USTEL INC, 424B3, 1997-02-20

USTEL INC
424B3, 1997-02-20
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

PROSPECTUS
1,350,000 UNITS

LOGO
------------------------

EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT

Each unit ("Unit") consists of two shares of Common Stock, par value $.01
per share ("Common Stock"), and one redeemable Common Stock purchase warrant
("Warrant") of UStel, Inc., a Minnesota corporation ("UStel" or the "Company").
Of the 1,350,000 Units being offered, 1,250,000 Units are being sold by UStel
and 100,000 Units by the Palisades USTL Trust (the "Trust" or the "Selling
Stockholder"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of the Units by the Selling
Stockholder. The Selling Stockholder will reimburse the Company for the value of
the 100,000 Warrants included in the Units being sold by the Selling Stockholder
at the rate of $0.01 per Warrant. The Common Stock and Warrants included in the
Units will not be immediately detachable and will not be immediately separately
transferable until 60 days from the date of this Prospectus or earlier in the
discretion of Barber & Bronson Incorporated (the "Representative"). Each Warrant
entitles the registered holder thereof to purchase, at any time until February
14 , 2002 (five years from the date of this Prospectus), one share of Common
Stock at a price of $4.00 per share. The Warrants are subject to redemption by
the Company at $0.01 per Warrant on 30 days' prior written notice to the
warrantholders if the closing bid price of the Common Stock as reported on the
Nasdaq SmallCap Market averages or exceeds $6.00 for a period of 20 consecutive
trading days ending within 30 days prior to the date notice of redemption is
given. The Common Stock is traded on the Nasdaq SmallCap Market.

Prior to this offering (the "Offering"), there has been no public market for
the Units or the Warrants and there can be no assurance that such a market will
develop or be sustained after the Offering. The Company's Units and Warrants
have been approved for listing on the Nasdaq SmallCap Market under the symbols
of "USTLU" and "USTLW," respectively. The Company's Nasdaq SmallCap Market
symbol for the Common Stock is "USTL." The last sale price for the Common Stock
on the Nasdaq SmallCap Market on February 14, 1997 was $3.75 per share. See
"Price Range of Common Stock."

SEE "RISK FACTORS" BEGINNING AT PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
==========================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(3)
- ----------------------------------------------------------------------------------------------------------
Per Unit..................................... $6.00 $0.48 $5.52 $5.52
- ----------------------------------------------------------------------------------------------------------
Total(4)........................... $8,100,000 $648,000 $6,900,000 $552,000
==========================================================================================================
</TABLE>

(1) Excludes the value of warrants to be issued to the Representative (the
"Representative's Warrants") to purchase up to 125,000 Units. The Company
agreed to indemnify the Underwriters against certain civil liabilities
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated offering expenses payable by the Company of
$817,492, including $243,000 for the Representative's non-accountable
expense allowance.
(3) Before deducting estimated offering expenses payable by the Selling
Stockholder of $65,328.
(4) The Company has granted the Underwriters a 45-day option to purchase up to
202,500 additional Units from the Company, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. To the extent
that the option is exercised, the Underwriters will offer the additional
Units at the Price to Public shown above. If the option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $9,315,000, $745,200 and $8,017,800,
respectively. See "Underwriting."

The Units are being offered severally by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, subject to
the right to reject any order in whole or in part and certain other conditions.
It is expected that delivery of such Units will be made against payment therefor
at the offices of Barber & Bronson Incorporated, Miami, Florida, or through the
facilities of the Depository Trust Company on or about February 24, 1997.
------------------------

Barber & Bronson Incorporated

THE DATE OF THIS PROSPECTUS IS FEBRUARY 14, 1997
<PAGE> 2

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company with the Commission may be inspected
and copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, such material concerning the Company
can be inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006. The Commission also maintains a World Wide
Web site (http://www.sec.gov) that contains reports, proxy and other information
regarding registrants that file electronically with the Commission.

The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Units offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Units offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Public Regional Office, 5670 Wilshire Boulevard, 11th
Floor, Los Angeles, California 90036-3848, and copies of all or any part of the
Registration Statement may be obtained from such offices or by mail from the
Public Reference Section of the Commission at its principal office upon the
payment of the fees prescribed by the Commission. The Company also intends to
file a Registration Statement on Form S-4 covering 1,076,923 shares of Common
Stock to be issued in the Merger (as hereinafter defined).

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK,
WARRANTS AND UNITS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ SMALLCAP MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in the Prospectus. The following summary is qualified in its entirety
by the more detailed information and the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as otherwise noted herein, all
information in this Prospectus (i) assumes that the Underwriters' over-allotment
option and the Representative's Warrants (as defined below) are not exercised;
(ii) assumes that an aggregate of 310,000 options and 1,081,000 warrants
outstanding are not exercised; (iii) does not give effect to the issuance of
1,076,923 shares of Common Stock pursuant to the Merger (as defined below), and
(iv) does not give effect to the conversion of $500,000 in convertible
debentures into 71,429 shares of Common Stock, or the conversion of the 550,000
shares of Series A Convertible Preferred Stock into 750,000 shares of Common
Stock, and (v) does not give effect to the exercise of the 1,350,000 Warrants
issued in this Offering. See "Capitalization," "Business -- Recent
Developments," "Description of Securities," and "Underwriting."

THE COMPANY

UStel provides long distance telecommunications services, consisting
primarily of direct dial long distance telephone transmissions, to commercial
customers throughout the United States. Customers who have selected the Company
as their long distance carrier can call any point in the United States or any
foreign country at rates that generally are lower than those charged by AT&T
Corp. ("AT&T"), MCI Telecommunications Corporation ("MCI") and Sprint
Communications, L.P. ("Sprint").

Since commencing operations in January, 1993, the Company's subscriber base
has grown to in excess of 18,000 customers at December 31, 1996. The Company's
monthly revenues have increased from approximately $10,000 in January, 1993 to
approximately $2,000,000 in December, 1996.

In addition to long distance telecommunications services, the Company also
offers a variety of service options, including "1 +" dialing, "800" service,
calling cards, operator services, private line networks and data transmission.
Separate rates are charged for interstate, intrastate and international calls.
While intrastate rates vary depending upon the state and international rates
vary based upon the country called, interstate calls, regardless of destination,
generally are charged on a flat rate per minute (or increment thereof) based
upon the time of day.

On August 14, 1996, a change of control of UStel occurred as a result of
the purchase of a substantial portion of the shares owned by the founders of the
Company at an adjusted price of $5.00 per share, by the Trust, an investment
group comprising shareholders of Consortium 2000, Inc. ("Consortium 2000"), the
Company's sales agent. Coincident with this transaction, a new and experienced
management team was appointed. Since its appointment, the new management team
has undertaken to restructure the Company's relationship with its primary long
distance carrier, refocus marketing activities, implement a new network
development strategy which will convert the majority of the Company's traffic
from switched access to dedicated access, improve billing and collections and
customer service, reduce cost of operations and develop a viable strategy for
the future.

The new management team undertook a comprehensive review of all of the
Company's assets. This review included evaluating the net realizable value of
various assets and the appropriateness of certain reserves. As a result of this
review, the Company recorded an additional expense for the period ended
September 30, 1996 in the amount of $2,860,869. This expense was primarily
attributable to an increase in the reserve for bad debts, the write-down of
certain deferred offering costs, the reduction of the accrual for unbilled
revenues and a change in the accrual for claims against other carriers.
Management believes this is an unusual and one-time charge related to
management's revaluation. With the addition of the Consortium 2000 marketing
organization, the Company believes that it is well-positioned to continue to
grow in the future.

3
<PAGE> 4

On August 14, 1996, UStel, Consortium 2000 and Consortium Acquisition
Corporation entered into a Merger Agreement and Plan of Reorganization (the
"Merger Agreement" and "Merger") pursuant to which 1,076,923 shares of UStel are
to be issued to the shareholders of Consortium 2000, in exchange for all of the
outstanding shares of Consortium 2000. The Merger is subject to approval by the
stockholders of UStel and certain other conditions. Upon consummation of the
Merger, Consortium 2000 will become a wholly-owned subsidiary of UStel. The
Merger is not expected to be completed or approved by the stockholders of the
Company prior to the closing of this Offering. See "Risk Factors -- Consummation
and Implementation of the Merger" and "Business -- Recent Developments."

The Company believes it can achieve significant benefits through the Merger
in that the Company will realize immediate cost savings because a portion of the
commissions historically paid by UStel to Consortium 2000 for customer referrals
will be eliminated.

Prior to the agreement to merge, UStel had a non-exclusive sales agency
agreement with Consortium 2000 which commenced in mid-1994. Consortium 2000
provides telecommunications consulting services to a diversified client base by
analyzing the customer's long distance calling patterns, usage volume and
specialized telecommunications needs, and recommending calling plans and
carriers (or combinations of carriers) to achieve the most cost-effective
result. Consortium 2000 acts as a sales agent for a broad base of long distance
carriers. For a significant portion of its clients, however, UStel frequently
represents the low-cost provider and, as of December 31, 1996, approximately 75%
of Consortium 2000's clients were customers of UStel. Consortium 2000 is
principally compensated in the form of commissions payable by each carrier with
whom business is placed. As of December 31, 1996, approximately 90% of UStel's
customers were referred to the Company by Consortium 2000, representing
approximately 75% of UStel's revenues.

The Company was incorporated in California on March 11, 1992, as U.S. Tel,
Inc. and changed its corporate name to UStel, Inc. on April 20, 1992. The
Company commenced operations as a long distance carrier in January 1993. On
January 4, 1994, the Company effected a recapitalization of its capital stock in
connection with its merger to reincorporate in Minnesota prior to its initial
public offering of Common Stock. The Company intends to reincorporate in
California after this Offering. Its corporate headquarters are located at 2775
South Rainbow Boulevard, Suite 102, Las Vegas, Nevada 89102 and its telephone
number is (702) 247-7400.

4
<PAGE> 5

THE OFFERING

<TABLE>
<S> <C>
Securities Offered by the Company............. 1,250,000 Units, each consisting of two shares of
Common Stock and one redeemable Warrant to purchase
one share of Common Stock.
Securities Offered by Selling Stockholder..... 100,000 Units, each consisting of two shares of
Common Stock and one redeemable Warrant to purchase
one share of Common Stock.
Exercise Price of Warrants.................... Each Warrant entitles the registered holder thereof
to purchase at any time until February 14, 2002,
one share of Common Stock at a price of $4.00 per
share. The Warrant exercise price is subject to
adjustment under certain circumstances. See
"Description of Securities."
Redemption of Warrants........................ The Warrants are subject to redemption by the
Company at $0.01 per Warrant on 30 days' prior
written notice to the warrantholders if the closing
bid price of the Common Stock as reported on the
Nasdaq SmallCap Market averages or exceeds $6.00
over a period of 20 consecutive trading days.
Common Stock Outstanding prior to the
Offering.................................... 2,126,851 Shares.
Common Stock Outstanding after the Offering... 4,626,851 Shares.
Use of Proceeds............................... The net proceeds to the Company will be used for
repayment of debt, purchase or lease of computer
hardware and software, installation of an in-house
billing system and working capital. See "Use of
Proceeds."
Nasdaq SmallCap Symbols
Common Stock................................ "USTL"
Warrants.................................... "USTLW"
Units....................................... "USTLU"
Risk Factors.................................. Prospective investors should consider carefully the
factors set forth under "Risk Factors."
</TABLE>

5
<PAGE> 6

SUMMARY FINANCIAL DATA

The following table sets forth summary historical and pro forma financial
data for UStel for the years ended December 31, 1992 through 1995 and for the
nine months ended September 30, 1995 and 1996. Such information and data should
be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and Pro Forma Condensed Financial Statements including, in each case,
the related Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11, NINE MONTHS ENDED
1992 YEARS ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO ------------------------------------------------------- ------------------------------------------
OPERATIONS DECEMBER 31, PRO FORMA PRO FORMA
DATA: 1992 1993 1994 1995 1995(1) 1995 1996(3) 1996(1)(2)(3)
-------------- ----------- ----------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues... $ 5,740 $ 1,600,147 $ 6,118,480 $ 16,127,575 $ 17,877,642 $ 11,310,018 $16,166,344 $ 17,121,990
Total
operating
expenses... 318,890 2,286,981 6,982,051 16,252,143 17,810,535 11,544,511 18,630,125 19,951,079
Income
(loss)
from
operations... (313,150) (686,834) (863,571) (124,568) 67,107 (234,493) (2,463,781) (2,829,089)
Net
interest
expense... -- (41,686) (117,780) (136,377) (147,051) (64,576) (313,928) (315,113)
Net
loss.... (313,150) (765,552) (1,075,442) (371,711) (302,856) (403,481) (2,777,709) (3,131,646)
Net loss
per
share... (0.33) (0.81) (0.83) (0.23) (0.11) (0.25) (1.37) (1.01)
Weighted
average
common
shares
outstanding... 950,000 950,000 1,291,913 1,600,000 2,676,923 1,600,000 2,025,740 3,102,663
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
OTHER INFORMATION: 1993 1994 1995 1995 1996
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Traffic volume (minutes).......................... 9,317,640 38,683,886 103,093,699 72,297,996 103,341,525
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996(3)
----------------------------------------------------
PRO FORMA AS
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(4) ADJUSTED(1)(2)(4)
----------- -------------- -----------------
<S> <C> <C> <C>
Working capital (deficit).................................................. $ (239,944) $ 5,542,564 $ 6,365,914
Total assets............................................................... 11,360,319 12,293,386 17,058,314
Notes payable to banks..................................................... 2,437,931 2,437,931 2,637,931
Notes payable to others.................................................... 5,144,275 84,000 84,000
Total long-term debt....................................................... 500,000 500,000 500,000
Total stockholders' equity................................................. 2,433,767 8,516,275 12,716,275
</TABLE>

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

(1) As adjusted to give effect to the consummation of the Merger. For
information regarding pro forma adjustments made to the Company's historical
financial data, see the Pro Forma Condensed Financial Statements, and the
Notes thereto, contained elsewhere in this Prospectus. See
"Business -- Recent Developments."

(2) As a result of entering into the Merger Agreement, Consortium 2000 agreed,
effective as of June 30, 1996, to write off a difference of $775,943 between
the Company's commission expenses to Consortium 2000 and Consortium 2000's
commission revenue from the Company. This difference was included in general
and administrative expenses.

(3) Includes an expense of $2,860,869 which was primarily attributable to an
increase in the reserve for bad debts, the write down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and a
change in the accrual for claims against other carriers.

(4) As adjusted to reflect the sale of 1,250,000 Units by the Company at a price
of $6.00 per Unit and the application of the net proceeds therefrom. See
"Use of Proceeds."

6
<PAGE> 7

RISK FACTORS

Investment in the securities offered hereby involves a high degree of risk.
Prospective investors should carefully consider all of the information in this
Prospectus, including the following risk factors in connection with an
investment in the securities offered hereby. This Prospectus contains certain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forwardlooking statements as a result of certain of the risk factors set forth
below and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; ACCUMULATED LOSSES FOR PRIOR PERIODS

The Company commenced operations in 1993 and has only a limited operating
history upon which potential investors may base an evaluation of its
performance. Potential investors, therefore, have limited historical financial
information upon which to base an evaluation of the Company's performance and an
investment in the Units. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stages of development.

The Company reported net losses of $765,552, $1,075,442, $371,711 and
$2,777,709 for the years ended December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1996, respectively. Losses incurred through December
31, 1995 were attributable primarily to costs required to develop the Company's
long distance telephone operations and the costs associated with transmitting
calls on behalf of a rapidly expanding customer base. Losses incurred through
September 30, 1996 are primarily attributable to a decision by new management to
increase the reserve for bad debts, write-down certain deferred offering costs,
reduce the accrual for unbilled revenues and change the accrual for claims
against other carriers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Recent Developments."
Although management believes this is an unusual and one-time charge related to
management's revaluation, there can be no assurance that the Company will attain
profitability or positive cash flows from operating activities in the future. If
the Company is unable to attain profitability or positive cash flow from
operating activities, it may be unable to meet its working capital or future
debt service requirements, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors-Restatement of Third Quarter Financials" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Financial Statements and the Notes thereto contained elsewhere in this
Prospectus.

LACK OF IN-HOUSE BILLING SYSTEM; PRESSURE ON WORKING CAPITAL

Because the Company has not yet installed an in-house billing system, it is
dependent upon a third-party billing services provider to send out bills to the
Company's customers for usage of the services provided by the Company. Because
of the Company's reliance on an outside billing service, it is uneconomical for
the Company to render bills more frequently than once a month. Typically, this
results in bills for services being mailed out between 15 to 25 days after the
end of the month in which the services are rendered. In most cases, therefore,
the Company is required to pay for the use of third-party long distance lines in
advance of the receipt of payment by the Company from its customers for the use
of the services provided by the Company. This condition requires the Company to
utilize its working capital facility to finance payables, pending collection of
its receivables. In December, 1996, the Company entered into an agreement with
WilTel, Inc., the Company's primary long distance carrier ("WilTel"), to finance
a portion of its approximately $6,448,501 outstanding payable due to WilTel.
Pursuant to this agreement, WilTel agreed to defer payment on $3,956,782 owed by
the Company to WilTel. Such amount bears interest at 18% per annum and will be
paid out of the proceeds of this Offering and, in any event, no later than
February 28, 1997. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

7
<PAGE> 8

COMPETITION

The Company is primarily engaged in providing telecommunications services
in the long distance telephone industry. This industry is highly competitive and
is significantly affected by new service introductions and the market activity
of major industry participants. As a service provider in the long distance
telecommunications industry, the Company competes with numerous carriers
including the three dominant carriers, AT&T, MCI and Sprint, all of which have
substantially greater name recognition, more extensive transmission networks,
significantly greater engineering and marketing capabilities and substantially
greater financial and personnel resources than those available to the Company.

AT&T continues to be the leading provider of long distance telephone
service, and its pricing and services largely determine the prices and services
offered by resellers and other long distance telephone carriers. Generally, the
Company endeavors to provide its long distance telephone services at a lower
cost than comparable services offered by AT&T, MCI or Sprint. Accordingly, the
ability of the Company to compete effectively in the long distance
telecommunications industry will depend upon its ability to offer and maintain
services at competitive rates.

In addition, under current government policy, almost any entity with
sufficient capital can freely enter the domestic long distance
telecommunications market. Moreover, recent legislation eliminated the ban on
local telephone companies competing in the long distance market. The Company may
therefore face additional new competition. Furthermore, a continuing trend
toward consolidations, mergers, acquisitions and strategic alliances in the
telecommunications industry could also give rise to significant market entry of
new competitors to the Company or to significant competition for the Company's
customers. There can be no assurance that the Company will be able to compete
successfully with existing or future competitors. See "Business--Competition."

TECHNOLOGICAL ADVANCES

The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The Company believes that its future success will depend on its
ability to anticipate such changes and to offer market responsive services on a
timely basis that meet these evolving industry standards. There can be no
assurance that the Company will have sufficient resources to make the
investments necessary to acquire new technology or to introduce new services
that would satisfy an expanded range of customer needs.

RESTATEMENT OF THIRD QUARTER FINANCIALS

The Company recently restated its unaudited financial statements for the
third quarter included in the financial statements for the nine months ended
September 30, 1996 to reflect a loss of $2,777,709 from a profit of $83,160, as
previously reported. This amendment was the result of the new management team
undertaking a comprehensive review of all of the Company's assets. This review
included evaluating the net realizable value of various assets and the adequacy
of current reserves. This review and evaluation was not completed until after
November 15, 1996, the Commission's deadline for filing third quarter financial
statements, and therefore the change was filed by an amendment to the Company's
10-QSB for the period ended September 30, 1996. As a result of this review the
Company recorded an additional expense for the period ended September 30, 1996
in the amount of $2,860,869. This expense was primarily attributable to an
increase in the reserve for bad debts, the write-down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and change in
the accrual for claims against other carriers. Management believes this is an
unusual and one-time charge related to management's revaluation.

USE OF PROCEEDS; SUBSTANTIAL REPAYMENT OF INDEBTEDNESS

The net proceeds to the Company from the sale of the Units, after
subtracting underwriting discounts and expenses of the Offering by the Company,
are estimated to be $6,082,508. The Company intends to use $5,514,500 (or 90.7%)
of the net proceeds from the sale of the Units to repay existing indebtedness.
See "Use of Proceeds."

8
<PAGE> 9

LIMITATION ON LIABILITY OF DIRECTORS TO STOCKHOLDERS

The Company's Articles of Incorporation limit the monetary liability of its
directors in their capacity as directors to the fullest extent permitted by the
Minnesota Business Corporation Act. Moreover, pursuant to the terms of the
Underwriting Agreement with the Underwriters, directors and officers of the
Company also are indemnified against certain civil liabilities that they may
incur under the Securities Act in connection with this Offering. See
"Management -- Limitation of Directors Liability and Indemnification."

POTENTIAL CONFLICTS OF INTEREST ON THE PART OF OFFICERS AND DIRECTORS

Under Minnesota law, officers and directors of the Company may enter into
transactions or contracts with the Company under certain conditions. The Company
has, in the past, entered into transactions or contracts with its officers and
directors and/or their affiliates, and may continue to do so in the future. See
"Certain Transactions." In particular, there are a number of common officers and
directors between Consortium 2000 and the Company. Consortium 2000 is a
telecommunications marketing and consulting services provider which refers
telecommunications customers to both the Company and other carriers. See
"Business -- Consortium 2000."

LACK OF INDEPENDENT DIRECTORS

As of the date hereof, the Company has only one independent director.
Accordingly, management directors control the Board of Directors. See
"Management."

REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE COMPANY

The Company has agreed that for five years from the effective date of the
Registration Statement, the Representative may designate one person for election
to the Company's Board of Directors and that the Company will reasonably
cooperate with the Representative in respect of such designation. The election
of such designee, if any, may enable the Representative to exert influence on
the Company. As of the date of this Prospectus, the Representative has not
designated any individual for election to the Company's Board of Directors. See
"Underwriting."

DEPENDENCE UPON THIRD PARTY TRANSMISSION FACILITIES

The future profitability of the Company is based upon its ability to
transmit its customers' long distance telephone calls on a cost effective basis
over transmission facilities leased from facilities based long distance carriers
that compete with the Company. The Company owns only a limited portion of the
transmission facilities needed to complete all of its customers' long distance
telephone calls. Accordingly, the Company is vulnerable to changes in its
transmission facilities lease arrangements and the Company's direct dial long
distance telephone business and the profitability thereof is dependent upon its
ability to enter into cost effective lease arrangements, both long and short
term, with facilities based carriers for the transmission of calls. While the
Company believes that it has ample access to transmission facilities at
attractive rates and expects to continue to have such access, there can be no
assurance that leased capacity will continue to be available at cost-effective
rates. See "Business -- Transmission Network."

NO ASSURANCES AS TO CONSUMMATION AND EFFECTS OF THE MERGER

The Merger is subject to the approval of a majority of the Company's
outstanding shares of Common Stock, as well as certain other closing conditions.
Following this Offering, the Company intends to reincorporate in California. The
Company expects to schedule a special meeting of stockholders, to be held after
the effective date of this Offering, for the purpose of voting on the Merger and
the reincorporation in California. Consequently, the Merger and the
reincorporation in California will not be approved by the Company's stockholders
prior to the expected closing date of this Offering. Because of Minnesota's
control share acquisition statute, only an estimated 404,101 of the 612,750
shares held by the Trust will be entitled to vote on the Merger. See
"Description of Securities." Although the Company has no reason to believe that
the Merger will not be completed in due course, the Company has no written or
oral agreement, relationship or understanding with any stockholders of the
Company with respect to the vote on the Merger. Accordingly,

9
<PAGE> 10

there can be no assurance that the Merger will be approved by the Company's
stockholders or that there will not be a delay in consummating the Merger. In
the event that the Merger is not consummated, or if there is a significant
delay, the Company will not realize the anticipated business benefits from a
combination of Consortium 2000 with the Company and the business strategy and
prospects of the Company could be materially adversely affected.

UStel believes the Merger provides significant benefits to UStel, although
there can be no assurance as to how the Consortium 2000 customers who look to it
for independent advice will perceive Consortium 2000 after it becomes a
wholly-owned subsidiary of UStel. Consortium 2000's clients accounted for
approximately 90% of the Company's customer base at December 31, 1996. See
"Business -- Consortium 2000," and "Description of Securities."

RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH

Although the Company has experienced significant growth in a relatively
short period of time and intends to continue to grow rapidly, there can be no
assurance that the growth experienced by the Company will continue or that the
Company will be able to achieve the growth contemplated by its business
strategy. Implementation of the Company's growth strategy, including the Merger,
will place additional demands upon the Company's management, operational and
other resources and will require additional long distance transmission capacity,
additional working capital and billing and information systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company's ability to
continue to grow may be affected by various factors, many of which are not
within the Company's control, including federal and state regulation of the
telecommunications industry, competition, the transmission capacity of the
Company's long distance carriers and adverse changes in customer attrition,
minute-usage patterns or response rates to the Company's marketing efforts.
While the Company believes that its capital resources, network and
infrastructure provide a platform for future growth, the Company's ability to
continue to manage its growth successfully will require it to further enhance
its operational, management, financial and information systems and controls and
to expand, train and manage its employee base. In addition, as the Company
increases its service offerings and expands its targeted markets, there will be
additional demands on its customer service support and sales, marketing and
administrative resources. There can be no assurance that the Company will
successfully manage its expanding operations, and if the Company's management is
unable to manage growth effectively, the Company's business, operating results,
and financial condition could be materially and adversely affected.

GOVERNMENT REGULATION

Certain of the Company's operations are subject to regulation by the
Federal Communications Commission (the "FCC") under the Communications Act of
1934, as amended (the "Communications Act"). In addition, certain of the
Company's businesses are subject to regulation by state public utility or public
service commissions. Changes in the regulation of, or the enactment or changes
in interpretation of legislation affecting, the Company's operations could have
a material adverse affect on the Company and the value of the Units, Common
Stock and Warrants. Recently, the federal government enacted the
Telecommunications Act of 1996 (the "Telecommunications Act"), which, among
other things, allows the regional bell operating companies ("RBOCs") and others
to enter the long distance business. Entry of the RBOCs or other entities, such
as electric utilities and cable television companies, into the long distance
business may have a negative impact on the Company or its customers. The Company
anticipates that certain of such entrants will be strong competitors because,
among other reasons, they may enjoy one or more of the following advantages:
they may (i) be well capitalized; (ii) already have substantial end user
customer bases; or (iii) enjoy cost advantages relating to local loops and
access charges. The introduction of additional strong competitors into the
switched long distance business would mean that the Company would face
substantially increased competition. This could have a material adverse effect
on the Company and the value of the Units, Common Stock and Warrants. In
addition, the Telecommunications Act provides that state proceedings may in
certain instances determine access charges the Company is required to pay to the
local exchange carriers ("LECs"). No assurance can be given that such
proceedings will not result in increases in such rates. Such increases

10
<PAGE> 11

could have a material adverse effect on the Company or its customers and on the
value of the Units. See "Business -- Government Regulation."

EQUIPMENT FAILURES; NATURAL DISASTER

The Company does not carry "business interruption" insurance. A major
equipment failure or a natural disaster affecting any one of the Company's
switching facilities could have a material adverse effect on the Company's
operations.

CONTROL BY PRINCIPAL STOCKHOLDERS; ANTI-TAKEOVER CONSIDERATIONS

Immediately following this Offering, the officers and directors of the
Company will own or control approximately 33.9% of the outstanding shares of
Common Stock. Consequently, such persons will likely have the power to control
the Company. See "Principal and Selling Stockholders." Upon completion of this
Offering, the Company will have authorized 5,000,000 shares of preferred stock,
$.01 par value ("Preferred Stock"). There is currently outstanding 550,000
shares of Series A Convertible Preferred Stock (the "Series A Preferred"). The
remaining authorized shares of Preferred Stock are unissued and may be issued by
the Board of Directors on such terms, and with such rights, preferences and
designations, as the Board of Directors may determine without future stockholder
action. In addition, the Company is subject to certain provisions of the
Minnesota Business Corporation Act that limit the voting rights of shares
acquired in certain acquisitions and restrict certain business combinations.
Some or all of the foregoing factors could have the effect of discouraging
certain attempts to acquire the Company which could deprive the Company's
stockholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices and could make it more difficult for a
third party to acquire the Company. See "Description of Securities."

LIMITED MARKET FOR COMMON STOCK, UNITS AND WARRANTS

The Company's Common Stock is traded on the Nasdaq SmallCap Market. The
Company believes there are currently four market makers in the Company's Common
Stock, three of which are active market makers. Daily trading volume to date has
been very limited and frequently there have been no trades on a given day.
Although the Company believes that this Offering will increase the float, or the
number of shares in the hands of the public, and hence liquidity in the Common
Stock, no assurance can be made that there will be sufficient liquidity in the
Common Stock to effectuate large volume trades in the Company's securities.
Prior to the date of this Prospectus there has been no public market for the
Units or the Warrants and, although the Units and Warrants have been approved
for listing on the Nasdaq SmallCap Market, there can be no assurance that a
liquid market will develop for the Units and Warrants.

The Company's Common Stock, Units and Warrants are listed on the Nasdaq
SmallCap Market. Under the current maintenance listing criteria for the Nasdaq
SmallCap Market, in order for the Company to maintain its listing, the Company
must maintain $2,000,000 in total assets, a $200,000 market value of the public
float and $1,000,000 in total capital and surplus. In addition, under the
current listing criteria, continued inclusion requires two market makers and a
minimum bid price of $1.00 per share; provided, however, that if the Company
falls below such minimum bid price, it will remain eligible for continued
inclusion if the market value of the public float is at least $1,000,000 and the
Company has $2,000,000 in capital and surplus. The Nasdaq SmallCap Market has
recently proposed new maintenance criteria which, if implemented, would
eliminate the exception to the $1.00 per share minimum bid price and require,
among other things, $2,000,000 in net tangible assets, $1,000,000 market value
of the public float and adherence to certain corporate governance provisions.
The failure to meet these maintenance criteria in the future may result in the
delisting of the Units, Common Stock and the Warrants and trading, if any, in
the Units, Common Stock and Warrants would thereafter be more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Units, Common Stock and Warrants. In addition, if the Common Stock was to become
delisted from trading and the trading price of the Common Stock were to fall
below $5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Exchange Act, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to

11
<PAGE> 12

certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the Units, Common Stock and Warrants, which could severely limit the market
liquidity of the Units, Common Stock and Warrants and the ability of purchasers
in this Offering to sell the Units, Common Stock and Warrants in the secondary
market. See "Price Range of Common Stock."

CUSTOMER ATTRITION

The Company believes that customer attrition is inherent in the long
distance telecommunications industry. Attrition in the long distance
telecommunications industry is generally attributable to a number of factors,
including (i) initiatives of existing and new competitors as they engage in,
among other things, national advertising campaigns, telemarketing programs, the
issuance of cash and other forms of customer "win back" incentives and other
customer acquisition programs prevalent in the residential long distance market,
and (ii) the termination of service for non-payment. Although the level of
attrition experienced by the Company has not had a material adverse effect on
its financial results, the Company only began operations in January, 1993 and,
accordingly, the level of customer attrition experienced to date may not be
indicative of future attrition levels. In addition, there can be no assurance
that any steps taken by the Company to counter increased customer attrition will
be successful. An increase in the Company's attrition rate or a decrease in the
customer minute-usage pattern could have a material adverse effect upon the
Company's business, financial condition and results of operations.

VOLATILITY OF STOCK PRICE

The market price of the Company's securities may be significantly affected
by announcements of expanded services by the Company or its competitors,
acquisitions of related companies, changes in governmental regulations and
variations in quarterly operating results, among other factors. The stock market
has recently experienced volatility which has been unrelated to the operating
results of such companies. Such volatility, as well as general economic,
political and market conditions, such as recessions and military conflicts, may
adversely affect the market price of the Company's securities.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock by existing stockholders under Rule 144 ("Rule
144") of the Securities Act through the exercise of outstanding registration
rights or otherwise, could have an adverse effect on the market price of the
Company's securities and the ability of the Company to raise capital in the
future. The Units sold in this Offering will be eligible for immediate resale,
except to the extent acquired by affiliates of the Company. Additionally,
337,250 shares of Common Stock which are "restricted securities," as that term
is defined in Rule 144 which are owned by persons who are affiliates of the
Company, are currently eligible for sale under Rule 144. 2,443,000 shares of the
Common Stock, and securities convertible into shares of the Company's Common
Stock, are subject to certain registration rights agreements. Although the
Company intends to obtain waivers from the parties entitled to such registration
rights, no assurances can be made that such shares will not be registered in
accordance with the terms of the applicable registration rights agreements.
Shares of Common Stock held by officers, directors and certain principal
stockholders will be subject to lock-up agreements with the Representative,
whereby such shares may not be sold for a 24 month period following the date of
this Prospectus (the "Lock-up Period") without the prior written consent of the
Representative. Pursuant to lock-up agreements with the Representative,
directors, officers and certain stockholders of the Company, have agreed not to
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any shares of Common Stock, including
any such shares beneficially or indirectly owned or controlled, or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock during the Lock-up Period, without the prior written consent of the
Representative. The Representative has agreed to release from the lock-up
agreement the number of shares of Common Stock held by the Trust

12
<PAGE> 13

necessary for it to make the following payments: $1,000,000 in August 1997;
$450,000 in February 1998; and $450,000 in April 1998. In addition, the
Representative will allow the holder of the Series A Preferred, which is
convertible into 750,000 shares of Common Stock, to sell up to 20,000 shares of
Common Stock per month, non-cumulatively, commencing 90 days after the date of
this Prospectus. See "Description of Securities," "Shares Eligible for Future
Sale" and "Underwriting."

FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business"
regarding the anticipated benefits of the Merger, the competition resulting from
the new telecommunications legislation, the anticipated benefits from the
installation of the in-house billing system, that the Company believes it is
well positioned to grow in the future and other matters are forward-looking
statements. Moreover, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "estimate", or "continue" or the negative other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are set forth in these "Risk
Factors," as well as elsewhere in this Prospectus. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements.

STOCK ISSUABLE PURSUANT TO WARRANTS AND REPRESENTATIVE'S WARRANTS

At the completion of this Offering, the Representative will receive the
Representative's Warrants to purchase 125,000 Units at a price of $7.50 per
Unit. The Company has outstanding warrants to purchase 1,081,000 shares of
Common Stock at prices ranging from $5.00 to $7.50 per share and options under
its 1993 Stock Option Plan to purchase 310,000 shares of Common Stock at $5.00
per share. See "Underwriting", "Description of Securities -- Outstanding
Warrants" and "Management -- 1993 Stock Option Plan." During the terms of
outstanding options, warrants and Representative's Warrants, the holders are
given the opportunity to profit from a rise in the market price of the Common
Stock, and their exercise may dilute the book value per share of Common Stock.
The existence of outstanding options, warrants and the Representative's Warrants
may affect adversely the terms on which the Company may obtain additional equity
financing. Moreover, the holders are likely to exercise their rights to acquire
Common Stock at a time when the Company would otherwise be able to obtain
capital on terms more favorable than could be obtained through the exercise or
conversion of such securities.

LEGAL AND BLUE-SKY RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS

The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all the shares of the Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.

The Warrants will be detachable and separately transferable starting 60
days from the date of this Prospectus or earlier in the discretion of the
Representative. Although the Units will not knowingly be sold to purchasers in
jurisdictions in which the Units are not registered or otherwise qualified for
sale, purchasers may

13
<PAGE> 14

buy Warrants in the after market in, or may move to, jurisdictions in which the
shares underlying the Warrants are not so registered or qualified during the
period that the Warrants are exercisable. In this event, the Company would be
unable to issue shares to those persons desiring to exercise their Warrants, and
holders of Warrants would have to attempt to sell the Warrants in a jurisdiction
where such sale is permissible or allow them to expire unexercised. Further,
although the Company intends to seek to qualify the securities underlying the
Warrants for sale in those states in which such securities are to be offered, no
assurance can be given that such qualification will be achieved. The Warrants
may be deprived of any value if a current prospectus covering the securities
issuable upon the exercise thereof is not filed and kept effective or if such
underlying securities are not, or cannot be, registered in the applicable
states.

ASSETS PLEDGED TO LENDER

Substantially all of the assets of the Company are pledged as collateral
under the Company's credit facility with its lender and under an agreement with
its primary long distance carrier, Wiltel. In addition, the assets of Consortium
2000 have also been pledged as collateral to Wiltel. See Note 4 to Unaudited
Financial Statements. As of December 31, 1996 an aggregate of $2,197,394 was
outstanding under the credit facility and approximately $3,956,782 was
outstanding under its agreement with Wiltel. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Should the Company default on its secured obligations it
would be at risk that its assets could be foreclosed upon. Should such event
occur the Company would be unable to conduct its business.

USE OF PROCEEDS

The net proceeds to the Company from the sale of 1,250,000 Units, after
deducting underwriting discounts and commissions and expenses of the Offering
payable by the Company, are estimated to be $6,082,508. The Company will not
receive any of the proceeds from the sale of Units by the Selling Stockholder.
The Company intends to use $5,514,500 from the net proceeds from the sale of the
Units to repay existing indebtedness, approximately $300,000 to purchase or
lease computer hardware and software and related services and to install an
in-house billing system, and the balance for working capital and general
corporate purposes.

The Company's plans for specific use of the net proceeds are set forth
below:

<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Repayment of Indebtedness
Jeflor, Inc...................................................... $1,248,000 20.5%
Wiltel, Inc...................................................... 4,177,334 68.7%
Solomon Ross Grey & Co........................................... 89,166 1.5%
Purchase of Equipment.............................................. 300,000 4.9%
Working Capital and General Corporate purposes..................... 268,000 4.4%
</TABLE>

The debt to be paid or reduced consists of the following: (i) $1,248,000
owed to Jeflor, Inc. on a loan bearing interest at the rate of 12% per annum,
payable quarterly, interest only, commencing in September, 1996, which is due in
June, 1997 (this loan was used for working capital purposes and is guaranteed by
Noam Schwartz, a founder and the former President of the Company); (ii)
$4,177,334 owed to WilTel, the Company's primary long distance carrier, due
February 28, 1997 (the debt, which includes interest of $220,552, is evidenced
by a promissory note bearing interest at the rate of 18% per annum and was used
to finance payables to WilTel); and (iii) $89,166 owing to Solomon, Ross, Grey &
Company, a California general partnership, which is affiliated with Andrew J.
Grey, a director of the Company (this debt is owing for consulting services, is
due upon the completion of this Offering and bears interest at 10% per annum).
In the event the over-allotment option is exercised in full, the Company will
realize additional net proceeds of approximately $1,081,350 which it will
allocate towards working capital and general corporate purposes. Pending the
application of the proceeds of this Offering as set forth above, the Company
will invest such proceeds in short-term, interest bearing, investment grade
securities.

14
<PAGE> 15

CAPITALIZATION

The following table sets forth the total capitalization of the Company as
of September 30, 1996, (i) on a historical basis, (ii) as adjusted to reflect
the sale of 1,250,000 Units in this Offering by the Company and the application
of net proceeds to the Company therefrom to repay a portion of the Company's
indebtedness and (iii) as further adjusted on a pro forma basis to reflect the
Merger. The table should be read in conjunction with the Company's Financial
Statements and Pro Forma Condensed Financial Statements, including in each case
the Notes thereto, appearing elsewhere herein. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------------------
AS PRO FORMA
ACTUAL ADJUSTED AS ADJUSTED(1)
---------- ---------- --------------
<S> <C> <C> <C>
Long-term debt:
12% Convertible Subordinated Debentures(2)............. $ 500,000 $ 500,000 $ 500,000
---------- ---------- -----------
Total long-term debt..................................... 500,000 500,000 500,000
---------- ---------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized and 550,000 Series A Convertible
Preferred Stock outstanding actual: 550,000 Series A
Convertible Preferred Stock, as adjusted and pro
forma as adjusted................................... 5,500 5,500 5,500
Common Shares, $0.01 par value per share: 40,000,000
shares authorized, 2,126,851 shares issued and
outstanding, actual; 4,626,851 shares issued and
outstanding as adjusted; and 5,703,774 issued and
outstanding, pro forma as adjusted.................. 21,269 46,269 57,038
Additional paid-in capital............................. 7,710,562 13,768,070 17,957,301
Accumulated deficit.................................... (5,303,564) (5,303,564) (5,303,564)
---------- ---------- -----------
Total stockholders' equity............................... 2,433,767 8,516,275 12,716,275
---------- ---------- -----------
TOTAL CAPITALIZATION..................................... $2,933,767 $9,016,275 $ 13,216,275
========== ========== ===========
</TABLE>

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

(1) Gives effect to the Merger and the issuance of 1,076,923 shares of Common
Stock in connection therewith. See "Business -- Recent Developments."

(2) See Note 5 of Notes to Financial Statements for the year ended December 31,
1995.

15
<PAGE> 16

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has traded in the over-the-counter market since
June 22, 1994 and is included in the Nasdaq SmallCap Market under the symbol
"USTL." The following table sets forth for the quarters indicated the high and
low closing sale prices per share of Common Stock as reported by the Nasdaq
SmallCap Market. Prices represent inter-dealer quotations, without adjustment
for retail mark-ups, markdowns or commissions and may not necessarily represent
actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
Second Quarter......................................... $7.00 $5.00
Third Quarter.......................................... 6.50 4.75
Fourth Quarter......................................... 6.25 4.75
1996
First Quarter.......................................... $6.50 $5.00
Second Quarter......................................... 7.00 5.75
Third Quarter.......................................... 6.75 6.00
Fourth Quarter......................................... 6.00 3.13
1997
First Quarter (through February 14).................... $4.38 $2.75
</TABLE>

The 2,126,851 shares of Common Stock outstanding as of December 31, 1996
were held by approximately 124 record holders, who the Company believes held for
in excess of 300 beneficial holders. There has been no trading market for the
Warrants or Units.

DIVIDEND POLICY

The Company has never paid any cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. Instead the
Company intends to retain any earnings to provide funds for use in its business.
The Company's line of credit with Coast Business Credit restricts payment of
cash dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Liquidity and Capital Resources."

16
<PAGE> 17

SELECTED FINANCIAL DATA

The selected financial and balance sheet data for 1992 through 1995 set
forth below are derived from the audited Financial Statements of the Company.
The Financial Statements at December 31, 1993, 1994 and 1995 and for the years
ended December 31, 1993, 1994 and 1995 have been audited by BDO Seidman, LLP and
are included elsewhere herein. The selected financial data set forth below at
September 30, 1996 and for the nine months ended September 30, 1995 and 1996 are
derived from the Company's unaudited Financial Statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of these data. Operating
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996 or any other interim period. The selected financial data are qualified in
their entirety by reference to, and should be read in conjunction with, the
Financial Statements and related Notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31,
1992 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------------------------- ---------------------------------------
-------------- PRO FORMA PRO FORMA
1992 1993 1994 1995 1995 1995 1996(1) 1996(1)(2)
-------------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues........ $ 5,740 $1,600,147 $ 6,118,480 $16,127,575 $17,877,642 $11,310,018 $16,166,344 $17,121,990
Operating
expenses:
Cost of
services
sold........ 3,563 1,248,463 4,696,106 11,542,374 11,293,640 8,240,409 12,006,378 11,679,809
General and
administrative... 199,821 637,263 1,412,649 3,071,788 4,689,152 2,282,329 4,762,971 6,259,715
Selling....... 113,909 368,361 785,933 1,460,010 1,460,010 900,960 1,676,705 1,676,705
Depreciation
and
amortization.. 1,597 32,894 87,363 177,971 358,696 120,813 184,071 334,850
--------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses...... 318,890 2,286,981 6,982,051 16,252,143 17,810,535 11,544,511 18,630,125 19,951,079
--------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss)
from
operations.... (313,150) (686,834) (863,571) (124,568) 67,107 (234,493) (2,463,781) (2,829,089)
Loss from rental
operations.... -- (62,025) (101,705) -- -- -- -- --
Net gain on sale
of property... -- 24,993 7,614 -- -- -- -- 12,556
Net interest
income
(expense)..... -- (41,686) (117,780) (136,377) (147,051) (64,576) (313,928) (315,113)
Relocation
costs(2)...... -- -- -- (110,766) (110,766) (104,412) --
Income taxes.... -- -- -- -- (112,146) -- -- --
--------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net loss........ $ (313,150) $ (765,552) $(1,075,442) $ (371,711) $ (302,856) $ (403,481) $(2,777,709) $(3,131,646)
========= ========== ========== =========== =========== =========== =========== ===========
Net loss per
share......... $ (0.33) $ (0.81) $ (0.83) $ (0.23) $ (0.11) $ (0.25) $ (1.37) $ (1.01)
========= ========== ========== =========== =========== =========== =========== ===========
Weighted average
common shares
outstanding... 950,000 950,000 1,291,913 1,600,000 2,676,923 1,600,000 2,025,740 3,102,663
========= ========== ========== =========== =========== =========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
OTHER INFORMATION:
Traffic volume (minutes)........................................ 9,317,640 38,683,886 103,093,699 72,297,996 103,341,525
</TABLE>

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996(1)
AT DECEMBER 31, --------------------------
-------------------------------------------------- PRO FORMA
1992 1993 1994 1995 ACTUAL AS ADJUSTED
--------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................... $(338,102) $(1,186,289) $3,722,506 $ 2,200,440 $ (239,944) $ 6,365,914
Total assets.................................... 130,314 2,696,601 7,318,627 11,978,031 11,360,319 17,058,314
Notes payable to banks.......................... -- 375,000 770,000 2,900,000 2,437,931 2,637,931
Notes payable to others......................... 334,421 994,438 -- 1,500,000 5,144,275 84,000
Total long-term debt............................ -- 969,516 500,000 500,000 500,000 500,000
Total debt...................................... 334,421 2,338,954 1,270,000 4,900,000 8,082,206 3,221,931
Total stockholders' equity (deficit)............ (213,150) (498,594) 4,088,234 3,787,773 2,433,767 12,716,275
</TABLE>

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

(1) Includes an expense of $2,860,869 which was primarily attributable to an
increase in the reserve for bad debts, the write-down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and a
change in the accrual for claims against other carriers.

(2) The Company incurred relocation costs resulting from the move of its
operations center from Los Angeles, California and Clearwater, Florida to
Las Vegas, Nevada.

17
<PAGE> 18

PRO FORMA CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

On August 14, 1996, UStel, Consortium Acquisition Corporation (a
wholly-owned subsidiary created by the Company) and Consortium 2000 entered into
a Merger Agreement and Plan of Reorganization (the "Merger Agreement" and
"Merger"). Under the terms of the Merger Agreement, Consortium Acquisition
Corporation will be merged with Consortium 2000, with Consortium 2000 being the
surviving corporation in the Merger. The following unaudited Pro Forma Condensed
Financial Statements give effect to the Merger and are based on the estimates
and assumptions set forth herein and in the notes to such statements. The Merger
will be accounted for as a purchase, with the assets acquired and liabilities
assumed at fair values, and the results of Consortium 2000's operations included
in UStel's financial statements from the date of acquisition. The Merger was
accounted for as a purchase since all of the criteria for a pooling of interests
were not met. This pro forma information has been prepared utilizing the
historical financial statements and notes thereto.

The unaudited Pro Forma Condensed Financial Statements do not purport to be
indicative of the results which actually would have been obtained had the Merger
been effected on the dates indicated or of the results which may be obtained in
the future.

The unaudited Pro Forma Condensed Financial Statements are based on the
purchase method of accounting for the aforementioned transaction. The unaudited
Pro Forma Condensed Balance Sheet and the unaudited Pro Forma Condensed
Statement of Operations and the related notes should be read in conjunction with
UStel's Audited Financial Statements and Unaudited Financial Statements
contained elsewhere in this Prospectus. In management's opinion, all adjustments
necessary to reflect the acquisition have been made.

18
<PAGE> 19

USTEL, INC.

PRO FORMA CONDENSED BALANCE SHEET

SEPTEMBER 30, 1996
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ---------- -----------
<S> <C> <C> <C> <C>
Cash........................... $ 394,126 $ 68,671 $ -- $ 462,797
Accounts receivable............ 7,241,162 854,124 (293,175)(4a(2)) 7,802,111
Prepaid expenses and other..... 551,320 172,308 -- 723,628
----------- ---------- ---------- -----------
8,186,608 1,095,103 (293,175) 8,988,536
Property & equipment........... 2,573,941 101,774 -- 2,675,715
Accumulated depreciation....... (410,491) (57,844) -- (468,335)
----------- ---------- ---------- -----------
2,163,450 43,930 -- 2,207,380
Other assets................... 1,010,261 186,288 (115,000)(4a(3)) 1,081,549
Goodwill....................... -- -- 3,732,782(4a(1)) 3,732,782
----------- ---------- ---------- -----------
$11,360,319 $ 1,325,321 $3,324,607 $16,010,247
=========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable & accrued
expense...................... $ 594,117 $ 620,722 $ (293,175)(4a(2)) $ 921,664
Accrued revenue taxes.......... 250,229 -- -- 250,229
Deferred salaries.............. -- 37,381 -- 37,381
Notes payable.................. 7,582,206 200,000 -- 7,782,206
----------- ---------- ---------- -----------
8,426,552 858,103 (293,175) 8,991,480
Long-term debt................. 500,000 -- -- 500,000
Stockholders' equity........... 2,433,767 467,218 3,617,782(4a) 6,518,767
----------- ---------- ---------- -----------
$11,360,319 $ 1,325,321 $3,324,607 $16,010,247
=========== ========== ========== ===========
</TABLE>

See accompanying notes to pro forma condensed financial statements.

19
<PAGE> 20

USTEL, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
-------------------------
USTEL, CONSORTIUM PRO FORMA
INC. 2000, INC. ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues.......................... $16,127,575 $3,148,773 $(1,398,706)(4b) $17,877,642
Cost of services sold............. 11,542,374 1,149,972 (1,398,706)(4b) 11,293,640
----------- ---------- ---------- -----------
Gross profit.................... 4,585,201 1,998,801 -- 6,584,002
Selling........................... 1,460,010 -- -- 1,460,010
General & administrative.......... 3,071,788 1,617,364 -- 4,689,152
Depreciation & amortization....... 177,971 9,000 180,762(4b) 367,733
----------- ---------- ---------- -----------
Income (loss) from operations... (124,568) 372,437 (180,762) 67,107
Interest expense.................. 136,377 10,674 -- 147,051
Relocation costs.................. 110,766 -- -- 110,766
----------- ---------- ---------- -----------
Income (loss) before taxes...... (371,711) 361,763 (180,762) (190,710)
Income taxes...................... -- 112,146 -- 112,146
----------- ---------- ---------- -----------
Net income (loss)............... $ (371,711) $ 249,617 $ (180,762) $ (302,856)
=========== ========== ========== ===========
Pro forma information:
Net loss per share.............. $ (0.23) $ (0.11)
=========== ===========
Shares used in per share
calculation.................. 1,600,000 2,676,923
=========== ===========
</TABLE>

See accompanying notes to pro forma condensed financial statements.

20
<PAGE> 21

USTEL, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO FORMA
USTEL, INC. CONSORTIUM 2000, INC. ADJUSTMENTS PRO FORMA
----------- --------------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues, net.............. $16,166,344 $ 2,563,596 $(1,607,950)(4b) $17,121,990
Cost of services sold...... 12,006,378 1,281,381 (1,607,950)(4b) 11,679,809
----------- ---------- ---------- -----------
Gross profit..... 4,159,966 1,282,215 -- 5,442,181
Selling.................... 1,676,705 -- -- 1,676,705
General & administrative... 4,762,971 1,496,744 -- 6,259,715
Depreciation &
amortization............. 184,071 10,800 139,979(4b) 334,850
----------- ---------- ---------- -----------
Loss from
operations..... (2,463,781) (225,329) (139,979) (2,829,089)
Other income............... -- 12,556 -- 12,556
Interest................... (313,928) (1,185) -- (315,113)
----------- ---------- ---------- -----------
Loss before
taxes.......... (2,777,709) (213,958) (139,979) (3,131,646)
Income taxes............... -- -- -- --
----------- ---------- ---------- -----------
Net loss......... $(2,777,709) $ (213,958) $ (139,979) $(3,131,646)
=========== ========== ========== ===========
Pro forma information:
Net loss per share....... $ (1.37) $ (1.01)
=========== ===========
Shares used in
per share
calculation.... 2,025,740 3,102,663
=========== ===========
</TABLE>

See accompanying notes to pro forma condensed financial statements.

21
<PAGE> 22

USTEL, INC.

NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. MERGER AGREEMENT AND PLAN OF REORGANIZATION

On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary of UStel) and Consortium 2000, Inc.
("Consortium 2000") entered into a Merger Agreement and Plan of Reorganization
("Merger Agreement" and "Merger"). Under the terms of the Merger Agreement, (a)
Consortium Acquisition Corporation will be merged with Consortium 2000, with
Consortium 2000 being the surviving corporation in the Merger; and (b) all of
the capital stock of Consortium 2000 will be converted into an aggregate of
1,076,923 shares of the Common Stock of UStel. As a result of the Merger,
Consortium 2000 will become a wholly-owned subsidiary of UStel.

2. EFFECT OF ACQUISITION

The adjustments to the Pro Forma Condensed Balance Sheet as of September
30, 1996 reflect the Merger as if it occurred on September 30, 1996. The Pro
Forma Condensed Statements of Operations for the year ended December 31, 1995
and for the nine month period ended September 30, 1996 reflect the acquisition
as if it occurred on the first day of each period.

3. HISTORICAL FINANCIAL STATEMENTS OF CONSORTIUM 2000, INC.

Consortium 2000 has a June 30 fiscal year end. In order to bring Consortium
2000's statement of operations up to UStel's December 31 fiscal year end, the
results of Consortium 2000's operations for the six month period ended June 30,
1995 were combined with its results of operations for the six month period ended
December 31, 1995. In order to bring Consortium 2000's statement of operations
up to UStel's nine months ended September 30, 1996, the results of Consortium
2000's operations for the six month period ended June 30, 1996 were combined
with its results of operations for the three month period ended September 30,
1996.

4. PRO FORMA ADJUSTMENTS

a. The pro forma adjustments to the condensed balance sheet are as follows:

(1) To reflect the acquisition of Consortium 2000 and the allocation of
the purchase price on the basis of the fair values of the assets
acquired and liabilities assumed. The components of the purchase
price and its allocation to the assets and liabilities of Consortium
2000 are as follows:

<TABLE>
<S> <C>
Total purchase price (1,076,923 shares X $3.90)....................... $4,200,000
Book value of Consortium 2000......................................... (467,218)
----------
Goodwill.............................................................. $3,732,782
==========
</TABLE>

(2) To eliminate intercompany receivable on Consortium 2000's books
against intercompany payable on UStel's books.

(3) To reclassify shares held by Consortium 2000 as treasury shares.

22
<PAGE> 23

b. The pro forma adjustments to the condensed statements of operations are
as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
(1) Adjustment to revenue for elimination of
intercompany sales................................ $ 1,398,706 $ 1,607,950
(2) Adjustment to cost of services sold for
elimination of intercompany sales................. (1,398,706) (1,607,950)
(3) Amortization of goodwill over 20 years............ 180,762 139,979
----------- -----------
$ 180,762 $ 139,979
=========== ===========
</TABLE>

23
<PAGE> 24

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

The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto and the other financial data included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain risk
factors, including those set forth in the following section and elsewhere in
this Prospectus. The following discussion should be read in conjunction with the
Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus.

GENERAL

On August 14, 1996, a change of control of UStel occurred as a result of
the purchase of a substantial portion of the shares owned by the founders of the
Company at an adjusted price of $5.00 per share by the Trust, an investment
group comprising shareholders of Consortium 2000. Coincident with this
transaction, a new and experienced management team was appointed. Since its
appointment, the new management team has undertaken to restructure the Company's
relationship with its underlying long distance carrier, refocus marketing
activities, implement a new network development strategy which will convert the
majority of the Company's traffic from switched access to dedicated access,
improve billing and collections and customer service, reduce cost of operations
and develop a viable strategy for the future.

The new management team undertook a comprehensive review of all of the
Company's assets. This review included evaluating the net realizable value of
various assets and the appropriateness of certain reserves. As a result of this
review, the Company recorded an additional expense for the period ended
September 30, 1996 in the amount of $2,860,869. This expense was primarily
attributable to an increase in the reserve for bad debts, the write-down of
certain deferred offering costs, the reduction of the accrual for unbilled
revenues and a change in the accrual for claims against other carriers.
Management believes that this is an unusual and one-time charge related to
management's revaluation. With the addition of the Consortium 2000 marketing
organization, the Company believes that it is well-positioned to continue to
grow in the future.

RESULTS OF OPERATIONS

The Company was formed in March, 1992, although the Company did not
commence significant operations until January, 1993. Since January, 1993, the
Company's monthly revenues have grown from $10,000 to approximately $2,000,000
in December, 1996. In addition, the number of subscribers to the Company's long
distance telephone service has grown to in excess of 18,000 at December 31,
1996.

On August 14, 1996, UStel, Consortium 2000 and Consortium Acquisition
Corporation entered into the Merger Agreement pursuant to which 1,076,923 shares
of UStel are to be issued to the shareholders of Consortium 2000, in exchange
for all of the outstanding shares of Consortium 2000. Upon consummation of the
Merger, Consortium 2000 will become a wholly-owned subsidiary of UStel. The
earnings of Consortium 2000 will be included in the Company's results on a going
forward basis.

The Company's primary cost is for local access services, which represents
the cost of originating and terminating calls through local networks owned and
operated by local telephone companies such as USWest and Pacific Telesis,
combined with the cost of utilizing usage-sensitive transmission facilities and
leasing long-haul bulk transmission lines from facilities-based carriers.

The Company's profit margin depends, among other things, on the volume of
its operations, on the type of services provided and on the mix between use of
usage-sensitive transmission facilities and long-haul bulk transmission lines.
Initial increases in volume may increase the use of usage-sensitive transmission
facilities relative to fixed rate bulk transmission facilities. The Company does
not expect this to have a significant impact on profit margin due to volume
discounts that are available on usage-sensitive transmission facilities and the
ability to shift to fixed rate long-haul bulk transmission facilities at
relatively low volumes of activity.

24
<PAGE> 25

QUARTERLY FINANCIAL DATA

From inception through December 31, 1994, and during each quarter in that
period, the Company incurred losses from operations and experienced net losses.
The following table sets forth certain quarterly financial information for 1995
and the first three quarters of 1996. The selected quarterly financial
information set forth below is derived from the Company's unaudited financial
statements and, in the opinion of management, includes all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of this information. Results for the first three quarters of 1996
are not necessarily indicative of the results that may be expected for the
fourth quarter ended December 31, 1996 or for any future period.

<TABLE>
<CAPTION>
1996-THREE MONTHS ENDED
1995-THREE MONTHS ENDED ------------------------------------
---------------------------------------------------- SEPT.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 30(1)
---------- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............. $3,142,512 $3,854,239 $4,313,267 $4,817,557 $4,903,267 $5,623,236 $5,639,841
Total operating
expenses.......... 3,121,261 3,804,321 4,618,928 4,707,632 4,810,345 5,458,181 8,361,599
Income (loss) from
operations........ 21,251 49,918 (305,661) 109,925 92,922 165,055 (2,721,758)
Net income (loss)... 9,020 39,117 (469,429) 31,770 1,398 70,567 (2,849,674)
</TABLE>

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

(1) Includes an expense of $2,860,869 which was primarily attributable to an
increase in the reserve for bad debts, the write down of certain deferred
offering costs, the reduction of the accrual for unbilled revenues and a
change in the accrual for claims against other carriers.

The following table sets forth certain items in the Company's statements of
earnings as a percentage of net sales for the periods shown:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services sold.............................. 78.0 76.8 71.6 72.9 74.3
------ ------ ------ ------ ------
Gross profit....................................... 22.0 23.2 28.4 27.1 25.7
Selling, general and administrative expenses....... 64.9 37.4 29.2 29.2 41.0
------ ------ ------ ------ ------
Loss from operations............................... (42.9) (14.1) (0.8) (2.1) (15.2)
Other expenses..................................... 2.3 1.6 0.7 0.9 --
Net interest (expense)............................. 2.6 2.5 1.6 (0.6) (1.9)
------ ------ ------ ------ ------
Loss before income taxes........................... (47.8) (17.6) (2.3) (3.6) (17.1)
Income tax expense................................. -- -- -- -- --
Net loss........................................... (47.8)% (17.6)% (2.3)% (3.6)% (17.1)%
====== ====== ====== ====== ======
</TABLE>

COMPARISON OF RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995.

Revenues for the nine months ended September 30, 1996 were $16,166,344 as
compared to $11,310,018 for the nine months ended September 30, 1995. The
increase in revenues in 1996 was the result of expansion from a customer base of
6,000 at September 30, 1995 to a customer base in excess of 16,500 at September
30, 1996.

Cost of services sold for the nine months ended September 30, 1996 was
$12,006,378 as compared to $8,240,409 for the nine months ended September 30,
1995. The increase in the cost of services expense was partially caused by the
change in the accrual for claims against other carriers which resulted in an
additional expense of $652,665. Prior to this adjustment the cost of services
expense for the nine months through September 30, 1996 amounted to $11,353,713.
The increase in cost of services sold, similar to the increase between periods
in revenue, was the result of the expansion in the Company's customer base. Cost
of services sold for the nine months ended September 30, 1996 was 74.3% of the
revenues produced in the first nine months of 1996. Cost of services sold for
the nine months ended September 30, 1995 was 72.9% of the revenues produced in
that period of 1995.

25
<PAGE> 26

General and administrative expenses for the nine months ended September 30,
1996 were $4,762,971 as compared to $2,282,329 for the nine months ended
September 30, 1995. The increase in general and administrative expenses is due
to an increase in the reserve for bad debts of $1,269,704 and the write-down of
certain deferred offering costs of $424,000. The additional increase of $786,938
was the result of increased staff and related costs in support of the increased
revenues being produced by the Company.

Selling expenses for the nine months ended September 30, 1996 were
$1,676,705 as compared to $900,960 for the nine months ended September 30, 1995.
The increase in selling expenses reflects the costs associated with the
expansion and retention of the Company's customer base from commencement through
September 30, 1996.

Depreciation and amortization for the nine months ended September 30, 1996
was $184,071 as compared to $120,813 for the nine months ended September 30,
1995. Amortization of the Company's start-up cost asset was $14,755 and $14,749
for the nine-month periods ended September 30, 1996 and September 30, 1995,
respectively. Depreciation for the nine months ended September 30, 1996 was
$169,315 as compared to $106,057 for the nine months ended September 30, 1995.

The increase in depreciation was the result of the Company's increasing
investments in telephone switching equipment and facilities to handle increased
telephone traffic and increased investment in the computer hardware and software
that supports the operations of the telephone equipment and related billing
activities. The Company's investment in these fixed assets increased from
approximately $1,475,000 at September 30, 1995 to approximately $2,574,000 at
September 30, 1996.

During the nine months ended September 30, 1996 the Company reported a loss
from operations of $2,463,781 versus a loss from operations of $234,493 for the
nine months ended September 30, 1995. This loss includes additional general and
administrative expenses of $2,860,869 as discussed above.

Interest expense for the nine months ended September 30, 1996 was $409,205
as compared to $151,349 for the nine months ended September 30, 1995. The
Company continues to utilize short-term bank lines of credit to supplement its
periodic needs for cash in operations. In July, 1996 those lines of credit were
repaid from the application of proceeds from certificates of deposit which
secured these obligations. In December, 1995, the Company obtained a senior
credit facility (the "Credit Facility") in the amount of up to $5,000,000. This
Credit Facility bears interest at the Bank of America Reference Rate plus 2% per
annum, with a minimum of $15,000 interest expense per month. Accordingly,
interest expense charged for the nine months ended September 30, 1996 was
$183,573 including amortization of related loan fees over thirty-six months.

Interest income for the nine months ended September 30, 1996 was $95,278
principally from the Company's holdings of bank certificates of deposit and
accrual of interest on officers loans, as compared to $86,773 for the nine
months ended September 30, 1995.

During the nine months ended September 30, 1996, the Company reported a net
loss of $2,777,709 versus a net loss of $403,481 for the nine months ended
September 30, 1995. The Company's new management, which took control on August
15, 1996, conducted a thorough review of the Company's assets and as a result,
the Company incurred a non-cash charge of $2,860,869 for the three-month period
ended September 30, 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

During the year ended December 31, 1995 the Company reported an operating
loss of $124,568 versus an operating loss of $863,571 for the year ended
December 31, 1994.

Revenues for the year ended December 31, 1995 were $16,127,575 as compared
to $6,118,480 for the year ended December 31, 1994. The increase in revenues in
1995 was the result of expansion from a customer base of 2,240 at December 31,
1994 to a customer base in excess of 9,000 at December 31, 1995.

Cost of services sold for the year ended December 31, 1995 was $11,542,374
as compared to $4,696,106 for the year ended December 31, 1994. The increase in
cost of services sold, similar to the increase in revenues, was the result of
the expansion in the Company's customer base. Cost of services sold for the year

26
<PAGE> 27

ended December 31, 1995 was 71.6% of the revenues produced in that period of
1995. Cost of services sold for the year ended December 31, 1994 was 76.8% of
the revenues produced in that period of 1994.

Selling expenses for the year ended December 31, 1995 were $1,460,010 as
compared to $785,933 for the year ended December 31, 1994. The increase in
selling expenses reflected the costs associated with the expansion of the
Company's customer base from commencement through December 31, 1995. Because of
the increased revenues from the Company's expanding customer base, selling
expenses as percentage of revenues decreased from approximately 12.8% in the
year ended December 31, 1994 to approximately 9.1% in the year ended December
31, 1995.

General and administrative expenses for the year ended December 31, 1995
were $3,071,788 as compared to $1,412,649 for the year ended December 31, 1994.
The increase in general and administrative expenses includes $515,000 of
provisions for losses on receivables plus increased staff and related costs in
support of increased revenues produced by the Company. Depreciation for the year
ended December 31, 1995 was $158,297 as compared to $47,947 for the year ended
December 31, 1994. The increase in depreciation was the result of the Company's
investments in telephone switching equipment and facilities to handle increased
telephone traffic and investments in computer hardware and software that
supports the operations of the telephone equipment and related billing
activities. The Company's investment in these fixed assets increased from
$824,172 at December 31, 1994 to $1,604,357 at December 31, 1995.

Interest expense for the year ended December 31, 1995 was $260,437 as
compared to $152,063 for the year ended December 31, 1994. Interest income for
the year ended December 31, 1995 was $124,060 as compared to $34,283 for the
year ended December 31, 1994. In each period, interest income was earned from
the Company's holdings of bank certificates of deposit.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

During the years ended December 31, 1994 and 1993, the Company incurred
losses from operations of $863,571 and $686,834, respectively. During these
periods the Company's operations expanded but were not sufficient to cover fixed
and variable expenses.

Revenues for the year ended December 31, 1994 were $6,118,480 as compared
to $1,600,147 for the year ended December 31, 1993. The increase in revenue was
the result of expansion from the Company's customer base of 840 at December 31,
1993 to in excess of 2,200 at December 31, 1994.

Cost of services sold for the year ended December 31, 1994 was $4,696,106
as compared to $1,248,463 for the year ended December 31, 1993. The increase in
cost of services sold, similar to the increase in revenue, was the result of the
expansion in customer base. Cost of services sold for the year ended December
31, 1994 was 76.75% of revenue compared to 77.89% of revenue for the year ended
December 31, 1993.

Selling expenses for the year ended December 31, 1994 were $785,933 as
compared to $368,361 for the year ended December 31, 1993. The increase in
selling expenses reflected the costs associated with the expansion of the
Company's customer base.

General and administrative expenses for the year ended December 31, 1994
were $1,412,649 as compared to $637,263 for the year ended December 31, 1993.
The increase in general and administrative expenses was the result of increased
staff and related costs to support the Company's increased revenue.

Depreciation and amortization for the year ended December 31, 1994 was
$87,363 as compared to $32,894 for the year ended December 31, 1993.
Amortization of start-up costs accounted for $19,674 in each of the years ended
December 31, 1993 and December 31, 1994. Depreciation for the year ended
December 31, 1994 was $67,689 as compared to $13,220 for the year ended December
31, 1993.

The increase in depreciation resulted from the Company's increased
investment in telephone switching equipment and facilities to handle increased
telephone traffic as well as increased investment in computer hardware and
software to support expanded operations and related billing activities. The
Company's investment in these fixed assets increased to $824,172 at December 31,
1994 from $295,709 at December 31, 1993.

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<PAGE> 28

In June, 1993, the Company invested in real property which resulted in a
loss from rental operations of $62,025 (including depreciation of $20,114 and
interest expense of $78,902) and a gain of $24,993 from the sale of one unit. In
1994, loss from rental operations was $101,705 (including depreciation of
$37,908 and interest expense of $124,630) and a gain of $47,205 from a partial
sale. In December, 1994, the Company disposed of the property and the debt
related to the property, at a loss of $39,591.

Interest expense for the year ended December 31, 1994 was $152,063 as
compared to $41,686 for the year ended December 31, 1993. In January, 1994, the
Company, in a private placement, sold $500,000 of 12% Convertible Subordinated
Debentures to investors, resulting in $60,000 in interest expenses in 1994 with
no comparable expense in 1993. In addition, the Company continued to utilize
short-term bank lines of credit to supplement its periodic needs for operating
capital. At December 31, 1994, the Company had outstanding borrowings on such
lines of credit in the amount of $770,000, at interest rates higher than those
experienced in 1993.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital position at September 30, 1996 was
approximately $85,000. Since its inception, the Company has experienced pressure
on its working capital position due to operating losses, the need to continually
invest in telecommunications equipment, lack of an in-house billing system and a
significant increase in accounts receivable due to growth in operations.

During the first nine months of 1996, the Company utilized net cash of
$2,355,317 for operating activities.

The Company is required to pay the costs of providing communications
services to its customers, consisting primarily of local access charges for
obtaining usage-sensitive transmission capacity or leasing fixed rate bulk
transmission facilities, before the Company receives payment from its customers
relating to those costs.

Because the Company has not yet commenced installation of an in-house
billing system, it is dependent upon a third-party billing services provider to
send out bills to the Company's customers for usage of the services provided by
the Company. Because of the reliance on an outside billing service it is
uneconomical for the Company to render bills more frequently than once a month.
Typically, this results in bills for services being mailed out between 15 to 25
days after the end of the month in which the services are rendered. The Company
is required to pay for the use of third-party long distance lines in advance of
the receipt of payment by the Company from its customers for the use of the
services provided by the Company. This strains the Company's working capital as
it is required to seek sources for financing the differences between the
payables and receivables. The Company intends to apply a portion of the proceeds
of this Offering to the installation of an in-house billing system which would
enable the Company to render its bills on a more frequent billing cycle.

At September 30, 1996, the Company's accounts receivable, net of allowance
for doubtful accounts, was $6,947,345. In addition, through September 30, 1996,
the Company had invested $1,879,643 in switching and related equipment and in
computer hardware and software.

To raise funds to meet the periodic cash needs for operations and fixed
asset acquisition, the Company has relied in the past on bridge financing in
amounts ranging from $100,000 to $1,500,000 at any particular time. Funds from
the initial public offering of Common Stock and the private placement of Series
A Preferred Stock in 1994 enabled the Company to partially alleviate, on a
temporary basis, the need for these short-term bridge financings, other than
arrangements with banks for short-term lines of credit. At September 30, 1996,
the Company had borrowings outstanding under bank lines of credit in the amount
of $2,437,931. These bank lines of credit were fully drawn at September 30,
1996. The lines of credit were secured by the Company's cash, accounts
receivable and certain other assets.

In October, 1995, the Company borrowed $1,500,000 pursuant to the terms of
a one-year term loan. Amounts borrowed under the agreement bear interest at 10%
per annum on a daily principal balance outstanding during the three calendar
months prior to each interest payment date on the first day of each calendar
quarter. The agreement calls for the issuance of warrants for the purchase of up
to 100,000 shares of

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<PAGE> 29

the Company's Common Stock at a price of $5.00 per share, exercisable over the
term of the loan. This loan was repaid in January, 1996 by the issuance of
160,000 shares of the Company's Common Stock and a cash payment of $725,000.

In December, 1995, the Company obtained the Credit Facility in the amount
of up to $5,000,000 with an asset-based lender. Amounts drawn under the Credit
Facility accrue interest at a variable rate equal to the Bank of America
Reference Rate plus 2% per annum. The Credit Facility is secured by accounts
receivable and all of the Company's other assets.

Under the Credit Facility, the Company can borrow up to an amount which is
the lesser of $5,000,000 or 85% of the Company's eligible receivables. Subject
to the $5,000,000 maximum borrowing, in addition to amounts supported by
receivables, the Company may borrow on a 36-month term loan basis up to the
lesser of $1,500,000 or a formula amount based on the fair value of new
equipment and the liquidation value of existing equipment. The amount
outstanding under the Credit Facility at September 30, 1996 was $2,437,931.

In February, 1996, the Company borrowed $400,000 from Kamel B. Nacif, the
holder of the Company's Series A Preferred Stock. This loan is payable on demand
and bears interest at the annual rate of 12%. At December 31, 1996, the unpaid
balance was $84,000. Interest is payable quarterly. In addition, an 8% loan fee
is payable at maturity.

In June, 1996, the Company borrowed $1,200,000 from an unrelated party. The
one-year note bears interest at the annual rate of 12% and is unsecured.
Interest is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for the acquisition of up to 540,000 shares of its
Common Stock at a price of $5.00 per share. Warrants for the purchase of 120,000
shares of Common Stock were issuable at the time the loan was funded. As of
December 19, 1996, the lender was entitled to warrants to purchase 240,000
shares of the Company's Common Stock. If the loan is not paid by March 19, 1997,
the lender will become entitled to a warrant to purchase an additional 60,000
shares; if the loan is not repaid by June 19, 1997, the lender will be entitled
to a warrant to purchase 60,000 shares for each ninety day period thereafter
that the loan remains unpaid, or warrants to purchase up to 240,000 additional
shares, for a total of warrants to purchase up to 540,000 shares.

As of December 27, 1996, the Company was indebted to WilTel, the Company's
primary long distance carrier, in the amount of $6,448,501. This amount was
settled by the payment of $2,491,720 by the Company. WilTel agreed to allow the
Company to defer the balance owing in the amount of $3,956,782 to February 28,
1997. The deferred amount is evidenced by a promissory note that bears interest
at a rate of 18% per annum and is secured by a second lien on all the Company's
and Consortium 2000's assets and is guaranteed by Consortium 2000. The balance
due on the note, including interest, will be $4,177,334, on February 28, 1997.

At December 31, 1995, the Company had available net operating loss
carryforwards of approximately $5,908,000 for income tax purposes, which expire
in varying amounts through 2010. Federal tax rules impose limitations on the use
of net operating losses following certain changes in ownership. As of September
30, 1996 the net operating loss carryforward may be utilized at a rate of
approximately $402,000 per year (subject to the Company generating sufficient
income from operations). The amount of the net operating loss carryforwards that
may be utilized per year to off-set income may be further limited as a result of
the consummation of this Offering. The loss carryforward generated a deferred
tax asset of approximately $2,186,000. The deferred tax asset was not recognized
due to uncertainties regarding its realization, accordingly, a 100% valuation
allowance was provided.

The Company anticipates that it may need to arrange for additional cash
resources within the next 12 months through debt or equity financings. The
Company has no commitments for additional debt or equity financings and there
can be no assurance that the Company will be successful in consummating any such
financing transaction in the future on terms that the Company would consider
favorable, if at all.

IMPACT OF NEW ACCOUNTING STANDARDS

During March, 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be

29
<PAGE> 30

Disposed of," which requires the Company to review for impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable. In certain situations, an impairment loss
would be recognized. SFAS 121 will become effective for fiscal years beginning
after December 15, 1995. The Company has studied the implications of SFAS 121
and, based on its initial evaluation, does not expect it to have a material
impact on the Company's financial condition or results of operations.

During October 1995, the FASB issued Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," which establishes a fair value-based
method of accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. The Company will continue to account for employee purchase rights
and stock options under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 disclosures will be effective for fiscal years beginning
after December 15, 1995.

Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
issued by the FASB is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive applications are not permitted.
The new standard provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.

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<PAGE> 31

BUSINESS
GENERAL

The Company provides long distance telecommunications services, consisting
primarily of direct dial long distance telephone transmissions to commercial
customers throughout the United States. The Company's customers can call any
point in the United States or any foreign country accessible to customers of
AT&T at rates that are generally lower than those charged by AT&T, MCI and
Sprint. Since commencing operations in January, 1993, the Company's subscriber
base has grown to in excess of 18,000 customers in December, 1996, consisting
primarily of medium-sized businesses located predominantly in the State of
California. In addition, the Company's monthly revenues have increased from
approximately $10,000 in January, 1993 to approximately $2,000,000 in December,
1996.

The Company owns two switch centers located in Los Angeles and Beverly
Hills, California, and leases switch capacity in New York, New York from WilTel,
a national telecommunications service provider. The Company is seeking to
increase its customer base and usage of its switches in order to attain the
volume levels necessary to realize the economic advantages from routing such
traffic through its owned or leased switch capacity. The following table
provides certain information concerning the Company's switching centers:

<TABLE>
<CAPTION>
PERCENTAGE
AVAILABLE PORTS UTILIZED AT UTILIZED AT
LOCATION PORTS SEPT. 30, 1996 SEPT. 30, 1996
- ----------------------------------------------------------- ------ ----------------- --------------
<S> <C> <C> <C>
110 East Ninth Street, Los Angeles, CA..................... 15,000 788 5.3%
9560 Wilshire Boulevard, Beverly Hills, CA................. 15,000 1,364 9.1
60 Hudson Street, New York, NY(1).......................... 38,400 648 1.7
</TABLE>

- ---------------
(1) This switch is leased from and is shared with WilTel.

The Company is primarily a non-facilities based interexchange carrier that
routes its customers' calls over a transmission network consisting primarily of
dedicated long distance lines secured by the Company from a variety of other
carriers. This enables the Company to avoid the substantial capital requirements
of building and maintaining its own extensive transmission facilities. The terms
of these lease arrangements vary from month-to-month to longer term arrangements
and the lease costs may be priced on a usage sensitive basis or at a fixed
monthly rate. Because the amount the Company charges its customers for long
distance telephone calls is not based on the cost to transmit such calls, long
distance calls transmitted over facilities leased on a fixed-cost basis
generally are more profitable to the Company than long distance calls
transmitted over usage sensitive circuits, assuming a sufficient volume of calls
is routed over the fixed-cost route. Approximately 65% of the Company's call
volume is transmitted via dedicated lines. Accordingly, the Company's strategy
is to reduce overall transmission costs by entering into long-term agreements
with other carriers to lease dedicated lines at fixed monthly rates and to route
as many of its customers' calls as possible over such lines. The success of this
strategy depends on the Company's ability to generate a sufficient volume of its
customers' calls over such facilities to exceed the fixed costs of leasing such
facilities.

RECENT DEVELOPMENTS

On August 14, 1996, a change of control of UStel occurred as a result of
the purchase of a substantial portion of the shares owned by the founders of the
Company by the Trust, an investment group comprised of shareholders of
Consortium 2000, at an adjusted price of $5.00 per share. Coincident with this
transaction, a new and experienced management team was appointed. Since its
appointment, the new management team has undertaken to restructure the Company's
relationship with its underlying long distance carrier, refocus marketing
activities, implement a new network development strategy which will convert the
majority of the Company's traffic from switched access to dedicated access,
improve billing and collections and customer service, reduce cost of operations
and develop a viable strategy for the future.

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<PAGE> 32

reserve for bad debts, the write-down of certain deferred offering costs, the
reduction of the accrual for unbilled revenues and a change in the accrual for
claims against other carriers. Management believes this is an unusual and
one-time charge related to management's revaluation. With the addition of the
Consortium 2000 marketing organization, the Company believes that it is
well-positioned to continue to grow in the future.

The change of control was effected through the purchase by the Trust of an
aggregate of 883,500 UStel shares for an aggregate consideration of $4,417,500
from the RGB/TAD Investment Partnership (the "Partnership"). The Partnership is
composed of two family trusts of which Noam Schwartz, the former President of
UStel, was at one time a trustee. The 883,500 shares include 270,750 shares to
be purchased by the Trust pursuant to an amendment dated February 4, 1997 to an
agreement dated August 14, 1996. The amendment, among other things, effected a
reduction in the purchase price from $7.15 to $5.00 per share. The amendment
also gives the Partnership an option to buy back 150,000 shares at $6.00 per
share. Royce Diener, the former Chairman of the Board of UStel, serves as
trustee of the Trust. The consideration for the shares consisted of cash and
purchase money notes. The notes are payable in installments through September
30, 1997 and are secured by the shares purchased and other collateral, including
an assignment of the Trust's participation rights in the secured position of the
lender providing the Credit Facility. The Trust will be acquiring these
participation rights as a result of depositing $500,000 as cash collateral with
the lender. In addition to his voting power over the 883,500 UStel shares
purchased, Royce Diener beneficially owns an additional 136,333 shares of Common
Stock consisting of 53,000 shares of Common Stock owned of record and
immediately exercisable warrants to purchase an additional 83,333 shares of
Common Stock. Messrs. Dackerman and van Biene, both founders of and substantial
shareholders in Consortium 2000, sit on the Consortium 2000 board of directors
with Royce Diener. Coincident with the acquisition of the shares, Messrs. Robert
L.B. Diener, Jerry Dackerman and Wouter van Biene were elected to the Board of
Directors of the Company and agreed to serve as President and Chief Executive
Officer, Executive Vice President and Chief Financial Officer, respectively, of
UStel. On December 23, 1996, Robert L.B. Diener was elected Chairman of the
Board of Directors, and Jerry Dackerman was elected President and Chief
Operating Officer.

Concurrent with the purchase of the shares of Common Stock by the Trust,
the Company entered into the Merger Agreement with Consortium 2000. Pursuant to
the Merger Agreement, all of the capital stock of Consortium 2000 will be
converted into an aggregate of 1,076,923 shares of the Common Stock of UStel. As
a result of the Merger, Consortium 2000 will become a wholly-owned subsidiary of
UStel. Consortium 2000 currently has a marketing agreement with UStel pursuant
to which it markets telephone services on behalf of UStel. Royce Diener, a
director of UStel, is also a director and a principal shareholder of Consortium
2000. The Merger will be effected following approval of the Merger by the
stockholders of UStel and Consortium 2000. The Merger Agreement is subject to
certain conditions, including receipt of stockholder approval, and other
conditions as are more fully set forth in the Merger Agreement. The Merger is
not expected to be completed or approved by the stockholders of the Company
prior to the closing of this Offering. See "Risk Factors -- No Assurance As to
Consummation and Effects of the Merger."

CONSORTIUM 2000

Consortium 2000 is a telecommunications marketing and consulting services
provider which refers telecommunications customers to long distance carriers,
regional carriers, interexchange carriers, resellers and other aggregators. It
derives its revenues from sales agent commissions paid by the carriers to whom
it refers its customers. Consortium 2000 obtains customers by offering to
analyze the customer's long distance calling patterns, usage volume and the
specialized telecommunications needs of its individual customers. Utilizing
network analysis software and the expertise of its employees, Consortium 2000
provides its customers with recommendations as to which long distance carrier is
best suited to provide the particular and specialized telecommunication needs of
its individual clients at the lowest possible costs.

Consortium 2000 has independent sales agent agreements with most of the
major long distance carriers and is able to recommend an array of carriers to
its customers or it can recommend a division of the customer's business among
several carriers in order to avoid excessive concentration with a single
carrier. Consortium 2000 also provides its customers with ongoing
telecommunications services and technical support by monitoring any changes in
client needs as well as developments in the telecommunications industry which

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<PAGE> 33

may provide new opportunities for service to its clients. Consortium 2000 is not
a long distance carrier, reseller, rebiller or representative for any particular
long distance provider and does not operate a telecommunications network. It
does, however, utilize the purchasing power and economies-of-scale of its client
base in order to negotiate with a variety of long distance providers for special
pricing and enhanced services for its clients.

In mid-1994, UStel entered into a non-exclusive sales agent agreement with
Consortium 2000. As of December 31, 1996, approximately 90% of UStel's customers
base had been referred to the Company by Consortium 2000. Conversely,
approximately 70% of Consortium 2000's revenues during the nine months ended
September 30, 1996 consisted of sales commissions resulting from referrals of
customers to UStel. After the Merger with UStel, Consortium 2000 will continue
to function as a wholly-owned subsidiary of UStel and as an independent
communication services management consultant with the ability to place members
with a broad range of carriers. Based upon its knowledge of comparative tariffs
among alternative carriers, Consortium 2000 believes that UStel frequently
represents the low-cost alternative and will accordingly continue, where
appropriate to its clients' needs, to refer its customers to UStel. However,
where a customer's needs are better served by another carrier, Consortium 2000
will refer such customer to the appropriate carrier and UStel will earn a sales
agent commission with respect to such business. There can be no assurance as to
how the Consortium 2000 customers who look to it for independent advice will
perceive Consortium 2000 after it becomes a wholly-owned subsidiary of UStel.
If, as a result of the Merger, or for any other reason, Consortium 2000 is no
longer able to successfully market the Company's services, the Company's
business would be materially and adversely affected. See "Risk Factors -- No
Assurance As to Consummation and Effects of the Merger."

BUSINESS STRATEGY

The Company's strategy is to achieve continued growth and profitability by
focusing its marketing efforts on small- to mid-sized businesses and by reducing
its overall cost of delivering long distance telecommunications services. The
Company's specific objectives are as follows:

Continue to Market Long Distance Telecommunications Services through
its Agent Network. The Company believes that direct sales are the most
effective means of adding customers who will have long-term loyalty to the
Company. In this regard, primarily utilizing the Consortium 2000 agent
network, the Company believes that it can access new customers by
continuing to market itself as a low-cost alternative compared to other
long distance carriers introduced to the customer by Consortium 2000.

Increase Name Recognition. The Company believes that its name is
well-recognized in the industry as providing reliable, low-cost
telecommunications services together with excellent customer service. The
Company will seek to increase customer awareness by targeting its products
to affinity purchasers and such other groups which the Company believes
will provide it access to large customer bases.

Leverage Consortium 2000's Diverse Client Base and Relationships with
Affiliated Long Distance Carriers. The Company believes that through
Consortium 2000, it can market to a diverse group of potential commercial
customers and, where appropriate, participate with larger carriers in
providing services to these customers. The Company believes that following
the consummation of the Merger, the Company will be able to maintain client
relationships and earn agent commissions from other carriers, even where
the Company is not selected as the customer's primary long distance
carrier.

Utilize Synergies of Consortium 2000 Merger. The Company believes that
significant cost efficiencies can be achieved through the integration of
Consortium 2000 upon consummation of the Merger and consolidation of
certain key functions within the combined companies.

Installation of In-house Billing System. The Company believes that it
can achieve significant cost-savings and reduce reliance on its working
capital facility by the installation of its own dedicated billing system.
The Company believes that the system will enable it to improve cashflow by
producing billings on

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<PAGE> 34

a more timely basis and permitting multiple billing cycles per month. The
Company also believes that the system will enhance customer service and
reduce billing errors.

Increase Shared Tenant Services. The Company has installed its
telecommunications equipment in two buildings where there are large numbers
of commercial telecommunications users. By placing switching equipment in
these locations, the Company can essentially become the customer's local
telephone carrier and further decrease the cost of providing long distance
services to these customers. The Company intends to provide shared tenant
services in the future in circumstances where the economics justify the
capital expenditures associated with providing such service.

Increase International Traffic. The Company has a number of contracts
with foreign telecommunications carriers who utilize the Company's
facilities to terminate traffic either in the United States or in other
foreign countries. In this manner, the Company provides "wholesale"
services to the foreign carrier and is directly compensated by the carrier.
Several carriers in Israel direct a portion of their international traffic
to the Company's switching equipment in New York City. The Company then
transmits the call to its final destination. The Company believes that the
opportunity exists to provide such foreign call termination services from a
number of countries.

Decrease Network Costs. As a result of its substantial growth in
traffic over the past two years, the Company has the opportunity to achieve
reductions in its cost of carrying traffic over its network. The Company
expects that these cost reductions will come from three principal
initiatives -- (1) negotiation of more favorable rates with its underlying
long distance carriers through volume guarantees and the ability to pay for
services on a more timely basis, (2) implementation of strategically placed
switching and related equipment to route more traffic through the Company's
fixed-cost circuits and (3) conversion of variable cost traffic to fixed
cost circuits as warranted by call volume.

Make Strategic Acquisitions. The Company believes that opportunities
exist to acquire other small-to mid-sized long distance carriers.
Typically, smaller carriers face difficulty reaching a critical mass of
business and accessing capital for expansion. Many of these carriers have
attractive regional customer bases which can easily be routed through the
Company's existing long distance telephone network.

THE LONG DISTANCE INDUSTRY

On January 1, 1984, AT&T's divesture of the Bell System went into effect.
As a result of the divestiture decree (the "AT&T Divestiture Decree"), AT&T was
forced to divest its 22 Bell Operating Companies ("BOCs"), which were
reorganized under seven RBOCs, such as Pacific Telesis and US West. The RBOCs
own and are responsible for operations of the BOCs in each of their regions. The
BOCs, as well as other independent companies which provide local telephone
service, are characterized as LECs. The LECs are responsible for providing dial
tone, local lines and billing for local service as well as local access for long
distance traffic.

The AT&T Divestiture Decree also required the LECs to provide all
interexchange carriers, such as the Company, with access to the local telephone
exchange facilities that is "equal in type, quality and price" to that provided
to AT&T. In addition, the LECs were required to conduct a subscription process
allowing consumers to select their long distance carrier. This development,
known as "equal access," enabled consumers to complete calls using their
selected long distance carrier by simply dialing "1" plus the area code and
number. Prior to equal access, consumers using an interexchange carrier other
than AT&T had to dial a local number, then an access code, then the area code
and number of the call destination to complete a call. With equal access, all
inter Local Access and Transport Area ("LATA") calls are routed automatically to
the consumer's long distance carrier of choice. The AT&T Divestiture Decree and
the implementation of equal access constitute the fundamental regulatory
developments that allow interexchange carriers other than AT&T, such as the
Company, to enter and compete in the long distance telecommunications market.

All interexchange carriers, including AT&T and the Company, pay charges to
the LECs for access to local telephone lines at both the originating and
terminating ends of all long distance calls, unless the Company is able to
install a dedicated line providing direct access from the customer to one of the
Company's

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<PAGE> 35

switch centers. As is the case with most interexchange carriers, access charges
represent the single largest component of the Company's cost of revenues. One
element of the Company's strategy is to focus on the development of "shared
tenant services" and "shared services providing," where the Company can install
dedicated lines from commercial customers concentrated in a single location such
as a high rise building to the Company's switch centers thereby bypassing the
local access cost.

Since the AT&T Divestiture Decree, the long distance industry has
experienced rapid technological development. Prior significant technological
change was the advent of digital transmission technology, which represented an
improvement over analog technology. Because the BOCs and many LECs converted
rapidly to digital switches, digital technology was necessary for interexchange
carriers to connect to the LECs for equal access. Accompanying the movement
toward digital switching was the rapid development and implementation of fiber
optic circuitry, which also requires digital technology. While AT&T had once
been the only source of high quality transmission facilities, several other
companies, including MCI and Sprint, entered the business of building
transmission facilities using primarily fiber optic circuits.

The construction of these additional transmission facilities created two
distinct groups in the long distance industry facilities based carriers
(entities which own their own transmission network) and non-facilities based
carriers (such as the Company). The surge in construction of new long-haul
facilities has created excess transmission capacity for long distance calls.
This excess capacity and the resultant decline in transmission rates have both
raised the break-even traffic volume for facilities based carriers and increased
the difficulty of obtaining that volume through their internal customer bases.
Accordingly, facilities based carriers have become both wholesalers and
retailers, selling their transmission capacity to both non-facilities based
carriers and consumers. Non-facilities based carriers such as the Company have
benefited from the wider availability and the lower cost of transmission
services, as it has become possible for them to lease circuits on attractive
terms, particularly as their volume of business increases to significant levels.

The AT&T Divestiture Decree prompted several hundred new entrants into the
long distance industry, including the Company. The industry, however, has
experienced rapid consolidation, primarily due to the technological changes
described above. Facilities based carriers, many of which were initially
unprofitable due to their sizable capital outlays, began acquiring other
carriers to increase traffic for their networks in an effort to cover fixed
costs. Similarly, larger non-facilities based carriers began buying smaller
carriers to build their traffic, improve their networking, and increase their
leverage in leasing transmission facilities from facilities based carriers.

As a result of the changes brought about by the AT&T Divestiture Decree,
interexchange carriers, including the Company, generally provide long distance
telephone services at a lower cost than the comparable services offered by AT&T,
MCI and Sprint. The Company's success will depend on its ability to provide
comparable or better services at prices equal to or lower than its competitors
in the future.

LONG DISTANCE SERVICES

The Company provides its customers with 24-hour long distance telephone
services to all points in the United States and to foreign countries. In
providing long distance telephone services, the Company offers a variety of
service options, including "l+" dialing (which avoids the need to dial a
separate access code to access the Company's long distance service), inbound
"800" service, "800" travel service, operator services, private line networks
and data transmission services. Under most of its service options, the Company
charges its customers on the basis of minutes of usage at rates that vary with
the distance, duration and time of day of a call as well as local access for
long distance traffic.

A subscriber may access the Company's telecommunications transmission
network in several ways. If a subscriber is located in a given service
origination area that has been converted to equal access and such subscriber has
selected the Company as its primary long distance carrier, then access is gained
by dialing "1" plus the area code and number desired. A second method of access
is through dedicated access lines, which are private leased lines dedicated to
one or more customers and which provide a direct connection between the
customer's premises and the Company's long distance transmission network.
Another method of access available in both equal access and non-equal access
areas requires a subscriber to dial a seven- or ten-digit

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<PAGE> 36

access number to reach the Company's switch. Following the switch's signal, the
subscriber then enters his authorization code, area code and the telephone
number of the call destination. If the switch determines that the subscriber's
authorization code is valid, the switch directs the call to the desired
destination through the most cost-effective intercity transmission circuits then
available. The installation of automatic dialers at a subscriber's location
reduces the number of digits a subscriber must dial to complete a long distance
telephone call by automatically dialing the local seven- to ten-digit access
number and the subscriber's authorization code. The use of dedicated access
lines or dialers, which are used for high-volume subscribers, also eliminates
the need to enter an authorization code. At December 31, 1996, approximately 51%
of the Company's revenues were derived from customers that utilize dedicated
access lines and approximately 48% of such revenues were derived from customers
that utilize the direct dial method of access. Less than 1% of such revenues
were derived from customers that were required to use access numbers and
authorization codes.

OTHER SERVICES

The Company makes available to its customers a variety of other service
options. The inbound "800" service, for example, permits the customer to be
billed for long distance calls made to the customer by that customer's clients.
The Company's "800" travel service permits customers to utilize the Company's
network from locations outside of their own service areas. Operator assistance
services provided through a third-party contractor permit broad based usages of
the Company's system from business establishments and residences. The Company
contracts with US Long Distance Inc., for operator services where the call is
answered in the name of the customer. The Company's experience with third-party
service providers has been positive. Private line networks offer specialized
point-to-point services, including transmission of data, on a fixed cost basis.
The TELCard(TM) calling card offers international calling capabilities in
addition to convenient long distance usage. The Company also offers its
customers special access options for dedicated long distance lines.

Each customer of the Company receives a detailed monthly call report and
invoice for services from the Company setting forth the date, number called,
duration of call and time and charges for each call. While billing services are
primarily provided through an outside contractor at present, the Company plans
to install an in-house billing system to achieve greater control, decreased
collection periods and increased profitability. See "Use of Proceeds." The
Company presently bills certain wholesale accounts by an in-house billing system
and also offers specialized billing services, including account coding which
permits identification of long distance calls in a single account by caller or
project.

The Company's long distance telecommunications services are available 24
hours a day, seven days a week. To assist subscribers with questions regarding
services, billing and other matters, the Company maintains a customer service
department and staff which is accessible to subscribers by telephone 24 hours a
day, 365 days a year.

Consortium 2000 provides telecommunications consulting services to a
diversified client base. Consortium 2000 analyzes a customer's long distance
calling patterns, usage volume and specialized telecommunications needs and
recommends equipment requirements, calling plans and carriers to be utilized to
achieve the most effective result. Consortium 2000 also acts as a sales agent
for a broad base of long distance carriers, including the Company, and is
compensated in the form of commissions for business placed with each such
carrier.

TRANSMISSION NETWORK

The Company's transmission network provides the connections from the
subscriber to the call destination. A call may be completed by using either (a)
a fixed-cost, long-haul circuit, connecting the call at a switch center to the
destination city where the call is terminated by a LEC which directs it to the
called party or (b) when all fixed-cost circuits connected to the called city
are in use or if the called area is not served by existing fixed-cost circuits,
switched access services from other carriers. Switched access services are usage
sensitive and may cost more or less than that of a fixed-cost circuit, depending
on the volume of calls to a particular destination.

36
<PAGE> 37

Switched access circuits are "usage sensitive" because the rates paid for
them may vary with the day, time, frequency and duration of telephone calls
transmitted through such circuits. In contrast, the rates paid by the Company to
lease dedicated line facilities are fixed and therefore do not vary with usage
or time of day. As a result, the Company's fixed-cost circuits are less
expensive to use for routes over which the Company carries high volumes of long
distance traffic. Because the amount the Company charges for long distance
telephone calls is not based on the cost to transmit such calls, long distance
calls transmitted over high-volume, fixed-cost routes generally are more
profitable to the Company than long distance calls transmitted over usage
sensitive circuits, assuming a sufficient volume of calls is routed over the
fixed-cost route. Consequently, to the extent possible, the Company attempts to
connect calls through transmission facilities which are not usage sensitive.
Profitability of the Company's operations depends largely on utilizing
transmission circuits on a cost effective basis. Accordingly, the Company's
strategy is to reduce overall transmission costs by entering into long-term
agreements with other carriers to lease bulk transmission facilities or other
dedicated lines at fixed monthly rates and to route as many of its customers'
calls as is possible over such lines.

Except for certain pricing agreements, the dedicated lines used by the
Company are generally leased on a month-to-month basis. While these
month-to-month arrangements may be terminated upon notice by the Company, they
may not be terminated under current law by the carrier unless the Company fails
to comply with the terms of the lease or unless the service is terminated for
the Company and all other long distance telephone carriers. Generally, rates
charged under these leases may be increased or decreased by the carriers upon
notice after filing with the FCC for interstate circuits, or applicable state
public utilities commissions ("PUCs") for intrastate circuits, provided the
rates charged apply equally to all users of the services. Since the FCC has
required the detariffing of most interstate service offerings no later than
September 1997, revisions to such rates by carriers will no longer be required
to be pre-filed with the FCC, but will be governed by contracts between the
Company and the carriers.

Subject to the foregoing, the Company's strategy is to continue to lease
bulk and/or flat rate circuit capacity and to resell that capacity at usage
sensitive rates to its subscribers. The Company continuously reviews traffic
study programs to analyze its volume of call traffic in light of its
then-existing circuit capacity. All circuits which the Company utilizes, with
the exception of local switched access circuits to a switch center, are
generally offered by several common carriers, and any decision concerning which
types of circuits to be used is typically based on individual route cost as well
as the transmission quality of the circuits provided. The continued availability
to the Company of transmission facilities leased at bulk rates is fundamental to
the economic and financial viability of its business.

CALL SWITCHING EQUIPMENT

The Company owns certain computerized network digital switching equipment
that routes certain of its customers' long distance calls. Other customers'
calls are routed through facilities which are leased by the Company from a
variety of other carriers. A switch is a computer controlled digital processor
designed primarily to route and track telephone calls. Switching equipment
operates like an electronic "toll booth," routing each call to its destination
and tracking the length of the call for billing purposes. A secondary function
of a switch is to determine and effect the least expensive route for each call
among a variety of routing options. Currently the Company owns two digital
switching centers and leases switch capacity from WilTel. Two of the switching
centers are located in Southern California and one is located in New York, New
York. The Company's subscribers can access this call switching equipment through
equal access, which only requires dialing "1", plus the area code and telephone
number, by using a dedicated line, or by dialing a seven- or ten-digit number,
authorization code, identification number (for billing), area code and telephone
number. Once a customer accesses the switching equipment, the equipment
"answers" the telephone call, verifies the caller's billing status, routes the
call to the dialed destination and monitors the call's duration for billing
purposes. The Company has programmed its switching equipment to select the most
cost-effective transmission circuit then available to the Company to complete a
call as dialed. In addition to networking, the Company's switching equipment
verifies customers' pre-assigned authorization codes, records billing data and
monitors system quality and performance. To satisfy increasing or anticipated
usage of its long distance

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<PAGE> 38

network, the Company has added and will continue to add circuit capacity at
existing switching centers by increasing the number of ports on existing
switches.

RATES AND CHARGES

The Company charges customers on the basis of minutes or partial minutes of
usage at rates that vary with the distance, duration and time of day of the
call. The rates charged are not affected by the cost to the Company of the
particular transmission facilities selected by the Company's network switching
centers for transmission of the call. Discounts are available to customers that
generate higher volumes of monthly usage. The Company continually evaluates the
rates and fees charged for its services and, under appropriate circumstances,
may implement different pricing arrangements for existing or new services.

The Company endeavors to charge rates that are generally lower than those
charged by AT&T and competitive with those charged by other long distance
carriers. The rates offered by the Company may be adjusted in the future as AT&T
and other interexchange carriers continue to adjust their rates.

Once a customer has submitted the proper paperwork and is approved by the
Company's credit department, all pertinent information, e.g., telephone numbers,
calling card data, address, contact person, billing address, etc. is entered
into the Company's information system and the Company's computer network. The
Company's information system then generates the appropriate electronic
instructions which connect the customer to the Company's network.

Data regarding calls made by the client come from several sources: the
Company's switches; its calling card system; or WilTel, AT&T, Sprint and/or MCI.
After receiving the records of the calls on magnetic media, the Company inputs
the data into the billing system for processing.

Processing by the Company's information system includes: checking for
duplicate call records, confirming that calls to and from numbers that are not
in the Company's system are flagged for further research, verifying that the
origination and termination of calls are from valid telephone numbers and
circuits, and verifying that valid rates exist for each call. Calls which fail
any initial processing checks are placed in a rejected call file for additional
analysis.

All approved calls are rated, taxed and a bill is generated for the
individual client. The Company's in-house personnel review printed bills for
accuracy and appearance before the Company mails them to customers.

Substantially all of the Company's billing services are currently provided
to the Company by a third party. The Company intends to use a portion of the
proceeds of this Offering for the installation of an in-house billing system.
See "Use of Proceeds" and "Management Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources."

MARKETING

The Company's marketing efforts have been and continue to be directed
principally at small- to mid-sized business and larger residential users. The
Company derives the majority of its revenues from the sale of long distance
telecommunications services to commercial subscribers. Commercial subscribers
typically use higher volumes of telecommunications services than residential
customers and concentrate usage on weekdays and business hours when rates are
highest. Consequently, commercial customers, on average, generate higher
revenues per account than residential customers. While the Company's focus is on
commercial customers in major metropolitan areas, it can provide long distance
services to customers in any area of the United States. The largest
concentration of the Company's customers is in Southern California.

The Company principally markets long distance services through independent
sales agents. These agents are not restricted to specific territories and their
sales efforts are not directed, as to location, by the Company. Through the
Company's marketing agreement with Consortium 2000, a network of approximately
1,000 agents have actively marketed the Company's services over the past two
years. The majority of the Company's new accounts over this period have been
procured by Consortium 2000-affiliated agents.

Consortium 2000 maintains agent relationships with various long distance
carriers. The Merger will provide marketing synergy in that the Company will
have the flexibility to place customers with carriers other than the Company who
might be in a better position to service that customer's particular needs, while
still

38
<PAGE> 39

benefiting from the customer relationship through receipt of agent fees paid by
the third-party carrier. From the customer's perspective, this flexibility
represents a value-added element of the client relationship. The Company also
has the ability to divide a customer's business between several carriers,
including the Company, thereby avoiding the problem of risk concentration
resulting from very large accounts. In the case of such large accounts, as long
as the Company is managing the customer's long distance traffic, over time,
additional traffic can be directed to the Company as the situation warrants.

COMPETITION

As a result of the AT&T Divestiture Decree, numerous competitors, in
addition to AT&T, have entered the long distance telecommunications market,
resulting in profound changes in the competitive aspects of the industry. The
Company competes directly with a number of facilities based common carriers,
including AT&T, MCI and Sprint, all of which have substantially greater
financial, marketing and product development resources than the Company. In
addition, the Company competes with hundreds of smaller regional and local
non-facilities based carriers and resellers. AT&T remains the dominant company
providing domestic long distance telephone service, and its pricing and services
largely determine the prices and services offered by resellers and long distance
telephone carriers providing long distance telephone service. Because the
regulation and operations of AT&T and the BOCs are undergoing considerable
change, it is difficult to predict what effects the future operations and
regulation of AT&T will have on the Company's existing and prospective business
operations.

In recent years, increased competition among long distance carriers has
resulted in an overall reduction in long distance telephone rates. The impact on
net income of these reductions has been offset somewhat by networking
efficiencies, declining costs in access charges and readily available
transmission facilities, largely due to the expansion of circuit capacity
through the installation of fiber optic transmission facilities. The advent of
fiber optic technology has resulted in another major impact on the long distance
market. Initially, long distance carriers competed with AT&T based strictly on
price. Discounts of 25% to 35% from AT&T rates were typical, because long
distance carriers were attempting to build market share and because their
transmission quality was generally inferior to that of AT&T. The introduction of
fiber optic facilities, however, effectively eliminated AT&T's transmission
quality advantage. Gradually, the industry and consumers begin to recognize the
importance of quality service as well as price, and the price differential has
decreased. Recognition that competition is not solely based on price has led to
a greater emphasis on customer service, with many companies adding product
variety, customized billing and other value-added services.

Unlike the Company's larger facilities based competitors which own their
own transmission facilities, the Company is vulnerable to changes in rates
charged by facilities based carriers for use of their facilities. The Company
has attempted to minimize its vulnerability to cost increases through the
long-term leasing of fiberoptic and other digital transmission circuits. While
cost or concessions paid to customers may, in certain cases, be the primary
consideration for a customer's selection of long distance telephone service, the
Company believes that other factors are significant, including ease of obtaining
access to the long distance network, quality of the telephone connection format
and management information presented in the specialized billing data generated
by the carrier, and enhanced services such as "800" service, repair service and
automated collect calling.

GOVERNMENT REGULATION

General

The Company competes in an industry that, to a large degree, continues to
be regulated by federal and state government agencies. At approximately the same
time as the required divestiture of the Bell telephone companies by AT&T in
1984, the FCC announced rules that were created to foster a self-regulating
interstate telecommunications industry, relying upon competitive forces to keep
rates and services in check.

The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, including the Company. Under Section 214 of
the Federal Communications Act, the FCC must certify a communications common
carrier before it may provide international services. The Company has obtained
Section 214 authorization to provide international services by means of resale.

39
<PAGE> 40

At December 31, 1996, the Company had obtained a certificate of public
convenience and necessity or equivalent documents from 35 states to provide long
distances services within those states. Regulations within each of these states,
as they pertain to completing direct dial long distance calls for the Company's
customers within the state, are virtually static. As the Company expands the
geographic scope of its direct dial long distance business, it will be required
to obtain additional state regulatory approvals to provide intrastate long
distance service.

Federal Regulation

In 1981, the FCC substantially deregulated the interstate activities of
terrestrial non-dominant inter-exchange resale carriers such as the Company. The
FCC later extended this deregulatory policy to resellers of satellite services,
resellers affiliated with independent telephone companies and facilities based
carriers (such as MCI and Sprint) which compete with AT&T. It retained its
jurisdiction over customer complaint procedures and basic statutory common
carrier obligations to provide nondiscriminatory services and rates. The FCC
ruled that interstate carriers subject to these deregulatory actions were no
longer subject to certification by the FCC or to tariff filing requirements
under the Communications Act.

These changes in FCC policy, as well as substantial deregulation of AT&T
have had the effect of lowering the rates of AT&T, the dominant provider of long
distance telephone service and pricing model for the Company, and other
providers and resellers of long distance services. The potential continued
deregulation of AT&T may have a material adverse effect on the Company's ability
to compete effectively with AT&T.

In connection with the 1984 divestiture by AT&T of the RBOCs, the RBOCs,
and subsequently General Telephone and Electric Company, were directed to
provide all long distance carriers and resellers the same high quality access
and technical interconnection that was previously provided solely to AT&T. The
FCC determined that the access charges to be paid by long distance carriers such
as the Company and other carriers not receiving access equal to that afforded
AT&T would be set initially at a rate offering a substantial discount from the
access charges paid by AT&T. Under equal access, the Company's subscribers enjoy
the convenience of a universal and simple dialing plan and the Company is
provided with equal access to the local exchange. Within the Company's primary
marketing areas, the equal access conversion process is virtually complete;
therefore, the Company no longer receives the above mentioned discount and must
pay the same access charges as are paid by AT&T.

Interstate Access Proceeding

In an effort to encourage competition in the provision of interstate access
service, in 1993 the FCC developed interim rules for the pricing of "access
transport" service. Access transport service refers to the connection provided
by LECs between long distance carriers' long distance facilities and the
customer's telephone. These interim rules were designed to: 1) align the
transport charges more closely to the way costs are incurred by reflecting both
flat rate elements and usage sensitive elements; and 2) remain in effect through
October 31, 1995.

The FCC extended the interim rules indefinitely, in part, in anticipation
of the Telecommunications Act of 1996. Several carriers appealed the interim
rules to the US Circuit Court of Appeals for the District of Columbia which
found that the FCC failed to justify important elements of the interim rules.
The Court remanded the matter back to the FCC.

In response to the Court and the Telecommunications Act of 1996, the FCC
has developed a new interim formulation of access pricing which is set to expire
no later than June 30, 1997. On December 23, 1996 the FCC instituted a
rulemaking proceeding designed to comprehensively reform access charges and
increase competition. In this proceeding the FCC is considering how best to
regulate access and associated transport rate structures, so that prices for
access and various access elements will become, by competition or other means,
more reflective of economic costs. While the Company cannot now predict the
outcome of the proceeding, the charges assessed to both the Company and its
competitors are likely to be affected. The rulemaking is expected to be resolved
in 1997, but implementation of new cost structures may be phased in by region or
service. In the event that this rulemaking proceeding has not concluded by June
30, 1997, the FCC may extend the interim formulation date.

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<PAGE> 41

FCC Forbearance Policy

In 1983, the FCC exempted "non-dominant" long distance carriers from being
required to publicly file rates with the FCC. As a result of the FCC's
"forbearance" policy, non-dominant long distance carriers such as the Company
were permitted to enter into individual contracts with customers without
disclosing in public tariffs the rates charged to such customers to their
competitors or its other customers. In November, 1992, however, the U.S. Court
of Appeals for the D.C. Circuit found the FCC's "forbearance" policy to be
unlawful, ruling that the forbearance policy violated federal communications law
governing the FCC. In response to the ruling by the federal appeals court, MCI
and the U.S. Justice Department, on behalf of the FCC, filed separate appeals
with the U.S. Supreme Court requesting that the appeals court ruling be
overturned. In June, 1994, the U.S. Supreme Court upheld the ruling in the case.
As a result, all long distance carriers, including the Company, are required to
publicly file with the FCC the rates charged for their long distance services.

Subsequently, the Telecommunications Act of 1996 amended the Communications
Act of 1934 to allow the FCC to forbear from applying any provision of the
Communications Act if enforcement of the provision: (1) is not necessary to
ensure that charges are just, reasonable and non-discriminatory; (2) is not
necessary to protect consumers; and (3) is consistent with the public interest.
On October 31, 1996, the FCC released an order finding that the statutory
conditions of the Telecommunications Act of 1996 were met with regard to most
tariff requirements for nondominant long distance carriers. The FCC's order
required all nondominant carriers to cancel their tariffs for interstate,
domestic, interexchange services on file with the FCC no later than September
22, 1997, and not file any such tariffs thereafter. International services,
however, continue to be tariffed.

Recent Legislation

In February, 1996, the Telecommunications Act was signed into law. The
purpose of the Telecommunications Act is to promote competition in all aspects
of telecommunications. The Telecommunications Act requires telecommunications
carriers to interconnect with other carriers and requires local exchange
carriers to provide for resale, number portability, dialing parity, access to
rights-of-way and compensation for reciprocal traffic. Additionally, incumbent
local telephone companies are required to provide nondiscriminatory unbundled
access, resale at wholesale rates and notice of changes that would affect
interoperability of facilities and networks. The FCC is to adopt mechanisms to
ensure that essential telecommunications services are affordable.

The Telecommunications Act also provides that RBOCs may provide long
distance service upon enactment that is out-of-region or incidental to: (i)
audio/video programming; (ii) internet services for schools; (iii) mobile
services; (iv) information or alarm services; and (v) telecommunications
signaling. In order for a RBOC to provide in-region long distance service, the
Telecommunications Act requires the RBOC to comply with a comprehensive
competitive checklist and expands the role of the U.S. Justice Department in the
FCC's determination of whether the entry of a RBOC into the competitive long
distance market is in the public interest. Additionally, there must be a real
facilities based competitor for residential and business local telephone service
(or the failure of the potential providers to request access) prior to a RBOC
providing in-region long distance service. RBOCs must provide long distance
services through a separate subsidiary for at least three years. Until the RBOCs
are allowed into long distance or three years have passed, long distance
carriers with more than 5% of the nation's access lines may not jointly market
RBOC resold local telephone service, and states may not require RBOCs to provide
intra LATA dialing parity except for single LATA states and states that had
earlier required an RBOC to implement such parity.

Telecommunications companies may also provide video programming and cable
operators may provide telephone service in the same service area under certain
circumstances. The Telecommunications Act prohibits telecommunications carriers
and cable operators from acquiring more than 10% of each other, except in rural
and other specified areas.

The impact of the Telecommunications Act on UStel is unknown because a
number of important implementation issues (such as the nature and extent of
continued subsidies for local rates) still need to be decided by state or
federal regulators. However, the Telecommunications Act offers opportunities as
well as risks. The new competitive environment should lead to a reduction in
local access fees, the largest single cost

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<PAGE> 42

in providing long distance service today. The removal of the long distance
restrictions on the RBOCs is not anticipated to have an immediate significant
impact on UStel because of the substantial preconditions that must be met before
the RBOCs can provide most in-region long distance services. However, the entry
of these local telephone companies into long distance telecommunications
services could result in new competition and there is a possibility that the
local telephone companies will be able to use local access to gain a competitive
advantage over other long distance providers such as the Company.

On August 1, 1996, the FCC announced the adoption of rules relating to the
manner in which and the price at which potential competitors in the local
services market will be able to obtain local facilities and services from the
incumbent telephone company. Subsequently, the FCC's rules adopted in the August
1, 1996 Order were published and challenged in federal court. Pending the
outcome of this challenge to the FCC's rules, the U.S. Court of Appeals for the
Eighth Circuit stayed the implementation of the relevant rules adopted by the
FCC under the Telecommunications Act of 1996. Iowa Utilities Board et al. v.
Federal Communications Commission, Order Granting Stay Pending Judicial Review,
4 C.R. (P&F) 1360 (8th Cir. 1996). As this case is still pending, it is unclear
how any court decision and its subsequent impact on the FCC's rules will affect
the Company.

State Regulation

In those states prohibiting intrastate resale, the Company may not engage
in intrastate operations. In those states where intrastate resale is permitted
(at least on an inter LATA basis), the Company may be required to obtain state
regulatory certification prior to commencing operations. At December 31, 1996,
the Company had received authorization to provide telecommunications services to
its customers in approximately 35 states, and is applying for authorization to
provide telecommunications services to customers in other states. In addition,
the Company is required to maintain on file at the state regulatory commissions
in those states a tariff or schedule of its intrastate rates and charges.
Various state legislatures and public utility commissions are considering a
variety of regulatory policy questions which could adversely affect the Company.
At this time, however, it is impossible to determine what effect, if any, such
regulations, including the cost of compliance with such regulations, may have on
the operations of the Company.

EMPLOYEES

At December 31, 1996, the Company had 49 full-time employees, including
three executives, five network, technical and operations personnel, and 41
administrative and support personnel. None of the Company's employees are
represented by a union. The Company believes that its employee relations are
good. As of December 31, 1996, Consortium 2000 employed 17 persons full time,
including two executives and 15 operations and accounting personnel.

PROPERTIES

The Company leases from a third party approximately 5,000 square feet of
office space in Las Vegas, Nevada, which it uses as its corporate headquarters
and operations center. The facilities are leased for a term expiring in July,
1998. Rental of approximately $7,500 per month is subject to adjustment based on
changes in various cost of living indices. Consortium 2000 subleases from a
third party approximately 4,900 square feet of office space in Culver City,
California, which it uses as its corporate headquarters and operations center.
The facilities are leased for a term expiring in June, 1998. The monthly rental
payment is approximately $5,000.

The Company also is subject to several operating leases relating to
properties in which its switching facilities are located expiring on various
dates through 1998. See Note 4 to Notes to Financial Statements.

LEGAL PROCEEDINGS

The Company is a party from time to time to litigation or proceedings
incident to its business. There is no pending legal proceeding to which the
Company is party that in the opinion of management is likely to have a material
adverse effect on the Company's business, financial condition or results of
operations.

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<PAGE> 43

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------
<S> <C> <C>
Robert L.B. Diener 48 Chairman and Chief Executive
Officer
Jerry Dackerman 46 President, Chief Operating Officer
and Director
Barry K. Epling 44 Executive Vice President,
Assistant Secretary and Director
Wouter van Biene 47 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Abe M. Sher 35 Vice President and General Counsel
Royce Diener(1) 78 Director
Andrew J. Grey(1) 41 Director
Noam Schwartz 45 Director
Ann Graham Ehringer, PhD(1) 57 Director, nominee
</TABLE>

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

Robert L. B. Diener served the Company as a consultant from July, 1995, to
January 1996, devoting a substantial portion of his time to the Company's
business. He became Executive Vice President in January, 1996, President and
Chief Executive Officer on August 14, 1996 and Chairman and Chief Executive
Officer on December 23, 1996. From its inception in 1986 through 1993, Mr.
Diener served as President and Chief Executive Officer of American Health
Properties, Inc., a New York Stock Exchange ("NYSE") listed real estate
investment trust specializing in health care. From 1976 through 1986, Mr. Diener
held various positions with American Medical International, Inc., ("AMI"), a
multinational hospital management company listed on the NYSE and included in the
S&P 500, most recently Group Vice President -- Corporate Development. For over
seven years, he was a principal business development officer in the
international division of AMI, overseeing projects worldwide. For four years
prior to joining AMI, Mr. Diener was engaged in the private practice of law with
a law firm in Los Angeles, California, concentrating in banking, real estate,
corporate and securities law. Mr. Diener is the son of Royce Diener.

Jerry Dackerman served the Company as Executive Vice President and Director
since August 14, 1996, and on December 23, 1996, was elected President and Chief
Operating Officer. Mr. Dackerman founded Consortium 2000 in 1988 as a
communications user group specializing in the design of large scale
telecommunications networks utilizing a group purchasing approach. Mr. Dackerman
is President and Chief Executive Officer of Consortium 2000 and will continue to
serve in such capacities after the Merger is completed. Mr. Dackerman's initial
experience in the telecommunications field was with Executone, Inc. and RCA
American Communications. In 1977, he founded Robin & Dackerman, Inc., an
international telecommunications consulting firm specializing in the design and
implementation of telecommunications networks. Mr. Dackerman is also a director
of New USA Growth Fund.

Barry K. Epling has served as Vice President and a director since March 1,
1993, and served as Executive Vice President and Chief Operating Officer from
September, 1995 to December 31, 1996. On December 23, 1996 he became Executive
Vice President. Prior to joining the Company, he served as a consultant to the
Company. Mr. Epling was employed by AT&T in network and telecommunications
equipment implementation and management, as well as in other managerial
capacities. Before joining AT&T, Mr. Epling worked in network and equipment
implementation and management for RCA Corporation. Subsequent to RCA and AT&T,
Mr. Epling was a principal of Alliance Card, where he developed the
telecommunications network, wrote all communications protocols and managed the
development of software to integrate UNIX, IBM AS 400 and DOS systems. Prior to
March 1, 1993, when he joined the Company, Mr. Epling served as a network and
systems consultant to several long distance carriers, including the Company.

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<PAGE> 44

Dr. Wouter van Biene has been the Senior Vice President, Chief Financial
Officer and Secretary of Consortium 2000, Inc. since 1991. On August 14, 1996,
he became Executive Vice President, Chief Financial Officer and Secretary of
UStel and will continue to serve in his capacity as Senior Vice President and
Chief Financial Officer of Consortium 2000 after the consummation of the Merger.
From 1986 to 1991, he was a partner with Robin & Dackerman, Inc., a
telecommunications consulting firm. From 1972 to 1986, he was employed by AMI
where he achieved the level of Group Vice President -- Information Systems and
Chief Financial Officer for International Operations. Dr. van Biene earned a
doctorate in Economics and Business Administration at the University of
Amsterdam, the Netherlands.

Abe M. Sher was appointed by the Company as its General Counsel in January,
1996. From June, 1995 to January, 1996, Mr. Sher was an advisor to the Company.
From 1994 through 1996, Mr. Sher served as a corporate finance consultant to
Micro Bell, Inc., a telecommunications/paging hardware manufacturer. From 1993
through 1995, Mr. Sher served as General Counsel for SpaceWorks, Inc., an
international service provider specializing in customized on-line
telecommunications applications for large corporations and associations. From
1989 to 1991, Mr. Sher was also a principal and served as General Counsel of
Atria Corporation, a real estate development company based in Southern
California. From 1986 to mid-1995, Mr. Sher was also engaged in the private
practice of law in Los Angeles, California.

Royce Diener has served as an advisor to the Company since July, 1995,
became a director of the Company in January, 1996 and served as Chairman from
August 14, 1996 to December 23, 1996. Mr. Diener served for over 18 years as
President, then Chairman and Chief Executive Officer of AMI. He serves on the
Board of Directors of Acuson, Inc. and American Health Properties, Inc., both
listed on the NYSE. Among private companies, Mr. Diener serves on the Board of
Directors of Harvard Medical International, an affiliate of Harvard University.
He recently completed a ten-year term as a director of Advanced Technology
Ventures, a registered investment firm located in Boston, Massachusetts, and
Palo Alto, California. Mr. Diener is the father of Robert L. B. Diener.

Andrew J. Grey served as Executive Vice President -- Finance, Chief
Financial Officer from January 1996 to August 14, 1996 and has been a director
of the Company since January 1996. From June, 1995 until January, 1996, Mr. Grey
was a consultant to the Company. Mr. Grey is a certified public accountant. Mr.
Grey joined the accounting firm of Solomon, Ross, Grey & Company in 1987. Mr.
Grey began his accounting career with Ernst & Whinney in 1979, where he served
as both an audit supervisor and tax manager and later joined The Baldwin
Company, a real estate developer, where he was employed as Senior Vice
President, Treasurer and Controller and was responsible for accounting, computer
systems and financing.

Noam Schwartz founded the Company in July, 1991 and served as President,
Chief Executive Officer and a director from March 20, 1992 to August 14, 1996.
He was an Executive Vice President of the Company from August 14, 1996 to
December 31, 1996. Mr. Schwartz was a principal of Homestead Management, Inc., a
real estate management company, and Homestead Group Associates, a real estate
development and construction company which constructed over 2,500 apartment
units between 1988 and 1991. Mr. Schwartz also serves as a director of Triangle
Development, Inc. and Great American Homes, Inc.

Ann Graham Ehringer, PhD, will become a director effective at the
conclusion of the Offering. Dr. Ehringer has been a director of the Family and
Closely-Held Businesses Program and associate professor in the Entrepreneur
Program in the Marshall School of Business of the University of Southern
California since July 1996. From 1990 to 1996 Dr. Ehringer has acted as a
private consultant to the owners and managers of small and mid-sized companies.
From September 1992 to the present she has also been Chairman and Chief
Executive Officer of S.P. Land, Inc. and S.P. Lodge, Inc., a real-estate holding
business and a fine-dining business, respectively. Dr. Ehringer has a Ph.D. in
Management from the University of Southern California, completed the
Owner/President, Management Program at the Harvard Business School, received a
M.A. from Stanford University and a B.A. from the University of Hawaii. She is a
member of the Executive Advisory Panel for the "Executive" a publication of the
Academy of Management and of the National Association of Corporate Directors.
She serves on the boards of directors of Dycam, Inc. (AMEX), Styles-On-Video,
Inc. (AMEX) and on other private and not-for-profit organizations.

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<PAGE> 45

BOARD OF DIRECTORS

Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified or until their
death, resignation or removal. The Company plans to reimburse its non-employee
directors for reasonable expenses incurred in attending meetings of the Board.

The Audit Committee of the Board of Directors, comprised of Royce Diener
and Andrew J. Grey, is responsible for making recommendations concerning the
engagement of independent certified public accountants, approving professional
services provided by the independent certified public accountants and reviewing
the adequacy of the Company's internal accounting controls. The Compensation
Committee, comprised of Royce Diener and Andrew J. Grey, is responsible for
recommending to the Board of Directors all officer salaries, management
incentive programs and bonus payments.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to August 1996, the Company did not have a compensation committee.
Messrs. Schwartz and Epling participated in deliberations concerning
compensation of executive officers during 1995. None of the executive officers
of the Company have served on the board of directors or on the compensation
committee of any other related entity.

EXECUTIVE COMPENSATION

The following table sets forth all compensation received by the Company's
Chief Executive Officer and its other most highly compensated executive officers
and key employees whose total cash and cash equivalent compensation exceeded
$100,000 for services rendered to the Company for the years ended December 31,
1994, 1995 and 1996.

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
PAYOUTS
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
------------ OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY #
- ---------------------------------------------------------- ---- ------------ ------------
<S> <C> <C> <C>
Robert L.B. Diener(1)..................................... 1996 $ -- --
Chairman, Chief Executive Officer and Former President 1995 -- --
1994 -- --
Jerry Dackerman(1)........................................ 1996 -- --
President, Chief Operating Officer and Director 1995 -- --
1994 -- --
Wouter van Biene(1)....................................... 1996 -- --
Executive Vice President, Chief Financial Officer,...... 1995 -- --
Secretary and Director 1994 -- --
Barry K. Epling........................................... 1996 102,440 100,000
Executive Vice President, Assistant Secretary, 1995 93,000 --
Director and Former Chief Operating Officer 1994 93,000 --
Noam Schwartz............................................. 1996 120,000 100,000
Former President, Chief Executive Officer and Director 1995 100,000 210,000
1994 60,000 210,000
</TABLE>

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

(1) In January 1997, the Company entered into three-year employment agreements,
retroactive to August 15, 1996, with Messrs. Diener, Dackerman and van
Biene, at annual salaries of $200,000, $180,000, and $140,000, respectively,
with bonuses to be determined at the discretion of the Board of Directors.

The Company has entered into employment agreements with Noam Schwartz and
Barry Epling that provide for annual salaries of $120,000 (of which Mr. Schwartz
only drew $100,000 in 1995) and $93,600, respectively. Mr. Schwartz's employment
agreement provides for a three-year term ending March 1, 1997. Mr. Epling's
employment agreement provides for a five-year term commencing December 1, 1993,
although

45
<PAGE> 46

the salary provided for in such agreement did not commence until February 1,
1994. Each of the employment agreements also provides for bonuses to be paid at
the discretion of the Company's Board of Directors.

The compensation of Robert L. B. Diener, in his capacity as the Company's
former Executive Vice President and Secretary, was payable by the Company as
consulting fees to Diener Financial Group, a company wholly owned by Mr. Diener,
under a one-year consulting agreement effective September 1, 1995. Pursuant to
this arrangement, the Company agreed to pay Mr. Diener $7,500 per month. In
addition, Mr. Diener was to personally receive $5,000 per month for a one year
period starting November 1, 1995. The consulting agreement further provided that
Diener Financial Group and Mr. Diener were to receive five-year warrants to
purchase up to 100,000 shares each of Common Stock at a price of $5.00 per
share. On August 14, 1996, Mr. Diener became President and Chief Executive
Officer of the Company.

In September, 1996, the Company entered into a two-year employment
agreement with Abe M. Sher that provides for a monthly salary of $6,950. Mr.
Sher's employment commitment is for 50% of his working time. The Company
previously granted Mr. Sher five-year warrants to purchase up to 200,000 shares
of Common Stock at $5.00 per share and issued to him 32,000 shares of Common
Stock. All of such warrants are currently exercisable. The 32,000 shares of
Common Stock are restricted from transfer for two years from the date of grant
and are forfeitable to the Company if Mr. Sher elects to terminate his
employment with the Company during that two-year period.

1993 STOCK OPTION PLAN

The 1993 Stock Option Plan (the "Stock Option Plan") provides for the grant
of options to acquire the Company's Common Stock ("Options"), the direct grant
of shares of the Company's Common Stock ("Stock Awards"), the grant of stock
appreciation rights ("SARs"), or the grant of other cash awards ("Cash Awards")
(Stock Awards, SARs and Cash Awards collectively are referred to herein as
"Awards"). Options and Awards under Stock Option Plan may be issued to
executives, key employees and others providing valuable services to the Company
and its subsidiaries. The Options issued may be incentive stock options or
nonqualified stock options. A maximum of 450,000 shares of Common Stock of the
Company may be issued under the Stock Option Plan. Of this amount, 40,000
options are available for grant. The Company anticipates that it will seek
stockholder approval of a proposal to increase the number of shares that may be
issued under the Stock Option Plan by an additional 350,000 shares. If any
change is made in the stock subject to the Stock Option Plan, or subject to any
Option or SAR granted under the Stock Option Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, split-up,
combination of shares, exchange of shares, change in corporate structure or
otherwise), the Stock Option Plan provides that appropriate adjustments will be
made as to the maximum number of shares subject to the Stock Option Plan and the
number of shares and exercise price per share of stock subject to outstanding
options.

The Stock Option Plan is administered by the Board of Directors of the
Company or a committee appointed by the Board. The exercise price of all options
granted under the Stock Option Plan must be at least equal to the fair market
value of such shares at the date of grant. The maximum term of options granted
under the Stock Option Plan is 10 years. With respect to any participant who
owns stock representing more than 10% of the voting rights of the Company's
outstanding capital stock, the exercise price of any option must be equal at
least to 110% of the fair market value of such shares on the date of grant.

Options granted under the Stock Option Plan are nontransferable other than
by will or by the laws of descent and distribution upon the death of the option
holder and, during the lifetime of the option holder, are exercisable only by
such option holder. Termination of employment at any time for cause immediately
terminates all options held by the terminated employee.

At December 31, 1995, there were outstanding options to acquire 210,000
shares of the Company's Common Stock under the Stock Option Plan. These options
were granted in January, 1994 to Noam Schwartz, the Company's former President,
at an exercise price of $7.50 per share, one-third of which will vest each year
following the date of grant. As of December 31, 1995, no options had been
granted to any other executive officers of the Company and no options had been
exercised. In January, 1996, the Company's Board of Directors approved the
reduction of the exercise price of Mr. Schwartz's outstanding options to $5.00
per

46
<PAGE> 47

share. In January, 1996, the Company also granted to each of Noam Schwartz and
Barry Epling from the Stock Option Plan, options to purchase 100,000 shares of
Common Stock at $5.00 per share. In June, 1996, Mr. Epling exercised such
options in connection with the Company's acquisition of a switch owned by Mr.
Epling. See "Certain Transactions."

LIMITATION OF DIRECTOR'S LIABILITY AND INDEMNIFICATION

The Company's Articles of Incorporation limit the liability of its
directors in their capacity as directors to the fullest extent permitted by the
Minnesota Business Corporation Act. Specifically, directors of the Company will
not be personally liable for monetary damages for breach of fiduciary duty as
directors except liability for (i) any breach of the duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends or
other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (iv) violations of certain Minnesota
securities laws, or (v) any transaction from which the director derives an
improper personal benefit.

The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota Indemnification Statute (Minn. Stat. sec. 302A.521) for a complete
statement of such indemnification rights. The Company's Bylaws also require the
Company to provide indemnification to the fullest extent of the Minnesota
Indemnification Statute.

Pursuant to the terms of the Underwriting Agreement, the directors and
officers of the Company also are indemnified against certain civil liabilities
that they may incur under the Securities Act in connection with this Offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to officers, directors or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.

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<PAGE> 48

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of December 31, 1996 and as adjusted
to give effect to the sale of 1,250,000 Units by the Company and 100,000 Units
by the Selling Stockholder in the offering by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each director of the Company owning Common Stock, (iii) each executive officer
of the Company owning Common Stock and (iv) all executive officers and directors
of the Company as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED SHARES SHARES BENEFICIALLY
PRIOR TO THE BEING OWNED AFTER
OFFERING(1) OFFERED OFFERING(1)
-------------------- ------- -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER NUMBER PERCENT
- ----------------------------------- -------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Robert L.B. Diener(2).............. 210,000 9.0% -- 210,000 4.3%
Jerry Dackerman(3)................. -- * -- -- *
Wouter van Biene(3)................ -- * -- -- *
Abe M. Sher(4)..................... 232,000 10.0 -- 232,000 4.8
Barry Epling(5).................... 202,851 9.5 -- 202,851 4.3
Royce Diener(3)(6)................. 1,019,833 46.1 200,000 819,833 17.4
Noam Schwartz(7)(8)................ 310,000 12.7 -- 310,000 6.2
Andrew J. Grey(9).................. 95,000 4.5 -- 95,000 2.0
Kamel B. Nacif(10)................. 750,000 26.0 -- 750,000 13.9
Jeflor, Inc.(11)................... 240,000 10.0 -- 240,000 5.0
SAS, Ltd........................... 112,000 5.3 -- 112,000 2.4
RGB/TAD Investment Partnership
(12)............................. 150,000 7.0 -- 150,000 3.2
All directors and officers as a
group (eight persons)(3)(13)..... 2,069,684 68.5 1,869,684 33.9
</TABLE>

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

* Less than one percent.

(1) In calculating percentage ownership, all shares of Common Stock which the
named stockholder has the right to acquire upon exercise of stock options
or conversion of convertible securities exercisable or convertible within
60 days of January 22, 1997, are deemed to be outstanding for the purpose
of computing the percentage of Common Stock owned by such stockholder, but
are not deemed to be outstanding for the purpose of computing the
percentage of Common Stock owned by any other stockholder. Percentages may
be rounded. Each of such persons may be reached through the Company at 2775
South Rainbow Boulevard, Suite 102, Las Vegas, Nevada 98102.

(2) Consists of 5,000 shares of Common Stock and warrants exercisable at
January 22, 1997 to purchase up to 100,000 shares of Common Stock owned by
the Diener Financial Group, and warrants to purchase up to an aggregate of
105,000 shares of Common Stock owned by Robert L.B. Diener, individually.

(3) Does not include 161,566, 170,961, and 132,664 shares of Common Stock to be
issued in the Merger to Messrs. Dackerman, van Biene and Royce Diener,
respectively, in exchange for their shareholdings in Consortium 2000.

(4) Consists of 32,000 shares of Common Stock and 200,000 shares of Common
Stock issuable upon the exercise of warrants that were exercisable within
60 days of January 22, 1997.

(5) Consists of 107,851 shares of Common Stock and 95,000 shares that Mr.
Epling has the right to acquire pursuant to the exercise of an option
granted by Noam Schwartz and his father, David Schwartz. The terms of the
options to acquire these shares are provided in separate Stock Option and
Repurchase Agreements between Mr. Epling and Noam and David Schwartz. The
Stock Option and Repurchase Agreements provide that the shares may be
purchased from such individuals at an exercise price of $1.00 per share.
The option is exercisable immediately and may be exercised at any time on
or before January 12, 1998, provided, however, that in the event Mr.
Epling's employment is terminated for reasons other than death or
disability, the option shall terminate immediately.

(6) Includes 612,750 shares owned by the Trust, a trust established by a group
of investors for which Royce Diener serves as trustee and 270,750 shares of
Common Stock which the Trust has agreed to purchase from the RGB/TAD
Investment Partnership and does not give effect to the possible exercise of
the option described in footnote (12) below. As trustee, Mr. Diener is
vested with the authority to distribute any income and/or the principal of
the Trust to its beneficiaries in the future. Also consists of 53,000
shares of Common Stock and warrants exercisable at January 22, 1997 to
purchase up to 83,333 shares of Common Stock.

(7) Consists of 310,000 shares issuable upon exercise of options granted under
the Company's Stock Option Plan.

(8) Does not give effect to the possible exercise of the option referred to in
footnote (5) above.

(9) Consists of 95,000 shares of Common Stock issued to Integrated Financial
Consultants, Inc., a company wholly owned by Mr. Grey.

48
<PAGE> 49

(10) Consists of 750,000 shares of Common Stock underlying 550,000 shares of
Series A Convertible Preferred stock issued to Mr. Nacif.

(11) Consists of warrants to purchase 240,000 shares of Common Stock. See
"Description of Securities -- Outstanding Warrants."

(12) Consists of an option to acquire 150,000 shares of Common Stock from the
Trust, at a purchase price of $6.00 per share, exercisable at any time
through February 5, 1999, or earlier if the Common Stock trades at $7.50
per share.

(13) Includes an aggregate of 893,333 shares of Common Stock as to which the
named directors and executive officers may acquire, as described in
footnotes (2), (4), (5), (6), (7) and (8) above.

CERTAIN TRANSACTIONS

The Company has advanced funds to Mr. Noam Schwartz. At December 31, 1995
and 1996, Mr. Schwartz owed the Company approximately $193,000 and $177,000,
respectively.

In mid-1995, the Company retained Consortium 2000 as a non-exclusive
independent sales representative on a commission basis. As part of the
consideration for its engagement, the Company agreed to issue Consortium 2000
warrants to purchase up to 300,000 shares of Common Stock. These warrants are
exercisable in increments of 50,000 shares upon the Company reaching certain
monthly revenue milestones for four years from the date of issuance. The minimum
exercise price of the warrants is $7.50 per share and increases depending on
when specified monthly revenue milestones are met. Royce Diener, a director of
the Company, is the Chairman of the Board of Consortium 2000. These warrants
will be canceled upon consummation of the Merger.

In June, 1995, the Company obtained a revolving line of credit from Bank
Leumi in the amount of $3,000,000, secured by certificates of deposit held by
the bank and guaranteed by Noam Schwartz. This line of credit was fully repaid
in July 1996.

In August, 1995, the Company agreed to engage the Diener Financial Group as
a financial consultant for a period of one year commencing September 1, 1995 and
agreed to grant to the Diener Financial Group five year warrants to purchase
100,000 shares of the Company's Common Stock at $5.00 per share. The sole
principal of the Diener Financial Group is Robert Diener, who currently is the
Company's Chairman and Chief Executive Officer. See "Management -- Executive
Compensation." Pursuant to the Diener Financial Group engagement, the Company
agreed to pay a consulting fee of $7,500 per month to the Diener Financial Group
and $5,000 a month to Mr. Diener personally. The Company also agreed to
additionally compensate the Diener Financial Group in an amount equal to 1%, 2%
and 3% of the senior debt, subordinated debt and equity proceeds, respectively,
raised by the Diener Financial Group for the Company. As of August 14, 1996, the
engagement agreement with the Diener Financial Group was terminated with no
additional sums owing to the Diener Financial Group.

In October, 1995, the Company obtained a $1,500,000 term loan from a group
of investors introduced to the Company by the Diener Financial Group. Of the
$1,500,000 loaned to the Company by the investor group, $500,000 came from Royce
Diener. The loan bore interest at 10% per annum payable quarterly and was due in
one year. The loan was secured by the Company's accounts receivable and
unrestricted deposit accounts of the Company to the fullest extent permitted by
law and was convertible at the lenders' option, in whole or in part, into shares
of the Company's Common Stock at the rate of $5.00 per share. The Company also
issued to the members of the investor group five-year warrants to purchase an
aggregate of up to 100,000 shares of Common Stock at $5.00 per share. The
warrants are allocable among the members of the investor group in proportion to
the amount loaned to the Company, which means that Royce Diener, who loaned
one-third of the total term loan, is entitled to one third of the warrants
(i.e., warrants to purchase 33,333 shares of Common Stock). In consideration for
arranging the term loan in 1995, the Company paid Robert Diener $15,000 (1% of
the proceeds raised). The $1,500,000 term loan was repaid by the Company in
January, 1996 from proceeds drawn under its new line of credit with Coast
Business Credit.

In January, 1996, the Company completed a private placement of 160,000
Units (consisting of 160,000 shares of Common Stock and 160,000 redeemable
common stock purchase warrants) raising net proceeds of approximately $775,000.
For assisting the Company in connection with this private placement, the Company
paid Robert Diener the sum of $25,000. In November, 1995, the Company granted
Mr. Diener 100,000 warrants exercisable at $5.00 per share, expiring October,
2000.

49
<PAGE> 50

In June, 1996, the Company acquired title to a telecommunications switch
owned by Mr. Epling for aggregate consideration in the amount of $716,375.
Consideration was paid by crediting $500,000 as payment for the issuance of
100,000 shares of Common Stock to Mr. Epling pursuant to the exercise of
employee stock options, cancelling approximately $109,949 in interim advances
made by the Company to TYC, Inc., a corporation wholly-owned by Mr. Epling, and
a cancellation of interim advances of approximately $75,522 made by the Company
to Mr. Epling for upgrading the switch, and the issuance of an additional 7,851
shares of Common Stock to Mr. Epling based on a $5.00 per share market value. At
the time the switching equipment was acquired, it was appraised at approximately
$716,000.

In consideration of services rendered and to be rendered to the Company and
$95,000 paid in the form of a promissory note due upon the earlier of conversion
or May 31, 2005, in November, 1995, the Company issued to Integrated Financial
Consultants, Inc., a company wholly-owned by Andrew J. Grey, ("IFC") 95,000
shares of its Series B Convertible Preferred Stock ("Series B Preferred"). In
February, 1996, the Company agreed to cancel the $95,000 note. In September,
1996, these shares converted into 95,000 shares of Common Stock.

In January, 1996, the Company entered into a supplemental consulting
agreement with IFC to provide the services of Mr. Grey as the chief financial
officer and as a director of the Company for up to 20 hours of service per week
for compensation of $12,500 per month. IFC agreed to defer payment of $7,500 per
month until such time as the Company obtained certain additional financing, or
experienced a change in control, as defined in the agreement, or IFC terminated
the services. The amount of deferred compensation is $166,000 and is represented
by a promissory note bearing interest at 10% per annum and is being paid from
the proceeds of this Offering. See "Use of Proceeds." Effective August 14, 1996
this agreement was terminated.

In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of Common Stock to Consortium 2000 at $5.75 per share to reconcile
variances in commissions owed to Consortium 2000 for July, 1995 through March,
1996. Prior to the Merger, these shares will be distributed as dividends to the
shareholders of Consortium 2000.

In August, 1996, the Company entered into a two-year consulting agreement
with Vanguard Consultants, Inc., a Nevada corporation owned by Ronnie Schwartz,
to provide consulting services in the areas of marketing, finance and business
development. Pursuant to this agreement, Vanguard Consultants, Inc. will receive
$7,500 per month for such services.

Pursuant to the Merger Agreement, all of the outstanding shares of
Consortium 2000 will be converted into 1,076,923 shares of Common Stock and
Consortium 2000 will become a wholly owned subsidiary of the Company. See
"Business -- Recent Developments."

Noam Schwartz, and his brother, Ronnie Schwartz, personally guaranteed the
Company's credit facility with Jeflor, Inc. As of September 1, 1996, the amount
outstanding under this facility was $1,248,000. The Company intends to use a
portion of the proceeds of this Offering to repay this obligation. See "Use of
Proceeds."

Under Minnesota law, officers and directors of the Company may enter into
transactions or contracts with the Company provided generally that (i) the
transaction is fair to the Company at the time it is authorized or approved;
(ii) the stockholders approve the transaction after disclosure of the
relationship or interest; or (iii) after disclosure to the Board of Directors, a
majority of the disinterested board members authorize the transaction. In
addition, any transaction involving a loan, guarantee or other financial
assistance by the Company to an officer or director requires approval of the
Board of Directors.

RELATED PARTY TRANSACTIONS

The Company has entered and anticipates that it will enter into business
transactions with certain of its principal stockholders and entities that are
owned or controlled by certain of its principal stockholders, including the
acquisition of Consortium 2000. Although the Company may continue to enter into
such transactions in the future, its policy is not to enter into transactions
with related persons unless the terms

50
<PAGE> 51

thereof are at least as favorable to the Company as those that could be obtained
for unaffiliated third parties and are approved by a majority of disinterested
directors.

DESCRIPTION OF SECURITIES

The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $0.01 per share (the "Common Stock"), and 5,000,000
shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock").

COMMON STOCK

At December 31, 1996, there were 2,126,851 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, the holders of a majority of the stock entitled to
vote in any election of directors may elect all of the directors standing for
election. The Company intends to reincorporate in California, which provides for
cumulative voting. Subject to preferences that may be applicable to any then
outstanding Preferred Stock, the holders of Common Stock will be entitled to
receive such dividends, if any, as may be declared by the Board of Directors
from time to time out of legally available funds. Upon liquidation, dissolution
or winding up of the Company, the holders of Common Stock will be entitled to
share ratably in all assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of holders of any Preferred Stock then outstanding. The holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of Common Stock will
be subject to the rights of the holders of shares of any series of Preferred
Stock that the Company may issue in the future.

PREFERRED STOCK

The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by the laws of the State of Minnesota, but without further action by
the Company's stockholders, to provide for the issuance of Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designations, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders.

The Board of Directors has designated 550,000 shares of Preferred Stock as
Series A Convertible Preferred Stock ("Series A Preferred") all of which were
outstanding as of December 31, 1996 and 95,000 shares of Series B Preferred, all
of which were converted into Common Stock in September 1996. Each share of
Series A Preferred entitles the holder to dividends at the same rate paid to
holders of Common Stock and as a result of an amendment to the terms of the
Series A Preferred made on January 24, 1997, is convertible at any time into
1.3636 shares of Common Stock, subject to adjustment for stock splits, stock
dividends and other similar events. Holders of Series A Preferred are entitled
to vote on all matters submitted or required to be submitted to stockholders on
an as if converted basis and, except as required by law, vote together with the
Common Stock and not as a separate class. Upon the liquidation, dissolution or
winding up of the Company (including for such purposes certain mergers or
consolidations and the sale of all of the assets of the Company) holders of each
outstanding share of Series A Preferred shall be entitled to receive, prior to
holders of Common Stock, an amount equal to approximately $5.45 per share.

The unissued Preferred Stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without further action by the Company's stockholders, and may include voting
rights, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions as determined by the Board of Directors.
Although the Company has no present plans to issue any new shares of Preferred
Stock, the issuance of Preferred Stock in the future could adversely affect the
rights of the holders of Common Stock and, therefore, reduce the value of the
Common Stock. In particular, specific rights granted to future holders of
Preferred Stock could be used to restrict the Company's

51
<PAGE> 52

ability to merge with or sell its assets to a third party, thereby preserving
control of the Company by present owners.

The Board of Directors may authorize and issue additional Preferred Stock
with voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. In addition, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plan to issue any
additional shares of Preferred Stock.

CONVERTIBLE SUBORDINATED DEBENTURES

The Company also has outstanding Convertible Subordinated Debentures (the
"Debentures") in the aggregate principal amount of $500,000, which bear interest
at the rate of 12% per annum, payable quarterly on the first day of January,
April, July and September, commencing April 1, 1994, with all principal and
accrued interest due and payable on or before December 31, 1998. The principal
amount of the Debentures is convertible on any payment date into shares of the
Company's Common Stock at a price of $7.00 per share. If the aggregate principal
amount of the Debentures were converted, an aggregate of 71,429 shares of Common
Stock would be issued.

UNITS

Each Unit offered by this Prospectus consists of two shares of Common Stock
and one Warrant, each Warrant to purchase one share of Common Stock for $4.00
per share. The Common Stock and Warrants included in the Units will not be
immediately detachable and will not be immediately separately transferable until
60 days from the date of this Prospectus or earlier in the discretion of the
Representative. As soon as is practical, the Transfer and Warrant Agent (as
defined) will cause to be delivered or mailed to the registered holders of the
Units the certificates representing the Common Stock and the Warrants. Any
transfer of a Unit will constitute a transfer of the holder's beneficial
interest in the related Common Stock and Warrants.

WARRANTS

The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
American Securities Transfer & Trust, Inc. (the "Transfer and Warrant Agent"). A
copy of the Warrant Agreement will be filed as an exhibit to the Registration
Statement of which the Prospectus is a part. See "Additional Information."

Exercise Price and Terms. Each Warrant entitles the holder thereof to
purchase at any time over a five year period from the date of this Prospectus,
one share of Common Stock at a price of $4.00 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Transfer and Warrant Agent, with the
subscription form on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price. The Warrants may be
exercised until February 14, 2002 in whole or in part at the applicable exercise
price until expiration of the Warrants. No fractional shares will be issued upon
the exercise of the Warrants.

The exercise price of the Warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.

Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock and, excluding all
presently outstanding options, warrants, employee stock options, the
Representative's Warrants and the Warrants included in the Units, upon sale of
the Common Stock below the then fair market value. Additionally, an adjustment
would be made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company in
order to enable warrantholders to acquire the kind and number of shares of stock
or other securities or property

52
<PAGE> 53

receivable in such event by a holder of the number of shares of Common Stock
that might otherwise have been purchased upon the exercise of the Warrant. No
adjustments will be made until the cumulative adjustments in the exercise price
per share amount to $0.05 or more. No adjustment to the number of shares and
exercise price of the shares subject to the Warrants will be made for dividends
(other than stock dividends), if any, paid on the Common Stock.

Redemption Provisions. The Warrants are subject to redemption at $0.01 per
Warrant on 30 days' written notice to the warrantholders if the closing bid
price of the Common Stock as reported on the Nasdaq SmallCap Market (or any
other market where the Common Stock is then traded) averages or exceeds $6.00
over a period of 20 consecutive trading days. In the event the Company exercises
the right to redeem the Warrants, such Warrant will be exercisable until the
close of business on the business day immediately preceding the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.

Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time prior to their expiration date five years from the date of
this Prospectus, at which time the Warrants become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.

Warrantholder Not a Shareholder. The Warrants do not confer upon holders
any voting, dividend or other rights as shareholders of the Company.

Modification of Warrant. The Company and the Transfer and Warrant Agent may
make such modifications to the Warrants that they deem necessary and desirable
that do not materially adversely affect the interests of the Warrantholders. No
other modifications may be made to the Warrants without the consent of the
majority of the Warrantholders. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of the holder
of such Warrant.

Certain Federal Income Tax Considerations. The basis of the Warrant and the
Common Stock purchased by the holder as part of a Unit or upon exercise of a
Warrant will be determined by allocating the cost of each Unit between the
Common Stock and the Warrant in accordance with the relative fair market values
of those elements at the time of acquisition.

No gain or loss will be recognized by a holder upon the exercise of a
Warrant. The sale of a Warrant by a holder or the redemption of a Warrant by a
holder will result in the recognition of gain or loss in an amount equal to the
difference between the amount realized by the holder and the Warrant's adjusted
basis in the hands of the holder. Provided that the holder is not a dealer in
the Warrants and that the Common Stock would have been a capital asset in the
hands of the holder had the Warrant been exercised, gain or loss from the sale
or redemption of a Warrant will be long-term or short-term capital gain or loss
to the holder. Loss on the expiration of a Warrant, equal to the Warrant's
adjusted basis in the hands of the holder, will be a long-term or short-term
capital loss, depending on whether the Warrant had been held for more than one
year.

THE ABOVE DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO A PARTICULAR PURCHASER. ACCORDINGLY, ALL PROSPECTIVE PURCHASERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
UNITS, THE WARRANTS AND THE COMMON STOCK.

REGISTRATION RIGHTS

The Company has granted certain registration rights to the holder of the
Series A Preferred, Integrated Financial Consultants, Inc., a company
wholly-owned by Andrew J. Grey, a director of the Company, the investors in the
December 29, 1995 $160,000 private placement, Noam Schwartz, David Schwartz, the
RGB 1993 Family Trust (the "RGB Trust"), the TAD 1993 Family Trust (the "TAD
Trust"), the Trust, (the trustee of which is Royce Diener, a director of the
Company, which now owns the RGB Trust's

53
<PAGE> 54

and TAD Trust's shares along with the registration rights), and to the holders
of warrants issued in connection with the October, 1995 $1,500,000 line of
credit, the holder of the Representative's Warrants, Jeflor, Inc., Abe Sher and
Norcross Securities, Inc. for the shares issuable pursuant to the exercise of
their warrants or options, as the case may be, and to certain other parties. The
total number of shares as to which the Company has granted registration rights
is 2,443,000. The Company intends to register with the Commission under Form S-4
the 1,076,923 shares to be issued in the Merger. However, officers and directors
and principal stockholders of the Company who receive shares in the Merger will
be subject to the two-year lock up agreement with the Representative.

CONTROL SHARE ACQUISITION

The Minnesota Control Share Act ("CSAA") provides that, generally, that a
person who becomes the beneficial owner of 20% or more of the voting power of
the shares of an "issuing public corporation" may exercise only an aggregate of
20% of the voting power of the corporation's shares in the absence of special
stockholder approval. That approval can be obtained only by resolution adopted
by (i) the affirmative vote of the holders of a majority of the voting power of
all shares entitled to vote, including all shares held by the acquiring person,
and (ii) the affirmative vote of the holders of a majority of the voting power
of all shares entitled to vote, excluding all "interested shares" (i.e., shares
held by the acquiring person, any officer of the issuing public corporation or
any director who is also an employee of the corporation).

The CSAA applies to a share acquisition only if (i) the person acquiring
the shares is an "acquiring person," (ii) the acquisition constitutes a "control
share acquisition," and (iii) the shares acquired are shares of an "issuing
public corporation." An "acquiring person" includes not only a single natural
person or entity but also two or more persons or entities who act as a
partnership, limited partnership, syndicate, or other group pursuant to any
written or oral agreement, arrangement, relationship, understanding, or
otherwise to acquire, own or vote an issuing public corporation's shares. A
"control share acquisition" generally occurs upon an acquisition of beneficial
ownership of shares which, together with all other shares beneficially owned by
the acquiring person, would increase the acquiring person's range of voting
power from less than 20% to 20% or more. An "issuing public corporation" is a
corporation incorporated in Minnesota which has at least 50 stockholders of
record.

Under the CSAA the acquisition by the Trust of 612,750 shares on August 14,
1996 may constitute a control share acquisition. Accordingly that number of
shares acquired by the Trust which exceeds 20% of the voting power of the
Company may be subject to the voting disqualification imposed by the CSAA. Thus
only 404,101 shares of Common Stock owned by the Trust, or 19% of the voting
power would be entitled to full voting rights under the CSAA. The Company
intends to reincorporate in California by merging with a wholly-owned California
corporation. Upon the reincorporation in California, the shares held by the
Trust will have full voting power. California does not have provisions similar
to those in the CSAA. The Trust has agreed to vote 404,101 shares of the Common
Stock (amounting to 19% of the outstanding Common Stock entitled to vote) in
favor of the reincorporation.

54
<PAGE> 55

OUTSTANDING WARRANTS

The following table sets forth certain information as of December 31, 1996
with respect to the issuance or agreements to issue by the Company of warrants
to purchase Common Stock:

<TABLE>
<CAPTION>
NAME OF HOLDER/ MAX. SHARES
DATE OF DESCRIPTION OF ISSUABLE UPON EXERCISE DATE FIRST EXPIRATION
ISSUANCE GROUP EXERCISE(#) PRICE($) EXERCISABLE DATE BACKGROUND OF WARRANTS
- -------- ------------------- ------------- -------- ----------- ---------- --------------------------
<C> <S> <C> <C> <C> <C> <C>
6/94 Registered 16,000 5.00 6/94 N/A In consideration of
Consulting Group financial public relations
services
6/94 Norcross 65,000 6.25 6/95 6/99 Granted to the Underwriter
Securities, Inc. upon completion of the
Company's initial public
offering.
8/95 Diener Financial 100,000 5.00 (1) 10/00 Issued in connection with
Group engagement as a financial
consultant to the Company
10/95 $1,500,000 term 100,000 5.00 10/95 10/00 Issued to investors making
loan investors $1,500,000 term loan to
the Company.
11/95 Robert L.B. Diener 100,000 5.00 (1) 11/00 Issued in connection with
Mr. Diener's engagement as
a consultant to the
Company
1/96 Abe M. Sher 200,000 5.00 (1) 12/01 Issued in connection with
Mr. Sher's engagement as
Vice President and General
Counsel
12/95 Investors in equity 160,000 7.50 5/96 5/01 Issued as part of 160,000
private placement units (consisting of
160,000 shares of Common
Stock and 160,000 Common
Stock purchase warrants)
in a private placement
completed in December,
1995
9/96 Dan Knoller 100,000 5.00 9/96 8/01 Issued in connection with
Mr. Knoller's engagement
as Vice President Business
Affairs
6/96 Jeflor, Inc. 240,000(2) 5.00 8/96 6/01 Issued in connection with
a loan for $1,200,000 due
June 19, 1997, subject to
four 90 day extensions
Total 1,081,000
=========
</TABLE>

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

(1) The warrants are fully vested.

(2) As of December 19, 1996 Jeflor, Inc., was entitled to warrants for 240,000
shares. If the loan is not repaid by March 19, 1997, Jeflor, Inc. will be
entitled to a warrant for an additional 60,000 shares. If the loan is not
repaid by June 19, 1997 Jeflor, Inc., will be entitled to warrants for an
additional 60,000 shares for each 90 day period thereafter, or an additional
240,000 shares up to a maximum of 540,000 shares. It is anticipated that the
Company will retire this debt in full with the proceeds of this Offering and
thus, Jeflor Inc., will be entitled only to warrants for 240,000 shares. See
"Use of Proceeds."

TRANSFER AND WARRANT AGENT AND REGISTRAR

The Transfer and Warrant Agent and Registrar for the Common Stock, Warrants
and Units is American Securities Transfer & Trust, Inc.

55
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. The officers,
directors and certain principal stockholders have agreed not to sell their
Common Stock into the open market for a period of two years from the date of
this Prospectus without the consent of the Representative. Sales of substantial
amounts of the Common Stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.

Upon the completion of this Offering, the Company will have 4,626,851
shares of Common Stock outstanding, assuming no exercise of options or warrants
after January 22, 1997. Of these shares, the 2,700,000 shares included in the
Units sold in this Offering and the 650,000 shares sold in the Company's initial
public offering will be freely tradable without restriction under the Securities
Act, unless held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. The remaining shares of Common Stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. In
addition, 1,081,000 shares of Common Stock were subject to outstanding warrants,
and as of January 24, 1997, 750,000 shares of Common Stock were issuable upon
conversion of the Series A Preferred, and 71,429 shares of Common Stock were
issuable upon conversion of the Debentures. See Notes 5 and 6 of Notes to the
Company's Financial Statements and Note 7 of Notes to the Company's Condensed
Financial Statements. These shares and the shares underlying options, warrants
and convertible securities may be sold in the public market only if registered,
or pursuant to an exemption from registration such as Rule 144, 144(k) or 701
under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are generally subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the initial public offering are entitled to
sell such shares 90 days after the effective date of the initial public offering
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144.

The Commission has recently proposed reducing the initial Rule 144 holding
period to one year and the Rule 144(k) holding period to two years. There can be
no assurance as to when or whether such rule changes will be enacted. If
enacted, such modifications will have a material effect on the times when shares
of the Company's Common Stock become eligible for resale.

56
<PAGE> 57

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Barber & Bronson
Incorporated is acting as representative (the "Representative"), have severally
agreed to purchase from the Company and the Selling Stockholder, and the Company
and the Selling Stockholder have agreed to sell to the Underwriters, the
respective number of Units set forth opposite each Underwriter's name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
---------------------------------------------------------------- ---------
<S> <C>
Barber & Bronson Incorporated................................... 1,145,000
Noble International Investments, Inc. .......................... 205,000
---------
Total................................................. 1,350,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company and
certain certificates from the Selling Stockholder. The nature of the
Underwriters' obligation is such that they are committed to purchase and pay for
all the Units if any are purchased.

The Company has been advised by the Representative that the Underwriters
propose to offer the Units directly to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain securities
dealers at such price less a concession not in excess of $0.30 per Unit. The
Underwriters may allow, and such selected dealers may reallow, a concession not
in excess of $0.24 per Unit to certain brokers and dealers. After the Offering,
the price to the public, concession allowance and reallowance may be changed by
the Representative.

The Company has granted the Underwriters an option, exercisable during the
45-day period after the date of this Prospectus, to purchase up to 202,500 Units
at the public offering price set forth or the cover page of this Prospectus,
less the underwriting discounts and commissions. The Underwriters may exercise
this option to cover over-allotments, if any. To the extent that the
Underwriters exercise this option each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional Units in
approximately the same proportion as set forth in the above table.

The Company has paid the Representative $25,000 on account of the
Underwriters' expenses in connection with this Offering to be applied to a
non-accountable expense allowance equal to 3% of the aggregate offering price of
the Units to be sold in this Offering.

The Company has agreed to issue to the Representative, for total
consideration of $100, warrants (the "Representative's Warrants") to purchase up
to 125,000 Units, at an exercise price per Unit equal to $7.50. The
Representative's Warrants are exercisable for a period of four years commencing
one year from the date of this Prospectus, and are not transferrable for a
period of one year prior to the exercise date except to the officers and
directors of the Representative or successors to the Representative. The
Representative's Warrants include net exercise provisions permitting the holders
to pay the exercise price by cancellation of a number of Representative's
Warrants with a fair market value equal to the exercise price of the remaining
Representative's Warrants. The holders of the Representative's Warrants will
have no voting, dividend or other stockholders rights until the Warrants are
exercised. In addition, the Company has granted certain rights to holders of the
Representative's Warrants to register the Representative's Warrants and the
Common Stock underlying the Representative's Warrants.

Except for the issuance of shares of Common Stock to be issued (i) upon the
exercise of any options or warrants or upon conversion of any convertible
securities, outstanding as of the date of this Prospectus, or upon the exercise
of the Warrants included in the Units or upon exercise of the Representative's
Warrants, (ii) pursuant to and in order to consummate a merger with or
acquisition from an unaffiliated party in a transaction negotiated at arms'
length and approved by a majority of the Company's Board of Directors, (iii) in
a public offering, at a price not less than 90% of the average of the closing
bid prices of the Common

57
<PAGE> 58

Stock as reported on the Nasdaq SmallCap Market for the 20 consecutive trading
day period immediately preceding the date of sale (the "Exempt Price") and (iv)
in a private sale at a price not less than 75% of the Exempt Price, during the
period of five years from the date of this Prospectus, the Company will not sell
or otherwise dispose of any securities without prior written consent of the
Representative.

The Company has agreed to enter into a financial consulting agreement with
an affiliate of the Representative ("Consultant"), for a three year period
commencing as of the date of this Prospectus, for an aggregate consideration of
$81,000. If the Company enters into a merger, acquisition or similar
transaction, the Consultant is to receive a fee ranging from 1% to 5% of the
consideration paid in the transaction.

The Representative has the right to designate a director to the Company's
Board of Directors for a period of five years from the date of this Prospectus.
The Company's officers, directors and significant shareholders have agreed to
vote their shares in favor of the election of the Representative's designee for
the Board. Commencing one year from the date of this Prospectus, the
Representative will receive a warrant solicitation fee of 7% with respect to the
exercise of the Warrants included in the Units, if the market price of the
Common Stock on the date of such exercise is greater than the exercise price of
the Warrant, (ii) the exercise of the Warrant was solicited by a NASD member,
and (iii) the Warrant is not held in a discretionary account of the
Representative. A portion of such fee may be reallowed to NASD member
broker-dealers soliciting in such exercise.

The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act, or to contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof. The Selling Stockholder has agreed to reimburse the Company
for $65,328 of the expenses of this Offering.

The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Company's Common Stock
during the "cooling off" period immediately preceding the commencement of sales
in the Offering. The Commission has, however, adopted an exemption from these
rules that permits passive market making under certain conditions. These rules
permit an Underwriter or other member of the selling group to continue to make a
market in the Company's Common Stock subject to the conditions, among others,
that its bid not exceed the highest bid by a market maker not connected with the
offering and that its net purchases on any one trading day not exceed prescribed
limits. Pursuant to these exemptions, certain Underwriters and other members of
the selling group intend to engage in passive market making in the Company's
Common Stock during the cooling off period.

LEGAL MATTERS

The validity of the Units, Common Stock and the Warrants offered hereby
will be passed upon for the Company by Freshman, Marantz, Orlanski, Cooper &
Klein, a law corporation, Beverly Hills, California. Certain legal matters will
be passed upon for the Underwriters by Broad and Cassel, a partnership including
professional associations, Miami, Florida.

EXPERTS

The financial statements of UStel, Inc. at December 31, 1994 and 1995, and
for each of the three years ended December 31, 1995 and the financial statements
of Consortium 2000, Inc. at June 30, 1996 and for the year ended June 30, 1996
appearing in this Prospectus and Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.

58
<PAGE> 59

USTEL, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS OF USTEL, INC.
Report of Independent Certified Public Accountants................................... F-2
Audited financial statements
Balance sheets at December 31, 1994 and 1995....................................... F-3
Statements of operations for the years ended December 31, 1993, 1994 and 1995...... F-4
Statements of changes in stockholders' equity for the years ended December 31,
1993, 1994 and 1995............................................................. F-5
Statements of cash flows for the years ended December 31, 1993, 1994 and 1995...... F-6
Summary of accounting policies..................................................... F-7
Notes to financial statements...................................................... F-9
Unaudited financial statements
Condensed balance sheets at December 31, 1995 and September 30, 1996............... F-15
Condensed statements of operations for the nine months ended September 30, 1995 and
1996............................................................................ F-16
Condensed statements of changes in stockholders' equity for the nine months ended
September 30, 1996.............................................................. F-17
Condensed statements of cash flows for the nine months ended September 30, 1995 and
1996............................................................................ F-18
Notes to condensed financial statements............................................ F-19

HISTORICAL FINANCIAL STATEMENTS OF CONSORTIUM 2000, INC.
Report of Independent Certified Public Accountants................................... F-22
Audited financial statements
Balance sheet at June 30, 1996..................................................... F-23
Statement of operations for the year ended June 30, 1996........................... F-24
Statement of changes in stockholders' equity for the year ended June 30, 1996...... F-25
Statement of cash flows for the year ended June 30, 1996........................... F-26
Summary of accounting policies..................................................... F-27
Notes to financial statements...................................................... F-29
Unaudited financial statements
Condensed balance sheets at June 30, 1996 and September 30, 1996................... F-31
Condensed statements of operations for the three months ended September 30, 1995
and 1996........................................................................ F-32
Condensed statements of changes in stockholders' equity for the three months ended
September 30, 1996.............................................................. F-33
Condensed statements of cash flows for the three months ended September 30, 1995
and 1996........................................................................ F-34
Notes to condensed financial statements............................................ F-35
</TABLE>

F-1
<PAGE> 60

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

UStel, Inc.
Los Angeles, California

We have audited the accompanying balance sheets of UStel, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of UStel,
Inc. at December 31, 1994 and 1995, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP

Los Angeles, California
April 4, 1996

F-2
<PAGE> 61

USTEL, INC.

BALANCE SHEETS

ASSETS (Note 2)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Current
Cash..................................................................... $ 2,207,304 $ 1,200
Restricted cash.......................................................... 1,000,000 3,133,433
Accounts receivable, less allowance for doubtful accounts of $188,000 and
$652,000.............................................................. 2,618,358 5,900,722
Due from related parties (Note 3(a))..................................... 444,366 348,519
Prepaid expenses......................................................... 182,871 506,824
----------- -----------
Total current assets............................................. 6,452,899 9,890,698
----------- -----------
Property and equipment
Office furniture and equipment........................................... 760,431 1,440,294
Leasehold improvements................................................... 63,741 164,063
----------- -----------
824,172 1,604,357
----------- -----------
Less accumulated depreciation............................................ (82,879) (241,176)
----------- -----------
Net property and equipment............................................ 741,293 1,363,181
----------- -----------
Other assets
Start-up costs less accumulated amortization of $39,348 and $59,022...... 59,021 39,347
Deferred charges (Note 1)................................................ 65,414 684,805
----------- -----------
$ 7,318,627 $11,978,031
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes payable (Note 2)................................................... $ 770,000 $ 2,900,000
Payable to related party (Note 3(b))..................................... -- 1,500,000
Accounts payable......................................................... 1,113,590 2,078,954
Accrued expenses......................................................... 102,218 113,525
Accrued revenue taxes.................................................... 744,585 1,097,779
----------- -----------
Total current liabilities........................................ 2,730,393 7,690,258
Convertible subordinated debentures (Note 5)............................... 500,000 500,000
----------- -----------
Total liabilities................................................ 3,230,393 8,190,258
----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity (deficit) (Notes 5, 6 and 7):
Series A Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized and 550,000 shares outstanding (Liquidation Preference
$3,000,000)........................................................... 5,500 5,500
Series B Convertible Preferred Stock, $.01 par value, 95,000 shares
authorized and 95,000 outstanding in 1995............................. -- 950
Common Stock, $.01 par value, 40,000,000 shares authorized; 1,600,000
shares issued and outstanding......................................... 16,000 16,000
Additional paid-in capital............................................... 6,220,878 6,386,178
Note receivable (Note 3(e)).............................................. -- (95,000)
Accumulated deficit...................................................... (2,154,144) (2,525,855)
----------- -----------
Total stockholders' equity....................................... 4,088,234 3,787,773
----------- -----------
$ 7,318,627 $11,978,031
=========== ===========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-3
<PAGE> 62

USTEL, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................. $1,600,147 $ 6,118,480 $16,127,575
Operating expenses
Cost of services sold.............................. 1,248,463 4,696,106 11,542,374
General and administrative......................... 637,263 1,412,649 3,071,788
Selling............................................ 368,361 785,933 1,460,010
Depreciation and amortization...................... 32,894 87,363 177,971
---------- ----------- -----------
Total operating expenses................... 2,286,981 6,982,051 16,252,143
---------- ----------- -----------
Loss from operations................................. (686,834) (863,571) (124,568)
Loss from rental operations (Note 3(e)).............. (62,025) (101,705) --
Net gain on sale of property (Note 3(e))............. 24,993 7,614 --
Relocation costs..................................... -- -- (110,766)
Interest income...................................... -- 34,283 124,060
Interest expense..................................... (41,686) (152,063) (260,437)
---------- ----------- -----------
Net loss................................... $ (765,552) $(1,075,442) $ (371,711)
========== =========== ===========
Net loss per share................................... $ (0.81) $ (0.83) $ (0.23)
========== =========== ===========
Weighted average number of common shares
outstanding........................................ 950,000 1,291,913 1,600,000
========== =========== ===========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-4
<PAGE> 63

USTEL, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN ACCUMULATED NOTE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
-------- ------ --------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........ -- $ -- 950,000 $9,500 $ 90,500 $ (313,150) $ -- $ (213,150)
Shareholder contributions
(Note 3(c))................. -- -- -- -- 480,108 -- -- 480,108
Net loss for period........... -- -- -- -- -- (765,552) -- (765,552)
------- ------ --------- ------- ---------- ---------- -------- ----------
Balance, December 31, 1993...... -- -- 950,000 9,500 570,608 (1,078,702) -- (498,594)
Sale of shares to public...... -- -- 650,000 6,500 2,595,770 -- -- 2,602,270
Sale of preferred shares...... 550,000 5,500 -- -- 2,994,500 -- -- 3,000,000
Contribution to capital....... -- -- -- -- 60,000 -- -- 60,000
Net loss for period........... -- -- -- -- -- (1,075,442) -- (1,075,442)
------- ------ --------- ------- ---------- ---------- -------- ----------
Balance, December 31, 1994...... 550,000 5,500 1,600,000 16,000 6,220,878 (2,154,144) -- 4,088,234
Sale of preferred shares...... 95,000 950 -- -- 165,300 -- (95,000) 71,250
Net loss for period........... -- -- -- -- -- (371,711) -- (371,711)
------- ------ --------- ------- ---------- ---------- -------- ----------
Balance, December 31, 1995...... 645,000 $6,450 1,600,000 $16,000 $6,386,178 $(2,525,855) $(95,000) $3,787,773
======= ====== ========= ======= ========== ========== ======== ==========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-5
<PAGE> 64

USTEL INC.

STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss........................................... $(765,552) $(1,075,442) $ (371,711)
Adjustments to reconcile net loss to net cash used
in operating activities:
Contributed services............................ 60,000 -- --
Depreciation and amortization................... 53,008 125,643 177,971
Provisions for losses on accounts receivable.... 30,000 158,000 516,000
Net gain on sale of property.................... (24,993) (7,614) --
Increase (decrease) from change in:
Checks issued against future deposits......... 32,668 (32,668) --
Accounts receivable........................... (980,612) (1,821,467) (3,746,364)
Prepaid expenses and other.................... 1,897 (108,466) (323,683)
Accounts payable and accrued expenses......... 814,530 1,136,820 1,329,865
Other items................................ (43,831) (21,583) (671,391)
--------- ----------- -----------
Net cash used in operating activities...... (822,885) (1,646,777) (3,089,313)
--------- ----------- -----------
Cash flows from investing activities
Proceeds from sale of property..................... 122,986 142,877 --
Purchase of equipment.............................. (267,429) (528,463) (780,185)
--------- ----------- -----------
Net cash used in investing activities................ (144,443) (385,586) (780,185)
--------- ----------- -----------
Cash flows from financing activities
Proceeds from notes payable........................ 785,000 395,000 4,030,000
Restricted cash.................................... -- (1,000,000) (2,133,433)
Proceeds from sale of common stock................. -- 2,602,270 --
Proceeds from sale of preferred stock.............. -- 3,000,000 71,250
Proceeds from issuance of convertible debenture.... -- 500,000 --
Related parties payable............................ (99,864) (665,395) 95,847
Payments on debt................................... (137,916) (592,678) (400,000)
Shareholder contributions.......................... 420,108 -- --
--------- ----------- -----------
Net cash provided by financing activities............ 967,328 4,239,197 1,663,664
--------- ----------- -----------
Net increase (decrease) in cash...................... -- 2,206,834 (2,205,834)
Cash, beginning of period............................ 200 200 2,207,034
--------- ----------- -----------
Cash, end of period.................................. $ 200 $ 2,207,034 $ 1,200
========= =========== ===========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-6
<PAGE> 65

USTEL, INC.

SUMMARY OF ACCOUNTING POLICIES

THE COMPANY

UStel, Inc. (the "Company") was formed on March 11, 1992 as a long-distance
telephone service provider. The Company offers competitive discounted calling
plans which are available to customers in the United States, Puerto Rico, and
the Virgin Islands. On January 12, 1994, the Company effected a recapitalization
of its capital stock in connection with its re-incorporation in Minnesota. In
connection with the recapitalization, the Company exchanged all its outstanding
common shares (1,000 shares) for 950,000 shares of the reincorporated company's
common shares. Accordingly, the financial statements were retroactively
restated.

REVENUE RECOGNITION

Revenue is recognized upon completion of the telephone call.

PROPERTY AND EQUIPMENT

Equipment is stated at cost with depreciation provided over the estimated
useful lives of the respective assets on the straight-line basis ranging from
five to fifteen years.

DEFERRED CHARGES

Deferred charges consist of loan fees, offering costs and certain costs
incurred in connection with expanding the Company's market position. Loan fees
are amortized over the life of the related loan. Offering costs will be charged
against paid-in capital if the private offering is consummated. If the private
offering is not consummated, such costs will be charged to operations during the
period it becomes evident that the above mentioned transaction will not be
completed. Costs incurred to expand the Company's market position are amortized
over the period of benefit not to exceed twenty-four months. It is the Company's
policy to periodically review and evaluate that the benefits associated with
these costs are expected to be realized and therefore deferral and amortization
is justified.

INCOME TAXES

Income taxes are accounted for under Financial Accounting Standards Board,
FAS No. 109, "Accounting for Income Taxes." Under this standard, deferred tax
assets and liabilities represent the tax effects, calculated at currently
effective rates, of future deductible taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial statements.

EARNINGS PER SHARE

Earnings per share are computed based upon the weighted average number of
common shares outstanding during the periods. Common stock equivalents relating
to stock options, warrants and convertible preferred stock are not included in
the computation since their effect is anti-dilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles required 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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

SIGNIFICANT RISKS AND UNCERTAINTIES

The Company is primarily a non-facilities based inter-exchange carrier that
routes customers' calls over a transmission network consisting primarily of
dedicated long distance lines secured by the Company from a

F-7
<PAGE> 66

USTEL, INC.

SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)

variety of other carriers. One of these carriers provides the call record
information from which the Company bills approximately 75% of its customer base.
Management believes other carriers could provide the same services on comparable
terms.

CONCENTRATIONS OF CREDIT RISKS

The Company maintains cash balances at one financial institution. Deposits
not to exceed $100,000 are insured by the Federal Deposit Insurance Corporation.
At December 31, 1995, the Company has uninsured cash in the amount of
approximately $3,035,000.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect adoption to
have a material effect on its financial position or results of operations.

Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and results of operations is currently unknown.

DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and Restricted Cash

The carrying amount approximates fair value due to the short maturity of
those instruments.

Notes Payable

The fair value of the Company's notes payable is based on quoted market
prices for similar issues of debt with similar remaining maturities.

Convertible Debenture

The fair value of the Company's convertible debentures is estimated based
upon current market borrowing rates for loans with similar terms and maturities.

RECLASSIFICATIONS

Certain financial statement items have been reclassified to conform to the
current year's presentation.

F-8
<PAGE> 67

USTEL, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- DEFERRED CHARGES

Deferred charges consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Development costs....................................... $ -- $336,690
Offering costs.......................................... -- 164,792
Loan fees............................................... -- 35,000
Calling card program.................................... -- 118,157
Deposits and other...................................... 65,414 82,166
------- --------
65,414 736,805
Accumulated amortization................................ -- (52,000)
------- --------
$65,414 $684,805
======= ========
</TABLE>

NOTE 2 -- NOTES PAYABLE

In September 1994, the Company entered into revolving credit agreements
with two banks that provide for secured borrowings aggregating $1.4 million and
expiring in September 1995. Borrowings under the agreements bear interest at the
banks' prime lending rate. The credit agreements are collateralized by a
security interest in substantially all of the Company's assets plus a restricted
certificate of deposit for $1 million. Borrowing under the credit agreements
amounted to $770,000 at December 31, 1994.

During June 1995 and September 1995, the Company entered into revolving
credit agreements with a bank that provides for secured borrowings aggregating
$1 million and $2 million, respectively, expiring in May 1996. Borrowings under
the agreements bear interest at the bank's prime lending rate. The credit
agreements are collateralized by three certificates of deposit totalling $3.1
million. Borrowing under the credit agreements amounted to $2.9 million at
December 31, 1995.

In December 1995, the Company obtained a Senior Credit Facility ("Credit
Facility" and "Line") in the amount of up to $5 million with an asset-based
lender. Amounts drawn under the Credit Facility accrue interest at a variable
rate equal to the Bank of America Reference Rate plus 2% per annum. The Line is
secured by accounts receivable and all of the Company's other assets. Under the
Credit Facility, the Company can borrow up to an amount which is the lesser of
$5 million or 85% of the Company's-eligible receivables. Subject to the $5
million maximum borrowing, in addition to amounts supported by receivables, the
Company may borrow on a 36-month term loan basis up to the lesser of $1.5
million or a formula amount based on the fair value of new equipment and the
liquidation value of existing equipment. No amounts were outstanding under the
Credit Facility as of December 31, 1995.

F-9
<PAGE> 68

USTEL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- RELATED PARTY TRANSACTIONS

(a) Related Parties Receivables

At December 31, 1994 and 1995, the Company has amounts due from various
related parties relating to telephone services and loans as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Due for telephone services:
Related entities..................................... $ 31,049 $ 20,505
Officers............................................. 51,949 144,567
Loans:
Related entities..................................... 132,822 --
Officers............................................. 163,546 181,658
Employees............................................ 65,000 1,789
-------- --------
$444,366 $348,519
======== ========
</TABLE>

(b) Related Parties Payable

In October 1995, the Company entered into a revolving credit agreement with
a related party that provides for secured borrowing aggregating $1.5 million and
expiring in October 1996. Borrowing under the agreement bears interest at 10%
per annum on a daily principal balance outstanding during the three calendar
months prior to each interest payment date. The credit agreement is
collateralized by a security interest in the Company's unrestricted deposit
accounts and accounts receivable. The agreement calls for the issuance of
warrants for the purchase of up to 100,000 shares of the Company's common stock
at $5.00 per share, exercisable over a period of five years. Borrowing under the
credit agreement amounted to $1.5 million at December 31, 1995. This loan was
repaid in January 1996 by the issuance of 160,000 common shares of the Company
plus $725,000.

During 1993, the President and shareholder assumed and paid Company debts
which amounted to $420,108 in the aggregate. This amount was then contributed to
additional paid-in capital. In addition, the Company recorded $60,000 in salary
expense related to the value of services contributed by the President.

(d) Stock Note Payable

(e) Rental Property Held For Investment

During 1993, the Company acquired land and buildings, which consisted of
fourteen condominium units, from a company owned by a related party. The assets
acquired were recorded at predecessor cost of approximately $1,424,000. The
Company assumed first trust deeds of $1,097,501 and existing second trust deeds
of $359,812, which amounted to $1,457,313. The difference of $33,313 was
accounted for as a reduction of the amounts due to the related party. One of the
units was sold during 1993, resulting in a gain of $24,993, the remaining units
were sold during 1994 at a gain of $7,614.

F-10
<PAGE> 69

USTEL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Loss from rental operations included in the statements of operations
include rental operations for the years ended December 31, 1993 and 1994 as
follows:

<TABLE>
<CAPTION>
1993 1994
-------- ---------
<S> <C> <C>
Rental income......................................... $ 46,933 $ 68,054
Operating expenses.................................... (9,942) (7,221)
Interest expense...................................... (78,902) (124,630)
Depreciation expense.................................. (20,114) (37,908)
-------- ---------
Loss from rental operations........................... $(62,025) $(101,705)
======== =========
</TABLE>

(f) Sales Agent

In August 1994, the Company retained an independent sales representative,
Consortium 2000, Inc., on a commission basis. As part of the consideration for
its engagement, the Company agreed to issue the sales agent warrants to purchase
up to 300,000 shares of common stock. These warrants are exercisable in
increments of 50,000 shares upon the Company reaching certain monthly revenue
milestones for four years from the date of issuance. The minimum exercise price
of the warrants is $7.50 per share and increases depending on when specified
monthly revenue milestones are met. Royce Diener is Chairman of the Board of the
sales agent.

(g) Financial Consultant

Effective as of September 1995, the Company engaged the Diener Financial
Group, a company wholly-owned by Robert L.B. Diener, as a financial consultant
for a period of one year and agreed to grant him five-year warrants to purchase
up to 100,000 shares of the Company's common stock at $5.00 per share. The
Company also agreed to pay the consultant $7,500 per month plus 1%, 2% and 3% of
the senior debt, subordinated debt and equity, respectively, raised by the
consultant for the Company. Robert L. B. Diener is the son of Royce Diener, a
director of the Company.

NOTE 4 -- COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company occupies certain office and switching facilities under
operating leases expiring on various dates through 1998 with options to renew on
switching facilities. Rent expense under these arrangements was $120,000;
$120,000; and $124,000 for the years ended December 31, 1993, 1994 and 1995.
Insurance and maintenance expenses covering these facilities are the Company's
obligations.

At December 31, 1995 future minimum lease commitments were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, OFFICE SPACE SWITCHING FACILITIES TOTAL AMOUNT
-------------------------------------- ------------ -------------------- ------------
<S> <C> <C> <C>
1996.................................. $ 59,928 $ 39,394 $ 99,322
1997.................................. 59,928 4,060 63,988
1998.................................. 59,928 -- 59,928
-------- ------- --------
$179,784 $ 43,454 $223,238
======== ======= ========
</TABLE>

Employment Agreements

The Company entered into employment agreements with two executive officers
of the Company. One agreement provides for an annual salary of $93,600 for a
term of five years commencing on December 1, 1993. The second agreement provides
for an annual salary of $120,000 for a term of three years commencing on

F-11
<PAGE> 70

USTEL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

March 1, 1994. Both agreements also provide for bonuses to be paid to the
officers at the discretion of the Company's Board of Directors.

In January 1996, the Company entered into a three-year employment agreement
with an officer that provides for an annual salary of $60,000 in the first year,
$96,000 in the second year and $132,000 in the third year. The Company also
granted the officer options to purchase up to 200,000 shares of common stock at
$5.00 per share and issued him 32,000 shares of common stock.

NOTE 5 -- CONVERTIBLE SUBORDINATED DEBENTURES

In January 1994, the Company issued 12% Convertible Subordinated Debentures
("Debentures") in the aggregate amount of approximately $500,000. The Debentures
bear interest at the rate of 12% per annum. Principal and accrued interest will
be due and payable on or before December 30, 1998. At any time prior to the
payment in full, the Debentures can be converted into shares of the Company's
common stock at the rate of $7.00 per share, subject to adjustment (as defined).
The proceeds were used to repay notes payable of $400,000 and the balance was
used for working capital purposes.

NOTE 6 -- PREFERRED STOCK

During September 1994, the Company issued 550,000 shares of $.01 par value
Series A Convertible Preferred Stock ("Preferred"). Each share of Preferred
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to the Preferred. Each share of Preferred is convertible into one share
of common stock, as adjusted, for such things as stock splits, stock dividends
and other similar dilutive occurrences. At any time subsequent to October 16,
1995, each holder of record of Preferred may, at his or her option, convert all
or part of the Preferred shares held into fully paid common shares.

In connection with the issuance of the Preferred shares described above,
the Company committed to pay a finders fee for the placement of the Preferred
shares. The Company will issue 112,000 common shares plus $46,000 in
satisfaction of the finders fee. This transaction has not been reflected in the
financial statements since the shares have not been issued and the effect on the
financial statements is not material. The Company anticipates that the common
shares will be issued during the second quarter of 1996.

During November 1995, the Company issued 95,000 shares of $.01 par value
Series B Convertible Preferred Stock ("Series B"). Each share of Series B
entitles its holder to receive dividends at the same rate paid to common
stockholders. Unless the Company pays or declares dividends with respect to
common shares, the Company has no obligation to declare or pay dividends with
respect to Series B. Each share of Series B is convertible into one share of
common stock, as adjusted, for such things as stock splits, stock dividends and
other similar dilutive occurrences. Each holder of record of Series B may, at
the option of the holder, convert all or part of the shares of Series B held by
that recordholder into fully paid nonassessable shares of common stock, if the
Company files a registration statement or there is a change in control of the
Company.

NOTE 7 -- COMMON STOCK

Public Offering

During 1994, the Company completed an initial public offering ("IPO"), of
650,000 shares of the Company's common stock. The Company received net proceeds
from the IPO amounting to $2,602,270 (after deducting offering costs of
$647,730).

In connection with the IPO described above, the Company granted to the
underwriter, warrants to acquire 65,000 shares of the Company's common stock.
The warrants are exercisable for a period of four years

F-12
<PAGE> 71

USTEL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

commencing one year after the date of the prospectus (June 22, 1994) at an
exercise price of $6.25 (125% of the public offering price). This warrant is
outstanding as of December 31, 1995.

Stock Option Plan

The Company adopted a stock option plan to provide for the grant of options
to key employees to acquire up to 450,000 shares of the Company's common stock.
The option price per share may not be less than 100% of the fair market value of
a share on the date the option is granted, and the maximum term of an option may
not exceed ten years. There are currently 210,000 options granted and
outstanding under the 1993 stock option plan. These options were granted to the
President of the Company at an exercise price of $7.50 per share, one-third
which will vest each year. In January 1996, the Board of Directors passed a
resolution reducing the exercise price from $7.50 to $5.00 per share. In January
1996, the Company also granted to each of two officers options to purchase
100,000 shares of common stock at $5.00 per share.

NOTE 8 -- INCOME TAXES

At December 31, 1995, the Company has available net operating loss
carryforwards of approximately $5,908,000 for income tax purposes, which expire
in varying amounts through 2010. Federal tax rules impose limitations on the use
of net operating losses following certain changes in ownership. Such a change in
control occurred during 1994. As a result $3,208,000 of the net operating loss
carryforwards are subject to limitation. The net operating loss carryforward may
be utilized at a rate of approximately $402,000 per year.

The loss carryforward generated a deferred tax asset of approximately
$2,186,000. The deferred tax asset was not recognized due to uncertainties
regarding its realization; accordingly, a 100% valuation allowance was provided.

NOTE 9 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Non-cash investing activities for the year ended December 31, 1993 were as
follows:

The Company acquired fourteen condominiums from a related party in exchange
for assuming notes and payables amounting to $1,457,313 collateralized by deeds
of trust.

The related party paid $82,186 to the mortgage holders on behalf of the
Company. The Company increased their notes payable to the related party and
decreased its long-term debt by that amount.

Cash paid for interest during the year ended December 31, 1993 amounted to
$28,600.

Non-cash investing and financing activities for the year ended December 31,
1994 were as follows:

Cash paid for interest during the year ended December 31, 1994 amounted to
$91,160.

During 1994, an officer/shareholder note payable amounting to $60,000 was
contributed to paid in capital.

Non-cash investing and financing activities for the year ended December 31,
1995 were as follows.

Cash paid for interest during the year ended December 31, 1995 amounted to
$260,437.

During 1995, the Company issued 95,000 shares of Series B Convertible
Preferred in payment of services plus a promissory note for $95,000.

F-13
<PAGE> 72

USTEL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- SUBSEQUENT EVENT

In January 1996, the Company completed a private placement of 160,000 Units
(consisting of 160,000 shares of common stock and 160,000 redeemable common
stock purchase warrants) raising net proceeds of approximately $775,000. For
assisting the Company with the private placement, the Company paid Robert L.B.
Diener the sum of $25,000 and granted him 100,000 warrants exercisable at $5.00
per share, expiring November 2000.

F-14
<PAGE> 73

USTEL, INC.

CONDENSED BALANCE SHEETS (NOTE 3)

ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (UNAUDITED)
<S> <C> <C>
Current
Cash..................................................................... $ 1,200 $ 394,126
Restricted cash.......................................................... 3,133,433 --
Accounts receivable, less allowance for doubtful accounts of $652,000 and
$1,346,000, respectively.............................................. 5,900,722 6,947,345
Due from related parties................................................. 348,519 293,817
Prepaid expenses......................................................... 506,824 551,320
----------- -----------
Total current assets............................................. 9,890,698 8,186,608
Property and equipment
Office furniture and equipment........................................... 1,440,294 2,398,192
Leasehold improvements................................................... 164,063 175,749
----------- -----------
1,604,357 2,573,941
Less accumulated depreciation............................................ (241,176) (410,491)
----------- -----------
Net property and equipment....................................... 1,363,181 2,163,450
----------- -----------
Other assets
Other receivables, net................................................... -- 139,625
Start-up costs less accumulated amortization of $59,022 and $73,777,
respectively.......................................................... 39,347 24,592
Deferred charges (Note 2)................................................ 684,805 846,044
----------- -----------
$ 11,978,031 $ 11,360,319
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Notes payable (Note 3)................................................... $ 2,900,000 $ 2,437,931
Notes payable to others (Note 4, 5)...................................... 1,500,000 5,144,275
Accounts payable and accrued expenses.................................... 2,192,479 594,117
Accrued revenue taxes.................................................... 1,097,779 250,229
----------- -----------
Total current liabilities........................................ 7,690,258 8,426,552
Long-term liabilities
Convertible subordinated debentures...................................... 500,000 500,000
----------- -----------
Total liabilities................................................ 8,190,258 8,926,552
----------- -----------
Stockholders' equity
Series A & B convertible preferred stock................................. 6,450 5,500
Common stock............................................................. 16,000 21,269
Additional paid-in capital............................................... 6,291,178 7,710,562
Accumulated deficit...................................................... (2,525,855) (5,303,564)
----------- -----------
Total stockholders' equity....................................... 3,787,773 2,433,767
----------- -----------
Total liabilities and stockholders' equity....................... $ 11,978,031 $ 11,360,319
=========== ===========
</TABLE>

See accompanying notes to condensed financial statements.

F-15
<PAGE> 74

USTEL, INC.

CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................................... $11,310,018 $16,166,344
Operating expenses
Cost of services sold........................................... 8,240,409 12,006,378
Selling......................................................... 900,960 1,676,705
General and administrative...................................... 2,282,329 4,762,971
Depreciation and amortization................................... 120,813 184,071
------------ ------------
Total operating expenses................................ 11,544,511 18,630,125
------------ ------------
Loss from operations.............................................. (234,493) (2,463,781)
Interest expense, net of interest income.......................... (64,576) (313,928)
Other expense..................................................... (104,412) --
------------ ------------
Net loss................................................ $ (403,481) $(2,777,709)
============ ============
Loss per share.................................................... $ (0.25) $ (1.37)
============ ============
Weighted average common shares outstanding........................ 1,600,000 2,025,740
============ ============
</TABLE>

See accompanying notes to condensed financial statements.

F-16
<PAGE> 75

USTEL, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE PERIOD JANUARY 1, 1996 THROUGH SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ --------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.............. 645,000 $6,450 1,600,000 $16,000 $6,291,178 $(2,525,855) $3,787,773
Conversion of debt.................. -- -- 180,000 1,800 888,200 -- 890,000
Conversion of Series B Preferred
Stock to Common Stock............ (95,000) (950) 95,000 950 -- -- --
Cost of Preferred Stock issued in
prior period..................... -- -- 112,000 1,120 (47,120) -- (46,000)
Acquisition of switching
equipment........................ -- -- 107,851 1,079 514,624 -- 515,703
Stock issued in connection with
debt............................. -- -- 32,000 320 63,680 -- 64,000
Net loss for period................. -- -- -- -- -- (2,777,709) (2,777,709)
------- ------ --------- ------- ---------- ----------- ----------
Balance, September 30, 1996
(unaudited)......................... 550,000 $5,500 2,126,851 $21,269 $7,710,562 $(5,303,564) $2,433,767
======= ====== ========= ======= ========== =========== ==========
</TABLE>

See accompanying notes to condensed financial statements.

F-17
<PAGE> 76

USTEL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss......................................................... $ (403,481) $ (2,777,709)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 120,813 184,071
Provision for losses on accounts receivable.................... 321,098 1,469,151
Change in operating assets and liabilities
Accounts receivable......................................... (2,619,185) (2,497,116)
Due from related parties.................................... 141,672 54,702
Prepaid expenses............................................ (378,534) (44,496)
Accounts payable and accrued expenses....................... 2,323,466 1,414,363
Other receivables........................................... (405,973) (158,283)
----------- ------------
Net cash used in operating activities.................. (900,124) (2,355,317)
----------- ------------
Cash flows from investing activities
Purchase of equipment............................................ (650,634) (180,553)
Increase in deferred charges..................................... (277,507) (161,240)
----------- ------------
Net cash used in investment activities................. (928,141) (341,793)
----------- ------------
Cash flows from financing activities
Restricted cash.................................................. (1,000,000) 3,133,433
Proceeds from related party payable.............................. 1,585,000 400,000
Payment on related party debt.................................... -- (316,000)
Proceeds from notes payable...................................... -- 19,647,390
Payment on notes payable......................................... (120,000) (19,774,787)
----------- ------------
Net cash provided by financing activities.............. 465,000 3,090,036
----------- ------------
Net increase (decrease) in cash.................................. (1,363,265) 392,926
Cash, beginning of period........................................ 2,207,034 1,200
----------- ------------
Cash, end of period.............................................. $ 843,769 $ 394,126
=========== ============
Supplemental information
Interest paid.................................................. $ 160,271 $ 361,837
Income taxes paid.............................................. 800 22,997
</TABLE>

See accompanying notes to condensed financial statements.

F-18
<PAGE> 77

USTEL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 1995 AND SEPTEMBER 30, 1996

NOTE 1 -- INTERIM FINANCIAL INFORMATION

The interim financial statements for the nine months ended September 30,
1996 and September 30, 1995, respectively, are unaudited. In the opinion of
management, such statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair representation of the results of the
interim periods. The results of operations for the nine-month period ended
September 30, 1996 are not necessarily indicative of the results for the entire
year.

NOTE 2 -- DEFERRED CHARGES

Deferred charges consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Development costs.................................. $336,690 $ 233,787
Offering costs..................................... 164,792 342,500
Loan fees.......................................... 35,000 129,608
Calling card program............................... 118,157 138,108
Deposits and others................................ 82,166 82,166
-------- --------
736,805 926,169
Accumulated amortization........................... (52,000) (80,125)
-------- --------
$684,805 $ 846,044
======== ========
</TABLE>

NOTE 3 -- NOTES PAYABLE

In June 1995 and September 1995, the Company entered into a revolving
credit agreements with a bank that provided for secured borrowings aggregating
$10 million and $2.1 million, respectively, expiring in July 1996. Borrowings
under the agreements bear interest at the bank's prime lending rate. The credit
agreements were collateralized by two certificates of deposit at that same bank
totalling $2.1 million. In July 1996, this outstanding credit line was paid off
by offsetting the outstanding balance against the certificates of deposit used
as collateral. Borrowings at December 31, 1995 and September 30, 1996 were
$2,900,000 and $0, respectively.

In December 1995, the Company obtained a Senior Credit Facility ("Credit
Facility" and "Line") in the amount of up to $5 million with an asset-based
lender. Amounts drawn under the Credit Facility accrue interest at a variable
rate equal to the Bank of America Reference Rate plus 2% per annum. The Line is
secured by accounts receivable and all of the Company's other assets. Under the
Credit Facility, the Company can borrow up to an amount which is the lesser of
$5 million or 85% of the Company's eligible receivables. Subject to the $5
million maximum borrowing, in addition to amounts supported by receivables, the
Company may borrow on a 36-month term loan basis up to the lesser of $1.5
million or a formula amount based on the fair value of new equipment and the
liquidation value of existing equipment. Amounts outstanding under the Credit
Facility at December 31, 1995 and September 30, 1996 were $0 and $2,437,931,
respectively.

NOTE 4 -- SHORT-TERM BORROWINGS

During February, 1996 the Company borrowed $400,000 from a related party.
The note is payable on demand and bears interest at 12% per annum. In June 1996
$116,000 of this borrowing was repaid. An additional repayment of $200,000 was
made in September 1996. Interest is payable at the earlier of maturity or
repayment of the full amount borrowed. The amount outstanding at September 30,
1996 was $84,000.

F-19
<PAGE> 78

USTEL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

During June 1996 the Company borrowed $1,200,000 from an unrelated party.
The one-year note bears interest at the annual rate of 12% and is unsecured.
Interest is payable at maturity. In conjunction with this loan the Company
agreed to issue warrants for acquisition of up to 540,000 of its common shares
at a price of $5.00 per share. Warrants for the purchase of 120,000 common
shares were issuable at the time the loan was funded. Additional warrants become
issuable in increments of 60,000 common shares each at intervals of ninety days
after funding of the loan so long as the loan remains unpaid.

As of September 9, 1996, the Company was indebted to WilTel, the Company's
primary long distance carrier, in the amount of $5,595,963 before application of
certain volume discounts available under the contract for those services. This
amount was settled by the payment of $1,000,000 by the Company on that date and
an agreement by the Company to remit $735,688 by September 27, 1996, and to
remit payment of its October 1, 1996 invoice to WilTel no later than October 31,
1996, and to provide WilTel with a second lien against all of its assets and
customer base. WilTel agreed to allow the Company to defer the balance owing in
the amount of $3,860,275 at September 30, 1996 (before application of volume
discounts available under the service contract between the Company and WilTel)
to the earlier of February 28, 1997 or the completion of an offering. Such
amounts bears interest at 18% per annum.

NOTE 5 -- RELATED PARTY TRANSACTIONS

In January, 1996, the Company completed a private placement of 160,000
units (consisting of 160,000 shares of Common Stock and 160,000 redeemable
common stock purchase warrants) raising net proceeds of approximately $775,000.
For assisting the Company in connection with this private placement, the Company
paid Robert L.B. Diener the sum of $25,000. In November, 1995, the Company
granted Mr. Diener 100,000 warrants exercisable at $5.00 per share, expiring
November, 2000.

In January, 1996, the Company entered into a supplemental consulting
agreement with Integrated Financial Consultants, Inc., ("IFC") a company wholly
owned by Andrew J. Grey, a director, to provide the services of Mr. Grey as the
chief financial officer and as a director of the Company for up to 20 hours of
service per week for compensation of $12,500 per month. IFC agreed to defer
payment of $7,500 per month until such time as the Company obtained certain
additional financing, or underwent a change in control, as defined in the
agreement, or IFC terminated the services. In February, 1996, the Company agreed
to cancel the $95,000 note in consideration of services rendered and to be
rendered by IFC and the payment by IFC of $5,000 to the Company.

In June, 1996, the Company acquired title to a telecommunications switch
owned by Mr. Epling for aggregate consideration in the amount of $716,375.
Consideration was paid by crediting $500,000 as payment for the issuance of
100,000 shares of common stock to Mr. Epling pursuant to the exercise of
employee stock options, cancelling approximately $117,934 in interim advances
made by the Company to TYC, Inc., a corporation wholly-owned by Mr. Epling, and
a cancellation of interim advances of approximately $68,522 made by the Company
to Mr. Epling for upgrading the switch, and the issuance of an additional 7,851
shares of Common Stock to Mr. Epling based on a $5.00 per share market value. At
the time the switching equipment was acquired, it was appraised at approximately
$716,000.

NOTE 6 -- OTHER MATTERS

In July, 1996, the Company's Board of Directors authorized the issuance of
20,000 shares of common stock to Consortium 2000 at $5.75 per share to reconcile
variances in commissions owed to Consortium 2000 for July, 1995 through March,
1996. Prior to the Merger, these shares will be distributed as a dividend to the
shareholders of Consortium 2000.

In August 1996, the Company entered into a two-year consulting agreement
with Vanguard Consultants, Inc., a Nevada corporation, to provide consulting
services in the areas of marketing, finance and business

F-20
<PAGE> 79

USTEL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

development. Pursuant to this agreement, Vanguard Consultants, Inc. will receive
$7,500 per month for such services.

On August 14, 1996, the Company, Consortium Acquisition Corporation (a
wholly-owned subsidiary created by the Company) and Consortium 2000, Inc.
entered into a Merger Agreement and Plan of Reorganization ("Merger Agreement").
Under the terms of the Merger Agreement, (a) Consortium Acquisition Corporation
will be merged with Consortium 2000, Inc., with Consortium 2000, Inc. being the
surviving corporation in the merger, and (b) all of the capital stock of
Consortium 2000, Inc. will be converted into an aggregate of 1,076,923 shares of
the common stock of the Company. As a result of the Merger Agreement, Consortium
2000, Inc. will become a wholly-owned subsidiary of the Company.

NOTE 7 -- SUBSEQUENT EVENT

On January 24, 1997, the Company agreed to amend the terms of the Series A
Convertible Preferred Stock to change the conversion ratio from 1:1 to 1.3636:1.
As a result of this change, the 550,000 shares of Series A Convertible Preferred
Stock will be convertible into 750,000 shares of the Company's Common Stock.

F-21
<PAGE> 80

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Consortium 2000, Inc.
Culver City, California

We have audited the accompanying balance sheet of Consortium 2000, Inc. as
of June 30, 1996, and the related statements of operations, shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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, based on our audit, the financial statements referred to
above present fairly, in all material respects, the financial position of
Consortium 2000, Inc. at June 30, 1996, and the results of its operations and
cash flows for the year then ended, in conformity with generally accepted
accounting principles.

BDO SEIDMAN, LLP

Los Angeles, California
September 20, 1996

F-22
<PAGE> 81

CONSORTIUM 2000, INC.

BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
Current
Cash.......................................................................... $ 116,068
Accounts receivable, less allowance for doubtful accounts of $115,000......... 810,470
Due from related parties (Note 1, a).......................................... 52,242
Employee advances............................................................. 18,642
Prepaid expenses.............................................................. 103,092
Loans to officers (Note 1, b)................................................. 8,254
----------
Total current assets.................................................. 1,108,768
----------
Furniture and equipment
Furniture and fixtures........................................................ 22,107
Professional equipment........................................................ 79,327
----------
101,434
Less accumulated depreciation................................................. (54,844)
----------
Net furniture and equipment........................................... 46,590
----------
Other assets
Deposits...................................................................... 5,000
Intangible assets, less accumulated amortization of $74,510 (Note 2).......... 68,088
----------
Total assets.......................................................... $ 1,228,446
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Bank loan (Note 3)............................................................ $ 100,000
Accounts payable.............................................................. 6,026
Accrued agent fee............................................................. 405,342
Accrued expenses.............................................................. 84,170
Deferred salaries............................................................. 37,381
Dividends payable............................................................. 10,764
----------
Total current liabilities............................................. 643,683
----------
Commitments and contingencies (Note 4)
Stockholders' equity
Common stock, no par value, with a stated value of $0.01 each, 30,000,000
shares authorized; 6,753,009 shares issued and 6,750,009 shares
outstanding................................................................ 67,530
Additional paid-in deficit.................................................... 1,036,166
Accumulated deficit........................................................... (518,933)
----------
Total shareholders' equity............................................ 584,763
----------
Total liabilities and shareholders' equity............................ $ 1,228,446
==========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-23
<PAGE> 82

CONSORTIUM 2000, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1996
------------------
<S> <C>
Revenues................................................................. $3,416,851
Cost of service provided................................................. 1,500,187
----------
Gross profit........................................................ 1,916,664
----------
Operating expenses
Depreciation and amortization.......................................... 9,000
General and administrative............................................. 2,071,656
----------
Loss from operations..................................................... (163,992)
----------
Other income (expense)
Other income........................................................... 71,541
Interest income........................................................ 4,301
Interest expense....................................................... (3,717)
----------
Net loss before income tax............................................... (91,867)
Income tax provision..................................................... 800
----------
Net loss............................................................ $ (92,667)
==========
Net loss per share....................................................... $ (0.01)
==========
Weighted average number of shares outstanding............................ 6,751,676
==========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-24
<PAGE> 83

CONSORTIUM 2000, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995............ 6,753,009 $67,530 $1,036,166 $(361,529) $742,167
Dividend paid................... -- -- -- (61,866) (61,866)
Treasury stock purchased
(Note 5)..................... (3,000) -- -- (2,871) (2,871)
Net loss for period............. -- -- -- (92,667) (92,667)
--------- ------- ---------- --------- --------
Balance, June 30, 1996............ 6,750,009 $67,530 $1,036,166 $(518,933) $584,763
========= ======= ========== ========= ========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-25
<PAGE> 84

CONSORTIUM 2000, INC.

STATEMENT OF CASH FLOWS

INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1996
------------------
<S> <C>
Cash flows from operating activities
Net loss.................................................................. $(92,667)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.......................................... 15,600
Change in operating assets and liabilities
Accounts receivable.................................................. 208,098
Prepaid expenses and other........................................... (50,569)
Accounts payable and accrued expenses................................ 1,262
Payments for deferred salaries....................................... (57,585)
Other items.......................................................... 2,811
--------
Net cash provided by operating activities......................... 26,950
--------
Cash flows from investing activities
Purchase of equipment..................................................... (26,673)
--------
Net cash used in investing activities............................. (26,673)
--------
Cash flows from financing activities
Dividends paid............................................................ (61,866)
Treasury stock purchased.................................................. (2,871)
Proceeds from bank loans.................................................. 100,000
--------
Net cash provided by financing activities......................... 35,263
--------
Net increase in cash........................................................ 35,540
Cash, beginning of period................................................... 80,528
--------
Cash, end of period......................................................... $116,068
========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-26
<PAGE> 85

CONSORTIUM 2000, INC.

SUMMARY OF ACCOUNTING POLICIES

NATURE OF OPERATIONS

Consortium 2000, Inc. (the "Company") was formed in December 1988 under the
laws of the State of California. The major business of the Company is to conduct
consultative marketing service for designing, developing, operating and managing
a telecommunication users group to produce savings for its member clients. The
Company provides services to various clients who are connecting with long
distance carriers throughout the nation.

REVENUE RECOGNITION

Revenue is recognized upon completion of the telephone call.

USE OF ESTIMATES

SIGNIFICANT UNCERTAINTIES

The Company's commission revenue is based upon its clients' usage of
telephone services with various long distance carriers. A majority of its
commission revenue comes from the Company's business clients. Generally, any
economic fluctuation in business client's operations will have significant
impact on their telephone usage. Accordingly, the fluctuation in the usage of
the Company's clients will have affected the commission revenue of the Company.

CASH AND CASH EQUIVALENTS

For purposes of cash flows, the Company considers all short-term debt
securities purchased with an original maturity of three months or less to be
cash equivalents.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company provides an allowance for all doubtful accounts. The balance of
the allowance is based on review of the current status of accounts receivable.
The allowance for doubtful accounts was $115,000 as of June 30, 1996.

EQUIPMENT AND FURNITURE

Equipment is stated at cost with depreciation provided over the estimated
useful lives of the respective assets on the straight-line basis as follows:

<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Professional Equipment.............................................. 5 years
Furniture and fixtures.............................................. 5 years
</TABLE>

Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.

INTANGIBLE ASSETS

Intangible assets consists of start-up costs which are stated at cost.
Amortization is computed using the straight-line method over twenty years.

F-27
<PAGE> 86

CONSORTIUM 2000, INC.

SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)

INCOME TAX

The Company has adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," which requires the Company to recognize deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement carrying amounts and tax basis of
assets using enacted rates in effect in the years in which the differences are
expected to reverse.

At June 30, 1996, the Company has available net operating loss
carryforwards of approximately $500,000 for income tax purposes, which expire in
varying amounts through 2010. Federal tax rules impose limitations on the use of
net operating losses following certain changes in ownership.

The loss carryforward generated a deferred tax asset of approximately
$185,000. The deferred tax asset was not recognized due to uncertainties
regarding its realization, accordingly, a 100% valuation allowance was provided.

During fiscal year 1996, the Company incurred a loss. As a result, the tax
provision of $800 represents the minimum payment required for State income tax
purposes.

EARNINGS PER SHARE

Earnings per share was computed by dividing net loss for the year ended
June 30, 1996 by the weighted average number of shares for the year ended June
30, 1996.

NEW ACCOUNTING STANDARD

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board is effective
for financial statements for fiscal years beginning after December 15, 1995. The
new standard establishes new guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment, certain identifiable
intangible assets and goodwill, should be recognized and how impairment losses
should be measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. The Company does not expect adoption to have a material effect on
its financial position or results of operations.

Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications are not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.

F-28
<PAGE> 87

CONSORTIUM 2000, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- RELATED PARTY TRANSACTIONS

(a) Due from Related Party

R & R Ventures, Inc. (R&R) is an agent which markets residential services
and is engaged by the Company. A board member and shareholder of the Company
owns 50% of R&R. In November, 1995, the Company and R&R agreed that R&R would
allow the Company to deduct R&R's commission from the Company to offset the
$75,422 that R&R owes to the Company. As a result of deducting commissions
earned by R&R from the Related Receivables, the remaining balance due from R&R
as of June 30, 1996 was $52,242.

(b) Officer Loan Receivables

The balance due to the company from an officer is $8,254. Interest accrues
monthly at seven percent per annum.

NOTE 2 -- INTANGIBLE ASSETS

Intangible assets as of June 30, 1996 consist of the following:

<TABLE>
<S> <C>
Start-up cost..................................................... $142,598
Less accumulated amortization..................................... 74,510
--------
$ 68,088
========
</TABLE>

NOTE 3 -- BANK LOAN

In May of 1996, the Company obtained a revolving line of credit of $200,000
from a commercial bank for working capital purposes. The loan matures at March
1, 1997 and has a variable interest rate (1% over the bank's prime rate). The
revolving line of credit is subject to certain restrictive covenants and is
collateralized by substantially all of the Company's assets. At June 30, 1996,
the Company was in violation of all of the financial ratio requirements due to
the write-off of $775,943 which was due from UStel, Inc. The Company obtained a
waiver of default from the lender which temporarily waives the specific events
of default for a period not to exceed sixty days.

NOTE 4 -- OPERATING LEASES

The Company conducts its operations from facilities that are leased under a
56 month noncancelable operating lease expiring in June 1998.

The following is a schedule of future minimum rental payments required
under the above operating lease as of June 30, 1996.

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
------------
<S> <C>
1997............................................................... $60,000
1998............................................................... 60,000
</TABLE>

NOTE 5 -- SHAREHOLDERS' EQUITY

F-29
<PAGE> 88

CONSORTIUM 2000, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

employee's installment payments and the stock price of $3,750. As of June 30,
1996, the treasury stock balance was $2,871.

NOTE 6 -- SUBSEQUENT EVENT

On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by the Company) and Consortium
2000, Inc. entered into a Merger Agreement and Plan of Reorganization ("Merger
Agreement"). Under the terms of the Merger Agreement, (a) Consortium Acquisition
Corporation will be merged with Consortium 2000, Inc., with Consortium 2000,
Inc. being the surviving corporation in the merger; and (b) all of the capital
stock of Consortium 2000, Inc. will be converted into an aggregate of 1,076,923
shares of the Common Stock of UStel. As a result of the Merger Agreement,
Consortium 2000, Inc. will become a wholly-owned subsidiary of UStel.

As a result of entering into the Merger Agreement, Consortium 2000 agreed
to write off a one time difference of $775,943 between UStel's commission
expenses to Consortium 2000 and Consortium 2000's commission revenue from UStel
during the fiscal year ended June 30, 1996. This difference was included in
general and administrative expenses. The management of Consortium 2000 agreed
not to pursue collection of bad debt from UStel.

F-30
<PAGE> 89

CONSORTIUM 2000, INC.

CONDENSED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
JUNE 30, 1996 ------------------
------------- (UNAUDITED)
(AUDITED)
<S> <C> <C>
Current
Cash......................................................... $ 116,068 $ 68,671
Accounts receivable, less allowance for doubtful accounts of
$115,000.................................................. 810,470 854,124
Due from related parties (Note 2)............................ 60,496 51,717
Prepaid expenses and other................................... 121,734 120,591
---------- ----------
Total current assets................................. 1,108,768 1,095,103
---------- ----------
Furniture and equipment........................................
Furniture and fixtures....................................... 22,107 22,107
Professional equipment....................................... 79,327 79,667
---------- ----------
101,434 101,774
Less accumulated depreciation................................ (54,844) (57,844)
---------- ----------
Net furniture and equipment............................... 46,590 43,930
---------- ----------
Other assets
Deposits..................................................... 5,000 5,000
Investments.................................................. -- 115,000
Intangible assets, less accumulated amortization of $74,510
and $76,310, respectively (Note 3)........................ 68,088 66,288
---------- ----------
Total assets......................................... $ 1,228,446 $1,325,321
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Bank loan (Note 4)........................................... $ 100,000 $ 200,000
Accounts payable and accrued expenses........................ 495,538 609,958
Deferred salaries............................................ 37,381 37,381
Dividends payable............................................ 10,764 10,764
---------- ----------
Total current liabilities............................ 643,683 858,103
---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity
Common stock, no par value, with a stated value of $0.01
each, 30,000,000 shares authorized; 6,753,009 shares
issued and 6,750,009 shares outstanding................... 67,530 67,530
Additional paid-in deficit................................... 1,036,166 1,036,166
Accumulated deficit.......................................... (518,933) (636,478)
---------- ----------
Total shareholders' equity........................... 584,763 467,218
---------- ----------
Total liabilities and shareholders equity............ $ 1,228,446 $1,325,321
========== ==========
</TABLE>

See accompanying summary of accounting policies and notes to condensed financial
statements.

F-31
<PAGE> 90

CONSORTIUM 2000, INC.

CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
-------------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues, net....................................................... $ 843,662 $ 748,954
Cost of service provided............................................ 327,227 483,653
---------- ----------
Gross profit................................................... 516,435 265,301
---------- ----------
Operating expenses
Depreciation and amortization..................................... 2,200 4,800
General and administrative........................................ 321,497 387,006
---------- ----------
Income (loss) from operations....................................... 192,738 (126,505)
---------- ----------
Other income (expense)
Other income...................................................... 11,136 12,556
Interest income................................................... 535 361
Interest expense.................................................. (1,531) (3,957)
---------- ----------
Net income (loss) before income tax................................. 202,878 (117,545)
Income tax provision................................................ 66,000 --
---------- ----------
Net income (loss).............................................. $ 136,878 ($ 117,545)
========== ==========
Net income (loss) per share......................................... $ 0.02 ($ 0.02)
========== ==========
Weighted average number of shares outstanding....................... 6,751,676 6,751,676
========== ==========
</TABLE>

See accompanying summary of accounting policies and notes to condensed financial
statements.

F-32
<PAGE> 91

CONSORTIUM 2000, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE PERIOD JULY 1, 1996 THROUGH SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996.......... 6,750,009 $67,530 $1,036,166 $(518,933) $ 584,763
Net loss for period............ -- -- -- (117,545) (117,545)
--------- ------- ---------- ---------- ----------
Balance, September 30, 1996.... 6,750,009 $67,530 $1,036,166 $(636,478) $ 467,218
========= ======= ========== ========== ==========
</TABLE>

See accompanying summary of accounting policies and notes to condensed financial
statements.

F-33
<PAGE> 92

CONSORTIUM 2000, INC.

CONDENSED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1995 1996
-------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................... $136,878 $(117,545)
Adjustments to reconcile net income (loss) to net cast provided by
operating activities:
Depreciation and amortization.................................... 2,200 4,800
Amounts due from related party................................... -- (115,000)
Change in operating assets and liabilities
Accounts receivable............................................ 11,917 (35,375)
Prepaid expenses and other..................................... (83,521) 1,643
Accounts payable and accrued expenses.......................... (8,193) 114,420
-------- ---------
Net cash provided by (used in) operating activities......... 59,281 (147,057)
-------- ---------
Cash flows from investing activities
Purchase of equipment............................................... (10,010) (340)
-------- ---------
Net cash used in investing activities....................... (10,010) (340)
-------- ---------
Cash flows from financing activities
Proceeds from related party loans................................... 51,420 --
Proceeds from bank loans............................................ -- 100,000
-------- ---------
Net cash provided by financing activities................... 51,420 100,000
-------- ---------
Net increase (decrease) in cash....................................... 100,691 (47,397)
Cash, beginning of period............................................. 80,527 116,068
-------- ---------
Cash, end of period................................................... $181,218 $ 68,671
======== =========
</TABLE>

See accompanying summary of accounting policies and notes to condensed financial
statements.

F-34
<PAGE> 93

CONSORTIUM 2000, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 1996 AND SEPTEMBER 30, 1996

NOTE 1 -- INTERIM FINANCIAL INFORMATION

The interim financial statements for the three months ended September 30,
1995 and 1996 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair representation of the results of the interim periods. The
results of operations for the three-month period ended September 30, 1996 are
not necessarily indicative of the results for the entire year.

NOTE 2 -- RELATED PARTY TRANSACTIONS

(a) Due from Related Party

(b) Officer Loan Receivables

The balance due to the Company from an officer at June 30, 1996 and
September 30, 1996 is $8,254 and $7,754, respectively. Interest accrues monthly
at seven percent per annum.

NOTE 3 -- INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1996 1996
-------- -------------
<S> <C> <C>
Start-up cost....................................... $142,598 $ 142,598
Less accumulated amortization....................... 74,510 76,310
-------- --------
$ 68,088 $ 66,288
======== ========
</TABLE>

NOTE 4 -- BANK LOAN

In May of 1996, the Company obtained a revolving line of credit of $200,000
from a commercial bank for working capital purposes. The loan matures at March
l, 1997 and has a variable interest rate (1% over the bank's prime rate). The
revolving line of credit is subject to certain restrictive covenants and is
collateralized by substantially all of the Company's assets. At June 30, 1996,
the Company was in violation of all of the financial ratio requirements due to
the write-off of $775,943 which was due from UStel, Inc. The Company obtained a
waiver of default from the lender which temporarily waives the specific events
of default for a period not to exceed sixty days.

NOTE 5 -- OPERATING LEASES

The Company conducts its operations from facilities that are leased under a
56 month noncancelable operating lease expiring in June 1998.

F-35
<PAGE> 94

CONSORTIUM 2000, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a schedule of future minimum rental payments required
under the above operating lease as of June 30, 1996.

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-------------------------------------------------------------------
<S> <C>
1997............................................................. $60,000
1998............................................................. 60,000
</TABLE>

NOTE 6 -- STOCKHOLDERS' EQUITY

In October of 1995, the Company repurchased 3,000 shares of common stock
from one of its shareholders for $3,750 and agreed to sell these shares to a key
employee. Per the employee stock purchase agreement, the employee will make
installment payment each payroll period, and has made 15 installment payments.
When the employee fulfills his performance, the Company will make a contribution
for the difference between the employee's installment payments and the stock
price of $3,750. As of June 30, 1996 and September 30, 1996, the treasury stock
balance was $2,871 and is included as a component of the accumulated deficit.

NOTE 7 -- BUSINESS COMBINATION

On August 14, 1996, UStel, Inc. ("UStel"), Consortium Acquisition
Corporation (a wholly-owned subsidiary created by UStel, Inc.) and Consortium
2000, Inc. entered into a Merger Agreement and Plan of Reorganization ("Merger
Agreement"). Under the terms of the Merger Agreement, (a) Consortium Acquisition
Corporation will be merged with Consortium 2000, Inc., with Consortium 2000,
Inc. being the surviving corporation in the merger; and (b) all of the capital
stock of Consortium 2000, Inc. will be converted into an aggregate of 1,076,923
shares of the Common Stock of UStel, Inc. As a result of the Merger Agreement,
Consortium 2000, Inc. will become a wholly-owned subsidiary of UStel.

As a result of entering into the Merger Agreement, the Company agreed to
write off a one time difference of $775,943 between UStel, Inc.'s commission
expenses to the Company and the Company's commission revenue from UStel, Inc.
during the fiscal year ended June 30, 1996. This difference was included in
general and administrative expenses. The management of the Company agreed not to
pursue collection of bad debt from UStel, Inc.

F-36
<PAGE> 95

======================================================

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 14
Capitalization.......................... 15
Price Range of Common Stock............. 16
Dividend Policy......................... 16
Selected Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 24
Business................................ 31
Management.............................. 43
Principal and Selling Stockholders...... 48
Certain Transactions.................... 49
Description of Securities............... 51
Shares Eligible for Future Sale......... 56
Underwriting............................ 57
Legal Matters........................... 58
Experts................................. 58
Index to Financial Statements........... F-1
</TABLE>

======================================================
======================================================

LOGO

USTEL, INC.

1,350,000 UNITS

------------------------
PROSPECTUS
------------------------
Barber & Bronson Incorporated

FEBRUARY 14, 1997

======================================================