would result in Carso indirectly holding approximately 30.2% of the
Common Stock of the Company. Samer Salameh, the President and Chief Executive
Officer of Prodigy, is a member of the Board of Directors of the Company. See
"Principal Stockholders." Since Prodigy is a private company, limited financial
or other information regarding Prodigy is publicly available. In addition, the
Prodigy Agreement provides for only very limited information regarding Prodigy
to be provided to the Company. Therefore, the Company is unable to assess with
any certainty the financial condition or results of operations of Prodigy or
whether Prodigy will continue to operate as a financially solvent company or
remain able to pay amounts owed under the Prodigy Agreement. Furthermore,
Prodigy operates in a highly competitive environment. Prodigy competes with a
wide range of national, regional and local ISPs. Due to the limited available
information regarding Prodigy, the Company is unable to predict whether Prodigy
will remain competitive in the ISP marketplace. If competitive or other factors
were to result in a reorganization, bankruptcy, liquidation or similar
proceeding with respect to Prodigy or otherwise result in Prodigy being unable
to pay amounts due under the Prodigy Agreement the Company's financial position,
results of operations and ability to pay principal and interest on the Notes
would be materially adversely affected. Furthermore, if due to competitive or
other factors the number of Prodigy subscribers or
13
<PAGE> 18

usage by subscribers were to decrease, the Company would receive less revenue
under the Prodigy Agreement, which could have a material adverse effect on the
Company's financial position and results of operations. In addition, Prodigy is
operating in an industry undergoing rapid consolidation. Any acquisition or
merger involving Prodigy and a company with an alternative source of network
services could result in Prodigy exercising its option to terminate the Prodigy
Agreement and therefore have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Prodigy Transactions."

The Prodigy Agreement allows Prodigy to terminate its arrangement with the
Company on twelve months notice upon the payment of a termination charge. The
Prodigy Agreement also allows Prodigy to terminate its arrangement with the
Company on 45 days notice without payment if the Company defaults, following a
cure period, with respect to certain performance standards contained in the
Prodigy Agreement. In addition, the Prodigy Agreement provides for arbitration
to resolve certain other disputes including a default by the Company with
respect to certain financial covenants. Such arbitration could lead to a
termination of the Prodigy Agreement. The Company believes that, based on
current market conditions, if the relationship with Prodigy were terminated, it
could find new customers to replace the resulting loss of traffic. There can be
no assurance that there will not be a change in market conditions or that the
Company will be able to secure additional traffic should the relationship with
Prodigy be terminated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers."

The Company is currently Prodigy's sole supplier of network services. As a
result, Prodigy is dependent on the Company to provide local Internet dial
access services to its subscribers. As such, Prodigy closely monitors the
quality of the services provided by the Company since it directly impacts
Prodigy's business and financial performance.

As part of its expansion plan, in January 1998 the Company began migrating
Prodigy subscribers from the Legacy Network to the Splitrock Network. In
addition to technical problems and network failures which occur from time to
time in the ordinary course of operating a telecommunications network, in
connection with the rapid migration of Prodigy subscribers from the Legacy
Network to the Splitrock Network during the first quarter of 1998, the Company,
and therefore Prodigy, experienced significant service interruptions and
failures, the most prolonged and serious of which occurred in February, March
and April of 1998. These service interruptions and failures were primarily due
to a faulty modem code that, among other things, resulted in a significant
number of Prodigy subscribers who called into the Splitrock Network receiving
busy signals when, in fact, there was sufficient capacity available to handle
the calls. At the time of these service interruptions, the Company had
inadequate staffing levels and procedures in place to detect or respond to the
situation in a timely manner. As a result, the modem related problems resulted
in an unfavorable call failure rate compared to industry norms. The Company
believes that it and its third-party modem vendor have corrected the faulty
modem code, although no assurance can be given in this regard. In addition, the
Company believes that it has achieved staffing levels in its NOCs adequate to
detect and address any such future service interruptions or failures.

Since February 1998 Prodigy has expressed repeated and serious concerns
regarding the Company's ability to deliver network services at a level of
quality and reliability necessary to sustain Prodigy's business and expected
growth. In particular, Prodigy has indicated that it believes that, due to the
Company's Network problems during the first quarter of 1998, Prodigy lost a
significant number of subscribers and the associated revenues and incurred
substantial costs. In addition, Prodigy has expressed serious concern about the
impact the Company's Network problems have had on the perception of Prodigy in
the industry. In May 1998, Prodigy notified the Company that unless the Company
was able to improve Network quality and access availability, it would be forced
to use alternate network service providers.

In connection with these discussions Prodigy raised a number of service and
technology related issues that it believes require prompt resolution. These
issues include, among other things, providing backup capacity to the Splitrock
Network (including through other providers' networks), automatic rollover
services to alternate access phone numbers, methods for limiting service
abusers, and network time-out circumventions. In addition, Prodigy has proposed
a number of amendments to the Prodigy Agreement including, among other

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things, modifying the current fee structure to a monthly fee based on
utilization of the Network, imposing more stringent financial penalties on the
Company in the event of Network interruptions, and exclusivity until the Network
is stable (i.e., a prohibition on the Company providing Internet dial access
services to Prodigy's large consumer-oriented ISP competitors).

Prodigy and the Company have had several meetings with regard to these
issues and have agreed to continue to have frequent periodic meetings. As a
result of these meetings, the Company has implemented a number of additional
procedures and business support systems. For example, the Company has
implemented network management systems that enable real time monitoring of the
Network and has established more frequent access to Prodigy subscriber-related
data on Network performance. Certain issues, however, remain under discussion.
Although the Company believes that it will resolve the outstanding issues
between the Company and Prodigy, until these issues are resolved, the future of
the Company's relationship with Prodigy is uncertain and there can be no
assurance that further discussions with Prodigy will not result in a termination
of the relationship, increased costs to the Company or amendments to the Prodigy
Agreement that are unfavorable to the Company. The loss of Prodigy as a customer
or any such increased costs or amendments to the Prodigy Agreement could have a
material adverse effect on the Company.

Prior to solutions implemented by the Company and its third-party modem
vendor, in April 1998 Inverse, an independent Internet testing group, indicated
that Prodigy had a call failure rate for the March 1998 reporting period that
was almost double that of Inverse's reported industry average, an 18.3% call
failure rate versus 9.4%, respectively, during the evening hours in which most
Prodigy traffic occurs. In June 1998, Inverse indicated that for the May
reporting period Prodigy had a call failure rate that was lower than the Inverse
industry average during such evening hours. The Company believes that its
improvement was primarily due to the solutions implemented by it and its
third-party modem vendor. In July 1998, Inverse indicated that for the June
reporting period Prodigy had a call failure rate above the Inverse industry
average during such evening hours. Prodigy's higher rate was in part due to
problems Prodigy experienced with certain log-on software during four evenings
during the Inverse testing period. The Company believes that Prodigy has
corrected these software problems. In all other call failure rating categories
tested by Inverse during June, the Company's measurements were better than the
Inverse industry average. Investors should not place undue reliance on the
Inverse report as a measure of the Company's Network performance because it does
not measure and report on all the factors that may affect the quality of
Splitrock's services to Prodigy and Inverse's findings are based on tests
conducted on a sampling of only 42 POPs. Furthermore, the most recent Inverse
data reflect only two months of operations and there can be no assurance that
the Company will be able to sustain such a level of Network performance.

ESTABLISHMENT AND MAINTENANCE OF TRANSMISSION SERVICES AND PEERING RELATIONSHIPS

The Company's success will depend upon its ability to complete the Phase II
Expansion and develop adequate support systems and services at an acceptable
cost. In order to complete the Phase II Expansion and continue operating the
existing POPs, the Company has entered into and will continue to enter into
agreements with various providers of infrastructure capacity.

The Company currently maintains transmission services agreements primarily
with WorldCom Communications, Inc. ("WorldCom") for long distance and with
competitive local exchange carriers ("CLECs") and various regional Bell
operating companies ("RBOCs") for local connections. In the future, the Company
will be required to negotiate new transmission services agreements, or
renegotiate existing transmission services agreements, as the Company expands
the Network. There can be no assurance that the Company will successfully
negotiate or renegotiate such agreements. The failure to negotiate or
renegotiate required transmission services agreements could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Splitrock's Network -- Transmission Services."

The Company has established peering arrangements with several ISPs and
intends to negotiate further agreements. The establishment and maintenance of
peering relationships with other network service providers is necessary in order
to exchange traffic with other network service providers without having to pay
transit costs. The basis on which network service providers make peering
available or impose settlement charges is

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<PAGE> 20

evolving as the provision of Internet access and related services has expanded
and the dominance of a small group of national network service providers has
driven corporate peering policies. Recently, companies that have previously
offered peering have cut back or eliminated peering relationships and are
establishing new, more restrictive criteria for peering. Furthermore, if
increasing requirements associated with maintaining peering with the major
national network service providers develop, the Company may have to comply with
those additional requirements in order to establish peering relationships.
Failure to maintain peering relationships or establish new ones, if necessary,
would cause the Company to incur additional operating expenditures which would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Splitrock's Network -- Peering."

LEVERAGE AND RESTRICTIONS IMPOSED BY INDEBTEDNESS

The Company is highly leveraged. At June 30, 1998, on a pro forma basis
after giving effect to the Unit Offering and the application of the net proceeds
therefrom, the Company would have had $279.3 million of total indebtedness,
representing approximately 96.3% of the Company's total capitalization. See
"Capitalization." In addition, the terms of the Notes permit the Company to
incur certain other indebtedness. There can be no assurance that the Company
will have sufficient cash flow to pay the interest expense or the principal
associated with the Notes or such additional indebtedness. See "Selected
Historical and Unaudited Pro Forma Financial Data," "Capitalization," and
"Description of the Notes."

The historical earnings of the Company were insufficient to cover its fixed
charges for the period from inception (March 5, 1997) to December 31, 1997 and
the six months ended June 30, 1998 by approximately $10.1 million and $13.6
million, respectively. On a pro forma basis after giving effect to the Unit
Offering and the application of the net proceeds therefrom, the earnings of the
Company would have been insufficient to cover its fixed charges for the period
from inception (March 5, 1997) to December 31, 1997 and the six months ended
June 30, 1998 by approximately $36.3 million and $29.1 million, respectively.
See "Selected Historical and Unaudited Pro Forma Financial Data."

The degree to which the Company will be leveraged could have several
important consequences to the holders of the Notes, including, but not limited
to, the following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to service the Company's
indebtedness, and the failure of the Company to generate sufficient cash flow to
service such indebtedness could result in a default under such indebtedness,
including under the Notes; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or for other purposes may be impaired; (iii) the Company's flexibility to
expand, make capital expenditures and respond to changes in the industry and
economic conditions may be limited; (iv) the Indenture will contain, and future
agreements relating to the Company's indebtedness (including any credit
facilities, to the extent permitted by the Indenture) may contain, numerous
financial and other restrictive covenants, including, among other things,
limitations on the ability of the Company to incur additional indebtedness, to
create liens and other encumbrances, to make certain payments and investments,
to pay dividends, to sell or otherwise dispose of assets or to merge or
consolidate with another entity, the failure to comply with which may result in
an event of default, which, if not cured or waived, could have a material
adverse effect on the Company; and (v) the Company will be more leveraged than
certain of its competitors, which might place the Company at a competitive
disadvantage. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

The Company's ability to meet its debt service obligations, to finance
planned capital expenditures, lease payments or acquisitions or to comply with
the covenants contained in the Indenture will depend upon the Company's future
performance, which will be subject to general economic conditions and to
financial, business, competitive, legislative, regulatory and other factors
affecting its operations, many of which are beyond the control of the Company.
There can be no assurance that the Company's business will be able to generate
cash flow at levels sufficient to satisfy its debt service and other
requirements. If in the future the Company is unable to generate sufficient cash
from its operations to make scheduled interest payments on the Notes, to pay the
Notes at maturity, or to meet other obligations and commitments, the Company may
be required to adopt one or more alternatives, such as refinancing or
restructuring its indebtedness, reducing or delaying planned expansion, selling
assets or seeking to raise additional debt or equity. There can be no
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<PAGE> 21

assurance that the Company will be able to implement any of these alternatives
on satisfactory terms or at all. In addition, the terms of existing or future
debt agreements, including the Indenture, may prohibit the Company from adopting
some of these alternatives. See "Description of the Notes."

ASSET ENCUMBRANCE

The Notes are senior obligations of Splitrock ranking pari passu in right
of payment with all existing and future Senior Indebtedness of Splitrock. The
Notes are unsecured except with respect to the security interest held by the
Trustee in the Escrow Account for the benefit of holders of the Notes. The
Indenture will permit the Company to incur certain indebtedness, including
secured indebtedness. Holders of secured indebtedness of the Company will have
claims with respect to the assets constituting collateral for such indebtedness
that are prior to the claims of holders of Notes.

In the event of a default on the Notes, or a bankruptcy, liquidation or
reorganization of the Company, assets securing indebtedness of the Company and
its subsidiaries other than the Notes will be available to satisfy obligations
with respect to the indebtedness secured thereby before any payment therefrom
could be made on the Notes. Accordingly, the Notes will be effectively
subordinated to claims of secured creditors of the Company to the extent of such
pledged collateral. At June 30, 1998, after giving pro forma effect to the Unit
Offering and the application of the net proceeds therefrom, the Company would
have had $21.2 million of secured indebtedness outstanding. See "Description of
the Notes," "Selected Historical and Unaudited Pro Forma Financial Data,"
"Description of Certain Indebtedness" and the Company's historical financial
statements and notes thereto included elsewhere in this Prospectus.

ABILITY TO MANAGE GROWTH

To date, the Company's operations have been limited to one primary customer
and rapid growth may place a significant strain on the Company's Network and
management, administrative, operational and financial resources. The Company's
ability to manage its growth successfully will require the Company to further
enhance its operational, management, administrative, financial and information
systems and controls. There can be no assurance that the Company will have the
resources available to successfully enhance such systems and controls.

Since June 1997, the Company has recruited and hired key members of
management in the areas of operations and administration. As a result, the key
members of the Company's management team have worked together for only a short
time. See "Management." Currently, the Company has limited personnel. In
accordance with the Company's growth strategy, it is seeking to hire additional
sales, marketing, administrative, operating and technical personnel. See
"Business -- Employees." Successful implementation of the Company's strategy
will depend on its ability to attract and retain such employees. The process of
locating, training and successfully integrating qualified personnel into the
Company's operations is often lengthy and expensive, and as a result of the
recent growth in the industry, the Company has experienced significant
competition in the attraction and retention of personnel that possess the skill
sets that the Company is seeking. There can be no assurance that the Company
will be successful in attracting, integrating and retaining such personnel. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Company's
results of operations, product development efforts, ability to attract customers
and ability to expand the Network.

In addition, as the Company increases its service offerings and number of
customers, there will be additional demands on the Company's customer support,
sales, marketing and administrative resources and personnel as well as on the
Splitrock Network infrastructure. While the Company's Network is operational, it
has experienced significant recent interruptions and failures and has not been
tested under circumstances consistent with the more significant volume of
activity anticipated as the Company grows its business and continues to migrate
Prodigy traffic from the Legacy Network and the IBM Global Services Network to
the Splitrock Network. See "-- Difficulties in Expanding and Operating the
Splitrock Network" and "-- Reliance on Prodigy; Recent Discussions with
Prodigy." The Company's inability to effectively manage its growth could have a
material adverse effect on the Company.

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DEVELOPMENT OF EFFECTIVE PROCESSES AND SYSTEMS

Sophisticated processes and systems are vital to the Company's growth and
its ability to monitor costs, bill customers, record and manage customer orders
and record taxes due. The Company utilizes information management, equipment
monitoring, tracking and other software systems provided by third party vendors
and intends to implement a billing system based on third party software late in
1998. As the Company's strategy provides for growth in the number and volume of
products and services offered by the Company, such systems will be required to
expand with and adapt to the Company's growth. Failure of third party vendors to
deliver proposed products and services in a timely and effective manner and at
acceptable costs, failure of the Company to adequately identify all of its
information and processing needs, failure of the Company's processing or
information systems or failure of the Company to upgrade systems as necessary
would have a material adverse effect on the ability of the Company to implement
its strategy and on its financial condition and results of operations.

COMPETITION

The industry in which the Company competes is extremely competitive. The
Company expects that competition will continue to intensify as customers seek
additional capacity to satisfy continued growth of the Internet industry. In
addition, numerous competitors, including major telecommunications carriers, are
rapidly expanding their network capabilities. The Company believes that the
primary competitive factors for the provision of network services are quality of
service, network coverage, reliability, price, and product innovation.
Management believes it can compete effectively on these factors based on the
design of the Splitrock Network and industry experience at top management
levels, although there can be no assurance in this regard.

The Company's current and prospective competitors generally may be divided
into two groups: (i) companies that provide Internet access services to ISPs
with both residential and small business customers, including Verio Inc.
("Verio"), Concentric Network Corporation ("Concentric"), PSINet Inc. ("PSINet")
and NETCOM On-Line Communications Services, Inc. ("Netcom") and (ii) companies
that provide Internet access (including Internet dial access and transit), VPN
and other value added services to medium and large business customers, including
UUNet Technologies, Inc., a subsidiary of WorldCom ("UUNet"), GTE
Internetworking (formerly Bolt, Beranek & Newman, Inc. ("BBN")) and DIGEX, a
subsidiary of Intermedia Communications Inc. ("DIGEX"), as well as most of the
major long distance companies. Many of these competitors, in addition to their
substantially greater market presence and financial, technical and personnel
resources, also have large existing commercial customer bases. Furthermore, many
of these competitors have the ability to bundle Internet access and VPN services
with other services such as Web browsing or, in the case of long distance
companies, telephony. Such bundling of services may have a material adverse
effect on the Company's ability to compete effectively and thus could have an
adverse effect on the Company's business, financial condition and results of
operations.

The Company believes that significant new competitors will enter the
network services market. The Company is aware that other companies, including
IXC Communications Inc. ("IXC Comm.") and Level 3 Communications Inc. ("Level
3"), are in the process of building or expanding networks that will have the
ability to provide services comparable to those of the Company. In addition,
many of the Company's competitors have the financial and operational resources
to construct networks similar to the Splitrock Network. For example, Sprint
Communications Corp. ("Sprint") recently announced that it is in the process of
designing a network which will contain ATM switches at every core, hub and
remote site. There can be no assurance that the Company will be able to compete
effectively with such companies.

Recent reforms in the federal regulation of the telecommunications industry
have also created greater opportunities for local exchange carriers ("LECs"),
including the RBOCs, to enter the Internet network services market and therefore
compete with the Company. Such increased competition could have a material
adverse effect on the Company. In order to address the Internet network service
requirements of the current business customers of long distance and local
carriers, the Company believes that there is a trend toward horizontal
integration through acquisitions of, joint ventures with, and the wholesale
purchase of connectivity from, ISPs. The WorldCom/MFS Communications Company,
Inc. ("MFS")/UUNet consolidation (as well

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<PAGE> 23

as the pending WorldCom/MCI Communications Corporation ("MCI") merger), the
Netcom/ICG Communications Inc. merger, the Intermedia Communications Inc.
("Intermedia")/DIGEX merger and the GTE Corporation's ("GTE") acquisition of BBN
are indicative of this trend. Such consolidations may result in the Company
competing with larger companies with greater resources to devote to the
development of new competitive products and services and the marketing of
existing competitive products and services.

As a result of increased competition and integration in the industry, the
Company could encounter significant pricing pressure, which in turn could result
in significantly lower average selling prices of the Company's services. There
can be no assurance that the Company will be able to offset the effects of any
such lower prices with an increase in the number of its customers, growth in
sales to its customers base, higher revenue from enhanced services, cost
reductions or otherwise. In addition, the Company believes that the Internet
access and related services industry is likely to undergo further consolidation
in the near future, which could result in increased price and other competition
in these industries and, potentially, other portions of the industry, including
the market for VPN services. Increased price or other competition could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully.

DEPENDENCE ON SUPPLIERS

The Company currently has limited alternative suppliers for many of the
products or services it employs in its Network. In particular, Lucent is the
sole producer of the LDR200 switch, which the Company believes is a key
component of the Network. The Company has entered into a Purchase Agreement with
Yurie (which was acquired by Lucent in May 1998) pursuant to which the Company
agreed to purchase and Yurie agreed to provide a minimum of $20.0 million of
Yurie equipment and related products prior to January 1, 1999. As of August 31,
1998 the Company had purchased $11.0 million of equipment and products under
this agreement. Should the Company require additional Lucent LDR200 switches
beyond the quantity covered by the agreement (which the Company does not expect
to be the case), there can be no assurance that the Company will be able to
acquire them on acceptable terms, or at all. See "Business -- Suppliers." In
addition, expansion of network infrastructures by the Company and others is
placing, and will continue to place, a significant demand on the Company's other
suppliers, some of which have limited resources and production capacity. Certain
of the Company's suppliers, in turn, rely on sole or limited sources of supply
of components included in their products. These constraints may limit such
suppliers' ability to deliver products of the quality or within the time frame
demanded by the Company. The Company has experienced significant service
interruptions caused, in part, by faulty modem software code provided by one of
its suppliers. See "-- Reliance on Prodigy; Recent Discussions with Prodigy."

The Company is also dependent upon third party suppliers for its data
communications facilities and capacity. Certain of these suppliers are or may
become competitors of the Company, and such suppliers are not subject to any
contractual restrictions upon their ability to compete with the Company. The
Company currently uses WorldCom for the majority of its long distance
connections and backbone long distance transmission facilities. In addition, the
Company obtains bandwidth capacity under leased line connection agreements with
LECs, including RBOCs, or is provided telecommunications services and leased
physical space under local access/collocation agreements with various CLECs,
such as Focal Communications Corp. ("Focal"), Intermedia, Brooks Fiber
Communications and others. Since its inception, the Company has actively pursued
agreements with additional CLECs in an effort to establish relationships with a
variety of
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<PAGE> 24

telecommunication providers and thereby reduce the cost of leased connectivity.
There can be no assurance that the Company will be able to continue to obtain
services from such suppliers on the scale and within the time frames required by
the Company at commercially reasonable cost, or at all. See
"Business -- Splitrock's Network -- Transmission Services." Any difficulties in
receiving adequate equipment, services or additional capacity on a timely basis
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company has an agreement with IBM to use the IBM Global Services
Network to cover market areas that are neither served by the Splitrock Network
nor the Legacy Network. The usage from these POPs currently account for
approximately 30% of all Prodigy-related traffic. The terms of the agreement
provide that either party may, upon 60 days prior notice, terminate its
respective obligations under the contract for the remaining POP sites. In
addition, under the terms of the agreement with IBM services at certain of the
POPs in the IBM Global Services Network are scheduled to be discontinued on
September 30, 1998. The usage from these POPs currently represent less than 2%
of the Company's Prodigy-related traffic. As part of the Phase II Expansion, the
Company plans to deploy POPs to those locations. The Company has also formulated
contingency plans, including providing toll free Internet dial access to users
in these areas, should the Company be unable to timely deploy POPs in those
areas or IBM be unwilling to continue to provide service to those POPs after
September 30, 1998. The inability to provide coverage to those cities terminated
on September 30, 1998 or any termination of IBM's other obligations under the
contract could have a material adverse effect on the Company's relationship with
Prodigy, and, consequently, the Company's business, financial condition and
results of operations.

As part of the Company's strategy to replace remaining POPs covered by the
IBM Global Services Network and to complete the expansion of the Splitrock
Network, the Company will rely significantly upon third parties to provide
equipment and services and to deploy the remainder of the Splitrock Network. The
Company has an agreement with Ericsson under which Ericsson will provide certain
equipment and services for, and deploy, 99 additional POP sites (the "Ericsson
Agreement"). In April 1998, Ericsson provided the Company with a $5.0 million
credit facility to be used to pay amounts due under the Ericsson Agreement. All
amounts drawn under the facility ($1.5 million) were repaid upon consummation of
the Unit Offering. The Company is in negotiations with Ericsson for the
deployment of the additional 231 POPs needed to complete the Phase II Expansion.
The Company expects that such negotiations will lead to an agreement on similar
terms and conditions as the Ericsson Agreement. There can be no assurance that
the Company and Ericsson will come to an agreement on the deployment of the
remaining 231 POPs required to complete the Network's expansion. Should the
Company and Ericsson fail to reach such an agreement, there can be no assurance
that the Company will be able to secure an alternative vendor to complete the
Network's expansion. The inability of Ericsson to complete its obligations under
the Ericsson Agreement or the failure of the Company to reach an agreement for
the deployment of additional POPs would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Suppliers" and "Description of Certain Indebtedness."

The Company also engages third party vendors for routine maintenance,
on-call repair and certain related services. In addition to nine employees and
six individual contractors designated, trained and engaged by the Company as
field operation personnel, the Company has an agreement with IBM designed to
provide additional on-call field support personnel for maintenance, part
replacement and repairs for the Legacy Network until that network is
substantially decommissioned. In addition, during and following the Phase I
Buildout, WilTel has performed on-call services for replacement parts,
maintenance and repair services for the Splitrock Network. The agreement with
WilTel will expire on September 30, 1998. The Company is currently evaluating
and negotiating maintenance service proposals that are designed to replace the
existing agreements with IBM and WilTel and expand as the network infrastructure
grows. There can be no assurance that the Company will be able to enter into a
replacement maintenance agreement on acceptable terms, or at all. See
"Business -- Suppliers."

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DEPENDENCE ON KEY PERSONNEL

The Company's business is managed by key executive officers, particularly
Mr. Kwok L. Li, Chairman of the Board and Chief Technical Officer, and Mr.
William R. Wilson, President and Chief Executive Officer. In addition, the
Company is currently in the process of recruiting additional key personnel,
including a Chief Operating Officer. The loss of one or more members of senior
management or the failure to recruit such personnel in the future could
significantly impede attainment of the Company's financial objectives. See
"-- Ability to Manage Growth." The Company does not currently maintain key man
life insurance on the life of any of its officers or employees but intends to
acquire such insurance for Mr. Li and Mr. Wilson in the near future.

CHANGE OF CONTROL

The Indenture provides that upon the occurrence of a Change of Control each
holder of Notes will have the right to require the Company to repurchase all or
any part of such holder's Notes at a price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, to the date of repurchase. The Indenture allows the
Company to incur certain indebtedness, including Senior Indebtedness. The terms
of such indebtedness may prohibit the repurchase of the Notes by the Company in
the event of a Change of Control, unless and until such time as it is repaid in
full. In such case, the Company, in order to repurchase the Notes, would need to
obtain the consent of the requisite lenders under such indebtedness or to repay
such indebtedness in full. The Company's failure to repurchase the Notes would
result in a default under the Indenture. The inability to repay any future
indebtedness, if accelerated, would also constitute an event of default under
the Indenture. There can be no assurance that the Company will have the
financial resources necessary to repurchase the Notes or any other indebtedness
upon a Change of Control. See "Description of the Notes -- Change of Control."

RISKS ASSOCIATED WITH STRATEGIC ALLIANCES AND ACQUISITIONS

The Company intends to evaluate strategic alliances and acquisitions both
domestically and internationally as they present themselves. The Company
believes that an attractive strategic alliance or acquisition candidate should
provide additional traffic over the Network, service enabling technology, or
management or employee expertise. Any future strategic alliances or acquisitions
which the Company pursues would be accompanied by the risks commonly encountered
in strategic alliances with or acquisitions of companies. Such risks include,
among other things, the difficulty of integrating the operations and personnel
of the companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company by the successful incorporation of licensed or acquired technology
and rights into the Company's service offerings, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and customers as a result of changes in management. Any
international alliance or acquisition would be accompanied by the additional
risks of doing business abroad, including unexpected changes in the regulatory
environments, export controls, tariffs, fluctuations in currency exchange rates
and potentially adverse tax consequences. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with such strategic alliances or acquisitions. In
connection with any strategic alliance or acquisition, the Company could incur
substantial expenses, including the expenses of integrating the business of the
strategic alliance or the acquired company with the Company's business. Such
expenses, in addition to the financial impact of such strategic alliances or
acquisitions, could have a material adverse effect on the Company's business,
financial condition and results of operations.

CONTROL BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT; TRANSACTIONS WITH RELATED
PARTIES

Mr. Kwok L. Li, one of the founders and Chairman of the Board of the
Company, and Linsang, a company controlled by Mr. Li, collectively own
approximately 50.1% of the Company's outstanding shares. In addition, William R.
Wilson, the other founder and the President and Chief Executive Officer of the
Company, owns approximately 21.8% of the Company's outstanding shares. As a
result of this direct and indirect ownership, Mr. Li, individually, and Mr. Li
and Mr. Wilson, collectively, are able to elect the entire
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Board of Directors of the Company, to direct the affairs of the Company, to
appoint new management and to approve any action requiring the approval of the
holders of the Company's capital stock, including the adoption of amendments to
the Company's certificate of incorporation and approval of mergers or sales of
substantially all of the Company's assets. There can be no assurance that the
interests of Mr. Li and Mr. Wilson will not conflict with the interests of the
holders of the Notes. See "Principal Stockholders."

Certain of the directors of the Company also serve as directors and/or
officers of other companies with which the Company conducts business and,
consequently, there exists the possibility that such directors will have a
conflict of interest. Until its sale to Lucent, Mr. Li was Director, Vice
Chairman, Chief Technology Officer and owner of 12.4% of the Common stock of
Yurie, one of the Company's principal suppliers. In connection with the sale of
Yurie to Lucent, Linsang has agreed to make the services of Mr. Li available to
Lucent to provide technical guidance for both the Lucent LDR200 and Lucent's
entire line of other ATM switches. The agreement has a term of three years and
terminates on May 29, 2001. Mr. Li has been named Chief Technical Officer of the
Carrier Network division of Lucent and has agreed to not participate in
designing, developing, producing, manufacturing or marketing multi-service
access equipment other than for Lucent. See "-- Dependence on Suppliers".
Furthermore, Mr. Samer Salameh is President and Chief Executive Officer of
Prodigy and is a member of the Company's Board of Directors. In addition,
certain stockholders may have conflicting interests. Orient Star, a wholly owned
subsidiary of Carso, owns 20.0 million shares, or 25.7%, of the outstanding
shares of Common Stock of the Company and a warrant, exercisable through
September 18, 1998, to acquire an additional 5.0 million shares which, if
exercised, would result in Orient Star holding approximately 30.2% of the Common
Stock of the Company. The Company expects that this warrant will be exercised
although no assurance can be given in this regard. Carso is a controlling
stockholder of Prodigy and a significant stockholder of Telmex.

Any decision made by directors is required by law to be made in accordance
with their duties and obligations to deal fairly and in good faith with a view
to the best interests of the Company and its shareholders. Directors may owe
similar duties to the other companies for which they serve as directors or
officers. Due in part to the nature of the potential conflicts presented on an
ongoing basis by certain of the Company's suppliers, customers and others, there
can be no assurance that the directors involved in such a conflict will act in
the best interests of the Company. See "Management -- Certain Relationships and
Related Transactions" and "Description of the Notes -- Certain
Covenants -- Limitation on Transactions with Affiliates."

RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS

The markets for Internet access, transit services, VPNs and related
services provided by the Company are relatively new and characterized by rapidly
changing technology, evolving industry standards, changes in customer needs and
frequent new product and service introductions. The Company's future success
will depend, in part, on its ability to effectively use leading technologies, to
continue to develop its technical expertise, to enhance its current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. There can be no assurance that the
Company will be successful in effectively using new technologies, developing new
services and technical expertise or enhancing its current services on a timely
basis or that such new technologies or enhancements will achieve market
acceptance. The Company believes that its ability to compete successfully is
also dependent upon the continued compatibility of its services with products
and architectures offered by various vendors. There can be no assurance that the
Company will be able to effectively address the compatibility issues raised by
technological changes or new industry standards. In addition, there can be no
assurance that services or technologies developed by others will not render the
services or technology of the Company or its vendors uncompetitive or obsolete.

In addition, issues concerning the commercial use of the Internet and other
services remain unresolved and may impact the growth of Internet use, especially
in the business market targeted by the Company. Despite growing interest in the
many commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, the lack of availability of
cost-effective, high-speed options, a limited number of local access points
22
<PAGE> 27

for corporate users, inability to integrate business applications on the
Internet, the need to deal with multiple and frequently incompatible vendors,
inadequate protection of the confidentiality of stored data and information
moving across the Internet, and a lack of tools to simplify Internet access and
use. In particular, there is a perceived lack of security of commercial data,
such as credit card numbers, that has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns. Capacity constraints caused by growth in the use of the
Internet may, unless resolved, also impede further development of the Internet
to the extent that users experience delays, transmission errors and other
difficulties. The failure of the Internet industry to address these concerns and
introduce viable solutions could limit the growth of the Internet and other
telecommunications services. Any such failure would have a material adverse
effect on the Company's ability to rapidly grow its business and attain its
financial objectives.

NETWORK SECURITY RISKS

Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its equipment, its
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by others. Computer viruses, break-ins or
other problems caused by third parties could lead to interruptions, delays or
cessation in service to the Company's customers. Furthermore, inappropriate use
of the Internet by third parties could also potentially jeopardize the security
of confidential information stored in the computer systems of the Company's
customers, which may deter potential customers and adversely affect existing
customer relationships. Security problems represent an ongoing threat to public
and private data networks. Addressing problems caused by computer viruses,
break-ins or other problems caused by third parties could have a material
adverse effect on the Company.

The security measures employed by the Company cannot assure complete
protection from computer viruses, break-ins and other disruptive problems. The
occurrence of such problems may result in claims against or liability on the
part of the Company. Such claims, regardless of their ultimate outcome, could
result in costly litigation and could have a material adverse effect on the
Company's business or reputation or on its ability to attract and retain
customers for its services.

RISK OF SYSTEM FAILURE; INSURANCE

The success of the Company is dependent upon its ability to protect its
network infrastructure against damage from fire, earthquakes, floods, power
loss, telecommunications failures and similar events. Despite precautions taken
by and planned by the Company, the occurrence of a natural disaster or other
unanticipated problems at one of the Company's NOCs or at a number of the
Company's core sites, hub sites or remote access sites could cause significant
interruptions in the services provided by the Company. Additionally, failure of
the Company's telecommunications providers to provide the communications
capacity required by the Company as a result of natural disaster, operational
disruption or for any other reason could cause significant interruptions in the
services provided by the Company. While the Company believes it has insurance
adequate to cover such risks, the occurrence of a significant loss not fully
covered by insurance could have a material adverse effect on the Company. In
addition, there can be no assurance that the Company will be able to maintain
adequate insurance coverage at rates it believes reasonable.

REGULATORY MATTERS; POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED OVER THE
INTERNET

Although the Company is not currently subject to direct regulation by the
Federal Communications Commission ("FCC") or any other federal or state agency,
it operates in a highly regulated industry and therefore changes in the
regulatory environment relating to Internet services and traditional
telecommunications services, including regulatory changes which directly or
indirectly affect telecommunications costs or increase the likelihood or scope
of competition from RBOCs or other telecommunication companies, could have a
material adverse effect on the Company's financial position or results of
operations, including by affecting the prices at which the Company offers its
services or imposing regulatory compliance and other costs on the Company. There
can be no assurance that future service offerings of the Company will not be
subject to regulation or that the current regulatory environment will not evolve
in ways which impose
23
<PAGE> 28

requirements on the Company or its customers that would materially adversely
affect the Company. Various existing federal and state regulations are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which the
industry operates. For example, the FCC is considering whether Internet related
service providers should be required to pay into Universal Service subsidy
pools. The imposition of such regulatory charges or similar regulatory
constraints would affect the Company's costs of serving its customers and could
have a material adverse effect on the Company's business and results of
operations. Furthermore, the FCC has indicated that it may consider regulating
ISPs, which could have a material adverse effect on the Company. In addition,
Internet telephony may become subject to some form of regulation in the future.
See "Business -- Regulation".

The law in the United States relating to the liability of ISPs and
providers of transmission capacity for information carried on, disseminated
through, or hosted on their systems is currently unsettled. The
Telecommunications Act of 1996 (the "Communications Act") and statutes enacted,
or under consideration in some states, impose civil and criminal liability upon
ISPs, or providers of transmission capacity to ISPs, for the transmission or
dissemination of certain types of information and materials. The imposition of
such liability may require the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of substantial
resources. Regulations, litigation, or legislation could affect the demand for
the Company's services.

BANKRUPTCY RISKS RELATED TO ESCROW ACCOUNT

The right of the Trustee under the Indenture and the Escrow and
Disbursement Agreement (as defined) to foreclose upon and sell Escrow Collateral
(as defined) upon the occurrence of an Event of Default on the Notes is likely
to be significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Company. Under
applicable bankruptcy law, secured creditors such as the holders of the Notes
are prohibited from foreclosing upon or disposing of a debtor's property without
prior bankruptcy court approval. See "Description of Notes -- Disbursement of
Funds; Escrow Account."

FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER

If, in a bankruptcy or reorganization case or a lawsuit by or on behalf of
unpaid creditors of the Company, a court were to find that, at the time the
Company incurred indebtedness under the Notes, (i) the Company incurred such
indebtedness with the intent of hindering, delaying or defrauding current or
future creditors or (ii)(a) the Company received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and (b) the Company
(1) was insolvent or was rendered insolvent by reason of such incurrence, (2)
was engaged, or about to engage, in a business or transaction for which its
assets constituted unreasonably small capital, (3) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured (as all of the foregoing terms are defined in or interpreted under the
relevant fraudulent transfer or conveyance statutes) or (4) was a defendant in
an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment, the judgment is
unsatisfied), then such court could avoid or subordinate the Company's
obligations under the Notes to presently existing and future indebtedness of the
Company and take other actions detrimental to the holders of the Notes.

For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered to have been insolvent at the time the Notes were
issued if the sum of its debts was, at that time, greater than the sum of the
value of all of its property at a fair valuation, or if the then fair saleable
value of its assets was less than the amount that was then required to pay its
probable liability on its existing debts as they became absolute and matured.
There can be no assurance as to what standard a court would apply in order to
determine whether the Company was insolvent as of the date the Notes were
issued, or that, regardless of the method of valuation, a court would not
determine that the Company was insolvent on that date, or that, regardless of
whether the Company was insolvent on the date the Notes were issued, that the
issuance constituted a fraudulent transfer for the grounds summarized above.

24
<PAGE> 29

Additionally, under federal bankruptcy law or applicable state insolvency
law, if certain bankruptcy or insolvency proceedings were initiated by or
against the Company within 90 days after any payment by the Company with respect
to the Notes or if the Company anticipated becoming insolvent at the time of
such payment or incurrence, all or a portion of such payment could be avoided as
a preferential transfer and the recipient of such payment could be required to
return such payment.

ABSENCE OF PUBLIC MARKET

There is no established trading market for the Warrants, the Warrant Shares
or the Notes, and the Company does not intend to list the Warrants, the Warrant
Shares or the Notes on any national securities exchange or to seek approval for
quotation through any automated quotation system. The Initial Purchaser of the
Units currently makes a market in the Original Notes and has advised the Company
that it intends to make a market in the Warrants, the Warrant Shares and the
Notes, but it is not obligated to do so and may discontinue such market making
at any time. In addition, such market making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act and may be limited
during the Exchange Offer. Accordingly, no assurance can be given that an active
public or other market will develop for the Notes, the Warrants or the Warrant
Shares or as to the liquidity of the trading market for such securities. If a
trading market does not develop or is not maintained, holders of the Warrants,
the Warrant Shares and the Notes may experience difficulty in reselling such
securities or may be unable to sell them at all and thus be required to bear the
financial risks of such investment for an indefinite period of time. If a market
for such securities develops, any such market may be discontinued at any time.
The Warrants and the Notes are currently eligible for trading in the private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market, but
following the declaration of effectiveness of the Registration Statement, such
securities will no longer be eligible for PORTAL trading.

If a public trading market develops for the Warrants, the Warrant Shares or
the Notes, future trading prices of such securities will depend on many factors,
including, among other things, prevailing interest rates, the Company's results
of operations and the market for similar securities, and such securities may
trade at a discount from their initial offering price. Historically, the market
for similar securities, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Warrants, the
Warrant Shares and the Notes, if such market develops, will not be subject to
similar disruptions.

ABSENCE OF DIVIDENDS

The Company has never paid any dividends on any of its capital stock,
including its Common Stock, and it does not have any plans to pay any dividends
on any of its capital stock, including its Common Stock, in the foreseeable
future. The Company currently intends to retain all earnings for reinvestment in
its business and repayment of indebtedness. The Indenture restricts the payment
of dividends by the Company. Such restrictions could materially and adversely
affect the Company's ability to pay dividends on, and the value of, the Warrant
Shares and therefore the value of the Warrants.

RESTRICTIVE COVENANTS

The Indenture contains a number of covenants that will limit the discretion
of the Company's management with respect to certain business matters. These
covenants, among other things, restrict the ability of the Company to incur
additional indebtedness, pay dividends and make other distributions, prepay
subordinated indebtedness, make investments and other distributions, enter into
sale and leaseback transactions, create liens, sell assets, and engage in
certain transactions with affiliates. A failure to comply with the covenants and
restrictions contained in the Indenture, or other agreements relating to any
subsequent financing, could result in an event of default under such agreements
which could permit acceleration of the related debt and acceleration of debt
under other debt agreements that may contain cross-acceleration or cross-default
provisions. See "Description of the Notes."

25
<PAGE> 30

YEAR 2000

The year-2000 issue is the result of computer programs being written using
two digits, rather than four digits, to define the applicable year. Programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations, including an inability to process transactions, send invoices
or engage in similar normal business activities. Due to its reliance on computer
hardware and software, the Internet and related service industries are highly
susceptible to the year-2000 issue. If the year-2000 issue should cause
widespread problems across the Internet, usage can be expected to decline
dramatically. Such an event would have a material adverse effect on the
Company's financial condition and results of operations, the nature and extent
of which cannot reasonably be determined by the Company on the basis of
information currently available to it. The Company has not prepared a
contingency plan and does not expect to do so in light of the uncertainty of the
impact of year-2000 issues on the Internet as a whole and the Company's
anticipated schedule to be year-2000 compliant before the end of 1999.

The Company is currently in the process of evaluating its operations and
both its information technology systems and its non-information technology
systems to determine its own vulnerability to the year-2000 issue. The Company
relies heavily on non-information technology systems in the conduct of its
operations and has determined that substantially all of such systems are
year-2000 compliant. Certain network-monitoring software, which is used by the
Company to monitor network equipment (POPs) on the Legacy Network, is not
year-2000 compliant, but as part of the Company's Phase II Expansion,
substantially all of the Legacy Network POPs are scheduled to be decommissioned
by the end of 1998 and such network-monitoring software will no longer be used
by the Company. With respect to the Company's database inventory software, used
to capture data about the network configuration, including location of equipment
and maintenance, the Company has purchased and is currently installing year-2000
compliant software to replace its existing software. Installation is scheduled
to be completed by the end of 1998, and the cost of such purchase and
installation is not material. The Company has also determined that certain other
of its software systems are not year-2000 compliant. The Company believes that,
with modifications and upgrades to such software, which are scheduled to occur
in the ordinary course of business, it will be fully year-2000 compliant by the
end of 1999. The Company is continuing its evaluation of the remaining areas
impacted by year-2000 issues, including Internet interfaces, facility matters
and equipment vendors, but does not expect to incur material costs in connection
with making its software year-2000 compliant. To date, the Company has not
incurred material costs in ensuring year-2000 compliance.

The Company is also dependent upon the ability of its customers to ensure
that their software and equipment is year-2000 compliant. The Company has
initiated formal communications with Prodigy to determine the extent to which
the Company is vulnerable to Prodigy's own year-2000 issues, if any. Prodigy has
informed the Company that Prodigy Classic may not be year-2000 compliant.
Prodigy is in the process of migrating users to Prodigy Internet, which is
year-2000 compliant, and plans to discontinue Prodigy Classic service by the end
of 1999. However, there can be no guarantee that Prodigy Classic or systems of
future customers on which the Company may rely will be timely converted, or that
a failure to convert, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.

USE OF PROCEEDS

The Company will not receive any cash proceeds from the registration or
sale of the Warrants, the Warrant Shares or the Notes offered hereby. The
Company believes the net proceeds of the Unit Offering, will be sufficient to
fund the Company's expected capital expenditures, working capital, lease
obligations and debt service requirements for at least the next twelve months.

26
<PAGE> 31

CAPITALIZATION

The following table sets forth the Company's capitalization as of June 30,
1998 (i) on an actual basis and (ii) on an as adjusted basis after giving effect
to the Unit Offering and the application of net proceeds therefrom as if they
had occurred on June 30, 1998. This table should be read in conjunction with
"Selected Historical and Unaudited Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 5,177 $187,456
======== ========
Restricted cash(1).......................................... $ -- $ 56,604
======== ========
Total debt (including current portion):
Short term note payable(2)................................ $ 1,477 $ --
Capital leases............................................ 21,219 21,219
Senior notes due 2008(3).................................. -- 258,120
Notes payable to stockholder(4)........................... 11,000 --
-------- --------
Total debt........................................ 33,696 279,339
Stockholders' equity:
Common stock.............................................. 78 78
Common stock warrants(5).................................. -- 2,880
Additional paid-in capital(6)............................. 31,550 31,550
Accumulated deficit....................................... (23,749) (23,749)
-------- --------
Total stockholders' equity........................ 7,879 10,759
-------- --------
Total capitalization.............................. $ 41,575 $290,098
======== ========
</TABLE>

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

(1) As adjusted amount represents escrowed funds that, together with interest
received thereon, will be sufficient to pay when due the first four
semi-annual payments on the Notes.

(2) As of June 30, 1998, the Company owed Ericsson $1.5 million. This
indebtedness was repaid with the net proceeds of the Unit Offering.

(3) Net of discount to the principal amount of the Notes attributable to the
Company's estimate of the value of the Warrants issued together with the
Original Notes as the Units in the Unit Offering.

(4) This amount was refinanced in connection with the Unit Offering. In
connection with such refinancing, such stockholder purchased $11.0 million
of the Original Notes.

(5) Includes $2.9 million attributable to the Company's estimate of the value of
the Warrants issued as part of the Units. Such estimate was based on a
valuation of the Common Stock as of December 31, 1997 by a third party
valuation firm. See "Management -- Aggregated Fiscal Year-End Option
Values." No assurance can be given that the value allocated to the Warrants
is indicative of the price at which the Warrants may actually trade.

(6) Includes a $10.0 million convertible note that was converted into equity on
August 9, 1997.

27
<PAGE> 32

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

The following table sets forth selected historical and unaudited pro forma
financial data of the Company. The historical statement of operations and other
financial data for the period from inception (March 5, 1997) through December
31, 1997 and the historical balance sheet data as of December 31, 1997 have been
derived from, should be read in conjunction with and are qualified in their
entirety by reference to the audited financial statements, including the notes
thereto, included elsewhere in this Prospectus. The historical statement of
operations and other financial data for the period from inception (March 5,
1997) through June 30, 1997 and for the six months ended June 30, 1998 and the
historical balance sheet data as of June 30, 1998 have been derived from, should
be read in conjunction with and are qualified in their entirety by reference to
the unaudited condensed financial statements, including the notes thereto,
included elsewhere in this Prospectus which have been prepared on a basis
consistent with the audited financial statements and in the opinion of
management include all adjustments, consisting solely of normal, recurring
adjustments, necessary to present fairly the information contained therein. The
historical quarterly statement of operations data for the three months ended
June 30, 1997, September 30, 1997, December 31, 1997, March 31, 1998 and June
30, 1998 have been derived from the Company's accounting records and have been
prepared on a basis consistent with the audited financial statements and in the
opinion of management include all adjustments, consisting solely of normal,
recurring adjustments, necessary to present fairly the information contained
therein. The selected historical financial data are not necessarily indicative
of the operating results to be expected in future periods.

The following table also presents certain selected unaudited pro forma
financial data of the Company for the period from inception (March 5, 1997) to
December 31, 1997 and for the six months ended and as of June 30, 1998, which
give effect to the Unit Offering and the application of the proceeds therefrom
as if they had occurred on March 5, 1997 and January 1, 1998, respectively, in
the case of the statement of operations data, and June 30, 1998, in the case of
the balance sheet data. The selected unaudited pro forma financial data do not
purport to be indicative of the results that actually would have been obtained
had the Unit Offering been consummated on the assumed dates and they are not
necessarily indicative of operating results to be expected in future periods.

The following selected historical and unaudited pro forma financial data
should be read in conjunction with the historical financial statements of the
Company and the notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

28
<PAGE> 33

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

<TABLE>
<CAPTION>
PERIOD FROM INCEPTION PERIOD FROM INCEPTION SIX MONTHS
(MARCH 5, 1997) (MARCH 5, 1997) ENDED
THROUGH THROUGH JUNE 30,
DECEMBER 31, 1997 JUNE 30, 1997 1998
--------------------- --------------------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ 22,708 $ -- $ 32,214
Operating expenses:
Network personnel costs...................... 437 -- 2,156
Network operating costs...................... 1,925 -- 9,402
Legacy Network costs......................... 25,341 -- 27,090
Severance costs(1)........................... 463 -- --
Selling, general and administrative.......... 1,276 125 1,628
Depreciation and amortization................ 3,500 -- 4,907
-------- ------- --------
Total operating expenses............. 32,942 125 45,183
-------- ------- --------
Loss from operations........................... (10,234) (125) (12,969)
Other income (expense):
Interest income.............................. 348 30 183
Interest expense............................. (235) -- (842)
-------- ------- --------
Loss before income taxes....................... (10,121) (95) (13,628)
Provision for income taxes..................... -- -- --
-------- ------- --------
Net loss....................................... $(10,121) $ (95) $(13,628)
======== ======= ========
Loss per share -- basic and diluted............ $ (0.24) $ (0.01) $ (0.18)
======== ======= ========
Weighted average shares -- basic and diluted... 42,824 11,525 76,888
======== ======= ========
</TABLE>

29
<PAGE> 34

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1998 1998
-------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS
DATA:
Revenue............................... $ -- $ 10,729 $11,979 $16,494 $15,720
Operating expenses:
Network personnel costs............. -- 95 342 1,051 1,105
Network operating costs............. -- 561 1,364 3,127 6,275
Legacy Network costs................ -- 13,119 12,222 12,295 14,795
Severance costs(1).................. -- -- 463 -- --
Selling, general and
administrative................... 125 471 680 657 971
Depreciation and amortization....... -- 1,708 1,792 2,820 2,087
------- -------- ------- ------- -------
Total operating expenses.... 125 15,954 16,863 19,950 25,233
------- -------- ------- ------- -------
Loss from operations.................. (125) (5,225) (4,884) (3,456) (9,513)
Other income (expense):
Interest income..................... 30 137 181 107 76
Interest expense.................... -- (113) (122) (349) (493)
------- -------- ------- ------- -------
Loss before income tax................ (95) (5,201) (4,825) (3,698) (9,930)
Provision for income tax.............. -- -- -- -- --
------- -------- ------- ------- -------
Net loss.............................. $ (95) $ (5,201) $(4,825) $(3,698) $(9,930)
======= ======== ======= ======= =======
Loss per share -- basic and diluted... $ (0.01) $ (0.11) $ (0.06) $ (0.05) $ (0.13)
======= ======== ======= ======= =======
Weighted average shares -- basic and
diluted............................. 14,648 48,991 76,800 76,800 76,976
======= ======== ======= ======= =======
OTHER QUARTERLY DATA:
EBITDA(7)............................. $ (125) $ (3,517) $(2,629) $ (636) $(7,426)
======= ======== ======= ======= =======
Cash provided by (used in):
Operating activities................ (1,554) 103 (2,333) (4,874) 1,162
Investing activities................ (377) (12,242) (2,878) (2,740) (4,974)
Financing activities................ 10,026 19,750 (3,387) 3,253 5,640
</TABLE>

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

30
<PAGE> 35

(2) Pro forma balance sheet data assumes the Unit Offering and the application
of the net proceeds therefrom had occurred on June 30, 1998.

(3) As of June 30, 1998, the Company owed Ericsson $1.5 million, which was
repaid with the proceeds of the Unit Offering, and a stockholder $11.0
million which was refinanced in connection with the Unit Offering. After
giving effect to such repayment and refinancing, pro forma cash and cash
equivalents would have been $187.5 million. Pro forma long term debt and
capital lease obligations is net of $2.9 million discount to the principal
amount of the Notes attributable to the Company's estimate of the value of
the Warrants issued in connection with the Unit Offering.

(5) Includes $2.9 million attributable to the Company's estimate of the value of
the Warrants issued in connection with the Unit Offering. Such estimate was
based on a valuation of the Common Stock as of December 31, 1997 by a third
party valuation firm. See "Management -- Aggregated Fiscal Year-End Option
Values." No assurance can be given that the value allocated to the Warrants
is indicative of the price at which the Warrants may actually trade.

(6) Capital expenditures include equipment purchased through capital leases of
$26.2 million and $4.1 million for the period from inception (March 5, 1997)
through December 31, 1997 and for the period from inception (March 5, 1997)
through June 30, 1997 and for the six months ended June 30, 1998,
respectively. These capital leases include $5.3 million of equipment leases
assumed from Prodigy and $3.5 million of equipment leases subsequently
liquidated through an early purchase option.

(8) The historical earnings of the Company were insufficient to cover its fixed
charges for the period from inception (March 5, 1997) through December 31,
1997 and for the period from inception (March 5, 1997) through June 30, 1997
and the six months ended June 30, 1998 by approximately $10.1 million and
$13.6 million, respectively. On a pro forma basis after giving effect to the
offering of the Original Notes and the application of the net proceeds
therefrom, the earnings of the Company would have been insufficient to cover
its fixed charges for the period from inception (March 5, 1997) to December
31, 1997 and the six months ended June 30, 1998 by approximately $36.3
million and $29.1 million, respectively. Fixed charges consist of interest
expense and that portion of rent expense the Company believes to be
representative of interest (i.e., one-third of rent expense).

(9) Pro forma interest expense assumes that the Unit Offering and the
application of the net proceeds therefrom had occurred on the first day of
the period presented. In addition to the stated interest rate on the Notes,
pro forma interest expense includes amortization of deferred issuance costs
and discount on the Notes related to the Warrants. Pro forma interest
expense does not include the pro forma effect of interest income which would
have been earned on excess cash for the period from inception (March 5,
1997) through December 31, 1997 and for the six months ended June 30, 1998.

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<PAGE> 36

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

OVERVIEW

The Company was formed in March 1997, and has a limited history of
operations. Thus, historical information set forth herein may not be indicative
of the Company's future operating results and financial condition.

The Company is a provider of telecommunications services, including high
speed Internet access services, on an advanced nationwide network based on ATM
switching technology, which will be deployed in every POP of the network being
constructed by the Company (the "Splitrock Network" or the "Network"). The
Company is currently providing Internet dial access and related services to
Prodigy for its subscribers. The Network currently reaches more than 55% of U.S.
households by a local call with 56k modem access (currently the fastest modem
speed commercially available over residential phone lines), including households
in every market with a population of at least 100,000 as well as several second
tier markets. The Company has deployed in 70 metropolitan areas across the
nation, and is currently constructing 330 additional POPs. Upon completion of
the Phase II Expansion, the Network will have approximately 400 active POPs with
a physical presence in all 50 states, reaching over 90% of U.S. households with
a local call.

From the formation of the Company until July 1, 1997 the Company did not
generate any revenue. On July 1, 1997 the Company consummated the Prodigy
Transactions (as defined) following which the Company began providing Internet
dial access and related services to Prodigy for its subscribers. To date, the
Company has generated substantially all of its revenue under its agreement with
Prodigy. See "-- Prodigy Transactions" and "Risk Factors -- Reliance on Prodigy;
Recent Discussions with Prodigy."

The Company recently began generating revenue from two additional
customers. The Company has provided transit services to Orbis, an Internet
connection service provider to businesses, on a month-to-month basis since May
1998. In addition, the Company has signed an agreement with NetworkTwo, a value
added network service provider, to provide VPN services to NetworkTwo's business
customers. Under this agreement, the Company installed co-location space in June
1998 and anticipates delivering VPN services beginning in the third or fourth
quarter 1998. Until the Company's customer base is broadened, its results of
operations will be substantially dependent on its relationship with Prodigy.

PRODIGY TRANSACTIONS

On June 24, 1997, the Company and Prodigy entered into the Splitrock Full
Service Agreement (the "Prodigy Agreement") pursuant to which the Company agreed
to provide certain network services to Prodigy for its subscribers. The Prodigy
Agreement became effective on July 1, 1997. In order to provide these services
to Prodigy for its subscribers prior to the completion of the Splitrock Network,
on July 1, 1997 the Company acquired, for temporary use, the Legacy Network from
Prodigy, which consisted of substantially all network assets and related
communications equipment owned or leased by Prodigy. Consideration for the
acquisition of the Legacy Network was in the form of the assumption of $5.9
million of liabilities. The foregoing transactions are collectively referred to
herein as the "Prodigy Transactions."

Prodigy Agreement. Under the Prodigy Agreement, the Company provides
Prodigy with network services, including Internet dial access services and other
network connections, and Prodigy pays the Company monthly usage-based or
subscriber-based service charges equal to the lower of: (i) total subscriber
hours for the month multiplied by the contracted hourly usage rate (the
"Usage-Based Rate") or (ii) total subscribers for the month, as measured by a
"Subscriber Count," as defined in the Prodigy Agreement, multiplied by the fixed
monthly charge per subscriber (the "Subscriber-Based Rate"). The contracted
hourly Usage-Based Rate increased by 9.5% on January 1, 1998 and will increase
by 8.7% on January 1, 1999. The fixed monthly Subscriber-Based Rate does not
increase over time. The Prodigy Agreement imposes certain minimum monthly
service charges on Prodigy in the event that the lower of the Usage-Based Rate
or Subscriber-Based Rate calculation is below defined levels. The minimum
monthly service charges are $3.5 million through

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<PAGE> 37

June 30, 1999 and will increase by $500,000 beginning each subsequent July 1.
Additionally, in the event the average monthly hours per subscriber (calculated
as the total subscriber hours for the month divided by the total subscribers at
the month end) exceeds 30 hours, the Prodigy Agreement provides that Prodigy
will be subject to additional fees ("Additional Fees") equal to (a) $1.00,
multiplied by (b) the number of average monthly hours per subscriber in excess
of 30 hours, multiplied by (c) the total subscribers at the month end. Through
March 31, 1998 amounts paid by Prodigy under the Prodigy Agreement were based on
the Usage-Based Rate. Since April 1998 such amounts have been based on the
Subscriber-Based Rate. Over the long-term the Company expects to receive amounts
from Prodigy based on the Subscriber-Based Rate, although there may be
short-term periods when the Usage-Based Rate applies. As a result, amounts
received by the Company from Prodigy since April 1998 have been, and over the
long-term (except for any Additional Fees) are expected to be, a function of the
total number of Prodigy subscribers as opposed to total subscriber hours.
Depending on the relative growth rates of the number of Prodigy subscribers and
total subscriber hours, the amount of the Company's revenues and the Company's
operating margins could be negatively affected.

The initial term of the Prodigy Agreement expires on June 30, 2001. After
the initial term either party may terminate the Prodigy Agreement upon twelve
months prior written notice. If no notice is received, the term of the Prodigy
Agreement is automatically extended for successive twelve month terms. Under the
Prodigy Agreement the Company is required, among other things, to provide
Prodigy with certain financial and other information, meet certain financial
covenants and meet certain network performance standards. The Company is
required to provide certain credits to Prodigy in the event it fails to meet
certain network performance standards. Prodigy has the right to terminate the
Prodigy Agreement following a cure period in the event of the Company's failure
to comply with certain provisions thereof, including certain network performance
standards. In addition, Prodigy has the right to terminate the Prodigy Agreement
during the initial term without cause by providing twelve months prior written
notice and paying a termination charge of $5.0 million until July 1, 1999 and
$3.0 million thereafter. In the event of certain prolonged network failures,
Prodigy also has the right to enter the Company's premises and cure such
failures.

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<PAGE> 38

RESULTS OF OPERATIONS

The following table sets forth selected quarterly statement of operations
data that are the basis of discussion below:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1998 1998
-------- ------------- ------------ --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS
DATA:
Revenue............................... $ -- $ 10,729 $11,979 $16,494 $15,720
Operating expenses:
Network personnel costs............. -- 95 342 1,051 1,105
Network operating costs............. -- 561 1,364 3,127 6,275
Legacy Network costs................ -- 13,119 12,222 12,295 14,795
Severance costs..................... -- -- 463 -- --
Selling, general and
administrative................... 125 471 680 657 971
Depreciation and amortization....... -- 1,708 1,792 2,820 2,087
------- -------- ------- ------- -------
Total operating expenses.... 125 15,954 16,863 19,950 25,233
------- -------- ------- ------- -------
Loss from operations.................. (125) (5,225) (4,884) (3,456) (9,513)
Other income (expense):
Interest income..................... 30 137 181 107 76
Interest expense.................... -- (113) (122) (349) (493)
------- -------- ------- ------- -------
Loss before income tax................ (95) (5,201) (4,825) (3,698) (9,930)
Provision for income tax.............. -- -- -- -- --
------- -------- ------- ------- -------
Net loss.............................. $ (95) $ (5,201) $(4,825) $(3,698) $(9,930)
======= ======== ======= ======= =======
Loss per share -- basic and diluted... $ (0.01) $ (0.11) $ (0.06) $ (0.05) $ (0.13)
======= ======== ======= ======= =======
Weighted average shares -- basic and
diluted............................. 14,648 48,991 76,800 76,800 76,976
======= ======== ======= ======= =======
OTHER QUARTERLY DATA:
EBITDA (as defined)................... $ (125) $ (3,517) $(2,629) $ (636) $(7,426)
======= ======== ======= ======= =======
Cash provided by (used in):
Operating activities................ $(1,554) $ 103 $(2,333) $(4,874) $ 1,162
Investing activities................ (377) (12,242) (2,878) (2,740) (4,974)
Financing activities................ 10,026 19,750 (3,387) 3,253 5,640
</TABLE>

Net Loss. The Company has incurred net losses since its inception in March
1997. Net losses of $0.1 million, $5.2 million, $4.8 million, $3.7 million and
$9.9 million were recorded for the second quarter of 1997, third quarter of
1997, fourth quarter of 1997, first quarter of 1998 and second quarter of 1998,
respectively. Cumulative losses from inception total $23.7 million. The Company
anticipates that losses will continue for the immediate future.

Revenue. Prior to July 1, 1997, the Company did not generate any revenue.
Since July 1, 1997 (the date of the consummation of the Prodigy Transactions)
substantially all revenue of the Company has been received from Prodigy under
the Prodigy Agreement.

Prodigy currently offers two services to its subscribers: Prodigy Classic
and Prodigy Internet. Prodigy Internet subscribers generally have higher average
usage, and therefore when Prodigy pays the Company based on the Usage-Based Rate
such subscribers generate greater revenues for the Company. Since April 1998
amounts paid by Prodigy have been based on the Subscriber-Based Rate, which the
Company expects to continue over the long-term. The Subscriber-Based Rate
measures subscribers on the basis of a "Subscriber Count" as defined in the
Prodigy Agreement. For the quarter ended June 30, 1998, the average

34
<PAGE> 39

"Subscriber Count" was approximately 725,000. Prodigy Classic subscribers are
expected to continue to decline as Prodigy seeks to migrate such subscribers to
Prodigy Internet and discontinues Prodigy Classic service by the end of 1999.
Most of those subscribers are expected to become Prodigy Internet subscribers,
although there can be no assurances in that regard.

During the third quarter of 1997, the first quarter following the
consummation of the Prodigy Transactions, the Company had revenue of $10.7
million. Revenue calculations were based on the Usage-Based Rate.

During the fourth quarter of 1997, the Company had revenue, calculated
based on the Usage-Based Rate, of $12.0 million, an increase of 11.7% from the
prior quarter. The increase in revenue was due primarily to a 12.1% increase in
total subscriber usage. While the average number of total Prodigy subscribers
for the fourth quarter decreased by approximately 3.3%, average subscriber usage
increased 15.8% due to a 30.2% increase in the average number of total Prodigy
Internet subscribers, with a partially offsetting 19.3% decrease in the average
number of total Prodigy Classic subscribers, which traditionally have lower
monthly usage than Prodigy Internet subscribers. Such decrease in Prodigy
Classic subscribers was in line with expectations.

During the first quarter of 1998, the Company had revenue, calculated based
on the Usage-Based Rate, of $16.5 million, an increase of 37.7% from the prior
quarter. The increase in revenue was due primarily to a 25.4% increase in total
Prodigy subscriber usage, as the average number of total Prodigy subscribers
increased by 6.4% for the first quarter. In addition, the 9.5% increase in the
contracted hourly Usage-Based Rate effective January 1, 1998 contributed to the
revenue growth. Average subscriber usage increased 17.9% due to a 36.4% increase
in the average number of total Prodigy Internet subscribers during the quarter,
which was partially offset by an 16.7% decrease in the average number of total
Prodigy Classic subscribers. Such decrease in Prodigy Classic subscribers was in
line with expectations.

During the second quarter of 1998, the Company had revenue of $15.7
million, a decrease of 4.7% from the first quarter 1998. Revenue calculations
were based on the Subscriber-Based Rate versus the Usage-Based Rate used in
previous quarters. See "-- Prodigy Transactions." The decrease was attributable
to the continued increase in Prodigy Internet subscribers relative to the
Prodigy Classic subscriber creating higher usage and a decline in total
subscriber counts by 8% from the previous quarter. Average subscriber usage
increased 10.7% due to a 3.3% increase in the average number of total Prodigy
Internet subscribers during the quarter, which was offset by a 22.2% decrease in
the average number of total Prodigy Classic subscribers. Such decrease in
Prodigy Classic subscribers was in line with expectations. During the second
quarter of 1998, Prodigy Internet and Prodigy Classic comprised 62.7% and 37.3%
of Prodigy's subscribers, respectively, as compared to 55.8% and 44.2% of
Prodigy's subscribers in the first quarter of 1998. The Company anticipates this
change in the mix between Prodigy Internet and Prodigy Classic subscribers will
continue as Prodigy currently plans for the Prodigy Classic user to be migrated
to Prodigy Internet by the end of 1999. Prodigy has informed the Company that it
intends to begin a widespread major U.S. market advertising campaign in the
latter part of 1998. In addition, the Company expects the number of Prodigy
Internet subscribers to continue to increase relative to the number of Prodigy
Classic subscribers, and thereby continue to increase average hourly usage per
subscriber, which could result in Additional Fees becoming due to the Company.
The Company is unable to predict when or whether it will receive any Additional
Fees from Prodigy in the future.

Network Related Operating Expenses. Network related operating expenses
include all of the direct costs incurred in connection with designing, deploying
and expanding the Splitrock Network, operating the Splitrock Network and the
Legacy Network, and accessing the IBM Global Services Network. The Company
accounts for its direct Network-related operating expenses in three line items,
Network personnel costs, Network operating costs and Legacy Network costs.
Network personnel costs include all internal personnel expenses incurred in
connection with deploying, operating and expanding the Splitrock Network.
Network operating costs include all other expenses incurred in connection with
deploying, operating and expanding the Splitrock Network, including assembly
costs, line charges, maintenance costs, travel costs, auxiliary equipment costs
and collocate charges. Legacy Network costs include all expenses incurred in
connection with operating and decommissioning the Legacy Network, including
facility leases, line charges, personnel costs, occupancy costs, equipment
maintenance costs and access fees for the IBM Global Services Network. Under

35
<PAGE> 40

a transition services agreement with Prodigy entered into as part of the Prodigy
Transactions, certain of these expenses which were incurred by Prodigy prior to
the consummation of the Prodigy Transactions continued to be paid by Prodigy and
the Company reimbursed Prodigy for such charges or netted such charges against
amounts due from Prodigy. The transition services agreement expired on January
1, 1998, although the Company continues to reimburse Prodigy for occupancy
expenses, telecommunications line charges and equipment lease payments relating
to Legacy Network POPs that have not yet been decommissioned. The Company
assumed no contractual liability for facility or telecommunications lines as
part of the transition services agreement. Under an agreement with Prodigy in
June 1998, all Legacy Network expenses payable except for contractual facility
leases after July 1, 1998 will be paid directly by the Company.

As the expansion of the Splitrock Network progresses, the Legacy Network is
being decommissioned and usage of the IBM Global Services Network is declining.
As POPs are decommissioned, all occupancy and telecommunication line charges are
terminated. The Company has fully decommissioned 90 of the original Legacy
Network POPs through August 31, 1998. Fewer than 20 Legacy Network POPs are
expected to remain in operation as of the end of 1998. There is typically a lag
time of two to three months between the time the Splitrock Network is
operational in any given area and either the Legacy Network infrastructure for
such area is decommissioned or the IBM Global Services Network is no longer
used. As a result, transition to the Splitrock Network involves a temporary
duplication of costs.

The Company was formed on March 5, 1997 to build the Splitrock Network.
From that time through the end of the second quarter of 1997, the Company had
not yet begun deploying the Splitrock Network nor had it consummated the Prodigy
Transactions. As a result, it incurred limited operating expenses prior to the
third quarter of 1997.

On July 1, 1997, the Company consummated the Prodigy Transactions. During
the third quarter of 1997, the Company incurred approximately $95,000 of Network
personnel costs, primarily representing engineering personnel located at the
Company's headquarters in The Woodlands, TX, and approximately $561,000 of
Network operating costs. In addition, during this quarter the Company incurred
$13.1 million of Legacy Network costs. The Network operating costs were
comprised primarily of approximately $470,000 of assembly and engineering design
charges paid to Yurie in connection with the Phase I Buildout. The Legacy
Network costs incurred in this period included operating costs to operate the
Legacy Network as well as $5.6 million of usage charges paid relating to the IBM
Global Services Network.

During the fourth quarter of 1997, the Company incurred approximately
$342,000 of Network personnel costs and $1.4 million of Network operating costs.
In addition, during this quarter the Company incurred $12.2 million of Legacy
Network costs. The increase in Network personnel costs was primarily due to the
hiring of approximately 20 technical and accounting employees for The Woodlands,
TX headquarters location. The increase in Network operating costs reflected the
beginning of the Splitrock Network deployment. During this period, the Company
deployed 29 POPs, of which 16 were operational by the end of the period, and
completed its backbone installation. The Network operating costs during this
period primarily consisted of approximately $514,000 of assembly and engineering
design charges paid to Yurie in connection with the Phase I Buildout and
approximately $551,000 of leased transmission and local access line charges. The
decrease in Legacy Network costs from the prior quarter primarily resulted from
disconnecting underutilized lines and reduced occupancy and personnel costs,
offset in part by expenses incurred related to new lines installed for the
Legacy Network in certain geographic areas to address capacity issues and
increased access charges relating to the IBM Global Services Network. The
Company paid $6.3 million of usage charges related to the IBM Global Services
Network in the fourth quarter of 1997. During this quarter the Company incurred
certain duplicative expenses as a result of the lag between moving Splitrock
Network POPs into production and decommissioning the corresponding Legacy
Network infrastructure.

Prior to January 1, 1998, the Yorktown, NY staff remained employed by
Prodigy and were made available to the Company by Prodigy. The Company
reimbursed Prodigy for the costs related to such employees and recorded them as
Legacy Network expenses. In the fourth quarter of 1997, as part of a downsizing
program in Yorktown, NY, the Company eliminated the need for 13 Prodigy
employees. The Company recorded a charge of approximately $463,000 related to
severance pay for these Prodigy employees.

36
<PAGE> 41

This charge was recorded as a severance cost in the fourth quarter of 1997. As
of January 1, 1998, the remaining employees at the Yorktown, NY facility and NOC
were transferred from Prodigy's payroll to the Company's payroll. As these
remaining employees are expected to be retained after the Legacy Network is
fully decommissioned, effective January 1, 1998 the Company began recording the
personnel expenses related to such employees as Network personnel expenses
rather than Legacy Network expenses.

During the first quarter of 1998, the Company incurred $1.1 million of
Network personnel costs and $3.1 million of Network operating costs. In
addition, during this quarter the Company incurred $12.3 million of Legacy
Network costs. The increase in Network personnel costs was due to continued
hiring for The Woodlands, TX operations and the change in recording the
personnel costs for Yorktown, NY employees (approximately $500,000) as Network
personnel costs rather than Legacy Network costs. The increase in Network
operating costs reflected the continued deployment of the Splitrock Network. By
the end of this period, the Company had deployed 58 POPs, of which 51 were
operational. Approximately 77% of the increase in Network operating costs was
due to increased line and backbone circuit charges. Network operating costs also
included assembly and engineering design charges paid to Yurie in connection
with the Phase I Buildout in the amount of $470,000. The slight increase in
Legacy Network costs was primarily due to increased usage charges relating to
the IBM Global Services Network as well as expenses incurred related to new
lines installed for the Legacy Network in certain geographic areas to address
capacity issues, offset by the decommissioning of Legacy Network lines (although
during this period duplicative costs were incurred in certain areas as a result
of the lag of such decommissioning) and the change in accounting for the
Yorktown, NY employees described above. During this quarter the Company paid
$7.3 million of usage charges related to the IBM Global Services Network.

During the second quarter of 1998, Network personnel costs remained flat
while the Company secured additional financing and executed agreements related
to the Phase II Expansion. Network personnel costs are expected to increase due
to the expansion of the Network facilities during the Phase II Expansion. The
Company incurred $6.3 million of Network operating costs during the second
quarter of 1998. The increase in Network operating costs reflected the continued
deployment of the Splitrock Network. By the end of this period, the Company had
deployed 70 POP's, all of which were operational. Approximately 85% of the
increase in Network operating costs was due to increased line charges. The
remaining increase relates to adding a second NOC in The Woodlands, TX during
the second quarter of 1998, increase in field operations to support added
capacity and the start of the customer support program. These increases were
offset by decreases in the engineering charges incurred for the Phase I Buildout
as it was completed at the beginning of the quarter. The Phase II Expansion
began in the middle of the second quarter of 1998. As the Company continues to
deploy Phase II Expansion, the Network operating costs will continue to
increase. Typically, telecommunication lines are installed and thus charges are
incurred prior to the POP site being in productive use. This results in higher
expenses during the startup of a new POP site.

To date, the Company has substantially performed its own maintenance of
equipment deployed in the Phase I Buildout and has relied on initial warranties
at no costs from its vendors. The Company is currently in discussions with
various vendors in regard to equipment maintenance contracts for current and
future operations. These maintenance contracts will significantly increase the
cost of Network operations. See "Risk Factors -- Dependence On Suppliers."

37
<PAGE> 42

During the second quarter of 1998, the Company incurred $14.8 million of
Legacy Network costs. The 20% net increase in Legacy Network costs was due
primarily to an increase in rates for access to the IBM Global Services Network.
Additionally, the Company continued to add new lines to the Legacy Network in
certain geographic areas to address capacity issues. These increases were offset
by the decommissioning of Legacy Network lines (although during this period
duplicative costs were incurred in certain areas as a result of the lag of such
decommissioning). Prior to April 1, 1998, the Company accessed the IBM Global
Services Network under Prodigy's contract with IBM. During the period from July
1, 1997 to March 31, 1998, Prodigy incurred usage charges to IBM and was
reimbursed by the Company for $19.2 million of these expenses. Effective April
1, 1998, the Company entered into a new contract with IBM to continue to provide
these access services. The increase in rates was due to the implementation of
this new contract between the Company and IBM Global Services Network. This new
contract provides for significantly higher hourly usage charges due to the
Company's expected short-term use of the IBM Global Services Network as well as
the Company's lack of a long-term relationship with IBM.

During this quarter, the Company paid $11.0 million of usage charges
related to the IBM Global Services Network. This represents a 51% increase in
IBM Global Services charges between the first and second quarter of 1998. The
Company anticipates that aggregate IBM charges will decline through mid-1999 as
the Splitrock Network is further expanded and traffic migrates from the IBM
Global Services Network to the Splitrock Network, although hourly usage charges
may increase due to the lower volume of use. If the Company is unable to meet
certain POP build out schedules, the Company may be required to move traffic
from the Legacy Network to the IBM Global Services Network until the Splitrock
Network is completed. This would result in higher charges in the interim. See
"Risk Factors -- Dependence on Suppliers."

Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of personnel and operating costs relating to
executive management, accounting and finance, human resources, sales and
marketing and administrative employees. In the second quarter of 1997 the
Company incurred limited selling, general and administrative expenses, which
primarily consisted of consulting and legal fees incurred in connection with the
Prodigy Transactions. The Company incurred approximately $125,000, $471,000,
$680,000 and $657,000 of selling, general and administrative expenses in the
second quarter of 1997, the third quarter of 1997, the fourth quarter of 1997
and the first quarter of 1998, respectively. This gradual increase reflects the
development of the Company's executive, accounting and administrative support
departments. The decrease in selling, general and administrative expenses in the
first quarter of 1998 compared to the fourth quarter of 1997 was due to certain
non-recurring expenses incurred in the fourth quarter of 1997, primarily
increased travel costs, bonuses paid to employees and other miscellaneous costs.

In the second quarter of 1998, selling, general and administrative expenses
increased by $314,000 to $971,000, in line with expectations, as the Company
continues to add staff in these areas and has experienced increases in legal and
other fees incurred in connection with the continued expansion of the Splitrock
Network. The Company believes that selling, general and administrative expenses
will begin increasing at a greater rate in the third and fourth quarters of
1998, as the Company (i) plans to begin hiring additional sales and marketing
personnel, (ii) continues the implementation of its advanced business support
systems, (iii) realizes the full quarter cost of its new facility in The
Woodlands, TX, which more than doubled the Company's occupancy costs, and (iv)
incurs the fees and expenses resulting from the obligations incident to the sale
of the Units.

Depreciation and Amortization. Depreciation and amortization in the third
and fourth quarter of 1997 consisted almost exclusively of depreciation of
Legacy Network equipment acquired as part of the Prodigy Transactions. Legacy
Network equipment was recorded at approximately $5.9 million based on the fair
value of the consideration paid. Approximately 80% of the equipment acquired was
depreciated over nine months, the expected useful life of the Legacy Network,
with the remaining 20% depreciated over 36 months. Therefore, on March 31, 1998,
80% of Prodigy equipment acquired was fully depreciated. All Splitrock
Network-related equipment begins to be depreciated as it is placed into service
using a straight-line basis over three years from the date of installation.
Depreciation will increase as the Phase II Expansion progresses. The Company
incurred depreciation expenses of $1.7 million, $1.8 million and $2.8 million in
the third quarter of 1997, the fourth quarter of 1997 and the first quarter of
1998, respectively.
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<PAGE> 43

In the second quarter of 1998, depreciation expense decreased to $2.1
million primarily due to the end of the accelerated depreciation of Legacy
Network equipment purchased from Prodigy by the end of the first quarter of
1998. This was offset by increases in depreciation of new Splitrock Network
equipment during the second quarter of 1998. Depreciation is expected to
increase as new POPs and equipment are installed to support the expansion of the
Splitrock Network.

Interest Expense. Historical interest expense is related to capital leases
on equipment and loans from a stockholder of the Company. The Company incurred
interest expense of approximately $113,000, $122,000 and $349,000 in the third
quarter of 1997, the fourth quarter of 1997 and the first quarter of 1998,
respectively. Interest expense increased to $493,000 for the second quarter of
1998 due to the receipt of additional working capital loans from Linsang, a
stockholder of the Company, during the quarter. Such loans were refinanced in
July 1998 in connection with the Unit Offering. Interest expense is expected to
increase significantly in the third quarter due to the interest on the Notes.

Interest Income. Interest income relates to the interest earned on
investments of cash on hand in commercial paper and money market accounts. The
Company recorded interest income of approximately $30,000, $137,000, $181,000
and $107,000 in the second quarter of 1997, in the third quarter of 1997, in the
fourth quarter of 1997 and in the first quarter of 1998, respectively. The
Company recorded interest income of $76,000 in the second quarter of 1998.
Interest income is expected to increase in the third quarter of 1998 due to the
investment of a portion of the proceeds from the Notes.

Provision for Income Taxes. No provision for income taxes has been
recognized as the Company had operating losses for both tax and financial
reporting purposes for the period from inception (March 5, 1997) to December 31,
1997 and for the six months ended June 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Historical. From the Company's inception (March 5, 1997), the Company has
satisfied the majority of its working capital requirements through the issuance
of equity or debt financing. The Company's capital purchases have been primarily
financed through lease financing with the exception of capital purchases from
Yurie, which were financed out of working capital.

Cash Flow Related to Operations. Cash flow used or provided in the
Company's operations approximated $1.6 million used, $103,000 provided, $2.3
million used, $4.9 million used and $1.2 million provided in the second, third
and fourth quarters of 1997 and the first and second quarters of 1998,
respectively. Cash flow used in operating activities can vary significantly from
period to period depending upon the timing of operating cash receipts from
Prodigy and the payments to large vendors. The Company expects this variation to
continue until the Phase II Expansion is completed and the Company's base of
customers has increased.

Previous Financings. The Company was founded in March 1997 by Mr. Kwok L.
Li and Mr. William R. Wilson. Since its inception, the Company has raised
approximately $263.3 million (excluding a $10.0 million note that was converted
into equity) through private sales of debt (of which $0.8 million has been
repaid) and $31.6 million through private sales of equity (including the
conversion into equity of such $10.0 million convertible note). The Notes issued
in the Unit Offering represent $261.0 million of the debt financing.

Through various transactions since March 1997, Mr. Li and Linsang, a
technology investment company controlled by Mr. Li, have invested approximately
$21.8 million in debt (including the convertible note described above) and $7.5
million in equity in the Company. Of the amount that Mr. Li and Linsang have
loaned to the Company, $0.8 million has been repaid and the $10.0 million
convertible note was converted into 16.0 million shares of Common Stock of the
Company. The remaining $11.0 million debt outstanding was represented by demand
notes bearing annual interest of 9.75% and maturing on the earlier of written
demand or December 1, 2002. Such indebtedness was refinanced in connection with
the Unit Offering, pursuant to which Linsang purchased 11,000 Units.

On August 18, 1997, Roy Wilkens and Sandra Wilkens purchased 800,000 shares
of the Common Stock of the Company for $0.5 million. Mr. Wilkens became a member
of the Board of Directors of the Company in April 1998.
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<PAGE> 44

On September 22, 1997, Orient Star, a wholly owned subsidiary of Carso (the
controlling stockholder of Prodigy), purchased 20.0 million shares of Common
Stock of the Company for $12.5 million. The transaction price included a
warrant, exercisable through September 18, 1998, to purchase an additional 5.0
million shares of Common Stock for $3.1 million. The warrant, if exercised,
would result in Orient Star holding approximately 30.2% of the Common Stock of
the Company. The Company expects Orient Star to exercise the warrant. Samer
Salameh, the President of Prodigy, an affiliate of Carso, became a member of the
Board of Directors of the Company in April 1998.

In June 1998, Clark McLeod, CEO of McLeodUSA, Incorporated ("McLeodUSA"), a
regional telecommunications firm in the Midwest, exercised in full a stock
option previously granted to him and purchased 1.0 million shares of Common
Stock of the Company for $1.1 million. Mr. McLeod became a member of the Board
of Directors of the Company in May 1998.

In addition, through June 30, 1998 the Company had arranged $24.4 million
in equipment financing, including $23.8 million related to network-related
equipment primarily from equipment vendors and $0.6 million related to office
equipment from vendors and leasing companies. This financing includes $3.5
million of equipment leases subsequently liquidated through an early purchase
option, In addition, the Company assumed approximately $5.9 million in
liabilities pursuant to the Prodigy Transactions. The Company does not
anticipate the continued use of leasing to fund capital purchases as the Company
anticipates that the proceeds from the sale of Notes will be adequate to cover
such purchases for the Phase II Expansion and the business support systems
anticipated.

On July 24, 1998, the Company issued and sold $261.0 million aggregate
principal amount of 11 3/4% Notes due 2008 with interest to be paid
semi-annually each January 15 and July 15 commencing with the January 15, 1999
payment. The Initial Purchaser of the Notes resold $250.0 million to qualified
institutional buyers and $11.0 million to Linsang, a stockholder of the Company
in connection with the refinancing of Linsang's outstanding notes to the
Company. The Notes are senior obligations of the Company ranking pari passu with
all existing and future Senior Indebtedness of the Company and will rank senior
to all future Subordinated Obligations of the Company. The Notes will be
unsecured (except that the Trustee will have a security interest in an Escrow
Account for the benefit of the holders) and will therefore be subordinate to all
secured indebtedness. An amount that, together with the interest received
thereon, will be sufficient to pay when due the first four semi-annual payments
of interest beginning with the January 15, 1999 payment has been escrowed from
the proceeds received upon consummation of the Unit Offering in the Escrow
Account. See "Description of the Notes."

As of July 31, 1998, the Company had incurred approximately $8.8 million in
costs associated with the Unit Offering. The Company anticipates the total costs
including underwriting fees will approximate $9.7 million.

Capital Expenditures. As of June 30, 1998 the Company had recorded capital
expenditures (exclusive of depreciation) of approximately $51.4 million, of
which $5.9 million represents assets acquired from Prodigy. The following table
sets forth such capital expenditures by category:

<TABLE>
<S> <C>
Network Equipment for Phase I Buildout...................... $25.0
Network Equipment for Phase II Expansion.................... 14.2
Network Operating Center and Other.......................... 4.4
Assets Acquired from Prodigy................................ 5.9
Office Equipment and Furniture Purchased.................... 1.9
-----
$51.4
</TABLE>

Of this amount, approximately $30.3 million was financed through capital
leases (including $5.3 million of equipment leases assumed from Prodigy and $3.5
million of equipment leases subsequently liquidated through an early purchase
option). Additionally, the Company has expended approximately $2.4 million in
deposits and other intangibles in connection with the Phase II Expansion.

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<PAGE> 45

Commitments. The Company has utilized contractual pricing in exchange for
volume commitments on certain Network activities, lease lines and equipment.

The Company has agreed to purchase a minimum of $20.0 million of standard
Yurie products during the 18-month period ended December 31, 1998. As of June
30, 1998, the Company had purchased approximately $11.0 million of products
under this arrangement.

The Company has an agreement with a telecommunication supplier to provide
certain installation services for the Company. The minimum amount of services
for which the Company is required to pay is $1.3 million. The Company estimates
that as of April 1998 it has approximately $700,000 remaining to be paid on this
agreement.

The Company has commitments to certain telecommunication vendors to meet
certain minimum monthly usage volumes over periods of two to three years. The
Company is currently meeting its minimum monthly usage volumes. Additionally,
the Company is subject to certain cancellation penalties should the Company need
to terminate its line contracts. The cancellation penalties typically require
the payment of a certain percentage of the remaining amounts due under the
contract depending on the year in which the cancellation occurs.

In addition, as of June 30, 1998, the Company had aggregate operating and
capital lease payments of $5.5 million, $9.6 million, $7.2 million, $1.0
million, $0.3 million and $0.2 million due in the last six months of 1998,
calendar 1999, 2000, 2001, 2002 and 2003, respectively.

Future. The Company's future liquidity and capital requirements will result
primarily from its debt service and principal repayment obligations, lease
obligations, capital expenditures and other expenses to be incurred in
connection with the expansion of the Splitrock Network, acquisitions and joint
ventures and general working capital purposes. Through June 30, 1998, the
Company had spent approximately $25.0 million on the Phase I Buildout, which was
substantially completed in April 1998, and $14.2 million on the Phase II
Expansion. The Company anticipates making an additional $139.6 million of
capital expenditures in connection with the Phase II Expansion. The Company
expects to spend approximately $45.9 to construct approximately 330 additional
POPs, approximately $81.5 million to deploy advanced processing equipment and
software to enhance and accelerate the Company's ability to provide value added
services, such as ISDN video, web hosting and VPN, and approximately $12.2
million to augment the Company's network management infrastructure. Of these
amounts, the Company has spent $1.5 million since June 30, 1998. The Company has
a commitment to purchase $9.0 million of additional equipment from Yurie prior
to January 1, 1999. The Company currently believes that the net proceeds of the
Notes will be sufficient to fund the Company's expected capital expenditures,
working capital, lease obligations and debt service requirements for at least
the next twelve months. Linsang has not committed to make any additional credit
available to the Company.

Any future acquisitions, joint ventures or similar transactions may require
additional financings and there can be no assurance that such financings will be
available to the Company on acceptable terms or at all.

The Company is highly leveraged. At June 30, 1998, on a pro forma basis
after giving effect to the offering of the Notes and the application of the net
proceeds therefrom, the Company would have had $279.3 million of total
indebtedness, representing approximately 96.3% of the Company's total
capitalization. See "Capitalization." In addition, the terms of the Notes permit
the Company to incur certain other indebtedness. While there can be no assurance
that the Company will have sufficient cash flow to pay the interest expense or
the principal associated with the Notes or such indebtedness, the Company has
placed funds in escrow that, together with the interest received thereon, will
be sufficient to pay when due the first four semi-annual interest payments on
the Notes. The highly leveraged position of the Company could have a material
adverse effect on its ability to obtain financing for acquisitions, joint
ventures or other purposes and the Company's ability to borrow is also
restricted by covenants contained in the Notes.

The Company recorded EBITDA (as defined) of approximately $(6.3) million
and $(8.1) million for the period from inception (March 5, 1997) to December 31,
1997 and the six months ended June 30, 1998, respectively (net losses amounted
to $10.1 million and $13.6 million for the same periods). On a pro forma basis
after giving effect to the Offering and the application of the net proceeds
therefrom, the Company would have reported net losses of $36.3 million and $29.1
million for the period from inception (March 5, 1997) to
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<PAGE> 46

December 31, 1997 and the six months ended June 30, 1998, respectively. The
Company expects such net losses to continue as the Company focuses on increasing
its customer base, implementing its business strategy and developing new
services. See "Summary -- Recent Developments." The historical earnings of the
Company were insufficient to cover its fixed charges for the period from
inception (March 5, 1997) to December 31, 1997 and the six months ended June 30,
1998 by approximately $10.1 million and $13.6 million, respectively. On a pro
forma basis after giving effect to the offering of the Notes and the application
of the net proceeds therefrom, the earnings of the Company would have been
insufficient to cover its fixed charges for the period from inception (March 5,
1997) to December 31, 1997 and the six months ended June 30, 1998 by
approximately $36.3 million and $29.1 million, respectively.

The Company's ability to meet its debt service obligations, to finance
planned capital expenditures, lease payments or acquisitions or to comply with
certain covenants contained in the Indenture will depend upon the Company's
future performance, which will be subject to general economic conditions and to
financial, business, competitive, legislative, regulatory and other factors
affecting its operations, many of which are beyond the Company's control. In
addition, for the foreseeable future the Company's financial performance will be
dependent on Prodigy. There can be no assurance that the Company's business will
be able to generate cash flow at levels sufficient to satisfy its debt service
and other requirements. If in the future the Company is unable to generate
sufficient cash from its operations to make scheduled interest payments on the
Notes, to pay the Notes at maturity, or to meet other obligations and
commitments, the Company may be required to adopt one or more alternatives, such
as refinancing or restructuring its indebtedness, reducing or delaying planned
expansion, selling assets or raising additional debt or equity. There can be no
assurance that the Company will be able to implement any of these alternatives
on satisfactory terms or at all. In addition, the terms of existing or future
debt agreements, including the Indenture, may prohibit the Company from adopting
some of these alternatives. See "Description of the Notes."

YEAR 2000

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<PAGE> 47

including Internet interfaces, facility matters and equipment vendors, but does
not expect to incur material costs in connection with making its software
year-2000 compliant. To date, the Company has not incurred material costs in
ensuring year-2000 compliance.

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<PAGE> 48

INDUSTRY OVERVIEW

The Internet. The Internet is a global collection of interconnected
computer networks that allows commercial organizations, educational
institutions, government agencies and individuals to communicate electronically,
access and share information and conduct business. The networks that comprise
the Internet are connected in a variety of ways, including by the public
switched telephone network ("PSTN") and by high speed, dedicated leased lines.
Over time, as businesses have begun to utilize e-mail, file transfer and, more
recently, intranet and extranet services, commercial usage has become a major
component of Internet traffic.

In order for an end-user to access the Internet, a local network connection
is required to an ISP's local facilities. For large, communication-intensive
users and for content providers, these connections are typically unswitched,
dedicated connections provided by incumbent local exchange carriers ("ILECs") or
CLECs, either as independent service providers or, in some cases, by a company
which is both a CLEC and an ISP. For residential and small and medium business
users, these connections are generally PSTN connections obtained on a dial-up
access basis as a local exchange telephone call. This collection of
interconnected networks makes up the Internet. A key feature of Internet
architecture is that a single dedicated channel between communication points is
never established, which distinguishes Internet-based services from the PSTN.

Internet Market Size and Growth. The Internet services industry is one of
the fastest growing segments of the global telecommunications market. Forrester
estimates that the U.S. market for Internet and related services, including
advanced Internet applications such as VPN, voice communications, fax and video
conferencing, was approximately $6.2 billion in 1997 and will grow to
approximately $49.7 billion in 2002, reflecting a compound annual growth rate of
over 50%. The Company believes that Internet dial access and transit services,
VPN services and enhanced business services represent three of the fastest
growing segments of the industry.

Internet Access. Internet access services represent the means by which ISPs
interconnect either businesses or individual consumers to the Internet's
resources or to corporate intranets and extranets. Access services include
dial-up access for individuals and small businesses and high-speed dedicated
access (transit services) used primarily by mid-sized and larger organizations.
According to Forrester, business access services are projected to grow at a
compound annual growth rate of approximately 75%, from approximately $1.0
billion in 1997 to approximately $16.0 billion in 2002.

The demand for access services is driven by the end-user's ability and
desire to gather data and communicate or interact with others. Over the past few
years, many organizations have established Web pages on the Internet in order to
convey a variety of information to end-users. Compounding this growth in
information available over the Internet has been a dramatic increase in the
number of ISPs providing access and related services to end-users. According to
IDC, there are currently over 4,000 ISPs in the U.S., consisting of national,
regional and local providers, of which the Company believes only a small
percentage have access to their own nationwide backbone network infrastructure.
These ISPs have exposed a broad population of users to the opportunities
available over the Internet, resulting in a large and growing group of people
who are accustomed to using networked computers for a variety of purposes,
including e-mail, electronic file transfers, on-line computing and electronic
financial transactions. According to IDC, the number of Internet users worldwide
reached approximately 60.0 million in 1997 and is forecasted to grow to 173.0
million by the year 2000.

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<PAGE> 49

The ISP market is segmented into large national or multinational ISPs
("Tier 1 ISPs"), which are typically full-service providers that offer a broad
range of Internet access and value-added services to businesses and regional and
local ISPs ("Tier 2 ISPs" and "Tier 3 ISPs"), which typically offer a smaller
range of products and services to both individuals and business customers. Tier
1 ISPs also provide wholesale services by reselling capacity on their networks
to smaller regional and local ISPs, thereby enabling these smaller ISPs to
provide Internet services on a private label basis without building their own
facilities. The Company believes that the top six Tier 1 ISPs represented
approximately 50% of the market for business connectivity and value-added
services. Tier 1 ISPs exchange Internet traffic at multiple public peering
points known as network access points ("NAPs") and through private peering
arrangements.

VPNs. The Company believes that many businesses desire to utilize VPNs as a
lower-cost alternative to certain traditional telecommunications services.
Historically, many corporations established and maintained their own private
wide-area networks to provide network-based services, such as transaction
processing, to their customers and to coordinate operations between employees,
suppliers and business partners. Despite the attractive capabilities of private
networks, however, limitations of many private WANs have impeded or reduced the
effectiveness of their use. These networks, which traditionally have required
the use of leased telephone lines with dedicated bandwidth and the purchase of
vendor-specific networking equipment and software, are inherently expensive to
set up, operate and maintain. The Company believes that VPNs present a
cost-effective alternative to WANs since VPNs (i) eliminate the need to invest
significant amounts in proprietary equipment and software, (ii) securely and
efficiently connect multiple, geographically dispersed locations, (iii) provide
global remote access capabilities and (iv) offer a full range of value added
services, such as videoconferencing, that meet a company's particular networking
needs.

Enhanced Business Services. In addition to Internet access and VPN
services, business customers increasingly are seeking a variety of enhanced
products and applications to take full advantage of the Internet. The principal
enhanced services currently available to companies are Web hosting, including
hosting of intranet sites, e-mail outsourcing, e-mail broadcast and security.
Forrester forecasts that enhanced business services revenues will grow from
approximately $0.4 billion in 1997 to approximately $10.5 billion in 2002,
representing a compound annual growth rate of 92%.

Development of Network Technology. The Company has designed, deployed and
is in the process of expanding an advanced nationwide telecommunications network
based on ATM-to-the-edge switching technology. The pervasive deployment of ATM
switches throughout the Network enables the Company to create a multi-service
platform by which to expand its service offerings to provide fully integrated
data, video and voice services and to incorporate future technological
innovations into its architecture with a lower incremental investment than that
required by other, less flexible, networks.

Most networks currently in operation use either circuit switching or packet
switching. Circuit switching operates by dedicating a circuit, or fixed amount
of bandwidth, to each end device. Circuit switching's use of dedicated circuits
provides high quality service for all network traffic, but, since information is
not continuously transmitted, the dedicated circuits are often inefficiently and
expensively idle.

Frame relay, a packet switching technology, was introduced in 1990 as a
method of connecting local area networks ("LANs") over WANs by using flexible
bandwidth allocation to lower the cost of transmission. Frame relay uses
"packets" or "frames" to transmit traffic, thereby allowing the same bandwidth
to be shared by many users, each using the bandwidth only for the time required
to transmit a packet. Designed primarily for data transmission, frame relay
cannot guarantee high quality transmission of voice and video. Currently, frame
relay is widely used to transmit data over WANs, including the Internet. Due to
the substantial increase in data traffic, however, today's frame relay networks
are being used to transmit more traffic than they were designed to support,
resulting in network congestion.

To increase a frame relay network's switching capacity to meet increased
data demands and alleviate congestion, sophisticated software is required. To
run this software, the network must be upgraded with powerful, intelligent
processors. The costs of these high-end processors required to switch frame
relay traffic at the speeds needed in today's data network backbones are very
high. Therefore, as data traffic increases, upgrading a frame relay network
becomes more costly and inefficient and ultimately impractical.
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<PAGE> 50

Faced with the limitations of frame relay, telecommunications service
providers are installing ATM switches, a newer packet switching technology, in
the backbones of their existing networks. ATM segments data, video and voice
traffic into small, uniform-sized "cells," rather than the larger, variable-size
"packets" or "frames" used in frame relay. The addition of ATM backbone switches
upgrades a network's performance by increasing switching capabilities at the
network's core. ATM's cell-based architecture increases bandwidth utilization
and seeks to provide consistent quality of service and predictability for all
traffic types.

ATM is the first standard protocol to permit reliable service for all
traffic types, allowing the consolidation of circuit switching and packet
switching networks into a single ATM network for data, video and voice. A single
ATM network offers the potential for economies of scale and streamlining of
network operations. The standardization of ATM has allowed for compatibility of
ATM equipment and interoperability of ATM among a wide variety of interfaces and
vendors.

The U.S. government was among the first to deploy ATM technology. Its
initial decision to use ATM was motivated by its desire to consolidate many
discrete networks onto a single network, thus significantly reducing cost. The
U.S. government was able to deploy ATM across geographic boundaries because ATM
was quickly accepted as an international standard, and the government soon
discovered the effectiveness and efficiency of ATM as a global networking
technology.

Several telecommunications service providers began offering trial ATM
services in the early 1990s. These services were available only for high speed
traffic and at high prices and, therefore, made ATM attractive only to users
with significant bandwidth needs. Driven by increasing competition and the rapid
growth of data traffic on frame relay systems, a number of telecommunications
service providers began deploying ATM for use in their network backbones to
manage heavy loads of user traffic and thereby relieve network congestion. Until
recently, providers have continued to install ATM primarily in their network
backbones and typically have not offered ATM service directly to end users.

In 1996, certain telecommunications service providers announced plans to
begin offering ATM services directly to end users at prices competitive with
similar packet switching and circuit switching access services. To utilize these
direct ATM services, an end user needs ATM access products either located at the
local office of a telecommunications service provider (in close proximity to the
end user) or deployed by the end user in its private network. Access products
provide the end user with network access through multiple network interfaces,
traffic concentration and data protocol translation.

ATM access products are well suited to provide efficient connectivity to
ATM networks, facilitate transmission of a variety of traffic types at varying
speeds and accommodate a mix of end user applications on a single network. In
addition, ATM access products have the potential to lower the cost to end users
of transmitting data, video and voice communications. Management believes that
the Splitrock Network contains more ATM-based switches than that of any other
commercial network.

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BUSINESS

GENERAL

The Company is a provider of telecommunications services, including high
speed Internet access services, on an advanced nationwide network based on ATM
switching technology which is deployed in every POP of the network. The
pervasive deployment of ATM switches throughout the Network enables the Company
to serve as a broad-based ISP through the creation of a multi-service platform
which efficiently delivers IP, frame relay and other Internet services. This
flexibility will allow the Company to expand its service offerings to provide
fully integrated data, video and voice services and to incorporate future
technological innovations into its Network architecture with a lower incremental
investment than that required by other, less flexible, networks. The Company
currently provides nationwide Internet dial access and related services to
Prodigy, the third largest U.S. ISP measured in minutes on-line, for its
subscribers. In addition, the Company has begun providing Internet transit
services to Orbis, an Internet connection service provider to businesses, and
expects to begin providing VPN services to NetworkTwo, a value added network
service provider, during the third or fourth quarter of 1998. For the six months
ended June 30, 1998, the Company had revenues of $32.2 million.

In order to provide services to Prodigy while the Splitrock Network was
being deployed, on July 1, 1997 the Company acquired the Legacy Network and
began immediately providing Internet dial access and related services to Prodigy
for its subscribers. Additionally, the Company has an agreement with IBM to use
the IBM Global Services Network to cover market areas that are served neither by
the Splitrock Network nor the Legacy Network. The Company currently handles more
than 800 million minutes of Internet traffic per month for Prodigy (currently
the Company's only Internet dial access customer), with over 60% of the traffic
flowing on the Splitrock Network, approximately 30% on the IBM Global Services
Network and the remainder on the Legacy Network. As the Phase II Expansion
progresses, Legacy Network POPs will be decommissioned and access to specific
IBM Global Services Network POPs will be terminated when appropriate.
Substantially all Legacy Network POPs are expected to be decommissioned by the
end of 1998 and usage of the IBM Global Services Network is expected to be
terminated by the end of the second quarter of 1999.

COMPETITIVE ADVANTAGES

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switches than that of any other commercial network. This pervasive use of ATM
technology and the Lucent LDR200 switch enables the Company to create a
multi-service platform which delivers IP, frame relay and other Internet
services. In addition, ATM-to-the-edge provides additional capabilities to
expand the Company's service offerings to provide fully integrated data, video
and voice services and to incorporate future technological innovations into the
Splitrock Network architecture with a lower incremental investment than that
required by other, less flexible, networks.

Providing of Wholesale Internet Dial Access and International Services. The
Company currently provides wholesale Internet data access services to Prodigy
for its subscribers. The Company intends to market Internet dial access services
directly to ISPs rather than to individual end-users. As a result, unlike many
providers of network services, the Company does not intend to compete against
its ISP customers, thereby broadening the potential customer base to include
those ISPs unwilling to strengthen their competitors with their own network
business. Furthermore, the Company believes it will be viewed as a non-competing
vendor and, thus a potential partner, by major foreign and regional
telecommunications carriers, providing an alternative to their primary U.S.
competitors for delivering data, video and voice services.

Experienced Management Team. The Company's co-founders, Kwok L. Li,
Chairman of the Board and Chief Technical Officer, and William R. Wilson,
President and Chief Executive Officer, have assembled a management team with
significant data and voice communications experience. The 10 most senior
executives and managers of the Company have an average of over 12 years
experience in the data and voice communications industry. Previously, Mr. Li and
Mr. Wilson were both senior executives at the predecessor corporation of WilTel,
a wholesale provider of telecommunications services. During their tenure WilTel
designed, constructed, developed and managed modern packet switched networks
(including frame relay and ATM) and marketed related services. At the time of
the sale of Yurie to Lucent in May 1998, Mr. Li was a Director, Vice Chairman
and Chief Technical Officer at Yurie, where he created and designed the Lucent
LDR200 switch which is a key component of the Splitrock Network.

BUSINESS STRATEGY

Key elements of the Company's business strategy include:

Complete the Expansion of the Advanced Network Infrastructure. The Company
has designed, deployed and is in the process of expanding the Splitrock Network,
an advanced nationwide telecommunications network based on ATM-to-the-edge
switching technology. Through June 30, 1998, the Company had spent approximately
$25.0 million on the Phase I Buildout, which was substantially completed in
April 1998, and $14.2 million on the Phase II Expansion. The Company anticipates
that completion of the Phase II Expansion will require an additional $139.6
million of capital expenditures. The Company expects to spend approximately
$45.9 million to construct approximately 330 additional POPs, approximately
$81.5 million to deploy advanced processing equipment and software to enhance
and accelerate the Company's ability to provide value added services, such as
ISDN video, web hosting and VPN, and approximately $12.2 million to augment the
Company's network management infrastructure. Of these amounts, the Company has
spent $1.5 million since June 30, 1998. The Company believes that having
ATM-to-the-edge results in: (i) a more easily upgradeable network; (ii) the
ability to efficiently add new services at a lower incremental investment; (iii)
improved network reliability; (iv) interoperability with other network
platforms; and (v) improved network manageability.

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<PAGE> 53

and evening-time consumer-oriented services (such as Internet dial access
services). The ability of the Company to offer a wide range of services will
enhance its ability to optimize traffic at all times of the day, thereby
increasing revenue and profitability. As its business strategy is implemented,
the Company will evaluate offering complementary services as they are required
by its customer base.

Expand Target Market Opportunities. IDC estimates that the total number of
U.S. companies with Internet access will grow from an estimated 1.5 million, or
20.0% of total U.S. companies, in 1996 to 4.1 million, or 53.0% of total U.S.
companies, in 2000. IDC also estimates that the number of U.S. households with a
personal computer and a modem will grow from an estimated 8.8 million, or 24.0%
of all U.S. households with a personal computer in 1996, to 39.4 million, or
58.0% of all U.S. households with a personal computer in 2000. IDC estimates
that there are currently over 4,000 ISPs in the U.S., consisting of national,
regional and local providers, of which the Company believes only a small
percentage have access to their own nationwide backbone network infrastructure.
The Company intends to capitalize on this expected growth in demand for network
services by aggressively marketing its services through a variety of
distribution channels and evaluating strategic alliances and acquisitions as
they present themselves. The Company believes that utilizing a range of
distribution channels will enable it to cost-effectively reach a broad base of
potential customers. The Company currently intends to develop and use a direct
sales force (which it expects to begin hiring in the second half of 1998) to
attract ISPs, carriers, value added service providers and medium and large
businesses. In addition, the Company intends to use alternative distribution
channels, including agents, resellers and wholesalers, to gain access to a
substantially larger base of potential customers than the Company could
otherwise initially address through its direct sales force. Through the
combination of a direct sales force and alternative distribution channels, the
Company will seek to rapidly increase revenue-producing traffic on its Network.

Provide Superior Comprehensive Customer Service. Splitrock believes that
superior customer service is a critical element in attracting and retaining
customers, and expanding value added services to existing customers. In
particular, the Company believes it is critical to maintain two geographically
dispersed NOCs, each of which is able to monitor the entire Network and provide
rapid problem resolution. The Company has established a 24-hours per day, seven
days per week NOC at its Yorktown, NY facility. In addition, a new 24-hours per
day, seven days per week NOC recently became fully operational at The Woodlands,
TX facility.

SPLITROCK'S NETWORK

Overview. The Splitrock Network is a facilities-based nationwide ATM-based
commercial telecommunications network. The Network currently reaches more than
55% of U.S. households by a local call with 56k modem access (currently the
fastest modem speed commercially available over residential phone lines),
including every market with a population of at least 100,000 as well as several
second-tier markets. Upon completion of the Phase II Expansion, the Splitrock
Network will have approximately 400 active POPs with a physical presence in all
50 states, reaching over 90% of U.S. households with a local call.

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On June 24, 1997, the Company entered into the Prodigy Agreement to provide
nationwide Internet dial access and related services to Prodigy for its
subscribers on the new Splitrock Network. In order to provide Internet access
services to Prodigy while the Splitrock Network was being deployed, on July 1,
1997 the Company acquired the Legacy Network and began immediately providing
Internet dial access and related services to Prodigy for its subscribers.
Additionally, the Company uses the IBM Global Services Network to cover market
areas that are served neither by the Splitrock Network nor the Legacy Network.
The Company currently handles more than 800 million minutes of Internet traffic
per month for Prodigy (currently the Company's only Internet dial access
customer), with over 60% of the traffic flowing on the Splitrock Network,
approximately 30% on the IBM Global Services Network and the remainder on the
Legacy Network. As the Phase II Expansion progresses, Legacy Network POPs will
be decommissioned and access to specific IBM Global Services Network POPs will
be terminated when appropriate. Substantially all Legacy Network POPs are
expected to be decommissioned by the end of 1998 and usage of the IBM Global
Services Network is expected to terminate by the end of the second quarter of
1999. In addition to providing Internet dial access and related services to
Prodigy, the Company has recently launched two new data services, transit
services and VPN services, and has begun providing transit services to Orbis, an
Internet connection service provider to businesses, and VPN services to
NetworkTwo, a value added network service provider.

The Splitrock Network Architecture. The Splitrock Network, through its
ATM-to-the-edge architecture, will allow the Company to concurrently provide
multiple services such as data, video and voice to its customers and to
incorporate future technology changes at relatively low incremental investments.
As a result, the Company believes it has created a more efficient network than
its competitors, thereby reducing its own costs and concurrently improving
reliability to the end user.

Communication service providers have typically provided services using two
predominant types of infrastructure, one geared towards voice service and the
other designed to optimize data communications. These infrastructures are based
on (i) telecommunications switches designed primarily for voice grade services
or (ii) data telecommunications routers and switches designed primarily for
communications between computers. Practical considerations and equipment
constraints have led to the development of these two types of distinct network
infrastructures. Voice telecommunications service providers historically have
needed to provide a high level of reliability because of the need for life
dependent emergency services such as 911 calls. Since telephone services use
relatively simple handsets that cannot redial or re-transmit automatically if
disconnected, telephone network providers depend upon equipment reliability,
network architecture design, network management and maintenance to meet their
service needs and reliability constraints. Data telecommunications service
providers, on the other hand, have the benefit of highly intelligent terminals
at the end-user. These terminals usually can determine if a transmission error
has occurred and automatically re-transmit data and even reconnect a session if
necessary. With the help of intelligent terminals, data telecommunication
service equipment run complex routing algorithms that allow them to locate and
find the best route to transmit data. While providing a high degree of
flexibility, data telecommunication service equipment is generally plagued with
system reliability issues and often unpredictable performance. This attribute
has historically differentiated data telecommunication service equipment from
voice telecommunication service equipment.

In order to create a network which efficiently supplies multiple types of
services, such as data, video and voice, a company must make the platform
reliable enough to support voice, yet flexible enough to support data. To date,
all companies successfully providing voice and data concurrently have
partitioned their network's bandwidth to support two separate service
infrastructures. Part of their bandwidth is used for voice, employing voice
telecommunications service switches, and the other part is used for data,
employing standard data telecommunication equipment in the network.

Separating bandwidth use is a very practical way to provide multiple
services. Particularly today, when voice traffic still dominates the majority of
bandwidth transferred over most networks, all major networks have partitioned
their bandwidth into two separate components, one to carry voice and the other
to carry data. As long as data represents a small portion of network traffic,
this partitioning remains practical. However, it is expected that the rapid
growth of data will soon cause data to consume more bandwidth than voice. When
that occurs, partitioning will make network bandwidth utilization very difficult
to optimize while creating significant management complexity.
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The Splitrock Network was designed to address these and other constraints
facing older networks by not requiring the separation of bandwidth for different
types of services. In the process of designing the Network the Company sought to
create a Network infrastructure which could (i) efficiently offer data, video,
and voice services concurrently, (ii) reduce operating costs by more efficient
utilization of network resources and (iii) provide high quality service for all
services offered on the Network.

The Company believes that three features distinguish the Splitrock Network
from other telecommunications networks. First, Splitrock uses the Lucent LDR200
switch which supports multiple services at every POP of the Network. The Company
believes that this "intelligent" ATM switch differs from typical ATM backbone
switch engines in two important ways. First, the Lucent LDR200 supports many
access protocols to the Network whereby an array of data, video and voice
services can be sent and/or received, such as IP, frame relay, ATM, ethernet,
T-1, T-3, OC-3 and many other digital as well as analog interfaces. The Lucent
LDR200 is also scalable with up to fourteen interface module slots designed to
house interface cards supporting these various services. The Lucent LDR200
translates these native service protocols into standard ATM format and
transports any service as an ATM connection. In addition, the Lucent LDR200
implements a patented queuing algorithm, allowing simultaneous support of data,
video and voice services on a unified platform without loss of quality of
service even during periods of high network utilization. The queuing algorithm
eliminates the need for bandwidth allocation to different kinds of services.

Second, to manage the large number of ATM switches in the Network, the
Company organized the Network architecture into classes and regions. This
architecture allows the Company to more quickly introduce new services because
all new services can be layered on the Network's ATM switching fabric without
alterations being made to the fabric itself. A new network service has two
components, the protocol that defines the format of the information payload and
the signaling or routing instructions required to direct the information to its
destination in the network. The Splitrock Network ATM switching platform
streamlines the signaling process because routing information is concentrated in
a limited number of central sites in the Network (known as core sites) rather
than having signaling or routing information interpreted by switches or routers
at every point of the network as occurs, for example, in a typical IP-based
network. Therefore, to introduce a new service, the Company only needs to deploy
the proper signaling or routing processors at a few core sites instead of
hundreds of switch or router sites distributed around the network. This reduced
number of routing decisions also allows for better management and typically
faster throughput than other networks.

Third, most modern networks achieve transmission efficiencies by deploying
ATM switching engines in three to twenty access sites only in the core backbone
of their network. In contrast, Splitrock has created an ATM-to-the-edge
switching fabric that blankets the entire network (i.e., ATM switches are
located in all POPs throughout the Splitrock Network). As of June 1, 1998,
Splitrock had installed 70 ATM switches, and expects to deploy an additional 330
ATM switches during the Phase II Expansion. ATM-to-the-edge forms the basic
platform for Splitrock to offer multiple services to all users on the Network.

The Splitrock Network is organized into three classes of access sites: core
sites, hub sites and remote sites. The architecture partitions the entire
Network into 21 regions, with a core site in each region. The core site is
generally located in the city with the most traffic in that region. Users access
the Network within a region by connecting to either a core, a hub or a remote
access site. The core sites form the backbone of the Splitrock Network, with the
hub and remote access sites extending the reach of the backbone.

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<PAGE> 56

The following diagram is a simplified illustration of the Company's
ATM-to-the-edge Network architecture, and is designed for illustrative purposes
only. It does not represent the actual number or location of POPs.

[NETWORK ARCHITECTURE GRAPHIC]

The 21 core sites, all of which were completed by June 1, 1998, are
equipped with Lucent LDR200 switches. Using ATM technology, these core sites are
logically fully meshed, allowing traffic to pass directly from any one region to
any other region. The core sites are interconnected by standard transmission
links such as DS-3 or OC-3, which are available from IXCs such as WorldCom, MCI
and Qwest Communications International Inc. ("Qwest"). Because the Lucent LDR200
conforms to standard transmission specifications, the Company can purchase
bandwidth on an actual need basis between each site and upgrade these links as
the bandwidth demand increases.

In addition, each core site is equipped with special protocol processors to
enable the Network to accommodate demand for a wide variety of services. For
example, to support IP protocol for Internet services, standard Cisco IP routers
are installed, one per core site. These are the only routers installed in the
Network as opposed to other networks which have routers installed throughout the
network. Since a router has direct connections to every other router in the
Splitrock Network, the routers have very simple routing tables and can forward
packets from region to region efficiently and directly.

Hub sites service the major cities within a region. Upon completion of the
Network expansion, there will be approximately 60 hub sites in the Network, of
which 49 were completed by June 1, 1998. Each hub site is equipped with a Lucent
LDR200 switch and all other user access equipment, including Bay Network modems,
necessary for Internet dial access service. A Splitrock user connected to any
hub site can access the complete array of services. Hub sites connect to core
sites over a DS-3 line or multiple T-1 lines depending on the traffic
requirements. Hub sites can be connected redundantly to other hub sites or to
other core sites to increase network reliability. For IP traffic, all packets
from a hub site are forwarded directly to the region's core site, and then
forwarded to their destination region by the core site router.

Upon completion of the Phase II Expansion, the Network will have more than
300 remote sites to reach the smaller cities within a region. None of such sites
were in place by June 1, 1998. These sites are also fully equipped with Lucent
LDR200 switches and other equipment to allow user access to the same services as
elsewhere in the Network. Remote access sites connect to a hub site, usually
with a T-1 line. The remote sites

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can also be protected from transmission failures by being connected redundantly
to other access or hub sites in the region. The Company has not added a material
number of POPs since June 1, 1998.

The following diagram is a simplified illustration of how the Splitrock
Network is designed to deliver data (including Internet), video and voice
services.

[FLOW CHART

Network Infrastructure. The Company believes that it has provided for
future growth by ensuring that the Splitrock Network is scalable, flexible,
fault tolerant, open standards and interoperable and manageable from remote
locations.

- Scalable. Splitrock's flexible, multi-layer network architecture utilizes
a high-speed switching fabric enabling the Company to grow the number of
POPs and the number of users served in an incremental manner that matches
investment with demand. The Splitrock Network's scalability extends
beyond the currently installed base of POPs to allow for growth without
fundamental design changes.

- Flexible. The Company believes that the Splitrock Network will adapt to
new services and manages network resources according to each service's
needs, permitting the Network to efficiently offer data, video and voice
services concurrently. On the switching level, the switching elements
(Lucent LDR200 switches) adjust Network responses based on the traffic's
delay and loss sensitivities. On the protocol level, the Network
architecture is able to sort and direct various protocols to its
designated protocol processors, including Internet packets to Cisco
routers, ISDN signaling to workstations with ISDN software, and
traditional voice network signaling to workstations with SS7 software.

- Fault Tolerant. Redundancy and adaptive technology in the Splitrock
Network reduces the impact of isolated failures. For example, all core
sites are interconnected, allowing traffic to be transferred among sites
in case of a failure. In addition, key switching, routers and
workstations are configured to search for alternate paths in the event of
individual component or transmission line failure. The Company also has
an uninterruptible power supply at each POP, limiting the impact of local
power outages on the Network.

- Open Standards and Interoperable. The Splitrock Network is entirely based
on standards compliant architecture supporting various protocols,
including IP, ATM, frame relay, ISDN video and SS7. This architecture
allows Splitrock to interconnect freely with other carrier networks or
customer networks.

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As a result, Splitrock can extend services of another carrier outside of
that carrier's own region. In addition, potential VPN clients that use
standards based protocols can easily access the Network without having to
purchase special equipment that would otherwise be necessary with a
proprietary network.

- Manageable. From its NOCs, the Company is able to monitor the Network
remotely, perform network diagnostics and equipment surveillance, and
inform customers when a network problem occurs. As a result of the
Company's network architecture, these tasks may be performed remotely
regardless of POP location or network status. This capability allows the
Company to control costs associated with on-site network configuration
and repair.

Network Management. The Company believes that superior customer service is
a critical element in attracting and retaining customers, and expanding value
added services to existing customers. In particular, the Company believes it is
critical to maintain two geographically dispersed NOCs, each of which is able to
monitor the entire Network and provide rapid problem resolution. The Company has
established a 24-hours per day, seven days per week NOC at its Yorktown, NY
facility. In addition, a new 24-hours per day, seven days per week NOC recently
became fully operational at The Woodlands, TX facility.

Peering. Peering arrangements between the Company and ISPs are necessary to
exchange traffic destined for other networks and to allow external traffic
access to the Splitrock Network. With Prodigy as a customer, the Company is now
carrying a significant amount of Internet traffic. The Company is building an
infrastructure equivalent to other Tier 1 providers and it has sought peering
relationships with many Tier 1 and Tier 2 ISPs. Peering arrangements have been
established with six ISPs, including Sprint and PSINet, and the Company is
currently in discussions with other ISPs in order to broaden its peering
capabilities. The Company peers with other networks from a core site through an
industrial standard Cisco router, which promotes proper protocol exchange
between Splitrock and other ISPs. The Company currently maintains private
peering connections at its Los Angeles, California; New York, New York; Atlanta,
Georgia; Phoenix, Arizona; and Dallas, Texas facilities. In addition, the
Company currently has access to one public peering location in Chicago, Illinois
and expects that access to two additional public peering locations will be
established in the third quarter of 1998. The Company expects that it will
substantially increase the number of ISPs with which it peers over the next two
years. The Company believes that by entering into direct peering relationships
with a large number of ISPs, the Company's business customers receive better
service and higher quality network performance. See "Risk
Factors -- Establishment and Maintenance of Transmission Services and Peering
Relationships."

Transmission Services. The Company leases long distance connections of
various bandwidths to connect sites in the Network. The choice of long distance
carriers is based on their network reliability, bandwidth availability,
responsiveness and pricing. The Company currently leases a majority of its long
distance connections from WorldCom and is also reviewing other suppliers such as
Sprint and Qwest.

The Company leases local connections (DS-1, T-1 or ISDN PRI) to access the
end-user. The local service providers are selected based on their reliability,
service availability, responsiveness, pricing and minimum switch congestion
during busy hours. Based on these criteria, the Company has relationships with
21 CLECs and all major ILECs in the country. The Company has also established
approximately 60 collocations with various CLECs.

PRODUCTS AND SERVICES

General. The pervasive deployment of ATM switching technology throughout
the Network enables the Company to offer new services with lower incremental
investment than that required by less flexible networks. Currently, the Company
provides Internet access options and related-services, including Internet dial
access services and transit services, as well as enhanced VPN services. The
Company is seeking to increase total network utilization primarily by targeting
providers of business services (daytime intensive traffic) and, to a lesser
extent, providers of consumer services (evening intensive traffic).

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Internet Access Options. The Company provides the following Internet access
options and related services to its customers:

- Internet Dial Access Services. The Company's Internet dial access
services offer a cost effective Internet solution that provides 56k dial
access to the Company's advanced ATM-to-the-edge network via ordinary
telephone lines. The Company's Internet dial access services provide
smaller ISPs with the opportunity to increase their user base over time
while at the same time providing larger ISPs the opportunity to cost
effectively manage their growth. The Company currently provides Internet
dial access services to Prodigy for its subscribers. The Company intends
to primarily target business focused ISPs and businesses and, to a lesser
extent, ISPs with residential customers to maximize traffic throughout
the Network. As of August 31, 1998, Prodigy was the Company's only
Internet dial access service customer.

- Transit Service. The Company offers high speed transit services, which
provide businesses with direct access, via dedicated capacity, to a full
range of Internet applications and allows an ISP to transfer traffic
through the Company's Network to another ISP. The Company's transit
services provide full-time dedicated Internet connectivity at a range of
access speeds from 56 Kbps to 155 Mbps. This service is designed to offer
comprehensive network security and to help ensure bandwidth availability
for priority business applications. Transit services enable businesses to
reduce their data communications expenses by leasing network utilization
from the Company in lieu of leasing point-to-point circuits from other
telecommunications providers. The Company has initially begun to target
carriers (i.e. ISPs, ILECs, CLECs, regional long distance providers and
wireless providers) as potential customers for this service. As the
Company's carrier transit service business grows, the Company will target
other businesses. Since May 1998, the Company has provided transit
services on a month-to-month basis to Orbis, an Internet connection
service provider to businesses, which is currently the Company's only
transit service customer.

Virtual Private Network Services. Many companies today have private data
communication networks (often referred to as WANs) built on expensive leased
lines designed to transfer proprietary data between office locations. The
Splitrock Network offers companies a cost-effective alternative to WANs through
VPNs, which are designed to provide secure transmission of private IP traffic
through the Internet. Additionally, many companies require that their employees
have remote access to these private networks from home or while traveling, which
is a function that VPNs provide. VPN products are also the vehicle for offering
intranet and extranet services. Intranets are corporate/organizational networks
that rely on Internet-based technologies to provide secure links between
corporate offices. Extranets expand the network to selected business partners
through secured links on the Internet. Increasingly, companies are finding that
intranets and extranets can enhance corporate productivity more easily and less
expensively than proprietary systems. The Company currently offers VPN
solutions, and is in the process of evaluating additional products to meet the
needs of customers. For example, the Company is in the process of testing ISDN
software and expects to offer video conferencing services to customers by the
end of 1998. Such services will be point-to-point, targeted primarily at the
communications needs of companies using PictureTel, VTEL or other standards
based video conferencing, and will allow the business customer to conduct video
conferencing with other on-network or off-network users with compatible video
conferencing equipment. The Company has initially begun to target carriers (e.g.
ISPs, ILECs, CLECs, regional long distance providers and wireless providers),
which the Company expects to distribute the Company's VPN services to end-users.
As the Company's VPN service business grows, the Company will also target
businesses as potential VPN customers. The Company has an agreement with
NetworkTwo, a value added network service provider, and expects to begin
delivering VPN services pursuant to this agreement in the third or fourth
quarter of 1998. NetworkTwo is currently the Company's only VPN customer.

DISTRIBUTION STRATEGY

Through the combination of a direct sales force and alternative
distribution channels, the Company believes that it will be able to access
markets and increase revenue-producing traffic on the Splitrock Network.

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To implement its distribution strategy, the Company intends to develop an
in-house direct sales force and has identified a variety of possible alternative
distribution channels. The Company expects to begin hiring sales employees in
the second half of 1998.

The Company intends to utilize its direct sales force to market its
products and services directly to ISPs, carriers, value added service providers
and medium and large businesses. The Company intends to utilize alternate
distribution channels to market its products and services to medium and small
businesses. These alternate distribution channels include agents, resellers and
wholesalers.

- Agents are independent organizations that would sell the Company's
products and services under the Splitrock brand name to end-users in
exchange for revenue based commissions. The Company intends to identify
agents that generally would be focused on specific market segments (such
as medium and small businesses) and have existing customer bases. Sales
through this alternative distribution channel would require the Company
to provide the same type of services that would be provided in the case
of sales through its own direct sales force, such as order fulfillment,
billing and collections, customer service and direct sales management.

- Resellers are independent companies that would purchase the Company's
products and services and then "repackage" these services for sale to
their customers under their own brand name. The Company believes that
resellers would require access to certain of the Company's business
operating systems in connection with the sale of the Company's services
to the resellers' customers. Sales through this distribution channel
generally would not require the Company to provide order fulfillment,
billing and collection and customer service.

- Wholesalers are independent companies that would purchase from the
Company unbundled network and service capabilities in large quantities in
order to market their own products and services under a brand name other
than Splitrock. The Company believes that wholesalers would have minimal
dependence on the Company's business support systems in connection with
the sale of services to their customers.

The Company anticipates that participants in its alternative distribution
channels will sell services directly to medium and small businesses. The Company
expects these medium and small businesses to access the Splitrock Network by
using local switched services that are provided by CLECs or ILECs.

CUSTOMERS

The Company currently provides Internet dial access, transit and VPN
services to its customers. To date, Internet dial access services have provided
substantially all of the Company's revenue. The Company expects this percentage
to decrease as the Company continues to add new customers.

Internet dial access customers. Prodigy has been the Company's customer
since July 1997 and has provided substantially all of the Company's revenue
since its inception. Launched in 1984 as a joint venture between IBM and Sears,
Prodigy developed a nationwide on-line service that reached more than 85% of
U.S. households with a local call. Along with America Online, Inc. and
CompuServe Corp., Prodigy helped pioneer the concept of e-mail and on-line
services to consumers in the U.S.

In 1996, Prodigy was spun off from IBM and Sears. In 1997, Carso obtained
control of Prodigy. Carso introduced a new management team which has focused on
growing and expanding the business, modernizing infrastructure, and reducing
costs. In early 1997, Prodigy launched a new Internet-based service, Prodigy
Internet, separate from the original proprietary on-line service, Prodigy
Classic, priced at $19.95 per month for unlimited service. In September 1997, PC
Magazine selected Prodigy as its Editor's Choice for Internet service. Prodigy
is in the process of migrating Prodigy Classic subscribers to Prodigy Internet.
The average number of total Prodigy Internet subscribers grew 36.4% during the
first quarter of 1998 compared to the fourth quarter of 1997 and 3.3% during the
second quarter of 1998, when compared to the first quarter of 1998.

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In 1998, as a result of its continued focus on marketing and customer
service, Prodigy outsourced its content management to Excite Communications,
Inc. Additionally, Prodigy has started aggressive marketing programs which are
intended to rebuild its brand name recognition. Since July 1997, Prodigy has
almost doubled the number of subscribers to its Prodigy Internet service
partially as a result of a migration of Prodigy Classic subscribers to Prodigy
Internet. The Prodigy customer base and associated revenue has enabled the
Company to support the deployment of the Splitrock Network. See "Risk
Factors -- Reliance on Prodigy; Recent Discussions with Prodigy."

Transit customers. There are approximately 4,000 ISPs in the U.S. today.
Most of these do not have their own nationwide network and thus require transit
service to the Internet. Commencing in May 1998, the Company has provided
transit services to Orbis on a month-to-month basis. Orbis is the leading
provider of local Internet connection services for businesses in Minneapolis and
St. Paul, Minnesota. Orbis offers business critical connectivity featuring
redundant, high-speed (T-1, T-3) backbone connections, 24-hour operational and
environmental monitoring, and Web hosting services. At the beginning of each
month, Orbis requests a certain amount of dedicated bandwidth and the Company
then charges a monthly fee based on the amount of bandwidth requested. The
Company began generating revenues from Orbis in May 1998. The Company does not
expect that revenues from Orbis will be material for the foreseeable future.

VPN customers. The Company has entered into a three-year agreement to
provide VPN services to NetworkTwo. NetworkTwo, formerly known as ADP AutoNet
Communications Group, supplies high quality, reliable and fully supported
network services and operates a national wide area network delivering both
dedicated and dial-up connectivity to business clients. NetworkTwo also manages
VPNs, enterprise-wide intranets and extranets. NetworkTwo moves more than $2.0
billion over its network each day as a function of its cash management and funds
transfer service for ADP Financial Services. Other Network Two users include Dow
Jones' News Retrieval service; State Farm and Allstate insurance companies; and
60 of the top 100 U.S. banks. Under the agreement, NetworkTwo will be billed
depending on the type of modem port used (i.e. 612 Kbps, 768 Kbps, etc.) and the
amount of bandwidth consumed, with certain discounts available based on volume.
The agreement provides for a minimum aggregate payment by NetworkTwo of $7.0
million over the three year contract period, but no minimum monthly payment is
required in 1998. The Company began generating revenue from NetworkTwo in June
1998 and expects to begin providing VPN services to NetworkTwo in the third or
fourth quarter of 1998.

CUSTOMER SERVICE

Splitrock believes that superior customer service is a critical element in
attracting and retaining customers and expanding value added services to
existing customers. In particular, the Company believes it is critical to
maintain two geographically dispersed NOCs, each of which is able to monitor the
entire Network and provide rapid problem resolution. Since the first quarter of
1998, the Company believes that it has developed a customer service platform
which will minimize the impact of future service interruptions and provide
superior customer service. Specifically, the Company has established a 24-hours
per day, seven days per week NOC at its Yorktown, NY facility and a new 24-hours
per day, seven days per week NOC recently became fully operational at The
Woodlands, TX facility. Each of these NOCs has the capability to manage traffic,
monitor system status and remotely implement solutions to system interruptions.

As of May 1998, the Company had implemented a number of other systems and
procedures to provide superior customer service. The Company has installed a
leading customer support trouble ticketing and workflow management system from
Remedy Corporation ("Remedy") to track, route and report on customer service
issues. In addition, software installed at the NOCs now enables the Company to
remotely service customer connections to the Splitrock Network. In addition,
field service personnel from the Company or third party vendors are dispatched
in the event of an equipment failure that cannot be serviced remotely. See
"-- Suppliers." In the first quarter of 1998 the Network experienced significant
service interruptions and failures. See "Risk Factors -- Reliance on Prodigy;
Recent Discussions with Prodigy."

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BUSINESS SUPPORT SYSTEMS

General. Through the development of scalable business support systems, the
Company believes that it has the opportunity to establish a competitive
advantage relative to traditional network service providers. Traditional network
service providers typically operate extensive legacy business support systems
with compartmentalized architectures that limit their ability to scale rapidly
and introduce enhanced services and features. In connection with the expansion
of the Splitrock Network, the Company is creating business support systems with
an architecture designed to maximize both reliability and scalability.
Furthermore, in establishing its business support systems, the Company has
attempted to develop Company-wide standardization of hardware, software,
database platforms and problem solving in order to maximize system automation
and minimize employee manual processing. Business support systems are, or will
be, distributed throughout the Splitrock Network, rather than located at central
sites, which improves network performance, recovery and reliability, while also
providing real-time capture of statistical and accounting data. Splitrock
utilizes, when available, industry standard software systems developed and
maintained by third party vendors but customized for the Company's specific
needs.

Network Management. The Company believes that an up-to-date management
platform is critical for the Company to be competitive and provide customers
with quality services. The Company has put in place a modern management platform
to manage the extensive Splitrock Network. The new management platform performs
operations, administration and management tasks. The Company has selected UNIX
and Windows NT based computing systems for network management to ensure ease of
upgrades in the future. Key features of the system are provided by third party
vendors, including an SQL database for information management, NetExpert from
Objective Systems, Inc. for equipment monitoring, Remedy for trouble request
tracking, and other software running tasks that monitor network utilization. The
Company has customized most of these platforms to ensure maximum Network
flexibility and efficiency. The systems also have sufficient capacity to expand
without significant design changes.

Billing. The Company is reviewing billing systems and will select an
industry-standard billing system and begin implementation late in 1998. The
Company believes that billing requirements prior to full implementation,
expected in the first quarter of 1999, can be addressed with existing systems.
In order to support the third party system that the Company plans to utilize,
the Company has adopted Radius Authentication software to capture Internet
session activity in order to feed the billing system for usage-based services.
The Company believes that this software offers the flexibility and scalability
necessarily to support high quality Network billing services. For example, the
Company believes that this software will have the ability to process 1 million
records per hour to capture all relevant billing information. While this
software has been purchased and customized, it has yet to be tested at
production levels but is expected to be fully deployed by the end of September
1998.

SUPPLIERS

The Company is dependent on third parties for key components of its network
infrastructure, including for leased lines, transmission services and networking
equipment, such as routers, switches and modems. The quantities and quality of
such networking equipment required by the Company are available only from
limited sources. The Company currently utilizes Lucent for ATM switching
products, including the Lucent LDR200 switch, Bay Networks for its Internet dial
access platform, Cisco for routers and Sun for servers. The Company has entered
into a Purchase Agreement with Yurie (which was acquired by Lucent in May 1998)
pursuant to which the Company agreed to purchase and Yurie agreed to provide a
minimum of $20.0 million of Yurie equipment and related products prior to
January 1, 1999. As of August 31, 1998 the Company had purchased $11.0 million
of equipment and products under this agreement. The Company also depends upon a
variety of LECs and IXCs to provide telecommunication services, including leased
line and collocation facilities. For long distance connections and backbone long
distance transmission facilities, the Company currently uses WorldCom. In
addition, the Company obtains bandwidth capacity under leased line connection
agreements with LECs, including RBOCs, or is provided telecommunications
services and leased physical space under local access/collocation agreements
with various CLECs, such as Focal, Intermedia, and others. The Company is also
actively pursuing agreements with additional CLECs in an effort to establish
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relationships with a variety of telecommunication providers and thereby reduce
the cost of lease connectivity. See "Risk Factors -- Dependence on Suppliers"
and "-- Splitrock's Network -- Transmission Services."

The Company has an agreement with IBM to use the IBM Global Services
Network to cover market areas that are neither served by the Splitrock Network
nor the Legacy Network. These POPs currently account for approximately 30% of
all Prodigy-related traffic. The terms of the agreement provide that either
party may, upon 60 days prior notice, terminate its respective obligations under
the contract for the remaining POP sites. In addition, under the terms of the
agreement with IBM, services at certain of the POPs in the IBM Global Services
Network are scheduled to be discontinued on September 30, 1998. The usage from
these POPs currently represents less than 2% of the Company's Prodigy-related
traffic. As part of the Phase II Expansion, the Company plans to deploy POPs to
those locations. The Company has also formulated contingency plans, including
providing toll free Internet dial access to users in these areas, should the
Company be unable to timely deploy POPs in those areas or IBM be unwilling to
continue to provide service to those POPs after September 30, 1998. See "Risk
Factors -- Dependence on Suppliers."

As part of the Company's strategy to replace remaining POPs covered by the
IBM Global Services Network and to complete the expansion of the Splitrock
Network, the Company will rely significantly upon third parties to provide
equipment and services and to deploy the remainder of the Splitrock Network.
Under the Ericsson Agreement, Ericsson will provide certain equipment and
services for, and deploy, 99 additional POP sites. In April 1998, Ericsson
provided the Company with a $5.0 million credit facility to be used to pay
amounts due under the Ericsson Agreement. The amount borrowed, $1.5 million,
under the Ericsson Agreement was repaid upon consummation of the Unit Offering.
The Company has had negotiations with Ericsson for the deployment of the
additional 231 POPs needed to complete the Phase II Expansion. The Company
expects that such negotiations will lead to an agreement on similar terms and
conditions as the Ericsson Agreement. There can be no assurance that the Company
and Ericsson will come to an agreement on the deployment of the remaining 231
POPs required to complete the Network's expansion. See "Risk
Factors -- Suppliers" and "Description of Certain Indebtedness."

The Company also engages third party vendors for routine maintenance,
on-call repair and certain related services. In addition to nine employees and
six individual contractors designated, trained and engaged by the Company as
field operation personnel, the Company has an agreement with IBM designed to
provide additional on-call field support personnel for maintenance, part
replacement and repairs for the Legacy Network until that network is
substantially decommissioned. In addition, during and following the Phase I
Buildout, WilTel has performed on-call services for replacement parts,
maintenance and repair services for the Splitrock Network. The agreement with
WilTel will expire on September 30, 1998. The Company is currently evaluating
and negotiating maintenance service proposals that are designed to replace the
agreements with IBM and WilTel and expand as the network infrastructure grows.
There can be no assurance that the Company will be able to enter into a
replacement maintenance agreement on acceptable terms, or at all. See "Risk
Factors -- Dependence on Suppliers."

COMPETITION

The industry in which the Company competes is extremely competitive. The
Company expects that competition will continue to intensify as customers seek
additional capacity to satisfy the continued growth of the Internet industry. In
addition, numerous competitors, including major telecommunications carriers, are
rapidly expanding their network capabilities. The Company believes that the
primary competitive factors for the provision of network services are quality of
service, network coverage, reliability, price, and product innovation.
Management believes it can compete effectively on these factors based on the
design of the Splitrock Network and industry experience at top management
levels.

The Company's current and prospective competitors generally may be divided
into two groups: (i) companies that provide Internet access services to ISPs
with both residential and small business customers and (ii) companies that
provide Internet access (including Internet dial access and transit), VPN and
other value added services to medium and large business customers.

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ISP Internet Access Service. According to IDC, there are over 4,000 ISPs in
the United States, consisting of national, regional and local providers. The
Company intends to market Internet dial access services to these ISPs. The
Company's competitors in this market will be other companies that provide
Internet access service to ISPs as well as ISPs which possess backbone networks
thereby enabling them to provide capacity to other ISPs. Competitors in this
segment include Verio, Concentric, PSINet and Netcom. While the Company believes
that its status as an independent service provider distinguishes it from many of
these competitors, some of these competitors have significantly greater market
presence, brand recognition and financial, technical and personnel resources
than the Company.

Corporate Internet Access and VPN. In the corporate Internet access
(including Internet dial access and transit) and VPN markets, competitors will
be comprised of network service providers that focus on medium and large
business customers as well as telecommunications carriers. Competitors will
include UUNet, GTE Internetworking (formally BBN)) and DIGEX. Many of the
network service providers that primarily focus on small business, including
Verio and Concentric, also have capabilities in these markets. In addition, all
of the major long distance companies, including AT&T Corporation ("AT&T"), MCI,
and Sprint, offer Internet access and VPN services and compete with the Company.
Many of these competitors, in addition to their substantially greater market
presence and financial, technical and personnel resources, also have large
existing commercial customer bases. Furthermore, many of these competitors have
the ability to bundle Internet access and VPN services with other services such
as Web browsing or, in the case of long distance companies, telephony. Such
bundling of services may have a material adverse effect on the Company's ability
to compete effectively and thus could have an adverse effect on the Company's
business, financial condition and results of operations.

The Company believes that significant new competitors will enter the
network services market. The Company is aware that other companies, including
IXC Comm. and Level 3, are in the process of building or expanding networks that
will have the ability to provide services comparable to those of the Company. In
addition, many of the Company's competitors have the financial and operational
resources to construct networks similar to the Splitrock Network. For example,
Sprint recently announced that it is in the process of designing a network which
will contain ATM switches at every core, hub and remote site. There can be no
assurance that the Company will be able to compete effectively with such
companies.

Recent reforms in the federal regulation of the telecommunications industry
have also created greater opportunities for LECs, including the RBOCs, to enter
the Internet network services market and therefore compete with the Company.
Such increased competition could have a material adverse effect on the Company.
In order to address the Internet network service requirements of the current
business customers of long distance and local carriers, the Company believes
that there is a trend toward horizontal integration through acquisitions of,
joint ventures with, and the wholesale purchase of connectivity from, ISPs. The
WorldCom/MFS/UUNet consolidation (as well as the pending WorldCom/MCI merger),
the Netcom/ ICG Communications Inc. merger, the Intermedia/DIGEX merger and
GTE's acquisition of BBN are indicative of this trend. Such consolidations may
result in the Company competing with larger companies with greater resources to
devote to the development of new competitive products and services and the
marketing of existing competitive products and services.

As a result of increased competition and integration in the industry, the
Company could encounter significant pricing pressure, which in turn could result
in significantly lower average selling prices of the Company's services. There
can be no assurance that the Company will be able to offset the effects of any
such lower prices with an increase in the number of its customers, growth in
sales to its customer base, higher revenue from enhanced services, cost
reductions or otherwise. In addition, the Company believes that the Internet
access and related services industry is likely to undergo further consolidation
in the near future, which could result in increased price and other competition
in these industries and, potentially, other portions of the industry, including
the market for VPN services. Increased price or other competition could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to continue to compete successfully.

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REGULATION

Overview. Although the Company is not currently subject to direct
regulation by the FCC or any other federal or state agency, it operates in a
highly regulated industry and therefore changes in the regulatory environment
relating to Internet related and other telecommunications services, including
regulatory changes which directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition from RBOCs or other
telecommunication companies, could have a material adverse effect on the
Company's financial position or results of operations, including by affecting
the prices at which the Company offers it services or imposing regulatory
compliance and other costs on the Company.

Various existing federal and state regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which the industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry generally, or on the Company particularly, can be
predicted at this time. In addition, over the past several years both the
federal and state governments have adopted new legislation and rules profoundly
affecting the telecommunications industry. No assurance can be given that the
changes in current legislation or new legislation, and the regulations adopted
by the FCC or state regulators pursuant to such legislation, would not have a
material adverse impact on the Company.

The Company Operates as an Unregulated Private Carrier. Unlike most
providers of telecommunications services, the Company does not offer services
indiscriminately to the public or to a broad class of customers, but instead
negotiates individual service contracts with a small number of select carriers.
As a result, it is classified as a "private carrier" as opposed to a "common
carrier" and is not subject to most federal and state regulations. If, in the
future, the Company broadens its customer base and/or provides services
according to standardized service arrangements instead of individually
negotiated contracts, it may become subject to common carrier regulation. If
this occurs, the Company may incur additional regulatory costs to which it is
not now subject.

Regulation of Internet Communications. To date, the FCC has exempted
Enhanced Service Providers ("ESPs"), including ISPs, from federal and state
regulations governing common carriers, including the obligation to pay access
charges and regulatory fees, including contributions to the Universal Services
Fund. Thus, to the extent that the Company provides Internet services and other
services employing Internet protocols, it is not currently subject to
regulation.

Some recent regulatory action indicates that ISPs may be subject to some
form of regulation in the future. The regulatory status of communications
services over the Internet is presently uncertain. For example, in an April 10,
1998 Report to Congress regarding Universal Service (the "Report"), the FCC
concluded that the provision of transmission capacity to ISPs constitutes
"telecommunications" under the Communications Act. The FCC has also indicated in
the Report that it would consider, in an upcoming proceeding, issues related to
whether ISPs that own transmission facilities and engage in data transport over
those facilities in order to provide information services are providing
telecommunications to themselves, and therefore ought to be required to
contribute to the Universal Service Fund. While the Report containing this
conclusion does not have the force of law, it provides a strong indication of
regulatory action that may be taken by the FCC in the future. A finding by the
FCC that ISPs and carriers providing service to ISPs must pay Universal Service
contributions could increase the Company's cost of doing business and have a
material adverse affect on the Company.

To the extent that the Company provides Internet telephony (i.e., a service
in which a voice transmission is made over a packet-switched interactive data
network), such service is deemed an enhanced service and is not currently
subject to federal or state regulation. There is no guarantee, however, that the
regulatory status of Internet telephony will not change in the future. If
Internet telephony does become subject to federal or state regulation in the
future, such a development could impose substantial new costs on the Company.
Therefore, there can be no assurance that new laws or regulations relating to
these services, or determinations that existing laws are applicable to them,
will not have a material adverse effect on the Company's business.

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<PAGE> 66

Potential Liability of ISPs. The law in the United States relating to the
liability of ISPs and providers of transmission capacity for information carried
on, disseminated through or hosted on their systems is currently unsettled. The
Communications Act and statutes enacted, or under consideration in some states,
impose civil and criminal liability upon ISPs, or providers of transmission
capacity to ISPs, for the transmission or dissemination of certain types of
information and materials. The imposition of such liability may require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources. Regulations, litigation,
or legislation could affect the demand for the Company's services. See "Risk
Factors -- Regulatory Matters; Potential Liability for Information Disseminated
over the Internet."

TRADEMARKS AND TRADE NAMES

The Company filed federal trademark applications for the words "Splitrock"
and "A Carrier of Wisdom" on September 18, 1997, and its domain name
"splitrock.net" on March 6, 1998. The Company also filed separate federal
trademark applications for logos on the above dates, for a logo on June 16, 1998
and for the domain name "splitrock.com" on July 27, 1998. These applications are
pending and the Company has no assurance that they will be granted. Trademark
applications for the "Splitrock" mark also have been applied for in numerous
foreign countries including Mexico, twelve Central and South American countries,
Canada, the European Community, Japan, South Korea, Taiwan, China, Thailand, the
Russian Federation, Poland and Australia. "Splitrock Services, Inc." is a trade
name of the Company.

EMPLOYEES

As of August 31, 1998, the Company had 82 full-time employees and 31
independent contract workers. None of the Company's employees are represented by
a union. The Company has experienced no strikes or work stoppages and considers
its relations with its employees to be satisfactory.

The Company believes that its ability to successfully implement its
business strategies will depend on its ability to attract and retain qualified
employees. The Company expects to hire approximately 24 and 70 additional
employees by the end of 1998 and the Phase II Expansion, respectively. In
addition, the Company expects to utilize additional independent contractors.
Independent contractors are expected to continue to represent approximately
20-25% of the Company's total workforce. While the Company is expecting to add
employees throughout its organization, the Company will focus on recruiting new
technical and sales and marketing employees. The Company expects to employ over
175 employees and independent contractors upon completion of the Phase II
Expansion in the second quarter of 1999. In order to attract and retain highly
qualified employees, the Company believes that it is important to provide a
competitive compensation program that aligns employees' interests with the
Company's. The Company's noncash benefit programs are designed to be comparable
to those offered by its competitors. See "Management." There can be no assurance
that the Company will be able to attract and retain the personnel necessary to
implement its strategies. See "Risk Factors -- Ability to Manage Growth".

INSURANCE

The Company has insurance coverage it believes to be adequate for the risks
of the businesses in which it is engaged. The Company carries property, general
liability and directors and officers insurance with basic policy limitations of
$5.0 million, $2.0 million and $5.0 million, respectively, subject to
deductibles, exclusions and self-insurance retention amounts. In addition, the
Company has a $5.0 million umbrella policy. Such coverage may not be adequate or
available to compensate the Company for all losses that may occur. The
occurrence of a significant loss not fully covered by insurance could have a
material adverse effect on the Company. See "Risk Factors -- Risk of System
Failure; Insurance."

PROPERTIES

Until recently the Company leased approximately 8,000 square feet of space
in The Woodlands, TX for its headquarters and administrative facilities. In
early July 1998 the Company moved its headquarters and

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administrative facilities to a new facility containing approximately 25,000
square feet in The Woodlands, TX. The lease on the new facility expires in 2003.
The Woodlands, TX NOC is also housed in the new facility.

The Company also subleases from Prodigy a facility of approximately 12,500
square feet in Yorktown, NY for the Company's Yorktown office and NOC. This
lease expires on February 28, 2001 but is subject to early termination on
December 31, 1999 upon three months written notice. The Company plans to move
its Yorktown, NY facility to another location in the New York metropolitan area.

In connection with its network operations, the Company leases space for
installed telecommunications equipment throughout the U.S. for those POPs
deployed in over 70 metropolitan markets. These leases have an average term of
three years and average monthly payments ranging up to several thousand dollars.
In many cases, the Company has the option to renew such leases. The Company
considers these facilities and properties to be suitable for its present needs.
The Company did not assume leases related to the Prodigy POPs in connection with
the Prodigy Transactions. The Company expects to enter additional leases as the
Phase II Expansion progresses.

LEGAL PROCEEDINGS

The Company is not currently involved in any legal proceedings, nor are any
legal proceedings threatened by or against the Company.

MANAGEMENT

The following is information concerning the Board of Directors, executive
officers and other key employees of the Company:

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION WITH THE COMPANY
- ---- --- -----------------------------------
<S> <C> <C>
Kwok L. Li................................ 41 Chairman of the Board of Directors and
Chief Technical Officer
William R. Wilson......................... 50 President, Chief Executive Officer and
Director
James D. Long............................. 44 Senior Vice President, Chief Financial
Officer and Director
Patrick J. McGettigan, Jr................. 45 Senior Vice President, Secretary and
General Counsel
Clark McLeod.............................. 51 Director
Samer Salameh............................. 33 Director
Roy A. Wilkens............................ 55 Director
Todd Wilkens.............................. 31 Vice President -- Engineering
Tracy Hammond............................. 38 Controller
</TABLE>

Kwok L. Li has served as a Chairman of the Board since July 1997 and has
served as Chief Technical Officer of the Company since April 1998. Mr. Li is a
co-founder of the Company. Mr. Li has also been the Chairman and managing member
of Linsang since July 1997. Linsang is a technology investment company in which
Mr. Li owns a controlling interest. Mr. Li was a director of Yurie from 1995
until the consummation of the sale of Yurie to Lucent. Mr. Li also served as
Vice Chairman of Yurie from June 1997 until its sale to Lucent, as President and
Chief Operating Officer of Yurie from March 1996 to June 1997, and as Executive
Vice President and Chief Technical Officer of Yurie from August 1994 through
March 1996. From 1991 to 1994, Mr. Li was Director of Strategic Planning at
WilTel an interexchange carrier. From 1988 to 1991, he was Manager of Fiber
Access Systems Development for Bell Northern Research, Inc., a subsidiary
conducting technological research and development for Northern Telecom Limited.
Mr. Li is the primary technical architect of the Lucent LDR200 switch
technology. Mr. Li received a B.E.S. in electrical engineering from The Johns
Hopkins University in 1979.

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William R. Wilson has served as President of the Company since its
formation and Chief Executive Officer of the Company since April 1998. Mr.
Wilson is a co-founder of the Company. Prior to assuming his position at the
Company, Mr. Wilson was the Chief Executive Officer of OneLine Management, a
telecommunications consulting firm specializing in strategic positioning founded
by Mr. Wilson in 1995. In that capacity, Mr. Wilson advised Carso and Telmex on
strategic matters. From 1988 to 1995, Mr. Wilson was Vice President of Strategic
Planning at WilTel. Previously, Mr. Wilson taught at Rice University, The
University of Texas at Austin, and The University of Michigan. Mr. Wilson holds
a Ph.D. in Social Psychology from The University of Michigan and an MBA from The
University of Texas at Austin.

James D. Long has served as Senior Vice President and Chief Financial
Officer of the Company since March 1998. From 1995 to 1997, Mr. Long was Senior
Vice President and Chief Financial Officer of CoreSource, Inc., a venture
capital backed healthcare service company, with responsibilities for general
management, financial management and corporate finance. From 1993 to 1995, Mr.
Long was a principal in Nightingale & Associates, a management consulting firm.
Mr. Long has experience with several other management consulting firms including
Deloitte & Touche and Price Waterhouse. Mr. Long holds a BA in Latin American
Economics and an MBA from the University of Texas.

Patrick J. McGettigan, Jr., has served as General Counsel of the Company
since September 1997, as Secretary since March 1998, and as Senior Vice
President since April 1998. Prior to joining the Company, Mr. McGettigan was in
the private practice of law, having been a partner in the firm he founded in the
early 1980s. Mr. McGettigan served as outside counsel to the Company when it was
formed in March 1997. While in private practice for 19 years, Mr. McGettigan
primarily represented closely held businesses in commercial litigation and
transactional matters. Mr. McGettigan received a Bachelor of Arts degree from
The University of Texas and his JD degree from South Texas College of Law, and
is a member of the State Bar of Texas.

Clark McLeod has served as a director of the Company since May 1998. Mr.
McLeod founded McLeodUSA, and has served as its Chairman of the Board and Chief
Executive Officer since its inception in 1991. McLeodUSA is a fully integrated
provider of telecommunications services in the Midwest region. Mr. McLeod's
previous business venture, Teleconnect, a long distance telecommunications
company, was founded in January 1980. This company later merged with
SouthernNet, Inc., forming Telecom*USA. The company grew to become the fourth
largest long distance telecommunications company in the U.S., and was purchased
by MCI in 1990 for $1.3 billion.

Samer Salameh has served as a director of the Company since April 1998.
Since September 1997, Mr. Salameh has been President, Chief Executive Officer,
and a director of Prodigy. From July 1994 until joining Prodigy, Mr. Salameh
served as Director, Long Distance Division of SBC Communications (formerly
Southwestern Bell), responsible for marketing, strategy, positioning, product
management and product development for Telmex, the leading provider of local and
long distance telephone services in Mexico. Before that, Mr. Salameh was
employed by MCI as a Product Manager in 1994 and as a Strategic Marketing
Manager from 1991 to 1993, and he was employed by Merl Industries, a management
consulting firm, as Vice President of Finance during 1993. Mr. Salameh holds a
Masters degree from the Fletcher School of Law and Diplomacy, a B.S. degree in
Management and Technology Transfer from Polytechnic University of New York and a
Baccalaureate degree with concentration in Math and Physics from Lycee Fenelon
in Paris.

Roy A. Wilkens has served as a director of the Company since April 1998.
Mr. Wilkens was President of The Williams Pipeline Company when he founded
WilTel Network Services as an operating unit of The Williams Companies, Inc. in
1985. He was Founder/Chief Executive Officer of WilTel Network Services from
1985 to 1997. In 1995, WilTel Network Services was acquired by LDDS
Communications, which now operates under the name WorldCom. Mr. Wilkens served
as Vice Chairman of WorldCom until his retirement in 1997. In 1992, Mr. Wilkens
was appointed by President George Bush to the National Security
Telecommunications Advisory Council. He has also served as chairman of both the
Competitive Telecommunications Association (CompTel) and the National
Telecommunications Network. Mr. Wilkens is a member of the board of directors of
Paging Network, Inc., UniDial Inc., Invensys Corporation Inc., and Qwest. Mr.
Wilkens is the father of Todd Wilkens, the Company's Vice
President -- Engineering.

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Todd Wilkens has served as Vice President -- Engineering of the Company
since July 1997. From 1996 to 1997, Mr. Wilkens was Vice President, Engineering
and Operations, at Gridnet International, where he helped Gridnet, a start-up
Internet services company, implement a nationwide frame relay/ATM network. From
1993 to 1996, Mr. Wilkens was Senior Manager, Advanced Products Support, at
WorldCom where he helped build the Internet Support Organization which
specialized in building and operating ISP backbones. Prior to that, Mr. Wilkens
supported offshore communications in the Gulf of Mexico for Conoco/Dupont. Mr.
Wilkens holds a BSEE from Oklahoma State University. Mr. Wilkens is the son of
Roy A. Wilkens, a director of the Company.

Tracy Hammond joined the Company as Controller in September 1997. From 1995
to 1997, Ms. Hammond served as Vice President -- Finance and Administration of
Comsul, Ltd., a privately held national communications consulting firm. From
1992 to 1995, Ms. Hammond was Principal Financial Officer at Optex Biomedical, a
high-tech biomedical start-up company. Previously, Ms. Hammond worked for seven
years in Arthur Andersen's emerging business practice group, achieving the level
of audit manager. Ms. Hammond is a CPA, and holds a BS in Accountancy from The
University of Missouri.

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has established a compensation and an
audit committee. The audit committee is composed of Messrs. Long, Wilkens and
McLeod. The audit committee is responsible for recommending the firm to be
appointed as independent accountants to audit the Company's financial
statements, discussing the scope and results of the audit with the independent
accountants, reviewing the functions of the Company's management and independent
accountants with respect to the Company's financial statements and performing
such other related duties and functions as are deemed appropriate by the audit
committee and the board. The compensation committee is responsible for reviewing
and establishing the compensation structure for the Company's officers and
directors, including salary rates, participation in incentive, compensation and
benefit plans, stock options and other forms of compensation. The compensation
committee is composed of Messrs. Li, Wilson, Wilkens and Salameh.

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding the
compensation earned by or awarded to the chief executive officer of the Company
and each other executive officer of the Company for the first fiscal year of the
Company from inception (March 5, 1997) through December 31, 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($) OPTIONS(#)
- --------------------------- ---- --------- --------------- ------------
<S> <C> <C> <C> <C>
Kwok L. Li, Chairman of the Board and Chief
Technical Officer............................. 1997 -- 10,600(1) --
William R. Wilson, President and Chief Executive
Officer....................................... 1997 62,980 16,400(1) --
James D. Long, Senior Vice President and Chief
Financial Officer(2).......................... 1997 -- -- --
Patrick J. McGettigan, Jr., Senior Vice
President, Secretary and General Counsel...... 1997 46,933 65,000(4) 250,000
</TABLE>

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

(1) The compensation for services rendered was paid in the form of shares of
Common Stock in May 1997.

(2) Mr. Long became an employee of the Company in March 1998.

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<PAGE> 70

(3) Mr. McGettigan became an employee of the Company in September 1997. Prior to
being employed by the Company, Mr. McGettigan performed legal services on
behalf of the Company. In 1997, Mr. McGettigan's former law firm received
approximately $18,000 from the Company.

(4) Granted as a bonus upon Mr. McGettigan becoming an employee of the Company.

OPTION GRANTS IN FISCAL YEAR 1997

The following table sets forth information concerning the grant of stock
options during the fiscal year ended December 31, 1997 to the executive officers
named in the Summary Compensation Table.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE OR APPRECIATION FOR
UNDERLYING GRANTED TO BASE PRICES OPTION TERM(1)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- ---- ---------- ------------ ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kwok L. Li....................... -- * * * * *
William R. Wilson................ -- * * * * *
James D. Long(2)................. -- * * * * *
Patrick J. McGettigan, Jr........ 250,000 13.3% .625 9/07 98,268 249,022
</TABLE>

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

* Not applicable.

(1) The potential realizable value through the expiration date of options has
been determined on the basis of a per share price at the time the options
were granted of $.625, compounded annually over ten years, net of the
exercise price. These values have been determined based upon assumed rates
of appreciation and are not intended to forecast the possible future
appreciation, if any, of the price or value of the Company's Common Stock.

(2) Mr. Long was granted an option to acquire 250,000 shares of Common Stock at
a price of $.625 per share upon his employment with the Company in 1998. The
Company will recognize compensation expense of $118,750 over the vesting
period of these options as they were granted at a discount from the then
fair market value of the Company's common stock.

AGGREGATED FISCAL YEAR-END OPTION VALUES

The following table shows information with respect to unexercised options
held by the executive officers named in the Summary Compensation Table as of
December 31, 1997. No stock options were exercised by any executive officers
during the fiscal year ended December 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997(#) AT DECEMBER 31, 1997(1)($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kwok L. Li..................................... * * * *
William R. Wilson.............................. * * * *
James D. Long.................................. * * * *
Patrick J. McGettigan, Jr...................... 80,000 170,000 38,000 80,750
</TABLE>

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

* Not applicable.

(1) Options are "in-the-money" if the price of the Company's Common Stock
exceeds the exercise price of the options. The value of unexercised options
represents the difference between the exercise price of such options and the
value of the Company's Common Stock on December 31, 1997, which is based on
a valuation made by an independent firm and which was determined to be $1.10
per share.

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<PAGE> 71

1997 INCENTIVE SHARE PLAN

On June 16, 1997, the Company's 1997 Incentive Share Plan (the "Plan")
became effective. On April 1, 1998, the Board of Directors of the Company
approved and adopted an amendment and restatement of the Plan which was
subsequently approved and adopted by the stockholders of the Company on April
27, 1998. The purpose of the Plan is to provide employees, and certain
non-employee directors, and consultants with additional incentives by increasing
their ownership interests in the Company.

Individual awards under the Plan may take the form of one or more of (i)
either incentive or non-qualified stock options, (ii) stock appreciation rights,
(iii) restricted stock and (iv) other awards, the value of which is based in
whole or in part upon the value of the Common Stock. Options under the Plan have
a term of ten years and are generally granted with an exercise price equivalent
to market value at the date of grant. Individual option grants vest over time,
based upon a schedule approved by the Board of Directors, which is generally
four years. All of the Company's Common Stock options vest automatically upon a
change in control of the Company, as defined.

The Compensation Committee administers the Plan, determines the persons who
will receive awards and establishes the terms and conditions of those awards.
The President of the Company is also authorized, subject to certain limitations,
to grant awards to other employees. The maximum number of shares of Common Stock
that may be subject to outstanding awards is 20.0 million. As of July 15, 1998,
options for 3,404,500 shares had been granted. No options have been exercised
other than the option to purchase 1,000,000 shares granted to Mr. McLeod in May
1998, which was exercised in June 1998. See "-- Certain Relationships and
Related Transactions -- Financings." Shares of Common Stock which are
attributable to awards which have expired, terminated or been canceled or
forfeited are available for issuance or use in connection with future awards.

Awards under the Plan may be made until January 1, 2007. The Plan may be
amended by the Board of Directors without the consent of the stockholders of the
Company.

DIRECTOR COMPENSATION

The directors of the Company who are not also employees of the Company are
entitled to receive an annual fee of $10,000 and a fee of $500 for attending
each committee meeting not held on the same date as a regular meeting of
directors (Mr. Wilkens and Mr. Salameh have waived all such cash compensation
for 1998), plus reimbursement for reasonable expenses incurred in conjunction
with attending meetings. Directors are also eligible for grants of awards under
the Plan. On May 28, 1998, each of the three outside directors was granted
options to purchase 80,000 shares of the Common Stock at $1.10 per share, with
options to purchase 20,000 of such shares vesting on each of the first four
anniversaries of the date of grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In 1997, the compensation of the Company's executive officers was
determined by the Board of Directors. In 1998, the Board of Directors of the
Company appointed a compensation committee consisting of Kwok L. Li, William R.
Wilson, Samer Salameh and Roy Wilkens, who will determine the compensation of
the Company's executive officers consistent with guidelines established by the
Board of Directors. Mr. Li and Mr. Wilson are executive officers of the Company.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Employment Agreements. The Company has entered into employment agreements
with William R. Wilson (the "Wilson Agreement") and Patrick J. McGettigan, Jr.
(the "McGettigan Agreement"). The Wilson Agreement terminates on March 15, 2002,
and provides for the payment of an initial base salary at an annual rate of not
less than $150,000 and entitles him to participate in employee benefit plans
offered to senior executives. The McGettigan Agreement terminates on August 31,
1999, and provides for the payment of an initial base salary at an annual rate
of not less than $140,000 and entitles him to participate in employee benefit
plans offered to senior executives. The base salaries are subject to adjustment
by the Board of Directors or the Compensation Committee.

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<PAGE> 72

The Wilson Agreement contains certain confidentiality provisions and
provides for termination (a) for cause (i.e., final conviction of a felony or
crime involving moral turpitude or willful or grossly negligent violation of the
terms regarding confidentiality), (b) upon death or disability or (c) without
cause. If Mr. Wilson is terminated upon death or disability or without cause,
the Company is required to pay the base salary for the remaining term of the
Wilson Agreement. The Company has also indemnified Mr. Wilson pursuant to the
Wilson Agreement for actions taken as an officer and director. The Wilson
Agreement further provides that Mr. Wilson may engage in other business
endeavors without violating any of provisions of the agreement and allows Mr.
Wilson to terminate all obligations under the agreement with 30 days written
notice.

The McGettigan Agreement provides for termination for cause (i.e., willful
and material breach of the McGettigan Agreement, intentional nonperformance,
willful dishonesty, fraud or misconduct with respect to the business or
conviction of a felony). If Mr. McGettigan is terminated by the Company for any
reason other than cause, the Company is required to pay the base salary for the
remaining term of the McGettigan Agreement. In addition, Mr. McGettigan can
terminate all obligations under the McGettigan Agreement upon 60 days written
notice.

Financings. In March 1997, the Company issued to its founders, Kwok L. Li
and William R. Wilson, 400,000 and 600,000 shares, respectively, of its Common
Stock for $0.00167 per share. In May 1997, the Company approved the issuance to
Mr. Li and Mr. Wilson of 10.6 million and 16.4 million shares, respectively, of
the Company's Common Stock in consideration of services performed since March
1997.

In March 1997, Mr. Li loaned to the Company an aggregate of $750,000. Such
loans were repaid with interest on July 7, 1997. On June 6, 1997, Mr. Li
advanced $3.0 million to the Company and on June 19, 1997, Mr. Li advanced an
additional $7.0 million to the Company. Such advances were evidenced by a $10.0
million convertible note. On August 9, 1997, Linsang, the assignee of Mr. Li,
converted such note into 16.0 million shares of the Common Stock of the Company.

In December 1997, Linsang loaned $1.0 million to the Company. Such loan is
repayable 30 days after written demand or, if no demand is made, on December 1,
2002 and bears interest at the rate of 9.75% per annum beginning in February
1998. In January, March and June 1998, Linsang advanced an additional $3.0
million, $2.0 million and $5.0 million, respectively, to the Company on similar
terms. Such indebtedness was refinanced in connection with the Unit Offering. In
connection with such refinancing, Linsang purchased 11,000 Units in the Unit
Offering.

In August 1997, Linsang purchased 800,000 shares of the Common Stock for
$0.5 million. In addition, in August 1997, Linsang acquired 11.2 million shares
of Common Stock of the Company for $7.0 million pursuant to a subscription
agreement previously executed by Mr. Li and assigned to Linsang.

In August 1997, Roy Wilkens and Sandra Wilkens purchased 800,000 shares of
the Common Stock of the Company for $0.5 million. Mr. Wilkens became a member of
the Board of Directors of the Company in April 1998.

In September 1997, Orient Star, a wholly owned subsidiary of Carso,
purchased 20.0 million shares of Common Stock of the Company for $12.5 million.
The transaction price included a warrant, exercisable through September 18,
1998, to purchase an additional 5.0 million shares for $3.1 million. The
warrant, if exercised, would result in Orient Star holding approximately 30.2%
of the Common Stock of the Company. The Company expects Orient Star to exercise
the warrant. Samer Salameh, the President of Prodigy, an affiliate of Carso,
became a member of the Board of Directors of the Company in April 1998.

In June 1998, Clark McLeod, CEO of McLeodUSA, a regional telecommunications
firm in the Midwest, exercised in full a stock option previously granted to him
and purchased 1.0 million shares of Common Stock of the Company for $1.1
million. Mr. McLeod became a member of the Board of Directors of the Company in
May 1998.

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<PAGE> 73

On July 24, 1998, the Company offered and sold 261,000 Units to the Initial
Purchaser pursuant to the Unit Offering, of which 250,000 Units were resold to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and 11,000 Units to Linsang. As a result, the Company received $261.0
million.

Other. Kwok L. Li, the Chairman and Chief Technical Officer of the Company,
was also the Vice Chairman and a Director of Yurie, a principal supplier of the
Company, until its acquisition by Lucent. As of August 31, 1998, the Company has
purchased approximately $11.0 million of products and services from Yurie. The
Company has agreed to purchase and Yurie has agreed to supply a minimum of $20.0
million of standard Yurie products during the 18-month period commencing on July
1, 1997. See "Business -- Suppliers."

Samer Salameh, a Director of the Company, is President, Chief Executive
Officer, and a Director of Prodigy, the principal customer of the Company. See
"Management" and "Business -- Customers." During the fiscal year ended December
31, 1997, the Company charged Prodigy approximately $22.7 million under the
agreements between the Company and Prodigy.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of August 31, 1998 by (i)
each executive officer and director of the Company, (ii) each stockholder known
by the Company to own beneficially 5% or more of the Company's common stock and
(iii) all directors and executive officers of the Company as a group. As of
August 31, 1998 the Company had 77.8 million shares of Common Stock outstanding.
The Company effected a 100-for-1 stock split on June 3, 1997 and a 10-for-1
stock split on August 8, 1997. All share amounts included in this Offering
Memorandum have been adjusted to reflect the effect of these stock splits. All
information contained in this Offering Memorandum relating to percentage
ownership of the Common Stock does not take into account the Warrant Shares
issuable upon exercise of the Warrants.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES PERCENTAGE
- ---- ---------- ----------
<S> <C> <C>
Kwok L. Li.................................................. 39,000,000(1) 50.1%
Linsang Partners, L.L.C..................................... 28,000,000(2) 36.0%
William R. Wilson........................................... 17,000,000 21.9%
Clark McLeod................................................ 1,000,000 1.3%
Roy A. Wilkens.............................................. 800,000(3) 1.0%
James D. Long............................................... 80,000(4) *
Samer Salameh............................................... --(5) --
Patrick J. McGettigan, Jr................................... 122,500(4) *
Orient Star Holdings........................................ 25,000,000(6) 30.2%
Paseo de las Palmas #736
Col Lomas de Chapultepec
Mexico DF CP 11000
Directors and executive officers as a group (7 people)...... 58,002,500(7) 74.4%
</TABLE>

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

* Less than 1%.

(1) Includes 28.0 million shares owned beneficially and of record by Linsang, a
limited liability company controlled by Mr. Li. Excludes 111,375 shares
issuable upon exercise of Warrants included as part of Units purchased by
Linsang in the Offering.

(2) Such shares are included in the shares shown as beneficially owned by Kwok
L. Li. Excludes 111,375 shares issuable upon exercise of Warrants included
as part of Units purchased by Linsang in the Offering.

(3) Such shares are held by Mr. Wilkens and Sandra L. Wilkens in joint tenancy.

(4) Consists of shares subject to stock options granted under the Plan that are
exercisable within 60 days of the date of this Offering.

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<PAGE> 74

(5) Excludes stock owned by Orient Star Holdings, a wholly owned subsidiary of
Carso. Carso is a controlling shareholder of Prodigy and Mr. Salameh is
President and Chief Executive Officer of Prodigy.

(6) Includes 5.0 million shares issuable upon exercise of a warrant exercisable
through September 18, 1998.

(7) See notes 1 through 5 above.

SELLING HOLDERS

The following tables set forth information with respect to the Selling
Holders as of August 31, 1998. Such information has been obtained from the
Selling Holders. Other than Linsang, a company controlled by Kwok L. Li, which
together with Mr. Li, a founder and Chairman of the Board of the Company, owns
approximately 50.1% of the Company's outstanding shares, none of the Selling
Holders has or since the inception of the Company has had any position, office
or other material relationship with the Company or any of its affiliates.

<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
NUMBER OF WARRANTS BENEFICIALLY OWNED
BENEFICIALLY OWNED AND OFFERED
SELLING HOLDER AND OFFERED HEREBY HEREBY(1)
-------------- ------------------ ------------------
<S> <C> <C>
Amalgamated Bank of Chicago................................ 35 354
Bankers Trust Company...................................... 3,000 30,375
Boston Safe Deposit and Trust Company...................... 14,740 149,242
Chase Manhattan Bank Trust Co. of California............... 500 5,062
Fund -- Phila. Main........................................ 700 7,087
Investors Fiduciary Trust Company/SSB...................... 8,645 87,530
Investors Bank & Trust/M.F. Custody........................ 6,150 62,268
Morgan Stanley & Co. Incorporated.......................... 5,245 53,105
Nesbitt Burns Inc.......................................... 2,000 20,250
Bank of New York........................................... 8,675 87,834
Bear, Stearns Securities Corp.............................. 250 2,531
Chase Manhattan Bank....................................... 41,050 415,629
Donaldson, Lufkin and Jenrette Securities Corporation...... 31,625 320,202
Goldman, Sachs & Co........................................ 3,000 30,375
ING Baring Furman Selz LLC................................. 10,000 101,250
Lewco Securities Corp...................................... 1,500 15,187
Northern Trust Company..................................... 2,000 20,250
Paine Webber Incorporated.................................. 1,000 10,130
PNC Bank, National Association............................. 22,925 232,115
Prudential Securities Incorporated......................... 7,000 70,875
Prudential Securities Custody.............................. 13,500 136,687
Star Bank, National Association............................ 1,500 15,187
SSB -- Custodian........................................... 61,035 617,977
Swiss American Securities Inc.............................. 300 3,037
U.S. Bank National Association............................. 3,125 31,640
Yasuda Bank and Trust Company (U.S.A.)..................... 500 5,062
Linsang Partners L.L.C..................................... 11,000 111,374
------- ---------
Total............................................ 261,000 2,642,613
======= =========
</TABLE>

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

(1) Assumes exercise of the Warrants. The Warrants are not exercisable until
July 24, 1999.

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF NOTES
SELLING HOLDER BENEFICIALLY OWNED AND OFFERED HEREBY
-------------- -------------------------------------
<S> <C>
Linsang Partners L.L.C...................................... $11,000,000
</TABLE>

The Warrants offered hereby were originally issued by the Company and sold
by the Initial Purchaser in a transaction, with respect to 250,000 Warrants,
exempt from the registration requirements of the Securities Act

70
<PAGE> 75

to persons reasonably believed by the Initial Purchaser to be qualified
institutional buyers (as defined in Rule 144A under the Securities Act) and,
with respect to 11,000 Warrants, in a private offering to Linsang, an affiliate
of the Company. The Selling Holders may from time to time offer and sell
pursuant to this Prospectus any or all of the Warrants and the Warrant Shares
issued upon exercise of such Warrants.

The Notes offered hereby were received by Linsang in a private exchange
between Linsang and the Company for notes substantially identical in form and
terms to the Notes and originally issued by the Company and sold by the Initial
Purchaser in a private offering to Linsang. Linsang, as a Selling Holder, may
from time to time offer and sell pursuant to this Prospectus any or all of the
Notes.

Information concerning the Selling Holders may change from time to time and
any such changed information will be set forth in supplements to this Prospectus
if and when necessary. The per share exercise price and the number of shares
issuable upon exercise of the Warrants is subject to adjustment upwards or
downwards in certain circumstances. See "Description of the
Warrants -- Adjustments." Moreover, because the Selling Holders may offer all or
some of the Notes, the Warrants or the Warrant Shares issuable upon exercise of
the Warrants, no estimate can be given as to the amount of the Notes, Warrants
or Warrant Shares that will be held by the Selling Holders upon the termination
of any such sales. In addition, the Selling Holders identified above may have
sold or otherwise transferred, in transactions exempt from the registration
requirements of the Securities Act, all or a portion of the Warrants, the
Warrant Shares or the Notes since the date with respect to which the information
in the preceding table is presented. See "Plan of Distribution."

The Company is paying the expenses of the registration of the securities
being offered by this Prospectus.

PLAN OF DISTRIBUTION

The Warrants, the Warrant Shares and the Notes offered hereby may be sold
from time to time in one or more transactions at fixed prices, at prevailing
market prices at the time of sale, at varying prices determined at the time of
sale or at negotiated prices. Such securities may be sold by one or more of the
following methods: (a) a block trade (which may involve crosses) in which the
broker or dealer so engaged will attempt to sell such securities as agent but
may position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, (d) ordinary
brokerage transactions and transaction in which the broker solicits purchasers,
(e) direct transactions between a Selling Holder and a purchaser without a
broker or dealer or (f) through the writing of options. Upon the Company being
notified by a Selling Holder that any material arrangement has been entered into
with a broker-dealer for the sale of Warrants, Warrant Shares or Notes through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling holder and of the participating
broker-dealer(s), (ii) the number of securities involved, (iii) the price at
which such securities were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction. In addition, upon the Company being notified by a
Selling Holder that a donee or pledgee intends to sell more than 50 Warrants or
500 Warrant Shares, a supplement to this prospectus will be filed. Such
prospectus supplement and, if required, post-effective amendment to the
Registration Statement of which this Prospectus is a part, will be filed with
the Commission to reflect the disclosure of additional information with respect
to the distribution of the Warrants, Warrant Shares and Notes. In addition, any
securities covered by this Prospectus may be sold in private transactions or, if
qualified for sale pursuant to Rule 144 under the Securities Act, may be sold
under Rule 144 rather than pursuant to this Prospectus.

To the knowledge of the Company, there are currently no plans, arrangements
or understandings between any Selling Holders and any broker, dealer, agent or
underwriter regarding the sale of the Warrants, the Warrant Shares or the Notes
by the Selling Holders. There is no assurance that any Selling Holder will sell
any or all of such securities held by such holder or that any Selling Holder
will not otherwise transfer, devise or gift such securities by other means not
described herein.

The Selling Holders and any broker-dealers that act in connection with the
sale of the Warrants, the Warrant Shares and the Notes might be deemed to be
"underwriters" within the meaning of Section 2(11) of

71
<PAGE> 76

the Securities Act, and any commissions received by such broker-dealers and any
profit on the resale of the Warrants, the Warrant Shares and the Notes sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. The Company has agreed to indemnify each
Selling Holder against certain liabilities, including liabilities arising under
the Securities Act. The Selling Holders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the
Warrants, the Warrant Shares and the Notes against certain liabilities,
including liabilities arising under the Securities Act. Because Selling Holders
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, the Selling Holders will be subject to the prospectus delivery
requirements of the Securities Act.

The Selling Holders and any other person participating in the distribution
contemplated in this Prospectus will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which may limit the timing of purchase and sales of any
of the Warrants, the Warrant Shares or the Notes by the Selling Holders and any
other such person. Furthermore, Regulation M of the Exchange Act may restrict
the ability of any person engaged in the distribution of the Warrants, Warrant
Shares or Notes to engage in market-making activities with respect to the
Warrants, Warrant Shares and Notes being distributed for a period of up to five
business days before commencement of such distribution. All of the foregoing may
effect the marketability of the Warrants, the Warrant Shares and the Notes.

DESCRIPTION OF CERTAIN INDEBTEDNESS

The following is a summary of the material terms of certain indebtedness of
the Company.

In connection with the Company's agreement with Ericsson, Ericsson provided
a $5.0 million credit facility to the Company. See "Business -- Suppliers." Such
credit facility was evidenced by a Secured Promissory Note and Agreement dated
April 30, 1998, providing for interest at the rate of 11% per annum on the
outstanding balance thereunder, payable monthly in arrears on the first business
day of each calendar month commencing on June 1, 1998. The Secured Promissory
Note and Agreement provided that all principal and accrued and unpaid interest
under such Secured Promissory Note and Agreement would become due and payable in
full upon the earlier of (i) the date the Company sells any of its equity
securities or debt instruments or securities (other than issuances of equities
securities to officers, directors, employees, or consultants in the ordinary
course of business) in an aggregate amount equal to or greater than the then
outstanding principal amount thereunder, and (ii) October 30, 1998. Thus, all
outstanding principal and accrued and unpaid interest under such Secured
Promissory Note and Agreement became due upon consummation of the Unit Offering.
Such Secured Promissory Note and Agreement was secured by a security interest in
the Company's Yurie ATM switches (with certain exceptions), Ericsson power
equipment, and concrete shelters. As of June 30, 1998, the outstanding principal
balance due under such Secured Promissory Note and Agreement was $1.5 million.
Such indebtedness was repaid with the proceeds of the Unit Offering.

The Company is indebted to Linsang, a stockholder of the Company controlled
by the Company's Chairman of the Board and Chief Technical Officer, Kwok L. Li,
for an aggregate of $11.0 million in principal, plus accrued interest, as a
result of advances made by Linsang to the Company. See "Management -- Certain
Relationships and Related Transactions." Such indebtedness, initially
represented by demand notes bearing annual interest of 9.75% and maturing on the
earlier of written demand or December 1, 2002, was exchanged for 11,000 Units in
connection with the Unit Offering.

As of June 30, 1998, the Company had outstanding total future commitments
relating to noncancelable capital and operating leases of $21.5 million and $2.3
million, respectively. Operating leases primarily relate to leases of the NOCs
and the Company's corporate offices. Capital leases primarily relate to Network
equipment and require payments on a monthly basis over periods ranging from 24
to 48 months, with implicit interest rates of 9.0% to 12.0%. As of June 30, 1998
the Company was required to make minimum capital and operating lease payments of
$5.5 million, $9.6 million, $7.2 million, $1.0 million, $0.3 million and $0.2
million in the last six months of 1998, calendar 1999, 2000, 2001, 2002 and
2003, respectively.

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<PAGE> 77

DESCRIPTION OF THE WARRANTS

The Warrants were issued pursuant to a Warrant Agreement dated July 24,
1998 (the "Warrant Agreement"), between the Company and Bank of Montreal Trust
Company, as warrant agent (the "Warrant Agent"). The following summary of
certain provisions of the Warrant Agreement does not purport to be complete and
is qualified in its entirety by reference to all of the provisions of the
Warrant Agreement, including the definitions therein of certain terms.
Capitalized terms in this "Description of the Warrants" not defined in this
Offering Memorandum have the meanings assigned to them in the Warrant Agreement.
With respect to the form of the Warrants, see "Description of the Notes -- Book
Entry, Delivery and Form" and "-- Certificated Securities."

GENERAL

Each Warrant, when exercised, will entitle the holder thereof to purchase
10.125 shares of Common Stock from the Company at a price (the "Exercise Price")
of $0.01 per share. The Exercise Price and the number of shares of Common Stock
issuable upon exercise of a Warrant are both subject to adjustment in certain
cases. See "-- Adjustments" below. The Warrants initially entitle the holders
thereof to acquire, in the aggregate, 2,642,613 shares of Common Stock.

The Warrants may be exercised at any time after the first anniversary of
the Issue Date; provided, however, that holders of Warrants will be able to
exercise their Warrants only if the Common Shelf Registration Statement (as
defined) relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside. Unless earlier exercised, the
Warrants will expire on July 15, 2008. The Company will give notice of
expiration not less than 90 nor more than 120 days before the Expiration Date to
the registered holders of the then outstanding Warrants. If the Company fails to
give such notice, the Warrants will nevertheless expire and become void on the
Expiration Date. The Warrants will not trade separately from the Notes until the
Separation Date.

At the Company's option, fractional shares of Common Stock may not be
issued upon exercise of the Warrants. If any fraction of a share of Common Stock
would, except for the foregoing provision, be issuable upon the exercise of any
such Warrant (or specified portion thereof), the Company will pay an amount in
cash equal to the Current Market Value per share of Common Stock, as determined
on the day immediately preceding the date the Warrant is presented for exercise,
multiplied by such fraction, computed to the nearest whole cent.

Certificates for Warrants will be issued in fully registered form only. No
service charge will be made for registration of transfer or exchange upon
surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Warrant Certificates.

In the event a bankruptcy, reorganization or similar proceeding is
commenced by or against the Company, a bankruptcy court may hold that
unexercised Warrants are executory contracts which may be subject to rejection
by the Company with approval of the bankruptcy court. As a result, holders of
the Warrants may, even if sufficient funds are available, not be entitled to
receive any consideration or may receive an amount less than they would be
entitled to if they had exercised their Warrants prior to the commencement of
any such bankruptcy, reorganization or similar proceeding.

CERTAIN TERMS

Exercise

In order to exercise all or any of the Warrants, the holder thereof is
required to surrender to the Warrant Agent the related Warrant Certificate and
pay in full the Exercise Price for each share of Common Stock or other
securities issuable upon exercise of such Warrants. The Exercise Price may be
paid (i) in cash or by

73
<PAGE> 78

certified or official bank check or by wire transfer to an account designated by
the Company for such purpose or (ii) without the payment of cash, by reducing
the number of shares of Common Stock that would be obtainable upon the exercise
of a Warrant and payment of the Exercise Price in cash so as to yield a number
of shares of Common Stock upon the exercise of such Warrant equal to the product
of (a) the number of shares of Common Stock for which such Warrant is
exercisable as of the date of exercise (if the Exercise Price were being paid in
cash) and (b) the Cashless Exercise Ratio (the "Cashless Exercise"). The
"Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the
excess of the Current Market Value per share of Common Stock on the Exercise
Date over the Exercise Price per share as of the Exercise Date and the
denominator of which is the Current Market Value per share of the Common Stock
on the Exercise Date. Upon surrender of a Warrant Certificate representing more
than one Warrant in connection with the holder's option to elect a Cashless
Exercise, the number of shares of Common Stock deliverable upon a Cashless
Exercise shall be equal to the number of shares of Common Stock issuable upon
the exercise of Warrants that the holder specifies are to be exercised pursuant
to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions
of the Warrant Agreement shall be applicable with respect to a surrender of a
Warrant Certificate pursuant to a Cashless Exercise for less than the full
number of Warrants represented thereby.

No Rights as Stockholders

The holders of unexercised Warrants are not entitled, by virtue of being
such holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as stockholders of the Company in respect
of any stockholders' meeting for the election of directors of the Company or any
other purpose, or to exercise any other rights whatsoever as stockholders of the
Company.

Mergers, Consolidations, etc.

If the Company consolidates with, merges with or into, or sells all or
substantially all of its assets to, another Person, each Warrant thereafter will
entitle the holder thereof to receive upon exercise thereof, per share of Common
Stock for which such Warrant is exercisable, the number of shares of common
stock or other securities or property which the holder of a share of Common
Stock is entitled to receive upon completion of such consolidation, merger or
sale of assets. However, if (i) the Company consolidates with, merges with or
into, or sells all or substantially all of its assets to, another Person and, in
connection therewith, the consideration payable to the holders of Common Stock
in exchange for their shares is payable solely in cash or (ii) there is a
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such event,
less the Exercise Price. Upon receipt of such payment, if any, the Warrants will
expire and the rights of the holders thereof will cease. In the case of any such
merger, consolidation or sale of assets, the surviving or acquiring person and,
in the event of any dissolution, liquidation or winding-up of the Company, the
Company, must deposit promptly with the Warrant Agent the funds, if any,
required to pay the holders of the Warrants. After such funds and the
surrendered Warrant Certificates are received, the Warrant Agent is required to
deliver a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Persons as it may be directed in writing by the holders surrendering such
Warrants.

ADJUSTMENTS

The number of shares of Common Stock issuable upon the exercise of the
Warrants and the Exercise Price will be subject to adjustment in certain events
including: (i) the payment by the Company of certain dividends (or other
distributions) on the Common Stock of the Company including dividends or
distributions payable in shares of Common Stock or other shares of the Company's
capital stock, (ii) subdivisions, combinations and certain reclassifications to
the Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for shares of Common Stock, or
of securities convertible into or exchangeable or exercisable for shares of
Common Stock, for a consideration per share which is less than the Current
Market Value per share of the Common Stock, (iv) the issuance of shares of

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Common Stock for a consideration per share which is less than the Current Market
Value per share of the Common Stock, and (v) the distribution to all holders of
the Common Stock of any of the Company's assets, debt securities or any rights
or warrants to purchase securities (excluding those rights and warrants referred
to in the foregoing clause (iii) and cash dividends and other cash distributions
from current or retained earnings other than any Extraordinary Cash Dividend).
No adjustment to the number of shares of Common Stock issuable upon the exercise
of the Warrants and the Exercise Price will be required in certain events
including: (i) the issuance of shares of Common Stock in bona fide public
offerings that are underwritten or in which a placement agent is retained by the
Company, (ii) the issuance of shares of Common Stock (including upon exercise of
options) pursuant to the terms of and in order to give effect to the 1997
Incentive Share Plan and (iii) the issuance of shares of Common Stock in
connection with acquisitions other than to affiliates of the Company.

In the event of a distribution to holders of Common Stock which results in
an adjustment to the number of shares of Common Stock or other consideration for
which a Warrant may be exercised, the holders of the Warrants may, in certain
circumstances, be deemed to have received a distribution subject to United
States Federal income tax as a dividend. See "Certain Federal Income Tax
Considerations".

No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent in the Exercise
Price; provided, however, that any adjustment which is not made as a result of
this paragraph will be carried forward and taken into account in any subsequent
adjustment.

AMENDMENT

From time to time, the Company and the Warrant Agent, without the consent
of the holders of the Warrants, may amend or supplement the Warrant Agreement
for certain purposes, including curing defects or inconsistencies or making any
change that does not adversely affect the rights of any holder. Any amendment or
supplement to the Warrant Agreement that has an adverse effect on the interests
of the holders of the Warrants shall require the written consent of the holders
of a majority of the then outstanding Warrants. The consent of each holder of
the Warrants affected shall be required for any amendment pursuant to which the
Exercise Price would be increased or the number of shares of Common Stock
issuable upon exercise of Warrants would be decreased (other than pursuant to
adjustments provided in the Warrant Agreement).

REGISTRATION RIGHTS

Registration of Warrants. The Company is required under the Warrant
Agreement to file a shelf registration statement under the Securities Act
covering the resale of the Warrants by the holders thereof (the "Warrant Shelf
Registration Statement") within 45 days after the Issue Date and to use its best
efforts to cause the Warrant Shelf Registration Statement to be declared
effective under the Securities Act within 105 days after the date of original
issuance of the Warrants and to remain effective until the earliest of (i) such
time as all of the Warrants have been sold thereunder, (ii) two years after its
effective date and (iii) such time as the Warrants can be sold without
restriction under the Securities Act. This Prospectus constitutes a part of the
Warrant Shelf Registration Statement filed by the Company.

Each holder of Warrants that sells such Warrants pursuant to the Warrant
Shelf Registration Statement is required to be named as a selling securityholder
in the Prospectus and to deliver the Prospectus to the purchaser, is subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and is bound by certain provisions of the Warrant Agreement
which are applicable to such holder (including certain indemnification
obligations). In addition, each holder of Warrants is required to deliver
information to be used in connection with the Warrant Shelf Registration
Statement in order to have its Warrants included in the Warrant Shelf
Registration Statement.

Registration of Underlying Common Stock. The Company is required under the
Warrant Agreement to file a shelf registration statement under the Securities
Act covering the issuance of shares of Common Stock to the holders of the
Warrants upon exercise of the Warrants by the holders thereof (the "Common Shelf
Registration Statement") and to use its best efforts to cause the Common Shelf
Registration Statement to be
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<PAGE> 80

declared effective on or before 365 days after the Issue Date and to remain
effective until the earlier of (i) such time as all Warrants have been exercised
and (ii) the Expiration Date. The Common Shelf Registration Statement and the
Warrant Shelf Registration Statement are being filed by the Company as a single
registration statement (the "Shelf Registration Statement"), of which this
Prospectus constitutes a part.

During any consecutive 365-day period, the Company shall be entitled to
suspend the availability of the Shelf Registration Statement for up to two 45
consecutive-day periods (except for the 45 consecutive-day period immediately
prior to the Expiration Date) if the Board of Directors of the Company
determines in the exercise of its reasonable judgment that there is a valid
business purpose for such suspension and provides notice that such determination
was made to the holders of the Warrants and the Notes; provided, however, that
in no event shall the Company be required to disclose the business purpose for
such suspension if the Company determines in good faith that such business
purpose must remain confidential. There can be no assurance that the Company
will be able to keep a registration statement continuously effective until all
of the Warrants have been exercised or have expired.

CERTAIN DEFINITIONS

The Warrant Agreement contains, among others, the following definitions:

"Current Market Value" per share of Common Stock or any other security at
any date means (i) if the security is not registered under the Exchange Act, (a)
the value of the security, determined in good faith by the Board of Directors of
the Company and certified in a board resolution, based on the most recently
completed arm's-length transaction between the Company and a Person other than
an Affiliate of the Company, the closing of which shall have occurred on such
date or within the six-month period preceding such date, or (b) if no such
transaction shall have occurred on such date or within such six-month period,
the value of the security as determined by a nationally recognized investment
banking firm or (ii) if the security is registered under the Exchange Act, the
average of the daily closing bid prices (or the equivalent in an over-
the-counter market) for each Business Day during the period commencing 15
Business Days before such date and ending on the date one day prior to such
date, or if the security has been registered under the Exchange Act for less
than 15 consecutive Business Days before such date, then the average of the
daily closing bid prices (or such equivalent) for all of the Business Days
before such date for which daily closing bid prices are available; provided,
however, that if the closing bid price is not determinable for at least ten
Business Days in such period, the "Current Market Value" of the security shall
be determined as if the security were not registered under the Exchange Act.

"Issue Date" means the date on which the Warrants are initially issued.

"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.

"Warrant Certificates" mean the registered certificates (including the
Global Warrants (as defined)) issued by the Company under the Warrant Agreement
representing the Warrants.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company presently consists of 150.0
million shares of Common Stock and 25.0 million shares of Preferred Stock, $.001
par value per share ("Preferred Stock"). At August 31, 1998, there were 77.8
million outstanding shares of Common Stock and no shares of Preferred Stock
outstanding.

The following are summaries of the terms of the Common Stock and the
Preferred Stock. Such summaries do not purport to be complete and are subject in
all respects to the Certificate of Incorporation and By-laws of the Company.

COMMON STOCK

The holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors of the Company out of funds legally available
therefor. See "Risk Factors -- Dividend Policy."

The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Shares
of Common Stock do not have cumulative voting rights, which means that the
holders of more than 50% of such shares voting for the election of directors can
elect 100% of the directors if they choose to do so and, in such event, the
holders of the remaining shares so voting will not be able to elect any
directors. See "Risk Factors -- Control by Principal Stockholders and
Management; Transactions with Related Parties." Holders of Common Stock do not
have any conversion, redemption or preemptive rights. In the event of the
dissolution, liquidation or winding up of the Company, holders of Common Stock
will be entitled to share ratably in any assets remaining after the satisfaction
in full of the prior rights of creditors, including holders of the Company's
indebtedness, and the liquidation preference of any Preferred Stock then
outstanding.

PREFERRED STOCK

Under Delaware law and the Company's Certificate of Incorporation, the
Company's Board of Directors has authority to issue, without further action by
stockholders, one or more series of Preferred Stock, and to determine at the
time of issuance of each such series the rights and preferences thereof
(including dividend rate, liquidation priority, benefit of a sinking fund,
redemption and conversion and voting rights, if any). The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power or other rights of the holders of Common Stock.

Holders of the Preferred Stock would be entitled to receive dividends, as
specifically provided with respect to each series, prior to the payment or
declaration of any dividends for the Common Stock.

CERTAIN BY-LAW PROVISIONS

The Company's By-laws provide additional notice requirements for
stockholder nominations of candidates for election to the Board of Directors and
proposals for other business that may be properly brought before a meeting of
stockholders.

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DESCRIPTION OF THE NOTES

GENERAL

The Notes were issued under the Indenture dated as of July 24, 1998,
between the Company and Bank of Montreal Trust Company, as trustee (the
"Trustee"), a copy of which has been filed as an exhibit to the Registration
Statement. The Notes and all other 11 3/4% Series B Senior Notes due 2008 issued
by the Company are deemed the same class of notes under the Indenture and are
entitled to the benefits thereof. Whenever particular sections or defined terms
of the Indenture not otherwise defined herein are referred to, such sections or
defined terms are incorporated herein by reference.

The following summary of certain provisions of the Indenture, the Notes and
the Escrow and Disbursement Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Indenture, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended, and
the Escrow and Disbursement Agreement. Capitalized terms used herein and not
otherwise defined have the meanings set forth in the section "Certain
Definitions."

The Indenture provides for the issuance of up to $50.0 million aggregate
principal amount of additional notes (the "Additional Notes") having identical
terms and conditions to the Notes offered hereby and the notes issued in the
Exchange Offer, subject to compliance with the covenants contained in the
Indenture. Any Additional Notes will be part of the same issue as the Notes
offered hereby and the notes issued in the Exchange Offer and will vote on all
matters with the Notes offered hereby and the notes issued in the Exchange
Offer.

Principal of, premium, if any, and interest on the Notes is payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 88 Pine Street, 19th Floor, New
York, New York 10005), except that, at the option of the Company, payment of
interest may be made by check mailed to the registered holders of the Notes at
their registered addresses.

The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.

TERMS OF THE NOTES

The Notes are senior obligations of the Company and will mature on July 15,
2008. Each Note will bear interest at a rate per annum shown on the front cover
of this Prospectus from July 24, 1998, or from the most recent date to which
interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on the January 1 or July 1 immediately preceding
the interest payment date on January 15 and July 15 of each year, commencing
January 15, 1999.

DISBURSEMENT OF FUNDS; ESCROW ACCOUNT

The Company has deposited $56.6 million in cash or Temporary Cash
Investments, an amount that, together with the interest received thereon, is
sufficient to pay when due the first four semi-annual interest payments on the
Notes. Such amounts will be deposited in an escrow account (the "Escrow
Account") held by the Escrow Agent for the benefit of the Trustee under the
Indenture in accordance with the Escrow and Disbursement Agreement. The Company
will enter into the Escrow and Disbursement Agreement, which will provide, among
other things, that funds may be disbursed from the Escrow Account only to pay
interest on the Notes (or, if a portion of the Notes has been retired by the
Company, funds representing the interest payment on the retired Notes may be
paid to the Company). Pending such disbursement, the Company will cause all
funds contained in the Escrow Account to be invested in Temporary Cash
Investments. Interest earned on these Temporary Cash Investments will be added
to the Escrow Account.

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Under the Escrow and Disbursement Agreement, the Company will grant to the
Trustee, for the benefit of the holders, a first priority and exclusive security
interest in the Escrow Account (the "Escrow Collateral"). The Escrow and
Disbursement Agreement will provide that the Trustee may foreclose on the Escrow
Collateral upon acceleration of the maturity of the Notes. Under the terms of
the Indenture, the proceeds of the Escrow Collateral will be applied, first, to
amounts owing to the Escrow Agent in respect of fees and expenses of the Escrow
Agent, and second, to the obligations of the Company to the holders under the
Notes and the Indenture. The ability of holders to realize upon the Escrow
Collateral may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Company.

Upon payment in full of the first four scheduled semi-annual payments on
the Notes, if no Default or Event of Default has occurred and is continuing, the
Escrow Collateral, if any, then remaining will be released to the Company.

OPTIONAL REDEMPTION

Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to July 15, 2003. On or after such
date, the Notes will be redeemable at the option of the Company, in whole or in
part, on not less than 30 nor more than 60 days prior notice, at the following
redemption prices (expressed as percentages of principal amount), plus accrued
and unpaid interest and liquidated damages (if any) to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period commencing on July 15 of the years set forth below:

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................ 105.875%
2004........................................................ 103.917%
2005........................................................ 101.958%
2006 and thereafter......................................... 100.000%
</TABLE>

In addition, at any time and from time to time prior to July 15, 2001, the
Company may redeem up to a maximum of 35% of the original aggregate principal
amount of the Notes (calculated giving effect to the notes issued in the
Exchange Offering and any issuance of Additional Notes) with the Net Cash
Proceeds of one or more Equity Offerings by the Company, at a redemption price
equal to 111.75% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to date of redemption (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date); provided, however, that at least 65% of
the original aggregate principal amount of the Notes remains outstanding
immediately after each such redemption (calculated giving effect to the notes
issued in the Exchange Offering and any issuance of Additional Notes). Any such
redemption shall be made within 60 days of such Equity Offering upon not less
than 30 nor more than 60 days notice mailed to each holder of Notes being
redeemed and otherwise in accordance with the procedures set forth in the
Indenture.

SELECTION

In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the notice
of redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.

RANKING

The indebtedness evidenced by the Notes will be unsecured Senior
Indebtedness of the Company, will rank pari passu in right of payment with all
existing and future Senior Indebtedness of the Company and will

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<PAGE> 84

be senior in right of payment to all existing and future Subordinated
Obligations of the Company. The Notes will also be effectively subordinated to
any Secured Indebtedness of the Company and its subsidiaries to the extent of
the value of the assets securing such Indebtedness.

At March 31, 1998, after giving pro forma effect to the Offering and the
application of the proceeds therefrom, the Company would have had $21.1 million
of Indebtedness outstanding (other than the Notes and the notes issued in the
Exchange Offer), all of which would have been Senior Indebtedness and all of
which would have been Secured Indebtedness. The Company currently does not have
any Subsidiaries.

Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "-- Certain Covenants -- Limitation on
Indebtedness."

CHANGE OF CONTROL

Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest and liquidated
damages, if any, to the date of repurchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that notwithstanding the occurrence
of a Change of Control, the Company shall not be obligated to repurchase the
Notes pursuant thereto if it has exercised its right to redeem all the Notes
under the terms of the section titled "Optional Redemption":

(i) prior to the first public offering of common stock of the Company,
the Permitted Holders cease to be the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting Stock of
the Company, whether as a result of issuance of securities of the Company,
any merger, consolidation, liquidation or dissolution of the Company, any
direct or indirect transfer of securities by any Permitted Holder or
otherwise (for purposes of this clause (i) and clause (ii) below, the
Permitted Holders shall be deemed to beneficially own any Voting Stock of
an entity (the "specified entity") held by any other entity (the "parent
entity") so long as the Permitted Holders beneficially own (as so defined),
directly or indirectly, in the aggregate a majority of the voting power of
the Voting Stock of the parent entity);

(ii) on the date of or after the first public offering of common stock
of the Company referred in clause (i), (A) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act), other than one or
more Permitted Holders, is or becomes the beneficial owner (as defined in
clause (i) above, except that for purposes of this clause (ii) such person
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 35% of the total voting power of the Voting Stock of the Company
and (B) the Permitted Holders "beneficially own" (as defined in clause (i)
above), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other
person and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors (for the purposes of this clause (ii), such other person shall be
deemed to beneficially own any Voting Stock of a specified entity held by a
parent entity, if such other person is the beneficial owner (as defined in
this clause (ii)), directly or indirectly, of more than 35% of the voting
power of the Voting Stock of such parent entity and the Permitted Holders
"beneficially own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent entity and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of such parent entity);

(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of the Company was approved by
a vote of
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66 2/3% of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office;

(iv) the adoption of a plan relating to the liquidation or dissolution
of the Company; or

(v) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving Person or transferee that represent immediately after such
transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving Person or transferee.

Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control Offer")
stating: (1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of repurchase (subject to
the right of Holders of record on the relevant record date to receive interest
on the relevant interest payment date); (2) the circumstances and relevant facts
and financial information regarding such Change of Control; (3) the repurchase
date (which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed); and (4) the instructions determined by the Company,
consistent with this covenant, that a Holder must follow in order to have its
Notes purchased.

The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.

The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.

The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "Certain Covenants -- Limitation on Indebtedness",
"Certain Covenants -- Limitation on Liens" and "Certain Covenants -- Limitation
on Sale/Leaseback Transactions". Such restrictions can only be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of a highly leveraged transaction.

Future Senior Indebtedness of the Company may contain prohibitions of
certain events which would constitute a Change of Control or require such Senior
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of their right to require the Company to repurchase the Notes
could cause a default under such Senior Indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the Holders
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<PAGE> 86

upon a repurchase may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. The provisions under the
Indenture relative to the Company's obligation to make an offer to repurchase
the Notes as a result of a Change of Control may be waived or modified with the
written consent of the holders of a majority in principal amount of the Notes.

CERTAIN COVENANTS

The Indenture contains covenants including, among others, the following:

Limitation on Indebtedness. (a) The Company will not, and will not
permit any Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company may Incur Indebtedness if
on the date of such Incurrence and after giving effect thereto the Debt to
Annualized Operating Cash Flow Ratio would be less than or equal to 6.0:1.0
if such Indebtedness is Incurred prior to July 15, 2001 and less than or
equal to 5.5:1.0 if such Indebtedness is Incurred on or after such date.

(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:

(i) Bank Indebtedness in an aggregate principal amount not to
exceed $75.0 million less the aggregate amount of all repayments of
principal applied to permanently reduce any such Indebtedness;

(ii) Indebtedness of the Company owed to and held by any Wholly
Owned Subsidiary or Indebtedness of a Restricted Subsidiary owed to and
held by the Company or any Wholly Owned Subsidiary; provided, however,
that (i) any subsequent issuance or transfer of any Capital Stock or any
other event that results in any such Wholly Owned Subsidiary ceasing to
be a Wholly Owned Subsidiary or any subsequent transfer of any such
Indebtedness (except to the Company or a Wholly Owned Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the issuer thereof and (ii) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations
with respect to the Notes;

(iii) Indebtedness (A) represented by the Notes (not including any
Additional Notes), (B) outstanding on the Closing Date (other than the
Indebtedness described in clauses (i) and (ii) above), (C) consisting of
Refinancing Indebtedness Incurred in respect of any Indebtedness
described in this clause (iii) (including Indebtedness Refinancing) or
the foregoing paragraph (a), (D) consisting of Guarantees of any
Indebtedness permitted under clauses (i) and (ii) of this paragraph (b)
and (E) consisting of any Guarantees of the Notes;

(iv) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary
was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became
a Subsidiary of or was otherwise acquired by the Company); provided,
however, that on the date that such Restricted Subsidiary is acquired by
the Company, the Company would have been able to Incur $1.00 of
additional Indebtedness pursuant to the foregoing paragraph (a) after
giving effect to the Incurrence of such Indebtedness pursuant to this
clause (iv) and (B) Refinancing Indebtedness Incurred by a Restricted
Subsidiary in respect of Indebtedness Incurred by such Restricted
Subsidiary pursuant to this clause (iv);

(v) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by
the Company and the Restricted Subsidiaries in the ordinary course of
their business, and (B) under Hedging Obligations entered into for bona
fide hedging purposes of the Company in the ordinary course of business;
provided, however, that such Hedging Obligations do not increase the
Indebtedness of the Company outstanding at any time other than as
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a result of fluctuations in interest rates or currency exchange rates or
by reason of fees, indemnities and compensation payable thereunder;

(vi) Purchase Money Indebtedness, provided that the amount of such
Purchase Money Indebtedness does not exceed the lesser of 80% of (a) the
Fair Market Value of or (b) the cost of the construction, installation,
acquisition, lease, development or improvement of, the applicable
Telecommunications Assets;

(vii) Contribution Indebtedness; or

(viii) Indebtedness (other than Indebtedness permitted to be
Incurred pursuant to the foregoing paragraph (a) or any other clause of
this paragraph (b)) in an aggregate principal amount on the date of
Incurrence that, when added to all other Indebtedness Incurred pursuant
to this clause (viii) and then outstanding, shall not exceed $40.0
million.

(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to paragraph (b) above if the proceeds thereof are
used, directly or indirectly, to repay, prepay, redeem, defease, retire,
refund or refinance any Subordinated Obligations unless such Indebtedness
will be subordinated to the Notes to at least the same extent as such
Subordinated Obligations.

(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may
Incur pursuant to this covenant shall not be deemed to be exceeded solely
as a result of fluctuations in the exchange rates of currencies. For
purposes of determining the outstanding principal amount of any particular
Indebtedness Incurred pursuant to this covenant, (i) Indebtedness permitted
by this covenant need not be permitted solely by reference to one provision
permitting such Indebtedness but may be permitted in part by one such
provision and in part by one or more other provisions of this covenant
permitting such Indebtedness and (ii) in the event that Indebtedness meets
the criteria of more than one of the types of Indebtedness described in
this covenant, the Company, in its sole discretion, shall classify such
Indebtedness and only be required to include the amount of such
Indebtedness in one of such clauses. Once so classified, such Indebtedness
shall retain such classification until repaid.

Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) or similar payment to the direct or indirect holders of its Capital
Stock except dividends or distributions payable solely in its Capital Stock
(other than Disqualified Stock) and except dividends or distributions payable to
the Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
has stockholders other than the Company or other Restricted Subsidiaries, to its
other stockholders on a pro rata basis), (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company or any Restricted
Subsidiary held by Persons other than the Company or another Restricted
Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise acquire or
retire for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition) or
(iv) make any Investment (other than a Permitted Investment) in any Person (any
such dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default will have occurred and be continuing (or would
result therefrom); (2) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Limitation
on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination will be
conclusive and evidenced by a resolution of the Board of Directors) declared or
made subsequent to the Closing Date would exceed the sum of: (A) (i) 100% of
Consolidated Operating Cash Flow accrued during the period (treated as one
accounting
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period) from the beginning of the fiscal quarter immediately following the
fiscal quarter during which the Closing Date occurs to the end of the most
recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Operating Cash Flow during
such period is a deficit, minus 100% of such deficit), minus (ii) 150% of
Consolidated Interest Expense accrued during the period (treated as one
accounting period) from the beginning of the fiscal quarter immediately
following the fiscal quarter during which the Closing Date occurs to the end of
the most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment; plus, (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Closing Date (other than an issuance or sale to (x) a
Subsidiary of the Company or (y) an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries); plus, (C) the amount by
which Indebtedness of the Company or its Restricted Subsidiaries is reduced on
the Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Closing Date of any Indebtedness of
the Company or its Restricted Subsidiaries issued after the Closing Date which
is convertible or exchangeable for Capital Stock (other than Disqualified Stock)
of the Company (less the amount of any cash or the fair market value of other
property distributed by the Company or any Restricted Subsidiary upon such
conversion or exchange); plus, (D) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (i) payments of
dividends, repayments of the principal of loans or advances or other transfers
of assets to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments; and less, (E) the aggregate
principal amount of any outstanding Contribution Indebtedness or, if less, the
Cash Contribution Amount.

(b) The provisions of the foregoing paragraph (a) will not prohibit: (i)
any purchase, repurchase, retirement or other acquisition or retirement for
value of Capital Stock of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries); provided, however, that
such purchase, repurchase, retirement or other acquisition or retirement for
value will be excluded in the calculation of the amount of Restricted Payments;
(ii) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Obligations of the Company made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company that is permitted to be Incurred pursuant to
paragraph (b) of the covenant described under "-- Limitation on Indebtedness" or
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or other trust established by the Company or any of its
Subsidiaries); provided, however, that such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value will be excluded in the
calculation of the amount of Restricted Payments; (iii) any purchase or
redemption of Subordinated Obligations from Net Available Cash to the extent
permitted by the covenant described under "-- Limitation on Sales of Assets and
Subsidiary Stock"; provided, however, that such purchase or redemption will be
included in the calculation of the amount of Restricted Payments; (iv) dividends
paid within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; provided,
however, that such dividend will be included in the calculation of the amount of
Restricted Payments; or (v) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of its
Subsidiaries from employees, former employees, directors or former directors of
the Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to the
terms of agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell, shares of such
common stock; provided, however, that the aggregate amount of such repurchases
shall not exceed $1.0 million in any calendar year and $3.0 million in the
aggregate; provided

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further, that such repurchases and other acquisitions shall be included in the
calculation of the amount of Restricted Payments.

Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except: (1) any encumbrance or restriction pursuant to
(A) an agreement in effect at or entered into on the Closing Date or (B) an
agreement entered into in connection with the Incurrence of Indebtedness
permitted under clause (b)(i) or (b)(vi) of the covenant described under
"-- Limitation on Indebtedness", provided that the chief financial officer of
the Company has determined in good faith that any restriction incurred pursuant
to this clause (B) is customary for similar Incurrences of Indebtedness; (2) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary
prior to the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred as consideration in, in contemplation
of, or to provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary or was otherwise
acquired by the Company) and outstanding on such date; (3) any encumbrance or
restriction pursuant to an agreement effecting a Refinancing of Indebtedness
Incurred pursuant to an agreement referred to in clause (1) or (2) of this
covenant or this clause (3) or contained in any amendment to an agreement
referred to in clause (1) or (2) of this covenant or this clause (3); provided,
however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are no less favorable to the Noteholders than
the encumbrances and restrictions contained in such predecessor agreements; (4)
in the case of clause (iii), any encumbrance or restriction (A) that restricts
in a customary manner the subletting, assignment or transfer of any property or
asset that is subject to a lease, license or similar contract, or (B) contained
in security agreements securing Indebtedness of a Restricted Subsidiary to the
extent such encumbrance or restriction restricts the transfer of the property
subject to such security agreements; and (5) with respect to a Restricted
Subsidiary, any restriction imposed pursuant to an agreement entered into for
the sale or disposition of all or substantially all the Capital Stock or assets
of such Restricted Subsidiary pending the closing of such sale or disposition.

Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the Fair Market Value of the shares
and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (iii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company elects (or is required by the terms of any Bank Indebtedness) to (x)
reinvest in Telecommunications Assets (including by means of an Investment in
Telecommunications Assets by a Restricted Subsidiary with Net Available Cash
received by the Company or another Restricted Subsidiary) or (y) prepay, repay,
redeem or purchase Bank Indebtedness of the Company Incurred pursuant to clause
(b)(i) of the covenant described under "-- Limitation on Indebtedness", in each
case within 180 days after the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) second, to the extent of the balance
of such Net Available Cash after application in accordance with clause (A), to
make an Offer (as defined below) to purchase Notes pursuant to and subject to
the conditions set forth in section (b) of this covenant within 365 days after
the later of such Asset Disposition or the receipt of such Net Available Cash;
provided, however, that if the Company elects (or is required by the terms of
any other Senior Indebtedness), such Offer may be made ratably to purchase the
Notes and other Senior Indebtedness of the Company, and (C) third, to fund (to
the extent consistent with any other applicable provision in the Indenture) any
corporate purpose. Notwithstanding the foregoing provisions of this covenant,
the Company and the Restricted Subsidiaries will not be required to apply any
Net

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Available Cash in accordance with this covenant except to the extent that the
aggregate Net Available Cash from all Asset Dispositions that is not applied in
accordance with this covenant exceeds $5.0 million.

For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption of Indebtedness of the Company (other than Disqualified Stock of
the Company) or any Restricted Subsidiary and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are converted by the Company or
such Restricted Subsidiary into cash within 60 days of such receipt.

(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Indebtedness) pursuant to clause (a)(iii)(B) of this
covenant, the Company will be required to purchase Notes (and other Senior
Indebtedness) tendered pursuant to an offer by the Company for the Notes (and
other Senior Indebtedness) (the "Offer") at a purchase price of 100% of their
principal amount plus accrued and unpaid interest and liquidated damages, if
any, to the date of purchase in accordance with the procedures (including
prorating in the event of oversubscription), set forth in the Indenture. If the
aggregate purchase price of Notes (and other Senior Indebtedness) tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Notes (and other Senior Indebtedness), the Company may apply the
remaining Net Available Cash in accordance with clause (a)(iii)(C) of this
covenant. The Company will not be required to make an Offer for Notes (and other
Senior Indebtedness) pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clause
(a)(iii)(A)) is less than $5.0 million for any particular Asset Disposition
(which lesser amount will be carried forward for purposes of determining whether
an Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).

(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.

Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") unless such transaction is on terms (i) that are no
less favorable to the Company or such Restricted Subsidiary, as the case may be,
than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (ii) that, in
the event such Affiliate Transaction involves an aggregate amount in excess of
$1.0 million, (1) are set forth in writing and (2) have been approved by a
majority of the members of the Board of Directors having no personal stake in
such Affiliate Transaction and (iii) that, in the event such Affiliate
Transaction involves an amount in excess of $20.0 million, have been determined
by a nationally recognized appraisal or investment banking firm to be fair, from
a financial standpoint, to the Company and its Restricted Subsidiaries.

(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"-- Limitation on Restricted Payments", (ii) any issuance of securities, or
other payments, awards or grants in cash, securities or otherwise pursuant to,
or the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors, (iii) the grant of stock options or
similar rights to employees and directors of the Company pursuant to plans
approved by the Board of Directors, (iv) loans or advances to employees in the
ordinary course of business in accordance with past practices of the Company,
but in any event not to exceed $2.0 million in the aggregate outstanding at any
one time, (v) the payment of reasonable fees to directors of the Company and its
Subsidiaries who are not employees of the Company or its Subsidiaries, (vi) any
transaction between the Company and a Wholly Owned Subsidiary or between Wholly
Owned Subsidiaries or (vii) any transaction pursuant to, and on the terms set
forth in, the Prodigy Agreement.

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Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company will not permit (a) any Restricted Subsidiary of the
Company to issue any Capital Stock except for (i) Capital Stock issued or sold
to, held by or transferred to the Company or a Wholly Owned Subsidiary, (ii)
Capital Stock issued by a Person prior to the time (A) such Person becomes a
Restricted Subsidiary of the Company, (B) such Person merges with or into a
Restricted Subsidiary of the Company or (C) a Restricted Subsidiary of the
Company merges with or into such Person; provided that such Capital Stock was
not issued or Incurred by such Person in anticipation of the type of transaction
contemplated by subclause (A), (B) or (C) (excluding for purposes of this
proviso, shares of Capital Stock issued in connection with customary accelerated
vesting provisions contained in option or similar plans or agreements which are
accelerated as a result of a change of control of such Person and which option
or similar plans or agreements were not adopted or implemented solely in
anticipation of or in connection with such transaction) or (b) any person (other
than the Company or a Wholly Owned Subsidiary) to acquire Capital Stock of any
Restricted Subsidiary of the Company from the Company or any Restricted
Subsidiary of the Company, except, in the case of each of clause (a) or (b), (1)
upon the acquisition of all the outstanding Capital Stock of such Restricted
Subsidiary in accordance with the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock", (2) if, immediately after giving effect
to such issuance or sale, such Restricted Subsidiary would no longer constitute
a Restricted Subsidiary, and any Investment in such Person remaining after
giving effect to such issuance or sale would have been permitted to be made
pursuant to the covenant described under "-- Limitation on Restricted Payments"
if made on the date of such issuance or sale, and (3) if required, the issuance,
transfer, conveyance, sale or other disposition of directors' qualifying shares.

Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its property or assets (including
Capital Stock of a Restricted Subsidiary), whether owned at the Closing Date or
thereafter acquired, other than Permitted Liens, without effectively providing
that the Notes shall be secured equally and ratably with (or prior to) the
obligations so secured for so long as such obligations are so secured; provided,
that if such obligations are expressly subordinated to the Notes or the
Subsidiary Guarantees the Lien securing such obligations will be subordinated
and junior to the Lien securing the Notes with the same relative priority as
such obligations have with respect to the Notes or the Subsidiary Guarantees.

Commission Reports. Notwithstanding that the Company may not be subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act the
Company will file with the Commission and provide the Trustee and Noteholders
and prospective Noteholders (upon request) within 15 days after it files them
with the Commission, copies of its annual report and the information, documents
and other reports that are specified in Sections 13 and 15(d) of the Exchange
Act. In addition, following a public offering of the common stock of the
Company, the Company shall furnish to the Trustee and the Noteholders, promptly
upon their becoming available, copies of the annual report to stockholders and
any other information provided by the Company to its public stockholders
generally. The Company also will comply with the other provisions of Section
314(a) of the TIA.

Future Subsidiary Guarantors. The Company will cause each Restricted
Subsidiary that Incurs Indebtedness to become a Subsidiary Guarantor, and
execute and deliver to the Trustee a supplemental indenture pursuant to which
such Restricted Subsidiary will Guarantee payment of the Notes. Each Subsidiary
Guarantee will be limited to an amount not to exceed the maximum amount that can
be Guaranteed by that Restricted Subsidiary without rendering the Subsidiary
Guarantee, as it relates to such Restricted Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.

Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than a
Telecommunications Business.

Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (a) the Company or such
Restricted Subsidiary would be entitled to (i) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under

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"-- Limitation on Indebtedness" and (ii) create a Lien on such property securing
such Attributable Debt without equally and ratably securing the Notes pursuant
to the covenant described under "-- Limitation on Liens", (b) the net proceeds
received by the Company or such Restricted Subsidiary in connection with such
Sale/Leaseback Transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors) of such property and (c) the
transfer of such property is permitted by, and the Company applies the proceeds
of such transaction in compliance with, the covenant described under
"-- Limitation on Sale of Assets and Subsidiary Stock".

MERGER AND CONSOLIDATION

The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by a supplemental indenture and
other appropriate documents, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes,
the Indenture and the Escrow and Disbursement Agreement; (ii) immediately after
giving effect to such transaction (and treating any Indebtedness which becomes
an obligation of the Successor Company or any Restricted Subsidiary as a result
of such transaction as having been Incurred by the Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness"; (iv) the Company shall have delivered
to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture and
other appropriate documents (if any) comply with the Indenture and the Escrow
and Disbursement Agreement; (v) the Company shall have delivered to the Trustee
an Opinion of Counsel to the effect that the Holders will not recognize income,
gain or loss for Federal income tax purposes as a result of such transaction and
will be subject to Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such transaction had not
occurred; and (vi) the Company shall have delivered to the Trustee an Opinion of
Counsel (subject to customary exceptions) to the effect that any Subsidiary
Guarantee shall remain in full force and effect after such transaction.

The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture and the
Escrow and Disbursement Agreement, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its assets will not be
released from the obligation to pay the principal of and interest on the Notes.

The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, all or substantially all of
its assets to any Person unless: (i) the resulting, surviving or transferee
Person will be a corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia, and such
Person (if not a Subsidiary Guarantor) will expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of such Subsidiary Guarantor under its Subsidiary
Guarantee; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction as having been
incurred by such Person at the time of such transaction), no Default shall have
occurred and be continuing; and (iii) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.

Notwithstanding the foregoing, (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company and (b) the Company may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction to realize tax or other benefits.

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DEFAULTS

An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due and payable, continued for 30 days,
(ii) a default in the payment of principal of any Note when due and payable at
its Stated Maturity, upon required redemption or repurchase, upon declaration or
otherwise, (iii) the failure by the Company to comply with its obligations under
the covenant described under "-- Merger and Consolidation", (iv) the failure by
the Company to comply for 30 days after notice with any of its obligations under
the covenants described under "-- Change of Control" or "-- Certain Covenants"
(in each case, other than a failure to purchase Notes) or any of its agreements
contained in the Escrow and Disbursement Agreement, (v) the failure by the
Company to comply for 60 days after notice with its other agreements contained
in the Notes or the Indenture, (vi) the failure by the Company or any Subsidiary
to pay any Indebtedness within any applicable grace period after final maturity
or the acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$5.0 million or its foreign currency equivalent (the "cross acceleration
provision") and such failure continues for 10 days after receipt of the notice
specified in the Indenture, (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) the rendering of any judgment or decree for the payment of
money in excess of $5.0 million or its foreign currency equivalent against the
Company or a Significant Subsidiary if (A) an enforcement proceeding thereon is
commenced by any creditor or (B) such judgment or decree remains outstanding for
a period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision"), (ix) any Subsidiary Guarantee ceases
to be in full force and effect (except as contemplated by the terms thereof) or
any Subsidiary Guarantor or Person acting by or on behalf of such Subsidiary
Guarantor denies or disaffirms such Subsidiary Guarantor's obligations under the
Indenture or any Subsidiary Guarantee and such Default continues for 10 days
after receipt of the notice specified in the Indenture, or (x) the Company
challenging the Lien on the Escrow Collateral under the Escrow and Disbursement
Agreement prior to the time that the Escrow Collateral is to be released to the
Company, the Escrow Collateral becoming subject to any lien other than liens
under the Escrow Agreement or the Escrow and Disbursement Agreement becomes, or
the Company asserts that the Escrow and Disbursement Agreement is, invalid and
unenforceable, other than in accordance with its terms.

The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.

However, a default under clauses (iv), (v), (vi) or (ix) will not
constitute an Event of Default until the Trustee or the Holders of at least 25%
in principal amount of the outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified in clauses
(iv), (v), (vi) or (ix) hereof after receipt of such notice.

If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes by notice to the Company may declare the principal of and
accrued but unpaid interest on all the Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs, the principal of and interest on all the
Notes will become immediately due and payable without any declaration or other
act on the part of the Trustee or any Holders. Under certain circumstances, the
Holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an

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Event of Default is continuing, (ii) Holders of at least 25% in principal amount
of the outstanding Notes have requested the Trustee in writing to pursue the
remedy, (iii) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt of the request and
the offer of security or indemnity and (v) the Holders of a majority in
principal amount of the outstanding Notes have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the Holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee will be entitled to indemnification satisfactory to it in
its sole discretion against all losses and expenses caused by taking or not
taking such action.

The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Note (including payments pursuant to the redemption provisions of such
Note), the Trustee may withhold notice if and so long as a committee of its
Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Company is required to deliver to
the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Company also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Events of Default, their status and what action the
Company is taking or proposes to take in respect thereof.

AMENDMENTS AND WAIVERS

Subject to certain exceptions, the Indenture or the Notes may be amended
with the written consent of the Holders of a majority in principal amount of the
Notes then outstanding and any past default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal amount
of the Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected, no amendment may, among other things, (i) reduce the
amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest or any liquidated damages on any
Note, (iii) reduce the principal of or extend the Stated Maturity of any Note,
(iv) reduce the premium payable upon the redemption of any Note or change the
time at which any Note may be redeemed as described under "-- Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any Holder to receive payment of principal of and
interest or any liquidated damages on such Holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions,
(viii) modify the Subsidiary Guarantees in any manner adverse to the Holders, or
(ix) modify the provisions of the Escrow and Disbursement Agreement or the
Indenture relating to the Escrow Collateral in any manner adverse to the Holders
or release any of the Escrow Collateral from the Lien under the Escrow and
Disbursement Agreement or permit any other obligation to be secured by the
Escrow Collateral.

Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add additional Guarantees with respect to the Notes, to secure the
Notes, to add to the covenants of the Company for the benefit of the Noteholders
or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any Holder,

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subject to the provisions of the Indenture, to provide for the issuance of the
Exchange Notes, or Additional Notes or to comply with any requirement of the
Commission in connection with the qualification of the Indenture under the TIA.

The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.

After an amendment under the Indenture becomes effective, the Company is
required to mail to the Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.

TRANSFER

A Noteholder may transfer Notes in accordance with the Indenture. Upon any
transfer, the registrar and the Trustee may require a Noteholder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Noteholder to pay any taxes required by law or permitted
by the Indenture. The Company is not required to transfer any Note selected for
redemption or to transfer any Note for a period of 15 days prior to a selection
of Notes to be redeemed. The Notes will be issued in registered form and the
registered holder of a Note will be treated as the owner of such Note for all
purposes.

DEFEASANCE

The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "-- Certain Covenants", the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "-- Defaults", the provisions
described under "-- Change of Control" and the limitations contained in clause
(iii) under the first paragraph of "-- Merger and Consolidation" ("covenant
defeasance").

The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" or because of the
failure of the Company to comply with clause (iii) under the first paragraph of
"-- Merger and Consolidation."

In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).

CONCERNING THE TRUSTEE

The Bank of Montreal Trust Company is to be the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.

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GOVERNING LAW

The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.

BOOK ENTRY, DELIVERY AND FORM

Except as described in the next paragraph, the Warrants and the Notes (and
the related guarantees) initially will each be represented by a single permanent
global certificate in definitive, fully registered form (the "Global Warrant"
and the "Global Note," respectively). Warrants and Notes (i) originally
purchased by or transferred to "foreign purchasers" or (ii) held by qualified
institutional buyers or Accredited Investors (as defined in Regulation D under
the Securities Act) who are not "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act) ("QIBs") who elect to take physical delivery
of their certificates instead of holding their interests through the Global
Warrant or Global Note (and which are thus ineligible to trade through the
Depositary) (collectively referred to herein as the "Non-Global Purchasers")
will be issued in registered form (the "Certificated Security"). Upon the
transfer to a QIB of any Certificated Security initially issued to a Non-Global
Purchaser, such Certificated Security will, unless the transferee requests
otherwise or the Global Warrant or Global Note has previously been exchanged in
whole for Certificated Securities, be exchanged for an interest in the Global
Warrant or Global Note.

Pursuant to procedures established by the Depositary (i) upon the issuance
of the Global Warrant and Global Note, the Depositary or its custodian credited,
on its internal system, the number of Warrants of the individual beneficial
interests represented by the Global Warrant and the principal amount of Notes of
the individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Warrant and Global Note will be
shown on, and the transfer of such ownership will be effected only through,
records maintained by the Depositary or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts were initially designated by or
on behalf of the Initial Purchaser and ownership of beneficial interests in the
Global Warrant and Global Note will be limited to persons who have accounts with
the Depositary ("participants") or persons who hold interests through
participants. QIBs may hold their interests in the Global Warrant and Global
Note directly through the Depositary if they are participants in such system, or
indirectly through organizations which are participants in such system. So long
as the Depositary, or its nominee, is the registered owner or holder of the
Warrants or Notes, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the Warrants or Notes represented by such
Global Warrant or Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Warrants or Global Note will be able to
transfer that interest except in accordance with the procedures of the
Depositary, in addition to those provided under the Indenture with respect to
the Notes.

The Depositary has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member of
the Federal Reserve System, (iv) a "clearing corporation" within the meaning of
the Uniform Commercial Code, as amended, and (v) a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. The Depositary was created to hold
securities for its participants (collectively, the "Participants") and
facilitates the clearance and settlement of securities transactions between
Participants through electronic book-entry changes to the accounts of its
Participants, thereby eliminating the need for physical transfer and delivery of
certificates. Participants in the Depositary include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Indirect access to the system of
the Depositary is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Investors who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through Participants or
Indirect Participants.

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The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Securities represented by
a global security to such persons may be limited. In addition, because the
Depositary can act only on behalf of its Participants, who in turn act on behalf
of persons who hold interests through Participants, the ability of a person
having an interest in Securities represented by a global security to pledge or
transfer such interest to persons or entities that do not participate in the
system of the Depositary, or to otherwise take actions in respect of such
interest, may be affected by the lack of a physical definitive security in
respect of such interest.

Payments with respect to the principal of, premium, if any, Liquidated
Damages, if any, and interest on, any Notes represented by the Global Note on
the applicable record date will be payable by the Trustee to or at the direction
of the Depositary or its nominee in its capacity as the registered holder of the
Global Note. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving payment thereon
and for any and all other purposes whatsoever. Accordingly, neither the Company
nor the Trustee has or will have any responsibility or liability for the payment
of such amounts to owners of beneficial interests in the Global Note (including
principal, premium, if any, Liquidated Damages, if any, and interest). Payments
by the Participants and the Indirect Participants to the owners of beneficial
interests in the Global Note will be governed by standing instructions and
customary industry practice and will be the responsibility of the Participants
or the Indirect Participants and the Depositary. Transfers between Participants
in the Depositary will be effected in accordance with the procedures of the
Depositary, and will be settled in same-day funds.

CERTIFICATED SECURITIES

If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary or the Depositary ceases to be
registered as a clearing agency under the Exchange Act and a successor
depositary is not appointed within 90 days of such notice or cessation, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Warrants and Notes in definitive form or (iii) upon the
occurrence of certain other events, then, upon surrender by the Depositary of
the Global Warrant and Global Note, Certificated Notes and Warrants will be
issued to each person that the Depositary identifies as the beneficial owner of
the Warrants and Notes represented by the Global Warrant and Global Note. Upon
any such issuance, the Trustee is required to register such Certificated Notes
and Warrants in the name of such person or persons (or the nominee of any
thereof) and cause the same to be delivered thereto.

Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related Warrants and Notes and each such person may
conclusively rely on, and shall be protected in relying on, instructions from
the Depositary for all purposes.

CERTAIN DEFINITIONS

"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Transactions with Affiliates" only, "Affiliate" shall also mean any
beneficial owner of shares representing 5% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.

"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying

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shares or shares required by applicable law to be held by a Person other than
the Company or a Restricted Subsidiary), (ii) all or substantially all the
assets of any division or line of business of the Company or any Restricted
Subsidiary or (iii) any other assets of the Company or any Restricted Subsidiary
other than inventory or obsolete assets sold in the ordinary course of business
of the Company or such Restricted Subsidiary (other than, in the case of (i),
(ii) and (iii) above, (x) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (y) for purposes of the provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments" and (z) a disposition of assets
with a fair market value of less than $250,000).

"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in a Sale/
Leaseback Transaction (including any period for which such lease has been
extended).

"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.

"Bank Indebtedness" means any Indebtedness outstanding under any credit or
similar agreement with a financial institution which provides for revolving
credit loans, term loans or letters of credit or other credit facilities, as
amended, waived, restated, supplemented, extended, replaced, refinanced or
otherwise modified from time to time.

"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.

"Business Day" means each day which is not a Legal Holiday.

"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.

"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.

"Cash Contribution Amount" means the aggregate amount of cash contributions
made to the capital of the Company described in the definition of "Contribution
Indebtedness".

"Closing Date" means the date of the Indenture.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Subsidiaries in such period but not
included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations and the interest expense relating to Attributable
Debt, (ii) amortization of debt discount and debt issuance costs, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges attributable to letters of credit and bankers'
acceptance financing, (vi) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary, (vii) net costs associated with Hedging Obligations
(including amortization of fees),
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(viii) dividends in respect of all Disqualified Stock of the Company and all
Preferred Stock of the Subsidiaries of the Company to the extent held by Persons
other than the Company or a Wholly Owned Subsidiary, (ix) interest Incurred in
connection with investments in discontinued operations and (x) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust.

"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income or loss of any Person (other than the Company) if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained in
clause (iv) below, the Company's equity in the net income of any such Person for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such period
to the Company or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution made to a Restricted
Subsidiary, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of any such Person (including any Unrestricted
Subsidiary) for such period shall be included in determining such Consolidated
Net Income; (ii) any net income (or loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition; (iii) any net income (or loss) of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution made to another
Restricted Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Restricted Subsidiary for such period
shall be included in determining such Consolidated Net Income; (iv) any gain
(but not loss) realized upon the sale or other disposition of any asset of the
Company or its Consolidated Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the
ordinary course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person; (v) any extraordinary
gain or loss; and (vi) the cumulative effect of a change in accounting
principles. Notwithstanding the foregoing, for the purpose of the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments"
only, there shall be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a)(3)(D) thereof.

"Consolidated Operating Cash Flow" for any period means the Consolidated
Net Income for such period, plus the following to the extent deducted in
calculating such Consolidated Net Income: (i) income tax expense of the Company
and its Consolidated Restricted Subsidiaries, (ii) Consolidated Interest
Expense, (iii) depreciation expense of the Company and its Consolidated
Restricted Subsidiaries, (iv) amortization expense of the Company and its
Consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid cash item that was paid in a prior period) and (v) all
other non-cash charges of the Company and its Consolidated Restricted
Subsidiaries (excluding any such non-cash charge to the extent it represents an
accrual of or reserve for cash expenditures in any future period) in each case
for such period. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization and non-cash
charges of, a Restricted Subsidiary of the Company shall be added to
Consolidated Net Income to compute Consolidated Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
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"Consolidation" means the consolidation of the amounts of each Restricted
Subsidiary with those of the Company in accordance with GAAP consistently
applied; provided, however, that "Consolidation" will not include consolidation
of the accounts of any Unrestricted Subsidiary, but the interest of the Company
or any Restricted Subsidiary in an Unrestricted Subsidiary will be accounted for
as an investment. The term "Consolidated" has a correlative meaning.

"Contribution Indebtedness" means Indebtedness of the Company in an
aggregate principal amount not greater than twice the aggregate amount of the
Net Cash Proceeds received by the Company from contributions made to the capital
of the Company after the date hereof, provided that such Contribution
Indebtedness (i) has a Stated Maturity later than the Stated Maturity of the
Notes, (ii) is Incurred substantially concurrently with such cash contribution,
and (iii) is so designated as Contribution Indebtedness, pursuant to an
Officers' Certificate, on the Incurrence date thereof.

"Currency Agreement" means with respect to any Person, any foreign exchange
contract, currency swap agreement or any similar agreement or arrangement to
which such Person is a party or of which it is a beneficiary.

"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) four times the Consolidated Operating Cash Flow for
the latest fiscal quarter for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (i) any Person that
is a Restricted Subsidiary on the Determination Date (or would become a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed to have been a Restricted Subsidiary at all times during
such Measurement Period, (ii) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (iii) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (through an acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by an Asset
Disposition or the termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement Period or
after the end of such period and on or prior to such Determination Date, such
calculation will be made on a pro forma basis in accordance with GAAP as if all
such transactions had been consummated prior to the first day of such
Measurement Period (it being understood that in calculating Consolidated
Operating Cash Flow, the exclusions set forth in clauses (i) through (vi) of the
definition of Consolidated Net Income shall apply to a Person which has been
acquired as if it were a Restricted Subsidiary).

"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.

"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the
Securities shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions of the
covenants described under "-- Change of Control" and "-- Certain
Covenants -- Limitation on Sale of Assets and Subsidiary Stock".

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"Equity Offering" means any public or private sale of common stock or
Preferred Stock of the Company (other than Disqualified Stock) other than any
sale to a Permitted Holder.

"Escrow Account" means an escrow account for the deposit of approximately
$56.6 million of the net proceeds from the sale of the Notes under the Escrow
and Disbursement Agreement.

"Escrow Agent" means The Chase Manhattan Bank as Escrow Agent under the
Escrow and Disbursement Agreement, or any successor thereto appointed pursuant
to such agreement.

"Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the Closing Date, by and among the Escrow Agent, the
Trustee and the Company, governing the disbursement of funds from the Escrow
Account.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board of Directors of
the Company acting in good faith and shall be evidenced by a resolution of the
Board of Directors of the Company delivered to the Trustee.

"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entities as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the Commission
governing the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
Commission. All ratios and computations based on GAAP contained in the Indenture
shall be computed in conformity with GAAP.

"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any obligation.

"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or any Currency Agreement.

"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the registrar's books.

"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a
noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.

"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money;

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(ii) the principal of and premium (if any) in respect of obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments; (iii)
all obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto); (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except Trade Payables), which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services; (v) Capitalized
Lease Obligations and all Attributable Debt of such Person; (vi) the amount of
all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary of
such Person, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such Person shall
be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person; and (ix) all obligations of the type referred to in
clauses (i) through (viii) of other Persons and all dividends of other Persons
for the payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including by means
of any Guarantee. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date.

"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.

"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.

"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions in New York State are authorized or required by law to close.

"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).

"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of (i) all legal,

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title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition, (iii) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a result
of such Asset Disposition and (iv) appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the property or other assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.

"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock
or any equity contribution, means the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.

"Noteholder" or "Holder" means the Person in whose name a Note is
registered on the registrar's books.

"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company.

"Officers' Certificate" means a certificate signed by two Officers.

"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.

"Permitted Holders" means Kwok L. Li, William R. Wilson and Linsang
Partners, LLC and any Person acting in the capacity of an underwriter in
connection with a public or private offering of the Company's Capital Stock.

"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Telecommunications Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Telecommunications Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that such trade terms
may include such concessionary trade terms as the Company or any such Restricted
Subsidiary deems reasonable under the circumstances; (v) Investments in prepaid
expenses; (vi) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary and not exceeding $2.0
million in the aggregate outstanding at any one time; (vii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition that was made pursuant to and in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Sale of Assets and
Subsidiary Stock"; (ix) Investments made prior to the Closing Date; (x)
Investments in Telecommunications Assets not to exceed $30.0 million at any one
time outstanding; and (xi) other Investments, not to exceed the greater of (a)
10% of Total Assets of the Company at the time of such Investment (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value) and (b) $30.0 million.

"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in
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connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person is
a party, or deposits as security for contested taxes or import duties or for the
payment of rent, in each case Incurred in the ordinary course of business; (b)
Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an appeal
or other proceedings for review; (c) Liens for property taxes not yet due or
payable or subject to penalties for non-payment or which are being contested in
good faith by appropriate proceedings; (d) Liens in favor of issuers of surety
bonds issued pursuant to the request of and for the account of such Person in
the ordinary course of its business; (e) minor survey exceptions, minor
encumbrances, easements or reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real property
or Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens to secure Indebtedness permitted pursuant to
clauses (b)(i) and (b)(vi) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness"; (g) Liens existing on the Closing
Date; (h) Liens on property or shares of stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, Incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Liens do not extend to any other property owned by
such Person or any of its Subsidiaries; (i) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or
any Subsidiary of such Person; provided, however, that such Liens are not
created, Incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens do not extend to any
other property owned by such Person or any of its Subsidiaries; (j) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (k) Liens securing
obligations under Interest Rate Agreements so long as such obligations under
Interest Rate Agreements relate to Indebtedness that is, and is permitted under
the Indenture to be, secured by a Lien on the same property securing such
obligations under Interest Rate Agreements; (l) Liens to secure any Refinancing
(or successive Refinancings) as a whole, or in part, of any Indebtedness secured
by any Lien referred to in the foregoing clauses (f), (g), (h) and (i);
provided, however, that (x) such new Lien shall be limited to all or part of the
same property that secured the original Lien (plus improvements to or on such
property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness secured by Liens
described under clauses (f), (g), (h) or (i) at the time the original Lien
became a Permitted Lien under the Indenture and (B) an amount necessary to pay
any fees and expenses, including premiums, related to such Refinancings; and (m)
Liens in favor of the Trustee arising under the provisions of the Escrow and
Disbursement Agreement and the provisions of the Indenture relating thereto.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (f), (h) or (i) above to the extent such Lien applies to
any Telecommunications Assets acquired directly or indirectly from Net Available
Cash pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock."

"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.

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"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.

"Prodigy Agreement" means the Splitrock Full Service Agreement dated as of
June 24, 1997 between the Company and Prodigy, Inc. as in effect on the date
hereof.

"Purchase Money Indebtedness" means Secured Indebtedness (including
Capitalized Lease Obligations, mortgage financings and purchase money
obligations) incurred for the purpose of financing all or any part of the cost
of construction, installation, acquisition, lease, development or improvement by
the Company or any Restricted Subsidiary of any Telecommunications Assets of the
Company or any Restricted Subsidiary and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time provided, however, that (i) the security agreement or
conditional sales or other title retention contract pursuant to which a Lien on
such assets is created shall be entered into within 180 days after the purchase
or acquisition of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions, replacements, modifications and
accessions thereto and any proceeds and products therefrom, (ii) at no time
shall the aggregate principal amount of the outstanding Indebtedness secured
thereby be increased, except in connection with the purchase of additions and
accessions thereto and except in respect of fees and other obligations in
respect of such Indebtedness and (iii) the Indebtedness secured thereby shall be
with recourse solely to the assets so purchased or acquired, any additions,
replacements, modifications and accessions thereto and any proceeds and products
therefrom.

"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.

"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) any Indebtedness of the Company or any Restricted
Subsidiary existing on the date of the Indenture or Incurred in compliance with
the Indenture (including Indebtedness of the Company that Refinances Refinancing
Indebtedness); provided, however, that (i) the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced, (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being Refinanced
and (iv) if the Indebtedness being Refinanced is subordinated in right of
payment to the Notes, such Refinancing Indebtedness is subordinated in right of
payment to the Notes at least to the same extent as the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness
of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.

"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.

"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other than
leases between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries.

"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.

"Senior Indebtedness" of the Company means the principal of, premium (if
any) and accrued and unpaid interest on (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization of the Company,
regardless of whether or not a claim for post-filing interest is allowed in such
proceedings), and fees and other amounts owing in respect of, Bank Indebtedness
and all other Indebtedness
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of the Company, whether outstanding on the Closing Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Notes; provided, however, that Senior Indebtedness shall
not include (i) any obligation of the Company to any Subsidiary, (ii) any
liability for Federal, state, local or other taxes owed or owing by the Company,
(iii) any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (iv) any Indebtedness or obligation of the Company
(and any accrued and unpaid interest in respect thereof) that by its terms is
subordinate or junior in any respect to any other Indebtedness or obligation of
the Company, including any Subordinated Obligations, (v) any obligations with
respect to any Capital Stock, or (vi) any Indebtedness Incurred in violation of
the Indenture.

"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.

"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).

"Subordinated Obligation" means, with respect to any Person, any
Indebtedness of such Person (whether outstanding on the Closing Date or
thereafter Incurred) that is subordinate or junior in right of payment to the
Notes or any other indebtedness of such Person pursuant to a written agreement.

"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.

"Subsidiary Guarantee" means each Guarantee of the obligations with respect
to the Notes issued by a Person pursuant to the terms of the Indenture.

"Subsidiary Guarantor" means any Person that has issued a Subsidiary
Guarantee.

"Telecommunications Assets" means all assets (including Capital Stock),
rights (contractual or otherwise) and properties, real or personal, whether
tangible or intangible, used or intended for use in connection with a
Telecommunications Business.

"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, data, video or voice through
owned or leased transmission facilities, (ii) constructing, creating, developing
or marketing networks, related network transmission equipment, software and
other devices for use in a communication business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of the Company.

"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company that is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by the
United States of America having capital, surplus and undivided profits
aggregating in excess of $500.0 million (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than

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30 days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard and Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc. ("S&P"), and (v) investments in securities with maturities of
six months or less from the date of acquisition issued or fully guaranteed by
any state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by S&P
or "A" by Moody's Investors Service, Inc.

"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.
77aaa-77bbbb) as in effect on the date of the Indenture.

"Total Assets" means, with respect to any Person, the total Consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.

"Total Consolidated Indebtedness" means, as of any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
its Restricted Subsidiaries, determined on a Consolidated basis in accordance
with GAAP, outstanding as of such date of determination, after giving effect to
any Incurrence of Indebtedness and the application of the proceeds therefrom
giving rise to such determination.

"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.

"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.

"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.

"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless (a) such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; (b) a Default or
Event of Default shall have occurred and be continuing; or (c) immediately after
giving effect to such designation, the Company would not be able to Incur $1.00
of Indebtedness under paragraph (a) of the covenant entitled "-- Limitation on
Indebtedness"; provided, however, that either (A) the Subsidiary to be so
designated has total Consolidated assets of $1,000 or less or (B) if such
Subsidiary has Consolidated assets greater than $1,000, then such designation
would be permitted under the covenant titled "-- Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation of a Subsidiary as a Restricted
Subsidiary or Unrestricted Subsidiary by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.

"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
103
<PAGE> 108

"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.

"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following is a summary of material United States Federal income tax
consequences relevant in the opinion of Winstead Sechrest & Minick P.C., counsel
to the Company, to the acquisition, ownership and disposition of the Notes, the
Warrants, and the Warrant Shares, but does not purport to be a complete analysis
of all potential tax effects. This summary is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed regulations
thereunder (the "Regulations"), published rulings and court decisions, all as in
effect and existing on the date hereof and all of which are subject to change at
any time, which change may be retroactive. Such counsel has relied upon
representations by the Company and its officers with respect to factual matters
for purposes of this summary. This summary is not binding on the Internal
Revenue Service or on the courts, and no ruling will be requested from the
Internal Revenue Service on any issues described below. There can be no
assurance that the Internal Revenue Service will not take a different position
concerning the matters discussed below and that such positions of the Internal
Revenue Service would not be sustained.

This summary applies only to U.S. Holders (as defined below) that are the
initial holders of the Notes, Warrants, or Warrant Shares, who acquired the same
for cash and who hold the same as capital assets. It does not address the tax
consequences to taxpayers who are subject to special rules (such as financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities or currencies and persons who hold Notes, Warrants, or Warrant Shares
as a hedge or as a position in a "straddle" for tax purposes). A "U.S. Holder"
means a beneficial owner of a Note, Warrant, or Warrant Shares that is for U.S.
federal income tax purposes (i) a citizen or resident of the United States; (ii)
a corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof; (iii) an estate
the income of which is subject to U.S. federal income taxation regardless of its
source; or (iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one or
more U.S. fiduciaries have the authority to control all substantial decisions of
the trust.

THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH INVESTOR IS
STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF
SUCH HOLDER'S TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, THE WARRANTS, OR THE
WARRANT SHARES.

TAXATION OF THE NOTES

Payment of Interest and Original Issue Discount. The stated interest
payable on the Notes generally will be taxable to a holder of Notes as ordinary
income at the time that it is paid or accrued in accordance with the holder's
method of accounting for Federal income tax purposes.

The Notes were issued with de minimis original issue discount ("OID") for
Federal income tax purposes. A debt instrument generally is issued with de
minimis OID if the amount by which its stated redemption price at maturity
exceeds its issue price is less than the product of .0025 multiplied by the
product of the stated redemption price at maturity and the number of complete
years to maturity from the issue date. The issue

104
<PAGE> 109

price of the Notes was determined by allocating the "issue price" of the Units
between the Notes and the Warrants based on their relative fair market values.
De minimis OID is recognized as capital gain upon the redemption, sale or other
taxable disposition of the debt instrument.

A holder that purchases a Note at a purchase price less then the stated
redemption price will be considered to have purchased the Note at a "market
discount" equal to such difference. Market discount, however, will be considered
to be zero if less than 0.25% of the stated redemption price at maturity of a
Note multiplied by the number of complete years to maturity remaining after the
date of its purchase.

Any principal payment or gain realized by a holder on disposition or
retirement of a Note will be treated as ordinary income to the extent that there
is accrued market discount on the Note. Unless a holder elects to accrue under a
constant-interest method, accrued market discount is the total market discount
multiplied by a fraction, the numerator of which is the number of days the
holder has held the obligation and the denominator of which is the number of
days from the date the holder acquired the obligation until its maturity. A
holder may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry a Note purchased with market discount. Any such deferred interest
expense would not exceed the market discount that accrued during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If the holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by the Holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.

A holder of Notes subject to certain limitations, may elect to treat all
"interest" on any Notes as original issue discount and calculate the amount
includible in gross income under the method described above. For this purpose,
"interest" includes stated and unstated interest, original issue discount,
acquisition discount, market discount and de minimis market discount, as
adjusted by any acquisition premium. Such election, if made with respect to a
market discount obligation, will constitute an election to include market
discount in income currently on all market discount obligations acquired by such
holder on or after the first taxable year to which the election applies. See
"Market Discount." The election is to be made for the taxable year in which the
holder acquired the Note and may not be revoked without the consent of the
Internal Revenue Service.

Sale, Retirement or Other Taxable Disposition. Gain or loss upon a sale or
other disposition of a Note will be measured by the difference between the
amount of cash and the fair market value of property received with respect to
such sale and the holder's adjusted tax basis in such Note. A holder's adjusted
tax basis in a Note generally will be equal to the purchase price of the Note.
Such gain or loss generally will be capital gain or loss, and will be long-term
capital gain or loss if the holder held the Note for more than one year.

Effect of Change of Control. Upon a Change of Control, each holder will
have the right to require the Company to repurchase all or any part of such
holder's Notes for a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest and liquidated damages, if any, to the date of
payment. Under the Regulations, a provision such as the Change of Control
redemption requirement will not affect the yield or maturity date of the Notes
unless, based on all facts and circumstances as of the date of issuance, it is
more likely than not that a Change of Control giving rise to the redemption will
occur. The Company will not treat the Change of Control redemption provision of
the Notes as affecting the calculation of the yield to maturity of any Note.

Characterization of the Warrants. Although the matter is not free from
doubt, and the form of the Warrants may be respected for Federal income tax
purposes, it is possible that the Warrants would be treated for Federal Income
tax purposes as Common Stock due to, among other things, the nominal Exercise
Price and lack of any meaningful contingency. Although the matter is thus not
free from doubt, the following discussion assumes that the Warrants would be
properly characterized as warrants and describes, as appropriate, any differing
Federal income tax treatment that would result if the Warrants are treated as
stock.

Exercise. A holder of a Warrant generally will not recognize gain or loss
upon exercise of the Warrant. The holder's Federal income tax basis in the
Common Stock received will be equal to the holder's Federal income tax basis in
the Warrant immediately prior to exercise (the cost of the Warrant), plus the
amount of

105
<PAGE> 110

cash paid upon exercise. The holding period of the Common Stock acquired upon
exercise of the Warrant will begin on the day after the date of exercise of the
Warrant and will not include the period during which the Warrant was held. If
the Warrants are treated as stock from the date of issuance, the holder would
not recognize any gain or loss on the exercise of the Warrants, and the holding
period of the stock received would include the entire period during which the
Warrant was held.

Adjustments. An adjustment to the exercise price of the Warrants made
pursuant to the antidilution provisions of the Warrants may, in certain
circumstances, result in constructive distributions to the holders of the
Warrants which could be taxable as dividends to the holders under Section 305 of
the Code. A holder's Federal income tax basis in the Warrants generally would be
increased by the amount of any such dividend. The consequences of such
adjustment generally should not differ if the Warrants are recharacterized as
stock on the date of issuance.

Disposition. Upon a sale, exchange or other taxable disposition of a
Warrant or a share of Common Stock received upon exercise of a Warrant, a holder
generally will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the sum of the amount of cash and
fair market value of any property received upon such sale exchange or
disposition and (ii) the holder's adjusted tax basis in the Warrant or Common
Stock would be long-term capital gain or loss if the Warrant or stock was held
by the holder for more than one year at the time of sale or exchange. The
consequences of a sale or disposition to the holder should not differ (except
potentially as to holding periods, see "-- Exercise") if the Warrants are
recharacterized as stock on the day they are issued.

Lapse. Upon the lapse of a Warrant, a holder will recognize a capital loss
equal to such holder's adjusted tax basis in the Warrant. If the Warrants are
treated as stock on the date of issuance and are never exercised, the treatment
of such warrants generally should not differ.

INFORMATION REPORTING AND BACKUP WITHHOLDING

The backup withholding and information reporting requirements may apply to
certain payments of principal and interest on a Note and to certain payments or
proceeds of the sale or retirement of a Note. The Company, its agent, a broker,
the Trustee or any paying agent, as the case may be, is required to withhold tax
from any payment that is subject to backup withholding at a rate of 31% of such
payment if the holder fails to furnish its taxpayer identification number
(social security number or employer identification number), to certify that such
holder is not subject to backup withholding rules. Certain holders (including,
among others, all corporations) are not subject to the backup withholding and
reporting requirements.

Under current Treasury regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof (in
its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder or has
otherwise established an exemption (provided that neither the Company nor such
agent has actual knowledge that the holder is a U.S. Holder or that the
conditions of any other exemption are not in fact satisfied).

Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.

LEGAL MATTERS

Certain legal matters with respect to the Notes, the Warrants and Warrant
Shares being offered hereby will be passed upon for the Company by Winstead
Sechrest & Minick P.C., Houston, Texas.

EXPERTS

The financial statements of Splitrock Services, Inc. as of December 31,
1997 and for the period from inception (March 5, 1997) to December 31, 1997
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
106
<PAGE> 111

GLOSSARY

ATM........................ Asynchronous Transfer Mode. A communications
standard that provides for information transfer in
the form of fixed-length cells of 53 bytes each.
The ATM format can be used to deliver data, video
and voice traffic at varying rates.

Backbone................... A centralized high-speed network that interconnects
smaller, independent networks.

Bandwidth.................. The number of bits of information which can move
over a communications medium in a given amount of
time; the capacity of a telecommunications
circuit/network to carry data, video and voice
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users in
increments from 56 Kbps to T-3.

CLEC....................... Competitive local exchange carrier.

Dedicated lines............ Telecommunications lines dedicated or reserved for
use by particular customers along predetermined
routes.

Ethernet................... A LAN protocol which supports data transfer rates
of up to 10 Mbps.

Extranet................... An Intranet expanded to include selected business
partners through secured links on the Internet.

56k........................ Equivalent to a single high-speed telephone service
line; capable of transmitting one voice call or 56
Kbps of data. Currently in widespread use by medium
and large businesses primarily for entry level
high-speed data and very low-speed video
applications.

Frame relay................ A communications standard that is optimized for
efficient switching of variable-length data
packets.

Host....................... A computer with direct access to the Internet.

ILEC....................... Incumbent local exchange carrier.

Internet................... An open global network of interconnected
commercial, educational and governmental computer
networks which utilize TCP/IP, a common
communications protocol.

Internet dial access....... Communications circuit that is established by a
switched-circuit connection using the telephone
network.

Intranet................... A TCP/IP based network and Web site which is
securely isolated from the Internet and serves the
internal needs of a company or institution.

IP......................... Internet protocol. Network protocols that allow
computers with different architectures and
operating system software to communicate with other
computers on the Internet.

ISDN....................... Integrated Services Digital Network. A network that
provides digital, voice and data services through a
single medium.

ISP........................ Internet service provider. Companies formed to
provide access to the Internet to consumers and
business customers via local networks.

IXC........................ Interexchange Carrier. A telecommunications company
that provides telecommunications services between
local exchanges on an interstate or intrastate
basis.
107
<PAGE> 112

K or Kbps.................. Kilobits per second. A measure of digital
information transmission rates. One kilobit equals
1,000 bits of digital information. Normally, 10
bits are used for each alpha-numeric character.

LAN........................ Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a
localized environment.

LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges.

Mbps....................... Megabits per second. A measure of digital
information transmission rates. One megabit equals
1,000 kilobits.

Modem...................... A device for transmitting information over an
analog communications channel such as a POTS
telephone circuit.

NAP........................ Network access point.

Network.................... A collection of distributed computers which share
data and information through inter-connected lines
of communication.

NOC........................ Network operations center.

OC-3....................... An optical data communications line capable of
transmitting data at 155 Mbps.

Peering.................... The commercial practice under which nationwide ISPs
exchange each other's traffic, in most cases
without the payment of settlement charges.

POPs....................... Points-of-Presence. An interlinked group of modems,
routers and other computer equipment, located in a
particular city or metropolitan area, that allows a
nearby subscriber to access the Internet through a
local telephone call or using a short-distance
permanent data circuit.

PRI........................ Primary Rate Interface. ISDN interface to primary
rate access.

Protocol................... A formal description of message formats and the
rules two or more machines must follow in order to
communicate.

PSTN....................... Public Switched Telephone Network. That portion of
a local exchange company's network available to all
users generally on a shared basis (i.e., not
dedicated to a particular user).

RBOC....................... Regional Bell Operating Company.

Router..................... A device that receives and transmits data packets
between segments in a network or different
networks.

Server..................... Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. The term also refers to the computer on
which server software runs.

SS7........................ Signaling System No. 7. The current(seventh)
version of the protocol used by switches to
establish a connection or call feature between
central offices.

Standards compliant........ A network or system that is compatible with
established industry standards or protocols.
108
<PAGE> 113

TCP/IP..................... Transmission Control Protocol/Internet Protocol. A
compilation of network and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.

T-1........................ A data communications line capable of transmitting
data at 1.5 Mbps.

T-3 or DS-3................ A data communications line capable of transmitting
data at 45 Mbps.

UNIX....................... A computer operating system for workstations and
personal computers and noted for its portability
and communications functionality.

VPN........................ Virtual Private Network. A network providing secure
transmission of IP traffic through the Internet.

WAN........................ Wide Area Network. A network spanning a wide
geographic area.

Web or World Wide Web...... A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.

109
<PAGE> 114

SPLITROCK SERVICES, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants......................... F-2
Balance Sheet as of December 31, 1997..................... F-3
Statement of Operations for the Period from Inception
(March 5, 1997) Through December 31, 1997.............. F-4
Statement of Stockholders' Equity for the Period from
Inception (March 5, 1997) Through December 31, 1997.... F-5
Statement of Cash Flows for the Period from Inception
(March 5, 1997) Through December 31, 1997.............. F-6
Notes to Financial Statements............................. F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Balance Sheet as of June 30, 1998............... F-14
Condensed Statement of Operations for the Period from
Inception (March 5, 1997) Through June 30, 1997 and for
the Six Months Ended June 30, 1998..................... F-15
Condensed Statement of Stockholders' Equity for the Period
from Inception (March 5, 1997) through June 30, 1997
and for the Six Months Ended June 30, 1998............. F-16
Condensed Statement of Cash Flows for the Period from
Inception (March 5, 1997) Through June 30, 1997 and for
the Six Months Ended June 30, 1998..................... F-17
Notes to Condensed Financial Information.................. F-18
</TABLE>

F-1
<PAGE> 115

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Splitrock Services, Inc.

In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Splitrock Services, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
period from inception (March 5, 1997) to December 31, 1997 in conformity with
generally accepted accounting principles. 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
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Houston, Texas
April 2, 1998

F-2
<PAGE> 116

SPLITROCK SERVICES, INC.

BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 7,710
Restricted cash equivalent................................ 3,472
Accounts receivable....................................... 4,252
Prepaids and other current assets......................... 221
--------
Total current assets.............................. 15,655
Property and equipment, net................................. 38,504
Other assets................................................ 229
--------
$ 54,388
========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of capital lease obligations........... $ 11,010
Accounts payable.......................................... 3,086
Accrued liabilities....................................... 5,775
--------
Total current liabilities......................... 19,871
Capital lease obligations................................... 13,110
Note payable to stockholder................................. 1,000
--------
Total liabilities................................. 33,981
Stockholders' equity:
Common Stock, $.001 par value, 150,000,000 shares
authorized, 76,800,000 shares issued and outstanding... 77
Additional paid-in capital................................ 30,451
Accumulated deficit....................................... (10,121)
--------
Total stockholders' equity........................ 20,407
--------
Commitments and contingencies (Note 6)...................... --
--------
$ 54,388
========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 117

SPLITROCK SERVICES, INC.

STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<S> <C>
Revenue..................................................... $ 22,708
Operating expenses:
Network personnel costs................................... 437
Network operating costs................................... 1,925
Legacy Network costs...................................... 25,341
Severance costs........................................... 463
Selling, general and administrative....................... 1,276
Depreciation and amortization............................. 3,500
--------
32,942
--------
Loss from operations........................................ (10,234)
Other income (expense):
Interest income........................................... 348
Interest expense.......................................... (235)
--------
Loss before income taxes.................................... (10,121)
Provision for income taxes.................................. --
--------
Net loss.................................................... $(10,121)
========
Loss per share -- basic and diluted......................... $ (0.24)
========
Weighted average shares -- basic and diluted................ 42,824
========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 118

SPLITROCK SERVICES, INC.

STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL COMMON
PAR PAID-IN STOCK ACCUMULATED
SHARES VALUE CAPITAL WARRANTS DEFICIT TOTAL
------ ----- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization.............. 28,000 $28 -- -- -- $ 28
Issuances of common stock for cash
of $0.625 per share and
warrants.......................... 32,800 33 $20,467 -- -- 20,500
Conversion of note payable to common
stock at $0.625 per share......... 16,000 16 9,984 -- -- 10,000
Net loss............................ $(10,121) (10,121)
------ --- ------- -------- -------- --------
Balance at December 31, 1997........ 76,800 $77 $30,451 -- $(10,121) $ 20,407
====== === ======= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 119

SPLITROCK SERVICES, INC.

STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,121)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 3,500
Increase in accounts receivable........................ (4,252)
Increase in prepaids and other current assets.......... (221)
Increase in accounts payable and accrued liabilities... 8,861
--------
Net cash used by operating activities.................. (2,233)
--------
Cash flows from investing activities:
Purchase of equipment..................................... (16,969)
Increase in other assets.................................. (229)
--------
Net cash used by investing activities.................. (17,198)
--------
Cash flows from financing activities:
Sale of common stock and warrants......................... 20,528
Proceeds from notes payable to stockholder................ 11,750
Proceeds from sale-leaseback of equipment................. 1,152
Payments on notes payable to stockholder.................. (750)
Payments on capital lease obligations..................... (2,067)
Restriction of cash under credit agreement................ (3,472)
--------
Net cash provided by financing activities.............. 27,141
--------
Increase in cash and cash equivalents....................... 7,710
Cash and cash equivalents:
Beginning of period....................................... --
--------
End of period............................................. $ 7,710
========
Supplemental cash flow information:
Cash paid for interest.................................... $ 235
========
Noncash investing and financing activities:
Assumption of capital lease obligations and other
liabilities (Note 2)................................... $ 5,900
========
Capital lease obligations incurred........................ $ 20,916
========
Conversion of note payable to stockholder into common
stock.................................................. $ 10,000
========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE> 120

SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (MARCH 5, 1997) THROUGH DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Splitrock Services, Inc. (the "Company") was formed as a Texas corporation
on March 5, 1997. The Company was formed to build a nationwide, facilities-based
telecommunications network with the goal of providing telecommunications
services. The Company has designed and is in the process of deploying a network
based on Asynchronous Transfer Mode (ATM) switching technology which it believes
will provide high quality communications services on a flexible multi-service
platform. This platform flexibility will allow the Company to expand its service
offerings to provide fully integrated data, video and voice services and to
incorporate future technological innovations into its Network architecture with
a lower incremental investment than that required by other, less flexible,
networks. On June 24, 1997, the Company entered into a four-year service
agreement to provide Internet dial access services to Prodigy (Note 2).

During 1997, the Company launched the network construction program based on
ATM technology. This program was organized in two phases. As of December 31,
1997, the Company was in Phase I of the Network build which encompassed the
replacement of the network facilities previously owned by Prodigy (Note 2). The
Company anticipates the completion of Phase I in the first half of 1998.

In addition to the development of a new telecommunications network, the
Company has been engaged in recruiting management and operational personnel and
structuring financing for the Company's operations. The development of the
network will require substantial capital expenditures. Management of the Company
believes that funding from affiliates of its stockholders or other sources will
be sufficient to fund the Company's operations for the next twelve months.

The following is a summary of the Company's significant accounting
policies:

Revenue Recognition. The Company recognizes revenue as services are
provided under its agreement with its customer. Prodigy was the Company's
only customer through December 31, 1997. Prodigy may terminate it's
agreement with the Company without payment in the event of certain defaults
by the Company, including documented failures (without cure) to meet
certain network performance standards.

Legacy Network Costs. The Legacy Network refers to certain assets
which the Company acquired from Prodigy on July 1, 1997 related to
Prodigy's existing network infrastructure in order to provide services to
Prodigy while the Splitrock Network is being fully deployed (Note 2).
Legacy Network costs include amounts incurred under a network
infrastructure support agreement with Prodigy. These costs include all
expenses incurred in connection with the operation of the Legacy Network,
including facility fees, line charges, personnel costs, occupancy costs and
equipment maintenance costs.

Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization of new property and equipment, including
assets under capital leases, is provided upon installation using the
straight-line method over the estimated useful lives of three to five
years. Previously used equipment is depreciated over its estimated useful
life of nine months to three years.

Long-Lived Assets. The Company reviews for the impairment of
long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The carrying amount
of a long-lived asset is considered impaired when anticipated undiscounted
cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. The Company believes that no
material impairment exists at December 31, 1997.

Income Taxes. Deferred tax assets and liabilities are determined based
on the temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using the enacted tax
rates in effect in the years in which the differences are expected to
reverse. In estimating

F-7
<PAGE> 121
SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

future tax consequences, all expected future events are considered other
than enactments of changes in the tax law or rates.

Cash and Cash Equivalents. The Company considers highly liquid
investments with an original maturity of three months or less from the date
of purchase to be classified as cash and cash equivalents. The restricted
cash equivalent is a three-month time deposit held as collateral on a
letter of credit.

Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentration of credit risk are primarily cash and
cash equivalents and receivables. The Company's cash investment policies
limit investments to short-term, investment grade instruments with quality
financial institutions. The Company's revenues and its trade receivable
balance for the period ended December 31, 1997 were derived solely from
services provided to Prodigy, the Company's sole customer during this
period. Any interruption of this relationship could adversely affect the
Company. Management believes that the risk of incurring material losses
related to these credit risks are remote.

Net Loss Per Share. In February 1997, Statement of Financial
Accounting Standards No. 128 ("FAS 128") Earnings Per Share was issued. FAS
128 is effective for both interim and annual periods ending after December
15, 1997. The Company adopted the pronouncement for the period ended
December 31, 1997. FAS 128 requires the Company to report both basic
earnings per share, which is based on the weighted average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted average number of common shares outstanding and all dilutive
potential common shares outstanding. At December 31, 1997, options to
acquire 1,880,000 shares of common stock at the exercise price of $0.625
and a warrant to purchase 5,000,000 shares of common stock at $0.625 were
not included in the computation of diluted earnings per share because their
effect is anti-dilutive.

Stock-Based Compensation. The Company has adopted Statement of
Financial Accounting Standards No. 123 ("FAS 123"), Accounting for
Stock-Based Compensation, for disclosure purposes. Under FAS 123, the
Company measures compensation expense for its stock-based employee
compensation plan using the intrinsic value method prescribed in APB No.
25, Accounting for Stock Issued to Employees, and provides disclosure of
the effect of net income as if the fair value-based method prescribed in
FAS 123 has been applied in measuring compensation expense.

Fair Values of Financial Instruments. Due to the short-term nature of
the Company's financial instruments, as well as their interest rates and
terms, management believes the carrying values of the Company's assets and
liabilities approximate their fair values.

Use of Estimates. The preparation of the Company's financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, as well as
disclosures of contingent assets and liabilities. Because of inherent
uncertainties in this process, actual future results could differ from
those expected at the reporting date. Management believes the estimates are
reasonable.

New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, and No. 131, Disclosures about Segments of
an Enterprise and Related Information. In February 1998, the Board issued
Statement of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The Company will adopt
these statements in 1998. As these statements only require additional
disclosures in the Company's financial statements, their adoption will not
have any effect on the Company's financial position or results of
operations.

F-8
<PAGE> 122
SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. PRODIGY TRANSACTIONS

On June 24, 1997, the Company entered a four-year Full Service Agreement
with Prodigy, in which the Company agreed to provide certain network services to
Prodigy from July 1, 1997 through June 30, 2001 for a price per hour of usage as
stipulated, subject to minimum and maximum amounts. Monthly minimum service
commitments set each year under this four-year contract range from $3,000 to
$4,500. Monthly maximum service commitments are based on average usage per
subscriber and the number of subscribers. Prodigy may terminate the Full Service
Agreement without payment in an event of default by the Company; such defaults
include documented failures (without cure) to meet certain network performance
standards. The Company is subject to several financial covenants through June
30, 1999 under this agreement, including the maintenance of at least $5,000 in
net tangible worth. The agreement also allows Prodigy to terminate its
arrangement with the Company at any time upon the payment of a termination
charge.

Also on June 24, 1997, the Company entered into a Definitive Agreement with
Prodigy pursuant to which the Company acquired selected data transmission
equipment from Prodigy. In consideration for the equipment, the Company assumed
approximately $5,900 in equipment lease obligations and other liabilities.

The Company also entered into an agreement with Prodigy in which Prodigy
agreed to provide certain network infrastructure support for the Company for the
period July 1, 1997 through December 31, 1997. The Company incurred expenses of
$25,804 (which includes $463 of severance costs) under this agreement during
1997, of which $5,194 remained payable to Prodigy at December 31, 1997. These
services included the services of selected Prodigy employees and services
provided under vendor arrangements related to the Prodigy network
infrastructure. The costs of these services and other reasonable and customary
charges incurred by Prodigy in connection with the continued operations of the
network during this transition period are reimbursable by the Company. The
Company assumed no contractual liabilities of any services related to Prodigy's
existing network infrastructure as part of the transition agreement.

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Network equipment........................................... $ 3,464
Office and other equipment.................................. 94
Network equipment under construction........................ 12,248
--------
15,806
Less -- accumulated depreciation............................ (103)
--------
Purchased property and equipment, net..................... 15,703
--------
Leased network equipment.................................... 13,648
Leased office and other equipment........................... 388
Leased network equipment under construction................. 12,162
--------
26,198
Less -- accumulated amortization............................ (3,397)
--------
Leased property and equipment, net........................ 22,801
--------
Property and equipment, net................................. $ 38,504
========
</TABLE>

F-9
<PAGE> 123
SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. INDEBTEDNESS

The components of indebtedness are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Capital lease obligations................................... $ 24,120
Note payable to stockholder................................. 1,000
--------
25,120
Less -- current maturities.................................. (11,010)
--------
$ 14,110
========
</TABLE>

Capital leases require payments on a monthly basis over periods ranging
from 24 to 48 months, with implicit interest rates of 9% to 12%.

In December 1997, the Company borrowed $1,000 from a stockholder. The
unsecured note has a stated rate of interest of 9.75% and provides for monthly
interest payments beginning February 1, 1998, with the principal due on demand
after December 31, 1998, and maturing December 31, 2002.

5. INCOME TAXES

A provision for income taxes for the period ended December 31, 1997 has not
been recognized as the Company had operating losses for both tax and financial
reporting purposes. Due to the uncertainty surrounding the timing of realizing
the benefits of its favorable tax attributes in future tax returns, the Company
has recorded a full valuation allowance against its otherwise recognizable net
deferred tax asset.

Deferred tax assets at December 31, 1997 consist of the following:

<TABLE>
<S> <C>
Net operating loss carryforward............................. $ 3,248
Depreciation................................................ 167
Other....................................................... 21
-------
Gross deferred tax assets................................. 3,436
Valuation allowance......................................... (3,436)
-------
Net deferred tax assets................................... $ --
=======
</TABLE>

The Company's net operating loss carryforward of approximately $9,500
expires in 2012. Certain changes in ownership of the Company could result in
limitations on the Company's ability to utilize the losses.

6. COMMITMENTS AND CONTINGENCIES

The Company leases office space, equipment facilities and equipment under
noncancelable operating and capital leases expiring through the year 2002. Rent
expense for noncancelable operating leases amounted to $218 in 1997.

The Company leases telephone lines ("line costs") from competitive local
exchange suppliers, interchange carriers and long distance telephone companies
primarily for access and transport purposes. These line costs are leased under
both cancelable and noncancelable operating leases over periods up to three
years and are included in Legacy Network costs on the statement of operations.
Certain cancellation charges could become applicable upon termination of a
number of these agreements. Line costs incurred during the period from inception
(March 5, 1997) to December 31, 1997 comprise a substantial portion of the
Legacy Network costs.

F-10
<PAGE> 124
SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum payments by year and in the aggregate related to
noncancelable operating and capital leases at December 31, 1997 are:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
<S> <C> <C> <C>
1998.................................................. $12,049 $ 457 $12,506
1999.................................................. 7,893 553 8,446
2000.................................................. 5,548 553 6,101
2001.................................................. 427 565 992
2002.................................................. -- 578 578
------- ------ -------
Total minimum lease payments................ 25,917 $2,706 $28,623
------- ====== =======
Less amount representing interest........... (1,797)
-------
Present value of minimum capital lease payments....... $24,120
=======
</TABLE>

The Company has an agreement to purchase certain network equipment from the
Vendor (Note 9) over an eighteen-month period ending December 31, 1998. Total
commitments remaining under the agreement approximated $9,045 at December 31,
1997.

The Company has an outstanding letter of credit in the amount of $3,472 as
of December 31, 1997. This letter of credit is maintained as security for
performance under a certain capital lease obligation. This letter of credit is
secured by the restricted cash equivalent shown on the balance sheet.

As of December 31, 1997, the Company has an agreement with a
telecommunications company to pay a minimum of $1,266 for network installation
services over a period ending June 30, 1998. Total commitments remaining under
this agreement approximated $1,160 at December 31, 1997.

7. COMMON STOCK EXCHANGE

The Company effected a 1-for-100 stock exchange on June 3, 1997 and a
1-for-10 stock exchange on August 8, 1997. All share amounts included in these
financial statements have been adjusted to reflect the effect of the stock
exchanges.

8. STOCK OPTIONS

The Company's 1997 Incentive Share Plan (the Plan) provides that options to
purchase up to 20,000,000 shares of common stock may be granted to certain
directors, employees or consultants of the Company. Options under the Plan have
a term of ten years and are granted with an exercise price equivalent to market
value at the date of grant. Individual option grants vest over time, based upon
a schedule approved by the Board of Directors, which is generally four years.
All of the Company's common stock options vest automatically upon a change in
control of the Company, as defined.

The following summarizes the activity for the Plan:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Balance, March 5, 1997...................................... -- --
Granted................................................... 1,880,000 $0.625
Exercised................................................. -- --
Canceled.................................................. -- --
--------- ------
Balance, December 31, 1997.................................. 1,880,000 $0.625
</TABLE>

F-11
<PAGE> 125
SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
0.62$5..... 1,880,000 9.58 years $0.625 257,000 $0.625
</TABLE>

The Company has adopted the disclosure-only provisions of FAS No. 123.
Accordingly, no compensation cost has been recognized for fixed options granted
to Company employees. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date for awards in 1997
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
would have been as follows (in thousands):

<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net loss....................................... $(10,141)
Net loss per share -- basic and diluted........ (0.24)
</TABLE>

Options granted in 1997 had weighted-average fair values of $0.077. The Company
used the minimum value method to estimate the fair values of options for the
above pro forma information. For purposes of the minimum value method, the
Company used average U.S. government security interest rates for its risk-free
interest rates, assumed no volatility or future dividends and assumed expected
life of the options of five years in 1997.

9. RELATED PARTY TRANSACTIONS

The Company's chairman of the Board of Directors (the Chairman), who is
also a shareholder of the Company, is the Chief Technical Officer and assistant
vice chairman and stockholder of a vendor (the Vendor) from which the Company
purchased approximately $16,500 in equipment through December 31, 1997.
Remaining commitments pursuant to a purchase agreement with the vendor
approximate $9,045 at December 31, 1997.

The Company also retained the Vendor to perform assembly services related
to the deployment of network equipment to the field. The Company incurred
approximately $1,500 for these services of which approximately $990 were
expensed in 1997.

A stockholder (an affiliate of the Chairman) has agreed to lend up to
$10,000 to the Company for the purchase of certain network equipment. As of
December 31, 1997, this affiliate had loaned $1,000 to the Company. During the
three months ended March 31, 1998 the affiliate made further advances under this
agreement (Note 10).

In September 1997, a wholly-owned subsidiary of a major stockholder of
Prodigy, the Company's sole customer, purchased 20,000,000 shares of the Company
for $0.625 per share and paid $0.1 for a warrant to purchase an additional
5,000,000 shares of the Company through September 18, 1998 for $0.625 per share.

10. SUBSEQUENT EVENTS

In March, 1998, the Company exercised its early purchase option under a
capital lease arrangement with AT&T Capital Corporation. The Company paid $3,455
to liquidate the obligation. Accordingly, the obligation is classified as
current indebtedness as of December 31, 1997.

F-12
<PAGE> 126
SPLITROCK SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In January 1998, the Company borrowed $3,000 from a stockholder. The note
has a stated rate of interest of 9.75% and provides for monthly interest
payments beginning March 1, 1998, with the principal due on demand after
December 31, 1998. The note matures on December 31, 2002. The Company borrowed
$2,000 from the same stockholder in March 1998 on terms substantially the same
as the previous note.

F-13
<PAGE> 127

SPLITROCK SERVICES, INC.

CONDENSED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 5,177
Restricted cash equivalent................................ --
Accounts receivable....................................... 6,238
Prepaids and other current assets......................... 420
-------
Total current assets.............................. 11,835
Property and equipment, net................................. 43,148
Other assets................................................ 2,647
-------
$57,630
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capital leases...................... $ 8,600
Note payable.............................................. 1,477
Accounts payable.......................................... 11,042
Accrued liabilities....................................... 5,013
-------
Total current liabilities......................... 26,132
Capital lease obligations................................... 12,619
Notes payable to stockholder................................ 11,000
-------
Total liabilities................................. 49,751
-------
Stockholders' equity:
Common stock.............................................. 78
Additional paid-in capital................................ 31,550
Accumulated deficit....................................... (23,749)
-------
Total stockholders' equity........................ 7,879
-------
Commitments and contingencies............................... --
-------
$57,630
=======
</TABLE>

The accompanying notes are an integral part of these unaudited condensed
financial statements.

F-14
<PAGE> 128

SPLITROCK SERVICES, INC.

CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 5, 1997) THROUGH SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
----------------------- ----------------
<S> <C> <C>
Revenue................................................. $ -- $ 32,214
Operating Expenses:
Network personnel costs............................... -- 2,156
Network operating costs............................... -- 9,402
Legacy Network costs.................................. -- 27,090
Selling, general and administrative................... 125 1,628
Depreciation and amortization......................... -- 4,907
------- --------
Total operating expenses...................... 125 45,183
------- --------
Loss from operations.................................... (125) (12,969)
Other income (expense):
Interest income....................................... 30 183
Interest expense...................................... -- (842)
------- --------
Loss before income taxes................................ (95) (13,628)
Provision for income taxes.............................. -- --
------- --------
Net loss................................................ $ (95) $(13,628)
======= ========
Loss per share -- basic and diluted..................... $ (0.01) $ (0.18)
======= ========
Weighted average shares -- basic and diluted............ 11,525 76,888
======= ========
</TABLE>

The accompanying notes are an integral part of these unaudited condensed
financial statements.

F-15
<PAGE> 129

SPLITROCK SERVICES, INC.

CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL COMMON
PAR PAID-IN STOCK ACCUMULATED
SHARES VALUE CAPITAL WARRANTS DEFICIT TOTAL
------- ----- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization............. 28,000 $28 $ -- -- $ -- $ 28
Net loss........................... -- -- -- -- (95) (95)
------ --- ------- -------- -------- --------
Balance at June 30, 1997........... 28,000 28 -- -- (95) (95)
Issuances of common stock for cash
of $0.625 per share and
warrants......................... 32,800 33 20,467 -- -- 20,500
Conversion of note payable to
common stock at $0.625 per
share............................ 16,000 16 9,984 -- -- 10,000
Net loss........................... -- -- -- -- (10,026) (10,026)
------ --- ------- -------- -------- --------
Balance at December 31, 1997....... 76,800 77 30,451 -- (10,121) 20,407
Net loss........................... -- -- -- -- (13,628) (13,628)
Stock options exercises............ 1,000 1 1,099 -- -- 1,100
------ --- ------- -------- -------- --------
Balance at June 30, 1998........... 77,800 $78 $31,550 -- $(23,749) $ 7,879
====== === ======= ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these unaudited condensed
financial statements.

F-16
<PAGE> 130

SPLITROCK SERVICES, INC.

CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 5, 1997) THROUGH SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
----------------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $ (95) $(13,628)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization...................... -- 4,907
Changes in operating assets and liabilities
Accounts receivable................................ -- (1,986)
Prepaids and other current assets.................. -- (199)
Accounts payable................................... 92 7,956
Accrued liabilities................................ -- (762)
-------- --------
Net cash used by operating activities......... (3) (3,712)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment.................... (2,078) (5,548)
Increase in other assets.............................. -- (2,166)
-------- --------
Net cash used by investing activities......... (2,078) (7,714)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............ 28 1,100
Borrowings under notes payable........................ -- 1,477
Proceeds from sale-leaseback of equipment............. -- 440
Release of restriction on cash under credit
agreement.......................................... -- 3,472
Principal payments on capital leases.................. -- (7,172)
Borrowings under notes payable to stockholder......... 10,750 10,000
Financing costs incurred.............................. -- (424)
-------- --------
Net cash provided by financing activities..... 10,778 8,893
-------- --------
Net increase (decrease) in cash......................... 8,697 (2,533)
Cash and equivalents at beginning of period............. -- 7,710
-------- --------
Cash and equivalents at end of period................... $ 8,697 $ 5,177
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred.................... $ -- $ 4,055
======== ========
</TABLE>

The accompanying notes are an integral part of these unaudited condensed
financial statements.

F-17
<PAGE> 131

SPLITROCK SERVICES, INC.

NOTES TO CONDENSED FINANCIAL INFORMATION
SIX MONTHS ENDED JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

1. BASIS OF PRESENTATION

The interim financial statements of Splitrock Services, Inc. (the Company)
as of June 30, 1998, for the period from inception (March 5, 1997) through June
30, 1997 and for the six months ended June 30, 1998 are unaudited. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented.

The financial statements presented herein should be read in connection with
the Company's financial statements as of December 31, 1997 and for the period
from Inception (March 5, 1997) to December 31, 1997.

2. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The Company was incorporated in Texas on March 5, 1997 and reincorporated
in Delaware on May 8, 1998.

The Company was formed to build a nationwide, facilities-based
telecommunications network with the goal of providing telecommunications
services on an advanced nationwide network. The Company has designed and is in
the process of deploying a network based on Asychronous Transfer Mode (ATM)
technology which it believes will provide high quality communications services
on a flexible multi-service platform.

During 1997, the Company launched a major network rebuilding program based
on ATM technology. This program was organized in two phases. As of June 30,
1998, the Company had completed Phase I of the network build which encompassed
the buildout of the nationwide ATM backbone and operational points of presence
in 70 metropolitan areas. During the second quarter of 1998, the Company had
begun the Phase II Expansion but no sites in this Phase were operational.

Upon completion of the network build, the Company will offer basic
transport services to other internet service providers and will be positioned to
provide other value-added data, voice and video products to business customers.

Revenue Recognition. The Company recognizes revenue as services are
provided under its agreement with its primary customer. Prodigy was the
Company's major customer (99% of revenue for the six months ended June 30, 1998)
through June 30, 1998, providing substantially all of the Company's revenues.
Prodigy may terminate its agreement with the Company without payment in the
event of certain defaults by the Company, including documented failures (without
cure) to meet certain network performance standards.

Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization of new property and equipment, including assets
under capital leases, is provided upon installation using the straight-line
method over their estimated useful lives of three to five years. Previously used
equipment is depreciated over its estimated useful life of nine months to three
years.

Net Loss Per Share. In February 1997, Financial Accounting Standards No.
128 ("FAS 128") Earnings Per Share was issued. FAS 128 is effective for both
interim and annual periods ending after December 15, 1997. The Company adopted
the pronouncement for all periods presented. FAS 128 requires the Company to

F-18
<PAGE> 132
SPLITROCK SERVICES, INC.

NOTES TO CONDENSED FINANCIAL INFORMATION -- (CONTINUED)

report both basic earnings per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings per share, which is
based on the weighted average number of common shares outstanding and all
dilutive potential common shares outstanding. At June 30, 1998, 3,400,500
options to acquire shares of common stock at the weighted-average exercise price
of $0.77 and a warrant to purchase 5,000,000 shares of common stock at $0.625
were not included in the computation of diluted earnings per share because their
effect is anti-dilutive.

Comprehensive Income. Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"). This Statement establishes standards for reporting and
display of comprehensive income and its components. For the six-month period
ended June 30, 1998 comprehensive net loss, as determined under FAS 130, was the
same as net loss reported in the Statement of Operations.

New Accounting Pronouncement. On June 15, 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due to its expected
limited or no use of derivative instruments, the adoption of FAS 133 will not
have a significant effect on the Company's results of operations or its
financial position.

3. INDEBTEDNESS

Components of indebtedness are summarized as follows:

<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Capital lease obligations................................... $ 21,219
Notes payable to stockholder................................ 11,000
Notes payable............................................... 1,477
--------
33,696
Less -- current maturities.................................. (10,077)
--------
$ 23,619
========
</TABLE>

In January 1998, the Company borrowed $3,000 from a stockholder. The note
has a stated rate of interest of 9.75% and provides for monthly interest
payments beginning March 1, 1998, with the principal due on demand after
December 31, 1998. The note matures on December 31, 2002. The Company borrowed
$2,000 and $5,000 from the same stockholder in March 1998 and June 1998,
respectively, on terms substantially the same as the previous note. The Notes
were refinanced in July, 1998 in connection with the Unit Offering.

In March 1998, the Company exercised its early purchase option under a
capital lease arrangement with AT&T Capital Corporation. The Company paid $3,455
to liquidate the obligation.

In April 1998, the Company entered into an agreement with a
telecommunications equipment supplier to obtain equipment and services for the
deployment of 99 points of presence. The Company obtained a $5,000 credit
facility from the same company (the Lender) to be used solely for the purchase
of such equipment and services. Borrowings on the credit facility bear an annual
rate of interest at 11%, with interest payable monthly, commencing on June 1,
1998. All principal and accrued interest is due the earlier of (i) the date the
Company sells any of its equity securities or debt instruments (other than
issuances to officers, directors, employees or

F-19
<PAGE> 133
SPLITROCK SERVICES, INC.

NOTES TO CONDENSED FINANCIAL INFORMATION -- (CONTINUED)

consultants in the ordinary course of business) and the net proceeds to the
Company are in an aggregate amount equal to or greater than the then outstanding
principal amount of the credit facility or (ii) October 30, 1998. The Lender may
extend the maturity to April 1, 2001 subject to the issuance of a transferable,
noncallable stock purchase warrant giving the Lender the right to purchase
1,111,000 shares of the Company's common stock at an exercise price based upon
the lower of $1.00 per share or the lowest price at which shares of common stock
are issued during the period from the date the warrants are issued to the date
the warrants expire (eight years following issuance). Upon extension, the credit
facility will have a stated rate of interest of LIBOR plus 5.75% and a default
rate of interest on all amounts not paid when due of an additional 2%. The
extended facility provides for monthly interest payments through January 2,
1999, with the principal due in ten equal consecutive quarterly installments
commencing on January 2, 1999. At June 30, 1998, the Company had borrowed $1,477
under this credit facility presented as a note payable on the face of the
balance sheet.

4. INCOME TAXES

A provision for income taxes for the period from inception (March 5, 1997)
to June 30, 1997 or for the six months ended June 30, 1998 has not been
recognized as the Company had operating losses for both tax and financial
reporting purposes. Certain changes in the ownership of the Company could result
in limitations on the Company's ability to utilize the losses.

5. EQUITY

A director of the Company exercised an option to purchase one million
shares of Company common stock for $1,100 in June 1998.

6. SUBSEQUENT EVENTS

On July 24, 1998, the Company sold 261,000 Units consisting of $261,000
principal amount of 11 3/4% Senior Notes due 2008 and Warrants to purchase
2,642,613 shares of common stock (the Offering). In connection with the
Offering, the Company repaid the amount outstanding, $1,477, under the $5,000
credit facility discussed above and refinanced $11,000 of indebtedness owed to a
stockholder. In connection with the refinancing, the stockholder received 11,000
Units in the Offering. The net proceeds to the Company, after Offering expenses,
approximated $240,400.

F-20
<PAGE> 134

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING MEMORANDUM, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS OFFERING MEMORANDUM NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 1
Risk Factors.......................... 12
Use of Proceeds....................... 26
Capitalization........................ 27
Selected Historical and Unaudited Pro
Forma Financial Data................ 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Industry Overview..................... 44
Business.............................. 47
Management............................ 63
Principal Stockholders................ 69
Selling Holders....................... 70
Plan of Distribution.................. 71
Description of Certain Indebtedness... 72
Description of the Warrants........... 73
Description of Capital Stock.......... 77
Description of the Notes.............. 78
Certain Federal Income Tax
Considerations...................... 104
Legal Matters......................... 106
Experts............................... 106
Glossary.............................. 107
Index to Financial Statements......... F-1
</TABLE>

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

UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.

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

================================================================================
[SPLITROCK LOGO APPEARS HERE]

SPLITROCK SERVICES, INC.

$11,000,000
11 3/4% SERIES B SENIOR NOTES
DUE 2008

2,642,613
SHARES OF COMMON STOCK
($.001 PAR VALUE)
ISSUABLE UPON
EXERCISE OF WARRANTS

261,000 WARRANTS
TO PURCHASE SHARES OF
COMMON STOCK

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

, 1998

================================================================================
<PAGE> 135

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses of this offering will be paid by Splitrock Services, Inc.,
(the "Registrant") and are estimated as follows:

<TABLE>
<S> <C>
SEC registration fee........................................ $ 3,337
Blue sky fees............................................... 10,000
Printing.................................................... 50,000
Legal fees and expenses..................................... 50,000
Accounting fees and expenses................................ 50,000
Trustee fees................................................ 5,000
Miscellaneous............................................... 11,663
--------
Total............................................. $180,000
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Splitrock is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or enterprise, including an
employee benefit plan. The indemnity may in specified circumstances include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding. The termination of any action, suit, or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful. Section 145 also provides that to the
extent that a director, officer, employee or agent of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter
therein, the corporation must indemnify him against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith. Section 145 further provides that any indemnification (unless ordered
by a court) must be made only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth above. Section 145 further provides that a corporation may
purchase and maintain liability insurance covering such liability and expenses
under the provisions described in the preceding paragraphs. Splitrock maintains
liability insurance covering its directors and officers.

Section 102(b)(7) of the General Corporation Law of the State of Delaware
permits a Delaware corporation to include a provision in its Certificate of
Incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the General Corporation Law of the State of
Delaware (providing for liability of directors for unlawful payment of dividends
or unlawful stock purchases or redemptions), or (iv) for any transaction from
which the director derived an improper personal benefit. Article VIII of
Splitrock's Certificate of Incorporation eliminates liability of directors of
Splitrock to Splitrock or its shareholders for monetary damages for breach of
fiduciary duty to the extent permitted by Section 102(b)(7) of the General
Corporation Law of the State of Delaware.

II-1
<PAGE> 136

Article IX of Splitrock's Certificate of Incorporation requires Splitrock
to indemnify Splitrock's directors and officers to the extent permitted under
Section 145.

Article VII of Splitrock's Bylaws also provides that Splitrock shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding whether
civil, criminal, administrative, or investigative, by reason of the fact that he
is or was a director or officer of Splitrock, or is or was serving at the
request of Splitrock as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise, in
accordance with provisions corresponding to Section 145. Further, Splitrock's
Bylaws provide that any person, other than an officer or director, who was or is
a party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, by reason of the fact that he is or was an employee or agent
of Splitrock, or was serving at the request of Splitrock as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, or
other enterprise, and who desires indemnification shall make written application
for such indemnification to the Board of Directors for its determination that
indemnification is appropriate, and if so, to what extent.

Splitrock's Bylaws also provide that Splitrock may indemnify, to the extent
of the provisions set forth therein, any person other than an officer or
director who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was an employee or agent of Splitrock, or was serving at the request of
Splitrock as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, if such person makes
written application for such indemnification to the Splitrock Board and the
Splitrock Board determines that indemnification is appropriate and the extent
thereof. Splitrock's Bylaws further provide that the indemnification described
therein is not exclusive, and shall not exclude any other rights to which the
person seeking to be indemnified may be entitled under statute, any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in his official capacity and to his action in another capacity
while holding such office.

The above discussion of Section 145 and of Splitrock's Certificate of
Incorporation and Bylaws is not intended to be exhaustive and is respectively
qualified in its entirety by such statute, the Certificate of Incorporation and
the By-laws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In March 1997, the Company issued shares to its founders, William R. Wilson
and Kwok L. Li, in the amounts of 600 and 400 shares of common stock,
respectively (600,000 and 400,000 shares following two subsequent stock splits).
In June of 1997 Mr. Wilson and Mr. Li were each granted additional shares for
services rendered in the amounts of 1,640,000 shares and 1,060,000 shares,
respectively (16,400,000 and 10,600,000 on a post-split basis).

In August 1997, Linsang acquired 12,000,000 shares in a private transaction
for $7,500,000 and converted a $10,000,000 note for an additional 16,000,000
shares. In that same month, Roy Wilkens purchased 800,000 shares in a private
transaction for $500,000.

In September 1997, Orient Star acquired 20,000,000 shares and a warrant to
acquire an additional 5,000,000 shares exercisable on or before September 18,
1998 in a private transaction for $12,500,100.

In June 1998, Clark McLeod acquired 1,000,000 shares pursuant to the
exercise of an option issued in a private offering at an aggregate exercise
price of $1,100,000.

On July 24, 1998, the Company offered and sold 261,000 Units to the Initial
Purchaser pursuant to the Unit Offering, of which 250,000 Unites were resold to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and 11,000 Units to Linsang, a stockholder of the Company. Each Unit
consisted of an 11 3/4% Senior Note due 2008 ("Senior Notes") in the principal
amount of $1,000 and a Warrant to purchase 10.125 shares of Common Stock of the
Company. On August 12, 1998, the Company filed an exchange offer registration
statement offering to exchange a substantially similar 11 3/4% Series B Senior
Note due 2008 ("Series B Notes") for each outstanding 11 3/4% Senior Note due
2008 held by a
II-2
<PAGE> 137

qualified institutional buyer. In 1998, Linsang exchanged its Senior
Notes for Series B Notes in a private offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following exhibits are filed herewith or incorporated herein by
reference.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 -- Purchase Agreement dated July 21, 1998 between the
Company and Chase Securities Inc.
*2.1 -- Plan of Merger effective May 8, 1998 between the Company
and Splitrock Services, Inc., a Texas corporation.
*3.1 -- Certificate of Incorporation of the Company filed with
the Secretary of State of the State of Delaware on April
15, 1998.
*3.2 -- Bylaws of the Company, adopted April 27, 1998.
4.1 -- Specimen 11 3/4% Series B Senior Note due 2008 (to be
filed by amendment).
4.2 -- Escrow and Disbursement Agreement dated as of July 24,
1998, among The Chase Manhattan Bank (as escrow agent),
Bank of Montreal Trust Company, and the Company.
*4.3 -- Indenture dated as of July 24, 1998, between Bank of
Montreal Trust Company (as trustee) and the Company,
including table of contents and cross-reference sheet.
*4.4 -- Exchange and Registration Rights Agreement dated as of
July 24, 1998 between Chase Securities Inc. and the
Company.
4.5 -- Warrant Agreement dated as of July 29, 1998 between the
Company and Bank of Montreal Trust Company.
5 -- Opinion of Winstead Sechrest & Minick P.C.
*10.1 -- Splitrock Full Service Agreement dated as of June 24,
1997 between the Company and Prodigy Services
Corporation.
*10.2 -- Definitive Agreement dated as of June 24, 1997 by and
between Prodigy Services Corporation and the Company.
*10.3 -- Transition Services Agreement dated as of June 24, 1997
between Prodigy Services Corporation and the Company.
*10.4 -- Network Implementation Agreement effective as of April
23, 1998 by and between the Company and Ericsson, Inc.
*10.5 -- Security Agreement dated as of April 30, 1998 by and
between the Company and Ericsson.
*10.6 -- Yurie Equipment Purchase Agreement effective July 1, 1997
between the Company and Yurie.
*10.7 -- Customer Service Agreement effective April 1, 1998
between the Company and IBM Global Services Network.
*10.8 -- IBM Customer Agreement effective April 1, 1998 between
the Company and International Business Machines
Corporation.
*10.9 -- Product Support Services Agreement dated February 27,
1998, together with Addendum effective March 1, 1998.
*10.10 -- Option Agreement dated May 28, 1998 between the Company
and Clark McLeod.
*10.11 -- Form of Notes between the Company and Linsang.
</TABLE>

II-3
<PAGE> 138

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.12 -- Warrant Agreement dated as of July 24, 1998 between the
Company and Bank of Montreal Trust Company, as Warrant
Agent.
*10.13 -- 1997 Incentive Share Plan.
10.14 -- Employment Agreement effective September 1, 1997 between
William R. Wilson and the Company.
*10.15 -- Employment Agreement effective September 1, 1997 between
Patrick J. McGettigan, Jr. and the Company.
*10.16 -- Option to subscribe to purchase 5,000,000 shares of
common stock of the Company for $3.1 million, registered
in the name of Orient Star.
10.17 -- ATM Backbone Services Agreement effective April 28, 1998
between the Company and Network Two Communications Group.
12 -- Statement re computation of ratios.
23.1 -- Consent of Winstead Sechrest & Minick P.C. (set forth in
Exhibit 5).
23.2 -- Consent of PricewaterhouseCoopers LLP.
24 -- Powers of Attorney(4).
*25 -- Statement of Eligibility of Bank of Montreal Trust
Company.
27 -- Financial Data Schedule for the six months ended June 30,
1998.
</TABLE>

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

* Incorporated by reference to the Company's Registration Statement on Form S-4,
File No. 333-61293.

(b) Financial Statement Schedule:

Schedule II: Valuation and Qualifying Accounts (in thousands)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax Valuation Allowance:
Period from inception (March 5,
1997) to December 31, 1997..... $ -- $3,436 $ -- $3,436
Six months ended June 30, 1998.... $3,436 $4,627 $ -- $8,063
</TABLE>

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; provided, however, that paragraph (a)(1)(i) and
(a)(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of
the Exchange Act that are incorporated by reference in the registration
statement.

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

II-4
<PAGE> 139

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

(i) The undersigned registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form. Every prospectus (i) that is filed in accordance with the
undertaking above or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining liability under the Securities Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(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 provisions described in Item 20 above, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-5
<PAGE> 140

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of The
Woodlands, the State of Texas, on September 4, 1998.

SPLITROCK SERVICES, INC.

By: /s/ WILLIAM R. WILSON
----------------------------------
William R. Wilson
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

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

/s/ WILLIAM R. WILSON President, Chief Executive September 4, 1998
- ----------------------------------------------------- Officer and Director
(William R. Wilson) (Principal Executive
Officer)

/s/ JAMES D. LONG Senior Vice President, Chief September 4, 1998
- ----------------------------------------------------- Financial Officer and
(James D. Long) Director (Principal
Accounting Officer)

/s/ KWOK L. LI Chairman of the Board, September 4, 1998
- ----------------------------------------------------- Director
(Kwok L. Li)

/s/ CLARK MCLEOD Director September 4, 1998
- -----------------------------------------------------
(Clark McLeod)

/s/ SAMER SALAMEH Director September 4, 1998
- -----------------------------------------------------
(Samer Salameh)

/s/ ROY A. WILKENS Director September 4, 1998
- -----------------------------------------------------
(Roy A. Wilkens)
</TABLE>

II-6
<PAGE> 141

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14 -- Employment Agreement effective September 1, 1997 between
William R. Wilson and the Company.
*10.15 -- Employment Agreement effective September 1, 1997 between
Patrick J. McGettigan, Jr. and the Company.
*10.16 -- Option to subscribe to purchase 5,000,000 shares of
common stock of the Company for $3.1 million, registered
in the name of Orient Star.
10.17 -- ATM Backbone Services Agreement effective April 28, 1998
between the Company and Network Two Communications Group.
12 -- Statement re computation of ratios.
23.1 -- Consent of Winstead Sechrest & Minick P.C. (set forth in
Exhibit 5).
23.2 -- Consent of PricewaterhouseCoopers LLP.
24 -- Powers of Attorney(4).
*25 -- Statement of Eligibility of Bank of Montreal Trust
Company.
27 -- Financial Data Schedule for the six months ended June 30,
1998.
</TABLE>

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

* Incorporated by reference to the Company's Registration Statement on Form S-4,
File No. 333-61293.

<PAGE> 1

EXHIBIT 4.2

ESCROW AND DISBURSEMENT AGREEMENT

This ESCROW AND DISBURSEMENT AGREEMENT ("Agreement"),
dated as of July 24, 1998 is entered into by and among THE CHASE MANHATTAN
BANK, as escrow agent (together with any Subcustodian (as defined in Section
2(a) below), "Escrow Agent"), BANK OF MONTREAL TRUST COMPANY, as trustee for
the benefit of the holders of the Notes (as defined below) under the Indenture
(as defined below) (the "Trustee"), and SPLITROCK SERVICES, INC., a Delaware
corporation (the "Company").

RECITALS

A. Pursuant to that certain Indenture dated as
of July 24, 1998, by and among the Company and the Trustee
(the "Indenture"), the Company has issued $261,000,000
aggregate principal amount of its 11 3/4% Senior Notes due
2008 (together with any other Securities issued under the
Indenture, including in connection with a Registered Exchange
Offer, the "Notes").

B. The parties are entering into this Agreement
to set forth the conditions upon which, and the manner in
which, funds will be disbursed from the Escrow Account to be
established pursuant to this Agreement and released from the
security interest and lien described in Section 6(a) of this
Agreement.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

1. Defined Terms. Capitalized terms used herein but not defined
herein shall have the meanings given in the Indenture. In addition to any
other defined terms used herein, the following terms shall constitute defined
terms for purposes of this Agreement and shall have the meanings set forth
below:

"Acceptable Replacement Escrow Agent" means a
corporation organized and doing business under the laws of the United States of
America or of any state thereof authorized under such laws to exercise
corporate trustee power, subject to supervision or examination by federal or
state authority and having a combined capital and surplus of at least $100
million as set forth in its most recent published annual report of condition.

"Available Funds" means (A) the sum of (i) the
Initial Escrow Amount and (ii) interest and other amounts earned, if any, or
dividends paid on the funds in the Escrow Account (including holdings of
Temporary Cash Investments), less (B) the aggregate disbursements previously
made pursuant to this Agreement.

"Escrow Account" means the escrow account established
pursuant to Section 2 hereof.
<PAGE> 2
"Escrow Account Statement" shall have the meaning
given in Section 2(g) hereof.

"Escrow Agent" has the meaning set forth in Section
2(a) hereof.

"Escrow Collateral" shall have the meaning given in
Section 6(a) hereof.

"Initial Escrow Amount" means $56,604,237.20.

"Payment Notice and Disbursement Request" means a
notice sent by the Trustee to Escrow Agent ordering a disbursement of funds
from the Escrow Account, in substantially the form of Exhibit A hereto. Each
Payment Notice and Disbursement Request shall be signed by an officer of the
Trustee whose signature appears on a Certificate of Incumbency, as defined in
Section 2(i), that has been provided to the Escrow Agent.

2. Escrow Account, Escrow Agent.

(a) Appointment of Escrow Agent. The Trustee and the Company
hereby appoint THE CHASE MANHATTAN BANK, and THE CHASE MANHATTAN BANK hereby
accepts appointment, as escrow agent ("Escrow Agent") under the terms and
conditions of this Agreement. The term "Escrow Agent" shall be deemed to
include any successor to, or subcustodian located in the State of New York
("Subcustodian") appointed by, Escrow Agent.

(b) Establishment of Escrow Account.

(i) Concurrently with the execution and delivery
hereof, Escrow Agent shall establish the Escrow Account at the office of Escrow
Agent or Subcustodian in New York. All funds and Temporary Cash Investments
accepted by Escrow Agent pursuant to this Agreement shall be held for the
exclusive benefit of the Trustee, for the ratable benefit of the holders of the
Notes. All such funds and Temporary Cash Investments shall be held in the
Escrow Account until disbursed in accordance with the terms hereof. The Escrow
Account, and the funds and any permitted Temporary Cash Investments and
proceeds held therein by Escrow Agent, shall be deemed to be under the sole
dominion and control of the Trustee for the ratable benefit of the holders of
the Notes and all such funds and Temporary Cash Investments shall be held by
Escrow Agent separate and apart from all other funds or investments of or held
by Escrow Agent, subject to Section 5 hereof. Concurrently with the execution
and delivery hereof, the Company shall deliver the Initial Escrow Amount in
cash or Temporary Cash Investments to Escrow Agent for deposit into the Escrow
Account against Escrow Agent's written acknowledgment and receipt of the
Initial Escrow Amount. Escrow Agent hereby acknowledges the security interest
in the Escrow Collateral in favor of the Trustee as a secured party for the
ratable benefit of the holders of the Notes. Escrow Agent does not have any
interest in the Escrow Collateral except as escrow holder for the benefit of
the Trustee for the ratable benefit of the holders of the Notes. The parties
acknowledge that this Agreement is intended to establish control of the Escrow
Account and the Escrow Collateral in favor of the Trustee for the ratable
benefit of the holders of the Notes in accordance and for purposes of Sections
8-106 and 9-115 of the Uniform Commercial Code (as defined in the Indenture).
The parties agree that no other person shall be granted such control.

(ii) The Company shall pay or reimburse Escrow
Agent upon request for any transfer taxes or other taxes, fees, charges or
expenses relating to the Escrow Collateral incurred

2
<PAGE> 3
in connection herewith and shall indemnify and hold harmless Escrow Agent from
any amounts that it is obligated to pay in the way of such taxes, fees, charges
or expenses. Any payments of income from the Escrow Account shall be subject
to withholding regulations then in force with respect to United States taxes.
The parties hereto will provide Escrow Agent with appropriate W-9 forms for tax
identification number certifications, or W-8 forms for non-resident alien
certifications. It is understood that the Company shall be responsible for
reporting and paying taxes on all income earned on investment of funds which
are part of the Escrow Collateral. This paragraph shall survive
notwithstanding any termination of this Agreement or the earlier resignation or
removal of Escrow Agent.

(iii) Escrow Agent hereby confirms that (i) it has
established the Escrow Account, (ii) it will hold (a) the Escrow Account and
any and all cash and Temporary Cash Investments (whether certificated or
uncertificated), now or hereafter held in or constituting part of or relating
to such Escrow Account, (b) all related stock and bond powers, certificates and
instruments held in the Escrow Account and all replacements, substitutions,
interest, cash and stock dividends, warrants, options, money, instruments,
documents, goods, chattel paper, accounts, general intangibles, deposit
accounts, partnership and limited liability company interests, and other
property and rights of any nature paid, accrued, received, receivable or
distributed with respect thereto from time to time, and (c) with respect to the
foregoing, all products and proceeds thereof, (iii) the Escrow Account is a
"securities account" as such term is defined in Section 8-501(a) of the Uniform
Commercial Code, (iv) each item of property (including securities) credited to
the Escrow Account shall be treated as a "financial asset" within the meaning
of Section 8-102 of the Uniform Commercial Code, (v) all property (including
securities) delivered to it will be promptly credited to the Escrow Account and
(vi) all property (including securities) underlying any financial assets
credited to the Escrow Account shall be registered in the name of the Trustee
or Escrow Agent, endorsed to the Trustee, Escrow Agent or in blank or credited
to another securities account maintained in the name of Escrow Agent and in no
case will any financial asset credited to the Escrow Account be registered in
the name of the Company, payable to the order of the Company or specially
endorsed to the Company. Escrow Agent shall receive and hold in the Escrow
Account all Escrow Collateral purchased from or through Escrow Agent with
assets in the Escrow Account and record or credit all such Escrow Collateral in
the name of "Bank of Montreal Trust Company, as Trustee under the Indenture
dated as of July 24, 1998" or in the name of Escrow Agent and Escrow Agent
shall collect all income and all proceeds of sales or other dispositions of
such Escrow Collateral and deposit the same in the Escrow Account.

(i) The Company shall pay to Escrow Agent from
time to time such compensation for its services as may be agreed upon by Escrow
Agent and the Company from time to time. The Company shall reimburse Escrow
Agent upon request for all reasonable out-of-pocket expenses incurred by it,
including costs of collections, in addition to the compensation for its
services. Such expenses shall include the compensation and expenses,
disbursements and advances of Escrow Agent's agents, counsel, accountants and
experts.

(ii) To the extent not paid by the Company when
due, Escrow Agent shall be entitled to disburse from the Escrow Account upon
written permission from the Trustee all amounts due to Escrow Agent as
compensation for services to be performed by Escrow Agent under this Agreement.

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<PAGE> 4
(d) Investment of Funds in Escrow Account. Funds deposited in the
Escrow Account shall be invested and reinvested upon the following terms and
conditions:

(i) Acceptable Investments. Funds deposited in
the Escrow Account (including proceeds of any Temporary Cash Investments at
maturity and interest and other earnings paid on any such investments) shall be
invested by Escrow Agent in Temporary Cash Investments in accordance with the
Company's written instructions to Escrow Agent accompanied by a certification
of the Company that such investments are in accordance with the terms of this
paragraph. The Company shall so instruct Escrow Agent in a manner such that
the Company in its sole discretion determines at such time is in accordance
with the Indenture and will generate sufficient funds available without any
further deposit by the Company of funds or securities into the Escrow Account
(other than the reinvestment of funds in the form of cash or Temporary Cash
Investments as Temporary Cash Investments mature) to cover all interest due on
the outstanding Notes, as such interest becomes due, for each Interest Payment
Date occurring from the Closing Date and ending on (and including) the fourth
such Interest Payment Date. Any Temporary Cash Investments constituting Escrow
Collateral maintained with the Federal Reserve Bank shall be transferred to a
book-entry account in the name of Escrow Agent, for the benefit of the Trustee
for the ratable benefit of the holders of the Notes, (subject to Sections 3 and
Section 5 hereof). Escrow Agent shall have no responsibility for determining
whether funds held in the Escrow Account shall have been invested in such a
manner so as to comply with the requirements of the second sentence of this
clause (i) or the Indenture, and shall have no responsibility for, and the
Company indemnifies and holds harmless Escrow Agent, its officers, directors,
agents and employees from any liability in connection with, any gain or loss on
any investment made pursuant to this clause (i) or the lack of sufficient funds
available in the Escrow Account to cover all interest or other amounts due on
any Interest Payment Date or otherwise.

(ii) Security Interest in Investments. No
investment of funds in the Escrow Account shall be made unless the Company has
certified in writing to Escrow Agent upon advice of legal counsel that, upon
such investment, the Trustee will have a valid and perfected first priority
security interest in the applicable investment (such advice of legal counsel
relating solely to the manner of perfecting a security interest in a particular
type of investment, but not to whether such perfection has been achieved in the
instance). A certificate as to a class of investments need not be issued with
respect to individual investments in securities in that class if the
certificate applicable to the class remains accurate with respect to such
individual investments, which continued accuracy Escrow Agent may conclusively
assume. When and if the Indenture is qualified under the Trust Indenture Act
of 1939, as amended (the "TIA"), to the extent, if any, that Section 314(b) of
the TIA is applicable, on such date and on each annual anniversary of such date
until the date upon which the balance of the Available Funds shall have been
reduced to zero, each of the Trustee and Escrow Agent shall receive an opinion
of counsel to the Company, dated each such date as applicable, which opinion
shall meet the requirements of Section 314(b) of the TIA.

(iii) Interest and Dividends. Subject to the
security interest granted therein for the benefit of the Trustee for the
ratable benefit of the holders of the Notes, and subject to the other terms and
conditions of this Agreement, all interest and other amounts earned and
dividends paid on funds invested in Temporary Cash Investments in accordance
with the written instructions of the Company shall be deposited in the Escrow
Account, and commingled with the funds therein, for the exclusive benefit of
the Trustee for the ratable benefit of the holders of the Notes (subject to
Sections 3 and 5 hereof) and shall be reinvested in accordance with the terms
hereof at the Company's written instruction and subject to disbursement as
provided herein.

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<PAGE> 5
(e) Limitation on Escrow Agent's Responsibilities.

(i) Escrow Agent's duties and responsibilities
shall be limited to those expressly set forth in this Agreement. Escrow Agent
shall not be subject to, or obligated to recognize, any agreement other than
this Agreement to which the Company, the Trustee, or either of them may be a
party. References in this Agreement to any such agreement are for
identification and definitional purposes only.

(ii) Escrow Agent shall have no obligation with
respect to the Escrow Account other than to follow faithfully instructions
contained in this Agreement or delivered to Escrow Agent in accordance with
this Agreement. Escrow Agent may conclusively rely and act upon any written
notice, instruction, direction, request, waiver, consent, receipt, or other
paper or document ("Instructions") which it believes in good faith to be
genuine and what it purports to be. Escrow Agent shall be subject to no
liability with respect to the form, execution, or validity of any such
Instruction. Escrow Agent shall not be liable for verifying the accuracy of
any certifications made by the Company or the Trustee, including without
limitation, any certifications made in any Payment Notice and Disbursement
Request.

(iii) Escrow Agent shall not be liable for any
error of judgment, or for any act done or step taken or omitted by it in good
faith, or for any mistake of fact or law, or for doing anything which, in good
faith, it may do or refrain from doing in connection with the Escrow Account,
except in each case in the event of Escrow Agent's gross negligence or willful
misconduct.

(f) Substitution of Escrow Agent.

(i) The Company shall have the right to cause
Escrow Agent to be relieved of its duties hereunder and to select a substitute
escrow agent to serve hereunder (provided such substitute escrow agent is an
Acceptable Replacement Escrow Agent), upon the expiration of thirty (30) days
following delivery of written notice of substitution to Escrow Agent and the
Trustee. Upon selection of such substitute escrow agent, such substitute
escrow agent and the parties hereto other than the substituted escrow agent
shall enter into an agreement substantially identical to this Agreement and,
thereafter, Escrow Agent shall be relieved of its duties and obligations to
perform hereunder, except that Escrow Agent shall transfer to the substitute
escrow agent upon request therefor all funds and Temporary Cash Investments
maintained by Escrow Agent hereunder and copies of all books, records, plans
and other documents in Escrow Agent's possession relating to such funds or
Temporary Cash Investments or this Agreement.

(ii) Escrow Agent, or any substitute escrow agent,
may at any time resign and be discharged of its duties and obligations under
this Agreement by giving at least thirty (30) days' notice to the Company and
the Trustee. The Company shall appoint an Acceptable Replacement Escrow Agent
as substitute escrow agent prior to the effective date of such resignation.

(iii) If the Company fails to appoint a substitute
escrow agent as required under paragraph (ii) above, Escrow Agent shall deliver
all assets held in the Escrow Account to an Acceptable Replacement Escrow Agent
of either its choosing or as appointed by a court upon application therefor, or
to a court as directed.

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<PAGE> 6
(iv) Escrow Agent shall be discharged from any
further duties under this Agreement upon its transfer of the assets held in the
Escrow Account to an Acceptable Replacement Escrow Agent.

(g) Escrow Account Statement. Escrow Agent shall deliver to the
Company and the Trustee a monthly statement setting forth with reasonable
particularity the Escrow Collateral then held by Escrow Agent, and the manner
in which the Escrow Collateral is invested (the "Escrow Account Statement").
The books and records of Escrow Agent with respect to the Escrow Account shall
be open to inspection and audit at reasonable times during reasonable business
hours by the Trustee and the Company by their respective representatives. The
parties hereto irrevocably instruct Escrow Agent that on the first date upon
which the balance in the Escrow Account (including the holdings of all
Temporary Cash Investments) is reduced to zero, Escrow Agent shall deliver to
the Company and to the Trustee a notice that the balance in the Escrow Account
has been reduced to zero.

(h) Other Powers of Escrow Agent.

(i) Escrow Agent may register any investments
held by the Escrow Account in its nominee name without increase or decrease of
liability.

(ii) Escrow Agent may consult with and obtain
advice from legal counsel in the event of any dispute or question as to the
construction of any of the provisions of this Agreement or any of Escrow
Agent's duties under this Agreement, and Escrow Agent shall incur no liability
in acting in good faith in accordance with the advice of such counsel. The
reasonable fees for consultation with such counsel shall be a proper expense
chargeable to the Company, and if the Company does not reimburse Escrow Agent
for such reasonable fees, to the Escrow Account upon written permission of the
Trustee, provided that Escrow Agent provides the Company with prior written
notice of any such charge.

(i) Incumbency Certificate. The Company and the Trustee each
shall provide a certificate (a "Certificate of Incumbency") to Escrow Agent as
to the incumbency and signatures of those individuals authorized to provide
from time to time instructions relating to the Escrow Account or to execute
documents to be provided to Escrow Agent. The Company and the Trustee also
shall notify Escrow Agent of any changes to such a certificate. Escrow Agent
may conclusively rely on the accuracy and completeness of any such certificate
unless and until it has received an acceptable replacement certificate. All
certificates provided under this Section 2(i) shall be executed by the
applicable party's corporate secretary or assistant secretary or, if the party
does not have a corporate secretary or assistant secretary, by an authorized
officer.

3. Disbursements.

(a) Disbursements. To the extent that there are sufficient funds
in the Escrow Account, Escrow Agent shall disburse to the Trustee for payment
to the Holders of the Notes at or before 11:00 a.m. New York City time on the
day of each Interest Payment Date described in Section 2(d)(i) hereof the
amount specified in a Payment Notice and Disbursement Request in substantially
the form of Exhibit A hereto. Such Payment Notice and Disbursement Request
shall be provided to Escrow Agent at least two Business Days prior to such
Interest Payment Date. Escrow Agent shall have no obligation to make any
payment or disbursement to the extent, if any, that there are insufficient
funds in the Escrow Account.

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<PAGE> 7
(b) Retired Notes. In the event that prior to the fourth Interest
Payment Date a portion of the Notes has been retired by the Company and
submitted to the Trustee for cancellation and there is no Default or Event of
Default under the Indenture, funds representing interest that would have been
due on such retired Notes through and including the fourth Interest Payment
Date less any amounts due to Escrow Agent shall, upon receipt of a Payment
Notice and Disbursement Request in substantially the form of Exhibit A attached
hereto, be paid to the Company. The Trustee shall provide such order to Escrow
Agent (i) upon receipt of notice of similar effect from, and certification of
such retirement by, the Company, which notice and certification shall be
provided to Escrow Agent and (ii) upon the Company's compliance with the
release of collateral provisions of the TIA to the extent applicable.

(c) Excess Amounts. Notwithstanding anything in this Agreement to
the contrary, so long as no Default or Event of Default shall have occurred and
be continuing, at such time as all interest due on the Notes through and
including the fourth Interest Payment Date on the Notes has been paid to the
Holders thereof pursuant to the Indenture and in accordance herewith, and all
other amounts due and owing under this Agreement and the Indenture, including
but not limited to the compensation, expenses, disbursements and advances of
Escrow Agent and the Trustee or their agents or counsel, upon receipt of a
Payment Notice and Disbursement Request in substantially the form of Exhibit A
attached hereto, Escrow Agent shall disburse all remaining funds and Temporary
Cash Investments in the Escrow Account to the Company and pending such
disbursement shall hold such funds or securities for the Company, except that
no such disbursement shall be made unless the Company has certified in writing
to Escrow Agent that all interest due and payable on the Notes from time to
time outstanding through and including the fourth Interest Payment Date has
been paid to the Holders thereof pursuant to the Indenture and in accordance
with this Agreement and the Company has indemnified Escrow Agent, its officers,
directors, employees and agents, for any liability, loss or expense in
connection therewith.

(d) Acceleration. Upon the acceleration of the maturity of the
Notes prior to the payment in full of the first four scheduled interest
payments, Escrow Agent shall, upon the receipt of written notice from the
Trustee, as agent for the Trustee, foreclose upon the Escrow Collateral and
shall apply the proceeds of such foreclosure in accordance with Section 6.10 of
the Indenture. Escrow Agent shall be entitled to reimbursement of all
expenses, disbursements and advances incurred or made by it in connection with
such foreclosure and application of proceeds.

(e) Escrow Agent shall in no event deliver any Escrow Collateral
held in the Escrow Account to the Company or any affiliate, employee or agent
of the Company unless it receives a written order from the Trustee to do so.

(f) The Company hereby irrevocably directs Escrow Agent to, and
Escrow Agent agrees it will, comply with instructions originated by the Trustee
and entitlement orders (within the meaning of Section 8-102 of the Uniform
Commercial Code) from the Trustee with respect to the Escrow Collateral without
further consent by the Company or any other Person. Escrow Agent shall,
subject to the terms of this Agreement, treat the Trustee as entitled to
exercise the rights that comprise any financial asset credited to the Escrow
Account. In furtherance of, and without limiting the effectiveness of, the
foregoing, Escrow Agent will comply with orders from the Trustee directing
Escrow Agent to hold, transfer or dispose of the Escrow Collateral (and any
financial asset (within the meaning of Section 8-102 of the Uniform Commercial
Code) subject to any security entitlement included therein), or any part
thereof, as the Trustee may from time to time specify, in each case without
obtaining consent from the Company in respect thereof. The Trustee covenants
to the

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<PAGE> 8
Company not to issue any entitlement orders except as permitted by this
Agreement and the Indenture; however, Escrow Agent shall comply with all
entitlement orders issued by the Trustee regardless of whether such orders are
authorized by this Agreement and the Indenture.

4. Escrow Agent. Escrow Agent's responsibility and liability
under this Agreement shall be limited as follows: (i) Escrow Agent does not
represent, warrant or guaranty to the holders of the Notes from time to time
the performance of the Company or the Trustee; (ii) Escrow Agent shall have no
responsibility to the Company or the holders of the Notes or the Trustee from
time to time as a consequence of performance or nonperformance by Escrow Agent
hereunder, except for any gross negligence or willful misconduct of Escrow
Agent; (iii) the Company shall remain solely responsible for all aspects of the
Company's business and conduct; and (iv) Escrow Agent is not obligated to
supervise, inspect or inform the Company or any third party of any matter
referred to above.

No implied covenants or obligations shall be inferred from
this Agreement against Escrow Agent, nor shall Escrow Agent be bound by the
provisions of any agreement beyond the specific terms hereof. Specifically and
without limiting the foregoing, Escrow Agent shall in no event have any
liability in connection with its investment, reinvestment or liquidation, in
good faith and in accordance with the terms hereof, of any funds or Temporary
Cash Investments held by it hereunder, including, without limitation, any
liability for any delay not resulting from its gross negligence or willful
misconduct in such investment, reinvestment or liquidation, or for any loss of
principal or income incident to any such delay.

Escrow Agent shall be entitled to conclusively rely upon any
judicial order or judgment, upon any written opinion of counsel or upon any
certification, instruction, notice, or other writing delivered to it by the
Company or the Trustee in compliance with the provisions of this Agreement
without being required to determine the authenticity or the correctness of any
fact stated therein or the propriety or validity of service thereof. Escrow
Agent may act in reliance upon any instrument comporting with the provisions of
this Agreement or signature believed by it to be genuine and may assume that
any person purporting to give notice or receipt or advice or make any statement
or execute any document in connection with the provisions hereof has been duly
authorized to do so.

Escrow Agent may act pursuant to the written advice of counsel
chosen by it with respect to any matter relating to this Agreement and (subject
to Section 4(ii) hereof) shall not be liable for any action taken or omitted in
accordance with such advice.

Escrow Agent shall not be called upon to advise any party as
to selling or retaining, or taking or refraining from taking any action with
respect to, any securities or other property deposited hereunder. Escrow Agent
shall not be responsible for or incur any liability in connection with the
performance of any investment made at the discretion of the Company, for any
other loss or gain in the Escrow Account, or for the sufficiency of funds in
the Escrow Account to cover interest payments on the Notes.

Escrow Agent shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that Escrow Agent's conduct does not
constitute wilful misconduct or negligence.

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<PAGE> 9
In no event shall Escrow Agent hereunder be liable for
special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if Escrow Agent has been
advised of the likelihood of such loss or damage and regardless of the form of
action.

No provisions hereunder shall require Escrow Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers.

5. Indemnity. The Company shall indemnify, hold harmless and
defend Escrow Agent, and its directors, officers, agents and employees, from
and against any and all claims, actions, obligations, liabilities and expenses,
including defense costs, investigative fees and costs, legal fees, and claims
for damages, arising from Escrow Agent's performance under this Agreement,
except to the extent that such liability, expense or claim is directly
attributable to the gross negligence or willful misconduct of such indemnified
person. In the defense of any claim, Escrow Agent may have separate counsel
and the Company shall pay the fees and expenses of such counsel. In connection
with any claim, action, obligation, liability or expense for which
indemnification is sought by Escrow Agent hereunder, Escrow Agent shall be
entitled to recover its costs and expenses as incurred from funds available in
the Escrow Account and the Company shall be required to deposit in the Escrow
Account an amount of cash equal to the amount so received by Escrow Agent. The
indemnification provisions of this Section 5 shall survive the termination of
this Agreement or the earlier resignation or removal of Escrow Agent.

6. Grant of Security Interest; Instructions to Escrow Agent.

(a) The Company hereby irrevocably grants a first priority
security interest in, and pledges, assigns and sets over to the Trustee all of
the Company's right, title and interest in, the Initial Escrow Amount, the
Escrow Account, all funds held therein and all Temporary Cash Investments and
replacements thereof and proceeds of each of the foregoing held by or on behalf
of Escrow Agent including, without limitation, any of the foregoing which is a
certificated or uncertificated security, a security entitlement, a securities
account, investment property, a financial asset, a Treasury security (including
any Treasury STRIPS (Separate Trading of Registered Interest and Principal of
Securities) (collectively, the "Escrow Collateral"), to secure all obligations
and indebtedness of the Company under the Notes and any other obligation now or
hereafter arising, of every kind and nature, owed by the Company under the
Indenture to the Holders of the Notes or the Trustee. The Company agrees to
take all actions necessary to create and maintain a valid and perfected first
priority security interest in the Escrow Collateral in favor of the Trustee for
the benefit of the Holders.

(b) The Company and the Trustee hereby irrevocably instruct Escrow
Agent to and Escrow Agent will: (i)(A) except as required to create and
maintain a valid and perfected first priority security interest in the Escrow
Collateral in favor of the Trustee for the benefit of the Holders, maintain
together with the Trustee sole and exclusive possession, dominion and control
over funds and Temporary Cash Investments in the Escrow Account for the benefit
of the Trustee for the ratable benefit of the holders of the Notes as required
herein until full and final payment of all interest due on the Notes through
and including the fourth Interest Payment Date and (B) take all applicable
steps set forth in Section 2(d) hereof; (ii) maintain all of the Escrow
Collateral free and clear of all liens, security interests, safekeeping or
other charges, demands and claims against Escrow Agent of any nature whatsoever
now or hereafter existing, in favor of anyone other than Escrow

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<PAGE> 10
Agent and the Trustee; (iii) take all actions necessary (including placing any
Escrow Account passbook under the control of the Trustee) to ensure a valid and
perfected first priority security interest in the Escrow Collateral in favor of
the Trustee for the benefit of the Holders; (iv) promptly notify the Trustee if
Escrow Agent becomes aware that any person other than the Trustee has a lien or
security interest upon any portion of the Escrow Collateral (other than any
claim which Escrow Agent may have against the Escrow Account for unpaid fees
and expenses); (v) immediately disburse all funds held in the Escrow Account to
the Trustee and transfer title to all Temporary Cash Investments held by Escrow
Agent hereunder to the Trustee upon written notice by the Trustee to Escrow
Agent (without any consent from the Company) that as a result of a Default or
Event of Default under the Indenture, the indebtedness represented by the Notes
has been accelerated and has become due and payable; and (vi) comply with
Section 3(f) hereof.

(c) Any money and Temporary Cash Investments collected by the
Trustee pursuant to Article 6 of the Indenture shall be applied as provided in
Section 6.10 of the Indenture.

(d) Upon demand, the Company and Escrow Agent will execute and
deliver to the Trustee such instruments and documents as the Trustee may
reasonably deem necessary or advisable to confirm or perfect the rights of the
Trustee under this Agreement and the Trustee's interest in the Escrow
Collateral.

(e) The Company hereby appoints the Trustee as its
attorney-in-fact effective upon and during the continuance of a Default or an
Event of Default under the Indenture with full power of substitution to do any
act which the Company is obligated hereunder to do, and the Trustee may
exercise such rights as the Company might exercise with respect to the Escrow
Collateral and take any action in the Company's name to protect the Trustee's
security interest hereunder.

7. Termination. This Agreement shall terminate automatically ten
(10) days following the date upon which the balance of funds in the Escrow
Account and other Escrow Collateral shall have been reduced to zero, unless
sooner terminated either pursuant to the terms of the Indenture or by agreement
of the parties hereto (in accordance with the terms hereof and not in violation
of the Indenture), provided, however, that the obligations of the Company under
Section 5 of this Agreement shall survive termination of this Agreement or the
resignation or removal of Escrow Agent; provided, further, however, that until
such tenth day, this Agreement (or any permitted successor agreement) will
remain in effect and the Company will use its reasonable best efforts to cause
there to be an escrow agent (including any permitted successor thereto) acting
hereunder (or under any such permitted successor agreement).

8. Miscellaneous.

(a) Waiver. Any party hereto may specifically waive any breach of
this Agreement by any other party, but no such waiver shall be deemed to have
been given unless such waiver is in writing, signed by the waiving party and
specifically designating the breach waived, nor shall any such waiver
constitute a continuing waiver of similar or other breaches.

(b) Invalidity. If, for any reason whatsoever, any one or more of
the provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid in a particular case or in all cases, such
circumstances shall not have the effect of rendering any of the other
provisions of this Agreement inoperative, unenforceable or invalid, and the
inoperative, unenforceable or

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<PAGE> 11
invalid provision shall be construed as if it were written so as to effectuate,
to the maximum extent possible, the parties' intent.

(c) Assignment. This Agreement is personal to the parties hereto,
and the rights and duties of any party hereunder shall not be assignable except
with the prior written consent of the other parties, provided however, that
Escrow Agent may, in accordance with the terms of Agreement, appoint a
Subcustodian hereunder. In any event, this Agreement shall inure to and be
binding upon the parties and their successors and permitted assigns.

(d) Benefit. The parties hereto, the holders of the Notes and
their permitted assigns, but no others, shall be bound hereby and entitled to
the benefits hereof.

(e) Time. Time is of the essence in each provision of this
Agreement of which time is an element.

(f) Choice of Law. The existence, validity, construction,
operation and effect of any and all terms and provisions of this Agreement
(including the security interest created hereby and perfection thereof) shall
be determined in accordance with and governed by the laws of the State of New
York, without giving effect to conflict of law principles thereof. Escrow
Agent and the Company agree that Escrow Agent's "jurisdiction", within the
meaning of Section 8-110(b) of the Uniform Commercial Code, is the State of New
York and the Escrow Account (as well as the Escrow Collateral related thereto)
shall be governed by the laws of the State of New York.

(g) Entire Agreement; Amendments. This Agreement contains the
entire agreement among the parties with respect to the subject matter hereof
and supersedes any and all prior agreements, understandings and commitments,
whether oral or written. This Agreement may be amended only by a writing
signed by duly authorized representatives of all parties.

(h) Notices. All notices and other communications required or
permitted to be given or made under this Agreement shall be in writing and
shall be deemed to have been duly given and received, regardless of when and
whether received, either: (a) on the day of hand delivery; (b) three business
days following the day sent, when sent by United States certified mail, postage
and certification fee prepaid, return receipt requested, or (c) the next
business day following the day timely delivered to a recognized next-day air
courier, addressed as follows:

To Escrow Agent:

The Chase Manhattan Bank
450 W. 33rd St., 15th Floor
New York, NY 10001
Fax Number: (212) 946-8154
Attention: Global Trust Services

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<PAGE> 12
To the Trustee:

Bank of Montreal Trust Company
88 Pine Street, 19th Floor
New York, NY 10005
Fax Number: (212) 701-7684
Attention: Amy Roberts

To the Company:

Splitrock Services, Inc.
8665 New Trails Drive, Suite 200
The Woodlands, TX 77381
Fax Number: (281) 364-6668
Attention: Chief Financial Officer

with a copy (which shall not constitute notice) to:

Winstead Sechrest & Minick P.C.
910 Travis, Suite 2400
Houston, TX 77002
Attention: Arthur S. Berner
Fax Number: (713) 650-2400

or at such other address as the specified entity most recently may have
designated in writing in accordance with this section to the others; or (d) by
facsimile transmission, with confirmation of transmission, to the fax number
set forth above.

(i) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

(j) Captions. Captions in this Agreement are for convenience only
and shall not be considered or referred to in resolving questions of
interpretation of this Agreement.

(k) Authority of the Company; Valid and Binding Agreement. The
Company hereby represents and warrants that this Agreement has been duly
authorized, executed and delivered on its behalf and constitutes the legal,
valid and binding obligation of the Company. The execution, delivery and
performance of this Agreement by the Company does not violate any applicable
law or regulation to which the Company is subject and does not require the
consent of any governmental or other regulatory body to which the Company is
subject, except for such consents and approvals as have been obtained and are
in full force and effect.

(l) Authority of Escrow Agent and the Trustee; Valid and Binding
Agreement. Each of Escrow Agent and the Trustee hereby represents and warrants
that this Agreement has been duly authorized, executed and delivered on its
behalf and constitutes its legal, valid and binding obligation.

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<PAGE> 13
IN WITNESS WHEREOF, the parties have executed and delivered
this Escrow and Disbursement Agreement as of the date first above written.

ESCROW AGENT:

THE CHASE MANHATTAN BANK,

By: /s/
-----------------------------------
Name:
Title:

TRUSTEE:

BANK OF MONTREAL TRUST COMPANY,

By: /s/
-----------------------------------
Name:
Title:

COMPANY:

SPLITROCK SERVICES, INC.,

By: /s/
-----------------------------------
Name:
Title:

<PAGE> 1

EXHIBIT 4.5

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

WARRANT AGREEMENT

Dated as of

July 24, 1998

between

SPLITROCK SERVICES, INC.

and

BANK OF MONTREAL TRUST COMPANY,

as Warrant Agent

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

Warrants for
Common Stock of
Splitrock Services, Inc.

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

================================================================================
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TABLE OF CONTENTS

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ARTICLE I

Definitions

SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE II

Warrant Certificates

SECTION 2.01. Form and Dating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.02. Execution and Countersignature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.03. Warrant Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.04. Warrantholder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.05. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.06. Replacement Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.07. Outstanding Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.08. Temporary Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.09. Cancelation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.10. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE III

Exercise Terms

SECTION 3.01. Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 3.02. Exercise Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.03. Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.04. Manner of Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3.05. Issuance of Warrant Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3.06. Fractional Warrant Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 3.07. Reservation of Warrant Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 3.08. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ARTICLE IV

Antidilution Provisions

SECTION 4.01. Changes in Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.02. Cash Dividends and Other
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>

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<PAGE> 3

<TABLE>
<S> <C> <C>
SECTION 4.03. Common Stock Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 4.04. Issuance of Rights or Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 4.05. Combination; Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 4.06. Other Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.07. Superseding Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4.08. Minimum Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.09. Notice of Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 4.10. Notice of Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 4.11. Adjustment to Warrant Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE V

Registration Rights; Indemnification

SECTION 5.01. Effectiveness of Registration
Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 5.02. Suspension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5.03. Blue Sky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.04. Accuracy of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.06. Additional Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 5.07. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

ARTICLE VI

Warrant Agent

SECTION 6.01. Appointment of Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.02. Rights and Duties of Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.03. Individual Rights of Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 6.04. Warrant Agent's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 6.05. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 6.06. Successor Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ARTICLE VII

Miscellaneous

SECTION 7.01. SEC Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.02. Persons Benefitting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.03. Rights of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.04. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.05. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.06. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.07. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.08. Multiple Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.09. Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 7.10. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>

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<PAGE> 4

<TABLE>
<S> <C>
APPENDIX PROVISIONS RELATING TO WARRANTS

EXHIBIT A Form of Face of Warrant Certificate
EXHIBIT B Form of Transferee Letter of Representation
</TABLE>

iii
<PAGE> 5

WARRANT AGREEMENT dated as of July 24, 1998 (this
"Warrant Agreement"), between SPLITROCK SERVICES, INC., a
Delaware corporation (the "Company"), and the BANK OF MONTREAL
TRUST COMPANY, a New York banking corporation, as warrant
agent (the "Warrant Agent").

The Company desires to issue the warrants described herein. The
warrants will initially entitle the holders thereof (the "Holders") to
purchase, in the aggregate, 2,642,613 shares of Common Stock, par value $.001
per share, of the Company ("Common Stock") in connection with an offering (the
"Offering") by the Company of 261,000 units (the "Units"). Each Unit consists
of (i) $1,000 principal amount of the Company's 11 3/4% Senior Note due 2008 (a
"Note") and (ii) one warrant (each, a "Warrant") to purchase 10.124954 shares
of Common Stock.

The Warrants will not trade separately from the Notes until the
earliest date (the "Separation Date") to occur of: (i) 90 days after the date
hereof, (ii) a Change of Control, (iii) the occurrence of an Event of Default,
(iv) the date on which a registration statement with respect to the Notes, a
Registered Exchange Offer for the Notes or the Warrants is declared effective
and (v) such earlier date as determined by the Initial Purchaser in its sole
discretion.

The Company further desires the Warrant Agent to act on behalf of the
Company in connection with the issuance of the Warrants as provided herein and
the Warrant Agent is willing to so act.

Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of Warrants:

ARTICLE I

Definitions

SECTION 1.01. Definitions.

"Affiliate" of any specified Person means (i) any other Person,
directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person who
is a director or executive officer (A) of such specified Person,

<PAGE> 6
2

(B) of any subsidiary of such specified Person or (C) of any Person described
in clause (i) above. For the purposes of this definition, "control" when used
with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. "Affiliate" shall
also mean any beneficial owner of shares representing 5% or more of the total
voting power of all classes of Capital Stock of such Person entitled to vote in
the election of directors, managers or trustees ("Voting Stock") (on a fully
diluted basis) or of rights or warrants to purchase such Voting Stock (whether
or not currently exercisable) and any Person who would be an Affiliate of any
such beneficial owner pursuant to the first sentence hereof.

"Board of Directors" or "Board" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such
Board.

"Business Day" means each day that is not a Saturday, Sunday or other
day on which banking institutions in New York State are authorized or required
by law to close.

"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of
or interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.

"Cashless Exercise Ratio" means a fraction, the numerator of which is
the excess of the Current Market Value per share of Common Stock on the
Exercise Date over the Exercise Price per share as of the Exercise Date and the
denominator of which is the Current Market Value per share of the Common Stock
on the Exercise Date.

"Certificated Warrants" means certificated Warrants in fully
registered definitive form.

"Change of Control" shall have the meaning assigned to it in the
Indenture.

"Combination" means an event in which the Company consolidates with,
merges with or into, or conveys, transfers or leases all or substantially all
of its assets to, another Person.

<PAGE> 7
3

"Current Market Value" per share of Common Stock or any other security
at any date means (i) if the security is not registered under the Exchange Act,
(a) the value of the security, determined in good faith by the Board of
Directors and certified in a board resolution, based on the most recently
completed arm's-length transaction between the Company and a Person other than
an Affiliate of the Company, the closing of which occurs on such date or shall
have occurred within the six-month period preceding such date, or (b) if no
such transaction shall have occurred on such date or within such six-month
period, the value of the security as determined by a nationally recognized
investment banking firm or (ii) if the security is registered under the
Exchange Act, the average of the daily closing bid prices (or the equivalent in
an over-the-counter market) for each Business Day during the period commencing
15 Business Days before such date and ending on the date one day prior to such
date, or if the security has been registered under the Exchange Act for less
than 15 consecutive Business Days before such date, the average of the daily
closing bid prices (or such equivalent) for all of the Business Days before
such date for which daily closing bid prices are available; provided, however,
that if the closing bid price is not determinable for at least ten Business
Days in such period, the "Current Market Value" of the security shall be
determined as if the security were not registered under the Exchange Act.

"Event of Default" shall have the meaning assigned to it in the
Indenture.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exercise Date" means, for a given Warrant, the day on which such
Warrant is exercised pursuant to Section 3.04.

"Extraordinary Cash Dividend" means that portion, if any, of the
aggregate amount of all dividends paid by the Company on the Common Stock in
any fiscal year that exceeds $5 million.

"Holder" or "Warrantholder" means the Person in whose name a Warrant
is registered on the Warrant Registrar's books.

"Indenture" means the Indenture dated as of July 24, 1998, between the
Company and the Trustee, with respect to the Notes, as it may be amended or
supplemented from time to time.

<PAGE> 8
4

"Initial Purchaser" means Chase Securities Inc.

"Issue Date" means the date on which the Warrants are initially
issued.

"Offering Memorandum" means the Offering Memorandum dated July 21,
1998, of the Company.

"Officer" means the Chairman of the Board of Directors, the Chief
Executive Officer, the Chief Financial Officer, the President, any Vice
President, the Treasurer or the Secretary of the Company.

"Officers' Certificate" means a certificate signed by two Officers.

"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Warrant Agent. Such counsel may be an employee of or counsel
to the Company or the Warrant Agent.

"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.

"Preferred Stock", as applied to the Capital Stock of any Person,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over shares of Capital Stock of any other class of such Person.

"Registered Exchange Offer" shall have the meaning assigned to it in
the Indenture.

"SEC" or "Commission" means the Securities and Exchange Commission.

"Securities" means the Warrants and the Warrant Shares.

"Securities Act" means the Securities Act of 1933, as amended.

"Separation Date" has the meaning assigned to it in the recitals
hereto.

<PAGE> 9
5

"Trustee" means Bank of Montreal Trust Company, or any successor
trustee under the Indenture.

"Uniform Commercial Code" shall have the meaning assigned to it in the
Indenture.

"Warrant Agent" means the party named as such in this Warrant
Agreement until a successor replaces it and, thereafter, means the successor.

"Warrant Agreement" means this Warrant Agreement as amended or
supplemented from time to time.

"Warrant Certificates" mean the registered certificates (including the
Global Warrants) issued by the Company under this Warrant Agreement
representing the Warrants.

"Warrant Officer" means the Chairman of the Board, the President or
any other officer or assistant officer of the Warrant Agent assigned by the
Warrant Agent to administer its corporate trust matters.

"Warrant Shares" mean the shares of Common Stock (and any other
securities) for which the Warrants are exercisable or which have been issued
upon exercise of Warrants.

"Wholly Owned Subsidiaries" shall have the meaning assigned to it in
the Indenture.

SECTION 1.02. Other Definitions.

<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Advice" . . . . . . . . . . . . . . . . . . . . 5.01
"Cashless Exercise" . . . . . . . . . . . . . . . 3.04
"Common Shelf Registration Statement" . . . . . . 5.01
"Effectiveness Period" . . . . . . . . . . . . . 5.01
"Exercise Price" . . . . . . . . . . . . . . . . 3.01
"Expiration Date" . . . . . . . . . . . . . . . . 3.02(b)
"Holders' Information" . . . . . . . . . . . . . 5.01
"Registration Statement" . . . . . . . . . . . . 5.01
"Stock Registrar" . . . . . . . . . . . . . . . . 3.07
"Stock Transfer Agent" . . . . . . . . . . . . . 3.05
"Successor Company" . . . . . . . . . . . . . . . 4.05(a)
"Warrant Registrar" . . . . . . . . . . . . . . . 2.03
"Warrant Shelf Registration Statement" . . . . . 5.01
</TABLE>

<PAGE> 10
6

SECTION 1.03. Rules of Construction. Unless the context otherwise
requires:

(i) a defined term has the meaning assigned to it;

(ii) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in
effect from time to time;

(iii) "or" is not exclusive;

(iv) "including" means including without limitation; and

(v) words in the singular include the plural and words in the plural
include the singular.

ARTICLE II

Warrant Certificates

SECTION 2.01. Form and Dating. Provisions relating to Warrants are
set forth in the Appendix, which is hereby incorporated in and expressly made a
part of this Warrant Agreement. The Warrant Certificates shall each be
substantially in the form of Exhibit A hereto, which is hereby incorporated in
and expressly made a part of this Warrant Agreement. The Warrant Certificates
may have notations, legends or endorsements required by law, stock exchange
rule, agreements to which the Company is subject, if any, or usage (provided
that any such notation, legend or endorsement is in a form acceptable to the
Company). Each Warrant Certificate shall be dated the date that it is executed
by the Company and countersigned by the Warrant Agent.

SECTION 2.02. Execution and Countersignature. Two Officers shall
sign the Warrant Certificates for the Company by manual or facsimile signature.

If an Officer whose signature is on a Warrant Certificate no longer
holds that office at the time the Warrant Agent countersigns the Warrant
Certificate, the Warrant Certificate shall be valid nevertheless.

A Warrant shall not be valid until an authorized signatory of the
Warrant Agent manually countersigns the Warrant Certificate. The signature
shall be conclusive

<PAGE> 11
7

evidence that the Warrant has been authenticated under this Warrant Agreement.

The Warrant Agent shall countersign and make available for delivery
Warrant Certificates as set forth in the Appendix.

The Warrant Agent may appoint an agent reasonably acceptable to the
Company to countersign the Warrants. Any such appointment shall be evidenced
by an instrument signed by a Warrant Officer, a copy of which shall be
furnished to the Company. Unless limited by the terms of such appointment, an
agent of the Warrant Agent may countersign Warrants whenever the Warrant Agent
may do so. Each reference in this Warrant Agreement to countersigning by the
Warrant Agent includes countersigning by such agent.

SECTION 2.03. Warrant Registrar. The Company shall maintain an office
or agency where Warrants may be presented for registration of transfer,
exchange or exercise (the "Warrant Registrar"). The Warrant Registrar shall
keep a register of the Warrants and of their transfer, exchange or exercise.
The Company may have one or more co- registrars. The term Warrant Registrar
includes any co-registrars. The Company initially appoints the Warrant Agent
as (i) Warrant Registrar in connection with the Warrants and (ii) the Warrant
Custodian (as defined in the Appendix) with respect to the Global Warrants.

The Company shall enter into an appropriate agency agreement with any
Warrant Registrar not a party to this Warrant Agreement. The agreement shall
implement the provisions of this Warrant Agreement that relate to such agent.
The Company shall notify the Warrant Agent of the name and address of any such
agent. If the Company fails to maintain a Warrant Registrar, the Warrant Agent
shall act as such and shall be entitled to appropriate compensation therefor
pursuant to Section 6.05. The Company or any of its domestically organized
Wholly Owned Subsidiaries may act as Warrant Registrar.

The Company may remove any Warrant Registrar upon written notice to
such Warrant Registrar and to the Warrant Agent; provided, however, that no
such removal shall become effective until (1) acceptance of an appointment by a
successor as evidenced by an appropriate agreement entered into by the Company
and such successor Warrant Registrar and delivered to the Warrant Agent or (2)
notification to the Warrant Agent that the Warrant Agent shall serve as Warrant
Registrar until the appointment of a successor in accordance with clause (1)
above. The Warrant Registrar may resign at

<PAGE> 12
8

any time upon written notice; provided, however, that the Warrant Agent may
resign as Warrant Registrar only if the Warrant Agent also resigns as Warrant
Agent in accordance with Section 6.06. The Company and the Warrant Agent may
deem and treat the Person in whose name a Warrant Certificate is registered as
the absolute owner of such Warrant Certificate for all purposes whatsoever and
neither the Company nor the Warrant Agent shall be affected by notice to the
contrary.

SECTION 2.04. Warrantholder Lists. The Warrant Agent shall preserve
in as current a form as is reasonably practicable the most recent list
available to it of the names and addresses of Warrantholders. If the Warrant
Agent is not the Warrant Registrar, the Company shall furnish, or cause the
Warrant Registrar to furnish, to the Warrant Agent, at such times as the
Warrant Agent may request in writing, a list in such form and as of such date
as the Warrant Agent may reasonably require of the names and addresses of
Warrantholders.

SECTION 2.05. Transfer and Exchange. The Warrants shall be issued in
registered form and shall be transferable only upon the surrender of a Warrant
Certificate for registration of transfer and in compliance with the Appendix.
When a Warrant is presented to the Warrant Registrar with a request to register
a transfer, the Warrant Registrar shall register the transfer as requested if
the requirements of Section 8-401(a) of the Uniform Commercial Code are met.
When Warrants are presented to the Warrant Registrar with a request to exchange
them for an equal number of Warrants of other denominations, the Warrant
Registrar shall make the exchange as requested if the requirements of Section
8-401(a)(1) and (2) of the Uniform Commercial Code are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Warrant Agent shall countersign Warrant Certificates at the Warrant Registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer,
exchange or exercise pursuant to this Section 2.05.

Any Holder of a Global Warrant (as defined in the Appendix) shall, by
acceptance of such Global Warrant, agree that transfers of beneficial interests
in such Global Warrant may be effected only through a book-entry system
maintained by (i) the Holder of such Global Warrant (or its agent) or (ii) any
Holder of a beneficial interest in such Global Warrant, and that ownership of a
beneficial interest in such Global Warrant shall be required to be reflected in
a book entry.

<PAGE> 13
9

All Warrants issued upon any transfer or exchange pursuant to the
terms of this Warrant Agreement will evidence the same Warrants as the Warrants
surrendered upon such transfer or exchange.

SECTION 2.06. Replacement Certificate. If a mutilated Warrant is
surrendered to the Warrant Agent or if the Holder of a Warrant claims that the
Warrant Certificate has been lost, destroyed or wrongfully taken, the Company
shall execute and the Warrant Agent shall countersign a replacement Warrant
Certificate if the requirements of Section 8-405 of the Uniform Commercial Code
are met, such that the Holder (i) notifies the Company or the Warrant Agent
within a reasonable time after he has notice of such loss, destruction or
wrongful taking and the Warrant Agent does not register a transfer prior to
receiving such notification, (ii) makes such request to the Company or the
Warrant Agent prior to the Warrant being acquired by a protected purchaser as
defined in Section 8-303 of the Uniform Commercial Code (a "protected
purchaser") and (iii) satisfies any other reasonable requirements of the
Warrant Agent. If required by the Warrant Agent or the Company, such Holder
shall furnish an indemnity bond sufficient in the judgment of the Warrant Agent
to protect the Company and the Warrant Agent from any loss that either of them
may suffer if a Warrant is replaced. The Company and the Warrant Agent may
charge the Holder for their expenses in replacing a Warrant Certificate. Every
replacement Warrant is an additional obligation of the Company.

The provisions of this Section 2.06 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement of mutilated, lost, destroyed or wrongfully taken Securities.

SECTION 2.07. Outstanding Warrants. Warrants outstanding at any time
are all Warrant Certificates executed by the Company and countersigned by the
Warrant Agent except for those canceled by it, those delivered to it for
cancelation and those described in this Section 2.07 as not outstanding. A
Warrant does not cease to be outstanding because an Affiliate of the Company
holds the Warrant. A Warrant ceases to be outstanding if the Company holds the
Warrant.

If a Warrant Certificate is replaced pursuant to Section 2.06, it
ceases to be outstanding unless the Warrant Agent and the Company receive proof
satisfactory to them that the replaced Warrant Certificate is held by a
protected purchaser.

<PAGE> 14
10

SECTION 2.08. Temporary Warrants. In the event that Definitive
Warrants (as defined in the Appendix) are to be issued under the terms of this
Warrant Agreement, until such Definitive Warrants are ready for delivery, the
Company may prepare and the Warrant Agent shall countersign temporary Warrant
Certificates. Temporary Warrant Certificates shall be substantially in the
form of Definitive Warrants but may have variations that the Company considers
appropriate for temporary Warrants. Without unreasonable delay, the Company
shall prepare and the Warrant Agent shall countersign Definitive Warrants and
deliver them in exchange for temporary Warrant Certificates upon surrender of
such temporary Warrant Certificates.

SECTION 2.09. Cancelation. The Company at any time may deliver
Warrant Certificates to the Warrant Agent for cancelation. The Warrant Agent
and no one else shall cancel all Warrant Certificates surrendered for
registration of transfer, exchange, exercise or cancelation and deliver
canceled Warrant Certificates to the Company pursuant to written direction by
an Officer. The Company may not issue new Warrant Certificates to replace
Warrants Certificates that have been exercised or Warrants which the Company
has purchased or otherwise acquired. The Warrant Agent shall not countersign
Warrant Certificates to replace canceled Warrant Certificates other than
pursuant to the terms of this Warrant Agreement.

SECTION 2.10. CUSIP Numbers. The Company in issuing the Warrants may
use "CUSIP" numbers (if then generally in use) and, if so, the Warrant Agent
shall also use "CUSIP" numbers in notices to Holders; provided, however, that
any such notice may state that no representation is made as to the correctness
of such numbers either as printed on the Warrant Certificates or as contained
in any notice and that reliance may be placed only on the other identification
numbers printed on the Warrant Certificates, and any such notice shall not be
affected by any defect in or omission of such numbers.

ARTICLE III

Exercise Terms

SECTION 3.01. Exercise. Each Warrant shall initially entitle the
Holder thereof, subject to adjustment pursuant to the terms of this Warrant
Agreement, to purchase 10.124954 shares of Common Stock. The exercise price
(the "Exercise Price") of each Warrant is $.01 per share.

<PAGE> 15
11

SECTION 3.02. Exercise Periods. (a) Subject to the terms and
conditions set forth herein, the Warrants shall be exercisable at any time and
from time to time on any Business Day after the first anniversary of the Issue
Date; provided, however, that holders of Warrants will be able to exercise
their Warrants only if (i) the Common Shelf Registration Statement relating to
the Warrant Shares is effective or (ii) the exercise of such Warrants is exempt
from the registration requirements of the Securities Act, and the Warrant
Shares are qualified for sale or exempt from qualification under the applicable
securities laws of the states or other jurisdictions in which such Holders
reside.

(b) No Warrant shall be exercisable after July 15, 2008 (the
"Expiration Date").

SECTION 3.03. Expiration. A Warrant shall terminate and become void
as of the earlier of (i) the close of business on the Expiration Date or (ii)
the date such Warrant is exercised. The Company shall give notice not less
than 90, and not more than 120, days prior to the Expiration Date to the
Holders of all then outstanding Warrants to the effect that the Warrants will
terminate and become void as of the close of business on the Expiration Date;
provided, however, that if the Company fails to give notice as provided in this
Section 3.03, the Warrants will nevertheless expire and become void on the
Expiration Date.

SECTION 3.04. Manner of Exercise. Warrants may be exercised upon (i)
surrender to the Warrant Agent at the office of the Warrant Agent of the
related Warrant Certificate, together with the form of election attached
thereto to purchase Common Stock on the reverse thereof duly filled in and
signed by the Holder thereof and (ii) payment to the Warrant Agent, for the
account of the Company, of the Exercise Price for each Warrant Share or other
security issuable upon the exercise of such Warrants then exercised. Such
payment shall be made (i) in cash or by certified or official bank check
payable to the order of the Company or by wire transfer of funds to an account
designated by the Company for such purpose or (ii) without the payment of cash,
by reducing the number of shares of Common Stock obtainable upon the exercise
of a Warrant and payment of the Exercise Price in cash so as to yield a number
of shares of Common Stock upon the exercise of such Warrant equal to the
product of (a) the number of shares of Common Stock issuable as of the Exercise
Date upon the exercise of such Warrant (if payment of the Exercise Price were
being made in cash) and (b) the Cashless Exercise Ratio. An exercise of a
Warrant in accordance with the immediately preceding clause (ii) is herein
called a "Cashless Exercise". Upon surrender

<PAGE> 16
12

of a Warrant Certificate representing more than one Warrant in connection with
the Holder's option to elect a Cashless Exercise, the number of shares of
Common Stock deliverable upon a Cashless Exercise shall be equal to the number
of shares of Common Stock issuable upon the exercise of Warrants that the
holder specifies are to be exercised pursuant to a Cashless Exercise multiplied
by the Cashless Exercise Ratio. All provisions of this Warrant Agreement shall
be applicable with respect to a surrender of a Warrant Certificate pursuant to
a Cashless Exercise for less than the full number of Warrants represented
thereby. Subject to Section 3.02, the rights represented by the Warrants shall
be exercisable at the election of the Holders thereof either in full at any
time or from time to time in part and in the event that a Warrant Certificate
is surrendered for exercise of less than all the Warrants represented by such
Warrant Certificate at any time prior to the Expiration Date, a new Warrant
Certificate representing the remaining Warrants shall be issued. The Warrant
Agent shall countersign and deliver the required new Warrant Certificates, and
the Company, at the Warrant Agent's request, shall supply the Warrant Agent
with Warrant Certificates duly signed on behalf of the Company for such
purpose.

SECTION 3.05. Issuance of Warrant Shares. Subject to Section 2.06,
upon the surrender of Warrant Certificates and payment of the per share
Exercise Price or election of a Cashless Exercise, as set forth in Section
3.04, the Warrant Agent shall requisition from the Company, and the Company
shall issue and, if appointed, cause the transfer agent for the Common Stock
("Stock Transfer Agent") to countersign and deliver to or upon the written
order of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of such Warrants or other securities or property to which it
is entitled, registered or otherwise, to the Person or Persons entitled to
receive the same (including any depositary institution so designated by a
Holder), together with cash as provided in Section 3.06 in respect of any
fractional Warrant Shares otherwise issuable upon such exercise. Such
certificate or certificates shall be deemed to have been issued and any Person
so designated to be named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrant
Certificates and payment of the per share Exercise Price or election of a
Cashless Exercise, as aforesaid; provided, however, that if, at such date, the
transfer books for the Warrant Shares shall be closed, the certificates for the
Warrant Shares in respect of which such Warrants are then exercised shall be
issuable as of the date on which

<PAGE> 17
13

such books shall next be opened and until such date the Company shall be under
no duty to deliver any certificates for such Warrant Shares; provided further,
however, that such transfer books, unless otherwise required by law, shall not
be closed at any one time for a period longer than 20 calendar days.

SECTION 3.06. Fractional Warrant Shares. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be exercised in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of Warrant
Shares which may be purchasable pursuant thereto. If any fraction of a Warrant
Share would, except for the provisions of this Section 3.06, be issuable upon
the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the Current Market Value per Warrant Share, as
determined on the day immediately preceding the date the Warrant is presented
for exercise, multiplied by such fraction, computed to the nearest whole cent.

SECTION 3.07. Reservation of Warrant Shares. The Company shall at
all times keep reserved out of its authorized shares of Common Stock a number
of shares of Common Stock sufficient to provide for the exercise of all
outstanding Warrants. The registrar for the Common Stock (the "Stock
Registrar") shall at all times until the Expiration Date reserve such number of
authorized shares as shall be required for such purpose. The Company will keep
a copy of this Warrant Agreement on file with the Stock Transfer Agent if such
Stock Transfer Agent is appointed. The Company will supply such Stock Transfer
Agent, if appointed, with duly executed stock certificates for such purpose and
will itself provide or otherwise make available any cash which may be payable
as provided in Section 3.06. The Company will furnish to such Stock Transfer
Agent, if appointed, a copy of all notices of adjustments (and certificates
related thereto) transmitted to each Holder.

Before taking any action which would cause an adjustment pursuant to
Article IV to reduce the Exercise Price below the then par value (if any) of
the Common Stock, the Company shall take any and all corporate action which
may, in the opinion of counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
at the Exercise Price as so adjusted.

<PAGE> 18
14

The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants shall, upon issue, be fully paid, nonassessable, free of
preemptive rights, free from all taxes and free from all liens, charges and
security interests with respect to the issue thereof.

SECTION 3.08. Compliance with Law. (a) Notwithstanding anything in
this Warrant Agreement to the contrary, in no event shall a Holder be entitled
to exercise a Warrant unless (i) a registration statement filed under the
Securities Act in respect of the issuance of the Warrant Shares is then
effective or (ii) in the opinion of counsel the exercise of such Warrants is
exempt from the registration requirements of the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other jurisdictions in which such
Holders reside.

(b) If any shares of Common Stock required to be reserved for
purposes of the exercise of Warrants require, under any other Federal or state
law or applicable governing rule or regulation of any national securities
exchange, registration with or approval of any governmental authority, or
listing on any such national securities exchange before such shares may be
issued upon exercise, the Company will use its best efforts to cause such
shares to be duly registered or approved by such governmental authority or
listed on the relevant national securities exchange, as the case may be.

ARTICLE IV

Antidilution Provisions

SECTION 4.01. Changes in Common Stock. In the event that at any time
and from time to time the Company shall (i) pay a dividend or make a
distribution on the Common Stock in shares of Common Stock or other shares of
Capital Stock, (ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, (iii) combine its outstanding shares
of Common Stock into a smaller number of shares of Common Stock or (iv)
increase or decrease the number of shares of Common Stock outstanding by
reclassification of its Common Stock, then the number of shares of Common Stock
issuable upon exercise of each Warrant immediately after the happening of such
event shall be adjusted so that, after giving effect to such adjustment, the
Holder of each Warrant shall be entitled to receive the number of shares of
Common Stock upon exercise of such Warrant that such Holder would have owned or
have been

<PAGE> 19
15

entitled to receive had such Warrants been exercised immediately prior to the
happening of the events described above (or, in the case of a dividend or
distribution of Common Stock, immediately prior to the record date therefor).
An adjustment made pursuant to this Section 4.01 shall become effective
immediately after the distribution date, retroactive to the record date
therefor in the case of a dividend or distribution in shares of Common Stock or
other shares of Capital Stock, and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.

SECTION 4.02. Cash Dividends and Other Distributions. In the event
that at any time and from time to time the Company shall distribute to all
holders of Common Stock (i) any dividend or other distribution (including any
dividend or distribution made in connection with a consolidation or merger in
which the Company is the continuing corporation) of cash, evidences of its
indebtedness, shares of its Capital Stock or any other properties or securities
or (ii) any options, warrants or other rights to subscribe for, purchase, or
which are convertible into, any of the foregoing (other than, in the case of
clause (i) and (ii) above, (A) any dividend or distribution described in
Section 4.01, (B) any rights, options, warrants or securities described in
Section 4.03 or Section 4.04 and (C) any cash dividends or other cash
distributions from current or retained earnings other than Extraordinary Cash
Dividends), then the number of shares of Common Stock issuable upon the
exercise of each Warrant immediately prior to such record date for any such
dividend or distribution shall be increased to a number determined by
multiplying the number of shares of Common Stock issuable upon the exercise of
such Warrant immediately prior to such record date for any such dividend or
distribution by a fraction, the numerator of which shall be the Current Market
Value per share of Common Stock on the record date for such dividend or
distribution, and the denominator of which shall be such Current Market Value
per share of Common Stock less the sum of (x) the amount of cash, if any,
distributed per share of Common Stock and (y) the then fair value (as
determined in good faith by the Board of Directors, whose determination shall
be evidenced by a board resolution filed with the Warrant Agent, a copy of
which will be sent to Holders upon request) of the portion, if any, of the
distribution applicable to one share of Common Stock consisting of evidences of
indebtedness, shares of stock, securities, other property, warrants, options or
subscription or purchase rights; and subject to Section 4.08, the Exercise
Price shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such record

<PAGE> 20
16

date by the above fraction. Such adjustments shall be made, and shall only
become effective, whenever any dividend or distribution to which this Section
4.02 applies is made; provided, however, that the Company is not required to
make an adjustment pursuant to this Section 4.02 if at the time of such
distribution the Company makes the same distribution to Holders of Warrants as
it makes to holders of Common Stock pro rata based on the number of shares of
Common Stock for which such Warrants are exercisable (whether or not currently
exercisable). No adjustment shall be made pursuant to this Section 4.02 which
shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant or increasing the Exercise Price.

SECTION 4.03. Common Stock Issue. In the event that at any time or
from time to time the Company shall issue shares of Common Stock for a
consideration per share that is less than the Current Market Value per share of
Common Stock as of the issuance date of such shares, the number of shares of
Common Stock issuable upon the exercise of each Warrant immediately after such
issuance date shall be determined by multiplying the number of shares of Common
Stock issuable upon exercise of each Warrant immediately prior to such issuance
date by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately preceding the issuance of such shares plus
the number of additional shares of Common Stock to be issued in such
transaction, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately preceding the date for the issuance of
such shares plus the total number of shares of Common Stock which the aggregate
consideration expected to be received by the Company upon the issuance of such
shares (as determined in good faith by the Board of Directors, whose
determination shall be evidenced by a board resolution filed with the Warrant
Agent, a copy of which will be sent to Holders upon request) would purchase at
the Current Market Value per share of Common Stock as of the date of such
issuance; and, subject to Section 4.08, in the event of any such adjustment,
the Exercise Price shall be adjusted to a number determined by dividing the
Exercise Price immediately prior to such date of issuance by the aforementioned
fraction; provided, however, that no adjustment to the number of Warrant Shares
issuable upon the exercise of the Warrants or to the Exercise Price shall be
made as a result of (i) the issuance of shares of Common Stock in bona fide
public offerings that are underwritten or in which a placement agent is
retained by the Company, (ii) the issuance of shares of Common Stock (including
upon exercise of options) pursuant to the terms of and in order to give effect
to the

<PAGE> 21
17

1997 Incentive Share Plan (as defined in the Offering Memorandum) as in effect
on the date hereof and (iii) the issuance of shares of Common Stock in
connection with acquisitions of products and businesses other than to
Affiliates of the Company. Such adjustment shall be made, and shall only
become effective, whenever such shares are issued. No adjustment shall be made
pursuant to this Section 4.03 which shall have the effect of decreasing the
number of shares of Common Stock issuable upon exercise of each Warrant or
increasing the Exercise Price.

SECTION 4.04. Issuance of Rights or Options. In the event that at
any time or from time to time the Company shall issue to holders of Common
Stock (i) rights, options or warrants to acquire (provided, however, that no
adjustment shall be made under Section 4.03 or 4.04 upon the exercise of such
rights, options or warrants), or (ii) securities convertible or exchangeable
into (provided, however, that no adjustment shall be made under Section 4.03 or
4.04 upon the conversion or exchange of such securities (other than issuances
specified in (i) or (ii) which are made as the result of anti-dilution
adjustments in such securities)), Common Stock entitling the holders thereof to
subscribe for or purchase shares of Common Stock at a price per share that is
less than the Current Market Value per share of Common Stock in effect
immediately prior to such issuance other than in connection with the adoption
of a shareholder rights plan by the Company, the number of shares of Common
Stock issuable upon the exercise of each Warrant immediately after such
issuance shall be determined by multiplying the number of shares of Common
Stock issuable upon exercise of each Warrant immediately prior to such issuance
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such rights, options,
warrants or securities plus the number of additional shares of Common Stock
offered for subscription or purchase or into which such securities are
convertible or exchangeable, and the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or securities plus the total number of shares of
Common Stock which the aggregate consideration expected to be received by the
Company upon the exercise, conversion or exchange of such rights, options,
warrants or securities (as determined in good faith by the Board, whose
determination shall be evidenced by a board resolution filed with the Warrant
Agent, a copy of which will be sent to Holders upon request) would purchase at
the Current Market Value per share of Common Stock as of the record date; and,
subject to Section 4.08, in the event of any such adjustment, the Exercise
Price shall be adjusted to

<PAGE> 22
18

a number determined by dividing the Exercise Price immediately prior to such
date of issuance by the aforementioned fraction; provided, however, that no
adjustment to the number of Warrant Shares issuable upon the exercise of the
Warrants or to the Exercise Price shall be made as a result of the issuance of
options to acquire additional shares of Common Stock pursuant to the terms of
and in order to give effect to the 1997 Incentive Share Plan (as defined in the
Offering Memorandum) as in effect on the date hereof. Such adjustment shall be
made, and shall only become effective, whenever such rights, options, warrants
or securities are issued. No adjustment shall be made pursuant to this Section
4.04 which shall have the effect of decreasing the number of shares of Common
Stock issuable upon exercise of each Warrant or increasing the Exercise Price.

SECTION 4.05. Combination; Liquidation. (a) Except as provided in
Section 4.05(b), in the event of a Combination, each Holder shall have the
right to receive upon exercise of the Warrants the kind and amount of shares of
Capital Stock or other securities or property which such Holder would have been
entitled to receive upon completion of or as a result of such Combination had
such Warrant been exercised immediately prior to such event or to the relevant
record date for any such entitlement. Unless paragraph (b) is applicable to a
Combination, the Company shall provide, and deliver to the Warrant Agent, an
Opinion of Counsel to the effect that the surviving or acquiring Person (the
"Successor Company") in such Combination will enter into an agreement with the
Warrant Agent confirming the Holders' rights pursuant to this Section 4.05(a)
and providing for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article IV. The provisions
of this Section 4.05(a) shall similarly apply to successive Combinations
involving any Successor Company.

(b) In the event of (i) a Combination where consideration to the
holders of Common Stock in exchange for their shares is payable solely in cash
or (ii) the dissolution, liquidation or winding-up of the Company, the Holders
of the Warrants shall be entitled to receive, upon surrender of their Warrant
Certificates, such cash distributions on an equal basis with the holders of
Common Stock or other securities issuable upon exercise of the Warrants, as if
the Warrants had been exercised immediately prior to such event, less the
Exercise Price.

In the event of any Combination described in this Section 4.05(b), the
surviving or acquiring Person and, in

<PAGE> 23
19

the event of any dissolution, liquidation or winding-up of the Company, the
Company, shall deposit promptly with the Warrant Agent the funds, if any,
necessary to pay the Holders of the Warrants the amounts to which they are
entitled as described above. After such funds and the surrendered Warrant
Certificates are received, the Warrant Agent shall make payment to the Holders
by delivering a check in such amount as is appropriate (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such Person or Persons as it may be directed in writing by the Holders
surrendering such Warrants.

SECTION 4.06. Other Events. If any event occurs as to which the
foregoing provisions of this Article IV are not strictly applicable or, if
strictly applicable, would not, in the good faith judgment of the Board of
Directors, fairly and adequately protect the purchase rights of the Warrants in
accordance with the essential intent and principles of such provisions, then
such Board of Directors shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, as shall
be reasonably necessary, in the good faith opinion of such Board of Directors,
to protect such purchase rights as aforesaid, but in no event shall any such
adjustment have the effect of increasing the Exercise Price or decreasing the
number of shares of Common Stock issuable upon exercise of the Warrants.

SECTION 4.07. Superseding Adjustment. Upon the expiration of any
rights, options, warrants or conversion or exchange privileges which resulted
in adjustments pursuant to this Article IV, if any thereof shall not have been
exercised, the number of Warrant Shares issuable upon the exercise of each
Warrant shall be readjusted pursuant to the applicable section of Article IV as
if (i) the only shares of Common Stock issuable upon exercise of such rights,
options, warrants, conversion or exchange privileges were the shares of Common
Stock, if any, actually issued upon the exercise of such rights, options,
warrants or conversion or exchange privileges and (ii) shares of Common Stock
actually issued, if any, were issuable for the consideration actually received
by the Company upon such exercise plus the aggregate consideration, if any,
actually received by the Company for the issuance, sale or grant of all such
rights, options, warrants or conversion or exchange privileges whether or not
exercised and the Exercise Price shall be readjusted inversely; provided,
however, that no such readjustment (except by reason of an intervening
adjustment under Section 4.01) shall have the effect of decreasing the number
of Warrant Shares issuable upon the exercise of each

<PAGE> 24
20

Warrant or increasing the Exercise Price by an amount in excess of the amount
of the adjustment initially made in respect of the issuance, sale or grant of
such rights, options, warrants or conversion or exchange privileges.

SECTION 4.08. Minimum Adjustment. The adjustments required by the
preceding sections of this Article IV shall be made whenever and as often as
any specified event requiring an adjustment shall occur, except that no
adjustment of the Exercise Price or the number of shares of Common Stock
issuable upon exercise of the Warrants that would otherwise be required shall
be made unless and until such adjustment either by itself or with other
adjustments not previously made increases or decreases by at least 1% the
Exercise Price or the number of shares of Common Stock issuable upon exercise
of the Warrants immediately prior to the making of such adjustment. Any
adjustment representing a change of less than such minimum amount shall be
carried forward and made as soon as such adjustment, together with other
adjustments required by this Article IV and not previously made, would result
in a minimum adjustment. For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close of business on the date of
its occurrence. In computing adjustments under this Article IV, fractional
interests in Common Stock shall be taken into account to the nearest
one-hundredth of a share.

SECTION 4.09. Notice of Adjustment. Whenever the Exercise Price or
the number of shares of Common Stock and other property, if any, issuable upon
exercise of the Warrants is adjusted, as herein provided, the Company shall
deliver to the Warrant Agent a certificate of a firm of independent accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) setting forth, in reasonable detail, the event requiring the
adjustment and the method by which such adjustment was calculated (including a
description of the basis on which (i) the Board of Directors determined the
then fair value of any evidences of indebtedness, other securities or property
or warrants, options or other subscription or purchase rights and (ii) the
Current Market Value of the Common Stock was determined, if either of such
determinations were required), and specifying the Exercise Price and the number
of shares of Common Stock issuable upon exercise of the Warrants after giving
effect to such adjustment. The Company shall promptly cause the Warrant Agent
to mail a copy of such certificate to each Holder in accordance with Section
7.05. The Warrant Agent shall be entitled to rely on such certificate and
shall be under no duty or responsibility with respect to any such certificate,
except to exhibit the same from time to time, to any Holder desiring

<PAGE> 25
21

an inspection thereof during reasonable business hours. The Warrant Agent
shall not at any time be under any duty or responsibility to any Holder to
determine whether any facts exist which may require any adjustment of the
Exercise Price or the number of shares of Common Stock or other stock or
property issuable on exercise of the Warrants, or with respect to the nature or
extent of any such adjustment when made, or with respect to the method employed
in making such adjustment or the validity or value of any shares of Common
Stock, evidences of indebtedness, warrants, options, or other securities or
property.

SECTION 4.10. Notice of Certain Transactions. In the event that the
Company shall propose to (a) pay any dividend payable in securities of any
class to the holders of its Common Stock or to make any other non-cash dividend
or distribution to the holders of its Common Stock, (b) offer the holders of
its Common Stock rights to subscribe for or to purchase any securities
convertible into shares of Common Stock or shares of stock of any class or any
other securities, rights or options, (c) issue any (i) shares of Common Stock,
(ii) rights, options or warrants entitling the holders thereof to subscribe for
shares of Common Stock or (iii) securities convertible into or exchangeable or
exercisable for Common Stock (in the case of (i), (ii) and (iii), if such
issuance or adjustment would result in an adjustment hereunder), (d) effect any
capital reorganization, reclassification, consolidation or merger, (e) effect
the voluntary or involuntary dissolution, liquidation or winding-up of the
Company or (f) make a tender offer or exchange offer with respect to the Common
Stock, the Company shall within five days after any such action or offer send
to the Warrant Agent a notice and the Warrant Agent shall within five days
after receipt thereof send the Holders a notice (in such form as shall be
furnished to the Warrant Agent by the Company) of such proposed action or
offer. Such notice shall be mailed by the Warrant Agent to the Holders at
their addresses as they appear in the books of the Warrant Registrar, which
shall specify the record date for the purposes of such dividend, distribution
or rights, or the date such issuance or event is to take place and the date of
participation therein by the holders of Common Stock, if any such date is to be
fixed, and shall briefly indicate the effect, if any, of such action on the
Common Stock and on the number and kind of any other shares of stock and on
other property, if any, and the number of shares of Common Stock and other
property, if any, issuable upon exercise of each Warrant and the Exercise Price
after giving effect to any adjustment pursuant to Article IV which will be
required as a result of such action. Such notice shall be given as promptly as

<PAGE> 26
22

possible and (x) in the case of any action covered by clause (a) or (b) above,
at least 10 days prior to the record date for determining holders of the Common
Stock for purposes of such action or (y) in the case of any other such action,
at least 20 days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of Common Stock, whichever shall
be the earlier.

SECTION 4.11. Adjustment to Warrant Certificate. The form of Warrant
Certificate need not be changed because of any adjustment made pursuant to this
Article IV, and Warrant Certificates issued after such adjustment may state the
same Exercise Price and the same number of shares of Common Stock issuable upon
exercise of the Warrants as are stated in the Warrant Certificates initially
issued pursuant to this Warrant Agreement. The Company, however, may at any
time in its sole discretion make any change in the form of Warrant Certificate
that it may deem appropriate to give effect to such adjustments and that does
not affect the substance of the Warrant Certificate, and any Warrant
Certificate thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant Certificate or otherwise, may be in the
form as so changed.

ARTICLE V

Registration Rights; Indemnification

SECTION 5.01. Effectiveness of Registration Statement. Subject to
Section 5.02, the Company shall cause to be filed pursuant to Rule 415 (or any
successor provision) of the Securities Act not later than 45 days after the
Issue Date, a shelf registration statement relating to the offer and sale of
the Warrants by the Holders from time to time in accordance with the methods of
distribution elected by such holders and set forth in such registration
statement (the "Warrant Shelf Registration Statement"), and shall use its best
efforts to cause the Warrant Shelf Registration Statement to be declared
effective under the Securities Act on or before 105 days after the Issue Date,
and shall cause to be filed a shelf registration statement covering the
issuance of Warrant Shares to the Holders upon exercise of the Warrants by the
Holders thereof (the "Common Shelf Registration Statement", and together with
the Warrant Shelf Registration Statement, the "Registration Statements") and
shall use its best efforts to cause the Common Shelf Registration Statement to
be declared effective on or before 365 days after the Issue Date. The Company
shall use its best efforts to cause (a) the Warrant Shelf Registration
Statement to remain

<PAGE> 27
23

continuously effective until the earliest of (i) such time as all Warrants have
been sold thereunder, (ii) two years after its effective date and (iii) until
all Warrants can be sold without restriction under the Securities Act and (b)
the Common Shelf Registration Statement to remain continuously effective until
the earlier of (i) such time as all Warrants have been exercised and (ii) the
Expiration Date. In connection with any Registration Statement, (i) the
Company shall furnish to the Warrant Agent and the Initial Purchaser, prior to
the filing with the Commission, a copy of any Registration Statement, and each
amendment thereof and each amendment or supplement, if any, to the prospectus
included therein and shall use its reasonable best efforts to reflect in each
such document, when filed with the Commission, such comments as the Warrant
Agent or the Initial Purchaser may reasonably propose, (ii) the Company shall
furnish to each Holder, without charge, at least one conformed copy of any
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in writing,
all exhibits thereto (including those incorporated by reference), (iii) the
Company shall, for so long as any Registration Statement is effective, deliver
to each Holder and the Initial Purchaser, without charge, as many copies of the
prospectus (including each preliminary prospectus) included in such
Registration Statement and any amendment or supplement thereto as such Holder
or Initial Purchaser may reasonably request, and the Company consents to the
proper use of the prospectus therein and any amendment or supplement thereto by
each of the selling Holders in connection with the offering and sale of the
Warrants or the exercise, offering or sale of Warrant Shares, as the case may
be, covered by such prospectus and any amendment or supplement thereto, (iv)
the Company may require each Holder of Warrants to be sold pursuant to the
Warrant Shelf Registration Statement or to be exercised in connection with the
Common Shelf Registration Statement to furnish to the Company such information
regarding the Holder and the distribution of such Warrants or Warrant Shares as
the Company may from time to time reasonably request for inclusion in such
Registration Statement (the "Holders' Information"), and the Company may
exclude from such registration the Transfer Restricted Warrants (as defined in
the Appendix) of any Holder that fails to furnish such information within a
reasonable time after receiving such request, (v) the Company shall, if
requested, promptly incorporate in a prospectus supplement or post-effective
amendment to such Registration Statement such information as a majority in
interest of the Holders reasonably agree should be included therein and shall
make all required filings of such prospectus supplement or post-effective

<PAGE> 28
24

amendment as soon as practicable following notification of the matters to be
incorporated in such prospectus supplement or post-effective amendment, (vi)
the Company shall enter into such agreements (including underwriting
agreements) as are appropriate, customary and reasonably necessary in
connection with any such Registration Statement and (vii) the Company shall (A)
make reasonably available for inspection by a representative of, and counsel
acting for Holders of a majority of the Warrants and any underwriter
participating in any disposition of Warrants, all relevant financial and other
records, pertinent corporate documents and properties of the Company, (B) use
its reasonable best efforts to have its officers, directors, employees,
accountants and counsel supply all relevant information reasonably requested by
such representative, counsel or any such underwriter in connection with such
Registration Statement, and (C) if requested by Holders of a majority of
Warrants, their counsel or the managing underwriters (if any) in connection
with such Registration Statement, use its reasonable best efforts to cause (x)
its counsel to deliver an opinion relating to the Registration Statement and
the Warrants or Warrant Shares, as the case may be, in customary form, (y) its
officers to execute and deliver all customary documents and certificates
requested by Holders of a majority of the Warrants, their counsel or the
managing underwriters (if any) and (z) its independent public accountants to
provide a comfort letter or letters in customary form, subject to receipt of
appropriate documentation as contemplated, and only if permitted, by Statement
of Auditing Standards No. 72.

(b) The Company shall notify Holders and, if requested, confirm in
writing (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied
by an instruction to suspend the use of the prospectus until the requisite
changes have been made): (i) when any Registration Statement and any amendment
thereto has been filed with the Commission and when such Registration Statement
or any post-effective amendment thereto has become effective; (ii) of any
request by the Commission for amendments or supplements to any Registration
Statement or the prospectus included therein or for additional information;
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of any Registration Statement or the initiation of any
proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Warrants or the Warrant Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose; and (v) of the happening of
any event that requires the making of any changes in any

<PAGE> 29
25

Registration Statement or the prospectus included therein in order that the
statements therein are not misleading and do not omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. The Company shall make every reasonable effort to obtain the
withdrawal at the earliest possible time of any order suspending the
effectiveness of any Registration Statement. If any event contemplated by
clauses (ii) through (v) occurs during the period for which the Company is
required to maintain an effective Registration Statement, the Company shall
promptly prepare and file with the Commission a post-effective amendment to the
Registration Statement or a supplement to the related prospectus or file any
other required document so that, as thereafter delivered, the prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Each Holder agrees
that, upon receipt of any notice from the Company pursuant to clauses (ii)
through (v), such Holder shall discontinue disposition of such Warrants or
Warrant Shares until such Holder's receipt of copies of a supplemental or
amended prospectus or until advised in writing (the "Advice") by the Company
that the use of the applicable prospectus may be resumed. If the Company shall
give any notice under clauses (ii) through (v) during the period that the
Company is required to maintain an effective Registration Statement (the
"Effectiveness Period"), such Effectiveness Period, in the case of the Warrant
Shelf Registration Statement, shall be extended by the number of days during
such period from and including the date of the giving of such notice to and
including the date when each seller of Warrants or Warrant Shares covered by
such Registration Statement shall have received (x) the copies of a
supplemental or amended prospectus (if an amended or supplemental prospectus is
required) or (y) the Advice (if no amended or supplemental prospectus is
required).

SECTION 5.02. Suspension. During any consecutive 365-day period, the
Company shall be entitled to suspend the availability of each of the Warrant
Shelf Registration Statement and the Common Shelf Registration Statement for up
to two 45 consecutive-day periods (except for the 45 consecutive-day period
immediately prior to the Expiration Date) if the Company's Board determines in
the exercise of its reasonable judgment that there is a valid business purpose
for such suspension and provides notice that such determination was made to the
Holders of the Warrants; provided, however, that in no event shall the Company
be required to disclose the business purpose for such

<PAGE> 30
26

suspension if the Company determines in good faith that such business purpose
must remain confidential.

SECTION 5.03. Blue Sky. The Company shall use its best efforts to
register or qualify the Warrants and the Warrant Shares under all applicable
securities laws, blue sky laws or similar laws of all jurisdictions in the
United States and Canada in which any holder of Warrants may or may be deemed
to purchase Warrants or Warrant Shares upon the exercise of Warrants and shall
use its best efforts to maintain such registration or qualification for so long
as it is required to cause the Warrant Shelf Registration Statement (in the
case of the Warrants) and the Common Shelf Registration Statement (in the case
of the Warrant Shares) to remain effective under the Securities Act pursuant to
Section 5.01; provided, however, that the Company shall not be required to
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 5.03 or to take any
action which would subject it to general service of process or to taxation in
any such jurisdiction where it is not then so subject.

SECTION 5.04. Accuracy of Disclosure. The Company represents and
warrants to each Holder and agrees for the benefit of each Holder that (i) each
of the Warrant Shelf Registration Statement and the Common Shelf Registration
Statement and any amendment thereto will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading and (ii) each
of the prospectus furnished to such Holder for delivery in connection with the
sale of Warrants and the prospectus delivered to such Holder upon the exercise
of Warrants and the documents incorporated by reference therein will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the Company shall have no liability
under clauses (i) or (ii) of this Section 5.04 with respect to any such untrue
statement or omission made in any Registration Statement in reliance upon and
in conformity with information furnished to the Company by or on behalf of the
Holders specifically for inclusion therein.

SECTION 5.05. Indemnification. (a) In connection with any
Registration Statement, the Company shall indemnify and hold harmless each
Holder (including, without limitation, the Initial Purchaser), its affiliates,

<PAGE> 31
27

their respective officers, directors, employees, representatives and agents,
and each person, if any, who controls such Holder within the meaning of the
Securities Act or the Exchange Act (collectively referred to for purposes of
this Section 5.05 as a Holder) from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including,
without limitation, any loss, claim, damage, liability or action relating to
purchases and sales of Warrants or Warrant Shares), to which that Holder may
become subject, whether commenced or threatened, under the Securities Act, the
Exchange Act, any other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any such Registration Statement or
any prospectus forming part thereof or in any amendment or supplement thereto
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and shall reimburse each Holder promptly upon demand for any legal
or other expenses reasonably incurred by that Holder in connection with
investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with any Holders'
Information; and provided, further, that with respect to any such untrue
statement in or omission from any related preliminary prospectus, the indemnity
agreement contained in this Section 5.05(a) shall not inure to the benefit of
any Holder from whom the person asserting any such loss, claim, damage,
liability or action received Warrants or Warrant Shares to the extent that such
loss, claim, damage, liability or action of or with respect to such Holder
results from the fact that both (A) a copy of the final prospectus was not sent
or given to such person at or prior to the written confirmation of the sale of
such Warrants (in the case of the sale of Warrants), to such person and (B) the
untrue statement in or omission from the related preliminary prospectus was
corrected in the final prospectus unless, in either case, such failure to
deliver the final prospectus was a result of noncompliance by the Company with
Section 5.01. This indemnity agreement will be in addition to any liability
which the Company may otherwise

<PAGE> 32
28

have to a Holder. The Company shall also indemnify underwriters, selling
brokers, dealer-managers and similar securities industry professionals
participating in the distribution (in each case as described in the
Registration Statement), their officers and directors and each person who
controls such persons within the meaning of the Securities Act or the Exchange
Act to the same extent as provided above with respect to the indemnification of
the Holders of the Securities if requested by such Holders.

(b) In connection with any Registration Statement each Holder,
severally and not jointly, shall indemnify and hold harmless the Company, its
affiliates, their respective officers, directors, employees, representatives
and agents, and each person, if any, who controls the Company within the
meaning of the Securities Act or the Exchange Act (collectively referred to for
purposes of this Section 5.05 as the Company), from and against any loss,
claim, damage or liability, joint or several, or any action in respect thereof,
to which the Company may become subject, whether commenced or threatened, under
the Securities Act, the Exchange Act, any other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in any such
Registration Statement or any prospectus forming part thereof or in any
amendment or supplement thereto or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to made the statements therein, in the light of the circumstances under
which they were made, not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with any Holders'
Information furnished to the Company by such Holder, and shall reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending or preparing to defend against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that no such Holder shall be liable for any indemnity claims hereunder in
excess of the amount of net proceeds received by such Holder from the sale of
Warrants, in the case of the Warrant Shelf Registration Statement, or the
Current Market Value of Warrant Shares at the time they were received in the
case of the Common Stock Shelf Registration Statement.

<PAGE> 33
29

commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party pursuant to Section
5.05(a) or 5.05(b), notify the indemnifying party in writing of the claim or
the commencement of that action; provided, however, that the failure to notify
the indemnifying party shall not relieve it from any liability which it may
have under this Section 5.05 except to the extent that it has been materially
prejudiced (through the forfeiture of substantive rights or defenses) by such
failure; and provided, further, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have to an
indemnified party otherwise than under this Section 5.05. If any such claim or
action shall be brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 5.05 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than the reasonable costs of investigation; provided, however,
that an indemnified party shall have the right to employ its own counsel in any
such action, but the fees, expenses and other charges of such counsel for the
indemnified party will be at the expense of such indemnified party unless (1)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based upon advice of counsel to the indemnified party) that there
may be legal defenses available to it or other indemnified parties that are
different from or in addition to those available to the indemnifying party, (3)
a conflict or potential conflict exists (based upon advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying
party has not in fact employed counsel reasonably satisfactory to the
indemnified party to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be
at the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or

<PAGE> 34
30

related proceedings in the same jurisdiction, be liable for the reasonable
fees, disbursements and other charges of more than one separate firm of
attorneys (in addition to any local counsel) at any one time for all such
indemnified party or parties. Each indemnified party, as a condition of the
indemnity agreements contained in Sections 5.05(a) and 5.05(b), shall use all
reasonable efforts to cooperate with the indemnifying party in the defense of
any such action or claim. No indemnifying party shall be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final judgment for the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any indemnified
party from and against any loss or liability by reason of such settlement or
judgment. No indemnifying party shall, without the prior written consent of
the indemnified party (which consent shall not be unreasonably withheld),
effect any settlement of any pending or threatened proceeding in respect of
which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.

(d) If the indemnification provided for above is unavailable or
insufficient to hold harmless an indemnified party under Section 5.05(a) or
5.05(b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in
respect thereof, (i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Company, on the one hand, and a Holder, on
the other, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company, on the one hand, and such Holder, on the other,
with respect to the statements or omissions that resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to the Company or information supplied by the Company, on
the one hand, or to any Holders' Information supplied by such Holder, on the
other, the intent of the parties and their relative knowledge, access

<PAGE> 35
31

to information and opportunity to correct or prevent such untrue statement or
omission. The parties hereto agree that it would not be just and equitable if
contributions pursuant to this Section 5.05(d) were to be determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section
5.05(d) shall be deemed to include, for purposes of this Section 5.05(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending or preparing to defend any such
action or claim. Notwithstanding the provisions of this Section 5.05(d), an
indemnifying party that is a Holder shall not be required to contribute any
amount in excess of the amount by which the total price at which the Warrants
sold, in the case of the Warrant Shelf Registration Statement, and the Current
Market Value of the Warrant Shares at the time they were received, in the case
of the Common Stock Registration Statement, by such indemnifying party to any
purchaser exceeds the amount of any damages which such indemnifying party has
otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.

(e) The agreements contained in this Section 5.05 shall survive the
sale of the Securities pursuant to the Registration Statements and shall remain
in full force and effect, regardless of any termination or cancelation of this
Warrant Agreement or any investigation made by or on behalf of any indemnified
party.

SECTION 5.06. Additional Acts. If the sale of Warrants or the
issuance or sale of any Common Stock or other securities issuable upon the
exercise of the Warrants requires registration or approval of any governmental
authority (other than the registration requirements under the Securities Act),
or the taking of any other action under the laws of the United States or any
political subdivision thereof before such securities may be validly offered or
sold in compliance with such laws, then the Company covenants that it will, in
good faith and as expeditiously as reasonably possible, use its reasonable best
efforts to secure and maintain such registration or approval or to take such
other action, as the case may be. The Company shall promptly notify the
Warrant Agent in writing when (i) the

<PAGE> 36
32

Company has obtained all such governmental approvals and authorizations and
(ii) such approvals and authorizations thereafter cease to be in effect.

SECTION 5.07. Expenses. All expenses incident to the Company's
performance of or compliance with its obligations under this Article V will be
borne by the Company, including without limitation: (i) all SEC, stock
exchange or National Association of Securities Dealers, Inc. registration and
filing fees, (ii) all reasonable fees and expenses incurred in connection with
the compliance with state securities or blue sky laws, (iii) all expenses of
any Persons incurred by or on behalf of the Company in preparing or assisting
in preparing, printing and distributing the Warrant Shelf Registration
Statement, the Common Shelf Registration Statement or any other registration
statement, prospectus, any amendments or supplements thereto and other
documents relating to the performance of and compliance with this Article V,
(iv) the fees and disbursements of the Warrant Agent as agreed, (v) the fees
and disbursements of counsel for the Company and the Warrant Agent as agreed,
(vi) the fees and disbursements of one firm of attorneys (in addition to any
local counsel) chosen by a majority of the Holders of Warrants in the case of
each of the Warrant Shelf Registration Statement and the Common Stock
Registration Statement and (vii) the fees and disbursements of the independent
public accountants of the Company, including the expenses of any special audits
or comfort letters required by or incident to such performance and compliance.

ARTICLE VI

Warrant Agent

SECTION 6.01. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the provisions of this Warrant Agreement and the Warrant Agent hereby accepts
such appointment.

SECTION 6.02. Rights and Duties of Warrant Agent. (a) Agent for the
Company. In acting under this Warrant Agreement and in connection with the
Warrant Certificates, the Warrant Agent is acting solely as agent of the
Company and does not assume any obligation or relationship or agency or trust
for or with any of the holders of Warrant Certificates or beneficial owners of
Warrants.

(b) Counsel. The Warrant Agent may consult with counsel satisfactory
to it (and may require an Opinion of

<PAGE> 37
33

Counsel before it acts or refrains from acting), and the advice of such counsel
shall be full and complete authorization and protection in respect of any
action taken, suffered or omitted by it hereunder in good faith and in
accordance with the advice of such counsel.

(c) Documents. The Warrant Agent shall be protected and shall incur
no liability for or in respect of any action taken or thing suffered by it in
reliance upon any Warrant Certificate, notice, direction, consent, certificate,
affidavit, statement or other paper or document reasonably believed by it to be
genuine and to have been presented or signed by the proper parties.

(d) No Implied Obligations. The Warrant Agent shall be obligated to
perform only such duties as are specifically set forth herein and in the
Warrant Certificates, and no implied duties or obligations of the Warrant Agent
shall be read into this Warrant Agreement or the Warrant Certificates against
the Warrant Agent. The Warrant Agent shall not be under any obligation to take
any action hereunder which may tend to involve it in any expense or liability
for which it does not receive indemnity if such indemnity is reasonably
requested. The Warrant Agent shall not be accountable or under any duty or
responsibility for the use by the Company of any of the Warrant Certificates
countersigned by the Warrant Agent and delivered by it to the Holders or on
behalf of the Holders pursuant to this Warrant Agreement or for the application
by the Company of the proceeds of the Warrants. The Warrant Agent shall have
no duty or responsibility in case of any default by the Company in the
performance of its covenants or agreements contained herein or in the Warrant
Certificates or in the case of the receipt of any written demand from a Holder
with respect to such default, including any duty or responsibility to initiate
or attempt to initiate any proceedings at law or otherwise.

(e) Not Responsible for Adjustments or Validity of Stock. The
Warrant Agent shall not at any time be under any duty or responsibility to any
Holder to determine whether any facts exist that may require an adjustment of
the number of shares of Common Stock issuable upon exercise of each Warrant or
the Exercise Price, or with respect to the nature or extent of any adjustment
when made, or with respect to the method employed, or herein or in any
supplemental agreement provided to be employed, in making the same. The
Warrant Agent shall not be accountable with respect to the validity or value of
any shares of Common Stock or of any securities or property which may at any
time be issued or delivered upon the exercise of any Warrant or

<PAGE> 38
34

upon any adjustment pursuant to Article IV, and it makes no representation with
respect thereto. The Warrant Agent shall not be responsible for any failure of
the Company to make any cash payment or to issue, transfer or deliver any
shares of Common Stock or stock certificates upon the surrender of any Warrant
Certificate for the purpose of exercise or upon any adjustment pursuant to
Article IV, or to comply with any of the covenants of the Company contained in
Article IV.

SECTION 6.03. Individual Rights of Warrant Agent. The Warrant Agent
and any stockholder, director, officer or employee of the Warrant Agent may
buy, sell or deal in any of the Warrants or other securities of the Company or
its affiliates and may otherwise deal with the Company or its affiliates with
the same rights it would have if it were not Warrant Agent. Nothing herein
shall preclude the Warrant Agent from acting in any other capacity for the
Company or for any other legal entity.

SECTION 6.04. Warrant Agent's Disclaimer. The Warrant Agent shall
not be responsible for and makes no representation as to the validity or
adequacy of this Warrant Agreement or the Warrant Certificates and it shall not
be responsible for any statement in this Warrant Agreement or the Warrant
Certificates other than its countersignature thereon.

SECTION 6.05. Compensation and Indemnity. The Company agrees to pay
the Warrant Agent from time to time reasonable compensation for its services as
agreed and to reimburse the Warrant Agent upon request for all reasonable
out-of-pocket expenses incurred by it, including the reasonable compensation
and expenses of the Warrant Agent's agents and counsel as agreed. The Company
shall indemnify the Warrant Agent against any loss, liability or expense
(including reasonable agents' and attorneys' fees and expenses) incurred by it
without negligence or bad faith on its part arising out of or in connection
with the acceptance or performance of its duties under this Warrant Agreement.
The Warrant Agent shall notify the Company promptly of any claim for which it
may seek indemnity. The Company need not reimburse any expense or indemnify
against any loss or liability incurred by the Warrant Agent through wilful
misconduct, negligence or bad faith. The Company's payment obligations
pursuant to this Section 6.05 shall survive the termination of this Warrant
Agreement.

To secure the Company's payment obligations under this Warrant
Agreement, the Warrant Agent shall have a lien

<PAGE> 39
35

prior to the Holders on all money or property held or collected by the Warrant
Agent.

SECTION 6.06. Successor Warrant Agent. (a) The Company To Provide
and Maintain Warrant Agent. The Company agrees for the benefit of the Holders
that there shall at all times be a Warrant Agent hereunder until all the
Warrants have been exercised or are no longer exercisable.

(b) Resignation and Removal. The Warrant Agent may at any time
resign by giving written notice to the Company of such intention on its part,
specifying the date on which its desired resignation shall become effective;
provided, however, that such date shall not be less than 60 days after the date
on which such notice is given unless the Company otherwise agrees. The Warrant
Agent hereunder may be removed at any time by the filing with it of an
instrument in writing signed by or on behalf of the Company and specifying such
removal and the date when it shall become effective, which date shall not be
less than 60 days after such notice is given unless the Warrant Agent otherwise
agrees. Any removal under this Section 6.06 shall take effect upon the
appointment by the Company as hereinafter provided of a successor Warrant Agent
(which shall be a bank or trust company authorized under the laws of the
jurisdiction of its organization to exercise corporate trust powers) and the
acceptance of such appointment by such successor Warrant Agent. At any time
that the Warrant Agent is also acting as Trustee under the Indenture and
holders of the Notes remove the Trustee pursuant to Section 7.08 of the
Indenture, the Company shall remove the Warrant Agent pursuant to this Section
6.06(b).

(c) The Company To Appoint Successor. In the event that at any time
the Warrant Agent shall resign, or shall be removed, or shall become incapable
of acting, or shall be adjudged a bankrupt or insolvent, or shall commence a
voluntary case under the Federal bankruptcy laws, as now or hereafter
constituted, or under any other applicable Federal or state bankruptcy,
insolvency or similar law or shall consent to the appointment of or taking
possession by a receiver, custodian, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Warrant Agent or its property
or affairs, or shall make an assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts generally as they become due,
or shall take corporate action in furtherance of any such action, or a decree
or order for relief by a court having jurisdiction in the premises shall have
been entered in respect of the Warrant Agent in an involuntary case under the
Federal bankruptcy laws, as now or hereafter

<PAGE> 40
36

constituted, or any other applicable Federal or state bankruptcy, insolvency or
similar law, or a decree or order by a court having jurisdiction in the
premises shall have been entered for the appointment of a receiver, custodian,
liquidator, assignee, trustee, sequestrator (or similar official) of the
Warrant Agent or of its property or affairs, or any public officer shall take
charge or control of the Warrant Agent or of its property or affairs for the
purpose of rehabilitation, conservation, winding up or liquidation, a successor
Warrant Agent, qualified as aforesaid, shall be appointed by the Company by an
instrument in writing, filed with the successor Warrant Agent. Upon the
appointment as aforesaid of a successor Warrant Agent and acceptance by the
successor Warrant Agent of such appointment, the Warrant Agent shall cease to
be Warrant Agent hereunder; provided, however, that in the event of the
resignation of the Warrant Agent under this subsection (c), such resignation
shall be effective on the earlier of (i) the date specified in the Warrant
Agent's notice of resignation and (ii) the appointment and acceptance of a
successor Warrant Agent hereunder.

(d) Successor To Expressly Assume Duties. Any successor Warrant
Agent appointed hereunder shall execute, acknowledge and deliver to its
predecessor and to the Company an instrument accepting such appointment
hereunder, and thereupon such successor Warrant Agent, without any further act,
deed or conveyance, shall become vested with all the rights and obligations of
such predecessor with like effect as if originally named as Warrant Agent
hereunder, and such predecessor, upon payment of its charges and disbursements
then unpaid, shall thereupon become obligated to transfer, deliver and pay
over, and such successor Warrant Agent shall be entitled to receive, all
monies, securities and other property on deposit with or held by such
predecessor, as Warrant Agent hereunder.

(e) Successor by Merger. If the Warrant Agent consolidates with,
merges or converts into, or transfers all or substantially all its corporate
trust business or assets to, another corporation or banking association, the
resulting, surviving or transferee corporation without any further act shall be
the successor Warrant Agent.

ARTICLE VII

Miscellaneous

SECTION 7.01. SEC Reports. Notwithstanding that the Company may not
be subject to the reporting requirements

<PAGE> 41
37

of Section 13 or 15(d) of the Exchange Act the Company shall file with the SEC
and provide the Warrant Agent and Holders within 15 days after it files them
with the SEC, copies of its annual report and the information, documents and
other reports that are specified in Sections 13 and 15(d) of the Exchange Act.
In addition, following a public offering of the common stock of the Company,
the Company shall furnish to the Warrant Agent and the Holders, promptly upon
their becoming available, copies of the annual report to stockholders and any
other information provided by the Company to its public stockholders generally.

SECTION 7.02. Persons Benefitting. Nothing in this Warrant Agreement
is intended or shall be construed to confer upon any Person other than the
Company, the Warrant Agent and the Holders any right, remedy or claim under or
by reason of this Warrant Agreement or any part hereof.

SECTION 7.03. Rights of Holders. Holders of unexercised Warrants are
not entitled to (i) receive dividends or other distributions, (ii) receive
notice of or vote at any meeting of the stockholders, (iii) consent to any
action of the stockholders, (iv) receive notice of any other proceedings of the
Company, (v) exercise any preemptive right or (vi) exercise any other rights
whatsoever as stockholders of the Company.

SECTION 7.04. Amendment. This Warrant Agreement may be amended by
the parties hereto without the consent of any Holder for the purpose of curing
any ambiguity, or of curing, correcting or supplementing any defective
provision contained herein or adding or changing any other provisions with
respect to matters or questions arising under this Warrant Agreement as the
Company and the Warrant Agent may deem necessary or desirable (including
without limitation any addition or modification to provide for compliance with
the transfer restrictions set forth herein); provided, however, that such
action shall not adversely affect the rights of any of the Holders. Any
amendment or supplement to this Warrant Agreement that has an adverse effect on
the interests of the Holders shall require the written consent of the Holders
of a majority of the then outstanding Warrants. The consent of each Holder
affected shall be required for any amendment pursuant to which the Exercise
Price would be increased, the number of Warrant Shares issuable upon exercise
of Warrants would be decreased (other than pursuant to adjustments provided
herein) or the antidilution provisions in Article IV are altered in a manner
which adversely affects the Holders. In determining whether the Holders of the
required number of Warrants have concurred in any direction, waiver or consent,
Warrants

<PAGE> 42
38

owned by the Company or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company shall
be disregarded and deemed not to be outstanding, except that, for the purpose
of determining whether the Warrant Agent shall be protected in relying on any
such direction, waiver or consent, only Warrants which the Warrant Agent knows
are so owned shall be so disregarded. Also, subject to the foregoing, only
Warrants outstanding at the time shall be considered in any such determination.

SECTION 7.05. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail addressed as
follows:

if to the Company:

Splitrock Services, Inc.
8665 New Trails Drive, Suite 200
The Woodlands, TX 77381

Attention of: Vice President and General Counsel

if to the Warrant Agent:

Bank of Montreal Trust Company
88 Pine Street
New York, NY 10005

Attention of: Corporate Trust Department

The Company or the Warrant Agent by notice to the other may designate
additional or different addresses for subsequent notices or communications.

Any notice or communication mailed to a Holder shall be mailed to the
Holder at the Holder's address as it appears on the records of the Warrant
Agent and shall be sufficiently given if so mailed within the time prescribed.

Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders. If a notice
or communication is mailed in the manner provided above, it is duly given,
whether or not the addressee receives it.

SECTION 7.06. Governing Law. THIS WARRANT AGREEMENT AND THE WARRANTS
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF

<PAGE> 43
39

NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW
TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY.

SECTION 7.07. Successors. All agreements of the Company in this
Warrant Agreement and the Warrant Certificates shall bind its successors. All
agreements of the Warrant Agent in this Agreement shall bind its successors.

SECTION 7.08. Multiple Originals. The parties may sign any number of
copies of this Warrant Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough
to prove this Warrant Agreement.

SECTION 7.09. Table of Contents. The table of contents and headings
of the Articles and Sections of this Warrant Agreement have been inserted for
convenience of reference only, are not intended to be considered a part hereof
and shall not modify or restrict any of the terms or provisions hereof.

SECTION 7.10. Severability. The provisions of this Warrant Agreement
are severable, and if any clause or provision shall be held invalid, illegal or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Warrant Agreement in any jurisdiction.

<PAGE> 44
40

IN WITNESS WHEREOF, the parties have caused this Warrant Agreement to
be duly executed as of the date first written above.

SPLITROCK SERVICES, INC.,

by /s/ WILLIAM R. WILSON
-------------------------------
Name: William R. Wilson
Title: Chief Executive Officer

BANK OF MONTREAL TRUST
COMPANY, as Warrant Agent,

by /s/ AMY ROBERTS
-------------------------------
Name: Amy Roberts
Title: Vice-President

<PAGE> 45
APPENDIX

PROVISIONS RELATING TO WARRANTS

1. Definitions

1.1 Definitions

For the purposes of this Appendix A the following additional terms
shall have the meanings indicated below:

"Definitive Warrant" means a certificated Warrant (bearing the
Restricted Warrant Legend if the transfer of such Warrant is restricted by
applicable law) that does not include the Global Warrant Legend.

"Depositary" means The Depository Trust Company, its nominees and
their respective successors.

"Global Warrant Legend" means the legend set forth under that caption
in Exhibit A to this Warrant Agreement.

"IAI" means an institutional "accredited investor" as described in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act.

"Purchase Agreement" means the Purchase Agreement dated July 21, 1998,
between the Company and the Initial Purchaser.

"QIB" means a "qualified institutional buyer" as defined in Rule 144A.

"Restricted Warrant Legend" means the legend set forth in Section
2.3(d)(i) herein.

"Rule 501" means Rule 501(a)(1), (2), (3) or (7) under the Securities
Act.

"Rule 144A" means Rule 144A under the Securities Act.

"Rule 144A Warrant" means all Warrants offered and sold to QIBs in
reliance on Rule 144A.

"Separability Legend" means the separability legend set forth in
Section 2.3(d)(i).

"Transfer Restricted Warrants" means Global Warrants, Definitive
Warrants and any other Warrants that bear or are required to bear the
Restricted Warrant Legend.

<PAGE> 46
2

"Warrant Custodian" means the custodian with respect to a Global
Warrant (as appointed by the Depositary) or any successor person thereto, who
shall initially be the Warrant Agent.

1.2 Other Definitions.

<TABLE>
<CAPTION>
Term: Defined in Section:
---- ------------------
<S> <C>
"Agent Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1(b)
"IAI Global Warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1(a)
"Global Units" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
"Global Warrant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1(a)
"Notes Transfer Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
"Rule 144A Global Warrant" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1(a)
</TABLE>

<PAGE> 47
3

2. The Securities

2.1 Form and Dating

Each Warrant shall initially be issued as part of a Unit consisting of
one Note and one Warrant. The Units issued on the date hereof (the "Global
Units") (i) will be offered and sold by the Company pursuant to the Purchase
Agreement and (ii) except for 11,000 Units which will be resold to Linsang
Partners LLC in reliance upon another exemption from registration under the
Securities Act, will be resold, initially, to QIBs in reliance on Rule 144A.
Prior to the Separation Date, the Warrants may not be transferred or exchanged
separately from, but may be transferred or exchanged only together with, the
Notes attached to such Warrants. Prior to the Separation Date, the registrar
for the Notes shall act as transfer agent ("Notes Transfer Agent") for both
the Warrants and the Notes. Any request for transfer of a Warrant prior to the
Separation Date made to the Note Transfer Agent shall be accompanied by the
Note attached thereto and the Note Transfer Agent will not execute any such
transfer without such Note attached thereto. Such Note will be duly endorsed
and accompanied by a written instrument of transfer in form satisfactory to the
Company, duly executed by the Holder thereof or the Holder's attorneys duly
authorized in writing. All such transfers shall meet the requirements set
forth in the Indenture and the Global Units. In the event of (i) the
commencement of a registered exchange offer for the Notes or the effectiveness
of a shelf registration statement with respect to the Notes or the Warrants,
(ii) a Change of Control or (iii) an Event of Default the Company shall provide
notice to the Note Transfer Agent and the Warrant Agent of the Separation Date
not less than two Business Days prior to such date and the Company will cause
the Note Transfer Agent to notify the Depositary of such date. In the event of
a determination by the Initial Purchaser to separate the Warrants and the
Notes, the Company shall promptly, but in no event later than the next
following Business Day after receiving notice of such determination, provide
notice to the Note Transfer Agent and the Warrant Agent of the Separation Date
and cause the Note Transfer Agent to notify the Depositary of such date. If
the Separation Date has not otherwise occurred prior to the 90th day after the
date hereof, the Separation Date shall occur on such day and the Company shall
provide notice of the Separation Date to the Note Transfer Agent and the
Warrant Agent and the Company will cause the Note Transfer Agent to notify the
Depositary of such date. In acting as the transfer agent for the Warrants
prior to the Separation Date, the Note Transfer Agent shall be entitled to all
the rights, privileges and immunities to which the Warrant Agent is entitled in
performing such role pursuant

<PAGE> 48
4

to the terms of this Warrant Agreement. After the Separation Date the Warrants
may only be sold or transferred in accordance with this Appendix.

(a) Global Warrants. Rule 144A Warrants shall be issued initially in
the form of one or more permanent global Warrants in definitive, fully
registered form (collectively, the "Rule 144A Global Warrant"), without
interest coupons and bearing the Global Warrant Legend, the Restricted Warrant
Legend and the Separability Legend, which shall be deposited on behalf of the
purchasers of the Warrants represented thereby with the Warrant Custodian, and
registered in the name of the Depositary or a nominee of the Depositary, duly
executed by the Company and countersigned by the Warrant Agent as provided in
this Warrant Agreement. One or more global Warrants in definitive, fully
registered form bearing the Global Warrant Legend, the Restricted Warrant
Legend and the Separability Legend (collectively, the "IAI Global Warrant")
shall also be issued on the Closing Date and deposited on behalf of the
purchasers of the Warrants represented thereby with the Warrant Custodian, and
registered in the name of the Depositary or a nominee of the Depositary, duly
executed by the Company and countersigned by the Warrant Agent as provided in
this Warrant Agreement. The Rule 144A Global Warrant and the IAI Global
Warrant are each referred to herein as a "Global Warrant" and are collectively
referred to herein as "Global Warrants." The number of Warrants represented by
the Global Warrants may from time to time be increased or decreased by
adjustments made on the records of the Warrant Agent and the Depositary or its
nominee as hereinafter provided.

(b) Book-Entry Provisions. This Section 2.1(b) shall apply only to a
Global Warrant deposited with or on behalf of the Depositary.

The Company shall execute and the Warrant Agent shall, in accordance
with this Section 2.1(b) and pursuant to an order of the Company, countersign
and deliver initially one or more Global Warrants that (a) shall be registered
in the name of the Depositary for such Global Warrant or Global Warrants or the
nominee of such Depositary and (b) shall be delivered by the Warrant Agent to
such Depositary or pursuant to such Depositary's instructions or held by the
Warrant Agent as Warrant Custodian.

Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Warrant Agreement with respect to any Global Warrants
held on their behalf by the Depositary or by the Warrant Agent as Warrant
Custodian or under such Global Warrant, and the Depositary may

<PAGE> 49
5

be treated by the Company, the Warrant Agent and any agent of the Company or
the Warrant Agent as the absolute owner of such Global Warrants for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Warrant Agent or any agent of the Company or the
Warrant Agent from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary
and its Agent Members, the operation of customary practices of such Depositary
governing the exercise of the rights of a holder of a beneficial interest in
any Global Warrants.

(c) Definitive Warrants. Except as provided in Section 2.3 or 2.4,
owners of beneficial interests in Global Warrants will not be entitled to
receive physical delivery of certificated Warrants.

2.2 Countersignature. The Warrant Agent shall countersign and make
available for delivery upon a written order of the Company, signed by an
Officer, Warrant Certificates entitling the Holders therefor to purchase in the
aggregate not more than 2,642,613 Warrant Shares.

2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive
Warrants. When Definitive Warrants are presented to the Warrant Registrar with
a request:

(x) to register the transfer of such Definitive Warrants; or

(y) to exchange such Definitive Warrants for an equal principal
amount of Definitive Warrants of other authorized denominations,

the Warrant Registrar shall register the transfer if the requirements of
Section 8-401(a) of the Uniform Commercial Code are met or make the exchange as
requested if the requirements of Section 8-401(a)(1) and (2) of the Uniform
Commercial Code are met; provided, however, that the Definitive Warrants
surrendered for transfer or exchange are accompanied by the following
additional information and documents, as applicable:

(i) if such Definitive Warrants are being delivered to the Warrant
Registrar by a Holder for registration in the name of such Holder, without
transfer, a certification from such Holder to that effect (in the form set
forth on the reverse side of the Warrant Certificate); or

<PAGE> 50
6

(ii) if such Definitive Warrants are being transferred to the
Company, a certification to that effect (in the form set forth on the
reverse side of the Warrant Certificate); or

(iii) if such Definitive Warrants are being transferred pursuant to
an exemption from registration in accordance with Rule 144 under the
Securities Act or in reliance upon another exemption from the registration
requirements of the Securities Act, (i) a certification to that effect (in
the form set forth on the reverse side of the Warrant Certificate) and (ii)
if the Company so requests, an Opinion of Counsel or other evidence
reasonably satisfactory to it as to the compliance with the restrictions
set forth in the legend set forth in Section 2.3(c)(i).

(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
Interest in a Global Warrant. A Definitive Warrant may not be exchanged for a
beneficial interest in a Global Warrant except upon satisfaction of the
requirements set forth below. Upon receipt by the Warrant Agent of a
Definitive Warrant, duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Warrant
Registrar, together with:

(i) certification (in the form set forth on the reverse side of the
Warrant Certificate) that such Definitive Warrant is being transferred (A)
to a QIB in accordance with Rule 144A or (B) to an IAI that has furnished
to the Warrant Agent a signed letter substantially in the form of Exhibit
B; and

(ii) written instructions directing the Warrant Agent to make, or to
direct the Warrant Custodian to make, an adjustment on its books and
records with respect to such Global Warrant to reflect an increase in the
aggregate amount of the Warrants represented by the Global Warrant, such
instructions to contain information regarding the Depositary account to be
credited with such increase,

then the Warrant Agent shall cancel such Definitive Warrant and cause, or
direct the Warrant Custodian to cause, in accordance with the standing
instructions and procedures existing between the Depositary and the Warrant
Custodian, the aggregate amount of Warrants represented by the Global Warrant
to be increased by the aggregate amount of the Definitive Warrant to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such

<PAGE> 51
7

instructions a beneficial interest in the Global Warrant equal to the amount of
the Definitive Security so canceled. If no Global Warrants are then
outstanding and the Global Warrant has not been previously exchanged for
certificated Warrants pursuant to Section 2.4, the Company shall issue and the
Warrant Agent shall countersign, upon written order of the Company in the form
of an Officers' Certificate, a new Global Warrant in the appropriate amount.

(c) Transfer and Exchange of Global Warrants. (i) The transfer and
exchange of a Global Warrant or beneficial interests therein shall be effected
through the Depositary, in accordance with this Warrant Agreement (including
applicable restrictions on transfer set forth herein, if any) and the
procedures of the Depositary therefor. A transferor of a beneficial interest
in a Global Warrant shall deliver a written order given in accordance with the
Depositary's procedures containing information regarding the participant
account of the Depositary to be credited with a beneficial interest in such
Global Warrant or another Global Warrant and such account shall be credited in
accordance with such order with a beneficial interest in the applicable Global
Warrant and the account of the Person making the transfer shall be debited by
an amount equal to the beneficial interest in the Global Warrant being
transferred. In the case of a transfer of a beneficial interest in the Rule
144A Global Warrant for an interest in the IAI Global Warrant, the transferee
must furnish a signed letter substantially in the form of Exhibit B to the
Warrant Agent.

(ii) If the proposed transfer is a transfer of a beneficial interest
in one Global Warrant to a beneficial interest in another Global Warrant,
the Warrant Registrar shall reflect on its books and records the date and
an increase in the amount of the Global Warrant to which such interest is
being transferred in an amount equal to the amount of the interest to be so
transferred, and the Warrant Registrar shall reflect on its books and
records the date and a corresponding decrease in the amount of Global
Warrant from which such interest is being transferred.

(iii) Notwithstanding any other provisions of this Appendix (other
than the provisions set forth in Section 2.4), a Global Warrant may not be
transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.

<PAGE> 52
8

(iv) In the event that a Global Warrant is exchanged for Definitive
Warrants pursuant to Section 2.4 prior to the effectiveness of a Warrant
Shelf Registration Statement with respect to such Warrants, such Warrants
may be exchanged only in accordance with such procedures as are
substantially consistent with the provisions of this Section 2.3 (including
the certification requirements set forth on the reverse of the Warrant
Certificate intended to ensure that such transfers comply with Rule 144A or
such other applicable exemption from registration under the Securities Act,
as the case may be) and such other procedures as may from time to time be
adopted by the Company.

(d) Legend.

(i) Except as permitted by the following paragraphs (ii), (iii) or
(iv), each Warrant Certificate evidencing the Global Warrants and the
Definitive Warrants (and all Warrants issued in exchange therefor or in
substitution thereof) shall bear a legend in substantially the following
form (each defined term in the legend being defined as such for purposes of
the legend only):

"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR
OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
SUCH REGISTRATION.

THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR
OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C)
FOR SO LONG AS THE WARRANTS ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A
UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES
IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER
TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN

<PAGE> 53
9

RELIANCE ON RULE 144A, (D) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING
OF RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS AN
INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THE SECURITY FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN
A MINIMUM NUMBER OF WARRANTS OF (I) 250 PRIOR TO THE SEPARATION OF THE
WARRANTS FROM THE NOTES AND (II) 25,000 AFTER SUCH SEPARATION, FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN
CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E)
PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), SUBJECT TO THE COMPANY'S AND THE WARRANT AGENT'S RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON
THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.

Each Definitive Security will also bear the following additional
legend:

"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
WARRANT AGENT AND THE WARRANT REGISTRAR SUCH CERTIFICATES AND OTHER
INFORMATION AS SUCH WARRANT AGENT MAY REASONABLY REQUIRE TO CONFIRM
THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS."

Each Warrant Certificate issued prior to the Separation Date will also
bear the following Separability Legend:

"THE WARRANTS EVIDENCED BY THIS CERTIFICATE WERE INITIALLY ISSUED AS
PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF ONE 11 3/4%
SENIOR NOTE DUE 2008 OF SPLITROCK SERVICES, INC. WITH A PRINCIPAL
AMOUNT AT MATURITY OF $1,000 (A "NOTE") AND ONE WARRANT. THE NOTES
AND WARRANTS WILL NOT TRADE SEPARATELY UNTIL THE EARLIEST OF (I) 90
DAYS AFTER THE DATE OF THE WARRANT AGREEMENT, (II) A CHANGE OF
CONTROL, (III) THE OCCURRENCE OF AN EVENT OF DEFAULT, (IV) THE DATE ON
WHICH A REGISTRATION STATEMENT WITH RESPECT TO THE NOTES, A REGISTERED
EXCHANGE OFFER FOR THE NOTES OR THE WARRANTS IS DECLARED EFFECTIVE AND
(V) SUCH EARLIER DATE AS DETERMINED BY THE INITIAL PURCHASER IN ITS
SOLE DISCRETION."

<PAGE> 54
10

(ii) Upon any sale or transfer of a Transfer Restricted Warrant that
is a Definitive Warrant, the Warrant Registrar shall permit the Holder
thereof to exchange such Transfer Restricted Warrant for a Definitive
Warrant that does not bear the legends set forth above and rescind any
restriction on the transfer of such Transfer Restricted Warrant if the
Holder certifies in writing to the Warrant Registrar that its request for
such exchange was made in reliance on Rule 144 (such certification to be in
the form set forth on the reverse of the Warrant Certificate).

(iii) After a transfer of any Warrant during the period of the
effectiveness of a Warrant Shelf Registration Statement with respect to
such Warrant all requirements pertaining to the Restricted Warrant Legend
on such Warrant shall cease to apply and the requirements that any such
Warrant be issued in global form shall continue to apply.

(iv) On or after the Separation Date, the Holder of a Warrant
Certificate containing a Separability Legend may surrender such Warrant
Certificate accompanied by a written application to the Warrant Agent, duly
executed by the Holder thereof, for a new Warrant Certificate or
certificates not containing the Separability Legend.

(e) Cancelation or Adjustment of Global Warrant. At such time as all
beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, transferred, redeemed, repurchased, canceled or exercised
such Global Warrant shall be returned by the Depositary to the Warrant Agent
for cancelation or retained and canceled by the Warrant Agent. At any time
prior to such cancelation, if any beneficial interest in a Global Warrant is
exchanged for Definitive Warrants, transferred in exchange for an interest in
another Global Warrant, redeemed, repurchased, canceled or exercised the number
of Warrants represented by such Global Warrant shall be reduced and an
adjustment shall be made on the books and records of the Warrant Agent (if it
is then the Warrant Custodian for such Global Warrant) with respect to such
Global Warrant, by the Warrant Agent or the Warrant Custodian, to reflect such
reduction.

(f) Obligations with Respect to Transfers and Exchanges of Warrants.

(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Warrant Agent shall countersign, Definitive Warrants
and Global Warrants at the Warrant Registrar's request.

<PAGE> 55
11

(ii) No service charge shall be made for any registration of transfer
or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax, assessments, or similar governmental charge payable
in connection therewith.

(iii) Prior to the due presentation for registration of transfer of
any Warrant, the Company, the Warrant Agent and the Warrant Registrar may
deem and treat the person in whose name a Warrant is registered as the
absolute owner of such Warrant for all purposes whatsoever, and neither the
Company nor the Warrant Agent shall be affected by notice to the contrary.

(iv) All Warrants issued upon any transfer or exchange pursuant to
the terms of this Warrant Agreement shall evidence the same terms and shall
be entitled to the same benefits under this Warrant Agreement as the
Warrants surrendered upon such transfer or exchange.

(g) No Obligation of the Warrant Agent.

(i) The Warrant Agent shall have no responsibility or obligation to
any beneficial owner of a Global Warrant, a member of, or a participant in
the Depositary or any other Person with respect to the accuracy of the
records of the Depositary or its nominee or of any participant or member
thereof, with respect to any ownership interest in the Warrants or with
respect to the delivery to any participant, member, beneficial owner or
other Person (other than the Depositary) of any notice or the payment of
any amount, under or with respect to such Warrants. All notices and
communications to be given to the Holders under the Warrants shall be given
only to the registered Holders (which shall be the Depositary or its
nominee in the case of a Global Warrant). The rights of beneficial owners
in any Global Warrant shall be exercised only through the Depositary
subject to the applicable rules and procedures of the Depositary. The
Warrant Agent may rely and shall be fully protected in relying upon
information furnished by the Depositary with respect to its members,
participants and any beneficial owners.

(ii) The Warrant Agent shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer
imposed under this Warrant Agreement or under applicable law with respect
to any transfer of any interest in any Warrant (including any transfers
between or among Depositary participants, members or beneficial owners in
any Global Warrant) other

<PAGE> 56
12

than to require delivery of such certificates and other documentation
or evidence as are expressly required by, and to do so if and when
expressly required by, the terms of this Warrant Agreement, and to
examine the same to determine substantial compliance as to form with
the express requirements hereof.

2.4 Definitive Warrants. (a) A Global Warrant deposited with the
Depositary or with the Warrant Agent as Warrant Custodian pursuant to Section
2.1 shall be transferred to the beneficial owners thereof in the form of
Definitive Warrants in an aggregate amount equal to the amount of such Global
Warrant, in exchange for such Global Warrant, only if such transfer complies
with Section 2.3 and (i) the Depositary notifies the Company that it is
unwilling or unable to continue as a Depositary for such Global Warrant or if
at any time the Depositary ceases to be a "clearing agency" registered under
the Exchange Act, and a successor depositary is not appointed by the Company
within 90 days of such notice, or (ii) an Event of Default has occurred and is
continuing or (iii) the Company, in its sole discretion, notifies the Warrant
Agent in writing that it elects to cause the issuance of Definitive Warrants
under this Warrant Agreement.

(b) Any Global Warrant that is transferable to the beneficial
owners thereof pursuant to this Section 2.4 shall be surrendered by the
Depositary to the Warrant Agent, to be so transferred, in whole or from time to
time in part, without charge, and the Warrant Agent shall countersign and
deliver, upon such transfer of each portion of such Global Warrant, an equal
number of Definitive Warrants. Any certificated Warrant in the form of a
Definitive Warrant delivered in exchange for an interest in the Global Warrant
shall, except as otherwise provided by Section 2.3(d), bear the Restricted
Warrant Legend.

(c) Subject to the provisions of Section 2.4(b), the registered
Holder of a Global Warrant may grant proxies and otherwise authorize any
Person, including Agent Members and Persons that may hold interests through
Agent Members, to take any action which a Holder is entitled to take under this
Warrant Agreement or the Warrants.

(d) In the event of the occurrence of any of the events specified
in Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available
to the Warrant Agent a reasonable supply of Definitive Warrants in fully
registered form.

<PAGE> 1
EXHIBIT 5

September 4, 1998

Board of Directors
Splitrock Services, Inc.
8665 New Trails Drive, Suite 200
The Woodlands, Texas 76381

Gentlemen:

We have acted as counsel to Splitrock Services, Inc. (the "Company")
in connection with the Registration Statement on form S-1 (the "Registration
Statement") to be filed with the Securities and Exchange Commission in
connection with the registration under the Securities Act of 1933, as amended,
of the resale of certain warrants (the "Warrants") issued pursuant to a Warrant
Agreement between the Company and Bank of Montreal Trust Company, as Warrant
Agent, to purchase common stock of the Company, such common stock (the "Shares")
and $11,000,000 in aggregate principal amount of 11 3/4% Series B Senior Notes
due 2008 issued by the Company (the "Notes") under an Indenture dated as of July
24, 1998 by and between the Company and Bank of Montreal Trust Company, as
Trustee.

We have examined the Warrant Agreement, the global warrant issued
under the Warrant Agreement, the Indenture, the global note issued under the
Indenture and such statues, corporate records and documents, certificates of
corporate and public officials and such other instruments and documents as we
have deemed necessary or appropriate for the purposes of the opinions expressed
herein.

Based upon the foregoing and subject to the qualifications,
assumptions and other statements set forth herein, we are of the opinion that
the Warrants have been validly issued and are fully paid and nonassessable, the
Shares, when issued pursuant to the terms of the Warrants, will be validly
issued, fully paid and nonassessable and the Notes are valid and binding
obligations of the company, except as the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(regardless of whether the issue of enforceability is considered in a proceeding
in equity or at law).

The opinion expressed above assumes that the Notes issued under the
Indenture have been duly executed, authenticated, issued and delivered in
accordance with the provisions of the Indenture upon exchange for the 11 3/4%
Senior Notes due 2008 as provided for therein.

Except as otherwise stated below, the opinions expressed herein are
based upon, and limited to, the laws of the State of Texas and the United States
and the Delaware General Corporation Law,
<PAGE> 2
Board of Directors
Splitrock Services, Inc.
September 4, 1998
Page 2

and to case decisions reported as of this date under such laws, and to facts
known to us on this date, and we do not undertake to provide any opinion as to
any matter or to advise any person with respect to any events or changes
occurring subsequent to the date of this letter.

The opinions expressed in this letter are provided as legal opinions only
and not as any guaranties or warranties of the matters discussed herein, and
such opinions are strictly limited to the matters stated herein, and no other
opinions may be implied. This letter is intended solely for you benefit.
Without our prior written consent, the opinions expressed herein may not be
published or relied upon by you other than in connection with the Registration
Statement, to which we hereby consent, or the transactions contemplated
therein, or published or relied upon by any other person in connection with any
matter or in any manner whatsoever.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to the Firm under the heading
"Legal Matters" in the Prospectus which is a part of the Registration Statement.

Very truly yours,

WINSTEAD SECHREST & MINICK P.C.

By:
--------------------------------
For the Firm

<PAGE> 1
EXHIBIT 10.14

EMPLOYMENT CONTRACT

This Employment Contract (the "Contract"), made and entered into effective
as of the 15th day of March, 1997, is by and between SplitRock Services, Inc., a
Texas corporation (the "Corporation"), and William R. Wilson ("Employee").

1. Introduction. The Corporation hereby employs Employee to perform the
services described herein and Employee hereby accepts such employment, on the
terms and conditions set forth herein.

2. Position and Duties. Employee hereby agrees to accept and perform
the duties of President of the Corporation and in that capacity agrees to exert
his best efforts to the prosecution of the duties of those offices ("Duties")
and faithfully to perform all such Duties. The Corporation agrees to elect
Employee to, and to employ Employee in, such office for the Employment Term (as
defined below). Employee shall generally have the Duties specified in the Bylaws
of the Corporation as in effect on the date of execution hereof (a copy of which
is attached hereto as Exhibit "A"), and the Corporation may not enlarge or
diminish Employee's Duties or responsibilities hereunder without Employee's
prior written consent.

3. Term. The term of this Contract (the "Employment Term") shall
commence on the date of this Contract and shall end on the fifth anniversary
hereof.

4. Compensation. For Employee's covenants included in this Contract and
for all services rendered by Employee in any capacity during the Employment
Term, including services as an officer, director or member of any committee of
the Corporation or of any subsidiary, division or affiliate thereof, Employee
shall be paid as compensation a base annual salary of not less than $150,000 (a
ratable part of which annual salary shall be payable monthly) with such
increases in such rate as shall be awarded from time to time by the Board of
Directors. Additionally, Employee shall be eligible for the same performance
incentive award that is made available to other officers of the Corporation.

5. Benefits and Working Facilities. During the Employment Term, Employee
shall be furnished with office space, stenographic help, all employee benefits
customarily offered by the Corporation to its senior
<PAGE> 2
executive employees, and reimbursement of all expenses incurred in the conduct
of the Corporation's business as are reasonable, prudent and necessary.
Employee shall have the right to reasonable vacation time in accordance with
the Corporation's standard policy. Health and disability insurance coverage
afforded other employees of the Corporation shall be made available to
Employee, subject to his eligibility for such coverage. Upon termination of
Employee's employment for any reason, the Corporation shall transfer any term
life insurance policy which Employer owns to Employee upon Employee's request,
and Employee shall thereafter pay the premiums and reimburse the Corporation
for prepaid premiums, prorated to the date of Employee's termination.

6. Affiliates. During the Employment Term, Employee shall also serve,
without compensation except as hereinafter provided, if and when elected and
reelected, as an officer or director, or both, of any subsidiary or division of
the Corporation or affiliate in which the Corporation holds a majority of the
outstanding equity interests.

7. Performance of Duties. During the Employment Term, Employee shall
devote his best efforts to the business and affairs of the Corporation. It is
understood and agreed that Employee may have other business endeavors which
will require his time and efforts and that he may engage in such business
endeavors without being in default of his Duties or this Agreement. It is
further understood and agreed that Employee shall take reasonable vacations,
may take time off due to illness or incapacity and may devote reasonable
periods required for engaging in charitable, professional, and community
activities, in each case so long as such activities do not interfere with the
proper performance of his Duties hereunder.

8. Termination. (a) The employment relationship between Employee and
the Corporation shall be terminated upon the first to occur of any of the
following events:

(i) the death of Employee;

(ii) the permanent disability of Employee;

-2-
<PAGE> 3
(iii) the resignation by Employee, which shall be made by
written notice to the Board specifying an effective date
of such resignation not less than 30 days after the date
of such notice; or

(iv) the termination by the Corporation of Employee's
employment with or without Cause, as defined below, which
shall be made by written notice to Employee specifying an
effective date of such termination and, if with Cause,
specifying such Cause.

(b) As used in this Contract, "Cause" shall mean:

(i) final conviction of Employee for a felony-grade crime or
any crime involving moral turpitude; or

(ii) the willful or grossly negligent violation by Employee of
the provisions of Section 9.

(c) Upon termination of the employment relationship between Employee and
the Corporation for any reason other than (i) by the Corporation with Cause or
(ii) by voluntary resignation by Employee the Corporation will pay Employee the
balance of the base salary remaining to be paid under this Contract and any
incentive awards which have been granted by the Board of Directors.

9. Confidential Information and Inventions. Employee agrees and
covenants to use his best efforts and exercise utmost diligence to protect and
safeguard the trade secrets and confidential and proprietary information of the
Corporation. Employee further agrees and covenants that, except as may be
required by the Corporation in connection with this Contract, or with the prior
written consent of the Corporation, Employee shall not, either during the term
of this Contract or thereafter, use for Employee's own benefit or for the
benefit of another, or disclose, disseminate or distribute to another, any
trade secret or confidential or proprietary information (whether or not
acquired, learned, obtained or developed by Employee alone or in conjunction
with another) of the Corporation or of any other person with whom the
Corporation has a business relationship. All memoranda, notes, records,
drawings, documents or other writings whatsoever made, compiled, acquired or
received by Employee during the Employment Term, arising out of, in connection
with, or related to any

-3-
<PAGE> 4
activity or business of the Corporation are and shall continue to be, the sole
and exclusive property of the Corporation, and shall, together with all copies
thereof, be returned and delivered to the Corporation by Employee immediately,
without demand, when Employee ceases to be employed by the Corporation, or at
any time upon the Corporation's demand.

10. Indemnification. The Corporation shall indemnify, and advance
expenses to, Employee (whether or not then employed by the Corporation) against
all judgments, penalties (including excise and similar taxes), fines, amounts
paid in settlement and reasonable expenses actually incurred by Employee in
connection with or arising out of any action, suit or proceeding in which he
may be involved by reason of his being or having been a director, officer,
employee or agent of the Corporation (whether or not he continues to be a
director, officer, employee or agent at the time of incurring such expenses and
liabilities) to the extent that indemnification of directors is permitted by
all valid and applicable laws, including, without limitation, Article 2.02-1
of the Texas Business Corporation Act; provided, however, that the Corporation
shall in no event be obligated to indemnify Employee or advance expenses to
Employee in connection with any action, suit or proceeding in which Employee
has been found liable for gross negligence, willful misconduct or an
intentional act. The indemnification and advancement of expenses provided in
this section shall (a) also extend to Employee who while serving as an officer,
director, employee or agent of the Corporation also served at the Corporation's
request as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, (b) not be deemed exclusive of any other rights of Employee arising
under any law, by any agreement or vote of shareholders or directors, by
contract, under any insurance policy maintained by the Corporation, or
otherwise, and (c) not be required if and to the extent that the person
otherwise entitled to payment of such amounts hereunder has actually received
payment therefor under any insurance policy, contract or otherwise. Neither the
amendment or modification of, nor the termination of, this Contract or any
provision hereof shall in any manner terminate, reduce or impair the right of
Employee to be indemnified by the Corporation, or the obligation of the
Corporation to indemnify Employee under and in accordance with the

-4-
<PAGE> 5
provisions of this Section 10 as in effect immediately prior to such amendment,
modification or termination with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment, modification,
or termination, regardless of when such claims may arise or be asserted.

11. SURVIVAL OF COVENANTS. In the event of termination of this Contract
for any reason whatsoever, the Corporation shall remain bound by the provisions
of Sections 8(c) and 10 of this Contract and Employee shall remain bound by the
provisions of Section 9 of this Contract.

12. NOTICES. Any notice or other communication hereunder shall be in
writing and shall be delivered by (i) personal delivery, (ii) certified or
registered mail, postage prepaid or (iii) telex or telecopier. Any such notice
shall be deemed given upon its receipt at the following address:

(a) If to Employee:

Mr. William R. Wilson

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

With a copy to:

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

(b) If to the Corporation:

SplitRock Services, Inc.
2170 Buckthorne, Suite 350
The Woodlands, Texas 77380

With a copy to:

Carole R. Riggs
Campbell & Riggs, P.C.
1980 Post Oak Boulevard, Suite 2300
Houston, Texas 77056

Any party may, by notice given in accordance with this Section 12 to the other
party, designate another address or person for receipt of notices hereunder.

-5-
<PAGE> 6
13. Parties Bound. This Contract shall inure to the benefit of and be
binding upon the parties hereto, their respective heirs, legal representatives,
successors and permitted assigns. Without limiting the generality of the
foregoing, any corporation into or with which the Corporation shall merge or
consolidate or to which the Corporation shall transfer all or substantially all
of its assets shall be deemed a successor of the Corporation. Neither party may
assign any of its or his rights or obligations under this Contract unless the
other party agrees thereto in writing, provided, however, that this provision
shall not preclude Employee from designating one or more beneficiaries to
receive any amount that may be payable after his death and shall not preclude
the legal representative or his estate from assigning any right hereunder to
the person or persons entitled thereto under his will or, in the case of
intestacy, to the person or persons entitled thereto under the laws of
intestacy applicable to his estate.

14. Integration and Amendments. This Contract contains the entire
agreement between the parties, and supersedes all prior and contemporaneous
written or oral agreements and understandings and may be amended only by an
instrument in writing signed by both parties hereto.

15. Captions. The headings herein are for convenience only and shall not
affect the construction hereof.

16. Time of the Essence. The parties agree that time shall be of the
essence in the performance of obligations hereunder.

17. Severability of Provisions. If any provision of this Contract is held
by a court of competent jurisdiction to be illegal, invalid, or unenforceable,
the remainder of the terms, provisions, covenants and restriction of this
Contract shall remain in full force and effect and shall in no way be affected,
impaired or invalidated thereby, and, in lieu of such illegal, invalid, or
unenforceable provision, there shall be added automatically as a part of this
Contract a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and enforceable.

-6-
<PAGE> 7
18. Governing Law. THIS CONTRACT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO THE PRINCIPLES
OF CONFLICTS OF LAW.

19. Due Authorization. The Corporation represents and warrants to
Employee that the Corporation has all necessary legal power and authority to
execute, deliver and perform this Contract, and has taken all necessary action
authorizing the execution, delivery and performance of same.

20. Alternative Dispute Resolution. The parties hereto agree that if a
dispute arises under this Contract that they will join in a motion requesting
the court with jurisdiction over the dispute to refer the dispute for
resolution by an alternative dispute resolution procedure as established under
Chapter 154 of the Texas Civil Practice and Remedies Code.

21. Fees and Expenses. The parties hereto agree that if a dispute over
the terms or enforcement of this Contract is litigated or is settled by an
alternative dispute resolution procedure, the party that prevails shall be
entitled to recover all fees and expenses incurred in connection with the
dispute, including reasonable fees of attorneys and accountants.

IN WITNESS WHEREOF, the parties hereto have executed this Contract
effective as of the date first above written.

SPLITROCK SERVICES, INC., a Texas
corporation

By: /s/ WILLIAM R. WILSON
---------------------
Name:
Title:

/s/ WILLIAM R. WILSON
-------------------------
WILLIAM R. WILSON

-7-

<PAGE> 1
EXHIBIT 10.17

[SPLITROCK LOGO]

ATM BACKBONE SERVICES AGREEMENT

This Agreement for ATM Backbone Services (the "Agreement") is made by SPLITROCK
SERVICES, INC., a Texas corporation with its principal offices at 2170
Buckthorne Place, Suite 350, The Woodlands, Texas 77330, ("SPLITROCK"), and
NETWORKTWO COMMUNICATIONS GROUP, a Delaware corporation with its principal
office at 175 Jackson Plaza, Ann Arbor, Michigan 48106 ("NETWORKTWO").
SPLITROCK and NETWORKTWO agree that the following terms and conditions apply to
the provision and use, within the United States, of the ATM Backbone Services
referenced in any appendices attached to this Agreement and Service Orders
signed by NETWORKTWO and accepted in writing by SPLITROCK.

1. SERVICES: ATM Backbone Service ("ATM Service") shall be provided by
SPLITROCK. ATM Service configurations for each network node shall be
described on SPLITROCK's Service Orders in effect when the Service is
ordered. Charges for ATM Service shall be in accordance with Exhibits A and
B attached hereto and by relevant Service Orders.

2. MINIMUM MONTHLY COMMITMENT: Commencing as of the Commitment Commencement
Date set forth below and continuing through the Commitment Ending Date
below, NETWORKTWO agrees to maintain each month base rate charges for
domestic ATM Services (before the application of discounts) (collectively
the "Base Rate Charges") equal to at least the Minimum Monthly Commitment
set forth below:

<S> <C>
Minimum Monthly Commitment: $ 0 for each month in calendar year 1998
$200,000 for each month in calendar year 1999
$300,000 for each month in calendar years 2000 and 2001

</TABLE>

(Based on NETWORKTWO's actual monthly Base Rate Charges for Service before
the application of discount and/or factored credits as set forth in
Paragraph 7 below.)

NETWORKTWO will be excused from further Minimum Monthly Commitments when
its aggregate payments to SPLITROCK under this Agreement is equal to or
exceeds $11 million.

3. SERVICE TERM/COMMENCEMENT/COMMITMENT:

Commitment Period: Thirty (36) months

Commencement Date: For the purposes of this Agreement, the
"Commencement Date" will be next billing cycle following the date that
this Agreement has been fully executed by both parties, and all
required documentation has been properly executed and delivered to
SPLITROCK.

Commitment Commencement Date: The Commencement Date as defined above.

Commitment Ending Date: Thirty-six (36) months following the
Commitment Commencement Date.

4. BILLING AND PAYMENT: NETWORKTWO shall pay SPLITROCK all charges due under
this Agreement, without deduction or setoff. All payments shall be mailed
to SPLITROCK at the address stated on the bill. Bills will be issued
monthly and are payable within twenty-five (25) days from the date shown on
the invoice. NETWORKTWO agrees to pay any taxes due on the Services,
however designated (excluding taxes on SPLITROCK's net income), unless
NETWORKTWO provides a valid tax exemption certificate. SPLITROCK agrees
that payments it receives under this Agreement are not subject to universal
service fund contribution requirements under current FCC rules and, so long
as those rules remain, SPLITROCK will not access universal service fund
charges under this Agreement. An initial deposit of $50,000 is required
thirty (30) days after the signing of this letter. By June 30, 1998, a
deposit equal to 50% of the average charges for the previous quarter must
be maintained.* Adjustment to the required deposit will be calculated
quarterly.

* SEE NOTE #1: Changes to required deposit.

Page 1
<PAGE> 2
ATM BACKBONE SERVICES AGREEMENT
NOTE #1

25 April 1998

Changes to Required Deposit
- ---------------------------

The requirement and level of deposit shall be based on NETWORKTWO's payment
history and ability to pay. SPLITROCK and NETWORKTWO will agree on a method of
determining the deposit percentage within 45 days of the signing of this
agreement.

If the deposit held by SPLITROCK should exceed the amount calculated for any
quarter the difference will be applied to the next invoice for service.

Termination of this agreement will result in the Release and Return of the
deposit held, to NETWORKTWO, less any fees owed to SPLITROCK.

AJD
- -----------
WRW
<PAGE> 3
5. TERMINATION: If NETWORKTWO fails to pay any outstanding charges within ten
(10) days after receipt of written notice from SPLITROCK of delinquency, or
if NETWORKTWO fails to perform or observe any other material term or
condition of this Agreement within thirty (30) days after receipt of
written notice from SPLITROCK of such failure, SPLITROCK may terminate this
Agreement. NETWORKTWO shall then be liable for all charges incurred as of
the date of termination and, if applicable, any Termination Charges
associated with termination prior to the Commitment Ending Date. The
Termination Charges will consist of the difference between the total
aggregate payments made by NETWORKTWO under this Agreement and $11 million.
NETWORKTWO will be excused from said Termination Charges when its aggregate
payments to SPLITROCK under this Agreement is equal to or exceeds $11
million. It is agreed that Splitrock's damages and or losses shall be
difficult or impossible to ascertain. The provision for a Termination
Charge is intended, therefore, to establish liquidated damages in the event
of a termination and is not intended as a penalty. If SPLITROCK fails to
perform any material term or condition of this Agreement within thirty (30)
days after receipt of written notice from NETWORKTWO of such failure,
NETWORKTWO may terminate this Agreement.

6. PROPRIETARY INFORMATION:

A. Confidential Information: The parties understand and agree that the
terms and conditions of this Agreement, all documents referenced
herein and invoices to NETWORKTWO for Service provided hereunder,
communications between the parties regarding this Agreement or the
Service to be provided hereunder (including price quotes to NETWORKTWO
for any Service proposed to be provided or actually provided
hereunder), as well as such information relevant to any other
agreement between the parties (collectively, "Confidential
Information"), are confidential as between NETWORKTWO and SPLITROCK.

B. Limited Disclosure: A party shall not disclose Confidential
Information unless subject to discovery or disclosure pursuant to
legal process, or to any party other than the directors, officers, and
employees of a party or a party's agents including their respective
brokers, lenders, insurance carriers or bona fide prospective
purchasers who have specifically agreed in writing to nondisclosure of
the terms and conditions hereof. Any disclosure hereof required by
legal process shall only be made after providing the non-disclosing
party with notice thereof in order to permit the non-disclosing party
to seek an appropriate protective order or exemption. Violation by a
party or its agents of the foregoing provisions shall entitle the
non-disclosing party, at its option, to obtain injunctive relief
without a showing of irreparable harm or injury and without bond.

C. Press Releases: The parties further agree that any press release,
advertisement or publication generated by a party regarding this
Agreement, the Service provided hereunder or in which a party desires
to mention the name of the other party or the other party's parent or
affiliated companies, will be submitted to the non-publishing party
for its written approval prior to publication.

D. Survival of Confidentiality: The provisions of this Section 6 will be
effective as of the date of this Agreement and remain in full force
and effect for a period which will be the longer of (i) one (1) year
following the date of this Agreement, or (ii) one (1) year from the
termination of all Service hereunder.

7. PRICING: Rates for ATM Services shall be as set forth in SPLITROCK's ATM
Price and Discount Structure attached hereto as Exhibit A. Discounts shall
be as described as set forth below and in the attached Exhibit A.

DISCOUNT SCHEDULE

<TABLE>
<CAPTION>
1st through 12th month

Monthly Volume Discount
- -------------- --------
<S> <C> <C>
All monthly volumes 45%

13th through 18th month
Month SPLITROCK "Factored" Credit + Actuals See attached Exhibit A.
- ----- -------------------------------------
13th $500,000 + actual charges = volume
</TABLE>

Page 2
<PAGE> 4
14th $400,000 + actual charges = volume
15th $300,000 + actual charges = volume
16th $200,000 + actual charges = volume
17th $100,000 + actual charges = volume
18th $0 + actual charges = volume

(19th through 36th month) See attached Exhibit A

The term "factored credit", as used above for months 13 to 18, shall mean a
monthly declining sum that SPLITROCK factors in to the calculation for
determining the total monthly volume.

During the 18th month following the Commencement Date, SPLITROCK agrees, if
requested by NETWORKTWO, to cooperate in a good faith evaluation of average
industry price trends for the types of services provided under this Agreement
and, if such prices have fallen materially since the Commencement Date, to
negotiate in good faith for a corresponding adjustment in the prices and
discounts to be paid by NETWORKTWO for the remaining term of this Agreement. In
the event any such adjustments are agreed upon, the Minimum Monthly Commitment
of Paragraph 2, and the Termination Charges of Paragraph 5, will be revised
proportionately.

8. APPLICATION OF DISCOUNTS: Commencing as of the Commencement Date and
continuing through the Commitment Ending Date, SPLITROCK agrees to
aggregate monthly Base Rate Charges for ATM Services (collectively "Monthly
Volume") in determining NETWORKTWO's corresponding discount for ATM
Services.

9. WAIVER OF ATM INSTALLATION CHARGES: Commencing with the Commencement Date
and continuing through the Commencement Ending Date, SPLITROCK agrees to
waive installation charges ("Installation Waivers") set forth in Auxillary
Charges, attached hereto as Appendix B. In the event that NETWORKTWO
terminates this Agreement prior to the Commitment Ending Date, SPLITROCK may
debit NETWORKTWO's account in the amount as deletion and cancellation
charges shown on Exhibit B.

10. WARRANTY AND LIMITATION OF LIABILITY

A. UNDER THIS AGREEMENT, SPLITROCK PROVIDES SERVICES, NOT GOODS. SPLITROCK
WARRANTS THAT IT WILL PERFORM THESE SERVICES IN A WORKMANLIKE MANNER.
NO TARIFFED SERVICES ARE OR WILL BE PROVIDED UNDER THIS AGREEMENT.
SPLITROCK MAKES NO OTHER WARRANTY OR GUARANTEE, EXPRESS OR IMPLIED,
UNDER THIS AGREEMENT, AND SPLITROCK EXPRESSLY DISCLAIMS ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

B. FOR PURPOSES OF THIS PARAGRAPH 10.B., SPLITROCK INCLUDES SPLITROCK AND
ANY AFFILIATED AND SUBSIDIARY COMPANIES OF SPLITROCK, AND THE DIRECTORS,
EMPLOYEES, OFFICERS, AGENTS, CONTRACTORS, SUBCONTRACTORS AND SUPPLIERS
OF ALL OF THEM.

(1) SPLITROCK'S LIABILITY TO NETWORKTWO ON ACCOUNT OF ANY ACTS OR
OMISSIONS RELATING TO THIS AGREEMENT SHALL BE LIMITED TO PROVEN
DIRECT DAMAGES IN AN AGGREGATE AMOUNT NOT TO EXCEED $20,000.00.
HOWEVER, NOTHING IN THIS SUBPARAGRAPH 10B(1) LIMITS SPLITROCK'S
LIABILITY FOR DIRECT DAMAGES TO REAL OR TANGIBLE PERSONAL PROPERTY,
OR FOR BODILY INJURY OR DEATH, PROXIMATELY CAUSED BY SPLITROCK'S
NEGLIGENCE.

(2) SPLITROCK SHALL NOT BE LIABLE FOR INDIRECT, INCIDENTAL,
CONSEQUENTIAL, RELIANCE SPECIAL DAMAGES, INCLUDING WITHOUT
LIMITATION DAMAGES FOR HARM TO BUSINESS, LOST PROFITS, LOST SAVINGS
OR LOST REVENUES, WHETHER OR NOT SPLITROCK HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.

(3) THESE LIMITATIONS OF LIABILITY SHALL APPLY REGARDLESS OF THE FORM
OF ACTION, WHETHER IN CONTRACT, WARRANTY, STRICT LIABILITY OR TORT.

Page 3
<PAGE> 5
INCLUDING WITHOUT LIMITATION NEGLIGENCE OF ANY KIND, WHETHER
ACTIVE OR PASSIVE, AND SHALL SURVIVE FAILURE OF AN EXCLUSIVE
REMEDY.

(4) SPLITROCK SHALL NOT BE LIABLE FOR (1) SERVICE IMPAIRMENTS
CAUSED BY ACTS WITHIN THE CONTROL OF NETWORKTWO, ITS
EMPLOYEES, AGENTS, SUBCONTRACTORS, SUPPLIERS OR LICENSEES OR
(2) INTEROPERABILITY OF SPECIFIC NETWORKTWO APPLICATIONS.

C. SPLITROCK acknowledges that, in the course of its performance
under this Agreement, it will obtain knowledge about the identity,
location, usage patterns and other characteristics of NETWORKTWO's
customers. SPLITROCK warrants that it will not use this
information to solicit, market or otherwise deal directly with
NETWORKTWO's Customers without the written authorization of
NETWORKTWO. The previsions of this Paragraph 10.C. will survive
for six months following termination or expiration of the term of
this Agreement.

11. GENERAL

A. If a dispute arises out of or relates to this Agreement, or its
breach, and if the dispute cannot be settled by good-faith
negotiations, the parties agree to submit the dispute to the
American Arbitration Association for non-binding mediation by a
sole mediator. Each party shall bear its own expenses associated
with the mediation, and an equal share of the compensation of the
mediator and administrative fees. The parties, their
representatives, other participants and the mediator shall hold the
existence, content and result of the mediation in confidence.

B. This Agreement shall be governed by and construed under the
laws of the State of Texas, except its choice of law rules.

C. Neither party shall publish or use any advertising, sales
promotions, press releases or other publicity which use the other
party's name, logo, trademarks or service marks without the prior
written approval of the other party.

D. Nothing in this Agreement shall create or vest in NETWORKTWO
any right, title, or interest in the Services, other than the right
to use the Services under the terms and conditions of this
Agreement.

E. If any portion of this Agreement is found to be invalid or
unenforceable, the remaining portions shall remain in effect and
the parties will begin negotiations for a replacement of the
invalid or unenforceable portion.

F. This Agreement may not be assigned by either party without the
prior written consent of the other. SPLITROCK may subcontract any
or all of the work to be performed by it under this Agreement, but
shall retain responsibility for the work that is subcontracted.

G. SPLITROCK's performance obligations under this Agreement shall
be solely to NETWORKTWO and not to any third party. Other than as
expressly set forth herein, this Agreement shall not be deemed to
provide third parties with any remedy, claim, right of action, or
other right.

H. SPLITROCK SHALL NOT HAVE ANY LIABILITY FOR DAMAGES OR DELAYS
DUE TO FIRE, EXPLOSION, LIGHTNING, POWER SURGES OR FAILURES,
STRIKES OR LABOR DISPUTES, WATER, ACTS OF GOD, THE ELEMENTS, WAR,
CIVIL DISTURBANCES, ACTS OF CIVIL OR MILITARY AUTHORITIES OR THE
PUBLIC ENEMY, INABILITY TO SECURE PRODUCTS OR TRANSPORTATION
FACILITIES, FUEL OR ENERGY SHORTAGES, ACTS OR OMISSIONS OF
COMMUNICATIONS CARRIERS OR SUPPLIERS, OR OTHER CAUSES BEYOND ITS
CONTROL WHETHER OR NOT SIMILAR TO THE FOREGOING.

I. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing
unless otherwise specified in this Agreement and shall be deemed to
have been duly made and received when personally served, or when
mailed by first class mail, postage prepaid, to the addresses
indicated on Page 1 of this Agreement. The parties may change the
addresses on ten (10) days' prior written notice.

THIS IS THE ENTIRE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SERVICES
PROVIDED HEREUNDER AND IT SUPERSEDES ALL PRIOR AGREEMENTS, PROPOSALS,
REPRESENTATIONS, STATEMENTS, OR UNDERSTANDINGS, WHETHER WRITTEN OR ORAL.

Page 4
<PAGE> 6
CONCERNING SUCH SERVICES. No change, modification, or waiver of any of the
terms of this Agreement shall be binding unless included in a written agreement
and signed by both parties.

NETWORKTWO COMMUNICATIONS GROUP SPLITROCK SERVICES, INC.

/s/ ALFRED J. DEIMAGGI /s/ WILLIAM R. WILSON
- ------------------------------- --------------------------------
(Authorized Signature) (Authorized Signature)

ALFRED J. DEIMAGGI WILLIAM R. WILSON
- ------------------------------- --------------------------------
President & COO (Print Name and Title)

4/26/98 4/28/98
- ------------------------------- --------------------------------
(Date Signed) (Date Signed)

Page 5

<PAGE> 1

EXHIBIT 12

SPLITROCK SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

Period from
Inception
(March 5, 1997) Six Months
through Ended
December 31, June 30,
1997 1998
------------ ---------

Pre-tax loss from continuing operations $(10,121) $(13,628)

Fixed charges:
Interest expense and amortization
of debt discount and premium on
all indebtedness 235 842

Portion of rentals on facilities
representative of an interest factor 72 207
-------- -------
Total fixed charges 307 1,049

Loss before income taxes and fixed charges $ (9,814) $(12,579)
======== ========
Ratio of earnings to fixed charges: A A
======== ========

COMPUTATION OF PROFORMA RATIO OF EARNINGS
TO FIXED CHARGES AFTER ADJUSTMENT FOR
ISSUANCE OF SENIOR NOTES

Period from
Inception
(March 5, 1997) Six Months
through Ended
December 31, June 30,
1997 1998
------------ ---------
Loss before income taxes and fixed charges, as above: $ (9,814) $(12,579)
======== ========
Fixed charges, as above 307 1,049

Adjustments:
Estimated net increase in interest expense
from financing 26,187 15,507
-------- --------

Total pro forma fixed charges $ 26,494 $ 16,556
======== ========
Pro forma ratio of earnings to fixed charges A A
======== ========

(A) As a result of the losses incurred, the Company was unable to fully cover
the indicated fixed charges.

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 2, 1998 relating to
the financial statements of Splitrock Services, Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.

PricewaterhouseCoopers LLP

Houston, TX
September 4, 1998

<PAGE> 1
EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that Kwok L. Li, whose signature
appears below, constitutes and appoints William R. Wilson and Patrick J.
McGettigan, Jr., and each one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-1 to be filed on behalf of Splitrock Services, Inc. (the
"Company") (the "Company") in connection with the registration for resale of
certain warrants to purchase common stock of the Company, such common stock and
the 11 3/4% Series B Senior Notes held by Linsang Partners L.L.C. and any and
all amendments (including post-effective amendments) thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

_________________________________ ____________________________, 1998
Kwok L. Li

<PAGE> 2

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that Clark McLeod, whose signature
appears below, constitutes and appoints William R. Wilson and Patrick J.
McGettigan, Jr., and each one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-1 to be filed on behalf of Splitrock Services, Inc. (the
"Company") (the "Company") in connection with the registration for resale of
certain warrants to purchase common stock of the Company, such common stock and
the 11 3/4% Series B Senior Notes held by Linsang Partners L.L.C. and any and
all amendments (including post-effective amendments) thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

_________________________________ ____________________________, 1998
Clark McLeod

<PAGE> 3

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that Roy A. Wilkens, whose signature
appears below, constitutes and appoints William R. Wilson and Patrick J.
McGettigan, Jr., and each one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-1 to be filed on behalf of Splitrock Services, Inc. (the
"Company") in connection with the registration for resale of certain warrants to
purchase common stock of the Company, such common stock and the 11 3/4% Series B
Senior Notes held by Linsang Partners L.L.C. and any and all amendments
(including post-effective amendments) thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.

_________________________________ ____________________________, 1998
Roy A. Wilkens

<PAGE> 4

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that Samer Salameh, whose signature
appears below, constitutes and appoints William R. Wilson and Patrick J.
McGettigan, Jr., and each one of them, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Registration
Statement on Form S-1 to be filed on behalf of Splitrock Services, Inc.(the
"Company") (the "Company") in connection with the registration for resale of
certain warrants to purchase common stock of the Company, such common stock and
the 11 3/4% Series B Senior Notes held by Linsang Partners L.L.C. and any and
all amendments (including post-effective amendments) thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.

_________________________________ ____________________________, 1998
Samer Salameh

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE
30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,177
<SECURITIES> 0
<RECEIVABLES> 6,238
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,835
<PP&E> 51,383
<DEPRECIATION> (8,235)
<TOTAL-ASSETS> 57,630
<CURRENT-LIABILITIES> 26,132
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 7,879
<TOTAL-LIABILITY-AND-EQUITY> 57,630
<SALES> 21,214
<TOTAL-REVENUES> 32,214
<CGS> 38,648
<TOTAL-COSTS> 45,183
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 842
<INCOME-PRETAX> (13,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,628)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)

</TABLE>