AMERICAN COMMUNICATIONS SERVICES INC, SB-2/A, 1997-03-12

AMERICAN COMMUNICATIONS SERVICES INC
SB-2/A, 1997-03-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997

REGISTRATION NO. 333-20867

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

PRE-EFFECTIVE AMENDMENT NO. 1
TO

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.
EXECUTIVE VICE PRESIDENT -- LEGAL AND REGULATORY AFFAIRS, GENERAL COUNSEL AND
SECRETARY
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............. $80,500,000 $24,394
=============================================================================================================
</TABLE>

(1) Calculated in accordance with Rule 457(o) under the Securities Act of 1933
and $15,152 of which was paid on January 31, 1997.

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

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

MARCH 12, 1997

8,000,000 SHARES

[ACSI LOGO]

COMMON STOCK
------------------

All of the 8,000,000 shares of Common Stock offered hereby are being sold
by American Communications Services, Inc. ("ACSI" or the "Company"). The Common
Stock is traded on the Nasdaq Stock Market under the symbol "ACNS." On March 11,
1997 the last reported sales price of the Common Stock on the Nasdaq Stock
Market was $8.75 per share. See "Price Range of Common Stock."

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

INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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 DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(2).................................. $ $ $
</TABLE>

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

(1) Before deducting expenses estimated at $775,000, payable by the Company.

(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 1,200,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

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

The shares of Common Stock are offered hereby by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to the right of the Underwriters to reject any order in whole or in
part. It is expected that delivery of the shares of Common Stock will be made at
the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about
, 1997.

ALEX. BROWN & SONS
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE> 3

[MAP TO BE INSERTED.]

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING.
SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."

<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus. Subsequent to June 30, 1996, the Company changed
its fiscal year-end from June 30 to December 31. Accordingly, all data for the
fiscal period ended December 31, 1996 is for the six month period ended December
31, 1996.

THE COMPANY

American Communications Services, Inc. ("ACSI" or the "Company") is a
provider of integrated local voice and data communications services to
commercial customers primarily in mid-size metropolitan markets in the southern
United States. The Company is a rapidly growing competitive local exchange
carrier ("CLEC"), supplying businesses with advanced telecommunications services
through its digital SONET-based fiber optic local networks. To date, the Company
has derived substantially all of its revenues from the sale of dedicated
services, generally at a discount to the price of the ILECs. The Company's
dedicated services include special access, switched transport and private line
services.

As a supplement to its dedicated services, in late 1996 and January 1997 the
Company introduced local switched voice services in two of its markets and
expects to begin offering local switched voice services in two additional
markets using its own switching facilities by March 31, 1997. The Company's
local switched services include local exchange services (dial tone), advanced
ISDN and enhanced voice services. Beginning April 1, 1997, the Company intends
to begin providing local switched services on a resale basis in 15 markets and
plans to expand the number of markets in which it is reselling local switched
services throughout 1997 and the first quarter of 1998. In late 1996, the
Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both Internet service providers ("ISPs") and local
businesses. As of February 28, 1997, the Company had ACSINet data POPs in 44
markets, including all but one of the markets in which the Company has
operational local networks. Additionally, principally through the Company's
recent acquisition of Cybergate, Inc., a Florida-based ISP, the Company has
begun providing Internet services. The Cybergate acquisition provides a
foundation to support the Company's Internet service offerings to ISPs in
existing ACSI markets and to end users in targeted ACSI markets.

ACSI LOCAL NETWORKS

From January 1, 1996 to December 31, 1996, the Company increased the number
of its operational local networks from nine to 21 and increased its route miles
in service from 136 to 697. As of February 28, 1997, the Company had 24
operational local networks and had 12 additional local networks under
construction. The Company is actively developing marketing and engineering plans
necessary to achieve its goal of 50 local networks operating or under
construction by June 1998. The following local network information is provided
as of February 28, 1997:

<TABLE>
<CAPTION>
ROUTE MILES TARGETED
------------------ DATE MARKETS UNDER INITIAL IN SERVICE
MARKETS IN OPERATION INITIAL CURRENT IN SERVICE CONSTRUCTION ROUTE MILES DATE
- -------------------------- ------- ------- ---------- -------------------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Albuquerque, NM........... 2.2 31.4 12-95 Austin, TX................ 2.2 9-97
Amarillo, TX.............. 0.8 1.0 9-96 Baton Rouge, LA........... 1.2 3-97
Baltimore, MD............. 2.8 12.0 10-96 Dallas, TX................ 1.5 6-97
Birmingham, AL............ 1.8 3.4 5-96 Jacksonville, FL.......... 1.4 3-97
Charleston, SC............ 1.9 1.9 4-96 Kansas City, KS........... 2.0 3-97
Chattanooga, TN........... 1.6 1.6 12-96 Knoxville, TN............. 2.3 9-97
Colorado Springs, CO...... 1.0 1.0 1-97 New Orleans, LA........... 3.9 3-97
Columbia, SC.............. 2.2 18.5 10-95 Rio Rancho, TX............ 14.2 9-97
Columbus, GA.............. 2.2 31.5 9-96 Roanoke, VA............... 1.2 9-97
Corpus Christi, TX........ 2.6 2.6 2-97 Savannah, GA.............. 6.6 9-97
El Paso, TX............... 1.2 69.0 11-95 Shreveport, LA............ 1.2 3-97
Fort Worth, TX............ 1.6 99.3 6-95 Tampa, FL................. 1.6 9-97
Greenville, SC............ 2.0 11.0 5-95
Irving, TX................ 8.8 23.0 9-96
Jackson, MS............... 2.2 5.4 7-96
Las Vegas, NV............. 0.2 16.4 5-96
Lexington, KY............. 3.0 14.5 3-96
Little Rock, AR........... 1.6 5.5 2-95
Louisville, KY............ 2.8 45.7 11-94
Mobile, AL................ 1.2 31.3 4-96
Montgomery, AL............ 1.7 40.5 12-95
Spartanburg, SC........... 4.1 4.3 6-96
Tucson, AZ................ 6.3 109.0 12-95
Tulsa, OK................. 1.5 2.0 1-97
</TABLE>

3
<PAGE> 5

TELECOMMUNICATIONS MARKET

Regulatory, technological, marketing, and competitive trends have
substantially expanded the Company's opportunities in the converging voice and
data communications services markets. Regulatory initiatives, such as the
Telecommunications Act of 1996 (the "Federal Telecommunications Act"), are
expected to expand opportunities in the local telecommunications services
market, the size of which is estimated to be approximately $100 billion in 1997.
Technological advances, including rapid growth of the Internet, the increased
use of packet switching technology for voice communications and the growth of
multimedia applications, are expected to result in substantial growth in the
high-speed data services market to approximately $10 billion by 2000 from $1
billion in 1995.

COMPANY STRATEGY

The Company's objective is to become the full service alternative local
phone company for businesses in markets served by its local networks. The
Company's strategy is to rapidly build out SONET-based fiber optic local
networks, which are located primarily in mid-size U.S. markets, and integrate
these local networks with the Company's recently deployed coast-to-coast, leased
broadband data communications network. This integrated network gives the Company
the ability to deliver high quality voice and high-speed data communications
services to IXCs and end users. The Company expects to leverage its local
network investment by expanding service offerings to provide switched voice and
Internet and other data services through its sales force and its strategic
partners. The Company is establishing the ACSI brand name by aggressively
marketing its broad array of communications services directly to end users. In
addition, the Company is trying to expand the distribution of private label
services through alternative channels. The Company believes it can provide its
customers with complete local communications services and achieve its strategic
objectives by implementing the following strategies:

- Expand Integrated Voice and Data Network. ACSI builds SONET-based fiber
optic local networks that are integrated with ACSINet, the Company's
coast-to-coast, leased broadband data communications network, to support
voice, data, multimedia and Internet technologies. By constructing rather
than acquiring its local networks, the Company believes it has achieved
significant cost savings. In addition, management believes the integrated
design of its local networks and ACSINet, which uses uniform technology
throughout all of its markets, provides the Company with substantial
benefits, including networking efficiencies and insured quality,
reliability and operating standards.

- Provide a Full Suite of ACSI-Branded Voice and Data Communications
Services. The Company believes that there is a substantial demand for an
integrated package of communications services from mid-size commercial
and government customers. ACSI has extended its service offerings to
include dedicated access, switched voice, enhanced voice, data and
Internet services. The Company believes that packaging its services under
the ACSI brand name will enhance revenues from the Company's existing
customer base, provide services that more effectively meet its customers'
needs, improve customer loyalty and expand awareness of ACSI's services
and capabilities.

- Rapidly Expand Sales, Marketing and Distribution Capabilities. In order
to enhance customer service and coverage, the Company has established a
local, customer-oriented, single point of service sales structure,
supported by product specialists. The Company plans to implement this
structure and exploit the opportunities presented by the increased number
and size of its operational local networks and the introduction of
expanded ACSI-branded service offerings by significantly increasing its
sales force during 1997. The Company plans to hire personnel with both
voice and data sales experience to strengthen its existing direct
distribution structure, provide extensive product and sales training and
compensate personnel under a highly incentivized program. In addition,
the Company is seeking to leverage existing and establish new strategic
relationships with utility and independent telephone

4
<PAGE> 6

companies, CATVs and cellular and other wireless communications providers
as an alternative means of distributing private label services to these
companies' customers.

- Leverage Strategic Relationships. In addition to its end-user sales
focus, ACSI has developed strategic relationships with major IXCs, CATVs
and electric utilities. As of February 28, 1997, ACSI had more than 40
rights-of-way agreements with gas and electric utility companies, ILECs
and CATVs, allowing the Company to construct its local networks using
those companies' infrastructure of conduits and utility poles. The
Company historically has leveraged and plans to continue to leverage
relationships with these companies to generate revenues and obtain cost
effective rights-of-way. For the fiscal period ended December 31, 1996,
approximately 40% of the Company's revenues were billed to four of the
largest IXCs for services provided for the benefit of their customers.
The Company has a five year agreement with MCImetro, pursuant to which
MCImetro has agreed to purchase minimum levels of dedicated services from
ACSI and has committed to construct portions of ACSI's fiber optic local
networks in six cities. The Company has also 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.

RECENT DEVELOPMENTS

Effective March 6, 1997, the Company and MCImetro entered into an agreement
in which MCI names ACSI as its preferred local provider for dedicated and
transport services in 21 ACSI markets for at least a five year period. Pursuant
to this preferred provider agreement, MCI will migrate current dedicated
transport circuits in these markets to ACSI and ACSI will be listed as the first
choice provider in MCI's provisioning system for all new dedicated access
circuits in the designated markets. The preferred provider agreement
contemplates that the parties will execute an agreement giving MCI the option to
purchase loop transport services from ACSI where ACSI has collocations with the
ILEC and MCI has deployed its own local switch. If this loop transport agreement
is not executed prior to April 30, 1997, MCI can terminate ACSI's preferred
provider status and ACSI's right of first refusal under the preferred provider
agreement. The parties also have agreed to use their best efforts to execute an
agreement pursuant to which MCI will resell local switched services in at least
10 of the 21 identified markets on a wholesale basis by July 23, 1997. In
connection with these agreements (collectively, the "MCI Transaction"), ACSI
issued MCI warrants to purchase up to 620,000 shares of ACSI's Common Stock at
$9.86 per share, subject to number and price adjustment in certain
circumstances. ACSI has also agreed to issue warrants to purchase up to an
aggregate of approximately 1.7 million additional shares of ACSI's Common Stock
at fair market value on the date of grant in tranches every six months after
execution of the preferred provider agreement, subject to, and based upon,
certain increases in revenues to ACSI generated under that agreement. Of the
620,000 warrants issued to MCI on March 6, 1997, 360,000 warrants will vest only
when the loop transport agreement is executed or MCI has agreed in writing not
to terminate ACSI's preferred provider status or right of first refusal under
the preferred provider agreement (the "Waiver") and the remaining 260,000
warrants will vest only upon execution of the switched services resale agreement
and the loop transport agreement or when MCI has executed the Waiver. Subject to
certain exceptions, including this offering, MCI has the right to purchase
additional shares of ACSI's Common Stock at a 10% discount to fair market value
so MCI can maintain its equity ownership interest in the Company after giving
effect to warrants issued in connection with the MCI Transaction and shares
issued upon exercise of such warrants. MCI has certain registration rights with
respect to any shares of Common Stock issued to MCI in connection with the MCI
Transaction. If MCI terminates ACSI's status as a preferred provider or ACSI's
right of first refusal under the preferred provider agreement for any reason
(other than ACSI's default under such agreement or a related agreement or a
change in control of ACSI) or MCI fails to deliver to ACSI the Waiver, in each
case, on or before May 12, 1997, the warrants, to the extent issued and not
previously exercised, ACSI's obligation to issue additional warrants, MCI's
right to purchase additional shares of ACSI in

5
<PAGE> 7

order to maintain its equity ownership interest and ACSI's obligation to
register shares of ACSI common stock issuable to MCI in connection with the MCI
Transaction will terminate.

On January 17, 1997, the Company acquired 100% of the outstanding capital
stock of Cybergate, Inc. in exchange for 1,030,000 shares of Common Stock plus
up to an additional 150,000 shares if certain performance goals are achieved
(the "Cybergate Acquisition"). Cybergate, a Florida-based ISP, delivers
high-speed data communications services, including computer network connections
and related infrastructure services, that provide both commercial and
residential customers access to the Internet through their personal computers
and the use of a modem. Cybergate had over 200 commercial dedicated line
accounts and 13,000 consumer accounts at December 31, 1996 compared to 25
commercial accounts and 7,500 consumer accounts at December 31, 1995. Cybergate
had revenues of approximately $4.9 million and EBITDA of approximately $744,000
for the year ended December 31, 1996. The Company believes the Cybergate
Acquisition will help it achieve its goal of becoming a major provider of
high-speed data communications services in the southern United States. The
Cybergate Acquisition provides ACSI with the ability to offer direct Internet
access to end-user commercial and consumer customers as well as to provide
private label Internet services for the Company's strategic distribution
partners throughout all of the Company's markets.

On December 2, 1996, the Company announced a reorganization of its
management structure to create an Office of the Chairman. Anthony J. Pompliano
was named Executive Chairman and has resumed responsibility for the overall
day-to-day operations of the Company. Jack E. Reich, formerly President of
Ameritech Corporation's Custom Business Services Division, joined the Company as
President and Chief Executive Officer of the Communications Services Division
and also has assumed oversight responsibility for the Company's finance,
accounting and investor relations functions. George M. Tronsrue, III was named
as President and Chief Operating Officer of Strategy and Technology Development
and Riley M. Murphy continued as General Counsel and Executive Vice
President -- Legal and Regulatory Affairs. Messrs. Reich and Tronsrue and Ms.
Murphy will report directly to Anthony J. Pompliano. Effective February 2, 1997,
the employment of Richard A. Kozak, who was named President and Chief Executive
Officer -- Corporate Services and Acting Chief Financial Officer in the
management reorganization, was terminated. Mr. Kozak and the Company have
settled their dispute relating to Mr. Kozak's termination. See "Certain
Transactions."

On March 11, 1997, ACSI announced that Mr. David L. Piazza will join the
Company as its Chief Financial Officer on March 24, 1997. For the last 10 years,
Mr. Piazza has been employed by MFS Communications Company, Inc. ("MFS
Communications") in various finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T in its finance and support
divisions. Mr. Piazza will report directly to Mr. Reich. See
"Management -- Executive Officers and Directors."

6
<PAGE> 8

THE OFFERING

Common Stock offered by the Company..... 8,000,000

Common Stock to be outstanding after the
offering................................ 33,452,823(1)

Use of proceeds......................... To be applied principally toward
the completion of the Company's
50-city local network plan,
operation of its coast-to-coast,
leased broadband data
communications network and
implementation of local switched
voice services, to fund negative
cash flow and to pay approximately
$8.0 million of accrued dividends
on the Company's Preferred Stock.
See "Use of Proceeds."

Nasdaq Stock Market Symbol.............. ACNS
- ---------------

(1) Includes 17,377,264 shares issued and issuable upon conversion of 464,164
shares of Preferred Stock. Excludes 12,881,563 shares issuable upon exercise
of options and warrants outstanding on February 28, 1997, at a weighted
average exercise price of $4.65 per share. Options to purchase 166,667 of
these shares were canceled subsequent to February 28, 1997. See "Certain
Transactions." Also excludes 500,000 shares issuable in connection with the
Company's Employee Stock Purchase Plan and up to approximately 2.3 million
shares issuable upon the exercise of warrants granted or to be granted in
connection with the MCI Transaction, subject to increase in certain
circumstances. See "-- Recent Developments."

RISK FACTORS

Investment in the Common Stock involves a high degree of risk. See "Risk
Factors" beginning on page 9 of this Prospectus.

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

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.

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 464,164 shares of the
Company's Preferred Stock will have been converted into 17,377,264 shares of
Common Stock upon completion of this offering and (ii) no exercise of the
Underwriters' over-allotment option.

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."

7
<PAGE> 9

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED FISCAL PERIOD ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31,(1)
------------------------------------- ------------ ------------------------
1995 1996 1995 1996
--------- ------------------------ ------------ ------------------------
ACTUAL PRO FORMA(2) (UNAUDITED) ACTUAL PRO FORMA(2)
-------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 389 $ 3,415 $ 7,138 $ 989 $ 6,990 $ 9,626
Operating expenses................. 14,797 24,543 29,027 7,966 34,434 37,548
Loss from operations............... (14,408) (21,128) (21,889) (6,977) (27,444) (27,922)
Interest and other income.......... 218 4,410 4,410 777 2,757 2,773
Interest and other expense......... (170) (10,477) (10,824) (2,835) (10,390) (10,619)
Loss before minority interest...... (14,746) (27,195) (28,303) (9,035) (35,077) (35,768)
Minority interest(3)............... 48 413 413 156 160 160
Net loss........................... (14,698) (26,782) (27,890) (8,879) (34,917) (35,608)

Net loss per common share.......... $ (3.30) $ (4.96) $ (4.40) $ (1.82) $ (5.48) $ (4.84)
Weighted average shares
outstanding...................... 4,772 6,185 7,215 5,901 6,734 7,764

OTHER DATA:
EBITDA(4).......................... $ (7,443) $(14,901) $(14,418) $ (4,855) $(21,822) $(21,620)
Depreciation and amortization...... 498 3,078 4,322 763 4,911 5,592
Capital expenditures............... 15,303 60,856 61,667 17,657 64,574 64,832
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(5)(6)
--------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 78,618 $ 75,178 $ 133,257
Total assets........................................... 230,038 240,578 298,657
Long-term liabilities.................................. 216,484 217,583 210,637
Redeemable stock, options and warrants................. 2,000 2,000 2,000
Stockholders' equity................................... (27,038) (18,283) 46,742
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1996 1996 1996 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NETWORK AND SELECTED STATISTICAL
DATA(7):
Total markets (in operation or under
construction)....................... 17 20 22 30 36
Networks in operation................. 9 10 15 19 21
Networks under construction........... 8 10 7 11 15
Route miles........................... 136 200 386 543 697
Fiber miles........................... 5,957 9,466 28,476 32,774 48,792
Buildings connected................... 100 133 216 532 595
VGE circuits in service............... 82,055 125,208 137,431 267,894 384,134
Employees............................. 111 142 199 272 322
</TABLE>

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

(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. All data for the fiscal period ended December 31,
1996 is for the six month period ended December 31, 1996.

(2) Pro forma to give effect to the Cybergate Acquisition as if consummated at
the beginning of the earliest period presented.

(3) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, Greenville, Columbia and El Paso. See "Description of Certain
Indebtedness."

(4) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. 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. Noncash compensation expense
associated with employee stock options was $6.4 million and $2.7 million in
fiscal years ended June 30, 1995 and 1996, respectively, and $1.2 million
and $550,000 in the six months ended December 31, 1995 and fiscal period
ended December 31, 1996, respectively. See Note 6 of "Notes to Consolidated
Financial Statements."

(5) Pro forma to give effect to the Cybergate Acquisition as if consummated on
December 31, 1996.

(6) Adjusted to give effect to: (i) sale of the shares of Common Stock offered
hereby (at an assumed offering price of $8.75 per share, the closing price
for the Common Stock on March 11, 1997) and application of the estimated net
proceeds therefrom and (ii) conversion of the Preferred Stock.

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

8
<PAGE> 10

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.

Negative Cash Flow; Anticipated Future Losses; Significant Future Capital
Requirements; Need for Additional Cash. The Company has never been profitable,
has never generated positive cash flow from consolidated operations and, since
its inception has incurred significant net operating losses and negative cash
flow. As of June 30, 1996 and December 31, 1996, the Company had accumulated
deficits of $47.5 million and $82.4 million, respectively. During the fiscal
period ended December 31, 1996, the Company incurred a net operating loss of
$27.4 million and generated negative cash flow from operations of $6.7 million.
The Company expects to continue to incur operating losses and negative cash flow
from operations for at least the next several years in connection with
establishing its local networks and implementing its local switched voice and
high-speed data services. Although the Company had begun to generate revenues
from its operational local networks as of February 28, 1997, it had not yet
generated revenues from any of its other networks. There can be no assurance
that the Company's networks or any of its other services will ever provide a
revenue base adequate to achieve or sustain profitability or to generate
positive cash flow.

The Company's continued development, construction, expansion, operation and
potential acquisition of local networks, as well as the further development of
new services, including local switched voice and high-speed data services, will
require substantial capital expenditures. The Company's ability to fund these
expenditures is dependent upon the Company's ability to raise substantial
financing. As of December 31, 1996, the Company had raised approximately $229.0
million from debt and equity financings, $30.2 million of which had been
advanced under a $31.2 million secured credit facility with AT&T Credit
Corporation, a subsidiary of AT&T Corporation (the "AT&T Credit Facility"),
$96.1 million of which had been raised from the issuance of $190.0 million
principal amount of the Company's 13% Senior Discount Notes due 2005 (the "2005
Notes") and warrants to purchase 2,432,000 shares of Common Stock at $7.15 per
share (the "Warrants") and $61.8 million of which had been raised from the
issuance of $120.0 million principal amount of the Company's 12 3/4% Senior
Discount Notes due 2006 (the "2006 Notes" and, with the 2005 Notes, the
"Notes"). The Company will use approximately $57.0 million of the estimated net
proceeds from this offering principally toward completion of the Company's
50-city local network plan, operation of its coast-to-coast, leased broadband
data communications network and implementation of its local switched voice
services and to fund negative operating cash flow. The Company estimates that
from January 1, 1997 through December 31, 1997 and December 31, 1998, remaining
capital required for implementation of its integrated networks and its other
services and to fund negative cash flow will be approximately $185 million and
$335 million, respectively. At December 31, 1996, the Company had approximately
$78.6 million of cash and cash equivalents available for this purpose. In
addition, the Company continues to consider potential acquisitions or other
strategic arrangements that may fit the Company's strategic plan. 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.

9
<PAGE> 11

the Company may be required to seek additional equity financing to maintain
balance sheet and liquidity ratios required under certain of its debt
instruments and, as a result of the registration rights of certain of the
Company's security holders, the Company's ability to raise capital through a
public offering of equity securities may be limited. Accordingly, there can be
no assurance that the Company will be able to obtain the additional financing
necessary to satisfy its cash requirements or to implement its growth strategy
successfully, in which event the Company will be forced to curtail its planned
network expansion and may be unable to fund its ongoing operations. This would
have a material adverse effect on its business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

Rapid Expansion of Operations. Subject to the sufficiency of its cash
resources, ACSI plans to continue to expand its business rapidly. The Company's
goal is to have 50 local networks operating or under construction by June 1998.
As of February 28, 1997, 24 of the Company's local networks were operational;
its switched voice services were being offered in only two markets; and the
Company had just recently deployed its coast-to-coast, leased broadband data
communications network. Delays in constructing and expanding any local network
may require the Company to reduce the number of other networks it expects to
build within a given time frame. Furthermore, the Company did not offer
high-speed data or local switched voice services prior to September 1996. There
can be no assurance that a market will develop for these services, that the
Company's implementation of these services will be technically or economically
feasible, that the Company will be able to market them successfully or that the
Company will be able to operate these services profitably. In addition to
managing internal growth, the Company will have to manage the growth, if any, of
Cybergate's business and integrate that business and new personnel into the
Company's existing operations. Any failure of the Company to implement its
growth strategy or manage its expanded operations effectively will have a
material adverse effect on the Company's business, operating results and
financial condition.

Management of Rapid Growth. The Company's future performance will depend,
in large part, upon its ability to manage its growth effectively. The Company's
rapid growth has placed, and in the future will continue to place, a significant
strain on its administrative, operational and financial resources. In the past
three months, the Company has effected a management reorganization in connection
with which the Company hired two new members of senior management and saw the
departure of several significant employees. The Company anticipates that
continued growth will require it to integrate its newest senior management
members successfully and to recruit and hire a substantial number of new
managerial, finance, accounting and support personnel. Failure to retain and
attract new members of management who can manage the Company's growth
effectively would have a material adverse effect on the Company and its growth.
To manage its growth successfully, the Company will also have to continue to
improve and upgrade operational, financial, accounting and informations systems,
controls and infrastructure as well as expand, train and manage its employee
base. In the event the Company is unable to upgrade its financial controls and
accounting and reporting systems adequately to support its anticipated growth,
the Company's business, results of operation and financial condition would be
materially adversely affected. In addition, the demands on the Company's
marketing and sales resources have grown rapidly with the Company's rapidly
expanding network and service offerings. The Company is taking steps to improve
marketing support of its expanded operations and plans to increase its existing
sales force significantly during 1997. There can be no assurance, however, that
the Company will be successful in attracting, retaining or effectively managing
and motivating such personnel or that its expanded sales force can successfully
market the Company's services or that the failure of either of the foregoing to
occur would not have a material adverse effect on the Company's business,
operating results and financial condition.

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

10
<PAGE> 12

proceeds from sales of its debt and equity securities. As a result of the
issuance of 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 December 31, 1996, the Company (through
five of its subsidiaries) had approximately $30.2 million in debt outstanding
under the AT&T Credit Facility. The credit remaining under the AT&T Credit
Facility must be used, if at all, by the five subsidiaries (operating local
networks in Louisville, Fort Worth, Greenville, Columbia and El Paso) to which
funds have already been advanced. As of December 31, 1996, the Company had
approximately $216.5 million of consolidated outstanding long-term indebtedness.
As of December 31, 1996, the total consolidated liabilities of the Company were
approximately $255.1 million. It is expected that the Company and its
subsidiaries will incur additional indebtedness, including increasing borrowings
under the AT&T Credit Facility to the maximum amount, which would be possible
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 and its subsidiaries to incur additional indebtedness or
create liens on their 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." In addition, the terms of
any debt or equity financings undertaken by the Company to meet its future cash
requirements could restrict the Company's operational flexibility and thereby
adversely affect the Company's business, results of operations and financial
condition.

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, 1996 and the fiscal period ended December 31, 1996, approximately
60% and 40% of the Company's revenues, respectively, were attributable to access
services provided to four of the largest IXCs, 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 Federal 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. Additionally, in the fiscal period ended December 31, 1996,
approximately 19% of the Company's revenues were generated by ISPs. See
"-- Competition," "Business -- Competition" and "-- Regulation."

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

11
<PAGE> 13

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 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 local networks. The Company has obtained the local approvals necessary to
construct and operate its local networks in the central business districts of
all of the markets in which the Company's local networks are presently operating
or are under construction. The Company does not yet have all of the local
approvals required to implement its local network 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 or to expand the Company's existing
networks to compete effectively. 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 local approvals
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 local network in place, such termination or non-renewal would be
likely to have a material adverse effect on the Company's business, results of
operations and financial condition. Furthermore, certain of the Company's pole
attachment agreements with private entities are contingent on CLECs being
legally entitled to pole access. If ongoing litigation or legislative activity
alters current requirements, the Company may be denied access or required to
renegotiate the rates and other terms for access in these contracts. In this
event, the Company may have to consider alternative means for building out its
local networks.

Strategic Investments; Business Combinations. The Company from time to
time engages in discussions with (i) potential business partners looking toward
formation of business combinations or strategic alliances that would expand the
reach of the Company's networks or services and (ii) 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. 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. 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. With the exception of the
MCI Transaction, 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.

Effects of Regulation. As a common carrier, the Company is subject to
substantial federal, state and local regulation. The Company's local networks do
not require authorization from the FCC for construction or installation.
However, the Company must file tariffs stating its rates, terms and conditions
of service for access services and international traffic. State regulatory
agencies regulate intrastate communications, while local authorities control the
Company's access to and use of municipal rights-of-way. The Federal
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.

12
<PAGE> 14

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. The Federal Telecommunications Act imposes a duty upon
all ILECs to negotiate in good faith with potential interconnectors such as the
Company to provide interconnection to the ILEC network, exchange local traffic,
make unbundled basic local network elements available, and permit resale of most
local services. In the event that negotiations do not succeed, the Company has a
right to seek state PSC arbitration of any unresolved issues. The Company sought
state PSC arbitration related to agreements for local interconnection and access
to unbundled elements with BellSouth, Southwestern Bell, US West, GTE and
Sprint/Central Telephone. Southwestern Bell, GTE and US West have filed lawsuits
in federal and/or state courts in several states seeking to overturn arbitration
awards and prevent implementation of the ACSI interconnection agreements. If
successful, these lawsuits could delay or interrupt ACSI's interconnection
arrangements with the ILECs in the affected states. Moreover, since ACSI
purchases ILEC local services for resale pursuant to the terms of the
interconnection agreements at issue, any adverse outcome in these lawsuits could
impede ACSI's plans to resell ILEC local services in the affected markets. The
Company is unable to predict the likely outcome of the lawsuits described above,
or the probable timeframe for decision.

Moreover, the Federal Telecommunications Act has increased local
competition by IXCs, CATVs and public utility companies, which may have a
material adverse effect on the Company. In addition, the Federal
Telecommunications Act has granted important benefits to the ILECs, including
providing ILECs substantial new pricing flexibility, restoring the ability of
RBOCs to provide long distance services and allowing RBOCs to provide certain
cable television services. Moreover, the FCC recently has taken a number of
actions intended ultimately to reduce regulation of ILECs, restructure the
manner in which ILECs charge for interexchange access services, reduce
interexchange access service rate levels and reform the current methods used to
fund universal service goals. These changes will tend to enhance the competitive
position of the ILECs, which may materially adversely affect the Company.
Furthermore, no assurance can be given that 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 is considering 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. In addition, the
FCC is considering whether to make Internet providers subject to the payment of
interexchange access charges. Moreover, as discussed hereafter, the Federal
Telecommunications Act creates civil and criminal penalties for the knowing
transmission of "indecent" material over the Internet. These and other 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. Additionally, the Federal 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 Federal 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 ILECs, 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 Federal Telecommunications Act and the entry of
RBOCs into the

13
<PAGE> 15

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
ILECs as a result of the Federal 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, ILECs 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 ILECs over the Company. See "Business -- Regulation." For example,
the Interconnection Decisions issued by the FCC and the Federal
Telecommunications Act, which allow CLECs to interconnect with ILECs'
facilities, have been accompanied by increased pricing flexibility and
partially relaxed regulatory oversight of ILECs. The Company believes
that ILECs are offering and will continue to 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 ILECs
impose reconfiguration charges and/or termination liabilities on
customers seeking to shift their traffic from ILEC facilities to CLEC
facilities, which may have an adverse effect on a CLEC's ability to
attract these customers and, in several instances, ILECs have delayed
converting customers who have requested conversion to the Company's local
networks. The Company may have to incur additional expense to acquire
customers if the Company has to reimburse their termination liabilities.

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 or expanding 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 services by the Company and its
competitors; the Company's ability to support industry standards; and
industry and general economic 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."

- Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company has
entered this market principally through the Cybergate Acquisition and
believes that its ability to compete successfully will depend upon a
number of factors, including: market presence; 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 introductions of new products and services by
the

14
<PAGE> 16

Company and its competitors; the Company's ability to support existing
and emerging industry standards; and industry and general economic
trends.

The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company
competes or expects to compete directly or indirectly with the following
categories of companies: (1) other international, national and regional
commercial Internet service providers; (2) established on-line services
companies that currently offer or are expected to offer Internet access;
(3) computer hardware and software and other technology companies; (4)
IXCs; (5) RBOCs; (6) CATVs; and (7) nonprofit or educational Internet
service providers. The ability of these competitors or others to bundle
services and products with Internet connectivity services could place the
Company at a significant competitive disadvantage in this services
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. Future technological changes, including changes related to the
emerging wireline and wireless transmission and switching technologies and
Internet-related services and technologies, could have a material adverse effect
on the Company's business, results of operations and financial condition.

The market for the Company's telecommunications 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 service opportunities
and develop and bring new 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.

As a condition to granting local approvals 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 December 31, 1996, the Company had posted approximately $6.2
million of performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of December 31, 1996,
the Company had been required to pledge approximately $2.3 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
(American Civil Liberties Union v. Janet Reno, C.A. No. 96-963 (U.S. Dist. Ct.,
E.D. Pa.)) 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 (Religious
Technology Center v. NETCOM On-Line Communications Services, Inc. (U.S. Dist.
Ct., N.D. Cal.)), the court ruled that an Internet access provider is not
directly liable for

15
<PAGE> 17

copies that are made and stored on its computer but may be held liable as a
contributing infringer where, with knowledge of the infringing activity, the
Internet access provider induces, causes or materially contributes to another
person's infringing conduct. 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 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 ILECs to
provide telecommunications services to the Company and its customers. The
Company has from time to time experienced delays in receiving telecommunications
services facilities, 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
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,
accounting 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 would likely have a material
adverse impact on the Company. See "Management."

Control by Certain Stockholders and Management. Upon completion of this
offering, the Company's directors, executive officers and principal stockholders
will beneficially own approximately 58.0% of the outstanding Common Stock
(including shares issuable upon conversion of the Preferred Stock and exercise
of currently exercisable options and warrants), including 25.2%, 15.4% and 7.8%
of the then outstanding Common Stock which will be beneficially owned by The
Huff Alternative Income Fund, L.P. ("Huff"), ING Equity Partners, L.P. ("ING")
and affiliates of 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
the right of the holders of the Notes to require the Company to repurchase the
Notes (a "Change of Control Offer"). 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 Stock Market
since May 22, 1996, is thinly traded and

16
<PAGE> 18

has experienced significant price volatility. There can be no assurance that,
after the completion of this offering, the Company's Common Stock will be traded
more actively or that its price fluctuations will be less volatile. 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; Registration Rights. Upon completion of
this offering and the simultaneous conversion of the Preferred Stock into Common
Stock, the Company will have outstanding 33,452,823 shares of Common Stock. The
8,000,000 shares offered hereby and 2,815,768 of the 25,452,823 shares
outstanding prior to this offering (after giving effect to the conversion of the
Preferred Stock) are freely transferable without registration under the
Securities Act of 1933, as amended (the "Securities Act"). The 22,637,055
remaining shares outstanding prior to this offering are "restricted securities"
as that term is defined in Rule 144 of the Securities Act, 20,401,837 of which
are subject to the Lock-Up Agreements described below. Assuming the recently
adopted amendments to Rule 144 became effective as of the date of this
Prospectus (such amendments become effective on April 29, 1997), 1,248,185 of
the restricted shares will be freely transferable under Rule 144(k) and
20,203,460 of the restricted shares will be saleable subject to certain volume
and manner of sale restrictions under Rule 144. Of the shares freely
transferable under Rule 144(k) or saleable subject to Rule 144 limitations,
20,396,164 shares are subject to the Lock-Up Agreements described below. Of the
20,203,460 shares eligible for sale under Rule 144, 273,945 shares will have
become freely transferable under Rule 144(k) on September 1, 1997 and an
additional 21,959 will have become freely transferable under Rule 144(k) on
January 1, 1998, respectively, assuming such shares are still held by
non-affiliates of the Company on each of those dates. By September 1, 1997, an
additional 84,173 restricted shares will have become saleable subject to Rule
144 limitations, with an additional 16,042 restricted shares becoming saleable
subject to Rule 144 limitations by January 1, 1998.

The holders of 23,858,765 shares of Common Stock and 521,540 shares of
Common Stock (including, in each case, shares issued or issuable upon conversion
of the Preferred Stock and exercise of options and warrants which are or will
have become vested during the applicable lock-up period) have executed or have
agreed to execute an agreement not to sell or otherwise dispose of any of their
shares of Common Stock for a period of 180 days and 90 days, respectively, from
the date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated (the "Lock-up Agreements").

17
<PAGE> 19

of Preferred Stock or exercise of options and warrants) will not request the
Company to file a registration statement for their shares prior to 180 days
after this offering or that such security holders will not seek damages from the
Company for any alleged breach of such security holders' registration rights in
connection with this offering or past Company offerings. Additionally, the
Company has an obligation to register under the Securities Act 1,000,000 of the
1,030,000 shares of Common Stock issued in the Cybergate Acquisition no later
than 210 days after the consummation of this offering, but in no event later
than December 31, 1997, and is required to register up to 150,000 additional
shares which may be issued in connection with the Cybergate Acquisition no later
than 60 days after such issuance. These shares will be freely transferable upon
such registration.

Of the 13,381,563 shares reserved for issuance upon exercise of options and
warrants outstanding on February 28, 1997 and in connection with the Company's
Employee Stock Purchase Plan, 2,352,640 shares and 8,594,035 shares have been
registered under the Securities Act on Form S-3 and Form S-8 registration
statements, respectively. Accordingly, the shares issued upon exercise of such
options or warrants or in connection with the Employee Stock Purchase Plan, will
be freely transferable unless held by affiliates of the Company.

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
"Shares Eligible for Future Sale."

USE OF PROCEEDS

The net proceeds to the Company from this offering are estimated to be
approximately $65.0 million ($74.9 million if the Underwriters' over-allotment
option is exercised in full), assuming a public offering price of $8.75 per
share, the per share closing price for the Common Stock on March 11, 1997. The
Company intends to use approximately $57.0 million of the net proceeds toward
the completion of its 50-city local network plan, operation of its
coast-to-coast, leased broadband data communications network and implementation
of its local switched voice services and to fund negative cash flow. The Company
has estimated that as of December 31, 1996, the total remaining capital required
for implementing integrated networks and its other services and to fund negative
cash flow through December 31, 1997 and December 31, 1998 was approximately $185
million and $335 million, respectively. However, management anticipates that the
Company's cash resources following this offering will be insufficient to fund
the Company's continuing negative cash flow and the capital expenditures
required to complete the Company's planned networks and successfully implement
its growth strategy, and, further, that the Company will exhaust its cash
resources during 1997. As a result, if the Company is unable to obtain
additional cash through the sale of debt or equity securities or increases in
existing or new credit facilities, the Company will be forced to curtail its
planned network expansion and may be unable to fund its existing operations.

In addition, the Company will use approximately $8.0 million of net
proceeds from this offering to pay the accrued dividends on its Preferred Stock,
all of which will have been converted into 17,377,264 shares of Common Stock
upon completion of this offering.

In addition, the Company from time to time considers potential acquisitions
or other strategic arrangements that may fit the Company's strategic plan,
although the Company is not currently negotiating any material transaction of
this type. 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.

18
<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 Stock Market.

The following table sets forth, for the periods indicated, the range of
high and low closing bid quotations for the Common Stock obtained from the
National Quotation Bureau for periods prior to March 3, 1995 and from The Nasdaq
SmallCap Market for the period March 3, 1995 through May 21, 1996 and high and
low closing sales prices for the Common Stock obtained from the Nasdaq Stock
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 and may
not necessarily represent actual transactions.

<TABLE>
<CAPTION>
HIGH PRICE LOW PRICE
---------- ---------
<S> <C> <C>
Fiscal Year Ended June 30, 1994
Second Quarter............................... $ 4.00 $3.00
Third Quarter................................ 4.75 3.00
Fourth Quarter............................... 3.25 2.50
Fiscal Year Ended June 30, 1995
First Quarter................................ $ 4.50 $2.50
Second Quarter............................... 4.25 3.50
Third Quarter................................ 3.75 3.50
Fourth Quarter............................... 4.38 3.25
Fiscal Year Ended June 30, 1996
First Quarter................................ $ 7.50 $3.63
Second Quarter............................... 6.75 5.00
Third Quarter................................ 9.00 5.00
Fourth Quarter............................... 15.38 8.00
Fiscal Period Ended December 31, 1996
First Quarter................................ $13.25 $8.50
Second Quarter............................... 12.38 9.88
Fiscal Year Ending December 31, 1997
First Quarter (through March 11, 1997)....... 11.13 8.25
</TABLE>

On March 11, 1997, the last reported sales price for the Company's Common
Stock as reported on The Nasdaq Stock Market was $8.75. As of December 31, 1996,
there were approximately 269 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
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 all of
the Preferred Stock will have been 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."

19
<PAGE> 21

CAPITALIZATION

The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of December 31, 1996, (ii) after giving pro
forma effect to the Cybergate Acquisition and (iii) as further adjusted to give
effect to the Cybergate Acquisition, the sale of the 8,000,000 shares of Common
Stock offered hereby and application of the estimated net proceeds therefrom
(assuming a public offering price of $8.75 per share, the closing price for the
Common Stock on March 11, 1997), and the conversion of 464,164 shares of
Preferred Stock into 17,377,264 shares of Common Stock. See "Use of Proceeds"
and "Unaudited Pro Forma Condensed Consolidated Financial Data." This table
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 78,618 $ 75,178 $ 133,257
======== ========= ==========
Long term debt
12 3/4% Senior Discount Notes due 2006.................. $ 70,825 $ 70,825 $ 70,825
13% Senior Discount Notes due 2005...................... 109,402 109,402 109,402
Notes payable(1)........................................ 29,311 29,717 29,717
Other long-term liabilities............................. -- 693 693
Dividends payable....................................... 6,946 6,946 --(5)
-------- --------- -----------
Total long-term debt............................... 216,484 217,583 210,637
Redeemable stock, options & warrants........................ 2,000 2,000 2,000
Minority interest........................................... -- -- --
Stockholders' equity (deficit):
9% Series A-1 convertible preferred stock, par value
$1.00 per share, 186,664 shares issued and
outstanding; no shares, as adjusted(2)............... 187 187 --
9% Series B convertible preferred stock, par value $1.00
per share, 277,500 shares issued and outstanding; no
shares, as adjusted.................................. 278 278 --
Common Stock, par value $0.01 per share, 75,000,000
shares authorized, 6,784,996 shares issued and
outstanding at December 31, 1996; 7,814,996 shares
pro forma; 33,192,260 shares pro forma, as
adjusted(3)(4)....................................... 68 78 332
Additional paid-in capital.............................. 54,869 63,614 128,850
Accumulated deficit..................................... (82,440) (82,440) (82,440)
-------- --------- -----------
Total stockholders' equity (deficit)............... (27,038) (18,283) 46,742
-------- --------- -----------
Total capitalization.......................... $191,446 $201,300 $ 259,379
======== ========= ==========
</TABLE>

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

(1) Consists primarily of the AT&T Credit Facility totalling $31.2 million, of
which approximately $30.2 million had been drawn as of December 31, 1996.

(2) As of December 31, 1996, 1,500,000 shares of Preferred Stock, par value
$1.00 per share, were authorized, of which 186,664 shares were designated as
9% Series A-1 Convertible Preferred Stock, 100,000 shares were designated as
9% Series B-1 Convertible Preferred Stock, 102,500 shares were designated as
9% Series B-2 Convertible Preferred Stock, 25,000 shares were designated as
9% Series B-3 Convertible Preferred Stock and 50,000 shares were designated
as 9% Series B-4 Convertible Preferred Stock.

(3) Excludes 7,457,085 and 4,771,836 shares reserved for issuance upon exercise
of options and warrants, respectively, outstanding at December 31, 1996, at
a weighted average exercise price of $4.37 and 500,000 shares issuable in
connection with the Company's Employee Stock Purchase Plan.

(4) The aggregate proceeds from the exercise of all warrants and options
outstanding at December 31, 1996, would be approximately $53.4 million.

(5) Reflects payment of accrued dividends on the Preferred Stock.

20
<PAGE> 22

UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA

The following Unaudited Pro Forma Condensed Consolidated Financial Data
consist of Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the fiscal year ended June 30, 1996 and for the fiscal period ended December
31, 1996 and an Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1996 (collectively, the "Pro Forma Statements"). The Unaudited Pro
Forma Condensed Consolidated Statements of Operations give effect to the
Cybergate Acquisition as if it occurred on July 1, 1995 and the Unaudited Pro
Forma Condensed Consolidated Balance Sheet gives effect to the Cybergate
Acquisition as if it occurred on December 31, 1996.

Management believes that, on the basis set forth herein, the Pro Forma
Statements reflect a reasonable estimate of the Cybergate Acquisition based on
currently available information. The pro forma financial data are presented for
informational purposes only and do not purport to represent what the Company's
financial position or results of operations would have been had the Cybergate
Acquisition in fact occurred on the dates assumed or that may result from future
operations. The pro forma data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto which are included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996 FISCAL PERIOD ENDED DECEMBER 31, 1996(1)
---------------------------------------------- ----------------------------------------------
THE THE
THE COMPANY THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- --------- -------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ 3,415 $ 3,723 $ 7,138 $ 6,990 $ 2,636 $ 9,626
Operating expenses:
Network development and
operations.................. 5,265 1,762 $ -- 7,027 8,703 1,136 $ -- 9,839
Selling, general and
administrative.............. 13,464 1,378 100(2) 14,942 20,270 1,247 50(2) 21,567
Noncash stock and
compensation................ 2,736 -- -- 2,736 550 -- -- 550
Depreciation and
amortization................ 3,078 372 872(3) 4,322 4,911 245 436(3) 5,592
-------- --------- ----------- --------- -------- --------- ----------- ---------
Total operating
expenses................ 24,543 3,512 972 29,027 34,434 2,628 486 37,548
-------- --------- ----------- --------- -------- --------- ----------- ---------

Operating income (loss)......... (21,128) 211 (972) (21,889) (27,444) 8 (486) (27,922)
Non-operating income (expense).. (6,067) (27) (320)(4) (6,414) (7,633) (53) (160)(4) (7,846)
-------- --------- ----------- --------- -------- --------- ----------- ---------
Income (loss) before minority
interest...................... (27,195) 184 (1,292) (28,303) (35,077) (45) (646) (35,768)
Minority interest............... 413 -- -- 413 160 -- -- 160
-------- --------- ----------- --------- -------- --------- ----------- ---------
Net income (loss)............... (26,782) 184 (1,292) (27,890) (34,917) (45) (646) (35,608)
Preferred stock dividends and
accretion..................... (3,871) -- -- (3,871) (2,003) -- -- (2,003)
-------- --------- ----------- --------- -------- --------- ----------- ---------
Net income (loss) to common
stockholders.................. $(30,653) $ 184 $(1,292) $(31,761) $(36,920) $ (45) $(646) $(37,611)
======== ========= =========== ========= ======== ========= =========== =========
Net loss per common
stockholder................... $ (4.96) $ (4.40) $ (5.48) $ (4.84)
======== ========= ======== =========
Weighted average number of
common shares outstanding..... 6,185 1,030(5) 7,215 6,734 1,030(5) 7,764
</TABLE>

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

(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31. Accordingly, data for the fiscal period ended
December 31, 1996 is for the six months ended December 31, 1996.

(2) Represents expense related to a consulting agreement entered into by the
Company with a former shareholder of Cybergate.

(3) Reflects amortization of goodwill over a 10 year period and accounting
software over a three year period.

(4) Reflects amortization of consent solicitation fees over the remaining terms
of the Notes.

(5) Excludes adjustment for shares of Common Stock issuable if Cybergate meets
certain performance measures. Inclusion of such shares would be
anti-dilutive.

21
<PAGE> 23

UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
THE
THE COMPANY
COMPANY CYBERGATE ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents..................... $ 78,618 $ 60 $ (500)(1) $ 75,178
(3,000)(2)
Restricted cash............................... 2,342 -- -- 2,342
Accounts receivable........................... 2,429 127 -- 2,556
Other current assets.......................... 1,203 51 -- 1,254
-------- ------- ------- --------
Total current assets..................... 84,592 238 (3,500) 81,330
Networks, furniture and equipment, net.......... 136,083 2,317 100(3) 138,500
Goodwill........................................ 8,385(1) 8,385
Deferred financing fees......................... 8,380 -- 3,000(2) 11,380
Other assets.................................... 983 -- -- 983
-------- ------- ------- --------
Total assets............................. $230,038 $ 2,555 $ 7,985 $240,578
======== ======= ======= ========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND
WARRANTS, MINORITY INTEREST AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses......... $ 33,588 $ 348 $ -- $ 33,936
Notes payable -- current portion.............. 872 -- -- 872
Customer deposits and advanced billings....... 0 338 -- 338
Other......................................... 4,132 -- -- 4,132
-------- ------- ------- --------
Total current liabilities................ 38,592 686 -- 39,278
Notes payable................................... 209,538 306 100(3) 209,944
Advances due to affiliates...................... -- 551 -- 551
Dividends payable............................... 6,946 -- -- 6,946
Other........................................... 0 142 -- 142
-------- ------- ------- --------
Total liabilities........................ 255,076 1,685 100 256,861
Redeemable stock, options, and warrants......... 2,000 347 (347)(1) 2,000
Minority interest............................... 0 -- -- 0
Stockholders' equity (deficit).................. (27,038) 523 8,232(1) (18,283)
-------- ------- ------- --------
Total liabilities, redeemable
stock, options and warrants,
minority interest and
stockholders' equity
(deficit)...................... $230,038 $ 2,555 $ 7,985 $240,578
======== ======= ======= ========
</TABLE>

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

(1) Records the Cybergate Acquisition for a purchase price of $8,755,000
(1,030,000 shares of Common Stock at $8.50 per share, the per share closing
sales price of the Common Stock on January 17, 1997) plus estimated
transaction expenses of $500,000. Excludes 150,000 additional shares of
Common Stock which may be issued in 50,000 share increments (or a percentage
thereof) on March 1, 1998, 1999 and 2000 if Cybergate achieves certain
performance measures. In determining the cost of the identifiable assets and
liabilities acquired, it has been assumed that an independent appraisal will
result in fair values equal to the recorded book values as of the date of
the Cybergate Acquisition. In the opinion of management, due to the nature
of the assets and liabilities acquired, the fair values will approximate the
book values. The preliminary allocation of the purchase price results in
goodwill of approximately $8.4 million which will be amortized over 10
years.

(2) Records the payment of $3.0 million, including related transaction expenses
for solicitation fees payable to holders of the Notes in order to obtain
their consent to amend the Indentures. The amendments permit the Company to
enter into certain acquisition transactions, including the Cybergate
Acquisition.
(3) Reflects the non-exclusive assignment to Cybergate of certain accounting
software for $100,000, payable over a three year period.

22
<PAGE> 24

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below as of and for the
periods ended June 30, 1995 and 1996 and December 31, 1996 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 periods ended June 30, 1995 and June 30, 1996 and December 31, 1996 have
been audited by KPMG Peat Marwick LLP, independent auditors. Subsequent to June
30, 1996, the Company has changed its fiscal year-end from June 30 to December
31. Accordingly, all data for the fiscal period ended December 31, 1996 is for
the six months ended December 31, 1996. The consolidated financial data of the
Company as of and for the six months ended December 31, 1995 have been derived
from the unaudited Consolidated Financial Statements of the Company 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 fiscal period ended December
31, 1996 are not necessarily indicative of results for a twelve-month fiscal
year.

<TABLE>
<CAPTION>
SIX MONTHS FISCAL PERIOD
FISCAL YEAR ENDED JUNE ENDED ENDED
30, DECEMBER 31, DECEMBER 31,
---------------------- ------------ -------------
1995 1996 1995 1996
--------- --------- ------------ -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 389 $ 3,415 $ 989 $ 6,990
Operating expenses............................... 14,797 24,543 7,966 34,434
-------- -------- -------- --------
Income (loss) from operations.................... (14,408) (21,128) (6,977) (27,444)
Interest and other income........................ 218 4,410 777 2,757
Interest and other expense....................... (170) (10,477) (2,835) (10,390)
Debt conversion expense.......................... (385) -- -- --
-------- -------- -------- --------
Net income (loss) before minority interest....... (14,746) (27,195) (9,035) (35,077)
Minority interest(1)............................. 48 413 156 160
-------- -------- -------- --------
Net income (loss)................................ (14,698) (26,782) (8,879) (34,917)
Preferred stock dividends and accretion.......... (1,071) (3,871) (1,854) (2,003)
-------- -------- -------- --------
Net income (loss) to common stockholders......... $ (15,769) $ (30,653) $(10,734) $ (36,920)
======== ======== ======== ========

Net income (loss) per common share............... $ (3.30) $ (4.96) $ (1.82) $ (5.48)
======== ======== ======== ========
Weighted average shares outstanding.............. 4,772 6,185 5,901 6,734

OTHER DATA:
EBITDA(2)........................................ $ (7,443) $ (14,901) $ (4,855) $ (21,822)
Depreciation and amortization.................... 498 3,078 763 4,911
Capital expenditures............................. 15,303 60,856 17,657 64,574

BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents........................ $ 20,351 $ 134,116 $ 57,348 $ 78,618
Total assets..................................... 37,627 223,600 147,935 230,038
Long-term liabilities............................ 4,723 189,072 110,176 216,484
Redeemable stock, options and warrants........... 2,931 2,155 2,660 2,000
Stockholders' equity (deficit)................... 22,141 8,982 26,308 (27,038)
</TABLE>

- ---------------
(1) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort
Worth, 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 and noncash stock compensation and, in fiscal
year ended June 30, 1995, debt conversion expense of $385,000. 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. Noncash compensation expense
associated with employee stock options was $6.4 million and $2.7 million in
fiscal years ended June 30, 1995 and 1996, respectively, and $1.2 million
and $550,000 in the six months ended December 31, 1995 and fiscal period
ended December 31, 1996, respectively. See Note 6 of "Notes to Consolidated
Financial Statements."

23
<PAGE> 25

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 is a provider of integrated local voice and data communications
services to commercial customers primarily in mid-size metropolitan markets in
the southern United States. The Company is a rapidly growing CLEC, supplying
businesses with advanced telecommunications services through its digital
SONET-based fiber optic local networks. To date, the Company has derived
substantially all of its revenues from the sale of dedicated services, generally
at a discount to the price of the ILECs. The Company's dedicated services
include special access, switched transport and private line services.

As a supplement to its dedicated services, in January 1997, the Company
introduced local switched voice services in two of its markets and expects to
begin offering local switched voice services in two additional markets by March
31, 1997. The Company's local switched services include local exchange services
(dial tone), advanced ISDN and enhanced voice services. In late 1996, the
Company also deployed ACSINet, a coast-to-coast, leased broadband data
communications network through which the Company offers frame relay, ATM and
Internet access services to both ISPs and local businesses. As of February 28,
1997, the Company had ACSINet data POPs in 44 markets, including all but one of
the markets in which the Company has operational local networks. Additionally,
principally through the Cybergate Acquisition, the Company has begun providing
Internet services. The Cybergate Acquisition provides a foundation to support
the Company's Internet service offerings to ISPs in existing ACSI markets and to
end users in targeted ACSI markets.

During 1996, the Company increased the number of its operational local
networks from nine to 21 and increased its route miles in service from 136 to
697. As of February 28, 1997, the Company had 24 operational local networks and
had 12 additional local networks under construction. The Company is actively
developing marketing and engineering plans necessary to achieve its goal of 50
local networks operating or under construction by June 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 ILECs for similar services, volumes and terms. For the fiscal period
ended December 31, 1996, 40% of the Company's revenues were generated by four of
the largest IXCs.

Beginning in the fiscal quarter ended December 31, 1996, the Company began
providing and plans to continue to provide, local switched voice services, such
as local dial tone, termination of local calling, Centrex services, PBX
trunking, switched access and enhanced voice services, initially to existing and
new corporate customers in buildings already connected to the Company's local
networks. Revenues from the Company's local switched voice services will be
generated from fixed and usage-based charges billed directly to the end user at
rates below those charged by ILECs for

24
<PAGE> 26

similar services. The Company expects to have begun generating revenues from its
local switched voice services beginning in the three months ending March 31,
1997.

In December 1996, the Company began providing high-speed data services to
ISPs and corporate, institutional and government customers. ACSI's data services
revenues are generated from either flat rate or usage-based recurring charges
based on network access speed and the data throughput rate of data requested by
the end user as well as from non-recurring charges for installation and
provisioning. Principally through the Cybergate Acquisition, ACSI has begun to
offer direct Internet access to commercial and consumer end users as well as
provide private label Internet services for the Company's strategic distribution
partners throughout all of the Company's markets. Revenues from the Company's
Internet services will be generated from usage-based variable rates charged
directly to the end user by the Company.

The Company believes that integration of its SONET-based fiber optic local
networks and its coast-to-coast, leased broadband data communications network
will provide a platform for the provision of a wide variety of voice, high-speed
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
integrated network through resale of the ILEC'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 integrated 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 integrated
network, prompt customer service, competitive pricing, cross marketing/bundling
synergies and new service offerings over its target 50-city local network market
area.

Where technically feasible and economically practicable, the Company's
local switched voice services will be offered through a hubbed switching
strategy by using 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, could reduce the cost
associated with installing a fully configured switch in markets which otherwise
may be too small to justify the investment. By aggregating switched traffic from
multiple small markets through a central hub switch, the Company also expects to
realize reduced operating expenses associated with switch engineering and
maintenance. As of February 28, 1997, the Company had long-term operating leases
for nine Lucent 5ESS switches. The use of operating leases, rather than the
acquisition of such equipment reduces the Company's capital requirements but
negatively impacts its EBITDA.

ACSI is operating its coast-to-coast, leased broadband data communications
network via high bandwidth (DS-3) longhaul circuits pursuant to multi-year
operating leases with various IXCs. Network connectivity within each node will
be via OC-3 bandwidth, enabling the transparent migration of longhaul circuits
to OC-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to OC-12 without further modification.

Initially, the Company expects to experience negative cash flow from
operations in each of its operating local networks. The Company estimates that
because of the reduced operating costs associated with its smaller local
networks and its single point of service sales force, it can achieve operating
cash flow breakeven (i.e., positive EBITDA before overhead allocations) on
dedicated access services provided on its local networks within ten to 15 months
from the start of those services. Thereafter, the Company anticipates that its
profit margins will increase as each local network is expanded to connect
additional customers directly to its network backbone and 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 ILEC for resale of ILEC facilities).
The Company will also experience initial negative cash flow from operations as
its data, local switched voice and Internet

25
<PAGE> 27

services are introduced and until networks providing those services reach
operating cash flow breakeven.

Capital Expenditures; Operating Cash Flow

The costs associated with the initial construction and operation of local
networks may vary greatly, primarily due to market variations in geographic and
demographic characteristics and the types of construction technologies which can
be used to deploy the network. Management estimates that construction of the
initial one-to-three mile local network backbone and installation of related
network transmission equipment for dedicated services for each market will cost
generally 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 local
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 local 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.

The Company has never been profitable, has never generated positive cash
flow from consolidated operations and, since its inception has incurred
significant net operating losses and negative cash flow. The Company's continued
development, construction, expansion, operation and potential acquisition of
local networks, as well as the further development of new services, including
local switched voice and high-speed data services, will require substantial
capital expenditures and the Company expects to continue to incur operating
losses and negative cash flows from operations for at least the next several
years. The Company estimates that through December 31, 1997 and December 31,
1998, remaining capital required for implementation of its integrated networks
and its other services and to fund negative cash flow will be approximately $185
million and $335 million, respectively. At December 31, 1996, the Company had
approximately $78.6 million of cash and cash equivalents available for this
purpose. Management anticipates that the Company's cash resources following this
offering will be insufficient to fund the Company's continuing negative cash
flow and the capital expenditures required to complete the Company's planned
networks. Furthermore, without an infusion of additional cash following this
offering, the Company will exhaust its cash resources during 1997. See
"-- Liquidity and Capital Resources."

RESULTS OF OPERATIONS

FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995

Revenues

During the fiscal period ended December 31, 1996, the Company recorded
revenues of $7.0 million as compared to revenues of $988,877 during the six
months ended December 31, 1995. Four of the largest IXCs accounted for
approximately $2.8 million, or 40%, of revenues for the fiscal period ended
December 31, 1996.

Other network information is as follows:

<TABLE>
<CAPTION>
NETWORKS VOICE
AS OF THE PERIOD IN ROUTE FIBER BUILDINGS GRADE FULL TIME
ENDED: OPERATION MILES MILES CONNECTED EQUIVALENTS EMPLOYEES
--------------------- ---------- ------- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 9 136 5,957 100 82,055 111
December 31, 1996 21 697 48,792 595 384,134 322
</TABLE>

26
<PAGE> 28

Total Operating Expenses

Network development and operating expenses for the fiscal period ended
December 31, 1996 increased to $8.7 million from $2.9 million in the six months
ended December 31, 1995, reflecting significant increases in personnel, network
development and non-payroll operating expenses. Related personnel costs
increased to $3.9 million in the fiscal period ended December 31, 1996, from
approximately $1.5 million in the six months ended December 31, 1995. 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 $4.8
million in the fiscal period ended December 31, 1996 from approximately $1.4
million in the six months ended December 31, 1995.

In the fiscal period ended December 31, 1996, selling, general and
administrative expenses increased to $20.3 million from $3.1 million in the six
months ended December 31, 1995. Related personnel costs increased to $6.6
million in the fiscal period ended December 31, 1996 from $1.5 million in the
six months ended December 31, 1995, and corresponding operating costs increased
to $13.7 million in the fiscal period ended December 31, 1996 from $1.6 million
in the six months ended December 31, 1995. This increase reflected costs
associated with the Company's efforts in the rapid expansion of its services
offered, network deployment and geographic coverage as well as significantly
increasing its national and local city sales, marketing and administrative
staffs and increased legal and other consulting expenses associated with its
programs for obtaining regulatory approvals and certifications and providing
quality network services.

Depreciation and amortization expenses increased to $4.9 million in the
fiscal period ended December 31, 1996 from $762,657 in the six months ended
December 31, 1995. The Company increased its capital assets to $144.4 million as
of December 31, 1996, from the $32.6 million in capital assets as of December
31, 1995. Non-cash stock compensation expense decreased to $549,545 for the
fiscal period ended December 31, 1996 from $1.2 million for the six months ended
December 31, 1995. This expense reflects the Company's accrual of non-cash costs
for options 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. Certain of
these options had put rights and other factors that required variable plan
accounting in both 1996 and 1995 but, on or about June 30, 1995, the Company
renegotiated contracts with certain of its officers, establishing a limit of
$2.5 million on the Company's "put right" obligations with respect to those
contracts. Between July 1, 1995 and June 30, 1996, the limit was further reduced
to $2.0 million.

During the fiscal period ended December 31, 1996, the Company incurred a
net operating loss of $27.4 million and generated negative cash flow from
operations of $6.7 million, compared to a net operating loss of $7.0 million and
negative cash flow from operations of $4.8 million in the six months ended
December 31, 1995.

Interest and Other Expenses

Interest and other income increased to $2.8 million for the fiscal period
ended December 31, 1996 from $777,504 in the six months ended December 31, 1995.
Interest and other expense increased to $10.4 million in the fiscal period ended
December 31, 1996 from $2.8 million in the six months ended December 31, 1995.
The increase in interest and other income reflects the significant increase in
available funds from the Company's sale of its 9% Series B Preferred Stock in
June and November 1995, the 2005 Notes in November 1995 and the 2006 Notes in
March 1996. The increase in interest and other expenses reflected the accrual of
interest related to the 2005 Notes and 2006 Notes and the Company's increased
borrowings under 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 will not begin until November 2000 and payments of interest on
the 2006 Notes will not begin until October 2001.

27
<PAGE> 29

AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries, reduced operating losses by approximately $160,370 for
the fiscal period ended December 31, 1996, and by $155,861 for the six month
period ended December 31, 1995.

FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995

Revenues

During the fiscal year ended June 30, 1996 ("fiscal 1996"), the Company
recorded revenues of $3.4 million as compared to revenues of $388,887 during the
fiscal year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs
accounted for approximately $2.1 million, or 60%, of revenues for fiscal 1996 as
compared to fiscal 1995 when three of the largest IXCs accounts for
approximately $331,000, or 85% of revenues for fiscal 1995, reflecting the
Company's increased sales to end users during fiscal 1996.

Total Operating Expenses

Network development and operations expenses for fiscal 1996 increased to
$5.3 million from $3.3 million in 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 $4.5 million in
fiscal 1996 from approximately $1.3 million in fiscal 1995. 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, decreased to $800,212 in
fiscal 1996 from approximately $1.9 million in fiscal 1995.

In fiscal 1996, selling, general and administrative expenses increased to
$13.5 million from $4.6 million in fiscal 1995. Related personnel costs
increased to $3.2 million in fiscal 1996 from $2.0 million in fiscal 1995, and
corresponding operating costs increased to $10.2 million in fiscal 1996 from
$2.2 million in 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 $3.1 million in fiscal
1996 from $497,811 in fiscal 1995. During fiscal 1996 the Company increased its
capital assets to approximately $80.2 million, representing an increase from
$15.9 million at the end of fiscal 1995. Non-cash stock compensation expense
decreased to $2.7 million for fiscal 1996 from $6.4 million for 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 $2.5 million on the Company's put right obligations with respect to
those contracts. During fiscal 1996, the limit was further reduced to $2.0
million.

Interest and Other Expenses

Interest and other income increased to $4.4 million for fiscal 1996 from
$217,525 in fiscal 1995. Interest expense and other costs increased to $10.5
million in fiscal 1996 from $170,095 in 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

28
<PAGE> 30

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 fiscal 1995 totaled $385,000, 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 $412,606 for fiscal 1996, and by $48,055 for
fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has funded the construction of its local 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 an
aggregate of approximately $39.6 million before related expenses, 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 the
2005 Notes and the Warrants from which the Company received approximately $96.1
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 Preferred Stock private placement. On March
21, 1996, the Company completed a private offering of the 2006 Notes from which
the Company received net proceeds of approximately $61.8 million. 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's continued development, construction, expansion, operation and
potential acquisition of local networks, as well as the further development of
new services, including local switched voice and high-speed data services, will
require substantial capital expenditures and the Company expects to continue to
incur operating losses and negative cash flows from operations for at least the
next several years. The Company will use approximately $57.0 million of the
estimated net proceeds from this offering principally toward completion of the
Company's 50-city local network plan, operation of its coast-to-coast, leased
broadband data communications network and implementation of its local switched
voice services and to fund negative operating cash flow. The Company estimates
that through December 31, 1997 and December 31, 1998, remaining capital required
for implementation of its integrated networks and its other services and to fund
negative cash flow will be approximately $185 million and $335 million,
respectively. At December 31, 1996, the Company had approximately $78.6 million
of cash and cash equivalents available for this purpose. The Company's
expectations of required future capital expenditures are based on the Company's
current estimates and the current state and federal regulatory environment.
There can be no assurance that actual expenditures will not be significantly
higher or lower. In addition, there can be no assurance that the Company will be
able to meet its strategic objectives or that such funds, if available, will be
available on a timely basis or on terms that are acceptable to the Company. In
addition, the Company continues to consider potential acquisitions or other
strategic arrangements that may fit the Company's strategic plan. Although the
Company has had discussions concerning such potential acquisitions or
arrangements, with the exception of the MCI Transaction, to date no agreements
have been reached with regard to any particular acquisition. Any such
acquisitions or

29
<PAGE> 31

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.

Management anticipates that the Company's cash resources following this
offering will be insufficient to fund the Company's continuing negative cash
flow and the capital expenditures required to complete the Company's planned
networks. Furthermore, without an infusion of additional cash following this
offering, the Company will exhaust its cash resources during 1997. To meet its
additional remaining capital requirements and to successfully implement its
growth strategy, ACSI will be required to sell additional equity securities,
increase its existing credit facility, acquire additional credit facilities or
sell additional debt securities, certain of which would require the consent of
the Company's debtholders. Furthermore, before incurring additional
indebtedness, the Company may be required to seek additional equity financing to
maintain balance sheet and liquidity ratios required under certain of its debt
instruments and, as a result of the registration rights of certain of the
Company's security holders, the Company's ability to raise capital through a
public offering of equity securities may be limited. Accordingly, there can be
no assurance that the Company will be able to obtain the additional financing
necessary to satisfy its cash requirements or to successfully implement its
growth strategy, in which event the Company will be forced to curtail its
planned network expansion and may be unable to fund its ongoing operations.

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 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 (before deduction of estimated offering expenses), 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 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
$22.8 million. 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 $4.7 million. The
Series B Preferred Stock will convert into an aggregate of 9,910,704 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 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, subject to
certain covenants contained in the Indentures. The Preferred Stock will convert
into an aggregate of 17,377,264 shares of Common Stock upon completion of this
offering, at which time the Company will pay accrued dividends on the Preferred
Stock of approximately $8.0 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 local networks by five of the Company's subsidiaries. In connection with
each loan made under the AT&T Credit Facility, AT&T Credit Corporation purchased
7.25% of the capital stock of the funded subsidiary, and ACSI pledged 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 December 31, 1996,
an aggregate of

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<PAGE> 32

$30.2 million had been borrowed under these agreements. Principal amounts
payable on the AT&T Credit Facility during 1997 are approximately $872,000.

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 requires 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 did not have a material impact on the Company's Consolidated Financial
Statements in the fiscal period ended December 31, 1996.

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 for fiscal years that begin
after December 15, 1995. The Company has elected to continue to apply the
intrinsic value-based method of accounting for stock options.

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<PAGE> 33

BUSINESS

INDUSTRY OVERVIEW

The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Company's opportunities in the converging
voice and data communications services markets. Regulatory initiatives, such as
the Federal Telecommunications Act, are expected to expand opportunities in the
local telecommunications services market, the size of which is estimated to be
approximately $100 billion in 1997. Technological advances, including rapid
growth of the Internet, the increased use of packet switching technology for
voice communications and the growth of multimedia applications, are expected to
result in substantial growth in the high-speed data services market to
approximately $10 billion by 2000 compared to $1 billion in 1995.

Dedicated Services. 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 ILECs due, in part, to antiquated copper-based facilities used in many ILEC
networks.

Local Switched Voice Services. Initially, CAPs could compete effectively
only for special access and private line services to customers in buildings
directly connected to their separate networks, but the FCC Interconnection
Decisions in 1992 and 1993 allowed CAPs to increase the number of customers and
markets serviced significantly without physically expanding their networks.
Those Interconnection Decisions also enabled CAPs to provide interstate switched
access services in competition with ILECs, which has encouraged the development
of the competitive interstate switched access market. The Company believes that
competition in this market will be further enhanced because the Federal
Telecommunications Act requires (i) removal of state and local entry barriers,
(ii) ILECs to provide interconnections to their facilities, and (iii) access to
rights-of-way. In addition, to the extent that ILECs begin to compete with IXCs
for long distance services, IXCs may have a competitive incentive to move access
business away from ILECs to CLECs, and CLEC market share may increase.

Data Communications Services. The Company believes that high-speed data
communications services represent one of the fastest growing segments of the
telecommunications services market 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, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for ACSI to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs.

- 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."
Increasing business utilization of the Internet has

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<PAGE> 34

added to the demand for higher-speed access (i.e., services connecting
users to the Internet), applications (such as "Web browsers"), increased
port capacity and secure network facilities. In addition, this has
resulted in significant demand for local and interexchange communications
network services, applications software and systems integration services.

- Frame Relay. Frame relay service is a fast-packet transport solution
targeted at LAN-to-LAN and legacy networks. 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.

- 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. The major benefits of ATM include providing
shared access to trunk bandwidth for multiple applications and
application types, minimizing the number of wide area connections needed
and supporting user access speeds of at least 1.5 mbps (T-1). The Company
expects the growth in demand for frame relay services to slow and the
demand for ATM services to increase.

Internet Services. An increasing number of businesses and individuals have
access to the Internet through their personal computers and the use of the
modem. Individuals or businesses can connect to the Internet via a modem by
calling an ISP's local POP. ISPs connect users to the Internet via leased or
owned high-speed dedicated data lines. ISPs also help users install and
configure connectivity software and Internet access services. An ISP may offer a
commercial user Internet services at various speeds, depending on a customer's
needs, via direct connections or leased local lines to a local POP.

COMPANY STRATEGY

The Company's objective is to become the full service alternative local
phone company for businesses in markets served by its local networks. The
Company's strategy is to rapidly build-out SONET-based fiber optic local
networks, which are located primarily in mid-size U.S. markets, and integrate
these local networks with the Company's recently deployed coast-to-coast, leased
broadband data communications network. This integrated network gives the Company
the ability to deliver high quality voice and high-speed data communications
services to IXCs and end users. The Company expects to leverage its local
network investment by expanding service offerings to provide switched voice and
Internet and other data services through its sales force and its strategic
partners. The Company is establishing the ACSI brand name by aggressively
marketing its broad array of communications services directly to end users. In
addition, the Company is trying to expand the distribution of private label
services through alternative channels. The Company believes it can provide its
customers with complete local communications services and achieve its strategic
objectives by implementing the following strategies:

- Provide a Full Suite of ACSI-Branded Voice and Data Communications
Services. The Company believes that there is substantial demand for an
integrated package of communica-

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tions services from mid-size commercial and government customers. ACSI
has extended its service offerings to include dedicated access, switched
voice, data and Internet services. The Company believes that packaging
its services under the ACSI brand name will enhance revenues from the
Company's existing customer base, provide services that more effectively
meet its customers' needs, improve customer loyalty and expand awareness
of ACSI's services and capabilities.

- Leverage Strategic Relationships. In addition to its end-user sales
focus, ACSI has developed strategic relationships with major IXCs, CATVs
and electric utilities. As of January 31, 1997, ACSI had more than 40
rights-of-way agreements with gas and electric utility companies, ILECs
and CATVs, allowing the Company to construct its local networks using
those companies' infrastructure of conduits and utility poles. The
Company historically has leveraged and plans to continue to leverage
relationships with these companies to generate revenues and obtain cost
effective rights-of-way. For the fiscal period ended December 31, 1996,
approximately 40% of the Company's revenues were billed to four of the
largest IXCs for services provided for the benefit of their customers.
The Company has a five-year agreement with MCImetro, pursuant to which
MCImetro has agreed to purchase minimum levels of dedicated services from
ACSI and has committed to construct portions of ACSI's fiber optic local
networks in six cities. In addition to the MCI Transaction, the Company
has also 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.

SALES AND MARKETING

The Company generated substantially all of its revenues in the fiscal
period ended December 31, 1996 from sales to IXCs and ISPs. As ACSI develops its
ACSI-branded product offerings and expands its sales force, the Company will
market its voice and high-speed data services through three channels: (i) direct
sales to end users, (ii) sales to IXCs and ISPs and (iii) sales of private-label
services through alternative distribution channels.

Direct Sales. The Company intends to focus its local sales force on the
commercial end users in each of the markets it serves. Generally, three or four
local sales representatives will provide a single point-of-service for the
customer base in each market and will be supported by voice, data and Internet
product specialists in order to respond effectively to unique and complex
customer needs. In addition, national account representatives will be
responsible for coordinating marketing efforts to Fortune 500 companies located
in the Company's markets. The Company believes that this local,
customer-oriented, single point-of-service sales structure facilitates greater
customer care in both the sales and customer service processes and helps the
Company differentiate itself as a customer-focused telecommunications services
provider. The Company expects the percentage of revenues generated through the
direct sales channel to increase as it hires additional local sales representa-

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<PAGE> 36

tives and focuses on sales directly to end users. The Company expects to
increase its direct sales force from 52 to 149 in the first half of 1997.

Carrier Sales. The Company sells dedicated services to IXCs and ISPs
(together, "carriers") who utilize the Company's products and services to
provide local access for their own products. The Company has a five-year
agreement with MCImetro, under which MCImetro has agreed to purchase minimum
levels of dedicated services from ACSI. In addition to the MCI Transaction, ACSI
is also a party to agreements with AT&T and two other IXCs to use the Company as
a supplier of dedicated access services in certain markets. See "Prospectus
Summary -- Recent Developments." The Company intends to support and expand its
relationships with carriers through additional agreements to offer dedicated and
switched services on its integrated network. At December 31, 1996, 10 sales
professionals targeted IXC and ISP customers. For the fiscal period ended
December 31, 1996, approximately 40% of the Company's revenues were billed to
four of the largest IXCs for services provided for the benefit of their
customers, and approximately 19% of the Company's revenues were billed to ISPs.

Alternative Distribution. The Company plans to expand distribution of its
services by contracting with IXCs, utilities, CATVs, out-of-region RBOCs, ILECs
and cellular and other wireless communication providers to resell the Company's
products and services under their own private labels. The Company is presently
recruiting a dedicated sales force to serve in support of sales through
alternative channels.

The Company is developing a core competency in marketing its integrated
voice and data network by focusing on branding its services and using its sales
force to sell ACSI's branded services continuously through its three sales
channels. The Company also plans to market its services by uniquely packaging
them in ways that meet its customers' various needs. Also, ACSI intends to
deliver additional services to its end-user customers throughout 1997.

ACSI 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 services, including IP switching and managed
services, local switched voice services and Internet services. The Company's
SONET-based fiber optic local 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 1996, dedicated and private line services for
IXCs and other carriers generated a substantial portion of the Company's
revenues, with the remaining revenues generated 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 ILEC central office or between two
ILEC 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 ILEC. 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 ILEC. Customer charges are based on
the number of channel terminations, fixed and mileage-sensitive
transport charges, and costs for any services required to multiplex
circuits.

- Switched transport services. Switched transport services are
offered to IXCs that have large volumes of long distance traffic
aggregated by a ILEC switch at a central office

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where the CAP has collocated its network. The Company provides dedicated
facilities for transporting these aggregated volumes of long distance
traffic from the ILEC central office to its POP or between ILEC central
offices. The flat monthly charge to the IXC is typically lower than the
transport fees charged by the ILEC, 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.

- 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.

Local Switched Voice Services. As of February 28, 1997 the Company offered
local switched voice services in Columbus, Georgia and Montgomery, Alabama and
expected to begin offering local switched voice services in two more of its
local network markets by March 31, 1997 using its own facilities. Beginning
April 1, 1997, the Company intends to begin providing local switched services on
a resale basis in 15 markets and plans to expand the number of markets in which
it is reselling local switched services throughout 1997 and the first quarter of
1998.

The Company's local switched voice services include telephone exchange
service, including optional enhanced services such as call waiting, caller ID
and three-way conference calling; switching traffic between ACSI's switch and a
business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; ISDN data
services; and origination and termination of long distance traffic between a
customer premise and interexchange carrier via shared trunks utilizing the
Company's local switch.

By March 31, 1997, the Company expects to have begun generating revenues
from its enhanced voice services that are currently being offered to small and
mid-sized business and government end users in a limited number of its local
network markets. During and after this time, the Company's goal is to expand its
enhanced voice service offerings and customer base. The Company's enhanced voice
services include its First Line and First Line Plus messaging products and
services under the brand names Virtualine and Virtualine 800, including basic
voice messaging, follow-me call routing, virtual calling card services, fax
services, e-mail and paging notification services, and automated attendant
services.

High-Speed Data Services. ACSINet, the Company's coast-to-coast, leased
broadband data communications network supports the following Company services:

- ACSINet Internet Access Service. The Company provides public Internet
connectivity and IP transport for the business and reseller communities.
This service is targeted to local and regional ISPs and corporate
Internet users requiring dedicated access. The service operates over the
ACSINet DS3 (45 Mbps) backbone, a fully-meshed, coast-to-coast network
with Internet connectivity at multiple network access points (NAPs) to
ensure continuous availability to the Internet.

- Managed Services. These services include design, installation,
maintenance, hardware (such as switches, routers and modems),
configuration management (such as maintaining consistent versions of the
router software and deploying consistent configurations) and overall
network management for a customer's network. The Company's managed
services are designed to eliminate many of the timing, coordination and
inter-operability issues that arise in installations requiring multiple
vendors.

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- Frame Relay. Frame relay service is provided to end users with
LAN-to-LAN and legacy networks, allowing them to share virtual bandwidth
connectivity at high speed. Frame relay services offer low cost data
transmission with generally minimal delay, few errors and high speed
performance. As users' requirements expand into multimedia applications,
which require higher bandwidth, frame relay offers a natural migration
path to ATM.

- ATM. The Company's ATM services include native speed LAN connectivity,
diagnostic imaging, videoconferencing and other high bandwidth
applications.

Internet Services. Principally through the Cybergate Acquisition, the
Company has begun to offer high-speed data communications services, including
computer network connections and related infrastructure services, to allow both
commercial and residential customers to have access to the Internet through
their personal computers and the use of a modem.

IMPLEMENTATION OF INTEGRATED NETWORK

The Company has developed an integrated communications network consisting
of SONET-based fiber optic local networks, a coast-to-coast, leased broadband
data communications network and local central office switching facilities.

Local Network Development. 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, which continues to be used in varying degrees by the
ILECs. Fiber optic networks also generally require less maintenance than copper
wire or microwave facilities of comparable transmission capacity, thereby
decreasing operating costs. Because ACSI is employing the latest digital
transmission technology in its local networks, these SONET-based fiber optic
networks will have substantial additional capacity, and further increases in
capacity can be achieved through a change in electronics. The Company believes
it will be able to use its local CLEC networks to provide a wide range of
telecommunications services with only incremental facilities costs. Key elements
of the Company's local 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, concentrations of commercial real estate, and the local city
permit 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 ILEC, the telecommunications
requirements of such end user, current pricing by the ILEC 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.

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<PAGE> 39

- 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."

Concurrently 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 ten 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 Local Network Construction. The Company initially
builds a one- to three-mile SONET-based 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's networks are
then expanded into suburban business areas and other ILEC central offices
to serve additional customers. These expansions may be in excess of 100
route miles. The Company utilizes outside contractors to construct its
networks.

The Company, through outside consultants, prepares preliminary and
final engineering studies for the initial portions of its local networks
prior to obtaining municipal authorizations required to begin network
construction. This process enables the Company to initiate network
construction activities immediately upon receipt of municipal
authorizations. Outside plant construction of a typical downtown network
will take from four to six months, depending on various factors. The
Company also coordinates collocation with the ILEC's downtown central
office and interconnections with selected IXC POPs with other
construction milestones, reducing overall network development costs and
allowing the Company 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 ILEC 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

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instances, the Company will design and construct some or substantially
all of its routes outside the central business district concurrently 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. During 1996, the Company
performed various network management services for other
telecommunications service providers and plans to continue to offer these
services on a limited basis.

A critical element of the Company's local network development plan is
integrating the Company's local networks with ACSINet, its coast-to-coast
broadband data communications network.

Implementation of Local Switched Voice and High-Speed Data 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. By aggregating switched traffic from multiple small markets
through a central hub switch, the Company also expects to realize reduced
operating expenses associated with switch engineering and maintenance.

As of February 28, 1997, the Company had installed central office switching
facilities in Columbus, Georgia and Montgomery, Alabama, was in the process of
installing switches in two additional markets and expects to have switches in 24
more markets installed by December 1999, with switches in 12 of those market
expected to be installed by December 1997. Toward this end, the Company had
long-term lease commitments for nine initial switches as of February 28, 1997.

In December 1996, the Company deployed ACSINet, a coast-to-coast, leased
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.

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 ILEC. The ILECs, 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 ILECs also offer certain
services that the Company cannot currently provide without first obtaining
requisite regulatory approvals. See "-- Regulation."

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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 ILECs, 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 ILEC
while providing what the Company believes is 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 ILEC's
networks (which were originally designed in tree and branch or star
configurations).

Other potential competitors of the Company include CATVs, 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 Federal 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 outweigh 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 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 ILEC 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. 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, CLECs 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 ISPs 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 ILEC, ACSI or another CLEC

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<PAGE> 42

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 more cost effective.

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 significant
savings over traditional private lines. Other frame relay service providers
include WorldCom, Inc. 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, WorldCom, Inc., AT&T, MCI, Sprint and WilTel,
Inc. A number of other data communications providers, CLECs and facilities-based
CATVs 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.

Local Switched Voice Services. In all of the markets where the Company is
currently operating or plans to operate, the ILEC currently is a de facto
monopoly provider of local switched voice services, including enhanced voice
services. The Company expects that the Federal Telecommunications Act will
enable CLECs, CATVs, electric utilities, cellular and wireless providers, and
others to offer local switched voice services in competition with the ILECs 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 ILEC.

Competition for enhanced voice services primarily consists of basic voice
mail services offered by ILECs and cellular providers in connection with their
core offerings and customer premise-based voice mail platforms. The voice mail
offerings of the ILECs 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
ILECs. 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.

Internet Services. The market for Internet access services is extremely
competitive. There are no substantial barriers to entry, and the Company expects
that competition will intensify in the future. The Company has entered this
market principally through the Cybergate Acquisition and believes that its
ability to compete successfully will depend upon a number of factors, including
market presence; 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 introductions of new
products and services by the Company and its competitors; the Company's ability
to support existing and emerging industry standards; and industry and general
economic trends.

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of companies: (1) other international, national and regional commercial Internet
service providers; (2) established on-line services companies that currently
offer or are expected to offer Internet access; (3) computer hardware and
software and other technology companies; (4) IXCs; (5) RBOCs; (6) CATVs; and (7)
nonprofit or educational Internet service providers. The ability of these
competitors or others to bundle services and products with Internet connectivity
services could place the Company at a significant competitive disadvantage in
this services market.

REGULATION

Overview

The Company's services are subject to federal, state and local regulation.
The Federal Communications Commission (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.

Federal Regulation

The Federal Telecommunications Act. On February 1, 1996, the U.S. Congress
enacted comprehensive telecommunications reform legislation, which the President
signed into law as the Federal Telecommunications Act on February 8, 1996. The
Company believes that this legislation is likely to enhance competition in the
local telecommunications marketplace because it (i) removes state and local
entry barriers, (ii) requires ILECs to provide interconnections to their
facilities, (iii) facilitates the end users' choice to switch service providers
from ILECs to CLECs such as the Company and (iv) requires access to
rights-of-way. The legislation also will tend to enhance the competitive
position of the ILECs and increase local competition by IXCs, CATVs and public
utility companies. Under the Federal Telecommunications Act, ILECs 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; IXCs are permitted to construct their own local facilities and/or
resell local services; and state laws can no longer require CATVs to obtain a
franchise before offering telecommunications services nor permit CATVs'
franchise fees to be based on their telecommunications revenues. In addition,
under the Federal Telecommunications Act all utility holding companies are
permitted to diversify into telecommunications services. See "Risk Factors --
Competition."

The Federal Telecommunications Act requires all telecommunications carriers
(including ILECs and CLECs (such as the Company)): (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. It also
requires incumbent ILECs to provide interconnection (a) for the transmission and
routing of telephone exchange service and exchange access, (b) at any
technically feasible point within the ILEC's network, (c) that is at least equal
in quality to that provided by the ILEC to itself, its affiliates or any other
party to which the ILEC provides interconnection, and (d) at rates, terms and
conditions that are just, reasonable and nondiscriminatory. ILECs 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 their
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.

In addition, the Federal Telecommunications Act requires RBOCs to comply
with certain safeguards and offer interconnections that satisfy a prescribed
14-point checklist before the RBOCs

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<PAGE> 44

are permitted to provide in-region interLATA (i.e. long distance) services.
Subject to FCC approval, RBOCs may manufacture telecommunications equipment,
originate interLATA telecommunications services, and provide interLATA
information services. The safeguards are designed to ensure that the RBOC's
competitors have access to local exchange and exchange access services on
nondiscriminatory terms and that subscribers of regulated non-competitive RBOC
services do not subsidize their provision of competitive services. The
safeguards also are intended to promote competition by preventing RBOCs from
using their market power in local exchange services to obtain an anti-
competitive advantage in the provision of other services. On December 24, 1996,
the FCC adopted a number of procedures to provide greater protection against
cross-subsidization and clarified the use of the prevailing price method for
transaction valuation.

FCC Rules Implementing the Local Competition Provisions of the Federal
Telecommunications Act. On August 8, 1996, the FCC released both a First Report
and Order and a Second Report and Order and Memorandum Opinion and Order in its
CC Docket 96-98 (combined, the "Interconnection Orders") that established a
framework of minimum, national rules enabling state Public Service Commissions
("PSCs") and the FCC to begin implementing many of the local competition
provisions of the Federal Telecommunications Act. In its Interconnection Orders,
the FCC prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to interconnect
with the ILECs' networks. The FCC also adopted a minimum list of unbundled
network elements that ILECs must make available to competitors upon request and
a methodology for states to use in establishing rates for interconnection and
the purchase of unbundled network elements. The FCC also adopted a methodology
for states to use when applying the Federal Telecommunications Act's "avoided
cost standard" for setting wholesale prices with respect to retail services.

Most provisions of the Interconnection Decisions have been appealed, and
application of most of the pricing and costing provisions of the Interconnection
Decisions discussed below have been stayed by the U.S. Court of Appeals for the
Eighth Circuit. The FCC's appeal of this stay was denied by the U.S. Supreme
Court. Within the next several months, the Court of Appeals for the Eighth
Circuit is expected to rule on the various appeals of the Interconnection
Orders, at which time the Court could approve, reverse or partially reverse the
Interconnection Orders.

The following summarizes the key issues addressed in the Interconnection
Orders.

- Interconnection. ILECs are required to provide interconnection for
telephone exchange or exchange access service, or both, to any
requesting telecommunications carrier at any technically feasible
point. The interconnection must be at least equal in quality to that
provided by the ILEC to itself or its affiliates and must be
provided on rates, terms and conditions that are just, reasonable
and nondiscriminatory.

- Access to Unbundled Elements. ILECs are required to provide
requesting telecommunications carriers with nondiscriminatory access
to network elements on an unbundled basis at any technically
feasible point on rates, terms, and conditions that are just,
reasonable and nondiscriminatory. At a minimum, ILECs must unbundle
and provide access to network interface devices, local loops, local
and tandem switches (including all software features provided by
such switches), interoffice transmission facilities, signaling and
call-related database facilities, operations support systems and
information and operator and directory assistance facilities.
Further, ILECs may not impose restrictions, limitations or
requirements upon the use of any unbundled network elements by other
carriers.

- Methods of Obtaining Interconnection and Access to Unbundled
Elements. ILECs are required to provide physical collocation of
equipment necessary for interconnection or access to unbundled
network elements at the ILEC's premises, except that the ILEC may
provide virtual collocation if it demonstrates to the PSC that
physical collocation is not practical for technical reasons or
because of space limitations.

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<PAGE> 45

- Pricing Methodologies. New entrants are required to pay for
interconnection and unbundled elements at rates based on the ILEC's
Total Element Long-Run Incremental Cost ("TELRIC") of providing a
particular network element plus a reasonable share of
forward-looking joint and common costs, and may include a reasonable
profit. If TELRIC cost information is not available for
consideration within the statutory time frame for arbitrating
interconnection disputes, PSCs are authorized to use certain maximum
default rates for local interconnection and unbundled network
element pricing and a range of rates for switching services, all of
which rates must be replaced with TELRIC-based rates once a review
of the TELRIC cost studies can been completed.

- Access Charges for Unbundled Switching and Access Charge
Reform. IXCs which order unbundled switching elements temporarily
will be required to pay an access charge to an ILEC when the ILEC
provides exchange access service. Access charges also must be paid
when an IXC originates or terminates interexchange traffic to a
customer to which it provides local services by reselling ILEC
exchange services. Access charge reform was proposed by the FCC on
December 24, 1996. See "-- Other Regulation -- Access Charges"
below.

- Resale Pricing. ILECs are required to offer for resale any
telecommunications service that the carrier provides at retail to
subscribers who are not telecommunications carriers. PSCs are
required to identify which marketing, billing, collection and other
costs will be avoided or that are avoidable by ILECs when they
provide services wholesale and to calculate the portion of the
retail rates for those services that is attributable to the avoided
and avoidable costs.

- Transport and Termination Charges. The LEC charges for transport
and termination of local traffic delivered to them by competing LECs
must be cost-based and should be based on the LECs' TELRIC cost of
providing that service, although additional reciprocal charges are
permitted if termination is through a tandem switch.

- Access to Rights-of-Way. The FCC established procedures and
guidelines designed to facilitate the negotiation and mutual
performance of nondiscriminatory access by telecommunications
carriers and poles, ducts, conduits, and rights-of-way owned by
utilities or LECs. Additionally, expedited dispute resolution
procedures are set forth should good faith negotiations fail.

- Universal Service Reform. All telecommunications carriers,
including the Company, are required to contribute funding for
universal service support, 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. The FCC has opened a
proceeding (CC Docket No. 96-45) which is intended to implement
these requirements. On November 8, 1996, a Federal-State Joint Board
formed by the FCC released extensive recommendations for regulatory
changes which redefine the services to be included in universal
service support programs, how affordability of eligible services
would be determined, which carriers are eligible for universal
service support, the terms of programs for low income consumers,
support for rural, insular and high cost areas, the future of
subscriber line charges and carrier common-line charges and the
administration of the universal service support mechanisms. The
proceeding must be concluded by May 8, 1997 and may have a
significant impact on future operations, expenses and pricing of the
Company.

Other 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. Therefore, the FCC has established
different levels of regulation for dominant carriers and nondominant carriers.
For domestic common carrier telecommunications regulation, large ILECs such as
GTE

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<PAGE> 46

and the RBOCs are currently considered dominant carriers, while CLECs such as
the Company are considered nondominant carriers.

- Tariffs. 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. With the exception of
informational tariffs for operator-assisted services, on October 31,
1996, the FCC announced that all nondominant IXCs may cancel their
tariffs for domestic, interstate interexchange services within nine
months of the effective date of the order. Tariffs are still
required to be filed for international services. Tariffs also must
be filed for interexchange access services. Moreover, nondominant
carriers like the Company must offer interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain
subject to FCC complaint procedures. The FCC's interexchange
de-tariffing order was stayed by the U.S. Court of Appeals for D.C.
on February 13, 1997.

Pursuant to these FCC requirements, the Company has filed and
maintains tariffs 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 believes
that its enhanced voice and Internet services are "enhanced"
services which need not be tariffed.

- ILEC Price Cap Regulation. In 1991, the FCC replaced traditional
rate of return regulation for large ILECs with price cap regulation.
Under price caps, ILECs 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 ILEC services that are competitive with those of CLECs.
On September 14, 1995, the FCC proposed a three-stage plan that
would substantially reduce ILEC price cap regulation as local
markets become increasingly competitive and ultimately would result
in granting ILECs nondominant status. The FCC proposed immediate
elimination of the lower service band index limit on price
reductions within service categories, modification of tariff filing
requirements and revision of the structure of price cap baskets. The
FCC also sought comment on whether ILECs should be permitted to
expand use of volume and term discount plans. Adoption of the FCC's
proposal to reduce significantly its regulation of ILEC pricing
would significantly enhance the ability of ILECs to compete against
the Company and could have a material adverse effect on the Company.
The FCC released an order on December 24, 1996 which adopted certain
of these proposals, including the elimination of the lower service
band index limits on price reductions within the access service
category. The FCC's December 1996 order also eased the requirements
necessary for the introduction of new services.

- Access Charges. The FCC has granted ILECs significant flexibility
in pricing their interstate special and switched access services on
a specific central office by central office basis. Under this
pricing scheme, ILECs 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
ILECs lowering their prices in high traffic density areas, the
probable area of competition with the Company. The Company also
anticipates that the FCC will grant ILECs 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
ILEC switched transport rates in order to facilitate competition for
switched access.

On February 15, 1996, the FCC partially waived its access charge rules for
Ameritech Corporation (one of the seven RBOCs), thereby giving Ameritech certain
access charge pricing flexibility which will likely make it more difficult for
CLECs to compete against Ameritech in the affected areas.

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<PAGE> 47

The FCC had previously approved alternative access charge billing plans proposed
by NYNEX. The Company does not currently provide service in the Ameritech or
NYNEX operating regions. However, on December 24, 1996, in its Notice of
Proposed Rulemaking, Third Report and Order, and Notice of Inquiry ("NPRM"), the
FCC proposed and sought comment on far-reaching reforms to its access charge
rules, including granting all ILECs additional access charge pricing
flexibility. These proposals could, if implemented, make it more difficult for
the Company to compete for access traffic.

In the NPRM, the FCC proposed a set of reforms to its existing access
charge rules which are intended to (i) take account of the local competition and
RBOC reentry provisions of the Federal Telecommunications Act, state PSC actions
to open local networks for competition and implicit universal service subsidies;
(ii) establish fair rules of competition; (iii) address perceived inequities and
inefficiencies in the current ILEC access charge structure and (iv) generally
lower access charge levels. The FCC proposed making significant changes to the
current rules which govern the common carrier elements subscriber, line charge,
local switching transport, tandem switching and transport interconnection charge
components, of the current ILEC access charge rate structure. In addition, in
the NPRM, the FCC proposed even more fundamental reforms the current ILEC access
charge structure by using either (i) the "market-based" approach, which would
result in gradual relaxation and ultimate removal of existing federal access
rate structure requirements and price cap restrictions as competition develops
and prices are naturally driven toward economic cost; or (ii) the "prescriptive
"approach, where the FCC would specify the nature and timing of changes to
existing access charge rate levels. Finally, in the NPRM, the FCC also sought
comment on whether ISPs, enhanced service providers and Internet access
providers should pay access charges. Requiring such service providers to pay
access charges could have a significant adverse impact on both the Company's
wholesale access services business and its enhanced voice services, high-speed
data and Internet access services.

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
are in the process of addressing issues relating to the regulation of CLECs.
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 Federal
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 Federal
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.

As of February 28, 1997 the Company had obtained intrastate authority for
the provision of dedicated services in Alabama, Arkansas, Colorado, Florida,
Georgia, Kentucky, Maryland, Mississippi, Nevada, New Mexico, South Carolina,
Tennessee, Texas and Virginia. As of that date, the Company also had
applications pending before PSCs in Arizona, Louisiana, Missouri and Oklahoma
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 February 28, 1997, the Company
had applied for authorization to provide local switched voice services in
Arizona, Kentucky, Louisiana, Mississippi, Missouri, New Mexico and Oklahoma and
had been granted such authority in Alabama, Arkansas, Colorado, Florida,
Georgia, Maryland, Nevada, South Carolina, Tennessee, Texas and Virginia. 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

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<PAGE> 48

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 ILECs increasing pricing flexibility. This
flexibility may present the ILECs with an opportunity to subsidize services that
compete with the Company's services with revenues generated from non-competitive
services, thereby allowing ILECs 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 Federal Telecommunications Act imposes a duty
upon all ILECs 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. 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 ILEC
received the Company's initial request for interconnection. Although the Company
found it necessary to seek state PSC arbitration of some material issues, the
Company negotiated partial agreements for local interconnection and access to
unbundled elements with BellSouth in South Carolina, Georgia, Florida, Kentucky,
North Carolina, Tennessee, Alabama, Mississippi and Florida; and with
Southwestern Bell in Arkansas and Texas. Unsuccessful interconnection
negotiations caused the Company to file petitions with state PSCs seeking
arbitrated agreements with US West in New Mexico and Arizona; with GTE in Texas,
Kentucky and Florida; and with Sprint/Central Telephone in Nevada. Southwestern
Bell has filed lawsuits in both federal and state courts in Texas seeking to
overturn the Texas PUC arbitration award and prevent implementation of the
anticipated ACSI interconnection agreement. The state action has been removed to
federal court. GTE and US West have filed similar lawsuits in federal courts in
Kentucky and Arizona, respectively, seeking to reverse the state commission
arbitration awards in those states, and prevent implementation of the arbitrated
interconnection agreements there. Similar court challenges to the state
commission arbitration decisions involving US West in New Mexico and GTE in
Texas also are expected. If successful, these lawsuits could delay or interrupt
ACSI's interconnection arrangements with the ILECs in the affected states.
Moreover, since ACSI purchases ILEC local services for resale pursuant to the
terms of the interconnection agreements at issue, any adverse outcome in these
lawsuits could impede ACSI's plans to resell ILEC local services in the affected
markets. The Company is unable to predict the likely outcome of the lawsuits
described above, or the probable timeframe for decision. As of February 28,
1997, state commission arbitration of ACSI requests for interconnection remained
underway in Florida (GTE) and Nevada (Sprint/Central). In addition, the Company
has initiated formal interconnection negotiations with Bell Atlantic for
Maryland, Virginia and the District of Columbia. The Company has also initiated
formal requests to expand its interconnection arrangements with US West to
include Colorado and with Southwestern Bell to include Oklahoma, Missouri and
Kansas.

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. 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 ILECs 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.

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<PAGE> 49

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 December 31, 1996, the Company employed a total of 322 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

On July 24, 1996, the Company was notified that a complaint against a
subsidiary had been filed in the District Court of El Paso County, Texas wherein
the plaintiff alleged permanent paraplegia resulting from his fall into a
concealed basement during construction of the Company's El Paso network. At the
time of the incident giving rise to the lawsuit, the plaintiff was an employee
of the subcontractor hired by the Company's general contractor for this project.
The plaintiff seeks recovery from the Company's subsidiary and the general
contractor of at least $25 million in damages (plus punitive damages). Both the
Company and the general contractor have begun investigations into the facts
surrounding the incident and intend to defend against this suit vigorously.
However, based on the facts known as of the date hereof, the Company does not
believe it is likely, although it is possible, that the Company could be liable
for payment of all or a portion of the requested damages, which potential
liability could materially adversely affect the results of operation and
financial condition of the Company.

Additionally, the Company and its subsidiaries are currently 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 are parties to various court appeals and
regulatory arbitration proceedings relating to certain of the Company's
interconnection agreements and continue to participate in regulatory proceedings
before the FCC and state regulatory agencies concerning the authorization of
services and the adoption of new regulations. See "-- Regulation."

PROPERTIES

The Company leases a 23,925 square foot office space in Annapolis Junction,
Maryland for its corporate headquarters and network management center for
$28,647 per month as of December 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 leases a 1,358 square foot field office
in Lombard, Illinois which houses its local network development and real estate
development operations. This lease expires on January 31, 1999.

As of December 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 $285,000. The various leases expire on
dates ranging from February 28, 1998, to April 1, 2007. 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.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information as of the date of this
Prospectus regarding the directors and executive officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ---------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Anthony J. Pompliano.......................... 58 Executive Chairman of the Board of
Directors
Jack E. Reich................................. 46 President and Chief Executive Officer --
Communications Services
George M. Tronsrue, III....................... 40 President and Chief Operating Officer --
Strategy and Technology Development
Riley M. Murphy............................... 41 Executive Vice President -- Legal and
Regulatory Affairs, General Counsel and
Secretary
David L. Piazza(1)............................ 42 Chief Financial Officer
George M. Middlemas(2)........................ 50 Director
Edwin M. Banks(3)............................. 34 Director
Christopher L. Rafferty(2).................... 48 Director
Benjamin P. Giess............................. 34 Director
Olivier L. Trouveroy(2)(3).................... 41 Director
Peter C. Bentz................................ 31 Director
</TABLE>

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

(1) Mr. Piazza's employment begins as of March 24, 1997.

(2) Member of Compensation Committee

(3) Member of Audit Committee

Anthony J. Pompliano, Executive Chairman of the Board of Directors, has
more than 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 Communications, a publicly-traded CLEC that was acquired by
WorldCom, Inc. in December 1996. Mr. Pompliano served as President, CEO and Vice
Chairman of MFS Communications from April 1988 until March 1991. He joined ACSI
in August 1993 after the expiration of his non-competition agreement with MFS
Communications. Before his association with MFS Communications 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.

Jack E. Reich, President and Chief Executive Officer -- Communications
Services, had 22 years of telecommunications industry and management experience
before joining ACSI in December 1996. For two and one-half years prior to
joining ACSI, Mr. Reich was employed by Ameritech, Inc. as President of its
Custom Business Service Organization, where Mr. Reich was responsible for full
business marketing to Ameritech's largest customers for telecommunications
services, advanced data services, electronic commerce and managed
services/outsource initiatives. Prior to that, he served as President of MCI's
Multinational Accounts organization and also served as MCI's Vice President of
Products Marketing. Mr. Reich has also held sales and marketing positions at
AT&T and ROLM Corp. Mr. Reich has a B.S. degree from St. Louis University and an
MBA from the University of Chicago.

George M. Tronsrue, III, President and Chief Operating Officer -- Strategy
and Technology Development, had 17 years of telecommunications industry and
management experience before joining ACSI in February 1994. Mr. Tronsrue served
the Company as Executive Vice President -- Strategic Planning and Business
Development from February 1994 until January 31, 1996. From

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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.

David L. Piazza, Chief Financial Officer, will join the Company as of March
24, 1997. For ten years prior to joining the Company, Mr. Piazza was employed by
MFS Communications in a variety of finance and senior management positions, most
recently as the Senior Vice President and Chief Financial Officer of MFS
Telecom, Inc., a subsidiary of MFS Communications. Prior to his employment with
MFS Communications, Mr. Piazza was employed by AT&T for four years in its
finance and support divisions. Mr. Piazza received his B.S. degree in
Accountancy from the University of Illinois and holds a CPA.

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 B.A. degree from Rutgers College
and his MBA 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.

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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 Dartmouth College and his
MBA 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 B.S. and Masters degrees in Economics from the University of
Louvain in Belgium, as well as an MBA 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 MBA from the Wharton School of the University of
Pennsylvania in 1992.

As part of the December 1996 management reorganization, Richard A. Kozak,
who had previously served as the Company's President and Chief Executive
Officer, was named President and Chief Executive Officer -- Corporate Services.
Mr. Kozak was also appointed as ACSI's Acting Chief Financial Officer, replacing
Harry D'Andrea who had resigned as ACSI's Chief Financial Officer in November
1996. Effective February 2, 1997, Mr. Kozak's employment was terminated, with
each of Mr. Kozak and the Company claiming the termination was the result of the
other party's breach of his employment agreement. The parties have settled their
dispute relating to the cause of Mr. Kozak's termination. See "-- Employment
Agreements."

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.

OTHER SIGNIFICANT EMPLOYEES

John R. Polchin, Director of Corporate Finance, joined the Company in May
1996. Prior to joining the Company, Mr. Polchin served as Corporate Controller
for ISA Corporation, a development stage software company. From 1993 through
1995, Mr. Polchin was the Assistant Treasurer at PaineWebber, Inc. Prior
thereto, Mr. Polchin held corporate finance positions within UNC Incorporated, a
publicly-traded aviation company, and NationsBank. As Director -- Corporate
Finance, Mr. Polchin's responsibilities include treasury management, fund
raising, strategic planning and

51
<PAGE> 53

financial analysis. Mr. Polchin received his B.S. degree in Economics from the
University of North Carolina.

Richard B. Robertson, Executive Vice President -- Operations and
Engineering, 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, Mr. 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.

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 Communications, 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.

Dennis J. Ives, Senior Vice President -- Network Development, joined the
Company's predecessor in 1992 as Vice President -- Operations. From 1990 to
1992, 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.

Richard Kingston, Regional Vice President/General Manager -- Western
Region, joined the Company in 1994. Prior to joining ACSI, Mr. Kingston was with
TCG where he had responsibility for the MCI account for the central region of
the U.S. Mr. Kingston's other professional experience includes management of
carrier accounts for MFS and a two year period during which he ran his own
telecommunications marketing firm. In December, 1996, Kingston received the
Chairman's award for the outstanding performance of his region. Prior to
assuming his position as RVP, Kingston was Vice President of Carrier Sales.

Terry Kokinda, Regional Vice President -- Central Region, joined the
Company in 1993. Mr. Kokinda had more than 18 years of telecommunications
experience before joining ACSI. Prior to joining the Company, Mr. Kokinda was a
District Sales Manager for AT&T where he had management and administrative
responsibility for a large account territory. Before joining AT&T, Mr. Kokinda
was employed at ATTIS where he held the positions of Account Executive and Sales
Manager, and was extensively involved with account teams, customers and vendors
as well as the design and development of proposals and business solutions. Mr.
Kokinda received his B.A. degree from Western Kentucky University.

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<PAGE> 54

Joseph Isaksen, Vice President/Controller, joined the Company in April
1996. Prior to joining the Company, Mr. Isaksen was employed by Concert
Communications (Concert), a joint venture company between MCI Communications
Corporation and British Telecommunications plc, for three years. Mr. Isaksen
served as Director of Financial Services in London, England, for Concert's
subsidiaries in 13 European and Asian countries. During the period 1987 through
1993, Mr. Isaksen spent most of his career at MCI Telecommunications in the
Corporate Financial Reporting area. His background also includes experience as
an accounting instructor and audit supervisor. Mr. Isaksen received a B.S.
degree in accounting from the University of Maryland and holds a CPA.

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<PAGE> 55

EXECUTIVE COMPENSATION

The following table provides a summary of compensation for the fiscal
period ended December 31, 1996 and for each of the three fiscal years ended June
30, 1996, 1995 and 1994, with respect to the Company's Chief Executive Officer,
and the other five most highly compensated officers of the Company during the
fiscal year ended June 30, 1996 whose annual salary and bonus during such fiscal
year exceeded $100,000 (collectively, the "Named Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- NUMBER OF
OTHER SECURITIES
NAME AND PRINCIPAL POSITION ON DECEMBER 31, ANNUAL UNDERLYING ALL OTHER
1996 YEAR SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION
- -------------------------------------------- ---- -------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Pompliano........................ 1996* $124,167 $ 75,000(3) $ -- -- $ 2,574(4)
Executive Chairman of the Board of 1996 239,583 175,000(3) -- -- 6,187(4)
Directors 1995 219,500 175,000(3) -- 500,000 6,977(4)
1994 110,000 -- 25,000(5) 1,349,899 61,507(6)
Jack E. Reich(7)............................ 1996* 20,883 -- -- 1,200,000
President and Chief Executive
Officer -- Communications Services
George M. Tronsrue.......................... 1996* 100,000 -- -- -- 2,400(4)
President and Chief Operating 1996 191,128 54,116(8) -- 50,000 4,800(4)
Officer -- Strategy and Technology 1995 150,000 135,417(8) 68,800(9) 350,001(10) --
Development 1994 53,827 50,000 -- --
Riley M. Murphy............................. 1996* 91,250 -- -- -- --
Executive Vice President -- Legal 1996 162,499 81,500(11) 37,004(9) 50,000 3,536(4)
and Regulatory Affairs, General 1995 150,000 81,500(12) -- 250,001(10) 9,783(4)
Counsel and Secretary 1994 37,500 -- 48,620(13) --
Robert H. Ottman(14)........................ 1996* 90,667 -- -- -- --
Executive Vice President/Network 1996 170,000 50,000(3) 100,000(9) -- --
Services and Technical Support 1995 28,333 -- -- 250,000 --
Richard A. Kozak(15)........................ 1996* 129,167 137,500(3) -- 83,334(16) 2,700(4)
President and Chief Executive 1996 232,885 200,000(3) -- -- 5,400(4)
Officer -- Corporate Services and 1995 184,378 175,000(3) -- 399,999(16) 3,750(4)
Acting Chief Financial Officer 1994 87,500 -- 39,728(5) 899,932 --
</TABLE>

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

* Subsequent to June 30, 1996, the Company changed its fiscal year-end to
December 31. Information is for the six months ended December 31, 1996.

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

(2) See information provided in "Option Grants in Fiscal Year Ended June 30,
1996 and Fiscal Period Ended December 31, 1996" and "December 31, 1996
Option Values."

(3) Represents cash bonuses received for attainment of certain performance
goals.

(4) Represents payments received for medical or disability insurance in excess
of that provided to other employees and/or car allowances and, for Ms.
Murphy, includes payments of $6,423 of premiums in connection with
professional liability insurance for the period prior to her employment
with the Company.

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

(6) 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.

(7) Mr. Reich commenced employment with the Company in December 1996.

(8) Represents an installment of a $244,500 bonus, $54,116 of which is due on
February 24, 1997.

(9) Includes $65,000, $100,000 and $37,004 paid to Messrs. Tronsrue and Ottman
and Ms. Murphy, respectively, in connection with relocation and moving
expenses relating to the relocation of the Company's headquarters to
Annapolis Junction, Maryland.

(10) 150,000 of these options were originally granted in the fiscal year ended
June 30, 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
Company's October 1994 private placement.

(11) Represents an installment of a $244,500 cash bonus, $81,500 of which was
paid in January 1997.

(12) This payment represents the first installment of a $244,500 cash bonus.

(13) Consists of $43,620 received for performing legal services for the Company
as outside counsel and a $5,000 for location expenses.

(14) Mr. Ottman commenced employment with the Company in May 1995 and his
employment was terminated in February 1997.

(15) Mr. Kozak served as the Company's President and Chief Executive Officer
during fiscal year 1996. He became Acting Chief Financial Officer in
December 1996 upon the resignation of the Company's previous Chief
Financial Officer. In connection with the Company's December 1996
management reorganization, Mr. Kozak became President and Chief Executive
Officer -- Corporate Services. Effective February 2, 1997, Mr. Kozak's
employment with the Company was terminated.

(16) In connection with the settlement of the dispute relating to the
termination of Mr. Kozak's employment, all of the options granted in fiscal
period ended December 31, 1996 and options to purchase 83,333 shares
granted in fiscal year ended June 30, 1995 were canceled. See
"-- Employment Agreements."

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<PAGE> 56

OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 1996 AND FISCAL PERIOD ENDED
DECEMBER 31, 1996

The following table contains information concerning the grant of stock
options to the Named Officers during the fiscal year ended June 30, 1996 and the
fiscal period ended December 31, 1996.

INDIVIDUAL GRANTS (1)

<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS MARKET PRICE
UNDERLYING GRANTED TO EXERCISE OR OF UNDERLYING
OPTIONS EMPLOYEES BASE PRICE SECURITIES ON EXPIRATION
NAME GRANTED IN PERIOD (PER/SHARE) DATE OF GRANT DATE
- ---------------------------- ---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Anthony J. Pompliano........ -- -- -- -- --
Jack E. Reich............... 200,000 13.95% $ 9.375 $11.625 12/1/02
200,000 13.95 9.375 11.625 12/1/03
200,000 13.95 9.375 11.625 12/1/04
200,000 13.95 9.375 11.625 12/1/05
400,000 27.9 9.375 11.625 12/31/07
George M. Tronsrue, III..... 25,000(2) 2.2 3.40 3.875 2/22/03
25,000(3) 2.2 3.40 3.875 2/22/04
Riley M. Murphy............. 25,000(2) 2.2 3.40 3.875 3/30/03
25,000(3) 2.2 3.40 3.875 3/30/04
Robert H. Ottman............ -- -- -- -- --
Richard A. Kozak............ 83,334 5.8 15.00 11.75 11/15/04(4)
</TABLE>

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

(1) Mr. Tronsrue and Ms. Murphy were granted options in fiscal year ended June
30, 1996, and Messrs. Reich and Kozak were granted options in the fiscal
period ended December 31, 1996.

(2) These options were granted on July 6, 1995, with an exercise price of $3.40.
Mr. Tronsrue's options will vest on February 23, 1998 and Ms. Murphy's
options will vest on March 31, 1998 provided, in each case, that he or she
does not voluntarily terminate his or her employment with the Company or is
not terminated for cause prior to the applicable vesting date.

(3) These options were granted on July 6, 1995, with an exercise price of $3.40.
Mr. Tronsrue's options will vest on February 23, 1999 and Ms. Murphy's
options will vest on March 31, 1999 provided, in each case, that he or she
does not voluntarily terminate his or her employment with the Company or is
not terminated for cause prior to the vesting date.

(4) These options were canceled in connection with the settlement of the dispute
relating to the termination of Mr. Kozak's employment. See "-- Employment
Agreements."

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<PAGE> 57

DECEMBER 31, 1996 OPTION VALUES

The following table sets forth the value of unexercised options held by the
Named Officers as of December 31, 1996. None of the Named Officers exercised
options during the fiscal year ended June 30, 1996 or the fiscal period ended
December 31, 1996.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT DECEMBER 31,
OPTIONS AT DECEMBER 31, 1996 1996(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Anthony J. Pompliano............... 1,599,899 250,000 $15,455,253 $ 1,987,500
Jack E. Reich...................... -- 1,200,000 -- 1,650,000
George M. Tronsrue, III............ 250,000 150,000 2,125,000 1,217,500
Riley M. Murphy.................... 137,501 162,501 1,168,759 1,323,759
Robert H. Ottman................... 100,000 150,000(2) 775,000 1,162,500
Richard A. Kozak................... 1,133,265 250,000(3) 10,824,326 970,825
</TABLE>

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

(1) Represents the difference between the per share exercise price of the
unexercised options and $10.75, the last sale price on December 31, 1996, as
reported by the Nasdaq Stock Market.

(2) The vesting of options to purchase 75,000 of these shares was accelerated in
connection with the termination of Mr. Ottman's employment in February 1997.

(3) Of these, options to purchase 166,667 shares were canceled and the vesting
of options to purchase an additional 83,333 shares was accelerated in
connection with the settlement of the dispute relating to the termination of
Mr. Kozak's employment. See "-- Employment Agreements."

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 the fiscal year ended June 30, 1996 and the fiscal period
ended December 31, 1996, the Company paid an aggregate of approximately $31,000
in 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." 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 year ended December 31, 1996, no directors
were granted options.

EMPLOYMENT AGREEMENTS

Anthony J. Pompliano. The Company is party to an employment agreement with
Anthony J. Pompliano, its Executive 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 a cash bonus of up to $175,000 for each
fiscal year through 1998 based upon the Company's achievement of certain
performance goals for the relevant fiscal year. Under this employment agreement,
Mr. Pompliano has been granted options to purchase an aggregate of 1,849,899
shares of the Company's Common Stock at exercise prices ranging from $.875 per
share to $2.80 per share. 1,599,899 of these options are currently vested. 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.

Mr. Pompliano has the right, for 90 days after termination of his
employment (unless he is terminated by the Company "for cause" or he voluntarily
resigns), to sell to the Company up to

56
<PAGE> 58

$1.0 million in then market value of 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, less the
exercise price of the options with respect to unexercised options; provided,
however, this right cannot be exercised unless at least 5,000,000 shares of
Common Stock are owned by non-affiliates of the Company at the time of his
request and the market value of the outstanding Common Stock is at least $300
million. Mr. Pompliano's employment agreement also contains non-compete,
non-solicitation and confidentiality provisions.

Jack E. Reich. The Company is party to an employment agreement with Jack
E. Reich, its President and Chief Executive Officer -- Communications Services,
which terminates on December 31, 2000, extendable for one year by mutual
agreement. Under the terms of this agreement, Mr. Reich is entitled to a minimum
annual base salary of $250,000, a cash bonus of $100,000 in 1997 and annual
bonuses of between $150,000 and $350,000 based on the Company's achievement of
certain performance goals. Under this employment agreement, Mr. Reich was
granted an option to purchase 1,200,000 shares of Common Stock at an exercise
price $9.375 per share. These options vest in installments between December 1997
and December 2001, subject to Mr. Reich's continued employment. Mr. Reich's
employment also contains a two year non-compete/non-solicit provision.

George M. Tronsrue, III. The Company is party to an employment agreement
with George M. Tronsrue, III, its President and Chief Operating
Officer -- Strategy and Technology Development, which terminates on February 23,
1999. The agreement, as amended, calls for an annual salary $200,000, a $400 per
month car allowance and a guaranteed bonus of $244,500 payable in annual
installments through February 1997. Under the terms of this employment
agreement, Mr. Tronsrue has been granted stock options to purchase an aggregate
of 400,000 shares of Common Stock at prices ranging from $2.25 per share to
$3.40. 250,000 of these options were exercisable as of December 31, 1996. Mr.
Tronsrue's employment agreement also contains a two year non-compete/non-solicit
provision.

Riley M. Murphy. The Company is party to an employment agreement with
Riley M. Murphy, its Executive Vice President for Legal and Regulatory Affairs,
which terminates on March 31, 1999. This agreement, as amended, calls for an
annual salary of $175,000 and a guaranteed bonus of $244,500, payable in annual
installments through January 1997. Under this employment agreement, Ms. Riley
was granted options to purchase an aggregate of 300,002 shares of Common Stock
at prices ranging from $2.25 per share to $3.40 per share. 137,501 of these
options are currently vested. Ms. Murphy's employment agreement also contains a
two year non-compete/non-solicit provision.

Robert H. Ottman. The Company is party to an employment agreement with
Robert Ottman, which was terminated in February 1997. In connection with Mr.
Ottman's termination, the Company accelerated the vesting of options to purchase
75,000 shares of Common Stock having an exercise price of $3.00 per share and
paid Mr. Ottman a lump sum of approximately $44,000. Mr. Ottman's employment
agreement contains a two year non-compete/non-solicit provision.

Richard A. Kozak. The Company was party to an employment agreement with
Richard A. Kozak, which was terminated effective February 2, 1997. Each of the
parties initially claimed the termination was the result of a breach of the
employment agreement by the other party. In settlement of their dispute and
related litigation concerning Mr. Kozak's termination, the parties agreed, among
other things, that Mr. Kozak will (i) receive $300,000 in cash, payable by the
Company in three equal installments on April 1, July 1 and October 1, 1997, (ii)
forfeit 166,667 of his unvested options, and (iii) execute a 180-day Lock-Up
Agreement with the Underwriters for all but 150,000 of the shares underlying his
vested options and 80,000 other shares he holds. Also, Mr. Kozak's rights to
have his shares of Common Stock registered under the Securities Act will
terminate upon completion of this offering. The Company has agreed to accelerate
the vesting of Mr. Kozak's remaining 83,333 options which had not vested at the
time of his termination. Mr. Kozak also agreed to waive any rights that he may
have under the Registration Rights Agreement with respect to this offering and,
upon consummation of this offering, he will waive all rights under the

57
<PAGE> 59

Registration Rights Agreement, provided that this offering is consummated by
June 30, 1997. If this offering has not been consummated by June 30, 1997, then
the Registration Rights Agreement shall only terminate as to Mr. Kozak if the
Stockholders Agreement has been amended to permit Mr. Kozak to transfer, in
addition to the 230,000 shares referred to above, the greater of (a) 75,000
shares of Common Stock in every three month period or (b) the amount that Mr.
Kozak would be permitted to sell under Rule 144(e) if he were an affiliate of
the Company. Mr. Kozak has also agreed to certain non-compete, non-solicitation
and confidentiality provisions expiring on December 31, 1997. Under his
employment agreement, Mr. Kozak had been granted stock options to purchase an
aggregate of 1,383,265 shares of the Company's Common Stock at exercise prices
ranging from $0.875 per share to $15.00 per share, of which options to purchase
1,133,265 shares had vested as of his termination. In January 1997, Mr. Kozak
exercised options to purchase 100,000 of these shares.

The shares of Common Stock underlying the stock options held by Messrs.
Pompliano, Kozak and Tronsrue and Ms. Murphy which are discussed above are the
subject of a registration rights agreement with the Company, pursuant to which
these executive officers have been granted certain demand and piggyback
registration rights with respect to the shares of Common Stock underlying these
options. Mr. Pompliano has waived his right to demand an underwritten
registration of at least 300,000 shares of Common Stock beginning 120 days after
this offering. Mr. Kozak has agreed that his rights under this agreement will
terminate upon completion of this offering. The Company has agreed to use its
best efforts to have Mr. Reich's shares included in this registration rights
agreement.

1994 STOCK OPTION PLAN

On November 15, 1994, the Board adopted and on December 16, 1994,
stockholders approved the 1994 Stock Option Plan. On January 26, 1996 and
November 15, 1996, the Company's stockholders approved amendments to the 1994
Stock Option Plan (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, 2,790,000 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 December 31, 1996, 845,350 discretionary and 20,000 formula options had
been granted under the 1994 Plan.

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.

58
<PAGE> 60

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.

As of December 31, 1996, there were 322 employees eligible to participate
and approximately 107 actual participants in the 1994 Plan. During the fiscal
year ended June 30 and the fiscal period ended December 31, 1996 there were no
grants of options pursuant to the 1994 Plan to any director or executive officer
of the Company, including the Named Officers. There were grants of options
pursuant to the 1994 Plan to all other employees as a group to acquire an
aggregate of 595,309 shares of Common Stock, at an average exercise price of
$5.41 per share, during the fiscal year ended June 30, 1996 and the fiscal
period ended December 31, 1996.

EMPLOYEE STOCK PURCHASE PLAN

On November 15, 1996, the Company's stockholders approved the Company's
adoption of an Employee Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code. All regular full-time employees of the Company
(including officers), and all other employees whose customary employment is for
more than 20 hours per week, who in either case have been employed by the
Company for at least three months are eligible to participate in the Stock
Purchase Plan. Directors who are not employees are not eligible. A maximum of
500,000 shares of the Company's Common Stock are reserved for offering under the
Stock Purchase Plan and available for purchase thereunder, subject to
anti-dilution adjustments in the event of certain changes in the capital
structure of the Company.

Under the Stock Purchase Plan, offerings will be made at the commencement
of each offering period ("Offer Period"). During each Offer Period, deductions
are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
Payroll deductions may be from 1% to 15% (in whole percentage increments) of a
participant's regular base pay. Participants may not make direct cash payments
to their accounts.

The price per share at which shares of Common Stock are to be purchased
pursuant to the Stock Purchase Plan for any Offer Period is the lesser of (a)
85% of the fair market value of Common Stock on the commencement of the Offer
Period or (b) 85% of the fair market value of Common Stock on the last business
day of an Offer Period. On the last business day of each Offer Period, amounts
credited to the accounts of participants who have been neither terminated from
the employ of the Company nor withdrawn from the Stock Purchase Plan for such
Offer Period are used to purchase shares of Common Stock in accordance with the
elections of such participants. Any amounts remaining in the accounts of
participants at the end of any Offer Period are refunded to the participants.
Only amounts credited to the accounts of participants may be applied to the
purchase of shares of Common Stock under the Stock Purchase Plan.

If for any Offer Period the number of shares of Common Stock available for
Stock Purchase Plan purposes shall be insufficient, the Board of Directors of
the Company is authorized to apportion the

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remaining available shares pro rata among participating employees on the basis
of their payroll deductions in effect for such Offer Period.

The Company makes no cash contributions to the Stock Purchase Plan, but
bears the expenses of its administration. The Stock Purchase Plan is
administered by the Compensation Committee, which has authority to establish and
change the number and duration of the Offer Periods during the term of the Stock
Purchase Plan, and to make rulings and interpretations thereunder.

The Stock Purchase Plan will terminate when all available shares have been
purchased, or earlier in the discretion of the Compensation Committee. The first
Offer Period commenced on December 2, 1996 and will end on June 30, 1997. New
Offer Periods will commence on each July 1 and January 1 thereafter until the
Stock Purchase Plan is terminated. At December 31, 1996, there were
approximately 272 employees (including officers and directors) who were eligible
to participate in the Stock Purchase Plan.

CERTAIN TRANSACTIONS

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 per share 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.

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

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<PAGE> 62

Preferred Stock. However, in the event of certain triggering events set forth in
the Company's Certificate of Incorporation occur, the Board shall be increased
to eleven members and the additional four directors shall be elected by holders
of the Company's Preferred Stock. 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. When the Board was
reduced to seven members on February 26, 1996, Richard A. Kozak, Steven G.
Chrust, Frederick Galland and Cathy Markey, all of whom had been elected by the
holders of the Company's Preferred Stock, resigned.

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"). 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.

The Company was party to an employment agreement with Richard A. Kozak,
which was terminated effective February 2, 1997. Each of the parties initially
claimed the termination was the result of a breach of the employment agreement
by the other party. In settlement of their dispute and related litigation
concerning Mr. Kozak's termination, the parties agreed, among other things, that
Mr. Kozak will (i) receive $300,000 in cash, payable by the Company in three
equal installments on April 1, July 1 and October 1, 1997, (ii) forfeit 166,667
of his unvested options, and (iii) execute a 180-day Lock-Up Agreement with the
Underwriters for all but 150,000 of the shares underlying his vested options and
80,000 other shares he holds. Also, Mr. Kozak's rights to have his shares of
Common Stock registered under the Securities Act will terminate upon completion
of this offering. The Company has agreed to accelerate the vesting of Mr.
Kozak's remaining 83,333 options which had not vested at the time of his
termination. Mr. Kozak also agreed to waive any rights that he may have under
the Registration Rights Agreement with respect to this offering and, upon
consummation of this offering, he will waive all rights under the Registration
Rights Agreement, provided that this offering is consummated by June 30, 1997.
If this offering has not been consummated by June 30, 1997, then the
Registration Rights Agreement shall only terminate as to Mr. Kozak if the
Stockholders Agreement has been amended to permit Mr. Kozak to transfer, in
addition to the 230,000 shares referred to above, the greater of (a) 75,000
shares of Common Stock in every three month period or (b) the amount that Mr.
Kozak would be permitted to sell under Rule 144(e) if he were an affiliate of
the Company. Mr. Kozak has also agreed to certain non-compete, non-solicitation
and confidentiality provisions expiring on December 31, 1997. Under his
employment agreement, Mr. Kozak had been granted stock options to purchase an
aggregate of 1,383,265 shares of the Company's Common Stock at exercise prices
ranging from $0.875 per share to $15.00 per share, of which options to purchase
1,133,265 shares had vested as of his termination. In January 1997, Mr. Kozak
exercised options to purchase 100,000 of these shares.

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<PAGE> 63

PRINCIPAL STOCKHOLDERS

The following table sets forth as of February 28, 1997, certain information
regarding the beneficial ownership of the Company's Common Stock outstanding
(assuming the exercise of options and warrants exercisable on or within 60 days
of such date and the conversion of the Preferred Stock) 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
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>
PERCENTAGE OF
TOTAL(3)
---------------------
NUMBER BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OF SHARES(2) OFFERING OFFERING
- --------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Anthony J. Pompliano(4)........................................ 1,662,499 6.1% 4.7%
Jack E. Reich.................................................. -- -- --
George M. Tronsrue, III(5)..................................... 300,000 1.2 *
Riley M. Murphy(6)............................................. 137,500 * *
George M. Middlemas(7)......................................... 1,433,679 5.3 4.1
Christopher Rafferty(8)........................................ 8,000 * *
Edwin M. Banks(8).............................................. -- -- --
Peter C. Bentz(8).............................................. -- -- --
Olivier L. Trouveroy(9)........................................ -- -- --
Benjamin P. Giess(9)........................................... -- -- --
Richard A. Kozak(10)........................................... 1,113,465 4.3 3.8
Robert H. Ottman(11)........................................... 175,000 * *
The Huff Alternative Income Fund, L.P.(12)..................... 11,246,782 30.7 25.2
ING Equity Partners, L.P. I(13)................................ 6,100,000 19.3 15.4
First Analysis Corporation(14)................................. 2,840,185 10.0 7.8
All executive officers and directors as a group (10 persons)... 3,541,678 12.2 9.6
</TABLE>

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

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

(2) Gives effect to conversion of 183,754 remaining shares of Series A-1
Preferred Stock into 7,350,160 shares of Common Stock and conversion of
277,500 shares of Series B Preferred Stock into 9,910,704 shares of Common
Stock. See "Description of Capital Stock."

(3) The percentage of total outstanding for each stockholder is calculated by
dividing (i) the number of shares of Common Stock deemed to be beneficially
owned by such stockholder as of February 28, 1997 (assuming conversion of
preferred stock into common stock) by (ii) the sum of (A) the number of
shares of Common Stock outstanding as of February 28, 1997 plus (B) the
number of shares of Common Stock into which all the shares of Preferred
Stock outstanding as of February 28, 1997, are convertible plus (C) the
number of shares of Common Stock issuable upon the exercise of options or
warrants held by such stockholder which were exercisable as of February 28,
1997 or will become exercisable within 60 days after February 28, 1997
("currently exercisable").

(4) Includes currently exercisable options to purchase 1,662,399 shares.

(5) Includes currently exercisable options to purchase 300,000 shares.

(6) Includes currently exercisable options to purchase 137,500 shares.

(7) Includes 20,000 shares of Common Stock and currently exercisable options to
purchase 20,000 shares. Also includes 245,560 shares of Common Stock,
16,803 shares of Series A-1 Preferred Stock convertible into 672,120 shares
of Common Stock and 3,269.9 shares of Series B-3 Preferred Stock
convertible into 116,785 shares of Common Stock currently owned by Apex II.
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 80,241 shares of
Common Stock currently owned by Apex I. Mr. Middlemas is a general partner
of Apex Management Partnership which is the

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<PAGE> 64

general partner of Apex I and Apex II. Mr. Middlemas disclaims beneficial
ownership of the shares owned by Apex I and Apex II, except to the extent
of his ownership in the general partner of Apex I and in the general
partner of Apex II.

(8) Messrs. Banks and Bentz are employees 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. Rafferty, Bentz and Banks
disclaim beneficial ownership of all shares held by Huff. Mr. Rafferty's
amounts include 200 shares of Series B-2 Preferred Stock convertible into
7,143 shares of Common Stock and 857 shares of Common Stock.

(9) Mr. Trouveroy is a Managing Partner of ING and Mr. Giess is a Partner of
ING. Messrs. Trouveroy and Giess disclaim beneficial ownership of all
shares held by ING.

(10) Includes currently exercisable options to purchase 1,033,265 shares. In
connection with the settlement of the dispute concerning termination of Mr.
Kozak's employment, the Company accelerated the vesting of an additional
83,333 shares subsequent to February 28, 1997. Mr. Kozak's employment was
terminated effective February 2, 1997. See "Certain Transactions."

(11) Includes currently exercisable options to purchase 175,000 shares. Mr.
Ottman's employment with the Company was terminated in February 1997.

(12) 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 currently
exercisable warrants to purchase 200,000 shares. The address for Huff is
1776 On the Green, 67 Park Place, Morristown, NJ 07960.

(13) Includes 100,000 shares of Series B-1 Preferred Stock convertible into
3,571,429 shares of Common Stock, 50,000 shares of Series B-4 Preferred
Stock convertible into 1,785,714 shares of Common Stock and currently
exercisable warrants to purchase 100,000 shares. The address for ING is 135
East 57th Street, 16th Floor, New York, NY 10022.

(14) Includes 245,560 shares of Common Stock, 16,803 shares of Series A-1
Preferred Stock convertible into 672,120 shares of Common Stock and 3,269.9
shares of Series B-3 Preferred Stock convertible into 116,785 shares of
Common Stock currently owned by Apex II. 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 80,241 shares of Common Stock currently owned by
Apex I. Includes 272,945 shares of Common Stock, 10,249 shares of Series
A-1 Preferred Stock convertible into 409,960 shares of Common Stock and
1,380.61 shares of Series B-3 Preferred Stock convertible into 49,308
shares of Common Stock currently owned by The Productivity Fund II, L.P.
("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
63,316 shares of Common Stock currently owned by Environmental Private
Equity Fund II, L.P. ("EPEF"). First Analysis Corporation ("FAC") is an
ultimate general partner of Apex I, Apex II, Productivity and EPEF and may
be deemed to be the beneficial owner of the shares owned by them. 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 for
First Analysis Corporation is 233 South Wacker Drive, Suite 9600, Chicago,
IL 60093.

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<PAGE> 65

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, and in
September 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. During 1996, the existing loan agreements were amended to
increase the aggregate credit available under such agreements to the $31.2
million credit availability under the AT&T Credit Facility. As of December 31,
1996, outstanding borrowings under the AT&T Credit Facility totalled
approximately $30.2 million, including accrued interest of approximately $2.6
million. Interest rates applicable to the loans ranged from 11.93% to 14.47% as
of February 28, 1997.

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.

Pursuant to the AT&T Credit Facility, the Company had contributed
approximately $18.9 million in capital to its subsidiaries through December 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.

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

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<PAGE> 66

substantially similar. The following summaries of 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 each of the Indentures 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

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<PAGE> 67

April 1, 2001, 2002 and 2003, respectively, plus accrued and unpaid interest, if
any, thereon, to the date of repurchase.

DESCRIPTION OF CAPITAL STOCK

ACSI's authorized capital stock consists of 76,500,000 shares of capital
stock, consisting of 75,000,000 shares of Common Stock, par value $.01 per
share, and 1,500,000 shares of Preferred Stock, par value $1.00 per share. On
February 28, 1997, there were 8,191,959 shares of Common Stock issued and
outstanding and held of record by approximately 271 persons, including 116,400
shares issued in February 1997 in connection with conversion of 2,910 shares of
Preferred Stock. The Company has designated 186,664 shares (of which 183,754
remain outstanding) 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 461,254 issued and outstanding shares of Preferred Stock
will be converted into 17,260,864 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

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<PAGE> 68

Company's Common Stock do not have pre-emptive rights or cumulative voting
rights with respect to the election of directors.

ANTI-TAKEOVER STATUTE

Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an interested stockholder, which is defined therein as a person
who, together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include 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 (includ-

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ing 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 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 10286.

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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 33,452,823
shares of Common Stock. The 8,000,000 shares offered hereby and 2,815,768 of the
25,452,823 shares outstanding prior to this offering (after giving effect to the
conversion of the Preferred Stock) are freely transferable without registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
22,637,055 remaining shares outstanding prior to this offering are "restricted
securities" as that term is defined in Rule 144 of the Securities Act,
20,401,837 of which are subject to the Lock-Up Agreements described below.
Assuming the recently adopted amendments to Rule 144 became effective as of the
date of this Prospectus (such amendments become effective on April 29, 1997),
1,248,185 of the restricted shares will be freely transferable under Rule 144(k)
and 20,203,460 of the restricted shares will be saleable subject to certain
volume and manner of sale restrictions under Rule 144. Of the shares freely
transferable under Rule 144(k) or saleable subject to Rule 144 limitations,
20,396,164 shares are subject to the Lock-Up Agreements described below. Of the
20,203,460 shares eligible for sale under Rule 144, 273,945 shares will have
become freely transferable under Rule 144(k) on September 1, 1997 and an
additional 21,959 will have become freely transferable under Rule 144(k) on
January 1, 1998, respectively, assuming such shares are still held by non-
affiliates of the Company on each of those dates. By September 1, 1997, an
additional 84,173 restricted shares will have become saleable subject to Rule
144 limitations, with an additional 16,042 restricted shares becoming saleable
subject to Rule 144 limitations by January 1, 1998.

Holders of substantially all of the shares of Common Stock (i) outstanding
(other than the shares being offered hereby), (ii) issuable upon conversion of
the Preferred Stock and (iii) issuable upon exercise of outstanding options and
warrants have either piggyback or demand registration rights relating to those
shares. Holders of 3,006,881 outstanding shares and 21,404,704 shares issuable
upon conversion of the Preferred Stock and exercise of options and warrants have
waived or agreed to waive their rights to "piggyback" on this offering or prior
Company offerings and/or to demand registration of their shares until 180 days
after consummation of this offering. The Company has agreed to use its
commercially reasonable efforts to register all shares as to which piggyback and
demand rights were waived on or before the 210th day following consummation of
this offering (in which all security holders with registration rights may have
the right to include their shares). As a result, the Company's ability to raise
additional cash through a public offering of its equity securities may be
limited. There can be no assurance that persons with piggyback and demand
registration rights who have not waived or agreed to waive those rights (holding
up to approximately 1,180,972 shares of outstanding Common Stock and up to
1,404,160 shares of Common Stock issuable upon conversion of Preferred Stock or
exercise of options and warrants) will not request the Company to file a
registration statement for their shares prior to 180 days after this offering or
that such security holders will not seek damages from the Company for any
alleged breach of such security holders' registration rights in connection with
this offering or past Company offerings. Additionally, the Company has an
obligation to register under the Securities Act 1,000,000 of the 1,030,000
shares of Common Stock issued in the Cybergate Acquisition no later than 210
days after the consummation of this offering, but in no event later than
December 31, 1997, and is required to register up to 150,000 additional shares
which may be issued in connection with the Cybergate Acquisition no later than
60 days after such issuance. These shares will be freely transferable upon such
registration.

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In general, under Rule 144 as currently in effect, a 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.

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UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation, have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:

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

---------
Total........................................................................... 8,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.

The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to
1,200,000 additional shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 8,000,000, and the Company will be
obligated, pursuant to the option to sell such shares to the Underwriters. The
Underwriters may exercise such option from time to time only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same terms
as those on which the 8,000,000 shares are being offered.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. In addition, the
Company has agreed to indemnify the Underwriters against certain liabilities
with respect to registration rights of certain of the Company's security
holders.

Stockholders of the Company, holding in the aggregate 22,871,967 and
521,540 shares of Common Stock (including, in each case, shares issued or
issuable upon conversion of the Preferred Stock and exercise of options and
warrants which are or will have become vested during the

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<PAGE> 73

applicable lock-up period) have agreed not to offer, sell or otherwise dispose
of any of such Common Stock for a period of 180 and 90 days, respectively, after
the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters. See "Shares Eligible for Future Sale."

It is contemplated that First Analysis Securities Corporation will be one
of the Underwriters. The provisions of Rule 2720 of the National Association of
Securities Dealers, Inc. (the "NASD") Conduct Rules apply to this offering.
Under Rule 2720, when a NASD member such as First Analysis Securities
Corporation distributes an affiliated company's equity securities, one of the
following two criteria must be met: (1) the price of such equity security can be
no higher than that recommended by a "qualified independent underwriter" or (2)
the offering must be for a class of equity security for which a "bona fide
independent market" exists. Because (i) the shares of Common Stock are quoted on
the Nasdaq Stock Market, (ii) the aggregate trading volume for the 12 months
immediately preceding the filing of the registration statement of which this
Prospectus forms a part was at least 100,000 shares, (iii) the Company had
outstanding for the 12-month period immediately preceding the filing of such
registration statement a minimum of 250,000 publicly-held shares and (iv) there
are, and for the 30-days immediately preceding the filing of such registration
statement there were, at least three "bona fide independent market makers" for
the Common Stock, a "bona fide independent market" for the Common Stock exists.
Accordingly, the public offering price of the Common Stock offered hereby will
not be passed upon by a "qualified independent underwriter." Pursuant to Rule
2720, NASD members may not execute transactions in the shares of Common Stock
offered hereby in discretionary accounts without the prior approval of the
customer.

During and after the offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. The Underwriters also may impose a
penalty bid, where selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of Common Stock which
may be higher than the price that might otherwise prevail in the open market.
These transactions may be effected on the Nasdaq National Market or otherwise
and these activities, if commenced, may be discontinued at any time.

As permitted by Rule 103 under the Exchange Act, Underwriters or
prospective Underwriters that are market makers ("passive market makers") in the
Common Stock may make bids for or purchases of Common Stock in the Nasdaq Stock
Market until such time, if any, when a stabilizing bid for such securities has
been made. Rule 103 generally provides that (a) a passive market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such securities for the two full consecutive calendar months
(or any 60 consecutive days ending within the 10 days) immediately preceding the
filing date of the registration statement of which this Prospectus forms a part,
(b) a passive market maker may not effect transactions or display bids for the
Common Stock at a price that exceeds the highest independent bid for the Common
Stock by persons who are not passive market makers and (c) bids made by passive
market makers must be identified as such.

In the past, Donaldson, Lufkin & Jenrette Securities Corporation has
performed certain investment banking and other financial advisory services for
the Company, including in connection with the solicitation of consents from the
Company's noteholders for the Cybergate Acquisition, for which they have
received customary compensation.

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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, New York, New
York.

EXPERTS

The consolidated financial statements of the Company as of June 30, 1995
and 1996 and December 31, 1996 and for the fiscal years ended June 30, 1995 and
1996 and for the fiscal period ended December 31, 1996, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts 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.

During the fiscal years ended June 30, 1993, and June 30, 1994, and the
subsequent interim periods immediately preceding the change in accountants,
there were no disagreements with Coopers & Lybrand on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which if not resolved to the satisfaction of Coopers & Lybrand would
have caused them to make reference to the subject matter of the disagreement in
connection with their reports on the Company's financial statements. During the
fiscal years ended June 30, 1993, and June 30, 1994, and the subsequent interim
periods immediately preceding the change in accountants, there were no
reportable events (as that term is used in 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.

ADDITIONAL 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.

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<PAGE> 75

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.

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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).

CATVS -- Cable television service providers.

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.

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.

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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 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 MILES -- 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 Miles" 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.

ILEC -- An incumbent CAP that also provides switched local
telecommunications services.

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.

INTERNET PROTOCOL (IP) -- A compilation of network- and transport-level
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.

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 -- An Internet service provider provides customers with access to the
Internet by linking its network 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.

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

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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 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 by way 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.

SONET (SYNCHRONOUS OPTICAL NETWORK) -- A self-healing fiber optic ring that
constitutes a local network.

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), whose 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

77
<PAGE> 79

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.

78
<PAGE> 80

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 and December 31, 1996........ F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30,
1995 and 1996 and for the Six Months Ended December 31, 1996........................ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 and 1996 and
for the Six Months Ended December 31, 1996.......................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 81

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders

American Communications Services, Inc.:

We have audited the accompanying consolidated balance sheets of American
Communications Services, Inc. and subsidiaries as of June 30, 1995 and 1996 and
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended June 30, 1995
and 1996 and the six months ended December 31, 1996. 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 audits.

We conducted our audits 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 audits provide 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 subsidiaries as of June 30, 1995 and 1996 and
December 31, 1996, and the results of their operations and their cash flows for
the years ended June 30, 1995 and 1996 and for the six months ended December 31,
1996 in conformity with generally accepted accounting principles.

/s/ KPMG PEAT MARWICK LLP

KPMG Peat Marwick LLP

Washington, D.C.

February 14, 1997

F-2
<PAGE> 82

AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1).................................... $ 20,350,791 $134,115,981 $ 78,618,544
Restricted cash (note 1).............................................. 752,000 2,342,152 2,342,152
Trade accounts receivable, net of allowance for doubtful accounts of
$8,600, $189,500, and $432,400 at June 30, 1995, June 30, 1996 and
December 31, 1996, respectively..................................... 350,436 735,260 2,429,077
Other current assets.................................................. 92,325 1,003,465 1,202,711
------------ ----------- -----------
Total current assets.................................................... 21,545,552 138,196,858 84,592,484
Networks, equipment and furniture, gross (note 2)....................... 15,897,562 80,147,964 144,403,123
Less: accumulated depreciation and amortization....................... (330,272) (3,408,698) (8,320,372)
------------ ----------- -----------
15,567,290 76,739,266 136,082,751
Deferred financing fees, net of accumulated amortization of $64,458,
$732,775 and $1,070,670, at June 30, 1995, June 30, 1996 and December
31, 1996, respectively................................................ 292,113 8,334,183 8,380,283
Other assets............................................................ 222,010 329,584 982,649
------------ ----------- -----------
Total assets............................................................ $ 37,626,965 $223,599,891 $230,038,167
============ =========== ===========
LIABILITIES, REDEEMABLE STOCK, OPTIONS AND WARRANTS, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- current portion (note 4)............................. $ 146,083 $ 252,809 $ 872,031
Accounts payable...................................................... 3,843,167 21,317,346 33,587,407
Accrued financing fees................................................ 1,542,255 -- --
Accrued employee costs................................................ 836,509 774,262 2,057,187
Other accrued liabilities............................................. 1,269,484 886,692 2,074,945
------------ ----------- -----------
Total current liabilities............................................... 7,637,498 23,231,109 38,591,570
Long term liabilities:
Notes payable, less current portion (notes 4 and 6)................... 3,652,085 184,129,361 209,538,226
Dividends payable (note 3)............................................ 1,070,985 4,942,313 6,945,943
------------ ----------- -----------
Total liabilities....................................................... 12,360,568 212,302,783 255,075,739
------------ ----------- -----------
Redeemable stock, options and warrants (notes 6, 9 and 11).............. 2,930,778 2,155,025 2,000,000
------------ ----------- -----------
Minority interest (note 4).............................................. 194,402 160,270 --
------------ ----------- -----------
Stockholders' equity (deficit) (notes 3, 4, 5 and 6):
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, June 30, 1996 and December 31, 1996,
respectively, convertible into 7,466,560 shares of common stock
(notes 3 and 4)..................................................... 186,664 186,664 186,664
Preferred stock, $1.00 par value, 277,500 shares authorized and
designated as 9% Series B Convertible Preferred Stock; 227,500,
277,500 and 277,500 shares issued and outstanding at June 30, 1995,
June 30, 1996 and December 31, 1996, respectively, convertible into
9,910,718 shares of common stock (notes 3 and 5).................... 227,500 277,500 277,500
Common stock, $.01 par value, 75,000,000 shares authorized, 5,744,782,
6,645,691 and 6,784,996 shares issued and outstanding at
June 30, 1995, June 30, 1996 and December 31, 1996, respectively
(note 5)............................................................ 56,827 65,837 67,850
Additional paid-in capital............................................ 42,411,448 55,975,078 54,870,194
Accumulated deficit................................................... (20,741,222) (47,523,266) (82,439,780)
------------ ----------- -----------
Total stockholders' equity (deficit).................................... 22,141,217 8,981,813 (27,037,572)
------------ ----------- -----------
Commitments and contingencies (notes 1, 4, 6, 7, 8, and 9)
Total liabilities, redeemable stock, options and warrants, minority
interest and stockholders' equity (deficit)........................... $ 37,626,965 $223,599,891 $230,038,167
============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 83

AMERICAN COMMUNICATIONS SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX
----------------------------- MONTHS ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues (note 1)................................ $ 388,887 $ 3,415,137 $ 6,990,452
------------ ------------ ------------
Operating expenses:
Network development and operations............. 3,282,183 5,264,570 8,703,057
Selling, general and administrative............ 4,597,615 13,463,775 20,269,991
Noncash stock compensation (note 6)............ 6,419,412 2,735,845 549,645
Depreciation and amortization.................. 497,811 3,078,426 4,911,674
------------ ------------ ------------
Total operating expenses......................... 14,797,021 24,542,616 34,434,367
Non-operating income (expenses):
Interest and other income...................... 217,525 4,409,733 2,757,461
Interest and other expense (note 4)............ (170,095) (10,476,904) (10,390,330)
Debt conversion expense (note 4)............... (385,000) -- --
------------ ------------ ------------
Loss before minority interest.................... (14,745,704) (27,194,650) (35,076,784)
Minority interest................................ 48,055 412,606 160,270
------------ ------------ ------------
Net loss......................................... (14,697,649) (26,782,044) (34,916,514)
Preferred stock dividends and accretion (note
3)............................................. (1,070,985) (3,871,328) (2,003,630)
------------ ------------ ------------
Net loss to common stockholders.................. $ (15,768,634) $ (30,653,372) $ (36,920,144)
============ ============ ============
Net loss per common share........................ $ (3.30) $ (4.96) $ (5.48)
============ ============ ============
Average number of common shares outstanding...... 4,771,689 6,185,459 6,733,759
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 84

AMERICAN COMMUNICATIONS SERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED JUNE 30, 1995 AND 1996 AND THE SIX MONTHS ENDED DECEMBER 31,
1996

<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------
SHARES AMOUNT
------ -----------
<S> <C> <C>
Balances at June 30, 1994.......................... 1,700 $ 1,700,000
Preferred Stock exchange (note 12)............... (1,700) (1,700,000)
Set par value for common stock (note 5).......... -- --
Acquisition of Piedmont Teleport, Inc. (note
13)............................................ -- --
Write-off of note receivable for common stock.... -- --
Series A Preferred private placement, net of
related costs (note 3)......................... -- --
Series B Preferred private placement, net of
related costs (note 3)......................... -- --
Issuance of put right obligations (notes 6
and 9)......................................... -- --
Cancellation of put right obligation (note 9).... -- --
Warrant and stock option exercises and stock
grant (note 6)................................. -- --
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.......................... -- $ --
Issuance of Series B-4 Preferred Stock
(note 3)....................................... -- --
Issuance of detachable warrants (notes 4 and
6)............................................. -- --
Warrants and stock options exercised (note 6).... -- --
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- --
Stock compensation expense....................... -- --
Net loss......................................... -- --
------ -----------
Balances at June 30, 1996.......................... -- $ --
Warrants and stock options exercised (note 6).... -- --
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- --
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............ -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- --
Stock compensation expense....................... -- --
Net loss......................................... -- --
------ -----------
Balances at December 31, 1996...................... -- $ --
====== ===========

SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994.......................... -- $ -- -- $ -- 2,755,005 $ --
Preferred Stock exchange (note 12)............... -- -- -- -- 548,387 --
Set par value for common stock (note 5).......... -- -- -- -- -- 33,033
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 9).... -- -- -- -- -- --
Warrant and stock option exercises and stock
grant (note 6)................................. -- -- -- -- 2,379,390 23,794
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 $56,827
Issuance of Series B-4 Preferred Stock
(note 3)....................................... -- -- 50,000 50,000 -- --
Issuance of detachable warrants (notes 4 and
6)............................................. -- -- -- -- -- --
Warrants and stock options exercised (note 6).... -- -- -- -- 900,909 9,010
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- -- -- -- -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- -- -- -- -- --
Stock compensation expense....................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- -------- ------- -------- --------- -------
Balances at June 30, 1996.......................... 186,664 $186,664 277,500 $277,500 6,645,691 $65,837
Warrants and stock options exercised (note 6).... -- -- -- -- 139,305 1,393
Series A and B Preferred Stock dividends accrued
(note 3)....................................... -- -- -- -- -- --
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............ -- -- -- -- --
Cancellation of and adjustments to put right
obligations (note 6)........................... -- -- -- -- -- 620
Stock compensation expense....................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- -------- ------- -------- --------- -------
Balances at December 31, 1996...................... 186,664 $186,664 277,500 $277,500 6,784,996 $67,850
======== ========= ======== ========= ========= ========

<CAPTION>
NOTES
RECEIVABLE TOTAL
ADDITIONAL ON SALE OF STOCKHOLDERS'
PAID-IN COMMON ACCUMULATED EQUITY
CAPITAL STOCK DEFICIT (DEFICIT)
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
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) -- -- --
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 9).... 487,500 -- -- 487,500
Warrant and stock option exercises and stock
grant (note 6)................................. 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..........................$42,411,448 $ -- $(20,741,222) $ 22,141,217
Issuance of Series B-4 Preferred Stock
(note 3)....................................... 4,950,000 -- -- 5,000,000
Issuance of detachable warrants (notes 4 and
6)............................................. 8,684,000 -- -- 8,684,000
Warrants and stock options exercised (note 6).... 289,360 -- -- 298,370
Series A and B Preferred Stock dividends accrued
(note 3)....................................... (3,871,328) -- -- (3,871,328)
Cancellation of and adjustments to put right
obligations (note 6)........................... 775,753 -- -- 775,753
Stock compensation expense....................... 2,735,845 -- -- 2,735,845
Net loss......................................... -- -- (26,782,044) (26,782,044)
----------- ---------- ------------ -------------
Balances at June 30, 1996..........................$55,975,078 $ -- $(47,523,266) $ 8,981,813
Warrants and stock options exercised (note 6).... 175,945 -- -- 177,338
Series A and B Preferred Stock dividends accrued
(note 3)....................................... (2,003,630) -- -- (2,003,630)
Accretion of consulting agreement credit to
exercise price of warrants (note 9)............ 18,750 18,750
Cancellation of and adjustments to put right
obligations (note 6)........................... 154,405 -- -- 155,025
Stock compensation expense....................... 549,646 -- -- 549,646
Net loss......................................... -- -- (34,916,514) (34,916,514)
----------- ---------- ------------ -------------
Balances at December 31, 1996......................$54,870,194 $ -- $(82,439,780) $(27,037,572)
=========== ========== ============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 85

AMERICAN COMMUNICATIONS SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTHS
----------------------------- ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (14,697,649) $ (26,782,044) $(34,916,514)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 497,811 3,078,426 4,911,674
Interest deferral and accretion.................................... -- 10,447,687 10,041,189
Amortization of deferred financing fees............................ 323,900 668,317 334,671
Provision for doubtful accounts.................................... 8,570 180,940 242,915
Loss from impairment of assets..................................... -- -- 318,737
Loss attributed to minority interest............................... (48,055) (412,606) (160,270)
Noncash compensation, consultants and other expenses............... 6,419,412 2,735,845 549,645
Accretion of consulting agreement credit to exercise price of
warrants......................................................... -- -- 18,750
Noncash debt conversion expense.................................... 385,000 -- --
Changes in operating assets and liabilities:
Trade accounts receivable........................................ (359,007) (565,764) (1,936,732)
Restricted cash related to operating activities.................. 200,000 -- --
Other current assets............................................. (92,325) (911,140) (199,246)
Other assets..................................................... (26,545) (107,574) (653,065)
Accounts payable................................................. 3,170,885 17,474,179 12,270,061
Accrued financing fees........................................... 1,542,255 (1,542,255) --
Accrued employee costs........................................... 719,333 (62,247) 1,282,925
Other accrued liabilities........................................ 1,055,673 (382,792) 1,188,253
------------ ------------ -----------
Net cash (used in) provided by operating activities.................... (900,742) 3,818,972 (6,707,007)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of net assets of Piedmont Teleport, Inc. ................... (19,135) -- --
Purchase of equipment and furniture.................................. (306,454) (2,966,987) (1,827,119)
Restricted cash related to network activities........................ (752,000) (1,590,152) --
Network development costs............................................ (14,996,303) (57,889,227) (62,746,777)
------------ ------------ -----------
Net cash used in investing activities.................................. (16,073,892) (62,446,366) (64,573,896)
------------ ------------ -----------
Cash flows from financing activities:
Issuance of notes payable............................................ 3,510,349 166,888,210 16,329,923
Payment of deferred financing fees................................... (310,175) (8,710,387) (380,771)
Warrant and stock option exercises................................... 372,824 298,370 177,338
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 5,000,000 --
Issuance of warrants with 2005 Notes................................. -- 8,684,000 --
Issuance of notes payable -- stockholders............................ 250,000 -- --
Proceeds from sale of minority interest in subsidiaries.............. 242,457 378,474 --
Payment of equipment financing....................................... -- -- (343,024)
Payments of notes payable -- stockholders............................ (481,692) (146,083) --
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.............................. 34,055,028 172,392,584 15,783,466
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents................... 17,080,394 113,765,190 (55,497,437)
Cash and cash equivalents, beginning of year........................... $ 3,270,397 $ 20,350,791 $134,115,981
------------ ------------ -----------
Cash and cash equivalents, end of year................................. $ 20,350,791 $ 134,115,981 $ 78,618,544
============ ============ ============
Supplemental disclosure of cash flow information -- interest paid on
all debt obligations................................................. $ 219,554 $ 29,217 $ 14,470
============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
Equipment financing.................................................... $ -- $ 343,024 --
============ ============ ============
Dividends declared in connection with Series A Preferred Stock......... $ 1,070,985 $ 3,871,328 $ 2,003,630
============ ============ ============
Bridge financing, secured convertible notes, and notes payable --
stockholders converted to equity in connection with private
placements........................................................... $ 4,080,079 $ -- $ --
============ ============ ============
Cancellation of and adjustments to put right obligations............... $ (487,500) $ (775,753) $ (155,025)
============ ============ ============
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 $ -- $ --
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 86

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996

(1) BASIS OF PRESENTATION AND RELATED MATTERS

FISCAL YEAR

Effective December 31, 1996, the Company changed its fiscal year from a
twelve-month period ending June 30 to a twelve-month period ending December 31.
The consolidated statements of operations, stockholders' equity (deficit) and
cash flows are presented for the twelve month period ended June 30, 1995, the
twelve month period ended June 30, 1996 and the six month period ended December
31, 1996.

The Unaudited Condensed Consolidated Statement of Operations information for the
six months ended December 31, 1995 is as follows:

<TABLE>
<S> <C>
Revenues...................................................... $ 988,877
Operating expenses............................................ 7,966,463
Non-operating expenses........................................ 2,057,410
------------
Loss before minority interest................................. (9,034,996)
Minority interest............................................. 155,861
------------
Net loss...................................................... (8,879,135)
Preferred stock dividends and accretion....................... (1,854,495)
------------
Net loss to common stockholders............................... (10,733,630)
------------
Net loss per common share..................................... (1.82)
Average number of common shares outstanding................... 5,900,606
============
</TABLE>

ORGANIZATION

The consolidated financial statements include the accounts of American
Communications Services, Inc. and its majority-owned subsidiaries (ACSI or the
Company). As discussed in note 4 to the consolidated financial statements, all
of the Company's subsidiaries are wholly owned with the exception of the
Louisville, Fort Worth, El Paso, Greenville, and Columbia subsidiaries, in which
the Company has a 92.75% controlling ownership interest. All material
intercompany accounts and transactions have been eliminated in consolidation.

BUSINESS AND OPERATING ENVIRONMENT

ACSI constructs and operates digital fiber optic networks and offers local
telecommunications services to long distance companies and business and
government end users in selected target markets, principally in the southern
United States. The Company provides nonswitched dedicated services, including
special access, switched transport and private line services. 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. The Company has also begun offering, on a
limited basis, enhanced voice messaging services and plans to begin offering
local switched voice services in the future. The Company is a competitive local
exchange carrier and is referred to as a competitive access provider with
respect to provision of dedicated services.

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 were two Preferred Stock private offerings completed in October 1994
and June 1995 (see note 3), and a credit facility from AT&T

F-7
<PAGE> 87

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)

Credit Corporation (see note 4). During the fiscal year ended June 30, 1996, the
Company raised additional funds through an additional sale of Preferred Stock
(see note 3), two private offerings of Senior Notes, one of which included
detachable warrants and further borrowings under the AT&T Credit Corporation
Credit Facility (see note 4).

The Company has never been profitable, has never generated positive cash flow
from consolidated operations and, since its inception has incurred significant
net operating losses and negative cash flow. In accordance with the terms of its
debt facilities the Company has also deferred payment of most of its interest
charges. The Company's continued development, construction, expansion, operation
and potential acquisition of local networks, as well as the further development
of new services, including local switched voices and high-speed data services,
will require substantial capital expenditures. The Company's ability to fund
these expenditures is dependent upon the Company's raising substantial
financing. To meet its remaining capital requirements and to fund operations and
cash flow deficiencies, ACSI will be required to sell additional equity
securities, increase its existing credit facility, acquire additional credit
facilities or sell additional debt securities, certain of which would require
the consent of the Company's debtholders. Before incurring additional
indebtedness, the Company may be required to seek additional equity financing to
maintain balance sheet and liquidity ratios under certain of its debt
instruments. There can be no assurance that the Company will be able to obtain
the additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. 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.

CASH EQUIVALENTS AND RESTRICTED CASH

Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company's short and long-term debt securities and marketable
equity securities are accounted for at market value. The fair market value of
short- and long-term investments is determined based on quoted market prices for
those investments. The Company's marketable securities have been classified as
available for sale and are recorded at current market value with an offsetting
adjustment to stockholders' equity (deficit).

The Company's investments consist of commercial paper, U.S. Government
Securities and money market instruments, all with original maturities of 90 days
or less. The fair market value of such securities approximates amortized cost.
At June 30, 1995 and 1996 and December 31, 1996, cash equivalents consists of
government securities and overnight investments.

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, $2,342,000 and $2,342,000 at June 30, 1995, June 30, 1996
and December 31, 1996, respectively. The face amount of all bonds and letters of
credits was approximately $6,200,000 as of December 31, 1996.

NETWORKS, EQUIPMENT AND FURNITURE

Networks, equipment and furniture are stated at cost less accumulated
depreciation and amortization. Costs capitalized during the network development
stage include expenses associated with network engineering, design and
construction, negotiation of rights-of-way, obtaining legal and regulatory
authorizations and the amount of interest costs associated with the network
development.

F-8
<PAGE> 88

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)

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....................... 3-10 years
Leasehold improvements........................................ Life of lease
Furniture and fixtures........................................ 5 years
Capitalized network development costs......................... 3-20 years
</TABLE>

The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

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. Billings to customers for
services in advance of providing such services are deferred and recognized as
revenue when earned. The Company also enters into managed services agreements
with certain customers. Under such agreements the Company provides use of
Company owned equipment, collocation and network access services. Revenue is
recognized on a monthly basis as these services are provided to the customer.

EARNINGS (LOSS) PER COMMON SHARE

The computation of earnings (loss) per common share is based upon the weighted
average number of common shares outstanding. 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.

F-9
<PAGE> 89

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)

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 June 30, 1995 and 1996
consolidated financial statements to conform to the December 31, 1996
presentation. Such reclassifications had no effect on net loss or total
stockholders' equity (deficit).

STOCK OPTION PLAN

Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosure for employee stock option grants as if the
fair-value based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

USE OF ESTIMATES

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

CONCENTRATION OF CREDIT RISK

The Company receives a significant portion of its revenues from a small number
of major customers, particularly the long distance telecommunications companies
that service the Company's markets. For the years ended June 30, 1995 and June
30, 1996 and the six months ended December 31, 1996 approximately 85%, 60% and
40% of the Company's revenues were attributable to services provided to three,
four and four of the largest long distance telecommunications companies,
respectively. The loss of any one of these customers could have an adverse
material impact on the Company's revenues.

The Company provides managed services to certain Internet service providers.
Such companies operate in a highly competitive and uncertain environment.
Approximately 19% of the Company's

F-10
<PAGE> 90

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) BASIS OF PRESENTATION AND RELATED MATTERS -- (CONTINUED)

revenues for the six months ended December 31, 1996 were attributed to these
companies. At December 31, 1996, the Company had trade accounts receivable of
$923,000 from Internet service providers. The Company also has approximately
$4.5 million in equipment dedicated to providing service to these companies. The
Company believes that, if necessary, this equipment could be redeployed
throughout the Company's data network.

(2) NETWORKS, EQUIPMENT AND FURNITURE

Networks, equipment and furniture consists of the following:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
Networks and telecommunications
equipment............................... $15,570,450 $76,853,865 $139,129,495
Furniture and fixtures.................... 188,534 1,982,910 3,334,147
Computer software......................... 56,485 948,848 1,558,384
Leasehold improvements.................... 82,093 362,341 381,097
----------- ----------- ------------
15,897,562 80,147,964 144,403,123
Less -- accumulated depreciation and
amortization............................ 330,272 3,408,698 8,320,372
----------- ----------- ------------
Total, net of accumulated depreciation and
amortization............................ $15,567,290 $76,739,266 $136,082,751
============ ============ =============
</TABLE>

For the years ended June 30, 1995 and 1996, the Company capitalized interest of
approximately $536,000 and $3,051,000, respectively. For the six months ended
December 31, 1996, the Company capitalized interest of approximately $2,268,000.

(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 resulting in proceeds
of $10,962,046, net of placement agent commissions and related placement fees
and costs.

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 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. There were 227,500 shares issued for cash at $100 per
share with proceeds of $20,661,500, net of placement agent commissions and
related placement fees and costs. In November 1995, 50,000 shares of 9% Series
B-4 Convertible Preferred Stock (the "Series B-4 Preferred") were issued for
cash of $100 per share resulting in proceeds of $5,000,000. The Series B-1
Preferred, the Series B-2 Preferred, the Series B-3 Preferred and the Series B-4
Preferred

F-11
<PAGE> 91

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) PRIVATE PLACEMENTS -- (CONTINUED)

are hereafter collectively referred to as the "Series B Preferred Stock." The
Series A-1 Preferred Stock and the Series B Preferred Stock are hereafter
collectively referred to as the "Preferred Stock." Further, 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 other 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 December 31, 1996, the outstanding Series A-1 Preferred Stock
was convertible into 7,466,560 shares of common stock and the outstanding Series
B Preferred Stock was convertible into 9,910,704 shares of common stock.

Pursuant to the Company's certificate of incorporation, the board of directors
is currently comprised of seven directors. The holders of common stock are
entitled to elect four directors and the holders of the Preferred Stock are
entitled to elect three directors. In addition, certain transactions and matters
require the consent of the holders of at least 75% of the shares of Preferred
Stock voting as a separate class.

Certain holders of the Company's Preferred Stock and common stock have entered
into a 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 the majority Preferred stockholders.

In connection with its Series A-1 and Series B Preferred Stock, the Company has
recorded approximately $1,071,000, $4,942,000 and $6,946,000 as of June 30,
1995, June 30, 1996 and December 31, 1996, respectively, as a reduction in
additional paid-in capital, for the payment of anticipated dividends. The
Company's certificate of incorporation requires the Company to accrue dividends,
on a quarterly basis, at an annual rate of 9% of the face value of the Series
A-1 and B Preferred Stock.

Although the Board of Directors of the Company has not taken any formal action
as of December 31, 1996, as a condition of the aforementioned provisions of the
certificate of incorporation, the dividends have been deemed declared and
properly reflected in the accompanying consolidated financial statements.
Pursuant to the Company's certificate of incorporation, dividends accrued shall
be paid cumulatively, beginning January 1, 1998, or earlier upon conversion.
Upon a voluntary conversion on or before December 31, 1997, the Company shall,
in lieu of accrued and unpaid dividends, issue promissory notes to the holders
of the Preferred Stock. The Company expects to issue promissory notes to the
holders on January 1, 1998 for dividends accrued, if conversion has not
occurred, subject to restrictions included in the Senior Discount Note
Indentures. Conversion may occur at any time at the holder's option or
automatically, upon a certain qualifying issuance of common stock. As of
December 31, 1996, no conversions had occurred.

F-12
<PAGE> 92

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Notes payable-stockholders at 10-15%,
maturing September 15, 1995............ $ 146,083 -- --
AT&T Credit Corporation equipment and
working capital financing facility..... 3,652,085 $ 14,971,122 $ 30,183,264
2006 Senior Discount notes, interest at
12 3/4%, maturing April 1, 2006........ -- 66,635,887 70,824,922
2005 Senior Discount notes, interest at
13% maturing November 1, 2005.......... -- 102,432,137 109,402,071
Secured equipment note payable, interest
of 9.98%, payable in 36 equal monthly
installments of $2,766, including
interest commencing March 1, 1996...... -- 343,024 --
------------ ------------ ------------
Total long-term debt..................... 3,798,168 184,382,170 210,410,257
Less current portion..................... 146,083 252,809 872,031
------------ ------------ ------------
$3,652,085 $184,129,361 $209,538,226
=========== ============= =============
</TABLE>

Principal payments for each of the years from 1997 to 2001 and thereafter, are
due as follows at December 31, 1996:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997.................................................... $ 872,031
1998.................................................... 1,190,150
1999.................................................... 2,124,721
2000.................................................... 3,250,483
2001.................................................... 4,618,260
Thereafter.............................................. 198,354,612
-------------
$ 210,410,257
=============
</TABLE>

NOTES PAYABLE -- STOCKHOLDERS

At June 30, 1995, the Company had a total of $146,083 in notes payable to
stockholders which matured and were repaid on September 14, 1995.

AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING FACILITY

In October 1994, the Company entered into the AT&T Credit Facility pursuant to
which AT&T Credit Corporation has agreed to provide financing for the
development and construction of fiber optic networks by certain of the Company's
subsidiaries. In accordance with the terms of the facility, the Company is
obligated to use at least 10% of the borrowed funds for purchases of equipment
manufactured by AT&T or its affiliates. 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 collateralized 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

F-13
<PAGE> 93

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT -- (CONTINUED)

subsidiary in E1 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 collateralized by its assets.
During the fiscal year ended June 30, 1996, the existing loan agreements were
amended to increase the aggregate credit available under such agreements to
$31.2 million. As of June 30, 1996 and December 31, 1996, outstanding borrowings
under the AT&T Credit Facility totaled approximately $15 million and $30
million, respectively, including accrued interest of approximately $1.4 million
and $2.7 million, respectively. Interest rates currently applicable to the loans
range from 11.93% to 14.47%.

The loans under the AT&T Credit Facility are collateralized by all of the assets
of the respective borrowing subsidiary, including its installed fiber optic
system and other equipment. The principal is payable in 28 consecutive quarterly
installments, beginning with the ninth quarter after the date of the loan. The
principal 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 restricted 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 restrictions could limit ACSI's ability to meet its
obligations with respect to the 2005 and 2006 Senior Discount Notes.

Pursuant to the AT&T Credit Facility, AT&T Credit Corporation purchased 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 these 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.

2005 SENIOR DISCOUNT NOTES AND 2006 SENIOR DISCOUNT NOTES

On November 14, 1995, the Company completed an 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"). 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. Thereafter,
interest on the 2005 Notes will accrue at the annual rate of 13% and will be
payable in cash semi-annually. The Company received net proceeds of
approximately $96,105,000 from the sale of the Units. The value ascribed to the
Warrants was $8,684,000.

On March 21, 1996, the Company completed an offering of $120,000,000 of 12 3/4%
Senior Discount Notes due 2006 (the "2006 Notes") resulting in net proceeds of
approximately $61,800,000. The

F-14
<PAGE> 94

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) DEBT -- (CONTINUED)

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 2006 Notes will mature on April 1, 2006.

The 2005 Notes and 2006 Notes (collectively the "Notes") are general,
unsubordinated and unsecured obligations of the Company. The Company's
subsidiaries have no obligation to pay amounts due on the Notes and do not
guarantee the notes. Therefore, the Notes are effectively subordinated to all
liabilities of ACSI's subsidiaries, including trade payables. Any rights of the
Company and its creditors, including the holders of the Notes, to participate in
the assets of any of the Company's subsidiaries upon any liquidation or
reorganization of any such subsidiaries will be subject to the prior claims of
that subsidiary's creditors.

The Notes are subject to 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.

DEBT CONVERSION

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 into 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 private offering (see note 3). The Company recorded
noncash debt conversion expense of $231,000 associated with the related
unamortized financing fees.

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% 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 into 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.

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

(5) STOCKHOLDERS' EQUITY (DEFICIT)

COMMON STOCK

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

F-15
<PAGE> 95

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) STOCKHOLDERS' EQUITY -- (CONTINUED)

PREFERRED STOCK

Pursuant to the Series B Preferred Stock offerings, as described in note 3, four
classes of Series B Preferred Stock have been designated and issued. The
composition of the Series B Preferred Stock at December 31, 1996 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 designated as 9%
Series B-4 Convertible Preferred Stock authorized, issued and
outstanding.................................................... 50,000
--------
Total............................................................ $277,500
=========
</TABLE>

(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS

The Company has a stock option plan which provides for the granting of options
to officers, employees, directors and consultants of the Company to purchase
shares of its common stock within prescribed periods.

In 1994, the Company entered into employment agreements with five executive
officers. Pursuant to the agreements, as amended, such officers have been
granted options to purchase an aggregate of 4,149,834 shares of common stock of
the Company at exercise prices ranging from $.875 to $3.40 per share. The
options vest at various dates as specified in the employment agreements with
4,069,834 of the options vesting on specific dates ranging from November 1, 1993
to November 4, 2001, and 80,000 of such options which vested upon the occurrence
of certain specified performance milestones. 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 reductions based on
the employees' sales of stock. During the year ended June 30, 1996, the limit
was further reduced to $2,000,000.

The Company has also issued 500,000 options to a supplier to purchase stock at
90% 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 under
certain circumstances. None of the options have been exercised to date and they
expire in December, 1997.

The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, compensation cost has been recognized for its stock
option plans based on the intrinsic value of the option at the date of grant.
The compensation cost that has been charged against income was approximately
$6.4 million, $2.7 million and $550,000 for the years ended June 30, 1995 and
June 30, 1996 and for the six months ended December 31, 1996, respectively. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates consistent with the method of FASB Statement 123 for all
options granted after June 30, 1995, and the intrinsic

F-16
<PAGE> 96

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)

value for all options granted prior to July 1, 1995, the Company's net loss and
loss per share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C> <C>
Net loss..................................... As reported: $ (26,782,044) $ (34,916,514)
Pro forma: (27,533,636) (36,828,677)
Loss per common share........................ As reported: (4.96) (5.48)
Pro forma: (5.08) (5.77)
</TABLE>

Pro forma net loss reflects compensation cost under SFAS No. 123 only for
options granted for the year ended June 30, 1996 and for the six months ended
December 31, 1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the vesting
period and compensation cost under SFAS No. 123 for options granted prior to
July 1, 1995 is not considered.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended June 30, 1996 and the six months
ended December 31, 1996, respectively: dividend yield of 0% for both periods;
expected volatility of 50% and 50%, risk-free interest rates of 5.97% and 6.4%
and expected lives of 4.74 and 4.37 years.

A summary of the status of the Company's stock options as of June 30, 1995, June
30, 1996 and December 31, 1996 and changes during the period ending on those
dates is presented below:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------------------------- --------------------------
JUNE 30, 1995 JUNE 30, 1996 DECEMBER 31, 1996
-------------------------- -------------------------- --------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 859 $ 2.22 5,042 $ 1.72 6,095 $ 2.21
Granted....................... 4,283 1.64 1,228 4.30 1,433 9.45
Exercised..................... -- -- (105) 2.46 (48) 2.02
Forfeited..................... (100) 2.51 (70) 3.57 (23) 3.54
------ ------ ------
Outstanding at end of year.... 5,042 1.72 6,095 2.21 7,457 3.60
Options exercisable at
year-end.................... 2,387 3,461 4,140
Weighted-average fair value of
options granted during the
year........................ $ 1.16 $ 3.35 $ 5.95
</TABLE>

The following table summarizes information about fixed stock options at December
31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISABLE
EXERCISE PRICE AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 to 2.25..... 4,038,777 2.2 years $ 1.46 3,596,275 $ 1.35
2.80 to 4.78....... 1,672,974 3.4 3.31 496,058 3.21
6.00 to 9.375...... 1,662,000 4.7 8.53 47,500 6.00
15.00.............. 83,334 4.9 15.00 -- --
----------- ---------------- ------- ----------- ------
$0.875 to 15.00.... 7,457,085 3.1 3.60 4,139,833 1.64
</TABLE>

F-17
<PAGE> 97

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) STOCK OPTIONS AND STOCK PURCHASE WARRANTS -- (CONTINUED)

During fiscal years ended June 30, 1995 and 1996, in connection with the Series
A-1 and Series B Preferred Stock private placements and related bridge note
conversions, warrants for 4,367,078 shares of common stock were issued at prices
ranging from $.01 to $3.10. In fiscal 1996, as part of the issuance of the 2005
Notes, detachable warrants to purchase 2,432,000 shares of the Company's common
stock at a price of $7.15 per share were issued. These warrants include certain
anti-dilution provisions.

At December 31, 1996, unexercised warrants outstanding are as follows:

<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Series A and Series B Preferred Stock
placements..................................... 1,474,836 $ 0.01-3.10
2005 Senior Discount Notes offering.............. 2,432,000 7.15
Other............................................ 865,000 0.01-9.68
--------- -------------
Total............................................ 4,771,836 $ 0.01-9.68
========= =============
</TABLE>

The gross proceeds that would be received by the Company on the exercise of all
outstanding options and warrants is approximately $53,400,000.

(7) COMMITMENTS AND CONTINGENCIES

CERTAIN AGREEMENTS

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.

RETIREMENT PLAN

On February 1, 1996, the Company began sponsoring the American Communications
Services, Inc. 401(k) Plan (the "Plan"), a defined contribution plan. All
individuals employed on February 1, 1996 were eligible to participate.
Participation to all other employees is available after three months of
full-time equivalent service. The Company contributions under the Plan are
discretionary and may be as much as 6% of an employee's gross compensation
subject to certain limits. Total expense under the Plan amounted to
approximately $30,000 and $95,000 for the year ended June 30, 1996 and for the
six months ended December 31, 1996, respectively.

LEGAL PROCEEDINGS

On July 24, 1996, the Company was named as a codefendant in a lawsuit arising
from a personal injury sustained during the construction of one of its networks.
At the time of the incident giving rise to the lawsuit, the plaintiff was an
employee of a subcontractor hired by the Company's general contractor for the
construction project. The lawsuit seeks recovery from the Company and the
general contractor of at least $25 million plus punitive damages. The Company,
the general contractor, and the Company's insurance carrier have begun
investigations into the facts surrounding the incident and intend to defend
against this suit vigorously.

F-18
<PAGE> 98

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

In addition, the Company is a party to certain litigation and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position.

(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 December 31, 1996 are
approximately as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------- -----------
<S> <C>
1997.......................................................... $ 3,980,000
1998.......................................................... 4,320,000
1999.......................................................... 4,560,000
2000.......................................................... 4,051,000
2001.......................................................... 3,078,000
Thereafter.................................................... 13,640,000
-----------
$33,629,000
===========
</TABLE>

Rent expense for the years ended June 30, 1995 and June 30, 1996 and for the six
months ended December 31, 1996 was approximately $200,000, $1,166,000 and
$1,700,000, respectively.

(9) RELATED-PARTY TRANSACTIONS

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's
obligations to repurchase the shares were assumed by a stockholder of the
Company. 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.

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 the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995, the Company paid $22,500, $90,000 and
$67,500 under this arrangement, respectively.

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 a
former director of the Company. Pursuant to the agreement, the Company will
compensate SGC as follows: (1) a monthly fee of $5,000; and (2) options to
purchase up to 50,000 shares of the Company's Common Stock which vest on July 1,

F-19
<PAGE> 99

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) RELATED-PARTY TRANSACTIONS -- (CONTINUED)

1997, and are exercisable on or before July 1, 1999. At the end of each month of
the term of the agreement, SGC earns a credit against the exercise price of
those options equal to 1/36th of the exercise price. The shares issued upon
exercise of the options will be priced at $2.25 per share and the shares issued
will have piggy back registration rights.

(10) INCOME TAXES

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

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1995 1996 1996
----------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Capitalized start-up and other costs.............. $ 4,163,941 $3,733,898 $ 3,972,981
Stock options -- noncash compensation............. 2,768,488 3,848,128 4,085,146
Net operating loss carryforwards.................. 1,149,755 12,181,162 31,310,726
Other accrued liabilities......................... 454,391 496,634 964,786
----------- ---------- ------------
Total gross deferred assets......................... 8,536,575 20,259,822 40,333,639
Less: valuation allowance......................... 8,291,380 18,304,754 31,990,518
----------- ---------- ------------
Net deferred tax assets............................. 245,195 1,955,068 8,343,121
Deferred tax liabilities -- fixed assets
depreciation and amortization..................... 245,195 1,955,068 8,343,121
----------- ---------- ------------
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 years ended
June 30, 1995 and June 30, 1996 and for the six months ended December 31, 1996
was an increase of $5,916,053, $10,013,374 and $13,685,764, respectively. The
valuation allowances at June 30, 1996 and December 31, 1996 are a result of the
uncertainty regarding the ultimate realization of the tax benefits related to
the deferred tax assets. The utilization of the tax benefits associated with net
operating losses of approximately $80,000,000 at December 31, 1996 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 2012.
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
June 30, 1996 and the six months ended December 31, 1996 as the aforementioned
deferred tax assets have provided no tax benefit.

(11) 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 had 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 was recorded as redeemable stock until
November 1996 at which time it was reclassed to additional paid in capital.

F-20
<PAGE> 100

AMERICAN COMMUNICATIONS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:

CASH AND CASH EQUIVALENTS

The carrying amount approximates fair value due to the relatively short period
to maturity of these instruments.

LETTERS OF CREDIT

The fair value of the Letters of credit is based on fees currently charged for
similar agreements.

SHORT-TERM AND LONG-TERM DEBT

The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues if available or based on the
present value of expected cash flows at rates currently available to the Company
for borrowings with similar terms.

The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996 were:

<TABLE>
<CAPTION>
1996
--------------------------
CARRYING FAIR
VALUE VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents (including restricted
cash) 80,960,696 80,960,696
Letters of credit............................... -- 25,000
Long-term debt.................................. 210,410,259 208,583,264
</TABLE>

(13) SUBSEQUENT EVENT

On January 17, 1997, the Company acquired 100% of the outstanding capital stock
of Cybergate, Inc. in exchange for 1,030,000 shares of common stock plus up to
an additional 150,000 shares if certain performance goals are achieved.
Cybergate, a Florida based Internet services provider, delivers high-speed data
communications services. The acquisition will be recorded using the purchase
method of accounting.

F-21
<PAGE> 101

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

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Consolidated Financial and
Operating Data...................... 8
Risk Factors.......................... 9
Use of Proceeds....................... 18
Price Range of Common Stock........... 19
Dividend Policy....................... 19
Capitalization........................ 20
Unaudited Pro Forma Condensed
Consolidated Financial Data......... 21
Selected Consolidated Financial
Data................................ 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 32
Management............................ 49
Certain Transactions.................. 60
Principal Stockholders................ 62
Description of Certain Indebtedness... 64
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 69
Underwriting.......................... 71
Legal Matters......................... 73
Experts............................... 73
Change in Independent Public
Accountants......................... 73
Additional Information................ 73
Glossary.............................. 75
Index to Financial Statements......... F-1
</TABLE>

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

8,000,000 SHARES

[ACSI LOGO]

COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

, 1997
======================================================
<PAGE> 102

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> 103

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.............................................. $ 24,394
NASD Filing Fee................................................... 8,550
Nasdaq Listing Fee................................................ 15,000
Accounting Fees and Expenses...................................... 100,000
Legal Fees and Expenses........................................... 200,000
Blue Sky Fees and Expenses........................................ 5,000
Printing Fees..................................................... 395,000
Miscellaneous..................................................... 27,056
--------
Total............................................................. $775,000
========
</TABLE>

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

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

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, 108,333 have already vested and the
remaining options vest over a one-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 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
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, 108,333 have already vested and the remaining
options vest over a 16 month 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

II-2
<PAGE> 104

May 31, 1995 and 1996, and will vest as to 14,584 shares on 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 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.

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 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.

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

II-3
<PAGE> 105

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.

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.

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.

II-4
<PAGE> 106

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 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-5
<PAGE> 107

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 2,432,000 shares of Common Stock at an
exercise price of $7.15 per share (the "Warrants"), for which it received
aggregate net proceeds of approximately $96.1 million (after deduction of
underwriting discounts and commissions of $3.3 million and offering expenses of
$900,000). The Units were sold to Smith Barney Inc. and Salomon Brothers Inc
(the "Unit Initial Purchasers"). As part of the plan of distribution, the Unit
Initial Purchasers subsequently sold the Units 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-6
<PAGE> 108

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 offering expenses of $400,000).
The 2006 Notes were sold to Smith Barney, Inc. and Bear, Stearns & Co. Inc. (the
"Note Initial Purchasers"). As part of the plan of distribution, the Note
Initial Purchasers subsequently sold the Notes to the following persons, all of
which were required to qualify as "Qualified Institutional Buyers" (as defined
under Rule 144A):

<TABLE>
<CAPTION>
AMOUNT OF
NAME/CLASS OF PURCHASER NOTES PURCHASED
-------------------------------------------------------------- ---------------
<S> <C>
Bank of New York (The)........................................ $ 35,860,000
Bankers Trust Company......................................... 34,170,000
Boston Safe Deposit and Trust Company......................... 1,400,000
Custodial Trust............................................... 1,500,000
Investors Fiduciary Trust Company/SSB......................... 100,000
Northern Trust Company -- Trust............................... 990,000
Smith Barney Inc. ............................................ 5,800,000
SSB -- Custodian.............................................. 40,180,000
-------------
Total:.............................................. $ 120,000,000
=============
</TABLE>

On June 25, 1996, all outstanding 2006 Notes were exchanged by the Company,
in an exchange offer registered with the SEC, for identical 2006 Notes which,
with certain exceptions, are freely transferable under the Securities Act.

On January 17, 1997, the Company issued 1,030,000 shares of Common Stock to
the stockholders of Cybergate, Inc. in exchange for all of the issued and
outstanding shares of capital stock of Cybergate. This transaction was effected
without registration pursuant to Section 4(2) of the Securities Act.

On March 6, 1997, the Company issued MCI Telecommunications Corporation
warrants to purchase 620,000 shares of Common Stock at a price of $9.86 per
share in connection with the execution of a preferred provider agreement, which
warrants vest upon certain criteria having been met. This transaction was
effected without registration pursuant to Section 4(2) of the Securities Act.

ITEM 27. EXHIBITS.

II-7
<PAGE> 109

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ------------------------------------------------------------------- -------------
<C> <S> <C>
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(a) 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 (the "1995 Indenture"). ...................................... ++
4.7(b) March 11, 1996 Supplement to 1995 Indenture........................ DEGREES
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 (the "1996 Indenture"). ............................... +++++
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. ..... -
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 Amended 1994 Stock Option Plan. ......................... ++
10.4 Company's Employee Stock Purchase Plan. ........................... --
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. ........................ *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ... ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ..... ****
10.8 Registration Rights Agreement dated June 26, 1995, between the
Company and certain Preferred Stockholders. ....................... **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders
on June 26, 1995. ................................................. ****
10.10 Form of $.01 Warrant Agreement. ................................... ****
10.11 Form of $1.79 Warrant Agreement. .................................. ****
10.12 Form of $2.25 Warrant Agreement. .................................. ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ................................... ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ......................................... ****
</TABLE>

II-8
<PAGE> 110

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ------------------------------------------------------------------- -------------
<C> <S> <C>
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 Employment Agreement between the Company and Jack E. Reich. ....... ****
10.18 Employment Agreement between the Company and David L. Piazza....... DEGREES
10.19 Form of Stock Option Certificates, as amended, issued to executive
officers under employment agreements. ............................. ****
10.20 Agreement, dated March 2, 1994, between the Company and Gerard
Klauer Mattison & Co., as amended. ................................ *
10.21 Agreement, dated March 20, 1995, between the Company and Gerard
Klauer Mattison & Co., as amended. ................................ ****
10.22 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. ................................................ *
10.23 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. .......................................................... ****
10.24 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of
Louisville, Inc. .................................................. *
10.25 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort
Worth, Inc. ....................................................... ****
10.26 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. .............................................................. ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. .................. ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. .................. ****
10.29 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ...................................................... ****
10.30 Consulting Agreement, dated October 25, 1993, between the Company
and Thurston Partners, Inc.. ...................................... *
10.31 Consulting Agreement, effective July 1, 1994, between the Company
and SGC Advisory Services, Inc. ................................... *
10.32 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. .................. *
10.33 Note Purchase Agreement, dated June 28, 1994. ..................... *
10.34 Investment Agreement dated October 21, 1994, between the Company
and the Purchasers named therein. ................................. *
10.35 Stock Purchase Agreement, dated October 17, 1994, between the
Company and AT&T Credit Corporation. .............................. *
10.36 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994. ....................... *
10.37 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. ..................... ****
</TABLE>

II-9
<PAGE> 111

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ------------------------------------------------------------------- -------------
<C> <S> <C>
10.38 Stock Purchase Agreement dated December 17, 1996 by and between the
Company and Cybergate, Inc. ....................................... ++++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen
Holcombe, as amended. ............................................. ****
10.40 Stock and Warrant Purchase Agreement, dated June 26, 1995, between
the Company and the Purchasers named therein. ..................... **
10.41 Form of Indemnity Agreement between the Company and its Directors,
as amended. ....................................................... ****
10.42 Assignment and Assumption Agreement dated June 21, 1995, between
the Company and Apex Investment Fund II, L.P. ..................... ****
10.43 Registration Agreement dated November 9, 1995, between the Company
and the Initial Purchasers. ....................................... ++
10.44 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. .............................................................. ++
10.45 Parent Support and Pledge Agreement (El Paso) dated September 8,
1995, between the Company and AT&T Credit Corporation. ............ ++
10.46 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. .......... ++
10.47 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").................... ++
10.48 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")....... ++
10.49 Amendment to Amended 1994 Stock Option Plan of the Company......... --
10.50 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation. .................. *
10.51 American Communication Services of El Paso Inc. Common Stock
Purchase Agreement dated September 8, 1995. ....................... -
10.52 Supplemental 1995 Indenture........................................ ++++
10.53 Supplemental 1996 Indenture........................................ ++++
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 Piper & Marbury L.L.P................................... ++++
24.1 Power of Attorney ................................................. ++++
</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.

II-10
<PAGE> 112

**** 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 on January 31, 1997 with this Registration Statement on Form SB-2
(File No. 333-20867).

+++++ 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.

++++++ Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 17, 1997 and incorporated herein by reference thereto.

+++++++ Filed herewith.

- 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.

-- Previously filed as an exhibit to the Company's Definitive Proxy
Statement filed on October 14, 1996 and incorporated herein by reference
thereto.

DEGREES To be filed by amendment.

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-11
<PAGE> 113

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
American Communications Services, Inc. has duly caused this Registration
Statement or Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in Annapolis Junction, Maryland, on March 11, 1997.

AMERICAN COMMUNICATIONS SERVICES, INC.

By: /s/ ANTHONY J. POMPLIANO
------------------------------------
Anthony J. Pompliano
Executive Chairman

POWER OF ATTORNEY

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 Executive Chairman of the Board of March 11, 1997
- ---------------------------------------- Directors (Principal Executive
Anthony J. Pompliano Officer)

/s/ JACK E. REICH President and Chief Executive March 11, 1997
- ---------------------------------------- Officer -- Communications Services
Jack E. Reich (Principal Financial and Accounting
Officer)

Director
- ----------------------------------------
George M. Middlemas

Director
- ----------------------------------------
Edwin M. Banks

/s/ CHRISTOPHER L. RAFFERTY* Director March 11, 1997
- ----------------------------------------
Christopher L. Rafferty

/s/ BENJAMIN P. GIESS* Director March 11, 1997
- ----------------------------------------
Benjamin P. Giess

/s/ OLIVIER L. TROUVEROY* Director March 11, 1997
- ----------------------------------------
Olivier L. Trouveroy

/s/ PETER C. BENTZ* Director March 11, 1997
- ----------------------------------------
Peter C. Bentz

*By: /s/ JACK E. REICH
- ----------------------------------------
Jack E. Reich, Attorney-in-Fact
</TABLE>

II-12
<PAGE> 114

EXHIBIT INDEX

<TABLE>
<CAPTION>
INCORPORATION
EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement. ...................................... ++++
1.2 Indemnification Agreement. ........................................... DEGREES
3.1 Amended and Restated Certificate of Incorporation of the Company. .... -
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. ...................... -
3.9 Supplemental Governance Agreement dated February 26, 1996. ........... -
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 (a) 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 (the
"1995 Indenture"). ................................................... ++
4.7 (b) March 11, 1996 Supplement to 1995 Indenture........................... DEGREES
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 (the
"1996 Indenture"). ................................................... +++++
5.1 Opinion of Piper & Marbury L.L.P., counsel to the Company. ........... DEGREES
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. ........ -
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 Amended 1994 Stock Option Plan. ............................ ++
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EXHIBIT NO. DESCRIPTION BY REFERENCE
- ----------- ---------------------------------------------------------------------- -------------
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10.4 Company's Employee Stock Purchase Plan. .............................. --
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. ........................... *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ...... ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ........ ****
10.8 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. .................................. **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ....................................................... ****
10.10 Form of $.01 Warrant Agreement. ...................................... ****
10.11 Form of $1.79 Warrant Agreement. ..................................... ****
10.12 Form of $2.25 Warrant Agreement. ..................................... ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ...................................... ****
10.14 Third Amended and Restated Employment Agreement between the Company
and Anthony J. Pompliano. ............................................ ****
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 Employment Agreement between the Company and Jack E. Reich. .......... ****
10.18 Employment Agreement between the Company and David L. Piazza.......... DEGREES
10.19 Form of Stock Option Certificates, as amended, issued to executive
officers under employment agreements. ................................ ****
10.20 Agreement, dated March 2, 1994, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... *
10.21 Agreement, dated March 20, 1995, between the Company and Gerard Klauer
Mattison & Co., as amended. .......................................... ****
10.22 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. ................................................... *
10.23 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as
amended. ............................................................. ****
10.24 Loan and Security Agreement, dated October 17, 1994, between AT&T
Credit Corporation and American Communication Services of Louisville,
Inc. ................................................................. *
10.25 Loan and Security Agreement, dated February 28, 1995, between AT&T
Credit Corporation and American Communication Services of Fort Worth,
Inc. ................................................................. ****
10.26 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. ................ ****
10.27 Amendment No. 1 to Parent Support and Pledge Agreement (Louisville)
between the Company and AT&T Credit Corporation. ..................... ****
10.28 Amendment No. 1 to Parent Support and Pledge Agreement (Fort Worth)
between the Company and AT&T Credit Corporation. ..................... ****
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EXHIBIT NO. DESCRIPTION BY REFERENCE
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10.29 Amendment No. 1 to Loan and Security Agreement between American
Communications Services of Louisville, Inc. and AT&T Credit
Corporation. ......................................................... ****
10.30 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc. .............................................. *
10.31 Consulting Agreement, effective July 1, 1994, between the Company and
SGC Advisory Services, Inc. .......................................... *
10.32 Consulting Agreement, dated June 16, 1994, between the Company and
Thurston Partners, Inc. and Global Capital, Inc. ..................... *
10.33 Note Purchase Agreement, dated June 28, 1994. ........................ *
10.34 Investment Agreement dated October 21, 1994, between the Company and
the Purchasers named therein. ........................................ *
10.35 Stock Purchase Agreement, dated October 17, 1994, between the Company
and AT&T Credit Corporation. ......................................... *
10.36 American Communication Services of Louisville, Inc. Common Stock
Purchase Agreement, dated October 17, 1994. .......................... *
10.37 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. ........................... ****
10.38 Stock Purchase Agreement dated December 17, 1996 by and between the
Company and Cybergate, Inc. .......................................... ++++
10.39 Stock Purchase Agreement, dated May 12, 1995, by and among the
Company, Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe,
as amended. .......................................................... ****
10.40 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. ............................ **
10.41 Form of Indemnity Agreement between the Company and its Directors, as
amended. ............................................................. ****
10.42 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ............................ ****
10.43 Registration Agreement dated November 9, 1995, between the Company and
the Initial Purchasers. .............................................. ++
10.44 Loan and Security Agreement, dated September 8, 1995, between AT&T
Credit Corporation and American Communications Services of El Paso,
Inc. ................................................................. ++
10.45 Parent Support and Pledge Agreement (El Paso) dated September 8, 1995,
between the Company and AT&T Credit Corporation. ..................... ++
10.46 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. ................. ++
10.47 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").............................. ++
10.48 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").......... ++
10.49 Amendment to Amended 1994 Stock Option Plan of the Company............ --
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EXHIBIT NO. DESCRIPTION BY REFERENCE
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10.50 Parent Pledge and Support Agreement dated as of October 17, 1994
between the Company and AT&T Credit Corporation. ..................... *
10.51 American Communication Services of El Paso Inc. Common Stock Purchase
Agreement dated September 8, 1995. ................................... -
10.52 Supplemental 1995 Indenture........................................... ++++
10.53 Supplemental 1996 Indenture........................................... ++++
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 Piper & Marbury L.L.P. .................................... ++++
24.1 Power of Attorney .................................................... ++++
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