WORLD ACCESS INC /NEW/, 10-K/A, 1999-10-07

WORLD ACCESS INC /NEW/
10-K/A, 1999-10-07
COMMUNICATIONS EQUIPMENT, NEC

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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A
AMENDMENT NO. 2
(AMENDING PART II -- ITEMS 7 AND 8; AND PART IV -- ITEM 14)

<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>

COMMISSION FILE NUMBER 0-29782

WORLD ACCESS, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 58-2398004
(State of Incorporation) (I.R.S. Employer Identification No.)
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<TABLE>
<S> <C>
945 EAST PACES FERRY ROAD
SUITE 2200
ATLANTA, GA 30326
(Address of Principal Executive (Zip Code)
Offices)

(404) 231-2025
(Registrant's Telephone Number)
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]

As of April 8, 1999 there were 44,854,797 shares of Common Stock
outstanding. The aggregate market value of the voting Common Stock held by
non-affiliates of the Registrant as of April 8, 1999, as based on the average
closing bid and ask prices, was approximately $332.9 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on June 15, 1999 are incorporated into Part III.
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WORLD ACCESS, INC.
FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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PAGE
NUMBER
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 20
Item 3 Legal Proceedings........................................... 20
Item 4 Submission of Matters to a Vote of Security Holders......... 21
Item 4.5 Executive Officers of the Registrant........................ 22

PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6 Selected Financial Data..................................... 25
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 7A Quantitative and Qualitative Disclosures about Market
Risks....................................................... 51
Item 8 Financial Statements........................................ 51
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 93

PART III
Item 10 Directors and Executive Officers of the Registrant.......... 93
Item 11 Executive Compensation...................................... 93
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 93
Item 13 Certain Relationships and Related Transactions.............. 93

PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 94
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FORWARD LOOKING STATEMENTS

This Form 10-K Report contains certain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1993, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward looking statements may be
identified by use of such terms as "believes", "anticipates", "intends", or
"expects". These forward-looking statements relate to the plans, objectives and
expectations of World Access, Inc. (the "Company") for future operations. In
light of the risks and uncertainties inherent in all such projected operational
matters, the inclusion of forward-looking statements in this Report should not
be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved or that any of the Company's
operating expectations will be realized.

Factors that could cause actual results to differ from the results
discussed in the forward-looking statements include, but are not limited to, the
Company's dependence on (i) recently introduced products and products under
development; (ii) successful integration of new acquisitions; (iii) the impact
of technological change on the Company's products; (iv) changes in customer
rates per minute; (v) termination of certain service agreements or inability to
enter into additional service agreements; (vi) changes in or developments under
domestic or foreign laws, regulations, licensing requirements or
telecommunications standards; (vii) changes in the availability of transmission
facilities; (viii) loss of the services of key officers; (ix) loss of a customer
which provides significant revenues to the Company; (x) highly competitive
market conditions in the industry; and (xi) concentration of credit risk. The
foregoing review of the important factors should not be considered as
exhaustive. The Company undertakes no obligation to release publicly the results
of any future revisions it may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

PART I

ITEM 1. BUSINESS

The Company provides international long distance voice and data services
and proprietary network equipment to the global telecommunications markets. The
Company's Telecommunications Group provides wholesale international long
distance service through a combination of its own international network
facilities, various international termination relationships and resale
arrangements with other international long distance service providers. The
Company's Equipment Group develops, manufactures and markets digital switches,
billing and network telemanagement systems, cellular base stations, fixed
wireless local loop systems, intelligent multiplexers, digital microwave radio
systems and other telecommunications network products. To support and complement
its product sales, the Company also provides its customers with a broad range of
network design, engineering, testing, installation and other value-added
services.

REORGANIZATION

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TELECOMMUNICATIONS GROUP INDUSTRY BACKGROUND

The international long distance telecommunications services industry
consists of all transmissions of voice and data that originate in one country
and terminate in another. This industry is undergoing a period of fundamental
change which has resulted in substantial growth in international
telecommunications traffic. According to industry sources, worldwide gross
revenues for providers of international telephone service were in excess of
$65.0 billion in 1997. The volume of international traffic on the public
telephone network is expected to grow at a compound annual growth rate of
approximately 8.7% from 1998 through the year 2000.

The strong growth experienced in the international telecommunications
market is expected to continue into the foreseeable future, driven principally
by the following factors:

- Dramatic increases in the availability of telephones and the number
of access lines in service around the world, stimulated by economic growth
and technological advancements;

- Opening of overseas telecommunications markets due to deregulation
and the privatization of government-owned monopoly carriers, permitting the
emergence of new carriers;

- Rapid globalization of commerce, trade and travel, which is creating
increased communications needs;

- Reduction of international long distance rates, driven by
competition and technological advancements, which is making international
calling available to a much larger customer base and stimulating increasing
traffic volumes;

- Increased availability and quality of digital undersea fiber optic
cable, which have enabled long distance carriers to improve the quality of
their service while reducing customer access cost;

- Worldwide proliferation of new communications services such as
cellular telephones, facsimile machines, the Internet and other forms of
data communications services; and

- Rapidly increasing demand for bandwidth-intensive data transmission
services, including the Internet.

Bilateral operating agreements between international long distance carriers
in different countries are key components of the international long distance
telecommunications market. Under an operating agreement, each carrier agrees to
terminate traffic in its country and provide proportional return traffic to its
partner carrier. The implementation of a high quality international network,
including the acquisition and utilization of digital undersea fiber optic cable
and adherence to the technical recommendations of the International Telegraph
and Telephone Consultative Committee of the International Telephone Union for
signaling, protocol and transmission, is an important element in enabling a
carrier to compete effectively in the international long distance
telecommunications market.

In February 1997, over 60 countries signed a global agreement on
telecommunications under the auspices of the World Trade Organization (the
"WTO"), which became effective February 5, 1998. The agreement seeks to open
markets to competition in telecommunications services, improve foreign
investment opportunities in the telecommunications industry and to adopt
pro-competitive regulatory principles. The Federal Communications Commission
("FCC") has adopted various rules designed to implement the principles of the
WTO agreement.

EQUIPMENT GROUP INDUSTRY BACKGROUND

The global telecommunications industry has undergone significant
transformation and growth in recent years due to continued domestic
deregulation, technological innovation and growth in international markets. In
addition, business and residential demand for voice, data and video services has
increased the need for additional systems capacity and network bandwidth to
accommodate the provision of such services by telecommunications providers. The
Company believes that these market forces will intensify in the foreseeable
future and that an increased number of telecommunications service providers, the
availability of new services and strong international demand for the deployment
of basic telephone service will provide the Company with
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extensive opportunities to sell its wireline and wireless switching, transport
and access products in the United States and in international markets.

Domestic Deregulation. The number of telecommunications service providers
continues to increase as a result of the federal and state deregulation of the
United States telecommunications industry. Changes in federal and state
regulations have created the opportunity for a number of new network operators
to enter the market and have fostered competition between both new and
established network operators. The Telecommunications Act of 1996
("Telecommunication Act") permits local and long distance telecommunications
companies, cable television companies and electric utility companies, subject to
certain conditions designed to facilitate local exchange competition, to compete
with each other to provide local and long distance telephony, data and video
services. The Telecommunications Act has also contributed to an increasing
number of mergers and acquisitions among large telecommunications service
providers. As a result, certain providers have changed key network technology
already in place to optimize efficiency and network compatibility.

To accommodate the demand for enhanced wireless services, the FCC auctioned
additional spectrum licenses for wireless communications in recent years,
potentially increasing the number of operators competing in each metropolitan
statistical area from two to eight. In addition, the FCC has announced plans to
auction additional spectrum in the future. Changes in FCC and certain state
public utility commission regulations governing interconnections have created
opportunities for the Regional Bell Operating Companies ("RBOCS") and other
local exchange carriers to provide services in markets and geographic regions in
which they traditionally have been prohibited. In addition, such changes have
allowed local exchange carriers, inter-exchange carriers, competitive access
providers, cable television companies and other telecommunications service
providers to enter these same markets and regions. The Company believes that the
Telecommunications Act, together with FCC and other government initiatives, will
increase the demand for telecommunications systems and services as network
operators respond to the changing competitive environment by constructing new or
enhancing existing networks and increasing the available bandwidth to meet
customer demand for voice, data and video services.

Technological Innovation. In recent years, there have been a number of
significant developments relating to telecommunications technology, including
the continuing miniaturization of large scale integrated circuits, the
development of lower cost, higher capacity memory devices and microprocessors
and new network protocols such as spread spectrum Code Division Multiple Access
("CDMA"), which are now available to offer improved performance and increased
security. These developments have lowered the cost of delivering multifunctional
services combining voice, data and video. In addition, new low cost, modular,
software-driven products (so-called "intelligent" products) can be readily
upgraded to provide additional revenue generating features such as call waiting,
call forwarding and caller-ID without having to undertake costly hardware
replacement. Moreover, the increasing use of wireless systems and technology
permits the more rapid deployment of telecommunications systems at lower costs
than traditional wireline networks.

These technological advances make it possible for products to facilitate
the delivery of telecommunications services and create new network configuration
options. For example, Integrated Services Digital Network ("ISDN") service
allows for the dynamic allocation of bandwidth between, and simultaneous
transmission of, any combination of voice, data and video, and individual call
set-up permits users to easily designate and change the service configuration.
Other new advanced technologies include Asymmetrical Digital Subscriber Line
("ADSL"), a communications technology which permits the transmission of
information at rates up to 50 megabits per second over existing copper wires,
and High-Speed Digital Subscriber Line ("HDSL"), a communications technology
which permits the digital transmission of information over longer distances
without adding signal regenerator equipment. These new technologies create
additional demands for switching systems, intelligent multiplexers and digital
loop carriers. In addition, cable television companies are beginning to expand
beyond one-way broadcast to provide interactive services using high-speed cable
modems and have announced plans to provide telephony and high speed data
services.

Growth in International Markets. The Company believes that international
markets represent significant opportunities for growth, particularly in Latin
America and other developing areas. Advances in radio and antenna technology in
recent years have made it possible for carriers to provide basic communications
access

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with wireline quality without the construction cost and obstacles associated
with establishing a wireline grid, thereby further encouraging the deployment of
telecommunications networks in developing countries. The governments of a number
of developed and developing countries have privatized, or are in the process of
privatizing, their state-owned telecommunications service providers and have
granted, or are in the process of granting, licenses to new network operators to
compete with them. In many instances, as part of the privatization, these
governments have imposed service requirements on all network operators,
resulting in an acceleration of capital expenditures on new or expanded network
systems.

TELECOMMUNICATIONS GROUP SERVICES

The Company's Telecommunications Group was established in December 1998 in
connection with the acquisition of Cherry Communications Incorporated, d/b/a
Resurgens Communications Group ("RCG"), and Cherry Communications U.K. Limited
("Cherry U.K.", and together with RCG, "Resurgens"). RCG operated under Chapter
11 bankruptcy protection from October 1997 to December 1998, with debtor-in-
possession financing provided by a wholly-owned subsidiary of MCI WorldCom, Inc.
("WorldCom"), its largest creditor. John D. Phillips, who was appointed the
Company's President and Chief Executive Officer in December 1998, was appointed
President and Chief Executive Officer of Resurgens in October 1997 and oversaw a
restructuring program that consisted of the recruitment of an experienced
management team, a complete redesign of Resurgens' operating network, the
installation of a new and accurate billing system, the establishment of a
network management center and the negotiation of new direct connectivity
agreements. Resurgens' monthly revenues increased from a nominal amount in early
1998 to in excess of $20.0 million in December 1998 as a result of the
restructuring program.

The Telecommunications Group is a facilities-based international long
distance carrier, offering wholesale switched voice and data services, primarily
to U.S.-based long distance carriers. International long distance service is
terminated in foreign countries through a combination of owned and leased
domestic and international network facilities (including international switching
facilities and digital undersea fiber optic cable), various foreign termination
relationships, and resale arrangements with other international long distance
providers.

The Telecommunications Group owns or leases gateway switching facilities in
Los Angeles, Dallas, Chicago, Newark and London, England. This internal network
consists of an international gateway switch in each city linked by leased
inter-machine trunking facilities and owned trans-Atlantic cable facilities.
These switches serve as customer "meet points" and digital routing facilities
for transmission of calls to their ultimate destination via cost efficient
routing. Additionally, the switches record call data for monitoring customer
usage, reviewing transmission route implementation, customer billing and
analysis of vendor invoices for accuracy. The multiple switch configuration
provides redundant capability to minimize the effect of network component
failure. The network switches are currently equipped at approximately 65% of
maximum port capacity.

The Telecommunications Group's Network Operations Center in San Francisco
is in place to ensure the integrity of the internal network and the quality of
the services provided. The Center operates 24 hours a day, seven days a week and
is staffed with experienced technicians and customer service personnel.

The Telecommunications Group also owns an Indefeasible Right of Use ("IRU")
in Globesystem Atlantic to connect its domestic switches with the United
Kingdom. This submarine fiber optic system is composed of two cables, (i)
CANTAT-3, which links Europe with Canada, and (ii) CANUS-1, which links Canada
with the United States. The owned trans-Atlantic capacity is three digital
signal level 3's ("DS3"). Capacity of one DS3 refers to a transmission rate of
44 million bits per second with 672 channels. This IRU allows calls to be
delivered on a more cost effective basis when compared to other short-term
variable arrangements.

The Telecommunications Group's long distance traffic is terminated through
agreements with other carriers. These include agreements directly with a
wholly-owned or partially-owned government carrier such as Post Telegraph &
Telephone operators (a "PTT Direct") or with a licensed alternative
long-distance carrier (a "Carrier Direct", and together with a PTT Direct, a
"Direct"). Transit agreements are also in place
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with PTTs for termination services in which the PTT acts as an intermediary for
delivery to other destination countries (a "Direct Transit"). Agreements with
carriers who act as intermediaries for other carriers are also used ("Resale
Agreements"). These arrangements all provide for termination on a variable, per
minute basis with rates being set for different termination points.

A combination of PTT Directs, Carrier Directs, Direct Transits and Resale
Agreements is used to take advantage of price opportunities available in the
market. These are generally provided by carriers who target specific geographic
regions to achieve low-cost termination facilities, carriers who presently have
under-utilized facilities and carriers who have made volume commitments to
achieve favorable pricing. As of March 30, 1999, the Telecommunications Group
had PTT Directs, Carrier Directs, Direct Transits and Resale Agreements to
terminate traffic in more than 200 countries.

For selected financial information for each of the Company's segments,
refer to "Part II -- Item 6. Selected Financial Data."

EQUIPMENT GROUP PRODUCTS AND SERVICES

The Company's Equipment Group offers wireline and wireless switching,
transport and access products for the global telecommunications marketplace.
These products allow telecommunications service providers to build and upgrade
their networks to provide a wide range of voice, data and video services to
business and residential customers. Prior to 1998, a significant portion of the
products sold by the Company was Northern Telecom switching products and
reengineered cellular base stations and related mobile network equipment. As a
result of the Company's acquisitions of Advanced TechCom, Inc. ("ATI"), NACT
Telecommunications, Inc. ("NACT") and Telco Systems, Inc. ("Telco") during 1998,
and the strategic decision made in December 1998 to sell its wireline switch
resale business (see "-- Discontinued Operations"), the Equipment Group's
products are now predominantly proprietary in nature and include advanced
technology platforms and software applications.

Switching Products. The Equipment Group markets digital telephone
switching products that are used for local, tandem, toll and cellular
applications. The switching product line consists of the STX switching system,
NTS billing systems and the CDX switch. Current users of the Company's switching
products are primarily U.S.-based local exchange carriers, inter-exchange
carriers, competitive access providers, private network operators and other
telecommunications service providers.

NACT's STX Switching System ("STX") consists of a switching hardware
platform and an integrated suite of applications software. The Company sells an
optional companion Master Control Unit ("MCU") to integrate and service multiple
STXs and to add redundancy to the network. The Company believes that the STX
offers value added features and capacity at price points typically below those
offered by its competitors. The STX hardware platform can operate on a
standalone basis with a port capacity of 1,920. An optional MCU can link up to
three STXs, which can be served by a common database for a total system capacity
of 5,760 ports. The STX is also designed to work seamlessly with NACT's NTS
billing systems.

The suite of STX applications software consists of over one million lines
of code. This software supports major application features that are fully
integrated and interoperable. The major applications features include: equal
access calling (1+), automated operator (0+), live operator service provider
support (0--), real-time validation of credit card and billing numbers, prepaid
debit cards, prepaid cellular, international call back, phone centers, real-time
rating, fraud minimization, external computer application programming
interfaces, call reorigination, and integrated audio with 22 languages.
Interoperability enables several applications packages to be used in conjunction
with each other. Almost all features are implemented in software, allowing
unlimited capability for enhancement and customization.

The MCU allows interconnectivity between multiple STX platforms and permits
database information to become centralized by connecting co-located systems.
Interconnectivity permits expanded carrier call routing. With more ports
available due to the MCU, the likelihood of a caller receiving a "system busy"
signal is essentially eliminated. Downtime of a single switch has minimal caller
impact when proper carrier management is used.

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The STX applications platform has been developed to allow multiple
application packages to run simultaneously and in a seamless fashion. An example
would be a client wishing to use international call back/reorigination, with the
assistance of an operator to place the call, and the cost of the call being
debited from the client's prepaid calling account. Virtually all features are
implemented in the software allowing unlimited capability for enhancement and
customization.

The NTS 1000 Billing System ("NTS 1000") is a call rating, accounting,
switch management, invoicing and traffic engineering system designed to process
the day-to-day operations of a small-to-medium sized long distance company. The
NTS 1000 can collect calls from most major switching platforms, including the
STX, and can rate all types of call traffic and, using a sophisticated rating
engine, provide the owner with a highly flexible and completely customized
rating capability. The accounting system handles all of the required information
for managing a long distance customer base including configuration of
authorization codes, accounts receivable, and management of delinquent accounts.
A major feature of the NTS 1000 is its switch management capability. When
coupled with the STX, information that has been entered into the NTS 1000 can be
electronically transferred into the STX, thereby minimizing data entry needs.
The NTS 1000 also has comprehensive international call back/reorigination and
prepaid debit card management support, as well as a complete invoicing package
that supports multiple invoice styles and options for summary reports. It has a
sophisticated traffic engineering reporting package that provides the ability to
generate over 20 types of reports with a user specified beginning and ending
time range. The NTS 1000 is Year 2000 compliant with NTS version 7.5 software,
which is expected to be released in the second quarter of 1999.

The NTS 2000 Billing System ("NTS 2000") is NACT's next generation billing
system, incorporating leading edge technology, data processing techniques and
Year 2000 compliance. This new product integrates the popular features and
functionality of the NTS 1000 with the following major enhancements: real time
data processing, including call rating; user friendly graphical user interface
("GUI"); open system connectivity, which allows integration with other
information systems; and enhanced security. This new system utilizes Informix's
industry standard On-Line Dynamic Server RDBMS, which provides for expanded
growth and also takes advantage of multiprocessor configurations. The new GUI
screens provide an advanced user interface, which dramatically increases user
productivity by consolidating operational and management needs and providing an
environment that is user friendly and intuitive. The NTS 2000 has additional
functionality, including support of 20-digit authorization code numbers, full
support of international rating, real time credit limit checks, and real-time
customer support management. The NTS 2000 was released for general sale during
the first quarter of 1999.

NACT also offers facilities management services to its customers who do not
have or plan to hire technical operators. This service allows the customer to
concentrate on marketing its products while NACT operates and maintains its
switch for a fee. NACT offers facilities management services primarily to
facilitate sales of its switches.

Pursuant to a long-term technology license agreement, the Company
manufactures and markets the Compact Digital Exchange Switch ("CDX"), a
microprocessor-based, modular, digital central office switch. The CDX utilizes
extensive large scale integrated circuit technology to provide advanced
telephony services such as call waiting, call forwarding and conference calling,
and requires reduced power and floorspace compared with alternative products.
The current switch serves applications up to 5,000 subscriber lines and is
designed to be expandable through future software enhancements. The CDX is
targeted for use in the international marketplace due to its compatibility with
international standards, "plug and play" installation features and tolerance of
a wide range of environmental conditions.

The Company intends to expand its United States customer base for switching
products and to increase its marketing efforts to customers outside the United
States through the addition of international features to the STX. This
development effort is in process and is expected to be completed in 1999. In
addition, the Company recently began a long-term development program to
integrate the central office functionality of the CDX and the long-distance
functionally of the STX into a common, "next generation" technology platform.
This strategic decision, performance difficulties experienced by certain
customers' applications of the CDX switch in 1998, and dramatically reduced
internal estimates for CDX switch revenues in 1999 caused the

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Company to significantly write-down CDX related assets as of December 31, 1998
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restructuring and Other Charges.")

Transport and Access Products. The Equipment Group develops, manufactures
and markets transport products, which are used for high-capacity connectivity
between points within a communications network, and access products, which are
used to provide integrated access to subscribers for network services. These
products are primarily digital and provide for the movement of any combination
of voice, data and video traffic across wireline or wireless media. Major
products offered include broadband transmission ("Broadband") and network access
("Access") products engineered by Telco, ATI microwave and millimeterwave radio
systems and cellular base stations and related mobile network equipment sold by
the Company's Cellular Infrastructive Supply, Inc. ("CIS") subsidiary.

Telco's products are deployed at the edge of the service providers'
networks to provide organizations with a flexible, cost-effective means of
transmitting voice, data and video traffic over public or private networks.
These products are used in a wide variety of applications by network service
providers, such as long distance carriers, RBOCs, independent and competitive
local exchange providers ("CLEC"), as well as government agencies, electric
utilities, wireless service operators, and major corporations. Its products,
which can be found most often in telephone company central offices and in
private communications networks, perform functions that range from basic
signaling and multiplexing of DS0 (64kbps) low speed data and voice traffic to
digital fiber optic transmission of high-speed, high-capacity services over
SONET OC-3 (155 Mbps) networks.

Primary customers of Telco's Broadband products are RBOCs and major
independent telephone companies as well as competitive and alternate access
providers. Products are sold as either complete systems or as stand-alone
equipment installed by Telco, third party installers, or by Telco's customers.
The most common application of Broadband transmission products is for
cost-effective delivery of high capacity T1 (1.544Mbps) and T3 (45Mbps) services
in the local loop applications between the telephone company central office or
hubbing sites and customers' business premises. These services are delivered
over both fiber optic technology and copper-based technology.

In early 1998, Telco introduced its EdgeLink 100 product. This DS3
multiplexer aggregates and consolidates traffic from various T1 lines over a
more cost-effective T3 line. It is marketed to major carriers as well as
competitive local exchange providers interested in reducing their cost of access
and delivery of services to customers.

Telco's Access products are designed for the digital multiplexing of voice
and data traffic of up to T1 and international E1 rates. The trend towards
increased use of public network services for voice, data and video applications
has created greater demand for customer premises access multiplexers. Telco's
access servers enable integration of multiple slower-speed lines and services
onto a single or multiple, high-speed, T1/E1 access facility, ultimately saving
access line charges for end users. They support interfaces for various types of
telephony and data services, such as Plain Old Telephone Service ("POTS"),
Centrex extensions, P-Phones, switched data, ISDN and frame relay. In addition,
Telco Systems provides a network management system which is designed to control
its intelligent multiplexer products.

Telco's Access45 and Access60 network access servers provide highly
reliable digital access to public, private and hybrid networks. They integrate
multiple business applications through cost-effective connections to dedicated,
switched and packet network services, and support multiple networking functions
such as T1/E1 add/drop multiplexing, grooming and digital cross-connection. They
also support advanced services such as ISDN and frame relay. The products
provide complete redundant architecture for fail-safe operation, which is a
critical feature for service providers. Access45 was introduced during 1997, and
is a smaller version of Access60 representing a lower price point. It is
designed to meet a key requirement for the CLEC marketplace, which is to provide
a high number of service ports in a very small form factor. It is completely
compatible with Access60, and uses the same interface cards to deliver the same
services.

In January 1998, Telco Systems acquired Jupiter Technology, Inc. This
acquisition brought frame relay and asynchronous transfer mode ("ATM")
technology to enhance the features and interfaces available in

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Telco's product portfolio. This product family includes the EdgeLink 500, a
low-cost, frame relay access device. By combining the benefits of traditional
routers with frame relay, the Edgelink 500 enables safe access to business
critical data over public and private frame relay networks. Products which will
utilize ATM technology are currently under development and are expected to reach
technological feasibility in late 1999.

In October 1998, Telco acquired Synaptyx Corporation, a developer of
integrated access solutions focusing on new service providers in the local loop
services market. The EdgeLink 300 product is a next generation integrated access
device for bundled Internet Protocol ("IP"), Frame Relay and TDMA services.
Future versions of the EdgeLink 300 will include E1 capability for use in Europe
and other international markets. This product will provide a platform for a
family of next generation products specifically targeted at the international
marketplace.

Primary customers of Telco's Access products are long distance service
providers, competitive and alternate local access providers, RBOCs, government
agencies, electric utilities and wireless service operators. In many cases, the
products are purchased by the service providers and are installed on customer
premises or are leased to private network users. These products comply with both
North American and international standards for specific applications, and are
sold worldwide.

Telco's products use digital technology, and over 40 different plug-in
printed circuit cards are available to support a large variety of analog and
digital voice, data and video applications. The products provide conversion of
analog signals into digital information, combine them with additional digital
data inputs and enable them to be processed and transmitted at high speed over
copper wires. Telco Systems provides a full range of products from cost
effective digital channel banks to high-functionality DSU/CSU.

Telco also offers a standards-based SNMP network management system, the
MVX. This system is designed to control all major products in the Telco Systems
portfolio. This system remotely manages voice and data mix, bandwidth
allocation, and selective access to special services offered by T1 carriers. In
addition, it can be used to modify the network as user requirements change.

ATI develops, manufacturers and markets a complete family of high
performance, technologically advanced digital radios for point-to-point
transmission of data and voice for short and long haul applications. The
majority of ATI's historical sales have been to customers operating outside the
United States. ATI's product lines are offered in a wide range of data rates and
frequency bands, including 1.5 GHz to 38 GHz and DS1/E1 to DS3/E3.

CIS offers its customers cellular base stations and related mobile network
equipment. Although substantially all of the equipment sold by CIS is
manufactured by other telecommunications equipment companies, CIS provides a
full range of highly technical, value-added services such as deinstallation,
system design, equipment tuning and installation.

In mid-1997, the Company introduced its Wireless Local Loop-2000
("WLL-2000"), a fixed wireless point-to-multipoint system offering toll quality
telephone service to subscribers in urban and suburban areas and remote
communities. To take advantage of existing market opportunities, the Company
reached an agreement in 1997 with another telecommunications equipment company
to private label its point-to-multipoint radio system and exclusively market it
within certain Latin American countries. The current WLL-2000 integrates the
Company's CDX and the radio products. The integrated switch provides customers
with the ability to switch local calls at the WLL-2000 base station, thus
providing superior service and reducing expensive back-haul costs to a central
office.

In 1997, the Company also executed a technology licensing agreement that
grants the Company the perpetual right to incorporate spread spectrum CDMA-based
wireless technology into the Company's products sold throughout the world. Under
the terms of the agreement, the Company also has the rights to use the
technology covered by seven patents, all of which address digital data signals
and wireless communication systems. The Company currently intends to use this
technology as the platform for several new products, including a proprietary
version of the WLL-2000.

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Engineering Services. In 1997, the Company acquired Galaxy Personal
Communications Services, Inc. ("Galaxy"), a provider of system design,
implementation, optimization and other value-added radio engineering and
consulting services to PCS, cellular and other wireless telecommunications
service companies. The background and experience of Galaxy's management and
staff of RF engineers is also utilized to support the Company's customers as
they build new, or upgrade existing, telecommunications networks throughout the
world. Galaxy's engineers also provide customers with a full range of support
services for wireless transmission equipment, including site surveys, path
calculations, installation and maintenance.

For selected financial information for each of the Company's segments,
refer to "Part II -- Item 6. Selected Financial Data."

DISCONTINUED OPERATIONS

In December 1998, the Company formalized its plan to offer for sale all of
its non-core businesses, which consist of the refurbishment and resale of
wireline switching equipment, third party repair of telecom equipment and pay
telephone refurbishment. An investment banking firm has been engaged to
facilitate the sale and management expects the sale to be completed in 1999.

Switching equipment offered for resale by the Company has line capacities
ranging from 100 to 120,000 subscribers and 30 to 60,000 inter-exchange trunks.
These products have been developed and manufactured by other telecommunications
equipment companies, primarily Northern Telecom. These products include complete
switching systems as well as add-on frames, line cards and modified circuit
boards for either newly constructed networks or upgrades to existing networks.
The Company also repairs a broad range of switching and transmission plug-in
circuit boards originally manufactured by other telecommunications equipment
companies.

The Company's Restor Telephone Products division includes the refurbishment
and upgrade of AT&T pay telephones to like-new condition and the sale of related
pay telephone products, such as stainless steel custom logo vault doors,
handsets and dial assemblies. To date, substantially all of these refurbishment
services and product sales have been provided to four RBOCs.

SALES AND MARKETING

Telecommunications Group. The Telecommunications Group sells its services
to international long distance companies. The Group's sales and marketing
efforts are directly managed by its Chief Operating Officer and its Vice
President of U.K. Operations. As of March 30, 1999, there were eight employees
dedicated to the sales and marketing activities of the Group.

Equipment Group. The Equipment Group has a decentralized approach to the
sales and marketing of its products and services. NACT, Telco, ATI, CIS and
Galaxy each employ sales and marketing personnel responsible for obtaining a
thorough technical knowledge of its respective products and services, soliciting
new customers and maintaining relationships with new customers. The Group's
Executive Vice President of Business Development and his staff provide support
to these personnel by coordinating significant project bids that incorporate
multiple product lines and facilitating certain trade show appearances by the
Company. As of March 30, 1999, there were 65 employees conducting the sales and
marketing activities of the Equipment Group, 43 of which were dedicated to NACT
and Telco products.

NACT sells its products primarily through a direct sales force located at
its headquarters in Provo, Utah and through remote sales offices in New York,
Florida and London. NACT's marketing strategy is to generate leads through
attendance at trade shows, advertising in industry periodicals and referrals
from existing customers. NACT sponsors annual two-day meetings for its customers
to discuss their experiences with NACT's products. These discussions provide
significant input into future NACT product development and enhancement programs.

During 1997, NACT sold its first STX switching and NTS billing systems
outside the United States. NACT has established a sales presence in the United
Kingdom and plans to establish a sales presence in other countries it believes
to be strategically advantageous. NACT believes that there is substantial
opportunity for
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future growth in the international market, particularly in the developing
countries and in countries in which the telecommunications industry is being
deregulated.

Telco markets its products through a combination of its own sales force,
value-added resellers and distributors. Installation is primarily performed by
third party providers. Telco has technical support and applications engineering
personnel and offers training of customer personnel. Telco's products are
generally sold to specialized common carriers and telephone operating companies
on an off-the-shelf basis. Typically, the products have been evaluated by such
customers and approved for purchase in advance. Both Broadband and Access
products are manufactured by Telco based on forecasted usage.

CUSTOMERS

Telecommunications Group. As of March 30, 1999, the Telecommunications
Group has approximately 38 customers. In June 1998, RCG entered into a Carrier
Service Agreement (the "Service Agreement") with a wholly-owned subsidiary of
WorldCom, pursuant to which WorldCom purchases international long distance
services on a wholesale basis. WorldCom is obligated to purchase from the
Telecommunications Group at least $25.0 million a month of such services,
provided the services are of acceptable quality and the rates quoted are at
least equal to the rates WorldCom is obtaining from other third party providers.
The Service Agreement has a rolling 12-month evergreen term, subject to a one
year prior notice of termination. WorldCom prepays the services it purchases
under the Service Agreement twice a month. The Telecommunications Group's
revenues attributable to the Service Agreement comprised approximately 65% of
its total revenues for the month of December 1998 and the year ended December
31, 1998. There can be no assurance, however, that WorldCom will purchase any
services under the Service Agreement. Termination of the Service Agreement, or
any reduction in services provided thereunder, could have a material adverse
affect on the Company's business, financial condition or results of operations.

Equipment Group. A small number of customers historically has accounted
for a significant percentage of the Equipment Group's total sales. For the years
ended December 31, 1998 and 1997, no customer individually accounted for more
than 10.0% of the Group's total sales from continuing operations and the top 10
customers accounted for 30.1% and 57.0%, respectively, of the Group's total
sales from continuing operations.

NACT's applications platforms and billing systems have been accepted in a
variety of segments of the telecommunications industry and serve a broad array
of domestic and international applications. To date, NACT estimates that it has
installed over 500 application switching and billing systems. NACT's customers
are diverse and represent many different aspects of the telecommunications
industry. These customers have implemented a wide variety of features on the STX
switching platform and NTS billing system, including prepaid debit card,
international call back, operator services, prepaid cellular and other
applications for specialty markets.

Telco is dependent for a significant amount of its sales upon Bell Atlantic
Corporation, Walker and Associates and Sprint Corporation, which in total
represented approximately 62.8% and 54.7% of Telco's sales for 1998 and 1997,
respectively. Telco and other Equipment Group customers typically are not
obligated contractually to purchase any quantity of products or services in any
particular period. The loss of, or a material reduction in orders by, one or
more of these key customers could have a material adverse effect on the
Company's business, financial condition or results of operations.

International Sales. The Company's international sales from continuing
operations represented approximately 14.8% and 16.6% of the Company's total
sales from continuing operations during the years ended December 31, 1998 and
1997, respectively. The Company intends to continue to focus significant product
development and sales efforts on emerging international markets.

MANUFACTURING, ASSEMBLY AND TESTING

NACT's manufacturing operations consist primarily of material requirements
planning, material procurement and final assembly, testing and quality control
of subassemblies and completed systems. NACT

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outsources its printed circuit board assembly, which provides flexibility in the
manufacturing process and achieves lower direct labor and overhead costs. NACT
currently conducts its manufacturing operations in approximately 10,000 square
feet of its facility in Provo, Utah.

NACT utilizes an annual planning forecast, which is modified monthly, to
determine its material and outsourcing requirements. NACT orders materials with
differing lead times, generally 30 to 180 days in advance. NACT uses
"just-in-time" ordering of materials that are readily available to minimize
inventory carrying costs. NACT's systems are manufactured to a standard
configuration that allows for better production planning, lower direct labor and
overhead costs and shorter order-to-shipment times.

Telco uses major contract manufacturers to supply final products, including
U.S. Assemblies, Inc. and SCI Technologies, Inc. Telco's contract manufacturing
process primarily involves the assembly of electronic components onto
custom-designed printed circuit boards, incorporating these boards into larger
system packages, and testing the finished products to assure their proper
functioning in accordance with product specifications. Most components used in
the process are standard electrical, electronic and mechanical parts available
from many suppliers. Telco presently maintains a favorable relationship with its
contract manufacturers and its other suppliers and does not presently anticipate
any difficulties that would prevent timely procurement of scheduled products.

Products manufactured by the Company typically require the procurement of
printed circuit boards, electronic components, cable assemblies, fabricated
metal, plastic parts and other materials, of which electronic components are the
most costly. The Company purchases electronic components from numerous sources,
including original manufacturers and parts distributors.

The Company purchases substantially all of its components and other parts
on a purchase order basis and does not maintain long-term supply arrangements.
Most of the components used in the Company's products and related services are
available from multiple sources. However, several components, primarily custom
hybrid integrated circuits, are currently obtained from a single source. To
date, the Company has been able to obtain adequate supplies of these components.
The Company's inability in the future to obtain sufficient quantities of
limited-source components, or to develop alternative sources therefor, could
result in delays in product delivery and increased component cost, either of
which could have a material adverse effect on the Company's business, financial
condition or results of operations.

ENGINEERING AND PRODUCT DEVELOPMENT

The Company has a decentralized approach to engineering support and product
development activities, with NACT, Telco, ATI and Galaxy maintaining separate
groups to support their respective products and customers. The Company's
internal engineering resources permit it to continually reduce the production
costs and improve the feasibility of its products. The Executive Vice President
of Product Development for the Equipment Group monitors these development
activities to ensure common technology platforms, software languages, testing
protocols, etc. are used to minimize costs and facilitate efficient interfaces
between the Company's products. The Company's engineers have significant
experience in switching systems configurations, transmission and access
applications and wireless technology such as spread spectrum CDMA, radio path
calculations, field performance measurement and frequency licensing. As of March
30, 1999, there were 241 professional engineers and supporting personnel
employed by the Company, including 102 at Telco, 67 RF engineers at Galaxy, 34
at NACT and 21 in a product development group maintained at the Equipment Group
level.

The Company's research and development expenses approximated $6.8 million,
$1.6 million and $580,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The significant increase in research and development expenses in
1998 over 1997 was mainly as a result of the research and development spending
of ATI, NACT and Telco which were acquired during 1998. Research and development
expenses of ATI, NACT and Telco are significantly higher than those historically
recognized by the Company due to the proprietary nature of their existing
products and their on-going product development efforts. A significant portion
of the research and development expenses in 1997 and 1996 related to the
Company's corporate level development group which has been developing the
WLL-2000 product.
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NACT's research and development efforts are focused on the development of
both new products and the addition of new features and capabilities to its
existing suite of products. The research and development department continually
works to improve the quality of NACT's products and to ensure that such products
meet industry standards and government regulations. In addition, NACT is working
toward the successful development of new products that will enable it to offer
additional intelligence to a customer's existing network (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Purchased In-Process Research and Development").

Telco maintains three technology centers for research and development
located in Norwood, Massachusetts, Wilmington, Massachusetts and Germantown,
Maryland. In the broadband transmission product area, Telco is concentrating its
research and development efforts on new products for delivering more
cost-effective solutions for DS3 based systems in the local loop distribution
portion of the telephone network. In the network access product area,
development programs are in process for further enhancements and new features
for digital loop access and data services applications for Access45 and Access60
network access servers. In both areas, a significant portion of the R&D
investment is going towards development of lower-cost designs to improve gross
margins of existing products (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Purchased In-Process Research
and Development").

The Company established a corporate level development group in mid-1997
that is based in Pleasanton, California and Plano, Texas. This group is focused
on the development of the WLL-2000 product and the integration of the WLL-2000,
NACT, Telco and ATI technology into unique, cost effective, next generation
product solutions.

The market for the Company's products and services is generally
characterized by rapidly changing technology, evolving industry standards and
frequent new product and service introductions that can render existing products
and services obsolete or unmarketable. The future success of the Company will
depend to a substantial degree upon its ability to develop and introduce in a
timely fashion enhancements to its existing products and services and new
products and services that meet changing customer requirements and emerging
industry standards. The failure of the Company to introduce new products and
services and respond to industry changes on a timely and cost effective basis
could have a material adverse affect on the Company's business, financial
condition and results of operations.

The development of new, technologically advanced products and services is a
complex and uncertain process requiring high levels of innovation and capital,
as well as the accurate anticipation of technological and market trends.
Furthermore, the introduction and marketing of new or enhanced products and
services require the Company to manage the transition from existing products and
services in order to minimize disruption in customer purchasing patterns. There
can be no assurance that the Company will be successful in developing and
marketing, on a timely and cost-effective basis, new products and services or
product enhancements, that its new products and services will adequately address
the changing needs of the marketplace, or that it will successfully manage the
transition to new or enhanced products and services. There also can be no
assurance that the Company will be able to identify, develop, manufacture or
support new products and services successfully, that such new products and
services will gain market acceptance or that the Company will be able to respond
effectively to technological changes, emerging industry standards or product
announcements by competitors. In addition, the Company has on occasion
experienced delays in the introduction of product enhancements and new products
and services. There can be no assurance that in the future the Company will be
able to introduce product enhancements or new products and services on a timely
and cost effective basis. The rapid development of new technologies also
increases the risk that current or new competitors could develop products and
services that would reduce the competitiveness of Company products and services.
There can be no assurance that products, services or technologies developed by
others will not render the Company's products, services or technologies
noncompetitive or obsolete.

Products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released, and
such errors have occurred in these products in the past. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments. The occurrence of such

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errors could result in the loss of or delay in market acceptance of Company
products, diversion of development resources, damage to the Company's reputation
or increased service or warranty costs, any of which could have a material
adverse effect upon the Company's business, financial condition or results of
operations.

Furthermore, from time to time, the Company may announce new products,
services, capabilities or technologies that have the potential to replace or
shorten the life cycle of their existing product and service offerings. There
can be no assurance that announcements of product enhancements or new product or
service offerings will not cause customers to defer purchasing existing Company
products and services or cause resellers to return products to the Company.
Failure to introduce new products and services or product or service
enhancements effectively and on a timely basis, customer delays in purchasing
products and services in anticipation of new product or service introductions
and any inability of the Company to respond effectively to technological
changes, emerging industry standards or product and service announcements by
competitors could have a material adverse effect on the Company's business,
financial condition or results of operations.

COMPETITION

Telecommunications Group. The international telecommunications industry is
highly competitive and subject to the introduction of new services facilitated
by advances in technology. International telecommunications providers compete on
the basis of price, customer service, transmission quality, breadth of service
offerings and value-added services. The U.S.-based international
telecommunications services market is dominated by AT&T, WorldCom and Sprint. As
the Telecommunications Group's network expands to serve a broader range of
customers, the Company expects to encounter increasing competition from these
and other major domestic and international communications companies, many of
which may have significantly greater resources and more extensive domestic and
international communications networks than the Company. Moreover, the Company is
likely to be subject to additional competition as a result of the formation of
global alliances and mergers among the largest telecommunications carriers and
an increasing amount of resold international telecommunications services due to
deregulation of telecommunications markets worldwide.

The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Those technologies being developed or already
introduced include satellite-based systems, such as the proposed Iridium and
GlobalStar systems, utilization of the Internet for international voice and data
communications, and digital wireless communication systems such as personal
communications services. The Company is unable to predict which of many possible
future products and service offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services.

Recent regulatory changes also are expected to increase competition in the
telecommunications industry. The Telecommunications Act promotes additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.-based and foreign companies. The Telecommunications Act
permits the RBOCs to compete in interstate and international service. Some RBOCs
have begun to resell international services. AT&T has obtained relaxed pricing
restrictions and relief from other regulatory constraints that should make it
easier for AT&T to compete with alternative carriers such as the Company. There
can be no assurance that the Company will be able to effectively compete in the
new regulatory environment or that these changes or other regulatory
developments will not have a material adverse effect on the Company's business,
financial condition or results of operations.

Equipment Group. The segments of the telecommunications industry in which
the Equipment Group operates are intensely competitive. The ability to compete
will be dependent upon several factors, including price, quality, product
features and timeliness of delivery. Many of the Group's competitors have
significantly more extensive engineering, manufacturing, marketing, financial
and technical resources than the Company.

The market for switching equipment and network management and billing
systems is highly competitive, and NACT expects competition to increase in the
future. The market is subject to rapid technological change, regulatory
developments in the telecommunications industry and emerging industry standards.
NACT believes that the primary competitive factors in the market for switching
equipment and network telemanagement and
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billing systems are the development and rapid introduction of new product
features, price/performance, reliability and quality of customer support. NACT
believes that it competes across three categories, PC Based Switch Platforms,
Open Architecture (Programmable) Hardware Platforms, and Application Switch
Platforms.

A PC-based switch platform is a personal computer, usually with high
capacity, that contains generic telephone boards for interfacing with the public
network. A typical platform provides a single application such as debit card or
international call back/reorigination, which are software applications that can
be brought to market rapidly. Leading providers of these types of switches are
Communications Product Development, Inc., Integrated Telephoning Products, Inc.
and PCS Telecom, Inc. The users of this equipment generally tend to be start-up
operations that are concerned about initial equipment costs and that are
generally able to bring software solutions to the market rapidly. While these
users may feel that PC-based solutions are relatively low cost, as their
business grows, it becomes apparent that these systems are costly to expand on a
cost per port basis and offer few features that are standard with switch-based
platforms. Additionally, PC-based systems are not regarded as a viable solution
for larger users due to their reliability concerns.

A programmable hardware platform generally consists of proprietary switch
hardware, together with the necessary software to provide a programmable
application interface ("API") that allows other computers executing third-party
application software to control the calls within the switch hardware. Leading
providers of these types of switches are Summa Four, Inc., Excel, Inc. and
Redcom Laboratories, Inc. and the value-added software providers that support
this type of hardware, such as Megellan Network Systems, Inc., Boston
Technology, Inc. and Open Development Corporation. The users of this type of
equipment tend to be companies that have the ability and desire to write their
own applications code or are willing to purchase their applications code from a
specialized third party developer.

An application switching platform is an integrated hardware/software
switching system that contains software applications that perform basic 1+ and
operator assisted services over the public network. To provide intelligent
functionality, an adjunct switch must be connected to the application switch
platform. Leading providers of application switch platforms are Harris
Corporation and Siemens Stromberg Carlson. The major users are companies that
are established in their telephony business such as 1+ providers that now need
to expand their offerings to their customers to remain competitive in the
marketplace. Enhanced services are particularly attractive to these customers
and play a large part in their decision making process.

As NACT's business develops and it seeks to market its switches to a
broader customer base, NACTs competitors may include larger switch and
telecommunications equipment manufacturers such as Lucent Technologies Inc.,
Harris Corporation, Siemens AG, Alcatel Alsthom Compagnie, Generale
D'Electricite, Telefonaktiebolaget, L.M. Ericcson and Northern Telecom Ltd. Many
of NACT's current and potential competitors have substantially greater
technical, financial, manufacturing and marketing resources than NACT.

Telco's competitors in the broadband transmission market are predominantly
large, full-line, integrated manufacturers of telecommunications equipment, such
as Lucent Technologies, Fujitsu, Northern Telecom Limited, Alcatel, NEC and ADC
Telecommunications. Many of these competitors have introduced newer SONET
transmission products which the telephone operating companies are deploying in
public networks. The availability of such SONET products by competitors provides
a distinct product advantage for them in certain customer applications. However,
the higher cost of the SONET products, typically 20-50% more expensive than the
asynchronous transmission products, is providing a continued strong demand for
Telco's asynchronous transmission products in certain customer applications.
Telco's principal competitors with respect to the network access product market
include Premisys Communications, Verilink Corp., Newbridge Networks, Tellabs and
Carrier Access Corp. Telco believes that it has substantially strengthened its
competitive position in this market with the availability of new features for
the Access60 product, introduction of the new EdgeLink 100 and Access45 products
and new products from the Jupiter and Synaptyx acquisitions, as well as with a
stronger network of distributors. Telco Systems also believes that the
redundancy, high-density application and the fail-safe nature of the Access60
architecture makes the product more suitable for the service providers market.

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The Equipment Group may face competition from the RBOCs, which have
historically been prohibited from manufacturing telecommunications equipment by
the terms of the Modification of Final Judgment entered into in connection with
the divestiture of the RBOCs by AT&T Corp. ("AT&T") in 1984. The
Telecommunications Act contains provisions that permit the RBOCs, subject to
satisfying certain conditions designed to facilitate local exchange competition,
to manufacture telecommunications equipment. In light of these provisions, it is
possible that one or more of the RBOCs, some of which are major customers of the
Company, may decide to manufacture telecommunications equipment or to form
alliances with other manufacturers. Any of these developments could result in
increased competition which may have a material adverse effect on the Company's
business, financial condition or results of operations.

GOVERNMENT REGULATION

The Telecommunications Group's businesses are heavily regulated. The FCC
exercises authority over all interstate and international facilities-based and
resale services offered by the Company. Services that originate and terminate
within the same state, also known as intrastate services, are regulated by state
regulatory commissions. The Company also may be subject to regulation in foreign
countries in connection with certain business activities. For example, the
Company's use of Direct, Direct Transit and Resale Agreements may be affected by
regulations in either the transited or terminating foreign jurisdiction. There
can be no assurance that foreign countries will not adopt laws or regulatory
requirements that could adversely effect the Company's business, financial
condition or results of operations. There can be no assurance that regulators or
other third parties will not raise issues or take enforcement actions with
regard to the Company's compliance with applicable regulations.

Federal Regulation. The Company must comply with the requirements of
common carriage under the Communications Act of 1934 (the "Communications Act"),
as amended by the Telecommunications Act (together with the Communications Act,
the "Act"), including the offering of service on a non-discriminatory basis at
just and reasonable rates, and obtaining FCC approval prior to any assignments
of authorizations or any transfer of de jure or de facto control of the Company.

The FCC has established different levels of regulation for dominant and
non-dominant carriers. The Company is classified as a non-dominant carrier for
both domestic and international service. Under the Act and the FCC's rules, all
international carriers, including the Company, are required to obtain authority
under Section 214 of the Act prior to initiating international common carrier
services, and must file and maintain tariffs containing the rates, terms and
conditions applicable to their services. The FCC has streamlined its regulation
of non-dominant international carriers to provide that these tariffs and any
revisions thereto are effective upon one day's notice in lieu of the previous
14-day notice period. The Company has filed international tariffs (for switched
and private line services) with the FCC. Nevertheless, an otherwise non-
dominant U.S.-based carrier may be subject to dominant carrier regulation on a
specific international route if it is affiliated with a foreign carrier with
market power operating at the foreign point. The Company is not subject to
dominant carrier treatment on any route.

In late 1996, the FCC implemented significant changes in its tariff
requirements. Exercising forbearance authority granted to it by the
Telecommunications Act, the FCC ruled that interexchange carriers must cancel
their tariffs for domestic interstate interexchange services. In August 1997,
the FCC affirmed its decision to end tariff filing requirements for domestic
interstate long distance services provided by non-dominant carriers. The FCC
also eliminated the requirement that non-dominant long distance carriers make
publicly available information on rates and terms of their products. The
detariffing order has been stayed by the U.S. Court of Appeals for the District
of Columbia and the order on reconsideration also is stayed until the Court
issues a decision. It is not known when the Court of Appeals will issue a
decision. On March 18, 1999, the FCC adopted an order that would permit the
alternative of posting rates on the carrier's website. This order will not
become effective until the Court affirms the FCC's mandatory detariffing scheme.

International Services. The Company must have Section 214 facilities-based
authority to offer international services via satellites and undersea fiber
optic cables. Section 214 resale authority is required to resell international
services. The Company has obtained global Section 214 facilities-based and
resale authority.

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The Company must conduct its international business in compliance with the
FCC's international settlements policy ("ISP"). The ISP establishes the
permissible boundaries for U.S.-based carriers and their foreign correspondents
to exchange traffic and settle the cost of terminating each other's traffic over
their respective networks. The precise terms of settlement are established in a
correspondent agreement, also referred to as an operating agreement. Among other
terms, the operating agreement establishes the types of service covered by the
agreement, the division of revenues between the carrier that bills for the call
and the carrier that terminates the call at the other end, the frequency of
settlements (i.e. monthly or quarterly), the currency in which payments will be
made, the formula for calculating traffic flows between countries, technical
standards, procedures for the settlement of disputes, the effective date of the
agreement and the term of the agreement. The Company may provide services over
international private lines without complying with the ISP, but only between the
United States and countries specifically approved by the FCC for this activity.

To promote competition in the international telecommunications market, in
November 1996, the FCC issued a new international settlement order, which
provided international carriers more flexibility in negotiating operating
agreements. Under the FCC's new international settlement order, U.S.-based
carriers can apply for waivers of the ISP. Such waivers, if granted, would allow
carriers to negotiate more flexible operating agreements that, for example,
allow them to accept greater than a proportionate share of return traffic. When
it implemented the WTO Agreement (see below), the FCC adopted a rebuttable
presumption that flexibility is permitted for WTO member countries. Although the
Company is unable to predict exactly how it will affect its international
business, the new ISP may reduce international access costs and facilitate the
Company's international business.

International telecommunications service providers are required to file
copies of their contracts with other carriers, including operating agreements,
with the FCC within 30 days of execution and to obtain approval of certain of
these contracts. The FCC's rules also require the Company to file a variety of
reports regarding its international traffic flows and use of international
facilities. In addition, the FCC requires carriers to notify them 60 days prior
to becoming affiliated with a foreign carrier or 30 days after acquiring a 25%
or greater noncontrolling interest in a foreign carrier. The FCC can impose
dominant carrier treatment on affiliates of WTO carriers with market power or
restrict service of affiliates of non-WTO carriers.

In February 1997, the United States entered into the WTO Agreement, which
seeks to open markets to competition in telecommunications services, improve
foreign investment opportunities in the telecommunications industry and promote
pro-competitive regulatory principles. In June 1997, the FCC proposed to
implement new rules in order to comply with the WTO Agreement. These new rules
were adopted by the FCC in November 1997 and became effective in February 1998.

The new rules facilitate the entry of foreign carriers operating in
countries that signed the WTO Agreement ("WTO Carriers") into the United States
telecommunications market. The rules replace the effective competitive
opportunities test (the "ECO Test") for entry of WTO Carriers with streamlined
procedures that presume entry is pro-competitive. The rules similarly relax the
equivalency test for WTO Carriers that seek to provide switched services over
private lines between the United States and certain WTO member countries. In
addition, the rules revise competitive safeguards to eliminate or reduce various
operating conditions and replace them with more targeted safeguards that enhance
the FCC's ability to monitor and detect anti-competitive behavior in the United
States market. The FCC has retained the right to issue fines, require additional
conditions on a grant of authority and, if necessary, deny or rescind a grant of
authority.

The FCC also narrowed the "No Special Concessions" rule, which generally
provides that United States carriers cannot accept benefits from foreign
carriers to which other United States carriers are not entitled. This rule
continues to apply to non-WTO Carriers. The new rule applicable to WTO Carriers
simply prohibits United States carriers from entering into exclusive
arrangements with WTO Carriers that have sufficient market power to affect
competition adversely in the United States market. To provide more certainty in
the market, the FCC adopted a rebuttable presumption that WTO Carriers with less
than 50% market share in a foreign market lack such market power. As a result,
United States carriers may enter into exclusive dealings with such WTO Carriers
involving a variety of matters, including operating agreements and
interconnection arrangements.

16
<PAGE> 19

In addition, in 1997 the FCC revised the safeguards that apply to United
States carriers classified as dominant due to an affiliation with a foreign
carrier that has market power on the foreign end of an international route. The
rules rely on reporting requirements, rather than restrictions on carriers'
provision of service, to prevent affiliated carriers from restricting
competition in the United States. In particular, the rules replace the 14-day
advance notice tariff filing requirement with one-day advance notice requirement
and accords these tariff filings a presumption of lawfulness. The rules also
remove the prior approval requirement for circuit additions or discontinuances
on the dominant route. The rules require quarterly reports on traffic and
revenue, provisioning and maintenance, and circuit status for the dominant
carrier in order to monitor and detect anti-competitive behavior. The rules also
require a limited form of structural separation between United States carriers
and their foreign affiliates with market power. The FCC adopted a rebuttable
presumption that a foreign carrier with less than 50% market share in the
foreign market lacks market power and, therefore, its United States affiliate
should be presumptively treated as non-dominant.

In August 1997, the FCC adopted mandatory settlement rate benchmarks for
carriers receiving traffic from or sending traffic to the United States. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC prohibits
a United States carrier affiliated with a foreign carrier from providing
facilities-based service to the foreign carrier's home market until and unless
the foreign carrier has implemented a settlement rate within the benchmark. In
connection with these rules, the FCC also adopted rules that liberalize the
provision of switched services over private lines to WTO member countries by
allowing such services on routes where 50% or more of United States billed
traffic is being terminated in the foreign country at or below the applicable
settlement rate benchmark, or where the foreign country's rules concerning the
provision of international switched services over private lines are deemed
equivalent to United States rules.

The Company is unable to predict the full effect on the international
telecommunications market resulting from the WTO Agreement or the rules enacted
to implement its provisions or the establishment of mandatory settlement rate
benchmarks. These changes are expected to increase competition in the
telecommunications market (see "-- Competition"). These changes may result in
lower costs to the Company, however, the revenues that the Company receives from
inbound international traffic may decrease to a greater degree as a result of
increased competition. WTO Carriers with market power in their home markets may
be able to more easily offer United States and foreign customers services to the
disadvantage of United States carriers, which may continue to face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such services. In addition, many foreign
carriers are currently challenging the enforceability against such carriers of
the FCC's order adopting mandatory settlement rate benchmarks. A finding that
this order was unenforceable against such carriers could accelerate the entry of
foreign carriers into the United States market by making it easier for foreign
carriers to route international traffic to the United States at low, cost-based
termination rates, while United States carriers would continue to have to route
international traffic into most foreign countries at much higher settlement
rates. There can be no assurance that these events would not have a material
adverse effect on the Company's business, financial condition or results of
operations.

Foreign Ownership. Under the Act, no common carrier radio licensee may be
held by non-U.S. citizens, foreign governments or corporations organized under
the laws of a foreign country, or their representatives. For companies from WTO
countries, the FCC has established an open entry standard, meaning that the FCC
presumptively will approve greater than 25% indirect ownership by a WTO carrier
of a U.S. common carrier radio licensee subject to certain competitive
safeguards. The FCC has reserved the right in certain cases to attach additional
conditions to a grant of authority, and to deny the application in the
exceptional case in which an application poses a very high risk to competition.
For carriers from countries that are non-signatory to the WTO Agreement, the FCC
will continue to apply the ECO test in deciding whether to approve greater than
25% ownership of a radio licensee.

Federal Legislation and Implementation. The Telecommunications Act was
adopted in February 1996 and substantially changed the regulation of
telecommunications in the United States. The Telecommunications Act permits
RBOCs to provide domestic and international long distance services to customers
located outside of the RBOCs' home regions; permits a petitioning RBOC to
provide domestic and international long
17
<PAGE> 20

distance service to customers within its operating area on a state by state
basis upon finding by the FCC that a petitioning RBOC has satisfied certain
criteria for opening up its local exchange network to competition and that
provision of long distance services would further the public interest; and
removes existing barriers to entry into local service markets. Additionally,
there were significant changes in the manner by which carrier-to-carrier
arrangements are regulated at the federal and state level; procedure to revise
universal service standards; and penalties for unauthorized switching of
customers. The FCC has instituted and, in most instances completed, proceedings
addressing the implementation of this legislation.

In implementing the Telecommunications Act, the FCC established nationwide
rules designed to encourage new entrants to participate in the local services
markets through interconnection with the incumbent local exchange carriers
("ILECs"), resale of ILECs' retail services, and use of individual and
combinations of unbundled network elements. These rules set the groundwork for
the statutory criteria governing the RBOC entry into the long distance market.
Appeals of the FCC Order adopting those rules were consolidated before the
United States Court of Appeals for the Eighth Circuit (the "Eighth Circuit").
The Eighth Circuit upheld challenges to certain practices implementing cost
provisions of the Telecommunications Act that were ordered by certain state
public utility commissions to be premature, but vacated significant portions of
the FCC's nationwide pricing rules, and vacated an FCC rule requiring that
unbundled network elements be provided on a combined basis. The Solicitor
General, on behalf of the FCC, and certain other parties, sought certiorari in
the United States Supreme Court, which was granted. Certain RBOCs have also
raised constitutional challenges to provisions of the Telecommunications Act
restricting RBOC provision of long distance services, manufacturing of
telecommunications equipment, electronic publishing and alarm monitoring
services. On December 31, 1997, the United States District Court for the
Northern District of Texas ruled that these restrictions violate the Bill of
Attainder Clause of the U.S. Constitution. Currently, this decision only applies
to SBC Corporation ("SBC"), US West Communications Group ("US WEST") and Bell
Atlantic Corporation ("Bell Atlantic"). AT&T, WorldCom, the U.S. Department of
Justice and the FCC announced that they will appeal the decision and sought a
stay of the ruling. The Company cannot predict either the ultimate outcome of
these or future challenges of the Telecom Act, any related appeals of regulatory
or court decisions, or the eventual effect on its businesses or the industry in
general. On January 25, 1999, the U.S. Supreme Court reversed most aspects of
the Eighth Circuit's decision, and reinstated several of the vacated rules, but
vacated another FCC rule that delineated the network elements to be unbundled by
the ILECs. The Eighth Circuit and the FCC are expected to conduct further
proceedings in response to the Supreme Court's decision.

The FCC has denied applications filed by Ameritech Corporation
("Ameritech"), SBC and BellSouth Corporation ("BellSouth") seeking authority to
provide inter-local access transport area ("interLATA") long distance service to
Michigan, Oklahoma and South Carolina, respectively. SBC has appealed the FCC's
denial of its application to the Eighth Circuit. In its denial of an Ameritech
application and a BellSouth application, the FCC provided detailed guidance to
applicants regarding the obligations of the applicants, the format of future
applications, the content of future applications, and the review standards that
it will apply in evaluating any future applications. The National Association of
Regulatory Utility Commissioners and several state regulatory commissions have
appealed jurisdictional aspects of the Ameritech application denial to the
Eighth Circuit. The Company cannot predict either the outcome of these appeals,
of the RBOC's willingness to abide by these FCC guidelines, or the timing or
outcome of future applications submitted to the FCC. Other RBOCs have announced
their intention to file applications at the FCC for authority to provide inter
LATA services. The Company cannot predict the outcome of these proceedings. To
the extent that the RBOC's are permitted to enter the international
long-distance business, they could become major competitors of the Company. It
is also possible that they could become customers of the Company's wholesale
business although there is no assurance that this would happen.

On May 7, 1997, the FCC announced that it will issue a series or orders
that will reform Universal Service Subsidy allocations and adopted various
reforms to the existing rate structure for interstate access services provided
by the ILECs that are designed to reduce access charges, over time, to more
economically efficient levels and rate structures. It also affirmed that
information services providers (including, among others, internet service
providers) should not be subject to existing access charges ("ISP Exemption").

18
<PAGE> 21

Petitions for reconsideration of, among other things, the access service and ISP
Exemption related actions were filed before the FCC, and appeals were taken to
various United States Courts of Appeals. On reconsideration, the FCC, in
significant part, affirmed the access charge and ISP Exemption actions, and the
court appeals have been consolidated before the Eighth Circuit. Also, several
state agencies have started proceedings to address the reallocation of implicit
subsidies contained in access rates and retail service rates to state universal
service funds. Access charges are a principal component of the Company's
telecommunications expense. The Company cannot predict either the outcome of
these appeals or whether or not the result(s) will have a material impact upon
the consolidated financial position or the Company's results of operations.

Certain Foreign Termination Arrangements. The Company has entered into and
expects to continue to enter into certain termination or origination
arrangements with competitive carriers in certain foreign countries. These
arrangements involve the termination of U.S. originated traffic or the
origination of foreign-based traffic from foreign countries over private lines
and may be viewed by foreign regulatory agencies as "international simple
resale" arrangements. The Company believes that foreign telecommunications
regulations are being liberalized and that such arrangements are permitted in
some instances and may be expressly approved by foreign regulatory agencies in
other instances. Nevertheless, at this time the FCC or a foreign regulatory
agency in a particular country may take the view that such arrangements are not
in compliance with current regulatory policies. If the FCC finds that such
arrangements violate FCC rules, the FCC could impose a variety of sanctions on
the Company, including rescission of the Company's Section 214 License. In
addition, competitive carriers, which compete with the PTT, may not be permitted
by foreign regulatory agencies or the PTT may act unilaterally to cancel or
eliminate the private line service on which the alternative carrier depends. For
example, in 1997, regulatory authorities in Hong Kong and the PTT in Mexico have
acted against such arrangements. The competitive carriers with whom the Company
enters into such arrangements, and perhaps the Company itself, could be subject
to a variety of penalties in connection with such arrangements under foreign or
U.S. law, including without limitation orders to cease operations or to limit
future operations, loss of licenses or of license opportunities, fines, seizure
of equipment and, in certain foreign jurisdictions, criminal prosecution. The
revenue and/or profit generated under such arrangements may have become a
significant portion of the overall revenue and/or profit of the Company at the
time such arrangements are discovered and curtailed. Moreover, the discovery of
the existence of such arrangements by foreign PTTs could adversely affect the
Company. Any of the developments described above (i.e., the imposition of
penalties, the loss of revenue and/or profit generated by such arrangements
(whether as a result of regulatory problems or otherwise) or the discovery of
the existence of such arrangements by foreign PTTs) could have a material
adverse effect on the Company's business, financial condition or results of
operations.

PATENTS AND TRADEMARKS

The Company owns, licenses or has applied for various patents with respect
to its technology and products. While these patents are of value, the Company
does not believe that it is dependent to any material extent upon patent
protection. The Company further believes that timely implementation of
technological advances, responsiveness to market requirements, depth of
technical expertise and a high level of customer service and support are more
important to its success than patent rights.

The Company has various trademarks, trade names and service marks used in
connection with its business and for private label marketing of certain of its
products, including: Access45(TM), Access60(R), CDX(TM), Compact Digital
Exchange(TM), EdgeLink 100(TM), EdgeLink 300(TM), EdgeLink 500(TM) and
WLL-2000(TM). Although the Company considers these trademarks, trade names and
service marks to be readily identifiable with, and valuable to, its business,
the Company does not believe the loss of any of the foregoing rights for
intellectual property would have a material adverse effect on the Company's
business, financial condition or results of operations.

EMPLOYEES

As of March 30, 1999, the Company had 791 full-time employees, including
658 in continuing operations and 133 in discontinued operations. The continuing
operations employees consist of 579 dedicated to the Equipment Group, 57
dedicated to the Telecommunications Group and 22 working in the Company's
19
<PAGE> 22

executive office. From time to time, the Company also uses part-time employees
and contractors in its operations, primarily to accommodate temporary changes in
production levels and facilitate certain research and development projects. None
of the Company's employees is represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage. The Company
considers its employee relations to be good.

ITEM 2. PROPERTIES

The Company's executive offices are located in Atlanta, Georgia, where it
occupies approximately 12,000 square feet under a lease expiring in October
2003. The Company owns NACT's building in Provo, Utah and leases its other
facilities under operating leases which expire at various dates during the next
five years. The following provides a summary of the significant facilities
currently utilized by the Company to conduct its operations.

<TABLE>
<CAPTION>
SQUARE FOOTAGE LEASE EXPIRES
-------------- -------------
<S> <C> <C>
Norwood, Massachusetts...................................... 80,000 January 2004
Wilmington, Massachusetts................................... 53,300 November 2000
Provo, Utah................................................. 40,000 Owned
Savannah, Georgia........................................... 33,500 October 2001
U.S. Switching Centers...................................... 33,900 Various
Alpharetta, Georgia......................................... 12,200 March 2002
Other warehouses and offices................................ 35,000 Various
-------
Total Continuing Operations....................... 287,900
Orlando, Florida............................................ 72,000 April 2002
Dallas, Texas............................................... 54,000 February 2003
South Bend, Indiana......................................... 22,000 July 2002
-------
Total Discontinued Operations..................... 148,000
-------
Total Company..................................... 435,900
=======
</TABLE>

The Company's existing facilities are adequate for its current operations,
and the Company believes that convenient, additional facilities are readily
available should the business need arise.

Telco leases a 216,000 square foot manufacturing, research and
administration facility in Norwood, Massachusetts, that is owned by a limited
partnership in which Telco has a 50% partnership interest. Approximately 80,000
square feet of this facility is currently utilized by Telco. Excess costs
associated with the idle portion of the facility through January 2004, the lease
termination date, have been reserved for in Telco's balance sheet.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in various legal proceedings
relating to claims arising in the ordinary course of the Company's business.
Other than as discussed below, neither the Company nor any of its subsidiaries
is party to any legal proceeding, the outcome of which is expected to have a
material adverse effect on the Company's financial condition or results of
operations.

Following the Company's announcement on January 5, 1999 regarding earnings
expectations for the quarter and fiscal year ended December 31, 1998 and the
subsequent decline in the price of the Company's common stock, 22 putative class
action complaints were filed between January 7, 1999 and March 5, 1999 in the
United States District Court for the Northern District of Georgia. The Company
and certain of its then current officers and directors were named as defendants.
A second decline in the Company's stock price occurred shortly after actual
earnings were announced on February 11, 1999, and a few of these cases were
amended, and additional, similar complaints were filed. On March 8, 1999, a
group of plaintiffs filed a joint motion seeking to be appointed as lead
plaintiffs and to have certain law firms appointed as lead counsel in these
actions. The Company expects that the cases will be consolidated and that an
amended consolidated

20
<PAGE> 23

complaint will be filed after a ruling on the pending motion regarding the
appointment of lead plaintiffs and lead counsel.

Although the 22 complaints differ in some respects, the plaintiffs,
generally, have alleged violations of the federal securities laws arising from
misstatements of material information in and/or omissions of material
information from certain of the Company's securities filings and other public
disclosures, principally related to inventory and sales activities during the
fourth quarter of 1998. With the exception of a single complaint (not filed by
one of the proposed lead plaintiffs) which seeks to include stock purchases that
occurred as early as April 10, 1998, the complaints are filed on behalf of: (a)
persons who purchased shares of the Company's common stock between October 7,
1998 and February 11, 1999; (b) shareholders of Telco who received shares of
common stock of the Company as a result of the Company's acquisition of Telco
that closed on November 30, 1998; and, (c) shareholders of NACT who received
shares of common stock of the Company as a result of the Company's acquisition
of NACT that closed on October 28, 1998. Plaintiffs have requested damages in an
unspecified amount in their complaints. Although the Company and the individuals
named as defendants deny that they have violated any of the requirements or
obligations of the federal securities laws, there can be no assurance the
Company will not sustain material liability as a result of or related to these
shareholder suits.

RCG operated under Chapter 11 bankruptcy protection from October 1997 until
December 1998 (the "Bankruptcy Case"). On September 3, 1998, the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division (the
"Bankruptcy Court"), entered an Order confirming the Debtor's Second Amended
Plan of Reorganization, dated September 2, 1998 (the "Plan"), which was
effective December 14, 1998. In general, the Plan provides for, among other
things, the discharge by the creditors of RCG of all indebtedness of and claims
against RCG and the issuance by the Company of 9,375,000 shares of common stock
of the Company to a disbursing agent for ultimate distribution to the creditors
of RCG. The Company has already issued such shares, which are being distributed
to the RCG creditors under the terms of the Plan.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) A special meeting of stockholders was held on November 30, 1998 (the
"November Special Meeting") at the Company's headquarters in Atlanta, Georgia.
There were 25,675,253 shares of common stock issued and entitled to vote at the
November Special Meeting, of which 14,519,172 were present in person or by
proxy. The November Special Meeting did not involve the election of directors.
At the November Special Meeting, the following matters were voted on:

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>

Approval and adoption of the Agreement and Plan of Merger 14,466,993 26,002 26,177
and Reorganization, dated as of June 4, 1998, as amended
by the first amendment thereto dated as of October 27,
1998, among World Access, Inc. (formerly known as WAXS
INC.), WA Telcom Products Co., Inc. (formerly known as
World Access, Inc.), Telco Systems, Inc. and Tail
Acquisition Corporation, pursuant to which Telco Systems,
Inc. was merged with and into Tail Acquisition
Corporation.

Approval of amendment to World Access, Inc. Certificate 14,127,104 351,587 40,481
of Incorporation to increase the number of authorized
shares of World Access common stock to 150,000,000.

Adoption of the World Access, Inc. 1998 Incentive Equity 10,775,569 3,676,000 67,603
Plan.

Ratification and approval of the indemnification 13,431,243 1,013,168 74,761
agreements with directors and executive officers of World
Access, Inc.
</TABLE>

21
<PAGE> 24

(b) A special meeting of stockholders was also held on December 14, 1998
(the "December Special Meeting") at the Company's headquarters in Atlanta,
Georgia. There were 25,678,453 shares of Common Stock issued and entitled to
vote at the December Special Meeting, of which 21,234,874 were present in person
or by proxy. At the December Special Meeting, the following matters were voted
on:

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>

Approval and Adoption of the Agreement and Plan of Merger 12,677,099 44,322 31,985
and Reorganization, dated as of May 12, 1998, as amended
by the first amendment thereto dated as of July 20, 1998
and the second amendment thereto dated as of September 2,
1998, among World Access, Inc., WA Telcom Products Co.,
Inc., WA Merger Corp. and Cherry Communications
Incorporated (d/b/a Resurgens Communications Group),
pursuant to which WA Merger Corp. was merged with and
into Resurgens Communications Group.

Approval and adoption of the Share Exchange Agreement and 12,633,726 86,670 33,010
Plan of Reorganization, dated as of May 12, 1998, among
World Access, Inc., WA Telcom Products Co., Inc., Cherry
Communications, U.K. Limited, and Renaissance Partners
II.
</TABLE>

<TABLE>
<CAPTION>
FOR VOTE WITHHELD
Election of the following director nominees --- -------------
<S> <C> <C> <C>
Stephen J. Clearman 21,069,496 165,378
(to serve for a two-year term)

Mark A. Gergel 21,051,932 182,942
(to serve for a three-year term)

John P. Imlay, Jr. 21,059,406 175,468
(to serve for a three-year term)

Carl E. Sanders 21,071,708 163,166
(to serve for a three-year term)
</TABLE>

The other directors of the Company whose terms of office continued after
the December Special Meeting are Max E. Bobbit, Steven A. Odom and John D.
Phillips.

ITEM 4.5 EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information, as of March 30, 1999, concerning
the Company's executive officers.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven A. Odom............... 45 Chairman of the Board
John D. Phillips............. 56 President, Chief Executive Officer and Director
Mark A. Gergel............... 41 Executive Vice President, Chief Financial Officer
and Director
A. Lindsay Wallace........... 49 President, World Access Equipment Group
Dennis E. Bay................ 55 Executive Vice President and Chief Operating Officer,
World Access Telecommunications Group
W. Tod Chmar................. 45 Executive Vice President and Secretary
</TABLE>

Steven A. Odom. Mr. Odom joined the Company's Board in October 1994. In
November 1994, he was appointed to the newly created position of Chairman of the
Board. In August 1995, he became Chairman and Chief Executive Officer of the
Company and served in that capacity until December 1998, when he relinquished
his Chief Executive Officer duties. From 1983 to 1987, he founded and served as
Chairman and

22
<PAGE> 25

Chief Executive Officer of Data Contract Company, Inc. ("DCC"), a designer and
manufacturer of intelligent data PBX systems, pay telephones and diagnostic
equipment. From 1987 to 1990, he was Vice President for the Public
Communications Division of Executone Information Systems, Inc., a public company
that acquired DCC in 1987. Mr. Odom formerly served as a director for Telematic
Products, Inc., a manufacturer of telephone central office equipment and
Resurgens Communications Group, Inc. ("Old Resurgens"), a provider of long
distance operator services that later merged with LDDS Communications, Inc., now
known as WorldCom.

John D. Phillips. Mr. Phillips has served as a director of the Company
since December 1994 and was appointed its President and Chief Executive Officer
in December 1998. Mr. Phillips was Chairman of the Board and Chief Executive
Officer of RCG and Cherry U.K. from October 1997 until December 1998, when both
companies were acquired by the Company. He was President, Chief Executive
Officer and a director of Metromedia International Group, Inc. ("Metromedia"), a
global media, entertainment and communications company, from November 1995 until
December 1996. Metromedia was formed in November 1995 through the merger of The
Actava Group, Inc. ("Actava"), Orion Pictures Corporation, MCEG Sterling
Incorporated and Metromedia International Telecommunications, Inc. He served as
President, Chief Executive Officer and a director of Actava from April 1994
until November 1995. In May 1989, Mr. Phillips became Chief Executive Officer of
Old Resurgens and served in this capacity until September 1993 when Old
Resurgens merged with Metromedia Communications Corporation and WorldCom.

Mark A. Gergel. Mr. Gergel joined the Company in April 1992 as Vice
President and Chief Financial Officer. In December 1996, he was named an
Executive Vice President of the Company and in December 1998, he was elected a
director of the Company. From 1983 until March 1992, Mr. Gergel held five
positions of increasing responsibility with Federal-Mogul Corporation, a
publicly-held manufacturer and distributor of vehicle parts, including
International Accounting Manager, Assistant Corporate Controller, Manager of
Corporate Development and Director of Internal Audit. Prior to joining
Federal-Mogul, Mr. Gergel spent four years with the international accounting
firm of Ernst & Young. Mr. Gergel is a Certified Public Accountant.

A. Lindsay Wallace. Mr. Wallace joined the Company in February 1998 in
connection with the Company's acquisition of a majority interest in NACT. He
served as President of the Switching Division from February 1998 until December
1998, when he was appointed Executive Vice President and Chief Operating Officer
of the Company's Equipment Group. In January 1999, he was named President of the
Equipment Group. From January 1996 until October 1998, when NACT merged with and
into the Company, Mr. Wallace was President, Chief Executive Officer and a
director of NACT. From January 1994 until January 1996, he was NACT's Director
of Sales and Marketing. In October 1995 he was named an Executive Vice President
of NACT. Prior to joining NACT, Mr. Wallace worked for Sprint Corporation for
five years where he held several positions including National Account Manager.

Dennis E. Bay. Mr. Bay has served as Executive Vice President and Chief
Operating Officer of the Company's Telecommunications Group since December 1998.
He was Senior Vice President and General Manager of RCG and Cherry U.K. from
November 1997 until December 1998, when both companies were acquired by the
Company. From 1994 to November 1997, Mr. Bay provided consulting services to
international long distance carriers through DBCS, his own consulting firm. He
was Vice President of Operations for Old Resurgens from 1989 until December
1993.

W. Tod Chmar. Mr. Chmar has served as Executive Vice President and
Secretary of the Company since December 1998. He was an Executive Vice President
and director of RCG and Cherry U.K. from October 1997 to December 1998, when
both companies were acquired by the Company. Mr. Chmar served as Senior Vice
President of Metromedia from November 1995 until December 1996 and of Actava
from 1994 until November 1995. From January 1985 until September 1993, Mr. Chmar
was a partner in the law firm of Long Aldridge & Norman LLP, specializing in
mergers and acquisitions and corporate finance.

23
<PAGE> 26

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's common stock is traded on The Nasdaq Stock Market ("Nasdaq")
under the symbol "WAXS". The quarterly price ranges for the Company's common
stock as reported by Nasdaq are as follows:

<TABLE>
<CAPTION>
HIGH LOW CLOSE
---- --- -----
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $33 1/2 $21 5/8 $32 1/2
Second Quarter............................................ 40 25 3/8 30
Third Quarter............................................. 30 15/16 18 3/4 20 1/4
Fourth Quarter............................................ 24 3/4 12 21 3/8
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $ 9 1/4 $ 7 1/2 $ 8
Second Quarter............................................ 23 7 5/8 20 1/2
Third Quarter............................................. 34 1/8 20 32 1/2
Fourth Quarter............................................ 33 3/4 17 23 7/8
</TABLE>

As of March 30, 1999, there were 679 holders of record of the Company's
common stock. This number does not include beneficial owners of the Company's
common stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.

SALE OF UNREGISTERED SECURITIES

On December 14, 1998, pursuant to the Plan approved by the Bankruptcy Court
in the Bankruptcy Case and the merger agreement between the Company and RCG, the
Company issued 9,312,500 shares of its common stock to a disbursing agent to be
distributed to creditors of RCG in exchange for the discharge by such creditors
of RCG of all indebtedness of and claims against RCG (approximately $375.0
million). The shares were issued under Section 1145 of the United States
Bankruptcy Code which generally provides that the registration requirements of
the Securities Act do not apply to the offer or sale under a plan of
reorganization of securities of a debtor in exchange for a claim against, or
interest in, the debtor. Section 1145 further provides that an offer or sale of
securities under the Section is deemed to be a public offering.

On December 14, 1998, the Company issued 1,875,000 shares of common stock
to Renaissance Partners II, the sole stockholder of Cherry U.K., in connection
with the Company's acquisition of Cherry U.K. The shares were issued under
Section 4(2) of the Securities Act which provides for an exemption from the
registration requirements of the Securities Act for transactions by an issuer
not involving any public offering.

DIVIDEND POLICY

The Company has not paid or declared any cash dividends on its common stock
and currently intends to retain all future earnings to fund operations and the
continued development of its business. In addition, the Company's credit
facility contains restrictions limiting the ability of the Company to pay cash
dividends. Any future determination to declare and pay cash dividends will be at
the discretion of the Board of Directors and will be dependent on the Company's
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.

24
<PAGE> 27

ITEM 6. SELECTED FINANCIAL DATA

The selected financial information for each of the five years in the period
ended December 31, 1998 set forth below has been derived from and should be read
in conjunction with the financial statements and other financial information
presented elsewhere herein.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONTINUING OPERATIONS DATA(1):
Equipment sales................................ $138,990 $ 48,614 $17,131 $12,612 $ 6,014
Carrier service revenues....................... 13,143 -- -- -- --
-------- -------- ------- ------- -------
Total sales.......................... 152,133 48,614 17,131 12,612 6,014
Gross profit................................... 56,031 21,087 3,055 1,802 135
In-process research and development............ 100,300 -- -- -- --
Goodwill impairment............................ 6,200 -- -- -- --
Restructuring and other charges................ 17,240 -- -- -- --
Income (loss) from continuing operations(2).... (114,645) 8,350 (1,041) (389) (2,079)
Net income (loss) from continuing operations
per share(3)................................. $ (5.19) $ 0.45 $ (0.07) $ (0.04) $ (0.45)
Weighted average shares outstanding(3)......... 22,073 18,708 14,530 9,083 4,631
BALANCE SHEET DATA(4):
Cash and equivalents........................... $ 55,176 $118,065 $22,480 $ 1,887 $ 753
Working capital................................ 125,586 153,750 37,961 10,222 2,267
Total assets................................... 613,812 225,283 60,736 28,515 8,943
Long-term debt................................. 137,864 115,264 -- 3,750 4,328
Total liabilities.............................. 253,229 133,528 8,362 14,181 7,783
Stockholders' equity........................... 360,583 91,755 52,374 14,334 1,160
</TABLE>

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

(1) Includes the results of operations for the following businesses from their
respective dates of acquisition: AIT -- May 1995; CIS -- January 1997;
Galaxy -- July 1997; ATI -- January 1998; NACT -- February 1998;
Telco -- November 1998; and Resurgens -- December 1998. On a pro forma
unaudited basis, as if the acquisitions of ATI, NACT, Telco and Resurgens
had occurred as of January 1, 1997, total sales, net loss from continuing
operations and net loss from continuing operations per diluted share for the
years ended December 31, 1998 and 1997 would have been approximately $378.0
million and $370.6 million; $100.8 million and $178.7 million; and $2.91 and
$5.48, respectively. The results of operations for Galaxy during 1996 and
the first six months of 1997 were not material and therefore are not
included in the pro forma disclosure.
(2) The Company recorded no income tax expense during 1994 and 1995 due to net
losses realized and the availability of federal income tax net operating
loss carryforwards.
(3) Net income (loss) per share and weighted average shares outstanding are
presented on a diluted basis. The calculations exclude 8,307,000, 995,000,
401,000 and 896,000 shares of common stock for 1998, 1997, 1996 and 1995,
respectively, that are held in escrow accounts. See Notes A and B to the
Consolidated Financial Statements.
(4) In October 1997, the Company sold $115.0 million of convertible subordinated
notes. See Note I to the Consolidated Financial Statements.

25
<PAGE> 28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company provides international long distance voice and data services
and proprietary network equipment to the global telecommunications markets. The
World Access Telecommunications Group provides wholesale international long
distance service through a combination of its own international network
facilities, various international termination relationships and resale
arrangements with other international long distance service providers. The World
Access Equipment Group develops, manufactures and markets digital switches,
billing and network telemanagement systems, cellular base stations, fixed
wireless local loop systems, intelligent multiplexers, digital microwave radio
systems and other telecommunications network products. To support and complement
its product sales, the Company also provides its customers with a broad range of
network design, engineering, testing, installation and other value-added
services.

The Company acquired five businesses during 1995 to 1997 in an effort to
broaden its line of switching, transport and access products, enhance its
product development capabilities and strengthen its technical base. Effective
May 1995, the Company acquired AIT, a full service provider of Northern Telecom
switching systems, add-on frames and related circuit boards; effective October
1995, the Company acquired Westec Communications, Inc. ("Westec"), a provider of
wireless products and services primarily to the cable television industry;
effective January 1996, the Company acquired Sunrise Sierra, Inc. ("Sunrise"), a
developer and manufacturer of intelligent transport and access products;
effective January 1997, the Company acquired CIS, a provider of mobile network
equipment and related design, installation and technical support services to
cellular, PCS and other wireless service providers; and effective August 1997,
the Company acquired Galaxy, a RF engineering firm that provides system design,
implementation, optimization and other value-added radio engineering and
consulting services to the wireless service markets. The markets served by CIS
and Galaxy complement the Company's traditional telephone service provider and
private network operator markets.

During 1998, the Company continued to execute its Total Network Solutions
strategy of broadening its offering of proprietary equipment and services by
acquiring four businesses. In the first quarter of 1998, the Company acquired
ATI, a designer and manufacturer of digital microwave and millimeterwave radio
systems for voice, data and/or video applications and a majority stake in NACT,
a single-source provider of advanced telecommunications switching platforms with
integrated telephony software applications and network telemanagement
capabilities. In October 1998, the Company acquired the remaining minority
interest in NACT. In November 1998, the Company acquired Telco, a designer and
manufacturer of broadband transmission, network access and bandwidth
optimization products.

During 1998, Telco has been building a core product portfolio that
incorporates new technologies and strategically positions it for the impending
evolution of telecommunications markets. Telco Systems made two strategic
acquisitions in 1998 that expanded its product offerings from circuit switched
into packet switched, frame relay and ATM markets.

In December 1998, the Company acquired Resurgens, a provider of wholesale
international long distance services. Resurgens now conducts its business as the
World Access Telecommunications Group. As a result of the Resurgens acquisition,
WorldCom, a major customer and vendor of Resurgens, now owns approximately 14%
of the outstanding common stock of the Company.

Through the completion of the acquisitions in 1998, the Company believes it
is now positioned to offer its customers a complete telecommunications network
solutions, including access to international long distance, proprietary
equipment, and network planning and engineering services. The Company's
management believes that numerous synergies exist as a result of these
acquisitions, including cross-selling opportunities, technology development and
cost savings.

In December 1998, John D. ("Jack") Phillips was appointed the Company's new
President and Chief Executive Officer. Mr. Phillips was formerly the President
and Chief Executive Officer of Resurgens. Also in December 1998, two new outside
directors joined the Company's Board.

26
<PAGE> 29

In connection with the recently completed acquisitions, the appointment of
a new Chief Executive Officer and the election of the new directors, the Company
approved and began implementing a major restructuring program to reorganize its
operating structure, consolidate several facilities, outsource its manufacturing
requirements, rationalize its product offerings and related development efforts,
and pursue other potential synergies expected to be realized as a result of the
integration of recently acquired businesses. The Company expects the plans
associated with the program to be substantially completed during the second
quarter of 1999.

As a result of the acquisitions in 1998, the various restructuring actions
initiated in the first and fourth quarters of 1998 and the discontinuance of its
non-core businesses, the Company recorded charges as follows:

<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS TOTAL
---------- ------------ --------
<S> <C> <C> <C>
In-process research and development................... $100,300 $ -- $100,300
Restructuring and other charges....................... 17,240 2,650 19,890
Write-down of inventories............................. 9,292 7,818 17,110
Provision for doubtful accounts....................... 10,674 1,926 12,600
Goodwill impairment................................... 6,200 -- 6,200
Write-down of discontinued operations to net
realizable value.................................... -- 3,500 3,500
-------- ------- --------
$143,706 $15,894 $159,600
======== ======= ========
</TABLE>

For further discussion relating to these charges see "Purchased In-Process
Research and Development, Restructuring and Other Charges, Discontinued
Operations and Goodwill Impairment".

In December 1998, the Company formalized its plan to offer for sale all of
its non-core businesses, which consist of the resale of Nortel and other
original equipment manufacturers' wireline switching equipment, third party
repair of telecommunications equipment and pay telephone refurbishment. These
businesses have been accounted for as discontinued operations and, accordingly,
the results of operations have been excluded from continuing operations in the
consolidated Statements of Operations.

During the past few years, the Company has significantly strengthened its
balance sheet through improved operating results, a $115.0 million sale of
convertible subordinated notes, a $26.2 million secondary public equity offering
and a recently executed $75.0 million credit facility. The Company has used this
capital for acquisitions and to support the working capital requirements
associated with the Company's growth.

RESULTS OF CONTINUING OPERATIONS

The following table sets forth certain financial data expressed as a
percentage of total sales from continuing operations except other data, which is
expressed as a percentage of the applicable revenue type:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Equipment sales........................................... 91.4% 100.0% 100.0%
Carrier service revenues.................................. 8.6 -- --
----- ----- -----
Total sales....................................... 100.0 100.0 100.0
Cost of equipment sold.................................... 48.9 56.6 82.2
Write-down of inventories................................. 6.1 -- --
Cost of carrier services.................................. 8.2 -- --
----- ----- -----
Total cost of sales............................... 63.2 56.6 82.2
----- ----- -----
Gross profit...................................... 36.8 43.4 17.8
Research and development.................................. 4.5 3.4 3.4
Selling, general and administrative....................... 13.1 13.6 21.4
Amortization of goodwill.................................. 2.8 2.3 1.1
In-process research and development....................... 65.9 -- --
</TABLE>

27
<PAGE> 30

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Write-down of impaired goodwill........................... 4.1 -- --
Provision for doubtful accounts........................... 7.4 -- --
Restructuring and other charges........................... 11.3 -- --
----- ----- -----
Operating income (loss)........................... (72.3) 24.1 (8.1)
Interest and other income................................. 2.2 5.1 1.6
Interest expense.......................................... (4.5) (2.1) (0.2)
----- ----- -----
Income (loss) from continuing operations before
income taxes and minority interests............. (74.6) 27.1 (6.7)
Income taxes (benefits)................................... (0.9) 9.9 (0.6)
----- ----- -----
Income (loss) from continuing operations before minority
interests.............................................. (73.7) 17.2 (6.1)
Minority interests in earnings of subsidiary.............. 1.6 -- --
----- ----- -----
Income (loss) from continuing operations.......... (75.3)% 17.2% (6.1)%
===== ===== =====
</TABLE>

1998 CONTINUING OPERATIONS COMPARED TO 1997 CONTINUING OPERATIONS

Sales. Total sales increased $103.5 million, or 212.9%, to $152.1 million
in 1998 from $48.6 million in 1997. Equipment sales increased $90.4 million, or
185.9% to $139.0 million in 1998 from $48.6 million in 1997. Carrier service
revenues were $13.1 million which primarily represented the revenues from
Resurgens which was acquired on December 15, 1998 and facilities management
services from NACT. The increase in equipment sales related to digital radio
systems sold by ATI, which was acquired effective January 29, 1998, switching
products sold by NACT, which was acquired effective February 28, 1998,
transmission and access products sold by Telco, which was acquired effective
November 30, 1998, and an increase in sales of cellular equipment sold by CIS.

Gross Profit. Gross profit increased $34.9 million, or 165.7%, to $56.0
million in 1998 from $21.1 million in 1997. Gross profit margin decreased to
36.8% in 1998 as compared to 43.4% in 1997.

Gross profit before special charges increased $44.2 million, or 209.8%, to
$65.3 million in 1998 from $21.1 million in 1997. Equipment Group gross profit
margin before special charges increased to 46.6% in 1998 from 43.4% in 1997.
Carrier service gross profit margin was 4.7% in 1998. The improved margin
performance of the Equipment Group relates to the switching products sold by
NACT and transmission and access products sold by Telco. The increase was
partially offset by the digital radio systems sold by ATI, which included sales
of the new WavePLEX radio system which carries a lower profit margin in its
infancy until costs are reduced by increased production. The Company's margins
on sales of cellular equipment sold by CIS declined over 1997, resulting from
large contract price negotiations which enabled CIS to obtain significant sales
growth of 70.4% over 1997.

Research and Development. Research and development expenses increased $5.2
million, or 315.4%, to $6.8 million in 1998 from $1.6 million in 1997. The
increase in expenses was attributable to the acquisitions of Telco, NACT and ATI
and the further expansion of a corporate product development group during 1998.
Research and development expenses increased to 4.5% of total sales in 1998 from
3.4% of total sales in 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.4 million, or 204.4%, to $20.0 million in
1998 from $6.6 million in 1997. The increase primarily related to expenses
associated with the operations of ATI and NACT, which were acquired in early
1998, expenses related to the operations of Telco and Resurgens, which were
acquired in the fourth quarter of 1998, the Company's continued expansion of a
dedicated international sales and marketing group and corporate business
development function. As a percentage of total sales, selling, general and
administrative expenses decreased to 13.1% in 1998 from 13.6% in 1997.

Amortization of Goodwill. Amortization of goodwill increased $3.1 million
to $4.3 million in 1998 from $1.1 million in 1997, primarily as a result of the
goodwill generated in connection with the ATI, NACT, Telco

28
<PAGE> 31

and Resurgens acquisitions. In December 1998, the Company recorded impairment
charges of $6.2 million related to the unamortized balance of goodwill recorded
in connection with the acquisitions of Westec in October 1995 and Sunrise in
January 1996. Both of these businesses, which have become less strategic to the
Company due to the ATI and Telco Mergers in 1998, are currently forecasted to
generate nominal revenues and cash flow in 1999.

Operating Income (Loss). Operating income (loss) decreased $121.8 million
to $(110.1) million in 1998 as compared to $11.7 million in 1997 due to the
significant special charges recorded during 1998, related to acquisitions and
restructuring programs. Operating margin was (72.3%) in 1998 as compared to
24.1% in 1997. Operating income before special charges increased $21.9 million,
or 186.7%, to $33.6 million in 1998 from $11.7 million in 1997. Operating income
margin decreased to 22.1% in 1998 from 24.1% in 1997. The reduction in operating
income margin is due to the margins of the newly formed Telecommunications Group
which are substantially less than those of the Equipment Group.

Interest and Other Income. Interest and other income increased $953,000,
or 38.6%, to $3.4 million in 1998 from $2.5 million in 1997 due to increased
invested cash balances of the Company, resulting primarily from proceeds
received from a $115.0 million private debenture offering completed in October
1997.

Interest Expense. Interest expense increased to $6.8 million in 1998 from
$1.0 million in 1997. The increase is primarily related to the $115.0 million
private debenture offering completed in October 1997.

1997 CONTINUING OPERATIONS COMPARED TO 1996 CONTINUING OPERATIONS

Sales. Total sales increased $31.5 million, or 183.8%, to $48.6 million in
1997 from $17.1 million in 1996. There were no carrier service revenues in 1997
and 1996.

The increase related to sales of cellular equipment by CIS, which was
acquired effective January 1, 1997, sales of the Company's international
products, the CDX and WLL-2000 and engineering services performed by Galaxy,
which was acquired effective July 1, 1997. These increases were partially offset
by a decline in electronic manufacturing revenues resulting from a strategic
decision to begin utilizing the Company's manufacturing capacity for new Company
products rather than servicing external contract manufacturing customers.
Equipment sales for 1996 included approximately $4.8 million in one-time sales
of a distributed product.

Gross Profit. Gross profit increased $18.0 million, or 590.2%, to $21.1
million in 1997 from $3.1 million in 1996. Gross profit margin increased to
43.4% in 1997 from 17.8% in 1996. The improved performance resulted from
economies of scale associated with the 183.8% increase in total sales and the
change in sales mix to higher margin equipment including CIS cellular equipment
and the CDX and WLL-2000.

Research and Development. Research and development expenses increased $1.1
million, or 184.0%, to $1.6 million in 1997 from $580,000 in 1996. The increase
in expenses was attributable to the formation of a corporate product development
group during the third quarter of 1996 and the continued expansion of the
development group during 1997. Research and development expenses were 3.4% of
total sales in 1997 and 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.9 million, or 79.1%, to $6.6 million in
1997 from $3.7 million in 1996. The increase related primarily to expenses
associated with the operations of CIS and Galaxy, which were acquired effective
January 1, 1997 and July 1, 1997, respectively, and the Company's establishment
of a dedicated international sales and marketing group and corporate business
development function in March 1996. In addition, the Company recorded
approximately $960,000 of incentive compensation expense in 1997 as compared to
a provision of approximately $300,000 in 1996. As a percentage of total sales,
selling, general and administrative expenses decreased to 13.5% in 1997 from
21.4% in 1996.

Amortization of Goodwill. Amortization of goodwill increased $915,000 to
$1.1 million in 1997 from $195,000 in 1996, primarily as a result of goodwill
recorded in connection with the CIS and Galaxy acquisitions.

29
<PAGE> 32

Operating Income. Operating income increased $13.1 million, or 945.9%, to
$11.7 million in 1997 from a loss of $(1.4) million in 1996 as a result of the
factors discussed previously under Sales, Gross Profit, Research and
Development, Selling, General and Administrative Expenses and Amortization of
Goodwill. Operating income margin increased to 24.1% in 1997 from (8.1)% in
1996.

Interest and Other Income. Interest and other income increased $2.2
million to $2.5 million in 1997 from $269,000 in 1996 due to a significant
increase in cash balances of the Company, resulting primarily from the sale of
$115.0 million convertible subordinated notes in October 1997 and proceeds
received from a $26.2 million secondary public equity offering completed in
October 1996.

Interest Expense. Interest expense increased to $1.0 million in 1997 from
$39,000 in 1996. The increase is primarily due to the sale of $115.0 million
convertible subordinated notes in October 1997 which bear interest at 4.5%.

Income Taxes. The Company's effective income tax rate increased to 36.5%
in 1997 from (9.9)% in 1996. The Company's 1996 effective rate was favorably
impacted by the recognition of a $4.1 million deferred tax asset during the year
to reflect the benefits of the Company's remaining net operating loss
carryforward.

DISCONTINUED OPERATIONS

Overview. During 1998, the Company broadened its offering of proprietary
equipment by acquiring three equipment businesses. The Company acquired ATI, a
designer and manufacturer of digital microwave and millimeterwave radio systems
for voice, data and/or video applications; NACT, a single-source provider of
advanced telecommunications switching platforms with integrated telephony
software applications and network telemanagement capabilities and Telco, a
designer and manufacturer of broadband transmission, network access and
bandwidth optimization products.

In connection with the completion of the acquisitions above, certain of the
Company's non-proprietary businesses became non-strategic. In December 1998, the
Company formalized its plan to offer for sale all of its non-core businesses,
which consist of the resale of Nortel and other original equipment
manufacturers' wireline switching equipment, third party repair of telecom
equipment and pay telephone refurbishment. On January 5, 1999, the Company
formally announced its intention to sell these businesses. Management expects
that the sale will be completed in 1999. These businesses have been accounted
for as discontinued operations and, accordingly, the results of operations have
been excluded from continuing operations in the Consolidated Statements of
Operations for all periods presented.

1998 Compared to 1997. Sales increased $14.2 million, or 32.0%, to $58.6
million in 1998 from $44.4 million in 1997. This increase was primarily due to
an increase in the resale of Nortel and other original equipment manufacturers'
wireline switching equipment at the Company's AIT business. Gross profit before
special charges increased $2.1 million, or 18.9%, to $13.1 million in 1998.
Gross profit margin before special charges declined to 22.4% in 1998 from 25.0%
in 1997. The Company elected to sell approximately $10.0 million of Nortel
equipment at substantially reduced margins in the fourth quarter in anticipation
of additional pricing pressure and in an effort to reduce the inventory levels
of this business. The Company also experienced margin declines in the \pay
telephone refurbishment business in 1998 related to the introduction of a vandal
resistant pay telephone modification which carries lower margins than the
historical refurbishment revenues.

During 1998, the Company also recorded special charges of approximately
$12.4 million relating to the non-core businesses (see "-- Restructuring and
Other Charges"). In addition, the net asset value recorded for these businesses
was written-down by $3.5 million to reflect the estimated loss on disposal.

1997 Compared to 1996. Sales increased $10.5 million, or 31.0% to $44.4
million in 1997 from $33.9 million in 1996. The increase was due to growth in
Nortel resale business of AIT and pay telephone refurbishment. Gross profit
decreased to $11.1 million in 1997 from $11.9 million in 1996. Gross profit
margin decreased to 25.0% in 1997 from 35.3% in 1996. The decline in gross
profit margin in 1997 related to margin pressure experienced by the Nortel
resale business.

30
<PAGE> 33

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

Overview. In connection with the ATI, NACT and Telco Mergers in 1998, the
Company wrote off purchased in-process R&D totaling $5.4 million, $44.6 million
and $50.3 million, respectively. These amounts were expensed as non-recurring
charges on the respective acquisition dates. These write-offs were necessary
because the acquired technology had not yet reached technological feasibility
and had no future alternate use.

The value of the purchased in-process technology from ATI was determined by
estimating the projected net cash flows related to in-process research and
development projects, including costs to complete the development of the
technology. These cash flows were discounted back to their net present value.
The projected net cash flows from such projects were based on management's
estimates of revenues and operating profits related to such projects. These
estimates were based on several assumptions, including those summarized below.

The value of the purchased in-process technology from NACT and Telco was
determined by estimating the projected net cash flows related to in-process
research and development projects, excluding costs to complete the development
of the technology. These cash flows were discounted back to their net present
value. The projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects. These estimates were based on several assumptions, including those
summarized below for each respective acquisition. The resultant net present
value amount was then reduced by a stage of completion factor. This factor more
specifically captures the development risk of an in-process technology (i.e.,
market risk is still incorporated in the estimated rate of return).

The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements. The progress on these activities determines the stage
of completion of each project in the life cycle of the development. Projects
described as being in the "early" or "early concept" stage are not expected to
achieve technological feasibility and commercial application within twelve
months from the valuation date. These projects are typically in the stage of
documenting hardware and software design and preparation of circuit board
layouts. Projects described as being in the "mid" stage of development are
expected to achieve technological feasibility and commercial application within
6 to 12 months from the valuation date. These projects are typically in the
stage of finalizing circuit board layouts and performing engineering integration
tests prior to prototype builds. Projects described as being in the "late" stage
of development are expected to achieve technological feasibility and commercial
application within 6 months from the valuation date. These projects are
typically in stage of prototype builds, initial system testing, quality
assurance and field trials. It should be noted that stages of completion refer
to specific development milestones, and do not necessarily directly correlate to
the percentage of completion used in the IPR&D valuation. The percentage of
completion for the IPR&D valuation is based on the development costs incurred on
each acquired IPR&D project as of the Acquisition Date, as a percentage of the
total development costs expected to be incurred on that project, from the
inception of its development (prior to the acquisition date) until its
development is completed (after the acquisition date).

If these projects to develop commercially viable products based on the
purchased in-process technology are not successfully completed, the sales and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets may become impaired.

ATI Merger. ATI develops and manufactures a series of high-performance
digital microwave and millimeterwave radio equipment. Their products reach
across all frequency bands and data rates and offer numerous features. The
nature of the in-process research and development was such that technological
feasibility had not been attained. Failure to attain technological feasibility
would have rendered partially designed equipment useless for other applications.
ATI's products are designed for specific frequency bandwidths and, as such, are
highly customized to those bandwidths and the needs of customers wishing to
operate in them. Products only partially completed for certain bandwidths cannot
be used in other bandwidths.

31
<PAGE> 34

Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility. The purchased in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave and millimeterwave radio equipment. Each
project consists of multiple products. These projects were at multiple stages
along ATI's typical development timeline. Some projects were beginning testing
in ATI labs; others were at earlier stages of planning and designing. The
majority of the products were scheduled to be released during 1998, 1999 and
early 2000. Revenue projections for the in-process technologies reflected the
anticipated release dates of each project.

Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from 30.9% to 60.9% as other products are released
in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $11.8 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base and movement into new markets.
Projected revenues from in-process technology were assumed to peak in 2001 and
decline from 2002 through 2004 as other new products are expected to enter the
market.

In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit (loss) ranged from approximately a low of
$(900,000) to a high of $9.1 million within the term of the projections.

The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.

Management estimated that the costs to develop the in-process technology
acquired in the ATI acquisition would be approximately $24.3 million in the
aggregate through the year 2002. The expected sources of funding were scheduled
R&D expenses from the operating budget of ATI.

NACT Merger. NACT provides advanced telecommunications switching platforms
with integrated applications software and network telemanagement capabilities.
NACT designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained. Failure to attain technological
feasibility, especially given the high degree of customization required for
complete integration into the NACT solution, would have rendered partially
designed hardware and software useless for other applications. Incomplete design
of hardware and software coding would create a non-connective, inoperable
product that would have no alternative use.

NACT's business plan called for a shift in market focus to large customers,
both domestic and international; therefore, NACT had numerous projects in
development at the time of the acquisition. Additionally, the pending completion
of a major release of NACT's billing system required significant development
efforts to ensure continued integration with NACT's product suite. The purchased
in-process technology acquired in the NACT acquisition was comprised of 13
projects related to switching and billing systems. These projects were scheduled
to be released between February 1998 and April 2000. These projects include
planned additions of new products, based on undeveloped technologies, to NACT's
suite of STX and NTS products. The projects also include the creation of
products for new product suites. The research and development projects were at
various stages of development. None of the in-process projects considered in the

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<PAGE> 35

write-off had attained technological feasibility. The in-process projects do not
build on existing core technology; such existing technologies were valued as a
separate asset.

A brief summary of the significant technologies NACT was developing for
their STX and NTS products at the time of the acquisition is as follows:

STX Application Switching Platform ("STX") -- STX was introduced in May
1996 as an integrated digital tandem switching system which allows scalability
from 24 ports to a capacity of 1,024 ports per switch. The STX can be combined
with three additional STXs to provide a total capacity of 4,096 ports per
system. The current STX is not sufficiently developed to address NACT's
objective of targeting larger, more diverse telecommunications companies. To
move into this expanded customer base, NACT has multiple development tasks
planned for the STX product. NACT plans to incorporate into the STX certain
features and enhancements such as SS7 and E1 (discussed below), R-2 signaling,
and Integrated Services Digital Network, which are critical to the Company's
strategy to broaden its customer base. The SS7 and E1 features are considered
new products within the STX family of products.

Master Control Unit ("MCU") -- MCU is a database hub which can link up to
four switches, creating a larger capacity tandem switch. NACT is developing an
updated MCU, called the "redundant MCU", which allows for intelligent peripheral
or recognition of pre-paid caller numbers. Redundant MCU is an important
extension to the MCU system because it will allow a telecommunications company
to create an entire switching network outside of the public network owned by
major telecommunications firms.

NTS Telemanagement and Billing System ("NTS") -- NTS performs call rating,
accounting, switch management, invoicing, and traffic engineering for multiple
NACT switches. NACT recently finished development of an improved billing system,
the NTS 2000, which is designed for real-time transaction processing with
graphical user interface and improved call reports. The NTS 2000 is compatible
with non-NACT switches. The NTS 2000 also allows for customization of invoices
and reports.

E1 to T1 Conversion -- The T1 is the switchboard hardware used in the STX.
The T1 product has been in existence for several years. The E1 is the standard
switchboard used in Europe. NACT is creating a technology which facilitates
compatibility between the T1 and the switchboard hardware currently used in
Europe. In addition, NACT is currently developing enhanced switchboard hardware
called the T3, which will allow for more calls to pass through the switchboard
at one time. Both development efforts, the T3 and compatibility between E1 and
T1, are necessary as NACT moves into international markets.

Transmission Control Protocol/Internet Protocol ("TCP/IP")
Connectivity -- TCP/IP is the most common method of connecting personal
computers, workstations and servers. Other historically dominant networking
protocols, such as the local area network ("LAN") protocol and international
packet exchange/sequence packet exchange, are losing ground to TCP/IP. The
addition of TCP/IP is vital relative to NACT's strategic objective of offering
voice-over-Internet.

68060 -- The Company is incorporating the Motorola 68060 board in the STX
application platform to enable the STX to support 2,048 ports per switch or
8,192 ports per integrated MCU system. With this enhancement, the STX is
expected to process significantly more call minutes per month.

Signaling System 7 ("SS7") -- SS7 is software that allows a call, which
normally would have to go through a series of switchboards to reach its
destination, to instead skip from the first switchboard to the last. With the
addition of this enhancement, the STX switch can interface with carriers more
quickly and efficiently. In addition, NACT is developing the C7, which is the
European version of the SS7.

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<PAGE> 36

Set forth in the table below are details relating to the significant NACT
in-process research and development projects (dollar amounts in thousands):

<TABLE>
<CAPTION>
PERCENTAGE OF ESTIMATED COSTS TO
COMPLETION AS OF COMPLETION AS OF
---------------------- THE ACQUISITION
PERCENTAGE OF COSTS INCURRED DATE FOR
IPR&D AS OF ACQUISITION ACQUISITION ------------------
DEVELOPMENT PROJECT CHARGE DATE DATE 12/31/98 1998 1999 2000
- ------------------- ------------- ----------------- ----------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STX Application Switching Platform... 43% $1,347 80% 83% $56 $285 $ --
TCPIP................................ 7 227 90 93 8 17 --
SS7/C7............................... 14 1,280 72 75 54 324 116
NTS Telemanagement and Billing
System............................. 26 1,425 91 95 54 82 --
E1/T1 Conversion..................... 6 125 48 55 20 117 --
MCU.................................. 1 123 24 36 66 334 --
68060................................ 2 218 48 61 60 178 --
</TABLE>

The seven technologies reflected above represent 11 of the 13 projects that
NACT had in development at the time of acquisition. The STX development consists
of four separate projects, and the MCU development consists of two separate
projects. These projects were at multiple stages along NACT's development
timeline. Some projects were beginning testing in NACT labs; others were at
earlier stages of planning and designing. These projects were scheduled for
release between December 1998 and December 2000. Revenue projections for the
in-process technologies reflected the anticipated release dates of each project.

Revenue attributable to in-process technology was assumed to increase in
the first five years of the 12-year projection at annual rates ranging from
61.4% to 2.81%, decreasing over the remaining years at annual rates ranging from
16.0% to 48.5% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $8.0 million to a high of $101.1 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base and movement into new markets. Projected revenues from in-process
technology were assumed to peak in 2003 and decline from 2004 through 2009 as
other new products are expected to enter the market.

In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 67.2% to a low of 2.8% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $2.1 million to $29.3
million within the term of the projections.

The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.

The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.

Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $5.0 million in the
aggregate through the year 1999. The expected sources of funding were scheduled
research and development expenses from the operating budget of NACT.

Telco Merger. Telco develops and manufactures products focused on
providing integrated access for network services. Telco's products can be
separated into three categories: (1) broadband transmission products, (2)
network access products, and (3) bandwidth optimization products. Telco's
products are

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<PAGE> 37

deployed at the edge of the service provider's networks to provide organizations
with a flexible, cost-effective means of transmitting voice, data, video and
image traffic over public or private networks.

At the time of acquisition, Telco had several primary projects in
development relating to next-generation telecommunication and data network
hardware. These projects were at various stages in the development process. Some
were about to enter the testing phase of the initial hardware prototype, while
others were still in the early concept and design specification stages. These
projects were scheduled for commercial release at various points in time from
December 1998 through early 2000.

Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.

A brief description of the significant in-process projects is set forth
below:

Access 45/60 Release 1 -- Access 45/60 Release 1 product provides
essentially the same functional service as the existing Access 45/60 network
access servers by providing highly reliable digital access to public, private
and hybrid networks, integrating multiple business applications through
cost-effective connections to dedicated, switched and packet network services.
However, unlike the current versions, the technology underlying the Release 1
("R1") version is based on high-bit-rate digital subscriber line ("HDSL")
technology. This HDSL technology will enable high-density voice and data
applications to travel simultaneously over one to ten HDSL lines from a single
platform, which will launch the R1 product into a whole new loop market by
eliminating the need for service providers to have separate platforms for voice
and data at the customer's premises or at the provider's central office.
Although the Access 45/60 R1 product is designed to provide a service similar to
the current Access 45/60 product, the core functional technology of the new R1
is very different, and the target market of the R1 product is different.

Access 45/60 Release 1 is in the mid stage of development. If technological
feasibility is achieved, Telco expects the product to be introduced into the
market at the end of 1999. However, before that can occur, Telco must complete
the first prototype builds of the product and perform initial system testing
which will not begin until the end of August 1999. In September 1999, Telco will
begin testing for system quality assurance and expects to begin beta field
testing in October or November 1999.

EdgeLink100 E1 -- The EdgeLink100 E1 version is an addition to the 100
family which will be marketed internationally. Conforming to all applicable ETSI
and ITU standards, this product will provide a cornerstone to the next
generation of international product offerings. This product was in the early
stage of development at the time of acquisition, and is expected to achieve
commercial viability by the end of 1999. Software code generation is expected to
be completed in April 1999. Prototype builds for initial units are expected to
be completed in May 1999, and initial beta field tests are expected to begin in
June 1999.

EdgeLink300 -- The EdgeLink300 is an intelligent integrated access device,
which will provide low cost integration of voice and data services at the
customer premise by incorporating the functionality of several different
customer premise devices to allow low cost integration of POTS (plain old
telephone service), PBX, corporate LAN access and Internet access services in a
single box. The product can be connected to the network via a DS1, SDSL or HDSL.
These multiple access choices allow for lowest cost access to customers under
various regulatory conditions. This project was acquired by Telco through its
acquisition of Synaptyx in October of 1998. This product was in the late stage
of development and will be introduced in the first half of 1999.

SONET Edge Device -- The SONET Edge Device is a next-generation edge device
expected to provide access to SONET networks. This access device will be
designed to take a T1 voice input from a PBX or an Access60 and convert to SONET
formatted tributaries and send it out via a traditional STS1 interface.

35
<PAGE> 38

completed in April 1999; software code generation is expected to be completed in
August 1999; prototype builds for initial units are expected to be completed in
October 1999; and initial beta field tests are expected to begin in January
2000.

EdgeLink600 -- The EdgeLink600 ATM access device is expected to be the
first of Telco's new class of remote access systems designed to support
mission-critical multimedia traffic with guaranteed end-to-end quality of
service. This device is expected to consolidate mission-critical data, voice and
video traffic onto ATM or Frame Relay networks, allowing cost effective video
conferencing and voice integration without compromising critical data traffic.
These systems will address users who wish to take advantage of the quality and
cost effectiveness of ATM but do not wish to run ATM to their desktop.

Although much of the hardware and software design documentation and the
board layouts have been completed, before this product achieves technological
feasibility and the first version is introduced to the market, Telco must first
achieve several tasks:

- building and testing the prototype units, initiated in August 1998; and

- beta field test trials, expected to begin in November 1998.

This project was in the late stage of development at the time of
acquisition, and is currently expected to be commercially released toward the
end of 1999. Version 1.0 of this product is expected to enable ATM, Frame Relay,
LAN, and Serial interfacing. Version 1.5 is expected to add T1 interfacing on a
higher density CompactPCI card and would support a number of digital subscriber
lines (fractional T1, up to 23 lines). Version 2.0 is expected to support E1 and
HDSL communication protocols, and is expected to include a design change to the
product's T1 ATM board.

EdgeLink650 IMA -- The EdgeLink650 ATM device will be designed to be a
multislot version of the Edgelink600 with DS3 and NxDS1 interface support. This
product will incorporate an ATM Inverse Multiplexer (IMA). This product was in
the early stage of development at the time of acquisition, and is expected to
reach commercial viability in early 2000. Documentation of the hardware and
software design is expected to be completed in June 1999; prototype builds for
initial units are expected to be completed in May 1999; and initial beta field
tests are expected to begin in December 1999.

Voice-Over-Packet Engines -- Voice-over-packet refers to sending voice
transmissions over packet-based communication protocols, such as internet
protocols (IP telephony), Frame Relay, or ATM. Telco is currently developing the
software and hardware for a generic "engine" to be integrated into the EdgeLink
family of products to enable this functionality. This product was in the mid
stage of development at the time of acquisition, and is expected to be
commercially viable by the end of 1999. Software code generation is expected to
be completed in June 1999; prototype builds for initial units are expected to be
completed in July 1999; and initial beta field tests are expected to begin in
September 1999.

Hyperspan SMUG -- A new application specific integrated circuit (ASIC) is
being designed to be integrated into the HyperSPAN multiplexer boards in order
to (i) avoid technological obsolescence, and (ii) to reduce production costs.
The development of this replacement technology was at an early to mid stage at
the time of acquisition and is expected to be commercially viable by the end of
1999.

Set forth in the table below are details relating to the significant Telco
in-process research and development projects (dollar amounts in thousands):

<TABLE>
<CAPTION>
PERCENTAGE OF
COMPLETION AS OF
PERCENTAGE OF ---------------------- ESTIMATED COSTS TO COMPLETION
TELCO COSTS INCURRED AS OF THE ACQUISITION DATE FOR
IPR&D AS OF ACQUISITION ACQUISITION ------------------------------
DEVELOPMENT PROJECT CHARGE DATE DATE 12/31/98 1998 1999 2000
- ------------------- ------------- ----------------- ----------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Access 45/60 Release 1........... 1% $2,610 72% 74% $ 77 $ 923
EdgeLink 100 E1.................. 4 880 47 51 76 914
Sonet IAD........................ 6 1,090 24 28 195 2,345 $1,000
EdgeLink 650/IMA................. 16 1,830 39 43 227 2,723
Voice over Packet................ 11 1,730 45 49 162 1,948
EdgeLink 300..................... 48 2,200 88 92 100 200
EdgeLink 600..................... 12 3,300 85 90 197 393
Hyperspan SMUG................... 2 760 77 81 38 192
</TABLE>

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<PAGE> 39

If these projects are not completed as planned, the in-process research and
development will have no alternative use. Failure of the in-process technologies
to achieve technological feasibility may adversely affect the future
profitability of World Access.

Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 103.6% to a low of 3.8%, reflecting both the displacement
of Telco's old products by these new products as well as the expected growth in
the overall market in which Telco's products compete. Thereafter, revenues are
projected to decline over the remaining projection period at annual rates
ranging from 15.2% to 42.6%, as the acquired in process technologies become
obsolete and are replaced by newer technologies.

Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $39.0
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.

The acquired in-process technology's contribution to the operating income
was projected to grow over the first five years of the projection period at
annual rates ranging from a high of 240.9% to a low of 22.2% with one
intermediate year of marginally declining operating income. Thereafter, the
contribution to operating income was projected to decline through the projection
period. The acquired in-process technology's contribution to operating income
ranged from a low of approximately $4.4 million to a high of approximately $70.5
million.

The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology and
potential obsolescence of legacy products, and the risk associated with the
financial assumptions with respect to the projections used in the analysis.

The discount rates used to value the in-process technologies were 21.5% and
23.5%, depending on the stage of development. These discount rates were selected
due to several incremental inherent risks. First the actual useful economic life
of such technologies may differ from the estimates used in the analysis. Second,
risks associated with the financial projections on the specific products that
comprise the acquired in-process research and development. The third factor is
the incomplete and unproven nature of the technologies. Finally, future
technological advances that are currently unknown may negatively impact the
economic and functional viability of the in-process R&D.

The discount rates used to value in-process research and development are
different in each of the three mergers due to the following factors: (i) The
nature of the markets for the products under development, including factors such
as market size, ability to enter the markets, competitive landscape, possibility
of technological obsolescence, and target customer base; and (ii) the nature of
the acquired businesses, including the historical success with product
introductions, ability to meet development milestones, strength of the sales and
marketing organizations, access to market channels and strength of the brand
names.

Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $11.6 million through 2001. Over the projection
period, management expects to spend an additional aggregate $48.2 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes and identified
upgrades.

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<PAGE> 40

RESTRUCTURING AND OTHER CHARGES

Summary. During 1998, the Company approved and began implementing two
restructuring programs designed to reduce operating costs, outsource
manufacturing requirements and focus Company resources on recently acquired
business units containing proprietary technology or services. Management
carefully reviewed the provisions of EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity" in
determining which costs related to the various actions should be included in the
special charges. No costs were included in the charge that would derive future
economic benefit to the Company, e.g., relocation of existing employees,
recruiting and training of new employees and facility start-up costs. A summary
of restructuring and related charges recorded in connection with these programs
follows:

<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS TOTAL
---------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
First Quarter
Restructuring Charges
Severance and termination benefits..................... $ 175 $ 375 $ 550
Idle facility costs.................................... 125 1,215 1,340
Idle production equipment.............................. 290 1,060 1,350
------- ------- -------
590 2,650 3,240
Related Charges
Write-down of inventories.............................. 465 2,895 3,360
------- ------- -------
Total First Quarter............................... 1,055 5,545 6,600
------- ------- -------
Fourth Quarter
Restructuring Charges
Severance and termination benefits..................... 2,050 -- 2,050
Idle facility costs.................................... 1,200 -- 1,200
Asset write-downs...................................... 11,763 -- 11,763
Other exit costs....................................... 1,637 -- 1,637
------- ------- -------
16,650 -- 16,650
Related Charges
Write-down of inventories.............................. 8,827 4,923 13,750
Provision for doubtful accounts........................ 10,674 1,926 12,600
------- ------- -------
Total Fourth Quarter.............................. 36,151 6,849 43,000
------- ------- -------
Total Charges..................................... $37,206 $12,394 $49,600
======= ======= =======
</TABLE>

First Quarter 1998. In January 1998, the Company's senior management
decided that the following actions were necessary to streamline operations and
position the Company to service anticipated sales growth:

- Close down the existing Orlando, Florida manufacturing and repair
facility. Move the manufacturing of certain World Access products to the
company's Alpharetta, Georgia manufacturing facility.

- Exit the contract manufacturing business.

- Close down four Lakeland, Florida facilities and move AIT operations to a
new facility in Orlando, Florida. Repair operations would be integrated
with AIT in this new facility.

- Close down Westec's facility in Scottsdale, Arizona and integrate its
operations into ATI's facility in Wilmington, Massachusetts.

Shortly thereafter, senior management informed the operating management of
the applicable divisions. All Orlando and Lakeland employees were informed in
January and Westec employees were informed in February (subsequent to the
closing of the ATI acquisition).

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<PAGE> 41

Severance and termination benefits were clearly communicated up front to
the approximately 60 employees who lost their jobs as a direct result of the
consolidations. Affected employees were notified shortly after the January and
February employee meetings. Benefits were determined consistent with the
Company's severance policy of one week of pay for each full year of service
(minimum of two weeks) and continued benefits through the month severance pay is
exhausted. Approximately 10 of these employees were involuntarily terminated in
February and March, approximately 40 employees were involuntarily terminated in
April and approximately 10 employees were involuntarily terminated in June. The
Orlando and Lakeland facilities were closed in April and the Scottsdale facility
was closed in June. The actual severance and termination benefit costs incurred
by the Company were not materially different from the $550,000 recorded in the
special charge.

The idle facility and equipment portion of the special charge included the
write-off of "old Orlando", Lakeland and Scottsdale leasehold improvements,
provisions for the estimated costs to terminate idle facility and equipment
leases, the write-off of Orlando manufacturing equipment not relocated to the
Company's Alpharetta facility and certain phase-down expenses associated with
the six facilities closed down.

As previously noted, all activities that resulted in the first quarter
special charge were completed by the Company as of June 30, 1998. Of the
$3,240,000 special charge, approximately $1.4 million related to assets directly
written-off or amounts charged to the reserve in the first quarter. As of
December 31, 1998, the accrual for the first quarter special charges was
approximately $325,000, which consisted primarily of lease termination losses
expected to be incurred.

Fourth Quarter 1998. In December 1998, in connection with the (i) recently
completed NACT Merger, Telco Merger and Resurgens Merger; (ii) election of
several new outside directors to the Company's Board; and (iii) appointment of a
new Chief Executive Officer, the Company approved and began implementing a major
restructuring program which included the following activities:

- Reorganize the Company's Equipment Group operating structure.

- Consolidate the Company's ATI operations in Wilmington, Massachusetts
into Telco's facility in Norwood, Massachusetts.

- Outsource its electrical manufacturing requirements resulting in the sale
of the Company's Alpharetta, Georgia manufacturing operations to an
established contract manufacturer.

- Change in the Company's long-term focus for its switching products,
primarily its Compact Digital Exchange ("CDX") switch.

Costs associated with the reorganized operating structure consist primarily
of retirement benefits payable to the Company's former President, which will be
paid throughout 1999, and remaining lease obligations on the Company's Equipment
Group headquarters facility in Alpharetta, Georgia. Group personnel relocated to
the Company's headquarters in Atlanta and the facility was closed in February
1999.

Immediately following the completion of the Telco Merger, the Company
announced that Telco would be the cornerstone of the Company's Transport and
Access Systems Group. Leveraging on Telco's existing operating infrastructure
was anticipated in the Telco Merger to reduce overall operating costs.
Restructuring charges were recorded for costs related to the consolidation of
the Company's ATI operations in Wilmington, Massachusetts into Telco's facility
in Norwood, Massachusetts. Manufacturing of ATI's wireless radios is being
out-sourced to a contract manufacturer and all other aspects of ATI's operations
will be integrated into Telco's existing operating infrastructure. Approximately
60 ATI employees will be losing their jobs as the consolidation program is
executed during the first half of 1999. Severance and other termination benefits
were determined consistent with the Company's severance policy as noted
previously. A provision was recorded for the costs associated with the idle
portion of the Wilmington facility, which is leased through November 2000.
Production equipment was written-down to reflect its estimated net realizable
value upon disposal.

39
<PAGE> 42

An integral part of the restructuring program was the Company's decision to
outsource all its electrical manufacturing requirements and sell its Alpharetta,
Georgia manufacturing operations to an established contract manufacturer.
Approximately 25 personnel who were not offered employment by the new buyer
received severance and other termination benefits consistent with the Company's
severance policy, the majority of which was paid in January and February 1999.
Restructuring charges also included the write-off of leasehold improvements
related to the manufacturing portion of the Alpharetta facility, and to
write-down production equipment and other manufacturing assets to their
estimated net realizable values. The Company completed the sale of its
manufacturing operations in March 1999. The actual loss incurred in connection
with the sale did not differ materially from the amounts recorded in the
restructuring charges.

The most significant component of the restructuring charges related to a
change in the Company's long-term focus for its switching products, primarily
its Compact Digital Exchange ("CDX") switch. In January 1999, the Company
elected to reallocate development resources targeted for the CDX switch as a
stand-alone product to the integration of the central office functionality of
the CDX switch and the long-distance functionality of NACT's switch into a
common, next generation technology platform. This strategic decision,
performance difficulties experienced by certain customers' applications of the
CDX switch in 1998, and dramatically reduced internal estimates for CDX switch
revenues in 1999 caused the Company to significantly write-down all CDX related
assets as of December 31, 1998.

Restructuring charges related to the CDX switch included $3.0 million
related to an international long-term contract, $3.5 million to reserve for
potential losses on an equity investment in and loan made to two companies
planning CDX-based network infrastructure build-outs in Latin America, and the
write-off of $1.7 million in other assets related to the development and
deployment of the CDX switch, including prepaid royalties and tooling costs.

Other charges to continuing operations recorded in the fourth quarter of
1998 were provisions for potential inventory obsolescence and doubtful accounts.
The inventory charge was recorded to write-down CDX inventories to estimated net
realizable value and to reflect estimated losses to be incurred in connection
with the sale of ATI and manufacturing inventories to contract manufacturers.
The provision for doubtful accounts was recorded primarily to reduce the
carrying value of accounts receivable resulting from previous CDX sales to
estimated minimum realizable values in light of the issues noted above.

The total provision for doubtful accounts related to continuing operations
in 1998 was $11.3 million. Of this amount, $10.7 million related specifically to
previous sales of CDX equipment in 1998, and $2.6 million related to CDX sales
in 1997. In January 1999, the Company elected to reallocate development
resources targeted for the CDX switch as a stand-alone product to the
integration of the central office functionality of the CDX switch and the
long-distance functionality of NACT's switch into a common, next generation
technology platform. Our customers (four accounted for the majority of the
provision) were designing and building international telecommunications networks
based on the CDX switch. Our decision to not support the CDX in the future has
influenced some customers to replace their CDX switch with a competing product.
In addition, even though the CDX is functional and is currently being operated,
our customers had requested several technological improvements and upgrades. The
Company's decision to not spend additional efforts to satisfy those requests
have put a strain on our relationship with our customers. In addition, deploying
telecommunication networks is very capital intensive and some of our customers
have run into financial difficulties. These factors have contributed to the
difficulty in receiving payment from our customers. We have filed lawsuits
against several customers in an effort to receive the monies due, however, the
Company has recorded a provision for estimated uncollectible amounts.

Of the fourth quarter restructuring charges of $16.7 million, approximately
$11.8 million related to assets directly written-off in the fourth quarter. As
of December 31, 1998, the accrual for the fourth quarter restructuring and
special charges was approximately $4.6 million, which consisted of $1.9 million
of severance and other termination benefits, $1.2 million of idle facility
costs. As of the date of this Report, the Company does not expect the actual
costs for these items to be materially different from the amounts recorded in
the restructuring and special charges. The Company expects the plans associated
with the program to be substantially completed during the first half of 1999.

40
<PAGE> 43

GOODWILL IMPAIRMENT

In December 1998, the Company's Equipment Group recorded impairment charges
of $6.2 million related to the unamortized balance of goodwill recorded in
connection with the acquisitions of Westec Communications, Inc. in October 1995
and Sunrise Sierra, Inc. in January 1996. Both of these businesses, which have
become less strategic to the Company due to the ATI and Telco Mergers in 1998,
are currently forecasted to generate nominal revenues and cash flow in 1999.

LIQUIDITY AND CAPITAL RESOURCES

Overview. Cash management is a key element of the Company's operating
philosophy and strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. As of December 31, 1998, the Company had
$55.2 million of cash and equivalents and $63.1 million in borrowings available
under its credit line to support its current working capital requirements and
strategic growth initiatives.

Operating Activities. Cash used by operating activities was $13.0 million
in 1998 and $1.6 million in 1997. The increased use of cash in 1998 resulted
from the Company's need to finance increased accounts receivable and inventories
to support its growth.

Accounts receivable increased $50.2 million, or 247.8%, to $70.5 million at
December 31, 1998 from $20.3 million at December 31, 1997. This was due to the
acquisitions of ATI, NACT, Telco and Resurgens and increased sales activity at
the Company (fourth quarter 1998 sales were $73.4 million as compared to fourth
quarter 1997 sales of $21.3 million). Average days sales outstanding at December
31, 1998 were approximately 88 days as compared to 81 days at December 31, 1997.
The Company's sales to international customers have increased during the last
twelve months. International sales generally have payment terms in excess of 90
days. The Company also has recently begun to enter into long-term notes
receivable with selected customers. To maximize cash flow, the Company sells the
notes where possible on either a non-recourse or recourse basis to a third party
financing institution. As of December 31, 1998, the Company has a contingent
liability of approximately $19.8 million related to notes sold with recourse.
The Company believes it has recorded sufficient reserves to recognize the
current risk associated with these recourse sales.

Inventories increased $26.2 million, or 116.7%, to $48.6 million at
December 31, 1998 from $22.4 million at December 31, 1997. This increase was due
to the acquisition of ATI, NACT and Telco and the increase in CIS inventories as
a result of the timing of a large equipment purchase in the fourth quarter. The
increases above were offset by the $17.2 million provision for obsolete and
redundant inventories related to the restructuring activities during 1998 (see
"-- Restructuring and Other Charges").

Investing Activities. Cash used by investing activities, primarily for the
acquisitions of businesses, was $66.5 million and $18.2 million for 1998 and
1997, respectively.

Between May 1995 and July 1997, the Company completed the acquisitions of
AIT, Westec, Sunrise, CIS and Galaxy (the "Acquisitions"), which were designed
to bring new wireline and wireless switching, transport and access products and
technology into the Company. All of the Acquisitions were relatively similar in
structure in that the former owners received initial consideration consisting of
a combination of common stock and cash, as well as contingent consideration tied
to the future profitability of the ongoing business. The majority of the
contingent consideration may be paid, at the option of the Company in the form
of Company common stock valued at its then-current market price. At the time it
becomes highly probable that contingent consideration will be earned, the fair
market value is measured and recorded on the Company's balance sheet as
additional goodwill and stockholders' equity. See Note B to the Consolidated
Financial Statements.

In addition to the $3.5 million in cash paid and 440,874 shares of common
stock issued up front to the CIS stockholders, the stockholders of CIS were
issued 845,010 restricted shares of common stock. These shares were immediately
placed into escrow and, together with $6.5 million in additional purchase price,
will

41
<PAGE> 44

be released and paid to the stockholders of CIS contingent upon the realization
of certain predefined levels of pre-tax income from CIS's operations during
three one-year periods beginning January 1, 1997.

The first measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration was January 1, 1997 to December 31, 1997.
In reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. Accordingly, 317,427 escrowed shares
were accounted for as if released and $3.5 million in contingent cash payments
were accounted for as if paid as of April 30, 1997. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$6.5 million at April 30, 1997. These shares were released and payment was made
to the former stockholders of CIS on February 15, 1998.

The second measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1998 to December 31, 1998. In
reviewing CIS's pre-tax income performance as of August 31, 1998, the Company
determined that it was highly probable that the conditions for release and
payment for the first period would be met. Accordingly, 244,929 escrowed shares
were accounted for as if released and $2.0 million of CIS Additional
Consideration was accounted for as if paid as of August 31, 1998. The net effect
of this accounting was to increase goodwill and stockholders' equity by
approximately $5.1 million and $3.1 million, respectively, as of August 31,
1998. These escrowed shares were released and CIS Additional Consideration was
paid to the former stockholders of CIS on February 15, 1999. The $2.0 million of
CIS Additional Consideration earned is included in Other accrued liabilities on
the Company's December 31, 1998 balance sheet.

In addition to the $1.2 million in cash and 262,203 shares of common stock
issued up front, the former Galaxy stockholders were issued 131,101 restricted
shares of the Company's common stock. These shares were immediately placed into
escrow, and along with $3.5 million in additional consideration (the "Galaxy
Additional Consideration"), will be released and paid to the former stockholders
of Galaxy contingent upon the realization of redefined levels of pre-tax income
from Galaxy's operations during four measurement periods between July 1, 1997
and December 31, 2000.

As of February 15, 1999, the Company had released 53,215 shares from escrow
and paid $1.4 million of Galaxy Additional Consideration (in the form of 101,015
restricted shares of Company common stock) based on Galaxy's pretax income
through December 31, 1998. The net effect of the above has been to increase
goodwill, other accrued liabilities and stockholder's equity as of December 31,
1998 by $2.3 million, $1.0 million and $1.3 million, respectively.

In the fourth quarter of 1997, the Company began its three phase
acquisition of NACT. During November and December 1997, the Company purchased
355,000 shares of NACT common stock in the open market for approximately $5.0
million.

On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already then owned by the Company or GST USA. On October 28, 1998, the
NACT Merger was completed whereby the Company issued 2,790,182 shares of the
Company's common stock valued at approximately $67.8 million for the remaining
minority interest of NACT.

On December 24, 1997, the Company entered into an agreement to acquire ATI.
On January 29, 1998, the transaction was completed in its final form whereby ATI
was merged with and into CIS (the "ATI Merger"). In connection with the ATI
Merger, the stockholders of ATI received approximately $300,000 and

42
<PAGE> 45

424,932 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $6.3 million.

In addition to the 424,932 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be released to the stockholders of
ATI contingent upon the realization of predefined levels of pre-tax net income
from ATI's operations during calendar years 1998 and 1999. The pre-tax income of
ATI for 1998 fell below the level required to release escrowed shares in 1998.

In December 1997, the Company loaned ATI approximately $4.5 million. ATI
used $2.4 million of the proceeds to pay off its line of credit with a bank and
the remainder for working capital purposes. The note receivable from ATI is
included in Other assets on the Company's December 31, 1997 balance sheet.

On June 4, 1998, the Company entered into a definitive agreement to acquire
Telco, a Norwood, Massachusetts based design and manufacturer of broadband
transmission, network access and bandwidth optimization products. On October 13,
1998 the Company and Telco agreed to amend the agreement to provide Telco
stockholders a minimum per share value. On November 30, 1998, the transaction
was completed in its final form whereby Telco was merged with and into a
wholly-owned subsidiary of the Company (the "Telco Merger").

In connection with the Telco Merger, the stockholders of Telco received
7,041,773 shares of the Company's common stock valued at approximately $143.0
million. In addition, the Company issued 1,028,670 non-qualified options to
purchase Company common stock at an average exercise price of $15.78 per share
in exchange for substantially all the options held by Telco employees, which
became immediately vested in connection with the Telco Merger. These options had
an initial fair value of approximately $10.8 million.

On February 12, 1998, the Company executed a letter of intent to acquire
Resurgens, a provider of wholesale international long distance services. On May
12, 1998, the Company signed definitive agreements to acquire Resurgens. On
December 14, 1998, the transactions were completed in its final form whereby RCG
and Cherry U.K. became wholly-owned subsidiaries of the Company (the "Resurgens
Merger").

In addition to the shares noted above, the RCG creditors and Cherry U.K.
stockholders were issued 7.5 million restricted shares of Company common stock
("Contingent Payment Stock"). These shares were immediately placed into escrow
and will be released if the sum of the earnings before interest, taxes,
depreciation and amortization ("EBITDA") for Resurgens for the three performance
periods December 1, 1998 to and including May 31, 1999; January 1, 1999 to and
including December 31, 1999; and January 1, 2000 to and including December 31,
2000 equals or exceeds the Target EBITDA for such performance periods. See Note
B to the Consolidated Financial Statements.

In addition, if the EBITDA for Resurgens is less than the Target EBITDA
required for the release of Contingent Payment Stock in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding the table above, the Contingent
Payment Stock shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.

43
<PAGE> 46

Nasdaq equals or exceeds $65.00 for a total number of consecutive trading days
during such subsequent calendar quarter equal to or exceeding the total number
of trading days which such closing price was required to equal or exceed for (i)
such subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which shares of Contingent Payment Stock
were not eligible for release; (b) if the combined EBITDA for Resurgens for the
Second Performance Period equals or exceeds \$52,775,000, then the Contingent
Payment Stock related to the Third Performance Period shall be released on
February 15, 2000; and (c) all of the shares of Contingent Payment Stock shall
be released upon a Change of Control (as defined in the Merger Agreement).

During 1998 and 1997, the Company invested $12.2 million and $3.6 million,
respectively, in capital expenditures. The Company invested approximately $5.0
million during 1998 related to the establishment of the new manufacturing
facility in Alpharetta, Georgia. The remaining expenditures were primarily for
computer network and related communications equipment designed to upgrade the
Company's management information systems and facilitate the integration of the
Acquisitions, and facility improvements required in connection with the
Company's growth.

The Company began capitalizing software development costs in the fourth
quarter of 1997 in connection with its increased focus on developing proprietary
technology and products. Software development costs are capitalized upon the
establishment of technological feasibility of the product. During 1998, the
Company capitalized approximately $5.2 million of software development costs.

During 1998, the Company loaned a total of $7.9 million to three
independent companies in an effort to support its product and market development
programs. One of the companies is developing a product that the Company has
gained certain distribution rights to and the other two companies are building
out telecommunications network infrastructure in certain international markets
that the Company expects to sell products and services into in the future. Each
of the loans is interest-bearing and is secured by equipment, licenses and/or
other assets of the borrower. In November 1998, a $5.0 million loan was made to
Telegroup, Inc. ("Telegroup"), a publicly held provider of international long
distance services. In early 1999, Telegroup filed for Chapter 11 bankruptcy
protection. Management believes that its loan to Telegroup, which is included in
Other current assets on the Company's December 31, 1998 balance sheet, is
adequately secured and currently expects it to be paid in full in 1999.

Financing Activities. Cash provided from financing activities was $16.7
million and $115.4 million for 1998 and 1997, respectively.

In December 1998, the Company entered into a $75.0 million revolving line
of credit facility (the "Facility"), with a banking syndicate group led by Bank
of America, Fleet National Bank and Bank Austria Creditanstalt. The new facility
consists of a 364-day revolving line of credit which may be extended under
certain conditions and provides the Company the option to convert existing
borrowings to a three year term loan. Borrowings under the line are secured by a
first lien on substantially all the assets of the Company. The Facility, which
expires in December 2001, contains standard lending covenants including
financial ratios, restrictions on dividends and limitations on additional debt
and the disposition of Company assets. Interest is paid at the rate of prime
plus 1 1/4% or LIBOR plus 2 1/4%, at the option of the Company. As of December
31, 1998, borrowings of $4.5 million were outstanding under the Facility.

The Facility restricts distributions from the Company's consolidated
subsidiaries. Accordingly, the assets and cash flows of such subsidiaries,
including WA Telcom, the primary obligor on the Notes, may not be used to pay
any dividends to World Access, Inc.

In September 1998, the Company entered into a loan agreement with the
Public Development Authority of Forsyth County, Georgia (the "Issuer"), in the
principal amount of $7,365,000. The Issuer issued its tax exempt industrial
revenue bonds (the "Bonds"), for the sole purpose of financing a portion of the
cost of the acquisition, construction and installation of the Company's
Alpharetta, Georgia telecommunications equipment and printed circuit boards
manufacturing plant. The Company delivered an irrevocable, direct pay letter of
credit of approximately $7.5 million as security for payment of the Bonds.

44
<PAGE> 47

The Bonds have an original maturity date of August 1, 2008. In March 1999,
the Company sold the Alpharetta, Georgia based manufacturing operation. Pursuant
to terms and conditions of the Bonds, the Company is required to pay off the
Bonds upon the sale of these assets and accordingly, the Bonds will be repaid in
April 1999.

As of December 31, 1998, the Company had qualifying expenditures under the
Bonds of approximately $4.1 million. The remaining $3.3 million of the proceeds
from the Bonds is restricted for qualifying future expenditures. The Bonds are
presented net of the restricted proceeds on the Company's December 31, 1998
balance sheet.

In October 1997, WA Telecom, a wholly-owned subsidiary of the Company sold
$115.0 million in aggregate principal amount of convertible subordinated notes
(the "Notes") under Rule 144A of the Securities Act of 1933. The Notes bear
interest at the rate of 4.5% per annum, are convertible into Company common
stock at an initial price of $37.03 per share and mature on October 1, 2002.
Interest on the Notes is payable on April 1 and October 1 of each year. The
Notes are general unsecured obligations of the Company and are subordinate in
right of payment to all existing and senior indebtedness. The Company received
$111.5 million from the sale of the Notes, after the initial purchasers'
discount fees of $3.5 million.

In October 1996, the Company received net cash proceeds of approximately
$25.3 million from the sale of 3,487,500 shares of common stock in a public
offering at a price of $8.00 per share. In October 1996, the Company used
approximately $3.9 million of the net proceeds to repay all amounts borrowed
under its bank term loan.

During 1998 and 1997, the Company received approximately $23.2 million and
$11.3 million in cash, respectively, including related federal income tax
benefits of approximately $12.8 million and $6.7 million, respectively, from the
exercises of incentive and non-qualified stock options and warrants by the
Company's directors and employees.

Income Taxes. As a result of the exercises of non-qualified stock options
and warrants by the Company's directors and employees, the Company realized
federal income tax benefits during 1998 and 1997 of approximately $12.8 million
and $6.7 million, respectively. Although these tax benefits do not have any
effect on the Company's provision for income tax expense in 1998 and 1997, they
represent a significant cash benefit to the Company. This tax benefit is
accounted for as a decrease in current income taxes payable and an increase in
capital in excess of par value. Due to the Company's net operating losses during
1998, approximately $10.5 million of these tax benefits have not yet been
utilized and are available to reduce future taxable income of the Company. These
benefits are included in Deferred income taxes on the Company's balance sheet at
December 31, 1998.

Summary. The completion of the sale of $115.0 million of Notes in October
1997 and the $75.0 million line of credit received in December 1998, have
significantly enhanced the financial strength of the Company and improved its
liquidity. As of the date of this Report, the Company has approximately $35.0
million of cash, and approximately $67.6 million available under the line of
credit. The Company believes that existing cash balances, available borrowings
under the Company's line of credit and cash projected to be generated from
operations will provide the Company with sufficient capital resources to support
its current working capital requirements and business plans for at least the
next 12 months.

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<PAGE> 48

QUARTERLY OPERATING RESULTS

The Company's quarterly operating results are difficult to forecast with
any degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.

The Company's Telecommunications Group carrier service revenues, costs and
expenses have fluctuated significantly in the past and are likely to continue to
fluctuate significantly in the future as a result of numerous factors. The
Company's revenues in any given period can vary due to factors such as call
volume fluctuations, particularly in regions with relatively high per-minute
rates; the addition or loss of major customers, whether through competition,
merger, consolidation or otherwise; the loss of economically beneficial routing
options for the termination of the Company's traffic; financial difficulties of
major customers; pricing pressure resulting from increased competition; and
technical difficulties with or failures of portions of the Company's network
that impact the Company's ability to provide service to or bill its customers.
The Company's operating expenses in any given period can vary due to factors
such as fluctuations in rates charged by carriers to terminate traffic;
increases in bad debt expense and reserves; the timing of capital expenditures,
and other costs associated with acquiring or obtaining other rights to switching
and other transmission facilities; and costs associated with changes in staffing
levels of sales, marketing, technical support and administrative personnel. In
addition, the Company's operating results can vary due to factors such as
changes in routing due to variations in the quality of vendor transmission
capability; loss of favorable routing options; the amount of, and the accounting
policy for, return traffic under operating agreements; actions by domestic or
foreign regulatory entities; the level, timing and pace of the Company's
expansion in international and commercial markets; and general domestic and
international economic and political conditions. Further, a substantial portion
of transmission capacity used by the Company is obtained on a variable, per
minute and short-term basis, subjecting the Company to the possibility of
unanticipated price increases and service cancellations. Since the Company does
not generally have long-term arrangements for the purchase or resale of long
distance services, and since rates fluctuate significantly over short periods of
time, the Company's operating results may vary significantly.

As the Company's Equipment Group increases its number of telecommunications
product offerings, its future operating results may vary significantly depending
on factors such as the timing and shipment of significant orders, new product
offerings by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the availability of new technologies, the mix of
distribution channels through which the Company's products are sold, the
inability to obtain sufficient supplies of sole or limited source components for
the Company's products, gains or losses of significant customers, the timing of
customers' upgrade and expansion programs, changes in the level of operating
expenses, the timing of acquisitions, seasonality and general economic
conditions.

The following table presents unaudited quarterly operating results for each
of the Company's last eight quarters. This information has been prepared on a
basis consistent with the Company's audited consolidated financial statements
and includes all adjustments, consisting only of normal recurring accruals, that
the Company considers necessary for a fair presentation in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future operating results. This information should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto included elsewhere in this Report.

The following includes the results of operations for businesses acquired
from their respective dates of acquisition as follows: CIS -- January 1, 1997;
Galaxy -- July 1, 1997; ATI -- January 29, 1998; NACT -- February 27, 1998;
Telco -- November 30, 1998; and Resurgens -- December 15, 1998. Net income
(loss) per share is presented on a diluted basis.

46
<PAGE> 49

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equipment sales............... $7,628 $13,525 $14,426 $13,035 $ 22,860 $33,823 $35,619 $ 46,688
Carrier service revenues...... -- -- -- -- 545 719 629 11,250
------ ------- ------- ------- -------- ------- ------- ---------
Total sales............... 7,628 13,525 14,426 13,035 23,405 34,542 36,248 57,938
Cost of equipment sold........ 4,767 7,761 7,032 7,967 11,717 17,171 18,395 27,005
Write-down of inventories..... -- -- -- -- 465 -- -- 8,827
Cost of carrier services...... -- -- -- -- 492 625 628 10,777
------ ------- ------- ------- -------- ------- ------- ---------
Total cost of sales....... 4,767 7,761 7,032 7,967 12,674 17,796 19,023 46,609
------ ------- ------- ------- -------- ------- ------- ---------
Gross profit.............. 2,861 5,764 7,394 5,068 10,731 16,746 17,225 11,329
Research and development...... 260 378 553 456 732 1,746 1,778 2,586
Selling, general and
administrative.............. 1,218 1,776 1,890 1,681 2,776 3,779 4,938 8,491
Amortization of goodwill...... 123 219 384 384 643 833 927 1,852
In-process research and
development(1).............. -- -- -- -- 35,400 -- -- 64,900
Goodwill impairment........... -- -- -- -- -- -- -- 6,200
Provision for doubtful
accounts.................... 5 4 22 18 9 235 166 10,922
Restructuring and other
charges..................... -- -- -- -- 590 -- -- 16,650
------ ------- ------- ------- -------- ------- ------- ---------
Operating income (loss)... 1,255 3,387 4,545 2,529 (29,419) 10,153 9,416 (100,272)
Interest and other income..... 405 238 226 1,597 1,271 700 857 591
Interest expense.............. -- -- (7) (1,033) (1,443) (1,516) (1,641) (2,232)
------ ------- ------- ------- -------- ------- ------- ---------
Income (loss) from continuing
operations before income
taxes and minority
interests............... 1,660 3,625 4,764 3,093 (29,591) 9,337 8,632 (101,913)
Income taxes (benefits)....... 546 1,352 1,774 1,120 2,185 3,720 3,473 (10,765)
------ ------- ------- ------- -------- ------- ------- ---------
Income (loss) from
continuing operations
before
minority interests...... 1,114 2,273 2,990 1,973 (31,776) 5,617 5,159 (91,148)
Minority interests in earnings
of subsidiary............... -- -- -- -- 684 849 1,090 (126)
------ ------- ------- ------- -------- ------- ------- ---------
Income (loss) from
continuing operations... 1,114 2,273 2,990 1,973 (32,460) 4,768 4,069 (91,022)
Net income (loss) from
discontinued operations..... 1,498 1,155 1,381 750 (1,742) 1,702 2,962 (4,979)
Write-down of discontinued
operations to net realizable
value....................... -- -- -- -- -- -- -- (3,500)
------ ------- ------- ------- -------- ------- ------- ---------
Net income (loss)......... $2,612 $ 3,428 $ 4,371 $ 2,723 $(34,202) $ 6,470 $ 7,031 $ (99,501)
====== ======= ======= ======= ======== ======= ======= =========
Net Income (Loss) Per Common
Share:
Continuing Operations..... $ 0.06 $ 0.12 $ 0.15 $ 0.10 $ (1.68) $ 0.22 $ 0.20 $ (4.12)
Discontinued Operations... 0.09 0.06 0.07 0.04 (0.09) 0.08 0.12 (0.38)
------ ------- ------- ------- -------- ------- ------- ---------
Net Income (Loss)......... $ 0.15 $ 0.18 $ 0.22 $ 0.14 $ (1.77) $ 0.30 $ 0.32 $ (4.50)
====== ======= ======= ======= ======== ======= ======= =========
</TABLE>

- ---------------------
(1) During the first quarter of 1998, $44.6 million of purchased in-process R&D
was expensed, which consisted of 67.3% of the value of NACT products in the
development stage that were not considered to have reached technological
feasibility as of the date of the NACT Acquisition. In connection with the
NACT Merger, the Company revalued purchased in-process R&D to reflect the
current status of in-process NACT technology and related business forecasts
and to ensure compliance with the additional guidance provided by the
Securities and Exchange Commission in its September 15, 1998 letter to the
American Institute of Certified Public Accountants. The revalued amount
approximated the $44.6 million expensed in connection with the NACT
Acquisition, therefore no additional charge was recorded for purchased
in-process R&D. However, the effect of the revaluation required the Company
to reduce the first quarter charge related to the purchased in-process R&D
by $14.6 million and record an additional charge of $14.6 million in the
fourth quarter as of the date of the NACT Merger. Consequently, net loss for
the quarter ended March 31, 1998 of $48.8 million as reported in the
Company's Report on Form 10-Q is now reported as $34.2 million in the table
above.

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<PAGE> 50

The following table sets forth the above unaudited quarterly financial
information as a percentage of total sales from continuing operations:

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equipment sales....................... 100.0% 100.0% 100.0% 100.0% 97.7% 97.9% 98.3% 80.6%
Carrier service revenues.............. -- -- -- -- 2.3 2.1 1.7 19.4
----- ----- ----- ----- ------ ----- ----- ------
Total sales....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of equipment sold................ 62.5 57.4 48.7 61.1 50.1 49.7 50.8 46.6
Write-down of inventories............. -- -- -- -- 2.0 -- -- 15.2
Cost of carrier services.............. -- -- -- -- 2.0 1.8 1.7 18.6
----- ----- ----- ----- ------ ----- ----- ------
Total cost of sales............... 62.5 57.4 48.7 61.1 54.1 51.5 52.5 80.4
----- ----- ----- ----- ------ ----- ----- ------
Gross profit...................... 37.5 42.6 51.3 38.9 45.9 48.5 47.5 19.6
Research and development.............. 3.4 2.8 3.8 3.5 3.1 5.1 4.9 4.5
Selling, general and administrative... 16.0 13.2 13.1 12.9 11.9 10.9 13.6 14.7
Amortization of goodwill.............. 1.6 1.6 2.7 3.0 2.7 2.4 2.5 3.2
In-process research and development... -- -- -- -- 151.2 -- -- 112.0
Goodwill impairment................... -- -- -- -- -- -- -- 10.7
Provision for doubtful accounts....... -- -- 0.2 0.1 -- 0.7 0.5 18.9
Restructuring and other charges....... -- -- -- -- 2.5 -- -- 28.7
----- ----- ----- ----- ------ ----- ----- ------
Operating income (loss)........... 16.5 25.0 31.5 19.4 (125.5) 29.4 26.0 (173.1)
Interest and other income............. 5.3 1.8 1.6 12.2 5.3 2.0 2.3 1.0
Interest expense...................... -- -- (0.1) (7.9) (6.2) (4.4) (4.5) (3.8)
----- ----- ----- ----- ------ ----- ----- ------
Income (loss) from continuing
operations before income taxes
and minority interests.......... 21.8 26.8 33.0 23.7 (126.4) 27.0 23.8 (175.9)
Income taxes (benefits)............... 7.1 10.0 12.3 8.6 9.4 10.8 9.6 (18.6)
----- ----- ----- ----- ------ ----- ----- ------
Income (loss) from continuing
operations before minority
interests....................... 14.7 16.8 20.7 15.1 (135.8) 16.2 14.2 (157.3)
Minority interests in earnings of
subsidiary.......................... -- -- -- -- 2.9 2.4 3.0 (0.2)
----- ----- ----- ----- ------ ----- ----- ------
Income (loss) from continuing
operations...................... 14.7 16.8 20.7 15.1 (138.7) 13.8 11.2 (157.1)
Net income (loss) from discontinued
operations.......................... 19.6 8.5 9.6 5.8 (7.4) 4.9 8.2 (8.6)
Write-down of discontinued operations
to net realizable value............. -- -- -- -- -- -- -- (6.0)
----- ----- ----- ----- ------ ----- ----- ------
Net income (loss)................. 34.3% 25.3% 30.3% 20.9% (146.1)% 18.7% 19.4% (171.7)%
===== ===== ===== ===== ====== ===== ===== ======
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. In March 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("ACSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This Statement is effective for fiscal years beginning after
December 15, 1998. In April 1998, the ACSEC issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." This statement is effective for fiscal years
beginning after December 15, 1998. The future adoption of SFAS 133, SOP 98-1 and
SOP 98-5 is not expected to have a material effect on the Company's consolidated
financial position or results of operations.

YEAR 2000 ISSUE

The turn of the century, Year 2000, poses a serious challenge for
Information Technology ("IT") used by virtually every corporation around the
world. The problem arises as a result of past standard industry practices to
store year date data in a 2-digit (YY) field, instead of a 4-digit (CCYY) format
where the first 2 digits

48
<PAGE> 51

(CC) represent the century and the last 2 digits (YY) represent the year. Thus,
in the two digit format, 1999 is stored as 99. This causes programs that perform
arithmetic operations, comparisons, or date sorts to possibly generate erroneous
results when the program is required to process dates from both centuries. The
absence of the century information adds an ambiguity to the date information
stored or processed by the program, and it may also cause problems with data
entry and display screens. The problem is further complicated because many
applications are not stand-alone, but interface with one or more applications.

State of Readiness. The Company is addressing the Year 2000 issue by
implementing its comprehensive Year 2000 Readiness Plan (the "Y2K Plan"). The
Y2K Plan involves the following phases: (1) developing an inventory of products,
systems and equipment that may be affected by the Year 2000 date change, (2)
assessment and (3) remediation. Efforts have been underway in certain
subsidiaries of the Company since 1997, and a formal Year 2000 Readiness Program
was developed in the first quarter of 1998. All of the Company's business units
are now engaged in identifying and remediating Year 2000 issues. In addition,
the Company has retained one of the nation's largest and most reputable
providers of Year 2000 remediation and compliance services to assist in the
execution of the Y2K Plan.

The Y2K Plan consists of several phases that overlap in areas and may be in
progress simultaneously. The first phase involves developing an inventory of all
products, IT and non-IT systems, software, and business infrastructure systems
and equipment that may be affected by the Year 2000 date change. External
parties, including customers, suppliers and service providers, with which the
Company interacts, and which may have Year 2000 readiness issues are also
identified. This phase has been completed in most areas of the Company and is
expected to be completed in mid-April 1999. Inventory listings include
computers, computer network equipment, routers, servers, computer software,
telephony systems, telecommunications equipment, facilities equipment, test
equipment, business tools, as well as all suppliers and all Company products.

The second phase involves risk and impact assessment, selection of
appropriate remediation methods, and resource/cost assessment for compliance.
Each inventory item identified in the first phase is assigned a compliance
status risk level of critical, moderate, low or no risk. Items associated with
critical or moderate risk are addressed with highest priority. Similarly, a risk
assessment is made for the customers, suppliers and service providers
identified. This phase includes contacting suppliers or manufacturers for
information regarding their Year 2000 readiness, technical review of products
and systems, and compliance testing. The necessary actions to bring each item
into compliance are determined, and remediation costs are estimated. To address
potential problems, contingency plans are developed as necessary. This phase has
been completed in most areas of the Company and is expected to be completed
before the end of April 1999. Information received from manufacturers and
suppliers is maintained in databases to monitor compliance status, and
compliance testing has been completed for most Company products.

The third phase involves the remediation for items found to be non-Year
2000 compliant. This involves replacement of equipment or upgrading of software
or hardware. This phase includes communications with the Company's customers and
suppliers to determine Year 2000 issues as appropriate. Verification testing is
done to ensure the effectiveness of the remediation efforts. Capital assets
found to be non-compliant have been, or will be replaced or remediated in this
phase. This phase is expected to be completed in the second quarter of 1999.
Most of the Company's internally controlled software has been remediated and
verified. Integrated testing (also known as "end-to-end" testing) is planned and
should expose unforeseen compliance problems associated with system interfaces
and dependencies.

Organizationally, the Company established a Program Management Office
("PMO") and support teams, including the Year 2000 Steering Committee, the Year
2000 Management Team and the Year 2000 Implementation Teams. A representative
from the Company's senior management has been appointed as the overall Year 2000
Program Director, who works closely with the support teams and manages the PMO.

The Year 2000 Steering Committee consists of the Company's senior managers
for Information Technology and Quality, the Company's Chief Financial Officer,
and the Company's President and Chief Executive Officer. The committee provides
high-level direction for the Y2K Plan and approves requests for Year 2000
resources.

49
<PAGE> 52

The Year 2000 Management Team consists of the business unit managers from
each internal department of the Company. Each such manager monitors progress of
the program in his or her respective department and allocates resources to
remediate Year 2000 issues.

The Year 2000 Implementation Teams are directly responsible for ensuring
Year 2000 compliance for the Company's products and information systems
infrastructure. This includes efforts to ensure suppliers and service providers
are able to provide uninterrupted product or services through the Year 2000. The
Year 2000 Implementation Teams consist of personnel from each of the Company's
internal departments, including: Information Technology, Quality, Operations,
Materials, Product Development, Human Resources, Finance and Contracts. Members
of the Year 2000 Implementation Teams are responsible for developing the
inventory listings and assessing the inventory for compliance, assuring that
each Company product is assessed for compliance, handling customer requests for
compliance information, auditing Year 2000 test plans and results, and reporting
status and progress of team activities to the Company's management on a
divisional level and the PMO.

The PMO provides planning and project management support to the teams, as
well as assisting in each phase of the Y2K Plan. The Company's Year 2000 outside
consultant furnishes expert Year 2000 professionals for the PMO, including a
Service Delivery Manager, a Project Manager, Senior Analysts, Analysts and a
Project Administrator. The PMO meets with the Company's management weekly to
review Y2K Plan status and costs, plan activities and schedule resources, and
report progress, status, risks, issues and costs.

To aid in communication with the Company's customers, suppliers and
business partners, the Company is making Year 2000 readiness and product
compliance information available on the internet. This information is updated
periodically to include the most current information on products and services.

All Transport and Access products have been determined to be Year 2000
compliant, or may be upgraded at no charge. Software required for upgrades is
presently available and may be downloaded from the internet. Switching products
have also been determined to be Year 2000 compliant, or may be upgraded at no
charge, with the exception of the obsolete LCX (superseded by the STX). LCX
customers have been contacted to advise them that this product may experience
minor data-logging failures associated with the Year 2000, and that the fully
compliant STX provides direct replacement. NTS-2000 Billing System software is
fully Year 2000 compliant, and compliant NTS-1000 Billing System software will
be available in April 1999.

The Telecommunications Group has assessed their switching and billing
systems and identified the required upgrades for Year 2000 compliance, as well
as estimated costs. These upgrades are expected to be implemented by the end of
the third quarter of 1999 and will enable ongoing, uninterrupted business
operations through the Year 2000. The Telecommunications Group continually
updates and maintains its switching and billing systems to the state of the art,
and to comply with FCC and international regulations, which include Year 2000
specific requirements.

Costs. The total cost associated with the Company's Year 2000 remediation
initiative is not expected to be material to the Company's financial condition
or results of operations. Approximately $500,000 has been spent by the Company
since 1997 in connection with Year 2000 issues. The Telecommunications Group
estimates $800,000 will be required in 1999 for upgrades to switching equipment
and billing systems. The Equipment Group estimates $1,000,000 will be required
in 1999 for upgrades and remediation efforts. The estimated total cost of the
Company's Year 2000 initiative is not expected to exceed $3.0 million and is
being funded through operating cash flows of the Company.

Risks. The Company believes, based on currently available information,
that it will be able to properly manage its total Year 2000 exposure. There can
be no assurance, however, that the Company will be successful in its efforts, or
that the computer systems of other companies on which the Company relies will be
modified in a timely manner. Additionally, there can be no assurance that a
failure to modify such systems by another company, or modifications that are
incompatible with the Company's systems, would not have a material adverse
effect on the Company's business, financial condition or results of operations.

50
<PAGE> 53

Contingency Plans. All of the Company's inventory items that are
identified as having a compliance status risk level of critical in the first
phase of the Y2K Plan are expected to be Year 2000 compliant within the
timeframe planned, and the Y2K Plan is currently on schedule. However, the
Company will develop business continuation or "contingency" plans for potential
areas of exposure as they are identified.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

At December 31, 1998, the Company was not invested in any market risk
sensitive instruments held for either trading purposes or for purposes other
than trading. As a result, the Company is not subject to interest rate risk,
foreign currency exchange rate risk, commodity price risk, or other relevant
market risks, such as equity price risk.

The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either the prime rate
or two percent over the London Interbank Offered Rates. The Company had $4.5
million outstanding pursuant to its revolving line of credit agreement at
December 31, 1998. The Company believes that the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's financial
position, results of operations and cash flows should not be material.

ITEM 8. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Auditors.............................. 52
Report of Independent Accountants........................... 53
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 54
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... 55
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... 56
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 57
Notes to Consolidated Financial Statements.................. 58
</TABLE>

51
<PAGE> 54

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of World Access, Inc.,

We have audited the accompanying consolidated balance sheet of World
Access, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of World Access,
Inc. and subsidiaries at December 31, 1998 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

Ernst & Young LLP

Atlanta, Georgia
March 26, 1999

52
<PAGE> 55

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of World Access, Inc.,

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
World Access, Inc. and its subsidiaries at December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Atlanta, Georgia
March 5, 1998, except for the discontinued operations reclassifications in the
Consolidated Statements of Operations and Note D, which are as of April 9, 1999

53
<PAGE> 56

WORLD ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents...................................... $ 55,176 $118,065
Accounts receivable....................................... 70,485 20,264
Inventories............................................... 48,591 22,427
Deferred income taxes..................................... 37,185 1,089
Other current assets...................................... 21,381 9,835
-------- --------
Total Current Assets.............................. 232,818 171,680
Property and equipment...................................... 63,602 5,705
Goodwill and other intangibles.............................. 298,780 36,758
Other assets................................................ 18,612 11,140
-------- --------
Total Assets...................................... $613,812 $225,283
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 17,989 $ 82
Accounts payable.......................................... 36,418 9,340
Other accrued liabilities................................. 52,825 8,508
-------- --------
Total Current Liabilities......................... 107,232 17,930
Long-term debt.............................................. 137,864 115,264
Other liabilities........................................... 8,133 334
-------- --------
Total Liabilities................................. 253,229 133,528
-------- --------
Stockholders' Equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value, 150,000,000 shares
authorized; 44,136,349 and 19,306,235 issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 441 193
Capital in excess of par value............................ 472,945 84,163
Retained earnings (deficit)............................... (112,803) 7,399
-------- --------
Total Stockholders' Equity........................ 360,583 91,755
-------- --------
Total Liabilities and Stockholders' Equity........ $613,812 $225,283
======== ========
</TABLE>

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

54
<PAGE> 57

WORLD ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Equipment sales............................................. $ 138,990 $48,614 $17,131
Carrier service revenues.................................... 13,143 -- --
--------- ------- -------
Total Sales....................................... 152,133 48,614 17,131
--------- ------- -------
Cost of equipment sold...................................... 74,288 27,527 14,076
Write-down of inventories................................... 9,292 -- --
Cost of carrier services.................................... 12,522 -- --
--------- ------- -------
Total Cost of Sales............................... 96,102 27,527 14,076
--------- ------- -------
Gross Profit...................................... 56,031 21,087 3,055
Research and development.................................... 6,842 1,647 580
Selling, general and administrative......................... 19,984 6,565 3,665
Amortization of goodwill.................................... 4,255 1,110 195
In-process research and development......................... 100,300 -- --
Goodwill impairment......................................... 6,200 -- --
Provision for doubtful accounts............................. 11,332 49 --
Restructuring and other charges............................. 17,240 -- --
--------- ------- -------
Operating Income (Loss)........................... (110,122) 11,716 (1,385)
Interest and other income................................... 3,419 2,466 269
Interest expense............................................ (6,832) (1,040) (39)
--------- ------- -------
Income (Loss) From Continuing Operations Before
Income Taxes and Minority Interests............. (113,535) 13,142 (1,155)
Income taxes (benefits)..................................... (1,387) 4,792 (114)
--------- ------- -------
Income (Loss) From Continuing Operations Before
Minority Interests.............................. (112,148) 8,350 (1,041)
Minority interests in earnings of subsidiary................ 2,497 -- --
--------- ------- -------
Income (Loss) From Continuing Operations.......... (114,645) 8,350 (1,041)
Net income (loss) from discontinued operations.............. (2,057) 4,784 7,820
Write-down of discontinued operations to net realizable
value..................................................... (3,500) -- --
--------- ------- -------
Net Income (Loss)................................. $(120,202) $13,134 $ 6,779
========= ======= =======
Income (Loss) Per Common Share:
Basic:
Continuing Operations.................................. $ (5.19) $ .48 $ (.08)
Discontinued Operations................................ (.26) .28 .60
--------- ------- -------
Net Income (Loss)...................................... $ (5.45) $ .76 $ .52
========= ======= =======
Diluted:
Continuing Operations.................................. $ (5.19) $ .45 $ (.07)
Discontinued Operations................................ (.26) .25 .53
--------- ------- -------
Net Income (Loss)...................................... $ (5.45) $ .70 $ .46
========= ======= =======
Weighted Average Shares Outstanding:
Basic..................................................... 22,073 17,242 13,044
========= ======= =======
Diluted................................................... 22,073 18,708 14,530
========= ======= =======
</TABLE>

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

55
<PAGE> 58

WORLD ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CAPITAL IN NOTE RETAINED
COMMON EXCESS OF RECEIVABLE EARNINGS
STOCK PAR VALUE FROM AFFILIATE (DEFICIT) TOTAL
------ ---------- -------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996..................... $126 $ 27,642 $ (920) $ (12,514) $ 14,334
Net and comprehensive net income............... 6,779 6,779
Issuance of 3,488 shares in secondary public
offering..................................... 35 25,296 25,331
Issuance of 655 shares for Sunrise
acquisition.................................. 6 2,991 2,997
Release of 319 escrowed shares for AIT
acquisition.................................. 2,042 2,042
Repayment of loan by affiliate, net............ 348 348
Issuance of 50 shares for technology license... 1 137 138
Issuance of 247 shares for options and
warrants..................................... 2 378 380
Retirement of 672 escrowed shares from 1991
I.P.O........................................ (7) 7 --
Issuance of shares to 401K plan................ 25 25
---- -------- -------- --------- --------
Balance at December 31, 1996................... 163 58,518 (572) (5,735) 52,374
Net and comprehensive net income............... 13,134 13,134
Issuance of 1,286 shares for CIS acquisition... 13 5,601 5,614
Issuance of 408 shares for Galaxy
acquisition.................................. 4 4,769 4,773
Release of 209 escrowed shares for
acquisitions................................. 1,728 1,728
Issuance of 121 shares for AIT acquisition..... 1 2,169 2,170
Repayment of loan by affiliate................. 572 572
Issuance of 1,155 shares for options and
warrants..................................... 12 4,594 4,606
Tax benefit from option and warrant
exercises.................................... 6,675 6,675
Issuance of shares to 401K plan................ 109 109
---- -------- -------- --------- --------
Balance at December 31, 1997................... 193 84,163 -- 7,399 91,755
Net and comprehensive net loss................. (120,202) (120,202)
Issuance of 634 shares and options for ATI
acquisition.................................. 6 6,509 6,515
Issuance of 4,357 shares and options for NACT
acquisition.................................. 44 105,856 105,900
Issuance of 7,042 shares and options for Telco
acquisition.................................. 70 153,719 153,789
Issuance of 11,188 shares for Resurgens
acquisition.................................. 112 92,759 92,871
Release of 408 escrowed shares for
acquisitions................................. 6,592 6,592
Issuance of 1,599 shares for options and
warrants..................................... 16 10,394 10,410
Tax benefit from option and warrant
exercises.................................... 12,759 12,759
Issuance of shares to 401K plan................ 194 194
---- -------- -------- --------- --------
Balance at December 31, 1998................... $441 $472,945 $ -- $(112,803) $360,583
==== ======== ======== ========= ========
</TABLE>

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

56
<PAGE> 59

WORLD ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
--------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(120,202) $ 13,134 $ 6,779
Adjustments to reconcile net income (loss) to net cash from
(used by) operating activities:
Depreciation and amortization............................. 9,200 3,096 1,420
Deferred income tax provision (benefit)................... (7,566) 1,561 (453)
Income tax benefit from stock option and warrant
exercises.............................................. 12,759 6,675 --
Provision for inventory reserves.......................... 17,193 773 197
Provision for bad debts................................... 13,741 172 168
In-process research and development....................... 100,300 -- --
Restructuring and other charges........................... 18,063 -- --
Goodwill impairment....................................... 6,200 -- --
Write-down of discontinued operations to net realizable
value.................................................. 3,500 -- --
Minority interests in earnings of subsidiary.............. 2,497 -- --
Changes in operating assets and liabilities, net of
effects from businesses acquired:
Accounts receivable.................................... (31,883) (8,797) (258)
Inventories............................................ (24,761) (12,147) (5,988)
Accounts payable....................................... 6,743 4,313 (47)
Other assets and liabilities........................... (18,822) (10,382) 177
--------- -------- -------
Net Cash From (Used By) Operating Activities...... (13,038) (1,602) 1,995
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired............ (40,280) (14,840) (437)
Expenditures for property and equipment..................... (12,216) (3,591) (1,176)
Software development costs.................................. (5,226) (360) --
Loans to business partners.................................. (7,917) -- --
Other....................................................... (888) 551 (180)
--------- -------- -------
Net Cash Used By Investing Activities............. (66,527) (18,240) (1,793)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt.................................. 4,116 111,909 --
Net proceeds from secondary public offering................. -- -- 25,331
Proceeds from exercise of stock warrants and options........ 10,410 4,606 4,251
Short-term debt borrowings (repayments)..................... 4,268 (588) (5,510)
Long-term debt repayments................................... (1,261) -- (3,625)
Debt issuance costs......................................... (857) (500) (56)
--------- -------- -------
Net Cash From Financing Activities................ 16,676 115,427 20,391
--------- -------- -------
Increase (Decrease) in Cash and Equivalents....... (62,889) 95,585 20,593
Cash and Equivalents at Beginning of Period....... 118,065 22,480 1,887
--------- -------- -------
Cash and Equivalents at End of Period............. $ 55,176 $118,065 $22,480
========= ======== =======
Supplemental Schedule of Noncash Financing and Investing
Activities:
Issuance of common stock and stock options for businesses
acquired.................................................. $ 365,159 $ 14,285 $ 5,039
Reduction in note receivable from affiliate to recognize
contingent purchase price earned.......................... -- -- 583
Conversion of accounts receivable to investment in
technology license........................................ -- -- 242
Issuance of common stock for technology license............. 508 -- 138
</TABLE>

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

57
<PAGE> 60

WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A: GENERAL

NATURE OF BUSINESS

World Access, Inc. and its subsidiaries (the "Company") provide
international long distance voice and data services and proprietary network
equipment to the global telecommunications markets. The World Access
Telecommunications Group provides wholesale international long distance service
through a combination of its own international network facilities, various
international termination relationships and resale arrangements with other
international long distance service providers. The World Access Equipment Group
develops, manufactures and markets digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, digital microwave radio systems and other
telecommunications network products. To support and complement its product
sales, the Company also provides its customers with a broad range of network
design, engineering, testing, installation and other value-added services.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of World Access,
Inc. and its majority owned subsidiaries from their effective dates of
acquisition (see "Note B"). All material intercompany accounts and transactions
are eliminated in consolidation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of the respective
balance sheet dates. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and current estimates of fair value may differ significantly from the
amounts presented herein.

The fair values of cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate the carrying values due to their short-term
nature. The fair values of long-term debt are estimated based on current market
rates and instruments with the same risk and maturities and approximate the
carrying value.

REVENUE RECOGNITION

In general, revenues are recognized when the Company's products are shipped
or services are rendered, provided that there are no significant uncertainties
regarding the customer's acceptance and collection of the related receivable is
probable. Revenue is deferred for estimated future returns for stock balancing
and excess quantities above levels the Company deems appropriate in its
distribution channels.

Revenues from sales of software products, which have not been material to
date, are recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable and collectibility is probable in
accordance with Statement of Position 97-2, "Software Revenue Recognition", as
amended.

58
<PAGE> 61
WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In the normal course of business, the Company enters into certain
sales-type lease arrangements with Equipment Group customers. These leases are
generally sold to third-party financing institutions. A portion of these
arrangements contains certain recourse provisions under which the Company
remains liable. The Company's maximum exposure under the recourse provisions,
net of related reserves, was approximately $19.8 million at December 31, 1998. A
portion of this contingent obligation is collateralized by security interests in
the related equipment. The fair value of the recourse obligation at December 31,
1998 was not determinable as no market exists for these obligations.

Occasionally, the Company enters into long-term contracts which require
percentage of completion accounting treatment. No revenues were recognized for
such contracts during 1998 and 1996. During 1997, the Company recognized
approximately $5.3 million of revenues under the percentage of completion
method. No costs and estimated earnings in excess of billings are included in
the Company's December 31, 1998 balance sheet.

SIGNIFICANT CUSTOMERS

During 1998 and 1997, no customer individually accounted for 10.0% of the
Company's total sales from continuing operations. During 1996, one customer
accounted for 10.9% of total sales from continuing operations.

RESEARCH AND DEVELOPMENT

Research, engineering and product development costs are expensed as
incurred. Development costs incurred in the research and development of new
software products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. After
technological feasibility is established, any additional development costs are
capitalized in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Such costs are amortized over the lesser of four years or
the estimated economic life of the related product. Capitalized software costs,
net of accumulated amortization, are included in Goodwill and other intangibles
on the Company's balance sheet.

On a quarterly basis, the Company evaluates the recoverability of
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software, any remaining capitalized amounts are written off.
No significant write-offs have been recorded by the Company to date.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Total advertising expenses for
1998, 1997 and 1996 were approximately $450,000, $125,000 and $100,000,
respectively.

CASH AND EQUIVALENTS

Cash equivalents consist of highly liquid time deposits, commercial paper,
and U.S. Treasury bills and notes with maturities of 90 days or less from the
date of purchase.

ACCOUNTS RECEIVABLE

Accounts receivable are presented net of an allowance for doubtful accounts
of $9.8 million and $237,000 at December 31, 1998 and 1997, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates impairment of long-lived assets pursuant to Statement
of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Management periodically evaluates
property and equipment and intangible assets for impairment whenever events or
changes in circumstances indicate the assets may be impaired. This evaluation
consists of comparing estimated future cash flows (undiscounted and without
interest charges) over the remaining life of the asset to its carrying value.
When such evaluation results in a deficiency, the asset is written down to its
estimated fair value.

OTHER ACCRUED LIABILITIES

At December 31, 1998, other accrued liabilities included customer deposits,
accrued payroll and accrued restructuring costs, of $6.9 million, $5.8 million
and $4.6 million, respectively.

EARNINGS PER SHARE

Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share is based on the
weighted average number of common shares outstanding plus, when their effect is
dilutive, potential common stock consisting of shares subject to stock options,
stock warrants and convertible notes. Due to the net loss incurred in 1998,
approximately 1.2 million shares of potential common stock were excluded in the
calculation of diluted loss per share for 1998. Approximately 1.5 million shares
of potential common stock were included in the calculation of diluted earnings
per share for 1997 and 1996. A total of 8,307,000, 995,000, and 401,000 shares
of common stock, held in escrow primarily from certain business acquisitions
(see "Note B"), were excluded from the earnings per share calculations for 1998,
1997 and 1996, respectively, because the conditions for release of shares from
escrow had not been satisfied.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." This Statement is effective for fiscal years
beginning after December 15, 1998. In April 1998, the ACSEC issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." This statement is effective for
fiscal years beginning after December 15, 1998. The future adoption of SFAS 133,
SOP 98-1 and SOP 98-5 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.

RECLASSIFICATIONS

Certain items in the prior year consolidated financial statements have been
reclassified to conform to the current presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE B: ACQUISITIONS

1998 ACQUISITIONS

The following table represents the purchase price and the allocation to the
fair values of assets and liabilities for the acquisitions completed in 1998.
See Note H for further discussion relating to goodwill and other intangibles
acquired.

<TABLE>
<CAPTION>
ATI NACT TELCO RESURGENS TOTAL
------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchase price............................... $11,343 $168,931 $159,087 $104,846 $444,207
======= ======== ======== ======== ========
Allocation to fair values of assets and
liabilities:
Goodwill..................................... $ 3,265 $ 92,688 $ 39,418 $ 78,625 $213,996
In-process research and development.......... 5,400 44,600 50,300 -- 100,300
Existing technology acquired................. -- 4,400 34,000 -- 38,400
Patents...................................... -- -- 6,800 -- 6,800
Other assets and liabilities................. 2,678 27,243 28,569 26,221 84,711
------- -------- -------- -------- --------
$11,343 $168,931 $159,087 $104,846 $444,207
======= ======== ======== ======== ========
</TABLE>

ATI ACQUISITION

On December 24, 1997, the Company entered into an agreement to acquire
Advanced TechCom, Inc. ("ATI"), a Wilmington, Massachusetts based designer and
manufacturer of digital microwave and millimeterwave radio systems for voice,
data and/or video applications. On January 29, 1998, the transaction was
completed in its final form whereby ATI was merged with and into Cellular
Infrastructure Supply, Inc., a wholly-owned subsidiary of the Company (the "ATI
Merger").

In connection with the ATI Merger, the stockholders of ATI received
approximately $300,000 in cash and 424,932 restricted shares of the Company's
common stock valued at approximately $6.3 million. The Company's policy is to
value restricted stock issued in acquisitions at the average market price of its
common stock for the three trading days prior and the three trading days
subsequent to the date economic terms of the acquisition are announced (the
"Stock Valuation Date"), less a discount to reflect the lack of marketability
caused by trading restrictions, size of the share issuances and other relevant
factors. A discount factor of 30% was used to value the 424,932 restricted
shares, which was based on previous sales of restricted Company common stock and
independent studies regarding discount attributable to lack of marketability.
Management believes the discount rate used to value these restricted shares was
appropriate and reasonable. The Company also paid approximately $3.6 million of
ATI's indebtedness in connection with the ATI Merger.

In addition to the shares noted above, the stockholders of ATI were issued
209,050 restricted shares of the Company's common stock. These shares were
immediately placed into escrow and will be released to the stockholders of ATI
contingent upon the realization of predefined levels of pre-tax income from
ATI's operations during calendar years 1998 and 1999. Upon issuance, the 209,050
escrowed shares were valued by the Company at par value only, or $2,091. As it
becomes determinable beyond a reasonable doubt that the conditions for release
from escrow will be met, the fair market value of the shares as measured at that
time will be recorded as additional goodwill and stockholders' equity,
respectively. To date, the pre-tax income of ATI has been below the level
required to release escrowed shares.

The acquisition of ATI has been accounted for using the purchase method of
accounting. Accordingly, the results of ATI's operations have been included in
the accompanying consolidated financial statements from January 29, 1998. The
purchase price was allocated to the net assets acquired, including $5.4 million
of purchased in-process research and development ("R&D"). The excess of purchase
price over the fair value of

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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

net assets acquired, currently $3.3 million, has been recorded as goodwill and
is being amortized over a 15 year period.

Purchased in-process R&D, which consisted of the value of ATI products in
the development stage that, were not considered to have reached technological
feasibility as of the date of the ATI Merger, was expensed in the first quarter
of 1998 in accordance with applicable accounting rules (see "Note C").

NACT ACQUISITION

In the fourth quarter of 1997, the Company began a three-phase acquisition
of NACT Telecommunications, Inc., ("NACT") a Provo, Utah based single-source
provider of advanced telecommunications switching platforms with integrated
telephony software applications and network telemanagement capabilities. During
November and December 1997, the Company purchased 355,000 shares of NACT common
stock in the open market for approximately $5.0 million.

On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 67.3% of the outstanding shares of NACT (the "NACT Acquisition").
On February 27, 1998, the NACT Acquisition was completed with GST USA receiving
$59.7 million in cash and 1,429,907 restricted shares of the Company's common
stock valued at approximately $26.9 million. These shares were valued at $18.80
per share, a 20% discount to the closing market price of Company common stock on
February 26, 1998. Management believes this valuation was appropriate and
reasonable based on the fact GST USA sold all 1,429,907 restricted shares at
$18.80 per share to an independent third party in a private transaction
completed on February 27, 1998.

In addition, the Company issued 740,543 non-qualified options to purchase
Company common stock at $11.15 per share and 106,586 non-qualified options to
purchase Company common stock at $16.25 per share in exchange for substantially
all the options held by NACT employees, which became immediately vested in
connection with the NACT Acquisition. These options had an initial fair value
using the Black-Scholes pricing model of approximately $8.4 million. The
significant assumptions used in the Black-Scholes calculation were: stock price
at date of grant of $18.80; risk-free interest rate of 5.25%; expected life of 3
years; expected volatility of 44; and no expected dividends.

Under the terms of the Company's stock purchase agreement with GST, the
Company and GST agreed to share evenly the costs of any judgement against NACT
as a result of a patent dispute claim filed by Aerotel, Ltd. and Aerotel U.S.A.,
Inc. (collectively "Aerotel") in 1996. Subsequent to the NACT Acquisition, the
Company actively engaged in settlement negotiations. On October 26, 1998, the
Company, GST and Aerotel settled the Aerotel litigation. The Company's portion
of the total settlement costs, including NACT legal fees, was approximately $3.4
million. The payment made to Aerotel was satisfied through the issuance of
137,334 shares of Company common stock. The settlement costs incurred by the
Company as a result of the Aerotel litigation have been accounted for as
additional NACT purchase price.

On February 24, 1998, the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already owned by the Company or GST USA (the "NACT Merger"). On
October 28, 1998, the NACT Merger was completed whereby the Company issued
2,790,182 shares of the Company's common stock valued at approximately $67.8
million for the remaining minority interest of NACT. These shares were valued at
$24.29 per share, the average trading price of Company common stock on the Stock
Valuation Date.

The acquisition of NACT has been accounted for using the purchase method of
accounting. Accordingly, the results of NACT's operations have been included in
the accompanying consolidated financial statements from February 27, 1998, the
date the majority interest was acquired. The purchase price was allocated to the
net assets acquired, including $44.6 million of purchased in-process R&D. The
excess of purchase price over
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the fair value of net assets acquired of approximately $92.7 million has been
recorded as goodwill and is being amortized over a 20 year period.

During the first quarter of 1998, $44.6 million of purchased in-process R&D
was expensed, which consisted of 67.3% of the value of NACT products in the
development stage that were not considered to have reached technological
feasibility as of the date of the NACT Acquisition. In connection with the NACT
Merger, the Company revalued purchased in-process R&D to reflect the current
status of in-process NACT technology and related business forecasts and to
ensure compliance with the additional guidance provided by the Securities and
Exchange Commission in its September 15, 1998 letter to the American Institute
of Certified Public Accountants. The revalued amount approximated the $44.6
million expensed in connection with the NACT Acquisition, therefore no
additional charge was recorded for purchased in-process R&D. However, the effect
of the revaluation required the Company to reduce the first quarter charge
related to the purchased in-process R&D by $14.6 million and record an
additional charge of $14.6 million in the fourth quarter as of the date of the
NACT Merger (see "Note C").

TELCO ACQUISITION

On June 4, 1998, the Company entered into a definitive agreement to acquire
Telco Systems, Inc. ("Telco") a Norwood, Massachusetts based design and
manufacturer of broadband transmission, network access and bandwidth
optimization products. On October 13, 1998 the Company and Telco agreed to amend
the agreement to provide Telco stockholders a minimum per share value. On
November 30, 1998, the transaction was completed in its final form whereby Telco
was merged with and into a wholly-owned subsidiary of the Company (the "Telco
Merger").

In connection with the Telco Merger, the stockholders of Telco received
7,041,773 shares of the Company's common stock valued at approximately $143.0
million. Pursuant to the merger agreement, the number of shares issued was to be
determined by the quotient of $17.00 divided by the average of the last reported
sales price of one share of Company common stock on Nasdaq during a period of 20
trading days before the closing of the Telco Merger. Since the purchase price
(i.e., the number of shares) was not determined until the closing of the Telco
Merger, the shares issued were valued at $20.31 which was the closing price of
the Company's common stock on November 30, 1998. In addition, the Company issued
1,028,670 non-qualified options to purchase Company common stock at an average
exercise price of $15.78 per share in exchange for substantially all the options
held by Telco employees, which became immediately vested in connection with the
Telco Merger. These options had an initial fair value using the Black-Scholes
pricing model of approximately $10.8 million. The significant assumptions used
in the Black-Scholes calculation were: stock price at date of grant of $20.31
(closing price on Nasdaq on November 30, 1998); risk free interest rate of
5.25%; expected life of 2 years; expected volatility of 60; and no expected
dividends.

The acquisition of Telco has been accounted for using the purchase method
of accounting. Accordingly, the results of Telco's operations have been included
in the accompanying consolidated financial statements from November 30, 1998.
The purchase price was allocated to net assets acquired, including $50.3 million
of purchased in-process R&D. The excess of purchase price over the fair value of
net assets acquired of approximately $39.4 million has been recorded as goodwill
and is being amortized over a 20 year period.

Purchased in-process R&D, which consisted of the value of Telco products in
the development stage that were not considered to have reached technological
feasibility as of the date of the Telco Merger, was expensed in the fourth
quarter of 1998 in accordance with applicable accounting rules (see "Note C").

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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the ATI, NACT and Telco Mergers, the Company has allocated a portion of
the purchase price to in-process research and development. The Company relied on
three sources of competence to identify and evaluate projects comprising
in-process R&D:

- The Company's due diligence of the target companies including a thorough
review by our engineers of the various technologies;

- The target companies' engineers and management provided substantial
information about the status of various technologies.

- Independent appraisers, who have substantial experience in these types of
engagements, had lengthy discussions with each target company's
management representatives.

The Company could not have purchased or internally developed the in-process
research and development projects for less.

We expect our results of operations to benefit from the above acquisitions
through increased revenues and gross margin due to new product introductions. We
expect to realize these benefits during 1999 and 2000 as new products are
introduced to the market. The in-process research and development projects
acquired from ATI, NACT and Telco all relate to new products and technologies
that are completely unrelated to our current projects and activities.

RESURGENS ACQUISITION

On February 12, 1998, the Company executed a letter of intent to acquire
Cherry Communications Incorporated, d/b/a Resurgens Communications Group
("RCG"), and Cherry Communications U.K. Limited ("Cherry U.K.", and together
with RCG, "Resurgens") providers of wholesale international long distance
services. On May 12, 1998, the Company signed definitive agreements to acquire
Resurgens. On December 14, 1998, the transactions were completed in its final
form whereby RCG and Cherry U.K. became wholly-owned subsidiaries of the Company
(the "Resurgens Merger").

In connection with the Resurgens Merger, the creditors of RCG and the sole
stockholder of Cherry U.K. received 3,687,500 restricted shares of the Company's
common stock valued at approximately $92.9 million. The shares may not be sold
or otherwise transferred until December 15, 1999. The shares were valued at
$25.17 per share, a 30% discount from the average trading price of Company
common stock on the Stock Valuation Date. This discount factor was based on
previous sales of restricted Company common stock, an independent review by an
investment banking firm, and independent studies regarding discount attributable
to lack of marketability. The market value of Company's common stock was $19.88
per share as of the date of the Resurgens Merger. Management believes the
discount rate used to value these restricted shares was appropriate and
reasonable.

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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition to the shares noted above, the RCG creditors and Cherry U.K.
stockholders were issued 7.5 million restricted shares of Company common stock
("Contingent Payment Stock"). These shares were immediately placed into escrow
and will be released in the amounts and on the dates specified below if the sum
of the earnings before interest, taxes, depreciation and amortization ("EBITDA")
for Resurgens for the performance periods set forth below equals or exceeds the
Target EBITDA for such performance period:

<TABLE>
<CAPTION>
PERCENTAGE OF
CONTINGENT PAYMENT
PERFORMANCE PERIOD RELEASE DATE STOCK TO BE RELEASED TARGET EBITDA
- ------------------ ----------------- -------------------- -------------
<S> <C> <C> <C>
December 1, 1998 to and including
May 31, 1999 (the "First
Performance Period").............. July 15, 1999 25.0% $14,100,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period").............. February 15, 2000 37.5 29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period").............. February 15, 2001 37.5 36,500,000
</TABLE>

Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
Company's common stock as reported by The Nasdaq Stock Market ("Nasdaq") equals
or exceeds $65.00 for any five consecutive trading days during such calendar
quarter, then 25% of all of the shares of Contingent Payment Stock shall be
released on February 15, 2000, provided that if no shares of Contingent Payment
Stock are eligible for release during any such calendar quarter, then such
shares of Contingent Payment Stock shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Company's Common Stock as reported by Nasdaq equals or
exceeds $65.00 for a total number of consecutive trading days during such
subsequent calendar quarter equal to or exceeding the total number of trading
days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which shares of Contingent Payment Stock
were not eligible for release; (b) if the combined EBITDA for Resurgens for the
Second Performance Period equals or exceeds $52,775,000, then the Contingent
Payment Stock related to the Third Performance Period shall be released on
February 15, 2000; and (c) all of the shares of Contingent Payment Stock shall
be released upon a Change of Control (as defined in the Merger Agreement).

Upon issuance, the 7.5 million escrowed shares were valued by the Company
at par value only, or $75,000. As it becomes determinable beyond a reasonable
doubt that the conditions for release from escrow will be met, the fair market
value of the shares as measured at that time will be recorded as additional
goodwill and stockholders' equity, respectively.

The acquisition of Resurgens has been accounted for using the purchase
method of accounting. Accordingly, the results of Resurgen's operations have
been included in the accompanying consolidated financial statements from
December 14, 1998. The excess of purchase price over the fair value of net
assets acquired, currently $78.6 million, has been recorded as goodwill and is
being amortized over a 20 year period.

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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1997 ACQUISITIONS

The following table represents the purchase price and the allocation to the
face values of assets and liabilities for the acquisitions completed in 1997.
See Note H for further discussion relating to goodwill acquired.

<TABLE>
<CAPTION>
CIS GALAXY TOTAL
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Purchase price.............................................. $6,193 $5,771 $11,964
====== ====== =======
Allocation to fair values of assets and liabilities:
Goodwill.................................................. $5,964 $4,554 $10,518
Other assets and liabilities.............................. 229 1,217 1,446
------ ------ -------
$6,193 $5,771 $11,964
====== ====== =======
</TABLE>

CIS ACQUISITION

On March 11, 1997, the Company entered into an agreement to acquire
Cellular Infrastructure Supply, Inc. ("CIS"), a Burr Ridge, Illinois based
provider of new and/or upgraded equipment and related design, installation and
technical support services to cellular, PCS and other wireless service
providers. On March 27, 1997, the transaction was completed in its final form
whereby CIS was merged with and into CIS Acquisition Corp., a wholly-owned
subsidiary of the Company (the "CIS Merger"). CIS Acquisition Corp. subsequently
changed its name to Cellular Infrastructure Supply, Inc. In connection with the
CIS Merger, the three stockholders of CIS received $3.5 million in cash and
440,874 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $2.6 million.

In addition to the 440,874 shares noted above, the stockholders of CIS were
issued 845,010 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $6.5 million in additional
purchase price (the "CIS Additional Consideration"), will be released and paid
to the stockholders of CIS contingent upon the realization of predefined levels
of pre-tax income from CIS's operations during three one-year periods beginning
January 1, 1997.

Upon issuance, the 845,010 escrowed shares were valued by the Company at
par value only, or $8,450. Once conditions for release from escrow have been
met, the fair market value of the shares as measured at that time, along with
any CIS Additional Consideration earned, will be recorded as additional goodwill
and stockholders' equity, respectively.

The first measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1997 to December 31, 1997. In
reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was determinable beyond a reasonable doubt that the
conditions for release and payment for the first period would be met.
Accordingly, 317,427 escrowed shares were accounted for as if released and $3.5
million of CIS Additional Consideration was accounted for as if paid as of April
30, 1997. The net effect of this accounting was to increase goodwill and
stockholders' equity by approximately $6.5 million and $3.0 million,
respectively, as of April 30, 1997. These escrowed shares were released and CIS
Additional Consideration was paid to the former stockholders of CIS on February
15, 1998.

The second measurement period for purposes of releasing escrowed shares and
paying CIS Additional Consideration was January 1, 1998 to December 31, 1998. In
reviewing CIS's pre-tax income performance as of August 31, 1998, the Company
determined that it was determinable beyond a reasonable doubt that the
conditions for release and payment for the first period would be met.
Accordingly, 244,929 escrowed shares were accounted for as if released and $2.0
million of CIS Additional Consideration was accounted for as if paid as of
August 31, 1998. The net effect of this accounting was to increase goodwill and
stockholders' equity by approximately $5.1 million and $3.1 million,
respectively, as of August 31, 1998. These escrowed shares

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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

were released and CIS Additional Consideration was paid to the former
stockholders of CIS on February 15, 1999. The $2.0 million of CIS Additional
Consideration earned is included in Other accrued liabilities on the Company's
December 31, 1998 balance sheet.

The acquisition of CIS has been accounted for using the purchase method of
accounting. Accordingly, the results of CIS's operations have been included in
the accompanying consolidated financial statements from January 1, 1997, the
effective date of acquisition as defined in the definitive agreement and plan of
merger. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the date of acquisition. The
excess of purchase price over the fair value of net assets acquired, currently
$17.6 million, has been recorded as goodwill and is being amortized over a 15
year period.

GALAXY ACQUISITION

On July 29, 1997, the Company entered into a letter of intent to acquire
Galaxy Personal Communications Services, Inc. ("Galaxy"), a Norcross, Georgia
based provider of system design, implementation, optimization and other
value-added radio engineering and consulting services to PCS, cellular and other
wireless telecommunications service providers. On August 26, 1997, the
transaction was completed in its final form whereby Galaxy was merged with and
into Galaxy Acquisition Corp., a wholly-owned subsidiary of the Company (the
"Galaxy Merger"). Galaxy Acquisition Corp. subsequently changed its name to
Galaxy Personal Communications Services, Inc. In connection with the Galaxy
Merger, the former stockholders of Galaxy received approximately $1.2 million in
cash and 262,203 restricted shares of the Company's common stock. These shares
had an initial fair value of approximately $4.2 million.

In addition to the 262,203 shares noted above, the former Galaxy
stockholders were issued 131,101 restricted shares of the Company's common
stock. These shares were immediately placed into escrow, and along with $3.5
million in additional consideration (the "Galaxy Additional Consideration"),
will be released and paid to the former stockholders of Galaxy contingent upon
the realization of predefined levels of pre-tax income from Galaxy's operations
during four measurement periods between July 1, 1997 and December 31, 2000. The
Galaxy Additional Consideration may be paid, at the option of the Company, in
the form of cash or restricted shares of the Company's common stock valued at
the then current market prices.

Upon issuance, the 131,101 escrowed shares were valued by the Company at
par value only, or $1,311. Once conditions for release from escrow have been
met, the fair market value of the shares as measured at that time, along with
any Galaxy Additional Consideration earned, will be recorded as additional
goodwill and stockholders' equity, respectively.

As of February 15, 1999, the Company had released 53,215 shares from escrow
and paid $1.4 million of Galaxy Additional Consideration (in the form of 101,015
restricted shares of Company common stock) based on Galaxy's pre-tax income
through December 31, 1998. The net effect of the above has been to increase
goodwill, other accrued liabilities and stockholder's equity as of December 31,
1998 by $2.3 million, $1.0 million and $1.3 million, respectively.

The acquisition of Galaxy has been accounted for using the purchase method
of accounting. Accordingly, the results of Galaxy's operations have been
included in the accompanying consolidated financial statements from July 1,
1997, the effective date of acquisition as defined in the definitive agreement
and plan of merger. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of the date of
acquisition. The excess of purchase price over the fair value of net assets
acquired, currently $6.9 million, has been recorded as goodwill and is being
amortized over a 15 year period.

PRO FORMA RESULTS OF OPERATIONS

On a pro forma, unaudited basis, as if the acquisitions of ATI, NACT, Telco
and Resurgens had occurred as of January 1, 1997, total sales, operating loss,
loss from continuing operations and net loss from continuing
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operations per diluted common share for the years ended December 31, 1998 and
1997 would have been approximately $378.0 million and $370.6 million; $88.4
million and $165.3 million; $100.8 million and $178.7 million; $2.91 and $5.48,
respectively. The results of operations for Galaxy during the first six months
of 1997 were not material and therefore are not included in the pro forma
disclosure.

These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
dates indicated. Purchased in-process R & D expensed in connection with the ATI,
NACT and Telco Mergers has been excluded from the pro forma results due to its
nonrecurring nature.

NOTE C: PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

OVERVIEW

In connection with the ATI, NACT and Telco Mergers in 1998, the Company
wrote off purchased in-process R&D totaling $5.4 million, $44.6 million and
$50.3 million, respectively. These amounts were expensed as non-recurring
charges on the respective acquisition dates. These write-offs were necessary
because the acquired technology had not yet reached technological feasibility
and had no future alternate use.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development costs expected to be incurred on that project, from the inception of
its development (prior to the acquisition date) until its development is
completed (after the acquisition date).

ATI MERGER

ATI develops and manufactures a series of high-performance digital
microwave and millimeterwave radio equipment. Their products reach across all
frequency bands and data rates and offer numerous features. The nature of the
in-process research and development was such that technological feasibility had
not been attained. Failure to attain technological feasibility would have
rendered partially designed equipment useless for other applications. ATI's
products are designed for specific frequency bandwidths and, as such, are highly
customized to those bandwidths and the needs of customers wishing to operate in
them. Products only partially completed for certain bandwidths cannot be used in
other bandwidths.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NACT MERGER

NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained. Failure to attain technological
feasibility, especially given the high degree of customization required for
complete integration into the NACT solution, would have rendered partially
designed hardware and software useless for other applications. Incomplete design
of hardware and software coding would create a non-connective, inoperable
product that would have no alternative use.

A brief summary of the significant technologies NACT was developing for
their STX and NTS products at the time of the acquisition is as follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

allow for more calls to pass through the switchboard at one time. Both
development efforts, the T3 and compatibility between E1 and T1, are necessary
as NACT moves into international markets.

Set forth in the table below are details relating to the significant NACT
in-process research and development projects (dollar amounts in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

annual contribution to operating profit ranged from approximately $2.1 million
to $29.3 million within the term of the projections.

TELCO MERGER.

Telco develops and manufactures products focused on providing integrated
access for network services. Telco's products can be separated into three
categories: (1) broadband transmission products, (2) network access products,
and (3) bandwidth optimization products. Telco's products are deployed at the
edge of the service provider's networks to provide organizations with a
flexible, cost-effective means of transmitting voice, data, video and image
traffic over public or private networks.

A brief description of the significant in-process projects is set forth
below:

Access 45/60 Release 1 -- Access 45/60 Release 1 product provides
essentially the same functional service as the existing Access 45/60 network
access servers by providing highly reliable digital access to public, private
and hybrid networks, integrating multiple business applications through
cost-effective connections to dedicated, switched and packet network services.
However, unlike the current versions, the technology underlying the Release 1
(R1) version is based on high-bit-rate digital subscriber line (HDSL)
technology. This HDSL technology will enable high-density voice and data
applications to travel simultaneously over one to ten HDSL lines from a single
platform, which will launch the R1 product into a whole new loop market by
eliminating the need for service providers to have separate platforms for voice
and data at the customer's premises or at the provider's central office.
Although the Access 45/60 R1 product is designed to provide a service similar to
the current Access 45/60 product, the core functional technology of the new R1
is very different, and the target market of the R1 product is different.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Telco must complete the first prototype builds of the product and perform
initial system testing which will not begin until the end of August 1999. In
September 1999, Telco will begin testing for system quality assurance and
expects to begin beta field testing in October or November 1999.

This project was in the early stage of development at the time of
acquisition, and is not expected to reach commercial viability until early 2000.
Documentation of the hardware and software design is expected to be completed in
April 1999; software code generation is expected to be completed in August 1999;
prototype builds for initial units are expected to be completed in October 1999;
and initial beta field tests are expected to begin in January 2000.

- building and testing the prototype units, initiated in August 1998; and

- beta field test trials, expected to begin in November 1998.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expected to reach commercial viability in early 2000. Documentation of the
hardware and software design is expected to be completed in June 1999; prototype
builds for initial units are expected to be completed in May 1999; and initial
beta field tests are expected to begin in December 1999.

Set forth in the table below are details relating to the significant Telco
in-process research and development projects (dollar amounts in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE D: DISCONTINUED OPERATIONS

In December 1998, the Company formalized its plan to offer for sale all of
its non-core businesses, which consist of the resale of Nortel and other
original equipment manufacturers' wireline switching equipment, third party
repair of telecom equipment and pay telephone refurbishment. In connection
therewith, goodwill recorded for these businesses was written-down by $3.5
million to reflect the estimated loss on disposal. On January 5, 1999, the
Company formally announced its intention to sell these businesses. Management
expects that the sale will be completed in 1999.

The estimated loss on disposal of the discontinued operations was
determined by comparing the book value of the net assets of the discontinued
operations to their net realizable value. The net realizable value was estimated
based on discussions with the Company's investment advisors hired to sell the
discontinued operations, as well as a preliminary non-committal offer from a
prospective buyer.

The goodwill related to the discontinued operations was not impaired prior
to 1998 as the related business segments were generating positive cash flows and
no indicators of impairment existed in 1997 or prior periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

These businesses have been accounted for as discontinued operations and,
accordingly, the results of operations have been excluded from continuing
operations in the Consolidated Statements of Operations for all periods
presented. Results of discontinued operations for 1998, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Total sales.............................................. $ 58,557 $44,370 $33,869
Cost of equipment sold................................... 45,418 33,317 21,930
Write-down of inventories................................ 7,818 -- --
-------- ------- -------
Gross Profit................................... 5,321 11,053 11,939
Selling, general and administrative...................... 2,340 2,601 2,656
Amortization of goodwill................................. 813 646 339
Restructuring and other charges.......................... 2,650 -- --
Provision for doubtful accounts.......................... 2,408 123 201
-------- ------- -------
Operating Income (Loss)........................ (2,890) 7,683 8,743
Net interest income (expense)............................ 53 (154) (64)
-------- ------- -------
Income (Loss) Before Income Taxes.............. (2,837) 7,529 8,679
Income taxes (benefits).................................. (780) 2,745 859
-------- ------- -------
Net Income (Loss).............................. $ (2,057) $ 4,784 $ 7,820
======== ======= =======
</TABLE>

The assets and liabilities of the discontinued operations included in the
Consolidated Balance Sheet at December 31, 1998 consisted of the following (in
thousands):

<TABLE>
<S> <C>
Current Assets
Accounts receivable....................................... $11,453
Inventories............................................... 12,083
Other current assets...................................... 252
-------
$23,788
=======
Noncurrent Assets
Property and equipment.................................... $ 2,028
Goodwill.................................................. 5,335
Other assets.............................................. --
-------
$ 7,363
=======
Current Liabilities
Accounts payable.......................................... $ 4,083
Other accrued liabilities................................. 3,741
-------
$ 7,824
=======
</TABLE>

NOTE E: RESTRUCTURING AND OTHER CHARGES

SUMMARY

During 1998, the Company approved and began implementing two restructuring
programs designed to reduce operating costs, outsource manufacturing
requirements and focus Company resources on recently acquired business units
containing proprietary technology or services. A summary of restructuring and
related charges recorded in connection with these programs follows:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FIRST QUARTER 1998

In January 1998, the Company approved and began implementing a
restructuring program to consolidate several operations and exit the contract
manufacturing business. The Company's wireline telecom equipment resale business
("AIT") in Lakeland, Florida and its circuit board repair operations were
consolidated into a new facility in Orlando, Florida; the Company's
manufacturing operations were moved from an old facility in Orlando to a new
facility in Alpharetta, Georgia; and the Company's Scottsdale, Arizona
operations were integrated into ATI's facility in Wilmington, Massachusetts.

The special charges included approximately $3.4 million to cost of sales
for obsolete contract manufacturing inventories and other inventories deemed
obsolete or redundant as a result of the consolidation activities. Severance and
termination benefits of approximately $550,000 were paid to the approximately 60
employees who lost their jobs as a direct result of the restructuring program.
The idle facility and equipment portion of the charge, collectively representing
$2.7 million, included the write-off of Orlando, Lakeland and Scottsdale
leasehold improvements, provisions for the estimated costs to terminate idle
facility and equipment leases, the write-off of Orlando manufacturing equipment
not relocated to the Company's Alpharetta facility and certain phase-down
expenses associated with the six facilities closed down.

This consolidation program began in the first quarter of 1998 and was
completed as of June 30, 1998. No costs were included in the charges that are
expected to derive future economic benefit to the Company. As of December 31,
1998, approximately $325,000 of these charges, which consisted primarily of
costs associated with carrying vacated space and certain idle equipment until
lease expiration dates, are included in Other accrued liabilities on the
Company's balance sheet.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FOURTH QUARTER 1998

In December 1998, in connection with the (i) recently completed NACT
Merger, Telco Merger and Resurgens Merger; (ii) election of several new outside
directors to the Company's Board; and (iii) appointment of a new Chief Executive
Officer, the Company approved and began implementing a major restructuring
program to reorganize its operative structure, consolidate several facilities,
outsource its manufacturing requirements, rationalize its product offerings and
related development efforts, and pursue other potential synergies expected to be
realized as a result of the integration of recently acquired businesses. The
Company expects the plans associated with the program to be substantially
completed during the first half of 1999.

Details of the restructuring charges related to this program are as
follows:

<TABLE>
<CAPTION>
RESTRUCTURING RESERVE BALANCE
CHARGE ACTIVITY AT 12/31/98
------------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Reorganize Operating Structure
Employee termination benefits............................ $ 449 $ -- $ 449
Idle facility costs...................................... 258 -- 258
Other.................................................... 437 133 304
------- ------- ------
1,144 133 1,011
Consolidation of ATI and Telco
Employee termination benefits............................ 1,175 -- 1,175
Idle facility costs...................................... 577 -- 577
Write-down production equipment.......................... 700 700 --
Other.................................................... 300 -- 300
------- ------- ------
2,752 700 2,052
Outsource Manufacturing
Employee termination benefits............................ 426 116 310
Idle facility costs...................................... 365 -- 365
Write-down production equipment.......................... 1,662 1,662 --
Write-down other assets.................................. 731 731 --
Other.................................................... 332 -- 332
------- ------- ------
3,516 2,509 1,007
Product Line Rationalization
Write-down of CDX assets................................. 4,707 4,707 --
Write-down of international investments.................. 3,542 3,542 --
Write-down of capitalized software....................... 421 421 --
Other.................................................... 568 -- 568
------- ------- ------
9,238 8,670 568
------- ------- ------
Total............................................ $16,650 $12,012 $4,638
======= ======= ======
</TABLE>

The activity consisted of either cash payments or asset write-downs; there
were no reclassifications or other adjustments. Fair value of assets are based
on market prices less costs to sell.

Costs associated with the reorganized operating structure consist primarily
of termination benefits payable to the Company's former President, which will be
paid throughout 1999, and remaining lease obligations on the Company's Equipment
Group headquarters facility in Alpharetta, Georgia. Group personnel relocated to
the Company's headquarters in Atlanta and the facility was closed in February
1999.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restructuring charges also included costs associated with the planned
consolidation of the Company's ATI operations in Wilmington, Massachusetts into
Telco's facility in Norwood, Massachusetts. Manufacturing of ATI's wireless
radios is being out-sourced to a contact manufacturer and all other aspects of
ATI's operations will be integrated into Telco's existing operating
infrastructure. Severance and other termination benefits of approximately $1.2
million are to be paid to approximately 60 ATI employees as the consolidation
program is completed during the first half of 1999. A provision of $577,000 was
recorded for the costs associated with the idle portion of the Wilmington
facility, which is leased through November 2000. Production equipment was
written-down by $700,000 to reflect its estimated fair value less costs to sell
upon disposal.

An integral part of the restructuring program was the Company's decision to
outsource all its electrical manufacturing requirements and sell its Alpharetta,
Georgia manufacturing operations to an established contract manufacturer.
Severance and other termination benefits of $426,000 were provided for in
December 1998, the majority of which was paid in January 1999 to approximately
25 personnel. Restructuring charges also included the write-off of $365,000 in
leasehold improvements related to the manufacturing portion of the Alpharetta
facility, and $2.4 million to write-down production equipment and other
manufacturing assets to $2.2 million representing their estimated fair value
less costs to sell upon disposal. The Company completed the sale of its
manufacturing operations in March 1999. The actual loss incurred in connection
with the sale did not differ materially from the amounts recorded in the
restructuring charges. As part of this sale agreement, the Company committed to
purchase a minimum of $15.0 million of products and services from the contract
manufacturer in each of three consecutive 12 month periods beginning April 1,
1999.

The most significant component of the restructuring charges related to a
change in the Company's long-term focus for its switching products, primarily
its Compact Digital Exchange ("CDX") switch. In January 1999, the Company
elected to reallocate development resources targeted for the CDX switch as a
stand-alone product to the integration of the central office functionally of the
CDX switch and the long-distance functionality of NACT's switch into a common,
next generation technology platform. This strategic decision, performance
difficulties experienced by certain customers' applications of the CDX switch in
1998, and dramatically reduced internal estimates for CDX switch revenues in
1999 caused the Company to significantly write-down all CDX related assets as of
December 31, 1998.

Restructuring charges related to the CDX switch included $3.0 million
related to an international long-term contract, $3.5 million to reserve for
potential losses on an equity investment in and loan made to two companies
planning CDX-based network infrastructure build-outs in Latin America, and $1.7
million for the write-off of other assets related to the development and
deployment of the CDX switch, including nonrefundable prepaid royalties and
tooling costs.

Other charges to continuing operations recorded in the fourth quarter of
1998 were provisions for potential inventory obsolescence and doubtful accounts
of $8.8 million and $10.7 million, respectively. The inventory charge consisted
of $4.7 million to write-down CDX inventories to estimated net realizable value.
In addition, in connection with the decision to outsource the manufacturing of
ATI's radios and the Company's electrical manufacturing requirements, the
Company sold inventories formerly utilized in the manufacture of the Company's
products to two contract manufacturers and recorded a write-down of
approximately $3.8 million to reflect estimated losses to be incurred in
connection with the sale. The provision for doubtful accounts was recorded
primarily to reduce the carrying value of accounts receivable resulting from
previous CDX sales to estimated minimum realizable values in light of the issues
noted above.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE F: INVENTORIES

Inventories are stated at the lower of cost or market as determined
primarily on a first-in, first-out basis. To address potentially obsolete and
slow moving inventories and related market valuation adjustments, the Company
charged to operations for the years ended December 31, 1998, 1997 and 1996
approximately $17.2 million, $773,000 and $197,000, respectively (see "Note E").

Inventories consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Transport and access products............................... $ 8,824 $ 1,088
Switching systems........................................... 6,218 --
Cellular equipment.......................................... 9,421 695
Work in progress............................................ 4,953 1,738
Raw materials............................................... 7,092 4,554
------- -------
Continuing operations............................. 36,508 8,075
Discontinued operations..................................... 12,083 14,352
------- -------
Total inventories................................. $48,591 $22,427
======= =======
</TABLE>

NOTE G: PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, less accumulated depreciation as
computed using the straight-line method. Leasehold improvements are depreciated
over their remaining estimated lease term. Estimated lives for other depreciable
assets range from three to eight years. Depreciation expense for the years ended
December 31, 1998, 1997 and 1996 was $2.6 million, $1.0 million and $830,000,
respectively.

Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Buildings and leasehold improvements........................ $ 7,724 $ 915
Manufacturing assembly and test equipment................... 60,664 9,865
Office furniture and equipment.............................. 2,411 1,740
Vehicles.................................................... 501 130
------- -------
71,300 12,650
Accumulated depreciation.................................... (7,698) (6,945)
------- -------
$63,602 $ 5,705
======= =======
</TABLE>

The Company leases various facilities and equipment under operating leases.
As of December 31, 1998, future minimum payments under noncancelable operating
leases with initial or remaining terms of more than one year are approximately
$20.8 million, payable over the next five years as follows: 1999 -- $6.0
million; 2000 -- $4.8 million; 2001 -- $4.0 million; 2002 -- $3.3 million; and
2003 -- $2.7 million.

Total rental expense under operating leases for the years ended December
31, 1998, 1997 and 1996 was approximately $2.5 million, $1.7 million and $1.3
million, respectively, exclusive of property taxes, insurance and other
occupancy costs generally payable by the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H: GOODWILL AND OTHER INTANGIBLES

SUMMARY

Intangible assets, which are amortized on a straight-line basis, consisted
of the following at December 31:

<TABLE>
<CAPTION>
AMORTIZATION
1998 1997 PERIODS
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.............................................. $245,738 $34,166 15-20 years
Existing technology acquired.......................... 38,400 -- 8 years
Patents............................................... 6,800 -- 8 years
Capitalized software development costs................ 7,224 360 3-4 years
Other intangibles..................................... 9,238 5,264 3-20 years
-------- -------
307,400 39,790
Accumulated amortization.............................. (8,620) (3,032)
-------- -------
$298,780 $36,758
======== =======
</TABLE>

GOODWILL

Goodwill from acquisitions, representing the excess of purchase price paid
over the value of net assets acquired, consisted of the following at December
31:

<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
NACT........................................................ $ 92,668 $ --
Resurgens................................................... 78,625 --
Telco....................................................... 39,418 --
CIS......................................................... 17,553 12,485
AIT......................................................... 7,307 11,558
Galaxy...................................................... 6,902 5,089
ATI......................................................... 3,265 --
Other....................................................... -- 5,034
-------- -------
245,738 34,166
Accumulated amortization.................................... (6,605) (2,506)
-------- -------
$239,133 $31,660
======== =======
</TABLE>

The Company reviews the net carrying value of goodwill on a regular basis,
and if deemed necessary, charges are recorded against current operations for any
impairment in the value of these assets. Such reviews include an analysis of
current results and take into consideration the projected operating cash flows.
When estimated future undiscounted cash flows from a business are less than the
carrying value of the related goodwill, the goodwill is written down to
estimated fair value. Estimated fair value is generally determined by discounted
cash flow analysis. Goodwill is removed from the books when fully amortized.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EXISTING TECHNOLOGY

In connection with the Telco and NACT Mergers, the Company allocated $34.0
million and $4.4 million of the purchase price, respectively, to existing
technology acquired and is amortizing these costs to expense over an eight year
life. Existing technology assets are comprised of technology that is
incorporated into products currently sold in the market place or at an advanced
stage of development where technological feasibility exists. The valuation of
the existing technology was performed by independent appraisers. The primary
Telco products (which are not similar to the Company's existing technology and
products) constituting the Telco existing technology acquired include:

EdgeLink100 -- The EdgeLink100 product is a broadband DS3 multiplexer
designed for the domestic market providing T1 delivery and T3 backhaul from
Internet service providers (ISPs), local exchange carriers (LECs),
competitive local exchange carriers (CLECs) and wireless service providers.

Access 45/60 -- The Access 45/60 network access servers provide highly
reliable digital access to public, private and hybrid networks, integrating
multiple business applications through cost-effective connections to
dedicated, switched and packet network services.

HyperSPAN/MicroFOX -- HyperSPAN and MicroFOX are DS3 and DS2 multiplexes,
respectively. Multiplexers combine digital inputs from multiple sources
into one digital output.

PATENTS

In connection with the Telco Merger, the Company allocated $6.8 million to
Telco's patents. The valuation of the patents was performed by independent
appraisers.

CAPITALIZED SOFTWARE COSTS

The Company capitalizes certain initial software development costs and
enhancements thereto incurred after technological feasibility has been
demonstrated. To date, all products and enhancements thereto have utilized
proven technology. Capitalized software costs are amortized on a
product-by-product basis. The annual amortization is the greater of the amount
computed using (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product or
(b) the straight-line method over the remaining estimated economic life of the
product, which typically ranges from three to four years. Amortization starts
when the product is available for general release to customers. The unamortized
capitalized costs by product are reduced to an amount not to exceed the future
net realizable value by product at each balance sheet date. Future net
realizable value is determined through sales forecasts. Although it is possible
that management's estimate for the future net realizable value could change in
the near future, management is not currently aware of any events that would
result in a change to its estimate which would be material to the Company's
financial position or its results of operations.

The amount of development costs capitalized in accordance with SFAS No. 86
for 1998 and 1997 was $5.2 million and $360,000, respectively. Amortization of
software development costs of $106,000 was charged to expense during 1998. There
was no amounts charged to expense during 1997 and 1996.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE I: DEBT

SUMMARY

Debt consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1997
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Convertible subordinated notes.............................. $ 115,000 $115,000
Capital lease obligations................................... 30,162 310
Industrial revenue bond..................................... 4,072 --
Bank line of credit......................................... 4,500 --
Other debt.................................................. 2,119 36
--------- --------
Total debt........................................ 155,853 115,346
Amount due within one year.................................. (17,989) (82)
--------- --------
Long-term debt.................................... $ 137,864 $115,264
========= ========
</TABLE>

Interest paid during 1998, 1997 and 1996 was $5.9 million, $57,000 and
$352,000, respectively.

CONVERTIBLE SUBORDINATED NOTES

In October 1997, the Company sold $115.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year. The Notes are general unsecured obligations of the
Company and are subordinate in right of payment to all existing and senior
indebtedness. The Company received $111.5 million from the sale of the Notes,
after the application of the initial purchasers' discount fees of $3.5 million.

The discount fees and legal, accounting, printing and other expenses (the
"Debt issuance costs") related to the Notes amounted to approximately $4.0
million, and are being amortized to expense over the five year term of the
Notes. During 1998 and 1997, the Company recognized approximately $800,000 and
$200,000, respectively, of Debt issuance costs amortization related to the
Notes. Debt issuance costs of approximately $3.0 million are included in
Goodwill and other intangibles on the Company's December 31, 1998 balance sheet.

SUMMARIZED FINANCIAL INFORMATION OF WA TELCOM PRODUCTS CO., INC.

Set forth below is summarized financial information of WA Telcom presented
for the information of its debtholders. The summarized financial information
presented below includes the results of operations for the following businesses
from their respective dates of acquisitions: Advanced TechCom, Inc. -- January
1998; NACT Telecommunications, Inc. -- February 1998; and Cherry Communications
Incorporated and Cherry Communications U.K. Limited -- December 1998. Separate
financial statements of WA Telcom are not
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

presented because management has determined that they would not be material to
investors. In addition, summarized financial information for 1997 and 1996 are
not presented as there is no difference between this information and the 1997
and 1996 consolidated financial statements included herein. The only difference
between the summarized financial information of WA Telcom and the 1998
consolidated financial statements is that WA Telcom does not include the
transactions incurred by the new parent holding company from October 28, 1998 to
December 31, 1998, including the acquisition of Telco on November 30, 1998.

BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
(IN THOUSANDS)
<S> <C>
Current assets.............................................. $162,554
Non-current assets.......................................... 300,139
Total assets................................................ 462,693
Current liabilities......................................... 70,976
Non-current liabilities..................................... 145,839
Stockholders equity......................................... 245,878
Total liabilities and stockholders equity................... 462,693
</TABLE>

OPERATING STATEMENT INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998
-----------------------
(IN THOUSANDS)
<S> <C>
Total sales................................................. $ 139,246
Gross profit................................................ 49,794
Income (loss) from continuing operations(1)................. (111,282)
Income (loss) from discontinued operations(2)............... (2,057)
Net income (loss)........................................... (116,839)
</TABLE>

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

(1) Income (loss) from continuing operations includes special charges relating
to: $100.3 million of in-process research and development; $6.2 million of
goodwill impairment; and $17.2 million of restructuring and other charges.
(2) Reflects the Company's plan to sell all of its non-core businesses, which
consist of the resale of Nortel and other original equipment manufacturers'
wireline switching equipment, third party repair of telcom equipment and pay
telephone refurbishment. The discontinued operations had total assets of
$31.1 million, and total liabilities of $7.8 million as of December 31,
1998.

84
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CAPITAL LEASE OBLIGATIONS

As a result of the Resurgens Merger, the Company leases telecommunications
and other equipment through capitalized lease arrangements. Future minimum lease
payments on these capitalized lease obligations at December 31, 1998 are as
follows (in thousands):

<TABLE>
<S> <C>
1999........................................................ $10,133
2000........................................................ 10,045
2001........................................................ 9,732
2002........................................................ 5,046
-------
Net minimum lease payments................................ 34,956
Less amount representing interest........................... (4,794)
-------
Present value of minimum lease payments................... 30,162
Less current portion of capitalized lease obligations....... 7,890
-------
Long-term portion of capitalized lease obligations........ $22,272
=======
</TABLE>

The net carrying value of assets under capital leases was approximately
$26.6 million at December 31, 1998, and is included in Property and equipment on
the Company's December 31, 1998 balance sheet. Amortization of these assets is
included in depreciation expense.

INDUSTRIAL REVENUE BOND

In September 1998, the Company entered into a loan agreement with the
Public Development Authority of Forsyth County, Georgia (the "Issuer"), in the
principal amount of $7,365,000. The Issuer issued its tax exempt industrial
revenue bonds (the "Bonds") for the sole purpose of financing a portion of the
cost of the acquisition, construction and installation of the Company's
Alpharetta, Georgia telecommunications equipment and printed circuit boards
manufacturing plant. The Company delivered an irrevocable, direct pay letter of
credit of approximately $7.5 million as security for payment of the Bonds.

The Bonds, which bear interest at a variable rate of approximately 4.0% as
of December 31, 1998, have an original maturity date of August 1, 2008. In March
1999, the Company sold the Alpharetta, Georgia based manufacturing operation.
Pursuant to the terms and conditions of the Bonds, the Company is required to
pay off the Bonds upon the sale of these assets and accordingly, the Bonds will
be repaid in April 1999.

BANK LINE OF CREDIT

85
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Facility restricts distributions from the Company's consolidated
subsidiaries. Accordingly, the assets and cash flows of such subsidiaries,
including WA Telcom Products Co., Inc., the primary obligor on the Notes, may
not be used to pay any dividends to World Access, Inc. As a result, restricted
net assets of consolidated subsidiaries of the Company amounted to approximately
$462.7 million at December 31, 1998.

NOTE J: STOCKHOLDERS' EQUITY

During September and October 1996, 3,487,500 shares of Company common stock
were sold in a secondary public offering at a price of $8.00 per share. The
Company received $26,156,250 from this offering, net of underwriting discounts.
The Company incurred additional expenses of approximately $825,000 in connection
with this offering.

In connection with the Company's initial public offering in August 1991,
all of the existing holders of the Company's common stock placed in escrow an
aggregate of 672,419 shares of the Company's common stock. As of August 12,
1996, the termination date of the escrow agreement, the conditions for release
of the shares had not been met. Accordingly, the 672,419 escrowed shares of
Company common stock were returned to the Company and became authorized but
unissued shares.

NOTE K: STOCK WARRANTS AND OPTIONS

DIRECTOR WARRANT PLANS

In December 1994, in an effort to attract and retain experienced executives
to serve as outside directors for the Company, the Company's Board of Directors
adopted an Outside Directors' Warrant Plan (the "Plan"). The Plan, as amended,
provides for the granting of up to 2.4 million warrants. Warrants granted are
priced at market value on the date of grant, are typically vested within a one
year period and must be exercised prior to the fifth anniversary from the date
of grant. As of December 31, 1998, there were 1,174,000 warrants available for
future grant under the Plan.

In December 1994, the Board also adopted the Directors Warrant Incentive
Plan (the "Incentive Plan"), pursuant to which the Board, beginning in 1997, may
grant to each director on an annual basis warrants to purchase up to 50,000
shares of Company common stock at an exercise price per share equal to no less
than 110% of the fair market value of the common stock at the date of grant.
Warrants may only be issued under this plan if the Company's common stock has
appreciated by a compounded average annual growth rate equal to or in excess of
35% for the four years preceding the year of grant. The Incentive Plan provides
for the granting of up to 600,000 warrants. As of December 31, 1998, there were
300,000 warrants available for future grant under the Incentive Plan.

86
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the activity relating to the Plan and the
Incentive Plan:

<TABLE>
<CAPTION>
NUMBER AVERAGE
OF WARRANTS PRICE
----------- -------
<S> <C> <C>
Balance at January 1, 1996.................................. 1,026,000 $ 2.61
Warrants granted............................................ --
Warrants exercised.......................................... --
Warrants lapsed or canceled................................. --
-----------
Balance at December 31, 1996................................ 1,026,000 2.61
Warrants granted............................................ 200,000 9.21
Warrants exercised.......................................... (358,660) 2.02
Warrants lapsed or canceled................................. --
-----------
Balance at December 1, 1997................................. 867,340 4.37
Warrants granted............................................ 400,000 22.87
Warrants exercised.......................................... (700,000) 3.76
Warrants lapsed or canceled................................. (100,000) 25.85
-----------
Balance at December 31, 1998................................ 467,340 $16.52
===========
Exercisable at December 31, 1998............................ 467,340 $16.52
===========
</TABLE>

The vesting of all warrants awarded pursuant to the plans above typically
will be subject to the Board's discretion, provided that the director to whom
such warrants have been granted has attended at least 75% of the meetings of the
Board of Directors for the year in which such warrants are scheduled to vest.
Notwithstanding this limitation, the warrants to be awarded pursuant to the
plans will become immediately exercisable (i) if the Company is to be
consolidated with or acquired by another entity in a merger, (ii) upon the sale
of substantially all of the Company's assets or the sale of at least 90% of the
outstanding common stock of the Company to a third party, (iii) upon the merger
or consolidation of the Company with or into any other corporation or the merger
or consolidation of any corporation with or into the Company (in which
consolidation or merger the shareholders of the Company receive distributions of
cash or securities as a result thereof), or (iv) upon the liquidation or
dissolution of the Company.

STOCK OPTION PLANS

In 1991, the Company's stockholders adopted the 1991 Stock Option Plan (the
"1991 Plan"). The 1991 Plan, as amended, provided for the granting of up to 3.5
million options. As of December 31, 1998, no options were available for future
grant under the 1991 Plan.

In December 1997, the Company's Board of Directors authorized the adoption
of the 1998 Incentive Equity Plan (the "1998 Plan"). The 1998 Plan, which was
ratified by the Company's shareholders on November 30, 1998, provides for the
granting of up to 5.0 million options. As of December 31, 1998, there were
2,386,500 options available for future grant under the 1998 Plan.

These plans allow the Board of Directors to grant non-qualified and
incentive stock options to purchase the Company's common stock at an exercise
price not less than fair market value as of the grant date. Options issued under
these plans typically vest over a four year period. Options awarded under the
1991 Plan and the 1998 Plan are subject to the same vesting acceleration
provisions described above under the director warrant plans.

87
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the activity relating to the 1991 Plan and
the 1998 Plan:

<TABLE>
<CAPTION>
NUMBER AVERAGE
OF OPTIONS PRICE
---------- -------
<S> <C> <C>
Balance at January 1, 1996.................................. 1,681,829 $ 4.57
Options granted............................................. 883,269 8.03
Options exercised........................................... (170,030) 1.47
Options lapsed or canceled.................................. (67,940) 5.38
----------
Balance at December 31, 1996................................ 2,327,128 6.08
Options granted............................................. 1,955,500 16.95
Options exercised........................................... (647,700) 5.77
Options lapsed or canceled.................................. (80,440) 7.23
----------
Balance at December 31, 1997................................ 3,554,488 12.14
Options granted............................................. 3,589,299 17.66
Options exercised........................................... (1,110,140) 7.74
Options lapsed or canceled.................................. (145,011) 15.27
----------
Balance at December 31, 1998................................ 5,888,636 $16.43
==========
Exercisable at December 31, 1998............................ 2,621,786 $14.00
==========
</TABLE>

The options outstanding at December 31, 1998 have been segregated into six
price ranges for additional disclosure as follows:

<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE PRICES
- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ .01 - 3.97.............................. 415,853 4.8 $ 2.23
5.44 - 9.75.............................. 1,051,303 3.2 7.79
11.09 - 14.71.............................. 462,051 3.1 11.35
15.89 - 19.88.............................. 788,185 6.8 17.91
20.04 - 24.74.............................. 2,946,189 4.8 21.11
25.25 - 32.41.............................. 225,055 5.1 26.44
</TABLE>

In February 1998, the Company issued 740,543 non-qualified options to
purchase Company common stock at $11.15 per share and 106,586 non-qualified
options to purchase Company common stock at $16.25 per share in exchange for
substantially all the options held by NACT employees, which became immediately
vested in connection with the NACT Merger. As of December 31, 1998, there were
533,125 of these options outstanding at an average exercise price of $14.40 per
share.

In November 1998, the Company issued 1,028,670 non-qualified options to
purchase Company common stock at prices ranging from $.01 to $32.41 per share in
exchange for substantially all the options held by Telco employees, which became
immediately vested in connection with the Telco Merger. As of December 31, 1998,
there were 1,025,659 of these options outstanding at an average exercise price
of $15.77 per share.

88
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRO FORMA RESULTS OF OPERATIONS

The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its employee
stock options. Therefore, no compensation cost has been recognized related to
stock options. If the company had elected to account for its stock options under
the fair value method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per common share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Income
As reported........................................... $ (120,202) $13,134 $6,779
Pro forma............................................. (124,249) 11,380 6,100
Basic Earnings Per Share
As reported........................................... (5.19) 0.76 0.52
Pro forma............................................. (5.63) 0.66 0.47
Diluted Earnings Per Share
As reported........................................... (5.19) 0.70 0.46
Pro forma............................................. (5.63) 0.61 0.42
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Since the Company's employee stock options have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.

The fair value of each option has been estimated on the date of grant using
a Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield.............................................. n/a n/a n/a
Expected volatility......................................... 72 44 50
Risk-free interest rate..................................... 5.0 5.5 5.1
Expected life of stock options (in years)................... 5.0 4.5 3.0
</TABLE>

NOTE L: RETIREMENT SAVINGS PLAN

The Company has a retirement savings 401(k) plan that covers substantially all
employees. The plan provides for the employees to voluntarily contribute a
portion of their compensation on a tax deferred basis and allows for the Company
to make discretionary matching contributions as determined by the Board of
Directors. For 1998, 1997 and 1996, the Company contributed approximately
$194,000, $109,000, and $25,000, respectively, in the form of Company common
stock to the Plan. In 1998 and 1997, Company contributions were based on a 50%
match to employee contributions, up to the first six percent contributed.

89
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE M: INCOME TAXES

The Company uses the asset and liability approach for financial accounting
and reporting for income taxes. Certain expenses are reported for financial
accounting purposes in different periods than for income tax purposes. These
temporary differences arise primarily from depreciation, provisions for doubtful
accounts, inventory valuation reserves and various other accrued expenses.

The components of the provision (benefit) for income taxes attributable to
income (loss) from continuing operations consisted of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal Income Taxes
Current................................................... $ 5,764 $3,412 $ --
Deferred.................................................. (7,566) 853 (91)
------- ------ -----
(1,802) 4,265 (91)
------- ------ -----
State Income Taxes
Current................................................... 415 389 --
Deferred.................................................. -- 138 (23)
------- ------ -----
415 527 (23)
------- ------ -----
Total Income Taxes................................ $(1,387) $4,792 $(114)
======= ====== =====
</TABLE>

As a result of the exercises of non-qualified stock options and warrants by
the Company's directors and employees, the Company realized federal income tax
benefits during 1998 and 1997 of approximately $12.8 million and $6.7 million,
respectively. These tax benefits are accounted for as a decrease in current
income taxes payable and an increase in capital in excess of par value. Due to
the Company's net operating losses during 1998, approximately $10.5 million of
these tax benefits have not yet been utilized and are available to reduce future
taxable income of the Company. These benefits are included in Deferred income
taxes on the Company's balance sheet at December 31, 1998.

The provision (benefit) for income taxes attributable to continuing
operations differs from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax at statutory rate......................... $(40,125) $4,600 $(404)
Effect of:
Nondeductible purchase adjustments.................... 35,000 (40) 3
Loss producing no current tax benefit................. -- -- 234
Reduction in valuation allowance, utilization of net
operating loss carryforwards and reduction of
reserves............................................ -- (499) --
Amortization of goodwill.............................. 3,570 388 68
State tax, net of federal benefit..................... 269 343 (15)
Other................................................. (101) -- --
-------- ------ -----
Income tax expense.................................... $ (1,387) $4,792 $(114)
======== ====== =====
</TABLE>

90
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of deferred tax assets and liabilities consisted of the
following at December 31:

<TABLE>
<CAPTION>
1998 1997
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Inventory and other reserves.............................. $ 7,305 $ 809
Restructuring/acquisition costs........................... 25,270 --
Net operating loss carryforwards.......................... 97,783 --
Federal tax credits carryforward.......................... 4,102 --
Capital loss carryforwards................................ -- 493
Other..................................................... 1,461 455
-------- ------
135,921 1,757
Valuation reserve......................................... (66,381) (493)
-------- ------
Total deferred tax assets......................... 69,540 1,264
Deferred tax liabilities
Depreciation/amortization................................. (2,579) (306)
Intangible assets......................................... (18,020) --
Capitalized software...................................... (2,596) --
Other..................................................... -- (182)
-------- ------
Total deferred tax liabilities.................... (23,195) (488)
-------- ------
Net deferred tax assets........................... $ 46,345 $ 776
======== ======
</TABLE>

SFAS No. 109 "Accounting for Income Taxes" requires that a valuation
reserve be established if it is "more likely than not" that realization of the
tax benefits will not occur. The valuation reserve increased by approximately
$65.9 million in 1998, primarily due to the valuation allowance established for
the net operating loss ("NOL") carryforward acquired in connection with the
Resurgens Merger. This NOL carryforward is subject to limitations under the
consolidation return regulations and limits for certain ownership changes.

At December 31, 1998, the Company had NOL carryforwards acquired through
acquisitions to reduce future taxable income of these acquisitions by
approximately $213.0 million. To the extent not utilized, the U.S. Federal NOL
carryforwards will expire in 2011 through 2013. The Company also acquired
through business acquisitions unused research and development and investment tax
credit carryforwards of approximately $4.1 million at December 31, 1998, which
will expire in 1999 through 2013.

NOTE N: REPORTABLE SEGMENT DATA

The Company has two reportable segments: telecommunications equipment
("World Access Equipment Group") and telecommunications carrier services ("World
Access Telecommunications Group"). The World Access Equipment Group develops,
manufactures and markets digital switches, billing and network telemanagement
systems, cellular base stations, fixed wireless local loop systems, intelligent
multiplexers, digital microwave radio systems and other telecommunications
network products. The World Access Telecommunications Group provides wholesale
international long distance service through a combination of its own
international network facilities, various international termination
relationships and resale arrangements with other international long distance
service providers.

The World Access Telecommunications Group consists of the Resurgens
business which was acquired in December 1998 and a portion of the NACT business
which was acquired in February and October 1998. Prior to 1998, the Company
operated in one reportable business segment, therefore no reportable segment
disclosures are presented for those periods.

The Company evaluates performance and allocates resources based on
operating income or loss before interest and other income, interest expense and
income taxes. The accounting policies of the reportable

91
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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

segments are the same as those described in the summary of significant
accounting policies. Intersegment sales and transfers are recorded at cost plus
a markup that equals current market prices. There were no intersegment sales
during 1998, 1997 and 1996.

The Company's reportable segments are business units that offer different
products and services. The reportable segments are each managed separately due
to the unique nature of each segment (i.e., selling telecommunications equipment
versus providing international long distance services). The following tables
present revenues and other financial information by business segment and
geographic region:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
EQUIPMENT TELECOM CONTINUING DISCONTINUED
GROUP GROUP OTHER OPERATIONS OPERATIONS TOTAL
--------- -------- -------- ---------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues from external
customers.................... $140,172 $ 11,961 $ -- $ 152,133 $ 58,557 $ 210,690
Depreciation and amortization
expense...................... 6,088 315 205 6,608 2,592 9,200
In-process research and
development.................. 100,300 -- -- 100,300 -- 100,300
Restructuring and other
charges...................... 17,240 -- -- 17,240 2,650 19,890
Segment income or loss......... (104,400) (321) (9,924) (114,645) (5,557) (120,202)
Segment assets................. 380,721 161,137 40,823 582,681 31,131 613,812
Expenditures for long-lived
assets....................... 8,838 -- 2,194 11,032 1,184 12,216
</TABLE>

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
REVENUES(A) LONG-LIVED ASSETS REVENUES(A) LONG-LIVED ASSETS REVENUES(A) LONG-LIVED ASSETS
----------- ------------------ ----------- ------------------ ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
United States............. $129,660 $54,297 $40,563 $5,705 $16,887 $2,658
United Kingdom............ -- 9,305 -- -- -- --
Other foreign countries... 22,473 -- 8,051 -- 244 --
Consolidated total........ 152,133 63,602 48,614 5,705 17,131 2,658
</TABLE>

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

(a) Revenues are attributed to countries based on the location of customers.

NOTE O: LITIGATION

Following the Company's announcement in January 1999 regarding earnings
expectations for the quarter and year ended December 31, 1998 and the subsequent
decline in the price of the Company's common stock, 22 putative class action
complaints were filed against the Company. The Company and certain of its then
current officers and directors were named as defendants. A second decline in the
Company's stock price occurred shortly after actual earnings were announced in
February 1999, and a few of these cases were amended, and additional similar
complaints were filed. The Company expects that the cases will be consolidated
and that an amended consolidated complaint will be filed after a ruling on a
pending motion regarding the appointment of lead plaintiffs and lead counsel.

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WORLD ACCESS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

result of the Company's acquisition of Telco that closed on November 30, 1998;
and (c) shareholders of NACT who received shares of common stock of the Company
as a result of the Company's acquisition of NACT that closed on October 28,
1998. Plaintiffs have requested damages in an unspecified amount in their
complaints. Although the Company and the individuals named as defendants deny
that they have violated any of the requirements or obligations of the federal
securities laws, there can be no assurance the Company will not sustain material
liability as a result of or related to these shareholder suits.

NOTE P: RELATED PARTY TRANSACTIONS

In October 1997, John D. ("Jack") Phillips, a director of the Company,
entered into a series of agreements whereby, among other things, he became the
new Chairman and Chief Executive Officer of Resurgens. In connection with the
Resurgens Merger in December 1998, he was appointed President and Chief
Executive Officer of the Company. He is a general partner of the sole
stockholder of Cherry U.K. and beneficially owns 625,000 shares of Company
common stock and 1,250,000 shares of Contingent Payment Stock issued at the time
of the Resurgens Merger.

MCI WorldCom, Inc. ("WorldCom"), which owned approximately 14% of the
Company's outstanding common stock at December 31, 1998, purchases international
long distance services from the Company's Telecommunications Group under a
Carrier Service Agreement (the "Service Agreement") entered into in June 1998.
WorldCom is obligated to purchase from the Telecommunications Group at least $25
million a month of such services, provided the services are of acceptable
quality and the rates quoted are at least equal to the rates WorldCom is
obtaining from other third party providers. The Service Agreement has a rolling
12-month evergreen term, subject to a one year prior notice of termination.
WorldCom prepays the services it purchases under the Service Agreement twice a
month. Although the revenues attributable to this Service Agreement were not
material to the Company's 1998 consolidated financial statements, these revenues
comprised approximately 65% of Resurgens' total revenues for the year ended
December 31, 1998.

93
<PAGE> 96

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On December 22, 1998, the Company engaged Ernst & Young LLP as the
certifying accountants and dismissed PricewaterhouseCoopers LLP. The Company's
Board of Directors approved this change in accountants. The Company had no
disagreements with its former accountant on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which disagreement(s), if not resolved to the satisfaction of the former
accountant, would have caused them to make reference to the subject matter of
the disagreement(s) in connection with their reports during each of the two
years in the period ended December 31, 1997 and from January 1, 1998 to December
22, 1998 and such accountants' report on the financial statements for each of
the past two years did not contain an adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The information with respect to the Company's directors outlined in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on June 15, 1999 (the "Proxy Statement"), is incorporated herein by
reference.

EXECUTIVE OFFICERS

The information with respect to the Company's executive officers is set
forth in Item 4.5 of Part I of this Report.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The information set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security ownership set forth under the caption "Security Ownership of
Certain Beneficial Owners" in the Proxy Statement is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.

94
<PAGE> 97

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) List of Documents filed as part of this Report

(1) Financial Statements

The index to the financial statements included in this Report within Item 8
(page 51) is incorporated herein by reference.

(2) Financial Statement Schedules

<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER NUMBER
-------- --------
<S> <C>
I 100
II 104
</TABLE>

(3) Exhibits -- See Item 14 (c) below

(b) Reports on Form 8-K

On October 28, 1998, World Access, Inc. (the "Registrant") filed a Report
on Form 8-K announcing the consummation of the transactions contemplated by the
Agreement and Plan of Merger and Reorganization, dated as of February 24, 1998,
as amended, by and between the Registrant, WA Telcom Products Co., Inc. ("Old
World Access"), NACT Telecommunications, Inc. ("NACT"), WAXS Acquisition Corp.
and NACT Acquisition Corp. on October 28, 1998.

On November 12, 1998, the Registrant filed a Report on Form 8-K announcing
the consummation of the transactions contemplated by the Agreement and Plan of
Merger and Reorganization, dated as of February 24, 1998, as amended, by and
between the Registrant, WA Telcom Products Co., Inc. ("Old World Access"), NACT
Telecommunications, Inc. ("NACT"), WAXS Acquisition Corp. and NACT Acquisition
Corp. on October 28, 1998.

On December 1, 1998, the Registrant filed a Report on Form 8-K announcing
the consummation of the business combination with Telco Systems, Inc. ("Telco").

On December 16, 1998, the Registrant filed a Report on Form 8-K announcing
the consummation of the acquisition of Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) on December 15, 1998.

On December 28, 1998, the Registrant filed a Report on Form 8-K announcing
the change in its certifying accountant as of December 22, 1998.

On October 14, 1998, Old World Access filed a Report on Form 8-K announcing
the agreement in principle with Telco to extend the deadline for completing the
Telco merger.

(c) The exhibits filed herewith and incorporated by reference herein are
set forth on the Exhibit Index on page 97 hereof. Included in those exhibits are
the following executive compensation plans and arrangements:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.1 -- 1991 Stock Option Plan
10.2 -- Amendment to 1991 Stock Option Plan
10.3 -- Second Amendment to 1991 Stock Option Plan
10.4 -- Third Amendment to 1991 Stock Option Plan
10.5 -- Outside Directors' Warrant Plan
10.6 -- Directors' Warrant Incentive Plan
</TABLE>

95
<PAGE> 98

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.7 -- Fourth Amendment to 1991 Stock Option Plan
10.8 -- Fifth Amendment to 1991 Stock Option Plan
10.9 -- Amendment One to Outside Directors' Warrant Plan
10.10 -- Amendment One to Directors' Warrant Incentive Plan
10.11 -- Amendment Two to Outside Directors' Warrant Plan
10.12 -- Amendment Two to Directors' Warrant Incentive Plan
10.13 -- Sixth Amendment to 1991 Stock Option Plan
10.14 -- Severance Protection Agreement -- Steven A. Odom
10.15 -- Severance Protection Agreement -- Hensley E. West
10.16 -- Severance Protection Agreement -- Mark A. Gergel
10.21 -- Amendment Three to Outside Directors' Warrant Plan
10.22 -- Executive Employment Agreement between World Access, Inc.
and Steven A. Odom
10.23 -- Executive Employment Agreement between World Access, Inc.
and Mark A. Gergel
10.24 -- Letter Agreement with Hensley E. West
10.25 -- 1998 Incentive Equity Plan, as amended
</TABLE>

96
<PAGE> 99

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
3.1 -- Certificate of Incorporation of the Registrant and
Amendments to Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Registrant's Form S-4 filed
October 6, 1998, Registration No. 333-65389, Amendment to
Certificate of Incorporation incorporated by reference to
Exhibit 3.2 of Old World Access' Form 8-K filed October 28,
1998).
3.2 -- Amendment to the Certificate of Incorporation (incorporated
by reference to the Registrant's Form 10-K for the year
ended December 31, 1998, filed April 9, 1999.
3.3 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to Registrant's Form S-4 filed October 6, 1998,
No. 333-65389).
4.1 -- Indenture dated as of October 1, 1997 by and between World
Access, Inc. and First Union Bank, as trustee (incorporated
by reference to Exhibit 4.1 to Old World Access' Form 8-K,
filed October 8, 1997).
4.2 -- First Supplemental Indenture dated October 28, 1998 between
World Access, Inc., WA Telcom Products Co., Inc. and First
Union Bank, as Trustee (incorporated by reference to Exhibit
4.1 to the Registrant's Form 8-K filed October 28, 1998).
10.1 -- World Access, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to Old World
Access' Registration Statement on Form S-18, filed on July
25, 1991, No. 33-41255-A).
10.2 -- Amendment to World Access, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Old World
Access' Form 10-K for the year ended December 31, 1993,
filed March 31, 1994).
10.3 -- Second Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Old World Access' Form 10-K for
the year ended December 31, 1993, filed March 31, 1994).
10.4 -- Third Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.26 to Old World Access' Form S-2,
Amendment No. 2, filed on February 14, 1995, No. 33-87026).
10.5 -- World Access, Inc. Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.40 to Old World
Access' Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.6 -- Directors' Warrant Incentive Plan (incorporated by reference
to Exhibit 10.41 to Old World Access' Form 10-K for the year
ended December 31, 1995, filed April 10, 1996).
10.7 -- Fourth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.32 to Old World Access' Form 10-K
for the year ended December 31, 1996, filed April 11, 1997).
10.8 -- Fifth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1996, filed April 11, 1997).
10.9 -- Amendment One to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.33 to Old World
Access' Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.10 -- Amendment One to Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.31 to Old World
Access' Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.11 -- Amendment Two to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.21 to Old World
Access' Form 10-K for the year ended December 31, 1997,
filed April 15, 1998).
10.12 -- Amendment Two to Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.22 to Old World
Access' Form 10-K for the year ended December 31, 1997,
filed April 15, 1998).
10.13 -- Sixth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.22 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
</TABLE>

97
<PAGE> 100

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.14 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Steven A. Odom (incorporated
by reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.15 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Hensley E. West (incorporated
by reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.16 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Mark A. Gergel (incorporated
by reference to Exhibit 10.33 to Old World Access' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.17 -- License Agreement dated July 1, 1996, by and between
International Communication Technologies, Inc., World Access
and Eagle Telephonics, Inc. (incorporated by reference to
Exhibit 10.36 to Old World Access' Form 10-K for the year
ended December 31, 1996, filed April 11, 1997).
10.18 -- Agreement and Plan of Merger between and among World Access,
Inc. and CIS Acquisition Corp. and Thomas R. Canham; Brian
A. Schuchman; and Cellular Infrastructure Supply, Inc. (with
exhibits thereto) (incorporated by reference to Exhibit Z to
Old World Access' Form 8-K, filed April 10, 1997).
10.19 -- Registration Rights Agreement dated October 1, 1997 by and
between World Access, Inc., BT Alex Brown Incorporated and
Prudential Securities Incorporated (incorporated by
reference to Exhibit 10.2 to Old World Access' Form 8-K,
filed October 8, 1997).
10.20 -- Agreement and Plan of Merger by and among World Access,
Inc., Cellular Infrastructure Supply, Inc., Advanced
TechCom, Inc. and Ernest H. Lin dated as of December 24,
1997 (incorporated by reference to Exhibit 2.1 to Old World
Access' Form 8-K, filed February 13, 1998).
10.21 -- Amendment Three to Outside Directors' Warrant Plan
(incorporated by reference to the Registrant's Form 10-K for
the year ended December 31, 1998, filed April 9, 1999).
10.22 -- Executive Employment Agreement between World Access, Inc.
and Steven A. Odom dated as of December 14, 1998
(incorporated by reference to the Registrant's Form 10-K for
the year ended December 31, 1998, filed April 9, 1999).
10.23 -- Executive Employment Agreement between World Access, Inc.
and Mark A. Gergel dated as of December 14, 1998
(incorporated by reference to the Registrant's Form 10-K for
the year ended December 31, 1998, filed April 9, 1999).
10.24 -- Letter Agreement with Hensley E. West, dated as of December
14, 1998 (incorporated by reference to the Registrant's Form
10-K for the year ended December 31, 1998, filed April 9,
1999).
10.25 -- World Access, Inc. 1998 Incentive Equity Plan, as amended
(incorporated by reference to the Registrant's Form 10-K for
the year ended December 31, 1998, filed April 9, 1999).
10.26 -- Assignment and Assumption Agreement dated October 29, 1998
between World Access, Inc. and WA Telcom Products Co., Inc.
(incorporated by Exhibit 10.1 to the Registrant's Form 8-K
filed October 28, 1998).
10.27 -- Form of Indemnification Agreement with directors and
officers (incorporated by reference to Appendix H to the
Registrant's Joint Proxy Statement/Prospectus dated November
10, 1998 relating to the Special Meeting of Stockholders
held on November 30, 1998).
10.28 -- Schedule of all officers and directors who have signed an
Indemnification Agreement referred to in Exhibit 10.27.
</TABLE>

98
<PAGE> 101

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <C> <S>
10.29 -- Credit Agreement dated as of December 30, 1998 between Telco
Systems, Inc., World Access Holdings, Inc. and NationsBank,
N.A. as Administrative Agent and Fleet National Bank as
Syndication Agent and Bank Creditanstalt Corporate Finance,
Inc. (incorporated by reference to the Registrant's Form
10-K for the year ended December 31, 1998, filed April 9,
1999).
10.30 -- Guaranty dated as of December 30, 1998 between the
Registrant, Telco, World Access Holdings, Inc., NationsBank,
N.A. as Administrative Agent and the lenders party to the
Credit Agreement (referred to in Exhibit 10.29).
10.31 -- Pledge Agreement dated as of December 31, 1998 by the
Registrant. in favor of NationsBank, N.A. as Administrative
Agent and the lenders party to the Credit Agreement
(referred to in Exhibit 10.29).
10.32 -- Security Agreement dated as of December 31, 1998 by the
Registrant in favor of NationsBank, N.A. as Administrative
Agent and the lenders party to the Credit Agreement
(referred to in Exhibit 10.29).
10.33 -- Disbursement Agreement dated as of December 14, 1998, by and
the Registrant, Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) and William H. Cauthen, Esq.
(incorporated by reference to the Registrant's Form 10-K for
the year ended December 31, 1998, filed April 9, 1999).
10.34 -- Agreement and Plan of Merger and Reorganization by and among
World Access, Inc., WAXS INC., WA Merger Corp. and Cherry
Communications Incorporated (d/b/a Resurgens Communications
Group) dated as of May 12, 1998, as amended (incorporated by
reference to Appendix A to the Registrant's Proxy Statement
dated November 12, 1998 relating to the Special Meeting of
Stockholders held on December 14, 1998).
10.35 -- Share Exchange Agreement by and among World Access, Inc.,
WAXS INC., Cherry Communications U.K. Limited and
Renaissance Partners II, dated as of May 12, 1998
(incorporated by reference to Appendix B to the Registrant's
Proxy Statement dated November 12, 1998 relating to the
Special Meeting of Stockholders held on December 14, 1998).
16.1* -- Letter of PricewaterhouseCoopers LLP.
21.1* -- Subsidiaries of the Registrant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
27.1* -- Financial Data Schedule for 1998. (For SEC use only).
27.2* -- Financial Data Schedule for 1997 and 1996 as restated for
discontinued operations.
</TABLE>

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

*Previously filed.

99
<PAGE> 102

SCHEDULE 1 -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

WORLD ACCESS, INC.
(PARENT COMPANY)

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
OCTOBER 28 DECEMBER 31
1998 1998
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents...................................... $ 11,040 $ 21,799
Other current assets...................................... 754 912
-------- --------
Total Current Assets.............................. 11,794 22,711
Property and equipment...................................... 487 842
Investment in subsidiaries.................................. 125,131 455,739
Other assets................................................ 11,810 1,000
-------- --------
Total Assets...................................... $149,222 $480,292
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ -- $ 8,500
Accounts payable.......................................... 1,962 2,095
Other accrued liabilities................................. 259 6,392
-------- --------
Total Current Liabilities......................... 2,221 16,987
Intercompany payable........................................ 95,985 102,722
-------- --------
Total Liabilities................................. 98,206 119,709
-------- --------
Stockholders' Equity
Common stock.............................................. 230 441
Capital in excess of par value............................ 157,093 472,945
Accumulated deficit....................................... (106,307) (112,803)
-------- --------
Total Stockholders' Equity........................ 51,016 360,583
-------- --------
Total Liabilities and Stockholders' Equity........ $149,222 $480,292
======== ========
</TABLE>

See accompanying notes to condensed financial statements.

100
<PAGE> 103

WORLD ACCESS, INC.
(PARENT COMPANY)

CONDENSED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
TWO MONTHS ENDED
DECEMBER 31,
1998
----------------
(IN THOUSANDS)
<S> <C>
Sales....................................................... $ --
Selling, general and administrative expenses................ (848)
Interest income............................................. 35
Interest expense............................................ (22)
-------
(835)
Equity in net loss of subsidiaries.......................... (5,661)
-------
Net Loss.......................................... $(6,496)
=======
</TABLE>

See accompanying notes to condensed financial statements.

101
<PAGE> 104

WORLD ACCESS, INC.
(PARENT COMPANY)

CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
TWO MONTHS ENDED
DECEMBER 31,
1998
----------------
(IN THOUSANDS)
<S> <C>
Cash Flows From Operating Activities:....................... $ 1,609
Cash Flows From Investing Activities:
Acquisitions of businesses................................ (1,171)
Expenditures for property and equipment................... (364)
--------
Net Cash Used By Investing Activities............. (1,535)
Cash Flows From Financing Activities:
Proceeds from short-term borrowings....................... 8,500
Proceeds from exercise of stock warrants and options...... 2,185
--------
Net Cash Provided By Financing Activities......... 10,685
--------
Increase in Cash and Equivalents............................ 10,759
Cash and Equivalents at Beginning of Period................. 11,040
--------
Cash and Equivalents at End of Period............. $ 21,799
========
Supplemental Schedule of Noncash Financing and Investing
Activities:
Issuance of common stock and stock options for businesses
acquired.................................................. $314,433
========
</TABLE>

See accompanying notes to condensed financial statements.

102
<PAGE> 105

WORLD ACCESS, INC.
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

On October 28, 1998, World Access, Inc. reorganized its operations into a
holding company structure and changed its name to WA Telcom Products Co., Inc.
("WA Telcom"). As a result of the reorganization, WA Telcom became a
wholly-owned subsidiary of WAXS INC., which changed its name to World Access,
Inc. and is the Company filing this report. Pursuant to the reorganization, the
Company exchanged each outstanding share of common stock of WA Telcom for one
share of common stock of the Company, converted each option and warrant to
purchase shares of common stock of WA Telcom into options and warrants to
purchase a like number of shares of common stock of the Company. In the
parent-company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income of
its unconsolidated subsidiaries is included in consolidated income using the
equity method. Parent-company-only financial statements should be read in
conjunction with the Company's consolidated financial statements. The parent-
company-only financial statements show the results of operations of the
parent-company for the period October 28, 1998 through December 31, 1998.

NOTE 2. GUARANTEE

Pursuant to the reorganization, the parent-company fully and
unconditionally guaranteed the payment of the $115.0 million aggregate principal
amount 4.5% convertible subordinated notes dated October 1, 1997 (due 2002)
issued by WA Telcom, a wholly owned subsidiary.

103
<PAGE> 106

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Deducted from asset account
Allowance for accounts
receivable.................... $237 $5,049 $4,151(B) $ (884)(A) $8,553
Allowance for notes
receivable.................... -- 4,929 493(B) -- 5,422
Allowance for contract
receivable.................... -- 2,583 -- -- 2,583
Year Ended December 31, 1997:
Deducted from asset account
Allowance for accounts
receivable.................... 265 172 35(B) (235)(A) 237
Year Ended December 31, 1996:
Deducted from asset account
Allowance for accounts
receivable.................... 207 168 30(B) (140)(A) 265
</TABLE>

- ---------------
(A) Write-off of uncollectible amounts.
(B) Reserves from businesses acquired.

104
<PAGE> 107

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed, on
its behalf by the undersigned, thereunto duly authorized.

WORLD ACCESS, INC.

By: /s/ JOHN D. PHILLIPS
------------------------------------
John D. Phillips
Chairman, President and Chief
Executive Officer

Dated as of October 7, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.

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

/s/ JOHN D. PHILLIPS Chairman, President and Chief October 7, 1999
- ----------------------------------------------------- Executive Officer (Principal
John D. Phillips Executive Officer)

/s/ MARK A. GERGEL Director, Executive Vice October 7, 1999
- ----------------------------------------------------- President and Chief
Mark A. Gergel Financial Officer (Principal
Financial Officer)

/s/ MARTIN D. KIDDER Vice President and Controller October 7, 1999
- ----------------------------------------------------- (Principal Accounting
Martin D. Kidder Officer)

/s/ JOHN P. IMLAY, JR. Director October 7, 1999
- -----------------------------------------------------
John P. Imlay, Jr.

/s/ CARL E. SANDERS Director October 7, 1999
- -----------------------------------------------------
Carl E. Sanders

/s/ LAWRENCE C. TUCKER Director October 7, 1999
- -----------------------------------------------------
Lawrence C. Tucker
</TABLE>

105

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the use of our report dated March 26, 1999, included in the
Annual Report on Form 10-K of World Access, Inc. and subsidiaries for the year
ended December 31, 1998, with respect to the consolidated financial statements
and schedules, as amended, included in this Form 10-K/A, Amendment No. 2.

We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-66723, 333-66731, 333-68125, 333-68619, 333-68623, and
333-68625) pertaining to the various stock option, warrant, and other employee
benefit plans of World Access, Inc. and subsidiaries of our report dated March
26, 1999, with respect to the consolidated financial statements and schedules
of World Access, Inc. included in the Annual Report (Form 10-K/A, Amendment No.
2) for the year ended December 31, 1998.

/s/ Ernst & Young LLP

Atlanta, Georgia
October 5, 1999

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference of our report dated
March 5, 1998, except for the discontinued operations reclassifications in the
Consolidated Statements of Operations and Note D, which are as of April 9, 1999,
relating to the financial statements of World Access, Inc. for each of the two
years in the period ended December 31, 1997, which appears on page 53 of World
Access, Inc.'s Annual Report on Form 10-K/A, Amendment No. 2, for the year ended
December 31, 1998, into the following:

1. Registration Statement on Form S-8 (Registration Statement
No. 333-66723) of World Access, Inc.;

2. Registration Statement on Form S-8 (Registration No. 333-66731)
of World Access, Inc.;

3. Registration Statement on Form S-8 (Registration No. 333-68125)
of World Access, Inc.;

4. Registration Statement on Form S-8 (Registration No. 333-68619)
of World Access, Inc.;

5. Registration Statement on Form S-8 (Registration No. 333-68623)
of World Access, Inc.;

6. Registration Statement on Form S-8 (Registration No. 333-68625)
of World Access, Inc.;

/s/ PRICEWATERHOUSECOOPERS LLP

Atlanta, Georgia
October 6, 1999