USTEL INC, 10QSB, 1998-11-19

USTEL INC
10QSB, 1998-11-19
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended September 30, 1998

Commission File number 0-24098

UStel, Inc.
(Name of Small Business Issuer in its charter)

Minnesota 95-4362330
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)

2033 6th Avenue Suite #401, Seattle WA 98121
(Address of principal executive offices) (Zip code)

(206) 505-4600
(Issuer's telephone number, including area code)

Check whether the issuer: (1) filed all reports required to be filed
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes_____ No_X___.

State the number of shares outstanding of each of issuers's classed
of common equity as of the latest practicable date.

Class Outstanding as of November 12, 1998

Common Stock, $0.01 par value per share 11,538,161 shares

Transitional Small Business Disclosure Format (check one)
Yes______; No___X__

<PAGE>
USTEL, INC.

Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 1998

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998................. 2

Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1997 and
Three Months and Nine Months Ended September 30, 1998.....4

Condensed Consolidated Statement of Changes In
Stockholders' Equity For The Period
January 1, 1998 to September 30, 1998.....................5

Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and
Nine Months Ended September 30,...........................6

Summary of Accounting Policies............................7

Notes To Condensed Consolidated Financial Statements.....12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.....................23

PART II - OTHER INFORMATION

Items 1 through Item 4 and Item 6 are not applicable for the
quarter ended September 30, 1998.

Item 5:

The Company's violation of the covenants of the Loan and Security
Agreement with Coast Business Credit and Goldman Sachs Credit
Partners L.P. (Lenders) and UStel, Inc. and Arcada Communications
(Borrowers), and the related initialing of a proposed Term Sheet
for resolution of those covenant violations, is discussed in Note
6 of Notes to the Condensed Consolidated Financial Statements
included herewith.

<PAGE>
<TABLE>
ITEM 1:
UStel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<CAPTION>
December 31, September 30,
1997 1998
Assets (Notes 6 and 8) (Audited) (Unaudited)

Current
<S> <C> <C>
Cash $ 135,689 $ 1,853,574

Accounts receivable, less allowance for
doubtful accounts of $1,696,000 and
$4,629,000, respectively 6,937,179 8,471,926
Prepaid expenses and other current assets 606,067 1,006,962
---------- ----------
Total current assets 7,678,935 11,332,462
---------- ----------
Property and equipment
Office furniture and equipment 3,073,452 6,488,956
Leasehold improvement 197,616 263,838
---------- ----------
3,271,068 6,752,794

Less accumulated depreciation (873,198) (1,286,264)
---------- ----------
Net property and equipment 2,397,870 5,466,530
---------- ----------
Original issue discount on Goldman Sachs
Note Payable, net of amortization of
-0- and $140,000, respectively (Note 6) -0- 2,660,000

Goodwill, net of accumulated amortization
of $102,454 and $440,351, respectively
(Notes 5 and 6) 4,333,049 17,362,301

Related party receivables (Note 4) 348,308 353,041
Other receivables, less allowance for
doubtful accounts of $559,000 and
$559,000, respectively 149,170 142,946
Start-up costs less accumulated amortization
of $162,538 and $240,967, respectively 78,429 -0-

Deferred charges (Note 3) 982,938 1,977,663
----------- -----------
Total Assets $15,968,699 $39,294,943
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.

</TABLE>
-2-
<PAGE><TABLE>

UStel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<CAPTION>
December 31, September 30,
1997 1998
Liabilities and stockholders' equity (Audited) (Unaudited)
Current Liabilities
<S> <C> <C>
Current portion of long-term debt $ -0- $ 1,537,210
Notes payable to Goldman Sachs CP(Note 6) -0- 17,757,452
Notes payable to bank (Note 7) 3,338,592 187,501
Notes payable to others 1,561,532 400,000
Accounts payable and accrued expenses 3,066,322 13,122,178
Accrued revenue taxes 282,311 759,460
---------- -----------
Total current liabilities 8,248,757 33,763,801
Other long-term debt -0- 707,092
Convertible subordinated debentures
(Note 9 ) 500,000 750,000
---------- -----------
Total liabilities 8,748,757 35,220,893
---------- -----------
Commitments and contingencies (Note 10)

Stockholders' equity
Series A Convertible Preferred Stock,
$.01 par value, 5,000,000 shares
authorized and 275,000 and 275,000
shares outstanding (Liquidation
Preference $1,500,000) (Note 11) 2,750 2,750
Series B Convertible Preferred Stock,
$.01 par value, 750,000 shares
authorized and -0- and 750,000
shares outstanding (Liquidation
Preference $750,000) (Note 11) -0- 7,500
Common stock, $.01 par value, 40,000,000
shares authorized; 6,911,515 and
11,503,252 shares issued and
outstanding (Note 12) 69,115 115,032
Additional paid-in capital 18,238,940 25,499,269
Accumulated deficit (11,090,863) (19,980,892)
----------- -----------
Sub-total 7,219,942 5,643,659

Less Treasury Stock (Note 13) -0- (1,569,609)
----------- -----------
Total Stockholders' Equity 7,219,942 4,074,050
----------- -----------
Total Liabilities and Stockholders'
Equity $15,968,699 $39,294,943
=========== ===========
<F/N>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.
-3-
/TABLE
<PAGE>
<TABLE>

UStel, Inc.
Condensed Consolidated Statements of Operations
<CAPTION> (Unaudited)
Three Months Ended Nine
Months Ended
September 30,
September 30,
---------------------------------------------------------
1997 1998 1997
1998
----------- -----------
- ------------ -----------
<S> <C> <C> <C>
<C>
Revenues $ 6,533,388 $10,164,539 $
18,101,835 $ 24,511,848
----------- -----------
- ------------ ------------
Operating expenses
Cost of services sold 5,303,454 8,354,486
14,147,561 19,264,880
Selling 163,887 559,224
1,397,641 1,206,484
General and administrative 3,461,556 6,479,866
5,292,431 10,357,575
Depreciation and amortization 154,031 448,201
337,355 790,807
---------- -----------
- ------------ ------------
Total operating expenses 9,082,928 15,841,777
21,174,988 31,619,746
---------- -----------
- ------------ ------------
Loss from operations (2,549,540) (5,677,238)
(3,073,153) (7,107,898)

Interest income 5,413 6,812
26,305 21,605

Interest expense (126,975) (1,030,573)
(428,232) (1,803,736)
----------- ------------
- ------------ ------------
Net loss $(2,671,102) $(6,700,999) $
(3,475,080) $ (8,890,029)
=========== ============
============ ============
Net loss per common
shareholder $ (0.40) $ (0.58) $
(0.68) $ (1.04)
======= ========
======== ========
Weighted average number of common
shares outstanding 6,622,031 11,499,595
5,129,826 8,523,166
========= =========
========= =========
<FN>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.

-4-
</TABLE>
<PAGE>
<TABLE>
UStel, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1998
<CAPTION> (Unaudited)
Additional
Preferred Stock Common Stock Paid-In
Accumulated Treasury
Shares Amount Shares Amount Capital
Deficit Stock Total
<S> <C> <C> <C> <C> <C>
<C> <C> <C>

Balance, January 1, 1998 275,000 $ 2,750 6,911,515 $ 69,115
$18,238,940 $(11,090,863) $ -0- $ 7,219,942

Issuance of Common Stock
for Investor relations
contract (Note 12) 100,000 1,000
76,000 -0- -0- 77,000
Issuance of Common Stock
for acquisition of
sub-agent contracts
(Note 12) 41,737 417
38,628 -0- -0- 39,045
Issuance of Common Stock
for acquisition of
Arcada Communications,
Inc. (Notes 6 and 12) 4,200,000 42,000
3,678,864 -0- -0- 3,720,864
Issuance of Preferred Stock
Series B for acquisition of
Arcada Communications,
Inc. (Notes 6 and 11) 750,000 7,500
447,857 -0- -0- 455,357
Issuance of Common Stock
to Sutro & Co. in
connection with Arcada
Communications, Inc.
(Notes 6 and 12) 150,000 1,500
131,388 -0- -0- 132,888
Issuance of Common Stock
to Catalyst Financial in
connection with Arcada
Communications, Inc.
(Notes 6 and 12) 100,000 1,000
87,592 -0- -0- 88,592
Value of Original Issue
Discount (Note 6) -0- -0- -0- -0-
2,800,000 -0- -0- 2,800,000
Acquisition of Treasury Stock
(1,569,609) (1,569,609)
Net loss for period -0- -0- -0- -0-
- -0- (8,890,029) -0- (8,890,029)
---------- ------- ---------- --------
- ----------- ------------ ----------- -----------
Balance, Sept.30, 1998 1,025,000 $10,250 11,503,252 $115,032
$25,499,269 $(19,980,892) $(1,569,609) $ 4,074,050
========== ======= ========== ========
=========== ============ =========== ===========
<FN>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.

</TABLE>
-5-
<PAGE>
<TABLE>
UStel, Inc.
Condensed Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
<CAPTION> (Unaudited)
Nine Months Ended September 30,
1997 1998
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (3,475,080) $ (8,890,029)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 363,740 790,807
Provisions for losses on accounts receivable 1,597,085 2,656,716
Increase (decrease) from change in:
Accounts receivable (1,195,417) (2,368,028)
Prepaid expenses and other (43,013) (297,598)
Accounts payable and accrued expenses 2,674,707 4,927,955
Other items (38,848) 111,107
------------ ------------
Net cash sources (uses) in operating activities (116,826) (3,069,070)
------------ ------------
Cash flows from investing activities:
Purchase of equipment (730,777) (1,301,165)
Acquisition of Arcada Communications, Inc.
net of cash acquired -0- (6,409,716)
Costs of offering and acquisition program (429,399) 328,466
Cost of treasury stock - cash portion -0- (758,000)

------------ ------------
Net cash used in investing activities (1,160,176) (8,140,415)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable - banks 18,011,118 12,494,986
Proceeds from notes payable-Goldman Sachs CP -0- 26,627,435
Proceeds from related party debt 24,500 -0-
Proceeds from sale of common stock 6,345,531 -0-
Payments on related parties debt (108,500) (55,536)
Payments on other debt (22,815,619) (25,265,960)
Costs of borrowing -0- (873,555)
------------ ------------
Net cash provided by financing activities 1,457,030 12,927,370
------------ ------------
Net increase in cash 180,028 1,717,885
Cash, beginning of period 225,926 135,689
------------ ------------
Cash, end of period $ 405,954 $ 1,853,574
============ ============
Supplemental Data:

Interest Paid $ 365,346 $ 966,860
Income Taxes Paid 4,753 6,860
<F/N>
See accompanying summary of accounting policies and notes to condensed
consolidated financial statements.

</TABLE>
-6-
<PAGE>
UStel, Inc. and Subsidiaries
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 Stock (1,000 shares) for 950,000 shares of the
reincorporated company's Common Stock. Accordingly, the financial statements
were retroactively restated.

Financial Statements

This quarterly statement on Form 10-QSB should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto filed on Form
10-KSB for the year ended December 31, 1997.

Principles of Consolidation

The balance sheets reflects the accounts of UStel, Inc., and its wholly-owned
subsidiaries Consortium 2000, Inc. (Consortium) and Arcada Communications,
Inc. (Arcada)(acquired June 25, 1998 - see Note 6). The condensed
consolidated statement of operations for the nine-month period ended September
30, 1997 does not include the results of operations of any of the operations
of Arcada and Will Call; these companies were acquired after September 30,
1997. The condensed consolidated statement of operations for the nine-month
period ended September 30, 1997 does not include the results of operations of
Consortium and Pacific for the first six months of 1997; these companies were
acquired in July 1997. The condensed consolidated statements of operations
for the three month and nine month periods ended September 30, 1998 do not
include the results of operations for Arcada for the first six months of 1998
because it was effectively acquired at the end of the second quarter of 1998.
All significant intercompany transactions and balances have been eliminated in
consolidation.

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. Leasehold improvements are amortized over the shorter
of the estimated life of the asset or the term of the lease.

Deferred Charges

-7-
<PAGE>

UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)

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 are
charged against paid-in capital if the public offering is consummated. If the
public 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 are justified.

Income Taxes

Income taxes are accounted for under Financial Accounting Standards Board,
SFAS 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

On March 31, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS No. 128). This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB No. 15, "Earnings Per Share". SFAS No. 128 provides for
the calculation of Basic and Diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. This pronouncement is effective for fiscal years
and interim periods ending after December 15, 1997. The Company has adopted
this pronouncement and it had no effect on its loss per share computations.

For the purpose of calculating loss per share for the nine months ended
September 30, 1997, net loss was increased by $722,000 for deemed dividend to
the preferred shareholder as a result of the January 24, 1997 change in the
conversion features of the Series A Convertible Preferred Stock (see Note 11).

Loss per share is based on the weighted average number of Common Stock
outstanding during each period presented. For three and nine-month periods
ended September 30, 1997 and 1998, outstanding stock options, warrants and
convertible preferred stock and debentures outstanding are not included in the
diluted earnings per share calculation since their effect would be
anti-dilutive.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
-8-
<PAGE>

UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)

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 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 Risk

The Company maintains cash balances at several financial institutions.
Deposits not to exceed $100,000 are insured by the Federal Deposit Insurance
Corporation. At September 30, 1998, the Company had uninsured cash of
$906,244.

Stock-based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.

SFAS 123 also encourages, but does not require companies to record
compensation cost for stock-based employee compensation. The Company has
chosen to continue to account for stock-based compensation utilizing the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. Also in accordance with SFAS No. 123, the
Company has provided footnote disclosure with respect to stock-based employee
compensation. The cost of stock-based compensation is measured at the grant
date on the value of the award and recognizes this cost over the service
period. The value of the stock-based award is determined using a pricing
model whereby compensation cost is the excess of the fair market value of the
stock as determined by the model at grant date or other measurement date over
the amount an employee must pay to acquire the stock.

New Accounting Pronouncements

Disclosure of Information About Capital Structure

-9-
<PAGE>

UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)

Statement of Financial Accounting Standard No. 129, "Disclosure of Information
About Capital Structure," (SFAS No. 129) issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. The
new standard reinstated various securities disclosure requirements previously
in effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company adopted SFAS No. 129 as of January 1,
1997 and it had no effect on its financial position or results of operations.

Reporting Comprehensive Income

Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," (SFAS No. 130) issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
adoption is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company has adopted SFAS 130 as of January
1, 1998 and it had no effect on its financial position or results of
operations.

Disclosure About Segments Of An Enterprise And Related Information

Statement of Financial Accounting Standard No. 131, "Disclosure About Segments
Of An Enterprise And Related Information," (SFAS No. 131) issued by the FASB
is effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 131 requires
that public companies report certain information about operating segments,
products, services and geographical areas in which they operate and their
major customers. The Company adopted SFAS 131 as
of January 1, 1998 and it had no effect on its financial position or results
of operations.

Reporting On The Costs of Start-Up Activities

Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
(SOP 98-5) issued by the Accounting Standards Executive Committee is effective
for financial statements beginning after December 15, 1998. SOP 98-5 requires
that the costs of start-up activities should be expenses as incurred. At the
time of adopting this SOP, the initial application should be reported as the
cumulative effect of a change in accounting principles. At June 30, 1998 the
Company had net unamortized start-up costs of $74,864 and had written off this
asset in the accompanying financial statements.

Accounting For Derivative Instruments and Hedging Activities

In June 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities" effective for financial statements with
fiscal years beginning after June 15, 1999. SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. The Company does not expect the adoption

-10-
<PAGE>

UStel, Inc. and Subsidiaries
Summary of Accounting Policies (Continued)

of SFAS No. 133 to have a material impact, if any, on its results of
operations, financial position or cash flows.

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, Accounts Receivable and Accounts Payable

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

Notes Payable

The carrying amount of the Company's notes payable approximates fair value
because the interest rates on these instruments approximate 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.

Related Party Receivables and Notes Payable To Related Parties

The fair value of related party receivables and notes payable to related
parties cannot be determined due to their related party nature.

Reclassification

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

-11-
<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1 - Management's Plan

The Company has suffered recurring losses from operations and had a net loss
of $4,869,814 and $8,890,029 for the year ended December 31, 1997 and the nine
months ended September 30, 1998, respectively. Also, as of December 31, 1997
and September 30, 1998 the Company had a working capital deficit of $569,822
and $22,431,339, respectively (see Note 6 regarding reclassification of
Goldman Sachs Note Payable). The Company's financial condition raised
substantial doubt about the Company's ability at December 31, 1997 to continue
as a going concern. The audited financial statements at December 31, 1997 led
the Company's independent auditors, BDO Seidman LLP, to include in their
opinion a "Going Concern" paragraph. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

The merger between the Company and S. V. V. Sales Corp. (Arcada) (see Note 6)
has not produced the expected synergies contemplated by the merger. The
Company has disclosed that it had not met its profitability goals for the
third quarter of 1998 due to the sluggish pace of integrating Arcada
operations. Accordingly, the Company has launched a major re-structuring
aimed at improving its declining financial condition and accelerating the
integration of all operations. In this regard, the Company hired Starshak &
Associates, Inc., in July 1998 to assist the Company with certain financial
and accounting operations and the integration of accounting systems,
coordinate compliance matters with respect to the Loan and Security Agreement
and integrate the Company's operations and management objectives.
Additionally, in September 1998 the Company hired Cornwell Consulting
Services, Inc. (Cornwell) to analyze and evaluate all of the operational,
management, financial and strategic issues facing the Company. Cornwell
completed its analysis and evaluation in October 1998 and the Company has
begun implementing the initiatives recommended by Cornwell. These initiatives
include (I) recruiting and hiring a Chief Executive Officer, Chief Financial
Officer/Controller and Vice President, Sales and Marketing, (ii) recruiting
additional board members with telecommunications expertise, (iii) closing the
Las Vegas and Culver City offices and realizing a corresponding reduction in
operational costs and employees, (iv) eliminating duplicative overhead and
integrating operations with respect to various billing and accounting,
customer service and credit and collections functions, (v) developing a sales
and marketing strategy designed to create greater brand identity, competitive
product offerings with higher volume sales and more attractive gross margins,
(vi) hiring an investment banking firm to assist the Company with analyzing
and implementing the Company's strategic growth plan and (vii) consolidating
all operations in the Company's headquarters located in Seattle WA. Further,
the Company's restructuring is designed to reduce the number of switches
required for transferring switchless customers to a "switch" platform, further
negotiate its carrier contracts to achieve more competitive pricing terms and
restructure the duties and responsibilities of certain management personnel
and otherwise continue to reduce its work force. In addition, the Board of
Directors has formed an independent committee of the Board which has hired its
own counsel and retained forensic auditors to

-12-
<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1 - Management's Plan (Continued)

carefully review the Company's acquisition of Arcada.

A portion of the Company's review and restructuring has resulted in additions
to its allowance for bad debts on trade accounts receivable, recognition of
additional expense for disputed credits with its source for long distance
traffic and additions to its reserves for charges relating to reduction in
work force and consolidation in its operations and amounts for settlement of
legal disputes. These additional reserves are more fully discussed in Note 17
of Notes to Condensed Consolidated Financial Statements.

Note 2 - Interim Financial Statements

The interim condensed consolidated financial statements for the three-month
periods and the nine-month periods ended September 30, 1997 and September 30,
1998 are unaudited. In the opinion of management, such financial statements
reflect all adjustments necessary for a fair presentation of the results of
the interim periods. The results of operations for the three-month period and
nine-month period ended September 30, 1998 are not necessarily indicative of
the results for the entire year.

Note 3 - Deferred Charges

Deferred charges consist of the following:

December 31, September 30
1997 1998

Development costs $ 111,437 $ 111,437
Acquisition costs - Arcada 365,966 -0-
Offering costs 34,361 -0-
Loan fees 274,478 1,411,359
Calling card program 138,108 138,108
Deposits and other 321,128 1,031,220
---------- ----------
1,245,478 2,692,124
Accumulated amortization (262,540) (714,461)
---------- ----------
$ 982,938 $1,977,663
========== ==========

Note 4 - Related Party Receivables

At December 31, 1997 and September 30, 1998, the Company has amounts due from
various related parties relating to loans as follows:

-13-
<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 4 - Related Party Receivables (Continued)

December 31, September 30,
1997 1998
Loans:
Related entities..........................$ 337,329 $ 339,984
Officers.................................. 102,904 100,857
Employees................................. 8,075 12,200
--------- ---------
448,308 453,041
Less allowance for bad debt (100,000) (100,000)
--------- ---------
$ 348,308 $ 353,041
========= =========
Note 5 - 1997 Acquisitions

On July 8, 1997, the Company completed the acquisition of Consortium 2000,
Inc., its principal sales source since mid-1994. Under the terms of the
Agreement (a) the Company merged with Consortium 2000, Inc., with the Company
being the surviving corporation in the merger, and (b) all of the capital
stock of Consortium 2000, Inc. was converted into an aggregate of 1,076,923
shares of the Common Stock of the Company. As a result of the acquisition,
Consortium 2000, Inc. is now a wholly-owned subsidiary of the Company. The
transaction was accounted for as a purchase as the assets and liabilities were
recorded at their fair values and the operations were included as of the date
of the acquisition. Goodwill created in the acquisition is being amortized
over twenty years.

On July 25, 1997, the Company completed the acquisition of the Pacific
Cellular Division of Pacific Communications, Inc., in exchange for an
aggregate of 304,014 shares of the Common Stock of the Company.

Because the Company's Common Stock received by the shareholders in the
transaction had not been registered by the Company with the Securities and
Exchange Commission by April 23, 1998, the shareholders of Pacific
Communications, Inc. have the right to put, i.e., to sell back to the Company
100% of the shares of the Company Common Stock received from the Company in
the transaction. The price at which the shares must be purchased by the
Company upon exercise of the put option is $3.81 per share. The transaction
was accounted for as a purchase of the assets and liabilities were recorded at
their fair values and the operations were included as of the date of the
acquisition. Goodwill created in the acquisition is being amortized over
twenty years.

See Note 13, where to sellers of Pacific Cellular have exercised the "Put"
option of shares of the Company received for Pacific Cellular and the Company
has re-acquired those shares as treasury shares.

On October 1, 1997, the Company completed the acquisition of Will Call
Communications in exchange for an aggregate of 38,737 shares of the Common

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<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 5 - 1997 Acquisitions (Continued)

Stock of the Company. The transaction was accounted for as a purchase as the
assets and liabilities were recorded at their fair values and the operations
were included as of the date of the acquisition. Goodwill created in the
acquisition is being amortized over twenty years.

Note 6 - Acquisition of S. V. V. Sales Corp. and Loan and Security Agreement

On June 25, 1998 the Company completed the acquisition of S. V. V. Sales Corp.
(Arcada), a privately held switch-based interexchange carrier based in
Seattle, WA. As consideration for this acquisition, the Company issued to the
Arcada shareholders 4,200,000 shares of UStel, Inc., Common Stock (valued at
$3,720,864), $750,000 in 14.75% Convertible Subordinated Debentures (see Note
9), $750,000 in Series B Convertible Preferred Stock (valued at $455,357 - see
Note 11), paid $5,000,000 in cash and issued a note for $520,388. The Company
also granted an aggregate of 585,000 stock options to certain Arcada
employees. The transaction was accounted for as a purchase as the assets and
liabilities were recorded at their fair values and the operations were
included as of the date of the acquisition. Goodwill created in the
acquisition is being amortized over twenty years.

Concurrent with the Closing of the acquisition of Arcada, the Company entered
into a Loan and Security Agreement (the Loan Agreement) dated as of June 25,
1998 between Coast Business Credit and Goldman Sachs Credit Partners L.P. on
the one hand (the Lenders) and the Company and Arcada on the other hand (the
Borrowers) whereby the Lenders agreed to lend the Company up to a maximum of
$35,000,000, secured by all the assets of the Company. The Loan Agreement
provides that the $35,000,000 in financing is to be divided among a
$12,500,000 revolving accounts receivable line of credit, a $15,000,000 term
loan and a $7,500,000 equipment purchase facility. The Loan Agreement also
provides for additional advances from time to time for acquisitions acceptable
to the Lenders in their sole and absolute discretion.

The Term Loan is to be repaid through monthly principal payments of $200,000
commencing February 1999 and increasing to $300,000 per month during the
period February 2000 through maturity of the loan in July 2003. The Equipment
Loan is to be repaid in forty-eight monthly principal installments of $18,913
that commenced in July 1998.

The Company is required under the terms of the carrier agreements to provide
Letters of Credit to certain wireless carriers. These Letters of Credit total
approximately $250,000 and have not yet been provided which is a violation of
these carrier agreements.

As part of the transaction, the Lenders received five year warrants to acquire
shares of Common Stock of the Company. The warrants contain registration
rights. The following table sets forth the number of shares subject to the

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<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6 - Acquisition of S. V. V. Sales Corp. and Loan Security Agreement
(Continued)

warrants issued to the Lenders and the exercise price per share:

NUMBER OF SHARES EXERCISE PRICE
SUBJECT TO WARRANTS PER SHARE

7,500,000 $1.00
1,000,000 1.50
2,000,000 3.00
2,000,000 5.00

12,500,000

Sutro & Co. (Sutro) and Catalyst Financial Corp. (Catalyst), who assisted the
Company in the acquisition of Arcada and the placement of the financing with
the Lenders, each received compensation for their role in these transactions.
Sutro, for its role, received a cash payment of $768,000, 150,000 shares of
the Company's Common Stock subject to registration rights and five year
warrants, subject to registration rights, to purchase 619,228 shares of the
Company's Common Stock at an exercise price of $1.23 per share. Catalyst, for
its role, received a cash payment of $200,000 and 100,000 shares of the
Company's Common Stock subject to registration rights.

The warrants issued in connection with the Arcada acquisition were valued at
$2,800,000 using the Black-Sholes valuation method and are recorded as an
original issue discount to be amortized over the term of the Loan Agreement.
The original issue discount asset is being amortized over a sixty-month period
that commenced July 1998.

The Company is in violation of financial loan covenants including minimum net
revenues, minimum gross profit, minimum EBITDA, minimum tangible net worth,
minimum debt service coverage ratio, minimum availability and certain other
loan covenants as of September 30, 1998, under the Loan Agreement. On
November 16, 1998 the Company entered into a Term Sheet with Coast Business
Credit and Goldman Sachs Credit Partners L.P. The Term Sheet, which
contemplates, among other things, amending certain financial covenants set
forth in the Loan and Security Agreement, securing a waiver from the lenders
for all events of default currently existing under the Loan and Security
Agreement, receiving funding in excess of that provided for under the terms
set forth in the Loan and Security Agreement and establishing certain other
terms and conditions associated with the operations of the Company and the
relationship between the Company, Coast Business Credit and Goldman Sachs
Credit Partners L.P. This Term Sheet is attached to this Form 10-QSB as
Exhibit 10.74.

Note 7 - Notes Payable to Bank

In December 1995, the Company obtained a Senior Credit Facility ("Credit

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<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7 - Note Payable To Bank (Continued)

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 could borrow up to an amount which is
the lesser of $5 million or up to 85% of the Company's eligible receivables.
Subject to the $5 million maximum borrowing, in addition to amounts supported
by receivables, the Company could 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, 1997 was $3,338,592.
This Credit Facility was paid off at June 30, 1998, when it had a balance of
$4,561,551, by use of a portion of the proceeds in the Loan Agreement
($4,311,551) discussed in Note 6 and the issuance of a 12-month note in the
amount of $250,000. The outstanding balance on this note was $187,501 at
September 30, 1998.

Note 8 - Notes Payable To Others

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 was 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.
This loan was paid off in full in February 1997. Total warrants of 240,000
granted and remaining outstanding as of December 31, 1997 were for 240,000
shares of Common Stock.

As of September 9, 1996, the Company was indebted for telecommunications
service to WilTel, its primary long distance carrier, in the amount of
$5,595,963 (before application of certain volume discounts available under the
transmission service contract)(the "1996 Promissory Note"). Payment of this
amount was settled by paying required amounts over the second half of 1996 and
the Company's agreement to execute a promissory note in the amount of
$3,860,275. The 1996 Promissory note bore interest at the rate of 15% per
annum through November 14, 1996 and 18% thereafter and was secured by a second
lien on all the Company's assets. The 1996 Promissory Note was also
guaranteed by Consortium 2000 and secured by certain assets of Consortium
2000. On February 28, 1997, the principal balance and accrued interest under
the promissory note was paid in full from proceeds of a public offering. The
amount outstanding on the 1996 Promissory Note, $3,707,239, was paid off in
February 1997.

On October 15, 1997 the Company executed a second Promissory Note (the "1997

-17-
<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8 - Notes Payable To Others (Continued)

Promissory Note") payable to WorldCom (formerly WilTel, Inc.) in the principal
amount of $1,561,532 in payment for telecommunications services provided to
the Company. This note bore interest at the annual rate of 16%. This note
was initially due on December 31, 1997. However, under the terms of the note,
the Company elected to extend the due date until January 31, 1998, with the
annual interest rate increasing to 20% for the period of January 1, 1998 to
January 31, 1998. Further, if the note was not paid in full by January
31, 1998, the annual interest rate for the period of execution of the note
until it is paid in full becomes 18%. As of December 31, 1997 the unpaid
principal on this note was $1,561,532. This note was paid in full on June 30,
1998.

As a part of the consideration in the acquisition of Arcada (see Note 6), the
Company assumed the obligation for payment of a note payable to one of the
selling shareholders of Arcada in the amount of $520,388. The principal on
this note was due in twelve equal monthly installments, plus interest of 10%,
commencing in July 1998. The Company is in default for payments due
subsequent to July 1998. The outstanding balance of this note is $486,609.

Note 9 - Convertible Subordinated Debentures

In January 1994, the Company issued 12% Convertible Subordinated Debentures
("12.00% Debentures") in the aggregate amount of approximately $500,000. The
12.00% Debentures bear interest at the rate of 12% per annum, payable on the
first day of each calendar quarter. Principal and accrued interest will be
due and payable on or before December 31, 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).

On June 25, 1998 in conjunction with the acquisition of Arcada, the Company
issued $750,000 of 14.75% Convertible Debentures (14.75% Debentures) to
selling shareholders of Arcada. These 14.75% Debentures bear interest at the
annual rate of 14.75% payable quarterly commencing September 25, 1998. The
14.75% Debentures are interest only until such time as the Loan Agreement (see
Note 6) has been paid in full, at which time the 14.75% Debentures become
payable in eight equal quarterly installments of principal plus accrued
interest on the outstanding amount. The 14.75% Debentures are convertible into
an aggregate of up to 382,653 shares of the Company's Common Stock, as
adjusted, for such things as stock splits, stock dividends and other similar
dilutive occurrences. The Company is currently in default on payment of
interest on this series of debentures.

Note 10 - Commitments And Contingencies

Legal Proceedings

Columbia Capital Corporation v. UStel, Inc. This action seeks recovery for an

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<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 10 - Commitments and Contingencies (Continued)

alleged non-payment owed to Columbia by the Company under a Finder's Fee
Agreement. The complaint of breach of contract specifically alleges that
Columbia is owed the sum of $499,173 as a "break-up" fee by the Company. The
Company is contesting the complaint and believes the lawsuit is without merit.
No provision has been made for this lawsuit.

Kamel Nacif v. UStel, Inc. This action has been brought by certain
shareholders of the Company, in the state of Minnesota where the Company is
domiciled, to enforce Shareholders' Dissent and Appraisal Rights under that
states statutes. Plaintiffs brought this action as a result of the merger of
S. V. V. Sales Corp. (Arcada) with and into a wholly-owned subsidiary of the
Company. This merger enabled plaintiff to exercise dissent and appraisal
rights under Minnesota statutes and plaintiffs have demanded the fair value of
their shares. The Company was notified of this action on November 9, 1998 and
counsel for the Company has not yet had a chance to respond to the action.
However, the Company has reflected the re-acquisition of 345,890 shares of its
common stock as treasury shares at a value of $411,609 in the accompanying
statements.

The Company is a party from time to time to litigation or proceedings
incident to its business. There are no pending legal proceedings 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.

Operating Leases

The Company occupies certain office and switching facilities under operating
leases expiring on various dates through 2002 with options to renew on
switching facilities. Insurance and maintenance expenses covering these
facilities are the Company's obligations.

Employment Contracts

The Company has employment agreements with certain executive officers and
employees, the terms of which expire on various dates through August, 1999.
Such agreements provide for minimum salary levels and incentive bonuses to be
determined at the discretion of the Board of Directors.

Note 11 - Preferred Stock

In September 1994, the Company issued 550,000 shares of $.01 par value Series
A Convertible Preferred Stock ("Preferred A"). Each share of Preferred A
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 A. Each share of Preferred A is convertible into one
share of Common Stock, as adjusted, for such things as stock splits, stock

-19-
<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 11 - Preferred Stock (Continued)

dividends and other similar dilutive occurrences. At any time subsequent to
October 16, 1995, each holder of record of Preferred A may, at his or her
option, convert all or part of the Preferred A shares held into fully paid
Common Stock.

On January 24, 1997, the Company agreed to amend the terms of the Preferred A
to change the conversion ratio from 1:1 to 1.3636:1. As a result of this
change, the 550,000 shares of Preferred A became convertible into 749,980
shares of the Company's Common Stock. This amendment in the terms of
Preferred A resulted in a deemed dividend of $722,000 at that time. During May
1997, 275,000 shares Preferred A were converted into 374,990 shares of Common
Stock.

On June 25, 1998, the Company issued 750,000 shares of $0.01 par value Series
B Convertible Preferred Stock (Preferred B) as part of the consideration for
the acquisition of Arcada (See Note 6). Those shares have an aggregate
liquidation preference value of $750,000. Each share of Preferred B entitles
its holder to receive dividends at the rate of 14.75 cents per annum from the
date issued until the date redeemed.

These shares of Preferred B are convertible into an aggregate of up to 382,653
shares of Common Stock, as adjusted, for such things as stock splits, stock
dividends and other similar dilutive occurrences and assuming no default in
the payment of dividends. The Company is currently in default on payment of
dividends on this series of preferred stock.

Note 12 - Common Stock

In February 1997, the Company completed the sale of 1,452,500 units, each unit
consisting of two shares of Common Stock and one redeemable Common Stock
purchase warrant. The net proceeds to the Company were $6,349,313.

In 1997 the Company issued 85,000 of its Common shares to a consultant in
exchange for the services of that individual over a two-year period commencing
October 1, 1997. The shares were valued at the fair value at the date of
issuance. The services to be provided by the consultant are in the areas of
international negotiations, both with customers and telecommunications service
providers.

In 1998 the Company issued 100,000 of its Common shares to an independent
consulting firm in exchange for the services of that consulting firm over a
period commencing January 1, 1998 and ending one year after the date on which
the Company completes a registration statement on Form S-3 that registers the
shares granted under the agreement between the parties. The agreement called
for an investor relations program conducted by the consultants and payment of
a minimum monthly retainer of $7,500. This contract has been terminated.

In 1998 the Company entered into an agreement with one of the independent

-20-
<PAGE>

UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 12 - Common Stock (Continued)

agents of its subsidiary, Consortium 2000, whereby that agent became an
employee of that subsidiary. A portion of the compensation of the individual
involved a series of quarterly payments, in the form of the Company's Common
Stock in exchange for liquidation of commission obligations of the subsidiary
to that individual and his former company. Through September 30, 1998 a total
of 41,737 shares of Common Stock had been issued in exchange for liquidation
of commissions owed to the agent.

Note 13 - Acquisition of Treasury Stock

In connection with the acquisition of Pacific Cellular in July 1997 (Note 5),
the Company issued 304,014 of its previously unissued shares of Common Stock.
The shareholders of Pacific Communications, Inc. have the right to put, i.e.,
to sell back to the Company 100% of the shares of the Company Common Stock
received from the Company in the transaction because the Company's Common
Stock received by the shareholders in the transaction had not been registered
by the Company with the Securities and Exchange Commission by April 23, 1998.
The price at which the shares must be purchased by the Company upon exercise
of the put option is $3.81 per share. On June 25, 1998 the Company paid
$758,000 and issued a note payable in the amount of $400,000 to honor the
"Put" of those shares. The underlying shares were simultaneously tendered
into an escrow account with the expectation that some or all of the shares
would be sold to satisfy the remaining amount owed.

Note 14 - Income Taxes

At December 31, 1997, the Company has available net operating loss
carryforwards of approximately $12,040,066 for income tax purposes, which
expire in varying amounts through 2012. 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 carryover may be utilized at a rate of approximately $402,000 per year.

The net operating loss carryforward generated a deferred tax asset of
approximately $4,454,825 as of December 31, 1997. The deferred tax asset was
not recognized since it is more likely than not that they will not be
realized. Accordingly, a 100% valuation allowance was provided.

Note 15 - Forensic Audit

An independent committee of the Company's Board of Directors has engaged its
own independent counsel who retained forensic auditors to carefully review the
Company's acquisition of Arcada Communications, Inc. (see Note 6).

Note 16 - Proposed Nasdaq Delisting

The Company has received notification from the Nasdaq Stock Market that it is

-21-
<PAGE>
UStel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 16 - Proposed Nasdaq Delisting (Continued)

not in compliance with Nasdaq's requirements for continued listing on the
Nasdaq Small Cap Market and that, consequently, Nasdaq will seek to delist the
Company's securities.

In response to this notification, the Company has requested an oral hearing to
further address Nasdaq's concerns and present the Company's proposal for
satisfying the continued listing requirements. An oral hearing has been
scheduled for November 20, 1998 in Washington, D. C.

The Company is not in compliance with the net tangible assets, net income,
market capitalization requirements for continued listing on the Nasdaq Small
Cap Market. In addition, the Company is not in compliance with the minimum
bid price requirement for continued listing, nor are there the required number
of market makers for the Company's warrants.

Note 17 - Restructuring and Review

As a result of the difficulties the Company has experienced in integrating the
operations of Arcada, management launched a major restructuring and review
aimed at improving its declining financial condition. The review included
analyses of the appropriate carrying value of certain assets and reserves for
possible losses.

Management has completed a review of the collectability of its trade accounts
receivable and, as a result, has increased its allowance for bad debts by
$1,975,000, to provide additional reserves for certain trade accounts
receivable previously thought to be collectable.

An additional reserve of $1,118,851 was accrued at September 30, 1998 relating
to certain credits with WorldCom, the Company's principle carrier, that had
previously been recorded and have been disallowed by the carrier. The credit
disputes are ongoing; however, management believes that the likelihood of
receiving some of the credits is less than previously estimated.

Note 18 - Option To Buy Common Stock

On September 18, 1998, an option to buy 8,000,000 shares of the Company's
$0.01 par value per share common stock was issued to Eurocom Communications,
Ltd. (Eurocom) of Tel Aviv, Israel. The option expired on November 17, 1998
and allowed Eurocom to buy the shares at an exercise price of $0.75 per share.
If the option was exercised, Eurocom would have acquired approximately 41% of
the Company's then outstanding common stock. Eurocom has stated in its
Section 13(D) filing with the Securities and Exchange Commission that the
purpose of the acquisition of the Company's securities is in order to acquire
control of the Company.

-22-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto filed on Form 10-KSB for
the year ended December 31, 1997. This quarterly report, as well as the
Annual Report on Form 10-KSB, 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 competition in the industry, UStel has since the beginning of
1997 experienced a decline in operating margins due to a decline in revenue
per minute of usage from its customer base. While management of UStel is
attempting to mitigate this trend by achieving greater cost efficiency from
the acquisition of additional switches and providing a broader range of value
added services which may allow for higher pricing, there can be no assurance
that UStel will be successful in these efforts.

In 1997 UStel completed the acquisition of Consortium 2000, Inc. and its
marketing organization, the acquisition of the Pacific Cellular wireless
services assets, and the acquisition of the Will Call assets. These
acquisitions, when combined with the acquisition on June 25, 1998 of Arcada
are consistent with UStel's strategy to evolve from its historic emphasis on
long distance service into a full-service telecommunications company.

UStel also announced in September 1997 that as a result of a management
review, certain unprofitable services and products will be discontinued. As a
result, UStel recorded a charge of $1,700,000 in its third quarter 1997
results. The charge comprised a write-down of discontinued services and an
increase in bad debt expense related to those operations, services and
products and severance expenses. There can be no assurance that charges to
earnings will not occur in the future.

The Company has suffered recurring losses from operations and had a net loss
of $4,869,814 and $8,890,029 for the year ended December 31, 1997 and the nine
months ended September 30, 1998, respectively. Also, as of December 31, 1997
and September 30, 1998 the Company had a working capital deficit of $569,822
and $22,431,339, respectively (see Note 6 regarding reclassification of the
Loan Agreement). The Company's financial condition raised substantial doubt
about the Company's ability at December 31, 1997 to continue as a going
concern. The audited financial statements at December 31, 1997 led the
Company's independent auditors, BDO Seidman LLP, to include in their opinion a
"Going Concern" paragraph. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

and accounting operations and the integration of accounting systems,
coordinate compliance matters with respect to the Loan and Security Agreement
and integrate the Company's operations and management objectives.
Additionally, in September 1998 the Company hired Cornwell Consulting
Services, Inc. (Cornwell) to analyze and evaluate all of the operational,
management, financial and strategic issues facing the Company. Cornwell
completed its analysis and evaluation in October 1998 and the Company has
begun implementing the initiatives recommended by Cornwell. These initiatives
include (I) recruiting and hiring a Chief Executive Officer, Chief Financial
Officer/Controller and Vice President, Sales and Marketing, (ii) recruiting
additional board members with telecommunications expertise, (iii) closing the
Las Vegas and Culver City offices and realizing a corresponding reduction in
operational costs and employees, (iv) eliminating duplicative overhead and
integrating operations with respect to various billing and accounting,
customer service and credit and collections functions, (v) developing a sales
and marketing strategy designed to create greater brand identity, competitive
product offerings with higher volume sales and more attractive gross margins,
(vi) hiring an investment banking firm to assist the Company with analyzing
and implementing the Company's strategic growth plan and (vii) consolidating
all operations in the Company's headquarters located in Seattle WA. Further,
the Company's restructuring is designed to reduce the number of switches
required for transferring switchless customers to a "switch" platform, further
negotiate its carrier contracts to achieve more competitive pricing terms and
restructure the duties and responsibilities of certain management personnel
and otherwise continue to reduce its work force. In addition, the Board of
Directors has formed an independent committee of the Board which has hired its
own counsel and retained forensic auditors to carefully review the Company's
acquisition of Arcada.

Operationally, the restructuring addresses a reduced number of switches placed
in high usage areas, a renegotiation of its carrier contracts and a
substantial reduction in work force. In addition, the Board of Directors has
formed an independent committee of the board, which has its own counsel, who
retained forensic auditors to carefully review the Company's acquisition of
Arcada.

A portion of the Company's review and restructuring has resulted in additions
to its allowance for bad debts on trade accounts receivable, recognition of
additional expense for disputed credits with its source for long distance
traffic and additions to its reserves for charges relating to reduction in
work force and consolidation in its operations. These additional reserves are
more fully discussed in Note 17 of Notes to Condensed Consolidated Financial
Statements.

Loan and Security Agreement

Concurrent with the Company's acquisition of Arcada, the Company entered into
a Loan and Security Agreement (the Loan Agreement) dated as of June 25, 1998
between Coast Business Credit and Goldman Sachs Credit Partners L.P. on the
one hand (the Lenders) and the Company and Arcada on the other hand (the
Borrowers) whereby the Lenders agreed to lend the Company up to a maximum of

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

$35,000,000, secured by all the assets of the Company. The Loan Agreement
provides that the $35,000,000 in financing is to be divided among a
$12,500,000 revolving accounts receivable line of credit, a $15,000,000 term
loan and a $7,500,000 equipment purchase facility. The Loan Agreement also
provides for additional advances from time to time for acquisitions acceptable
to the Lenders in their sole and absolute discretion.

Results of Operations

UStel'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.

UStel'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.
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.

Comparison of Results of Operations--Three Months Ended September 30, 1998
Compared to Three Months Ended September 30, 1997:

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

Revenues for the three months ended September 30, 1998 were $10,164,539 as
compared to $6,533,388 for the three months ended September 30, 1997. The
increase in revenues in 1998 was the result of expansion from a customer base
of 18,000 at January 1, 1997 to a customer base in excess of 35,000 at
September 30, 1998. Growth in revenue has been affected by increasing
competition in the long distance telecommunications marketplace and the
Company's need to shift to products with less gross margin to enable it to
compete. The growth in the Company's customer base and acquisitions have
accounted for most of the growth in periodic revenues. Revenues were also
affected by the acquisitions of Consortium 2000 and Pacific Cellular during
the second half of 1997, which accounted for combined revenues of $2,000,867
in the third quarter of 1998. Revenues were also affected by the acquisition
of Arcada Communications at the end of the second quarter of 1998, which had
revenues of $3,116,425 in the third quarter of 1998. It is expected that
future revenues will continue to be affected by these acquisitions.

Cost of services sold for the three months ended September 30, 1998 was
$8,354,486 as compared to $5,303,454 for three months ended September 30,
1997. 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 and recent acquisitions. Cost of services sold for the quarter ended
September 30, 1998 includes a provision made at that date for additional
reserves of $1,118,851 relating to certain credits with WorldCom, the
Company's primary carrier, that had previously been recorded and have been
disallowed by the carrier. The credit disputes are ongoing; however,
management believes that the likelihood of receiving some of the credits is
less than previously estimated. Cost of services sold for the three months
ended September 30, 1998 (excluding the aforementioned additional reserve) was
71.2% of the revenues produced in the three months ended September 30, 1998.
Cost of services sold for the three months ended September 30, 1997 was 81.2%
of the revenues produced in that period of 1997. This decrease in the cost of
services sold, as a percentage of revenues, reflects the increasing
contribution of the business of Pacific Cellular, which has a higher gross
margin, and higher margin switched based traffic of Arcada. The Company's
gross margin continues to be impacted by competition in the long distance
telecommunications marketplace. Consequently, the Company's products are
priced to reflect these competitive pressures.

General and administrative expenses for the three months ended September 30,
1998 were $6,479,866 as compared to $3,461,556 for the three months ended
September 30, 1997. General and administrative expenses for the three month
period ended September 30, 1998 included an addition to the allowances for bad
debts in the amount of $1,975,385 and an addition to the reserve for severance
and restructuring in the amount of $600,000 resulting from management's review
of operations and the plans for restructuring of the Company. The increase
in general and administrative expenses reflects the addition of Consortium
2000 and Pacific Cellular, which were acquired in July 1997, and Arcada
Communications, which was acquired at the end of the second quarter of 1998.

Selling expenses for the three months ended September 30, 1998 were $559,224
as compared to $163,887 for the three months ended September 30, 1997. The

-26-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

increase is attributable to the additions of Pacific Cellular and Arcada
Communications, offset by the elimination of certain selling expenses in 1998
as a result of the consolidation of Consortium 2000 with the Company.

Depreciation and amortization for the three months ended September 30, 1998
was $448,201 as compared to $154,031 for the three months ended September 30,
1997. Depreciation for the three months ended September 30, 1998 was $216,531
as compared to $104,149 for the three months ended September 30, 1997. 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 $2,717,000 at January 1, 1997 to approximately
$3,742,000 at September 30, 1998, exclusive of the acquisition of Arcada.

During the three months ended September 30, 1998, the Company reported a loss
from operations of $5,677,238 (which amount includes the reserves for credit
disputes, additional allowance for bad debts and reserves for severance and
restructuring) versus a loss from operations of $2,549,540 for the three
months ended September 30, 1997.

Interest expense for the three months ended September 30, 1998, was $1,030,573
(including amortization of loan fees in the amount of ($335,854) as compared
to $126,975 (including amortization of loan fees in the amount of $19,764) for
the three months ended September 30, 1997. In December, 1995, the Company
obtained a senior credit facility (the "Credit Facility") from a finance
company in the amount of up to $5,000,000. This Credit Facility bore interest
at the Bank of America Reference Rate plus 2% per annum, with a minimum of
$15,000 interest expense per month. On June 30, 1998 this Credit Facility was
replaced by the Loan and Security Agreement with Goldman Sachs Credit Partners
L.P. and Coast Business Credit. Interest expense charged on the Loan and
Security Agreement for the three months ended September 30, 1998 was $539,098
excluding amortization of related loan fees over sixty months, the period of
the credit agreement.

Interest income for the three months ended September 30, 1998 was $6,812
principally from the Company's accrual of interest on related party loans, as
compared to $5,413 for the three months ended September 30, 1997.

During the three months ended September 30, 1998, the Company reported a net
loss of $6,700,999 versus a net loss of $2,671,102 for the three months ended
September 30, 1997.

Comparison of Results of Operations-27-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

of 18,000 at January 1, 1997 to a customer base in excess of 35,000 at
September 30, 1998. Growth in revenue has been affected by increasing
competition in the long distance telecommunications marketplace and the
Company's need to shift to products with less gross margin to enable it to
compete. The growth in the Company's customer base and acquisitions have
accounted for most of the growth in periodic revenues. Revenues were also
affected by the acquisitions of Consortium 2000 and Pacific Cellular during
the second half of 1997, which accounted for combined revenues of $5,169,227
in the first nine months of 1998. Revenues were also affected by the
acquisition of Arcada Communications at the end of the second quarter of 1998,
which had revenues of $3,116,425 in the third quarter of 1998. It is expected
that future revenues will continue to be affected by these acquisitions.

Cost of services sold for the nine months ended September 30, 1998 was
$19,264,880 as compared to $14,147,561 for the nine months ended September 30,
1997. 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 and recent acquisitions. Cost of services sold for the quarter ended
September 30, 1998 includes a provision made at that date for additional
reserves of $1,118,851 relating to certain credits with WorldCom, the
Company's primary carrier, that had previously been recorded and have been
disallowed by the carrier. The credit disputes are ongoing; however,
management believes that the likelihood of receiving some of the credits is
less than previously estimated. Cost of services sold for the nine months
ended September 30, 1998 (excluding the aforementioned reserve addition) was
74.0% of the revenues produced in the nine months ended September 30, 1998.
Cost of services sold for the nine months ended September 30, 1997 was 78.2%
of the revenues produced in that period of 1997. This decrease in the cost of
services sold, as a percentage of revenues, reflects the increasing
contribution of the business of Pacific Cellular, which has a higher gross
margin, and higher margin switched based traffic of Arcada. The Company's
gross margin continues to be impacted by competition in the long distance
telecommunications marketplace. Consequently, the Company's products are
priced to reflect these competitive pressures.

General and administrative expenses for the nine months ended September 30,
1998 were $10,357,576 as compared to $5,292,431 for the nine months ended

September 30, 1997. General and administrative expenses for the three month
period ended September 30, 1998 included an addition to the allowances for bad
debts in the amount of $1,975,385 and an addition to the reserve for severance
and restructuring in the amount of $600,000 resulting from management's review
of operations and the plans for restructuring of the Company. The increase in
general and administrative expenses reflects the addition of Consortium 2000
and Pacific Cellular, which were acquired in July 1997 and the addition of
Arcada Communications at the end of the second quarter of 1998.

Selling expenses for the nine months ended September 30, 1998 were $1,206,484
as compared to $1,397,641 for the nine months ended September 30, 1997. The
decrease is attributable to the elimination of certain selling expenses in
1998 as a result of the consolidation of Consortium 2000 with the Company,

-28-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

which eliminated costs were partially offset by selling cost incurred by
Arcada Communications.

Depreciation and amortization for the nine months ended September 30, 1998 was
$790,807 as compared to $337,355 for the nine months ended September 30, 1997.
Depreciation for the nine months ended September 30, 1998 was $435,810 as
compared to $277,634 for the nine months ended September 30, 1997. The
increase in depreciation was the result of the Company's increasing
investments in telephone switching equipment and facilities 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 $2,717,000 at
January 1, 1997 to approximately $3,742,000 at September 30, 1998, excluding
the acquisition of Arcada.

During the nine months ended September 30, 1998, the Company reported a loss
from operations of $7,107,899 (which amount includes the reserves for credit
disputes, additional allowance for bad debts and reserves for severance and
restructuring) versus a loss from operations of $3,073,153 for the nine months
ended September 30, 1997.

Interest expense for the nine months ended September 30, 1998, was $1,803,736
(including amortization of loan fees in the amount of $617,007) as compared to
$428,232 (including amortization of loan fees in the amount of $59,291) for
the nine months ended September 30, 1997. In December, 1995, the Company
obtained a senior credit facility (the "Credit Facility") from a finance
company in the amount of up to $5,000,000. This Credit Facility bore interest
at the Bank of America Reference Rate plus 2% per annum, with a minimum of
$15,000 interest expense per month. Interest expense charged on that Credit
Facility for the first six months of 1998 was $560,933 including amortization
of related loan fees over thirty six months, the period of that credit
facility. On June 30, 1998 this Credit Facility was replaced by the Loan and
Security Agreement with Goldman Sachs Credit Partners L.P. and Coast Business
Credit. Interest expense charged on the Loan and Security Agreement for the
three months ended September 30, 1998 was $539,098 excluding amortization of
related loan fees over sixty months, the period of the credit agreement.

Interest income for the nine months ended September 30, 1998 was $21,605
principally from the Company's accrual of interest on related party loans, as
compared to $26,305 for the nine months ended September 30, 1997, when
interest income also included earnings from certain certificates of deposit.

During the nine months ended September 30, 1998, the Company reported a net
loss of $8,890,029 versus a net loss of $3,475,080 for the nine months ended
September 30, 1997.

Liquidity and Capital Resources

UStel's working capital deficit at September 30, 1998 was $22,431,339. During
the nine months ended September 30, 1998 UStel's operating activities used
cash flow of $3,069,070.

-29-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

The Company is in violation of certain covenants under the Loan and Security
Agreement. Accordingly, the amounts outstanding under the Loan and Security
Agreement have been reclassified as a current liability.

At September 30, 1998, UStel's consolidated accounts receivable, net of
allowance for doubtful accounts, were $8,614,872.

To raise funds to meet cash needs for operations and fixed asset acquisitions,
the Company has relied upon an initial public offering of Common Stock, a
secondary public offering of units comprising Common Stock and warrants, a
private placement of Series A Preferred Stock, a private placement of
convertible subordinated debentures, a private placement of units comprised of
Common Stock and warrants, a revolving credit facility and periodic bridge
financings.

In December, 1995, UStel obtained a 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. Except for a 12-month note
issued to the Bank for $250,000, this Credit Facility was paid in full at
September 30, 1998 with proceeds from the new Loan Agreement discussed more
fully in Note 6 of Notes to Condensed Consolidated Financial Statements.

As of September 9, 1996, UStel was indebted for transmission service to
WilTel, its primary long distance carrier, in the amount of $5,595,963 (before
application of certain volume discounts available under the transmission
service contract). Payment of this amount was settled by a series of required
payments and the Company's agreement to execute a promissory note in the
amount of $3,860,275.

-30-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

The note bore interest at the rate of 15% per annum through November 14, 1996
and 18% thereafter and was secured by a second lien on all of UStel's assets.
The promissory note was also guaranteed by Consortium 2000 and secured by
certain assets of Consortium 2000. On February 28, 1997, the principal
balance and accrued interest under the promissory note was paid in full from
the proceeds of the 1997 public offering.

In February 1997, UStel successfully completed a public offering of 1,452,500
Units (with each Unit consisting of two shares of the Company's Common Stock
plus one redeemable Common Stock Purchase Warrant) for $6.00 per Unit less
underwriter's discount, commissions and offering costs. The net proceeds to
UStel were approximately $6,349,000. With the net proceeds of this offering
UStel was able to pay off all of its outstanding notes payable, with the
exception of its Credit Facility.

In the fall of 1997, UStel retained Sutro & Co. to raise up to $15,000,000 in
order to finance the $5,000,000 cash portion of the Merger consideration,
expand UStel's switch network and provide working capital. That effort
resulted in the Company entering into the Loan and Security Agreement executed
in June 1998, which provides up to $35,000,000 of financing from Coast
Business Credit and Goldman Sachs Credit Partners L.P., as more fully
discussed in Note 6 of Notes to Condensed Consolidated Financial Statements.

On October 15, 1997, UStel executed a promissory note in favor of WorldCom
Network Services, Inc., its primary long distance carrier, in the amount of
$1,561,532 which represented all past due amounts under the Company's
transmission service contract. The note bears interest at the rate of 16% per
annum through December 31, 1997 and 18% thereafter and is secured by a second
lien on all of UStel's assets. The Company repaid this obligation from the
proceeds of the Loan and Security Agreement entered into in June 1998.

Management's Plan

The Company has suffered recurring losses from operations and had a net loss
of $4,869,814 and $8,890,029 for the year ended December 31, 1997 and the nine
months ended September 30, 1998, respectively. Also, as of December 31, 1997
and September 30, 1998 the Company had a working capital deficit of $569,822
and $22,431,339, respectively. The Company's financial condition raised
substantial doubt about the Company's ability at December 31, 1997 to continue
as a going concern. The audited financial statements at December 31, 1997 led
the Company's independent auditors, BDO Seidman LLP, to include in their
opinion a "Going Concern" paragraph. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

-31-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

integration of all operations. In this regard, the Company hired Starshak &
Associates, Inc., in July 1998 to assist the Company with certain financial
and accounting operations and the integration of accounting systems,
coordinate compliance matters with respect to the Loan and Security Agreement
and integrate the Company's operations and management objectives.
Additionally, in September 1998 the Company hired Cornwell Consulting
Services, Inc. (Cornwell) to analyze and evaluate all of the operational,
management, financial and strategic issues facing the Company. Cornwell
completed its analysis and evaluation in October 1998 and the Company has
begun implementing the initiatives recommended by Cornwell. These initiatives
include (I) recruiting and hiring a Chief Executive Officer, Chief Financial
Officer/Controller and Vice President, Sales and Marketing, (ii) recruiting
additional board members with telecommunications expertise, (iii) closing the
Las Vegas and Culver City offices and realizing a corresponding reduction in
operational costs and employees, (iv) eliminating duplicative overhead and
integrating operations with respect to various billing and accounting,
customer service and credit and collections functions, (v) developing a sales
and marketing strategy designed to create greater brand identity, competitive
product offerings with higher volume sales and more attractive gross margins,
(vi) hiring an investment banking firm to assist the Company with analyzing
and implementing the Company's strategic growth plan and (vii) consolidating
all operations in the Company's headquarters located in Seattle WA. Further,
the Company's restructuring is designed to reduce the number of switches
required for transferring switchless customers to a "switch" platform, further
negotiate its carrier contracts to achieve more competitive pricing terms and
restructure the duties and responsibilities of certain management personnel
and otherwise continue to reduce its work force. In addition, the Board of
Directors has formed an independent committee of the Board which has hired its
own counsel and retained forensic auditors to carefully review the Company's
acquisition of Arcada.

A portion of the Company's review and restructuring has resulted in additions
to its allowance for bad debts on trade accounts receivable, recognition of
additional expense for disputed credits with its source for long distance
traffic and additions to its reserves for charges relating to reduction in
work force and consolidation in its operations. These additional reserves are
more fully discussed in Note 17 of Notes to Condensed Consolidated Financial
Statements.

Because of the extended management review of operations and sales and
marketing and continuing pressures on cash flows and expenditures, management
believes that fourth quarter 1998 revenues will be flat or declining.

Year 2000

The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900

-32-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)

rather than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, which the Company expects to
implement on a timely basis, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. Estimated costs associated with this conversion are anticipated to
be minimal. However, if such modifications and conversions are not completed
timely, the Year 2000 problem may have a material adverse impact on the
operations of the Company.

-33-
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit Number Exhibits
<S> <C><C>
2 Merger Agreement and Plan of Reorganization
by and among UStel, Inc., Arcada
Acquisition Corp., and S.V.V. Sales, Inc.,
d.b.a., Arcada Communications dated
September 25, 1997. See Appendix A of Proxy
Statement/Prospectus (8).

2(a) Amendment No. 2 to Agreement for Merger,
dated as of June 25, 1998, by and
among UStel, Inc., Arcada Acquisition Corp.
and S.V.V. Sales, Inc., d.b.a. Arcada
Communications (6).

2.2 Merger Agreement and Plan of Reorganization
by and among UStel, Inc. and
Consortium 2000, Inc., dated August 14, 1996 (5).

2.3 Asset Purchase and Sale Agreement between
UStel, Inc. and Pacific
Communications, Inc., dated July 23, 1997.

3.1 Articles of Incorporation of UStel, Inc.(2).

3.1-a Statement of Designations, Preferences and
Rights of Series A Convertible Preferred
Stock(3).

3.1-b Form of Amendment to Statement of Designation
of Preferences and Rights of
Series A Convertible Preferred Stock (1).

3.2 Bylaws of UStel(2).

4.1 Form of Certificate evidencing shares of
Common Stock of UStel(2).

4.1-a Form Warrant Agreement between UStel and
American Transfer & Trust, Inc (1).

4.2 Form of 12% Convertible Subordinated Debenture(2).

4.3 Form of Representative's Warrant by and
between UStel and Barber & Bronson
Incorporated (1).

4.4 Form of Warrant Certificate (1).

4.5 Form of 14.75% Convertible Subordinated
Debentures dated June 25, 1988 (6).

4.6 Form of Amended & Restated Statement of
Designations, Preferences and Rights
of Series B Convertible Preferred Stock(6).

10.1 Federal Communications Commission Order,
Authorization and Certificate dated
October 20, 1992(2).

10.2 Registration Rights Agreement dated August
14, 1996 between UStel, Inc. and
Noam Schwartz, David Schwartz, the RGB 1993
Family Trust and the TAD 1993
Family Trust (5).

10.3 Carrier Switched Services Agreement between
the Company and WilTel, Inc. dated
March 10, 1993(2).

10.3.1 Collocate Agreement with WilTel, Inc.,
January 9, 1995(4).

10.12 Leases for 3400 square feet in Las Vegas,
Rainbow Interim Partners, June 19,
1995(4).

10.20 1993 Stock Option Plan(2).

10.21 Form of 1993 Option Agreement(2).

10.21-a Amendment to Stock Option Plan(8).

10.22 Stock Option Agreement between UStel, Inc.
and Frank Bonadio dated June 25,
1998 (9).

10.23 Stock Option Agreement between UStel, Inc.
and David Otto dated June 25, 1998
(9).

10.24 Employment Agreement with Abe Sher, January
4, 1996 (1).

10.24-a Modification to Employment Agreement with Abe
Sher (1).

10.26 Coast Business Credit Agreement, December 21, 1995(4).

10.33 Robert L. Diener Consulting Agreements dated
November 1, 1995, August 15,
1995(4).

10.39 Telecommunication Services Agreement, WilTel,
Inc., July 25, 1994, Confidential
Redacted Version(4).

10.40 Registration Rights Agreement dated August
14, 1996 between UStel, Inc. and
Consortium 2000 Shareholders (exhibit 10.1 to
the Company's report on Form 8-K
filed with the SEC on August 27, 1996)(5).

10.43 Promissory Note, and ancillary agreement, by
and between the Registrant and
Kamel B. Nacif, February 29, 1996 (1).

10.45 Form of Employment and Non-Disclosure
Agreement by and between the Registrant
and Danny Knoller, September 1, 1996 (1).

10.47 Indemnification Agreement by and between the
Registrant and Noam Schwartz,
August 2, 1996 (1).

10.49 Amendment Number One to Loan and Security
Agreement, Secured Promissory
Note and Amended and Restated Secured
Promissory Note by and between UStel,
Inc. and Coast Business Credit, September,
1996 (1).

10.52 Sales Agency Agreement by and between
Consortium 2000, Inc., and WorldCom,
Inc., d/b/a/ LDDS WorldCom, June 1, 1995
Confidential Redacted Version (1).

10.53 Hertz Technologies, Inc., Marketing Agreement
and Amendments No. 1 and 2
thereto, by and between Consortium 2000,
Inc., and Hertz Technologies, Inc., July
7, 1995 Confidential Redacted Version (1).

10.54 Distributor Program Agreement and Amendment
No. 1 and 2 thereto, by and
between Consortium 2000, Inc., and LCI
International Telecom Corp., November
3, 1994, January 31, 1996 and March 26, 1996,
respectively, Confidential Redacted
Versions (1).

10.55 Marketing Services Agreement by and between
Consortium 2000, Inc., and New
Enterprise Wholesale Telephone Services,
Limited Partnership, August 15, 1994
Confidential Redacted Version (1).

10.56 Consortium 2000 and Call Points, Inc.,
Agreement by and between Consortium
2000 and Call Points, Inc., September 7, 1995
Confidential Redacted Version (1).

10.60 (a) Letter Agreement by and between UStel,
a, b, c, d Inc. and Jeflor, Inc., June 10, 1996;
(b) Subordinated Convertible Debenture, June
19, 1996;
copyright Warrant, June 21, 1996; and
(d) Guaranty of Loan by Noam Schwartz, Ronnie
Schwartz and Haskel Iny, June
17, 1996 (1).

10.61 Employment and Non-Disclosure Agreement
between the Company and Robert
L.B. Diener, effective as of August 15, 1996 (1).

10.62 Employment and Non-Disclosure Agreement
between the Company and Jerry
Dackerman, effective as of August 15, 1996 (1).

10.63 Employment and Non-Disclosure Agreement
between the Company and Wouter van
Biene, effective as of August 15, 1996 (1).

10.64 Form of Indemnification Agreement between the
Company and Robert L.B. Diener,
effective as of August 15, 1996 (1).

10.65 Form Indemnification Agreement between the
Company and Jerry Dackerman,
effective as of August 15, 1996 (1).

10.66 Form of Indemnification Agreement between the
Company and Wouter van Biene,
effective as of August 15, 1996 (1).

10.67 Form of Financial Consulting Agreement
between the Company and B.C. Capital
Corporation (1).

10.68 Employment Agreement between UStel, Inc. and
Frank Bonadio, June 25, 1998 (9).

10.69 Loan and Security Agreement entered into as
of June 25, 1998, between and among
Coast Business Credit, a division of Southern
Pacific Bank, and Goldman Sachs
Credit Partners LP, on one hand and on the
other hand UStel, Inc. and Arcada
Communications, Inc. (7).

10.70 Warrant to purchase 11,785,715 shares of
UStel, Inc. Common Stock in favor of
Goldman Sachs & Co. dated as of June 25, 1998(7).

10.71 Warrant to purchase 714,285 shares of UStel,
Inc. Common Stock in favor Coast
Business Credit, a division of Southern
Pacific Bank, dated as of June 25, 1998 (7).

10.72 Warrant to purchase 619,228 shares of UStel,
Inc. Common Stock in favor Sutro &
Co. Incorporated, dated as of June 25, 1998 (7).

10.73 Side Letter Agreement dated as of June 25,
1998, by and between Coast Business
Credit, a division of Southern Pacific Bank
and UStel, Inc. and Arcada
Communications, Inc.(7)
</TABLE>
10.74 Term Sheet With Respect
To Possible Agreement Between Coast Business Credit
And Goldman Sachs Credit
Partners L.P. and UStel, Inc. /Arcada
Communications, Inc. In
Connections With That Loan and Security Agreement
Dated June 25, 1998

(1) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2, Amendments 1
through 3, declared effective February 14, 1997, File No. 333-12981
and incorporated by
reference.

(2) Incorporated by reference to the Company's Registration Statement
and Amendments No. 1
through No. 2 on Form SB-2 (Registration No. 33-75210-LA) declared
effective June 21, 1994.

(3) Incorporated by reference to the Company's 10-KSB for the year ended
December 31, 1994
Commission file 0-24098;

(4) Incorporated by reference to the Company's Amendment No. 1 to 10-KSB
for the year ended
December 31, 1995 filed with the SEC on August 27, 1996 Commission
file 0-24098.

(5) Incorporated by reference to the Company's report on Form 8-K, filed
with the SEC on August 27,
1996

(6) Incorporated by reference to the Company's report on Form 8KA, dated
June 25, 1998

(7) Incorporated by reference to the Company's report on Form 8K, dated
June 25, 1998.

(8) Incorporated by reference to the Company's registration Form S-4,
dated October 25, 1997,
Commission file no. 33-38831

(9) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended June
30, 1998, filed August 14, 1998.

.<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.

UStel, INC.

Date November 19, 1998 By:_/s/_David Otto_______________

David Otto
General Counsel and Secretary

Date November 19, 1998 By:_/s/_David Otto_______________

David Otto
Chief Financial Officer

-37-
<PAGE>

EXHIBIT 10.74

TERM SHEET

WITH RESPECT TO POSSIBLE AGREEMENT BETWEEN

COAST BUSINESS CREDIT, A DIVISION OF SOUTHERN PACIFIC BANK ("COAST")
GOLDMAN SACHS CREDIT PARTNERS L.P. ("GOLDMAN")

AND

USTEL, INC. ("USTEL")
ARCADA COMMUNICATIONS, INC.("ARCADA")

IN CONNECTION WITH THAT LOAN AND SECURITY AGREEMENT
DATED JUNE25, 1998
DATED AS OF NOVEMBER___, 1998

THIS TERM SHEET HAS BEEN PREPARED SOLELY FOR THE PURPOSE OF FACILITATING
DISCUSSIONS BETWEEN COAST AND GOLDMAN (COLLECTIVELY "LENDERS"), ON THE ONE
HAND, AND USTEL AND ARCADA (COLLECTIVELY "BORROWERS"), ON THE OTHER HAND, IN
CONNECTION WITH A POSSIBLE AMENDMENT AND WAIVER AGREEMENT BETWEEN LENDERS AND
BORROWERS RELATING TO THE OUTSTANDING DEFAULTS BY BORROWERS UNDER THAT CERTAIN
LOAN AND SECURITY AGREEMENT ENTERED INTO ON OR ABOUT JUNE25, 1998, BETWEEN
LENDERS AND BORROWERS (THE "LOAN AGREEMENT").

THIS TERM SHEET IS NOT INTENDED AS, AND SHALL NOT BE DEEMED: (1)A COMMITMENT
BY LENDERS TO ANY AMENDMENT AND WAIVER AGREEMENT RELATING TO DEFAULTS
OUTSTANDING UNDER THE LOAN AGREEMENT; (2)A COMPLETE LISTING OF THE PROVISIONS
THAT MAY BE NECESSARY OR DESIRABLE IN CONNECTION WITH SUCH POTENTIAL AMENDMENT
AND WAIVER AGREEMENT; OR (3)A WAIVER, FORBEARANCE UPON, OR ALTERATION OF ANY
RIGHTS OR REMEDIES NOW OR HEREAFTER EXISTING IN FAVOR OF LENDERS.

ANY INITIALLY CAPITALIZED TERMS USED HEREIN AND NOT SEPARATELY DEFINED SHALL
HAVE THE MEANINGS SET FORTH IN THE LOAN AGREEMENT.

CLOSING: The execution and delivery of the definitive documentation
representing the matters set forth in this Term Sheet must occur no later than
November20, 1998 (the "Closing Date").

EVENTS OF DEFAULT: Borrowers acknowledge that numerous unwaived Events of
Default have occurred and are continuing under the Loan Agreement. Borrowers
further acknowledge that Lenders have not, and by virtue of their delivery of
this Term Sheet, do not, waive such Events of Default.

WAIVER OF EVENTS OF DEFAULT: As of the Closing Date, Lenders would waive any
and all Events of Default under the Loan Agreement as to which Lenders and
Borrowers have knowledge, which Events of Default would be set forth on a
schedule to the amended Loan Agreement.

ADDITIONAL FUNDING: Lenders would amend section 2.1 of the Loan Agreement
to eliminate the Borrowing Base and to provide that the Maximum Revolving
Amount would be equal to the sum of the following (the "New Maximum Revolving
Amount"): (I) the outstanding balance of the Obligations as of October 31,
1998; plus (ii) the amount of $2,750,000, which amount would be
advanced to Borrowers on a weekly basis in accordance with a budget (the

TERM SHEET (Continued)

"Budget") of Borrowers that is acceptable to Lenders, a copy of which would be
attached to the amended Loan Agreement; plus (iii) the amount needed to
fund Lenders' guaranty of Borrower's obligations under that certain
note payable to WorldCom Network Services, Inc. ("WorldCom") in the principal
amount of $818,356.21 ("WorldCom Note") described in that certain term sheet
between and among WorldCom, Borrower, and Coast ("WorldCom Settlement Term
Sheet"); provided, however, that the amount needed to guaranty the WorldCom
Note would be reduced as and when Borrowers satisfied their obligations under
the WorldCom Note; plus (iv)the Amendment Fee; plus (v) the Guaranty Fee.

WORLDCOM: In accordance with the WorldCom Settlement Term Sheet, Lenders
would guaranty Borrowers' obligations under the WorldCom Note and the traffic
payables owed to WorldCom for the months of September, October, and November
of 1998 ("Traffic Payables"). [Lenders' guaranties of the WorldCom Note and
the Traffic Payables is referred to as the "Guaranteed Amount."] In order to
induce Lenders to issue such guaranties, Borrowers would agree to pay from
funds made available to Borrower under the New Maximum Revolving Amount, the
obligations of Borrowers under the WorldCom Settlement Term Sheet, including,
without limitation, the initial $400,000 payment to WorldCom, the WorldCom
Note, and the Traffic Payables.

RETENTION OF INVESTMENT BANKER: Borrowers immediately would retain an
investment banker reasonably acceptable to Lenders to evaluate and to assist
Borrowers in pursuing all financial options available to them, whether in the
form of an infusion of equity, a merger and/or sale of Borrowers' businesses
("Strategic Alternatives") on terms reasonably acceptable to Lenders. Such
investment banking firm would, at the time of its engagement, provide Lenders
with a written summary of the Strategic Alternatives being considered by such
investment banking firm, the steps to be taken in evaluating such Strategic
Alternatives, including relevant milestones, and the target dates of such
milestones. Such investment banking firm would provide to Lenders on a weekly
basis reports on the investment banking firm's progress in evaluating such
Strategic Alternatives. Borrowers and their investment bankers would be
required to (a)deliver to Lenders a time-line for marketing the Borrowers'
businesses and meeting with potential investors in connection with pursuing
the Strategic Alternatives, in form and substance satisfactory to Lenders,
developed by Borrowers' investment bankers by no later than November 24, 1998;
(b)deliver to Lenders marketing materials, such as an offering memorandum or
reasonably equivalent document which details the Borrowers' businesses and the
Strategic Alternatives, in form and substance satisfactory to Lenders, by no
later than December 1, 1998; copyright enter into a letter of intent by no
later than
February 1, 1999, to effect an infusion of equity, a merger and/or sale of
Borrowers' businesses on terms and conditions satisfactory to Lenders that
would result in payment in full in cash of all Obligations due Lenders; and
(d) use Borrowers' best efforts to consummate such infusion of equity, merger
or sale by no later than April 1, 1999.

SALE OF NONCORE BUSINESSES: Immediately after the Closing Date, Borrowers
would be required to take all steps necessary to sell their wireless
operations, including, without limitation, those operations conducted through
the entity known as Pacific Cellular. Borrowers would be required to enter
into a definitive purchase and sale agreement for Pacific Cellular by no
later than December 18, 1998, for an amount that is equal to or exceeds
$2,000,000, and would be required to use best efforts to consummate such sale

TERM SHEET (Continued)

by no later than January 18, 1999. All proceeds from such sales of Borrowers'
wireless operations would be deposited into the Agent Account, where such
proceeds would be applied to reduce the Obligations and the New Maximum
Revolving Amount.

RESTRUCTURE OF WORLDCOM PAYABLE: Borrowers and WorldCom would have entered
into a definitive settlement agreement in accordance with the WorldCom
Settlement Term Sheet.

RESTRUCTURE OF BONDHOLDERS DEBT: By no later than December 30, 1998, UStel
would be required to restructure its obligations to each of its holders of its
12% Convertible Subordinated Debentures (due December 31, 1998) which were
issued on or about January 28, 1994 ("12% Debentures"), and to each of its
holders of its 14.75% Convertible Subordinated Debentures, which were issued
on or about June 25, 1998 ("14.75% Debentures"), on terms and conditions
acceptable to Lenders ("Restructure Agreements").

RESTRUCTURE OF OTHER PAYABLES: By no later than November 30, 1998,
Borrowers would be required to exercise their best efforts to negotiate
favorable payment terms for their past-due payables (other than those to
WorldCom and the holders of the 12% Debentures and 14.75% Debentures),
including, without limitation, those owed to carriers, trade creditors, and
any other notes payable by UStel and/or Arcada (including, without limitation,
that certain Promissory Note dated July 1, 1998, payable to Keith Leppaluoto
in the original principal amount of $520,388.40).

CORNWELL RECOMMENDATIONS The Board of Directors of Borrowers would be
required to give due consideration to the recommendations of their advisors,
including, without limitation, the recommendations of the Cornwell consulting
team delivered at the board meeting that took place on October23, 1998, and,
after such due consideration, take appropriate action in furtherance of such
recommendations.

INTERIM MANAGEMENT: On or before the Closing Date, Borrowers would be
required to appoint from amongst their existing officers and advisors a crisis
management team, or such other crisis management team as Borrowers may select,
either of which must be reasonably acceptable to Lenders, that would be
committed to remain with Borrowers through the time period necessary to guide
Borrowers through a restructuring or sale of Borrowers' businesses.

EMPLOYMENT OF CONTROLLER: As soon as would be practicable, but in no event
later than 30days after the Closing Date, Borrowers would be required either
to employ a controller or to engage the services of a nationally recognized
accounting firm with the appropriate staff to discharge the duties of such
controller, either of whom would be required to be reasonably acceptable to
Lenders.

BOARD OF DIRECTORS: By no later than December 15, 1998, UStel would be
required to add 1 additional independent member to its board of directors.

INTEREST: Lenders would amend section 2.9 of the Loan Agreement to provide
that all Obligations shall bear interest at a per annum rate equal to 4.0
percentage points above the Base Rate.

TERM SHEET (Continued)

AMENDMENT FEE: An amendment, waiver and additional funding fee of $200,000
("Amendment Fee") would be earned by Lenders on the Closing Date (such fee
would be added to the principal amount of the Obligations).

GUARANTY FEE: A one-time guaranty fee of $150,000 ("Guaranty Fee") would
be earned by Lenders on the Closing Date (such fee would be added to the
principal amount of the Obligations).

USAGE FEES: Lenders would amend section 2.9(b) of the Loan Agreement to
provide for a guaranty usage fee equal to 2.5% per annum times the Guaranteed
Amount.

REPRICING WARRANTS: That certain Warrant UStel issued in favor of Coast as
of June 25, 1998, would be rescinded. That certain Warrant UStel issued in
favor of Goldman as of June 25, 1998, would be amended to reduce the exercise
price from $1.00 to $0.21 for 7,891,106 shares and to cancel the right to
subscribe for and to purchase the shares offered at the prices of $1.50,
$3.00, and $5.00, respectively.

ADDITIONAL WARRANTS: UStel would issue to Lenders (on a ratable basis)
5-year
warrants to acquire 1,953,988 additional shares of Common Stock of UStel for
$0.01 per share.

RESET FINANCIAL COVENANTS: Lenders would agree to modify the financial
covenants in section 7.21 of the Loan Agreement to a level that, in Lenders'
judgment, would protect Lenders against the risk of further deterioration in
the financial stability of Borrowers' businesses.

MATURITY: Section 3.4 of the Loan Agreement would be amended to provide that
the term of the Loan Agreement shall expire, and all Obligations under the
Loan Agreement shall be due and payable, on February1, 1999 ("Maturity Date");
provided, however, if UStel has failed to enter into definitive restructuring
agreements with the holders of UStel's 12% Debentures and 14.75% Debentures by
no later than December 30, 1998, the Maturity Date shall be December 30, 1998;
and, provided, further, if Borrowers have entered into by no later than
February 1, 1999, a letter of intent to sell their businesses on terms and
conditions satisfactory to Lenders that would result in payment in full in
cash of all Obligations due Lenders, Lenders shall extend the Maturity Date to
March 1, 1999.

SALES OF COLLATERAL: The proceeds from the sale of any and all Collateral
would be deposited into the Agent Account.

CIVIL ACTIONS: Borrowers would be required to investigate and disclose to
Lenders any and all actual and potential actions for damages that Borrowers
hold against third parties, and Borrowers would be required to execute and
deliver to Lenders any additional documents necessary to reaffirm or confirm
Lenders' first priority lien upon any and all such actions.

RELEASE: Borrowers each would grant Lenders a general release. Lenders
would grant the members of the board of directors a limited release of claims
arising from the exercise of the so-called Business Judgment Rule, as that
rule has been interpreted under the laws of the state of Delaware.

TERM SHEET (Continued)

BANKRUPTCY COVENANTS: Borrowers would agree to the following covenants [e.g.
restrictions on access to bankruptcy relief, appointment of independent
directors, waiver of the automatic stay, designation of venue for commencement
of bankruptcy proceeding, change in control provisions, agreement to 363 sale
free and clear of liens, etc.]

IN WITNESS WHEREOF, and in order to advise Goldman and Coast to proceed on the
basis outlined above, the undersigned have caused this Term Sheet to be
executed and delivered as of the date first above written.

USTEL, INC.,
A Minnesota corporation
By:
Title:
ARCADA COMMUNICATIONS, INC.,
A Washington corporation
By:
Title:
COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a California
corporation
By:
Title:
GOLDMAN SACHS CREDIT PARTNERS L.P., a Bermuda limited partnership
By:
Title:

<PAGE>

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