AMERICAN COMMUNICATIONS SERVICES INC, 8-K, 1996-07-12

AMERICAN COMMUNICATIONS SERVICES INC
8-K, 1996-07-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

Previous: ILM II LEASE CORP, 10-Q, 1996-07-12

Next: INFORMATION STORAGE DEVICES INC /CA/, S-8, 1996-07-12

<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) June 17, 1996
--------------------------

American Communications Services, Inc.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 0-25314 52-1947746
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)

131 National Business Parkway, Annapolis Junction, Maryland 20701
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (301) 617-4200
----------------------------

Not Applicable
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
2

Item 5. Other Events.

On June 17, 1996, American Communications Services, Inc. (the
"registrant"), filed a registration statement on Form SB-2 with the Securities
and Exchange Commission (the "Commission") relating to the registration of
$133,750,000 proposed maximum aggregate offering price of the registrant's
common stock, par value $.01 per share. A copy of the registration statement
on Form SB-2, filed with the Commission on June 17, 1996, is attached hereto as
Exhibit 99.1 and is incorporated herein by reference.

On July 2, 1996, the registrant filed Amendment No. 1 to the
Registration Statement on Form SB-2 with the Commission. A copy of Amendment
No. 1 to the Registration Statement on Form SB-2, filed with the Commission on
July 2, 1996, is attached hereto as Exhibit 99.2 and is incorporated herein by
reference.

Item 7. Financial Statements and Exhibits.

99.1. Registration Statement on Form SB-2 filed by the
registrant with the Commission on June 17, 1996.

99.2. Amendment No. 1 to the Registration Statement on Form
SB-2 filed by the registrant with the Commission on July 2, 1996.
<PAGE> 3
3

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.

American Communications Services, Inc.

By: /s/ Harry J. D'Andrea
--------------------------------
Name: Harry J. D'Andrea
Title: Chief Financial Officer

Dated: July 12, 1996
<PAGE> 4
4

EXHIBIT INDEX

Exhibit Number Description
- -------------- -----------
99.1 Registration Statement on Form SB-2,
filed by the registrant with the
Commission on June 17, 1996.

99.2 Amendment No. 1 to the Registration
Statement on Form SB-2, filed by the
registrant with the Commission on
July 2, 1996.

<PAGE> 1
EXHIBIT 99.1
============

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY SIC CODE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
</TABLE>

131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

RILEY M. MURPHY, ESQ.
AMERICAN COMMUNICATIONS SERVICES, INC.
131 NATIONAL BUSINESS PARKWAY
ANNAPOLIS JUNCTION, MARYLAND 20701
(301) 617-4215
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------

with copies to:

<TABLE>
<S> <C>
RICHARD C. TILGHMAN, JR., ESQ. GERALD S. BACKMAN, P.C.
PIPER & MARBURY L.L.P. WEIL, GOTSHAL & MANGES LLP
36 SOUTH CHARLES STREET 767 FIFTH AVENUE
BALTIMORE, MARYLAND 21201-3018 NEW YORK, NEW YORK 10153-0119
(410) 576-1678 (212) 310-8348
</TABLE>

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

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

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

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

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

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

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE FEE(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share............. $133,750,000 $46,120.62
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>

(1) In accordance with Rule 457(c) and Rule 457(o) under the Securities Act of
1933, the price used for calculating the registration fee was the last
reported sales price of the Common Stock on June 13, 1996.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

AMERICAN COMMUNICATIONS SERVICES, INC.
CROSS-REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM
-------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus............................ Facing Page of the Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Available Information; Outside Back Cover Page
of Prospectus
3. Summary Information and Risk Factors............. Prospectus Summary; Summary Consolidated
Financial and Operating Data; Risk Factors
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Price Range of Common Stock
6. Dilution......................................... Not Applicable
7. Selling Security Holders......................... Not Applicable
8. Plan of Distribution............................. Underwriting
9. Legal Proceedings................................ Business
10. Directors, Executive Officers, Promoters and
Control Persons................................ Management
11. Security Ownership of Certain Beneficial Owners
and Management................................. Principal Stockholders
12. Description of Securities........................ Description of Capital Stock
13. Interests of Named Experts and Counsel........... Legal Matters; Experts; Change in Independent
Public Accountants
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Description of Capital Stock
15. Organization Within Last Five Years.............. Business; Management's Discussion and Analysis
of Financial Condition and Results of
Operations
16. Description of Business.......................... Business
17. Management's Discussion and Analysis or Plan of
Operation...................................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property.......................... Business
19. Certain Relationships and Related Transactions... Certain Relationships and Related Transactions
20. Market for Common Equity and Related Stockholder
Matters........................................ Dividend Policy; Price Range of Common Stock
21. Executive Compensation........................... Executive Compensation
22. Financial Statements............................. Consolidated Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............ Change in Independent Public Accountants
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED JUNE 17, 1996

PROSPECTUS
, 1996

[ACSI LOGO]

COMMON STOCK

All of the shares of Common Stock offered hereby (the "Offering") are being
sold by American Communications Services, Inc. The Common Stock is traded on the
Nasdaq National Market under the symbol "ACNS." On , 1996 the last
reported sales price of the Common Stock on the Nasdaq National Market was
$ per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE PUBLIC DISCOUNTS AND COMMISSIONS(1) TO THE COMPANY(2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
Total(3).......................... $ $ $
- ----------------------------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the Underwriters.

(2) Before deducting expenses payable by the Company estimated at $ .

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional shares of Common Stock, at the Price to the Public
less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If the option is exercised in full, the total Price
to the Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."

The shares of Common Stock offered hereby are being offered by the several
Underwriters when, as and if delivered to and accepted by them, subject to
certain conditions, including their right to withdraw, cancel or reject orders
in whole or in part. It is expected that delivery of share certificates
representing the shares of Common Stock will be made in New York, New York on or
about , 1996.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
<PAGE> 4

[MAP TO BE INSERTED.]

This Prospectus includes trademarks, trade names and service marks of the
Company and other companies.
------------------------

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITING."

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Please refer to the "Glossary" for the
definitions of certain capitalized terms used herein and elsewhere in this
Prospectus.

Unless otherwise indicated, all information in this Prospectus assumes (i)
that the 464,164 issued and outstanding shares of the Company's Preferred Stock
will be converted into 17,377,278 shares of Common Stock upon completion of this
Offering and (ii) no exercise of the Underwriters' over-allotment option.

THE COMPANY

American Communications Services, Inc. ("ACSI" or the "Company") is a
rapidly growing competitive local exchange carrier ("CLEC," and is referred to
as a competitive access provider or "CAP" with respect to provision of dedicated
services) that constructs and operates digital fiber optic networks and offers
local telecommunications services to long distance companies (interexchange
carriers or "IXCs") and business and government end users in Tier II and Tier
III markets (200,000 to 2,000,000 in population) principally in the southern
United States. The Company provides non-switched dedicated services, including
special access, switched transport and private line services. These services
generally are offered by the Company at a discount to those of the local
exchange carrier ("LEC") and are delivered with a high level of network
reliability. In addition to these dedicated services, the Company is developing
and has begun offering high-speed data services to business, government and
other communications carriers (including Internet service providers, or "ISPs").
High-speed data services include Internet Protocol ("IP") switching, frame relay
and Asynchronous Transfer Mode ("ATM"). Management believes this wide range of
data services will ensure support of legacy, current and emerging applications,
including multimedia applications such as desktop videoconferencing. The Company
has also begun offering on a limited basis enhanced voice messaging services.
Management believes that successful marketing of these high-speed data and
enhanced voice messaging services should provide the Company with increased
revenues, an expanded end-user customer base and relevant marketing experience
that can be leveraged into offering local switched voice services. The Company
plans to begin offering local switched voice services by late 1996.

As of May 31, 1996, ACSI had 15 operational networks and seven additional
networks under construction. From September 30, 1995 to May 31, 1996, the
Company increased its operational networks from five to 15 and increased its
route miles from 92 to 386. The Company expects to have 30 networks in service
or under construction by September 30, 1996 and intends to have a total of 50
local distribution networks in service or under construction by the middle of
calendar-year 1998. To date, management believes that it has been able to deploy
its capital most efficiently by constructing, rather than acquiring, fiber optic
networks. By constructing all of its networks, ACSI believes it has realized
significant cost savings, created considerable networking efficiencies and
ensured quality, reliability and high operating standards. The Company believes
the concentration of its 50 networks principally throughout the southern United
States, together with its planned inter-city broadband backbone network, will
provide an effective platform for the provision of its high-speed data and
enhanced voice messaging and local switched voice services at reduced costs.
ACSI's management team includes several pioneers in the development of the
competitive access industry with demonstrated expertise in successfully
deploying fiber optic networks and aggressively managing operations to generate
positive operating cash flow.

ACSI NETWORKS

<TABLE>
<CAPTION>
TARGETED TO BE
OPERATIONAL AS OF OPERATIONAL BY
MAY 31, 1996 SEPTEMBER 30, 1996
- ---------------------------------------- ---------------------
<S> <C> <C>
Albuquerque, NM Las Vegas, NV Amarillo, TX
Birmingham, AL Lexington, KY Baton Rouge, LA
Charleston, SC Little Rock, AR Colorado Springs, CO
Columbia, SC Louisville, KY Columbus, GA
El Paso, TX Mobile, AL Corpus Christi, TX
Fort Worth, TX Montgomery, AL Jackson, MS
Greenville, SC Tucson, AZ Spartanburg, SC
Irving, TX
</TABLE>

3
<PAGE> 6

Regulatory, technological and competitive trends have stimulated dramatic
growth in the CLEC industry. Regulatory initiatives, such as the
Telecommunications Act of 1996 (the "Telecommunications Act"), are expected to
stimulate additional competition and demand for local telecommunications
services, the total market for which was estimated to be approximately $93.0
billion in 1994. The Company expects continuing pro-competitive regulatory
changes, including those mandated by the Telecommunications Act, together with
increasing customer demand, will create more opportunities for the Company to
provide additional services, expand the Company's networks and address a larger
customer base.

COMPANY STRATEGY

The Company's objective is to become a leading provider of dedicated and
private line, high-speed data, including IP switching, and enhanced voice
messaging and local switched voice services in its 50 planned markets by
implementing the following strategies:

Early Entry in Tier II and Tier III Markets in the Southern United
States. The Company principally targets Tier II and Tier III markets, as
they are generally subject to less competition from other CLECs relative to
larger, more developed Tier I markets, thereby enabling the Company to
achieve market penetration quickly. ACSI intends to continue focusing its
market entry principally in areas of the southern United States because of
attractive demographic trends and expected growth in demand for
telecommunications services in these regions, which the Company believes
have been underserved to date. Between 1989 and 1994, the rate of access
line growth in all regions of the South exceeded the national average by
approximately two and one-half times. Additionally, the 18 state area
targeted by the Company accounts for approximately 37% of the U.S.
population and approximately 35% of the total access lines in the United
States. Although not precluding entry into a particular market by
competitors, the Company believes that the first operational competitive
network in a market generally has a competitive advantage in attracting
customers willing to switch from the LEC. Management believes that the
Company will be the first competitor to offer dedicated services in 14 of
the above-listed 22 markets.

Building on Strong Relationships with IXCs. ACSI has significant
customer relationships with most of the major IXCs serving its markets.
Currently, a substantial portion of the Company's revenues is billed to
IXCs for services provided for the benefit of their customers. IXCs often
choose the access provider for the local portion of a long distance call
and have a strong presence in all of the Company's target markets. By
demonstrating its ability to provide high quality services in its existing
markets, the Company has the opportunity to obtain commitments for
dedicated services from IXCs in new markets. The Company has signed a
five-year agreement with MCImetro Access Transmission Services, Inc.
("MCImetro"), in which MCImetro has agreed to purchase minimum levels of
dedicated services from ACSI and has committed to construct portions of
ACSI's fiber optic networks in six cities. Recently, the Company signed
agreements with AT&T Communications, Inc. ("AT&T") and two other IXCs,
pursuant to which the Company expects AT&T and such other IXCs to use the
Company as a supplier of dedicated special access services, as well as such
other services as may be agreed upon, in particular markets. The Company
markets its services directly to the end user in conjunction with IXC
representatives. The Company expects further growth to the extent that LECs
begin to compete with IXCs for long distance services, thereby providing
IXCs with a competitive incentive to move access business away from LECs to
CLECs. Moreover, because the Telecommunications Act prohibits the three
largest IXCs from jointly marketing their long distance services with
resold local services of an RBOC (until that RBOC itself offers in-region
long distance service), the Company believes that IXCs should have
incentive to resell CLEC services.

Aggressive Bottom-Line Approach to Network Deployment. The Company
rapidly deploys its networks and markets its services in order to quickly
achieve operating cash flow breakeven, i.e., positive EBITDA (net income
(loss) before net interest, income taxes, depreciation and amortization)
before overhead allocations. The Company's objective is to commence
construction of a network in the central business district of a market
immediately upon receipt of the requisite municipal approval. ACSI targets
completion of its initial network phase and commencement of commercial
service in a market within approximately six months after the start of
construction. The Company typically begins premarketing its services at the
start of construction so that once a network becomes operational, customer
demand already exists for its dedicated services. The Company then seeks to
extend the reach of its network

4
<PAGE> 7

outside the central business district in response to customer demand. ACSI
anticipates that each dedicated services network will achieve operating
cash flow breakeven within ten to fifteen months after commencement of
service. In its more mature markets, Louisville, Little Rock and
Greenville, the Company achieved operating cash flow breakeven in a year or
less after initiation of service.

Cost-Effective Entry into Local Switched Voice and Value-Added
Services. To take advantage of the opportunities created by the
Telecommunications Act and following receipt of state regulatory approval
and LEC interconnections, the Company plans to offer local switched voice
services beginning in late 1996 where it is deploying local distribution
networks. The Company expects to deploy telecommunications switching
equipment in eight markets by mid-1997 and in 24 markets by early 1999. To
take advantage of the size and regional concentration of ACSI's markets,
where technically feasible and economically practicable, the Company plans
to deploy a hubbed switching strategy whereby one switch can serve multiple
markets via remote switching modules. This strategy would justify the
switch investment in Tier II and Tier III markets by reducing capital costs
and operating expenses. The Company recently agreed initially to purchase
eight 5ESS()-2000 switching systems from Lucent Technologies. The Company
believes that providing dedicated, enhanced voice messaging and high-speed
data services will enhance the Company's ability to cross-market local
switched voice services.

ACSI has begun offering on a limited basis a range of enhanced voice
messaging services to small and mid-sized business and government end
users. The Company's initial offerings of enhanced voice messaging services
include business voice messaging services utilizing the Company's First
Line and First Line Plus products and one-number services utilizing the
Company's Virtualine and Virtualine 800 products. The Company's enhanced
voice messaging service can function as a virtual PBX. Management believes
that the market for enhanced voice messaging services in 1993 was
approximately $1.4 billion, that this market is underserved and that, with
the availability of enhanced voice messaging services such as the
Company's, this market has the potential for continued, rapid growth as
customers become more accustomed to use of these services. The Company
believes that this market should also serve as an additional customer base
to which the Company can market its local switched voice services.

Developing a Broadband Data Communications Backbone Network with
Extensive Local Points of Presence. The Company believes that switched
data communications represents one of the fastest growing segments of the
telecommunications services market. Industry sources estimate that the U.S.
switched data services market was approximately $1.1 billion in 1995 and
the Company believes that this market will grow to approximately $8.8
billion by 2000 due, in part, to the continuing proliferation of computers
and the increasing need to interconnect these computers via local and wide
area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy,
current and emerging needs. The domestic network infrastructure currently
supporting both voice and data transport requirements is being strained by
the increasing demand for high bandwidth transport at both the local and
national levels. The Company believes that the growth of high speed
applications will further strain the networks that exist today. Unless
additional network infrastructure supporting these high bandwidth
requirements is deployed, the ability of existing networks to service the
demand for both speed and capacity may continue to be strained and may
result in further degradation of the quality of service afforded by network
service providers. The Company believes that this constraint in bandwidth
capacity creates a significant business opportunity for the Company,
particularly in its Tier II and Tier III markets, which have largely been
ignored by the larger data communications providers.

The Company is developing and currently implementing a coast-to-coast
broadband data communications backbone network via leased inter-city fiber
connections on which customers' high-speed data and multimedia traffic may
be transported at a high-quality level on a cost-effective basis. ACSI
believes its ATM-based high bandwidth network will be capable of
simultaneously supporting IP switching, frame relay and multimedia
applications. This technology will allow network customers to migrate
transparently from lower speed services to high bandwidth services, as
their data communications requirements expand. The Company plans to have 40
data POPs in service by the end of calendar year 1996. The Company believes
this backbone, coupled with its planned 50 local distribution networks,
provides the Company with a cost advantage for its high speed data
services.

5
<PAGE> 8

Attract and Retain a Management Team with Extensive Telecommunications
Experience. The senior management of ACSI pioneered the development of
many of the first fiber optic networks in Tier I markets in the United
States and has substantial experience in rapidly building cost-effective
networks and managing service operations. The Company's Chairman, Anthony
J. Pompliano, is the co-founder and former President and Chief Executive
Officer of MFS Communications, Inc. ("MFS"). Richard A. Kozak, the
Company's President and Chief Executive Officer, has held senior management
positions at several telecommunications companies, including MFS and Sprint
International (formerly Telenet Communications Corporation). Other members
of the Company's senior management team have experience working at MFS,
Teleport Communications Group, AT&T, MCI Communications Corporation
("MCI"), WilTel, Inc., BellSouth Telecommunications, Inc. and other
telecommunications companies. The Company's management team collectively
has over 200 years of marketing and operating experience in the
telecommunications industry.

RECENT DEVELOPMENTS

From September 30, 1995 to May 31, 1996, the Company increased the number
of its operational networks from five to 15, began construction on networks in
seven other markets, increased route miles from 92 to 386, increased buildings
connected or ready to connect from 79 to 216 and increased its employee base
from 100 to 181. Since May 31, 1996, the Company has commenced construction of
an additional network in Central Maryland (Washington-Baltimore corridor). As of
May 31, 1996, the Company obtained certifications to offer local switched voice
services in Tennessee and Texas, has certifications pending in ten other states
and has commenced interconnection negotiations with the five major LECs in
markets in which it currently operates or has networks under construction.

In May 1996, the Company entered into agreements to interconnect at two
major Network Access Points ("NAPs") where national ISPs interconnect their
networks, allowing the multitude of local and regional ISPs to exchange data and
access the Internet globally, seamlessly and transparently. In addition to these
two initial NAP agreements at MAE-East (Vienna, Virginia) and MAE-West (San
Jose, California), ACSI is currently negotiating for interconnection at three
additional NAPs, as well as peering agreements and Network-to-Network Interfaces
("NNIs") with most major IXCs.

On March 21, 1996, the Company completed a private offering to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933 of
$120.0 million principal amount of 12 3/4% Senior Discount Notes due 2006 (the
"2006 Notes"), for which it received net proceeds of approximately $61.8
million.

On February 1, 1996, the U.S. Congress enacted comprehensive
telecommunications reform legislation, which the President signed into law as
the Telecommunications Act on February 8, 1996. The Company believes that this
legislation is likely to enhance competition in the local telecommunications
marketplace through (i) removal of state and local entry barriers, (ii)
requirements that LECs provide interconnections to their facilities, (iii)
facilitation of the process of changing from LEC services to those offered by
CLECs and (iv) access to rights-of-way. The Company expects further growth to
the extent that LECs begin to compete with IXCs for long distance services,
thereby providing IXCs with a competitive incentive to move access business away
from LECs to CLECs, such as ACSI. See "Risk Factors -- Competition" and
"Business -- Regulation."

During the first five months of 1996, the Company entered into service
agreements with AT&T and two other major IXCs under which the Company expects
AT&T and such other IXCs to use the Company as a supplier of dedicated special
access services in many of the Company's markets. The Company currently is
providing certain services under these agreements in a number of its markets.
The Company expects to add additional services in these markets and to add
additional markets as may be mutually agreed to by the Company and AT&T or the
other IXCs, as the case may be, subject to, among other things, satisfactory
completion of all quality, service and network validation tests with respect to
provision of such services in each additional market. There can be no assurance
that such service agreements will be extended to cover additional markets or
services.

6
<PAGE> 9

THE OFFERING

Common Stock offered by the
Company..................

Common Stock to be
outstanding after the
Offering................. shares(1)

Use of proceeds............ To be applied towards the completion of the
Company's 50-city business plan and to pay
approximately $4.8 million of accrued dividends on
the Company's Preferred Stock, all of which will be
converted into Common Stock upon completion of this
Offering. See "Use of Proceeds."

Nasdaq National Market
symbol................... ACNS
- ---------------
(1) Includes 17,377,278 shares issuable upon conversion of 464,164 shares of
Preferred Stock. Excludes 10,990,698 shares issuable upon exercise of
options and warrants outstanding on March 31, 1996 at a weighted average
exercise price of $3.32 per share.

RISK FACTORS

See "Risk Factors" beginning on page 9 of this Prospectus for certain
factors relating to an investment in the Common Stock that should be considered
by prospective investors.

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

ACSI is a Delaware corporation. The Company's principal executive offices
are located at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland 20701, and its
telephone number is (301) 617-4200.

7
<PAGE> 10

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, FISCAL YEAR ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 1,895,812 $ 95,631 $ 388,887 $ --
Operating expenses........................... 15,330,108 8,842,313 14,797,021 2,986,975
Income (loss) from operations................ (13,434,296) (8,746,682) (14,408,134) (2,986,975)
Interest and other income.................... 1,438,817 189,474 217,525 5,155
Interest and other expense................... (6,374,884) (214,900) (170,095) (332,997)
Debt conversion expense...................... -- (584,985) (385,000) (681,250)
Net income (loss) before minority interest... (18,370,363) (9,357,093) (14,745,704) (3,996,067)
Minority interest(1)......................... 190,668 16,155 48,055 --
Net income (loss)............................ (18,179,695) (9,340,938) (14,697,649) (3,996,067)
Net income (loss) per common share........... $ (3.48) $ (2.17) $ (3.30) $ (1.77)
Weighted average shares outstanding.......... 6,046,136 4,590,182 4,771,689 2,283,695
OTHER DATA:
EBITDA(2).................................... $(11,829,767) $(8,590,355) $(13,862,268) $(2,985,008)
Depreciation & amortization.................. 1,413,861 140,172 497,811 1,967
Capital expenditures......................... 28,236,884 10,152,865 15,302,757 519,945
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------
AS
ACTUAL ADJUSTED(3)
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $154,454,550 $
Total assets...................................... 207,978,611
Long-term liabilities............................. 183,667,996
Redeemable stock, options and warrants............ 2,457,337
Stockholders' equity.............................. 17,815,135
</TABLE>

<TABLE>
<CAPTION>
MAY 31, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1996 1996 1995 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL DATA(4):
Total markets (in operation or under
construction)............................. 22 20 17 12
Networks in operation....................... 15 11 9 5
Networks under construction................. 7 9 8 7
Route miles................................. 386 200 136 92
Fiber miles................................. 28,476 9,466 5,957 4,373
Buildings connected......................... 216 133 100 79
VGE circuits in service..................... 137,431 125,208 82,055 50,303
Employees................................... 181 142 111 100
</TABLE>

- ---------------
(1) As of June 30, 1995, minority interest represents a 7.25% ownership of AT&T
Credit Corporation in the Company's subsidiaries that operate its networks
in Louisville and Fort Worth. As of March 31, 1996, minority interest also
includes the 7.25% ownership of AT&T Credit Corporation in the Company's
subsidiaries in Greenville, Columbia and El Paso. See "Description of
Certain Indebtedness."
(2) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with Generally Accepted
Accounting Principles.
(3) Adjusted to give effect to: (i) the sale of the shares of Common Stock
offered hereby and application of the estimated net proceeds therefrom
(assuming a per share offering price of $ , the last reported sales
price of the Common Stock on June , 1996) and (ii) the conversion of the
Preferred Stock.
(4) Network and Selected Statistical Data are derived from ACSI's records.

8
<PAGE> 11

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
including statements regarding the development of the Company's businesses, the
markets for the Company's services and products, the Company's anticipated
capital expenditures, regulatory reform and other statements contained herein
regarding matters that are not historical facts, are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). Because such statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Risk Factors."

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following risk factors, together with the other information
set forth in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the shares offered by this
Prospectus.

HISTORICAL AND ANTICIPATED FUTURE LOSSES; NEGATIVE CASH FLOW

The Company has never been profitable and has never generated positive cash
flow from consolidated operations. As of June 30, 1995, and March 31, 1996, the
Company had accumulated deficits of $20.7 million and $38.9 million,
respectively. Currently, although the Company has begun to generate revenues in
15 markets, it has not yet generated revenues in any other markets. Until
December 1994, when it recorded its first operating revenues, the Company was
considered a development stage company for accounting purposes. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from operations in the future.

The Company has incurred significant net operating losses and negative cash
flow to date in connection with establishing its fiber optic networks. Losses
and negative cash flow will continue while the Company concentrates on the
development and construction of additional fiber optic networks and until its
networks have established a sufficient revenue-generating customer base. The
Company will also incur losses during the initial start-up phases of its local
switched voice services, enhanced voice messaging and high-speed data. There can
be no assurance that an adequate revenue base will be established or that these
services will generate positive cash flow. Continued losses and negative cash
flow may prevent the Company from meeting its debt obligations and pursuing its
strategies for growth.

RAPID EXPANSION OF OPERATIONS; IMPLEMENTATION OF GROWTH STRATEGY

ACSI plans to continue to expand its business rapidly. The Company
currently has commenced service in 15 of its target markets, and its goal is to
have begun service in all 50 contemplated target markets by the end of the
calendar year 1998. The Company's ability to manage its rapid expansion
effectively will require it to continue to implement and improve its operating,
financial and accounting systems, to attract and hire qualified personnel in
each market, and to expand, train and manage its employee base. Delays in
constructing any network may require the Company to scale back the number of
other networks it expects to build within a given time frame. There can be no
assurance that the Company will be able to implement its growth strategy or
manage its expanded operations effectively. Any failure to do so may have a
material adverse effect on the Company's business, results of operations and
financial condition.

As part of its strategy, ACSI plans to expand the range of services that it
offers. The Company is developing and has begun offering on a limited basis
high-speed data and enhanced voice messaging services and, upon receipt of
requisite regulatory approvals and where cost effective, plans to offer local
switched services in certain of its markets beginning in late 1996. These are
services that the Company has not previously offered. There can be no assurance
that a market will develop for these services, that the Company's implementation
will be technically or economically feasible, that the Company will be able to
develop or market them successfully or that the Company will be able to operate
and maintain these services profitably.

9
<PAGE> 12

SUBSTANTIAL LEVERAGE; FUTURE CASH OBLIGATIONS

Since inception, the Company's consolidated cash flow from operations has
been negative. As a result, the Company has been required to pay its fixed
charges (including interest on existing indebtedness) and operating expenses
with the proceeds from sales of its debt and equity securities. As of March 31,
1996, the Company (through its subsidiaries) had approximately $14.1 million in
debt outstanding under a secured credit facility (the "AT&T Credit Facility")
with AT&T Credit Corporation, a subsidiary of AT&T. The maximum potential
borrowings under the AT&T Credit Facility is $31.2 million. Borrowings under the
AT&T Credit Facility may be used to fund the construction and operation of only
six of the Company's 50 contemplated networks. With the issuance of $190.0
million principal amount of the Company's 13% Senior Discount Notes due 2005
(the "2005 Notes") and the 2006 Notes (collectively, the "Notes"), the Company
will be required to satisfy substantially higher periodic cash debt service
obligations in the future. Commencing in the year 2001, cash interest on the
2005 Notes and 2006 Notes will be payable semi-annually at the rate of 13% per
annum (approximately $24.7 million per year) and 12 3/4% per annum
(approximately $15.3 million per year), respectively. The full accreted value of
the 2005 Notes and 2006 Notes of $190.0 million and $120.0 million,
respectively, will become due on November 1, 2005 and April 1, 2006,
respectively. As of March 31, 1996, the Company had approximately $183.0 million
of outstanding long-term indebtedness. As of March 31, 1996, the total
liabilities of the Company's subsidiaries (after the elimination of loans and
advances by the Company to its subsidiaries) were approximately $15 million. It
is expected that the Company and its subsidiaries will incur additional
indebtedness, including increasing its borrowings under the AT&T Credit Facility
to the maximum amount; provided the Company can successfully raise additional
equity capital. Many factors, some of which are beyond the Company's control,
will affect its performance and, therefore, its ability to meet its ongoing
obligations to repay the Notes and its other debt. There can be no assurance
that the Company will be able to generate sufficient cash flow or otherwise
obtain funds in the future to cover interest and principal payments associated
with the Notes and its other debt. See "Description of Certain Indebtedness."

CERTAIN FINANCIAL AND OPERATING RESTRICTIONS

The Indenture dated November 14, 1995 pursuant to which the 2005 Notes were
issued and the Indenture dated March 21, 1996 pursuant to which the 2006 Notes
were issued (collectively, the "Indentures") and the AT&T Credit Facility,
impose operating and financial restrictions on the Company and its subsidiaries.
These restrictions affect, and in certain cases significantly limit or prohibit,
among other things, the ability of the Company or its subsidiaries to incur
additional indebtedness or create liens on its assets, pay dividends, sell
assets, engage in mergers or acquisitions or make investments. Failure to comply
with any of these restrictions could limit the availability of borrowings or
result in a default thereunder. See "Description of Certain Indebtedness."

SIGNIFICANT FUTURE CAPITAL REQUIREMENTS

The Company's continued development, construction, expansion, operation and
potential acquisition of fiber optic networks, as well as the further
development and introduction of new services, including high speed data,
enhanced voice messaging and local switched voice services, will require
substantial capital expenditures. The Company's ability to fund these
expenditures is dependent upon the Company's raising substantial financing.
Prior to this Offering, the Company had raised approximately $202.6 million in
debt and equity financing and obtained $31.2 million in financing commitments
from the AT&T Credit Facility. The Company will use $ million of the
estimated net proceeds from this Offering, toward completion of the Company's
50-city business plan including the development and construction of fiber optic
networks, the deployment of a broadband inter-city data communications network
and development and introduction of new services, such as high-speed data, voice
messaging and local switched voice services, for expansion of the Company's
existing networks and to fund negative operating cash flow until cash flow
breakeven. The Company has estimated that from April 1, 1996 through the end of
the calendar year 1998, capital requirements for implementation of its 50-city
business plan are approximately $430.4 million. At March 31, 1996, the Company
had approximately $154.5 million of cash and cash equivalents available for the
completion of its planned networks. To meet any additional remaining capital
requirements, ACSI may be

10
<PAGE> 13

required to sell additional debt or equity securities or increase its existing
credit facility. The Company may also need to seek such additional equity
financing to maintain balance sheet and liquidity ratios required under certain
of its debt instruments. In addition, the Company in the past has considered and
expects to continue to consider potential acquisitions or other strategic
arrangements that may fit the Company's strategic plan, although the Company is
not currently negotiating any particular transaction. Any such acquisitions or
strategic arrangements that the Company might consider are likely to require
additional equity or debt financing, which the Company will seek to obtain as
required. Failure to raise sufficient capital could compel the Company to delay
or abandon some or all of its plans or expenditures, which could have a material
adverse effect on its business, results of operations and financial condition.
Also, the terms of any debt or equity capital raised by the Company in the
future could restrict the Company's operational flexibility and ability to raise
additional capital and thereby adversely affect the Company's business, results
of operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

BUSINESS COMBINATIONS; STRATEGIC INVESTMENTS

The Company from time to time engages in preliminary discussions with (i)
potential strategic investors (i.e., investors in the same or related business)
who have expressed an interest in making an investment in or acquiring the
Company and (ii) potential business partners looking toward formation of
business combinations or strategic alliances that would expand the reach of the
Company's networks or services. In addition to providing additional growth
capital, the Company believes that an alliance with an appropriate strategic
investor or business partner could provide operating synergies to, and enhance
the competitive position of, both ACSI and such strategic investor/business
partner within the rapidly consolidating telecommunications industry. There can
be no assurance that any agreement with any potential strategic investor or
business partner will be reached on terms acceptable to the Company nor does the
Company believe that any such investment, business combination or strategic
alliance is necessary for successful consummation of its strategic plan. An
investment, business combination or strategic alliance could constitute a Change
of Control (as defined in the Indentures) requiring the Company to offer to
purchase all outstanding Notes. In the event that such a Change of Control
occurs at a time when the Company does not have sufficient available funds to
purchase all Notes tendered or at a time when the Company is prohibited from
purchasing the Notes, an Event of Default (as defined in the Indentures) could
occur under the Indentures. However, the Company currently has no agreement,
arrangement or understanding with any potential strategic investor or potential
business partner with respect to any acquisition, business combination or
strategic alliance.

EFFECT OF REGULATION

As a common carrier, the Company is subject to substantial federal, state
and local regulation. The Company's fiber optic networks do not require
authorization from the Federal Communications Commission ("FCC") for
construction or installation. However, the Company must file tariffs stating its
rates, terms and conditions of service for interstate traffic, although the FCC
has proposed adopting rules which would preclude IXCs from filing tariffs and is
considering a request that the proposed rules also be applicable to CLECs. State
regulatory agencies regulate intrastate communications, while local authorities
control the Company's access to and use of municipal rights-of-way. The
Telecommunications Act preempted all state and local legal requirements which
prohibit or have the effect of prohibiting any entity from providing any
intrastate telecommunications service. However, many states continue to require
telecommunications carriers to obtain a certificate, license, permit or similar
approval before providing services. Thus, the Company's ability to provide
additional intrastate services is dependent upon its receipt of requisite state
regulatory approval. The inability to obtain the approvals necessary to provide
intrastate switched services could have a material adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
Telecommunications Act has increased local competition by IXCs, cable television
service providers ("CATVs") and public utility companies, which may have a
material adverse effect on the Company. In addition, the Telecommunications Act
has granted important benefits to the LECs, including providing LECs substantial
new pricing flexibility, restoring the ability of RBOCs to provide long distance
services and allowing RBOCs to provide certain cable television services. These
changes will tend to enhance the competitive position of the LECs, which may
materially adversely affect the Company. Furthermore, no assurance can be given
that

11
<PAGE> 14

court decisions or changes in current or future federal or state legislation or
regulations would not materially adversely affect the Company. See
"-- Competition" and "Business -- Regulation."

Internet-related services are not currently subject to direct regulation by
the FCC or any other U.S. agency other than regulation applicable to businesses
generally. The FCC recently requested comments on a petition filed by the
America's Carriers Telecommunication Association which requests that the FCC
regulate certain voice transmissions over the Internet as telecommunications
services. Changes in the regulatory environment relating to the
telecommunications or Internet-related services industry could have an adverse
effect on the Company's Internet-related services business. The
Telecommunications Act may permit telecommunications companies, RBOCs or others
to increase the scope or reduce the cost of their Internet access services. The
Company cannot predict the effect that the Telecommunications Act or any future
legislation, regulation or regulatory changes may have on its business.

COMPETITION

The Company operates in a highly competitive environment for all of its
services. An increasing trend toward strategic business alliances in the
telecommunications industry may create significant new competition for ACSI.

Dedicated and Switched Voice Services. The Company's competitors in this
market are predominantly LECs, other CLECs and CATVs and may potentially include
microwave carriers, satellite carriers, teleports, public utilities, wireless
telecommunications providers, IXCs, integrated communications providers and
private networks built by large end users. With the passage of the
Telecommunications Act and the entry of RBOCs into the long distance market, the
Company believes that IXCs may construct their own local facilities and/or
resell local services in order to compete with the bundled local and long
distance services to be offered by the LECs as a result of the
Telecommunications Act. Given that a substantial portion of the Company's
revenues are billed to IXCs for services provided for the benefit of their
customers, such action could have a material adverse effect on the Company. See
"Business -- Competition."

Currently, the Company does not have a significant market share in any
market. Most of the Company's actual and potential competitors have
substantially greater financial, technical and marketing resources than the
Company. In particular, LECs have long-standing relationships with their
customers, have the potential to subsidize access services with monopoly service
revenue and benefit from certain existing federal, state and local regulations
that the Company believes, in certain respects, favor LECs over the Company. See
"Business -- Regulation." For example, the Interconnection Decisions issued by
the FCC and the Telecommunications Act, which allow CLECs to interconnect with
LECs' facilities, have been accompanied by increased pricing flexibility and
partially relaxed regulatory oversight of LECs. The Company expects that LECs
will offer time and volume discounts to customers, which will further increase
competition for the Company and other CLECs and which could significantly
adversely affect the Company's future dedicated services revenues. Moreover,
some LECs impose reconfiguration charges on customers seeking to shift their
traffic from LEC facilities to CLEC facilities, which may have an adverse effect
on a CLEC's ability to attract these customers.

The Company expects that other CLECs may operate in most, if not all, of
the markets targeted by the Company and many of these markets may not be able to
support multiple CLECs. Additionally, delays in constructing any network could
adversely affect the Company's competitive position in markets where another CAP
or CLEC has a network under construction or can provide services on an
already-existing network. There can be no assurance that the Company will be
able to achieve or maintain an adequate market share, maintain construction
schedules or compete effectively in any of its markets. See
"Business -- Competition."

Data Services. The market for data communications services, including IP
switching, is extremely competitive. There are no substantial barriers to entry,
and the Company expects that competition will intensify in the future. The
Company believes that its ability to compete successfully depends on a number of
factors, including: market presence; the ability to execute a rapid expansion
strategy; the capacity, reliability and security of its network infrastructure;
ease of access to and navigation of the Internet; the pricing policies of its
competitors and suppliers; the timing of the introduction of new products and
services by the Company and its competitors; the Company's ability to support
industry standards; and industry and general economic

12
<PAGE> 15

trends. The Company's success in this market will depend heavily upon its
ability to provide high quality Internet connectivity and value-added Internet
services at competitive prices. See "Business -- Competition."

DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS

The Company receives a significant portion of its revenues from a small
number of major customers, particularly the IXCs that service the Company's
markets. For the fiscal year ended June 30, 1995, and for the nine months ended
March 31, 1996, approximately 85%, and 60%, respectively, of the Company's
revenues were attributable to access services provided to three and four of the
largest IXCs, respectively, including services provided for the benefit of their
customers. The Company is, and expects to continue to be, dependent upon such
customers, and the loss of any one of them could have a material adverse effect
on the Company's business, results of operations and financial condition.
Additionally, customers who account for significant portions of the Company's
revenues may have the ability to negotiate prices for the Company's services
that are more favorable to the customer and that result in lower profit margins
for the Company. The Telecommunications Act may also encourage IXCs to construct
their own local facilities and/or resell the local services of ACSI's
competitors, which may materially adversely affect the Company. See
"-- Competition," "Business -- Competition" and "-- Regulation."

LIMITED OPERATING REVENUES; LIMITED MARKETING AND OPERATING EFFORTS

Although the Company has begun to generate operating revenues in 15
markets, it has not yet commenced operations or generated revenue in its other
targeted markets. The Company will be required to expand its marketing efforts
to attract customers as its networks are being built in each market. Additional
staffing will be required to manage future administrative, operating, marketing
and sales functions effectively. Failure to obtain significant and widespread
commercial and public acceptance of its networks and access to certain buildings
in a market could jeopardize the Company's ability to remain in business in that
market. There can be no assurance that the Company will be able to secure
customers for the commercial use of its proposed networks or access to buildings
in each market.

IMPACT OF TECHNOLOGICAL CHANGE

The telecommunications industry is subject to rapid and significant
technological change that could materially affect the continued use of fiber
optic cable or the electronics utilized in the Company's networks, and although
the effect of technological changes, including changes related to the emerging
wireline and wireless transmission and switching technologies, on the future
business of the Company cannot be predicted, it could have a material adverse
effect on the Company's business, results of operations and financial condition.

The market for the Company's telecommunications products and services is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. There
can be no assurance that the Company will successfully identify new product and
service opportunities and develop and bring new products and services to market.
The Company is also at risk from fundamental changes in the way
telecommunications services are marketed and delivered. The Company's data
communications service strategy assumes that the TCP/IP, frame relay and ATM
protocols, utilizing fiber optic or copper-based telecommunications
infrastructures, will continue to be the primary protocols and transport
infrastructure for data communications services. The Company's pursuit of
necessary technological advances may require substantial time and expense, and
there can be no assurance that the Company will succeed in adapting its
telecommunications services business to alternate access devices, conduits and
protocols.

DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS

The Company must obtain easements, rights-of-way, franchises and licenses
(collectively, "local approvals") from various private parties, actual and
potential competitors and local governments in order to construct and maintain
its fiber optic networks. The Company has obtained the local approvals necessary
to construct and operate its networks in the central business districts of all
of the markets in which the Company's digital fiber optic networks are presently
operating or are under construction. The Company does

13
<PAGE> 16

not yet have all of the local approvals required to implement its business plan
in prospective new markets, and there can be no assurance that the Company will
be able to obtain and maintain local approvals on acceptable terms or that other
CLECs will not obtain similar local approvals that will allow them to compete
against the Company or enter a market before the Company. Some of the agreements
for local approvals obtained by the Company may be short-term, or revocable at
will, and there can be no assurance that the Company will have continued access
to existing rights-of-way and franchises after their expiration. If any of these
agreements were terminated or could not be renewed and the Company was forced to
remove its fiber from the streets or abandon its network in place, such
termination would be likely to have a materially adverse effect on the Company's
business, results of operations and financial condition.

As a condition to allowing use of rights-of-way or granting franchises to
the Company, certain local governments have required the Company to post
performance bonds or letters of credit and to pay ongoing fees based upon the
gross revenues generated by, or linear footage of, the applicable network. In
many markets, LECs are not required to pay such fees or pay substantially less
than those paid by the Company which may put the Company at a competitive
disadvantage in its markets. In addition, as of March 31, 1996, the Company had
posted approximately $2.6 million of performance bonds and letters of credit and
expects to post additional bonds or letters of credit in the future. As of March
31, 1996, the Company had been required to pledge approximately $1.5 million in
cash collateral to obtain these bonds and letters of credit, and may be required
to pledge substantial collateral to obtain the bonds or letters of credit in the
future. See "Business -- Network Development -- Rights-of-Way" and
"-- Regulation."

POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS

The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
of the Telecommunications Act, both civil and criminal penalties can be imposed
for the use of interactive computer services for the transmission of certain
indecent or obscene communications. While this provision has been stayed by a
federal court while its constitutionality is being considered, many states have
adopted or are considering adopting similar requirements. In addition, several
private lawsuits have been filed seeking to hold Internet access providers
accountable for information which they transmit. In one such case pending in the
United States District Court for the Northern District of California, i.e.
Religious Technology Center v. NETCOM On-Line Communications Services, Inc., the
court ruled that an Internet access provider can potentially be held liable for
the copyright infringement committed by its subscribers. While the outcome of
these activities is uncertain, the ultimate imposition of potential liability on
Internet access providers for information which they host, distribute or
transport could materially change the way they must conduct business. To avoid
undue exposure to such liability, Internet access providers could be compelled
to engage in burdensome investigation of subscriber materials or even
discontinue offering the service altogether.

DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS

The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its network infrastructure. The Company's networks are subject to
physical damage, power loss, capacity limitations, software defects, breaches of
security (by computer virus, break-ins or otherwise) and other factors, certain
of which may cause, interruptions in service or reduced capacity for the
customers. Interruptions in service, capacity limitations or security breaches
could have a material adverse effect on the Company's business, financial
condition and results of operations.

DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY

The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality demanded by the Company, are
available only from sole or limited sources. The Company is also dependent upon
LECs to provide telecommunications services to the Company and its customers.
The Company has from time to time experienced delays in receiving
telecommunications services, and there can be no assurance that the Company will
be able to obtain such services on the scale and within the time frames required
by the

14
<PAGE> 17

Company at an affordable cost, or at all. Any failure to obtain such services or
additional capacity on a timely basis at an affordable cost, or at all, would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company also is dependent on its suppliers'
ability to provide necessary products and components that comply with various
Internet and telecommunications standards, interoperate with products and
components from other vendors and function as intended when installed as part of
the network infrastructure. Any failure of the Company's sole or limited source
suppliers to provide products or components that comply with Internet standards,
interoperate with other products or components used by the Company in its
network infrastructure or by its customers or fulfill their intended function as
a part of the network infrastructure could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business."

DEPENDENCE ON KEY PERSONNEL

The Company is currently managed by a small number of key management and
operating personnel, whose efforts will largely determine the Company's success.
The success of the Company also depends upon its ability to hire and retain
qualified operating, marketing, financial and technical personnel. Competition
for qualified personnel in the telecommunications industry is intense and,
accordingly, there can be no assurance that the Company will be able to continue
to hire or retain necessary personnel. The loss of key management personnel,
particularly Anthony J. Pompliano, the Company's Chairman, or Richard A. Kozak,
its President and Chief Executive Officer, would likely have a material adverse
effect on the Company. See "Management."

CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT

Upon completion of this Offering, the Company's directors, officers and
principal stockholders will beneficially own approximately % of the
outstanding Common Stock, including %, % and % of the then outstanding
Common Stock which will be owned by Huff Alternative Income Fund, L.P. ("Huff"),
ING Equity Partners, L.P. ("ING") and Apex Investment Fund Limited Partnership
("Apex"), respectively. Accordingly, if they choose to act together, these
persons will be able to control the election of the Board of Directors and other
matters voted upon by the stockholders. A sale by one or more of these principal
stockholders to third parties could trigger a Change of Control Offer (as
defined in the Indentures). In the event that a Change of Control Offer occurs
at a time when the Company does not have sufficient available funds to pay the
Change of Control Purchase Price (as defined in the Indentures) for all Notes
tendered, or at a time when the Company is prohibited from purchasing the Notes,
an Event of Default (as defined in the Indentures) could occur under the
relevant Indenture. See "Management," "Principal Stockholders" and "Description
of Certain Indebtedness -- 2005 Notes and 2006 Notes."

LIMITED TRADING MARKET AND POSSIBLE VOLATILITY OF PRICE OF THE COMMON STOCK

The Company's Common Stock has been listed on the Nasdaq National Market
since May 22, 1996 and is thinly traded. There can be no assurance that, after
the completion of this Offering, the Company's Common Stock will be traded more
actively. From March 3, 1995 through May 21, 1996, the Company's Common Stock
was quoted on the Nasdaq SmallCap Market. The market price of the Common Stock
could be subject to wide fluctuations in response to quarterly variations in the
Company's results of operations, changes in earnings estimates by analysts,
conditions in the telecommunications industry (particularly among CAPs or CLECs)
or general market or economic conditions. In addition, in recent years, the
stock market has experienced price and volume fluctuations. These fluctuations
often have had a particularly substantial effect on the market prices for many
emerging growth companies, often unrelated to their specific operating
performances. Such market fluctuations could adversely affect the market price
of the Common Stock. See "Price Range of Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE

15
<PAGE> 18

further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless held by affiliates of the Company. The remaining
shares outstanding are "restricted securities" as that term is defined in Rule
144 of the Securities Act. Of such restricted shares, 4,258,162 have been held
(or are deemed to have been held) for more than two years, and, as such, are
saleable subject, in certain instances, to certain volume and manner of sale
restrictions under Rule 144. Of the 10,990,698 shares reserved for issuance upon
exercise of outstanding options and warrants, 9,229,771 shares have been or
within a month after the date hereof will be registered under the Securities
Act. Accordingly, any shares issued upon exercise of such options or warrants
will be freely transferable upon registration thereof unless acquired by
affiliates of the Company. Subject to certain exceptions, the Company, all of
its executive officers and directors and certain stockholders of the Company
have agreed not to, directly or indirectly, offer, sell, contract to sell, grant
any option to purchase, or otherwise dispose of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for shares of
Common Stock or cause to be filed with the Securities and Exchange Commission
(the "Commission") a registration statement under the Securities Act to register
any shares of Common Stock or, in any manner, transfer all or a portion of the
economic consequences associated with the ownership of Common Stock without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation for
a period of 180 days after the date of this Prospectus.

Holders of substantially all of the restricted shares of Common Stock and
outstanding options and warrants to purchase Common Stock have either piggy-back
or demand registration rights relating to those shares. In December 1995, ACSI
filed a registration statement with the Commission which covers the offer and
sale of the warrants to purchase shares of Common Stock (the "Warrants") which
were sold together with the 2005 Notes in a November 1995 private placement and
the 2,432,000 shares of Common Stock underlying the Warrants. The filing of such
registration statement required the Company to send notice to certain holders of
its Common Stock and other warrants who have "piggy-back" registration rights.
Such notice was sent to these holders in November 1995. A total of twenty-seven
holders, holding approximately 635,225 shares of Common Stock and warrants to
purchase 1,710,059 shares of Common Stock, either responded and requested to
have their shares included in such registration statement or may not have
received such notice. The Company did not include any of these shares in such
registration statement and is in the process of obtaining waivers of such
"piggy-back" rights from these holders. In connection with this Offering, the
Company expects to obtain waivers from stockholders and holders of options and
warrants having registration rights and, in connection therewith, has agreed to
use its commercially reasonable efforts to file a registration statement
relating to up to 4,324,467 of these shares if all such waivers are obtained on
the later of 210 days from the date of this Prospectus or April 30, 1997. There
can be no assurance that waivers will be obtained from all such stockholders,
and the Company may be required to file an earlier registration statement for
any non-waiving stockholders.

The future sale pursuant to Rule 144 or pursuant to a registration
statement of the outstanding Common Stock or the Common Stock underlying the
options and warrants, or the future sale of Common Stock for the Company's own
account, or the perception that such sales could occur, could have an adverse
effect on the market price of the Common Stock and could impair the Company's
ability to raise capital through an offering of Common Stock. See "Certain
Relationships and Related Transactions."

USE OF PROCEEDS

The net proceeds to the Company from this Offering are estimated to be
approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full), assuming a public offering price of
$ per share (the last reported sale price of the Common Stock on June ,
1996). The Company intends to use approximately $ million of the net
proceeds towards the completion of its 50-city business plan, including
development and construction of 50 fiber optic networks, development and
introduction of new data services including development of a high-speed data
backbone network, enhanced voice-messaging and local switched voice services,
for expansion of the Company's existing operational networks and to fund
negative cash flow until breakeven. The Company has estimated that as of April
1, 1996, the total remaining capital requirements for implementation of its
50-city business plan through the end of calendar year 1998 was approximately
$430.4 million. The Company will use approximately $4.8 million of net

16
<PAGE> 19

proceeds from this Offering to pay the accrued dividends on its Preferred Stock,
which will be converted into 17,377,278 shares of Common Stock upon completion
of this Offering.

Upon completion of this Offering, the Company will have obtained
approximately $ million in net proceeds or commitments from debt and equity
financings that have been or will be applied towards the development and initial
construction of its planned networks and to support its general corporate
development, network data and voice services and sales functions. To meet
additional remaining capital requirements, ACSI will consider the sale of
additional debt or equity securities or increases in existing credit facilities.
In addition, the Company in the past has considered and expects to continue to
consider potential acquisitions or other strategic arrangements that may fit the
Company's strategic plan, although the Company is not currently negotiating any
particular transaction. Any acquisitions are likely to require additional equity
or debt financing, which the Company will seek to obtain, as required.

Pending such uses, the Company intends to invest the net proceeds from this
Offering in short-term U.S. government securities.

17
<PAGE> 20

PRICE RANGE OF COMMON STOCK

From March 3, 1995 until May 21, 1996, the Company's Common Stock traded
under the symbol "ACNS" on The Nasdaq SmallCap Market. Since May 22, 1996, the
Company's Common Stock has been included on the Nasdaq National Market.

The following table sets forth, for the periods indicated, the range of
high and low bid quotations for the Company's Common Stock obtained from the
National Quotation Bureau for periods prior to March 3, 1995, from The Nasdaq
SmallCap Market for the period March 3, 1995 through May 21, 1996 and from the
Nasdaq National Market after May 21, 1996. No quotations for the Common Stock
were available from the National Quotation Bureau for the first quarter of the
fiscal year ended June 30, 1994, or any preceding period. The quotations as set
forth below for periods prior to March 3, 1995, are believed to be
representative of inter-dealer quotations, without retail mark-up, mark-down or
commission, but may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
HIGH
BID LOW BID
PRICE PRICE
------- -------
<S> <C> <C>
Fiscal Year Ended June 30, 1994
Second Quarter.................................... $ 4.00 $2.50
Third Quarter..................................... 4.75 3.00
Fourth Quarter.................................... 3.25 1.75
Fiscal Year Ended June 30, 1995
First Quarter..................................... $ 4.50 $1.50
Second Quarter.................................... 4.25 2.50
Third Quarter..................................... 3.75 3.25
Fourth Quarter.................................... 4.33 3.25
Fiscal Year Ending June 30, 1996
First Quarter..................................... $ 8.25 $3.75
Second Quarter.................................... 6.75 5.00
Third Quarter..................................... 9.00 5.00
Fourth Quarter (through June 13).................. 14.88 8.00
</TABLE>

On June , 1996, the last reported sales price for the Company's Common
Stock as reported on The Nasdaq National Market was $ . As of May 31, 1996,
there were approximately 272 holders of record of the Company's Common Stock.

DIVIDEND POLICY

The Company has never paid dividends on its Common Stock and does not
expect to declare any dividends on its Common Stock in the foreseeable future.
The Company is, however, required to accrue quarterly dividends at an annual
interest rate of 9% on its issued Preferred Stock. Such accrued dividends will
be paid in cash cumulatively upon the consummation of this Offering, at which
time the Preferred Stock will be converted into shares of Common Stock. The
Company may not pay or declare any dividend or distribution in respect of its
Common Stock unless all accrued and unpaid dividends on all outstanding shares
of its Preferred Stock have been paid or declared and set apart for payment. In
addition, the Indentures and a pledge agreement between the Company and AT&T
Credit Corporation made in connection with the AT&T Credit Facility contain
certain covenants that restrict the Company's ability to declare or pay
dividends on its Common Stock. See "Description of Certain Indebtedness" and
"Description of Capital Stock."

18
<PAGE> 21

CAPITALIZATION

The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of March 31, 1996, and as adjusted to give
effect to the sale of the Common Stock offered hereby (at an assumed public
offering price of $ per share, the last reported per share sales price for
the Common Stock on June , 1996) and application of the estimated net proceeds
therefrom, and the conversion of 464,164 shares of Preferred Stock into
17,377,278 shares of Common Stock. See "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------
<S> <C> <C>
(UNAUDITED)
(IN THOUSANDS)

<CAPTION>
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Cash and cash equivalents.............................................. $154,455 $
======== =========
Long term debt
12 3/4% Senior Discount Notes due 2006............................ 100,453 100,453
13% Senior Discount Notes due 2005................................ 64,571 64,571
Notes payable(1).................................................. 14,054 14,054
Dividends payable................................................. 3,919 --
-------- -----------
Total long term debt......................................... 182,997 179,078
Redeemable stock, options & warrants................................... 2,457 2,457
Minority interest...................................................... 385 385
Stockholders' equity (deficit):
9% Series A-1 convertible preferred stock, par value $1.00 per
share, 813,336 shares authorized (for all series of convertible
preferred stock); 186,664 shares issued and outstanding; no
shares, as adjusted.............................................. 187 --
9% Series B convertible preferred stock, par value $1.00 per
share, 277,500 shares issued and outstanding; no shares, as
adjusted......................................................... 278 --
Common Stock, par value $0.01 per share, 75,000,000 shares
authorized, 6,555,455 shares issued and outstanding at March 31,
1996; shares, as adjusted for this Offering(2)(3)......... 65
Additional paid-in capital........................................ 56,213
Accumulated deficit............................................... (38,928) (38,928)
-------- -----------
Total stockholders' equity................................... 17,815
-------- -----------
Total capitalization.................................... $203,654 $
======== =========
</TABLE>

- ---------------
(1) Consists of the AT&T Credit Facility totalling $31.2 million, of which
approximately $14.1 million had been drawn as of March 31, 1996.

(2) Excludes 7,501,415 and 3,489,283 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at March 31, 1996, at a
weighted average exercise price of $3.32.

(3) The aggregate proceeds from the exercise of all warrants and options
outstanding at March 31, 1996, would be approximately $36,466,476.

19
<PAGE> 22

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial information presented below as of and
for the period ended June 30, 1995 and 1994 are derived from and qualified by
reference to the audited consolidated financial statements of the Company
contained herein and the related notes thereto, and should be read in
conjunction therewith and in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Prospectus. The Company's consolidated financial statements as of and for
the period ended June 30, 1994 have been derived from the consolidated financial
data of the Company, which have been audited by Coopers & Lybrand LLC,
independent public accountants. The Company's consolidated financial statements
as of and for the period ended June 30, 1995 have been derived from the
consolidated financial data of the Company, which have been audited by KPMG Peat
Marwick LLP, independent auditors. The consolidated financial data of the
Company as of and for the nine months ended March 31, 1995 and March 31, 1996
have been derived from the unaudited consolidated financial data of the Company
appearing elsewhere herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments which the Company
considers necessary for a fair presentation of the results of operations and the
financial condition for those periods. The consolidated financial data for the
nine months ended March 31, 1996 are not necessarily indicative of results for a
full fiscal year.

<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED JUNE 30,
MARCH 31,
-------------------------- --------------------------
1996 1995 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 1,895,812 $ 95,631 $ 388,887 $ --
Operating expenses.......................................... 15,330,108 8,842,313 14,797,021 2,986,975
Income (loss) from operations............................... (13,434,296) (8,746,682) (14,408,134) (2,986,975)
Interest and other income................................... 1,438,817 189,474 217,525 5,155
Interest and other expense.................................. (6,374,884) (214,900) (170,095) (332,997)
Debt conversion expense..................................... -- (584,985) (385,000) (681,250)
Net income (loss) before minority interest.................. (18,370,363) (9,357,093) (14,745,704) (3,996,067)
Minority interest(1)........................................ 190,668 16,155 48,055 --
Net income (loss)........................................... (18,179,695) (9,340,938) (14,697,649) (3,996,067)
Net income (loss) per common share.......................... $ (3.48) $ (2.17) $ (3.30) $ (1.77)
Weighted average shares outstanding......................... 6,046,136 4,590,182 4,771,689 2,283,695
OTHER DATA:
EBITDA(2)................................................... $(11,829,767) $(8,590,355) $(13,862,268) $(2,985,008)
Depreciation & amortization................................. 1,413,861 140,172 497,811 1,967
Capital expenditures........................................ 28,236,884 10,152,865 15,302,757 519,945
BALANCE SHEET DATA (END OF PERIOD):
Cash and short term investments............................. $154,454,550 $ 2,558,801 $ 20,350,791 $ 3,270,397
Total assets................................................ 207,978,611 14,491,589 37,626,965 4,605,659
Long-term liabilities....................................... 183,667,996 2,356,589 4,723,070 --
Redeemable stock, options and warrants...................... 2,457,337 5,827,371 2,930,778 1,116,276
Stockholders' equity........................................ 17,815,135 3,059,619 22,141,217 (3,265,757)
</TABLE>

(2) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. However, it is not intended to represent cash
flow or results of operations in accordance with Generally Accepted
Accounting Principles.

20
<PAGE> 23

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

The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such
forward-looking statements. The following discussion should be read in
conjunction with the consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus.

OVERVIEW

ACSI provides or plans to provide a variety of telecommunications services
to IXCs and business and government end users in Tier II and Tier III markets
located principally in the southern United States. The Company began
construction of its first fiber optic network in Louisville in February 1994 and
began to provide commercial service on that network in November 1994. Between
August 1994 and May 31, 1996, the Company commenced construction of an
additional 21 networks, 14 of which (plus the Louisville network) are currently
operational. The Company expects to provide commercial service in the Amarillo,
Baton Rouge, Colorado Springs, Columbus, Corpus Christi, Jackson and Spartanburg
markets by the end of the third calendar quarter of 1996. The Company is
actively developing necessary marketing and engineering plans and pursuing
required municipal authorizations to begin construction of additional markets
during 1996 and plans to have 30 networks in service or under construction by
September 30, 1996 and a total of 50 networks in service or under construction
by mid-calendar year 1998.

The Company provides dedicated services to IXCs and to those business and
government end users whose volumes of voice and data traffic are large enough to
warrant paying a fixed monthly charge for a specific capacity requirement rather
than a usage-based variable charge. These monthly charges vary according to the
capacity of each circuit, the volume of individual circuits ordered by the
customer, the mileage of the circuits, the need for any ancillary services and
the term of the service contract, but are typically less than the rates charged
by the LECs for similar services, volumes and terms. The Company focuses its
sales efforts on the largest IXCs, with whom it believes it has good customer
relationships. Sales of dedicated services are typically coordinated with the
end user's IXC account team and billed by the IXC rather than by the Company,
thus providing the end user a single point of contact for its entire long
distance account and reducing the Company's back-office overhead requirements.
Currently, the Company offers these services in all of its operational markets
and plans to offer these services in all markets where it constructs and
operates networks.

The Company is developing and has begun offering on a limited basis
high-speed data services, including IP switching, frame relay and ATM access
services. IP switching facilitates the connectivity of corporate, institutional
and governmental customers to the Internet, a collection of data networks that
communicate with one another using common protocols. Frame relay is a
cost-effective data transport solution for LAN-to-LAN connectivity, legacy
networks and client-server applications. ATM is a high-bandwidth service
offering virtual networking for voice, data and video traffic, allowing a
customer to use a single network for all three applications. Customer charges
include nonrecurring charges for installation and provisioning and either flat
rate or usage-based recurring charges based on network access speed and the
statistically guaranteed throughput rate of data for the particular service
order. The Company intends to deploy a broadband inter-city backbone data
network utilizing ATM switches that will connect the Company's service markets
and major data centers and Internet access points. The same backbone network
architecture can be utilized by the Company's enhanced voice and local switched
services for its data services offerings, which the Company believes will result
in operational efficiencies and lower costs while further enhancing
opportunities for cross marketing and bundling services to ACSI's customers.

ACSI is implementing its data communications network via leased high
bandwidth (DS-3) longhaul circuits from various interexchange carriers. Network
connectivity within each node will be via OC-3

21
<PAGE> 24

bandwidth, enabling the transparent migration of longhaul circuits to OC-3
capacity as needed. The Company's initial network phase established data POPs in
seven markets plus a link to ACSI's network management center in Maryland, where
the data network is monitored on a 24-hour-a-day basis. The Company expects to
have at least 20 POPs in operation by June 30, 1996 and at least 40 POPs by the
end of calendar year 1996.

The Company attained national service provider status for Internet services
in May 1996. Subsequently, the Company entered into agreements to interconnect
at two major Network Access Points ("NAPs") where national Internet service
providers interconnect their networks, allowing the multitude of local and
regional ISPs to exchange data and access the Internet globally, seamlessly and
transparently. In addition to these two initial NAP agreements at MAE-East
(Vienna, Virginia) and MAE-West (San Jose, California), ACSI is currently
negotiating for interconnection at three additional NAPs as well as negotiating
peering agreements and Network-to-Network Interfaces ("NNIs") with most major
interexchange carriers. The Company is deploying a coast-to-coast DS-3/OC-3
backbone and deploying domain name systems for Internet routing. As the Company
deploys additional data POPs (including POPs in all markets where ACSI has local
infrastructure), it intends to negotiate additional NNIs to facilitate the
exchange of data among other carriers' networks both domestically and abroad.

In addition, with a limited capital investment, the Company is developing
and during May 1996 began offering to small and mid-sized business and
government end users in its first five markets, enhanced voice messaging
services. These customers will be billed by the Company. The range of services
includes a voice messaging service for a flat monthly charge that may be bundled
with one or more additional features (such as automated attendant/call
screening, follow-me calling, remote fax and paging and E-mail notification) in
order to meet the customer's specific communications requirements. The
additional features will be offered for incremental fixed charges and/or usage
based charges. Management believes that successful marketing of these enhanced
voice messaging services will help build the Company's customer base and provide
relevant sales experience that can be leveraged into offering local switched
services. The Company may also offer these enhanced voice messaging services on
a retail or wholesale basis in markets where it has no network facilities,
resulting in increased revenue potential. However, the gross margins associated
with such revenues may be lower, resulting from the payment of LEC access
charges in those non-ACSI markets. Additionally, unlike traditional telephone
service, customers have not yet become fully accustomed to use of voice
messaging services, and the demand for these services cannot be predicted at
this time.

As requisite interconnection agreements are obtained and regulatory
approvals are obtained on a state-by-state basis, the Company plans to provide
local switched voice services, such as local dial tone, termination of local
calling, Centrex services, PBX trunking and switched access services. It is
expected that these services will be offered for appropriate fixed and
usage-based charges at rates below those charged by LECs for similar services.
Where technically feasible and economically practicable, the Company intends to
deploy a hubbed switching strategy by using Company-owned or leased switch
capacity in a large, centrally located market to provide services within that
market and to serve several other markets located within the same geographical
area via remote switching modules. The Company believes that this strategy, if
successfully implemented, will reduce the capital expense associated with
installing a fully configured switch in each market, which market may otherwise
be too small on its own to justify the investment. By aggregating switched
traffic from multiple Tier II and Tier III markets through a central hub switch,
the Company also expects to realize reduced operating expenses associated with
switch engineering and maintenance. The Company believes that providing
dedicated and private line, high-speed data and enhanced voice messaging
services will enhance the Company's ability to cross-market local switched voice
services to its then existing customers at a reduced cost. Finally, the Company
is evaluating opportunities, on a market-by-market basis, to establish mutually
beneficial alliances with certain entities that have local switching
requirements, experience, facilities and/or administrative back office
operations. Successful negotiation of switching alliances may further reduce the
Company's capital and operating expenses associated with the provision of
switched voice services.

The Company believes that its local digital fiber optic networks, coupled
with the distributed hub configurations and inter-city broadband digital
networks described above, will provide a platform for the provision of a wide
variety of voice, data and other communications services at a reduced cost.
While the Company may offer its services to customers that are not directly
connected to its network through resale of

22
<PAGE> 25

the LEC's network, the Company believes that it can gradually migrate many of
these off-net customers to higher margin on-net accounts as it increases
penetration of all its services within a given building. As a result, the
capital investment of connecting additional buildings and customers to ACSI's
network should become more cost-effective. Over time, the Company believes it
can increase its market share of all of its service offerings as a result of the
reliability and quality of its networks, prompt customer service, competitive
pricing, cross marketing/bundling synergies and new service offerings over its
target 50-city market area.

Initially, the Company expects to experience negative cash flow from
operations in each of its operating networks. The Company estimates that because
of the reduced operating costs associated with its smaller markets and
IXC-focused sales force, it can achieve operating cash flow breakeven (i.e.,
positive EBITDA before overhead allocations) results on its networks within ten
to fifteen months from the start of commercial service. Thereafter, the Company
anticipates that its profit margins will increase as each network is expanded to
directly connect additional customers to its backbone, as off-net customers
migrate to on-net status (thus allowing the Company to retain the portion of
customer charges previously paid out to the LEC for resale of LEC facilities).
The Company will also experience initial negative cash flow from operations as
additional value-added services such as high-speed data, enhanced voice
messaging and local switched voice services are offered and until networks
providing those services reach operating cash flow breakeven.

Capital Expenditures; Operating Cash Flow

Currently, the Company is operating 15 digital fiber optic networks, and as
of May 31, 1996 had initiated construction of seven additional networks and
intends to have 30 networks operating or under construction by September 30,
1996 and 50 networks operating or under construction by the mid-calendar year
1998. The costs associated with the initial construction and operation of a
network may vary greatly, primarily due to market variations in geographic and
demographic characteristics. Management estimates that construction of the
initial one-to-three mile fiber optic backbone and installation of related
network transmission equipment for dedicated services for each market will
generally cost between $3.5 million and $6.0 million, depending on the size of
the market served. Including planned expansion routes, total capital
expenditures per network are estimated to average $6.0 million. In addition to
capital expenditure requirements, the Company incurs sales and marketing
(including sales commissions) and operating expenses and other expenses such as
property taxes and, in certain markets, franchise fees. Prior to the completion
of network construction, certain of these expenses, to the extent they are
related to pre-service construction, are capitalized. These capitalized
expenses, estimated by management to be between approximately $500,000 and $1.0
million per network, are amortized over the anticipated life of the network.
These costs vary depending on the size of the market, the length of time
required to build-out the network and the rate of growth of the customer base.

At such time as the Company develops, introduces and rolls out its
high-speed data, enhanced voice messaging and local switched services in its
target markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary based on the number of customers
served and the actual services provided to the customers.

Although the Company is now generating revenues from 15 of its fiber optic
networks, on a consolidated basis, it is still incurring negative cash flows
due, in part, to the funding requirements for the networks the Company is now
planning or has under construction or development and due, in part, to the
roll-out of its new data and voice services. The Company expects to continue to
incur negative cash flow for at least the next several years.

RESULTS OF OPERATIONS

Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1995

Revenues

During the nine months ended March 31, 1996 (the "first three quarters of
fiscal 1996"), the Company recorded revenues of $1,895,812 as compared to
revenues of $95,631 during the nine months ended March 31, 1995 (the "first
three quarters of fiscal 1995"). Three of the largest IXCs accounted for
approximately $1,130,000, or 60%, of revenues for the first three quarters of
fiscal 1996.

23
<PAGE> 26

Total Operating Expenses

Network development and operations expenses for the first three quarters of
fiscal 1996 increased to $4,796,067 from $1,220,125 in the first three quarters
of fiscal 1995, reflecting significant increases in personnel, network
development and non-payroll operating expenses. These increased costs were
associated with developing and establishing centralized engineering, circuit
provisioning and network management functions, constructing and initially
operating the Company's competitive access networks and performing market
feasibility, engineering, rights-of-way and regulatory evaluations in additional
target cities. Related personnel costs increased to $1,501,959 in the first
three quarters of fiscal 1996 from approximately $791,900 in the first three
quarters of fiscal 1995, when the Company was operating primarily as a
development stage company. Other operating expenses related to the development
of prospective new markets, which include expenses such as contract labor and
legal expenses and certain franchise fees, travel expenses, rent, utilities,
charges and taxes, increased to $3,294,108 in the first three quarters of fiscal
1996 from approximately $428,225 in the first three quarters of fiscal 1995.

In the first three quarters of fiscal 1996, selling, general and
administrative expenses increased to $5,929,996 from $2,615,921 in the first
three quarters of fiscal 1995. Related personnel costs increased to $3,622,229
in the first three quarters of fiscal 1996 from $1,909,821 in the first three
quarters of fiscal 1995, and corresponding operating costs increased to
$2,307,767 in the first three quarters of fiscal 1996 from $706,100 the first
three quarters of fiscal 1995. This increase reflected costs associated with the
Company's efforts in expanding its national and local city sales, marketing and
administrative staffs, as well as increased legal and other consulting expenses
associated with its aggressive programs for obtaining regulatory approvals and
certifications and providing quality network services.

Depreciation and amortization expenses increased to $1,413,861 in the first
three quarters of fiscal 1996 from $140,172 in the first three quarters of
fiscal 1995. During the first three quarters of fiscal 1996 the Company
increased its capital assets to approximately $42,737,680, representing an
increase of such assets of more than 293% over the end of the first three
quarters of fiscal 1995. Non-cash stock compensation expense decreased to
$3,190,184 for the first three quarters of fiscal 1996 from $4,866,095 for the
first three quarters of fiscal 1995. This expense reflects the Company's accrual
of non-cash costs for options and warrants granted to key executives, employees
and others arising from the difference between the exercise price and the
valuation prices used by the Company to record such costs and from the vesting
of those options and warrants. Certain of these options had put rights and other
factors that required variable plan accounting in fiscal 1994 and fiscal 1995
but, at the end of fiscal 1995, the Company renegotiated contracts with certain
of its officers, establishing a limit of $2,000,000 on the Company's put right
obligations with respect to those contracts.

Interest and Other Expenses

Interest and other income increased to $1,438,817 for the first three
quarters of fiscal 1996 from $189,474 in the first three quarters in fiscal
1995. Interest expense and other costs increased to $6,374,884 in the first
three quarters of fiscal 1996 from $214,900 in the first three quarters of
fiscal 1995. These increases in interest income and expenses reflected the
significant increase in available funds from the Company's sale of its 9% Series
B Preferred Stock in June and November 1995 and the 2005 Notes in November 1995.
The increase in interest and other expenses reflected the accrual of interest
related to the 2005 Notes and the Company's increased borrowings under its
secured financing facility with AT&T Credit Corporation (the "AT&T Credit
Facility"). Payments of principal and interest on the AT&T Credit Facility will
begin in calendar 1997, payments of interest on the 2005 Notes do not begin
until November, 2000 and payments of interest of the 2006 Notes do not begin
until October 2001.

Debt conversion expense in the first three quarters of fiscal 1995 totaled
$584,985, reflecting expenses incurred in connection with the conversion of
certain of the Company's debt to equity in September 1994. AT&T Credit
Corporation's minority interest in the Company's operating subsidiaries for
which it provided funding, reduced operating losses by approximately $190,668
for the first three quarters of fiscal 1996, and by $16,155 for the first three
quarters of fiscal 1995.

24
<PAGE> 27

Fiscal Year Ended June 30, 1995, Compared to Fiscal Year Ended June 30, 1994

Revenues

During the fiscal year ended June 30, 1995 ("fiscal 1995"), the Company
recorded $388,887 in revenues compared to no revenues in the fiscal year ended
June 30, 1994 ("fiscal 1994"). The Company operated as a development stage
company throughout fiscal 1994 and through the first half of fiscal 1995. These
revenues were comprised substantially of revenues from the Company's provision
of interstate dedicated services in its Louisville, Little Rock, Greenville and
Fort Worth networks in which it began recording revenues in December 1994, March
1995, May 1995 and June 1995, respectively. Three of the five largest IXCs
accounted for $329,000, or 85%, of fiscal 1995 revenues.

Total Operating Expenses

Network development and operations expenses for fiscal 1995 increased to
$3,282,200 compared to $1,054,400 in fiscal 1994, reflecting the Company's
significant increases in personnel, network development and non-payroll
operating expenses. These increased costs were associated with developing and
establishing centralized engineering, circuit provisioning and network
management functions, constructing and initially operating the Company's first
five competitive access provider networks, and with the performance of market
feasibility, engineering, rights-of-way and regulatory evaluations in several
additional cities. Related salaries, wages and benefits increased from $331,500
in fiscal 1994 to $1,341,100 in fiscal 1995 as the number of network development
and operations employees increased from six at June 30, 1994, to 44 at June 30,
1995. The Company also incurred significant operating expenses related to the
development of prospective new markets. These costs, which include expenses such
as contract labor, legal and certain franchise fees, travel, rent, utilities,
and taxes, increased from $722,900 in fiscal 1994 to $1,941,100 in fiscal 1995.

In fiscal 1995, selling, general and administrative expenses increased to
$4,597,600 from $1,297,500 in fiscal 1994. Related salaries, wages and benefits
increased from $382,900 during fiscal 1994 to $1,974,200 in fiscal 1995, and
corresponding office and other operating costs increased to $2,210,900 in fiscal
1995 from $134,600 in fiscal 1994. This increase reflected costs associated with
the recruitment of additional executive management, the establishment of a
centralized sales and marketing organization, and the establishment of
administration and sales staff in five cities. Selling, general and
administrative staff grew from nine at June 30, 1994, to 30 at June 30, 1995.
Consulting and professional fees decreased from $780,000 in fiscal 1994 to
$412,500 in fiscal 1995, as the Company's need for the significant legal and
accounting costs that it incurred early in fiscal 1994 as it restructured its
operations and began to finance its growth activities was reduced. Depreciation
and amortization expenses increased from $1,967 in fiscal 1994 to $497,811 in
fiscal 1995, as the Company began to depreciate the capitalized costs of its
first four networks in Louisville, Little Rock, Greenville, and Fort Worth.

Non-cash stock compensation expense increased from $633,151 in fiscal 1994
to $6,419,412 in fiscal 1995, primarily reflecting the accrual of costs equal to
the difference between the current fair market value of the shares of Common
Stock which vested under options and warrants granted to key executives and
consultants and the aggregate exercise price with respect to such shares. Such
options have put rights and other factors that required variable plan accounting
in fiscal 1994 and fiscal 1995. During June 1995, the Company renegotiated
contracts with certain of its officers and established a limit of $2,500,000 on
the Company's put obligations, thereby eliminating the requirement for the
Company to continue to record expenses based on the continually changing fair
market value of the underlying stock in excess of the $2,500,000 limitation. As
a result of establishing this limitation, the Company reclassified $4,511,000 to
additional paid-in capital from redeemable stock options and warrants.
Subsequent to the end of fiscal 1995, this limitation was reduced to $2,000,000.

Interest and Other Expenses

Interest and other income increased from $5,155 in fiscal 1994 to $217,525
in fiscal 1995. The Company placed funds received from its financing efforts in
short-term interest investments. Due to increased borrowings in connection with
the construction and operation of its networks, interest and other expenses
increased from $332,997 in fiscal 1994 to $706,000 in fiscal 1995. In fiscal
1995, the Company capitalized

25
<PAGE> 28

$536,000 of interest in connection with its construction of fiber optic
networks, causing interest expense to decrease to $170,095.

Debt conversion expense in fiscal 1994 totalled $681,250, reflecting debt
conversion expenses associated with the conversion of debt in September 1993.
During fiscal 1995, the Company incurred costs of $554,900 in connection with
(i) the issuance in June 1994 of $4.3 million of notes, substantially all of
which were retired or converted into Series A Preferred Stock (which was later
exchanged for 9% Series A-1 Preferred Stock) in the Company's October 1994 $16.8
million equity financing, and (ii) the amortization of debt issuance costs
associated with the Company's initial round of secured debt financing under the
AT&T Credit Facility, $323,900 of which was capitalized. In connection with the
conversion of the June 1994 notes, $231,000 was recorded as debt conversion
expense for fiscal 1995. The Company recorded an additional debt conversion
expense amount of $154,000 due to a premium associated with its conversion of
certain secured notes that was paid in conjunction with the Company's October
1994 equity financing.

AT&T Credit Corporation's minority interest in the Company's Louisville and
Fort Worth operating subsidiaries reduced operating losses for fiscal 1995 by
$40,000 and $8,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has funded the construction of its networks and its
operations with external financing. Prior to November 1995, the primary sources
of funds used to finance the building of existing networks and the completion of
new targeted networks were two Preferred Stock private offerings completed in
October 1994 and June 1995, through which the Company raised approximately $46.0
million, and the AT&T Credit Facility, through which the Company has financing
commitments for $31.2 million. On November 14, 1995, the Company completed a
private offering of 190,000 Units consisting of the 2005 Notes and the Warrants
from which the Company received approximately $97.8 million in net proceeds. The
2005 Notes will accrete to an aggregate principal amount of $190.0 million by
November 1, 2000, after which cash interest will accrue and be payable on a
semi-annual basis. The Company also received net proceeds of approximately $4.7
million from the private sale of an additional 50,000 shares of its Preferred
Stock to a principal stockholder and the exercise by that stockholder of
warrants to purchase 214,286 shares of Common Stock acquired in the Company's
June 1995 private placement. On March 21, 1996, the Company completed a private
offering of $120.0 million in principal amount of the 2006 Notes. The 2006 Notes
will accrete to an aggregate principal amount of $120.0 million by April 1,
2001, after which cash interest will accrue and be payable on a semi-annual
basis. The Company received net proceeds of approximately $61.8 million from the
sale of the 2006 Notes.

The Company intends to continue to use these funds and all but
approximately $4.8 million of the net proceeds of this Offering towards
completion of the Company's 50-city business plan, including the development and
construction of fiber optic networks, the further development and introduction
of new services, including high-speed data, enhanced voice messaging and local
switched services, for expansion of the Company's existing networks and to fund
negative operating cash flow until cash flow break even. The Company has
estimated that from April 1, 1996 through the end of the calendar year 1998,
capital requirements for implementation of its 50-city business plan are
approximately $430.4 million. At March 31, 1996, the Company had approximately
$154.5 million in cash and cash equivalents available for this purpose. To meet
additional capital requirements, ACSI may be required to sell additional debt or
equity securities or increase its existing credit facility. The Company may also
need to seek such additional equity financing to maintain balance sheet and
liquidity ratios required under certain of its debt instruments. In addition,
the Company in the past has considered and expects to continue to consider
potential acquisitions or other strategic arrangements that may fit the
Company's strategic plan, although the Company is not currently negotiating any
particular transaction. Any such acquisitions or strategic arrangements that the
Company might consider are likely to require additional equity or debt
financing, which the Company will seek to obtain as required.

Preferred Stock. In October 1994, the Company completed the private
placement of 186,664 shares of its 9% Series A Convertible Preferred Stock, par
value $1.00 per share (which was later exchanged for

26
<PAGE> 29

Series A-1 Preferred Stock that will convert into 7,466,560 shares of Common
Stock simultaneous with the completion of this Offering) with accompanying
warrants to purchase an aggregate of 2,674,506 shares of Common Stock, for an
aggregate consideration of $16.8 million, including the conversion of $4.3
million of outstanding debt. Of the warrants sold in October 1994, warrants to
acquire 1,491,222 shares of Common Stock were exercised by a principal
stockholder in connection with a June 1995 private placement of its Series B
Preferred Stock, for an aggregate exercise price of approximately $100,000. See
"Principal Stockholders."

In June 1995, the Company completed a private placement of 227,500 shares
of its Series B Preferred Stock with accompanying warrants to purchase an
aggregate of 1,584,303 shares of Common Stock, for an aggregate consideration of
$22,750,000. In addition, in November 1995, the Company completed a private
placement of 50,000 shares of its Series B Preferred Stock together with the
exercise of accompanying warrants to purchase 214,286 shares of Common Stock to
a principal stockholder for an aggregate consideration of $5,000,000 (before
deduction of estimated offering expenses). All classes of the Series B Preferred
Stock will convert into an aggregate of 9,910,718 shares of Common Stock
simultaneous with the completion of this Offering.

Under the terms of the Preferred Stock, the Company is required to accrue
quarterly dividends at an annual interest rate of 9% of the face value of the
Preferred Stock outstanding. Such accrued dividends will be payable cumulatively
beginning January 1, 1998, or earlier upon conversion into Common Stock. The
Preferred Stock will convert into an aggregate of 17,377,278 shares of Common
Stock upon completion of this Offering, at which time the Company will pay
accrued dividends on the Preferred Stock of approximately $4.8 million.

AT&T Credit Facility. In October 1994, the Company entered into the AT&T
Credit Facility pursuant to which AT&T Credit Corporation has agreed to provide
up to $31.2 million in financing for the development and construction of fiber
optic networks by the Company's subsidiaries. In connection with each loan made
under the AT&T Credit Facility, AT&T Credit Corporation purchases 7.25% of the
capital stock of the funded subsidiary, and ACSI pledges the other shares and
the assets of the subsidiary to AT&T Credit Corporation as security for the
loan. During fiscal 1995, the Company's subsidiaries in Louisville, Fort Worth,
Greenville and Columbia entered into loan agreements under the AT&T Credit
Facility providing for AT&T Credit Corporation funding of up to $19.8 million in
the aggregate, and in September 1995, the Company's subsidiary in El Paso
entered into a loan agreement under the AT&T Credit Facility providing for up to
$5.5 million of AT&T Credit Corporation funding. As of May 31, 1996, an
aggregate of $14.5 had been borrowed under these agreements.

EFFECTS OF NEW ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of, which will require the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. Adoption of SFAS
No. 121 is required in fiscal 1997.

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value-based method for financial
accounting and reporting stock-based employee compensation plans. However, the
new standard allows compensation to continue to be measured by using the
intrinsic value based method accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1997. The Company
has elected to continue to apply the intrinsic value-based method of accounting
for stock options.

While the Company does not know precisely the impact of adopting SFAS No.
121 and SFAS No. 123, the Company does not expect that the adoption of SFAS No.
121 and SFAS No. 123 will have a material effect on the Company's consolidated
financial statements.

27
<PAGE> 30

BUSINESS

INDUSTRY OVERVIEW

The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. The ability to access information quickly has become
critical to the success of both business and government end users. Both voice
and data communications traffic of large business and government end users have
increased significantly. In addition, deregulation has led to an increase in
competition in the telecommunication services industry, most recently in the
local exchange markets. CLECs such as ACSI have sought to take advantage of the
opportunities presented by increased competition and the demand for timely and
reliable telecommunications services. Regulatory initiatives in the
telecommunications industry introduced to foster competition in the local
exchange market have stimulated demand for local voice services, the total
market for which was approximately $93.0 billion in 1994.

Several factors have served historically to promote competition in the
local exchange market, including (i) rapidly growing customer demand for an
alternative to the LEC's monopoly, spurred partly by the development of
competitive activities in the long distance market; (ii) advances in the
technology for transmission of data and video, which require greater capacity
and reliability levels than copper-based LEC networks were able to accommodate;
(iii) a monopoly position and rate of return-based pricing structure that
provided little incentive for LECs to upgrade their networks; (iv) the
development of fiber optics and digital electronic technology, which combined
the ability to build a network economically with the ability to transmit data
and video at high-speeds and greatly increased capacity as compared to the LECs'
copper-based networks; and (v) the significant access charges IXCs were required
to pay to LECs to access the LECs' networks.

Competition in the local exchange services market began in the mid-1980s.
In New York City, Chicago and Washington, D.C., newly formed companies provided
dedicated non-switched services by installing fiber optic facilities connecting
POPs of IXCs within a metropolitan area and, in some cases, connecting business
and government end users with IXCs. Most of the early CAPs operated limited
networks in the central business districts of major cities in the U.S. where the
highest concentration of voice and data traffic, including IXC traffic, is
typically found. CAPs used the substantial capacity and economies of scale
inherent in fiber optic cable to offer customers service that was generally less
expensive and of higher quality than could be obtained from the LECs due, in
part, to antiquated copper-based facilities used in many LEC networks. In
addition, based on management's experience, CAPs offered shorter installation
and repair intervals, improved reliability and more responsive customer service
in comparison to the LECs.

Initially, CAPs could effectively compete only for special access and
private line services to customers in buildings directly connected to their
separate networks. The Interconnection Decisions allowed CAPs to significantly
increase the number of customers and markets serviced without physically
expanding their networks. The Interconnection Decisions also enabled CAPs to
provide interstate switched access services in competition with LECs, which has
encouraged the development of competitive interstate switched access market.

With the enactment of the Telecommunications Act, the Company believes that
competition in the local telecommunications marketplace will be enhanced through
(i) removal of state and local entity barriers, (ii) requirements that LECs
provide interconnections to their facilities, (iii) facilitation of the process
of changing from LEC services to those offered by CLECs and (iv) access to
rights-of-way. To the extent that LECs begin to compete with IXCs for long
distance services, IXCs may have a competitive incentive to move access business
away from LECs to CLECs, and CLEC market share may increase.

THE COMPANY

ACSI is a rapidly growing CLEC that constructs and operates digital fiber
optic networks and offers local telecommunications services to IXCs and business
and government end users principally in the southern United States. The Company
provides non-switched dedicated services, generally at a discount to those of
the

28
<PAGE> 31

LEC, and delivers such services with a high level of network reliability. In
addition to dedicated services, the Company is developing and has begun to offer
to business and government end users, on a limited basis, high-speed data and
enhanced voice messaging services. High-speed data services include IP
switching, frame relay and ATM. Management believes that successful marketing of
these high-speed data and enhanced voice messaging services should provide the
Company with increased revenues, an expanded end-user customer base and relevant
marketing experience that can be leveraged into offering local switched voice
services. The Company plans to begin offering local switched voice services by
late 1996.

ACSI NETWORKS

<TABLE>
<CAPTION>
TARGETED
TO BE
OPERATIONAL AS OF OPERATIONAL BY
MAY 31, 1996 SEPTEMBER 30, 1996
- ----------------------------------- ---------------------
<S> <C> <C>
Albuquerque, NM Las Vegas, NV Amarillo, TX
Birmingham, AL Lexington, KY Baton Rouge, LA
Charleston, SC Little Rock, AR Colorado Springs, CO
Columbia, SC Louisville, KY Columbus, GA
El Paso, TX Mobile, AL Corpus Christi, TX
Fort Worth, TX Montgomery, AL Jackson, MS
Greenville, SC Tucson, AZ Spartanburg, SC
Irving, TX
</TABLE>

COMPANY STRATEGY

Early Entry in Tier II and Tier III Markets in the Southern United States.
The Company principally targets Tier II and Tier III markets, as they are
generally subject to less competition from other CLECs relative to larger, more
developed Tier I markets, thereby enabling the Company to achieve market
penetration quickly. ACSI intends to continue focusing its market entry
principally in areas of the southern United States because of attractive
demographic trends and expected growth in demand for telecommunications services
in these regions, which the Company believes have been underserved to date.
However, the Company may consider larger markets or markets outside its current
geographic focus. Between 1989 and 1994, the rate of access line growth in all
the regions of the South exceeded the national average by approximately two and
one-half times. Additionally, the 18 state area targeted by the Company accounts
for approximately 37% of the U.S. population and approximately 35% of the total
access lines in the United States. Although not precluding entry into a
particular market by competitors, the Company believes that the first
operational competitive network in a market generally has a competitive
advantage in attracting

29
<PAGE> 32

customers willing to switch from the LEC. Management believes that the Company
will be the first competitor to offer dedicated services in 14 of the
above-listed 22 markets.

Building on Strong Relationships with IXCs. ACSI has significant customer
relationships with most of the major IXCs serving its markets. Currently, a
substantial portion of the Company's revenues is billed to IXCs for services
provided for the benefit of their customers. IXCs often choose the access
provider for the local portion of a long distance call and have a strong
presence in all of the Company's target markets. By demonstrating its ability to
provide high quality services in its existing markets, the Company has the
opportunity to obtain commitments for dedicated services from IXCs in new
markets. The Company has signed a five-year agreement with MCImetro in which
MCImetro has agreed to purchase minimum levels of dedicated services from ACSI
and has committed to construct portions of ACSI's fiber optics networks in six
cities. Recently, the Company signed agreements with AT&T and two other IXCs,
pursuant to which the Company expects AT&T and such other IXCs to use the
Company as a supplier of dedicated special access services as well as such other
services as may be agreed upon in particular markets. The Company also markets
its services directly to the end user in conjunction with IXC representatives.
The Company expects further growth to the extent that LECs begin to compete with
IXCs for long distance services, thereby providing IXCs with a competitive
incentive to move access business away from LECs to CLECs. Moreover, because the
Telecommunications Act prohibits the three largest IXCs from jointly marketing
their long distance services with resold local services of an RBOC (until that
RBOC itself offers in-region long distance service), the Company believes that
IXCs should have incentive to resell CLEC services.

Aggressive Bottom-Line Approach to Network Deployment. The Company rapidly
deploys its networks and markets its services in order to quickly achieve
operating cash flow breakeven, i.e., positive EBITDA before overhead allocation.
The Company's objective is to commence construction of a network in the central
business district of a market immediately upon receipt of the requisite
municipal approval. ACSI targets completion of its initial network phase and
commencement of commercial service in a market within approximately six months
after the start of construction. The Company typically begins premarketing its
services at the start of construction so that once a network becomes
operational, customer demand exists for its dedicated services. The Company then
seeks to extend the reach of its network outside the central business district
in response to customer demand. ACSI anticipates that each dedicated services
network will achieve operating cash flow breakeven within ten to fifteen months
after commencement of service. In its more mature markets, Louisville, Little
Rock and Greenville, the Company achieved operating cash flow breakeven in a
year or less after initiation of service.

Cost-Effective Entry into Local Switched Voice and Value-Added
Services. To take advantage of the opportunities created by the
Telecommunications Act and following receipt of state regulatory approval and
LEC interconnections, the Company plans to offer local switched voice services
beginning in late 1996 where it is deploying local distribution networks. The
Company expects to deploy telecommunications switching equipment in eight
markets by mid-1997 and in 24 markets by early 1999. To take advantage of the
size and regional concentration of ACSI's markets, where technically feasible
and economically practicable, the Company plans to deploy a hubbed switching
strategy whereby one switch can serve multiple markets via remote switching
modules. This strategy would justify the switch investment in Tier II and Tier
III markets by reducing capital costs and operating expenses. The Company
recently agreed to purchase eight 5ESS(R)-2000 switches from Lucent
Technologies. The Company believes that providing dedicated, enhanced voice
messaging and high-speed data services will enhance the Company's ability to
cross-market local switched voice services. The U.S. market for local switched
voice services was estimated to constitute more than 95% of the approximately
$93.0 billion local telecommunications services market in 1994 and represents a
significant growth opportunity for the Company.

The Company's local switched voice services plan is targeted at small and
medium sized business and government end users. The typical customer is expected
to have between ten and 100 employees. The Company plans to initially target
users within the buildings of ACSI's existing customers to connect such users
directly to its network and then to offer its services to customers that are not
directly connected to the Company's network through interconnection agreements
with the incumbent LECs. Several of these

30
<PAGE> 33

interconnection negotiations are currently in progress, in accordance with
requirements of the Telecommunications Act. The Company believes that many of
these potential customers can be gradually attracted as the Company expands the
range of local switched voice services within specific buildings, thereby
justifying the expansion of the Company's network to connect these additional
customers and buildings.

Additionally, the Company will seek existing and emerging technical
solutions in order to serve smaller markets, where feasible and cost justified.
The Company will continue to seek and evaluate opportunities in the future to
deploy regional switching hubs that can serve multiple smaller markets. In
addition, the Company is evaluating opportunities, on a market-by-market basis,
to partner with certain entities that have local switching requirements,
experience, facilities and/or back office operations that can result in mutually
beneficial alliances. Successful negotiation of switching partnerships may
further reduce the Company's capital and operating expenses associated with the
provisioning of local switched services in its markets.

The Company believes that its local digital fiber optic networks, coupled
with the distributed hub configuration and its broad band inter-city network,
will provide a robust platform for the provision of a wide variety of voice,
data and communications services at a reduced cost. Over time, the Company
believes it can increase its market share in all of its service offerings as a
result of the reliability and quality of its networks, prompt customer service,
competitive pricing, cross-marketing/bundling synergies and new service
offerings over its target 50-city market area.

ACSI has begun offering on a limited basis a range of enhanced voice
messaging services to small and mid-sized business and government end users. The
Company's initial offerings of enhanced voice messaging services include
business voice messaging services utilizing the Company's First Line and First
Line Plus products and one-number services utilizing the Company's Virtualine
and Virtualine 800 products. The Company's enhanced voice messaging service can
function as a virtual PBX. Management believes that the market for enhanced
voice messaging services in 1993 was approximately $1.4 billion, that this
market is underserved and that, with the availability of enhanced voice
messaging services such as the Company's, the market has the potential for
continued rapid growth as customers become more accustomed to use of these
services. The Company believes that this service should enable the Company to
begin marketing to small and mid-sized customers in ACSI on-net and off-net
buildings that are not candidates for dedicated services in anticipation of
offering local switched services to these customers. Additionally, the Company
may market this service directly or through third parties (as a private label
service) in cities where it does not have a network presence.

Developing a Broadband Data Communications Backbone Network with Extensive
Local Points of Presence. The Company believes that switched data
communications represents one of the fastest growing segments of the
telecommunications services market. Industry sources estimate that the U.S.
switched data services market was approximately $1.1 billion in 1995 and the
Company believes that this market will grow to approximately $8.8 billion by
2000 due, in part, to the continuing proliferation of personal computers and the
increasing need to interconnect these computers via local and wide area
networks, the dramatic growth of the Internet and the emergence of multimedia
applications. Together, these applications have spawned numerous network
technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements is being strained by the increasing demand
for high bandwidth transport at both the local and national levels. The Company
believes that the growth of high speed applications will further strain the
networks that exist today. Unless additional network infrastructure supporting
these high bandwidth requirements is deployed, the ability of existing networks
to service the demand for both speed and capacity may continue to be strained
and may result in further degradation of the quality of service afforded by
network service providers. The Company believes that this constraint in
bandwidth capacity creates a significant business opportunity for the Company,
particularly in its Tier II and Tier III markets, which have largely been
ignored by the larger data communications providers.

31
<PAGE> 34

ATM-based high bandwidth network will be capable of simultaneously supporting IP
switching, frame relay and multimedia applications. This technology will allow
network customers to migrate transparently from lower speed services to high
bandwidth services, as their data communications requirements expand. The
Company plans to have 40 data POPs in service by the end of calendar 1996. The
Company believes this backbone, coupled with its planned 50 local distribution
networks, provides the Company with a cost advantage for its high speed data
services.

The Company believes that it can become a major provider of high-speed data
communications services (including IP switching, frame relay and ATM) in the
southern United States by:

- Offering Data Communications Solutions Based on Proven Carrier-Grade,
Standards-Based Technology with Flexible and Superior Back-Office
Systems. The Company believes open and carrier-grade, standards-based
technology is necessary for companies to compete effectively (with
respect to features and price), avoid costly conversion from legacy
systems, offer multiple data solutions with minimal equipment and
manpower cost, and cost effectively establish interconnection among key
IXCs, LECs and customers. The Company believes that its ability to
maintain flexibility on provisioning and billing with respect to its
initial and future product offerings and pricing differentiates ACSI from
its competitors. Examples of the billing flexibility that the Company
plans to offer include accounting and billing information at the
wholesale level to IXCs and resellers, retail level accounting and
billing information to business customers and ISPs, flat/transaction
billing, volume discounts (multi-product/multi-service) and chain
billing.

- Packaging Complex Data Solutions as a Simple Offering. ACSI packages its
data communications service capabilities through a solutions-oriented,
consultative selling approach supported by a highly trained sales and
support staff, which provides the customer with easy and uncomplicated
access to a series of complex services. Pricing, provisioning, and
customer interface to the product has been structured as simply as
possible. The Company expects that one-stop shopping through ACSI's data
services business unit will facilitate implementation and minimize
customers' need to interface with multiple vendors. A complete service
offering capability is expected to enable the Company to provide improved
quality of service as an "upstream" network provider to regional and
local service providers as well as to public sector, corporate and
institutional customers.

- Addressing the Need for High Bandwidth Data Network Infrastructure in the
Southern United States. The Company believes that, to date, major data
services providers, such as the IXCs, have focused on serving the Tier I
markets. An increasing number of regional, national and multinational
corporations are located in mid-sized markets within the southern United
States (the principal target markets of ACSI's local network
infrastructure) and are demanding the entire range of switched data
communications services, including IP switching, frame relay and high
bandwidth transport services. The Company believes there is inadequate
data services infrastructure in this region to support these services.

- Offering Integrated Data Communications Services Via a Single High
Bandwidth Network. While current growth in demand for data
communications services has been focused on IP switching and frame relay
services, the Company does not believe that either has been engineered to
meet the growing demand for bandwidth. The Company believes that end
users will benefit from being able to have their diverse data
communications needs met by a single provider over a single network. By
deploying an ATM-based, high bandwidth network, the Company can offer
business, institutional and government customers the entire range of
switched data communications service offerings through a single
integrated network, aggregating traffic and increasing network
efficiencies, managing bandwith, ensuring consistent delivery and
servicing of customers' diverse data communications requirements. This
backbone should enable the Company to expand its range of service
coverage and offerings.

32
<PAGE> 35

network facilities in place and, therefore, must purchase these local
components from other parties such as the LEC or a CLEC. Similarly, to the
extent data service requirements include a need for local switched
services, these lines must be obtained from the LEC or a CLEC with local
switching capability. Because ACSI is planning local network facilities in
50 markets and switching capability in at least 24 of those markets, the
Company believes that it can provide data communications services to
customers in those markets where it has network and switching facilities
at a lower cost with higher quality of service.

The Company believes that the following data communications services
constitute the principal growth areas in commercial data market:

Internet Access Services. Businesses are increasingly using the
Internet to transmit e-mail, engage in commercial transactions (e.g.,
electronic commerce) and develop internal communications networks, or
"intranets." Businesses are also using the World Wide Web to disseminate
information about their products and services. Increasing business
utilization of the Internet has added to the demand for higher-speed
Internet connections, increased port capacity and secure network
facilities.

Industry analysts estimate that the number of Internet users during
the past five to ten years has grown by 100% a year. Demand for Internet
services, including access (i.e., services connecting users to the
Internet), applications (such as "Web browsers") and hardware, has resulted
in significant demand for local and interexchange communications network
services, applications software and systems integration services. The
current U.S. market for IP switching is estimated to be approximately
$550.0 million and is projected to grow to approximately $3.5 billion by
2000.

Managed Services. Managed services are comprehensive value-added
offerings that provide the design, installation, and on-going management,
maintenance and hardware (such as switches, routers and modems) for a
customer's network. By eliminating many of the timing, coordination and
inter-operability issues that arise in installations requiring multiple
vendors to design and install a network, managed services offer a single
source solution. In addition, configuration management issues, such as
maintaining consistent versions of the router software, deploying
consistent configurations and overall network management, are addressed in
most managed services offerings.

While managed services can be provided for all data communications
applications and technologies (including frame relay and ATM), the most
immediate market opportunity for managed services is with local and
regional ISPs. Managed services, via a turnkey approach, address numerous
network implementation, expansion and management issues for ISPs, including
the provision of hardware of local lines and dedicated circuits, and
securing physical space via collocation for expansion of the ISP's network
hardware. Collocation of the ISP's equipment in the managed services
provider's network facility also reduces the ISP's local access costs by
reducing circuits to approach the "zero-mile" level. Finally, because a
managed services provider can aggregate and consolidate interexchange data
communications traffic from multiple customers (and thus purchase transport
at more cost effective higher bandwidths, e.g., 45 mbps versus 1.5 mbps),
the provider can offer ISPs lower pricing on their interexchange (longhaul)
transport than if the ISPs obtained the service directly from a longhaul
carrier (such as an IXC). The U.S. market for Internet-related data network
equipment was an estimated $800.0 million in 1995 and is projected to grow
to approximately $4.0 billion by the year 2000. Managed service providers
can penetrate this market for network equipment through bundling an ISP's
hardware needs with network services on a turnkey basis.

Frame Relay. Frame relay service is a fast-packet transport solution
targeted at LAN-to-LAN and legacy networks such as SNA. Frame relay service
is designed to meet fluctuating, or periodic, data transfer requirements by
offering shared virtual bandwidth connectivity at high speed. Frame relay
services offer low cost data transmission with generally minimal delay, few
errors and high speed performance. Frame relay provides a solution that
satisfies customer requirements for integrated, cost-effective data
communications in environments where transmission needs fluctuate. As
users' requirements expand into multimedia applications, which require
higher bandwidth, frame relay offers a natural

33
<PAGE> 36

migration path to ATM. Industry sources project that the U.S. market for
frame relay services will grow from an estimated $1.3 billion in 1996 to
approximately $3.7 billion by the end of the year 2000.

ATM. ATM is a high bandwidth service providing virtual networking for
voice, data and multimedia traffic. The ability to combine all three media
provides opportunities to reduce costs associated with running three
separate networks for each medium. The major benefits of ATM include
providing shared access to trunk bandwidth for multiple application and
application types, minimizing the number of wide area connections needed,
and supporting user access speeds of at least 1.5 mbps (T-1). Frame relay
customers whose capacity requirements increase can achieve cost savings by
migrating to fractional T-3 transmission speeds (between 1.5 mbps and 45
mbps) or to full 45 mbps and higher connectivity. Large customers, such as
regional or national ISPs, financial institutions and other entities with
very high volume data transport requirements, may also seek redundant
dedicated transport at T-3 to OC-3 levels or higher, essentially obtaining
the same level of network capacity and self-healing network reliability as
a dedicated facilities customer with SONET service. Local ATM applications
include native speed LAN connectivity, diagnostic imaging,
videoconferencing and other high bandwidth applications. Industry sources
estimate the ATM market will be approximately $63.0 million during 1996,
and the Company believes that this market will increase to approximately
$1.6 billion by the end of 2000.

Attract and Retain a Management Team with Extensive Telecommunications
Experience. The senior management of ACSI pioneered the development of many of
the first fiber optic networks in Tier I markets in the United States and has
substantial experience in rapidly building cost-effective networks and managing
service operations. The Company's Chairman, Anthony J. Pompliano, is the
co-founder and former President and Chief Executive Officer of MFS. Richard A.
Kozak, the Company's President and Chief Executive Officer, has held senior
management positions at several telecommunications companies, including MFS and
Sprint International (formerly Telenet Communications Corporation). Other
members of the Company's senior management team have experience working at MFS,
Teleport Communications Group, AT&T, MCI, WilTel, Inc., BellSouth
Telecommunications, Inc. and other telecommunications companies. The Company's
management team collectively has over 200 years of marketing and operating
experience in the telecommunications industry.

The Company believes that various telecommunications companies, such as the
IXCs and other LECs, will seek entry into the now competitive local exchange
services market through relationships with alternative service providers such as
the Company. The Company further believes that its service offerings will be
attractive to such competitive telecommunications providers due to the Company's
breadth of market coverage in a significant number of Tier II and Tier III
markets in the southern United States. The Company is developing relationships
with key partners and intends to create the infrastructure to support this
resale opportunity.

NETWORK DEVELOPMENT

The Company constructs and operates digital fiber optic networks. Signal
transmissions carried over digital fiber optic networks are superior in many
respects to older analog transmissions carried over copper wire and by
microwave, which continues to be used in varying degrees by the LECs. Digital
fiber optic telecommunications networks generally offer faster and more accurate
transmissions for all data and voice communications than analog
telecommunications systems or digital transmission systems using copper wire.
Fiber optic networks also generally require less maintenance than copper wire or
microwave facilities or comparable transmission capacity, thereby decreasing
operating costs. An increase in capacity can be achieved through a change in
electronics. Because ACSI is employing the latest digital transmission
technology in its networks, its digital fiber optic networks will have
substantial additional capacity. The Company believes it will be able to use its
CLEC networks to provide a wide range of telecommunications services with only
incremental facilities costs.

Management believes that it can currently deploy its capital more
efficiently by constructing fiber optic networks rather than acquiring networks
constructed by other CLECs. In light of the significant premium to book values
associated with recent acquisitions within the CLEC industry, there are
considerable efficiencies associated with utilizing consistent vendors and
equipment in the Company's network, therefore ensuring high quality, reliability
and operating standards.

34
<PAGE> 37

Key elements of the Company's network development plan include: (i)
thoroughly analyzing potentially favorable markets for development; (ii) seeking
authorizations from public and private entities for rights-of-way; and (iii)
efficiently implementing construction plans in a timely manner, thereby allowing
the Company to gain a competitive position in the chosen market.

Site Selection. Before deciding to enter a market, the Company conducts a
detailed feasibility study to determine the potential size of the market,
existing competition within the market, the Company's ability to obtain
municipal authorizations, including franchises and access to rights-of-way, and
the relative ease of market entry from a local and state regulatory standpoint.
The rights-of-way assessment, done by independent telecommunications
consultants, determines whether another CAP/CLEC network is under construction
or ready to construct in the target market, the availability of economical
rights-of-way, the local utility's receptiveness to allow use of its
rights-of-way, the topology of the city and concentrations of commercial real
estate, and the local city permitting and franchise requirements. The market or
end user survey, also done by independent telecommunications consultants,
identifies the significant commercial and government end users in the target
service areas. Individual telephone and/or face-to-face interviews are then
conducted with potential end users, focusing on those anticipated to have the
largest business volume. The interviews determine the end user's receptiveness
to using a competitor to the LEC, the telecommunications requirements of such
end user, current pricing by the LEC and other relevant information. This
"bottom up" sizing of the target service areas provides an estimate of the
prospective business by building and by customer.

Rights-of-Way. As part of its due diligence on a market during its site
selection process, the Company seeks municipal authorizations (such as
franchises, licenses, or permits) to construct and operate its network within
the public rights-of-way. The duration of this approval process can vary from
less than three months to several years, depending on the specific legal,
administrative, and political factors existing in that market. The initial term
of these municipal approvals, once granted, may range from as few as five years
to as many as 25 years, and such approvals typically may be renewed for
additional terms. See "Risk Factors -- Dependence on Rights-of-Way and Other
Third Party Agreements" and "-- Effect of Regulation."

Concurrent with its seeking municipal authorizations, the Company initiates
discussions with electric or gas utilities, CATVs and other private providers of
rights-of-way and/or facilities that may be used by the Company for installation
of its network. These discussions are intended to result in agreements that
allow the Company to make use of those parties' fiber optic cables (such as
IRUs), the underground conduits, distribution poles, transmission towers, and
building entrances. The Company's ability to enter into such agreements can have
a material impact on the Company's capital costs for network construction and
the speed with which the Company can construct its networks. Additionally,
obtaining such agreements facilitates the Company's ability to expand
efficiently beyond the central business district to serve additional end users
in its markets. The term of such agreements is typically 10 to 25 years, with
renewal terms of five to 15 years. The Company believes that the experience of
members of its senior management team in negotiating such agreements gives it a
competitive advantage over other CLECs that have less experience in successfully
negotiating such agreements.

Implementation of Network Construction. The Company initially builds a
one- to three-mile self-healing fiber loop in the central business district or a
discrete area outside of the central business district of a given target market.
This network provides the users with lower costs, fiber optic clarity, diversity
of access, and fault tolerant reliability of service, with automatic stand-by
and rerouting in the event of operator, system or network failure. The Company
utilizes outside contractors to construct its networks.

Prior to its obtaining required municipal authorizations, the Company,
through outside consultants, prepares preliminary and final engineering studies
for the initial portions of its networks. The Company's intent is to have the
necessary route maps, detailed final engineering drawings, and other
construction documents completed by the time municipal authorizations are
obtained. This process enables the Company to initiate network construction
activities immediately upon receipt of municipal authorizations. Concurrent with
the engineering process, the Company identifies commercial space for the
location of its administrative and sales offices and node (hub) site and
commences negotiations for the lease of such space. Outside plant construction
of a typical downtown network will take from four to six months, depending on
various factors. Preparation and build out of the Company's office and node
space and subsequent installation of electronics

35
<PAGE> 38

and cabling typically proceed during the outside construction activity and are
scheduled to be completed concurrently. Finally, the Company initiates the
application processes for collocation with the LEC's downtown central office and
interconnection with selected IXC POPs to coincide with other construction
milestones. The Company believes that this coordinated construction process
reduces overall network development costs and reduces construction intervals,
allowing it to initiate operations at an earlier date.

Following completion of its initial network and the commencement of network
operations, the Company's local staff, in consultation with personnel at the
Company's headquarters, designs expansion routes that will enable the Company to
reach additional end users and to interconnect with additional LEC central
offices outside the central business district or the targeted construction area.
Construction of these expansion routes is typically done under agreements with
third party rights-of-way providers as described above, but in some instances
the Company constructs its own new facilities (typically by trenching or
directional boring) where third party facilities (whether aerial or underground)
do not exist or are not available for use by the Company. The Company also
constructs lateral network facilities from its fiber optic backbone to provide
on-network service to its customers. In some instances, the Company will design
and construct some or substantially all of its routes outside the central
business district concurrent with the construction of the downtown network,
increasing the speed of overall network construction and, in the Company's
opinion, creating a competitive advantage over other CLECs that may have entered
or are seeking to enter the market. To the extent possible, the Company engages
the third party right-of-way provider to install ACSI's cable in or on the third
party's facilities, usually at a lower cost and with greater speed than that
obtained by using outside contractors.

The Company's network management center in Annapolis Junction, Maryland
monitors all of the Company's networks from one central location. Centralized
electronic monitoring and control of the Company's networks allows the Company
to avoid duplication of this function in each city. This consolidated operations
center also helps to reduce the Company's per customer monitoring and customer
service costs, such that they are lower than would be available if monitored on
a single-city basis. The Company also plans to use this facility to monitor the
performance of data and switched voice services.

PRODUCTS AND SERVICES

The Company currently provides, or is actively implementing plans to
provide, a wide range of local telecommunications services including dedicated
and private line, high-speed data service solutions, including IP switching and
managed services, local switched voice services and enhanced voice messaging.
The Company's local distribution networks are designed to support this wide
range of enhanced communications services, provide increased network reliability
and reduce costs for its customers.

Dedicated Services. During the first three quarters of fiscal 1996,
dedicated and private line services for IXCs and other carriers accounted for a
substantial portion of the Company's revenues with the remainder coming from
business and government end users. The Company's dedicated services provide high
capacity non-switched interconnections: (i) between POPs of the same IXC; (ii)
between POPs of different IXCs; (iii) between large business and government end
users and their selected IXCs; (iv) between an IXC POP and a LEC central office
or between two LEC central offices; and (v) between different locations of
business or government end users.

- Special access services. Special access services provide a link
between an end user location and the POP of its IXC, or links
between IXC POPs, thus bypassing the facilities of the incumbent
LEC. These services, which may be ordered by either the long
distance customer or directly by its IXC, typically provide the
customer better reliability, shorter installation intervals, and
lower costs than similar services offered by the LEC. Customer
charges are based on the number of channel terminations, fixed and
mileage-sensitive transport charges, and costs for any services
required to multiplex (increase or decrease the bandwidth or
transmission speed) circuits (e.g., taking VGE circuits at 64
kilobits per second and stepping them up to a single DS-1 (1.54)
megabit circuit, which has the capacity to carry up to 24 VGE
circuits and is priced at a significant discount to multiple VGE
circuits over the same route). A CAP may provide special access
service on an on-net basis by connecting an end user directly to its
fiber backbone, or on an off-net basis by reselling a portion of the
LEC's network to terminate the circuit at the end user's

36
<PAGE> 39

location and passing the cost of the LEC services on through to the
customer (who realizes cost savings and network benefits for the portion
of the circuit that is on the CAP's network). While resulting in lower
margins than on-net service due to the payout to the LEC, off-net service
can be provided to any customer within a LATA, reducing the CAP's need to
build pervasive network infrastructure.

- Switched transport services. Switched transport services are
offered to IXCs that have large volumes of long distance traffic
aggregated by a LEC switch at a central office where the CAP has
collocated its network. The CAP provides dedicated facilities for
transporting these aggregated volumes of long distance traffic from
the LEC central office to its POP or between LEC central offices.
The flat monthly charge to the IXC is typically lower than the
transport fees charged by the LEC, which is typically lower than
special access services that include a charge for terminating the
traffic at the end user's location and/or the IXC POP in addition to
the transport charges. Switched transport services, however, are
also typically associated with higher volume orders compared to most
special access orders, thus providing potential for large monthly
recurring revenues to the CAP.

- Private line services. Private line services provide dedicated
facilities between two end user locations in the same metropolitan
area (e.g., a central banking facility and a branch office or a
manufacturing facility and its remote data processing center) and
are priced like special access services (channel termination charges
plus transport and any associated multiplexing charges). The Company
expects the demand for private line service to increase in
conjunction with higher bandwidth customer applications.

High-Speed Data Services. The Company is developing and has begun offering
advanced high-speed data services, including Internet access service, and plans
to offer frame relay and ATM services to businesses, government entities, IXCs
and ISPs in the Company's targeted markets.

The Company expects that the majority of its initial high-speed data
network traffic will be comprised of Internet access traffic from regional and
national ISPs, online service providers, major corporations and educational and
financial institutions. The Company expects frame relay, LAN-to-LAN and network
consolidation traffic to constitute the second largest element of its high-speed
traffic. The Company believes that during the next five years, the high-speed
data market will evolve to higher bandwidth requirements and will accept new ATM
applications and technology. Therefore, the Company believes the price of ATM
service will decrease relative to that of frame relay offerings. The Company
expects the growth in demand for frame relay services to slow and the demand for
ATM services to increase. While ATM is currently in its introductory stage and
is generally considered a premium service offering, the Company believes that
ATM technology affords ACSI the ability to consolidate its internal and customer
traffic on large backbone links. This consolidation will enable the Company to
reduce its overall cost of service and position it to migrate its customers to
higher bandwidth as their demand increases, with minimal impact to customers'
applications.

ACSI initially plans to utilize its ATM network to provide IP and frame
relay transport for ISPs and major customers. The rapid growth in the Internet
has strained the existing network infrastructure, which was not engineered to
support the speeds or volumes of traffic that it now bears. The current
infrastructure supporting the Internet protocol has been engineered to support
speeds of up to 2 mbps (slightly above T-1 speed), while many major IP customers
are demanding up to 45 mbps. ATM offers an immediate solution for providing
efficient transport of IP switching traffic (as well as frame relay), allowing
ACSI to utilize available capacity long before it becomes cost effective for a
larger number of customers to deploy high bandwidth video, voice, WAN-to-WAN
connectivity and multimedia applications via ATM. ACSI, as a network-based
national service provider, will be positioned to offer Internet access and
connectivity to national, regional and local ISPs, as well as to corporate,
government and institutional customers that require direct access to the
Internet for both internal and/or external communications. Early focus on IP
customers is also expected to bolster demand for the Company's dedicated and
local switched service offerings; a large regional ISP can require hundreds or
up to several thousands of dial-up lines and numerous T-1 and DS-3 circuits to
meet its subscribers' demands.

37
<PAGE> 40

Local Switched Voice Services. Following receipt of the requisite
regulatory approvals and when cost-effective, the Company plans to offer local
switched voice services such as origination and termination of local calls,
Centrex services, PBX trunking and switched access services, in certain of its
markets beginning in late 1996.

The Company intends to offer the following local switched voice services:

- Local Telephone Services. The Company plans to offer small and medium
size businesses local telephone exchange service, which will also include
optional enhanced services (e.g. call waiting, caller ID and three-way
conference calling).

- PBX Trunking. For those customers that use PBX equipment in their
business offices, the Company plans to offer services to switch traffic
between ACSI's switch and a business customer's PBX, routing local,
intralata and interlata phone calls according to the customers' specific
requirements.

- Centrex Services. The Company plans to offer advanced telecommunications
services for those businesses desiring the advanced features available in
a PBX environment without the investment in PBX premise equipment and its
attendant support staff. The Company intends to provide local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing.

- ISDN Services. ACSI also will offer ISDN data services to its local
customer base. Those small businesses which require higher bandwidth for
data communications needs such as remote file transfer, e-mail,
collaborative computing, multi-media computing, telecommuting and
Internet access services, will be able to access the lower cost data
services provided by ACSI. As these customers' data requirements expand,
the Company's advanced data services can be offered, thereby expanding
the Company's opportunity to increase revenues from existing customers.

- Enhanced Services. The Company already offers enhanced voice messaging
services on a stand-alone basis. These and other services will also be
offered on an integrated basis with local switched services, allowing the
business or government customer to meet their telecommunications
requirements from a single source.

- Switched Access. The Company will offer origination and termination of
long distance traffic between a customer premise and interexchange
carrier via shared trunks utilizing the Company's local switch.

The domestic market for local switched services (including switched access)
was estimated to constitute more than 95% of the total local telecommunications
market in 1994, or approximately $89.0 billion.

Enhanced Voice Messaging Services. Market sources estimate that the voice
messaging services marketplace was approximately $1.4 billion in 1993. The
market for voice messaging services is projected to grow at a compound annual
rate of 13% to approximately $3 billion nationally in 2000. Local service
providers (i.e., ILECs, CLECs and wireless), are expected to begin to displace
voice messaging services offered by IXCs. The Company is developing and has
begun offering, on a limited basis, an enhanced voice messaging service to small
and mid-sized business and government end users. The Company's enhanced voice
messaging service can function as a virtual PBX. The Company's business voice
messaging services will include its First Line and First Line Plus products. The
Company also plans to market one number services under the brand names
Virtualine and Virtualine 800. These offerings will be targeted towards the
small and medium sized companies without voice messaging and those who are
currently seeking to upgrade their existing systems, which marketplace has a
significantly lower penetration rate than the larger business market. The
Company believes there are significant growth opportunities in this market.
Industry sources estimate that in 1994 fewer than 25% of companies with less
than 100 employees had voice messaging services and that fewer than 12% of
companies with 50 employees or less had voice messaging services.

38
<PAGE> 41

The services for the Company's enhanced messaging will include basic voice
messaging, follow-me call routing, virtual calling card services, fax services,
E-mail and paging notification services, and automated attendant services.

- Voice messaging -- a basic voicemail solution that allows the
subscriber greater flexibility, including closed-end user group
message forwarding and interface capabilities with the office
attendant.

- Follow-me call routing -- the platform can be programmed to find the
subscriber by forwarding calls to designated phone numbers anywhere
nationwide at the subscriber's discretion and control. The current
market for follow-me messaging is relatively undersized, as the
technology enabling this feature has only recently begun to emerge.
However, industry sources estimate that this market will have grown
from less than 60,000 subscribers in 1995 to approximately 2.9
million subscribers in 1999.

- Virtual calling card -- the platform enables the subscriber to use
the service to make outbound calls in response to messages received
without disconnecting the call.

- Fax services -- the platform enables faxes to be stored and
transmitted at the discretion of the subscriber.

- Notification services -- at the subscriber's discretion, the arrival
of voicemail can trigger pager or E-mail notification.

- Automated attendant -- the platform can provide all of the above
services, as well as call screening for the subscriber.

The Company's enhanced voice messaging services will also provide links to
the Internet through ACSI's web site, providing users with the capability to
access their voice, electronic mail and fax messages. In addition to offering
these services in its operational network markets, the Company may offer these
services in other markets where it does not intend to construct or has not yet
constructed a network. The Company believes that such services will allow it to
develop relationships with end users that may be potential customers for either
dedicated services or switched voice services that may be offered in these
markets in the future. However, unlike traditional telephone service, customers
have not yet become fully accustomed to use of voice messaging services, and the
usage ramp-up of these services is not certain at this time.

SALES AND MARKETING

While a network is under construction, the Company's salespeople in each
city begin selling on-network interstate dedicated services to the major
business and government end users in that city, while the central headquarters'
sales staff concentrates on selling services to IXCs. The Company expects to
initially price its services at a discount to the LEC's tariffs and sells on the
basis of cost savings to the customer. However, based on management's experience
in other cities where CAPs offer services, end users are expected to be
attracted to the Company as a provider of back-up service for disaster recovery
and a 100% fiber optic network that can provide generally higher quality and
more reliable service than can the incumbent LEC's network.

The Company's sales efforts with respect to dedicated services emphasize
cooperation between ACSI's centralized and local sales staff and the regional
and field sales staff of the IXCs. ACSI's centralized sales staff works closely
with senior management of the IXCs to establish technical and service
requirements, pricing, and quality standards on a nationwide basis, then
coordinates at the local level specific orders for service to the IXC and/or its
end user customers in a given market. The Company is pursuing multiple-city
service arrangements with a number of IXCs, but no assurance can be made that
the Company will ultimately be successful in negotiating such agreements with
any of the IXCs.

39
<PAGE> 42

The Company typically has a general manager and at least one account
executive in each of its major markets. In many cases, the general manager
oversees the operations and sales efforts of additional smaller markets that may
be operated as satellites of the larger market, thus reducing operating
overhead. In the Company's experience, the sales process in the southern regions
of the country is largely affected by personal relationships, and the Company's
ability to hire sales and management staff with existing customer relationships
enhances its ability to penetrate the market.

The Company plans to utilize two separate sales forces to market its
enhanced voice messaging services to business and government customers. While
the Company's dedicated services sales force will target their on-net customers
for such enhanced services, the enhanced voice sales staff will focus on
potential customers that are not connected to ACSI's network and on potential
resellers of the Company's services. These enhanced voice salespersons will also
be responsible for encouraging existing accounts to subscribe to additional
features and to increase their usage of those features. The Company believes
that, once established, the customer relationships will enhance the Company's
ability to market local switched voice services to these customers as such
services are offered. The Company's enhanced voice messaging sales force will be
augmented by additional sales personnel as local switched services are
introduced on a market by market basis.

The Company's data services will be marketed by a separate sales group that
focuses on providing total solutions to a customer's data and networking needs.
This marketing will require a more technically sophisticated staff than for the
Company's dedicated, enhanced and switched voice services. The Company believes
that it will be able to package and cross-market all of its services through
centralized and local account team coordination, making ACSI a full-service
regional provider of local telecommunications services.

As of May 31, 1996, the Company has entered into contracts to provide
managed services to ISPs totaling approximately $4.0 million. In addition, the
Company has begun providing local area frame relay services to customers via the
Company's local fiber optic networks.

ACSI is marketing its data communications services via national, regional
and local sales personnel supported by teams of sales engineers. In addition,
sales representatives in the Company's network services group (primarily
responsible for selling dedicated circuits at the local level) cross-market
ACSI's data communications service offerings, generating leads and supporting
the development and closure of relationships with established local access
customers.

The Company also plans to expand its distribution of certain data
communications service offerings through alternative channels such as cable TV
providers, electric utilities, out-of-region RBOCs, and independent LECs. ACSI
is currently in discussions with several providers regarding reseller and
private labeling arrangements involving the Company's data communications
service offerings, but there can be no assurance that any of these discussions
will result in an agreement to resell and private label such offerings.

COMPETITION

Dedicated Services. The Company operates in a highly competitive
environment and has no significant market share in any market in which it
operates. The Company provides dedicated services to large business and
government end users. In each of the metropolitan areas to be served by the
Company's networks, the Company's dedicated services will compete principally
with the dedicated services offered by the incumbent LEC. The LECs, as the
historical monopoly providers of local access and other services, have
long-standing relationships with their customers and have financial and
technical resources substantially greater than those of the Company. The LECs
also offer certain services that the Company cannot currently provide without
first obtaining requisite regulatory approvals. See "-- Regulation."

40
<PAGE> 43

deployed fiber optic networks in many of the Company's target markets. The
Company currently prices its services at a modest discount compared to the
prices of the LEC while providing a higher level of customer service. The
Company's fiber optic networks will provide both diverse access routing and
redundant electronics, design features not widely deployed by the LEC's networks
(which were originally designed in tree and branch or star configurations).

Other potential competitors of the Company include CATV operators, public
utilities, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, teleports, private networks built by large end users, and
other CLECs. With the passage of the Telecommunications Act and the entry of
RBOCs into the long distance market, the Company believes that IXC's may be
motivated to construct their own local facilities and/or resell the local
services of ACSI's competitors. For example, AT&T has announced its intention to
offer local services and has filed for state certification in markets which
include, among others, several of the Company's markets. See "Risk
Factors -- Competition." Other CLECs or CATVs currently are competitors in
various markets in which the Company has networks in operation or under
construction. Based on management's experience at other CLECs, the initial
market entrant with an operational fiber optic CLEC network generally enjoys a
competitive advantage over other CLECs that later enter the market. The Company
expects that there will be other CLECs operating in most, if not all, of its
target markets and that some of these CLECs may have networks in place and
operating before the Company's network is operational. While it is generally
accepted within the CLEC industry that being the first market entrant to offer
services typically enhances that CLEC's competitive advantage relative to CLECs
that enter the market at a later time, the Company recognizes that in some
instances it may have other competitive advantages (such as a superior
right-of-way arrangement or large customer commitments) that it believes
outweighs another CLEC's first to market advantage; in these instances, the
Company may elect to enter a market where an established CLEC already exists.

High-Speed Data Services. The Company's competitors for high-speed data
services include the major IXCs, other CLECs, and various providers of niche
services (e.g., Internet access providers, router management services and
systems integrators). In general, none of these competitors currently offers a
comprehensive solution for a customer's potential data service requirements, a
core premise of the Company's data strategy. The Company intends to pursue
arrangements with other data service providers to leverage each entity's
strengths in a given market or segment of the service chain by bundling elements
of complete data solutions (i.e., bundle its local access and frame relay
services with an IXC's longhaul transport services). The interconnectivity of
the Company's markets will create additional competitive advantages over other
data service providers that must obtain local access from the LEC or another
CLEC in each market or that cannot obtain intercity transport rates on as
favorable terms as the Company.

There is significant competition for Internet access and related services
in the United States, with few barriers to entry other than capital. The Company
expects that competition will increase as existing services and network
providers and new entrants compete for customers. ACSI's current and future
competitors include telecommunications companies, including the RBOCs, IXCs,
competitive local exchange companies and cable TV providers, and other Internet
access providers, such as UUNET Technologies, Inc., Advanced Network & Services,
Inc., BBN Corporation, NETCOM On-Line Communications Services, Inc. and PSINet
Inc. Many of these competitors have greater financial, technical, marketing and
human resources, more extensive infrastructure and stronger customer and
strategic relationships than ACSI. The Company believes that it will have a
competitive advantage in offering Internet access services to those ISP and
commercial customers in markets where ACSI has local fiber optic network
facilities relative to other Internet access providers that must purchase local
loop access from the LEC, ACSI or another CLEC in that market. Additionally,
ACSI believes that customers with operations in multiple locations served by
ACSI local fiber optic networks will find single-source Internet access services
from ACSI attractive.

41
<PAGE> 44

offered by most of the original RBOCs, MFS Communications, AT&T, MCI, Sprint and
WilTel, Inc. A number of other data communications providers, CLECs and
facilities-based cable TV providers have announced their intentions to offer ATM
services in the future.

A number of equipment vendors, systems integrators and Internet access and
service providers offer components of managed services. The Company believes
that it will have a competitive advantage over those managed services providers
that do not have local loop facilities which means they cannot provide a full
solution for customers.

Local Switched Voice Services. In all of the markets where the Company is
currently operating or plans to operate, the LEC currently is a de jure or de
facto monopoly provider of local switched voice services. The Company expects
that the enactment of the Telecommunications Act will enable CLECs, CATVs,
electric utilities, cellular and wireless providers, and others to offer local
switched voice services in competition with the LECs in the Company's target
markets. The Company believes that its strategy to leverage its basic network
infrastructure into higher margin service offerings, migrating to local switched
voice services, will allow it to procure a profitable share of the market. The
Company's ability to cross-market services will create opportunities to increase
margins by migrating customers from off-network to on-network status. As the
number of end users in a given off-network building increases for all service
offerings, the economics improve to the point where the capital costs of
connecting the building to ACSI's network are more than covered by the increased
margins represented by retaining the portion of customer revenue paid out to the
LEC.

Enhanced Voice Messaging Services. Competition for enhanced voice
messaging services primarily consists of basic voice mail services offered by
LECs and cellular providers in connection with their core offerings and customer
premise-based voice mail platforms. The voice mail offerings of the LECs
typically have limited features and flexibility compared to the services
contemplated by the Company; thus, the Company believes its enhanced voice
messaging services and focused sales efforts should be able to penetrate
effectively those segments of the small and mid-sized business market that
require more features and/or flexibility than services offered by the LECs.
Customer premise-based platform voice mail offerings typically require a
relatively large up front capital investment and recurring maintenance costs and
are generally marketed to large companies rather than the small and mid-sized
end users targeted by the Company.

REGULATION

Overview

The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or terminate intrastate
communications. Local governments may require the Company to obtain licenses or
franchises regulating use of public rights-of-way necessary to install and
operate its networks.

The allocation of jurisdiction between federal and state regulation of
dedicated facilities carrying both interstate and intrastate traffic raises
definitional issues. Although the FCC generally does not rule as to the
jurisdictional nature of a carrier's traffic, under FCC practice, such services
are considered to be jurisdictionally interstate if at least 10% of the traffic
is interstate in nature. Virtually all dedicated services provided by the
Company between long distance carrier POPs, and between IXCs and their end
users, satisfy this requirement and are jurisdictionally interstate in the
opinion of the Company.

However, the FCC has proposed to adopt rules which would deny interexchange
carriers the opportunity to file tariffs, and also is considering two requests
that CAPs be freed of any tariff-filing obligation.

Recent Federal Legislation

42
<PAGE> 45

interconnection (i) for the transmission and routing of telephone exchange
service and exchange access, (ii) at any technically feasible point within the
LECs' network, (iii) that is at least equal in quality to that provided by the
LEC to itself, its affiliates or any other party to which the LEC provides
interconnection, and (iv) at rates, terms and conditions that are just,
reasonable and nondiscriminatory. LECs also are required under the new law to
provide nondiscriminatory access to network elements on an unbundled basis at
any technically feasible point, to offer its local telephone services for resale
at wholesale rates, and to facilitate collocation of equipment necessary for
competitors to interconnect with or access the unbundled network elements.

The Telecommunications Act also imposes a legal duty on all
telecommunications carriers (including LECs and CLECs) (i) not to prohibit or
unduly restrict resale of their services; (ii) to provide dialing parity and
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings; (iii) to afford access to poles, ducts,
conduits and rights-of-way; and (iv) to establish reciprocal compensation
arrangements for the transport and termination of telecommunications.

In addition, under the terms of the Telecommunications Act, the RBOC's must
offer terms and conditions for interconnection that satisfy a prescribed
14-point checklist before they may obtain authority to provide interLATA
services within their operating regions. In addition to the obligations
discussed in the preceding paragraphs in this subsection, RBOCs must offer
interconnection that includes each of the following:

- local loop transmission from the central office to the customer's
premises, unbundled from local switches, or other services;

- local switching, unbundled from transport, local loop transmission, or
other services;

- nondiscriminatory access to 911 and E911 services, directory
assistance services and operator services;

- white page directory listings;

- nondiscriminatory assignment of telephone numbers;

- nondiscriminatory access to data bases and associated signaling
necessary for call routing or completion; and

- interim number portability through remote call forwarding, direct
inward dialing trunks or other comparable arrangements.

The Company believes that this legislation is likely to enhance competition
in the local telecommunications marketplace through (i) removal of state and
local entry barriers, (ii) requirements that LECs provide interconnections to
their facilities, (iii) facilitation of the process of changing from LEC
services to those offered by CLECs and (iv) access to rights-of-way. Although
there can be no assurances, the Company expects further growth to the extent
that LECs begin to compete with IXCs for long distance services, thereby
providing IXCs with a competitive incentive to move access business away from
LECs to CLECs, such as ACSI. However, the legislation also has granted important
benefits to the LECs. The LECs have substantial new pricing flexibility. RBOCs
have regained the ability to provide long distance services and have obtained
new rights to provide certain cable TV services. In addition, the legislation
may encourage IXCs to construct their own local facilities and/or resell local
services in order to compete with the bundled local and long distance services
to be offered by the LECs as a result of the Telecommunications Act. The
Telecommunications Act also amends the Communications Act of 1934 to preempt any
state or municipal action requiring cable companies to obtain a franchise before
offering telecommunications services or allowing their franchise fees to be
based on their telecommunications revenues. The Telecommunications Act also
lifts restrictions previously contained in the Public Utility Holding Company
Act of 1935, which had previously prevented certain registered utility holding
companies from diversifying into telecommunications services. These changes will
tend to enhance the competitive position of the LECs and increase local
competition by IXCs, CATVs

43
<PAGE> 46

and public utility companies, which may have a material adverse effect on the
Company. See "Risk Factors -- Competition."

The FCC has opened numerous proceedings intended to implement the
provisions of the Telecommunications Act. In its CC Docket No. 96-98, for
example, the FCC will develop rules implementing the Telecommunications Act
requirements for interconnection, collocation, local traffic exchange, network
element unbundling, local service resale, dialing parity, access to
rights-of-way, local number portability and number administration. While the
Company cannot predict what form these rules will take, their extent and form
could prove critically important to the Company's ability to take advantage of
the Telecommunications Act's local interconnection requirements. The outcome of
FCC rules governing the pricing by incumbent LECs of interconnection, network
elements and local resale services could prove particularly important to the
Company. Other examples include proceedings to reform the system of universal
service funding and establish rules for Exempt Telecommunications Companies. In
addition, the passage of the Telecommunications Act has spawned a number of
related FCC proceedings which could affect the Company. The Texas Public Utility
Commission, for example, has petitioned the FCC to declare that certain limits
on local competition included in Texas state statutes have not been preempted by
the Telecommunications Act. Decisions made in these and other proceedings
relating to implementation of the Telecommunications Act could affect the
Company's business operations significantly.

Pursuant to the terms of the Telecommunications Act, the FCC has convened a
Federal-State Joint Board for the purpose of recommending a revised universal
service funding program to the FCC. While it is impossible to predict what
system of universal service support will ultimately result from this effort, the
Telecommunications Act requires that all telecommunications carriers, including
the Company, contribute to the funding effort on an equitable and
nondiscriminatory basis, in an amount sufficient to preserve and advance
universal service pursuant to a specific or predictable universal service
funding mechanism. The Company cannot at this time predict the level or form of
its mandatory contribution, but the Company believes that it will likely be a
significant expenditure.

On February 15, 1996, the FCC released an order granting in part Ameritech
Corporation's (one of the seven RBOCs) request for a waiver of the Commission's
access charge rules sufficient to grant it certain access charge pricing
flexibility. The FCC permitted Ameritech to "bulk bill" IXCs for the portion of
the Carrier Common Line Charge ("CCLC") that contributes to the National
Exchange Carriers Association Long Term Support Fund for high-cost carriers. The
FCC also allowed Ameritech to reduce the transport interconnection charge on a
geographically deaveraged basis in the Chicago and Grand Rapids LATAs, on the
basis that Ameritech faces actual competition from CCLCs in those LATAs. Such
access charge pricing flexibility is likely to make it more difficult for CLECs
to compete against Ameritech in the affected areas. Although the Company does
not provide service in the Ameritech operating region, if the FCC grants similar
access pricing flexibility to other LECs, it could become more difficult for the
Company to compete for access traffic.

Federal Regulation

In general, the FCC has a policy of encouraging entry of new competitors,
such as the Company, in the telecommunications industry and preventing
anti-competitive practices.

The FCC has established different levels of regulation for dominant
carriers and nondominant carriers. For domestic common carrier
telecommunications regulation, large LECs such as GTE and the RBOCs are
currently considered dominant carriers, while CLECs such as the Company are
considered nondominant carriers. As a nondominant carrier, the Company may
install and operate facilities for the transmission of domestic interstate
communications without prior FCC authorization. Services of nondominant carriers
have been subject to relatively limited regulation by the FCC, primarily
consisting of the filing of tariffs and periodic reports concerning the
carrier's interstate circuits and deployment of network facilities. However, the
FCC has proposed adopting rules which would preclude IXCs from filing tariffs
and is considering a request that the proposed rules also be applicable to
CLECs. Moreover, the Company must offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remains subject to
FCC complaint procedures.

44
<PAGE> 47

Pursuant to these FCC requirements, the Company has filed and maintains a
tariff for its interstate services with the FCC. All of the interstate retail
"basic" services (as defined by the FCC) provided by the Company are described
therein. "Enhanced" services (as defined by the FCC) need not be tariffed. The
Company has an "enhanced" frame relay product, which is not contained in the
Company's current FCC tariff. A tariff for a "basic" frame relay offering is
under development. The Company believes that its voice messaging and Internet
access products are "enhanced" services which need not be tariffed.

In 1991, the FCC replaced traditional rate of return regulation for large
LECs with price cap regulation. Under price caps, LECs can only raise prices for
certain services, including interconnection services provided to CLECs, by a
small percentage each year. In addition, there are constraints on the pricing of
LEC services that are competitive with those of CLECs. On September 14, 1995,
the FCC proposed to adopt a three-stage plan that would substantially reduce LEC
price cap regulation as local markets become increasingly competitive. The FCC
proposed to immediately eliminate the lower service band index limit on price
reductions within service categories, modify tariff filing requirements and
revise the structure of price cap baskets. The FCC also sought comment on
whether LECs should be permitted to expand use of option discount plans such as
volume and term discounts. Under the FCC's proposal, during the second phase
certain LEC services could be removed from price cap regulation and regulated on
a streamlined basis if they were deemed to be subject to competition. In the
third stage, LECs would be granted nondominant status. Adoption of the FCC's
proposal to significantly reduce its regulation of LEC pricing would
significantly enhance the ability of LECs to compete against the Company and
could have a material adverse effect on the Company.

The FCC has granted LECs additional flexibility in pricing their interstate
special and switched access services on a specific central office by central
office basis. Under this pricing scheme, LECs may establish pricing zones based
on access traffic density and charge different prices for each zone. The Company
anticipates that this pricing flexibility will result in LECs lowering their
prices in high traffic density areas, the probable arena of competition with the
Company. The Company also anticipates that the FCC will grant LECs increasing
pricing flexibility as the number of interconnections and competitors increases.
In a concurrent proceeding on transport rate structure and pricing, the FCC
enacted interim pricing rules that restructure LEC switched transport rates in
order to facilitate competition for switched access.

State Regulation

The Company believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. Many of the states in which the Company operates or intends to operate
have not yet addressed issues relating to the regulation of CLECs. Some states
that have authorized the competitive provision of dedicated services have not
authorized the provision of competitive local switched services. Some states may
require authorization to provide enhanced services.

In some states, existing state statutes, regulations or regulatory policy
may preclude some or all forms of local service competition. The
Telecommunications Act contains provisions that prohibit states and localities
from adopting or imposing any legal requirement that may prohibit, or have the
effect of prohibiting, the ability of any entity to provide any interstate or
intrastate telecommunications service. The FCC is required to preempt any such
state or local requirements to the extent necessary to enforce the
Telecommunications Act's open market entry requirements. States and localities
may, however, continue to regulate the provision of intrastate
telecommunications services, and, presumably, require carriers to obtain
certificates or licenses before providing service.

The Company currently has obtained intrastate authority for the provision
of dedicated services in Alabama, Arkansas, Georgia, New Mexico, South Carolina,
Tennessee, Texas, Nevada and Kentucky (excludes intraexchange private line
services). The Company has applications pending before the public service
commissions ("PSCs") in Arizona, Florida, Maryland, Mississippi and Louisiana
for intrastate dedicated services authority. To the extent the Company expands
the scope of its intrastate services in the future in these states to include
the full range of local switched services, the Company will be required to seek
additional authorization from such PSCs. As of May 31, 1996, the Company had
applied for authorization to provide local switched services in Alabama,
Arizona, Arkansas, Florida, Georgia, Louisiana, Maryland,

45
<PAGE> 48

Nevada, New Mexico and South Carolina and had been granted such authority in
Texas and Tennessee. There can be no assurances that the Company will receive
the authorizations it is currently seeking, or will seek, from these PSCs. See
"Risk Factors -- Rapid Expansion of Operations."

In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate.

The Company believes that, as the degree of intrastate competition
increases, the states will offer the LECs increasing pricing flexibility. This
flexibility may present the LECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing LECs to offer competitive services at prices below
the cost of providing the service. The Company cannot predict the extent to
which this may occur or its impact on the Company's business.

Local Interconnection. The Telecommunications Act imposes a duty upon all
incumbent LECs to negotiate in good faith with potential interconnectors to
provide interconnection to the ILEC network, exchange local traffic, make
unbundled basic local network elements available, and permit resale of most
local services. The Company has entered into interconnection negotiations with
the major LECs in each of the markets it currently serves seeking mutual
agreement on each of these points. The Company is unable to predict at this time
the likelihood that voluntary mutual agreements will be reached. However, in the
event that negotiations do not succeed, the Company has a right to seek state
PUC arbitration of any unresolved issues. The state PUC must conclude the
arbitration within nine months of the date upon which the incumbent LEC received
the Company's initial request for interconnection.

Local Government Authorizations

The Company is required to obtain street use and construction permits and
licenses and/or franchises to install and expand its fiber optic networks using
municipal rights-of-way. In some municipalities where the Company has installed
or anticipates constructing networks, it will be required to pay license or
franchise fees based on a percentage of gross revenues or on a per linear foot
basis, as well as post performance bonds or letters of credit. As of March 31,
1996, the Company had posted approximately $2.6 million of such bonds and
letters of credit. As of such date, the Company had been required to pledge
approximately $1.5 million in cash collateral to obtain such bonds and letters
of credit. There can be no assurance that the Company will not be required to
post similar bonds in the future, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels. In
many markets, the LECs do not pay such franchise fees or pay fees that are
substantially less than those required to be paid by the Company. To the extent
that competitors do not pay the same level of fees as the Company, the Company
could be at a competitive disadvantage. However, the Telecommunications Act
provides that any compensation extracted by states and localities for use of
public rights-of-way must be "fair and reasonable," applied on a "competitively
neutral and nondiscriminatory basis" and be "publicly disclosed" by such
government entity.

Termination of the existing franchise or license agreements prior to their
expiration dates could have a materially adverse effect on the Company.

EMPLOYEES

As of May 31, 1996, the Company employed a total of 181 individuals full
time. The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.

LEGAL PROCEEDINGS

The Company and its subsidiaries currently are not parties to any material
litigation. The Company and its subsidiaries are from time to time parties to
routine litigation incidental to their business, none of which,

46
<PAGE> 49

individually or in the aggregate, are expected to have a material adverse effect
on the Company. The Company and its subsidiaries continue to participate in
regulatory proceedings before the FCC and state regulatory agencies concerning
the authorization of services and the adoption of new regulations.

PROPERTIES

The Company leases a 23,925 square foot office space in Annapolis Junction,
Maryland for its corporate headquarters and network management center for
$27,812 per month as of March 31, 1996, subject to periodic increases in
specified amounts. The lease expires in 2002, but may be renewed for two
additional five-year terms. The Company's field office, housing its network
development and real estate development operations, is located in a 1,358 square
foot facility in Lombard, Illinois which the Company leases for $1,643 per
month, subject to periodic increases in specified amounts. This lease expires on
January 31, 1999.

As of March 31, 1996, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $37,900. The various leases expire on
dates ranging from February 28, 1998, to October 30, 2005. Most have renewal
options. A subsidiary of the Company leases shared office space in Greenville,
SC. Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.

The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.

47
<PAGE> 50

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding the directors and
executive officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Anthony J. Pompliano....................... 57 Chairman of the Board of Directors
Richard A. Kozak........................... 50 President and Chief Executive Officer
George M. Tronsrue, III.................... 39 Chief Operating Officer
Riley M. Murphy............................ 40 Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary
Douglas R. Hudson.......................... 34 Executive Vice President/General
Manager -- Network Services
Harry J. D'Andrea.......................... 40 Chief Financial Officer
Robert H. Ottman........................... 57 Executive Vice President -- Network Systems
and Technical Support
George M. Middlemas(1)..................... 50 Director
Edwin M. Banks(2).......................... 33 Director
Christopher L. Rafferty(1)................. 48 Director
Benjamin P. Giess.......................... 33 Director
Olivier L. Trouveroy(1)(2)................. 41 Director
Peter C. Bentz............................. 31 Director
</TABLE>

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

(1) Member of Compensation Committee

(2) Member of Audit Committee

In response to voting rights issues raised by the Nasdaq Stock Market staff
concerning the Company's governance structure, the Company amended its
Certificate of Incorporation, which amendments were approved by the stockholders
of the Company on January 26, 1996, such that the Board will be comprised of
seven members, four of whom will be elected by the holders of the Company's
Common Stock and three of whom will be elected by the holders of the Company's
Preferred Stock (a "Standard Board"). However, upon the occurrence of certain of
the triggering events set forth in the Company's Certificate of Incorporation,
the Board shall be increased to eleven members and the additional four directors
(in addition to the existing seven directors) shall be elected by holders of the
Company's Preferred Stock (a "Triggering Event Board"). Pursuant to the
Governance Agreement dated November 8, 1995 between the Company and certain
holders of its Preferred Stock (the "Governance Agreement"), until June 26,
1996, the Board was to consist of eleven members, four of whom were elected by
holders of the Common Stock and seven of whom were elected by holders of the
Preferred Stock. On February 26, 1996, the Company and the other parties to the
Governance Agreement signed the Supplemental Governance Agreement pursuant to
which the Board was reduced to seven members, four of whom were elected by
holders of the Common Stock and three of whom were elected by holders of the
Preferred Stock. Although the Supplemental Governance Agreement will terminate
upon conversion of the Company's Preferred Stock, the holders of the Preferred
Stock will own a sufficient amount of the Common Stock, upon conversion of their
shares of Preferred Stock, to elect the Company's directors. When the Board was
reduced to seven members on February 26, 1996, four directors, including Mr.
Kozak, all of whom had been elected by the holders of the Company's Preferred
Stock, resigned. Other than as provided herein, no other arrangement or
understanding exists between an officer or director and any other person under
which any officer or director was elected. All directors of the Company hold
office until the next annual meeting of stockholders and until their successors
are duly elected and qualified. No director or officer is related to any other
director or officer by blood, marriage, or adoption.

In connection with the changes in the Company's governance structure,
certain principal holders of the Preferred Stock and Common Stock have entered
into a Voting Rights Agreement dated November 8, 1995,

48
<PAGE> 51

as amended as of December 14, 1995 ("the Voting Rights Agreement"), pursuant to
which such stockholders have agreed to vote their shares of Preferred Stock and
Common Stock for the election of directors designated by Huff, ING and Apex,
three principal stockholders of the Company. As of December 31, 1995, the
parties to the Voting Rights Agreement owned approximately 98% of the Preferred
Stock outstanding and approximately 51% of the Common Stock outstanding (and
upon completion of this Offering will own approximately % of the outstanding
securities of the Company). The Voting Rights Agreement provides that it shall
terminate upon the earliest of (i) a Qualifying Offering (an underwritten public
offering of the Company's Common Stock with gross proceeds of at least $15.0
million, a price per share of at least $5.00 and the result of which is the
inclusion of the Common Stock in the Nasdaq National Market or listing of the
Common Stock on the New York Stock Exchange), (ii) ten years from the date of
the Voting Rights Agreement or (iii) upon the written agreement of Huff and ING.
The Company expects that this Offering will be a Qualifying Offering; and, thus,
the Voting Rights Agreement will terminate upon consummation of this Offering.

In the event the Voting Agreement does not automatically terminate because
this Offering is not a Qualifying Offering, during a period in which a Standard
Board is in effect, the parties to the Voting Rights Agreement (whose shares of
Preferred Stock will be converted to Common Stock upon completion of this
Offering even if it is not a Qualifying Offering) have agreed to vote all of
their shares of Common Stock to elect Mr. Pompliano (designated by Huff and
ING), Mr. Giess (designated by ING), Mr. Middlemas (designated by Apex) and Mr.
Bentz (designated by Huff) to the Board. Designees may be substituted for the
named designees in the Voting Rights Agreement from time to time by the party
having the right to designate such named designees. Mr. Banks is an employee of
W. R. Huff Asset Management Co., L.L.C., an affiliate of Huff. Mr. Rafferty is
an employee of WRH Partners, L.L.C., the general partner of Huff. Messrs.
Trouveroy and Giess are employees of ING, which owned all of the shares of the
Series B-1 Preferred Stock and Series B-4 Preferred Stock outstanding as of
December 31, 1995. Mr. Bentz is also an employee of W. R. Huff Asset Management
Co., L.L.C. Upon completion of this Offering, Huff will own approximately 37% of
the Common Stock then outstanding. Mr. Middlemas is a general partner of Apex
Management Partnership, which is the general partner of Apex. Apex, together
with certain affiliated partnerships, will own approximately 4.5% of the Common
Stock outstanding upon completion of this Offering. In addition to the
aforementioned provisions, the Voting Rights Agreement contains provisions
regarding the selection of substitute board members, members of board committees
and board members of the Company's subsidiaries.

The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee is comprised of three directors, none of whom may be
an employee of the Company or any of its subsidiaries and two of whom shall be
directors elected by holders of the Company's Preferred Stock (the "Preferred
Directors") selected by a majority of the Preferred Directors. The Audit
Committee is generally comprised of three directors, one of whom shall be a
senior executive officer of the Company (but not the chief financial or chief
accounting officer) and two of whom may not be employees of the Company or any
of its subsidiaries and shall be Preferred Directors selected by a majority of
the Preferred Directors. Currently, only two directors serve on the Audit
Committee.

In the event that the group of directors of the Company that are specified
to select a committee member is deadlocked over its selection of such committee
member for more than 30 days, the full Board shall select such committee member
from among such group of directors.

Anthony J. Pompliano, Chairman of the Board of Directors, has 30 years of
experience in the telecommunications industry. Mr. Pompliano was elected a
director of the Company in November 1993. He was co-founder and President of
Metropolitan Fiber Systems, the predecessor organization to MFS, a
publicly-traded CLEC. Mr. Pompliano served as President, CEO and Vice Chairman
of MFS from April 1988 until March 1991. He joined ACSI in August 1993 after the
expiration of his non-competition agreement with MFS. Before his association
with MFS and its predecessor, he was Vice President -- Operations and Sales for
MCI Telecommunications International from 1981 to 1987, and prior thereto, was
Vice President -- National Operations for Western Union International, Inc. from
1960 to 1981.

49
<PAGE> 52

served as Chief Financial Officer of the Company from September 30, 1994, until
November 30, 1994. Mr. Kozak served on the Board from November 15, 1994, until
June 1995, when he resigned voluntarily to allow the investors in the Company's
June 1995 private placement to elect representatives to the Board without unduly
increasing its size and from November 1995 until February 26, 1996 when he
resigned to allow the Board to return to seven members. Mr. Kozak has more than
twenty years of experience in the telecommunications industry. He was President
of the Southern Division of MFS from October 1992 until June 1993, where he was
responsible for networks in Atlanta, Baltimore, Dallas, Houston, Philadelphia,
Pittsburgh and Washington, DC, as well as for establishing networks in
additional markets in the southern U.S. Previously, he was President of MFS
Development from July 1991 until October 1992, where he was responsible for the
planning, development and implementation of more than $100 million of major
expansions of networks throughout the U.S., and Senior Vice President of Network
Services for MFS. Prior to joining MFS in 1990, he was a Vice-President and
General Manager for Telenet Communications Corporation (now Sprint
International) from 1986 through 1989 and an Executive Vice President and Chief
Financial Officer for TRT Communications from 1982 to 1986. Mr. Kozak holds an
Engineering degree from Brown University, studied at the University of Chicago
Graduate School of Business, and completed his MBA in Finance at the George
Washington University School of Government and Business Administration.

George M. Tronsrue, III, Chief Operating Officer, has seventeen years of
telecommunications industry and management experience. Mr. Tronsrue served as
Executive Vice President -- Strategic Planning and Business Development from
February 1994 until January 31, 1996. From 1993 until he joined ACSI in February
1994, Mr. Tronsrue was the Regional Vice President for the Central Region for
Teleport Communications Group and the Vice President of Emerging Markets,
responsible for start-up and profit and loss management of joint ventures with
major cable television providers in eight major markets. From 1987 until 1992,
he was a member of the initial management team at MFS, where he held senior
positions in planning and market development, served as Vice President of Sales
and the Vice President/General Manager for the initial start-up of MFS' New York
operations, and served as the Executive Vice President for MFS-Intelenet. Prior
to joining MFS, he was a Director of Operations for MCI Telecommunications
International. Mr. Tronsrue has a B.S. degree in Applied Sciences and
Engineering from the United States Military Academy at West Point.

Riley M. Murphy, Executive Vice President -- Legal and Regulatory Affairs
and Secretary, had twelve years of experience in the private practice of
telecommunications regulatory law for inter-exchange, cellular, paging and other
competitive telecommunication services prior to joining the Company. Since
February 1995, she has served as an officer and director of The Association for
Local Telecommunications Services. Ms. Murphy joined ACSI on a full-time basis
in April 1994 and was senior counsel to Locke Purnell Rain Harrell, a
Dallas-based law firm through December 1994. From 1987 to 1992, Ms. Murphy was a
partner of Wirpel and Murphy, a telecommunications law firm she co-founded, and
from 1992 to 1993 she was a sole practitioner. She holds a B.A. degree from the
University of Colorado and a J.D. from the Catholic University of America, and
is admitted to practice law in the District of Columbia and Louisiana.

Douglas R. Hudson, Executive Vice President/General Manager -- Network
Services, has ten years of sales and marketing experience within the
telecommunications industry. For seven years prior to joining ACSI in May 1994,
Mr. Hudson had been with MFS having served as, a director of field sales from
September 1987 to September 1989, Vice President of Industry Sales and Marketing
from September 1989 to July 1992 and as Vice President and General Manager in
charge of MFS's Mid-Atlantic region from July 1992 until May 1994. Prior to
joining MFS, Mr. Hudson was a regional sales manager for Microtel International,
Inc., a national telecommunications company providing competitive long distance
and private line services.

Harry J. D'Andrea, Chief Financial Officer, has over fifteen years of
experience in financial management. Mr. D'Andrea joined the Company on February
6, 1996. From 1989 through 1995, Mr. D'Andrea was employed by Caterair
International Corporation ("CIC"), where he served as Vice President, Finance
and Treasurer from 1989 through 1993 and Executive Vice President, Chief
Financial Officer and Treasurer from 1993 through 1995. As Chief Financial
Officer of CIC, Mr. D'Andrea was responsible for all of CIC's financial planning
and analysis, treasury operations, financial and management reporting, tax and
internal audit operations. From 1987 to 1989, Mr. D'Andrea served as Controller
of Marriott Corporation ("Marri-

50
<PAGE> 53

ott"), where he was responsible for twelve airline catering units in five
countries. Mr. D'Andrea also served as Director of Pricing of Marriott from 1986
to 1987. Mr. D'Andrea has a B.A. degree from Pennsylvania State University and
completed his MBA in Finance at Drexel University.

Robert H. Ottman, Executive Vice President -- Network Systems and Technical
Support, joined the Company in May 1995. Mr. Ottman has 30 years of experience
in telecommunications and has been involved in network services, operations,
quality assurance, human resources and labor relations within the
telecommunications industry. Prior to joining ACSI, he was the Vice President of
Operations and Quality Assurance for MCI International and directly responsible
for the New York City, Washington, Atlanta, Boston, Miami, Chicago, Detroit, San
Francisco, Los Angeles, Puerto Rico, Hawaii and Guam Networks from 1993 to 1995.
From 1981 to 1982, Mr. Ottman was Assistant Vice President of Operations and
Labor Relations for Western Union International, Inc. (which was acquired by MCI
in 1982). From 1982 to 1993, Mr. Ottman held various positions with MCI
International, including: Director of Metro Operations from 1982 to 1983,
Director of Administration and Labor Relations from 1983 to 1988, and Vice
President of Administration and Labor Relations from 1988 to 1993. While at MCI
International, in 1989 Mr. Ottman initiated Quality Programs for the support and
assistance of MCI customers.

George M. Middlemas, Director, was elected a director of the Company in
December 1993. Mr. Middlemas is a general partner of Apex Management
Partnership, which is the general partner of Apex Investment Fund I, L.P. and
Apex Investment Fund II, L.P., both of which are venture capital funds, and
affiliates of First Analysis Corporation, a principal stockholder of the
Company. See "Principal Stockholders." From March 1991 to December 1991, Mr.
Middlemas acted as an independent consultant providing fund raising and other
advisory services. From 1985 until March 1991, Mr. Middlemas was a Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm. He also serves on the Board of Directors of PureCycle Corporation,
Security Dynamics Technologies, Inc. and several privately held companies.

Edwin M. Banks, Director, was elected a director of the Company in October
1994. Since 1988, Mr. Banks has been employed by W. R. Huff Asset Management
Co., L.L.C. and currently serves as a portfolio manager concentrating in the
healthcare, communications, food and food services industries. From 1985 until
he joined W. R. Huff Asset Management Co., L.L.C., Mr. Banks was employed by
Merrill Lynch & Company. Mr. Banks received his Bachelor of Arts degree from
Rutgers College and his Masters of Business Administration degree from Rutgers
University. Mr. Banks also serves as a director of Charter Medical Corporation,
Del Monte Foods Company and ABCO Food Service.

Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty also serves as a director of Del Monte Foods Company.
Mr. Rafferty received his undergraduate degree from Stanford University and his
law degree from Georgetown University.

Benjamin P. Giess, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Giess has been employed by ING and its predecessors and
affiliates and currently serves as a Vice President responsible for originating,
structuring and managing equity and debt investments. From 1991 to 1992, Mr.
Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991,
Mr. Giess was employed by the Corporate Finance Group of General Electric
Capital Corporation where he worked in the media and entertainment group. Prior
to attending business school, from 1986 to 1988, Mr. Giess was the Credit
Department Manager of the Boston Branch of ABN Amro North America, Inc. From
1984 to 1986, Mr. Giess was employed at the Shawmut Bank of Boston. Mr. Giess
also serves as a director of Matthews Studio Equipment Group and CMI Holding
Corp. Mr. Giess received his undergraduate degree from

51
<PAGE> 54

Dartmouth College and his Masters of Business Administration degree from the
Wharton School of the University of Pennsylvania.

Olivier L. Trouveroy, Director, was elected a director of the Company in
June 1995. Since 1992, Mr. Trouveroy has been employed by ING and its
predecessors and affiliates and currently serves as a Managing Director
responsible for originating, structuring and managing equity and debt
investments. From 1990 to 1992, Mr. Trouveroy was a Managing Director in the
Corporate Finance Group ("CFG") of General Electric Capital Corporation in
charge of CFG's office in Paris, France. From 1984 to 1990, Mr. Trouveroy held
various positions in the Mergers and Acquisitions department of Drexel Burnham
Lambert in New York, most recently as a First Vice President. Mr. Trouveroy also
serves as a director of AccessLine Technologies, Inc. and Cost Plus, Inc. Mr.
Trouveroy holds Bachelor of Science and Masters degrees in Economics from the
University of Louvain in Belgium, as well as a Masters of Business
Administration degree from the University of Chicago.

Peter C. Bentz, Director, was elected a director of the Company in June
1995. Since 1992, Mr. Bentz has been employed by W. R. Huff Asset Management
Co., L.L.C. as a research analyst specializing in telecommunications, media and
healthcare. Mr. Bentz received his Bachelor of Science degree from Boston
College in 1987 and his Masters of Business Administration degree from the
Wharton School of the University of Pennsylvania in 1992.

OTHER SIGNIFICANT EMPLOYEES

Richard B. Robertson, Executive Vice President/General Manager -- Switched
Services, joined the Company in April 1996. Prior to joining the Company, Mr.
Robertson was employed by BellSouth for 16 years where, since 1991, he directed
marketing activities for its network interconnection business. In that role, Mr.
Robertson was responsible for negotiating interconnection agreements with
competitive local exchange companies, development and implementation of
BellSouth's advanced intelligent network (AIN) services for the interconnection
market and also formulating the company's plan for and entry into the customer
premise equipment (CPE) market in the mid-1980s. In other assignments during his
28-year career in the telecommunications industry, Robertson's experience
included outside plant, manufacturing, finance, purchasing and strategy
development and R&D positions with Western Electric, Bellcore, and the U.S.
Army. Robertson received a B.S. in Electrical Engineering from Virginia Tech and
an MBA from the University of Virginia.

Michael H. Mansouri, Executive Vice President/General Manager -- Advanced
Data Services, joined the Company in August 1995. Before joining ACSI, Mr.
Mansouri spent nearly 10 years at Sprint International, serving as director of
international multimedia services, director of global messaging, director of
global value-added systems and director of business development. Prior to that,
Mr. Mansouri was a manager of Applied Communications Systems at Tymshare/Tymnet,
Inc. He received a B.S. in Computer Science and Statistics from Utah State
University and an M.S. in Operations Research from The George Washington
University.

Dennis J. Ives, Senior Vice President -- Network Development, joined the
Company's predecessor in 1992 as Vice President -- Operations. Prior to that,
from 1990, Mr. Ives was involved in the planning and implementation of other
fiber optic networks and Broadband Systems in Illinois and Wisconsin at DigiNet
Communications, Inc. Mr. Ives spent over 30 years with AT&T in various
engineering and operations management positions and has 37 years of
telecommunications industry and management experience.

Martin F. McDermott, Senior Vice President -- Marketing, joined the Company
in April 1996. From July 1995 until he joined the Company, Mr. McDermott served
as chief operating officer for American Wireless Communications Corporation.
Prior thereto, Mr. McDermott spent four years at WilTel Inc. following his
service as Chief Operating Officer of the National Telecommunications Network, a
coalition of long distance carriers. Mr. McDermott attended Georgetown
University, is active in industry associations such as ACTA, NATA and Comptel
and has 30 years of telecommunications industry experience.

52
<PAGE> 55

EXECUTIVE COMPENSATION

The Company's current executive officers did not receive any compensation
from the Company during any fiscal year prior to fiscal 1994. The following
table provides a summary of compensation for fiscal 1995 and 1994, with respect
to the Company's Chief Executive Officer and the other four most highly
compensated officers of the Company whose annual salary and bonus during fiscal
1995 exceeded $100,000 (collectively, the "Named Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
-------------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(2) (#)(3) ($)
---------------------- ----- ------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano....................... 1995 219,500 175,000(4) -- 500,000 6,977(5)
Chairman of the Board of Directors 1994 110,000 - 0 - 25,000(6) 1,349,899 61,507(7)
Richard A. Kozak........................... 1995 184,378 175,000(8) - 0 - 399,999 3,750(9)
President and Chief Executive Officer 1994 87,500 - 0 - 39,728(6) 899,932 - 0 -
George M. Tronsrue......................... 1995 150,000 135,417(10) 68,800(11) 350,000(12) - 0 -
Chief Operating Officer 1994 53,827 50,000 - 0 - - 0 - - 0 -
Riley M. Murphy............................ 1995 150,000 81,500(13) - 0 - 250,002(12) 9,783(14)
Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary 1994 37,500 - 0 - 48,620(15) - 0 - - 0 -
Douglas R. Hudson.......................... 1995 125,004 100,000(16) - 0 - 250,002(12) - 0 -
Executive Vice President/General
Manager -- Network Services 1994 10,417 - 0 - - 0 - - 0 - - 0 -
</TABLE>

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

(1) Prior to fiscal 1994, none of the individuals noted received compensation
from the Company.

(2) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of the Named Officers' total annual salary and bonus.

(3) See information provided in "Option Grants in Last Fiscal Year," and
"Option Exercises and Fiscal Year-End Values."

(4) This bonus was comprised of $50,000 paid with respect to the successful
debt financing for two networks during fiscal 1995 and $125,000 paid with
respect to the successful completion of the June 1995 private placement of
the Series B Preferred Stock.

(5) Includes $3,800 for car allowance and $3,177 in premiums for disability
insurance in excess of that provided to other employees.

(6) Consists of amounts paid to Messers. Pompliano and Kozak as consultants for
services rendered prior their employment by the Company in August 1993 and
November 1993, respectively.

(7) Consists of $20,000 received as compensation in connection with the
Company's November 1993 sale of 400,000 shares of Common Stock and $41,507
received as compensation in connection with the Company's June 1994
issuance of $4,300,720 principal amount of 15% convertible notes.

(8) This bonus was comprised of $50,000 paid with respect to the successful
debt financing for two networks during fiscal 1995 and $125,000 paid with
respect to the successful completion of the June 1995 private placement of
the Series B Preferred Stock.

(9) Includes $3,750 in premiums for disability insurance in excess of that
provided to other employees.

(10) This payment represents the first installment of a bonus of $244,500,
$135,417 of which was due and payable on February 28, 1995, and $54,116 of
which is due and payable on each of February 24, 1996, and February 24,
1997.

(11) Includes $65,000 paid in connection with relocation and moving expenses
relating to the relocation of the Company's headquarters from Oak Brook,
Illinois to Annapolis Junction, Maryland, of which $45,000 must be repaid
to the Company if Mr. Tronsrue voluntarily terminates his employment with
the Company prior to May 31, 1996.

(12) 150,000 of these options were originally granted in fiscal 1994 at an
exercise price of $2.50 per share and such exercise price was subsequently
reduced to $2.25 per share in connection with the October 1994 Private
Placement.

(13) This payment represents the first installment of a bonus of $244,500, which
is due and payable in the amount of $81,500 on each of January 31, 1995,
January 31, 1996, and January 31, 1997.

(14) Includes $3,360 of premiums for disability and life insurance paid for by
the Company in excess of that provided for other employees and $6,423 of
premiums in connection with professional liability insurance for the period
prior to her employment with the Company.

(15) Consists of $43,620 received for performing legal services for the Company
as outside counsel and $5,000 received pursuant to a relocation agreement.

(16) This payment was comprised of $18,750 paid with respect to a quarterly
bonus payable pursuant to Mr. Hudson's employment agreement, and $81,250,
which represents the first installment of a bonus of $243,750, which is due
and payable in the amount of $81,250 on each of January 31, 1995, January
31, 1996, and January 31, 1997.

53
<PAGE> 56

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the grant of stock
options to the Named Officers during fiscal 1995.

INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET PRICE
UNDERLYING GRANTED TO EXERCISE OR OF UNDERLYING
OPTIONS EMPLOYEES IN BASE PRICE SECURITIES ON EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE OF GRANT DATE
- --------------------------------- ----------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano............. 50,000(1) 1.94% $ 2.25 $ 3.75 (i) 10/20/99
100,000(2) 3.87 2.25 3.94(ii) 6/26/00
100,000(3) 3.87 2.25 3.94(ii) 8/24/06
250,000(3) 9.68 2.80 3.94(ii) 8/24/06
Richard A. Kozak................. 30,000(4) 1.16 2.25 3.50 (i) 10/17/99
40,000(5) 1.55 2.25 3.94(ii) 6/29/00
80,000(6) 3.10 2.25 3.94(ii) 11/01/06
249,999(6) 9.68 2.80 3.94(ii) 11/01/06
George M. Tronsrue, III.......... 50,000(7) 1.94 2.25 3.75(i) 2/23/99
33,333(7) 1.29 2.25 3.75(i) 2/23/00
33,333(7) 1.29 2.25 3.75(i) 2/23/01
33,333(7) 1.29 2.25 3.75(i) 2/23/02
20,000(8) .77 2.25 4.00(i) 3/31/00
20,000(8) .77 2.25 4.00(i) 8/31/00
20,000(8) .77 2.25 4.00(i) 6/30/01
40,000(8) 1.55 2.25 4.00(i) 9/01/01
16,667(9) .65 2.25 3.25(i) 2/23/00
16,667(9) .65 2.25 3.25(i) 2/23/01
16,667(9) .65 2.25 3.25(i) 2/23/02
50,000(9) 1.94 2.25 3.25(i) 2/23/03
Riley M. Murphy.................. 25,000(10) .97 2.25 3.75(i) 3/31/99
41,666(10) 1.61 2.25 3.75(i) 3/31/00
41,667(10) 1.61 2.25 3.75(i) 3/31/01
41,667(10) 1.61 2.25 3.75(i) 3/31/02
14,584(11) .56 2.25 3.25(i) 3/30/00
14,584(11) .56 2.25 3.25(i) 3/30/01
14,584(11) .56 2.25 3.25(i) 3/30/02
56,250(11) 2.18 2.25 3.25(i) 3/30/03
Douglas R. Hudson................ 25,000(12) .97 2.25 3.75(i) 5/30/99
41,666(12) 1.61 2.25 3.75(i) 5/30/00
41,667(12) 1.61 2.25 3.75(i) 5/30/01
41,667(12) 1.61 2.25 3.75(i) 5/30/02
14,584(11) .56 2.25 3.25(i) 5/30/00
14,584(11) .56 2.25 3.25(i) 5/30/01
14,584(11) .56 2.25 3.25(i) 5/30/02
56,250(11) 2.18 2.25 3.25(i) 5/30/03
</TABLE>

- ---------------
(i) Underlying market price is based on the average of the high and low bid
price on the date of grant as reported by the National Quotation Bureau.
(ii) Underlying market price is based on the average of the closing bid and
asked price of the Company's stock on the date of grant on The Nasdaq
SmallCap Market.
(1) These options vested on October 21, 1994.
(2) These options vested on June 26, 1995.
(3) These options vest on August 24, 2001, except that vesting may be
accelerated upon the achievement of certain milestones. In the event
vesting is accelerated, the expiration date of such options will be
modified to be five years from such accelerated vesting date.
(4) These options vested on October 17, 1994.

54
<PAGE> 57

(5) These options vested on June 30, 1995.
(6) 63,333 of these options have vested and the remaining will vest on November
1, 2001, except that vesting may be accelerated upon the achievement of
certain milestones. In the event vesting is accelerated, the expiration
date of such options will be modified to be five years from such
accelerated vesting date.
(7) These options were originally granted with an exercise price of $2.50. The
average high and low bid price for the Common Stock on February 24, 1994,
the date these options were granted, was $4.00. In connection with the
October 1994 private placement, the exercise price of these options was
reduced to $2.25, the conversion price of the Series A Preferred Stock. On
October 21, 1994, the date the October 1994 private placement closed, the
average high and low bid price of the Common Stock was $3.75. Mr.
Tronsrue's options vested with respect to 50,000 shares upon the signing of
his employment agreement, as to 33,333 shares on each of February 23, 1995
and February 23, 1996, and, provided that he does not voluntarily terminate
his employment with the Company or is not terminated for cause prior to the
applicable vesting date, as to 33,333 shares on the third anniversary of
his employment with the Company. At the time such options were granted and
the exercise price was reduced, the Common Stock was thinly traded and the
Company believes the pink sheet quotes were not necessarily a fair
representation of what the market price would have been if any significant
volume of trading were to have occurred.
(8) Of such options, 20,000 were granted in connection with the Company's
successful completion by December 31, 1994, of detailed business plans for
five networks and completion by June 30, 1995, of detailed business plans
for an additional five networks. The remaining 80,000 options were granted
to Mr. Tronsrue at the same time and are fully vested.
(9) These options were granted on December 14, 1994, with an exercise price of
$2.25. The average high and low bid price for the Common Stock on December
14, 1994, the date these options were granted, was $3.25. These options
vested with respect to 16,667 shares on February 23, 1995 and with respect
to 16,667 shares on February 23, 1996, and, provided that he does not
voluntarily terminate his employment with the Company or is not terminated
for cause prior to the applicable vesting date, will vest as to 16,667
shares on February 23, 1997, and as to the remaining 50,000 shares on
February 23, 1998.
(10) These options were originally granted with an exercise price of $2.50. The
average high and low bid price for the Common Stock on April 4, 1994, the
date for which the National Quotation Bureau can provide quotes which is
closest to the date these options were granted, was $2.625. In connection
with the October 1994 private placement, the exercise price of these
options was reduced to $2.25. On October 21, 1994, the date the October
1994 private placement closed, the average high and low bid price of the
Common Stock was $3.75. Ms. Murphy's options vested with respect to 25,000
shares upon the signing of her employment agreement, as to 41,666 shares on
March 31, 1995 and as to 41,667 shares on March 31, 1996, and, provided
that she does not voluntarily terminate her employment with the Company or
is not terminated for cause prior to the applicable vesting date, as to
41,667 shares on the third anniversary of her employment with the Company.
At the time such options were granted and the exercise price was reduced
the Common Stock was thinly traded and the Company believes the pink sheet
quotes were not necessarily a fair representation of what the market price
would have been if any significant volume of trading were to have occurred.
(11) These options were granted on December 14, 1994, with an exercise price of
$2.25. The average high and low bid price for the Common Stock on December
14, 1994, the date these options were granted, was $3.25. These options
vested with respect to 14,584 shares on March 31, or May 30, 1995 and as to
14,584 shares on March 31, or May 30, 1996, and, provided that Ms. Murphy
or Mr. Hudson, as the case may be, does not voluntarily terminate
employment with the Company or is not terminated for cause prior to the
applicable vesting date, will vest as to 14,584 shares on each of March 31,
or May 30, 1997, respectively, and as to the remaining 56,250 shares on
March 31 or May 30, 1998, respectively.
(12) These options were originally granted with an exercise price of $2.50. The
average high and low bid price for the Common Stock on May 26, 1994, the
date these options were granted was $2.50. In connection with the October
1994 private placement, the exercise price of these options was reduced to
$2.25. On October 21, 1994, the date the October 1994 private placement
closed, the average high and low bid price of the Common Stock was $3.75.
Mr. Hudson's options vested with respect to 25,000 shares upon the signing
of his employment agreement, as to 41,666 shares on May 31, 1995, and as to
14,666 shares on May 31, 1996 and, provided that he does not voluntarily
terminate his employment with the Company or is not terminated for cause
prior to the applicable vesting date, as to 41,667 shares on each of the
second and third anniversaries of his employment with the Company. At the
time such options were granted and the exercise price was reduced the
Common Stock was thinly traded and the Company believes the pink sheet
quotes were not necessarily a fair representation of what the market price
would have been if any significant volume of trading were to have occurred.

55
<PAGE> 58

OPTION EXERCISES AND FISCAL YEAR-END VALUES

The following table sets forth the information with respect to the Named
Officers concerning the exercise of options during fiscal 1995 and unexercised
options held as of June 30, 1995.

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED YEAR-END YEAR-END(1)
ON VALUE ----------------------- --------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------- --------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano... 0 0 1,049,932 799,967 $2,943,546 $1,781,151
Richard A. Kozak....... 0 0 744,949 554,982 2,138,597 1,073,698
George M. Tronsrue,
III.................. 0 0 120,000 230,000 195,000 373,750
Riley M. Murphy........ 0 0 81,250 168,752 132,031 274,222
Douglas R. Hudson...... 0 0 81,250 168,752 132,031 274,222
</TABLE>

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

(1) Represents the difference between the exercise price and a fair market value
of $3.875 as determined by the average of the closing bid and asked
quotations on June 29, 1995, as reported on The Nasdaq SmallCap Market. The
Company's stock did not trade on June 30, 1995.

DIRECTORS' COMPENSATION

Members of the Board do not receive cash compensation for acting as members
of the Board or Committees of the Board, other than reimbursement for reasonable
out-of-pocket expenses incurred in connection with their attendance at meetings
of the Board and its committees. The Company is obligated to pay the reasonable
fees and expenses of two counsel selected by the directors elected by the
Preferred Directors from time to time to represent them in their capacity as
directors. During fiscal 1995, the Company paid no such counsel fees. Directors
who also serve as executive officers receive cash compensation for acting in
their capacity as executive officers. See "--Summary Compensation Table."

Directors' Stock Options

From time to time the Board has granted options to purchase shares of
Common Stock to members of the Board who are not also officers of the Company in
consideration for their service as directors. However, other than "formula
grants" under the Company's 1994 Stock Option Plan, no formal arrangement
exists. For fiscal 1995, the following directors were granted the options listed
below in consideration for serving on the Board.

<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
NAME OPTIONS PRICE DATE
------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Russell Stern(1)........................... 20,000 $0.875(2) 07/21/99
30,000 $2.25 (3) 07/21/99
</TABLE>

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

(1) Mr. Stern resigned as a director of the Company in September 1994.

(2) On July 21, 1994, the date for which the National Quotations Bureau can
provide quotes which is closest to the date these options were granted, the
average high and low bid price as reported by the National Quotations Bureau
was $2.375.

(3) These options originally had exercise prices ranging from $6.00 to $8.00. On
July 21, 1994, the exercise prices of the options were all reduced to $3.10.
On that date, the average high and low bid price of the Common Stock was
$2.375. On December 31, 1994, the exercise prices of the options were all
reduced to $2.25. On that date, the average high and low bid price of the
Common Stock was $3.50.

EMPLOYMENT AGREEMENTS

Anthony J. Pompliano. The Company has entered into an employment agreement
with Anthony J. Pompliano, its Chairman, which terminates on August 23, 1998.
Under the terms of the agreement, as amended, Mr. Pompliano is entitled to an
annual base salary of $250,000 and is entitled to a cash bonus of up to $175,000
for each of the fiscal years ending June 30, 1996, 1997 and 1998 based upon the
Company's achievement of certain performance goals for the relevant fiscal year.
Mr. Pompliano earned a bonus of $100,000 upon the consummation of the offering
of the 2005 Notes. Under his prior employment agreement, Mr. Pompliano
previously earned bonuses aggregating $225,000 based upon the Company's
achievement of certain performance goals ($25,000 of which was earned subsequent
to June 30, 1995) and will be entitled to an additional bonus of $25,000 in the
event an additional performance goal is achieved. Mr. Pompliano was

56
<PAGE> 59

granted options to purchase an aggregate of 1,349,899 shares of the Company's
Common Stock at an exercise price of $0.875 per share (the "Initial Stock
Options"), all of which are currently vested and exercisable. Mr. Pompliano was
also granted (i) options to purchase an additional 150,000 shares at an exercise
price of $2.25 per share, all of which vested and became exercisable based upon
the Company's achievement of certain performance goals, and (ii) options to
purchase an additional 350,000 shares of Common Stock at exercise prices ranging
from $2.25 per share to $2.80 per share, which will vest and become exercisable
on August 24, 2001, if Mr. Pompliano is then employed by the Company or earlier,
as to specified tranches of such shares, based upon the Company's achievement of
certain performance goals related to each such tranche or upon a "change in
control," as defined in the agreement (collectively, the "Performance Stock
Options"). Mr. Pompliano has the right to obtain a 30-day loan from the Company
for the purpose of paying the aggregate exercise price of the options granted to
him.

In the event Mr. Pompliano's employment is terminated pursuant to his
death, disability or voluntary resignation, the Initial Stock Options,
regardless of whether they have then vested, and the Performance Stock Options,
to the extent they have then vested, will become immediately exercisable by Mr.
Pompliano or his estate in accordance with their terms. In the event Mr.
Pompliano's employment is terminated pursuant to the Company's material breach
of the agreement, upon a "change in control," or by the Company without cause,
all of the Initial Stock Options and the Performance Stock Options, regardless
of whether they have then vested, will become immediately exercisable in
accordance with their terms. In the event Mr. Pompliano's employment is
terminated due to his death or disability, the Company's material breach of the
agreement, upon a change in control or by the Company without cause prior to
August 24, 1996, Mr. Pompliano (or his estate) is entitled to receive a lump sum
severance payment equal to his base salary for two years and the continuation of
his health and medical benefits for two years; or if Mr. Pompliano's employment
is so terminated subsequent to August 24, 1996, he (or his estate) shall be
entitled to receive a lump sum severance payment equal to the greater of his
base salary for one year or his base salary from the date of termination through
August 23, 1998, and continuation of his health and medical benefits for a
minimum of one year.

Mr. Pompliano shall have the right, for a period of 90 days after the
termination of his employment with the Company (unless such employment is
terminated by the Company "for cause" (as defined in the agreement) or Mr.
Pompliano voluntarily resigns), to sell to the Company and the Company is
required to purchase, the shares of Common Stock issued or issuable pursuant to
the options granted to Mr. Pompliano under his employment agreement, at a price
equal to the publicly-traded price of the Common Stock (as defined in the
agreement), less the exercise price of the options with respect to unexercised
options. The aggregate purchase price paid by the Company for such shares shall
not exceed $1 million (which amount shall be reduced by the net proceeds
received by Mr. Pompliano from his sales of shares of Common Stock in the market
or otherwise). This right may be exercised by Mr. Pompliano only if at the time
of exercise the aggregate value (based on the publicly traded price) of the
Company's outstanding shares of Common Stock and the shares of Common Stock
issuable pursuant to options, warrants and other convertible securities which
have an exercise or conversion price which is equal to or less than the then
publicly traded price of the Common Stock is greater than $200 million and at
least 5,000,000 outstanding shares of Common Stock are neither held by
"affiliates" (as defined in Rule 405 under the Securities Act) of the Company
nor "restricted securities" (as defined in Rule 144 under the Securities Act).
Mr. Pompliano's agreement contains non-compete, non-solicitation and
confidentiality provisions.

Richard A. Kozak. The Company has entered into an employment agreement
with Richard A. Kozak, its President and Chief Executive Officer, which
terminates on October 31, 1998. Under the terms of the agreement, Mr. Kozak is
entitled to a minimum annual base salary of $200,000 through October 31, 1995,
and $250,000 thereafter. He is entitled to cash bonuses of up to $150,000 for
the fiscal year ending June 30, 1996, $175,000 for the fiscal year ending June
30, 1997, and $200,000 for the fiscal year ending June 30, 1998, based upon the
Company's achievement of certain performance goals for the relevant fiscal year.
Mr. Kozak earned a bonus of $50,000 upon the consummation of the offering of the
2005 Notes. Under his prior employment agreement, Mr. Kozak previously earned
bonuses aggregating $225,000 based upon the Company's achievement of certain
performance goals ($25,000 of which was earned subsequent to June 30, 1995) and
will be entitled to an additional bonus of $25,000 in the event an additional
performance goal is achieved. Mr. Kozak was granted Initial Stock Options to
purchase an aggregate of 899,932 shares of the Company's Common Stock at an
exercise price of

57
<PAGE> 60

$0.875 per share, all of which are currently vested and exercisable. Mr. Kozak
was also granted Performance Stock Options that will allow him to: (i) purchase
an additional 70,000 shares at an exercise price of $2.25 per share, all of
which vested and became exercisable based upon the Company's achievement of
certain performance goals, and (ii) purchase an additional 369,999 shares of
Common Stock at exercise prices ranging from $2.25 per share to $2.80 per share,
which will vest and become exercisable on November 1, 2001, if Mr. Kozak is then
employed by the Company or earlier, as to specified tranches of such shares,
based upon the Company's achievement of certain performance goals related to
each such tranche or upon a change in control, as defined in the agreement, of
which 153,333 have vested. In particular, Mr. Kozak's Performance Stock Options
vested as to 216,666 shares upon the consummation of the offering of the 2005
Notes. Mr. Kozak has the right to obtain a 30-day loan from the Company for the
purpose of paying the aggregate exercise price of the options granted to him.

In the event Mr. Kozak's employment is terminated pursuant to his death,
disability or voluntary resignation, the Initial Stock Options, regardless of
whether they have then vested, and the Performance Stock Options, to the extent
they have then vested, will become immediately exercisable by Mr. Kozak or his
estate in accordance with their terms. In the event Mr. Kozak's employment is
terminated pursuant to the Company's material breach of the agreement, upon a
"change in control", or by the Company without cause, all of the Initial Stock
Options and the Performance Stock Options, regardless of whether they have then
vested, will become immediately exercisable in accordance with their terms. In
the event Mr. Kozak's employment is terminated due to his death or disability,
the Company's material breach of the agreement, upon a change in control, or by
the Company without cause prior to November 1, 1996, Mr. Kozak (or his estate)
is entitled to receive a lump sum severance payment equal to his base salary for
two years and the continuation of his health and medical benefits for two years;
or if Mr. Kozak's employment is so terminated subsequent to November 1, 1996, he
(or his estate) shall be entitled to receive a lump sum severance payment equal
to the greater of his base salary for one year or his base salary from the date
of termination through October 31, 1998, and continuation of his health and
medical benefits for a minimum of one year.

Mr. Kozak shall have the right, for a period of 90 days after the
termination of his employment with the Company (unless such employment is
terminated by the Company "for cause" (as defined in the agreement) or Mr. Kozak
voluntarily resigns), to sell to the Company and the Company is required to
purchase, the shares of Common Stock issued or issuable pursuant to the options
granted to Mr. Kozak under his employment agreement, at a price equal to the
publicly-traded price of the Common Stock (as defined in the agreement), less
the exercise price of the options with respect to unexercised options. The
aggregate purchase price paid by the Company for such shares shall not exceed $1
million (which amount shall be reduced by the net proceeds received by Mr. Kozak
from his sales of shares of Common Stock in the market or otherwise). This right
may be exercised by Mr. Kozak only, if at the time of exercise, the aggregate
value (based on the publicly traded price) of the Company's outstanding shares
of Common Stock and shares of Common Stock issuable pursuant to options,
warrants and other convertible securities which have an exercise or conversion
price which is equal to or less than the then publicly traded price of the
Common Stock is greater than $200 million and at least 5,000,000 outstanding
shares of Common Stock are neither held by "affiliates" (as defined, in Rule 405
under the Securities Act) of the Company nor "restricted securities" (as defined
in Rule 144 under the Securities Act). Mr. Kozak's agreement contains
non-compete, non-solicitation and confidentiality provisions.

George M. Tronsrue III. The Company has entered into an employment
agreement with George M. Tronsrue, III, its Chief Operating Officer, which
terminates on February 23, 1999. The agreement, as amended, calls for an annual
salary of $170,000, a $400 per month car allowance and a guaranteed bonus of
$244,500, $135,417 of which was received on February 24, 1995, $54,116 of which
was received on February 24, 1996, and $54,116 of which will be received by Mr.
Tronsrue on February 24, 1997. Mr. Tronsrue was granted Initial Stock Options to
purchase 150,000 shares of Common Stock at a price of $2.25 per share. These
options vested as to 50,000 shares at the commencement of Mr. Tronsrue's
employment and vested as to 33,333 shares on each of February 23, 1995 and
February 23, 1996 (the first and second anniversaries, respectively, of his
employment with the Company). The options will vest as to 33,333 shares on the
third anniversary of Mr. Tronsrue's employment with the Company. Mr. Tronsrue
was granted five year options to purchase up to 100,001 shares of Common Stock
at an exercise price of $2.25 per share. These options vested with respect to
16,667 shares on each of February 23, 1995, and February 23, 1996, and will vest
as to

58
<PAGE> 61

16,667 shares on February 23, 1997, and as to the remaining 50,000 shares on
February 23, 1998. Mr. Tronsrue was granted Performance Stock Options to
purchase 20,000 shares of Common Stock exercisable at a price of $2.25 per share
through March 31, 2000, based upon the achievement of certain performance goals.
Upon the achievement of certain performance goals, Mr. Tronsrue also has
received five year Performance Stock Options to purchase up to 80,000 shares of
Common Stock at an exercise price of $2.25 per share, all of which options have
vested. Upon the occurrence of the respective performance criteria, the options
will vest as to 20,000 shares on June 30, 1996. On July 6, 1995, pursuant to the
agreement, Mr. Tronsrue was also granted options to purchase 50,000 shares of
Common Stock at an exercise price of $3.40 per share. These options will vest as
to 25,000 shares on each of February 23, 1998, and February 23, 1999. None of
the foregoing options granted to Mr. Tronsrue shall be deemed earned if, as to
any given year, Mr. Tronsrue's employment is terminated for cause or if he
voluntarily resigns. In the event Mr. Tronsrue's employment is terminated
without cause or pursuant to his death, disability or the Company's material
breach of the agreement, Mr. Tronsrue or his estate shall be entitled to receive
his earned bonus and exercise the Initial Stock Options to purchase 150,000
shares in accordance with their terms. In the event Mr. Tronsrue's employment is
terminated without cause or pursuant to his death, disability or the Company's
material breach of the agreement prior to February 24, 1997, he will receive his
then current base salary and health and medical benefits coverage at the
Company's expense for two years from the date of such termination or if on or
subsequent to February 24, 1997, he will receive his then current base salary
and health and medical benefits coverage at the Company's expense for the longer
of (i) the period from the date of termination through February 23, 1999, or
(ii) one year from the date of termination. Mr. Tronsrue's employment agreement
also contains a two year non-compete/non-solicit provision.

Riley M. Murphy. The Company has entered into an employment agreement with
Riley M. Murphy, its Executive Vice President for Legal and Regulatory Affairs,
which terminates on March 31, 1999. The agreement, as amended, calls for an
annual salary of $160,000 and a guaranteed bonus of $244,500. $81,500 of this
bonus was received by Ms. Murphy on January 31, 1995, $81,500 was received by
her on January 31, 1996, and $81,500 will be received by her on January 31,
1997. The agreement includes options to purchase 150,000 shares of Common Stock
at a price of $2.25 per share. These options vested with respect to 25,000
shares upon the signing of her employment agreement and vested as to 41,666
shares on each of March 31, 1995 and March 31, 1996, and will vest as to 41,667
shares on the third anniversary of her employment with the Company. The
agreement also includes options to purchase 100,002 shares which were granted on
December 14, 1994, with an exercise price of $2.25. These options vested with
respect to 14,584 shares on each of March 31, 1995 and March 31, 1996, and will
vest as to 14,584 shares on March 31, 1997, and as to the remaining 56,250
shares on March 31, 1998. On July 6, 1995, pursuant to the agreement, Ms. Murphy
was also granted options to purchase 50,000 shares of Common Stock at an
exercise price of $3.40 per share. These options will vest as to 25,000 shares
on each of March 31, 1998, and March 31, 1999. None of the foregoing options
granted to Ms. Murphy shall be deemed earned if, as to any given year, Ms.
Murphy's employment is terminated for cause or if she voluntarily resigns. In
the event Ms. Murphy's employment is terminated without cause or pursuant to her
death, disability or the Company's material breach of the agreement, Ms. Murphy
or her estate shall be entitled to receive her earned bonus and exercise the
options to purchase 150,000 shares in accordance with their terms. In the event
Ms. Murphy's employment is terminated without cause or pursuant to her death,
disability or the Company's material breach of the agreement prior to April 1,
1997, she will receive her then current base salary and health and medical
benefits coverage at the Company's expense for two years from the date of such
termination or if on or subsequent to April 1, 1997, she will receive her then
current base salary and health and medical benefits coverage at the Company's
expense for the longer of (i) the period from the date of termination through
March 31, 1999, or (ii) one year from the date of termination. Ms. Murphy's
employment agreement also contains a two year non-compete/non-solicit provision.

Douglas R. Hudson. The Company has entered into an employment agreement
with Douglas R. Hudson, its Executive Vice President/General Manager -- Network
Services for Sales and Marketing, which terminates on May 30, 1999. The
agreement, as amended, calls for an annual salary of $135,000, a Sales
Commission Plan for the fiscal year ending June 30, 1996, based on 1% of the
incremental billings in excess of those for the fiscal year ended June 30, 1995,
net of disconnects and credits, paid quarterly, and a guaranteed three year
bonus, $81,250 of which was received by him on January 31, 1995, $81,250 of
which was received

59
<PAGE> 62

by him on January 31, 1996, and $81,250 of which will be received by him on
January 31, 1997. The agreement includes options to purchase 150,000 shares of
Common Stock at a price of $2.25 per share. The options vested as to 25,000
shares on May 31, 1994 and as to 41,666 shares on each of May 31, 1995 and May
31, 1996 and will vest as to 41,667 shares on the third anniversary of his
employment with the Company. The agreement also includes options to purchase
100,002 shares which were granted on December 14, 1994, with an exercise price
of $2.25. These options vested with respect to 14,584 shares on May 31, 1995,
and will vest as to 14,584 shares on each of May 31, 1996, and May 31, 1997, and
as to the remaining 56,250 shares on May 31, 1998. On July 6, 1995, pursuant to
the agreement, Mr. Hudson was also granted options to purchase 50,000 shares of
Common Stock at an exercise price of $3.40 per share. These options will vest as
to 25,000 shares on each of May 31, 1998, and May 31, 1999. None of the
foregoing options granted to Mr. Hudson shall be deemed earned if, as to any
given year, Mr. Hudson's employment is terminated for cause or if he voluntarily
resigns. In the event Mr. Hudson's employment is terminated without cause or
pursuant to his death, disability or the Company's material breach of the
agreement, Mr. Hudson or his estate shall be entitled to receive his earned
bonus and exercise the options to purchase 150,000 shares in accordance with
their terms. In the event Mr. Hudson's employment is terminated without cause or
pursuant to his death, disability or the Company's material breach of the
agreement prior to May 31, 1997, he will receive his then current base salary
and health and medical benefits coverage at the Company's expense for two years
from the date of such termination or if on or subsequent to May 31, 1997, he
will receive his then current base salary and health and medical benefits
coverage at the Company's expense for the longer of (i) the period from the date
of termination through May 31, 1999, or (ii) one year from the date of
termination. Mr. Hudson's employment agreement also contains a two year
noncompete/non-solicit provision.

The shares of Common Stock underlying the stock options discussed above are
the subject of a registration rights agreement among the Company and Mr.
Pompliano, Mr. Kozak, Mr. Tronsrue, Ms. Murphy and Mr. Hudson pursuant to which
theses executive officers have been granted certain demand and piggy-back
registration rights with respect to the shares of Common Stock underlying
options granted to them under their employment agreements with the Company.

REPORTING OF SECURITIES TRANSACTIONS

Ownership of, and transactions in, the Company's stock by executive
officers and directors of the Company and owners of 10% or more of the Company's
outstanding Common Stock are required to be reported to the Securities and
Exchange Commission pursuant to Section 16(a) of the Exchange Act. Russell
Stern, William Salatich and Cathy Markey, former directors of the Company,
Anthony Pompliano, the Company's Chairman of the Board, Richard Kozak, the
Company's President and Chief Executive Officer, Christopher Rafferty and Edwin
Banks, directors of the Company, George Tronsrue, the Company's Chief Operating
Officer, and Huff, ING and First Analysis Corporation, principal stockholders of
the Company, each inadvertently did not file on a timely basis during the fiscal
year ended June 30, 1995, a report regarding the beneficial ownership of, or
transaction in, certain shares of the Company's Common Stock. Each of the
foregoing have since filed reports regarding the beneficial ownership of or
transaction in certain shares of the Company's Common Stock.

1994 STOCK OPTION PLAN

On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the 1994 Stock Option Plan (the "1994 Plan"). In December
1995, the Board adopted and on January 26, 1996, the Company's stockholders
approved amendments to the 1994 Plan. The 1994 Plan will terminate no later than
November 15, 2004, ten years after adoption by the Board of Directors and after
such termination no additional options may be granted. The 1994 Plan is
administered by the Compensation Committee which makes discretionary grants
("discretionary grants") of options to employees (including employees who are
officers and directors of the Company), directors who are not employees of the
Company ("Outside Directors") and consultants. The 1994 Plan also provides for
formula grants of options to Outside Directors ("formula grants"). Under the
1994 Plan, 1,700,000 shares of Common Stock have been reserved for discretionary
grants and 210,000 shares of Common Stock have been reserved for formula grants.
As of March 31, 1996, 900,813 discretionary and 20,000 formula options have been
granted under the 1994 Plan.

60
<PAGE> 63

Options granted pursuant to discretionary grants may be nonqualified
options or incentive options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. The selection of participants, allotment of
shares, determination of price and other conditions of purchase of such options
will be determined by the Compensation Committee, in its sole discretion.
Options granted pursuant to discretionary grants are exercisable for a period of
up to ten years, except that incentive options granted to optionees who, at the
time the option is granted, own stock representing greater than 10% of the
voting power of all classes of stock of the Company or any parent or subsidiary,
are exercisable for a period of up to five years. The per-share exercise price
of incentive options granted pursuant to discretionary grants must be no less
than 100% of the fair market value of the Common Stock on the date of grant,
except that the per share exercise price of incentive options granted to
optionees who, at the time the option is granted, own stock representing greater
than 10% of the voting power of all classes of stock of the Company or any
parent or subsidiary, must be no less than 110% of the fair market value of the
Common Stock. The per share exercise price of nonqualified stock options granted
pursuant to discretionary grants must be no less than 85% of the fair market
value of the Common Stock on the date of grant. To the extent options are
granted at less than fair market value, the Company incurs a non-cash cost for
financial reporting purposes.

Under the formula grants, each Outside Director will be granted
automatically a nonqualified option to purchase 50,000 shares (subject to
adjustment as provided in the 1994 Plan). Each such director may decline such
grant. Each option granted pursuant to a formula grant will vest and become
exercisable as to 10,000 shares on the date such option is granted (the "Grant
Date"), as to 10,000 shares on the date of the first annual meeting of
stockholders held at least eight months after the Grant Date (the "First Annual
Meeting") and as to 10,000 shares on the date of each of the next three annual
meetings of stockholders held after the First Annual Meeting, provided that the
option will only vest on the relevant annual meeting of stockholders date if the
Outside Director is re-elected to the Board at such meeting. Each such option
shall have a term of five years from the relevant vesting date. The exercise
price per share of Common Stock for options granted pursuant to a formula grant
shall be 100% of the fair market value as determined under the terms of the 1994
Plan.

Options granted under the 1994 Plan are nontransferable, other than by will
or by the laws of descent and distribution, and may be exercised during the
optionee's lifetime, only by the optionee, or in the event of the optionee's
legal incapacity to do so, by the optionee's guardian or legal representative.

An optionee will not generally recognize any taxable income upon the grant
of a nonqualified option because, under current Treasury regulations pursuant to
Section 83 of the Code, the fair market value of an option at the time it is
granted is ordinarily not considered to be readily ascertainable. However, upon
exercise of a nonqualified option, an optionee must recognize ordinary income in
an amount equal to the excess of the fair market value of the Common Stock at
the time of exercise over the exercise price. Upon the subsequent disposition of
the Common Stock, the optionee will realize a capital gain or loss, depending on
whether the selling price exceeds the fair market value of the Common Stock on
the date of exercise.

An optionee's tax basis in the shares received on exercise of a
nonqualified option will be equal to the amount of consideration paid by the
optionee on exercise, plus the amount of ordinary income recognized as a result
of the receipt of such shares, which together equals the fair market value of
the Common Stock on the date of exercise. The optionee's holding period in the
Common Stock, for capital gains and losses purposes, begins on the date of
exercise. Optionees who are required to report their holdings and transfers of
the Common Stock under Section 16(a) of the Exchange Act ("Section 16 Persons")
are subject to the trading restrictions of Section 16(b) of the Exchange Act and
unless the election described below is made will not recognize ordinary
compensation income until the date such trading restrictions terminate (the
"Deferred Date"), rather than the exercise date. If the election is not made,
the amount of such taxable income will equal the excess of the fair market value
on the Deferred Date of the Common Stock received over the exercise price for
such Common Stock and the holding period for long-term capital gain would not
begin until the Deferred Date.

Section 16 Persons may elect to recognize compensation income on the date
of exercise of the nonqualified option. In such event, the amount of taxable
income to be recognized would equal the excess of the fair market value of the
Common Stock on such exercise date, over the exercise price for such Common

61
<PAGE> 64

Stock. The election to recognize income on the date of exercise of the
nonqualified option may be made by the timely filing of an appropriate statement
with the Internal Revenue Service.

The Company will be entitled to a deduction for federal income tax purposes
at the same time and in the same amount as the optionee recognizes compensation
income, provided the Company satisfied any applicable withholding tax obligation
with respect to such income.

Under Section 422 of the Code, no taxable income is realized by the
optionee upon the grant or exercise of an incentive stock option, provided that
the optionee is continuously employed by the Company during the period beginning
on the date of grant and ending on the date three months before the date of
exercise (or, in the case of disability, one year before the date of exercise).
However, the exercise of an incentive stock option may result in alternative
minimum tax liability for the optionee. If no disposition of shares issued to an
optionee pursuant to the exercise of an incentive stock option is made by the
optionee within two years from the date of grant or within one year after the
transfer of such shares to the optionee, then upon sale of such shares, any
amount realized in excess of the exercise price will be taxed to the optionee as
long-term capital gain (and any loss sustained will be long-term capital loss)
and no deduction will be allowed to the Company for federal income tax purposes.
The grant of an incentive stock option and the optionee's exercise of the
incentive stock option will result in no federal income tax consequences to the
Company.

If the shares of Common Stock acquired upon the exercise of an incentive
stock option are disposed of prior to the expiration of the two-year and
one-year holding periods described above (a "disqualifying disposition"),
generally the optionee will realize ordinary income in the year of disposition
in an amount equal to the excess (if any) of the fair market value of the shares
on the date of exercise (or, if less, the amount realized on an arms-length sale
of such shares) over the exercise price thereof, and the Company will be
entitled to deduct such amount as compensation expenses.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On July 1, 1992, Russell T. Stern, Jr., Patrick J. Haynes and Willard
McNitt, the stockholders of Alabama Lightwave, Inc., North Carolina Lightwave,
Inc., Chicago Lightwave, Inc., Delaware Lightwave, Inc., and Virginia Lightwave,
Inc. (collectively referred to as the "ALI subsidiaries") entered into stock
exchange agreements with ALI. Under these agreements, the stockholders of the
ALI subsidiaries received 650 shares of ALI mandatorily redeemable, nonvoting,
cumulative Series A preferred stock (the "ALI Preferred Stock") and 103,920
shares of ALI common stock (the "ALI Common Stock"). Additionally, ALI issued
363,720 shares of ALI Common Stock to existing stockholders for $0.0042 per
share.

At the time of the exchange agreements, ALI also entered into a stock
subscription agreement under which an aggregate 500 shares of ALI Preferred
Stock and an aggregate of 181,860 shares of ALI Common Stock were issued to
Apex, The Productivity Fund II, L.P. ("Productivity") and Brian Boyer for a
total of $500,875. The ALI Preferred Stock was issued for $1,000 per share and
the ALI Common Stock was issued for $0.0048 per share.

On December 15, 1992, 100 additional shares of ALI Preferred Stock and
36,372 shares of ALI Common Stock were issued to Apex, Productivity and Brian
Boyer for a total of $100,175 under the stock subscription agreement noted above
on the same terms and at the same per share price as noted above.

On September 14, 1993, an acquisition agreement and related agreements,
among other things, resulted in the acquisition of ALI by Golf Links Ltd.
("GLL"), a dormant publicly-held company, with GLL as the surviving corporation,
in exchange for newly issued shares of GLL's preferred and common stock. Under
the agreements, each outstanding common share of ALI Common Stock was exchanged
for 207.84 shares of GLL common stock and each outstanding share of ALI
Preferred Stock was exchanged for one share of GLL preferred stock (or an
aggregate of 1,250 shares of Preferred Stock) and the shares of ACC and ACS
which were held by certain stockholders of ALI were assigned to GLL.
Additionally, notes receivable for common stock of ACC totaling $50,000 held by
Russell T. Stern, Jr. and Patrick J. Haynes were forgiven in conjunction with
the merger. After the merger, GLL changed its name to American Communication
Services, Inc. (a Colorado Corporation).

62
<PAGE> 65

On September 15, 1993, the Company's former subsidiary, ALI, issued
promissory notes to Apex, Productivity, Russell T. Stern, Jr. and Brian Boyer
for $68,825, $68,825, $7,083 and $1,350, respectively (the "ALI Notes"). These
ALI Notes were originally due September 15, 1994, but ALI had the option to
extend the maturity date to September 15, 1995. Interest was payable on the
notes at ten percent (10%) per annum. The noteholders had warrants to purchase,
at any time up to September 14, 1996, shares of ALI Common Stock at a price of
$181.86 per share, subject to anti-dilution adjustments. ALI elected to extend
the maturity date to September 14, 1995, and the number of ALI shares that the
noteholder could purchase pursuant to the warrant increased as provided therein.
The holders of ALI Notes converted the ALI Notes and warrants into notes and
warrants substantially similar to notes and warrants issued by the Company on or
about September 14, 1993. These notes, together with accrued interest, were
repaid on the maturity date. The converted warrants along with the additional
warrants issued upon the extension of the ALI Notes gave the four holders listed
above the right to purchase an aggregate of 36,500 shares of the Company's
Common Stock at a price of $0.875 per share. The unexpired term of the
three-year warrants carried over to the converted warrants. In connection with
the October 1994 private placement, Apex and Productivity agreed to reduce the
number of warrants held by each of them by 50% in exchange for the exercise
price of 50% of such remaining warrants being reduced to $0.44 and 50% of such
remaining warrants being reduced to $0.01. Apex and Productivity each exercised
warrants for 8,353 shares of Common Stock at $0.44 per share during November
1994 and each exercised warrants for 8,353 shares of Common Stock at $0.01 per
share during December 1994.

In November 1993, the Company executed a financial consulting and advisory
agreement with The Thurston Group, Inc. for a period of six months. The Company
believes that Russell T. Stern, Jr., who, as of December 31, 1995, owned in
excess of 5% of the Company's outstanding voting stock and was a director of the
Company at the time the consulting agreement was executed, and Patrick J.
Haynes, who at the time the consulting agreement was executed was an executive
officer of the Company and owned in excess of 5% of the Company's outstanding
voting stock, had controlling interests in The Thurston Group, Inc. In
consideration, The Thurston Group, Inc. or its transferees received warrants to
purchase 300,000 shares of ACSI Common Stock, exercisable at $0.875 per share.
The holders of these warrants had the right to resell the shares to ACSI for
$2.25 per share through October 25, 1995. Pursuant to an Assignment and
Assumption Agreement dated June 21, 1995, Apex assumed the Company's obligation
to purchase such shares for a purchase price of $2.25 per share.

On June 1, 1994, the Company entered into a Stock Exchange Agreement with
the following holders of 1,700 shares of its Preferred Stock, some of whom were
affiliates of the Company at such time: Apex--247.5 shares; Productivity 247.5
shares; Brian Boyer--5 shares; Russell T. Stern, Jr.--550 shares and The
Thurston Group, Inc.--650 shares. George Middlemas, who is a director of the
Company, is a general partner of a partnership which is the general partner of
Apex. Productivity, until the closing of the October 1994 private placement
owned in excess of 5% of the Company's outstanding voting stock. Brian Boyer is
a former officer and director of the Company. Russell T. Stern, Jr. owned in
excess of 5% of the Company's outstanding voting stock as of December 31, 1995,
and was a director of the Company at the time such exchange was effective. The
Company believes that Mr. Stern is also a principal stockholder of The Thurston
Group, Inc. See "Principal Stockholders". The Preferred Stock had a face value
of $1,000 per share, and represented all of the then issued and outstanding
shares of the Preferred Stock. As of June 30, 1994, none of the Preferred Stock
remained outstanding. The Company exchanged each share of such Preferred Stock
for the number of shares of Common Stock determined by dividing the face amount
of such shares of Preferred Stock by $3.10 (which equals the average of the high
bid and low ask prices for the Company's Common Stock during the five trading
days immediately preceding June 1, 1994). The preferred stockholders were
granted piggyback registration rights for the Common Stock received in the
exchange, and demand registration rights on two occasions for the two year
period, June 1, 1995, to June 1, 1997, upon written request of 60% of the
holders of such Common Stock received in the exchange. The preferred
stockholders also each executed a general release in favor of the Company.

On June 9, 1994, the Company issued Secured Convertible Notes to, and
executed Security Agreements with, Apex and Productivity, and with Russell T.
Stern, Jr. The notes, which were repaid immediately following the October 1994
private placement, had principal amounts of $264,680, $264,680 and $77,281,

63
<PAGE> 66

respectively, with an interest rate of 15% per annum. The notes were secured
pari passu by the tangible assets of the Company's subsidiaries in the first two
cities to complete construction of networks, American Communication Services of
Louisville, Inc. and American Communication Services of Little Rock, Inc. The
Company paid the principal and accrued interest on Mr. Stern's note in cash and
paid Apex and Productivity in shares of its Series A Preferred Stock. Under the
terms of the notes, because the notes held by Apex and Productivity were paid in
shares of Series A Preferred Stock valued at $90 per share, the Company was
obligated to pay an additional $77,250 each to Apex and Productivity, payable
also in shares of Series A Preferred Stock valued at $90 per share. Mr. Stern,
Apex and Productivity released their security interests, upon repayment of their
notes.

On June 16, 1994, the Company entered into a financial consulting agreement
with Thurston Partners, Inc. and Global Capital, Inc., both of which the Company
believes to be affiliates of Russell T. Stern, Jr. and Patrick J. Haynes. The
Company agreed to pay $153,750 for consulting services rendered through the date
of the agreement, and a monthly payment of $7,500 continuing for a period of two
years.

In June 1994, Apex, Productivity and William G. Salatich, then a director
of the Company, purchased notes with the aggregate principal amount of
$1,300,720. These notes paid interest at a rate of 15% per annum and were
originally due December 31, 1994. The principal of these Notes was converted
into 14,453 shares of Series A Preferred Stock as part of the October 1994
private placement and the holders thereof received warrants to purchase 173,428
shares of Common Stock, which warrants were exercised. The accrued interest of
$62,736 on these Notes as of October 21, 1994, was paid by the Company in cash.

Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of Steven G. Chrust, a former director of the Company. Pursuant to the
agreement, the Company will compensate SGC as follows: (1) a monthly fee of
$5,000; (2) options to purchase up to 50,000 shares of the Company's Common
Stock that vest on July 1, 1997, and are exercisable on or before July 1, 1999;
and (3) a fee equal to 4% of the total aggregate consideration received by the
Company or its shareholders, in any transaction that the Company completes with
a strategic partner, merger partner or buyer if SGC is the finder of such
entity; or in the case where SGC is not the finder but proves instrumental in
completing the transaction then a fee of 2% will be payable to SGC. In either
case, 50% of the fee will be payable in cash at the time of closing and 50% will
be payable in warrants to purchase securities or instruments similar to those
received by the Company or its shareholders, unless the entire purchase price is
paid in cash. In the latter case, the entire fee will be payable in cash at
closing. Any warrants will have an exercise life of five years from date of
issuance or vesting whichever is later and will be exercisable at the same price
as established by the transaction that generates the warrant fee. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of the options referred to in (2) above equal to 1/36th of the exercise
price. The shares issued upon exercise of the options were priced at the average
of the high bid and low asked price on the closing date of the October 1994
private placement and have piggy-back registration rights.

In August 1994, Apex loaned the Company $250,000. The terms of this loan
were 15% per annum interest on a note due December 31, 1994, the grant of a
security interest in the tangible assets of the Company's operating subsidiary
that was then constructing a CAP network, and the issuance of the Company's
warrants in the amount of $250,000 to purchase shares of Preferred Stock at $90
per share. Apex converted the principal of this loan into 2,778 shares of Series
A Preferred at $90 per share as part of the October 1994 private placement. In
addition, Apex received warrants to purchase 3,333 shares of Common Stock at
$1.125 per share and warrants to purchase 3,333 shares of Common Stock at $0.01
per share in connection with this conversion. All of these warrants were
exercised.

In October 1994, the Company completed a private placement in which it sold
an aggregate of 186,664 shares of its Series A Preferred Stock and issued
warrants to purchase an aggregate of 2,674,506 shares of Common Stock for an
aggregate consideration of $16.8 million, including the conversion of $4.3
million of outstanding debt. Each share of the Series A Preferred Stock is
convertible into 40 shares of Common Stock, subject to anti-dilution
adjustments, generally at the option of the holder. Huff acquired control of the
Company through its purchase of 138,889 shares of the Series A Preferred Stock
for an aggregate purchase price of $12.5 million and its receipt of warrants to
purchase 77,000 and 1,414,222 shares of Common Stock at

64
<PAGE> 67

prices of $1.125 and $0.01 per share, respectively, all of which were exercised
in November 1994. Huff is an investment limited partnership and the
consideration for the Series A Preferred Stock was obtained from its general and
limited partners through capital calls for investments by the fund. Upon
completion of these transactions, Huff owned approximately 55.1% of the
Company's outstanding voting stock.

In June 1995, the Company completed a private placement of its Series B
Preferred Stock, of which ING purchased an aggregate of 100,000 shares of
Preferred Stock, warrants to purchase 428,571 shares of Common Stock at an
exercise price of $0.01 per share and a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $2.50 per share. Huff and certain of its
affiliates purchased an aggregate of 100,975 shares of the Preferred Stock,
warrants to purchase 432,749 shares of Common Stock at an exercise price of
$0.01 per share, a warrant to purchase 100,000 shares of Common Stock at an
exercise price of $1.79 and a warrant to purchase 100,000 shares at an exercise
price of $2.50 per share. Apex and certain of its affiliates purchased an
aggregate of 21,000 shares of the Preferred Stock and warrants to purchase an
aggregate of 90,000 shares of Common Stock at an exercise price of $0.01 per
share. The price per unit in the June 1995 private placement was $100. Pursuant
to the Series B Purchase Agreement, in November 1995, ING purchased 50,000
additional shares of the Series B Preferred Stock and exercised a warrant
entitling ING to purchase 214,286 shares of Common Stock at an exercise price of
$0.01 per share. In connection with these private placements, the Company
entered into the Registration Rights Agreement dated June 26, 1995, among the
holders of the Preferred Stock, certain holders of Common Stock and certain
holders of options or warrants convertible into Common Stock (the "Registration
Rights Agreement") wherein the parties were granted piggy-back registration
rights with respect to any registration statements (other than Registration
Statements filed on Forms S-4 or S-8) filed by the Company with the Commission
at any time prior to the sixth anniversary of the Registration Rights Agreement,
and certain demand registration rights following the occurrence of, among other
things, a Qualifying Offering.

The Company also has entered into the Stockholders' Agreement, dated as of
June 26, 1995, with the holders of 414,164 shares of the Series A-1 and June
1995 Preferred Stock, Anthony J. Pompliano and Richard A. Kozak. The
Stockholders' Agreement, among other things, generally restricts the transfer of
Common and Preferred Stock owned by the parties to the agreement, with the
exception of stock sold: (i) in a public offering pursuant to an effective
registration statement under the Securities Act or (ii) in the public market
pursuant to Rule 144 under the Securities Act. The agreement further provides
the stockholders with rights of first refusal in the case of sales initiated by
stockholders that are parties to the agreement and certain "tag-along" rights
which allow the stockholders to sell a proportionate amount of their stock in
the event a stockholder proposes to sell such stock to an unrelated purchaser.

On November 8, 1995, the Company entered into the Governance Agreement with
Huff, ING, Apex and other holders of the Preferred Stock. On February 26, 1996,
the same parties entered into the Supplemental Governance Agreement. Although
the Supplemental Governance Agreement will terminate upon conversion of the
Company's Preferred Stock, the holders of the Preferred Stock will own a
sufficient amount of the Common Stock, upon conversion of their shares of
Preferred Stock, to elect the Company's directors. See "Management."

On December 28, 1995, the Company entered into an agreement with Gerard
Klauer Mattison & Co., LLC ("GKM"), wherein the Company agreed to pay to GKM
approximately $1.4 million in full satisfaction of claims and as payment for
past services provided by GKM to the Company and issue GKM a Warrant exercisable
for 96 shares of the Company's Common Stock at an exercise price of $0.01 per
share at any time before June 28, 1996 ("GKM Warrant I"), and Warrant, which
will allow GKM to purchase 62,473 shares of the Company's Common Stock at an
exercise price of $2.80 per share (subject to certain adjustments) at any time
after 5:00 p.m. New York City time on December 28, 1996, until 5:00 p.m. New
York City time on December 28, 2000 (collectively, the "GKM Warrants"). See
"Business -- Legal Proceedings." The GKM Warrants were earned as a result of
services that GKM performed in connection with the June 1995 private placement.
The Common Stock issuable upon the exercise of the GKM Warrants have certain
registration rights. The GKM Warrant I was exercised.

65
<PAGE> 68

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock (including shares issuable upon the
exercise of currently exercisable options and warrants and the conversion of the
Preferred Stock) as of May 31, 1996 by (i) each person who is known to the
Company to own 5% or more of the Common Stock, (ii) each director of the
Company, (iii) the Chief Executive Officer and each of the named executive
officers and (iv) all executive officers and directors of the Company as a
group.

Unless otherwise indicated, the named persons exercise sole voting and
investment power over the shares that are shown as beneficially owned by them.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
------------------------------------------------
PERCENT BEFORE PERCENT AFTER
NAME(2) NUMBER OFFERING OFFERING
- ----------------------------------------------------------- ---------- -------------- --------------
<S> <C> <C> <C>
Anthony J. Pompliano(3).................................... 1,499,999 5.9%
Richard A. Kozak(4)........................................ 1,133,465 4.5%
George M. Tronsrue, III(5)................................. 230,000 1.0%
Riley M. Murphy(6)......................................... 137,501 *
Douglas R. Hudson(7)....................................... 137,501 *
George M. Middlemas(8)..................................... 1,423,676 5.9%
Christopher Rafferty(9).................................... 8,000 *
Edwin M. Banks(9).......................................... 0 *
Peter C. Bentz(9).......................................... 0 *
Olivier L. Trouveroy(10)................................... 0 *
Benjamin P. Giess(10)...................................... 0 *
The Huff Alternative Income Fund, L.P.(11)................. 11,246,782 46.6%
ING Equity Partners, L.P. I(12)............................ 6,100,000 25.4%
First Analysis Corporation(13)............................. 2,840,183 11.9%
Russell T. Stern, Jr.(14).................................. 1,355,860 5.7%
All executive officers and directors as a group (13
persons)................................................. 4,745,142 17.4%
</TABLE>

- ------------
* Less than one percent.

(1) Assumes 464,164 shares of Preferred Stock, outstanding on December 31, 1995
were converted into 17,377,278 shares of Common Stock simultaneously with
the completion of the Offering.

(2) The address of all officers and directors listed above is in the care of
the Company.

(3) Includes 1,499,899 shares subject to currently exercisable options held by
Mr. Pompliano.

(4) Includes 1,133,265 shares subject to currently exercisable options held by
Mr. Kozak.

(5) Includes 230,000 shares subject to currently exercisable options held by
Mr. Tronsrue.

(6) Includes 137,501 shares subject to currently exercisable options held by
Ms. Murphy.

(7) Includes 137,501 shares subject to currently exercisable options held by
Mr. Hudson.

(8) Includes 30,000 shares subject to currently exercisable options held by Mr.
Middlemas. Also includes 231,546 shares of Common Stock, 16,803 shares of
Series A-1 Preferred Stock convertible into 672,120 shares of Common Stock,
3,269.9 shares of Series B-3 Preferred Stock convertible into 116,782
shares of Common Stock and 14,014 shares of Common Stock subject to
currently exercisable warrants owned by Apex. Includes 2,595 shares of
Series A-1 Preferred Stock convertible into 103,800 shares of Common Stock,
4,904.85 shares of Series B-3 Preferred Stock convertible into 175,173
shares of Common Stock and 21,021 shares of Common Stock subject to
currently exercisable warrants owned by Apex Investment Fund Limited
Partnership ("Apex I"). Mr. Middlemas is a general partner of Apex
Management Partnership which is the general partner of Apex and Apex I. Mr.
Middlemas disclaims beneficial ownership of the shares owned by Apex and
Apex I, except to the extent of his ownership in the general partner of
Apex I and in the general partner of Apex.

(9) Excludes shares listed as owned by Huff since none of Messrs. Banks, Bentz
or Rafferty, each an employee of an affiliate of Huff, exercises any voting
or dispositive power with respect to such shares. Mr. Rafferty's amounts
include 200 shares of Series B-2 Preferred Stock convertible into 7,143
shares of Common Stock.

66
<PAGE> 69

(10) Mr. Trouveroy is a stockholder, executive officer and director of Lexington
Partners, Inc. and Mr. Giess is an executive officer of Lexington Partners,
Inc., which is the sole general partner of Lexington Partners, L.P., the
sole general partner of ING, but do not exercise sole or shared voting or
dispositive power with respect to the shares held by ING which are
described in footnote (15) and thus, are not deemed to beneficially own
such shares.

(11) Includes 138,889 shares of Series A-1 Preferred Stock convertible into
5,555,560 shares of Common Stock, 100,000 shares of Series B-2 Preferred
Stock convertible into 3,571,429 shares of Common Stock and 628,571 shares
of Common Stock issuable upon the exercise of warrants. The address of this
holder is 30 Schuyler Place, Morristown, NJ 07962.

(12) Includes 100,000 shares of Series B-1 Preferred Stock convertible into
3,571,429 shares of Common Stock and 100,000 shares issuable upon the
exercise of warrants owned by ING and 50,000 shares of Series B-4 Preferred
Stock convertible into 1,785,714 shares of Common Stock. The address of
this holder is 135 E. 57th St., 9th Floor, New York, NY 10022.

(13) First Analysis Corporation ("FAC") is an ultimate general partner of Apex,
Apex I, The Productivity Fund II, L.P. ("Productivity") and Equity Fund II,
L.P. ("EPEF"). Includes 231,546 shares of Common Stock, 16,803 shares of
Series A-1 Preferred Stock convertible into 672,120 shares of Common Stock,
3,269.9 shares of Series B-3 Preferred Stock convertible into 116,782
shares of Common Stock and 14,014 shares of Common Stock issuable upon the
exercise of warrants owned by Apex. Includes 2,595 shares of Series A-1
Preferred Stock convertible into 103,800 shares of Common Stock, 4,904.85
shares of Series B-3 Preferred Stock convertible into 175,173 shares of
Common Stock and 21,021 shares of Common Stock issuable upon the exercise
of warrants owned by Apex I. Includes 253,232 shares of Common Stock,
10,249 shares of Series A-1 Preferred Stock convertible into 409,960 shares
of Common Stock, 1,380.61 shares of Series B-3 Preferred Stock convertible
into 49,308 shares of Common Stock and 5,917 shares of Common Stock
issuable upon the exercise of warrants owned by Productivity. Includes
6,056 shares of Series A-1 Preferred Stock convertible into 242,240 shares
of Common Stock, 11,444.64 shares of Series B-3 Preferred Stock convertible
into 408,737 shares of Common Stock and 49,048 shares of Common Stock
subject to currently exercisable warrants owned by EPEF. FAC disclaims
beneficial ownership of these shares. This information was obtained from a
Schedule 13D filed with the Securities and Exchange Commission on August 4,
1995, as amended in October 1995. The address of this holder is 233 South
Wacker Drive, Suite 9600, Chicago, IL 60606.

(14) Includes 30,000 shares and 3,542 shares issuable upon exercise of an option
and warrant, respectively. Also includes 238,306 shares owned of record by
an option exercisable through The Thurston Group, Inc., of which Mr. Stern
is a principal. The address of the holder is 660 Mews, Winnetka, IL 60093.

67
<PAGE> 70

DESCRIPTION OF CERTAIN INDEBTEDNESS

AT&T CREDIT FACILITY

In October 1994, the Company entered into the AT&T Credit Facility pursuant
to which AT&T Credit Corporation has agreed to provide up to $31.2 million in
financing for the development and construction of fiber optic networks by the
Company's subsidiaries. Pursuant to the AT&T Credit Facility, during fiscal 1995
the Company's subsidiaries in Louisville, Fort Worth, Greenville and Columbia
entered into loan agreements with AT&T Credit Corporation providing for up to
$19.8 million in loans secured by the assets of such subsidiaries. As of June
30, 1995, an aggregate of approximately $3.7 million had been borrowed under
these agreements. Subsequent to June 30, 1995, the Company's subsidiary in El
Paso entered into a separate loan agreement with AT&T Credit Corporation
pursuant to the AT&T Credit Facility providing for up to an aggregate of
approximately $5.5 million in loans secured by its assets. As of March 31, 1996,
outstanding borrowings under the AT&T Credit Facility totalled approximately
$14.1 million, including accrued interest of approximately $945,000. Interest
rates currently applicable to the loans range from 11.32% to 13.59%.

The loans under the AT&T Credit Facility are secured by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal of borrowed amounts is payable in 28
consecutive quarterly installments, beginning with the ninth quarter after the
date of the loan. The principal of borrowed amounts may be prepaid in certain
circumstances, and must be prepaid along with a premium in other circumstances.
Interest is due quarterly. At the borrowing subsidiary's option, the interest
rate may be fixed or variable. The borrowing subsidiary has a one-time option to
convert all variable rate loans to fixed rate loans. Upon certain events of
default, additional interest ranging from 2% to 4% will become payable. Interest
may generally be deferred so long as it would not cause the outstanding
principal balance to exceed the commitment amounts for Capital Loans and for
Equipment Loans (as defined in the loan documents). To date, the Company has
elected to defer all interest due under the loans. In addition, the AT&T Credit
Facility includes covenants, some of which impose certain restrictions on the
Company and its subsidiaries including restrictions on the declaration or
payment of dividends, the conduct of certain activities, certain capital
expenditures, the creation of additional liens or indebtedness, the disposition
of assets, transactions with affiliates, and extraordinary corporate
transactions. The AT&T Credit Facility imposes restrictions on the ability of
those subsidiaries of ACSI that incur indebtedness thereunder to transfer funds
to ACSI in the form of dividends or other distributions. The AT&T Credit
Facility also imposes restrictions on the ability of such subsidiaries to raise
capital by incurring additional indebtedness. These factors could limit ACSI's
ability to meet its obligations with respect to the Notes. The various
agreements which comprise the AT&T Credit Facility terminate on dates ranging
from October 1996 to May 1997.

Pursuant to the AT&T Credit Facility, the Company has contributed
approximately $7.9 million in capital to its subsidiaries through March 31,
1996, and AT&T Credit Corporation received 7.25% of the outstanding capital
stock of each of the Company's operating subsidiaries for which it provided
financing. The Company was required to pledge its interest in the respective
subsidiaries to AT&T Credit Corporation as a condition to each loan. Under
certain circumstances, this pledge agreement also restricts the Company's
ability to pay dividends on its capital stock.

The Company is presently considering a proposal by AT&T Credit Corporation
to increase the amount of the AT&T Credit Facility on modified terms, but has
not reached any decision regarding that proposal.

2005 NOTES AND 2006 NOTES

The 2005 Notes were issued under an Indenture, dated as of November 14,
1995 (the "2005 Note Indenture"), between the Company and Chemical Bank, as
trustee thereunder; and the 2006 Notes were issued under an Indenture dated as
of March 21, 1996 (the "2006 Note Indenture" and, together with the 2005 Note
Indenture, the "Indentures") between the Company and Chemical Bank, as trustee
thereunder. The terms of the 2005 Notes and the 2006 Notes include those stated
in the applicable Indenture and those made a part of the applicable Indenture by
reference to the Trust Indenture Act of 1939 as in effect on the date of that
Indenture. The terms of the Indentures are substantially similar. The following
summaries of

68
<PAGE> 71

certain provisions of the Indentures do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the applicable Indenture. A copy of the 2006 Note Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part and the 2005 Note Indenture is incorporated into the Registration Statement
by reference.

The Notes are general unsubordinated and unsecured obligations of ACSI and
will rank pari passu with all other unsubordinated and unsecured indebtedness of
ACSI. As a holding company that conducts virtually all of its business through
subsidiaries, ACSI currently has no source of operating cash flow other than
from dividends and distributions from its subsidiaries. ACSI's subsidiaries will
have no obligation to pay amounts due on the Notes and will not guarantee the
Notes. Therefore, the Notes will be effectively subordinated to all liabilities
of ACSI's subsidiaries, including trade payables. Any rights of ACSI and its
creditors, including the holders of the Notes, to participate in the assets of
any of ACSI's subsidiaries upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors
(including trade creditors).

Upon a Change of Control (as defined in the Indentures), each holder of the
Notes will have the right to require ACSI to repurchase all or any part of such
holder's Notes at 101% of the Accreted Value (as defined in the Indenture)
thereof, or, in the case of any such repurchase on or after November 1, 2000 in
the case of the 2005 Notes and on or after April 1, 2001 in the case of the 2006
Notes, 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, thereon, to the date of repurchase. A Change of Control would occur if,
among other things, any person or group, other than Mr. Pompliano, Mr. Kozak or
Huff, acquires more than 35% of the total voting power of the Company.

Each of the Indentures contains certain covenants which, among other
things, restrict the ability of ACSI and certain of its subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of
ACSI's capital stock or make certain other restricted payments, create
restrictions on the ability of certain subsidiaries to make distributions on
their capital stock, create liens, enter into transactions with affiliates or
related persons, sell assets, or consolidate, merge or sell all or substantially
all of their assets.

The 2005 Notes

The 2005 Notes mature on November 1, 2005. The yield on the 2005 Notes
equals 13% per annum, computed on a semi-annual bond equivalent basis and
calculated from November 9, 1995. The 2005 Notes will accrete at a rate of 13%,
compounded semi-annually, to an aggregate principal amount of $190,000,000 by
November 1, 2000. Cash interest will not accrue on the 2005 Notes prior to
November 1, 2000. Thereafter, interest on the 2005 Notes will accrue at the rate
of 13% per annum and will be payable in cash semi-annually on May 1 and November
1, commencing May 1, 2001. The 2005 Notes will be redeemable, at the option of
ACSI at any time, in whole or in part, on or after November 1, 2000, at 110%,
106 2/3% and 103 1/3% of the principal amount for the twelve months following
November 1, 2000, 2001 and 2002, respectively, plus accrued and unpaid interest,
if any, to the date of redemption.

The 2006 Notes

The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of ACSI at any time, in whole or in part, on or after April 1,
2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the twelve
months following April 1, 2001, 2002 and 2003, respectively, plus accrued and
unpaid interest, if any, thereon, to the date of repurchase.

69
<PAGE> 72

DESCRIPTION OF CAPITAL STOCK

ACSI's authorized capital stock consists of 75,813,336 shares of capital
stock, consisting of 75,000,000 shares of Common Stock, par value $.01 per
share, and 813,336 shares of Preferred Stock, par value $1.00 per share. On May
31, 1996, there were 6,555,455 shares of Common Stock issued and outstanding and
held of record by approximately 291 persons. The Company has designated 186,664
shares of its authorized Preferred Stock as 9% Series A-1 Convertible Preferred
Stock, 100,000 shares as its 9% Series B-1 Convertible Preferred Stock, 102,500
shares as its 9% Series B-2 Convertible Preferred Stock, 25,000 shares as its 9%
Series B-3 Convertible Preferred Stock, and 50,000 shares as its 9% Series B-4
Convertible Preferred Stock. Upon completion of this Offering, the 464,164
issued and outstanding shares of Preferred Stock will be converted into
17,377,278 shares of Common Stock and will again become authorized but unissued
shares of Preferred Stock.

PREFERRED STOCK

The authorized but unissued Preferred Stock may be issued by the Board of
Directors of the Company from time to time in one or more series with such
preferences, terms and rights as the Board of Directors may determine without
further action by the stockholders of the Company. Accordingly, the Board of
Directors has the power to fix the dividend rate and to establish the
provisions, if any, relating to dividends, voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.

It is not possible to state the actual effect of the authorization of any
particular series of Preferred Stock upon the rights of holders of the Common
Stock until the Board of Directors determines the specific rights of the holder
of Preferred Stock of any further series. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders.

COMMON STOCK

ACSI is authorized to issue 75,000,000 shares of Common Stock. Under the
Company's By-Laws, at least a majority of the issued and outstanding voting
securities of the Company present at a duly called stockholders' meeting
constitutes a quorum. Generally, if a quorum is present the affirmative vote of
the majority of the voting securities represented at the meeting constitutes an
act of the stockholders.

Subject to the rights of holders of the Preferred Stock, certain covenants
contained in the Indentures which restrict the Company's ability to declare
dividends on its Common Stock, and the restrictions on dividends contained in an
agreement between the Company and AT&T Credit Corporation, holders of the
Company's Common Stock are entitled to receive dividends, on a pro rata basis,
as may from time to time be declared by the Board of Directors. The holders of
Common Stock are entitled to one vote per share, voting together with the
holders of Preferred Stock (voting on an as-converted basis) as a single class
(except with respect to the election of directors and certain transactions and
matters), on every question submitted to them at a meeting of shareholders. In
the event of liquidation, dissolution or winding up, the holders of Common Stock
are, subject to the liquidation preference of the holders of Preferred Stock,
entitled to share ratably in all assets of the Company available for
distribution to stockholders along with the holders of the Preferred Stock, any
other series or class of preferred stock entitled to a share of the remaining
assets of the Company pro rata based on the number of shares of Common Stock
held by each (assuming full conversion of all such Preferred Stock or such other
series or class of preferred stock). The holders of the Company's Common Stock
do not have pre-emptive rights or cumulative voting rights with respect to the
election of directors.

ANTI-TAKEOVER STATUTE

70
<PAGE> 73

mergers, consolidations, sales or other dispositions of assets having an
aggregate value in excess of 10% of the consolidated assets of the corporation,
and certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation) between an interested
stockholder and a corporation for a period of three years following the time the
interested stockholder acquired its stock unless (i) the business combination is
approved by the corporation's Board of Directors prior to the date the
interested stockholder acquired shares, (ii) the interested stockholder acquired
at least 85% of the voting stock of the corporation in the transaction in which
it becomes an interested stockholder or (iii) the business combination is
approved by a majority of the Board of Directors and by the affirmative vote of
66 2/3% of the votes entitled to be cast by disinterested stockholders at an
annual or special meeting. The Charter and By-laws do not exclude the Company
from the restrictions imposed under Section 203 of the DGCL.

LIMITATION OF LIABILITY OF DIRECTORS

The Charter provides that a director of the Company will not be personally
liable for monetary damages to the Company or its stockholders for breach of
fiduciary duty as a director, except for liability, (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemption as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.

This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, stockholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders in any particular
situation, stockholders may not have an effective remedy against a director in
connection with such conduct.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Amended and Restated Certificate of Incorporation and the By-laws
provide that directors and officers of the Company (as well as agents and
employees of the Company at the discretion of the Board) shall, to the fullest
extent authorized by the DGCL or any other applicable laws then in effect, be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties. Section 145 of the DGCL empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.

Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such

71
<PAGE> 74

person is fairly and reasonably entitled to indemnity for such expenses which
the Delaware Court of Chancery or such other court shall deem proper.

Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is a or was a director, officer, employee or agent of
the corporation against any liability asserted against him in any such capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.

There has not been in the past and there is not presently pending any
litigation or proceeding involving a director, officer, employee or agent of the
Company which could give rise to an indemnification obligation on the part of
the Company. In addition, except as described herein, the Board of Directors is
not aware of any threatened litigation or proceeding which may result in a claim
for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The foregoing summary of certain material provisions of ACSI's Charter and
By-laws is qualified in its entirety by reference to the complete text of those
documents.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of ACSI's Common Stock is The Bank of New
York, 101 Barclay Street, New York, New York 10296.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering and the simultaneous conversion of the
Preferred Stock into Common Stock, the Company will have outstanding
shares of Common Stock, plus options and warrants to acquire an additional
10,990,698 shares of Common Stock. Of the outstanding shares of Common Stock,
1,134,073 shares (plus the shares offered hereby) are freely
transferable without restriction or further registration under the Securities
Act unless held by affiliates of the Company. The remaining shares outstanding
are "restricted securities" as that term is defined in Rule 144 of the
Securities Act. Of such restricted shares, 4,258,162 have been (or are deemed to
have been) held for more than two years, and, as such, are saleable subject, in
certain instances, to certain volume and manner of sale restrictions under Rule
144. Of the 10,990,698 shares reserved for issuance upon exercise of outstanding
options and warrants, 9,229,771 shares have been or within a month of the date
hereof will be registered under the Securities Act. Accordingly, any shares
issued upon exercise of such options or warrants will be freely transferable
upon registration thereof unless acquired by affiliates of the Company. Subject
to certain exceptions, the Company, all of its executive officers and directors
and certain stockholders of the Company have agreed not to, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for shares of Common Stock

72
<PAGE> 75

or cause to be filed with the Securities and Exchange Commission a registration
statement under the Securities Act to register any shares of Common Stock or, in
any manner, transfer all or a portion of the economic consequences associated
with the ownership of Common Stock without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation for a period of 180 days
after the date of this Prospectus.

Holders of substantially all of the restricted shares of Common Stock and
outstanding options and warrants to purchase Common Stock have either piggy-back
or demand registration rights relating to those shares. In December 1995, ACSI
filed a registration statement with the Commission which covers the offer and
sale of the Warrants and 2,432,000 shares of Common Stock underlying the
Warrants. The filing of such registration statement required the Company to send
notice to certain holders of its Common Stock and other warrants who have
"piggy-back" registration rights. Such notice was sent to these holders in
November 1995. A total of twenty-seven holders, holding approximately 635,225
shares of Common Stock and warrants to purchase 1,710,059 shares of Common
Stock, either responded and requested to have their shares included in such
registration statement or may not have received such notice. The Company did not
include any of these shares in such registration statement and is in the process
of obtaining waivers of such "piggy-back" rights from these holders. In
connection with this Offering, the Company expects to obtain waivers from
stockholders and holders of options and warrants having registration rights and,
in connection therewith, has agreed to use its commercially reasonable best
efforts to file a registration statement relating to up to 4,324,467 of these
shares if all such waivers are obtained on the later of 210 days from the date
of this Prospectus or April 30, 1997. There can be no assurance that waivers
will be obtained from all such stockholders, and the Company may be required to
file an earlier registration statement for any non-waiving stockholders.

In general, under Rule 144 as currently in effect, as stockholder (or
stockholders whose securities are aggregated) who (together with predecessor
holders who are not affiliates of the Company) has beneficially owned shares of
Common Stock which are treated as restricted securities for at least two years
from the date such shares were acquired from the Company or an affiliate
thereof, is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock or (ii) the average weekly trading volume of the then outstanding
shares of Common Stock during the four calendar weeks preceding the date on
which notice of such sale was filed with the Commission under Rule 144. Sales
under Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144 (other than the two-year holding
period requirement) in order to sell shares of Common Stock that are not
restricted securities (such as shares acquired by affiliates of the Company in
the public market). Furthermore, commencing three years after the acquisition of
restricted securities from the Company or an affiliate of the Company, a holder
of such restricted securities who is not an affiliate of the Company at the time
of the sale and has not been an affiliate for at least three months prior to
such sale would be entitled to sell such securities immediately without regard
to the volume limitations and other conditions described above.

73
<PAGE> 76

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation,
Alex. Brown & Sons Incorporated and Montgomery Securities are acting as
representatives (the "Representatives"), have agreed, severally and not jointly,
to purchase from the Company the respective number of shares of Common Stock set
forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............................
Alex. Brown & Sons Incorporated.................................................
Montgomery Securities...........................................................

----------
Total.................................................................
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock hereby
are subject to approval of certain legal matters by counsel and to certain other
conditions. If any shares of Common Stock are purchased by the Underwriters
pursuant to the Underwriting Agreement, all such shares (other than the shares
subject to the over-allotment option described below) must be purchased.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock in part directly to the public initially at
the public offering price set forth on the cover page of this Prospectus and in
part to certain selected dealers at such price less a concession not in excess
of $ per share; that the Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to other
dealers; and that after this Offering, the Price to the Public, concession and
discount to dealers may be changed by the Representatives.

Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional shares of Common Stock at
the Price to the Public less underwriting discounts and commissions. The
Underwriters may exercise such option from time to time only for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares of Common Stock offered hereby. To the extent the Underwriters exercise
such option, each Underwriter will become obligated, subject to certain
conditions, to purchase the same proportion of additional shares as the number
of other shares to be purchased by that Underwriter bears to the total number of
shares set forth on the cover page of this Prospectus.

Subject to certain exceptions, the Company, all of its executive officers
and directors and certain stockholders of the Company have agreed not to,
directly or indirectly, offer, sell, contract to sell, grant any option to
purchase, or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for shares of Common Stock or
cause to be filed with the Securities and Exchange Commission a registration
statement under the Securities Act to register any shares of Common Stock or, in
any manner, transfer all or a portion of the economic consequences associated
with the ownership

74
<PAGE> 77

of Common Stock without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation for a period of 180 days after the date of this
Prospectus.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.

In connection with this Offering, certain Underwriters and selling group
members (and any of their affiliated purchasers) who are qualified registered
market makers on the Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Exchange Act during the two business day period
before commencement of offers or sales of the Common Stock in this Offering.
Passive market making consists of, among other things, displaying bids on the
Nasdaq National Market limited by the bid prices of independent market makers
and purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
securities during a specified prior period, and all passive market making
activity must be discontinued when such limit is reached. Passive market making
may stabilize the market price of the securities at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.

LEGAL MATTERS

Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Piper & Marbury L.L.P., Baltimore,
Maryland and for the Underwriters by Weil, Gotshal & Manges LLP (a limited
liability partnership including professional corporations), New York, New York.

EXPERTS

The consolidated financial statements of the Company as of and for the
fiscal year ended June 30, 1995, have been included in this Prospectus and in
the registration statement of which this Prospectus forms a part in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants and upon the authority of said firm as an expert in accounting and
auditing. The consolidated financial statements of the Company as of and for the
fiscal year ended June 30, 1994 have been included in this Prospectus and in the
registration statement of which this Prospectus forms a part in reliance upon
the report of Coopers & Lybrand L.L.P., independent certified public
accountants, and upon the authority of said firm as an expert in accounting and
auditing.

CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS

On April 21, 1995, pursuant to authorization of its Board of Directors and
approval of its Audit Committee, the Company dismissed the firm of Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") as its auditors and retained KPMG Peat
Marwick LLP ("KPMG Peat Marwick"). Coopers & Lybrand's report for each of the
fiscal years ended June 30, 1993, and June 30, 1994, indicated uncertainties as
to the Company's ability to continue as a going concern. However, Coopers &
Lybrand's report for these years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to audit scope or
accounting principles.

75
<PAGE> 78

Regulation S-K, Item 304(a)(1)(v)(A) through (D) of the Exchange Act), except
that at the March 30, 1994, meeting of the Audit Committee at which
representatives of Coopers & Lybrand were present, Coopers & Lybrand
communicated to the Audit Committee that through approximately August 1993,
documentation of equity or other non-cash transactions and controls over cash
were less than adequate. This matter was then discussed. The Company has
authorized Coopers & Lybrand to respond fully to the inquiries of KPMG Peat
Marwick concerning such reportable events.

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information may be inspected
and copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Commission by
mail at prescribed rates. Requests should be directed to the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Company's Common Stock is quoted on the Nasdaq
National Market and material filed by the Company can be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street
N.W., Washington, D.C. 20006.

The Company has filed with the Commission a registration statement on Form
SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement. This
Prospectus contains summaries of the material terms and provisions of certain
documents and, in each instance, reference is made to the copy of such the
document filed as an exhibit to the Registration Statement. Copies of the
Registration Statement and the exhibits thereto may be inspected, without
charge, at the offices of the Commission, at the address set forth above.

76
<PAGE> 79

GLOSSARY

ACCESS CHARGES -- The fees paid by IXCs to LECs for originating and
terminating long distance calls on their local networks.

ATM (Asynchronous Transfer Mode) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multi-media" information) at varying rates. The ATM
format can be used by many different information systems, including LANs.

BROADBAND -- Broadband communications systems can transmit large quantities
of voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television station
that transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.

CAP (Competitive Access Provider) -- A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).

CENTRAL OFFICES -- The switching centers or central switching facilities of
the LECs.

CENTREX -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who do not have the size or
the funds to support their own on-site PBX.

CLEC -- A CAP that also provides switched local telecommunications
services.

CO-CARRIER STATUS -- A relationship between competitive local exchange
carriers (CLEC) that affords the same access and rights to the other's network,
and provides access and services on an equal basis.

COLLOCATION -- The ability of a CAP such as the Company to connect its
network to the LEC's central offices. Physical collocation occurs when a CAP
places its network connection equipment inside the LEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the LEC permits a CAP to connect its network to the LEC's central offices at
competitive prices, even though the CAP's network connection equipment is not
physically located inside the central offices.

DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).

DEDICATED SERVICES -- Special access, switched transport and private line
services generally offered by CAPs, including the Company.

DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.

DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit

77
<PAGE> 80

rate of 64 kilobits per second. DS-1 service has a bit rate of 1.544 megabits
per second and DS-3 service has a bit rate of 45 megabits per second.

EBITDA -- Net income (loss) before net interest, income taxes, depreciation
and amortization.

FCC -- Federal Communications Commission.

FIBER MILE -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.

FIBER OPTICS -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet has significantly greater bandwidth
capacity than copper cable, which is many times greater in size.

FIBER OPTIC RING NETWORK -- Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture in its networks.

FRAME RELAY -- Frame relay is a high-speed data packet switching service
used to transmit data between computers. Frame Relay supports data units of
variable lengths at access speeds ranging from 56kbs to 1.5 mbs. This service is
ideal for connecting LANs, but is not appropriate for voice and video
applications due to the variable delays that can occur. Frame Relay was designed
to operate at higher speeds on modern fiber optic networks.

INTERCONNECTION DECISIONS -- Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or end
user seeking such interconnection for the provision of interstate special access
and switched access transport services.

ISDN -- An internationally agreed upon standard which, through special
equipment, allows two-way, simultaneous voice and data transmission in digital
formats over the same transmission line. ISDN permits videoconferencing over a
single line, for example, and also supports a multitude of value-added
networking capabilities, reducing costs for end-users and results in more
efficient use of available facilities. ISDN combines standards for highly
flexible customers to network signaling with both voice and data within a common
facility.

ISP -- Internet service providers provide customers with access onto the
Internet by linking their networks directly or through other ISPs to the
Internet backbone network.

IXC (Interexchange Carriers) -- See Long Distance Carrier.

LANS (Local Area Networks) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.

LATAS (Local Access and Transport Areas) -- The geographically defined
areas in which LECs are authorized by the MFJ to provide local switched
services.

LECS (Local Exchange Carrier) -- A company providing local telephone
services.

LOCAL EXCHANGE AREAS -- A geographic area determined by the appropriate
state regulatory authority in which local calls generally are transmitted
without toll charges to the calling or called party.

LONG DISTANCE CARRIERS OR IXCS (Interexchange Carriers) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Long distance carriers include, among others, AT&T, MCI,
Sprint, WorldCom and LCI, as well as resellers of long distance capacity.

MFJ (Modified Final Judgment) -- The MFJ was an agreement made in 1982
between AT&T and the Department of Justice that forced the breakup of the old
Bell System. This judgment, also known as the Divestiture of AT&T, established
seven separate Regional Bell Operating Companies (RBOCs) and created two
distance segments of telecommunications service: local and long distance. This
laid the ground work for

78
<PAGE> 81

intense competition in the long distance industry, but essentially created seven
separate regionally-based local switched service monopolies.

NAP -- Network Access Points are points where the national ISPs
interconnect their networks, allowing a multitude of local and regional ISPs to
exchange data and access the Internet globally.

NODE -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.

OFF-NET -- A customer that is not physically connected to one of the
Company's networks but who is accessed through interconnection with a LEC
network.

ON-NET -- A customer that is physically connected to one of the Company's
networks.

PBX (Private Branch Exchange) -- A switching system within an office
building which allows calls from outside to be routed directly to the individual
instead of through a central number. This PBX also allows for calling within an
office byway of four digit extensions. Centrex is a service which can simulate
this service from an outside switching source, thereby eliminating the need for
a large capital expenditure on a PBX.

PCS (Personal Communications Service) -- A type of wireless telephone
system that uses light, inexpensive handheld sets and communicates via low power
antennas.

POPS (Points of Presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.

PRIVATE LINE -- A private, dedicated telecommunications connection between
end-user locations (excluding long distance carrier POPs).

RBOCS (Regional Bell Operating Companies) -- The seven local telephone
companies established by the MFJ. These RBOCs are prohibited from providing
interLATA services and from manufacturing telecommunications equipment.

ROUTE MILES -- The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.

SPECIAL ACCESS SERVICES -- The lease of private, dedicated
telecommunications lines or "circuits" along the network of a LEC or a CAP (such
as the Company), which lines or circuit run to or from the long distance carrier
POPs. Examples of special access services are telecommunications lines running
between POPs of a single long distance carrier, from one long distance carrier
POP to the POP of another long distance carrier or from an end user to its long
distance carrier POP. Special access services do not require the use of
switches.

SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.

SWITCHED ACCESS SERVICES -- The origination or termination of long distance
traffic between a customer premise and an IXC POP via shared local trunks using
a local switch.

SWITCHED TRANSPORT SERVICES -- Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.

SWITCHED TRAFFIC -- Telecommunications traffic along a switched network.

VGE (Voice Grade Equivalent Circuits) -- A measure of service equivalent to
one telephone line (64 kilobits of bandwidth) actually billed to a customer.

79
<PAGE> 82

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Report of Independent Accountants..................................................... F-3
Consolidated Balance Sheets as of June 30, 1995, and 1994............................. F-4
Consolidated Statements of Operations for the Years Ended June 30, 1995, and 1994..... F-5
Consolidated Statements of Series A Preferred Stock and Stockholders' Equity (Deficit)
for the Years Ended June 30, 1995, and 1994......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, and 1994..... F-7
Notes to Consolidated Financial Statements............................................ F-8
Condensed Consolidated Balance Sheet as of June 30, 1995 and as of March 31, 1996
(unaudited)......................................................................... F-20
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended March 31, 1996, and March 31, 1995 (unaudited)................................ F-21
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31,
1996, and March 31, 1995 and for the Three Months Ended March 31, 1996, and March
31, 1995 (unaudited)................................................................ F-22
Notes to Unaudited Condensed Consolidated Interim Financial Statements................ F-23
</TABLE>

F-1
<PAGE> 83

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
American Communications Services, Inc.:

We have audited the accompanying consolidated balance sheet of American
Communications Services, Inc. and its subsidiaries as of June 30, 1995, and the
related consolidated statements of operations, Series A preferred stock and
stockholders' equity (deficit), and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Communications Services, Inc. and its subsidiaries as of June 30, 1995, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

KPMG Peat Marwick LLP

Washington, D.C.
August 25, 1995

F-2
<PAGE> 84

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
American Communication Services, Inc.:

We have audited the accompanying consolidated balance sheet of American
Communications Services, Inc. (a development stage company) as of June 30, 1994
and the related consolidated statements of operations, Series A preferred stock
and stockholders' equity (deficit) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

Our original report on the Company's fiscal 1994 financial statements,
dated August 29, 1994, included an explanatory paragraph that referenced to a
footnote discussing factors indicating substantial doubt as to the Company's
ability to continue as a going concern for a reasonable period of time beyond
December 31, 1994. Such note also discussed the Company's being in the
development stage and continuation of the Company being dependent upon obtaining
and maintaining adequate sources of capital or other financing arrangements,
evolving from the development stage and achieving sufficiently profitable
operations. Based on events subsequent to our original report, the reissued
fiscal 1994 financial statements accompanying this report do not contain such
footnote disclosures and an explanatory paragraph discussing such matters is no
longer required.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Communication Services, Inc. as of June 30, 1994 and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Coopers & Lybrand L.L.P.
Chicago, Illinois
August 29, 1994, except for matters discussed
in the third paragraph above, as to which the
date is September 15, 1995

F-3
<PAGE> 85

AMERICAN COMMUNICATIONS SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1)....................................... $ 20,350,791 $ 3,270,397
Restricted cash (note 1)................................................. 752,000 200,000
Trade accounts receivable, net of allowance for doubtful accounts of
$8,570................................................................. 350,436 --
Other current assets..................................................... 92,325 --
------------ -----------
Total current assets.............................................. 21,545,552 3,470,397
Networks, equipment and furniture, net (note 2)............................ 15,567,290 522,918
Deferred financing fees, net of accumulated amortization of $34,956 and
$124,021 at June 30, 1995 and 1994, respectively......................... 292,113 601,879
Other assets............................................................... 222,010 10,465
------------ -----------
Total assets...................................................... $ 37,626,965 $ 4,605,659
============ ===========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................................... $ 3,843,167 $ 492,332
Accrued financing fees................................................... 1,542,255 179,950
Accrued employee costs................................................... 836,509 117,176
Other accrued liabilities................................................ 1,269,484 355,547
Convertible bridge notes (note 4)........................................ -- 4,300,720
Secured note -- stockholder (note 4)..................................... -- 75,000
Secured convertible notes -- related party (note 4)...................... -- 606,640
Notes payable -- stockholders (note 4)................................... 146,083 627,775
------------ -----------
Total current liabilities......................................... 7,637,498 6,755,140
Long term liabilities:
Notes payable (note 4)................................................... 3,652,085 --
Dividends payable (note 3)............................................... 1,070,985 --
------------ -----------
Total liabilities................................................. 12,360,568 6,755,140
------------ -----------
Redeemable stock, options and warrants (notes 6 and 7)..................... 2,930,778 1,116,276
------------ -----------
Minority interest (note 4)................................................. 194,402 --
------------ -----------
Stockholders' equity (deficit) (note 6):
Preferred stock, no par value, non-voting, cumulative, 2,000 shares
authorized, 1,700 shares issued and outstanding at June 30, 1994,
liquidation value is equal to face value (note 12)..................... -- 1,700,000
Preferred stock, $1.00 par value, 186,664 shares designated as 9% Series
A-1 Convertible Preferred Stock authorized, issued and outstanding at
June 30, 1995 (notes 3 and 4).......................................... 186,664 --
Preferred stock, $1.00 par value, 277,500 shares authorized and
designated as 9% Series B Convertible Preferred Stock; 227,500 shares
issued and outstanding at June 30, 1995 (notes 3 and 5)................ 227,500 --
Common stock, no par value, 20,000,000 shares authorized, 2,755,005
shares issued and outstanding at June 30, 1994......................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 5,744,782
shares issued and outstanding at June 30, 1995 (notes 5, 6, and 12, and
13).................................................................... 56,827 --
Additional paid-in capital............................................... 42,411,448 1,080,566
Note receivable from sale of common stock................................ -- (2,750)
Accumulated deficit...................................................... (20,741,222) (6,043,573)
------------ -----------
Total stockholders' equity (deficit).............................. 22,141,217 (3,265,757)
------------ -----------
Commitments and contingencies (notes 1, 6, 7, 8, and 9)
Total liabilities, redeemable stock, options and warrants, minority
interest and stockholders' equity (deficit).............................. $ 37,626,965 $ 4,605,659
============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 86

AMERICAN COMMUNICATIONS SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Revenues........................................................... $ 388,887 $ --
------------- -----------
Operating expenses:
Network development and operations............................... 3,282,183 1,054,358
Selling, general and administrative.............................. 4,597,615 1,297,499
Noncash stock compensation (note 6).............................. 6,419,412 633,151
Depreciation and amortization.................................... 497,811 1,967
------------- -----------
Total operating expenses........................................... 14,797,021 2,986,975
Non-operating income (expenses):
Interest and other income........................................ 217,525 5,155
Interest and other expense....................................... (170,095) (332,997)
Debt conversion expense (note 4)................................. (385,000) (681,250)
------------- -----------
Loss before minority interest...................................... (14,745,704) (3,996,067)
Minority interest.................................................. 48,055 --
------------- -----------
Net loss........................................................... (14,697,649) (3,996,067)
Preferred stock dividends and accretion (note 3)................... (1,070,985) (48,670)
------------- -----------
Net loss to common stockholders.................................... $(15,768,634) $(4,044,737)
============= ===========
Net loss per common share.......................................... $ (3.30) $ (1.77)
============= ===========
Average number of common shares outstanding........................ 4,771,689 2,283,695
============= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 87

AMERICAN COMMUNICATIONS SERVICES, INC.

CONSOLIDATED STATEMENTS OF SERIES A PREFERRED STOCK AND STOCKHOLDERS'
EQUITY(DEFICIT)
YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
SERIES A SERIES A SERIES B COMMON
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK
------------------- ------------------- ----------------- ----------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------ ----------- ------ ----------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993............ 1,250 $ 960,061 -- $ -- -- $ -- -- $ -- 893,712
Series A Preferred Stock dividends
accrued.......................... -- 48,670 -- -- -- -- -- -- --
Exchange of Series A Preferred
Stock and common stock for
debt............................. (100) (73,378) -- -- -- -- -- -- (36,372)
Common stock exchanged for trade
payables (note 5)................ -- -- -- -- -- -- -- -- 151,588
Exchange of notes receivable for
Series A Preferred Stock and
common stock (note 4)............ 550 550,000 -- -- -- -- -- -- 628,577
Series A Preferred exchanged for
Preferred Stock.................. (1,700) (1,485,353) 1,700 1,700,000 -- -- -- -- --
Common stock issuance in reverse
acquisition...................... -- -- -- -- -- -- -- -- 562,500
Common stock issued to Bridge Loan
creditors (note 3)............... -- -- -- -- -- -- -- -- 150,000
Issuance of common stock to an
employee......................... -- -- -- -- -- -- -- -- 5,000
Issuance of common stock (note
3)............................... -- -- -- -- -- -- -- -- 400,000
Issuance of put right obligation
(note 7)......................... -- -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- -- --
------ ----------- ------ ----------- ------- -------- ------- -------- ---------
Balances at June 30, 1994............ -- -- 1,700 1,700,000 -- -- -- -- 2,755,005
Preferred Stock exchange (note
12).............................. -- -- (1,700) (1,700,000) -- -- -- -- 548,387
Set par value for common stock
(note 5)......................... -- -- -- -- -- -- -- -- --
Acquisition of Piedmont Teleport,
Inc. (note 13)................... -- -- -- -- -- -- -- -- 62,000
Write-off of note receivable for
common stock..................... -- -- -- -- -- -- -- -- --
Series A Preferred private
placement, net of related costs
(note 3)......................... -- -- -- -- 186,664 186,664 -- -- --
Series B Preferred private
placement, net of related costs
(note 3)......................... -- -- -- -- -- -- 227,500 227,500 --
Issuance of put right obligations
(notes 6 and 9).................. -- -- -- -- -- -- -- -- --
Cancellation of put right
obligation (note 7).............. -- -- -- -- -- -- -- -- --
Warrant and stock option exercises
and stock grant (note 6)......... -- -- -- -- -- -- -- -- 2,379,390
Establish limitation on common
stock put right obligation (note
6)............................... -- -- -- -- -- -- -- -- --
Series A Preferred Stock dividends
accrued (note 3)................. -- -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- -- --
------ ----------- ------ ----------- ------- -------- ------- -------- ---------
Balances at June 30, 1995............ -- $ -- -- $ -- 186,664 $186,664 227,500 $227,500 5,744,782
====== ========== ====== ========== ======= ======== ======= ======== ========

STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------
NOTES
COMMON RECEIVABLE EQUITY TOTAL
STOCK ADDITIONAL ON SALE OF IN STOCKHOLDERS'
------- PAID-IN COMMON COMBINED ACCUMULATED EQUITY
AMOUNT CAPITAL STOCK EQUITIES DEFICIT (DEFICIT)
------- ----------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993............ $ -- 190,919 (2,750) 35,000 (2,047,506) (1,824,337)
Series A Preferred Stock dividends
accrued.......................... -- (48,670) -- -- -- (48,670)
Exchange of Series A Preferred
Stock and common stock for
debt............................. -- (26,797) -- (35,000) -- (61,797)
Common stock exchanged for trade
payables (note 5)................ -- 132,636 -- -- -- 132,636
Exchange of notes receivable for
Series A Preferred Stock and
common stock (note 4)............ -- 550,000 -- -- -- 550,000
Series A Preferred exchanged for
Preferred Stock.................. -- (214,647) -- -- -- 1,485,353
Common stock issuance in reverse
acquisition...................... -- -- -- -- -- --
Common stock issued to Bridge Loan
creditors (note 3)............... -- 131,250 -- -- -- 131,250
Issuance of common stock to an
employee......................... -- 4,375 -- -- -- 4,375
Issuance of common stock (note
3)............................... -- 849,000 -- -- -- 849,000
Issuance of put right obligation
(note 7)......................... -- (487,500) -- -- -- (487,500)
Net loss........................... -- -- -- -- (3,996,067) (3,996,067)
------- ----------- ---------- -------- ---------- ------------
Balances at June 30, 1994............ -- 1,080,566 (2,750) -- (6,043,573) (3,265,757)
Preferred Stock exchange (note
12).............................. -- 1,700,000 -- -- -- --
Set par value for common stock
(note 5)......................... 33,033 (33,033) -- -- -- --
Acquisition of Piedmont Teleport,
Inc. (note 13)................... -- -- -- -- -- --
Write-off of note receivable for
common stock..................... -- (2,750) 2,750 -- -- --
Series A Preferred private
placement, net of related costs
(note 3)......................... -- 15,009,461 -- -- -- 15,196,125
Series B Preferred private
placement, net of related costs
(note 3)......................... -- 20,434,000 -- -- -- 20,661,500
Issuance of put right obligations
(notes 6 and 9).................. -- (53,303) -- -- -- (53,303)
Cancellation of put right
obligation (note 7).............. -- 487,500 -- -- -- 487,500
Warrant and stock option exercises
and stock grant (note 6)......... 23,794 349,030 -- -- -- 372,824
Establish limitation on common
stock put right obligation (note
6)............................... -- 4,510,962 -- -- -- 4,510,962
Series A Preferred Stock dividends
accrued (note 3)................. -- (1,070,985) -- -- -- (1,070,985)
Net loss........................... -- -- -- -- (14,697,649) (14,697,649)
------- ----------- ---------- --------- ----------- ------------
Balances at June 30, 1995............ $56,827 42,411,448 -- -- (20,741,222) 22,141,217
======= ========== ========= ========= =========== ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 88

AMERICAN COMMUNICATIONS SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................... $(14,697,649) $(3,996,067)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................ 497,811 1,967
Amortization of deferred financing fees.............................................. 323,900 124,020
Provision for doubtful accounts...................................................... 8,570 --
Loss attributed to minority interest................................................. (48,055) --
Noncash compensation, consultants and other expenses................................. 6,419,412 633,151
Noncash debt conversion expense...................................................... 385,000 681,250
Changes in operating assets and liabilities:
Trade accounts receivable.......................................................... (359,007) --
Restricted cash related to operating activities.................................... 200,000 (200,000)
Other current assets............................................................... (92,325) --
Other assets....................................................................... (26,545) (9,865)
Accounts payable................................................................... 3,170,885 472,973
Accrued financing fees............................................................. 1,542,255 --
Accrued employee costs............................................................. 719,333 117,176
Other accrued liabilities.......................................................... 1,055,673 312,748
------------- -----------
Net cash used in operating activities.................................................... (900,742) (1,862,647)
------------- -----------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport, Inc....................................... (19,135) --
Proceeds from sale of Wilmington Delaware Network...................................... -- 70,000
Purchase of furniture and fixtures..................................................... (306,454) (14,731)
Restricted cash related to network activities.......................................... (752,000) --
Network development costs.............................................................. (14,996,303) (505,214)
------------- -----------
Net cash used in investing activities.................................................... (16,073,892) (449,945)
------------- -----------
Cash flows from financing activities:
Issuance of notes payable.............................................................. 3,510,349 --
Payment of deferred financing fees..................................................... (310,175) (594,900)
Warrant and stock option exercises..................................................... 372,824 --
Issuance of common stock, net of offering costs........................................ -- 699,000
Issuances of Series A Preferred Stock, net of offering costs and conversion of bridge
financing............................................................................ 10,962,046 --
Issuances of Series B Preferred Stock, net of offering costs........................... 20,661,500 --
Issuance of bridge notes............................................................... -- 4,300,720
Issuance of secured convertible note................................................... -- 606,640
Issuance of secured note............................................................... -- 75,000
Issuance of notes payable -- stockholders.............................................. 250,000 641,606
Proceeds from sale of minority interest in subsidiaries................................ 242,457 --
Payments of notes payable -- stockholders.............................................. (481,692) (150,000)
Payments of bridge notes............................................................... (1,000,000) --
Payments of secured note............................................................... (75,000) --
Payments of secured convertible notes.................................................. (77,281) --
------------- -----------
Net cash provided by financing activities................................................ 34,055,028 5,578,066
------------- -----------
Net increase in cash and cash equivalents................................................ 17,080,394 3,265,474
Cash and cash equivalents beginning of year.............................................. 3,270,397 4,923
------------- -----------
Cash and cash equivalents end of year.................................................... $ 20,350,791 $ 3,270,397
============= ===========
Supplemental disclosure of cash flow information -- interest paid on all debt
obligations............................................................................ $ 219,554 $ 21,452
============= ===========
Supplemental disclosure of noncash investing and financing activities:
Series A Preferred exchanged for Preferred Stock......................................... $ -- $ 1,485,353
============= ===========
Dividends declared in connection with Series A Preferred Stock........................... $ 1,070,985 $ 48,670
============= ===========
Bridge financing, secured convertible notes, and notes payable -- stockholders converted
to equity in connection with private placements........................................ $ 4,080,079 $ --
============= ===========
Accrued redeemable warrant costs......................................................... $ (487,500) $ 487,500
============= ===========
Write off of note receivable from sale of common stock................................... $ 2,750 $ --
============= ===========
Preferred stock exchange................................................................. $ 1,700,000 $ --
============= ===========
Purchase of Piedmont Teleport, Inc. for common stock and related put right obligation.... $ 192,303 $ --
============= ===========
Negotiation of right-of-way agreement for option discount................................ $ 201,000 $ --
============= ===========
Common stock exchanged for trade payable................................................. $ -- $ 132,636
============= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 89

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994

(1) BASIS OF PRESENTATION AND RELATED MATTERS

Basis of Presentation

As of July 1, 1993, the Company's operations consisted of the activities of
American Lightwave, Inc. (ALI) and its subsidiaries, Alabama Lightwave, Inc.,
North Carolina Lightwave, Inc., Chicago Lightwave, Inc., Delaware Lightwave,
Inc. and Virginia Lightwave, Inc. combined with American Consolidated
Communications, Inc. (ACC) and its subsidiaries, Austin Lightwave, Inc., Los
Colinas Lightwave, Inc., Winston Salem Lightwave, Inc., and Phoenix Lightwave,
Inc. combined with a management company, American Communication Services, Inc.
(an Illinois Corporation) (ACS). These entities are collectively referred to
hereafter as "Combined ALW." Common ownership served as the basis for
combination. All significant intercompany accounts and transactions were
eliminated in the combination.

On September 14, 1993, a merger agreement and related agreements, among
other things, caused the merger of Combined ALW into Golf Links Ltd. (GLL), a
dormant publicly-held company, with GLL as the surviving corporation, in
exchange for newly issued shares of GLL's preferred and common stock. Under the
agreements, each outstanding common share of ALI was exchanged for 207.84044
shares of GLL common stock, and each outstanding share of ALI Series A Preferred
Stock was exchanged for one share of GLL preferred stock and the shares of ACC
and ACS were assigned to GLL. Additionally, notes receivable for common stock of
ACC totaling $50,000 were forgiven in conjunction with the merger. After the
merger, GLL changed its name to American Communication Services, Inc. (a
Colorado Corporation) (hereinafter "the Company" or "ACSI"). ACSI became a
Delaware corporation in September 1994.

For accounting purposes, and as required by Securities and Exchange
Commission Staff Accounting Bulletin 2A-2, the above transaction was treated as
a reverse acquisition. Combined ALW is deemed to have acquired GLL. As such, the
historical financial statements have been prepared on the historical basis of
Combined ALW and have been presented as if held by a holding company. The
transaction is presented as if the Company was capitalized with 1,637,500 shares
of common stock and 1,700 shares of preferred stock issued to its stockholders
which was consistent with the actual shares received in this transaction. The
stockholders' equity (deficit) of the Company retroactively reflects such
capitalization.

Additionally, the transaction has been recorded as if the Company issued
common stock to each of the stockholders of GLL in exchange for GLL shares on a
one-for-one basis to effect the merger on September 14, 1993. Since this
transaction was considered a reverse acquisition, it has been accounted for
using the purchase method. All material intercompany transactions and accounts
have been eliminated in consolidation.

As of and for the year ended June 30, 1995, the consolidated financial
statements include the accounts of American Communications Services, Inc. and
its subsidiaries, all of which, excluding the Louisville and Fort Worth
subsidiaries, are wholly owned. As discussed in note 4 to the consolidated
financial statements, the Company has a 92.75 percent ownership interest in
these two subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.

Business

The Company's efforts have been directed toward becoming a competitive
access provider (CAP) of business telecommunications services in selected
mid-sized cities. The Company builds and operates competitive access fiber optic
networks to provide local special access telecommunications services to major
businesses and government customers in selected target markets.

F-8
<PAGE> 90

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
The Company was considered a Development Stage Company through November
1994 as defined in Statement of Financial Accounting Standards (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises." In December of
1994, the Company recorded its first operating revenues.

During 1995, the Company raised capital in two separate private placements
of equity, a portion of which was used to repay debt (see notes 3 and 4). Also,
the Company obtained a financing facility from AT&T Credit Corporation, with
respect to equipment and working capital financing for up to $31.2 million, a
portion of which has been drawn upon as of June 30, 1995 (see notes 3 and 4).

The Company has utilized its existing equity and debt financing to enable
it to establish its initial five networks and support its operations through
1995 and believes that it can sustain its general operating expenses through the
end of fiscal 1996 through these sources. The Company is in the process of
seeking and obtaining additional funding, without which it will be forced to
severely curtail its operations and development activities, to enable it to
support its future operating requirements and further develop its next networks.

The Company is continuing discussions with a number of equity and debt
investors. While the success of these efforts is uncertain, the Company's
management believes that it will secure the necessary funding to carry out its
business plans.

Cash Equivalents

Cash equivalents generally consist of highly liquid debt instruments with
an initial maturity date of three months or less. At June 30, 1995, cash
equivalent consisting of overnight investments are $20,944,751, including
restricted cash of $752,000.

The Company has provided performance bonds and letters of credit in various
cities in connection with its operations, resulting in a restriction of cash
amounting to $752,000 and $200,000 at June 30, 1995 and 1994, respectively.

Networks, Equipment and Furniture

Networks, equipment and furniture are stated at cost less accumulated
depreciation. Costs capitalized during the network development stage include
expenses associated with network engineering, design and construction,
negotiation of rights-of-way, obtaining legal regulatory authorizations and the
net amount of interest costs associated with the network development. In 1995,
the Company has capitalized interest of approximately $536,000.

Provision for depreciation of networks, equipment and furniture is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month a network is substantially complete and available for use
and equipment and furniture are acquired.

The estimated useful lives of the Company's principal classes of assets are
as follows:

<TABLE>
<S> <C>
Networks:
Fiber optic cables and installation costs.................... 20 years
Telecommunications equipment................................. 3-7 years
Interconnection and collocation costs........................ 10 years
Leasehold improvements......................................... Life of lease
Furniture and fixtures......................................... 5 years
</TABLE>

F-9
<PAGE> 91

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
Deferred Financing Fees

Deferred financing fees include commitment fees and other costs related to
certain debt financing transactions and are being amortized using the effective
interest method over the initial term of the related debt.

Revenue Recognition

Revenue is recognized as services are provided and is recorded net of
interconnection payments to local exchange carriers. Billings to customers for
services in advance of providing such services are deferred and recognized as
revenue when earned.

Earnings (Loss) Per Common Share

The computation of earnings (loss) per common share is based upon the
weighted average number of common shares outstanding. For the per share
computation, accrued dividends on the Series A Preferred Stock have been added
to the reported net loss. The effect of including common stock options and
warrants as common stock equivalents would be anti-dilutive and is excluded from
the calculation of loss per common share.

Income Taxes

Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards and tax credit carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that all, or some
portion, of such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.

Reclassifications

Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation. Such reclassifications had no effect on net
loss or total stockholders' equity.

(2) NETWORKS, EQUIPMENT AND FURNITURE

Networks, equipment and furniture consists of the following at June 30:

<TABLE>
<CAPTION>
1995 1994
----------- --------
<S> <C> <C>
Networks and telecommunications equipment................... $15,570,450 $505,214
Furniture and fixtures...................................... 327,112 20,658
----------- --------
15,897,562 525,872
Less -- accumulated depreciation and amortization........... 330,272 2,954
----------- --------
Total, net of accumulated depreciation and amortization..... $15,567,290 $522,918
=========== ========
</TABLE>

(3) PRIVATE PLACEMENTS

In October 1994, the Company completed a private placement of its 9% Series
A Convertible Preferred Stock, $1.00 par value (the "Series A Preferred Stock").
There were 138,889 shares issued for cash at $90 per share with proceeds of
$10,962,046, net of placement agent commissions and related placement fees and
costs.

F-10
<PAGE> 92

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) PRIVATE PLACEMENTS -- (CONTINUED)
In addition, bridge financing was converted and several other obligations were
retired with proceeds of the offering. See note 4 to the consolidated financial
statements. Further, as discussed in note 6 to the consolidated financial
statements, certain parties obtained warrants to purchase shares of the
Company's common stock. In June 1995, the Series A Preferred Stock was exchanged
for an identical number of 9% Series A-1 Convertible Preferred Stock, $1.00 par
value (the Series A-1 Preferred Stock).

In June 1995, the Company completed a second private placement of its 9%
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9% Series
B-2 Convertible Preferred Stock (the "Series B-2 Preferred") and 9% Series B-3
Convertible Preferred Stock (the "Series B-3 Preferred"), each having a par
value of $1.00 per share (the Series B-1 Preferred, Series B-2 Preferred and
Series B-3 Preferred, hereafter collectively referred to as the "Series B
Preferred Stock"). There were 227,500 shares issued for cash at $100 per share
with proceeds of $20,661,500, net of placement agents commissions and related
placement fees and costs. An additional 50,000 shares of 9% Series B-4
Convertible Preferred Stock (the "Series B-4 Preferred Stock"), $1.00 par value,
will be issued for $5,000,000 in cash less commissions upon the achievement of
certain milestones. The Company currently expects to meet these requirements by
the end of the second quarter of 1996. Additionally, as discussed in note 6 to
the consolidated financial statements, certain parties obtained warrants to
purchase shares of the Company's common stock.

The Company's Preferred Stock and common stock vote as a single class
(except with respect to the election of directors and certain transactions and
matters) with the common stock entitled to one vote per share and the Preferred
Stock entitled to one vote for each share of common stock into which it is
convertible. At June 30, 1995, the outstanding Series A-1 Preferred Stock was
convertible into 7,466,560 shares of common stock and the outstanding Series B
Preferred Stock (all series) was convertible into 8,125,003 shares of common
stock. If issued, the Series B-4 Preferred Stock will be convertible into
1,785,714 shares of the Company's common stock.

The holders of common stock are entitled to elect two directors and the
holders of the Preferred Stock are entitled to elect an aggregate of seven
directors. In addition, certain transactions and matters require the consent of
the holders of at least the majority of the shares of Series A-1 Preferred Stock
voting as a separate class and a majority of the shares of Series B-1 Preferred
Stock voting as a separate class.

In connection with the Company's private placement offering of its Series
A-1 Preferred Stock, the Company has recorded $1,070,985 as a reduction in
additional paid-in capital, for the payment of anticipated dividends. The
associated investment agreement requires the Company to accrue dividends, on a
quarterly basis, at an annual rate of 9 percent of the face value of the Series
A-1 Preferred Stock. The Series B Preferred Stock, which was issued on June 26,
1995, will also accrue dividends on a quarterly basis, at an annual rate of 9
percent of their face value.

Although the Board of Directors of the Company has not taken any formal
action as of June 30, 1995, as a condition of the aforementioned agreement, the
dividends have been deemed declared and properly reflected in the accompanying
consolidated financial statements as of June 30, 1995. Pursuant to the
resolution authorizing the Series A-1 and B Preferred Stock, dividends accrued
shall be paid cumulatively, beginning December 31, 1997, or earlier upon
conversion. Upon such conversion prior to December 31, 1997, the Company may, in
lieu of accrued and unpaid dividends, issue promissory notes to the holders of
the Preferred Stock. The Company will issue promissory notes to the holders on
January 1, 1998 for dividends accrued, if conversion has not occurred.
Conversion may occur at any time at the holder's option or automatically, upon
certain qualifying issuance of common stock, liquidation, or occurrence of
certain triggering events. As of June 30, 1995, no conversions have occurred.

F-11
<PAGE> 93

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT

Long-term debt at June 30 consists of the following:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Convertible Bridge Notes, interest at 15%, maturing
December 31, 1994........................................... $ -- $4,300,720
Secured note -- stockholder, interest at 15%, maturing
December 31, 1994........................................... -- 75,000
Secured convertible notes -- related party at 15%, maturing
December 31, 1994........................................... -- 606,640
Notes payable -- stockholders at 10-15%, maturing September
15, 1995 and September 14 and 15, 1994, respectively........ 146,083 627,775
AT&T Credit Corporation equipment and working capital
financing facility.......................................... 3,652,085 --
---------- ---------
Total long-term debt.......................................... 3,798,168 5,610,135
Less current portion.......................................... 146,083 5,610,135
---------- ---------
$3,652,085 $ --
========== =========
</TABLE>

Principal payments for each of the years from 1996 to 2000 and thereafter,
are due as follows at June 30, 1995:

<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------------------------- ----------
<S> <C>
1996............................................. $ 146,083
1997............................................. 198,715
1998............................................. 190,946
1999............................................. 376,331
2000............................................. 546,180
Thereafter....................................... 2,339,913
----------
$3,798,168
==========
</TABLE>

Convertible Bridge Notes

On June 28, 1994, the Company issued a total of $4,300,720 principal of its
15 percent convertible bridge notes due December 31, 1994, including $1,300,720
issued to then existing stockholders. During 1995, the holders of $3,300,720 of
these convertible bridge notes converted the notes plus accrued interest thereon
of $35,754, to 37,073 shares of Series A Preferred Stock. The remaining
$1,000,000 principal amount was retired by cash payment from the proceeds of the
Series A Preferred Stock offering (see note 3). The Company recorded noncash
debt conversion expense of $231,000 associated with the related unamortized
financing fees.

Secured Note -- Stockholder

On May 25, 1994, the Company issued a Promissory Note in the principal
amount of $75,000 to a stockholder with an interest rate of 15 percent per
annum, due December 31, 1994. As additional consideration, the Company issued
6,923 shares of common stock. In October 1994, the cash proceeds of the Series A
Preferred Stock private placement offering were used to retire the outstanding
principal and accrued interest associated with this secured note (see note 3).

F-12
<PAGE> 94

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT -- (CONTINUED)
Secured Convertible Notes

At June 30, 1994, the Company had outstanding loans from affiliates with an
aggregate principal balance of $606,640, which were notes secured by certain
assets of the Company. These loans bore interest at 15 percent per annum and had
a scheduled maturity date of December 31, 1994.

In October 1994, the holders of $529,359 principal amount of these notes,
plus accrued interest thereon of $29,368, converted the notes for 7,924 shares
of Series A Preferred Stock. The remaining principal on the secured convertible
notes of $77,281 was retired by a cash payment from the proceeds of the Series A
Preferred Stock private placement offering (see note 3). The Company recorded
noncash debt conversion expense of $154,000 equal to the premium to induce
conversion.

Demand Note

In August 1994, the Company borrowed $250,000, at a rate of 15 percent per
annum from an affiliate that was payable on demand. In October 1994, this note
was converted for 2,778 shares of Series A Preferred Stock (see note 3).

Notes Payable -- Stockholders

At June 30, 1994, the Company had a total of $627,775 in notes payable to
stockholders. Such notes payable included $300,000 in ACSI Bridge Notes due
September 14, 1994, $252,775 in ALI Senior Subordinated Notes Payable (Senior
Notes) including accrued interest due September 15, 1994, that were convertible
into ACSI Bridge Notes, and a note payable to a stockholder of $75,000, that was
paid by the Company on July 6, 1994. The ACSI Bridge Notes and the Senior Notes
bore interest at 10 percent per annum while the note payable to stockholder bore
interest at 15 percent per annum. Additionally, at June 30, 1994, the Senior
Notes had attached warrants to purchase a total of 12,500 shares of ACSI common
stock for every $50,000 of principal amount exercisable at $.875.

The aforementioned ACSI Bridge Notes and Senior Notes due September 14,
1994 and September 15, 1994, respectively, were all, with the exception of
$146,083 principal amount, paid in July and August 1994. The maturity date for
the remaining $146,083 was extended until September 14, 1995.

At June 30, 1993, ALI had short-term notes payable due to stockholders (ALI
Notes Payable) totaling $569,994. The notes bore interest at various rates
ranging from 8 to 10 percent, which was payable quarterly. Immediately prior to
the reverse acquisition, as described in note 1, a stockholder exchanged the
remaining balance on these ALI Notes Payable totaling $550,000 for 550 shares of
no par Series A Preferred Stock and 628,577 shares of common stock. The Company
recorded noncash debt conversion expense of $550,000 related to the exchange
transaction.

Immediately prior to the September 14, 1993 reverse acquisition, ALI issued
$600,000 of Senior Unsecured Promissory Notes (ALI Bridge Notes), which bore
interest at 10 percent, payable quarterly. The ALI Bridge Notes had attached
warrants to purchase 12,500 shares of common stock of ACSI, exercisable at $.875
per share, for every $50,000 of principal amount. The ALI Bridge Notes carried
an initial term of one year. In conjunction with the reverse acquisition, the
ALI Bridge Notes were converted into ACSI Bridge Notes (ACSI Bridge Notes). As
an inducement to convert, the holders of the ALI Bridge Notes received, at no
cost, 12,500 shares of ACSI common stock for every $50,000 of principal amount.
The Company recorded a noncash debt conversion expense of $131,250 in 1994
associated with the debt conversion. During 1994, the Company made principal
payments totaling $150,000 to the holders of such ACSI Bridge Notes. The Company
also issued 400,000 shares of common stock at $2.50 per share for cash totaling
$850,000 in

F-13
<PAGE> 95

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT -- (CONTINUED)
satisfaction of $150,000 of such ACSI Bridge Notes. The issuance of the common
stock has been recorded as an increase in additional paid-in capital net of
offering costs totaling $151,000.

Additionally, in anticipation of the September 14, 1993 reverse
acquisition, certain stockholders converted 100 shares of ALI Series A Preferred
Stock, 36,372 shares of ALI common stock, and 3,325 shares of ACC common stock
to Senior Notes with principal value of $135,175. The Senior Notes bore interest
at 10 percent and matured in one year. Stockholders also exchanged short-term
notes payable totaling $107,083 for Senior Notes.

AT&T Credit Corporation Equipment and Working Capital Financing Facility

The Company has an arrangement for an anticipated $31,200,000 secured
equipment and working capital financing facility with AT&T Credit Corporation.
Each network is treated as a separate loan facility which has a maturity date of
nine years after the closing of the facility. Each loan shall bear interest at a
rate per annum equal to a fixed rate or a variable rate, computed on the basis
of a 360 day year compounded monthly. The variable rate is based upon the
average offering rate for three month commercial paper. The fixed rate is based
upon the "ask yields" of United States seven year treasury notes.

Interest on each loan shall be payable quarterly in arrears on each payment
date providing that no event of default has occurred. All of the principal and
related interest payments are deferred for twenty-four months from the date of
closing. The Company is responsible for an interest deferral rate ranging from 5
to 5.75 percent.

The Company's subsidiaries, which have built and are currently operating
networks in Louisville, Kentucky, Fort Worth, Texas, and Greenville and
Columbia, South Carolina, have received loan commitments totaling approximately
$19.8 million under this arrangement, of which approximately $3,650,000,
including interest of approximately $142,000, which is accruing at rates ranging
from 11.76 to 13.59 percent, has been drawn down at June 30, 1995. The Company
also sold a 7.25 percent ownership interest in the Louisville and Fort Worth
subsidiaries to AT&T Credit Corporation during 1995. Pursuant to this facility,
subsequent to June 30, 1995, the Company also sold a 7.25 percent ownership
interest in its Greenville and Columbia, South Carolina subsidiaries to AT&T
Credit Corporation and received additional loan commitments from AT&T Credit
Corporation totalling $5.5 million for its El Paso, Texas network on
substantially identical terms.

The AT&T Credit Corporation facility is subject to certain conditions with
respect to the funding of each city's network, including the execution of
definitive loan documents, the completion of due diligence and submission of
business plans satisfactory to the lender for each network to be funded.

The provisions of the facility restrict the subsidiaries' incurrence of
liens and other indebtedness, sale of assets, dividend payments, and other
activities not designated in the business plan. Additionally, timely reporting
of financial and other non-financial information is required as well as
maintaining the established minimum cash flow requirements, fixed charge
coverage, and debt service reserve. At June 30, 1995, the Company and its
subsidiaries were in compliance with the covenants contained in the agreements.

Further, pursuant to the facility, the Company is required to purchase
certain minimum levels of equipment from AT&T, an affiliate of AT&T Credit
Corporation, at prevailing market prices. At June 30, 1995, the Company is
required to purchase approximately $2.3 million in AT&T equipment over the next
two years. For the year ended June 30, 1995, the Company purchased approximately
$1,775,000 of telecommunications equipment from AT&T, which amount is recorded
as networks, equipment and furniture within the accompanying consolidated
financial statements.

F-14
<PAGE> 96

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) STOCKHOLDERS' EQUITY

Common Stock

In 1995, the Company established a par value of $.01 for its issued and
outstanding common stock.

In 1994, prior to the September 14, 1993 reverse acquisition (see note 1),
the Company issued 151,588 shares of common stock in settlement of $132,636 in
liabilities payable for services rendered. GLL issued 212,500 shares of common
stock in payment of $185,938 in services to effect the reverse acquisition. This
amount was charged to paid-in-capital.

Additionally, in October 1993, the Company approved the issuance of a total
of 5,000 shares of the common stock of the Company to an employee in
consideration for services performed. Noncash compensation expense recorded for
the transaction was $4,375.

Preferred Stock

Pursuant to the Series B Preferred Stock offering, as described in note 3,
four classes of Series B Preferred Stock have been issued. The composition of
the Series B Preferred Stock at June 30, 1995 is as follows:

<TABLE>
<S> <C>
Preferred Stock, $1.00 par value, 100,000 shares designated as 9% Series
B-1 Convertible Preferred Stock authorized, issued and outstanding...... $100,000
Preferred Stock, $1.00 par value, 102,500 shares designated as 9% Series
B-2 Convertible Preferred Stock authorized, issued and outstanding...... 102,500
Preferred Stock, $1.00 par value, 25,000 shares designated as 9% Series
B-3 Convertible Preferred Stock authorized, issued and outstanding...... 25,000
Preferred Stock, $1.00 par value, 50,000 shares authorized and designated
as 9% Series B-4 Convertible Preferred Stock; none issued and
outstanding............................................................. --
--------
Total..................................................................... $227,500
========
</TABLE>

(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS

The Company has a stock option plan which provides for the granting of
options to certain officers, employees, and affiliated members of the Company to
purchase shares of its common stock within prescribed periods at a price which
generally equals the fair market value on the date of grant.

In 1994, the Company entered into employment agreements with five executive
officers. In 1995, the employment agreements were amended. As of June 30, 1995,
pursuant to the agreements, as amended, such executive officers have been
granted options to purchase 3,999,835 shares of common stock of the Company at
exercise prices ranging from $.875 to $2.80 per share. The options vest at
various dates as specified in the employment agreements with 3,919,835 of the
options vesting on specific dates ranging from October 31, 1993 to March 31,
1998, and 80,000 of such options vesting upon the occurrence of certain
specified performance milestones from August 31, 1995 through September 1, 1996.
When the employment of these individuals with the Company terminates, these
individuals have the right to sell certain of their shares to the Company (the
put right) for a price equal to fair market value. On June 26, 1995, the
employment agreements were amended to limit the purchase price paid by the
Company pursuant to the put right to a maximum of $2,500,000, which amount is
subject to further reduction based on the employees' sales of stock. As of June
30, 1995 and 1994, 2,586,487 and 549,966 of the options are vested and
exercisable, respectively. Noncash compensation expense associated with these
agreements amounted to approximately $6,382,000 and $628,000, in 1995 and 1994,
respectively.

F-15
<PAGE> 97

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)
During 1995 and in connection with the Series A and Series B Preferred
Stock private placements and related bridge note conversions, warrants for
4,258,810 shares of common stock were issued at prices ranging from $.01 to
$3.10. Subsequently, 2,299,967 in such options and warrants were exercised
during the year for proceeds totaling approximately $305,000.

The Company has also issued 500,000 options to a supplier to purchase stock
at 90 percent of the fair value at the date of exercise. Such options give the
supplier the right to sell the stock acquired back to the Company at fair value.
None of the options have been exercised to date and they expire in June of 1998.
The Company's obligation with respect to the options is included in redeemable
stock, options, and warrants in the accompanying consolidated financial
statements.

Stock option activity for the years ended June 30, 1995 and 1994 is as
follows:

<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Balances, June 30, 1993.................................... -- $ --
Granted.................................................. 858,875 .875 - 3.10
Cancelled................................................ -- --
--------- -----------
Balances, June 30, 1994.................................... 858,875 .875 - 3.10
Granted.................................................. 4,935,314 .875 - 4.00
Exercised................................................ -- --
Cancelled................................................ (100,000) 2.25
--------- -----------
Balances, June 30, 1995.................................... 5,694,189 $ .875 - 4.00
========= ===========
</TABLE>

In addition to the Company's stock option plan, several options and
warrants to purchase the Company's stock have been issued pursuant to various
consulting agreements, bridge note conversions and in connection with the
Company's Series A Preferred Stock and Series B Preferred Stock private
placements.

At June 30, 1994, 512,194 warrants pursuant to consulting and subordinated
note agreements, granted at $.875 during 1994, were outstanding. Pursuant to
these warrant agreements, an additional 2,109 warrants were issued during 1995.
Additionally, during 1995, 33,412 of such warrants were canceled and 72,500 of
such warrants were exercised. Proceeds to the Company upon the exercise of such
warrants approximated $64,000.

At June 30, 1995, the remaining warrants outstanding are as follows:

<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Pursuant to consulting and subordinated note agreements,
expiration through September 13, 1996.................... 408,391 $ 0.875
Series A and Series B Preferred Stock placements........... 1,958,843 .01 - 3.10
--------- -----------
Total...................................................... 2,367,234 $ .01 - 3.10
</TABLE>

Subsequent to June 30, 1995, warrants issued in connection with the Series
B private placement for 108,268 shares were exercised at $.01 per share.

(7) COMMITMENTS AND CONTINGENCIES

In October 1993, the Company executed a financial consulting and advisory
agreement with a related party for a period of six months. In consideration, the
related party received warrants to purchase 300,000 shares of ACSI common stock
exercisable at $.875 per share if a future equity financing was successfully
completed. The related party had the right to resell the shares to ACSI for
$2.50 per share two years from the date of the agreement. At June 30, 1994, the
Company provided an accrual of $487,500 for this redemption privilege at the
redemption price net of the exercise price. In June 1995, the Company was
released from its

F-16
<PAGE> 98

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
obligations to repurchase the shares. Accordingly, as of June 30, 1995, the
$487,500 share value has been transferred from redeemable stock, options, and
warrants to additional paid-in-capital.

As of June 30, 1995, the Company has signed nonexclusive license agreements
with various utility and inter exchange carrier companies, including an
affiliate of one of the country's three largest long distance carriers, to
install and maintain fiber cable systems for the Company's use for periods up to
15 years or more, upon exercising of extensions available to the parties. Under
these agreements, the Company has use of these rights-of-way for its
telecommunications systems, and may be entitled to certain payments for
providing telecommunications service, subject to its satisfactory performance of
certain agreed upon requirements.

(8) LEASES

The Company is obligated under various noncancelable operating leases for
office and node space as well as office furniture. The minimum future lease
obligations under these noncancelable operating leases as of June 30, 1995 are,
approximately, as follows:

<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------------------------- ----------
<S> <C>
1996............................................. $ 787,000
1997............................................. 719,000
1998............................................. 604,000
1999............................................. 562,000
2000............................................. 569,000
Thereafter....................................... 888,000
----------
$4,129,000
==========
</TABLE>

Rent expense for the years ended June 30, 1995 and 1994 was approximately
$200,000 and $48,000, respectively.

(9) RELATED-PARTY TRANSACTIONS

The Company and all of its subsidiaries are parties to a management
services agreement whereby the Company renders financial, legal, and other
administrative and network support services in connection with the development
and operational needs of each subsidiary. A fee, based on direct and allocated
costs, is billed monthly. The term of the agreement is initially 15 years and is
renewed automatically for successive 5 year terms. During 1995 and 1994,
intercompany billings for the aforementioned arrangement were approximately $2.3
million and $0, respectively, all of which have been eliminated in
consolidation.

On June 16, 1994, the Company entered into a financial consulting agreement
for capital raising activities with an entity controlled by significant
stockholders of the Company. Under this agreement, the Company paid $153,750 for
consulting services rendered through the date of the agreement relating to
placement of the Convertible Bridge Notes. Additionally, the Company agreed to
pay a $7,500 monthly consulting fee for a two year period beginning on the
closing date of the first private placement. During 1995, the Company paid
$67,500 under this arrangement.

F-17
<PAGE> 99

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) RELATED-PARTY TRANSACTIONS -- (CONTINUED)
exercise of the options will be priced at $2.25 per share and the shares issued
will have piggy back registration rights.

An entity controlled by significant stockholders of the Company provided
office space and certain administrative personnel through February 1, 1994. The
Company was charged for these items based on a percentage of space occupancy and
personnel time usage. Total charges for the year ended June 30, 1994 were
$78,840. The Company incurred no such costs during 1995.

(10) INCOME TAXES

Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities at June 30 are as follows:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs...................... $4,163,941 $1,898,244
Stock options -- noncash compensation..................... 2,768,488 251,510
Net operating loss carryforwards.......................... 1,149,755 225,573
Other accrued liabilities................................. 454,391 --
---------- ----------
Total gross deferred tax assets............................. 8,536,575 2,375,327
Less: valuation allowance................................. 8,291,380 2,375,327
---------- ----------
Net deferred tax assets..................................... 245,195 --
Deferred tax liabilities -- fixed assets depreciation and
amortization.............................................. 245,195 --
---------- ----------
Net deferred tax assets (liabilities)....................... $ -- $ --
========== ==========
</TABLE>

The valuation allowance for deferred tax assets as of July 1, 1994 was
$2,375,327. The net change in the total valuation allowance for the year ended
June 30, 1995 was an increase of $6,161,248. The valuation allowances at June
30, 1995 and 1994 are a result of the uncertainty of the ultimate utilization of
the tax benefits related to the deferred tax assets. The utilization of the tax
benefits associated with net operating losses of approximately $2,927,000 and
$564,000 at June 30, 1995 and 1994, respectively, is dependent upon the
Company's ability to generate future taxable income. The net operating loss
carryforward period expires commencing in 2008 through the year 2010. Further,
as a result of certain financing and capital transactions, an annual limitation
on the future utilization of the net operating loss carryforward may have
occurred.

No income tax provision has been provided for the years ended June 30, 1995
and 1994 as the aforementioned deferred tax assets have provided no tax benefit.

(11) MAJOR CUSTOMERS

During 1995, special access services provided by the Company to three long
distance carriers accounted for 85 percent of total revenues. No revenues were
recorded in 1994.

(12) EXCHANGE OF STOCK

On June 1, 1994, the Company entered into an agreement to exchange 548,387
shares of ACSI Common Stock for all 1,700 issued and outstanding shares of ACSI
Preferred Stock. This transaction was completed in July 1994.

F-18
<PAGE> 100

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) ACQUISITION

On September 12, 1994 the Company executed a Stock Purchase Agreement with
Piedmont Teleport, Inc. under which the Company acquired certain assets,
liabilities, and certain right-of-way agreements for $20,000 in cash and the
issuance of 62,000 shares of the Company's common stock. The Company accounted
for the acquisition as a purchase and, accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at September 12, 1994. The seller has the right to put
these shares back to the Company on November 1, 1996 for a price of $2.50 per
share. Accordingly, this obligation is recorded as redeemable stock in the
accompanying consolidated financial statements.

F-19
<PAGE> 101

AMERICAN COMMUNICATIONS SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

JUNE 30, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 20,350,791 $154,454,550
Restricted cash............................................... 752,000 1,452,000
Accounts receivable, net...................................... 350,436 598,799
Other current assets.......................................... 92,325 729,719
------------ ------------
Total current assets.................................. 21,545,552 157,235,068
------------ ------------
Networks furniture and equipment, net........................... 15,567,290 42,737,680
Deferred financing fees and other assets........................ 514,123 8,005,863
------------ ------------
Total assets.......................................... $ 37,626,965 $207,978,611
============ ============
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY
INTEREST, AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................................. $ 3,843,167 $ 1,749,314
Accrued liabilities........................................... 3,648,248 1,801,145
Notes payable -- stockholders................................. 146,083 103,169
------------ ------------
Total current liabilities............................. 7,637,498 3,653,628
------------ ------------
Long term liabilities
Notes payable................................................. 3,652,085 14,054,484
Senior discount notes (due 2005).............................. -- 64,571,366
Senior discount notes (due 2006).............................. -- 100,452,832
Other long term liabilities................................... -- 670,633
Dividends payable............................................. 1,070,985 3,918,681
------------ ------------
Total liabilities..................................... 12,360,568 187,321,624
------------ ------------
Redeemable stock, options and warrants.......................... 2,930,778 2,457,337
------------ ------------
Minority interest............................................... 194,402 384,515
------------ ------------
Stockholders' equity
Preferred stock, $1.00 par value, 186,664 shares designated as
9% Series A-1 Convertible Preferred Stock, authorized,
issued and outstanding..................................... 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized
and designated as 9% Series B Convertible Preferred Stock;
227,500 shares issued and outstanding...................... 227,500 277,500
Common stock, $0.01 par value, 75,000,000 shares authorized,
5,744,782 and 6,555,455 shares, respectively, issued and
outstanding at June 30, 1995 and March 31, 1996............ 56,827 64,934
Additional paid-in capital.................................... 42,411,448 56,213,198
Accumulated deficit........................................... (20,741,222) (38,927,161)
------------ ------------
Total stockholders' equity............................ 22,141,217 17,815,135
------------ ------------
Commitments and contingencies...................................
Total Liabilities, redeemable stock, options and warrants,
minority interest and stockholders' equity.................... $ 37,626,965 $207,978,611
============ ============
</TABLE>

June 30, 1995, information was condensed from audited financial statements.
See accompanying notes to unaudited condensed consolidated interim financial
statements.

F-20
<PAGE> 102

AMERICAN COMMUNICATIONS SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE NINE MONTH
PERIODS ENDED PERIODS ENDED
--------------------------- ---------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1995 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues........................... $ 87,385 $ 816,639 $ 95,631 $ 1,895,812
----------- ----------- ---------- -----------
Operating expenses:
Network development and
operations.................... 585,431 1,954,514 1,220,125 4,796,067
Selling, general and
administrative................ 1,373,368 2,650,263 2,615,921 5,929,996
Noncash stock compensation....... 4,257,464 1,985,765 4,866,095 3,190,184
Depreciation and amortization.... 118,093 630,004 140,172 1,413,861
----------- ----------- ---------- -----------
Total operating expenses........... 6,334,356 7,220,546 8,842,313 15,330,108
Non-operating (income) expenses:
Interest and other income........ (93,664) (661,313) (189,474) (1,438,817)
Interest and other expense....... 85,897 3,500,624 214,900 6,374,884
Debt conversion cost............. 5,000 0 584,985 0
----------- ----------- ---------- -----------
Loss before minority interest...... 6,244,204 9,243,218 9,357,093 18,370,363
Minority interest.................. (4,495) (102,074) (16,155) (190,668)
----------- ----------- ---------- -----------
Net loss........................... 6,239,709 9,141,144 9,340,938 18,179,695
Preferred stock dividends and
accretions....................... 628,644 955,489 628,644 2,847,696
----------- ----------- ---------- -----------
Net loss to common/common
equivalent shareholders.......... $6,868,353 $10,096,633 $9,969,582 $21,027,391
=========== =========== ========== ===========
Net loss per common share.......... $ (1.31) $ (1.54) $ (2.17) $ (3.48)
=========== =========== ========== ===========
Average number of common/common
equivalent shares outstanding.... 5,245,104 6,536,722 4,590,182 6,046,136
=========== =========== ========== ===========
</TABLE>

See accompanying notes to unaudited condensed consolidated interim financial
statements.

F-21
<PAGE> 103

AMERICAN COMMUNICATIONS SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED ENDED
------------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1995 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss....................................... $(6,239,709) $ (9,141,144) $(9,340,938) $ (18,179,695)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 118,093 630,044 140,172 1,413,861
Noncash debt conversion expense.............. 5,000 -- 584,985 --
Noncash interest expense..................... -- 3,500,625 -- 6,374,884
Provision for doubtful accounts.............. -- 30,691 -- 59,697
Loss attributable to minority interest....... (4,495) (102,074) (16,155) (190,668)
Noncash compensation......................... 4,257,464 1,985,765 4,866,095 3,190,184
Changes in operating assets and liabilities:
Restricted cash related to operating
activities............................... 104,069 --
Trade accounts receivable.................. (76,003) (72,826) (83,499) (308,060)
Other current assets....................... -- (184,526) -- (637,394)
Other assets............................... (55,139) -- (238,893) --
Accounts payable........................... 538,415 (3,296,545) 1,389,375 (2,093,853)
Other accrued liabilities.................. 292,335 (1,526,443) 528,051 (1,847,103)
----------- ------------- ----------- -------------
Net cash provided by (used in) operating
activities..................................... (1,059,970) (8,176,474) (2,170,807) (12,218,147)
----------- ------------- ----------- -------------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport.... -- -- (20,000) --
Investment in office equipment................. (14,812) (282,320) (73,492) (1,710,364)
Investment in network, equipment and
software..................................... (4,047,986) (10,297,369) (10,059,373) (26,526,520)
Investment in Marketable Securities --
available for sale........................... -- -- -- --
Restricted cash related to network
activities................................... -- -- (475,000) (700,000)
----------- ------------- ----------- -------------
Net cash used in investment activities........... (4,062,798) (10,579,689) (10,627,865) (28,936,884)
----------- ==----------- ----------- -------------
Cash flows from financing activities:
Issuance of preferred stock, net of offering
costs and conversion of bridge financing..... -- -- 11,371,912 4,725,318
Deferred financing fees........................ -- (2,588,305) -- (7,839,110)
Issuance of Senior discount notes and
warrants..................................... -- 65,565,429 -- 166,884,179
Issuance of notes payable...................... 752,501 2,997,811 1,640,784 11,176,201
Warrant or stock option exercises.............. 41,763 60,674 346,326 79,811
Proceeds from sale of minority interest
in subsidiaries.............................. -- -- 109,475 378,474
Issuance of stockholder notes payable.......... -- -- 250,000 --
Payment of notes payable....................... -- -- (1,633,973) (146,083)
Payments of capital lease obligation........... (3,617) -- (17,448) --
----------- ------------- ----------- -------------
Net cash flow from financing activities.......... 790,647 66,035,609 12,067,076 175,258,790
----------- ------------- ----------- -------------
Net increase/(decrease) in cash and cash
equivalents.................................... (4,332,121) 47,279,446 (731,596) 134,103,759
Cash and cash equivalents -- beginning of
period......................................... 6,870,922 107,175,104 3,270,397 20,350,791
----------- ------------- ----------- -------------
Cash and cash equivalents -- end of period....... $ 2,538,801 $ 154,454,550 $ 2,538,801 $ 154,454,550
=========== ============= =========== =============
Supplemental disclosure of cash flow information:
Interest paid on all indebtedness.............. 218,575 -- 346,273 --
Supplemental disclosure of noncash investing and
financing activities:
Excludes furniture acquired under capital
leases....................................... -- -- $ 50,785 --
===========
Dividends accrued in connection with
preferred stock.............................. $ 628,644 $ 955,489 $ 628,644 $ 2,847,696
=========== ============= =========== =============
Bridge financing converted to equity in
connection with private placement............ -- -- $ 4,080,079 --
===========
</TABLE>

See accompanying notes to unaudited condensed consolidated interim financial
statements.

F-22
<PAGE> 104

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION AND RELATED MATTERS

Basis of Presentation

As of the end of and for the three and nine month periods ended March 31,
1996, the accompanying unaudited condensed consolidated interim financial
statements include the accounts of American Communications Services, Inc. and
its subsidiaries, all of which, excluding the Louisville, Kentucky, Fort Worth
and El Paso, Texas, and Columbia and Greenville, South Carolina subsidiaries,
are wholly owned (the Louisville, Kentucky subsidiary was also not wholly owned
for the three month period ending March 31, 1995). The Company has a 92.75
percent ownership interest in these subsidiaries. Such statements, including
comparative information for the three and nine month periods ended March 31,
1995, where applicable, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and item 310(b) of Regulation S-B. The unaudited
condensed consolidated statements should be read in conjunction with the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended June 30, 1995 filed with the
Securities and Exchange Commission (the "SEC") on October 13, 1995, as amended.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
material intercompany accounts and transactions have been eliminated in
consolidation. Results for the interim periods are not indicative of the results
to be expected for the full year.

Business

American Communications Services, Inc. ("ACSI" or the "Company") is a
competitive local exchange carrier ("CLEC") that constructs and operates digital
fiber optic networks and offers local telecommunications services to long
distance companies (interexchange carriers or "IXCs") and business and
government end users in the southern US.

The Company currently provides non-switched dedicated services including
special access, switched transport and private line services. These services
generally are offered by the Company in competition with incumbent local
exchange telephone companies ("ILECs") and are delivered with a high level of
network reliability. The Company also offers high speed data services including
ATM, high speed Local Area Network ("LAN") to LAN applications and multiple
internet services. In addition to the data and non-switched dedicated services,
the Company has begun offering on a limited basis enhanced voice messaging
services to small and mid-size business and government end users. Successful
marketing of these enhanced voice messaging and high-speed data services will
not only provide the Company with increased revenues, but also with an expanded
end user customer base and relevant marketing experience that can be leveraged
into the offering of local switched services.

As of March 31, 1996, ACSI had eleven operational networks and an
additional nine networks under construction, most of which are expected to be
operational by mid-1996. As of March 31, 1996, ACSI had applied for authority to
provide switched local exchange telecommunications services in Alabama, Arizona,
Arkansas, Georgia, Maryland, Nevada and New Mexico. Since March 31, 1996, the
Company has filed for switched services authority in Texas. As of March 31,
1996, ACSI had received authority to provide intrastate dedicated services in
Alabama, Arkansas, Georgia, Kentucky, New Mexico, Nevada, South Carolina and
Texas and had an application pending in Mississippi. Since March 31, 1996, the
Company has filed for intrastate dedicated services in Louisiana. In Tennessee,
ACSI has received authority to provide intrastate telecommunications services
including both switched local exchange and dedicated telecommunications
services. The Company intends to have 30 networks in service or under
construction during the third calendar quarter of 1996, with all 30 networks
operational by mid-1997. To date, management believes that it has been able to
deploy its capital most efficiently by constructing, rather than acquiring,
fiber optic networks. By

F-23
<PAGE> 105

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
constructing all of its networks, ACSI believes it has realized significant cost
savings, created considerable networking efficiencies and ensured quality,
reliability and high operating standards.

Financing Activities

On March 26, 1996 the Company completed the private placement of
$120,000,000 of 12 3/4% Senior Discount Notes due 2006 (the "2006 Notes") under
Rule 144A of the Securities Act of 1933, as amended (the "Act"). The Company
received net proceeds of approximately $61,800,000 from the sale of the 2006
Notes. The Company has commenced an exchange offer pursuant to a registration
statement on Form S-4 filed by the Company with the SEC pursuant to which the
holders of the original 2006 Notes are entitled to exchange such 2006 Notes for
newly-issued notes which are identical to the original 2006 Notes and which,
with certain exceptions, are freely transferable under the Act. The exchange
offer expires June 25, 1996. The 2006 Notes will accrete at a rate of 12 3/4%
compounded semi-annually, to an aggregate principal amount of $120,000,000 by
April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at the annual
rate of 12 3/4% and will be payable in cash semi-annually on April 1 and October
1, commencing on October 1, 2001. The Notes will mature on April 1, 2006.

On November 14, 1995, the Company completed a private offering of 190,000
Units (the "Units") consisting of $190,000,000 principal amount of 13% Senior
Discount Notes due 2005 (the "2005 Notes") and warrants to purchase 2,432,000
shares of the Company's common stock at a price of $7.15 per share (the
"Warrants"). On March 27, 1996, the Company completed an exchange offer of
newly-issued 2005 Notes for all of the original 2005 Notes pursuant to a
registration statement on Form S-4 filed with the SEC. The new 2005 Notes are
identical to the original 2005 Notes and, with certain exceptions, are freely
transferable under the Act. Resale of the Warrants, and the issuance of common
stock upon exercise of the Warrants, have been registered on a registration
statement on Form S-3 filed with the SEC. The 2005 Notes will accrete to an
aggregate principal amount of $190,000,000 by November 1, 2000, after which cash
interest will be due on a semi-annual basis. The Company received net proceeds
of approximately $96,826,000 from the sale of the Units. At the time of the
closing of the Units, the Company also received net proceeds of approximately
$4,725,000 from the private sale to ING Equity Partners, L.P.I. ("ING") of
50,000 shares of its 9% Series B-4 Convertible Preferred Stock (the "Series B-4
Preferred Stock") and the exercise by ING of warrants to purchase 214,286 shares
of common stock pursuant to the June 1995 Series B Convertible Preferred Stock
private placement. The Company will continue to use the proceeds from the sale
of the 2005 Notes and Warrants and the Series B-4 Preferred Stock and the
proceeds of the 2006 Notes to complete its 30 city business plan, as discussed
below, and to fund negative operating cash flow until break-even.

Other Information

In February, 1996, the President signed into law comprehensive
telecommunications reform legislation, The Telecommunications Act of 1996 ("1996
Act"). The new law requires all ILECs to unbundle their local network elements.
Moreover, the 1996 Act requires all local exchange carriers ("LECs")to
interconnect their facilities and equipment. Such provisions enable the Company
to obtain critical connections to ILEC facilities. In addition, LECs are
obligated to provide local telephone number portability and dialing parity upon
request and make their local services available for resale by competitors. Under
the legislation, LECs also have to allow competitors nondiscriminatory access to
pole attachments, conduit space and other rights-of-way. Moreover, states are
prohibited from disallowing local competition, although they are allowed to
regulate such competition.

The Company believes that each of these requirements is likely to enhance
competition in the local telecommunications marketplace, and simplify the
process of switching from ILEC services to those offered

F-24
<PAGE> 106

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)
by CLECs. However, the legislation also offers important benefits to the ILECs.
The ILECs are granted substantial new pricing flexibility and Regional Bell
Operating Companies ("RBOCs") regain the ability to provide long distance
services and obtain new rights to provide certain cable TV services. Management
believes these changes enhance the competitive position of the ILECs.

(2) SUBSEQUENT EVENTS

On April 11, 1996, AT&T announced agreements with ACSI and four other
companies allowing business customers in 70 cities to connect with AT&T's
network for some services as an alternative to access provided by ILECs. Terms
of the agreements were not disclosed, including the assignment of cities for
service to the companies. ACSI expects to have networks in 22 of the 70 cities
covered by the AT&T announcement.

F-25
<PAGE> 107

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Consolidated Financial and
Operating Data...................... 8
Risk Factors.......................... 9
Use of Proceeds....................... 16
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Selected Consolidated Financial Data.. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 28
Management............................ 48
Executive Compensation................ 53
Certain Relationships and Related
Transactions........................ 62
Principal Stockholders................ 66
Description of Certain Indebtedness... 68
Description of Capital Stock.......... 70
Shares Eligible for Future Sale....... 72
Underwriting.......................... 74
Legal Matters......................... 75
Experts............................... 75
Change in Independent Public
Accountants......................... 75
Available Information................. 76
Glossary.............................. 77
Index to Financial Statements......... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

[ASCI LOGO]

COMMON STOCK

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

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

ALEX. BROWN & SONS
INCORPORATED

MONTGOMERY SECURITIES

, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 108

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Amended and Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability, (i) for any breach of the director's duty of loyalty to
such corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemption as provided in Section 194 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.

The Amended and Restated Certificate of Incorporation and the By-laws
further provide that directors and officers of the Company (as well as agents
and employees of the Company at the discretion of the Board) shall, to the
fullest extent authorized by the DGCL or any other applicable laws then in
effect, be indemnified against liabilities arising from their service as
directors and officers. The Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties.

Section 145 of the DGCL empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.

Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation is empowered to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.

II-1
<PAGE> 109

Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered (other than underwriting
accounts and commissions) are estimated to be as follows:

<TABLE>
<S> <C>
SEC Registration Fee............................................... $46,121
NASD Filing Fee.................................................... 13,875
Nasdaq Listing Fee................................................. *
Accounting Fees and Expenses....................................... *
Legal Fees and Expenses............................................ *
Blue Sky Fees and Expenses......................................... *
Printing Fees...................................................... *
Miscellaneous...................................................... *
-------
Total.............................................................. $
=======
</TABLE>

- ---------------
* To be completed by amendment.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

On July 1, 1992, the stockholders of Alabama Lightwave, Inc., North
Carolina Lightwave, Inc., Chicago Lightwave, Inc., Delaware Lightwave Inc. and
Virginia Lightwave, Inc. (collectively, the "ALI Subsidiaries") Russell T.
Stern, Jr., Patrick J. Haynes and Willard McNitt entered into stock exchange
agreements with ALI. Under these agreements, the stockholders of the ALI
Subsidiaries received 650 shares of ALI mandatorily redeemable, non-voting,
cumulative Series A Preferred Stock (the "ALI Preferred Stock") and 103,920
shares of ALI Common Stock (the "ALI Common Stock"). Additionally, ALI issued
363,720 shares of ALI Common Stock to existing stockholders for $0.0042 per
share. The forgoing transactions were effected in private transactions under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").

On July 1, 1992, pursuant to the terms of a stock subscription agreement
(the "Subscription Agreement"), ALI sold 500 shares of ALI Preferred Stock and
181,860 shares of ALI Common Stock to Apex, Productivity and Brian Boyer for
aggregate consideration of $500,875 in a private transaction in reliance on
Section 4(2) of the Securities Act.

On December 15, 1992, ALI sold 100 additional shares of ALI Preferred Stock
and 36,372 shares of ALI Common Stock to Apex, Productivity and Brian Boyer for
an aggregate consideration of $100,175 pursuant to the terms of the Subscription
Agreement. This transaction took the form of a private transaction under Section
4(2) of the Securities Act.

On September 14, 1993, pursuant to an acquisition agreement and related
documents, ALI was acquired by Golf Links, Ltd. ("GLL"), a dormant publicly held
company. Under the acquisition agreement, each outstanding share of ALI Common
Stock was exchanged for 207.84044 shares of GLL common stock and each
outstanding share of ALI Preferred Stock was exchanged for one share of GLL
Preferred Stock. Additionally, notes receivable for the purchase of common stock
in the amount of $50,000 held by Russell T. Stern, Jr. and Patrick J. Haynes
were forgiven as part of the acquisition transaction. After the acquisition,
which resulted in the former shareholders of ALI owning a controlling interest
in GLL, GLL changed its

II-2
<PAGE> 110

name to American Communication Services, Inc., a Colorado corporation. This
transaction was completed in reliance on Section 4(2) of the Securities Act.

Pursuant to an employment agreement dated August 23, 1993, the Company
issued options to Anthony Pompliano, the Company's Chairman and Chief Executive
Officer. Mr. Pompliano's employment agreement has been amended to provide for
the grant of five year options to purchase 1,349,899 shares of Common Stock
exercisable at $0.875 per share of which 899,932 have already vested and options
to purchase up to 200,000 shares of Common Stock at $2.25 per share of which
50,000 have already vested. Pursuant to the third amendment to his employment
agreement, Mr. Pompliano was also granted (i) options to purchase an additional
150,000 shares at an exercise price of $2.25 per share, all of which vested and
became exercisable based upon the Company's achievement of certain performance
goals, and (ii) options to purchase an additional 350,000 shares of Common Stock
at exercise prices ranging from $2.25 per share to $2.80 per share, which will
vest and become exercisable on August 24, 2001, if Mr. Pompliano is then
employed by the Company or earlier, as to specified tranches of such shares,
based upon the Company's achievement of certain performance goals related to
each such tranche or upon a "change in control," as defined in the agreement.
The Company has relied on Section 4(2) of the Securities Act in issuing these
options.

In September 1993, ALI issued $600,000 of senior unsecured promissory notes
(the "ALI Notes") and warrants to purchase shares of ALI Common Stock to Shelby
Goldring, Ronald Harris, Sandor Garfinkle, Morris Ades, Walter Lake, Ronald Mack
IRA, Lamare Investments, Ltd. and Sabina, S.A. This offering was made in
reliance on Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder. In addition, in September, 1993, Apex, Productivity and Brian Boyer
converted 100 shares of ALI Preferred Stock, 36,372 shares of ALI Common Stock
and 3,325 shares of one of the Company's former subsidiaries into ALI Notes with
an original principal value of $135,175. Russell T. Stern, Jr. and Willard
McNitt also converted $107,083 of short-term notes payable of ALI into ALI
Notes. These transactions were undertaken as private resales in reliance on
Section 4(2) of the Securities Act. In July 1994, the Company repaid Willard
McNitt the original principal amount of these notes plus accrued interest
totalling $106,692. The notes were originally due on September 14, 1994, but the
Company could, at its option, extend the maturity of these notes by one year in
exchange for doubling the holder's warrant coverage. The Company elected to
extend the maturity date of the remaining unpaid original principal amount of
these notes held by Apex, Productivity, Brian Boyer and Russell T. Stern, Jr. In
addition, upon the merger of ALI with and into the Company, the outstanding ALI
Notes and accompanying warrants to purchase shares of ALI Common Stock became
notes payable of the Company and warrants to purchase Common Stock of the
Company. In connection therewith, $146,083 original principal amount of notes
and warrants to purchase 247,715 shares of the Company's Common Stock remain
outstanding and are held by Apex, Brian Boyer, Sandor Garfinkle, Shelby
Goldring, Morris and Louis Ades, Ronald Harris, Walter Lake, Lamare Investments,
Ltd., Ronald Mack IRA, Willard McNitt, Productivity, Sabina S.A., and Russell T.
Stern, Jr. In connection with the October 1994 Private Placement, Apex and
Productivity each exercised warrants received in connection with the ALI notes
thereby purchasing 8,353 shares of Common Stock of the Company for an aggregate
exercise price of $7,308.88. The issuance of the Common Stock upon exercise of
the warrants was considered as part of the Private Placement and was effected
pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder. ALI paid a fee of $131,000 to Leveraged Capital Group Investments in
connection with the original issuance of the ALI Notes. No fee was paid by the
Company in connection with the conversion of ALI Preferred Stock, ALI Common
Stock and ALI short-term notes payable into ALI Notes, the substitution of
Company securities for ALI Notes and warrants or in connection with the issuance
of Common Stock upon exercise of the warrants.

In September 1993, the Company issued 151,588 shares of Common Stock to
Deloitte & Touche, John J. Gaines, John L. Huff and The Thurston Group, Inc. in
settlement of $136,636 in accrued liabilities for services rendered prior to
that date. This issuance was treated as a private sale pursuant to Section 4(2)
of the Securities Act.

In June and July 1994 and October 1993, the Company issued options to
purchase 50,000 shares of common stock to each of Russell T. Stern, Jr., William
Salatich, George Middlemas and Steven Chrust, then all of its outside directors.
The options vested immediately as to 20,000 shares and are exercisable for a
period of five years at an exercise price of $0.875. The options with respect to
the remaining 30,000 shares are

II-3
<PAGE> 111

exercisable at $3.10 and vest with respect to 10,000 shares on each of the first
three anniversaries of the grant and expire on the fifth anniversary of the
vesting date. 30,000 of these options were originally granted to each of Messrs.
Stern, Salatich, Middlemas and Chrust at exercise prices ranging from $6.00 to
$8.00 and such exercise prices were subsequently reduced to $3.10 on July 21,
1994. On December 13, 1994, the exercise prices of such options were further
decreased from $3.10 to $2.25. Messrs. Stern and Salatich subsequently resigned
from the Company's board of directors and pursuant to agreement with the Company
all of their options vested upon such resignation. The Company has relied on
Section 4(2) of the Securities Act in issuing these options.

In October 1993, the Company issued a warrant to purchase 300,000 shares of
common stock at $0.875 per share to the Thurston Group, Inc. as compensation for
a consulting agreement. These warrants became exercisable in October, 1994 and
expire in October, 1995. The Company considers this a private sale pursuant to
Section 4(2) of the Securities Act.

In October 1993, the Company approved the issuance of 5,000 shares of
common stock to Dennis J. Ives as consideration for services performed. This
transaction was considered a private sale pursuant to Section 4(2) of the
Securities Act and the Company received no cash consideration and paid no fees
in connection with this transaction. A non-cash compensation expense of $4,375
was recorded in connection with this transaction.

In November 1993, the Company sold 400,000 shares of common stock at $2.50
per share to Louis Ades, Morris Ades, Louis and Morris Ades, Ronald Ades,
Special Equity Associates, Lone Star Auto Partners, Inc., Corina Docteroff,
Terivinn Enterprises, Inc., Thomas Joseph Fitzmaurice, Sandor A. Garfinkle,
Shelby A. Goldring, Ronald I. Harris, Ronald Harris, Kenneth David Hecht, AMPM
Enterprises, Alan Joseph Kaufman, M.D., Justin Products, Shelia N. Koch, Walter
J. Lake, Jr., Bruce L. Levenbrook, Ronald Liedel, Ronald Mack, Ronald S. Mack
IRA, Salvatore D. Merlo, Andrew J. Panico, Stanley Associates, Allan Schneider,
Leo Serrur, Siar Corp Money Purchase Pension Plan, Murray Slimowitz, Adams James
Steiger, Andrew Robert Steiger, Alan Tabush, George James Vasilakos, Alan
Warshak, and Gail Yamner. The Company received $850,000 in cash and retired
$150,000 of its 10% senior unsecured promissory notes. This transaction was made
in reliance on Section 4(2) of the Securities Act and Rule 504 promulgated
thereunder. In connection with this transaction, the Company paid a fee of
$171,000 to The Thurston Group, Inc., Huff & Gaines and Anthony Pompliano.

Pursuant to an employment agreement dated November 1, 1993, the Company
issued options to Richard Kozak its President and Chief Operating Officer. Mr.
Kozak's employment agreement was amended to provide for the grant of five year
options to purchase 899,932 shares of Common Stock at $0.875 per share of which
674,949 have vested and five year options to purchase up to 150,000 shares of
Common Stock at $2.25 per share. Pursuant to his third amended and restated
employment agreement dated as of June 30, 1995, with the Company, Mr. Kozak was
granted options to purchase an additional 70,000 shares at an exercise price of
$2.25 per share, all of which vested and became exercisable based upon the
Company's achievement of certain performance goals, and (ii) options to purchase
an additional 329,999 shares of Common Stock at exercise prices ranging from
$2.25 per share to $2.80 per share, which will vest and become exercisable on
November 1, 2001, if Mr. Kozak is then employed by the Company or earlier, as to
specified tranches of such shares, based upon the Company's achievement of
certain performance goals related to each such tranche or upon a change in
control, as defined in the agreement (collectively, "Performance Stock
Options"). Mr. Kozak's Performance Stock Options vested as to 40,000 shares in
connection with the closing in November 1995 of the Private Placement. The
Company considers these private transactions pursuant to Section 4(2) of the
Securities Act.

In December 1993, the Company entered into a consulting agreement with
Ronald Hengen pursuant to which he received warrants to purchase 15,000 shares
of common stock at an exercise price of $3.00 per share. These options expire
December 31, 1998. The Company considers this a private transaction pursuant to
Section 4(2) of the Securities Act.

In February 1994, the Company issued options to purchase 150,000 shares of
common stock to George M. Tronsrue, III, its Executive Vice President for
Strategic Planning and business Development. Of

II-4
<PAGE> 112

these options, 50,000 have already vested. The remaining options vest over a
three-year period and all such options are exercisable at $2.25 per share and
expire on the fifth anniversary of the vesting date. Pursuant to an amendment to
his employment agreement, Mr. Tronsrue was granted five year options to purchase
up to 100,001 shares of Common Stock at an exercise price of $2.25 per share.
These options vested with respect to 16,667 shares on February 23, 1995, and
will vest as to 16,667 shares on each of February 23, 1996, and February 23,
1997, and as to the remaining 50,000 shares on February 23, 1998. Mr. Tronsrue
was granted Performance Stock Options to purchase 20,000 shares of Common Stock
exercisable at a price of $2.25 per share through March 31, 2000, based upon the
achievement of certain performance goals on the occurrence of certain events
prior to December 31, 1994, and June 30, 1995. Upon the achievement of certain
performance goals, Mr. Tronsrue also is entitled to receive five year
Performance Stock Options to purchase up to 80,000 shares of Common Stock at an
exercise price of $2.25 per share. Upon the occurrence of the respective
performance criteria, the options will vest as to 20,000 shares on March 31,
1996, as to 20,000 on June 30, 1996, and as to 40,000 on September 1, 1996. On
July 6, 1995, pursuant to the agreement, Mr. Tronsrue was also granted
Performance Stock Options to purchase 50,000 shares of Common Stock at an
exercise price of $3.40 per share. These options will vest as to 25,000 shares
on each of February 23, 1998, and February 23, 1999. None of the foregoing
options granted to Mr. Tronsrue shall be deemed earned if, as to any given year,
Mr. Tronsrue's employment is terminated for cause or if he voluntarily resigns.
These were private transactions effected pursuant to Section 4(2) of the
Securities Act.

In April 1994, the Company issued options to purchase 150,000 shares of
common stock to Riley M. Murphy, its Executive Vice President for Legal and
Regulatory Affairs. Of these options, 25,000 have already vested and the
remaining options vest over a three-year period and all such options are
exercisable at $2.25 per share and expire on the fifth anniversary of the
vesting date. Pursuant to an amendment to her employment agreement, Ms. Murphy
also received options to purchase 100,002 shares which were granted on December
14, 1994, with an exercise price of $2.25. These options vested with respect to
14,584 shares on March 31, 1995, and will vest as to 14,584 shares on each of
March 31, 1996, and March 31, 1997, and as to the remaining 56,250 shares on
March 31, 1998. On July 6, 1995, pursuant to the agreement, Ms. Murphy was also
granted options to purchase 50,000 shares of Common Stock at an exercise price
of $3.40 per share. These options will vest as to 25,000 shares on each of March
31, 1998, and March 31, 1999. None of the foregoing options granted to Ms.
Murphy shall be deemed earned if, as to any given year, Ms. Murphy's employment
is terminated for cause of if she voluntarily resigns. These were private
transactions effected pursuant to Section 4(2) of the Securities Act.

On April 5, 1994, the Company entered into a right of way agreement
pursuant to which they granted the provider an option to the purchase 500,000
shares of common stock at 90% of the current market value at the time of
exercise. This option expires on June 28, 1997. This transaction was considered
a private sale pursuant to Section 4(2) of Securities Act.

In May 1994, the Company granted options to purchase 150,000 shares of its
common stock to Douglas R. Hudson, its Executive Vice President for Sales and
Marketing. Of these options, 25,000 have already vested and the remaining
options vest over a three-year period and all such options are exercisable at
$2.25 per share and expire on the fifth anniversary of the vesting date.
Pursuant to an amendment to his employment agreement, Mr. Hudson also received
options to purchase 100,002 shares which were granted on December 14, 1994, with
an exercise price of $2.25. These options vested with respect to 14,584 shares
on May 31, 1995, and will vest as to 14,584 shares on each of May 31, 1996, and
May 31, 1997, and as to the remaining 56,250 shares on May 31, 1998. On July 6,
1995, pursuant to the agreement, Mr. Hudson was also granted options to purchase
50,000 shares of Common Stock at an exercise price of $3.40 per share. These
options will vest as to 25,000 shares on each of May 31, 1998, and May 31, 1999.
None of the foregoing options granted to Mr. Hudson shall be deemed earned if,
as to any given year, Mr. Hudson's employment is terminated for cause or if he
voluntarily resigns. These were private transactions effected pursuant to
Section 4(2) of the Securities Act.

In May and June 1994, the Company sold notes to Apex, Productivity, Russell
T. Stern, Jr. and Siar Corp. Purchase Money Pension Plan ("Siar") in the
original principal amount of $681,640. This transaction was effected as a
private sale in reliance on Section 4(2) of the Securities Act. In connection
with the

II-5
<PAGE> 113

purchase of its note, Siar was given 6,923 shares of common stock with a then
current market value of approximately $22,500. The terms of the notes to Apex,
Productivity and Stern provided that they were convertible into equity
securities at the holder's option and that if the notes were so converted, the
holders thereof would be entitled to conversion fees, also payable in equity
securities of the Company. On October 25, 1994, the Company repaid Mr. Stern's
note in the original principal amount of $77,281, along with accrued interest of
$4,256 in cash. In connection with the October 1994 Private Placement, Apex and
Productivity each converted their notes in the original principal amount of
$264,679.50, along with accrued interest of $14,684.27 and a conversion fee of
$77,250, into 3,962 shares of the Company's Series A Preferred Stock. In August
1994, Apex loaned the Company $250,000. The terms of this loan were 15% per
annum interest on a note due December 31, 1994, the grant of a security interest
in the tangible assets of the Company's operating subsidiary which was then
constructing a CAP network and the issuance of the Company's warrants in the
amount of $250,000 to purchase shares of Preferred Stock at $90 per share. Apex
converted the principal of this loan into 2,778 shares of Series A Preferred
Stock at $90 per share as part of the October 1994 Private Placement. In
addition, Apex received warrants to purchase 3,333 shares of Common Stock at
$1.125 per share and warrants to purchase 3,333 shares of Common Stock at $0.01
per share in connection with this conversion. All of these warrants were
exercised. These transactions were considered a part of the October 1994 Private
Placement and were effected in reliance on Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.

On June 1, 1994, the Company entered into an agreement with Apex,
Productivity, The Thurston Group, Inc., Brian Boyer and Russell T. Stern, Jr.,
to exchange 548,387 shares of common stock for all 1,700 of the Company's then
currently issued and outstanding shares of preferred stock. The number of shares
of common stock issued was computed by dividing the $1,700,000 face value of the
preferred stock by $3.10, the average of the bid and ask price of the common
stock for the five business days immediately preceding the transaction. This
transaction was effected in reliance on Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.

On June 28, 1994, the Company issued $4,300,720 principal amount of 15%
convertible notes. These notes had warrants attached, however, the terms of
exercise could not be determined except with reference to an anticipated equity
financing on the part of the Company. The notes were sold by the Company to the
following accredited investors in reliance on Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder: Melco Developments Ltd., Pasquale J.
Beldotti, Brad Peery Capital L.P., Barfield Nominees Limited, Apex,
Productivity, William C. Miller, IV, Prime II Management, L.P., U.S. Signal
Corporation, Ethos Partners L.P. and Global Opportunity Fund I Ltd. In
connection with this transaction, the Company paid a fee of $554,900 to Gerard,
Klauer, Mattison & Co.

Effective July 1, 1994, the Company engaged SGC Advisory Services, Inc.
("SGC") as a financial and business consultant for three years. SGC is an
affiliate of Steven G. Chrust, a director of the Company. Pursuant to the
agreement, the Company will compensate SGC as follows: (1) a monthly fee of
$5,000; (2) options to purchase up to 50,000 shares of the Company's Common
Stock that vest on July 1, 1997, and are exercisable on or before July 1, 1999;
and (3) a fee equal to 4% of the total aggregate consideration received by the
Company or its shareholders in any transaction that the Company completes with a
strategic partner, merger partner or buyer if SGC is the finder of such entity;
or in the case where SGC is not the finder but proves instrumental in completing
the transaction then a fee of 2% will be payable to SGC. In either case, 50% of
the fee will be payable in cash at the time of closing and 50% will be payable
in warrants to purchase securities or instruments similar to those received by
the Company or its shareholders, unless the entire purchase price is paid in
cash. In the latter case, the entire fee will be payable in cash at closing. Any
warrants will have an exercise life of five years from date of issuance or
vesting whichever is later and will be exercisable at the same price as
established by the transaction that generates the warrant fee. At the end of
each month of the term of the agreement, SGC earns a credit against the exercise
price of the options referred to in (2) above equal to 1/36th of the exercise
price. The shares issued upon exercise of the options were priced at the average
of the high bid and low asked price on the closing date of the October 1994
Private Placement and have piggy-back registration rights.

II-6
<PAGE> 114

In August 1994, the Company entered into a consulting agreement with
Richard Walko pursuant to which he was granted options to purchase 17,000 shares
of common stock at $3.10 per share. These options are currently exercisable and
expire on December 31, 1996. This transaction was considered a private sale
pursuant to Section 4(2) of the Securities Act.

Pursuant to an agreement dated as of September 9, 1994, as amended on May
12, 1995, the Company issued 62,000 shares of Common Stock to Randall Holcombe
and Karen Grob Holcombe in partial payment of the purchase price for all of the
outstanding shares of Piedmont Teleport, Inc. in a private transaction under
Section 4(2) of the Securities Act.

On October 21, 1994, the Company sold 186,664 shares of Series A Preferred
Stock and warrants to purchase an aggregate of 1,794,486 shares of common stock
to Huff, Apex, Productivity, Ethos Partners L.P., Zelus International Ltd.,
Global Opportunity Fund I Ltd., William G. Salatich, Trustee William G. Salatich
Consulting and U.S. Signal Corporation in a private transaction. The Company
received aggregate consideration of approximately $16.8 million in connection
with this transaction. In connection with this transaction, which was
effectuated pursuant to Section 4(2) of the Securities Act and Rule 506
thereunder, the Company paid Huff a commitment fee consisting of warrants to
purchase 77,000 shares of common stock at $1.125 per share, Gerard, Klauer,
Mattison and Co. a placement agent fee consisting of warrants to purchase
350,000 shares of common stock at $3.10 per share and a cash payment of $825,000
and Marvin Saffian a fee consisting of warrants to purchase 126,007 shares of
common stock for $3.10 per share and a cash payment of $125,000.

In November 1994, the Company issued options to purchase 100,000 shares of
common stock to Ronald W. Kaiser, its Chief Financial Officer. Pursuant to an
amendment to Mr. Kaiser's employment agreement, these options vest over a
five-year period, are exercisable at $2.25 per share and expire on November 20,
1999. This was a private transaction effected pursuant to Section 4(2) of the
Securities Act.

Pursuant to an agreement dated as of November 28, 1994, the Company issued
10,636 shares of Common Stock to Jeffrey Corl and Leila Davis in partial payment
of the purchase price for all of the outstanding shares of CitiLink Corp. in a
private transaction under Section 4(2) of the Securities Act.

On or about November 30, 1994, Huff exercised warrants to purchase
1,491,222 shares of common stock that it received in connection with the October
1994 Private Placement for an aggregate consideration of $100,767.22. This
transaction was consummated as a private sale pursuant to Section 4(2) of the
Securities Act.

Between August 8 and November 1, 1994, the Company issued options to
purchase 202,000 shares of Common Stock for $3.10 per share to nine employees of
the Company. These were considered private transactions pursuant to Section 4(2)
of the Securities Act.

On March 20, 1995, the Company issued 25,000 shares of Common Stock to
Suite 1025 Limited Partnership ("Suite 1025") pursuant to its exercise of
certain warrants to purchase Common Stock at $.875 per share. On March 10, 1995,
the Company issued 17,500 shares of Common Stock to Suite 1025 pursuant to its
exercise of certain warrants to purchase Common Stock at $.875 per share. On
March 23, 1995, the Company issued 5,000 shares of Common Stock to Suite 1025
pursuant to its exercise of certain warrants to purchase Common Stock at $.875
per share. On April 13, 1995, the Company issued 25,000 shares of Common Stock
to Sabina International S.A. pursuant to its exercise of certain warrants to
purchase Common Stock at $.875 per share. These transactions were completed in
reliance on Section 4(2) of the Securities Act.

In June 1995, the Company completed a private placement of its Series B-1,
Series B-2, and Series B-3 Preferred Stock and warrants to purchase Common Stock
for an aggregate purchase price of $22.75 million. ING purchased an aggregate of
100,000 shares of the Company's Series B-1 Preferred Stock, warrants to purchase
428,571 shares of Common Stock at an exercise price of $0.01 per share and a
warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.50
per share. In June 1995, ING exercised its warrants to purchase 428,571 shares
of Common Stock for an aggregate consideration of $4,286 and the remaining
investors, with the exception of Huff, exercised warrants to purchase 117,854
shares of Common Stock for an aggregate consideration of $1,179 in July 1995.
Huff and certain of its affiliates purchased an

II-7
<PAGE> 115

aggregate of 100,975 shares of Series B-2 Preferred Stock, a warrant to purchase
432,749 shares of Common Stock at an exercise price of $0.01 per share, a
warrant to purchase 100,000 shares of Common Stock at an exercise price of $1.79
and a warrant to purchase 100,000 shares at an exercise price of $2.50 per
share. Apex and certain of its affiliates purchased an aggregate of 21,000
shares of Series B-3 Preferred Stock and warrants to purchase an aggregate of
90,000 shares of Common Stock at an exercise price of $.01 per share. The
remaining investors in the June 1995 Private Placement purchased an aggregate of
1,525 shares of Series B-2 Preferred Stock and 4,000 shares of Series B-3
Preferred Stock and warrants to purchase 23,676 shares of Common Stock at an
exercise price of $.01 per share. The price per unit in the private placement
was $100 and the Company received aggregate proceeds of approximately $22.7
million. Pursuant to the Series B Purchase Agreement, ING purchased 50,000
shares of the Company's Series B-4 Preferred Stock and exercised a warrant
entitling ING to purchase 214,286 shares of Common Stock at an exercise price of
$0.01 per share, which purchases were consummated in November 1995 at a purchase
price of $5.0 million. In connection with the private placement, the Series A
Preferred Stock was exchanged for an identical number of shares of Series A-1
Preferred Stock and subsequently retired. In addition, GKM received $1,250,950
warrants to purchase 284,253 shares of Common Stock at an exercise price of
$2.80 per share, and warrants to purchase 54 shares of Common Stock at an
exercise price of $.01 per share and Marvin Saffian received warrants to
purchase 25,000 shares of Common Stock at $2.80 per share. These were considered
private transactions pursuant to Section 4(2) of the Securities Act.

On July 7, 1995, the Company granted options to purchase 407,850 shares of
Common Stock at an exercise price of $3.40 per share to various employees and
consultants of the Company, which options will vest in various amounts over the
next four years.

On July 19, 1995, the Company issued 54 shares of Common Stock to GKM in
connection with GKM's exercise of certain warrants received by GKM as partial
payment of its placement fee relating to the June 1995 Private Placement. This
transaction was completed in reliance on Section 4(2) of the Securities Act.

On September 22, 1995, the Company granted options to purchase 136,500
shares of Common Stock at an exercise price of $4.00 per share to various
employees and consultants of the Company, which options will vest in various
amounts over the next four years.

On November 14, 1995, the Company issued 12,500 shares of Common Stock to
Walter Lake pursuant to his exercise of certain warrants to purchase Common
Stock at $.875 per share and 676 shares of Common Stock to Brian Boyer pursuant
to his exercise of certain warrants to purchase Common Stock at $.875 per share.
These transactions were completed in reliance on Section 4(2) of the Securities
Act.

II-8
<PAGE> 116

On November 14, 1995, the Company completed a private offering pursuant to
Rule 144A of the Securities Act of 190,000 units (the "Units") consisting of
$190,000,000 principal amount of 13% Senior Discount Notes (the "2005 Notes")
due 2005, and warrants to purchase 2,432 shares of Common Stock at an exercise
price of $7.15 per share (the "Warrants"), for which it received aggregate net
proceeds of approximately $97.8 million (after deduction of underwriting
discounts and commissions of $3.3 million and estimated offering expenses of
$0.6 million). The Units were sold to Smith Barney Inc. and Salomon Brothers Inc
(the "Initial Purchasers"). As part of the plan of distribution, the Initial
Purchasers subsequently sold to the following persons, all of which were
required to qualify as "Qualified Institutional Buyers" (as defined under Rule
144A):

<TABLE>
<CAPTION>
NUMBER OF
NAME/CLASS OF PURCHASER UNITS PURCHASED
-------------------------------------------------------------- ---------------
<S> <C>
American Express Financial/IDS Financial Services............. 21,000
Lutheran Brotherhood.......................................... 30,000
Manufacturers Life Insurance.................................. 16,000
Invesco Funds Group........................................... 11,000
First Investors Management Co................................. 13,000
T. Rowe Price Associates...................................... 12,000
Nomura Capital Management..................................... 10,000
Northstar Investment Management............................... 12,500
BEA Associates Inc............................................ 13,050
Loews Corp.................................................... 7,200
J&W Seligman & Co............................................. 5,000
Massachusetts Financial Services.............................. 4,000
Fortis Advisers Inc........................................... 5,500
Hampshire Management Company.................................. 3,000
Caywood-Scholl Capital Management............................. 2,750
HighView Fund................................................. 1,000
Brinson Partners Inc.......................................... 2,000
State Street Research & Management............................ 10,000
Aetna Life Insurance & Annuity................................ 4,000
Prospect Management Co........................................ 2,000
Smith Barney Inc.............................................. 5,000
-------
190,000
=======
</TABLE>

The Warrants and the shares of Common Stock underlying the Warrants, as
well as Notes, substantially identical in terms to the 2005 Notes and into which
the 2005 Notes were exchangeable, were registered under the Securities Act
pursuant to Registration Statements declared effective in February 1996.

In December 1995, the Company entered into the GKM Settlement Agreement,
wherein the Company agreed to pay to GKM the GKM Settlement Expenses and issue
the GKM Warrant I, which will allow GKM to purchase 96 shares of the Company's
Common Stock at an exercise price of $0.01 per share at any time before June 28,
1996, and the GKM Warrant II, which will allow GKM to purchase 62,473 shares of
the Company's Common Stock at an exercise price of $2.80 per share at any time
after 5:00 p.m. New York City time on December 28, 1996, until 5:00 p.m. New
York City time on December 28, 2000. The GKM Warrants were earned as a result of
services that GKM performed in connection with the June 1995 private placement.
The Common Stock issuable upon the exercise of the GKM Warrants have certain
registration rights. The GKM Warrant I was exercised.

II-9
<PAGE> 117

On March 21, 1996, the Company completed a private offering pursuant to
Rule 144A of the Securities Act of $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes") for which it received net
proceeds of approximately $61.8 million (after deduction of discounts and
commissions of approximately $2.3 million and estimated offering expenses of
$0.4 million). The 2006 Notes were sold to Smith Barney, Inc. and Bear, Stearns
& Co. Inc. As part of the plan of distribution, the Initial Purchasers are in
the process of offering the 2006 Notes to persons required to qualify as
"Qualified Institutional Buyers" (as defined under Rule 144A).

ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement. ...................................... ++++++
3.1 Amended and Restated Certificate of Incorporation of the Company. .... 0
3.2 Certificate of Designations of the Company's 9% Series A-1, Series
B-1, Series B-2, Series B-3 and Series B-4 Convertible Preferred
Stock. ............................................................... **
3.3 Certificate of Elimination regarding the 9% Series A Preferred
Stock. ............................................................... **
3.4 Amended and Restated By-Laws of the Company, as amended. ............. *
3.5 Governance Agreement dated November 8, 1995, between the Company and
the holders of its Preferred Stock. .................................. ++
3.8 Certificate of Correction dated March 11, 1996. ...................... 0
3.9 Supplemental Governance Agreement dated February 26, 1996. ........... 0
4.1 Specimen Certificate of the Company's Common Stock. .................. *
4.2 Specimen Certificate of the Company's 9% Series A-1 Preferred
Stock. ............................................................... ****
4.3 Specimen Certificate of the Company's 9% Series B-1 Preferred
Stock. ............................................................... ****
4.4 Specimen Certificate of the Company's 9% Series B-2 Preferred
Stock. ............................................................... ****
4.5 Specimen Certificate of the Company's 9% Series B-3 Preferred
Stock. ............................................................... ****
4.6 Certificate of the Company's 9% Series B-4 Preferred Stock dated
November 14, 1995. ................................................... ++
4.7 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of 13%
Senior Discount Notes due 2005, including the form of global note. ... ++
4.8 Initial Global Note dated November 14, 1995. ......................... ++
4.9 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. .......................... +++
4.10 Initial Global Warrant dated November 14, 1995. ...................... +++
4.11 Indenture dated March 21, 1996, between the Company and Chemical Bank,
as trustee, relating to $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006, including the form of global note. ... +++++
5.1 Opinion of Piper & Marbury L.L.P., counsel to the Company. ........... ++++++
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. ............................... ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ............................... ++
9.3 Voting Rights Agreement dated November 8, 1995, between the Company
and certain of its Preferred Stockholders. ........................... ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. ........ 0
</TABLE>

II-10
<PAGE> 118

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.1 Exchange Agreement, dated June 1, 1994, between the Company and
certain of its Preferred Shareholders. ............................... *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its
9% Series A Preferred Shareholders. .................................. **
10.3 Company's 1994 Stock Option Plan. .................................... *
10.4 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. ........................... *
10.5 Supplemental Registration Rights Agreement dated June 26, 1995. ...... ****
10.6 Management Registration Rights Agreement dated June 30, 1995. ........ ****
10.7 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. .................................. **
10.8 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ....................................................... ****
10.9 Form of $.01 Warrant Agreement. ...................................... ****
10.10 Form of $1.79 Warrant Agreement. ..................................... ****
10.11 Form of $2.25 Warrant Agreement. ..................................... ****
10.12 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ...................................... ****
10.13 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Richard A. Kozak. ................................................ ****
10.15 Third Amended and Restated Employment Agreement between the Company
and George M. Tronsrue, III. ......................................... ****
10.16 Third Amended and Restated Employment Agreement between the Company
and Riley M. Murphy. ................................................. ****
10.17 Third Amended and Restated Employment Agreement between the Company
and Douglas R. Hudson. ............................................... ****
10.18 Second Amended and Restated Employment Agreement between the Company
and Ronald W. Kaiser. ................................................ ****
10.19 Employment Agreement between the Company and Robert Ottman. .......... ****
10.20 Form of Non-Qualified Stock Option Certificate, as amended, issued to
Richard A. Kozak. .................................................... ****
10.21 Form of Stock Option Certificates, as amended, issued to George M.
Tronsrue, III under employment agreement. ............................ ****
10.22 Form of Stock Option Certificates, as amended, issued to Riley M.
Murphy under employment agreement. ................................... ****
10.23 Form of Stock Option Certificates, as amended, issued to Douglas R.
Hudson under employment agreement. ................................... ****
10.24 Form of Stock Option Certificates, as amended, issued to Ronald W.
Kaiser under employment agreement. ................................... ****
10.25 Form of Stock Option Certificates, as amended, issued to Robert
Ottman. .............................................................. ****
10.26 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... *
</TABLE>

II-11
<PAGE> 119

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.27 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... ****
10.28 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. ................................................... *
10.29 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................. ****
10.30 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................. *
10.31 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................. ****
10.32 Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
Corporation and American Communication Services of Greenville, Inc.
and American Communication Services of Columbia, Inc. ................ ****
10.33 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ..................... ****
10.34 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ..................... ****
10.35 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ......................................................... ****
10.36 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc.. ............................................. *
10.37 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. .......................................... *
10.38 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. ..................... *
10.39 Note Purchase Agreement, dated June 28, 1994. ........................ *
10.40 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ........................................ *
10.41 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ......................................... *
10.41 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994. .......................... *
10.42 Stock Purchase Agreement, dated November 28, 1994, by and among the
Company, CitiLink Corp., and the former directors and shareholders of
CitiLink Corp., as amended August 3, 1995. ........................... ****
10.43 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. .......................................................... ****
10.44 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. ............................ **
10.45 Form of Indemnity Agreement between the Company and its Directors, as
amended. ............................................................. ****
10.46 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ............................ ****
10.47 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. .............................................. ++
</TABLE>

II-12
<PAGE> 120

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.48 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. ................................................................. ++
10.49 Parent Support and Pledge Agreement (El Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ..................... ++
10.50 Letter Agreement dated November 14, 1995, between the Company and ING
Equity Partners, L.P. I, with respect to the purchase of 50,000 shares
of the Company's 9% Series B-4 Convertible Preferred Stock and
warrants to purchase 214,286 shares of Common Stock. ................. ++
10.51 Warrant to Purchase Shares of American Communications Services, Inc.
Common Stock dated December 28, 1995, between the Company and Gerard
Klauer, Mattison & Co. ("GKM Warrant I").............................. ++
10.52 Warrant to Subscribe For and Purchase Common Stock of American
Communications Services, Inc. dated December 28, 1995, between the
Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II").......... ++
10.53 Amended 1994 Stock Option Plan of the Company......................... ++
10.54 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation. ..................... *
10.55 American Communication Services of El Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. ................................... 0
11.1 Statement re: computation of per share earnings (loss). .............. +
16.1 Letter re: change in certifying accountant. .......................... ***
21.1 Subsidiaries of the Registrant. ...................................... ++++++
23.1 Consent of KPMG Peat Marwick LLP. .................................... ++++
23.2 Consent of Coopers & Lybrand L.L.P. .................................. ++++
23.3 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5.1).......... ++++++
24.1 Power of Attorney (included on page II-15). .......................... ++++
</TABLE>

- ---------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-87200) and incorporated herein by reference
thereto.

** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated June 26, 1995, and incorporated herein by reference thereto.

*** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 1995, and incorporated
herein by reference thereto.

**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.

+ Previously filed as an exhibit to the Company's Annual Report on Form
10-QSB for the fiscal year ended June 30, 1995, and the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended September
30, 1995, both of which are incorporated herein by reference thereto.

++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.

+++ Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.

++++ Filed herewith.

+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.

++++++ To be filed by amendment.

II-13
<PAGE> 121

0 Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-3632) and incorporated herein by reference
thereto.

ITEM 28. UNDERTAKINGS.

REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
set forth in response to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

RULE 430A INFORMATION. For purposes of determining any liability under the
Securities Act, the Registrant will treat the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant under rule
424(b) (1), or (4) or 497(h) under the Securities Act (sec.sec. 230.424(b) (1),
(4) or 230.497(h) as part of this Registration Statement as of the time the
Commission declared it effective.

For purposes of determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.

II-14
<PAGE> 122

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
American Communications Services, Inc. has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Annapolis Junction, Maryland, on June 13, 1996.

AMERICAN COMMUNICATIONS SERVICES, INC.,
Registrant

By: /s/ RICHARD A. KOZAK
------------------------------------
Richard A. Kozak
President and Chief Executive
Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Richard
A. Kozak and Anthony J. Pompliano his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to the Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting along, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ ANTHONY J. POMPLIANO Chairman of the Board of June 13, 1996
- ---------------------------------------- Directors
Anthony J. Pompliano

/s/ RICHARD A. KOZAK President and Chief Executive Officer June 13, 1996
- ---------------------------------------- (Principal Executive Officer)
Richard A. Kozak

/s/ HARRY J. D'ANDREA Chief Financial Officer June 13, 1996
- ---------------------------------------- (Principal Financial and
Harry J. D'Andrea Accounting Officer)

/s/ GEORGE M. MIDDLEMAS Director June 13, 1996
- ----------------------------------------
George M. Middlemas

/s/ EDWIN M. BANKS Director June 13, 1996
- ----------------------------------------
Edwin M. Banks

/s/ CHRISTOPHER L. RAFFERTY Director June 13, 1996
- ----------------------------------------
Christopher L. Rafferty
</TABLE>

II-15
<PAGE> 123

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ BENJAMIN P. GIESS Director June 13, 1996
- ----------------------------------------
Benjamin P. Giess

/s/ OLIVIER L. TROUVEROY Director June 13, 1996
- ----------------------------------------
Olivier L. Trouveroy

/s/ PETER C. BENTZ Director June 13, 1996
- ----------------------------------------
Peter C. Bentz
</TABLE>

II-16
<PAGE> 124

EXHIBIT INDEX

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement. ...................................... ++++++
3.1 Amended and Restated Certificate of Incorporation of the Company. .... 0
3.2 Certificate of Designations of the Company's 9% Series A-1, Series
B-1, Series B-2, Series B-3 and Series B-4 Convertible Preferred
Stock. ............................................................... **
3.3 Certificate of Elimination regarding the 9% Series A Preferred
Stock. ............................................................... **
3.4 Amended and Restated By-Laws of the Company, as amended. ............. *
3.5 Governance Agreement dated November 8, 1995, between the Company and
the holders of its Preferred Stock. .................................. ++
3.8 Certificate of Correction dated March 11, 1996. ...................... 0
3.9 Supplemental Governance Agreement dated February 26, 1996. ........... 0
4.1 Specimen Certificate of the Company's Common Stock. .................. *
4.2 Specimen Certificate of the Company's 9% Series A-1 Preferred
Stock. ............................................................... ****
4.3 Specimen Certificate of the Company's 9% Series B-1 Preferred
Stock. ............................................................... ****
4.4 Specimen Certificate of the Company's 9% Series B-2 Preferred
Stock. ............................................................... ****
4.5 Specimen Certificate of the Company's 9% Series B-3 Preferred
Stock. ............................................................... ****
4.6 Certificate of the Company's 9% Series B-4 Preferred Stock dated
November 14, 1995. ................................................... ++
4.7 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of 13%
Senior Discount Notes due 2005, including the form of global note. ... ++
4.8 Initial Global Note dated November 14, 1995. ......................... ++
4.9 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. .......................... +++
4.10 Initial Global Warrant dated November 14, 1995. ...................... +++
4.11 Indenture dated March 21, 1996, between the Company and Chemical Bank,
as trustee, relating to $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006, including the form of global note. ... +++++
5.1 Opinion of Piper & Marbury L.L.P., counsel to the Company. ........... ++++
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. ............................... ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ............................... ++
9.3 Voting Rights Agreement dated November 8, 1995, between the Company
and certain of its Preferred Stockholders. ........................... ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. ........ 0
10.1 Exchange Agreement, dated June 1, 1994, between the Company and
certain of its Preferred Shareholders. ............................... *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its
9% Series A Preferred Shareholders. .................................. **
10.3 Company's 1994 Stock Option Plan. .................................... *
10.4 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. ........................... *
</TABLE>
<PAGE> 125

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.5 Supplemental Registration Rights Agreement dated June 26, 1995. ...... ****
10.6 Management Registration Rights Agreement dated June 30, 1995. ........ ****
10.7 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. .................................. **
10.8 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ....................................................... ****
10.9 Form of $.01 Warrant Agreement. ...................................... ****
10.10 Form of $1.79 Warrant Agreement. ..................................... ****
10.11 Form of $2.25 Warrant Agreement. ..................................... ****
10.12 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ...................................... ****
10.13 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Richard A. Kozak. ................................................ ****
10.15 Third Amended and Restated Employment Agreement between the Company
and George M. Tronsrue, III. ......................................... ****
10.16 Third Amended and Restated Employment Agreement between the Company
and Riley M. Murphy. ................................................. ****
10.17 Third Amended and Restated Employment Agreement between the Company
and Douglas R. Hudson. ............................................... ****
10.18 Second Amended and Restated Employment Agreement between the Company
and Ronald W. Kaiser. ................................................ ****
10.19 Employment Agreement between the Company and Robert Ottman. .......... ****
10.20 Form of Non-Qualified Stock Option Certificate, as amended, issued to
Richard A. Kozak. .................................................... ****
10.21 Form of Stock Option Certificates, as amended, issued to George M.
Tronsrue, III under employment agreement. ............................ ****
10.22 Form of Stock Option Certificates, as amended, issued to Riley M.
Murphy under employment agreement. ................................... ****
10.23 Form of Stock Option Certificates, as amended, issued to Douglas R.
Hudson under employment agreement. ................................... ****
10.24 Form of Stock Option Certificates, as amended, issued to Ronald W.
Kaiser under employment agreement. ................................... ****
10.25 Form of Stock Option Certificates, as amended, issued to Robert
Ottman. .............................................................. ****
10.26 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... *
10.27 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... ****
10.28 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. ................................................... *
10.29 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................. ****
</TABLE>
<PAGE> 126

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.30 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................. *
10.31 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................. ****
10.32 Loan and Security Agreement, dated June 30, 1995, between AT&T Credit
Corporation and American Communication Services of Greenville, Inc.
and American Communication Services of Columbia, Inc. ................ ****
10.33 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ..................... ****
10.34 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ..................... ****
10.35 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ......................................................... ****
10.36 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc.. ............................................. *
10.37 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. .......................................... *
10.38 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. ..................... *
10.39 Note Purchase Agreement, dated June 28, 1994. ........................ *
10.40 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ........................................ *
10.41 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ......................................... *
10.41 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994. .......................... *
10.42 Stock Purchase Agreement, dated November 28, 1994, by and among the
Company, CitiLink Corp., and the former directors and shareholders of
CitiLink Corp., as amended August 3, 1995. ........................... ****
10.43 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. .......................................................... ****
10.44 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. ............................ **
10.45 Form of Indemnity Agreement between the Company and its Directors, as
amended. ............................................................. ****
10.46 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ............................ ****
10.47 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. .............................................. ++
10.48 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. ................................................................. ++
10.49 Parent Support and Pledge Agreement (El Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ..................... ++
</TABLE>
<PAGE> 127

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
10.50 Letter Agreement dated November 14, 1995, between the Company and ING
Equity Partners, L.P. I, with respect to the purchase of 50,000 shares
of the Company's 9% Series B-4 Convertible Preferred Stock and
warrants to purchase 214,286 shares of Common Stock. ................. ++
10.51 Warrant to Purchase Shares of American Communications Services, Inc.
Common Stock dated December 28, 1995, between the Company and Gerard
Klauer, Mattison & Co. ("GKM Warrant I").............................. ++
10.52 Warrant to Subscribe For and Purchase Common Stock of American
Communications Services, Inc. dated December 28, 1995, between the
Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II").......... ++
10.53 Amended 1994 Stock Option Plan of the Company......................... ++
10.54 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation. ..................... *
10.55 American Communication Services of El Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. ................................... 0
11.1 Statement re: computation of per share earnings (loss). .............. +
16.1 Letter re: change in certifying accountant. .......................... ***
21.1 Subsidiaries of the Registrant. ...................................... ++++++
23.1 Consent of KPMG Peat Marwick LLP. .................................... ++++
23.2 Consent of Coopers & Lybrand L.L.P. .................................. ++++
23.3 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5.1).......... ++++++
24.1 Power of Attorney (included on page II-15). .......................... ++++
</TABLE>

- ---------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-87200) and incorporated herein by reference
thereto.

** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated June 26, 1995, and incorporated herein by reference thereto.

*** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended March 31, 1995, and incorporated
herein by reference thereto.

**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated herein
by reference thereto.

++ Previously filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-80305) and incorporated herein by reference
thereto.

+++ Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-80673) and incorporated herein by reference
thereto.

++++ Filed herewith.

+++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 26, 1996 and incorporated herein by reference thereto.

++++++ To be filed by amendment.

0 Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-3632) and incorporated herein by reference
thereto.
<PAGE> 128

EXHIBIT 23.1

ACCOUNTANTS' CONSENT

The Stockholders and Board of Directors
American Communications Services, Inc.:

We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the Prospectus.

/s/ KPMG PEAT MARWICK LLP

KPMG Peat Marwick LLP

Washington, D.C.
June 14, 1996
<PAGE> 129

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2 of
our report dated August 29, 1994, except for matters discussed in the third
paragraph of that report, as to which the date is September 15, 1995, on our
audit of the financial statements and financial statement schedules of American
Communication Services, Inc. (a development stage company) as of and for the
year ended June 30, 1994. We also consent to the reference to our firm under the
captions "Experts" and "Change in Independent Public Accountants".

/s/ COOPERS & LYBRAND L.L.P.

Chicago, Illinois
June 13, 1996

<PAGE> 1
EXHIBIT 99.2
============

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996

REGISTRATION NO. 333-06101

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

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

PRE-EFFECTIVE

AMENDMENT NO. 1

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

AMERICAN COMMUNICATIONS SERVICES, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 4813 52-1947746
(STATE OR OTHER JURISDICTION OF (PRIMARY SIC CODE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
</TABLE>

with copies to:

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

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

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

AMERICAN COMMUNICATIONS SERVICES, INC.
CROSS-REFERENCE SHEET

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities
laws of any such State.

SUBJECT TO COMPLETION, DATED JULY 2, 1996

PROSPECTUS
, 1996

7,000,000 SHARES

LOGO

COMMON STOCK

All of the shares of Common Stock offered hereby (the "Offering") are being
sold by American Communications Services, Inc. The Common Stock is traded on the
Nasdaq National Market under the symbol "ACNS." On July 1, 1996 the last
reported sales price of the Common Stock on the Nasdaq National Market was
$12.00 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.

<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
Total(3).......................... $ $ $
</TABLE>

- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.

(2) Before deducting expenses payable by the Company estimated at $630,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 1,050,000 shares of Common Stock, at the Price to the
Public less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If the option is exercised in full, the total Price
to the Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
MONTGOMERY SECURITIES
<PAGE> 4

[MAP TO BE INSERTED.]

This Prospectus includes trademarks, trade names and service marks of the
Company and other companies.
------------------------

PROSPECTUS SUMMARY

THE COMPANY

As of May 31, 1996, ACSI had 15 operational networks and seven additional
networks under construction. Since May 31, 1996, the Company has begun
construction of two additional networks. From September 30, 1995 to May 31,
1996, the Company increased its operational networks from five to 15 and
increased its route miles from 92 to 386. The Company expects to have 30
networks in service or under construction by September 30, 1996 and intends to
have a total of 50 local distribution networks in service or under construction
by the middle of calendar year 1998. To date, management believes that it has
been able to use its capital most efficiently by constructing, rather than
acquiring, fiber optic networks. By constructing all of its networks, ACSI
believes it has realized significant cost savings, created considerable
networking efficiencies and ensured quality, reliability and high operating
standards. The Company believes the concentration of its 50 networks principally
throughout the southern United States, together with its planned inter-city
broadband backbone network, will provide an effective platform for the provision
of its high-speed data and enhanced voice messaging and local switched voice
services at reduced costs. ACSI's management team includes several pioneers in
the development of the competitive access industry with demonstrated expertise
in successfully deploying fiber optic networks and aggressively managing
operations to generate positive operating cash flow.

ACSI NETWORKS

<TABLE>
<CAPTION>
TARGETED TO BE TARGETED TO BE
OPERATIONAL AS OF OPERATIONAL BY OPERATIONAL BY
MAY 31, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
- ------------------------------------- --------------------- ---------------------
<S> <C> <C> <C>
Albuquerque, NM Las Vegas, NV Amarillo, TX Central Maryland
Birmingham, AL Lexington, KY Baton Rouge, LA Chattanooga, TN
Charleston, SC Little Rock, AR Columbus, GA Colorado Springs, CO
Columbia, SC Louisville, KY Jackson, MS Corpus Christi, TX
El Paso, TX Mobile, AL Spartanburg, SC
Fort Worth, TX Montgomery, AL
Greenville, SC Tucson, AZ
Irving, TX
</TABLE>

3
<PAGE> 6

COMPANY STRATEGY

Early Entry in Tier II and Tier III Markets in the Southern United
States. The Company principally targets Tier II and Tier III markets, as
they are generally subject to less competition from other CLECs relative to
larger, more developed Tier I markets, thereby enabling the Company to
achieve market penetration quickly. ACSI intends to continue focusing its
market entry principally in areas of the southern United States because of
attractive demographic trends and expected growth in demand for
telecommunications services in these regions, which the Company believes
have been underserved to date. Between 1989 and 1994, the rate of access
line growth in all regions of the South exceeded the national average by
approximately two and one-half times. Additionally, the 18-state area
targeted by the Company accounts for approximately 37% of the U.S.
population and approximately 35% of the total access lines in the United
States. Although not precluding entry into a particular market by
competitors, the Company believes that the first operational competitive
network in a market generally has a competitive advantage in attracting
customers willing to switch from the LEC. Management believes that the
Company will be the first competitor to offer dedicated services in 14 of
the above-listed 24 markets.

4
<PAGE> 7

commencement of service. In its more mature markets, Louisville, Little
Rock and Greenville, the Company achieved operating cash flow breakeven in
a year or less after initiation of service.

Cost-Effective Entry into Local Switched Voice and Value-Added
Services. To take advantage of the opportunities created by the
Telecommunications Act and following receipt of state regulatory approval
and LEC interconnections, the Company plans to offer local switched voice
services beginning in late 1996 where it is deploying local distribution
networks. The Company expects to deploy telecommunications switching
equipment in eight markets by mid-1997 and in 24 markets by early 1999. To
take advantage of the size and regional concentration of ACSI's markets,
where technically feasible and economically practicable, the Company plans
to implement a hubbed switching strategy whereby one switch can serve
multiple markets via remote switching modules. This strategy would justify
the switch investment in Tier II and Tier III markets by reducing capital
costs and operating expenses. The Company recently agreed initially to
purchase eight 5ESS()-2000 switching systems from Lucent Technologies. The
Company believes that providing dedicated, enhanced voice messaging and
high-speed data services will enhance the Company's ability to cross-market
local switched voice services.

ACSI has begun offering on a limited basis a range of enhanced voice
messaging services to small and mid-sized business and government end
users. The Company's initial offerings of enhanced voice messaging services
include business voice messaging services utilizing the Company's First
Line and First Line Plus products and one-number services utilizing the
Company's Virtualine and Virtualine 800 products. The Company's enhanced
voice messaging service can function as a virtual PBX. Management believes
that the market for voice messaging services in 1993 was approximately $1.4
billion, that this market is underserved and that, with the availability of
enhanced voice messaging services such as the Company's, this market has
the potential for continued, rapid growth as customers become more
accustomed to use of these services. The Company believes that this market
should also serve as an additional customer base to which the Company can
market its local switched voice services.

Developing a Broadband Data Communications Backbone Network with
Extensive Local Points of Presence. The Company believes that switched
data communications represents one of the fastest growing segments of the
telecommunications services market. Industry sources estimate that the U.S.
switched data services market was approximately $1.1 billion in 1995 and
the Company believes that this market will grow to approximately $8.8
billion by 2000 due, in part, to the continuing proliferation of computers
and the increasing need to interconnect these computers via local and wide
area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy,
current and emerging needs. The domestic network infrastructure currently
supporting both voice and data transport requirements is being strained by
the increasing demand for high bandwidth transport at both the local and
national levels. The Company believes that the growth of high speed
applications will further strain the networks that exist today. Unless
additional network infrastructure supporting these high bandwidth
requirements is developed, the ability of existing networks to service the
demand for both speed and capacity may continue to be strained and may
result in further degradation of the quality of service afforded by network
service providers. The Company believes that this constraint in bandwidth
capacity creates a significant business opportunity for the Company,
particularly in its Tier II and Tier III markets, which have largely been
ignored by the larger data communications providers.

5
<PAGE> 8

Kozak, the Company's President and Chief Executive Officer, has held senior
management positions at several telecommunications companies, including MFS
and Sprint International (formerly Telenet Communications Corporation).
Other members of the Company's senior management team have experience
working at MFS, Teleport Communications Group, AT&T, MCI Communications
Corporation ("MCI"), WilTel, Inc., BellSouth Telecommunications, Inc. and
other telecommunications companies. The Company's management team
collectively has over 200 years of marketing and operating experience in
the telecommunications industry.

RECENT DEVELOPMENTS

From September 30, 1995 to May 31, 1996, the Company increased the number
of its operational networks from five to 15, began construction on networks in
seven other markets, increased route miles from 92 to 386, increased buildings
connected or ready to connect from 79 to 216 and increased its employee base
from 100 to 181. As of June 30, 1996, the Company obtained certifications to
offer local switched voice services in Alabama, Georgia, Maryland, Tennessee and
Texas, has certifications pending in 12 other states and has commenced
interconnection negotiations with the five major LECs in markets in which it
currently operates or has networks under construction.

6
<PAGE> 9

THE OFFERING

Common Stock offered by the
Company.................. 7,000,000

Common Stock to be
outstanding after the
Offering................. 31,022,969 shares(1)

Nasdaq National Market
symbol................... ACNS
- ---------------

(1) Includes 17,377,278 shares issuable upon conversion of 464,164 shares of
Preferred Stock. Excludes 10,925,525 shares issuable upon exercise of
options and warrants outstanding on June 30, 1996 at a weighted average
exercise price of $3.39 per share.

RISK FACTORS

See "Risk Factors" beginning on page 9 of this Prospectus for certain
factors relating to an investment in the Common Stock that should be considered
by prospective investors.

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

ACSI is a Delaware corporation. The Company's principal executive offices
are located at 131 National Business Parkway, Suite 100, Annapolis Junction,
Maryland 20701, and its telephone number is (301) 617-4200.

7
<PAGE> 10

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------
AS
ACTUAL ADJUSTED(3)
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $154,454,550 $228,865,869
Total assets...................................... 207,978,611 282,389,930
Long-term liabilities............................. 183,667,996 179,749,315
Redeemable stock, options and warrants............ 2,457,337 2,457,337
Stockholders' equity.............................. 17,815,135 96,145,135
</TABLE>

(3) Adjusted to give effect to: (i) the sale of the shares of Common Stock
offered hereby and application of the estimated net proceeds therefrom
(assuming a per share offering price of $12.00, the last reported sales
price of the Common Stock on July 1, 1996) and (ii) the conversion of the
Preferred Stock.

(4) Network and Selected Statistical Data are derived from ACSI's records.

8
<PAGE> 11

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

RISK FACTORS

HISTORICAL AND ANTICIPATED FUTURE LOSSES; NEGATIVE CASH FLOW

RAPID EXPANSION OF OPERATIONS; IMPLEMENTATION OF GROWTH STRATEGY

9
<PAGE> 12

SUBSTANTIAL LEVERAGE; FUTURE CASH OBLIGATIONS

CERTAIN FINANCIAL AND OPERATING RESTRICTIONS

SIGNIFICANT FUTURE CAPITAL REQUIREMENTS

The Company's continued development, construction, expansion, operation and
potential acquisition of fiber optic networks, as well as the further
development and introduction of new services, including high speed data,
enhanced voice messaging and local switched voice services, will require
substantial capital expenditures. The Company's ability to fund these
expenditures is dependent upon the Company's raising substantial financing.
Prior to this Offering, the Company had raised approximately $202.6 million in
debt and equity financing and obtained $31.2 million in financing commitments
from the AT&T Credit Facility. The Company will use approximately $73.5 million
of the estimated net proceeds from this Offering, toward completion of the
Company's 50-city business plan including the development and construction of
fiber optic networks, the deployment of a broadband inter-city data
communications network and development and introduction of new services, such as
high-speed data, voice messaging and local switched voice services, for
expansion of the Company's existing networks and to fund negative operating cash
flow until cash flow breakeven. The Company has estimated that from April 1,
1996 through the end of the calendar year 1998, capital requirements for
implementation of its 50-city business plan are approximately $430.4 million. At
March 31, 1996, the Company had approximately $154.5 million of cash and cash
equivalents available for the completion of its planned networks. To meet its
additional remaining capital requirements, ACSI may

10
<PAGE> 13

sell additional equity or debt securities or increase its existing credit
facility. Before incurring additional indebtedness, the Company may be required
to seek such additional equity financing to maintain balance sheet and liquidity
ratios required under certain of its debt instruments. In addition, the Company
in the past has considered and expects to continue to consider potential
acquisitions or other strategic arrangements that may fit the Company's
strategic plan, although the Company is not currently negotiating any particular
transaction. Any such acquisitions or strategic arrangements that the Company
might consider are likely to require additional equity or debt financing, which
the Company will seek to obtain as required. Failure to raise sufficient capital
could compel the Company to delay or abandon some or all of its plans or
expenditures, which could have a material adverse effect on its business,
results of operations and financial condition. Also, the terms of any debt or
equity capital raised by the Company in the future could restrict the Company's
operational flexibility and ability to raise additional capital and thereby
adversely affect the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

BUSINESS COMBINATIONS; STRATEGIC INVESTMENTS

EFFECT OF REGULATION

11
<PAGE> 14

court decisions or changes in current or future federal or state legislation or
regulations would not materially adversely affect the Company. See
"-- Competition" and "Business -- Regulation."

COMPETITION

12
<PAGE> 15

DEPENDENCE ON A SMALL NUMBER OF MAJOR CUSTOMERS

LIMITED OPERATING REVENUES; LIMITED MARKETING AND OPERATING EFFORTS

IMPACT OF TECHNOLOGICAL CHANGE

DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS

13
<PAGE> 16

POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS

DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS

DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY

14
<PAGE> 17

DEPENDENCE ON KEY PERSONNEL

CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT

Upon completion of this Offering, the Company's directors, officers and
principal stockholders will beneficially own approximately 72.4% of the
outstanding Common Stock (including shares issuable upon conversion of the
Preferred Stock and exercise of currently exercisable options and warrants),
including 35.5%, 19.6% and 9.1% of the then outstanding Common Stock which will
be beneficially owned by Huff Alternative Income Fund, L.P. ("Huff"), ING Equity
Partners, L.P. ("ING") and First Analysis Corporation, respectively.
Accordingly, if they choose to act together, these persons will be able to
control the election of the Board of Directors and other matters voted upon by
the stockholders. A sale by one or more of these principal stockholders to third
parties could trigger a Change of Control Offer (as defined in the Indentures).
In the event that a Change of Control Offer occurs at a time when the Company
does not have sufficient available funds to pay the Change of Control Purchase
Price (as defined in the Indentures) for all Notes tendered, or at a time when
the Company is prohibited from purchasing the Notes, an Event of Default (as
defined in the Indentures) could occur under the relevant Indenture. See
"Management," "Principal Stockholders" and "Description of Certain
Indebtedness -- 2005 Notes and 2006 Notes."

LIMITED TRADING MARKET AND POSSIBLE VOLATILITY OF PRICE OF THE COMMON STOCK

SHARES ELIGIBLE FOR FUTURE SALE

15
<PAGE> 18

1,134,073 shares (plus the 7,000,000 shares offered hereby) will be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), unless held by affiliates of the
Company. The remaining shares outstanding are "restricted securities" as that
term is defined in Rule 144 of the Securities Act. Of such restricted shares,
4,168,976 have been held (or are deemed to have been held) for more than two
years, and, as such, are saleable subject, in certain instances, to certain
volume and manner of sale restrictions under Rule 144. During the period from
the commencement of the Offering to February 1, 1997, up to 9,407,211 shares of
Common Stock will become saleable under Rule 144, with an additional 11,119,911
shares becoming saleable under Rule 144 as of January 1, 1998. Of the 10,925,525
shares reserved for issuance upon exercise of outstanding options and warrants,
2,432,000 shares have been registered on a Registration Statement on Form S-3
and 6,797,771 shares have been or within a month after the date hereof will be
registered on a Registration Statement on Form S-8, under the Securities Act.
Accordingly, the shares issued upon exercise of such options or warrants will be
freely transferable. Subject to certain exceptions, the Company has agreed, and,
all of its executive officers and directors and certain of its security holders
of the Company have agreed pursuant to certain agreements (the "Lock-up
Agreements"), not to, directly or indirectly, offer, sell, contract to sell,
grant any option to purchase, or otherwise dispose of any shares of Common Stock
or any securities convertible into or exercisable or exchangeable for shares of
Common Stock or cause to be filed with the Securities and Exchange Commission
(the "Commission") a registration statement under the Securities Act to register
any shares of Common Stock or, in any manner, transfer all or a portion of the
economic consequences associated with the ownership of Common Stock without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Holders of 23,707,909 shares of Common Stock, 688,431 shares of Common Stock and
1,531,820 shares of Common Stock (in each case, including shares issuable upon
conversion of the Preferred Stock and the exercise of options and warrants which
are or will become vested within the applicable lock-up period) have executed
Lock-up Agreements covering a period of 180 days, 90 days and 45 days,
respectively, after the date of this Prospectus. Under certain circumstances,
Huff, ING and affiliates of First Analysis Corporation, each of whom has
executed a 180-day Lock-up Agreement, will be permitted to include their shares
of Common Stock on a registration statement that is filed with the Commission on
or after the 150th day after the date of this Prospectus, but will be prohibited
from selling any of such shares of Common Stock thereunder until the 180-day
lock-up period has expired.

Holders of substantially all of the restricted shares of Common Stock,
including all shares issuable upon conversion of the Preferred Stock and
exercise of outstanding options and warrants have either piggy-back or demand
registration rights relating to those shares. In December 1995, ACSI filed a
registration statement with the Commission which covers the offer and sale of
warrants to purchase 2,432,000 shares of Common Stock (the "Warrants") which
were sold together with the 2005 Notes in a November 1995 private placement. The
filing of such registration statement required the Company to send notice to
certain of its security holders who have "piggy-back" registration rights. Such
notice was sent to these holders in November 1995. A total of twenty-seven
holders, holding approximately 635,225 shares of Common Stock and warrants to
purchase 1,710,059 shares of Common Stock, either requested to have their shares
included in such registration statement or may not have received such notice.
The Company did not include any of these shares in such registration statement
and is in the process of obtaining waivers of such "piggy-back" rights from
these holders. In connection with this Offering, the Company has also requested
from its security holders waivers of such security holders' registration rights.
In connection therewith, the Company has agreed to use its commercially
reasonable efforts to file on the later of 210 days from the date of this
Prospectus or April 30, 1997 a registration statement on which all security
holders with registration rights may have the right to include their shares. To
date, the Company has not received waivers from all its security holders having
registration rights. There can be no assurance that the Company will not be
required to file an earlier registration statement for any non-waiving security
holders, on which security holders having registration rights may include their
shares, or that such security holders will not seek damages from the Company for
any alleged breach of such security holders' registration rights.

16
<PAGE> 19

The future sale pursuant to Rule 144 or pursuant to a registration
statement for the outstanding restricted shares of Common Stock or the Common
Stock underlying the options and warrants, the future sale of Common Stock for
the Company's own account, or the exercise of registration rights by any
security holder or the perception that such sales or exercise could occur, could
have an adverse effect on the market price of the Common Stock and could impair
the Company's ability to raise capital through an offering of Common Stock. See
"Certain Relationships and Related Transactions."

USE OF PROCEEDS

The net proceeds to the Company from this Offering are estimated to be
approximately $78.3 million ($90.2 million if the Underwriters' over-allotment
option is exercised in full), assuming a public offering price of $12.00 per
share (the last reported sale price of the Common Stock on July 1, 1996). The
Company intends to use approximately $73.5 million of the net proceeds towards
the completion of its 50-city business plan, including development and
construction of 50 fiber optic networks, development and introduction of new
data services including development of a high-speed data backbone network,
enhanced voice-messaging and local switched voice services, for expansion of the
Company's existing operational networks and to fund negative cash flow until
breakeven. The Company has estimated that as of April 1, 1996, the total
remaining capital requirements for implementation of its 50-city business plan
through the end of calendar year 1998 was approximately $430.4 million. The
Company will use approximately $4.8 million of net proceeds from this Offering
to pay the accrued dividends on its Preferred Stock, which will be converted
into 17,377,278 shares of Common Stock upon completion of this Offering.

Upon completion of this Offering, the Company will have obtained
approximately $307.3 million in net proceeds or commitments from debt and equity
financings that have been or will be applied towards the development and initial
construction of its planned networks and to support its general corporate
development, network data and voice services and sales functions. To meet
additional remaining capital requirements, ACSI will consider the sale of
additional debt or equity securities or increases in existing credit facilities.
In addition, the Company in the past has considered and expects to continue to
consider potential acquisitions or other strategic arrangements that may fit the
Company's strategic plan, although the Company is not currently negotiating any
particular transaction. Any acquisitions are likely to require additional equity
or debt financing, which the Company will seek to obtain, as required.

Pending such uses, the Company intends to invest the net proceeds from this
Offering in short-term U.S. government securities.

17
<PAGE> 20

PRICE RANGE OF COMMON STOCK

<TABLE>
<CAPTION>
HIGH
BID LOW BID
PRICE PRICE
------- -------
<S> <C> <C>
Fiscal Year Ended June 30, 1994
Second Quarter.................................... $ 4.00 $ 2.50
Third Quarter..................................... 4.75 3.00
Fourth Quarter.................................... 3.25 1.75
Fiscal Year Ended June 30, 1995
First Quarter..................................... $ 4.50 $ 1.50
Second Quarter.................................... 4.25 2.50
Third Quarter..................................... 3.75 3.25
Fourth Quarter.................................... 4.33 3.25
Fiscal Year Ended June 30, 1996
First Quarter..................................... $ 8.25 $ 3.75
Second Quarter.................................... 6.75 5.00
Third Quarter..................................... 9.00 5.00
Fourth Quarter.................................... 15.38 7.75
Fiscal Year Ended June 30, 1997
First Quarter (July 1)............................ $12.50 $11.75
</TABLE>

On July 1, 1996, the last reported sales price for the Company's Common
Stock as reported on The Nasdaq National Market was $12.00. As of June 30, 1996,
there were approximately 271 holders of record of the Company's Common Stock.

DIVIDEND POLICY

18
<PAGE> 21

CAPITALIZATION

The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of March 31, 1996, and as adjusted to give
effect to the sale of the Common Stock offered hereby (at an assumed public
offering price of $12.00 per share, the last reported per share sales price for
the Common Stock on July 1, 1996) and application of the estimated net proceeds
therefrom, and the conversion of 464,164 shares of Preferred Stock into
17,377,278 shares of Common Stock. See "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------
(UNAUDITED)
(IN THOUSANDS)
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Cash and cash equivalents.............................................. $154,455 $ 228,866
======== =========
Long term debt
12 3/4% Senior Discount Notes due 2006............................ $ 64,571 $ 64,571
13% Senior Discount Notes due 2005................................ 100,453 100,453
Notes payable(1).................................................. 14,054 14,054
Dividends payable................................................. 3,919 --
-------- -----------
Total long term debt......................................... 182,997 179,078
Redeemable stock, options & warrants................................... 2,457 2,457
Minority interest...................................................... 385 385
Stockholders' equity (deficit):
9% Series A-1 convertible preferred stock, par value $1.00 per
share, 813,336 shares authorized (for all series of convertible
preferred stock); 186,664 shares issued and outstanding; no
shares, as adjusted.............................................. 187 --
9% Series B convertible preferred stock, par value $1.00 per
share, 277,500 shares issued and outstanding; no shares, as
adjusted......................................................... 278 --
Common Stock, par value $0.01 per share, 75,000,000 shares
authorized, 6,555,455 shares issued and outstanding at March 31,
1996; 30,932,733 shares, as adjusted for this Offering(2)(3)..... 65 309
Additional paid-in capital........................................ 56,213 134,764
Accumulated deficit............................................... (38,928) (38,928)
-------- -----------
Total stockholders' equity................................... 17,815 96,145
-------- -----------
Total capitalization.................................... $203,654 $ 278,065
======== =========
</TABLE>

- ---------------
(1) Consists of the AT&T Credit Facility totalling $31.2 million, of which
approximately $14.1 million had been drawn as of March 31, 1996.

(2) Excludes 7,501,415 and 3,489,283 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at March 31, 1996, at a
weighted average exercise price of $3.32.

(3) The aggregate proceeds from the exercise of all warrants and options
outstanding at March 31, 1996, would be approximately $36,466,476.

19
<PAGE> 22

SELECTED CONSOLIDATED FINANCIAL DATA

20
<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such
forward-looking statements. The following discussion should be read in
conjunction with the consolidated financial statements and the related notes
thereto included elsewhere in this Prospectus.

OVERVIEW

The Company is developing and has begun offering on a limited basis
high-speed data services, including IP switching and frame relay. IP switching
facilitates the connectivity of corporate, institutional and governmental
customers to the Internet, a collection of data networks that communicate with
one another using common protocols. Frame relay is a cost-effective data
transport solution for LAN-to-LAN connectivity, legacy networks and
client-server applications. ATM is a high-bandwidth service offering virtual
networking for voice, data and video traffic, allowing a customer to use a
single network for all three applications. Customer charges include nonrecurring
charges for installation and provisioning and either flat rate or usage-based
recurring charges based on network access speed and the statistically guaranteed
throughput rate of data for the particular service order. The Company is
deploying a broadband inter-city backbone data network utilizing ATM switches
that will connect the Company's service markets and major data centers and
Internet access points. The same backbone network architecture can be utilized
by the Company's enhanced voice and local switched services for its data
services offerings, which the Company believes will result in operational
efficiencies and lower costs while further enhancing opportunities for cross
marketing and bundling services to ACSI's customers.

ACSI is implementing its data communications network via leased high
bandwidth (DS-3) longhaul circuits from various interexchange carriers. Network
connectivity within each node will be via OC-3

21
<PAGE> 24

bandwidth, enabling the transparent migration of longhaul circuits to OC-3
capacity as needed. The Company's initial network phase established data POPs in
seven markets plus a link to ACSI's network management center in Maryland, where
the data network is monitored on a 24-hour-a-day basis. The Company expects to
have at least 20 POPs in operation by July 31, 1996 and at least 40 POPs by the
end of calendar year 1996.

22
<PAGE> 25

Capital Expenditures; Operating Cash Flow

RESULTS OF OPERATIONS

Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1995

Revenues

During the nine months ended March 31, 1996 (the "first three quarters of
fiscal 1996"), the Company recorded revenues of $1,895,812 as compared to
revenues of $95,631 during the nine months ended March 31, 1995 (the "first
three quarters of fiscal 1995"). Four of the largest IXCs accounted for
approximately $1,130,000, or 60%, of revenues for the first three quarters of
fiscal 1996.

23
<PAGE> 26

Total Operating Expenses

Interest and Other Expenses

24
<PAGE> 27

Fiscal Year Ended June 30, 1995, Compared to Fiscal Year Ended June 30, 1994

Revenues

Total Operating Expenses

Interest and Other Expenses

25
<PAGE> 28

$536,000 of interest in connection with its construction of fiber optic
networks, causing interest expense to decrease to $170,095.

AT&T Credit Corporation's minority interest in the Company's Louisville and
Fort Worth operating subsidiaries reduced operating losses for fiscal 1995 by
$40,000 and $8,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

26
<PAGE> 29

EFFECTS OF NEW ACCOUNTING STANDARDS

27
<PAGE> 30

BUSINESS

INDUSTRY OVERVIEW

THE COMPANY

28
<PAGE> 31

As of May 31, 1996, ACSI had 15 operational networks and seven additional
networks under construction. Since May 31, 1996, the Company has begun
construction of two additional networks. From September 30, 1995 to May 31,
1996, the Company increased its operational networks from five to 15 and
increased its route miles from 92 to 386. The Company expects to have 30
networks in service or under construction by September 30, 1996 and intends to
have a total of 50 local distribution networks in service or under construction
by the middle of calendar year 1998. To date, management believes that it has
been able to deploy its capital most efficiently by constructing, rather than
acquiring, fiber optic networks. By constructing all of its networks, ACSI
believes it has realized significant cost savings, created considerable
networking efficiencies and ensured quality, reliability and high operating
standards. The Company believes the concentration of its 50 networks principally
throughout the southern United States, together with its planned inter-city
broadband backbone network, will provide an effective platform for the provision
of its high-speed data and enhanced voice messaging and local switched voice
services at reduced costs. ACSI's management team includes several pioneers in
the development of the competitive access industry with demonstrated expertise
in successfully deploying fiber optic networks and aggressively managing
operations to generate positive operating cash flow.

ACSI NETWORKS

<TABLE>
<CAPTION>
TARGETED TARGETED
TO BE TO BE
OPERATIONAL AS OF OPERATIONAL BY OPERATIONAL BY
MAY 31, 1996 SEPTEMBER 30, 1996 DECEMBER 30, 1996
- ----------------------------------- --------------------- ---------------------
<S> <C> <C> <C>
Albuquerque, NM Las Vegas, NV Amarillo, TX Central Maryland
Birmingham, AL Lexington, KY Baton Rouge, LA Chattanooga, TN
Charleston, SC Little Rock, AR Columbus, GA Colorado Springs, CO
Columbia, SC Louisville, KY Jackson, MS Corpus Christi, TX
El Paso, TX Mobile, AL Spartanburg, SC
Fort Worth, TX Montgomery, AL
Greenville, SC Tucson, AZ
Irving, TX
</TABLE>

COMPANY STRATEGY

Early Entry in Tier II and Tier III Markets in the Southern United States.
The Company principally targets Tier II and Tier III markets, as they are
generally subject to less competition from other CLECs relative to larger, more
developed Tier I markets, thereby enabling the Company to achieve market
penetration quickly. ACSI intends to continue focusing its market entry
principally in areas of the southern United States because of attractive
demographic trends and expected growth in demand for telecommunications services
in these regions, which the Company believes have been underserved to date.
However, the Company may consider larger markets or markets outside its current
geographic focus. Between 1989 and 1994, the rate of access line growth in all
the regions of the South exceeded the national average by approximately two and
one-half times. Additionally, the 18 state area targeted by the Company accounts
for approximately 37% of the U.S. population and approximately 35% of the total
access lines in the United States. Although not precluding entry into a
particular market by competitors, the Company believes that the

29
<PAGE> 32

first operational competitive network in a market generally has a competitive
advantage in attracting customers willing to switch from the LEC. Management
believes that the Company will be the first competitor to offer dedicated
services in 14 of the above-listed 24 markets.

Building on Strong Relationships with IXCs. ACSI has significant customer
relationships with most of the major IXCs serving its markets. Currently, a
substantial portion of the Company's revenues is billed to IXCs for services
provided for the benefit of their customers. IXCs often choose the access
provider for the local portion of a long distance call and have a strong
presence in all of the Company's target markets. By demonstrating its ability to
provide high quality services in its existing markets, the Company has the
opportunity to obtain commitments for dedicated services from IXCs in new
markets. The Company has signed a five-year agreement with MCImetro in which
MCImetro has agreed to purchase minimum levels of dedicated services from ACSI
and has committed to construct portions of ACSI's fiber optics networks in six
cities. Recently, the Company signed agreements with AT&T and two other IXCs,
pursuant to which the Company expects AT&T and such other IXCs to use the
Company as a supplier of dedicated special access services as well as such other
services as may be agreed upon in particular markets. The Company also markets
its services directly to the end user in conjunction with IXC representatives.
The Company expects further growth to the extent that LECs begin to compete with
IXCs for long distance services, thereby providing IXCs with a competitive
incentive to move access business away from LECs to CLECs. Moreover, because the
Telecommunications Act prohibits the three largest IXCs from jointly marketing
their long distance services with resold local services of an RBOC (until that
RBOC itself offers in-region long distance service), the Company believes that
IXCs should have incentive to resell CLEC services.

Aggressive Bottom-Line Approach to Network Deployment. The Company rapidly
deploys its networks and markets its services in order to quickly achieve
operating cash flow breakeven, i.e., positive EBITDA before overhead allocation.
The Company's objective is to commence construction of a network in the central
business district of a market immediately upon receipt of the requisite
municipal approval. ACSI targets completion of its initial network phase and
commencement of commercial service in a market within approximately six months
after the start of construction. The Company typically begins premarketing its
services at the start of construction so that once a network becomes
operational, customer demand exists for its dedicated services. The Company then
seeks to extend the reach of its network outside the central business district
in response to customer demand. ACSI anticipates that each dedicated services
network will achieve operating cash flow breakeven within ten to fifteen months
after commencement of service. In its more mature markets, Louisville, Little
Rock and Greenville, the Company achieved operating cash flow breakeven in a
year or less after initiation of service.

Cost-Effective Entry into Local Switched Voice and Value-Added
Services. To take advantage of the opportunities created by the
Telecommunications Act and following receipt of state regulatory approval and
LEC interconnections, the Company plans to offer local switched voice services
beginning in late 1996 where it is deploying local distribution networks. The
Company expects to deploy telecommunications switching equipment in eight
markets by mid-1997 and in 24 markets by early 1999. To take advantage of the
size and regional concentration of ACSI's markets, where technically feasible
and economically practicable, the Company plans to implement a hubbed switching
strategy whereby one switch can serve multiple markets via remote switching
modules. This strategy would justify the switch investment in Tier II and Tier
III markets by reducing capital costs and operating expenses. The Company
recently agreed to purchase eight 5ESS(R)-2000 switches from Lucent
Technologies. The Company believes that providing dedicated, enhanced voice
messaging and high-speed data services will enhance the Company's ability to
cross-market local switched voice services.

30
<PAGE> 33

Company expands the range of local switched voice services within specific
buildings, thereby justifying the expansion of the Company's network to connect
these additional customers and buildings.

ACSI has begun offering on a limited basis a range of enhanced voice
messaging services to small and mid-sized business and government end users. The
Company's initial offerings of enhanced voice messaging services include
business voice messaging services utilizing the Company's First Line and First
Line Plus products and one-number services utilizing the Company's Virtualine
and Virtualine 800 products. The Company's enhanced voice messaging service can
function as a virtual PBX. Management believes that the market for voice
messaging services in 1993 was approximately $1.4 billion, that this market is
underserved and that, with the availability of enhanced voice messaging services
such as the Company's, the market has the potential for continued rapid growth
as customers become more accustomed to use of these services. The Company
believes that this service should enable the Company to begin marketing to small
and mid-sized customers in ACSI on-net and off-net buildings that are not
candidates for dedicated services in anticipation of offering local switched
services to these customers. Additionally, the Company may market this service
directly or through third parties (as a private label service) in cities where
it does not have a network presence.

Developing a Broadband Data Communications Backbone Network with Extensive
Local Points of Presence. The Company believes that switched data
communications represents one of the fastest growing segments of the
telecommunications services market. Industry sources estimate that the U.S.
switched data services market was approximately $1.1 billion in 1995 and the
Company believes that this market will grow to approximately $8.8 billion by
2000 due, in part, to the continuing proliferation of personal computers and the
increasing need to interconnect these computers via local and wide area
networks, the dramatic growth of the Internet and the emergence of multimedia
applications. Together, these applications have spawned numerous network
technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements is being strained by the increasing demand
for high bandwidth transport at both the local and national levels. The Company
believes that the growth of high speed applications will further strain the
networks that exist today. Unless additional network infrastructure supporting
these high bandwidth requirements is developed, the ability of existing networks
to service the demand for both speed and capacity may continue to be strained
and may result in further degradation of the quality of service afforded by
network service providers. The Company believes that this constraint in
bandwidth capacity creates a significant business opportunity for the Company,
particularly in its Tier II and Tier III markets, which have largely been
ignored by the larger data communications providers.

31
<PAGE> 34

lower speed services to high bandwidth services, as their data communications
requirements expand. The Company plans to have 40 data POPs in service by the
end of calendar 1996. The Company believes this backbone, coupled with its
planned 50 local distribution networks, provides the Company with a cost
advantage for its high speed data services.

The Company believes that it can become a major provider of high-speed data
communications services (including IP switching, frame relay and ATM) in the
southern United States by:

- Leveraging Local Network and Switching Infrastructure to Reduce Cost of
Service. Local access charges and switched local lines are a major cost
component of data communications. Most data communications service
providers, such as IXCs and ISPs, do not currently have local
distribution network facilities in place and, therefore, must purchase
these local components from other parties such as the LEC or a CLEC.
Similarly, to the extent data service requirements include a need for

32
<PAGE> 35

local switched services, these lines must be obtained from the LEC or a
CLEC with local switching capability. Because ACSI is planning local
network facilities in 50 markets and switching capability in at least 24
of those markets, the Company believes that it can provide data
communications services to customers in those markets where it has
network and switching facilities at a lower cost with higher quality of
service.

The Company believes that the following data communications services
constitute the principal growth areas in commercial data market:

33
<PAGE> 36

Attract and Retain a Management Team with Extensive Telecommunications
Experience. The senior management of ACSI pioneered the development of many of
the first fiber optic networks in Tier I markets in the United States and has
substantial experience in rapidly building cost-effective networks and managing
service operations. The Company's Chairman, Anthony J. Pompliano, is the
co-founder and former President and Chief Executive Officer of MFS. Richard A.
Kozak, the Company's President and Chief Executive Officer, has held senior
management positions at several telecommunications companies, including MFS and
Sprint International (formerly Telenet Communications Corporation). Other
members of the Company's senior management team have experience working at MFS,
Teleport Communications Group, AT&T, MCI, WilTel, Inc., BellSouth
Telecommunications, Inc. and other telecommunications companies. The Company's
management team collectively has over 200 years of marketing and operating
experience in the telecommunications industry.

NETWORK DEVELOPMENT

34
<PAGE> 37

way; and (iii) efficiently implementing construction plans in a timely manner,
thereby allowing the Company to gain a competitive position in the chosen
market.

Site Selection. Before deciding to enter a market, the Company conducts a
detailed feasibility study to determine the potential size of the market,
existing competition within the market, the Company's ability to obtain
municipal authorizations, including franchises and access to rights-of-way, and
the relative ease of market entry from a local and state regulatory standpoint.
The rights-of-way assessment, done by independent telecommunications
consultants, determines whether another CAP/CLEC network is under construction
or ready to construct in the target market, the availability of economical
rights-of-way, the local utility's receptiveness to allow use of its
rights-of-way, the topology of the city and concentrations of commercial real
estate, and the local city permitting and franchise requirements. The market or
end-user survey, also done by independent telecommunications consultants,
identifies the significant commercial and government end users in the target
service areas. Individual telephone and/or face-to-face interviews are then
conducted with potential end users, focusing on those anticipated to have the
largest business volume. The interviews determine the end user's receptiveness
to using a competitor to the LEC, the telecommunications requirements of such
end user, current pricing by the LEC and other relevant information. This
"bottom up" sizing of the target service areas provides an estimate of the
prospective business by building and by customer.

35
<PAGE> 38

downtown central office and interconnection with selected IXC POPs to coincide
with other construction milestones. The Company believes that this coordinated
construction process reduces overall network development costs and reduces
construction intervals, allowing it to initiate operations at an earlier date.

PRODUCTS AND SERVICES

- Special access services. Special access services provide a link
between an end-user location and the POP of its IXC, or links
between IXC POPs, thus bypassing the facilities of the incumbent
LEC. These services, which may be ordered by either the long
distance customer or directly by its IXC, typically provide the
customer better reliability, shorter installation intervals, and
lower costs than similar services offered by the LEC. Customer
charges are based on the number of channel terminations, fixed and
mileage-sensitive transport charges, and costs for any services
required to multiplex (increase or decrease the bandwidth or
transmission speed) circuits (e.g., taking VGE circuits at 64
kilobits per second and stepping them up to a single DS-1 (1.54)
megabit circuit, which has the capacity to carry up to 24 VGE
circuits and is priced at a significant discount to multiple VGE
circuits over the same route). A CAP may provide special access
service on an on-net basis by connecting an end user directly to its
fiber backbone, or on an off-net basis by reselling a portion of the
LEC's network to terminate the circuit at the end user's location
and passing the cost of the LEC services on through to the customer
(who realizes cost savings and network benefits for the portion of
the circuit that is on the CAP's network). While

36
<PAGE> 39

resulting in lower margins than on-net service due to the payout to the
LEC, off-net service can be provided to any customer within a LATA,
reducing the CAP's need to build pervasive network infrastructure.

- Private line services. Private line services provide dedicated
facilities between two end-user locations in the same metropolitan
area (e.g., a central banking facility and a branch office or a
manufacturing facility and its remote data processing center) and
are priced like special access services (channel termination charges
plus transport and any associated multiplexing charges). The Company
expects the demand for private line service to increase in
conjunction with higher bandwidth customer applications.

37
<PAGE> 40

calls, Centrex services, PBX trunking and switched access services, in certain
of its markets beginning in late 1996.

The Company intends to offer the following local switched voice services:

38
<PAGE> 41

- Virtual calling card -- the platform enables the subscriber to use
the service to make outbound calls in response to messages received
without disconnecting the call.

- Fax services -- the platform enables faxes to be stored and
transmitted at the discretion of the subscriber.

- Notification services -- at the subscriber's discretion, the arrival
of voicemail can trigger pager or E-mail notification.

- Automated attendant -- the platform can provide all of the above
services, as well as call screening for the subscriber.

SALES AND MARKETING

39
<PAGE> 42

relationships, and the Company's ability to hire sales and management staff with
existing customer relationships enhances its ability to penetrate the market.

COMPETITION

Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its management expertise, coupled
with its highly reliable, state-of-the-art digital networks, which offer
significant transmission capacity at competitive prices, will allow it to
compete effectively with the LECs, which may have not yet fully deployed fiber
optic networks in many of the Company's target markets. The Company currently
prices its services at a modest discount compared to the prices of the LEC while
providing a higher level of customer service. The Company's fiber optic networks
will provide both diverse access routing and redundant

40
<PAGE> 43

electronics, design features not widely deployed by the LEC's networks (which
were originally designed in tree and branch or star configurations).

Other potential competitors of the Company include CATV operators, public
utilities, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, teleports, private networks built by large end users, and
other CLECs. With the passage of the Telecommunications Act and the entry of
RBOCs into the long distance market, the Company believes that IXC's may be
motivated to construct their own local facilities and/or resell the local
services of ACSI's competitors. For example, AT&T has announced its intention to
offer local services and has filed for state certification in markets which
include, among others, several of the Company's markets. See "Risk
Factors -- Competition." Other CLECs or CATVs currently are competitors in
various markets in which the Company has networks in operation or under
construction. Based on management's experience at other CLECs, the initial
market entrant with an operational fiber optic CLEC network generally enjoys a
competitive advantage over other CLECs that later enter the market. The Company
expects that there will be other CLECs operating in most, if not all, of its
target markets and that some of these CLECs may have networks in place and
operating before the Company's network is operational. While it is generally
considered within the CLEC industry that being the first market entrant to offer
services typically enhances that CLEC's competitive advantage relative to CLECs
that enter the market at a later time, the Company recognizes that in some
instances it may have other competitive advantages (such as a superior
right-of-way arrangement or large customer commitments) that it believes
outweighs another CLEC's first to market advantage; in these instances, the
Company may elect to enter a market where an established CLEC already exists.

There is significant competition for Internet access and related services
in the United States, with few barriers to entry other than capital. The Company
expects that competition will increase as existing services and network
providers and new entrants compete for customers. ACSI's current and future
competitors include telecommunications companies, including the RBOCs, IXCs,
competitive local exchange companies and CATVs, and other Internet access
providers, such as UUNET Technologies, Inc., Advanced Network & Services, Inc.,
BBN Corporation, NETCOM On-Line Communications Services, Inc. and PSINet Inc.
Many of these competitors have greater financial, technical, marketing and human
resources, more extensive infrastructure and stronger customer and strategic
relationships than ACSI. The Company believes that it will have a competitive
advantage in offering Internet access services to those ISP and commercial
customers in markets where ACSI has local fiber optic network facilities
relative to other Internet access providers that must purchase local loop access
from the LEC, ACSI or another CLEC in that market. Additionally, ACSI believes
that customers with operations in multiple locations served by ACSI local fiber
optic networks will find single-source Internet access services from ACSI
attractive.

All of the seven original RBOCs offer at least some basic frame relay
service. The Company believes that most IXCs offer substantial domestic and
international frame relay service, generally positioned to provide a significant
savings over traditional private lines. Other frame relay service providers
include MFS Communications and Intermedia Communications. A number of companies,
primarily CLECs, have announced plans to offer frame relay service. ATM
offerings are only beginning to emerge. ATM service is currently being offered
by most of the original RBOCs, MFS Communications, AT&T, MCI, Sprint and WilTel,
Inc. A number of other data communications providers, CLECs and facilities-based
cable TV providers have announced their intentions to offer ATM services in the
future.

41
<PAGE> 44

REGULATION

Overview

Recent Federal Legislation

On February 1, 1996, the U.S. Congress enacted comprehensive
telecommunications reform legislation, which the President signed into law as
the Telecommunications Act on February 8, 1996. The Telecommunications Act
amends the Communications Act of 1934 to impose a legal duty upon incumbent LECs
to provide interconnection (i) for the transmission and routing of telephone
exchange service and exchange access, (ii) at any technically feasible point
within the LECs' network, (iii) that is at least equal in quality to that
provided by the LEC to itself, its affiliates or any other party to which the
LEC provides interconnection, and

42
<PAGE> 45

(iv) at rates, terms and conditions that are just, reasonable and
nondiscriminatory. LECs also are required under the new law to provide
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point, to offer its local telephone services for resale at
wholesale rates, and to facilitate collocation of equipment necessary for
competitors to interconnect with or access the unbundled network elements.

- local loop transmission from the central office to the customer's
premises, unbundled from local switches, or other services;

- local switching, unbundled from transport, local loop transmission, or
other services;

- nondiscriminatory access to 911 and E911 services, directory
assistance services and operator services;

- white page directory listings;

- nondiscriminatory assignment of telephone numbers;

- nondiscriminatory access to data bases and associated signaling
necessary for call routing or completion; and

- interim number portability through remote call forwarding, direct
inward dialing trunks or other comparable arrangements.

43
<PAGE> 46

Federal Regulation

In general, the FCC has a policy of encouraging entry of new competitors,
such as the Company, in the telecommunications industry and preventing
anti-competitive practices.

44
<PAGE> 47

Company are described therein. "Enhanced" services (as defined by the FCC) need
not be tariffed. The Company has an "enhanced" frame relay product, which is not
contained in the Company's current FCC tariff. A tariff for a "basic" frame
relay offering is under development. The Company believes that its voice
messaging and Internet access products are "enhanced" services which need not be
tariffed.

State Regulation

The Company currently has obtained intrastate authority for the provision
of dedicated services in Alabama, Arkansas, Georgia, Maryland, New Mexico, South
Carolina, Tennessee, Texas, Nevada and Kentucky (excludes intraexchange private
line services). The Company has applications pending before the public service
commissions ("PSCs") in Arizona, Colorado, Florida, Louisiana, Maryland,
Mississippi, Missouri, Oklahoma and Virginia for intrastate dedicated services
authority. To the extent the Company expands the scope of its intrastate
services in the future in these states to include the full range of local
switched services, the Company is required to seek additional authorization from
such PSCs. As of June 30, 1996, the Company had applied for authorization to
provide local switched services in Arizona, Arkansas, Colorado, Florida,
Kentucky, Louisiana, Missouri, Nevada, New Mexico, Oklahoma, South Carolina and
Virginia and had been granted such authority in Alabama, Georgia, Maryland,
Texas and Tennessee. There

45
<PAGE> 48

can be no assurances that the Company will receive the authorizations it is
currently seeking, or will seek, from these PSCs. See "Risk Factors -- Rapid
Expansion of Operations."

In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services that are classified as intrastate.

Local Interconnection. The Telecommunications Act imposes a duty upon all
incumbent LECs to negotiate in good faith with potential interconnectors to
provide interconnection to the ILEC network, exchange local traffic, make
unbundled basic local network elements available, and permit resale of most
local services. The Company has entered into interconnection negotiations with
the major LECs in each of the markets it currently serves seeking mutual
agreement on each of these points. The Company is unable to predict at this time
the likelihood that voluntary mutual agreements will be reached. However, in the
event that negotiations do not succeed, the Company has a right to seek state
PSC arbitration of any unresolved issues. The state PSC must conclude the
arbitration within nine months of the date upon which the incumbent LEC received
the Company's initial request for interconnection.

Local Government Authorizations

Termination of the existing franchise or license agreements prior to their
expiration dates could have a materially adverse effect on the Company.

EMPLOYEES

LEGAL PROCEEDINGS

The Company and its subsidiaries are not currently parties to any material
litigation. The Company and its subsidiaries are from time to time parties to
routine litigation incidental to their business, none of which, individually or
in the aggregate, are expected to have a material adverse effect on the Company.
The Company and its subsidiaries continue to participate in regulatory
proceedings before the FCC and state regulatory agencies concerning the
authorization of services and the adoption of new regulations.

46
<PAGE> 49

PROPERTIES

The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.

47
<PAGE> 50

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding the directors and
executive officers of the Company.

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

(1) Member of Compensation Committee

(2) Member of Audit Committee

The Board is comprised of seven members, four of whom were elected by the
holders of the Company's Common Stock and three of whom were elected by the
holders of the Company's Preferred Stock. Following conversion of the Preferred
Stock upon completion of this Offering, the Board will be elected by the holders
of the Company's Common Stock. All directors of the Company hold office until
the next annual meeting of stockholders and until their successors are duly
elected and qualified.

48
<PAGE> 51

Richard A. Kozak, President and Chief Executive Officer, served as a
consultant to the Company starting in July 1993 and joined the Company as
President and Chief Operating Officer in November 1993. Mr. Kozak served as
Chief Financial Officer of the Company from September 30, 1994, until November
30, 1994. Mr. Kozak served on the Board from November 15, 1994, until June 1995,
when he resigned voluntarily to allow the investors in the Company's June 1995
private placement to elect representatives to the Board without unduly
increasing its size and from November 1995 until February 26, 1996 when he
resigned to allow the Board to return to seven members. Mr. Kozak has more than
twenty years of experience in the telecommunications industry. He was President
of the Southern Division of MFS from October 1992 until June 1993, where he was
responsible for networks in Atlanta, Baltimore, Dallas, Houston, Philadelphia,
Pittsburgh and Washington, DC, as well as for establishing networks in
additional markets in the southern U.S. Previously, he was President of MFS
Development from July 1991 until October 1992, where he was responsible for the
planning, development and implementation of more than $100 million of major
expansions of networks throughout the U.S., and Senior Vice President of Network
Services for MFS. Prior to joining MFS in 1990, he was a Vice-President and
General Manager for Telenet Communications Corporation (now Sprint
International) from 1986 through 1989 and an Executive Vice President and Chief
Financial Officer for TRT Communications from 1982 to 1986. Mr. Kozak holds an
Engineering degree from Brown University, studied at the University of Chicago
Graduate School of Business, and completed his MBA in Finance at the George
Washington University School of Government and Business Administration.

49
<PAGE> 52

financial planning and analysis, treasury operations, financial and management
reporting, tax and internal audit operations. From 1987 to 1989, Mr. D'Andrea
served as Controller of Marriott Corporation ("Marriott"), where he was
responsible for twelve airline catering units in five countries. Mr. D'Andrea
also served as Director of Pricing of Marriott from 1986 to 1987. Mr. D'Andrea
has a B.A. degree from Pennsylvania State University and completed his MBA in
Finance at Drexel University.

50
<PAGE> 53

Mr. Giess was employed at the Shawmut Bank of Boston. Mr. Giess also serves as a
director of Matthews Studio Equipment Group and CMI Holding Corp. Mr. Giess
received his undergraduate degree from Dartmouth College and his Masters of
Business Administration degree from the Wharton School of the University of
Pennsylvania.

OTHER SIGNIFICANT EMPLOYEES

51
<PAGE> 54

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
-------------------------------------------- AWARDS
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(2) (#)(3) ($)
----- ------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano....................... 1995 219,500 175,000(4) -- 500,000 6,977(5)
Chairman of the Board of Directors 1994 110,000 - 0 - 25,000(6) 1,349,899 61,507(7)
Richard A. Kozak........................... 1995 184,378 175,000(8) - 0 - 399,999 3,750(9)
President and Chief Executive Officer 1994 87,500 - 0 - 39,728(6) 899,932 - 0 -
George M. Tronsrue......................... 1995 150,000 135,417(10) 68,800(11) 350,000(12) - 0 -
Chief Operating Officer 1994 53,827 50,000 - 0 - - 0 - - 0 -
Riley M. Murphy............................ 1995 150,000 81,500(13) - 0 - 250,002(12) 9,783(14)
Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary 1994 37,500 - 0 - 48,620(15) - 0 - - 0 -
Douglas R. Hudson.......................... 1995 125,004 100,000(16) - 0 - 250,002(12) - 0 -
Executive Vice President/General
Manager -- Network Services 1994 10,417 - 0 - - 0 - - 0 - - 0 -
</TABLE>