AMERICAN COMMUNICATIONS SERVICES INC
S-3, 1997-09-18
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1997
 
                                                     REGISTRATION NO. 333-
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-3
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                            ------------------------
 
<TABLE>
<S>                             <C>                             <C>
            DELAWARE                                                       52-1947746
(STATE OR OTHER JURISDICTION OF                                 (I.R.S. EMPLOYER IDENTIFICATION
 INCORPORATION OR ORGANIZATION)                                               NO.)
</TABLE>
 
                         131 NATIONAL BUSINESS PARKWAY
                       ANNAPOLIS JUNCTION, MARYLAND 20701
                                 (301) 617-4200
         (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
            AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------
 
                             RILEY M. MURPHY, ESQ.
                     AMERICAN COMMUNICATIONS SERVICES, INC.
                         131 NATIONAL BUSINESS PARKWAY
                       ANNAPOLIS JUNCTION, MARYLAND 20701
                                 (301) 617-4215
      (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
                        AREA CODE, OF AGENT FOR SERVICE)
                            ------------------------
 
                                with copies to:
 
                          GEORGE W. BILICIC, JR., ESQ.
                            CRAVATH, SWAINE & MOORE
                                WORLDWIDE PLAZA
                               825 EIGHTH AVENUE
                         NEW YORK, NEW YORK 10019-7475
                                 (212) 474-1000
                            ------------------------
 
    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
 
    If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
 
    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, other than securities offered only in connection with dividend or interest
reinvestment, check the following box. [X]
 
    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 number of the earlier effective
registration statement for the same offering. [ ]
- ------------
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(e)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration number 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>
<S>                                 <C>              <C>              <C>              <C>
- -------------------------------------------------------------------------------------------------------
                                                                          PROPOSED
                                                         PROPOSED         MAXIMUM
                                         AMOUNT          MAXIMUM         AGGREGATE        AMOUNT OF
TITLE OF EACH CLASS OF                   TO BE        OFFERING PRICE      OFFERING       REGISTRATION
SECURITIES TO BE REGISTERED            REGISTERED     PER NOTE(1)(2)    PRICE(1)(2)         FEE(3)
- -------------------------------------------------------------------------------------------------------
13 3/4% Senior Notes due 2007.....    $50,000,000          100%         $50,000,000        $15,152
=======================================================================================================
</TABLE>
 
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Exclusive of accrued interest, if any.
(3) Calculated pursuant to Rule 457(o).
 
     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
 
                SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1997
PROSPECTUS
                                  $50,000,000
 
                                      LOGO
                         13 3/4% SENIOR NOTES DUE 2007
                            ------------------------
 
    This Prospectus relates to the 13 3/4% Senior Notes due 2007 (the "Notes")
of American Communications Services, Inc., a Delaware corporation (the "Company"
or "ACSI"). The Notes were issued and sold on July 23, 1997, (the "Private
Placement") in transactions exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), to persons reasonably
believed by the Initial Purchasers (as defined) to be "qualified institutional
buyers" (as defined by Rule 144A under the Securities Act) or other
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) of Regulation D under the Securities Act or in transactions complying with
the provisions of Regulation S under the Securities Act. In connection with the
Private Placement, the Company and the Initial Purchasers (as defined) executed
and delivered for the benefit of the holders of the Notes a Registration Rights
Agreement dated July 23, 1997 (the "Registration Rights Agreement"), providing
for (i) the filing of a registration statement for an offer to exchange certain
Notes (the "Exchange Notes") which have been registered under the Securities Act
for certain existing Notes (the "Exchange Offer") and (ii) the filing with the
Securities and Exchange Commission (the "SEC") of the Registration Statement of
which this Prospectus forms a part. The $50,000,000 aggregate principal amount
of Notes offered hereby may be offered and sold from time to time (the
"Offering") by the holders named herein or, if required, by holders named in an
accompanying supplement (a "Prospectus Supplement") or by their respective
transferees, pledgees, donees, or their successors (collectively, the "Selling
Holders") pursuant to this Prospectus and a Prospectus Supplement, if required.
 
    The Company placed approximately $70 million of the net proceeds realized
from the sale of the Notes, representing funds sufficient to pay the first five
interest payments on the Notes, into an Escrow Account (as defined herein) to be
held by the Escrow Agent (as defined herein) for the benefit of the holders of
the Notes. The Notes bear interest at a rate of 13 3/4% per annum, payable
semi-annually in arrears on January 15 and July 15 commencing January 15, 1998.
The Notes are redeemable, in whole or in part, at the option of the Company on
or after January 15, 2002, at the redemption prices set forth herein, plus
accrued interest to the date of redemption. In addition, at any time on or prior
to July 15, 2000, the Company may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the Notes with the net cash proceeds
of one or more Equity Offerings (as defined), at a redemption price equal to
113.75% of the principal amount thereof; provided, however, that after giving
effect to any such redemption, at least $143 million aggregate principal amount
of the Notes remains outstanding. Upon a Change of Control (as defined), each
holder of the Notes will have the right to require the Company to repurchase
such holder's Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of repurchase. In addition, the
Company is obligated to offer to repurchase the Notes in the event of certain
Asset Sales (as defined). See "Description of the Notes."
 
    The Notes are unsecured senior obligations of the Company and rank pari
passu with any existing and future senior indebtedness of the Company and will
rank senior in right of payment to all subordinated obligations of the Company.
As of June 30, 1997, the Company had approximately $193.0 million of senior
indebtedness outstanding. In addition, the Notes are structurally subordinated
to liabilities (including trade payables) of the Company's subsidiaries. As of
June 30, 1997, liabilities of the Company's Subsidiaries were approximately
$62.7 million. See "Description of the Notes."
 
    The Notes may be sold by the Selling Holders from time to time directly to
purchasers or through underwriters, dealers or agents. See "Plan of
Distribution." If required, the names of any such underwriters, dealers or
agents involved in the sale of the Notes in respect of which this Prospectus is
being delivered and the applicable underwriter's discount, dealer's purchaser
price or agent's commission, if any, will be set forth in a Prospectus
Supplement.
 
    The Selling Holders will receive all of the net proceeds from the sale of
the Notes and will pay all underwriting discounts and selling commissions, if
any, applicable to the sale of the Notes. The Company is responsible for payment
of all other expenses incident to the offer and sale of the Notes.
 
    The Selling Holders and any underwriters, dealers or agents which
participate in the distribution of the Notes may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commission received by them
and any profit on the resale of the Notes purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Plan of
Distribution" for a description of indemnification arrangements.
 
    Prior to this Offering, there has been no public market for the Notes. If
such a market were to develop, the Notes could trade at prices that may be
higher or lower than their principal amount. The Company does not intend to
apply for listing or quotation of the Notes on any securities exchange or stock
market. Therefore, there can be no assurance as to the liquidity of any trading
market for the Notes or that an active public market for the Notes will develop.
See "Risk Factors -- Lack of Public Market; Exchange Offer."
 
    BT Securities Corporation, Alex. Brown & Sons Incorporated, ING Baring
(U.S.) Securities, Inc. and Societe Generale Securities Corporation (the
"Initial Purchasers") have agreed that one or more of them will act as
market-makers for the Notes. However, the Initial Purchasers are not obligated
to so act and they may discontinue any such market-making at any time without
notice.
 
     SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
 
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 
                            ------------------------
 
             The date of this Prospectus is                , 1997.
<PAGE>   3
 
                                      LOGO
<PAGE>   4
 
                             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 SEC. Such reports, proxy and information statements and
other information may be inspected and copied at the public reference facilities
of the SEC 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 SEC by mail at prescribed rates, or in certain cases by accessing the
SEC's World Wide Web site at http://www.sec.gov. Requests should be directed to
the SEC's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Company's Common Stock is quoted on
the Nasdaq National Market and material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
 
     The Company has filed with the SEC a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth or incorporated by
reference 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 SEC. For further information with respect to the Company and the Notes
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 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
SEC at the address set forth above.
 
     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."
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     The following documents previously filed with the SEC (File No. 0-25314)
are hereby incorporated by reference into this Prospectus:
 
          (i) the Company's Annual Report on Form 10-KSB for the fiscal year
     ended June 30, 1996;
 
          (ii) the Company's Annual Report on Form 10-KSB/A for the fiscal year
     ended June 30, 1996;
 
          (iii) the Company's Transition Report on Form 10-KSB for the fiscal
     period from July 1, 1996 to December 31, 1996;
 
          (iv) the Company's Transition Report on Form 10-KSB/A for the fiscal
     period from July 1, 1996 to December 31, 1996;
 
          (v) the Company's Quarterly Reports on Form 10-QSB for the quarterly
     periods ended March 31 and June 30, 1997;
 
          (vi) the Company's Current Reports on Form 8-K, dated January 8, 1997,
     January 9, 1997, February 7, 1997 and July 29, 1997; and
 
                                        i
<PAGE>   5
 
          (vii) the description of the Company's Common Stock contained in its
     registration statement on Form 8-A filed with the SEC on December 23, 1994,
     including any amendments or reports filed for the purpose of updating such
     description.
 
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
to which this Prospectus relates shall be deemed to be incorporated by reference
into this Prospectus and to be part hereof from the date of filing thereof.
 
     Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated herein modifies or replaces such statement.
Any statement so modified or superseded shall not be deemed, in its unmodified
form, to constitute a part of this Prospectus. The Company will provide without
charge to each person to whom a copy of the Prospectus has been delivered, and
who makes a written or oral request, a copy of any and all of the foregoing
documents incorporated by reference in the Prospectus (other than exhibits
unless such exhibits are specifically incorporated by reference into such
documents). Requests should be submitted in writing or by telephone to Riley M.
Murphy, Executive Vice President -- Legal and Regulatory Affairs, American
Communications Services, Inc., at the Company's executive offices located at 131
National Business Parkway, Suite 100, Annapolis Junction, MD 20701, telephone
(301) 617-4200.
 
                                       ii
<PAGE>   6
 
                                    SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere and incorporated by reference 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") provides a
broad range of integrated local voice and data communications services primarily
to commercial customers in mid-sized markets in the southern United States. As a
competitive local exchange carrier ("CLEC"), the Company has constructed its own
local fiber optic networks in 31 markets, is now evaluating in which additional
markets it will construct local networks and expects to offer services on its
own networks or on a resale basis in up to 50 markets by the end of 1998. The
Company uses its own facilities and leases network capacity from others to
provide long distance carriers, Internet service providers ("ISPs") and
business, government and institutional end-users with an alternative to the
incumbent local phone companies for high quality voice, data, video transport
and other telecommunications services. The Company believes that its customers
choose ACSI's telecommunications services because of the reliability and breadth
of the Company's services, discounted pricing relative to the incumbent local
exchange carrier ("ILEC") and a high level of customer service.
 
     From the formation of the Company through 1996, the Company derived
substantially all of its revenues from the sale of dedicated services to
interexchange carriers ("IXCs") and ISPs. Since the passage of the
Telecommunications Act of 1996 (the "Federal Telecommunications Act"), however,
the Company has enhanced its product offerings to meet the needs of commercial
end-users, and is aggressively expanding the sales and marketing capabilities
necessary to deliver these products to such customers. Specifically, the Company
introduced local switched voice services, including local exchange services
(dial tone) in late 1996, and has also added capabilities to provide other
services such as high speed video conferencing, frame relay, asynchronous
transfer mode ("ATM") and Internet access.
 
                             PRODUCTS AND SERVICES
 
     The Company currently provides a wide range of local telecommunications
services including dedicated and private line, local switched voice services,
high-speed data services and Internet services. The Company's SONET-based local
fiber optic networks and its coast-to-coast leased high broadband backbone data
network ("ACSINet") are designed to support this wide range of enhanced
communications services, provide increased network reliability and reduce costs
for its customers, as follows:
 
     - Dedicated Services.  The Company's special access services, switched
       transport services and private line services provide high capacity
       non-switched interconnections: (1) between points of presence ("POPs") of
       the same IXC; (2) between POPs of different IXCs; (3) between large
       business and government end-users and their selected POPs; (4) between an
       IXC POP and an ILEC central office, or between two such central offices;
       and (5) between different locations of business or government end-users.
       During 1996, such dedicated services provided substantially all of the
       Company's revenues.
 
     - Local Switched Voice Services.  The Company began offering local switched
       voice services (including dial tone) in late 1996; as of August 22, 1997,
       the Company offered such local switched services using its own facilities
       in 9 markets and offered such services on a resale basis in a total of 31
       markets. The Company expects to offer facilities-based services in 16 of
       the markets in which it has operational local networks by the end of
       1997, and it expects to offer local services on a resale basis in
       additional markets. As an adjunct to its local switched services, the
       Company anticipates providing calling card and other interLATA services
       by the fourth quarter of 1997.
 
                                        1
<PAGE>   7
 
     - Data Services.  During 1996, the Company deployed ACSINet and as of
       August 15, 1997 had a total of 44 data POPs. ACSI provides a full range
       of high-speed data services over this network, including Internet
       connectivity, frame relay, ATM and managed services (such as network
       design, configuration and installation) to businesses, government, health
       care providers, educational institutions and ISPs for local and wide area
       network solutions.
 
                                       STRATEGY
 
     The Company's objective is to become a full-service alternative to the ILEC
primarily for business, government and institutional end-users in its markets by
offering superior products with excellent customer service at competitive
prices. In order to achieve this objective, the Company seeks to:
 
Leverage Existing Infrastructure.
 
     The Company believes that its integrated telecommunications networks, both
its local fiber networks and ACSINet, are capable of providing a broad range of
voice and data communications services to its customers. The Company is focusing
its efforts on improving penetration in the markets it already serves by
continuing to offer additional services. The Company believes that providing
switched local voice services permits it to increase the traffic and revenue
associated with its networks. The Company plans to seek certification to offer
calling-card, teleconferencing and other long distance services. In markets in
which it does have operational networks, the Company's decision to pursue a
resale strategy would help position the Company as a full-service provider,
capable of providing its customers with a one-stop-shopping alternative to the
ILEC. In markets in which it does not currently have an operational network,
this resale strategy may position the Company to eventually construct networks
in those markets, which networks would benefit immediately from an existing
customer base.
 
Develop Direct and Indirect Sales Channels to Commercial End-Users.
 
     The Company has divided its sales and marketing efforts into three
different channels: direct sales to end-users, sales to IXCs and ISPs and sales
of private-label services through alternative distribution channels.
 
     - Direct Sales.  The Company's local sales force continues to focus on the
       commercial end-users in each of the markets it serves. The Company
       believes that its 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's
       major account sales force targets large national accounts. As of June 30,
       1997, the Company's sales force in this area was made up of 153 sales
       people, which represents an increase of 98 sales people since December
       31, 1996, and is expected to increase to 210 sales people by the end of
       1997.
 
     - Sales to IXCs and ISPs.  The Company sells dedicated services to long
       distance carriers and ISPs who use the Company's products and services to
       provide local access for their own products. For example, the Company
       recently entered into an agreement with MCImetro in which, subject to
       certain conditions, MCI has agreed to name ACSI as its preferred local
       provider for dedicated and transport services in 21 ACSI markets for at
       least a five-year period. See "Recent Developments."
 
     - Sales Through Alternative Distribution Channels.  As of August 22, 1997,
       the Company had executed 66 sales agency agreements and is actively
       recruiting additional telecommunications sales agents to market the
       Company's services. In addition, the Company intends to expand
       distribution of its services by attempting to contract with IXCs,
       utilities, cable television service providers ("CATVs"), out-of-region
       regional Bell operating companies ("RBOCs"), other 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 the support of sales
       through these and other alternative distribution channels.
 
                                        2
<PAGE>   8
 
Market the Company's Services Under the ACSI Brand Name.
 
     The Company is establishing the ACSI brand name by marketing and packaging
its broad array of communications services directly to end-users. In markets in
which it has local networks established, both switched services and data
services are marketed under the ACSI brand name; in markets in which the Company
has no network installed, it resells local switched services under the ACSI
brand name. In both types of markets, the Company also pursues opportunities to
bundle its services together to strengthen the ACSI identity as a full-service
provider of telecommunications services.
 
Provide Superior Customer Service.
 
     The Company is developing and implementing an integrated customer care
strategy that is intended to provide a heightened level of responsive customer
service across its full range of existing and planned products and services.
This strategy comprises infrastructure, training, performance monitoring and
image/brand recognition and would serve to leverage the Company's operational
support systems, other information/financial systems and customer care
organizations. For example, the Company has made significant capital investments
in its integrated network management platform, which monitors and manages all
voice and data network elements. The Company expects to have completed customer
care and billing systems by as early as the end of 1998, which are intended to
improve the Company's provision of integrated customer service on a cost
efficient basis. These and other quality management and improvement programs,
when implemented, are expected to enable the Company to differentiate itself in
the marketplace by providing a level of customer care and customer service that
is of a higher quality than that which is available in today's market.
 
Expand Resale of Exchanged Local Voice Services.
 
     Management believes that the Company can successfully enter new markets
with lower capital investment by acting as a reseller of either local switched
voice or data services. This strategy is intended to allow the Company to build
brand name awareness and develop a customer base without incurring the initial
capital costs typically incurred by facilities-based entrants. This strategy
also enables the Company to make capital decisions based on where its customers
are most highly concentrated. Once the Company has established a customer base,
the Company plans to invest in extending its network infrastructure in those
markets that it already serves.
 
Accelerate Financial Return on Incremental Expenditures.
 
     The Company is pursuing opportunities that accelerate the return on the
Company's invested capital. The Company believes that it will achieve an earlier
return on its investment by focusing on new customer applications in existing
markets rather than continuing to increase the number of new networks built. For
this reason, the Company has modified its earlier goal of constructing 50 local
networks by the end of 1998, is now evaluating in which additional markets it
will construct local networks and is establishing a presence in additional
markets through resale of switched services and data POPs. The Company plans to
redeploy into customer applications in existing markets the capital that was
scheduled to be used to develop those additional networks. While management
continues to believe in the long-term return on capital afforded by the
constructed networks, it believes that the investment in customer applications
will have a more immediate return. As part of this strategy, the Company has
also implemented a shift in its incentive-based compensation for a number of its
key executives away from new network development and growth to revenue and
EBITDA (as defined herein).
 
                                MANAGEMENT TEAM
 
     The Company's senior management is among the most experienced in the
emerging competitive local telecommunications industry. Members of ACSI's
executive team developed and/or operated CAP networks
 
                                        3
<PAGE>   9
 
in 25 major metropolitan markets for companies such as MFS Communications and
Teleport Communications Group. Key executives include:
 
     ANTHONY J. POMPLIANO, EXECUTIVE CHAIRMAN OF THE BOARD OF DIRECTORS, had
more than 30 years of experience in the telecommunications industry before
joining ACSI in August 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.
 
     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 he 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.
 
     DAVID L. PIAZZA, CHIEF FINANCIAL OFFICER, joined the Company on 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.
 
     RILEY M. MURPHY, GENERAL COUNSEL, EXECUTIVE VICE PRESIDENT -- LEGAL AND
REGULATORY AFFAIRS AND SECRETARY, had 12 years of experience in the private
practice of telecommunications regulatory law for interexchange, cellular,
paging and other competitive telecommunications services prior to joining the
Company in April 1994. Since February 1995, she has served as an officer and
director of the Association for Local Telecommunications Services.
 
                              RECENT DEVELOPMENTS
 
     Other.  Effective September 3, 1997, George M. Tronsrue, III resigned from
his position as President and Chief Operating Officer -- Strategy and Technology
Development. The Company and Mr. Tronsrue are negotiating a separation agreement
and the Company has agreed to extend Mr. Tronsrue's compensation, benefits and
loan repayment provisions through September 30, 1997, without waiving any rights
under Mr. Tronsrue's employment agreement.
 
Unit Offering.  On July 10, 1997, the Company consummated the issuance and sale
of 75,000 units (the "Unit Offering"), consisting of its 14 3/4% Redeemable
Preferred Stock due 2008 (the "Preferred Stock") and warrants (the "Warrants")
to purchase shares of common stock (the "Common Stock"). Total net proceeds to
the Company from the Unit Offering were approximately $67 million.
 
     Common Equity Offering.  On April 15, 1997, the Company consummated (i) the
issuance and sale of 5,060,000 shares of Common Stock (inclusive of the May 14,
1997 exercise by the underwriters of their over-allotment option) at a price per
share of $5.00 in an underwritten public offering and (ii) the issuance and sale
directly to certain of its principal stockholders of 3,600,000 shares of Common
Stock at a purchase price of $4.70 per share (together, the "April Offering").
Total net proceeds to the Company from the April Offering were approximately $40
million.
 
     MCImetro Agreement.  Effective March 6, 1997, the Company and MCImetro
entered into an agreement in which MCI named 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 and on June 19, 1997,
executed an agreement giving MCI the option to purchase loop transport services
from
 
                                        4
<PAGE>   10
 
ACSI where ACSI has collocations with the ILEC and MCI has deployed its own
local switch. 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. 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 have vested and the remaining 260,000 warrants
will vest only upon execution of the switched services resale agreement. MCI has
certain registration rights with respect to any shares of Common Stock issued to
MCI in connection with the MCI Transaction.
 
     Cybergate Acquisition.  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 $750,000 for the year ended December 31, 1996. The Company
believes the Cybergate Acquisition will help ACSI 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.
 
                                        5
<PAGE>   11
 
                                  THE OFFERING
 
THE PRIVATE PLACEMENT......  The Notes were sold by the Company on July 23,
                             1997, to the Initial Purchasers, which placed the
                             Notes with institutional investors in the Private
                             Placement. $50,000,000 aggregate principal amount
                             of the Notes were purchased in the Private
                             Placement by W.R. Huff Asset Management Co., L.L.C.
                             ("W.R. Huff") on behalf of investment management
                             accounts for which W.R. Huff acts as investment
                             advisor and over which it has sole dispositive
                             power. In connection therewith, the Company
                             executed and delivered for the benefit of the
                             holders of the Notes the Registration Rights
                             Agreement, providing for, among other things, (i)
                             the Exchange Offer to exchange the Exchange Notes
                             for certain existing Notes and (ii) the filing of
                             this Registration Statement.
 
SECURITIES OFFERED.........  $50,000,000 aggregate principal amount of 13 3/4%
                             Senior Notes due 2007. $220,000,000 aggregate
                             principal amount of Notes are outstanding as of the
                             date of this Prospectus.
 
MATURITY DATE..............  July 15, 2007.
 
INTEREST PAYMENT DATES.....  The Notes bear interest at a rate of 13 3/4% per
                             annum. Interest on the Notes will accrue from July
                             23, 1997 (the "Issue Date"), and are payable
                             semi-annually on each January 15 and July 15,
                             commencing January 15, 1998.
 
ESCROW AND DISBURSEMENT
 AGREEMENT.................  The Company placed approximately $70 million of the
                             net proceeds realized from the Private Placement,
                             representing funds sufficient to pay the first five
                             interest payments on the Notes, into an Escrow
                             Account (as defined herein) to be held by the
                             Escrow Agent (as defined herein) for the benefit of
                             the holders of the Notes. Until disbursed in
                             accordance with the Escrow and Disbursement
                             Agreement (as defined herein), the Escrow Account
                             is designed to secure a portion of the Company's
                             obligations under the Notes. Funds will be
                             disbursed from the Escrow Account only to pay
                             interest on the Notes and, upon certain repurchases
                             or redemptions of the Notes, to pay principal of
                             and premium, if any, thereon. Pending such
                             disbursement, all funds contained in the Escrow
                             Account will be invested in Marketable Securities
                             (as defined herein). Pursuant to the Escrow and
                             Disbursement Agreement, if the Company makes the
                             first five interest payments on the Notes in a
                             timely manner, immediately after the fifth interest
                             payment any remaining Marketable Securities will be
                             released from the Escrow Account to the Company and
                             thereafter the Notes will be unsecured. See
                             "Description of the Notes -- Disbursement of
                             Funds -- Escrow Account" and "Description of the
                             Notes -- Security."
 
OPTIONAL REDEMPTION........  The Notes are redeemable, in whole or in part, at
                             the option of the Company, on or after July 15,
                             2002, at the redemption prices set forth herein,
                             plus accrued and unpaid interest, if any, to the
                             date of redemption. In addition, on or prior to
                             July 15, 2000, the Company, at its option, may
                             redeem up to 35% of the aggregate principal amount
                             of the Notes with the net cash proceeds of one or
                             more Equity Offerings (as defined), at the
                             redemption prices set forth herein plus accrued
                             interest to the date of redemption, provided that
                             after any such redemption at least $143 million
                             aggregate principal amount of Notes remains
                             outstanding.
 
                                        6
<PAGE>   12
 
CHANGE OF CONTROL..........  If a Change of Control (as defined) occurs, each
                             holder will have the right to require the Company
                             to offer to repurchase such holder's Notes at a
                             redemption price of 101% of the principal amount
                             thereof plus accrued and unpaid interest, if any,
                             to the date of repurchase. There can be no
                             assurance that ACSI will have the financial
                             resources necessary to repurchase the Notes upon a
                             Change of Control.
 
RANKING....................  The Notes are general unsecured senior obligations
                             of the Company and rank pari passu with all
                             existing and future senior indebtedness of the
                             Company and rank senior to all subordinated
                             indebtedness of the Company. As of June 30, 1997,
                             there was $193.0 million of senior indebtedness of
                             the Company outstanding. In addition, the Notes are
                             structurally subordinated to liabilities (including
                             trade payables) of the Company's subsidiaries. As
                             of June 30, 1997, liabilities of the Company's
                             subsidiaries were $62.7 million.
 
CERTAIN COVENANTS..........  The indenture governing the Notes (the "Indenture")
                             contains certain covenants that limit the ability
                             of the Company and its subsidiaries to, among other
                             things, incur additional indebtedness, pay
                             dividends or make certain other restricted
                             payments, consummate certain asset sales, enter
                             into certain transactions with affiliates, incur
                             liens, impose restrictions on the ability of a
                             subsidiary to pay dividends or make certain
                             payments to the Company and its subsidiaries, merge
                             or consolidate with any other person or sell,
                             assign, transfer, lease, convey or otherwise
                             dispose of all or substantially all of the assets
                             of the Company or its subsidiaries. In addition,
                             the Indenture requires that the Company apply
                             certain Excess Proceeds (as defined) of Asset Sales
                             (as defined) to make an offer to purchase on a pro
                             rata basis, from all holders, outstanding Notes and
                             Existing Notes (as defined).
 
For additional information regarding the Notes, see "Description of the Notes."
 
                                USE OF PROCEEDS
 
     The Selling Holders will receive all of the net proceeds from the Notes
sold pursuant to this Prospectus. The net proceeds from the Private Placement
were approximately $208 million, after deducting discounts and other offering
expenses payable by the Company. Approximately $70 million of the net proceeds
from the Private Placement were placed into the Escrow Account. The Company
plans to use the balance of the net proceeds from the Private Placement
(approximately $138 million) to fund sales, marketing and product development
costs incurred in connection with the Company's growth, to expand voice and data
networks and to fund negative operating cash flow. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
 
                                        7
<PAGE>   13
 
                                  RISK FACTORS
 
     See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors in evaluating an investment in the Notes.
 
     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 Offering Memorandum.
 
     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." The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations, with regard thereto or any
change in events, conditions or circumstances on which any statement is based.
 
                                        8
<PAGE>   14
 
               SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
         (IN THOUSANDS, EXCEPT PER SHARE, NETWORK AND STATISTICAL DATA)
<TABLE>
<CAPTION>
                                                          SIX MONTHS                           SIX MONTHS
                                                            ENDED       FISCAL PERIOD ENDED       ENDED           SIX MONTHS
                          FISCAL YEAR ENDED JUNE 30,     DECEMBER 31,     DECEMBER 31,(1)       JUNE 30,        ENDED JUNE 30,
                        ------------------------------   ------------   -------------------   -------------   -------------------
<S>                     <C>        <C>        <C>        <C>            <C>        <C>        <C>             <C>        <C>
                          1995            1996               1995              1996               1996               1997
                        --------   -------------------   ------------   -------------------   -------------   -------------------
 
<CAPTION>
                                                PRO                                  PRO                                   PRO
                                    ACTUAL    FORMA(2)                   ACTUAL    FORMA(2)                    ACTUAL    FORMA(2)
                                   --------   --------                  --------   --------                   --------   --------
<S>                     <C>        <C>        <C>        <C>            <C>        <C>        <C>             <C>        <C>
Statement of
  Operations Data:
Revenues..............  $    389   $  3,415   $  7,138     $    989     $  6,990   $  9,626      $ 2,426      $ 19,793   $ 20,011
Operating expenses....    14,797     24,543     29,027        7,966       34,434     37,548       16,576        58,125     58,371
Loss from
  operations..........   (14,408)   (21,128)   (21,889)      (6,977)     (27,444)   (27,922)     (14,150)      (38,333)   (38,361)
Interest and other
  income..............       218      4,410      4,410          777        2,757      2,773        3,632         1,078      1,083
Interest and other
  expense.............      (170)   (10,477)   (10,824)      (2,835)     (10,390)   (10,619)      (7,642)      (12,421)   (12,423)
Loss before minority
  interest............   (14,746)   (27,195)   (28,303)      (9,035)     (35,077)   (35,768)     (18,160)      (49,676)   (49,701)
Minority
  interest(3).........        48        413        413          156          160        160          257            --         --
Net loss..............   (14,698)   (26,782)   (27,890)      (8,879)     (34,917)   (35,608)     (17,903)      (49,676)   (49,701)
Net loss per common
  share...............  $  (3.30)  $  (4.96)  $  (4.40)    $  (1.82)    $  (5.48)  $  (4.84)     $ (3.03)     $  (2.82)  $  (2.81)
Weighted average
  shares
  outstanding.........     4,772      6,185      7,215        5,901        6,734      7,764        6,572        17,994     18,080
Other Data:
Deficiency in earnings
  to cover fixed
  charges(4)..........   (15,282)   (30,246)   (31,354)      (9,796)     (37,345)   (38,036)     (20,448)      (51,207)   (51,232)
EBITDA(5).............  $ (7,443)  $(14,901)  $(14,418)    $ (4,855)    $(21,822)  $(21,620)     $(10,046)    $(28,052)  $(28,022)
Depreciation and
  amortization........       498      3,078      4,322          763        4,912      5,592        2,316         9,456      9,514
Capital
  expenditures........    15,303     60,856     61,667       17,657       64,574     64,832       43,199        73,213     73,213
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1996                            JUNE 30, 1997
                                               -----------------------------------------------     ------------------------------
                                                                               PRO FORMA AS                       PRO FORMA AS
                                                                               ADJUSTED FOR                       ADJUSTED FOR
                                                                               UNIT OFFERING                      UNIT OFFERING
                                                                                  AND THE                            AND THE
                                                             PRO FORMA       PRIVATE PLACEMENT                  PRIVATE PLACEMENT
                                                ACTUAL          (6)              (6)(7)(8)          ACTUAL           (7)(8)
                                               --------     ------------     -----------------     --------     -----------------
<S>                                            <C>          <C>              <C>                   <C>          <C>
Balance Sheet Data:
Cash and cash equivalents....................  $ 78,618       $114,854           $ 319,719         $  8,499         $ 213,364
Total assets.................................   230,038        280,254             571,169          243,381           534,296
Long-term liabilities........................   216,484        210,637             430,637          224,562           444,562
Redeemable stock, options and warrants.......     2,000          2,000              51,089            2,000            51,089
Stockholders' equity (deficit)...............   (27,038)        28,339              50,185          (18,226)            3,600
</TABLE>
 
<TABLE>
<CAPTION>
                                        DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,   MARCH 31,   JUNE 30,
                                            1995         1996        1996         1996            1996         1997        1997
                                        ------------   ---------   --------   -------------   ------------   ---------   --------
<S>                                     <C>            <C>         <C>        <C>             <C>            <C>         <C>
Network and Selected Statistical
  Data(9):
Networks in operation.................          9            10          15           19              21           28          31
Route miles...........................        136           200         386          543             697          908         957
Fiber miles...........................      5,957         9,466      28,476       32,774          48,792       75,867      82,693
Buildings connected...................        100           133         216          532             595          858       1,083
VGE circuits in service...............     82,055       125,208     137,431      267,894         384,134      554,883     886,375
Employees.............................        111           142         199          272             322          502         559
</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) For purposes of computing this amount earnings (loss) consists of earnings
    (loss) before minority interest and fixed charges. Fixed charges consists of
    interest expense (including amortization of debt issuance costs) and
    one-third of rent expense which is deemed to be representative of interest
    expense.
 
(5) 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 ("GAAP"). 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, $1.2
    million and $550,000 in the six months ended December 31, 1995 and fiscal
    period ended December 31, 1996, respectively and $1.5 million and $820,000
    in the six months ended June 30, 1996 and 1997, respectively. See Note 6 of
    "Notes to Consolidated Financial Statements."
 
(6) Pro forma to give effect to (i) the Cybergate Acquisition as if consummated
    on December 31, 1996, (ii) sale of 5,060,000 shares of Common Stock in the
    April Offering (including shares sold upon exercise of the underwriters'
    over-allotment option), sale to certain stockholders of 3,600,000 shares of
    Common Stock in the April Offering and application of the net proceeds
    therefrom and (iii) conversion upon consummation of the April Offering of
    the previously outstanding preferred stock and payment of accrued dividends
    in cash and Common Stock in connection with such conversion in the same
    proportion of accrued dividends payable that were paid in cash and shares of
    Common Stock upon completion of the April Offering.
 
(7) Adjusted to give effect to the sale of 75,000 shares of Preferred Stock and
    75,000 Warrants to purchase shares of Common Stock in the Unit Offering with
    net proceeds of approximately $67 million. The net proceeds from the sale of
    the Units have been allocated to the Preferred Stock and the Warrants based
    upon their relative fair values of $49.1 million for the Preferred Stock and
    $21.8 million for the Warrants. Also reflects a consulting fee of
    approximately $370,000 with respect to the purchase of Units by certain
    principal stockholders and certain other parties in the Unit Offering and
    consent solicitation fees paid out of the proceeds of the Unit Offering of
    $4.375 million, which includes a solicitation agent fee of $500,000.
 
(8) Adjusted to give effect to the Private Placement with net proceeds of
    approximately $138 million, excluding restricted cash of $70 million. Also
    reflects a consulting fee of $500,000 with respect to the purchase of $50
    million of Notes by W.R. Huff on behalf of investment management accounts
    for which it acts as investment advisor and over which it has sole
    dispositive power and consent solicitation fees paid out of the proceeds of
    the Private Placement of $3.875 million.
 
(9) Network and Selected Statistical Data are derived from ACSI's records.
 
                                        9
<PAGE>   15
 
                                  RISK FACTORS
 
     An investment in the Notes offered hereby involves a high degree of risk.
The following risk factors, together with the other information set forth in or
incorporated by reference in this Prospectus, should be carefully considered in
evaluating the Company and its business before purchasing the Notes offered by
this Offering Memorandum.
 
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,
December 31, 1996 and June 30, 1997, the Company had accumulated deficits of
$47.5 million, $82.4 million and $132.1 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.
During the six months ended June 30, 1997, the Company incurred a net operating
loss of $38.3 million and generated negative cash flow from operations of $36.8
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
implementing and marketing its local switched voice and high-speed data services
and establishing and expanding its local networks. Although the Company had
begun to generate revenues from its operational local networks as of March 31,
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 further development and enhancement of new services,
including local switched voice and high-speed data services, as well as the
continued development, construction, expansion, operation and potential
acquisition of local networks, 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 August 15, 1997, the Company had
raised approximately $475 million from debt and equity financings, $31.2 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 "2005 Warrants"), $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
"Existing Notes"), $40.0 million of which had been raised in the April Offering,
approximately $67 million of which had been raised in the Unit Offering and $138
million of which had been raised in the Private Placement. The 2005 Notes were
issued under the indenture dated November 14, 1995 and the 2006 Notes were
issued under the indenture dated March 21, 1996 (collectively, the "Existing
Indentures"). The Company estimates that from June 30, 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 $91.6 million and $237 million, respectively. At August 15,
1997, the Company had approximately $250 million of cash and cash equivalents
available for this purpose. The Company continues to use the estimated net
proceeds from the Private Placement principally to fund sales, marketing and
product development costs incurred in connection with the Company's growth, to
expand voice and data networks and to fund negative operating cash flow. 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.
 
     Management anticipates that the Company's current cash resources from the
Unit Offering and the Private Placement will be sufficient to fund the Company's
continuing negative cash flow and the capital expenditures required through the
fourth quarter of 1998. Without an infusion of additional cash, the Company will
exhaust its cash resources at the end of the fourth quarter of 1998. To meet its
additional remaining capital requirements and to successfully implement its
strategy, ACSI will be required to sell
 
                                       10
<PAGE>   16
 
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. 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
strategy successfully, in which event the Company will be unable to fund its
ongoing operations, which 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."
 
SUBSTANTIAL LEVERAGE; RECENT DEFAULT; FUTURE CASH OBLIGATIONS
 
     Since inception, the Company's consolidated cash flow from operations has
been negative. As a result, the Company has been required to pay its fixed
charges (including interest on existing indebtedness) and operating expenses
with the proceeds from sales of its debt and equity securities. As a result of
the issuance of the Existing 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. In addition, the Company will have substantial
cash interest requirements with respect to the Notes issued in the Private
Placement. As of June 30, 1997, the Company (through five of its subsidiaries)
had approximately $31.2 million in debt outstanding under the AT&T Credit
Facility. The credit provided 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 June 30, 1997, the Company had approximately $224.6 million of
consolidated outstanding long-term indebtedness. As of June 30, 1997, the total
consolidated liabilities of the Company were approximately $259.6 million. As of
June 30, 1997, after giving pro forma effect on a consolidated basis to the
completion of the Private Placement, the Company would have had approximately
$444.6 million of outstanding long term indebtedness. It is expected that the
Company and its subsidiaries will incur additional indebtedness, including
increasing the borrowing capacity under the AT&T Credit Facility to $35 million
the maximum amount permitted to be incurred under the Indenture (as defined
herein) and the Existing Indentures. 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, the Existing 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, the Existing Notes and its
other debt. See "Description of Certain Indebtedness."
 
     On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not permitted under each of
the Existing Indentures and, therefore, constituted an Event of Default (as
defined in the Existing Indentures) under each Existing Indenture. The Company
used a portion of the proceeds of the Unit Offering to pay in full all ordinary
course trade accounts payable that were more than 60 days overdue to cure such
Event of Default.
 
     In addition, in connection with the Unit Offering the Company issued its
Preferred Stock, dividends on which may be paid, at the Company's option, either
in cash or by the issuance of additional shares of Preferred Stock; provided,
however, that after June 30, 2002, to the extent and so long as the Company is
not precluded from paying cash dividends on the Preferred Stock by the terms of
any then outstanding indebtedness or any other agreement or instrument to which
the Company is then subject, the Company shall pay dividends on the Preferred
Stock in cash.
 
     The level of the Company's indebtedness and its other obligations could
have important consequences to holders of the Notes, including the following:
(i) the debt service requirements of the Company's existing
 
                                       11
<PAGE>   17
 
indebtedness and any additional indebtedness could make it difficult for the
Company to make payments on the Notes; (ii) the ability of the Company to obtain
any necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (iii) any cash flow
from the operations of certain of the Company's subsidiaries may need to be
dedicated to debt service payments and might not be available for other
purposes; (iv) the Company's level of indebtedness could limit its flexibility
in planning for, or reacting to, changes in its business; (v) the Company is
more highly leveraged than most of its competitors, which may place it at a
competitive disadvantage; and (vi) the Company's high degree of indebtedness
will make it more vulnerable to a downturn in its business.
 
HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF NOTES; EFFECTIVE SUBORDINATION
OF NOTES TO INDEBTEDNESS OF SUBSIDIARIES
 
     As a holding company that conducts virtually all of its business through
its subsidiaries, ACSI has no source of operating cash flow other than from
dividends and distributions from its subsidiaries. In order to pay interest on
the Notes or the principal amount of the Notes at maturity, or to redeem or
repurchase the Notes, ACSI will be required to obtain distributions from its
subsidiaries, refinance its indebtedness, raise funds in a public or private
equity or debt offering, or sell some or all of its or its subsidiaries' assets.
Moreover, the Indenture and the Existing Indentures limit the Company's ability
to incur additional indebtedness and the AT&T Credit Facility imposes
restrictions on the ability of those five 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, the Indenture and the Existing
Indentures also impose 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.
 
     If ACSI is required to conduct an offering of its capital stock or to
refinance the Notes, its ability to do so on acceptable terms, if at all, will
be affected by several factors, including financial market conditions and the
value and performance of the Company at the time of such offering or
refinancing, which in turn may be affected by many factors, including economic
and industry cycles. There can be no assurance that an offering of ACSI's
Capital Stock (as defined) or a refinancing of the Notes can or will be
completed on satisfactory terms, that they would be sufficient to enable ACSI to
make any payments with respect to the Notes if required, or that they would be
permitted by the terms of the debt instruments of ACSI and its subsidiaries then
in effect.
 
     The Notes will be senior obligations only of ACSI, will be pari passu in
right of payment with certain other indebtedness of ACSI and will not be secured
by any assets. 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. As of June 30, 1997, the total liabilities of the Company's
subsidiaries (after the elimination of loans and advances by the Company to its
subsidiaries) were approximately $62.7 million. Of that amount, approximately
$31.2 million in indebtedness was secured by first priority liens in favor of
AT&T on all the assets of the borrowing subsidiaries and a pledge of the stock
of such subsidiaries. See "Description of Certain Indebtedness." 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.
 
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
 
     The Existing Indentures, the AT&T Credit Facility and the Indenture 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 the Notes -- Certain
Covenants" and "Description of Certain Indebtedness." In addition, the terms of
any debt or equity financings undertaken by the Company to
 
                                       12
<PAGE>   18
 
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.
 
RAPID EXPANSION OF OPERATIONS
 
     Subject to the sufficiency of its cash resources, ACSI plans to continue to
expand its business rapidly. There can be no assurance that a market will
develop for any of the Company's 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 nine months,
the Company has effected a management reorganization in connection with which
the Company hired several members of senior management and saw the departure of
several significant employees and members of senior management. 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 information 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.
 
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
 
     Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company transitions to the provisioning of local services and as its long
distance and Internet operations continue to expand, the need for sophisticated
billing and information systems will increase significantly. The Company's plans
for the development and implementation of its billing systems rely, for the most
part, on the delivery of products and services by third party vendors.
Similarly, the Company is developing customer call centers to provision service
orders. Information systems are vital to the success of the call centers, and
the information systems for these call centers are largely being developed by
third party vendors. Failure of these vendors to deliver proposed products and
services in a timely and effective manner and at acceptable costs, failure of
the Company to adequately identify all of its information and processing needs,
failure of the Company's related processing or information systems, or the
failure of the
 
                                       13
<PAGE>   19
 
Company to upgrade systems as necessary could have a material adverse effect on
the ability of the Company to reach its objectives, on its financial condition
and on its results of operations.
 
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, the fiscal period ended
December 31, 1996 and the six months ended June 30, 1997, approximately 60%, 40%
and 29% 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, repackage unbundled
network elements and/or resell the local services of ACSI's competitors, which
may materially adversely affect the Company. Additionally, in the six months
ended June 30, 1997, approximately 18% of the Company's revenues were generated
by ISPs. See "-- Competition," "Business -- Competition" and "-- Regulation."
 
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, network
capacity and switching 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 and facilities to the Company and its customers. The Company has from
time to time experienced delays in receiving telecommunications services and
facilities, and there can be no assurance that the Company will be able to
obtain such services or facilities 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 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 and networks
upon which it depends are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security (by computer virus,
break-ins or otherwise) and other factors, certain of which may cause
interruptions in service or reduced capacity for the customers. Interruptions in
service, capacity limitations or security breaches could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
DEPENDENCE 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
 
                                       14
<PAGE>   20
 
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 or to expand its existing markets, and there can be no assurance
that the Company will be able to obtain and maintain local approvals on
acceptable terms or that ILECs, CLECs or other competitors 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. Certain utilities have challenged the
constitutionality of mandatory access to poles and other facilities in ongoing
litigation. 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.
 
     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, ILECs 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 June 30, 1997, the Company had posted approximately $8.8
million in performance bonds and letters of credit and expects to post
additional bonds or letters of credit in the future. As of June 30, 1997, the
Company had been required to pledge approximately $5.0 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 -- Implementation of Integrated Network -- Rights-of-Way"
and "-- Regulation."
 
EFFECT 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 Federal Communications Commission (the "FCC") for construction or
installation. However, the Company must file FCC 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. 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 Public Service Commission ("PSC") arbitration of any
unresolved issues.
 
     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
 
                                       15
<PAGE>   21
 
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 information services are not currently subject to direct
regulation by the FCC or any other U.S. agency other than regulation applicable
to businesses generally. However on December 24, 1996, the FCC released a notice
of inquiry seeking comment on the degree of regulation which should be applied
to interstate Internet and information 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 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 term 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.
       Although these problems have been encountered with several ILECs, the
       Company has filed formal complaints with the FCC alleging that
 
                                       16
<PAGE>   22
 
       BellSouth in particular has imposed reconfiguration charges in an
       unreasonable and discriminatory manner and has failed to convert
       customers to ACSI's local services on a timely basis.
 
       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 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
technology such as frame relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for
 
                                       17
<PAGE>   23
 
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.
 
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 Indenture) requiring the Company to offer to purchase all
outstanding Notes and Existing 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 and Existing Notes tendered or at a time when the Company is
prohibited from purchasing the Notes and the Existing Notes, an Event of Default
(as defined in the Indenture) could occur under the relevant indenture. 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.
 
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 Federal 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. However, this provision was recently
found to be unconstitutional by the U.S. Supreme Court in American Civil
Liberties Union v. Janet Reno. Nonetheless, many states have adopted or are
considering adopting similar requirements, and the constitutionality of such
state requirements remains unsettled at this time. 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. (907 F. Supp. 1361 (N.D.
Cal. 1995), the court ruled that an Internet access provider is not directly
liable for 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. Another court recently extended the
Netcom holding to operators of electronic bulletin boards (Sega Enterprises Ltd.
v. Maphia, 848 F. Supp. 923 (N.D. Cal. 1996)). 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 services altogether.
 
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."
 
                                       18
<PAGE>   24
 
CONTROL BY CERTAIN STOCKHOLDERS AND MANAGEMENT
 
     The Company's directors, executive officers and principal stockholders
beneficially own approximately 72.8% of the outstanding Common Stock, including
39.6%, 22.1% and 8.8% of the outstanding Common Stock which is beneficially
owned by The Huff Alternative Income Fund, L.P. ("Huff"), which occupies three
positions on the Board of Directors, ING Equity Partners, L.P. I ("ING"), which
occupies two positions on the Board of Directors and affiliates of First
Analysis Corporation ("FAC"), which occupies one position on the Board of
Directors, respectively. In addition, Huff is the beneficial owner of
approximately 13% of the Preferred Stock issued in connection with the Unit
Offering, which has voting rights in certain circumstances. ING Baring (U.S.)
Securities, Inc., which may be deemed an affiliate of ING, is the beneficial
owner of 10% of the Preferred Stock issued in connection with the Unit Offering.
The Initial Purchasers have informed the Company that W.R. Huff (an affiliate of
Huff) on behalf of investment management accounts for which W.R. Huff acts as
investment advisor and over which it has sole dispositive power, purchased $50
million of the Notes in the Private Placement, for which the Company paid W.R.
Huff, on behalf of such accounts, a fee of $750,000 with respect to such
purchase. 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 and the
Existing Notes to require the Company to repurchase the Notes and the Existing
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 Indenture) for all
Notes and Existing Notes tendered, or at a time when the Company is prohibited
from purchasing the Notes and the Existing Notes, an Event of Default (as
defined in the relevant indenture) could occur under the relevant indenture. In
certain circumstances, in determining whether the approval of holders of the
required principal amount of Notes has been received, the Notes held by W.R.
Huff, on behalf of investment management accounts for which it acts as
investment advisor and over which it has sole dispositive power, shall be
disregarded. See "Management," "Principal Stockholders," "Description of the
Notes" and "Description of Certain Indebtedness -- 2005 Notes and 2006 Notes."
 
LACK OF PUBLIC MARKET
 
     The Notes are securities for which there is currently no market. The Notes
are eligible for trading in the PORTAL Market. However, ACSI does not intend to
apply for listing of the Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. There can be no assurance
as to the development or liquidity of any market for the Notes. If an active
market does not develop, the market price and liquidity of the Notes will be
adversely affected. Many possible events could adversely affect the development
or liquidity of any market for such securities. Although the Initial Purchasers
have informed the Company that they currently intend to make a market in the
Notes, they are not obligated to do so and any such market-making may be
discontinued at any time without notice. In addition, such market-making
activity may be limited during any exchange offer for the Notes and the pendency
of any shelf registration statement with respect to the resale of the Notes. In
addition, the $50 million of Notes purchased by W.R. Huff, on behalf of
investment management accounts for which it acts as investment advisor, are
subject to a lock-up agreement pursuant to which W.R. Huff, on behalf of such
accounts, has agreed with the Initial Purchasers not to transfer or otherwise
dispose of such Notes for a period of 60 days following the Issue Date.
 
                                       19
<PAGE>   25
 
                                USE OF PROCEEDS
 
     The Selling Holders will receive all of the net proceeds from the Notes
sold pursuant to this Prospectus. The net proceeds to the Company from the
Private Placement were approximately $208 million. Approximately $70 million of
the proceeds of the Private Placement, representing funds sufficient to pay the
first five interest payments on the Notes, were placed into the Escrow Account
and, pending disbursement, the Trustee (as defined herein) for the benefit of
the holders of the Notes has a first priority lien on the Escrow Account. Funds
may be disbursed from the Escrow Account only to pay interest on the Notes and,
upon certain repurchases or redemptions of the Notes, to pay principal of and
premium, if any, thereon. See "Description of the Notes -- Disbursement of
Funds -- Escrow Account" and "Description of Notes -- Security." The Company
intends to use the balance of the net proceeds from the Private Placement,
approximately $138 million, to fund sales, marketing and product development
costs incurred in connection with the Company's growth, to expand voice and data
networks and to fund negative operating cash flow. The Company has estimated
that as of June 30, 1997, 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 $91.6 million
and $237 million, respectively. Management anticipates that the Company's
current cash resources from the Unit Offering and the Private Placement will be
sufficient to fund the Company's continuing negative cash flow and the capital
expenditures required through the fourth quarter of 1998. If by the end of the
fourth quarter of 1998 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 unable to fund its operations.
 
     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 has invested the net proceeds from the
Private Placement in Marketable Securities.
 
                                       20
<PAGE>   26
 
                                 CAPITALIZATION
 
     The following table sets forth the total cash and cash equivalents and
capitalization of the Company (i) as of June 30, 1997, and (ii) as adjusted to
give effect to the Unit Offering and the Private Placement and application of
the estimated net proceeds therefrom. For this purpose, the net proceeds of the
Unit Offering were approximately $67 million and the net proceeds from the
Private Placement were approximately $138 million, excluding restricted cash of
approximately $70 million. The solicitation fees were approximately $8,250,000
for the consent related to the Private Placement. 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 in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                JUNE 30, 1997
                                                                   ----------------------------------------
                                                                                         AS ADJUSTED FOR
                                                                                      UNIT OFFERING AND THE
                                                                                             PRIVATE
                                                                       ACTUAL            PLACEMENT(1)(2)
                                                                   --------------     ---------------------
                                                                                (IN THOUSANDS)
<S>                                                                <C>                <C>
Cash and cash equivalents..........................................   $    8,499            $ 213,364
Restricted assets invested in Marketable Securities(3).............           --               70,000
Total cash and restricted assets...................................   $    8,499            $ 283,364
                                                                      =========             =========
Long term debt
  12 3/4% Senior Discount Notes due 2006...........................   $   75,423            $  75,423
  13% Senior Discount Notes due 2005...............................      117,608              117,608
  13 3/4% Senior Notes due 2007....................................           --              220,000
  Notes payable(4).................................................       30,721               30,721
  Other long-term liabilities......................................          809                  809
                                                                      ---------             ---------
          Total long-term debt.....................................      224,561              444,561
Redeemable stock and options.......................................        2,000               51,089(1)
Stockholders' equity (deficit):
  Common Stock, par value $0.01 per share, 75,000,000 shares
     authorized, 35,926,902 shares issued and outstanding at June
     30, 1997(5)(6)................................................          359                  359
  Additional paid-in capital(1)....................................      113,565              135,391
  Accumulated deficit..............................................     (132,149)            (132,149)
                                                                      ---------             ---------
          Total stockholders' equity (deficit).....................      (18,226)               3,600
                                                                      ---------             ---------
          Total capitalization.....................................   $  208,335            $ 499,250
                                                                      =========             =========
</TABLE>
 
- ---------------
 
(1) Adjusted to give effect to the sale of 75,000 shares of Preferred Stock and
    75,000 Warrants to purchase shares of Common Stock in the Unit Offering with
    net proceeds of approximately $67 million. The estimated net proceeds from
    the sale of the Units have been allocated to the Preferred Stock and the
    Warrants based upon their relative fair values of $49.1 million for the
    Preferred Stock and $21.8 million for the Warrants. Also reflects a
    consulting fee of approximately $370,000 with respect to the purchase of
    Units by certain principal stockholders and certain other parties in the
    Unit Offering and consent solicitation fees paid out of the proceeds of the
    Unit Offering of $4.375 million, which includes a solicitation agent fee of
    $500,000.
(2) Adjusted to give effect to the Private Placement with estimated net proceeds
    of $138 million, excluding restricted cash of $70 million. Also reflects a
    consulting fee of $500,000 with respect to the expected purchase of $50
    million of Notes by W.R. Huff on behalf of investment management accounts
    for which it acts as investment advisor and consent solicitation fees paid
    out of the proceeds of the Private Placement of $3.875 million.
(3) Represents investments in Marketable Securities sufficient to make the first
    five interest payments on the Notes. The Company placed approximately $70
    million of the net proceeds realized from the Private Placement,
    representing funds sufficient to pay the first five interest payments on the
    Notes, into the Escrow Account.
(4) Consists primarily of the AT&T Credit Facility totaling $31.2 million, of
    which approximately $31.2 million had been drawn as of June 30, 1997.
(5) Excludes 7,853,741 and 5,312,476 shares reserved for issuance upon exercise
    of options and warrants, respectively, outstanding at June 30, 1997, at a
    weighted average exercise price of $4.62 and 500,000 shares issuable in
    connection with the Company's Employee Stock Purchase Plan (as defined).
    Also excludes 251,567 additional shares issuable upon exercise of the 2005
    Warrants as a result of the April Offering. ACSI has also agreed to issue
    warrants to purchase up to an aggregate of approximately 1.7 million shares
    of Common Stock to MCI. Also excludes the 6,023,850 shares (subject to an
    increase of 1,684,875 additional shares in the event the Company fails to
    raise net proceeds of at least $50,000,000 through the issue and sale of its
    qualified capital stock (other than preferred stock) on or before December
    31, 1998) reserved for issuance upon exercise of the 75,000 warrants issued
    in connection with the Unit Offering on July 10, 1997. See "Summary --
    Recent Developments."
(6) The aggregate proceeds from the exercise of all warrants and options
    outstanding at June 30, 1997, would be approximately $61.2 million.
 
                                       21
<PAGE>   27
 
                         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, for the fiscal period ended December
31, 1996 and for the six months ended June 30, 1997 and 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:
Revenues......................... $  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>
 
                                       22
<PAGE>   28
 
<TABLE>
<CAPTION>
                                                              SIX-MONTH PERIOD ENDED JUNE 30, 1997
                                                             --------------------------------------
                                                                                             THE
                                                                                           COMPANY
                                                               THE                           PRO
                                                             COMPANY      CYBERGATE(6)      FORMA
                                                             --------     ------------     --------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>          <C>              <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................................  $ 19,793         $218         $ 20,011
Operating expenses:
Network development and operations.........................    18,026           94           18,120
Selling, general and administrative........................    29,818           94           29,912
Noncash stock and compensation.............................       824           --              824
Depreciation and amortization..............................     9,456           58            9,514
                                                             --------         ----         --------
Total operating expenses...................................    58,125          246           58,371
                                                             --------         ----         --------
Operating income (loss)....................................   (38,333)         (28)         (38,361)
Non-operating income (expense).............................   (11,343)           3          (11,340)
                                                             --------         ----         --------
Income (loss) before minority interest.....................   (49,676)         (25)         (49,701)
Minority interest..........................................        --           --               --
                                                             --------         ----         --------
Net income (loss)..........................................   (49,676)         (25)         (49,701)
Preferred stock dividends and accretion....................    (1,095)          --           (1,095)
                                                             --------         ----         --------
Net income (loss) to common stockholders...................  $(50,770)        $(25)        $(50,795)
                                                             ========         ====         ========
Net loss per common stockholder............................  $  (2.82)                     $  (2.81)
                                                             ========                      ========
Weighted average number of common shares outstanding.......    17,994                        18,080
</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 Existing Notes.
 
(5) Excludes adjustment for shares of Common Stock issuable if Cybergate meets
    certain performance measures. Inclusion of such shares would be
    anti-dilutive.
 
(6) Reflects Cybergate activity for the period from January 1, 1997, to January
    17, 1997 (the date of acquisition).
 
                                       23
<PAGE>   29
 
                         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.
 
                                       24
<PAGE>   30
 
                      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 and as of and for
the six months ended June 30, 1996 and June 30, 1997 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 and
the six months ended June 30, 1997 are not necessarily indicative of results for
a twelve-month fiscal year.
 
<TABLE>
<CAPTION>
                                                                                           FISCAL
                                                        FISCAL YEAR        SIX MONTHS      PERIOD          SIX MONTHS
                                                           ENDED             ENDED         ENDED             ENDED
                                                          JUNE 30,        DECEMBER 31,  DECEMBER 31,        JUNE 30,
                                                    --------------------  ------------  ------------  --------------------
                                                      1995        1996        1995          1996        1996        1997
                                                    --------    --------  ------------  ------------  --------    --------
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>         <C>       <C>           <C>           <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Revenues........................................  $    389    $  3,415    $    989      $  6,990    $  2,426    $ 19,793
  Operating expenses..............................    14,797      24,543       7,966        34,434      16,576      58,125
                                                    --------    --------    --------      --------    --------    --------
  Income (loss) from operations...................   (14,408)    (21,128)     (6,977)      (27,444)    (14,150)    (38,333)
  Interest and other income.......................       218       4,410         777         2,757       3,632       1,078
  Interest and other expense......................      (170)    (10,477)     (2,835)      (10,390)     (7,642)    (12,421)
  Debt conversion expense.........................      (385)         --          --            --          --          --
                                                    --------    --------    --------      --------    --------    --------
  Net income (loss) before minority interest......   (14,746)    (27,195)     (9,035)      (35,077)    (18,160)    (49,676)
  Minority interest(1)............................        48         413         156           160         257          --
                                                    --------    --------    --------      --------    --------    --------
  Net income (loss)...............................   (14,698)    (26,782)     (8,879)      (34,917)    (17,903)    (49,676)
  Preferred stock dividends and accretion.........    (1,071)     (3,871)     (1,854)       (2,003)     (2,017)     (1,095)
                                                    --------    --------    --------      --------    --------    --------
  Net income (loss) to common stockholders........  $(15,769)   $(30,653)   $(10,734)     $(36,920)   $(19,920)   $(50,770)
                                                    ========    ========    ========      ========    ========    ========
  Net income (loss) per common share..............  $  (3.30)   $  (4.96)   $  (1.82)     $  (5.48)   $  (3.03)   $  (2.82)
                                                    ========    ========    ========      ========    ========    ========
  Weighted average shares outstanding.............     4,772       6,185       5,901         6,734       6,572      17,994
OTHER DATA:
  Deficiency in earnings to cover fixed
    charges(2)....................................   (15,282)    (30,246)     (9,796)      (37,345)    (20,448)    (51,207)
  EBITDA(3).......................................  $ (7,443)   $(14,901)   $ (4,855)     $(21,822)   $(10,046)   $(28,052)
  Depreciation and amortization...................       498       3,078         763         4,911       2,316       9,456
  Capital expenditures............................    15,303      60,856      17,657        64,574      43,199      73,213
BALANCE SHEET DATA (END OF PERIOD):
  Cash and cash equivalents.......................  $ 20,351    $134,116    $ 57,348      $ 78,618    $134,116    $  8,499
  Total assets....................................    37,627     223,600     147,935       230,038     223,600     243,381
  Long-term liabilities...........................     4,723     189,072     110,176       216,484     189,072     224,562
  Redeemable stock, options and warrants..........     2,931       2,155       2,660         2,000       2,155       2,000
  Stockholders' equity (deficit)..................    22,141       8,982      26,308       (27,038)      8,982     (18,226)
</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) For purposes of computing this amount earnings (loss) consists of earnings
    (loss) before minority interest and fixed charges. Fixed charges consists of
    interest expense (including amortization of debt issuance costs) and
    one-third of rent expense which is deemed to be representative of interest
    expense.
 
(3) 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, $1.2 million and
    $550,000 in the six months ended December 31, 1995 and fiscal period ended
    December 31, 1996, respectively and $1.5 million and $820,000 in the six
    months ended June 30, 1996 and 1997, respectively. See Note 6 of "Notes to
    Consolidated Financial Statements."
 
                                       25
<PAGE>   31
 
                    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-sized metropolitan markets in
the southern United States. The Company is a rapidly growing CLEC, supplying
businesses with advanced telecommunications services on its digital SONET-based
fiber optic local networks and through resale of incumbent local exchange
carrier services. To date, the Company has derived the majority 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, the Company introduced local
switched voice services in two of its markets and began offering local switched
voice services in two additional markets using its own facilities before 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 June 30, 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,
primarily 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.
 
     As of June 30, 1997, the Company had 31 operational local networks. In an
attempt to improve financial performance and conserve capital, the Company is
reassessing the optimum number of local networks needed to achieve its
objectives.
 
     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. As of June 30, 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. The Company has long-term operating leases
for 9 voice and 40 data switches totaling $20.8 million at interest rates
ranging from 7% to 11% over terms ranging from 3 to 7 years, with annual
payments increasing over the term of each lease, and is currently negotiating
long-term operating leases for an additional 8 voice and 20 data switches
totalling $19 million with interest rates and payment structures similar to the
existing operating leases.
 
     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
 
                                       26
<PAGE>   32
 
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 similar services. The Company began 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 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 throughout the markets it serves.
 
     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 DS-3 bandwidth, enabling the transparent migration of longhaul circuits
to DS-3 capacity as needed. Ultimately, the platform technology is capable of
upgrading the backbone to higher bandwidths 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 services are introduced and until
networks providing those services reach operating cash flow breakeven.
 
CAPITAL EXPENDITURES; OPERATING CASH FLOW
 
     As of June 30, 1997, the Company was operating 31 digital fiber optic
networks. The costs associated with the initial construction and operation of a
network may vary greatly, primarily due to market variations in geographic and
demographic characteristics, 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 fiber optic backbone and installation of related
network transmission equipment for dedicated services for each market will
generally cost between $3.5 million and $6.0 million depending on the size of
the market served. Including planned expansion routes, total capital
expenditures per network are estimated to average $6.0 million. In addition to
capital expenditure requirements, the Company incurs sales and marketing
(including sales commissions) and operating expenses and other expenses such as
property taxes and, in certain markets, franchise fees. Prior to the completion
of network construction, certain of these expenses, to the extent they are
related to pre-service construction, are capitalized. These additional
capitalized expenses, estimated by
 
                                       27
<PAGE>   33
 
management to be between approximately $500,000 and $1.0 million per network,
are amortized over the anticipated life of the network. These costs vary
depending on the size of the market, the length of time required to build-out
the network and the rate of growth of the customer base.
 
     As the Company develops, introduces and rolls out its high-speed data,
enhanced voice messaging and local switched services in each of its target
markets, additional capital expenditures and net operating costs will be
incurred. The amount of these costs will vary, based on the number of customers
served and the actual services provided to the customers.
 
     Although as of June 30, 1997, the Company was generating revenues from 31
of its fiber optic networks, on a consolidated basis, it is still incurring
negative cash flows due, in part, to the funding requirements for the networks
the Company has under construction or development and, to the roll-out of its
new data and switched voice services. The Company expects it will continue to
incur a negative cash flow for at least two years. The Company anticipates that
without an infusion of additional cash following the Private Placement, it will
exhaust its cash resources at the end of the fourth quarter of 1998.
 
RESULTS OF OPERATIONS
 
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1996.
 
  Revenues
 
     The Company recorded revenues of $11.6 million for the three month period
ended June 30, 1997 and revenues of $19.8 million for the six month period ended
June 30, 1997. This compares to revenues of $1.6 million for the three month
period ended June 30, 1996 and revenues of $2.4 million for the six month period
ended June 30, 1996. Although substantially all of the revenues in the 1996
periods were derived from the provision of dedicated services, revenues in the
1997 periods were derived primarily from significant growth in dedicated
services, plus the addition of data services, Internet services and local
switched voice services.
 
OTHER NETWORK INFORMATION IS AS FOLLOWS:
 
<TABLE>
<CAPTION>
                                      NETWORK     NETWORK                      VOICE
                                       ROUTE       FIBER      BUILDINGS        GRADE        FULL TIME
        AS OF THE PERIOD ENDED:        MILES       MILES      CONNECTED     EQUIVALENTS     EMPLOYEES
    --------------------------------  -------     -------     ---------     -----------     ---------
    <S>                               <C>         <C>         <C>           <C>             <C>
    March 31, 1996..................    200        9,466          133         125,208          142
    June 30, 1996...................    386       28,476          216         137,431          199
    March 31, 1997..................    908       75,867          858         554,883          502
    June 30, 1997...................    957       82,693        1,083         886,375          559
</TABLE>
 
     The terms "Voice Grade Equivalents ('VGEs')" or "Voice Grade Equivalent
Circuits" are commonly used measures of telephone service equivalent to one
telephone line (64 kilobits of bandwidth) actually billed to a customer.
 
  Total Operating Expenses
 
     Network development and operating expenses for the three month period ended
June 30, 1997 increased to $9.4 million from $0.4 million in the three month
period ended June 30, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
increased to $3.3 million in the quarter ended June 30, 1997, from approximately
$0.3 million in the quarter ended June 30, 1996. Other operating expenses
related to the development of prospective new markets, which include expenses
such as contract labor and legal expenses, travel expenses, rent, utilities,
charges and taxes increased to $6.0 million in the quarter ended June 30, 1997
from approximately $0.1 million in the quarter ended June 30, 1996.
 
     For the six month period ended June 30, 1997, total network development and
operating expenses increased to $18.0 million from $2.3 million in the six month
period ended June 30, 1996, reflecting significant increases in personnel,
network development and non-payroll operating expenses. Related personnel costs
 
                                       28
<PAGE>   34
 
increased to $6.5 million in the six month period ended June 30, 1997, from
approximately $3.0 million in the same period in 1996. Other operating expenses,
which include expenses such as contract labor and legal expenses, travel
expenses, rent, utilities, charges and taxes increased to $11.5 million in the
six month period ended June 30, 1997 from approximately ($0.7) million in the
six month period ended June 30, 1996.
 
     In the three month period ended June 30, 1997, selling, general and
administrative expenses increased to $15.9 million from $7.7 million in the
three month period ended June 30, 1996. Related personnel costs increased to
$6.7 million in the quarter ended June 30, 1997 from $1.8 million in the quarter
ended June 30, 1996, and corresponding operating costs increased to $9.2 million
in the quarter ended June 30, 1997 from $5.9 million in the quarter ended June
30, 1996. This increase reflected costs associated with the Company's efforts to
expand significantly its national and local city sales and its 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.
 
     In the six month period ended June 30, 1997, selling, general and
administrative expenses increased to $29.8 million from $10.4 million in the six
month period ended June 30, 1996. Related personnel costs increased to $12.1
million in the six month period ended June 30, 1997 from $1.7 million in the six
month period ended June 30, 1996, and corresponding operating costs increased to
$17.7 million in the six month period ended June 30, 1997 from $8.7 million in
the six month period ended June 30, 1996.
 
     Depreciation and amortization expenses increased to $5.3 million in the
three month period ended June 30, 1997 from $1.7 million in the three month
period ended June 30, 1996 and increased to $9.5 million in the six month period
ended June 30, 1997 from $2.3 million in the six month period ended June 30,
1996. As of June 30, 1997, the Company increased its capital assets to $219.9
million, from $144.4 million at December 31, 1996 and from $80.1 million as of
June 30, 1996. Non-cash stock compensation expense increased to $0.6 million for
the quarter ended June 30, 1997 from ($0.5 million) for the quarter ended June
30, 1996. For the six month period ended June 30, 1997, non-cash compensation
expense decreased to $0.8 million from $1.5 million for the same period in 1996.
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 both 1996 and 1995 but, at the end of fiscal 1995, the
Company renegotiated contracts with certain of its officers, establishing a
limit of $2,500,000 on the Company's "put right" obligations with respect to
those contracts. During the fiscal period ended December 31, 1996, the limit was
further reduced to $2,000,000.
 
  Interest and Other Expenses
 
     Interest and other income decreased to $0.2 million and $1.1 million for
the three and six month periods ended June 30, 1997, respectively from $3.0
million and $3.6 million in the three and six month periods ended June 30, 1996,
respectively. Interest and other expense increased to $6.3 million and $12.4
million in the quarter and six month period ended June 30, 1997, respectively
from $4.2 million and $7.6 million in the quarter and six month period ended
June 30, 1996, respectively. The decrease in interest and other income reflects
the decrease in available funds from the Company's sale of its 9% Series B
Preferred Stock, the 2005 Notes and the 2006 Notes. 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 began
in the first quarter 1997. Payments of interest on the 2005 Notes will not begin
until May 2001 and payments of interest on the 2006 Notes will not begin until
October 2001.
 
                                       29
<PAGE>   35
 
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
                                    IN         ROUTE      FIBER     BUILDINGS        GRADE        FULL TIME
    AS OF THE PERIOD 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>
 
  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 $549,645 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
 
                                       30
<PAGE>   36
 
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.
 
     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 accounted 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.
 
                                       31
<PAGE>   37
 
  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 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 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 2005 Warrants from which the Company received approximately
$96.1 million in net proceeds. The 2005 Notes will accrue 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 accrue 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. On April 15, 1997, the Company completed the April
Offering. The Company completed the sale of an additional 660,000 shares on May
14, 1997 upon exercise of the underwriters' over-allotment option. The Company
received net proceeds of approximately $40.0 million from the sale of these
8,660,000 shares. On July 10, 1997, the Company completed the Unit Offering from
which the Company received net proceeds of approximately $67 million. The
Company used a portion of these funds to pay ordinary course trade accounts
payable that were more than 60 days overdue, thereby curing an Event of Default
under each of the Existing Indentures and intends to continue to use the
remaining funds towards the expansion and construction of local fiber optic
networks, the further expansion and introduction of services and to fund
negative operating cash flow.
 
     In addition, the Company in the past has considered and expects to continue
to consider potential acquisitions or other strategic arrangements that may fit
the Company's strategic plan. Although the Company has had discussions
concerning such potential acquisitions or arrangements, to date, no agreements
have been reached with regard to any particular transaction. Any such
acquisitions or strategic arrangements that the Company might consider are
likely to require additional equity or debt financing, which the Company will
seek to obtain as required. 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 at all, will be available on a
timely basis or on terms that are acceptable to the Company.
 
     Management anticipates that the Company's current cash resources from the
Unit Offering and the Private Placement will be sufficient to fund the Company's
continuing negative cash flow and capital expenditures required through the
fourth quarter of 1998. Without an infusion of additional cash, the Company will
exhaust its cash resources at the end of the fourth quarter of 1998. To meet its
additional
 
                                       32
<PAGE>   38
 
remaining capital requirements and to successfully implement its growth
strategy, ACSI will be required to sell additional equity securities, increase
its existing credit facility, enter into 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 was converted into 7,466,560 shares of Common Stock simultaneous with the
completion of the April 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 was converted into an aggregate of 9,910,704 shares of
Common Stock simultaneous with the completion of the April Offering.
 
     In connection with the Unit Offering the Company issued the Preferred
Stock. Dividends on the Preferred Stock accrue from the date of issuance, are
cumulative and are payable quarterly in arrears commencing September 30, 1997,
at a rate per annum of 14 3/4% of the liquidation preference per share.
Dividends on the Preferred Stock will be paid, at the Company's option, either
in cash or by the issuance of additional shares of Preferred Stock; provided,
however, that after June 30, 2002, to the extent and for so long as the Company
is not precluded from paying cash dividends on the Preferred Stock by the terms
of any then outstanding indebtedness or any other agreement or instrument to
which the Company is then subject, the Company shall pay dividends on the
Preferred Stock in cash.
 
     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 June 30, 1997, an
aggregate of $31.2 million had been borrowed under these agreements. Principal
amounts payable on the AT&T Credit Facility during 1997 are approximately
$872,000.
 
     The Company has entered into negotiations with AT&T Capital Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into one loan agreement to be entered into with the Company, and to be secured
by the existing assets of the Company (including the stock, but not the assets,
of certain of the Company's subsidiaries) (the "New AT&T Facility"). The Company
expects the New AT&T Facility to otherwise be on terms substantially similar to
those of the existing AT&T Credit Facility. The maximum aggregate amount of
credit available under the proposed New AT&T Facility will not exceed $35
 
                                       33
<PAGE>   39
 
million, which is the maximum amount of credit the Company is allowed to borrow
in its Secured Credit Facility (as defined in the Existing Indentures and in the
Indenture (as defined herein) with respect to the Notes). On June 26, 1997, each
of the Company's Subsidiaries that are parties to the AT&T Credit Facility
entered into an agreement with AT&T Credit Corporation to waive, for a period of
90 business days commencing on the date thereof, compliance by such subsidiaries
with certain covenants contained therein. Such covenants are not expected to be
included in the New AT&T Facility.
 
     On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not permitted under each of
the Indentures and, therefore, constituted an Event of Default (as defined in
the Existing Indentures) under each Existing Indenture. The Company used a
portion of the proceeds of the Unit Offering to pay in full all ordinary course
trade accounts payable that were more than 60 days overdue to cure such Event of
Default.
 
EFFECTS OF NEW ACCOUNTING STANDARDS
 
     During early 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Accounting for EPS, which will become effective December 15, 1997,
and will thereafter require the Company to disclose basic earnings (loss) per
share in addition to the common stock equivalent disclosure information already
required. Early adoption of SFAS No. 128 is not permitted.
 
     While the Company does not know precisely the impact of adopting SFAS No.
128, the Company does not expect that the adoption of SFAS No. 128 will have a
material effect on the Company's consolidated financial statements.
 
                                       34
<PAGE>   40
 
                                    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 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.
 
                                       35
<PAGE>   41
 
     - 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 a full service alternative to the ILEC
for business, government and institutional end-users in its markets by offering
superior products with excellent customer service at competitive prices. In
order to achieve this objective, the Company seeks to:
 
     - Leverage Existing Infrastructure.  The Company believes that its
       integrated telecommunications networks, both its local fiber networks and
       ACSINet, are capable of providing a broad range of voice and data
       communications services to its customers. The Company is focusing its
       efforts on improving penetration in the markets it already serves by
       continuing to offer additional services. The Company believes that
       providing switched local voice services permits it to increase the
       traffic and revenue associated with its networks. As a further example,
       the Company has filed for requisite state and federal authority to offer
       calling-card, teleconferencing and other long distance services. In
       markets in which it does have operational networks, the Company's
       decision to pursue a resale strategy would position the Company as a
       full-service provider, capable of providing its customers with a
       one-stop-shopping alternative to the ILEC. In markets in which it does
       not currently have an operational network, this resale strategy positions
       the Company to eventually construct networks in those markets, which
       networks would benefit immediately from an existing customer base.
 
     - Develop Direct and Indirect Sales Channels to Commercial End-Users.  The
       Company has divided its sales and marketing efforts into three different
       channels: direct sales to end-users, sales to IXCs and ISPs and sales of
       private-label services through alternative distribution channels.
 
       Direct Sales.  The Company's local sales force continues to focus on the
       commercial end-users in each of the markets it serves. The Company
       believes that its 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's
       major account sales force targets large national accounts. As of June 30,
       1997, the Company's sales force in this area was made up of 153 sales
       people, which represents an increase of 98 sales people since December
       31, 1996, and is expected to increase to 210 sales people by the end of
       1997.
 
       Sales to IXCs and ISPs.  The Company sells dedicated services to long
       distance carriers and ISPs who use the Company's products and services to
       provide local access for their own products. For example, the Company
       recently entered into an agreement with MCImetro in which, subject to
       certain conditions, MCI has agreed to name ACSI as its preferred local
       provider for dedicated and transport services in 21 ACSI markets for at
       least a five-year period. See "Recent Developments".
 
                                       36
<PAGE>   42
 
       Sales Through Alternative Distribution Channels.  As of August 22, 1997,
       the Company currently had executed 66 sales agency agreements and is
       actively recruiting additional telecommunications sales agents to market
       the Company's services. In addition, the Company intends to expand
       distribution of its services by contracting with IXCs, utilities, CATVs,
       RBOCs, other 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 the support of sales through these and other
       alternative distribution channels.
 
     - Market the Company's Services Under the ACSI Brand Name.  The Company is
       establishing the ACSI brand name by marketing and packaging its broad
       array of communications services directly to end-users. In markets in
       which it has local networks established, both switched services and data
       services are marketed under the ACSI brand name; in markets in which the
       Company has no network installed, it resells local switched services
       under the ACSI brand name. In both types of markets, the Company also
       pursues opportunities to bundle its services together to strengthen the
       ACSI identity as a full-service provider of telecommunications services.
 
     - Provide Superior Customer Service.  The Company is developing and
       implementing an integrated customer care strategy that is intended to
       provide a heightened level of responsive customer service across its full
       range of existing and planned products and services. This strategy
       comprises infrastructure, training, performance monitoring and
       image/brand recognition and will serve to leverage the Company's
       operational support systems, other information/financial systems and
       customer care organizations. The Company has made significant capital
       investments in its integrated network management platform which monitors
       and manages all voice and data network elements. The Company expects to
       have completed customer care and billing systems by the end of 1998,
       which are intended to improve the Company's provision of integrated
       customer service on a cost efficient basis. These and other quality
       management and improvement programs, when implemented, are expected to
       enable the Company to differentiate itself in the marketplace by
       providing a level of customer care and customer service that is of a
       higher quality than that which is available in today's market.
 
     - Expand Resale of Exchange Local Voice Services.  Management believes that
       the Company can successfully enter new markets with lower capital
       investment by acting as a reseller of either local switched voice or data
       services. This strategy is intended to allow the Company to build brand
       name awareness and develop a customer base without incurring the initial
       capital costs typically incurred by facilities-based entrants. This
       strategy also enables the Company to make capital decisions based on
       where its customers are most highly concentrated. Once the Company has
       established a customer base, the Company plans to invest in extending its
       network infrastructure in those markets that it already serves.
 
     - Accelerate Financial Return on Incremental Expenditures.  The Company is
       pursuing opportunities that accelerate the return on the Company's
       invested capital. The Company believes that it will achieve an earlier
       return on its investment by focusing on new customer application in
       existing markets rather than continuing to increase the number of new
       networks built. For this reason, the Company has modified its earlier
       goal of constructing 50 local networks by the end of 1998, is now
       evaluating in which additional markets it will construct local networks
       and is establishing a presence in additional markets through resale of
       switched services and data POPs. The Company plans to redeploy into
       customer applications in existing markets the capital that was scheduled
       to be used to develop those additional networks. While management
       continues to believe in the long-term return on capital afforded by the
       constructed networks, it believes that the investment in customer
       applications will have a more immediate return. As part of this strategy,
       the Company has also implemented a shift in its incentive-based
       compensation for a number of its key executives, toward revenue and
       EBITDA and away from new network development and growth.
 
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
 
                                       37
<PAGE>   43
 
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 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 August 22, 1997, the Company is
offering local switched voice services using its own facilities in Columbus,
Georgia; Montgomery, Alabama; Birmingham, Alabama; Ft. Worth, Texas; Louisville,
Kentucky; Little Rock, Arkansas; Albuquerque, New Mexico; Tucson, Arizona; and
New Orleans, Louisiana. In April 1997, the Company began providing local
switched services on a resale basis in 15 markets. As of August 22, the Company
is offering local switched services on a resale basis in 31 markets and plans to
expand further the number of markets in which it is reselling local switched
services throughout 1997 and the first quarter of 1998. As an adjunct to its
local switched services, the Company anticipates providing calling card and
other interLATA services by the fourth quarter of 1997.
 
     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.
 
     During the first quarter of 1997, the Company began 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. 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
 
                                       38
<PAGE>   44
 
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.
 
     - 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, video-conferencing 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
 
                                       39
<PAGE>   45
 
       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.
 
     - 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 indefeasible rights of use),
       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
 
                                       40
<PAGE>   46
 
(typically by trenching or directional boring) where third party facilities
(whether aerial or underground) do not exist or are not available for use by the
Company. The Company also constructs lateral network facilities from its fiber
      optic backbone to provide on-network service to its customers. In some
      instances, the Company will design and construct some or substantially all
      of its routes outside the central business district 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 leased
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.
 
     The Company is implementing local switched services through a combination
of facilities-based services and resale of ILEC services. As of August 22, 1997,
the Company has installed central office switching facilities in Columbus,
Georgia; Montgomery, Alabama; Birmingham, Alabama; Ft. Worth, Texas; Louisville,
Kentucky; Little Rock, Arkansas; Albuquerque, New Mexico; Tucson, Arizona; and
New Orleans, Louisiana. The Company expects to have switches installed in a
total of 16 markets by December 1997. Toward this end, the Company had long-term
lease commitments for nine initial switches as of June 30, 1997. As of August
22, 1997, the Company is offering local switched services on a resale basis in
31 markets and plans to expand further the number of markets in which it is
reselling local switched services throughout 1997 and the first quarter of 1998.
 
     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."
 
                                       41
<PAGE>   47
 
     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 IXCs 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, it is believed 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 believed 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 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.
 
                                       42
<PAGE>   48
 
     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.
 
     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 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.
 
                                       43
<PAGE>   49
 
REGULATION
 
  Overview
 
     The Company's services are subject to federal, state and local regulation.
The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate or terminate interstate or international communications.
State regulatory commissions retain jurisdiction over the Company's facilities
and services to the extent they are used to originate or terminate intrastate
communications. Local governments may require the Company to obtain licenses or
franchises regulating use of public rights-of-way necessary to install and
operate its networks.
 
  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 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 RBOCs' 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.
 
     Two RBOCs, Ameritech and Southwestern Bell ("SBC"), have filed applications
with the FCC for authority to provide in-region interLATA service. Both
applications have been denied by the FCC. Other RBOCs have begun the process to
provide in-region interLATA service by filing with state commissions
 
                                       44
<PAGE>   50
 
notice of their intent to file at the FCC. In addition, on July 2, 1997, SBC
filed suit in U.S. District Court in Wichita Falls, Texas challenging the
constitutionality of the provision of the Telecommunications Act governing RBOC
entry into in-region long distance markets.
 
     FCC Rules Implementing the Local Competition Provisions of the Federal
Telecommunications Act. On August 8, 1996, the FCC released a First Report and
Order, a Second Report and Order and a 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.
 
     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.
 
     - Pricing Methodologies.  New entrants were 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. However, as discussed
       below, these rules were first stayed, and later vacated, by the U.S.
       Court of Appeals for the Eighth Circuit.
 
     - Access Charges for Unbundled Switching and Access Charge Reform.  IXCs
       which order unbundled switching elements temporarily were 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. However, a series of access
       charge reforms were announced by the FCC on May 7, 1997. 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 were required
       to identify which marketing, billing, collection and other costs will be
       avoided or that are avoidable by ILECs when they provide services on a
       wholesale basis and to calculate the portion of the retail rates for
       those services that is attributable to the avoided and avoidable costs.
       However, as discussed below,
 
                                       45
<PAGE>   51
 
       the specific federal pricing requirements were stayed, and later vacated,
       by the U.S. Court of Appeals for the Eighth Circuit.
 
     - Transport and Termination Charges.  The FCC rules required that 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. However, as discussed below, the
       FCC's pricing and costing rules were first stayed, and later vacated, by
       the U.S. Court of Appeals for the Eighth Circuit.
 
     - Access to Rights-of-Way.  The FCC established procedures and guidelines
       designed to facilitate the negotiation and mutual provision of
       nondiscriminatory access by telecommunications carriers and utilities to
       their poles, ducts, conduits, and rights-of-way. 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 of its mandatory contribution, but
       the Company believes that it will likely be a significant expenditure. On
       May 8, 1997, the FCC released an order implementing these requirements by
       reforming its existing access charge and universal service rules. See
       "-- Other Regulation -- Universal Service Reform" below.
 
     Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the U.S. Court of Appeals for the
Eighth Circuit (captioned Iowa Utilities Board v. FCC). The Court of Appeals
thereupon stayed the effectiveness of most of the pricing and costing provisions
of FCC rules adopted in the Interconnection Orders. On July 18, 1997, the Court
of Appeals released its decision regarding issues raised in the consolidated
appeals of the Interconnection Orders. A non-exclusive list of decisions
rendered include that:
 
     - The FCC exceeded its jurisdiction in establishing rules governing the
       prices that ILECs may charge competitors for interconnection, unbundled
       access and resale. The Court ruled that the authority to establish prices
       for local communications facilities and services is reserved to the
       States and, thus, vacated the FCC's pricing rules (except as they apply
       to CMRS providers).
 
     - The FCC's "pick and choose" rule, which allows competitors to select
       terms of previously approved interconnection agreements for their own
       use, conflicts with the purposes of the Federal Telecommunications Act,
       and also was vacated.
 
     - The FCC lacks authority to hear formal complaints which involve the
       review and/or enforcement of certain terms of local interconnection
       agreements approved by State commissions.
 
     - The FCC lacks authority to require interconnection agreements which were
       negotiated before the enactment of the Federal Telecommunications Act to
       be submitted for State commission approval.
 
     - The FCC may not adopt a blanket requirement that State interconnection
       rules must be consistent with the FCC's regulations.
 
     - The FCC correctly concluded that ILEC operations support systems,
       operator services and vertical switching features qualify as network
       elements that are subject to the unbundling requirements of the Federal
       Telecommunications Act.
 
     - The FCC's definition of "technically feasible" was upheld for purposes of
       deciding where ILECs must permit interconnection by competitors, but the
       FCC's use of this term to determine what elements must be unbundled was
       rejected.
 
     - The FCC erred in deciding that ILECs could be required by competitors to
       provide interconnection and unbundled network elements at levels of
       quality which exceed those levels at which ILECs provide such services to
       themselves.
 
     - The FCC cannot require ILECs to recombine network elements for
       competitors, but competitors may recombine such network elements
       themselves as necessary to provide telecommunications services.
 
                                       46
<PAGE>   52
 
     - Claims that the unbundling rules effected an unconstitutional taking were
       not decided because they were either raised by parties which lacked
       standing or were not ripe for review.
 
     - FCC rules and policies regarding the ILECs' duty to provide for physical
       collocation of equipment were upheld.
 
     - The FCC's rules requiring ILECs to allow the resale of promotional prices
       lasting more than 90 days were upheld.
 
The Interconnection Decisions, and resulting local interconnection rules, were
vacated in part consistent with these decisions. A companion appeal (captioned
Competitive Telecommunications Association v. FCC) was decided on June 27, 1997.
In the latter case, the court upheld the FCC's decision that the term
"interconnection" as used in the Federal Telecommunications Act relates to
physical access, and does not include transmission and routing services as well.
The Company expects that parties will seek rehearing of the panel decisions by
the full Eighth Circuit, or seek review of the appellate decisions by the U.S.
Supreme Court. The Company cannot predict whether the Eighth Circuit decisions
will stand, or what actions the FCC may or may not take in response to these
appellate decisions. Notably, the FCC recently made the use of forward looking,
economic costs for the pricing of local interconnection, transport and
termination and unbundled network elements, a temporary condition of its
approval of the merger of Bell Atlantic and NYNEX. Similarly, the FCC indicated
in its denial of Ameritech's application for in-region long distance authority
that an RBOC's use of such forward looking, economic costs is relevant to the
issue of whether it has satisfied the conditions necessary for approval of such
an application.
 
     Other Regulation.  In general, the FCC has a policy of encouraging the
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 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. However, the FCC's
       interexchange de-tariffing order was stayed by the U.S. Court of Appeals
       for D.C. on February 13, 1997. In addition, tariffs are still required to
       be filed for international services. On June 19, 1997, the FCC issued an
       order granting petitions filed by Hyperion and Time-Warner to provide
       CLECs the option to cease filing tariffs for interstate interexchange
       access tariffs and has proposed to make the withdrawal of CLEC access
       service tariffs mandatory. However, 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.
 
       Pursuant to these FCC requirements, the Company has filed and maintains
       tariffs for its interstate services with the FCC. All of the interstate
       access and 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.
       The Company has not yet decided whether it will elect to cease filing
       interstate interexchange access tariffs.
 
       Nondomestic carriers such as the Company also are required to obtain FCC
       authorization pursuant to Section 214 of the Communications Act before
       providing international communications services. The Company recently
       applied to the FCC for authority to provide voice and data communications
       services between the United States and all foreign points.
 
     - ILEC Price Cap Regulation Reform.  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
 
                                       47
<PAGE>   53
 
       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. On May 7, 1997, the FCC took further action
       in its CC Docket No. 94-1 updating and reforming its price cap plan for
       incumbent LECs. The changes require price cap LECs to reduce their price
       cap indices by 6.5 percent annually, less an adjustment for inflation.
       The FCC also eliminated rules that require incumbent LECs earning more
       than certain specified rates of return to "share" portions of the excess
       with their access customers during the next year in the form of lower
       access rates. These actions could have a significant impact on the
       interstate access prices charged by the ILECs with which the Company
       competes.
 
     - 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. On May 7, 1997, the FCC took action in its CC
       Docket No. 96-262 to reform the current interstate access charge system.
       The FCC adopted an order which makes various reforms to the existing rate
       structure for interstate access that are designed to move access charges,
       over time, to more economically efficient rate levels and structures. The
       following is a nonexclusive list of actions announced by the FCC:
 
       Subscriber Line Charge ("SLC").  The maximum permitted amount which an
       incumbent may charge for SLC's on certain lines was increased.
       Specifically, the ceiling was increased significantly for second and
       additional residential lines, and for multi-line business customers. SLC
       ceiling increases will begin in July 1997 and be phased-in over a
       two-year period.
 
       Presubscribed Interchange Carrier Charge ("PICC").  The FCC created a new
       PICC access charge rate element. The PICC is a flat-rated, per-line
       charge that is recovered by LECs from IXCs. The charge is designed to
       recover common line revenues not recovered through SLCs. Effective
       January 1, 1998, the maximum permitted PICC charge will be $0.53 per
       month for primary residential lines and $1.50 per month for second and
       additional residential lines. The initial maximum PICC for multi-line
       business will be $2.75. The ceilings will be permitted to increase over
       time.
 
       Carrier Common Line Charge ("CCL").  As the ceilings on the SLCs and
       PICCs increase, the per-minute CCL charge will be eliminated. Until then,
       the CCL will be assessed on originating minutes of use. Thus, incumbent
       LECs will charge lower rates for terminating then originating access. In
       addition, Long Term Support ("LTS") payments for universal service will
       be eliminated from the CCL charge.
 
       Local Switching.  Effective January 1, 1998, incumbent LECs subject to
       price-cap regulation will be required to move non-traffic-sensitive
       ("NTS") costs of local switching associated with line ports to common
       line and recover them through the common line charge discussed above.
       Local switching costs attributable to dedicated trunk ports must be moved
       to the trunking basket and recovered through flat-rate monthly charges.
 
                                       48
<PAGE>   54
 
       Transport.  The "unitary" rate structure option for tandem-switched
       transport will be eliminated effective July 1, 1998. For price cap LECs,
       additional rate structure charges will become effective on January 1,
       1998, which will alter the recovery of certain NTS costs of
       tandem-switching and multiplexing and the minutes-of-use assumption
       employed to determine tandem-switched transport prices. Also effective
       January 1, 1998, certain costs currently recovered through Transport
       Interconnection Charge ("TIC") will be reassigned to specified facilities
       charges. The reassignment of tandem costs currently recovered through the
       TIC to the tandem switching charge will be phased in evenly over a
       three-year period. Residual TIC charges will be recovered in part through
       the PICC, and price cap reductions will be targeted at the per-minute
       residual TIC until it is eliminated.
 
       In other actions, the FCC clarified that incumbent LECs may not assess
       interstate access charges on the purchasers of unbundled network elements
       or information services providers (including ISPs). Further regulatory
       actions affecting ISPs are being considered in a notice of inquiry
       released December 24, 1996. The FCC also decided not to adopt any
       regulations governing the provision of terminating access by CLECs. ILECs
       also were ordered to adjust their access charge rate levels to reflect
       contributions to and receipts from the new universal service funding
       mechanisms.
 
       The FCC also announced that it will, in a subsequent Report and Order to
       be issued during summer 1997, provide detailed rules for implementing a
       market-based approach to further access charge reform. That process will
       give incumbent LECs progressively greater flexibility in setting rates as
       competition develops, gradually replacing regulation with competition as
       the primary means of setting prices. The FCC also adopted a "prescriptive
       safeguard" to bring access rates to competitive levels in the absence of
       competition. For all services then still subject to price caps and not
       deregulated in response to competition, the FCC required incumbent LECs
       subject to price caps to file Total Service Long Run Incremental Cost
       ("TSLRIC") costs studies no later than February 8, 2001.
 
     This series of decisions is likely to have a significant impact on the
operations, expenses, pricing and revenue of the Company. On June 18, 1997, the
FCC denied petitions filed by several ILECs asking the FCC to stay the
effectiveness of its access charge reform decision. The access charge order has
been appealed and could be set aside or revised.
 
     Universal Service Reform.  On May 8, 1997, the FCC released an order in its
CC Docket No. 96-45, which reforms the current system of intrastate universal
service support and implements the universal services provisions of the Federal
Telecommunications Act. The FCC established a set of policies and rules that
ensure that low-income consumers and consumers that live in rural, insular and
high cost areas received a defined set of local telecommunications services at
affordable rates. This is accomplished in part through expansion of direct
consumers subsidy programs and in part by ensuring that rural, small and high
cost LECs continue to receive universal service subsidy support. The FCC also
created new programs to subsidize connection of eligible schools, libraries and
rural health care providers to telecommunications networks. These programs will
be funded by assessment of eligible revenues of nearly all providers of
intrastate telecommunications carriers, including competitive LECs such as the
Company.
 
     The Company, like other telecommunications carriers that provide intrastate
telecommunications services, will be required to contribute a portion of its
end-user telecommunications revenues to fund universal service programs.
However, the Company also is eligible to qualify as a recipient of universal
service support if it elects to service areas designated for universal service
support over its own network. The eligibility criteria established by the FCC
provide that carriers must be a common carrier, and offer and advertise,
throughout a designated service area, all of the services supported by universal
service subsidies. Such carriers must provide the support services, at least in
part, over their own facilities or through use of unbundled network elements
purchased from incumbent LECs. The FCC's decisions in CC Docket No. 96-45 could
have a significant impact on future operations of the Company.
 
  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
 
                                       49
<PAGE>   55
 
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.
 
     Some states in which the Company operates are considering legislation which
could impede efforts by new entrants in the local services market to compete
effectively with ILECs. The Arkansas legislature, for example, recently enacted
legislation which curtails the ability of the state PSC to make available
additional network elements to CLECs or authorize CLECs to receive universal
service funding. On March 25, 1997, the Company filed a petition for Declaratory
Ruling with the FCC asking it to preempt portions of the Arkansas statute.
 
     As of June 30, 1997 the Company had obtained intrastate authority for the
provision of dedicated services and a full range of local switched services in
Alabama, Arizona, Arkansas, Colorado, the District of Columbia, Florida,
Georgia, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, New
Mexico, Oklahoma, South Carolina, Tennessee, Texas and Virginia. In addition,
the Company is seeking PSC certification to provide interLATA services in these
and other states. There can be no assurances that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks additional services from the above-named PSCs. See "Risk
Factors -- Rapid Expansion of Operations." In most states, the Company is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate.
 
     The Company believes that, as the degree of intrastate competition
increases, the states will offer the 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. The Company has
negotiated or arbitrated interconnection arrangements with each of the
following: BellSouth (North Carolina, South Carolina, Georgia, Florida, Alabama,
Mississippi, Louisiana, Tennessee and Kentucky), Southwestern Bell (Texas,
Arkansas, Kansas, Missouri and Oklahoma), US West (Arizona, New Mexico and
Colorado), Bell Atlantic (Maryland, Virginia and the District of Columbia), GTE
(Texas, Kentucky and Florida) and Sprint/ Central Telephone (Nevada).
Arbitration decisions involving interconnection arrangements in several states
have been challenged in lawsuits filed in U.S. District Court by the affected
ILECs.
 
     The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
unbundled loop installation have caused the Company to file complaints against
BellSouth with the FCC and Georgia PSC. The Company is considering the
possibility of filing similar actions against other ILECs.
 
     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
 
                                       50
<PAGE>   56
 
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. 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 June 30, 1997, the Company employed a total of 559 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.
 
     ACSI's former Chief Financial Officer, Harry J. D'Andrea, has initiated
litigation against the Company in the Circuit Court of Maryland for Anne Arundel
County. The lawsuit alleges four different counts: breach of contract; breach of
the covenant of good faith and fair dealing; negligent misrepresentation; and
specific performance. D'Andrea seeks damages in excess of $5,000,000, and the
right to exercise options to purchase 100,000 shares of ACSI common stock at
$4.25 per share. The Company received a copy of the Complaint on April 8, 1997.
The Company believes it has meritorious defenses to this complaint and intends
to defend this lawsuit vigorously.
 
     A Houston, Texas based company named "American Communication Services,
Inc." has initiated litigation against the Company, contending that the
Company's use of the "American Communications Services, Inc." name in the State
of Texas has caused confusion and violates Texas law. The Company intends to
litigate the matter vigorously if an out of court resolution cannot be reached.
 
     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.
 
                                       51
<PAGE>   57
 
     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.
 
                                       52
<PAGE>   58
 
                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table sets forth certain information as of the date of this
Offering Memorandum 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
Riley M. Murphy.........................  41      Executive Vice President -- Legal and Regulatory
                                                  Affairs, General Counsel and Secretary
David L. Piazza.........................  42      Chief Financial Officer
George M. Middlemas(1)..................  51      Director
Edwin M. Banks(2).......................  35      Director
Christopher L. Rafferty(1)..............  49      Director
Benjamin P. Giess.......................  34      Director
Olivier L. Trouveroy(1)(2)..............  42      Director
Peter C. Bentz..........................  32      Director
</TABLE>
 
- ---------------
(1) Member of Compensation Committee
(2) 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.
 
     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 interexchange, 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.
 
                                       53
<PAGE>   59
 
     David L. Piazza, Chief Financial Officer, joined the Company on 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 Magellan Health Services, Charter Medical Corporation and ABCO Food Service.
 
     Christopher L. Rafferty, Director, was elected a director of the Company in
October 1994. Mr. Rafferty has been employed by WRH Partners, L.L.C., the
general partner of Huff since June 1994. From January 1993 to February 1994, Mr.
Rafferty was Vice President -- Acquisitions for Windsor Pet Care, Inc., a
venture capital-backed firm focusing on consolidating the pet care services
industry. From October 1990 to January 1993, Mr. Rafferty was a consultant
specializing in merchant banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his consulting business, Mr.
Rafferty was a Managing Director of Chase Manhattan Capital Corporation, the
merchant banking and private equity investment affiliate of Chase Manhattan
Corporation. Mr. Rafferty 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.
 
                                       54
<PAGE>   60
 
     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.
 
     The Board is comprised of seven members who were 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.
 
LIMITATION OF LIABILITY OF DIRECTORS
 
     The Charter provides that a director of the Company will not be personally
liable for monetary damages to the Company or its stockholders for breach of
fiduciary duty as a director, except for liability, (i) for any breach of the
director's duty of loyalty to such corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemption as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
 
     This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of care
by a director. As a result of the inclusion of such a provision, stockholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are otherwise in
violation of their fiduciary duty of care, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to stockholders in any particular
situation, stockholders may not have an effective remedy against a director in
connection with such conduct.
 
INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     The Amended and Restated Certificate of Incorporation and the By-laws
provide that directors and officers of the Company (as well as agents and
employees of the Company at the discretion of the Board) shall, to the fullest
extent authorized by the DGCL or any other applicable laws then in effect, be
indemnified against liabilities arising from their service as directors and
officers. Additionally, the Company has entered into indemnification agreements
with each of its executive officers and directors to reimburse them for certain
liabilities incurred in connection with the performance of their fiduciary
duties. Section 145 of the DGCL empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
 
     Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Delaware Court of Chancery or the court
in which such action was brought shall determine that despite the adjudication
of liability such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.
 
                                       55
<PAGE>   61
 
     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.
 
                                       56
<PAGE>   62
 
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                                           ANNUAL          UNDERLYING       ALL OTHER
         DECEMBER 31, 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     1996      239,583      175,000(3)           --                --           6,187(4)
  of 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
Riley M. Murphy.....................  1996*      91,250           --              --                --              --
  Executive Vice President -- Legal   1996      162,499       81,500(8)       37,004(10)        50,000           3,536(4)
  and Regulatory Affairs, General     1995      150,000       81,500(9)           --           250,001(12)       9,783(4)
  Counsel and Secretary               1994       37,500           --          48,620(11)                            --
Robert H. Ottman(13)................  1996*      90,667           --              --                --              --
  Executive Vice President/Network    1996      170,000       50,000(3)      100,000(10)            --              --
  Services and Technical Support      1995       28,333           --              --           250,000              --
Richard A. Kozak(14)................  1996*     129,167      137,500(3)           --            83,334(15)       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(15)       3,750(4)
  Acting Chief Financial Officer      1994       87,500           --          39,728(5)        899,932              --
George M. Tronsrue, III(16).........  1996*     100,000           --              --                --           2,400(4)
  President and Chief Operating       1996      191,128       54,116(17)          --            50,000           4,800(4)
  Officer -- Strategy and Technology  1995      150,000      135,417(17)      68,800(10)       350,001(12)          --
  Development                         1994       53,827       50,000              --                                --
</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 cash bonus, $81,500 of which was
      paid in January 1997.
  (9) This payment represents the first installment of a $244,500 cash bonus.
 (10) 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.
 (11) Consists of $43,620 received for performing legal services for the Company
      as outside counsel and a $5,000 for relocation expenses.
 (12) 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 Offering.
 (13) Mr. Ottman commenced employment with the Company in May 1995 and his
      employment was terminated in February 1997.
 (14) 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.
 (15) 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
      "Certain Transactions."
 (16) Mr. Tronsrue served as Chief Operating Officer during fiscal year 1996,
      until November when he became President and Chief Operating
      Officer -- Strategy and Technology Development. Effective September 3,
      1997, Mr. Tronsrue resigned from such position. The Company and Mr.
      Tronsrue are negotiating a separation agreement and the Company has agreed
      to extend Mr. Tronsrue's compensation, benefits and loan repayment
      provisions through September 30, 1997, without waiving any rights under
      Mr. Tronsrue's employment agreement.
 (17) Represents an installment of a $244,500 bonus, $54,116 of which is due on
      February 24, 1997.
 
                                       57
<PAGE>   63
 
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.
 
<TABLE>
<CAPTION>
                                            INDIVIDUAL GRANTS(1)
                                  -----------------------------------------
                                  NUMBER OF      % OF TOTAL                     MARKET PRICE
                                  SECURITIES      OPTIONS                       OF UNDERLYING
                                  UNDERLYING     GRANTED TO     EXERCISE OR     SECURITIES ON
                                   OPTIONS       EMPLOYEES      BASE PRICE         DATE OF        EXPIRATION
NAME                               GRANTED       IN PERIOD      (PER/SHARE)         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
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)
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
</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. Due to Mr.
    Tronsrue's resignation, effective as of September 3, 1997, these options
    were cancelled.
 
(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. Due to Mr. Tronsrue's
    resignation effective as of September 3, 1997, these options were cancelled.
 
(4) These options were canceled in connection with the settlement of the dispute
    relating to the termination of Mr. Kozak's employment. See "Certain
    Transactions."
 
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
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
George M. Tronsrue, III..................      250,000         150,000(4)      2,125,000        1,217,500
</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 "Certain Transactions."
 
(4) Of Mr. Tronsrue's unexercisable options, 50,000 vested in February, 1997,
    and the remainder have been cancelled due to Mr. Tronsrue's resignation
    effective as of September 3, 1997.
 
                                       58
<PAGE>   64
 
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. 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 the fiscal period 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 $275,000 and a cash bonus of up to $200,000 for each of
the 1997 and 1998 fiscal years 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. 1,662,399 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 $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 agreement also contains non-compete, non-solicitation and
confidentiality provisions.
 
     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 $200,000 and a guaranteed bonus of $244,500, payable in annual
installments through January 1997. Under this employment agreement, Ms. Murphy
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. Ms. Murphy's
employment agreement also contains non-compete, non-solicitation and
confidentiality provisions.
 
     Robert H. Ottman.  The Company was 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 in severance. Mr. Ottman's
employment agreement contains non-compete, non-solicitation and confidentiality
provisions.
 
                                       59
<PAGE>   65
 
     The shares of Common Stock underlying the stock options held by Messrs.
Pompliano, Reich 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 the April
Offering. Mr. Tronsrue is also a signatory to 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, 5,000,000 shares of Common Stock have been reserved for discretionary
and 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.
 
     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.
 
     Currently, all 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. On June 25, 1997, the Company's stockholders approved the
Company's adoption of an amendment to the 1994 Plan authorizing the inclusion of
a provision in stock option agreements relating to options granted to Outside
 
                                       60
<PAGE>   66
 
Directors which permits the transfer by such Outside Director of the options
granted pursuant to such stock option agreement.
 
     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 remaining available shares pro rata
among participating employees on the basis of their payroll deductions in effect
for such Offer Period.
 
                                       61
<PAGE>   67
 
     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 Series
B 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 Series B 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 Series B 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 Series B Preferred Stock, certain holders of Common Stock and
certain holders of options or warrants convertible into Common Stock (the
"Equity 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
Equity Registration Rights Agreement, and certain demand registration rights
following the occurrence of, among other things, a qualifying offering. The
April Offering was a qualifying offering. Huff and certain of its affiliates
purchased an aggregate of 10,000 Units in the Unit Offering, acquiring thereby
10,000 shares of Preferred Stock and 10,000 Warrants. ING Baring (U.S.)
Securities, Inc., which may be deemed an affiliate of ING, purchased 7,500 Units
in the Unit Offering, acquiring thereby 7,500 shares of Preferred Stock and
7,500 Warrants.
 
     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 would (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 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 terminated upon completion of the April 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 Equity Registration Rights
Agreement with respect to the April Offering and, upon consummation of the April
Offering, he waived all rights under the Equity Registration Rights Agreement.
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.
 
                                       62
<PAGE>   68
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth as of June 30, 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) 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>
                                                                      NUMBER        PERCENTAGE
                     NAME OF BENEFICIAL OWNER(1)                    OF SHARES       OF TOTAL(2)
    -------------------------------------------------------------  ------------     -----------
    <S>                                                            <C>              <C>
    Anthony J. Pompliano(3)......................................     1,662,499          4.4%
    Jack E. Reich................................................            --           --
    Riley M. Murphy(4)...........................................       193,752            *
    George M. Middlemas(5).......................................     1,748,147          4.9
    Christopher L. Rafferty(6)...................................         8,000            *
    Edwin M. Banks(6)............................................            --           --
    Peter C. Bentz(6)............................................            --           --
    Olivier L. Trouveroy(7)......................................            --           --
    Benjamin P. Giess(7).........................................            --           --
    Richard A. Kozak(8)..........................................     1,041,598          2.8
    Robert H. Ottman(9)..........................................       175,000            *
    George M. Tronsrue, III(10)..................................       300,000            *
    The Huff Alternative Income Fund, L.P.(11)...................    14,286,960         39.6
    ING Equity Partners, L.P. I(12)..............................     7,946,828         22.1
    First Analysis Corporation(13).).............................     3,156,420          8.8
    All executive officers and directors as a group (10
      persons)...................................................     2,520,800          6.6
</TABLE>
 
- ---------------
 * Less than one percent.
 (1) The addresses of all officers and directors listed above are in the care of
     the Company.
 (2) 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 June 30, 1997 by (ii) the sum of (A) the
     number of shares of Common Stock outstanding as of June 30, 1997 plus (B)
     the number of shares of Common Stock issuable upon the exercise of options
     or warrants held by such stockholder which were exercisable as of June 30,
     1997 or will become exercisable within 60 days after June 30, 1997
     ("currently exercisable").
 (3) Includes currently exercisable options to purchase 1,662,399 shares.
 (4) Includes currently exercisable options to purchase 193,752 shares.
 (5) Includes currently exercisable options to purchase 20,000 shares. Also
     includes 788,905 shares of Common Stock owned by Apex II and 278,973 shares
     of Common Stock currently owned by Apex I. Mr. Middlemas is a general
     partner of Apex Management Partnership which is the 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.
 (6) Messrs. Banks and Bentz are employees of W.R. Huff, 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.
 (7) 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.
 (8) Includes currently exercisable options to purchase 1,041,598 shares. Mr.
     Kozak's employment was terminated effective February 2, 1997. See "Certain
     Transactions."
 (9) Includes currently exercisable options to purchase 175,000 shares. Mr.
     Ottman's employment with the Company was terminated in February 1997.
(10) Includes currently exercisable options to purchase 300,000 shares.
(11) Includes currently exercisable warrants to purchase 200,000 shares. The
     address for Huff is 1776 On the Green, 67 Park Place, Morristown, NJ 07960.
(12) Includes currently exercisable warrants to purchase 100,000 shares. The
     address for ING is 135 East 57th Street, 16th Floor, New York, NY 10022.
(13) Includes 1,034,465 shares of Common Stock currently owned by Apex II.
     Includes 103,800 and 175,173 shares of Common Stock owned by Apex I.
     Includes 359,214 and 732,213 shares of Common Stock owned by The
     Productivity Fund II, L.P. ("Productivity"). Includes 714,293 shares of
     Common Stock owned by Environmental Private Equity Fund II, L.P. ("EPEF").
     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. The address for
     First Analysis Corporation is 233 South Wacker Drive, Suite 9600, Chicago,
     IL 60093.
 
                                       63
<PAGE>   69
 
                      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 June 30, 1997,
outstanding borrowings under the AT&T Credit Facility totaled approximately
$31.2 million, including accrued interest of approximately $3.9 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 $27.8 million in capital to its subsidiaries through June 30,
1997, and AT&T Credit Corporation received 7.25% of the outstanding capital
stock of each of the Company's operating subsidiaries for which it provided
financing. The Company was required to pledge its interest in the respective
subsidiaries to AT&T Credit Corporation as a condition to each loan. Under
certain circumstances, this pledge agreement also restricts the Company's
ability to pay dividends on its capital stock.
 
     The Company has entered into negotiations with AT&T Credit Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into the New AT&T Credit Facility (to be secured by the existing assets of the
Company including the stock, but not the assets, of certain of the Company's
subsidiaries), which the Company expects will otherwise be on terms
substantially similar to those of the existing AT&T Credit Facility. The maximum
aggregate amount of credit available under the proposed New AT&T Facility will
not exceed $35 million, which is the maximum amount of credit the Company is
allowed to borrow in its Secured Credit Facility (as defined in the Existing
Indentures and in the Indenture with respect to the Notes). On June 26, 1997,
each of the Company's Subsidiaries that are parties to the AT&T Credit Facility
entered into an agreement with AT&T Credit Corporation to waive, for a period of
90 business days commencing on the date thereof, compliance by such subsidiaries
with a certain covenants contained therein. Such covenants are not expected to
be included in the New AT&T Facility.
 
                                       64
<PAGE>   70
 
2005 NOTES AND 2006 NOTES
 
     The terms of the 2005 Notes and the 2006 Notes include those stated in the
applicable Existing Indenture and those made a part of the applicable Existing
Indenture by reference to the Trust Indenture Act of 1939, as in effect on the
date of that Existing Indenture. The terms of the Existing Indentures are
substantially similar. The following summaries of certain provisions of the
Existing 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 Existing Indenture.
 
     The Existing Notes are general unsubordinated and unsecured senior
obligations of ACSI and 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 have no obligation to pay amounts due on the Notes and do
not guarantee the Notes. Therefore, the Existing 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
Existing Notes, to participate in the assets of any of ACSI's subsidiaries upon
any liquidation or reorganization of any such subsidiary are subject to the
prior claims of that subsidiary's creditors (including trade creditors).
 
     Upon a Change of Control (as defined in the Existing Indentures), each
holder of the Existing Notes will have the right to require ACSI to repurchase
all or any part of such holder's Existing Notes at 101% of the respective
Accreted Value (as defined in the Existing Indentures) 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
respective 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, certain
affiliates of First Analysis Corporation, ING or Huff, acquires more than 35% of
the total voting power of the Company.
 
     Each of the Existing 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.
 
     On June 11, 1997, the Company notified the trustee under each of the
Existing Indentures that, as of June 10, 1997, it had approximately $13.0
million in the aggregate of ordinary course trade accounts payable that were
more than 60 days overdue. As of June 30, 1997, the Company had approximately
$17.4 million in the aggregate of ordinary course trade accounts payable that
were more than 60 days overdue. These overdue amounts constituted Indebtedness
of the Company, as that term is defined in each of the Existing Indentures. The
incurrence by the Company of such Indebtedness is not currently permitted under
Section 4.09 of each of the Existing Indentures and, therefore, constituted an
Event of Default (as defined in the Existing Indentures) under each Existing
Indenture. The Company used a portion of the proceeds of the Unit Offering to
pay in full all ordinary course trade accounts payable that were more than 60
days overdue to cure such Event of Default.
 
  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.
 
                                       65
<PAGE>   71
 
  The 2006 Notes
 
     The 2006 Notes mature on April 1, 2006. The yield on the 2006 Notes equals
12 3/4% per annum, computed on a semi-annual bond equivalent basis and
calculated from March 21, 1996. The 2006 Notes will accrete at a rate of
12 3/4%, compounded semi-annually, to an aggregate principal amount of
$120,000,000 by April 1, 2001. Cash interest will not accrue on the 2006 Notes
prior to April 1, 2001. Thereafter, interest on the 2006 Notes will accrue at
the rate of 12 3/4% per annum and will be payable in cash semi-annually on April
1 and October 1, commencing October 1, 2001. The 2006 Notes will be redeemable,
at the option of ACSI at any time, in whole or in part, on or after April 1,
2001 at 106 3/8%, 104 1/4% and 102 1/8% of the principal amount for the twelve
months following April 1, 2001, 2002 and 2003, respectively, plus accrued and
unpaid interest, if any, thereon, to the date of repurchase.
 
                                       66
<PAGE>   72
 
                            DESCRIPTION OF THE NOTES
 
GENERAL
 
     The Notes were issued under an indenture, dated as of July 23, 1997 (the
"Indenture"), between the Company and The Chase Manhattan Bank, as trustee under
the Indenture (the "Trustee"). For purposes of this Description of the Notes,
the term "Company" refers to American Communications Services, Inc. and does not
include its subsidiaries except for purposes of financial data determined on a
consolidated basis.
 
     The terms of the Notes include those stated in the Indenture and those made
a part of the Indenture by reference to the Trust Indenture Act of 1939 as in
effect on the date of the Indenture (the "Trust Indenture Act"). The following
summaries of certain provisions of the Indenture 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 Indenture. A copy of the Indenture is available from the
Company upon request. Whenever particular defined terms of the Indenture not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference. The Notes are subject to all such terms, and holders of the
Notes are referred to the Indenture and the Trust Indenture Act for a complete
statement of such terms. Certain terms used herein are defined below under
" -- Certain Definitions."
 
     The Notes rank pari passu in right of payment with all existing and future
senior unsecured indebtedness of the Company, including the 2005 Notes and the
2006 Notes, and are senior in right of payment to all existing and future
subordinated indebtedness of the Company. As of June 30, 1997, the total
outstanding indebtedness of the Company that would rank pari passu with the
Notes was approximately $193.0 million. The Notes are not secured by any assets
and are effectively subordinated to any secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness. As of June 30,
1997, the Company, on a consolidated basis, had approximately $31.2 million
outstanding of secured indebtedness.
 
     The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries have no direct obligation to pay
amounts due on the Notes and have not guaranteed the Notes. As a result, the
Notes effectively are subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's subsidiaries (including
trade payables). As of June 30, 1997, the total liabilities of the Company's
subsidiaries (after the elimination of loans and advances by the Company to its
subsidiaries) were approximately $62.7 million. Of that amount, approximately
$31.2 million in indebtedness was secured by first priority liens on all the
assets of the borrowing subsidiaries. See "Description of Certain Indebtedness."
Any rights of the Company and its creditors, including the holders of Notes, to
participate in the assets of any of the Company'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).
 
PRINCIPAL, MATURITY AND INTEREST
 
     The Notes are limited in aggregate principal amount to $220,000,000 and
will mature on July 15, 2007. Interest on the Notes will accrue at the rate of
13 3/4% per annum and will be payable semi annually in cash on each January 15
and July 15, commencing January 15, 1998, to the Persons who are registered
Holders at the close of business on January 1 and July 1, respectively,
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from the most recent date to which interest has been paid, or,
if no interest has been paid, from July 23, 1997. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
 
     If the Company does not comply with certain deadlines set forth in the
Registration Rights Agreement with respect to the Exchange Offer or the
registration of the Notes for resale under a shelf registration statement,
holders of the Notes will be entitled to Additional Interest. See "Exchange
Offer; Registration Rights."
 
                                       67
<PAGE>   73
 
     Principal and interest are payable at the office of the Paying Agent but,
at the option of the Company, interest may be paid by check mailed to the
registered holders at their registered addresses. The Notes were issued without
coupons and in fully registered form, in denominations of $1,000 and integral
multiples thereof. Unless otherwise designated by the Company, the Company's
office or agency in New York is the office of the Trustee maintained for such
purpose.
 
OPTIONAL REDEMPTION
 
     The Notes are not be redeemable at the option of the Company prior to July
15, 2002. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest thereon (if any), if redeemed
during the twelve months beginning July 15 of the years indicated below:
 
<TABLE>
<CAPTION>
                                       YEAR                                 PERCENTAGE
        ------------------------------------------------------------------  ----------
        <S>                                                                 <C>
        2002..............................................................    106.875
        2003..............................................................    105.156
        2004..............................................................    103.438
        2005..............................................................    101.719
        2006 and thereafter...............................................    100.000%
</TABLE>
 
     Notwithstanding the foregoing, at any time prior to July 15, 2000, the
Company may redeem up to 35% of the aggregate principal amount of Notes with the
net proceeds from one or more Equity Offerings of the Company at a redemption
price equal to 113.750% of the aggregate principal amount thereof on the date of
redemption; provided, however, that, after giving effect to any such redemption,
at least $143 million aggregate principal amount of the Notes remain
outstanding.
 
MANDATORY REDEMPTION
 
     Except as set forth under "-- Repurchase at the Option of Holders Upon a
Change of Control" and "-- Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the
Notes.
 
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
 
     Upon the occurrence of a Change of Control, each holder of Notes shall have
the right to require the Company to repurchase all or any part (equal to $1,000
principal amount or an integral multiple thereof) of such holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any, to
any Change of Control Payment Date (as defined below).
 
     Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating: (1)
that a Change of Control Offer is being made pursuant to the covenant in the
Indenture entitled "Repurchase at the Option of Holders upon a Change of
Control" and that all Notes timely tendered will be accepted for payment; (2)
the Change of Control Purchase Price and the purchase date (the "Change of
Control Payment Date"), which shall be no earlier than 30 days nor later than 40
days from the date such notice is mailed; (3) that any Notes or portions thereof
not tendered or accepted for payment will continue to accrue interest; (4) that,
unless the Company defaults in the payment of the Change of Control Purchase
Price, all Notes or portions thereof accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest, from and after the Change of
Control Payment Date; (5) that holders electing to have any Notes or portions
thereof purchased pursuant to a Change of Control Offer will be required to
surrender the Notes, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Notes completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (6) that holders will be entitled
to withdraw their election if the Paying Agent receives, not later than the
close
 
                                       68
<PAGE>   74
 
of business on the second Business Day preceding the Change of Control Payment
Date, a telegram, telex, facsimile transmission or letter setting forth the name
of the holder, the principal amount of Notes delivered for purchase, and a
statement that such holder is withdrawing his election to have such Notes or
portions thereof purchased; and (7) that holders whose Notes are being purchased
only in part will be issued Notes equal in principal amount to the unpurchased
portion of the Note or Notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple thereof.
 
     The Company will comply with the requirements of Section 14(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and any other
securities laws and regulations, to the extent such laws and regulations are
applicable, in connection with the repurchase of Notes pursuant to a Change of
Control Offer.
 
     On the Change of Control Payment Date, the Company will (1) accept for
payment Notes or portions thereof properly tendered pursuant to the Change of
Control Offer; (2) irrevocably deposit with the Paying Agent in immediately
available funds an amount equal to the Change of Control Purchase Price in
respect of all Notes or portions thereof so tendered; and (3) deliver, or cause
to be delivered, to the Trustee the Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof tendered to the Company and
accepted for payment. The Paying Agent shall promptly mail to each holder of
Notes so accepted payment in an amount equal to the Change of Control Purchase
Price for such Notes, and the Trustee shall promptly authenticate and mail to
each holder a Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such Note shall be in a principal
amount of $1,000 or any integral multiple thereof.
 
     The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter a
third party from acquiring the Company in a transaction that constitutes a
Change of Control. If a Change of Control Offer is made, there can be no
assurance that the Company will have sufficient funds to pay the Change of
Control Purchase Price for all Notes tendered by holders seeking to accept the
Change of Control Offer. In addition, instruments governing other indebtedness
of the Company may prohibit the Company from purchasing any Notes prior to their
stated maturity, including pursuant to a Change of Control Offer. See
"Description of Certain Indebtedness." 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 for all Notes tendered pursuant to
such offer or a time when the Company is prohibited from purchasing the Notes
(and the Company is unable either to obtain the consent of the holders of the
relevant indebtedness or to repay such indebtedness), an Event of Default would
occur under the Indenture. In addition, one of the events that constitutes a
Change of Control under the Indenture is a sale, conveyance, transfer or lease
of all or substantially all of the property of the Company. The Indenture is
governed by New York law, and there is no established definition under New York
law of "substantially all" of the assets of a corporation. Accordingly, if the
Company were to engage in a transaction in which it disposed of less than all of
its assets, a question of interpretation could arise as to whether such
disposition was of "substantially all" of its assets and whether the Company was
required to make a Change of Control Offer.
 
     Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of Notes to
require that the Company repurchase or redeem Notes in the event of a takeover,
recapitalization or similar restructuring.
 
DISBURSEMENT OF FUNDS -- ESCROW ACCOUNT
 
     Pursuant to the Indenture, the Company placed approximately $70 million of
the net proceeds realized from the Private Placement, representing funds
sufficient to pay the first five interest payments on the Notes, in an escrow
account (the "Escrow Account") held by the Escrow Agent for the benefit of the
Trustee under the Indenture in accordance with the Escrow and Disbursement
Agreement. The Company entered into the Escrow and Disbursement Agreement, which
provides, among other things, that funds may be disbursed from the Escrow
Account only to pay interest on the Notes (or, if a portion of the Notes has
been retired by the Company, funds representing the interest payment on the
retired Notes may be paid to the Company) and, upon certain repurchases or
redemptions thereof, to pay principal of and premium, if any, thereon. Pending
 
                                       69
<PAGE>   75
 
such disbursement, the Company has caused all funds contained in the Escrow
Account to be invested in Marketable Securities. Interest earned on these
Marketable Securities will be added to the Escrow Account.
 
ASSET SALES
 
     The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) no Event of Default shall have occurred and
be continuing or shall occur as a consequence thereof; (ii) the Company or such
Restricted Subsidiary, as the case may be, receives net consideration at the
time of such Asset Sale at least equal to the Fair Market Value (as evidenced by
a Board Resolution delivered to the Trustee) of the Property or assets sold or
otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds or Telecommunications Assets; and (iv) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from such
Asset Sale in the manner set forth in the next paragraph.
 
     Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest (or enter a
binding agreement to reinvest, provided that such reinvestment is completed
within 180 days of the date of such agreement) an amount equal to the Net Cash
Proceeds (or any portion thereof) from such Asset Sale in Telecommunications
Assets and/or (ii) apply an amount equal to such Net Cash Proceeds (or remaining
Net Cash Proceeds) to the permanent reduction of Indebtedness of the Company
(other than Indebtedness to a Restricted Subsidiary) that is pari passu with the
Notes or to the permanent reduction of Indebtedness or preferred stock of any
Restricted Subsidiary (other than Indebtedness to, or preferred stock owned by,
the Company or another Restricted Subsidiary); provided, however, that any Net
Cash Proceeds applied to the reduction of Indebtedness represented by the 2005
Notes and 2006 Notes shall be in accordance with the next paragraph. Any Net
Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets and/or reduce pari passu Indebtedness of the Company
or Indebtedness or preferred stock of its Restricted Subsidiaries shall
constitute Excess Proceeds.
 
     If at any time the aggregate amount of Excess Proceeds (including any Net
Cash Proceeds applied to the permanent reduction of Indebtedness represented by
the 2005 Notes and 2006 Notes) calculated as of such date exceeds $10 million,
the Company shall, within 30 days of the date the amount of Excess Proceeds
exceeds $10 million, use such Excess Proceeds to make an offer to purchase (an
"Asset Sale Offer") on a pro rata basis, from all holders, outstanding Notes,
2005 Notes and 2006 Notes in an aggregate principal amount equal to the maximum
principal amount that may be purchased out of Excess Proceeds, at a purchase
price (the "Offer Purchase Price") in cash equal to (a) with respect to the
Existing Notes, 100% of the Accreted Value thereof (as defined in the relevant
indenture) and (b) with respect to the Notes, 100% of the principal amount
thereof, plus, in each case, accrued and unpaid interest, if any, to the
purchase date, in accordance with the procedures set forth in the relevant
indenture. Upon completion of an Asset Sale Offer (including payment of the
Offer Purchase Price), any surplus Excess Proceeds that were the subject of such
offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
 
     The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extend such
laws and regulations are applicable, in connection with the repurchase of Notes
pursuant to an Asset Sale Offer.
 
CERTAIN COVENANTS
 
     Set forth below are certain covenants contained in the Indenture:
 
  Limitation on Indebtedness
 
     The Company will not, and will not permit its Restricted Subsidiaries to,
directly or indirectly, incur any Indebtedness (including Acquired Indebtedness)
and the Company will not issue any Disqualified Stock or permit any of its
Restricted Subsidiaries to issue any Disqualified Stock or preferred stock;
provided that the Company may incur Indebtedness or issue Disqualified Stock if,
after giving effect to such issuance or incurrence on a pro forma basis, the
Debt to EBITDA Ratio of the Company does not exceed 5.5x in the case
 
                                       70
<PAGE>   76
 
of any issuance or incurrence on or before November 1, 1998, or 5.0x in the case
of any issuance or incurrence thereafter.
 
     The foregoing limitation will not apply to: (a) the incurrence by the
Company or any of its Restricted Subsidiaries of Indebtedness under the Secured
Credit Facility; provided that the aggregate principal amount of Indebtedness
under such facility does not exceed $35 million at any one time outstanding; (b)
the Existing Indebtedness; (c) the incurrence by the Company or any of its
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; (d) the incurrence by the
Company or any of its Restricted Subsidiaries of Interest Hedging Obligations
with respect to any floating rate Indebtedness that is permitted by the covenant
described in this paragraph; (e) the incurrence by the Company of any Exchange
Rate Obligations, provided that such Exchange Rate Obligations were entered into
in connection with transactions in the ordinary course of business or the
incurrence of Indebtedness that is permitted by the covenant described in this
paragraph; (f) the incurrence by the Company of Indebtedness represented by the
Existing Notes; (g) Indebtedness of the Company in connection with one or more
standby letters of credit issued in the ordinary course of business; (h)
Indebtedness in respect of performance, surety or appeal bonds provided by the
Company in the ordinary course of business; (i) Indebtedness of the Company not
to exceed, at any one time outstanding, one and a half times the amount of the
Net Cash Proceeds received by the Company from the issuance and sale of its
Qualified Stock (other than preferred stock) subsequent to the Issue Date;
provided such Indebtedness shall have a stated maturity no earlier than that of
the Notes and is subordinated in right of payment to the Notes; (j) the
incurrence by the Company or any of its Restricted Subsidiaries of Refinancing
Indebtedness issued in exchange for, or the proceeds of which are used to
refinance, repurchase, replace, refund or defease ("Refinance" and,
correlatively, "Refinanced" and "Refinancing") Indebtedness permitted pursuant
to clause (b) or (f) of this paragraph; provided that (i) the amount of such
Refinancing Indebtedness shall not exceed the principal amount of, premium, if
any, and accrued interest on the Indebtedness so Refinanced (or if such
Indebtedness was issued with original issue discount, the original issue price
plus amortization of the original issue discount at the time of the repayment of
such Indebtedness) plus the fees, expenses and costs of such Refinancing and
reasonable prepayment premiums, if any, in connection therewith; (ii) such
Refinancing Indebtedness shall have a stated maturity no earlier than the
Indebtedness being Refinanced; (iii) such Refinancing Indebtedness shall have an
Average Life equal to or greater than the Average Life of the Indebtedness being
Refinanced; (iv) if the Indebtedness being Refinanced is subordinated in right
of payment to the Notes, such Refinancing Indebtedness shall be subordinated in
right of payment to the Notes on terms at least as favorable to the holders of
Notes as those contained in the documentation governing the Indebtedness being
so Refinanced; and (v) no Restricted Subsidiary shall incur Refinancing
Indebtedness to Refinance Indebtedness of the Company or another Subsidiary; (k)
the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness of any Person which incurrence resulted directly from an Investment
described in clause (ix) of the definition of "Permitted Investments" herein;
provided that, (i) immediately after giving effect to such Investment on a pro
forma basis (and treating any Indebtedness which becomes, or is anticipated to
become, an obligation of the Company or any Restricted Subsidiary as a result of
such Investment as having been incurred by the Company or such Restricted
Subsidiary at the time of such Investment), the Company would (A) be permitted
to incur $1.00 of additional Indebtedness under the immediately preceding
paragraph or (B) have a Debt to EBITDA Ratio which is equal to or not worse than
the Debt to EBITDA Ratio of the Company immediately prior to such Investment or
(ii) such incurrence is otherwise permitted; provided further that Indebtedness
incurred by the Company and its Restricted Subsidiaries under this clause (k) as
a result of any such Investment does not exceed 50 percent of the Fair Market
Value of the Qualified Stock used as consideration in such Investment; provided
further that the aggregate principal amount of Indebtedness incurred under this
clause (k) does not exceed $50,000,000; (l) the incurrence by the Company of
Permitted Subordinated Financing; and (m) Indebtedness not otherwise permitted
to be incurred pursuant to the covenant described in this paragraph in an
aggregate amount not to exceed $428,634.
 
  Limitation on Issuances of Guarantees by Restricted Subsidiaries
 
     The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simulta-
 
                                       71
<PAGE>   77
 
neously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives, and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee. If the Guaranteed
Indebtedness is (i) pari passu with the Notes then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (ii) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
 
     Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by, or as a result of, payment under such Guarantee.
 
  Limitation on Liens
 
     The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any Liens of any kind, other than Permitted Liens, on or with
respect to any of its Property or assets now owned or hereafter acquired, or any
interest therein or any income or profits therefrom, without effectively
providing that the Notes shall be secured equally and ratably with (and provided
the Notes shall be secured prior to any secured obligation that is subordinated
in right of payment to the Notes) the obligations so secured for so long as such
obligations are so secured.
 
  Limitation on Sale and Leaseback Transactions
 
     The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property or assets subject to such transaction;
(ii) the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under " -- Limitation on Indebtedness"; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
or assets without securing the Notes by the covenant described under
" -- Limitation on Liens"; and (iv) the Net Cash Proceeds from such transaction
are applied in accordance with the covenant described under " -- Asset Sales."
 
  Restricted Payments
 
     The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment, (i) no
Default or Event of Default shall have occurred and be continuing or shall occur
as a consequence thereof; (ii) after giving effect, on a pro forma basis, to
such Restricted Payment and the incurrence of any Indebtedness the net proceeds
of which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness"; and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (A) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for the
period (taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such Restricted Payment, plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company subsequent
to the Issue Date from the issuance or sale (other than to a Restricted
Subsidiary) of shares of its Qualified Stock, including Qualified Stock issued
upon the exercise of options, warrants or rights to purchase Qualified Stock,
plus (C) 100% of the amount of any Indebtedness of
 
                                       72
<PAGE>   78
 
the Company or any of its Restricted Subsidiaries (as expressed on the face of a
balance sheet in accordance with GAAP), or the carrying value of any
Disqualified Stock, which has been converted into, exchanged for or satisfied by
the issuance of shares of Qualified Stock of the Company subsequent to the Issue
Date, less the amount of any cash, or the value of any other Property
distributed by the Company or its Restricted Subsidiaries upon such conversion,
exchange or satisfaction, plus (D) 100% of the net reduction in Investments,
subsequent to the Issue Date, in any Person, resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of Consolidated
Net Income), in each case to the Company or any Restricted Subsidiary from any
Person (including, without limitation, from Unrestricted Subsidiaries) or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed in
the case of any Person the amount of Investments previously made by the Company
or any Restricted Subsidiary in such Person and which was treated as a
Restricted Payment, minus (E) 100% of the amount of Investments made pursuant to
clause (vii) of the following paragraph subsequent to the Issue Date.
 
     The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the Indenture; (ii) retiring (A) any Capital Stock of the
Company or any Restricted Subsidiary of the Company or (B) Indebtedness of the
Company that is subordinate to the Notes or (C) Indebtedness of a Restricted
Subsidiary of the Company, in exchange for, or out of the proceeds of, the
substantially concurrent sale of Qualified Stock of the Company; (iii) retiring
any Indebtedness of the Company subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, the substantially concurrent incurrence
of Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is subordinated in right of
payment to the Notes at least to the same extent as, (B) has an Average Life at
least as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) retiring any Indebtedness of a Restricted Subsidiary of the
Company in exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of the Company or any Restricted Subsidiary that is
permitted under the covenant described under " -- Limitation on Indebtedness"
and that (A) is not secured by any assets of the Company or any Restricted
Subsidiary to a greater extent than the retired Indebtedness was so secured, (B)
has an Average Life at least as long as the retired Indebtedness and (C) is
subordinated in right of payment to the Notes at least to the same extent as the
retired Indebtedness; (v) retiring any Capital Stock of the Company or any
Restricted Subsidiary of the Company held by any member of the Company's (or any
of its Subsidiaries') management pursuant to any management equity subscription
agreement or stock option plan in effect on the Issue Date or upon the death or
termination of such member, provided that the aggregate price paid for all such
retired Capital Stock shall not exceed, in the aggregate, the sum of $2.0
million plus the aggregate cash proceeds received by the Company subsequent to
the Issue Date from any reissuance of Capital Stock by the Company to members of
management of the Company and its Subsidiaries; (vi) making loans to members of
management of the Company as required pursuant to employment agreements with
such members, provided that the aggregate amount of all such loans shall not
exceed $2.2 million; (vii) making Investments in an aggregate amount not to
exceed $20,000,000 in joint ventures or other risk sharing arrangements (which
may include partnerships, limited liability companies, corporations or other
arrangements) (each a "Joint Venture Entity") the purpose of which is to engage
in the same or complementary lines of business as the Company or a Restricted
Subsidiary or in businesses consistent with the fundamental nature of the
operating business of the Company or a Restricted Subsidiary; provided the
management and operations of any such Joint Venture Entity are controlled by the
Company pursuant to (a) the charter documents of such Joint Venture Entity, or
(b) an agreement between or among the holders of the Voting Stock of such Joint
Venture Entity, or (c) a management agreement of a minimum duration of three or
more years between the Company and such Joint Venture Entity; (viii) permitting
a Restricted Subsidiary which became a Restricted Subsidiary as a result of an
Investment by the Company or a Restricted Subsidiary described in clause (vii)
of this paragraph to declare or pay any dividend or distribution on any Capital
Stock of such Subsidiary to all holders of Capital Stock of such Subsidiary on a
pro rata basis; and (ix) permitting a Restricted Subsidiary to pay a dividend
 
                                       73
<PAGE>   79
 
with respect to any shares of Capital Stock of such Subsidiary held by a lender,
which shares of Capital Stock were acquired by such lender in connection with
the Secured Credit Facility.
 
     Not later than the date of making any Restricted Payment (including any
Restricted Payment Permitted to be made pursuant to the previous paragraph), the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available financial statements.
 
  Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
 
     The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary of the
Company; (ii) to make loans or advances to the Company or any Restricted
Subsidiary of the Company; or (iii) to transfer any of its Property or assets to
the Company or any other Restricted Subsidiary of the Company, except: (a) any
encumbrance or restriction existing as of the Issue Date pursuant to an
agreement relating to the Secured Credit Facility or the Existing Indebtedness;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of assets or Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the assets or Property so acquired; (c)
any encumbrance or restriction relating to any Indebtedness of any Restricted
Subsidiary existing on the date on which such Restricted Subsidiary is acquired
by the Company or any Restricted Subsidiary (other than Indebtedness issued by
such Restricted Subsidiary in connection with or in anticipation of its
acquisition), provided that the EBITDA of such Restricted Subsidiary is not
taken into account in determining whether such acquisition is permitted by the
terms of the Indenture; (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted Refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such Refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements; (e) customary provisions restricting subletting or
assignment of any lease of the Company or any Restricted Subsidiary or customary
provisions in certain agreements that restrict the assignment of such agreement
or any rights thereunder; (f) any temporary encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or Property and assets of, such Restricted Subsidiary; and (g)
any restriction on the sale or other disposition of assets or Property securing
Indebtedness as a result of a Permitted Lien on such assets or Property
permitted by the covenant described under "-- Limitation on Liens."
 
  Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
 
     The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary and (ii)
shall not permit any Person other than the Company or a Restricted Subsidiary to
own any Capital Stock of any Restricted Subsidiary (other than directors'
qualifying shares), except for (a) a sale of 100% of the Capital Stock of a
Restricted Subsidiary sold in a transaction not prohibited by the covenant
described under "-- Asset Sales"; (b) Capital Stock of a Restricted Subsidiary
issued and outstanding on the Issue Date and held by Persons other than the
Company or any Restricted Subsidiary; (c) Capital Stock of a Restricted
Subsidiary issued and outstanding prior to the time that such Person becomes a
Restricted Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's becoming a Restricted Subsidiary or otherwise
being acquired by the Company; (d) any Disqualified Stock permitted to be issued
under "Limitation on Indebtedness"; (e) Capital Stock of a Subsidiary issued to
a lender or lenders under the Secured Credit Facility in an aggregate amount not
to exceed 7.25% of the outstanding Capital Stock of such Subsidiary; and (f)
Capital Stock of a Person which became or will become a Restricted Subsidiary as
a result of an Investment by the Company or a Restricted Subsidiary described in
clause (vii) of the second paragraph of the covenant described under "Restricted
Payments" herein, provided
 
                                       74
<PAGE>   80
 
that, (A) the Company or such Restricted Subsidiary, as the case may be,
receives net consideration at the time of such issuance at least equal to the
Fair Market Value (as evidenced by a Board Resolution delivered to the Trustee)
of the Capital Stock issued, (B) any consideration received by the Company or
such Restricted Subsidiary in respect of such issuance consist of Cash Proceeds
and/or Telecommunications Assets and (C) the Company or such Restricted
Subsidiary, as the case may be, within 270 days of such issuance, uses the Net
Cash Proceeds from such issuance to (1) reinvest (or enters a binding agreement
to reinvest, provided that such reinvestment is completed within 180 days of the
date of such agreement) an amount equal to the Net Cash Proceeds (or any portion
thereof) from such issuance in Telecommunications Assets and/or (2) apply an
amount equal to such Net Cash Proceeds (or remaining Net Cash Proceeds) from
such issuance to repurchase or redeem Notes or to permanently reduce
Indebtedness of the Company (other than Indebtedness to a Restricted Subsidiary)
that is pari passu with the Notes or to permanently reduce Indebtedness or
preferred stock of any Restricted Subsidiary (other than Indebtedness to, or
preferred stock owned by, the Company or another Restricted Subsidiary).
 
  Transactions with Affiliates
 
     The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that would have been obtained in a comparable arm's-length transaction by
the Company or such Restricted Subsidiary with a Person that is not an Affiliate
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1.0 million, a Board
Resolution certifying that such Affiliate Transaction complies with clause (a)
above and that such Affiliate Transaction has been approved by a majority of the
Independent Directors, who have determined that such Affiliate Transaction is in
the best interests of the Company or such Restricted Subsidiary and (ii) with
respect to any Affiliate Transaction (other than Permitted Subordinated
Financing) involving aggregate payments in excess of $5.0 million, an opinion as
to the fairness from a financial point of view to the Company or such Restricted
Subsidiary issued by an investment banking firm of national standing together
with an Officers' Certificate to the effect that such opinion complies with this
clause (ii); provided that the following shall not be deemed Affiliate
Transactions: (i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice; (ii) any agreement or arrangement with respect to the
compensation of a director of the Company or any Restricted Subsidiary approved
by the Board of Directors and consistent with industry practice; (iii)
transactions between or among the Company and its Restricted Subsidiaries; (iv)
transactions permitted by the covenant described under "-- Restricted Payments";
(v) transactions pursuant to contracts existing on the Issue Date and listed in
a schedule to the Indenture; and (vi) loans and advances to employees and
officers of the Company or a Restricted Subsidiary in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, provided that the aggregate principal amount of all such loans and
advances shall not exceed $3.0 million at any one time outstanding, and
provided, further, that in the event the aggregate principal amount of all such
loans or advances exceeds $1.0 million at any one time outstanding, the Company
shall, within 180 days of the date such amount first exceeds $1.0 million,
reduce such amount to an amount less than $1.0 million.
 
  Restricted and Unrestricted Subsidiaries
 
     (a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of the
Company or a Restricted Subsidiary (other than Indebtedness to the Company or a
Restricted Subsidiary), and (i) such subsidiary has total assets of $1,000 or
less or (ii) such designation is effective immediately upon such Person becoming
a Subsidiary. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary
 
                                       75
<PAGE>   81
 
thereof. Except as provided in clause (a)(i), no Restricted Subsidiary may be
redesignated as an Unrestricted Subsidiary.
 
     (b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness other than Indebtedness to the Company or a
Restricted Subsidiary at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action, transaction
or series of transactions, on a pro forma basis, (i) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-- Limitation on Indebtedness" and (ii) no Default or Event of Default would
occur; provided, however,that the foregoing restriction shall not apply to a
Person which becomes a Restricted Subsidiary as a result of (a) an Investment
described in clause (ix) of the definition of "Permitted Investments" herein or
(b) an Investment described in clause (vii) of the second paragraph of the
covenant described under "Restricted Payments" herein. Subject to this clause
(b), an Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary.
 
     (c) The designation of a Subsidiary as an Unrestricted Subsidiary or the
designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (b) shall be made by the Board of Directors pursuant to a
Board Resolution delivered to the Trustee and shall be effective as of the date
specified in such Board Resolution, which shall not be prior to the date such
Board Resolution is delivered to the Trustee.
 
  Reports
 
     Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the SEC the annual reports, quarterly reports and other documents which the
Company would have been required to file with the SEC pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were subject
thereto, such documents to be filed with the SEC on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required to file them. The Company shall also (whether or not it is required to
file reports with the SEC), within 30 days of each Required Filing Date, (i)
transmit by mail to all holders of Notes, as their names and addresses appear in
the Security Register and to any Persons that request such reports in writing,
without cost to such holders or Persons, and (ii) file with the Trustee copies
of the annual reports, quarterly reports and other documents (without exhibits)
which the Company has filed or would have filed with the SEC pursuant to Section
13(a) or 15(d) of the Exchange Act, any successor provisions thereto or this
covenant. The Company shall not be required to file any report with the SEC if
the SEC does not permit such filing. In addition to the foregoing, commencing
with the unaudited information for the fiscal quarter ended September 30, 1997,
the Company will file with the SEC and will thereafter transmit by mail to the
Holders and file with the Trustee within the same time periods as set forth in
the second next preceding sentence, unaudited information, on an aggregate Fiber
Network basis (before headquarter allocations) segmented by the calendar year in
which each such Fiber Network became operational, setting forth the investment
in plant, property and equipment to date, revenue, EBITDA, EBIT, access lines,
fiber miles, route miles, buildings connected and voice grade equivalents;
provided, however, that the Company will provide such unaudited information with
respect to (i) all Fiber Networks that were initially operational at any time
prior to December 31, 1995 (all such Fiber Networks shall be deemed to have
become operational in calendar year 1995) and (ii) all Fiber Networks that were
initially operational in each succeeding calendar year (including all or any
portion of the then current year); and provided, further, that the Company need
no longer comply with the information requirements of this sentence after four
consecutive fiscal quarters for which the ratio of EBITDA of the Company to
Consolidated Interest Expense (other than dividends or distributions with
respect to preferred stock or Disqualified Stock of the Company) of the Company
is greater than 1.0 or after the occurrence of a Change of Control.
 
  Limitation on Construction of Fiber Networks
 
     The Company may construct Fiber Networks in no more than 45 Metropolitan
Areas until the earlier of such time as (i) the ratio of EBITDA of the Company
to Consolidated Interest Expense (other than
 
                                       76
<PAGE>   82
 
dividends or distributions with respect to preferred stock or Disqualified Stock
of the Company) of the Company is greater than 1.0 for four consecutive fiscal
quarters and (ii) the occurrence of a Change of Control.
 
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
 
     The Company will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
 
          (i) either (a) the Company shall be the continuing corporation or (b)
     the corporation (if other than the Company) formed by such consolidation or
     into which the Company is merged, or the Person which acquires, by sale,
     assignment, conveyance, transfer, lease or disposition, all or
     substantially all of the Property and assets of the Company and the
     Restricted Subsidiaries taken as a whole (such corporation or Person, the
     "Surviving Entity"), shall be a corporation organized and validly existing
     under the laws of the United States of America, any political subdivision
     thereof, any state thereof or the District of Columbia, and shall expressly
     assume, by a supplemental indenture, the due and punctual payment of the
     principal of (and premium, if any) and interest on all the Notes and the
     performance of the Company's covenants and obligations under the Indenture;
 
          (ii) immediately after giving effect to such transaction or series of
     related transactions on a pro forma basis (including, without limitation,
     any Indebtedness incurred or anticipated to be incurred in connection with
     or in respect of such transaction or series of related transactions), no
     Event of Default or Default shall have occurred and be continuing or would
     result therefrom; and
 
          (iii) immediately after giving effect to such transaction or series of
     related transactions on a pro forma basis (including, without limitation,
     any Indebtedness incurred or anticipated to be incurred in connection with
     or in respect of such transaction or series of related transactions), the
     Company (or the Surviving Entity, if the Company is not continuing) would
     (A) be permitted to incur $1.00 of additional Indebtedness pursuant to the
     first paragraph of "-- Limitation on Indebtedness" or (B) have a Total
     Market Capitalization of at least $1.0 billion and total Indebtedness in an
     amount less than 40% of its Total Market Capitalization.
 
SECURITY
 
     The Notes are secured, pending disbursement pursuant to the Escrow and
Disbursement Agreement, by a pledge of the Escrow Account, which initially
contains approximately $70 million of the net proceeds from the Private
Placement (the "Collateral"), representing funds sufficient to pay the first
five interest payments on the Notes.
 
     The Company entered into the Escrow and Disbursement Agreement which
provided for the grant by the Company to the Trustee for the benefit of the
Holders of security interests in the Collateral. All such security interests
will secure the payment and performance when due of all of the obligations of
the Company under the Indenture with respect to the Notes and under such Notes,
as provided in the Escrow and Disbursement Agreement. The Liens created by the
Escrow and Disbursement Agreement will be first priority security interests in
the Collateral. The ability of holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Company.
 
     Funds will be disbursed from the Escrow Account only to pay interest on the
Notes and, upon certain repurchases or redemptions of the Notes, to pay
principal of and premium, if any, thereon. Pending such disbursements, all funds
contained in the Escrow Account will be invested in Marketable Securities. Upon
the acceleration of the maturity of the Notes or the failure to pay principal at
maturity or upon certain redemptions and repurchases of the Notes, the Escrow
and Disbursement Agreement provides for the foreclosure by the Trustee upon the
net proceeds of the Escrow Account. Under the terms of the Indenture, the
proceeds of the Escrow Account shall be applied, first, to amounts owing to the
Trustee in respect of fees and expenses of the Trustee and second, to the
obligations under the Notes and the Indenture.
 
                                       77
<PAGE>   83
 
     Pursuant to the Escrow and Disbursement Agreement, if the Company makes the
first five interest payments on the Notes in a timely manner, immediately after
the fifth interest payment any remaining Marketable Securities will be released
from the Escrow Account to the Company and thereafter the Notes will be
unsecured.
 
EVENTS OF DEFAULT
 
     Each of the following is an "Event Of Default" under the Indenture:
 
          (a) default in the payment of interest on any Note when the same
     becomes due and payable, and the continuance of such default for a period
     of 30 days;
 
          (b) default in the payment of the principal of (or premium, if any,
     on) any Note at its maturity, upon optional redemption, required repurchase
     (including pursuant to a Change of Control Offer or an Asset Sale Offer) or
     otherwise or the failure to make an offer to purchase any Note as required;
 
          (c) the Company fails to comply with any of its covenants or
     agreements contained in "-- Limitation on Indebtedness," "-- Limitation on
     Sale and Leaseback Transactions" or "-- Restricted Payments," or fails to
     perform or comply with the provisions described under "-- Repurchase at the
     Option of the Holders Upon a Change of Control," "-- Asset Sales" or
     "-- Consolidation, Merger, Conveyance, Lease or Transfer";
 
          (d) default in the performance, or breach, of any covenant or warranty
     of the Company in the Indenture (other than a covenant or warranty
     addressed in (a), (b) or (c) above) and continuance of such Default or
     breach for a period of 30 days after written notice thereof has been given
     to the Company by the Trustee or to the Company and the Trustee by holders
     of at least 25% of the aggregate principal amount of the outstanding Notes;
 
          (e) Indebtedness of the Company or any Restricted Subsidiary is not
     paid when due within the applicable grace period, if any, or is accelerated
     by the holders thereof and, in either case, the principal amount of such
     unpaid or accelerated Indebtedness exceeds $10 million;
 
          (f) the entry by a court of competent jurisdiction of one or more
     final judgments against the Company or any Restricted Subsidiary in an
     uninsured or unindemnified aggregate amount in excess of $10 million which
     is not discharged, waived, appealed, stayed, bonded or satisfied for a
     period of 60 consecutive days;
 
          (g) the entry by a court having jurisdiction in the premises of (i) a
     decree or order for relief in respect of the Company or any Significant
     Restricted Subsidiary in an involuntary case or proceeding under U.S.
     bankruptcy laws, as now or hereafter constituted, or any other applicable
     Federal, state or foreign bankruptcy, insolvency or other similar law or
     (ii) a decree or order adjudging the Company or any Significant Restricted
     Subsidiary a bankrupt or insolvent, or approving as properly filed a
     petition seeking reorganization, arrangement, adjustment or composition of
     or in respect of the Company or any Significant Restricted Subsidiary under
     U.S. bankruptcy laws, as now or hereafter constituted, or any other
     applicable Federal, state or foreign bankruptcy, insolvency or similar law,
     or appointing a custodian, receiver, liquidator, assignee, trustee,
     sequestrator or other similar official of the Company or any Significant
     Restricted Subsidiary or of any substantial part of the Property or assets
     of the Company or any Significant Restricted Subsidiary, or ordering the
     winding up or liquidation of the affairs of the Company or any Significant
     Restricted Subsidiary, and the continuance of any such decree or order for
     relief or any such other decree or order unstayed and in effect for a
     period of 60 consecutive days; or
 
          (h) (i) the commencement by the Company or any Significant Restricted
     Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
     now or hereafter constituted, or any other applicable Federal, state or
     foreign bankruptcy, insolvency or other similar law or of any other case or
     proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
     by the Company or any Significant Restricted Subsidiary to the entry of a
     decree or order for relief in respect of the Company or any Significant
     Restricted Subsidiary in an involuntary case or proceeding under U.S.
     bankruptcy laws, as now or
 
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<PAGE>   84
 
     hereafter constituted, or any other applicable Federal, state or foreign
     bankruptcy, insolvency or other similar law or to the commencement of any
     bankruptcy or insolvency case or proceeding against the Company or any
     Significant Restricted Subsidiary; or (iii) the filing by the Company or
     any Significant Restricted Subsidiary of a petition or answer or consent
     seeking reorganization or relief under U.S. bankruptcy laws, as now or
     hereafter constituted, or any other applicable Federal, state or foreign
     bankruptcy, insolvency or other similar law; or (iv) the consent by the
     Company or any Significant Restricted Subsidiary to the filing of such
     petition or to the appointment of or taking possession by a custodian,
     receiver, liquidator, assignee, trustee, sequestrator or similar official
     of the Company or any Significant Restricted Subsidiary or of any
     substantial part of the Property or assets of the Company or any
     Significant Restricted Subsidiary, or the making by the Company or any
     Significant Restricted Subsidiary of an assignment for the benefit of
     creditors; or (v) the admission by the Company or any Significant
     Restricted Subsidiary in writing of its inability to pay its debts
     generally as they become due; or (vi) the taking of corporate action by the
     Company or any Significant Restricted Subsidiary in furtherance of any such
     action.
 
     If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of Notes may declare all unpaid principal of, and any accrued
and unpaid interest on, all Notes then outstanding to be immediately due and
payable by a notice in writing to the Company (and to the Trustee if given by
holders of the Notes), and upon any such declaration, such amount will become
and be immediately due and payable. If any Event of Default specified in clause
(g) or (h) above occurs, all unpaid principal of, and any accrued and unpaid
interest on, the Notes then outstanding shall become immediately due and payable
without any declaration or other act on the part of the Trustee or any holder of
Notes. In the event of a declaration of acceleration because an Event of Default
set forth in clause (e) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied, or cured or waived by the holders of the relevant Indebtedness, within
60 days after such event of default. Under certain circumstances, the holders of
a majority in principal amount of the outstanding Notes by notice to the Company
and the Trustee may rescind an acceleration and its consequences.
 
     The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto.
 
AMENDMENT, SUPPLEMENT AND WAIVER
 
     The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of Notes, enter into one or more indentures
supplemental to the Indenture (l) to evidence the succession of another Person
to the Company and the assumption by such successor of the covenants of the
Company in the Indenture and the Notes; (2) to add to the covenants of the
Company, for the benefit of the holders, or to surrender any right or power
conferred upon the Company by the Indenture; (3) to add any additional Events of
Default; (4) to provide for uncertificated Notes in addition to or in place of
certificated Notes; (5) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (6) to secure the Notes;
(7) to cure any ambiguity in the Indenture, to correct or supplement any
provision in the Indenture which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the Indenture; provided such actions shall not adversely affect
the interests of the holders in any material respect; or (8) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
 
     With the consent of the holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into one
or more indentures supplemental to the Indenture for the purpose or adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the holders; provided
that no such supplemental indenture
 
                                       79
<PAGE>   85
 
shall, without the consent of the holders of not less than 75% in principal
amount of the outstanding Notes, modify the obligations of the Company to make
offers to purchase Notes upon a Change of Control or from the proceeds of Asset
Sales; and, provided, further, that no such supplemental indenture shall,
without the consent of the holder of each outstanding Note: (l) change the
stated maturity of the principal of, or any installment of interest on, any
Note, or reduce the principal amount thereof (or premium, if any), or the
interest thereon that would be due and payable upon maturity thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium or interest thereon is payable, or impair the right to institute suit
for the enforcement of any such payment on or after the maturity thereof; (2)
reduce the percentage in principal amount of the outstanding Notes, the consent
of whose holders is necessary for any such supplemental indenture or required
for any waiver of compliance with certain provisions of the Indenture or certain
Defaults thereunder; (3) subordinate in right of payment, or otherwise
subordinate, the Notes to any other Indebtedness; or (4) modify any provision of
this paragraph (except to increase any percentage set forth herein).
 
     The holders of not less than a majority in principal amount of the
outstanding Notes may, on behalf of the holders of all the Notes, waive any past
Default under the Indenture and its consequences, except Default (1) in the
payment of the principal of (or premium, if any) or interest on any Note, or (2)
in respect of a covenant or provision hereof which under the first proviso to
the prior paragraph cannot be modified or amended without the consent of the
holders of not less than 75% in principal amount of the outstanding Notes, or
(3) in respect of a covenant or provision hereof which under the second proviso
to the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Note affected; provided with respect to any past
Default referred to in clause (2) of this paragraph, the holders of not less
than 75% in principal amount of the outstanding Notes may waive such Default.
 
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
 
     The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding Notes have been delivered to the Trustee for
cancellation or (B) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, will become due and payable within one
year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes, not
theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
 
     The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of further
effect as to all outstanding Notes (except as to (i) rights of registration of
transfer, substitution and exchange of Notes and the Company's right of optional
redemption, (ii) rights of holders to receive payments of principal of, premium,
if any, and interest on the Notes (but not the Change of Control Purchase Price
or the Offer Purchase Price) and any rights of the holders with respect to such
amounts, (iii) the rights, obligations and immunities of the Trustee under the
Indenture and (iv) certain other specified provisions in the Indenture) or (b)
cease to be under any obligation to comply with certain restrictive covenants
including those described under "-- Certain Covenants," after the irrevocable
deposit by the Company with the Trustee, in trust for the benefit of the
holders, at any time prior to the maturity of the Notes, of (A) money in an
amount, (B) U.S. Government Obligations which through the payment of interest
and principal will provide, not later than one day before the due date of
payment in respect of the Notes, money in an amount, or (C) a combination
thereof, sufficient to pay and discharge the principal of, and interest on, the
Notes then outstanding on the dates on which any such payments are due in
accordance with the terms of the Indenture and of the Notes. Such defeasance or
covenant defeasance shall be deemed to occur only if certain conditions are
satisfied, including, among other things, delivery by the Company to the Trustee
of an opinion of outside counsel acceptable to the Trustee to the effect that
(i) such
 
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<PAGE>   86
 
deposit, defeasance and discharge will not be deemed, or result in, a taxable
event for federal income tax purposes with respect to the holders; and (ii) the
Company's deposit will not result in the trust or the Trustee being subject to
regulation under the Investment Company Act of 1940.
 
THE TRUSTEE
 
     The Chase Manhattan Bank is the Trustee under the Indenture.
 
     The holders of not less than a majority in principal amount of the
outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the holders of the
Notes, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
 
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
 
     No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of such person's or
entity's status as a director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note, each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver way not be
effective to waive liabilities under the federal securities laws and it has been
the view of the SEC that such a waiver is against public policy.
 
TRANSFER AND EXCHANGE
 
     A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
 
CERTAIN DEFINITIONS
 
     Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
 
     "Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or
into or becoming a Subsidiary of such specified Person, but excluding
Indebtedness which is extinguished, retired or repaid in connection with such
other Person merging with or into or becoming a Subsidiary of such specified
Person.
 
     "Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, neither the Company nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other; and provided, further, any lender under
the Secured Credit Facility and its Affiliates shall not be deemed to be
Affiliates of the Company or any Restricted Subsidiary solely as a result of the
existence of the Secured Credit Facility or their holdings of Capital Stock of
the Company or any Restricted Subsidiary acquired in
 
                                       81
<PAGE>   87
 
connection with the Secured Credit Facility. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling," "under
common control with" and "controlled by"), and as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of Voting Stock, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
 
     "Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, by way of
consolidation or merger, but excluding by means of any Sale and Leaseback
Transaction or by the granting of a Lien permitted under "-- Limitation on
Liens") by such Person or any of its Restricted Subsidiaries to any Person other
than the Company or a Restricted Subsidiary of the Company, in one transaction,
or a series of related transactions (each hereinafter referred to as a
"Disposition"), of Property or assets of such Person or any of its Restricted
Subsidiaries, the Fair Market Value of which exceeds $2 million, other than (i)
a Disposition of Property in the ordinary course of business consistent with
industry practice, (ii) a Disposition that constitutes a Restricted Payment
permitted under "-- Restricted Payments" and (iii) a Disposition by the Company
in connection with a transaction permitted under "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
 
     "Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by such Person) of the payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty (in
which case the rental payments shall include such penalty).
 
     "Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
 
     "Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
 
     "Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such.
 
     "Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
 
     "Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to acquire an equity interest in such
Person.
 
     "Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents.
 
     "Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of
 
                                       82
<PAGE>   88
 
Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(i) under the Exchange Act) (other than any Permitted Holder or any
Restricted Subsidiary of the Company) shall have occurred; (ii) any "Person" or
"group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange
Act or any successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d-5(b)(i) under the Exchange Act), other than any
Permitted Holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 35% of the total voting power of all classes of
the Voting Stock of the Company and/or warrants or options to acquire such
Voting Stock, calculated on a fully diluted basis, and such voting power
percentage is greater than or equal to the total voting power percentage then
beneficially owned by the Permitted Holders in the aggregate; or (iii) during
any period of two consecutive years, individuals who at the beginning of such
period constituted the Board of Directors (together with any new directors whose
election or appointment by such board or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office.
 
     "Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, (A) the sum of (i) the aggregate amount of cash and
non-cash interest expense (including capitalized interest) of such Person and
its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP in respect of Indebtedness (including, without
limitation, (v) any amortization of debt discount, (w) net costs associated with
Interest Hedging Obligations (including any amortization of discounts), (x) the
interest portion of any deferred payment obligation, (y) all accrued interest
and (z) all commissions, discounts and other fees and charges owed with respect
to letters of credit, bankers' acceptances or similar facilities) paid or
accrued, or scheduled to be paid or accrued, during such period; (ii) dividends
or distributions with respect to preferred stock or Disqualified Stock of such
Person (and of its Restricted Subsidiaries if paid to a Person other than such
Person or its Restricted Subsidiaries) declared and payable in cash; (iii) the
portion of any rental obligation of such Person or its Restricted Subsidiaries
in respect of any Capital Lease Obligation allocable to interest expense in
accordance with GAAP; (iv) the portion of any rental obligation of such Person
or its Restricted Subsidiaries in respect of any Sale and Leaseback Transaction
allocable to interest expense (determined as if such were treated as a Capital
Lease Obligation); and (v) to the extent any Indebtedness of any other Person is
Guaranteed by such Person or any of its Restricted Subsidiaries, the aggregate
amount of interest paid, accrued or scheduled to be paid or accrued, by such
other Person during such period attributable to any such Indebtedness, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its Restricted Subsidiaries during such
period and any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness of such Person and its Restricted
Subsidiaries prior to its stated maturity; in the case of both (A) and (B)
above, after elimination of intercompany accounts among such Person and its
Restricted Subsidiaries and as determined in accordance with GAAP.
 
     "Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(i) all items classified as extraordinary, (ii) any net income of any Person
other than such Person and its Restricted Subsidiaries, except to the extent of
the amount of dividends or other distributions actually paid to such Person or
its Restricted Subsidiaries by such other Person during such period; (iii) the
net income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition; (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan; (v) net gains (but not
net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries; (vi) the net income (but not net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such
 
                                       83
<PAGE>   89
 
Restricted Subsidiary to such Person; (vii) with regard to a non-wholly owned
Restricted Subsidiary, any aggregate net income (or loss) in excess of such
Person's or such Restricted Subsidiary's pro rata share of such non-wholly owned
Restricted Subsidiary's net income (or loss); and (viii) the cumulative effect
of changes in accounting principles.
 
     "Consolidated Tangible Assets" of any Person means, as of any date, the sum
for such Person and its Restricted Subsidiaries (after eliminating intercompany
items) of the net book value of all Property and assets of such Person and its
Restricted Subsidiaries reflected on a balance sheet of such Person or such
Restricted Subsidiary, as the case may be, prepared in accordance with GAAP,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, and (ii) un-amortized deferred financing
costs, debt discount and expenses.
 
     "Debt to EBITDA Ratio" means, as at any date of determination, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (ii) the
aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for
the four preceding fiscal quarters for which financial information is available
immediately prior to the date of determination; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Subsidiaries during
the fiscal quarter in which the date of determination occurs shall be calculated
as if such Indebtedness was so incurred or retired on the first day of the
fiscal quarter in which the date of determination occurs; and provided, further,
that (x) if the transaction giving rise to the need to calculate the Debt to
EBITDA Ratio would have the effect of increasing or decreasing Indebtedness or
EBITDA in the future, Indebtedness or EBITDA shall be calculated on a pro forma
basis as if such transaction had occurred on the first day of such four fiscal
quarter period preceding the date of determination and (y) if during such four
fiscal quarter period the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the subject
of such Asset Sale and any related retirement of Indebtedness as if such Asset
Sale and related retirement of Indebtedness had occurred on the first day of
such period or (z) if during such four fiscal quarter period the Company or any
of its Restricted Subsidiaries shall have acquired any material assets outside
the ordinary course of business, EBITDA shall be calculated on a pro forma basis
as if such asset acquisition and related financing had occurred on the first day
of such period.
 
     "Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
 
     "Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on which
the Notes mature.
 
     "EBIT" means the amount calculated in the same manner as EBITDA, but not
including clauses (iii) and (iv) of the definition thereof.
 
     "EBITDA" means, with respect to any Person for any period, the sum for such
Person for such period of Consolidated Net Income plus, to the extent reflected
in the income statement of such Person for such period from which Consolidated
Net Income is determined, without duplication, (i) Consolidated Interest
Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization
expense, (v) any non-cash expense related to the issuance to employees of such
Person of options to purchase Capital Stock of such Person and (vi) any charge
related to any premium or penalty paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity and minus, to the extent reflected
in such income statement, any non-cash credits that had the effect of increasing
Consolidated Net Income of such Person for such period. This definition of
EBITDA is used only for the purpose of this Description of the Notes and the
Indenture.
 
                                       84
<PAGE>   90
 
     "Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above, (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within ninety days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's Ratings Group ("Standard & Poor's") or A-2 or
better from Moody's Investors Service, Inc. ("Moody's"), (v) commercial paper
issued by the parent corporation of any commercial bank organized in the United
States having capital and surplus in excess of $500 million and commercial paper
issued by others having one of the two highest ratings obtainable from either
Standard & Poor's or Moody's and in each case maturing within ninety days after
the date of acquisition, (vi) overnight bank deposits and bankers' acceptances
at any commercial bank organized in the United States having capital and surplus
in excess of $500 million, (vii) deposits available for withdrawal on demand
with a commercial bank organized in the United States having capital and surplus
in excess of $500 million and (viii) investments in money market funds
substantially all of whose assets comprise securities of the types described in
clauses (i) through (vi).
 
     "Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to Standard &
Poor's or Moody's at the time as of which any investment or rollover therein is
made.
 
     "Equity Offering" means an offering of Common Stock of the Company
resulting in net proceeds to the Company in excess of $20 million.
 
     "Escrow Account" means an escrow account for the deposit of approximately
$70 million of the net proceeds from the sale of the Notes under the Escrow and
Disbursement Agreement.
 
     "Escrow Agent" means The Bank of New York, as Escrow Agent under the Escrow
and Disbursement Agreement, or any successor thereto appointed pursuant to such
agreement.
 
     "Escrow and Disbursement Agreement" means the Escrow and Disbursement
Agreement, dated as of the date of the Indenture, by and among the Escrow Agent,
the Trustee and the Company, governing the disbursement of funds from the Escrow
Account.
 
     "Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
 
     "Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture (other than under the Secured Credit Facility), including the 2005
Notes and the 2006 Notes, and disclosed in a schedule attached to the Indenture,
and the incurrence by the Company of Indebtedness represented by the 2005 Notes
and the 2006 Notes.
 
     "Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
 
     "Fiber Network" means a digital fiber optic telecommunications network
wholly owned by the Company that serves a Metropolitan Area.
 
     "GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting
 
                                       85
<PAGE>   91
 
profession of the United States, that are applicable to the circumstances as of
the date of determination; provided that, except as otherwise specifically
provided, all calculations made for purposes of determining compliance with the
terms of the provisions of the Indenture shall utilize GAAP as in effect on the
Issue Date.
 
     "Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
 
     "incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurrable" and "incurring," shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness. Indebtedness otherwise
incurred by a Person before it becomes a Subsidiary of the Company shall be
deemed to have been incurred at the time at which it becomes a Subsidiary.
 
     "Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding trade accounts payable made in the ordinary course of
business, (iii) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (iv) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable for, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture; provided that if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability of any Guarantees at such date; provided that for purposes of
calculating the amount of the 2005 Notes or 2006 Notes outstanding at any date,
the amount of such 2005 Notes or 2006 Notes shall be the Accreted Value (as
defined in the relevant indenture) thereof as of such date unless cash interest
has commenced to accrue pursuant to the relevant indenture, in which case the
amount of the 2005 Notes or 2006 Notes outstanding will be determined pursuant
to the relevant indenture and will not include any accrued and unpaid cash
interest which would otherwise be included in Accreted Value because of clause
(iii) of the definition thereof in the relevant indenture.
 
     "Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
 
                                       86
<PAGE>   92
 
     "Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
 
     "Issue Date" means the date on which the Notes were first authenticated and
delivered under the Indenture.
 
     "Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
 
     "Marketable Securities" means (i) U.S. Government Securities maturing not
more than two years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued by
or time deposit of an Eligible Institution; (iii) commercial paper maturing not
more than 270 days after the date of acquisition issued by a corporation (other
than an Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "A-1" (or higher) according to Standard & Poor's
or "P-1" (or higher) according to Moody's; (iv) any banker's acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types described in
clauses (i) through (iv) above.
 
     "Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
 
     "Metropolitan Area" means the 31 metropolitan areas in which the Company,
as of June 30, 1997, has a Fiber Network and other metropolitan areas deemed in
the reasonable business judgment of the management of the Company to provide an
opportunity for the building and operation of such a Fiber Network with the
reasonable potential to produce financial results for the Company at least
substantially comparable to the metropolitan areas in which the Company has such
operational Fiber Networks.
 
     "Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as liability under GAAP by such Person or its Restricted Subsidiaries,
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale and (iii) all contractually required
distributions and other payments made to minority interest holders (but
excluding distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; provided that, in
the event that any consideration
 
                                       87
<PAGE>   93
 
for a transaction (which would otherwise constitute Net Cash Proceeds) is
required to be held in escrow pending determination of whether a purchase price
adjustment will be made, such consideration (or any portion thereof) shall
become Net Cash Proceeds only at such time as it is released to such Person or
its Restricted Subsidiaries from escrow; provided, further, that any non-cash
consideration received in connection with any transaction, which is subsequently
converted to cash, shall be deemed to be Net Cash Proceeds at such time, and
shall thereafter be applied in accordance with the Indenture.
 
     "Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President or a Vice President, and by
the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee, which shall comply with the Indenture.
 
     "Permitted Holders" means The Huff Alternative Income Fund, L.P., ING
Equity Partners, L.P.I., Apex Investment Fund I, L.P., Apex Investment Fund II,
L.P., The Productivity Fund II, L.P. and Anthony J. Pompliano and the respective
Affiliates (other than the Company and the Restricted Subsidiaries) of each of
the foregoing.
 
     "Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the Indenture; (iv) Investments pursuant to
certain agreements or obligations of the Company or a Restricted Subsidiary, in
effect an the Issue Date, to make such Investments, and disclosed in a Schedule
attached to the Indenture; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and workers' compensation,
performance and other similar deposits; (vi) Interest Hedging Obligations with
respect to any floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding; (vii) Exchange Rate Obligations; provided that such
Exchange Rate Obligations were entered into in connection with transactions in
the ordinary course of business or the incurrence of Indebtedness that is
permitted by the terms of the Indenture to be outstanding; (viii) bonds, notes,
debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "-- Asset Sales"; (ix) Investments
by the Company or a Restricted Subsidiary in or in respect of a Person to the
extent the consideration for such Investment consists of shares of Qualified
Stock of the Company; and (x) Investments in existence at the Issue Date.
 
     "Permitted Liens" means (i) Liens on Property or assets of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such merger or consolidation;
(ii) Liens on Telecommunications Assets existing during the time of the
construction thereof; (iii) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business consistent with industry practice;
(iv) Liens existing as of the Issue Date; (v) Liens to secure borrowings
permitted under clause (a) of the second paragraph of "-- Limitation on
Indebtedness"; (vi) any Lien on Property of the Company in favor of the United
States of America or any state thereof, or any instrumentality of either, to
secure certain payments pursuant to any contract or statute; (vii) any Lien for
taxes or assessments or other governmental charges or levies not then due and
payable (or which, if due and payable, are being contested in good faith and for
which adequate reserves are being maintained, to the extent required by GAAP);
(viii) easements, rights-of-way, licenses and other similar restrictions on the
use of Properties or minor imperfections of title that, in the aggregate, are
not material in amount and do not in any case materially detract from the
Properties subject thereto or interfere with the ordinary conduct of the
business of the Company or its Subsidiaries; (ix) any Lien to secure obligations
under workmen's compensation laws or similar legislation, including any Lien
with respect to judgments which are not currently dischargeable; (x) any
statutory warehousemen's, materialmen's or other similar Liens for sums not then
due and payable (or which, if due and payable, are being contested in good faith
and with respect to which adequate reserves are being maintained, to the extent
required by GAAP); (xi) any interest or title of a lessor in Property subject to
a Capital Lease Obligation; (xii) Liens to secure any Vendor Financing
Indebtedness; provided that such Liens do not extend to any Property or assets
other than
 
                                       88
<PAGE>   94
 
the Property or assets the acquisition of which was financed by such
Indebtedness; (xiii) Liens in favor of the Company or any Restricted Subsidiary;
(xiv) Liens on Property or assets of a Person existing prior to the time such
Person is acquired by the Company as a result of (a) an Investment described in
clause (ix) of the definition of "Permitted Investments" herein or (b) an
Investment described in clause (vii) of the second paragraph of the covenant
described under "Restricted Payments" herein; provided that such Liens were in
existence prior to the contemplation of such Investment and do not secure any
Property or assets of the Company or any of its Subsidiaries other than the
Property or assets subject to the Liens prior to such Investment; (xv) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other Property relating to such letters of credit and the
products and proceeds thereof; (xvi) Liens on the Escrow Account and all funds
and securities therein securing only the Notes equally and ratably and (xvii)
Liens to secure any permitted extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, of any Indebtedness secured by Liens referred to in the foregoing clauses
(i) through (v) and (xii), provided that such Liens do not extend to any other
Property or assets and the principal amount of the Indebtedness secured by such
Liens is not increased.
 
     "Permitted Subordinated Financing" means Indebtedness or preferred stock of
the Company issued to a Permitted Holder on terms specified in the Indenture,
provided that (i) in the case of Permitted Subordinated Financing that
constitutes Indebtedness, such Indebtedness is subordinated in right of payment
to the Notes and has a maturity of 180 days or less and (ii) in the case of
Permitted Subordinated Financing that constitutes preferred stock, such
preferred stock is retired within 180 days of issuance.
 
     "Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
 
     "Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
 
     "Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
 
     "Refinancing Indebtedness" means any Indebtedness incurred in connection
with the Refinancing of other Indebtedness.
 
     "Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted Subsidiary, (ii) a payment made by the Company or any of its
Restricted Subsidiaries (other than to the Company or any Restricted Subsidiary)
to purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
the Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company or
such Restricted Subsidiary which is subordinate (whether pursuant to its terms
or by operation of law) in right of payment to the Notes and which was scheduled
to mature on or after the maturity of the Notes or (iv) an Investment in any
Person, including an Unrestricted Subsidiary or the designation of a Subsidiary
as an Unrestricted Subsidiary, other than (a) a Permitted Investment, (b) an
Investment by the Company in a Restricted Subsidiary or (c) an Investment by a
Restricted Subsidiary in the Company or a Restricted Subsidiary.
 
     "Restricted Subsidiary" means any Subsidiary of the Company that has not
been classified as an "Unrestricted Subsidiary."
 
     "Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
 
                                       89
<PAGE>   95
 
     "Secured Credit Facility" means the AT&T Credit Facility as in effect on
the Issue Date and additional secured credit agreements to which the Company is
or becomes a party, in an aggregate amount not to exceed $35 million, and all
related amendments, notes, collateral documents, guarantees, instruments and
other agreements executed in connection therewith, as the same may be amended,
modified, supplemented, restated, renewed, extended, refinanced, substituted or
replaced from time to time.
 
     "Significant Restricted Subsidiary" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act and the Exchange Act.
 
     "Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
 
     "Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights-of-way, trademarks and licenses to use
copyrighted material), that are utilized by such Person, directly or indirectly,
in a Telecommunications Business. Telecommunications Assets shall include stock,
joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to the
Indenture. The determination of what constitutes Telecommunication Assets shall
be made by the Board of Directors and evidenced by a Board Resolution delivered
to the Trustee.
 
     "Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications-related network equipment, software and other devices for use in
(i) above or (iii) evaluating, participating or pursuing any other activity or
opportunity that is related to those specified in (i) or (ii) above.
 
     "Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.
 
     "Total Market Capitalization" of any Person means, at the time of
determination, the product of (i) the aggregate amount of outstanding shares of
common stock of such Person (which shall not include any common stock issuable
upon the exercise of options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the preceding 20 consecutive Trading
Days. If no such closing price exists with respect to shares of any such class,
the value of such shares shall be determined by the Board of Directors in good
faith as evidenced by a Board Resolution delivered to the Trustee.
 
     "Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
 
     "U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from
 
                                       90
<PAGE>   96
 
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal or interest of the U.S. Government Obligation
evidenced by such depository receipt.
 
     "Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
 
     "Vendor Financing Indebtedness" of any Person means an obligation owed by
such Person to a vendor of any Telecommunications Assets solely in respect of
the purchase price of such assets, provided that the amount of such Indebtedness
does not exceed the Fair Market Value of such assets, and provided, further,
that such Indebtedness is incurred within 180 days of the acquisition of such
assets.
 
     "Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
 
                      EXCHANGE OFFER; REGISTRATION RIGHTS
 
     In connection with the Private Placement, the Company and the Initial
Purchasers entered into the Registration Rights Agreement on July 23, 1997
pursuant to which the Company agreed that it will, at its cost, for the benefit
of the Holders, (i) on or prior to September 21, 1997, file a registration
statement on an appropriate registration form (the "Exchange Offer Registration
Statement") with respect to the Exchange Offer to exchange the Notes for the
Exchange Notes of the Company, which Exchange Notes will have terms
substantially identical in all material respects to the Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions) and
(ii) use commercially reasonable efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act by
November 20, 1997. Upon the Exchange Offer Registration Statement being declared
effective, the Company will offer the Exchange Notes in exchange for surrender
of the Notes. The Company will keep the Exchange Offer open for not less than 20
business days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the Holders. For each of the Notes surrendered
to the Company pursuant to the Exchange Offer, the Holder who surrendered such
Notes will receive an Exchange Note having a principal amount equal to that of
the surrendered Notes. Interest on each Exchange Note will accrue (A) from the
later of (i) the last interest payment date on which interest was paid on the
Note surrendered in exchange therefor, or (ii) if the Note is surrendered for
exchange on a date in a period which includes the record date for an interest
payment date to occur on or after the date of such exchange and as to which
interest will be paid, the date of such interest payment date or (B) if no
interest has been paid on the Notes, from July 23, 1997.
 
     Under existing interpretations of the SEC contained in several no-action
letters to third parties, the Exchange Notes will be freely transferable by
holders thereof (other than affiliates of the Company) after the Exchange Offer
without further registration under the Securities Act; provided, however, that
each Holder that wishes to exchange its Notes for Exchange Notes will be
required to represent (i) that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business, (ii) that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of Securities
Act) of the Exchange Notes in violation of the Securities Act, (iii) that it is
not an "affiliate" (as defined in Rule 405 promulgated under the Securities Act)
of the Company, (iv) if such Holder is not a broker-dealer, that it is not
engaged in, and does not intend to engage in, the distribution of Exchange Notes
and (v) if such Holder is a broker-dealer (a "Participating Broker-Dealer") that
will receive Exchange Notes for its own account in exchange for Notes that were
acquired as a result of market-making or other trading activities, that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
SEC has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of an unsold allotment from the original sale of the Notes) with the
prospectus contained in the Exchange Offer
 
                                       91
<PAGE>   97
 
Registration Statement. The Company will agree to make available, for a period
of 180 days after consummation of the Exchange Offer, a prospectus meeting the
requirements of the Securities Act for use by Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery requirements for use in
connection with any resale of Exchange Notes.
 
     If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the SEC, the Company is not permitted to effect
an Exchange Offer, (ii) the Exchange Offer Registration Statement is not
declared effective within 120 days of the Issue Date, (iii) in certain
circumstances, certain holders of unregistered Exchange Notes so request or (iv)
in the case of any Holder that participates in the Exchange Offer, such Holder
does not receive Exchange Notes on the date of the exchange that may be sold
without restriction under state and federal securities laws (other than due
solely to the status of such Holder as an affiliate of the Company within the
meaning of the Securities Act), then in each case, the Company will (x) promptly
deliver to the Holders and the Trustee written notice thereof and (y) at its
sole expense, (a) as promptly as practicable (but in no event later than 60 days
after the Issue Date), file a shelf registration statement covering resales of
the Notes (the "Shelf Registration Statement"), (b) use its commercially
reasonable efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) use its commercially reasonable
efforts to keep effective the Shelf Registration Statement until the earlier of
three years after the Issue Date and such time as all of the applicable Notes
have been sold thereunder. The Registration Statement of which this Prospectus
forms a part has been filed to satisfy the Company's obligations with respect to
filing the Shelf Registration Statement. The Company will provide to each Holder
copies of the prospectus that is a part of the Shelf Registration Statement,
notify each such Holder when the Shelf Registration Statement for the Notes has
become effective and take certain other actions as are required to permit
unrestricted resales of the Notes. A Holder that sells Notes pursuant to the
Shelf Registration Statement will be required to be named as a selling security
holder in the related prospectus and to deliver a prospectus to purchasers, will
be subject to certain of the civil liability provisions under Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such a Holder (including
certain indemnification rights and obligations).
 
     If the Company fails to comply with the above provision or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to become
effective, then, as liquidated damages, additional interest (the "Additional
Interest") shall become payable in respect of the Notes as follows:
 
          (i) if (A) neither the Exchange Offer Registration Statement nor the
     Shelf Registration Statement is filed with the SEC within 60 days following
     the Issue Date or (B) notwithstanding that the Company has consummated or
     will consummate an Exchange Offer, the Company is required to file a Shelf
     Registration Statement and such Shelf Registration Statement is not filed
     on or prior to the date required by the Registration Rights Agreement, then
     commencing on the day after either such required filing date, Additional
     Interest shall be paid on the principal amount of the Notes at a rate per
     annum equal to 0.5% of the principal amount of the Notes; or
 
          (ii) if (A) neither the Exchange Offer Registration Statement nor a
     Shelf Registration Statement is declared effective by the SEC within 120
     days following the Issue Date or (B) notwithstanding that the Company has
     consummated or will consummate an Exchange Offer, the Company is required
     to file a Shelf Registration Statement and such Shelf Registration
     Statement is not declared effective by the Commission on or prior to the
     120th day following the Issue Date, then, commencing on the day after
     either such required effective date, Additional Interest shall be paid on
     the principal amount of the Notes at a rate per annum equal to 0.5% of the
     principal amount of the Notes; or
 
          (iii) if applicable, the Shelf Registration Statement has been
     declared effective and such Shelf Registration Statement ceases to be
     effective at any time prior to the second anniversary of the Issue Date
     (other than after such time as all Notes have been disposed of thereunder),
     then Additional Interest shall be paid on the principal amount of the Notes
     at a rate per annum equal to 0.5% of the principal amount of the Notes
     commencing on the day such Shelf Registration Statement ceases to be
     effective;
 
provided, however, that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.5% per annum of the principal amount; provided, further,
however, that (1) upon the filing of the Exchange Offer
 
                                       92
<PAGE>   98
 
Registration Statement or a Shelf Registration Statement (in the case of clause
(i) above), (2) upon the effectiveness of the Exchange Offer Registration
Statement or a Shelf Registration Statement (in the case of clause (ii) above),
or (3) upon the effectiveness of the Shelf Registration Statement which had
ceased to remain effective (in the case of clause (iii) above), Additional
Interest on the Notes as a result of such clause (or the relevant subclause
thereof), as the case may be, shall cease to accrue and the terms of the Notes
shall revert to the original terms set forth on the cover page of this Offering
Memorandum.
 
     Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on January 15 and July 15 of each year.
 
     In addition, certain investment management accounts for which W.R. Huff
acts as investment advisor and on behalf of which W.R. Huff purchased Notes in
the Private Placement are entitled to demand registration rights with respect to
Notes, if any, held by them after the expiration date of the Shelf Registration
Statement.
 
     The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, which
is incorporated as an exhibit to the Registration Statement of which this
Prospectus forms a part and is available as set forth under "Additional
Information."
 
                         BOOK-ENTRY; DELIVERY AND FORM
 
     Except as described below, the Notes will be represented by a single
permanent global certificate in definitive, fully registered form (the "Global
Note"). The Global Note has been deposited with, or on behalf of, The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC.
 
     The Global Note.  The Company expects that pursuant to procedures
established by DTC (i) DTC or its custodian will credit, on its internal system,
the principal amount of Notes of the individual beneficial interests represented
by such Global Note to the respective accounts of persons who have accounts with
such depositary and (ii) ownership of beneficial interests in the Global Note
will be shown on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially were designated by or
on behalf of the Initial Purchasers and ownership of beneficial interests in the
Global Note will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants.
 
     So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in the Global Note will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
 
     Payments of the principal of, premium (if any), and interest (including
Additional Interest) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
 
     The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Additional Interest) on the
Global Note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the
 
                                       93
<PAGE>   99
 
accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
 
     Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
 
     DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Note
for Certificated Securities, which it will distribute to its participants and
which will be legended as set forth under the heading "Transfer Restrictions."
 
     DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
 
     Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
 
     Certificated Securities.  If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
 
                                SELLING HOLDERS
 
     The Notes were originally issued by the Company and sold by the Initial
Purchasers, in transactions exempt from the registration requirements of the
Securities Act, to persons reasonably believed by the Initial Purchasers to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) or other institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act) or in transactions
complying with the provisions of Regulation S under the Securities Act. The
Selling Holders (which term includes their transferees, pledgees, donees or
their successors) may from time to time offer and sell pursuant to this
Prospectus any or all of the Notes owned by each of them.
 
     The following table sets forth information with respect to the Selling
Holder named herein and the principal amounts of Notes beneficially owned by
such Selling Holder. Such information has been obtained from such Selling
Holder. Huff, an affiliate of W.R. Huff Asset Management Co., L.L.C., the
Selling Holder named herein, has a number of material relationships with the
Company. See "Management," "Certain Transactions" and "Principal Stockholders."
Except as otherwise disclosed herein, such Selling Holder does not have, or
within the past three years has not had, any position, office or other material
relationship with the Company or any of its predecessors or affiliates. Because
such Selling Holder may offer all or some portion of the Notes pursuant to this
Prospectus, no estimate can be given as to the amount of the Notes that will be
held
 
                                       94
<PAGE>   100
 
by such Selling Holder upon termination of any such sales. In addition, the
Selling Holder identified below may have sold, transferred or otherwise disposed
of all or a portion of its Notes since the date on which it provided the
information regarding their Notes in transactions exempt from the registration
requirements of the Securities Act. Finally, if required, additional Selling
Holders may from time to time be identified and information with respect to such
Selling Holders be provided in a Prospectus Supplement.
 
<TABLE>
<CAPTION>
                                                                      PRINCIPAL AMOUNT OF
                                                                             NOTES
                                                                      BENEFICIALLY OWNED
        SELLING HOLDER                                                AND OFFERED HEREBY
        ------------------------------------------------------------  -------------------
        <S>                                                           <C>
        W.R. Huff Asset Management Co., L.L.C.......................      $50,000,000
                                                                          -----------
                  Total.............................................      $50,000,000
                                                                          ===========
</TABLE>
 
                              PLAN OF DISTRIBUTION
 
     The Notes offered hereby may be sold from time to time to purchasers
directly by the Selling Holders. Alternatively, the Selling Holders may from
time to time offer the Notes to or through underwriters, dealers or agents, who
may receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Holders or the purchasers of Notes for whom they
may act as agents. The Selling Holders and any underwriters, dealers or agents
which participate in the distribution of Notes may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of Notes by them and any discounts, commissions, concessions or other
compensation received by any such underwriter, dealer or agent may be deemed to
be underwriting discounts and commissions under the Securities Act.
 
     The Notes may be sold from time to time in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. The sale of the Notes
may be effected in transactions (which may involve crosses or block
transactions) (i) on any national securities exchange or quotation service on
which the Notes may be listed or quoted at the time of sale, (ii) in the
over-the-counter market, (iii) in transactions otherwise than on such exchanges
or in the over-the-counter market or (iv) through the writing of options. At the
time a particular offering of the Notes is made, a Prospectus Supplement, if
required, will be distributed which will set forth the aggregate amount and type
of Notes being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents, any discounts, commissions and
other terms constituting compensation from the Selling Holders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
 
     To comply with the securities laws of certain jurisdictions, if applicable,
the Notes will be offered or sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain jurisdictions the Notes
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or an exemption from registration or qualification is
available and is complied with.
 
     Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Notes may not simultaneously engage in
market-making activities with respect to such securities for a restricted period
prior to the commencement of such distribution. In addition to and without
limiting the foregoing, each Selling Holder and any other person participating
in a distribution will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation Rules
102, 103 and 104, which provisions may limit the timing of purchases and sales
of any of the securities by the Selling Holders or any such other person. All of
the foregoing may affect the marketability of the Notes and brokers' and
dealers' ability to engage in market-making activities with respect to these
securities.
 
     Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Notes will be paid by the Company, including, without
limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Holders will
pay all underwriting discounts and selling commissions, if any. The Selling
Holders will be indemnified by the Company against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection
 
                                       95
<PAGE>   101
 
therewith. The Company will be indemnified by the Selling Holders against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith.
 
                                 LEGAL MATTERS
 
     Certain legal matters with respect to the Notes will be passed upon for the
Company by Riley M. Murphy, Annapolis Junction, Maryland.
 
                                    EXPERTS
 
     The consolidated financial statements of American Communications Services,
Inc. as of June 30, 1995 and 1996 and December 31, 1996, and for the years ended
June 30, 1995 and 1996 and six months 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.
 
                                       96
<PAGE>   102
 
                                    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.
 
     CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- a CAP that also provides
Switch Local Services such as local dial tone and centrex.
 
     CO-CARRIER STATUS -- A relationship between a CLEC and an ILEC that affords
the same access and rights to the other's network, and provides access and
services on an equal basis.
 
     COLLOCATION -- The ability of a CAP such as the Company to connect its
network to the LEC's central offices. Physical collocation occurs when a CAP
places its network connection equipment inside the LEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the LEC permits a CAP to connect its network to the LEC's central offices at
competitive prices, even though the CAP's network connection equipment is not
physically located inside the central offices.
 
     DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
 
     DEDICATED SERVICES -- Special access, switched transport and private line
services generally offered by CAPs, including the Company.
 
     DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
 
     DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit
 
                                       97
<PAGE>   103
 
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 (INCUMBENT LOCAL EXCHANGE CARRIER) -- An incumbent carrier providing
local exchange 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 (INTEGRATED SERVICES DIGITAL NETWORK) -- 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 video-conferencing 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.
 
     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
 
                                       98
<PAGE>   104
 
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.
 
     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 ILEC 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 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.
 
                                       99
<PAGE>   105
 
                         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-5
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-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 and 1996 and
  for the Six Months Ended December 31, 1996..........................................    F-7
Notes to Consolidated Financial Statements............................................    F-8
Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 1996 and June 30,
  1997................................................................................   F-22
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six
  Months Ended June 30, 1996 and 1997.................................................   F-23
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
  June 30, 1996 and 1997..............................................................   F-24
Notes to Unaudited Condensed Consolidated Interim Financial Statements................   F-25
</TABLE>
 
                                       F-1
<PAGE>   106
 
                          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>   107
 
                     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
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-3
<PAGE>   108
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                   CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                     JUNE 30,         JUNE 30,       DECEMBER 31,
                                                       1995             1996             1996
                                                    -----------     ------------     ------------
<S>                                                 <C>             <C>              <C>
  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
     9,910,704 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-4
<PAGE>   109
 
                     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-5
<PAGE>   110
 
                     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>
                                                                                 SERIES A-1              SERIES B           COMMON
                                                       PREFERRED STOCK         PREFERRED STOCK        PREFERRED STOCK        STOCK
                                                    ---------------------    -------------------    -------------------    ---------
                                                    SHARES      AMOUNT       SHARES      AMOUNT     SHARES      AMOUNT      SHARES
                                                    ------    -----------    -------    --------    -------    --------    ---------
<S>                                                 <C>       <C>            <C>        <C>         <C>        <C>         <C>
Balances at June 30, 1994........................    1,700    $ 1,700,000         --    $     --         --    $     --    2,755,005
Preferred Stock exchange (note 12)...............   (1,700)    (1,700,000)        --          --         --          --      548,387
Set par value for common stock (note 5)..........       --             --         --          --         --          --           --
Acquisition of Piedmont Teleport, Inc. (note
 13).............................................       --             --         --          --         --          --       62,000
Write-off of note receivable for common stock....       --             --         --          --         --          --           --
Series A Preferred private placement, net of
 related costs (note 3)..........................       --             --    186,664     186,664         --          --           --
Series B Preferred private placement, net of
 related costs (note 3)..........................       --             --         --          --    227,500     227,500           --
Issuance of put right obligations (notes 6 and
 9)..............................................       --             --         --          --         --          --           --
Cancelation of put right obligation (note 9).....       --             --         --          --         --          --           --
Warrant and stock option exercises and stock
 grant (note 6)..................................       --             --         --          --         --          --    2,379,390
Establish limitation on common stock put right
 obligation (note 6).............................       --             --         --          --         --          --           --
Series A Preferred Stock dividends accrued (note
 3)..............................................       --             --         --          --         --          --           --
Net loss.........................................       --             --         --          --         --          --           --
                                                    ------    -----------    -------    --------    -------    --------    ---------
Balances at June 30, 1995........................       --    $        --    186,664    $186,664    227,500    $227,500    5,744,782
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
Series A and B Preferred Stock dividends accrued
 (note 3)........................................       --             --         --          --         --          --           --
Cancelation 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
Warrants and stock options exercised (note 6)....       --             --         --          --         --          --      139,305
Series A and B Preferred Stock dividends accrued
 (note 3)........................................       --             --         --          --         --          --           --
Accretion of consulting agreement credit to
 exercise price of warrants (note 9).............       --             --         --          --         --          --           --
Cancelation of and adjustments to put right
 obligations (note 6)............................       --             --         --          --         --          --           --
Stock compensation expense.......................       --             --         --          --         --          --           --
Net loss.........................................       --             --         --          --         --          --           --
                                                    ------    -----------    -------    --------    -------    --------    ---------
Balances at December 31, 1996....................       --    $        --    186,664    $186,664    277,500    $277,500    6,784,996
                                                    ======    ===========    =======    ========    =======    ========    =========
 
<CAPTION>
                                                                               NOTES
                                                                             RECEIVABLE                        TOTAL
 
                                                              ADDITIONAL     ON SALE OF                    STOCKHOLDERS'
 
                                                                PAID-IN        COMMON      ACCUMULATED        EQUITY
 
                                                   AMOUNT       CAPITAL        STOCK         DEFICIT         (DEFICIT)
 
                                                   -------    -----------    ----------    ------------    -------------
 
<S>                                                 <C>       <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        (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)
 
Cancelation of put right obligation (note 9).....       --        487,500           --               --          487,500
 
Warrant and stock option exercises and stock
 grant (note 6)..................................   23,794        349,030           --               --          372,824
 
Establish limitation on common stock put right
 obligation (note 6).............................       --      4,510,962           --               --        4,510,962
 
Series A Preferred Stock dividends accrued (note
 3)..............................................       --     (1,070,985)          --               --       (1,070,985)
 
Net loss.........................................       --             --           --      (14,697,649)     (14,697,649)
 
                                                   -------    -----------      -------     ------------     ------------
 
Balances at June 30, 1995........................  $56,827    $42,411,448     $     --     $(20,741,222)   $  22,141,217
 
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)....    9,010        289,360           --               --          298,370
 
Series A and B Preferred Stock dividends accrued
 (note 3)........................................       --     (3,871,328)          --               --       (3,871,328)
 
Cancelation 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........................  $65,837    $55,975,078     $     --     $(47,523,266)   $   8,981,813
 
Warrants and stock options exercised (note 6)....    1,393        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
 
Cancelation of and adjustments to put right
 obligations (note 6)............................      620        154,405           --               --          155,025
 
Stock compensation expense.......................       --        549,646           --               --          549,646
 
Net loss.........................................       --             --           --      (34,916,514)     (34,916,514)
 
                                                   -------    -----------      -------     ------------     ------------
 
Balances at December 31, 1996....................  $67,850    $54,870,194     $     --     $(82,439,780)   $ (27,037,572)
 
                                                   =======    ===========      =======     ============     ============
 
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-6
<PAGE>   111
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                             FOR THE YEAR ENDED           FOR THE SIX
                                                                       ------------------------------     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
  Offerings..........................................................  $  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-7
<PAGE>   112
 
                     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 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).
 
                                       F-8
<PAGE>   113
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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.
 
     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.
 
                                       F-9
<PAGE>   114
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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.
 
  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.
 
                                      F-10
<PAGE>   115
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  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 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.
 
                                      F-11
<PAGE>   116
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(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 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
 
                                      F-12
<PAGE>   117
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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.
 
(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>
 
                                      F-13
<PAGE>   118
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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 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
 
                                      F-14
<PAGE>   119
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 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
 
                                      F-15
<PAGE>   120
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
secured convertible notes of $77,281 was retired by a cash payment from the
proceeds of the Series A Preferred Stock private 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.
 
  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
 
                                      F-16
<PAGE>   121
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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
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>
                                                                        SIX
                                                    YEAR ENDED      MONTHS ENDED
                                                     JUNE 30,       DECEMBER 31,
                                                       1996             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
                                           -------------------    ------------------    ------------------
                                                     WEIGHTED-              WEIGHTED-             WEIGHTED-
                                                      AVERAGE               AVERAGE               AVERAGE
                                           SHARES    EXERCISE     SHARES    EXERCISE    SHARES    EXERCISE
                                           (000)       PRICE      (000)      PRICE      (000)      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>
 
                                      F-17
<PAGE>   122
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information about fixed stock options at
December 31, 1996:
 
<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING
                                 ---------------------------------------
                                                 WEIGHTED-                    OPTIONS EXERCISABLE
                                                  AVERAGE      WEIGHTED-    -----------------------
                                   NUMBER        REMAINING      AVERAGE       NUMBER       WEIGHTED-
           RANGE EXERCISABLE     OUTSTANDING    CONTRACTUAL    EXERCISE     EXERCISABLE    AVERAGE
            EXERCISE PRICE       AT 12/31/96       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>
 
     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.
 
                                      F-18
<PAGE>   123
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  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.
 
     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.
 
                                      F-19
<PAGE>   124
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     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, 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>
                                                                               DECEMBER
                                                    JUNE 30,     JUNE 30,         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>   125
 
                     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>   126
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,    JUNE 30, 1997
                                                                      1996         (UNAUDITED)
                                                                  -------------   -------------
<S>                                                               <C>             <C>
Assets
Current Assets
  Cash and cash equivalents.....................................  $  78,618,544   $   8,499,115
  Restricted cash...............................................      2,342,152       5,156,258
  Accounts receivable, net......................................      2,429,077       6,653,925
  Other current assets..........................................      1,202,711       1,461,345
                                                                  -------------   -------------
     Total current assets.......................................     84,592,484      21,770,643
                                                                  -------------   -------------
Networks, furniture and equipment, gross........................    144,403,123     219,933,362
     (less: Accumulated depreciation)...........................     (8,320,372)    (17,029,394)
                                                                  -------------   -------------
                                                                    136,082,751     202,903,968
Deferred financing fees.........................................      8,380,283      10,340,377
Goodwill (net of accumulated amortization)......................             --       7,748,679
Other assets....................................................        982,649         617,309
                                                                  -------------   -------------
     Total assets...............................................  $ 230,038,167   $ 243,380,976
                                                                  -------------   -------------
Liabilities, Redeemable Stock, Options and Warrants and
  Stockholders' Equity
Current Liabilities
  Accounts payable..............................................  $  33,587,407   $  28,621,966
  Accrued liabilities...........................................      4,132,132       5,097,044
  Notes payable -- current portion..............................        872,031       1,325,532
                                                                  -------------   -------------
     Total current liabilities..................................     38,591,570      35,044,542
                                                                  -------------   -------------
Long Term Liabilities
  Notes payable.................................................    209,538,226     223,753,180
  Other Long Term Liabilities...................................             --         808,781
  Dividends payable.............................................      6,945,943              --
                                                                  -------------   -------------
     Total liabilities..........................................    255,075,739     259,606,503
                                                                  -------------   -------------
Redeemable stock, options and warrants..........................      2,000,000       2,000,000
                                                                  -------------   -------------
Stockholders' Equity/(Deficit)
  Preferred stock, $1.00 par value, 186,664 shares authorized
     and designated as 9% Series A-1 Convertible Preferred
     Stock, 186,664 and 0 shares, respectively, issued and
     outstanding................................................        186,664              --
  Preferred stock, $1.00 par value, 277,500 shares designated as
     9% Series B Convertible Preferred Stock, authorized,
     277,500 and 0, respectively, issued and outstanding........        277,500              --
  Common Stock, $0.01 par value, 75,000,000 shares authorized,
     6,784,996 and 35,926,902 shares, respectively, issued and
     outstanding................................................         67,850         359,269
  Additional paid-in-capital....................................     54,870,194     113,564,536
  Accumulated deficit...........................................    (82,439,780)   (132,149,332)
                                                                  -------------   -------------
Total stockholders' equity/(deficit)............................    (27,037,572)    (18,225,527)
                                                                  -------------   -------------
Total Liabilities, Redeemable Stock, Options and Warrants and
  Stockholders' Equity/(deficit)................................  $ 230,038,167   $ 243,380,976
                                                                  -------------   -------------
</TABLE>
 
  See accompanying notes to unaudited condensed consolidated interim financial
                                   statements
 
                                      F-22
<PAGE>   127
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         FOR THE THREE MONTHS ENDED                 FOR THE SIX MONTHS ENDED
                                                      ---------------------------------         ---------------------------------
                                                        JUNE 30,             JUNE 30,             JUNE 30,             JUNE 30,
                                                          1996                 1997                 1996                 1997
                                                      ------------         ------------         ------------         ------------
<S>                                                   <C>            <C>   <C>            <C>   <C>            <C>   <C>
Revenues............................................  $  1,609,621         $ 11,615,836         $  2,426,260         $ 19,792,511
Operating Expenses
  Network, development and operations...............       388,347            9,357,277            2,342,861           18,026,390
  Selling, general and administrative...............     7,735,834           15,893,562           10,386,097           29,818,429
  Non-cash compensation expense.....................      (454,339)             584,458            1,531,426              824,002
  Depreciation and amortization.....................     1,685,765            5,338,596            2,315,769            9,456,250
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
Total Operating Expenses............................     9,355,607           31,173,893           16,576,153           58,125,071
Non-operating income/expenses
  Interest and other income.........................    (2,970,916)            (193,620)          (3,632,229)          (1,077,691)
  Interest and other expense........................     4,141,366            6,287,621            7,641,990           12,420,763
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
Net loss before minority interest...................     8,916,436           25,652,058           18,159,654           49,675,632
Minority interest...................................      (154,671)                  --             (256,745)                  --
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
Net loss............................................     8,761,765           25,652,058           17,902,909           49,675,632
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
Preferred stock dividends/accretion.................     1,061,344              106,201            2,016,833            1,094,839
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
Net loss to common stockholders.....................     9,823,109           25,758,259           19,919,742           50,770,471
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
Net loss per common/common equivalent share.........        ($1.49)              ($0.92)              ($3.03)              ($2.82)
Average number of common/common
equivalent shares outstanding.......................     6,605,501           28,025,238            6,572,061           17,994,161
                                                                                          == ==
                                                                                          -- --
                                                      ------------   ----  ------------
                                                                     ====
</TABLE>
 
  See accompanying notes to unaudited condensed consolidated interim financial
                                   statements
 
                                      F-23
<PAGE>   128
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                    FOR THE SIX MONTHS ENDED
                                                                  -----------------------------
                                                                  JUNE 30, 1996   JUNE 30, 1997
                                                                  -------------   -------------
<S>                                                               <C>             <C>
Cash Flow from Operating Activities
Net Loss........................................................  $ (17,902,909)  $ (49,675,632)
Adjustments to reconcile net loss to net cash used in operating
  activities: Depreciation and amortization.....................      2,294,569       9,456,250
  Interest deferral and accretion...............................      7,573,427      12,239,366
  Amortization of deferred financing fees.......................        668,317         473,666
  Provision for doubtful accounts...............................        151,934         859,621
  Loss attributable to minority interest........................       (324,012)             --
  Noncash compensation..........................................      1,531,426         824,002
  Changes in operating assets and liabilities:
     Restricted cash related to operating activities............             --      (2,814,106)
     Trade accounts receivable..................................       (330,530)     (5,084,469)
     Other current assets.......................................       (458,272)       (258,634)
     Other assets...............................................       (107,574)        365,340
     Accounts payable...........................................     16,271,487      (4,162,403)
     Other accrued liabilities..................................     (1,666,634)        964,912
                                                                  --------------  --------------
Net cash provided by (used in) operating activities.............      7,701,229     (36,812,087)
                                                                  --------------  --------------
Cash flows from investing activities:
  Restricted cash related to network activities.................       (890,152)             --
  Purchase of furniture and equipment...........................     (1,538,943)     (4,911,864)
  Network development costs.....................................    (41,660,076)    (68,301,375)
                                                                  --------------  --------------
Net cash (used in) investing activities.........................    (44,089,171)    (73,213,239)
                                                                  --------------  --------------
Cash flows from financing activities:
  Issuance of notes payable and warrants........................     66,234,486       1,737,297
  Issuance of common stock......................................             --      40,702,000
  Issuance of Series B Preferred Stock..........................        274,682
  Payment of notes payable......................................             --        (238,291)
  Payment of dividends..........................................             --        (290,193)
  Payment of deferred financing fees............................     (3,459,582)     (3,299,499)
  Warrant and stock option exercises............................        279,233       1,294,583
                                                                  --------------  --------------
Net cash flow provided by financing activities..................     63,328,819      39,905,897
                                                                  --------------  --------------
Net increase/(decrease) in cash and cash equivalents............     26,940,877     (70,119,429)
Cash and cash equivalents -- beginning of period................  $ 107,175,104   $  78,618,544
                                                                  --------------  --------------
Cash and cash equivalents -- end of period......................  $ 134,115,981   $   8,499,115
                                                                  --------------  --------------
Supplemental disclosure of cash flow information:
  Dividends declared with preferred stock.......................  $   2,016,833   $   1,094,839
                                                                  --------------  --------------
  (Decrease) in accrued redeemable warrant cost.................  $    (504,554)  $          --
                                                                  --------------  --------------
  (Increase) in goodwill........................................  $          --   $  (8,118,632)
                                                                  --------------  --------------
</TABLE>
 
  See accompanying notes to unaudited condensed consolidated interim financial
                                   statements
 
                                      F-24
<PAGE>   129
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                   NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                          INTERIM FINANCIAL STATEMENTS
 
BUSINESS AND ORGANIZATION
 
     American Communications Services, Inc. (ACSI or the Company) provides a
broad range of integrated local voice and data communications services primarily
to commercial customers in mid-sized markets in the southern United States. The
Company manages and operates its own local fiber optic networks.
 
BASIS OF PRESENTATION AND RELATED MATTERS
 
     Effective December 31, 1996, the Company changed its fiscal year from a
twelve month period ended June 30, to a twelve month period ended December 31.
The consolidated financial statements include the accounts of ACSI and its
majority-owned subsidiaries. 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% ownership interest. All
material intercompany accounts and transactions have been eliminated in
consolidation.
 
     In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation thereof. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to instructions, rules and regulations prescribed by the Securities and Exchange
Commission. Although the Company believes that the disclosures provided are
adequate to make the information presented not misleading, these unaudited
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Operating results for the three and six months periods ended
June 30, 1997 are not necessarily indicative of the results expected for the
full year.
 
SIGNIFICANT ACCOUNTING POLICIES
 
  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 December 31, 1996 and June 30, 1997, 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 $2,342,152 and $5,156,258 at December 31, 1996 and June 30, 1997,
respectively. The face amount of all bonds and letters of credits was
approximately $6,200,000 as of December 31, 1996, and $8,072,000 as of June 30,
1997.
 
  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,
 
                                      F-25
<PAGE>   130
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                   NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                  INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
 
design and construction, negotiation of rights-of-way, obtaining legal and
regulatory authorizations and the amount of interest costs associated with the
network development.
 
     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.
 
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
 
                                      F-26
<PAGE>   131
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                   NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                  INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
 
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, 1996 consolidated
financial statements to conform to the June 30, 1997 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.
 
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. The Company provides managed
services to certain Internet service providers. Such companies operate in a
highly competitive and uncertain environment.
 
FINANCING ACTIVITIES
 
     To date, the Company has funded the construction of its networks and its
operations with external financings, as described below.
 
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
 
                                      F-27
<PAGE>   132
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                   NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                  INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
 
subsidiary, and ACSI pledged the other shares and the assets of the subsidiary
to AT&T Credit Corporation as security for the loan. As of June 30, 1997, an
aggregate of $31.2 million had been borrowed under these agreements. Principal
amounts payable on the AT&T Credit Facility during 1997 are approximately
$872,000.
 
     The Company has entered into negotiations with AT&T Capital Corporation to
roll-up the five existing loan agreements comprising the AT&T Credit Facility
into one loan agreement to be entered into with the Company, and to be secured
by the existing assets of the Company (including the stock, but not the assets,
of certain of the Company's subsidiaries) (the "New AT&T Facility"). The Company
expects the New AT&T Facility to otherwise be on terms substantially similar to
those of the existing AT&T Credit Facility. The maximum aggregate amount of
credit available under the proposed New AT&T Facility will not exceed $35.0
million as defined by the Company's existing indentures. On June 26, 1997, each
of the Company's Subsidiaries that are parties to the AT&T Credit Facility
entered into an agreement with AT&T Credit Corporation to waive, for a period of
90 business days commencing on the date thereof, compliance by such subsidiaries
with certain covenants contained therein. Such covenants are not expected to be
included in the New AT&T Facility.
 
9% SERIES A CONVERTIBLE 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 was converted
into 7,466,560 shares of Common Stock simultaneous with the completion of the
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. The
Series A Preferred Stock was converted into an aggregate of 7,350,160 shares of
common stock simultaneously with the completion of the April Offering discussed
below.
 
9% SERIES B CONVERTIBLE PREFERRED STOCK
 
     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 was converted into an aggregate of 9,910,704 shares of
Common Stock simultaneously with the completion of the April Offering discussed
below.
 
2005 SENIOR DISCOUNT NOTES (2005 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 "2005 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 on November 1 and May 1, commencing May 1, 2001.
The Company received net proceeds of approximately $96,105,000 from the sale of
the Units. The value ascribed to the 2005 Warrants was $8,684,000.
 
                                      F-28
<PAGE>   133
 
                     AMERICAN COMMUNICATIONS SERVICES, INC.
 
                   NOTES TO UNAUDITED CONDENSED CONSOLIDATED
                  INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
 
2006 SENIOR DISCOUNT NOTES (2006 NOTES)
 
     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 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.
 
COMMON EQUITY (APRIL OFFERING)
 
     On April 15, 1997, the Company consummated the issuance and sale of
5,060,000 shares of Common Stock (inclusive of the May 14, 1997 exercise by the
underwriters of their overallotment option) at a price per share of $5.00 in an
underwritten public offering, and the issuance and sale directly to certain of
its principal stockholders of 3,600,000 shares of Common Stock at a purchase
price of $4.70 per share (together, the "April Offering"). Total net proceeds to
the Company from the April Offering were approximately $40 million.
 
     In addition, the Company recently completed additional financings,
described below.
 
14-3/4% REDEEMABLE PREFERRED STOCK (UNIT OFFERING)
 
     On July 10, 1997, the Company consummated the private placement of 75,000
units, (the "Unit Offering"), consisting of its 14-3/4% Redeemable Preferred
Stock due 2008 (the "Redeemable Preferred Stock") and warrants to purchase
shares of common stock. The Company received net proceeds of approximately $67
million from the sale of these units. Each unit includes a warrant to purchase
80.318 shares of ACSI common stock subject to an increase of 22.645 additional
shares of common stock in the event that the Company fails to raise net proceeds
of at least $50 million through the issuance and sale of its qualified capital
stock on or before December 31, 1998. Dividends on the Redeemable Preferred
Stock will accrue from the date of issuance, are cumulative and will be payable
in arrears on March 31, June 30, September 30 and December 31, commencing
September 30, 1997. Dividends may be paid, at the Company's option, on any
dividend payment date either in cash or by the issuance of additional shares of
preferred stock, provided however, that after June 30, 2002, to the extent and
for so long as the Company is not precluded from paying cash dividends on the
Redeemable Preferred Stock by the terms of any then outstanding indebtedness or
any other agreement or instrument to which the Company is subject, the Company
shall pay the dividends in cash. The company is required to redeem all the
Redeemable Preferred Stock outstanding on June 30, 2008 at a redemption price
equal to 100.00% of the liquidation preference thereof, plus, without
duplication, accrued and unpaid dividends to the date of redemption.
 
2007 SENIOR NOTES (2007 NOTES)
 
     On July 18, 1997, the Company completed the private placement of $220
million of 13-3/4% Senior Notes due 2007. The Company received net proceeds of
approximately $209 million from the sale of the 2007 Notes, of which,
approximately $70 million has been placed in escrow solely to fund the first
five interest payments or otherwise for the benefit of the holders of the 2007
Notes. The 2007 Notes bear interest at 13-3/4% compounded semi-annually in
arrears, payable on January 15 and July 15 each year, commencing on January 15,
1998. The notes mature on July 15, 2007. The 2007 Notes will not be redeemable
at the option of the Company prior to July 15, 2002, except that any time prior
to July 15, 2000, the Company may redeem up to 35% of the aggregate principal
amount of the 2007 Notes with the net proceeds from one or more equity offerings
of the Company, at a redemption price equal to 113.75% of the aggregate
principal amount thereof on the date of the redemption, subject to other
conditions.
 
                                      F-29
<PAGE>   134
 
======================================================
 
     NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE
AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF NOR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
Additional Information................    i
Summary...............................    1
Risk Factors..........................   10
Use of Proceeds.......................   20
Capitalization........................   21
Unaudited Pro Forma Condensed
  Consolidated Financial Data.........   22
Selected Consolidated Financial
  Data................................   25
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................   26
Business..............................   35
Management............................   53
Certain Transactions..................   62
Principal Stockholders................   63
Description of Certain Indebtedness...   64
Description of the New Notes..........   67
Selling Holders.......................   94
Plan of Distribution..................   95
Legal Matters.........................   96
Experts...............................   96
Change in Independent Public
  Accountants.........................   96
Glossary..............................   97
Index to Financial Statements.........  F-1
</TABLE>
 
======================================================
 
======================================================
 
                 ---------------------------------------------
                                   PROSPECTUS
                 ---------------------------------------------
 
                                  $50,000,000
                                      LOGO
                              13 3/4% SENIOR NOTES
                                    DUE 2007
                                          , 1997
 
======================================================
<PAGE>   135
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The following table sets forth the various expenses to be paid by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee.
 
<TABLE>
        <S>                                                                       <C>
        SEC registration fee....................................................  $15,152
        Legal fees and expenses.................................................    5,000
        Accounting fees and expenses............................................    1,000
        Printing fees and expenses..............................................    5,000
        Miscellaneous expenses..................................................      848
                                                                                  -------
                  Total.........................................................  $27,000
                                                                                  =======
</TABLE>
 
ITEM 15.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     The Second 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 174 of the DGCL or (iv) for any transaction from which the
director derived an improper personal benefit.
 
     The Second Restated Certificate of Incorporation and the Amended and
Restated 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 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
 
                                      II-1
<PAGE>   136
 
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.
 
     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 Registrant
has been advised that in the opinion of the SEC 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.
 
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
<TABLE>
<CAPTION>
                                                                                     INCORPORATION
EXHIBIT NO.                                DESCRIPTION                                BY REFERENCE
- -----------   ---------------------------------------------------------------------  --------------
<C>           <S>                                                                    <C>
    3.1       Second Restated Certificate of Incorporation of the Company. ........         --
    3.2       Certificate of Designations of the Company's 14.75% Redeemable
              Preferred Stock due 2008. ...........................................         --
    3.3       Certificate of Amendment of the Certificate of Designations of the
              Company's 14.75% Redeemable Preferred Stock due 2008. ...............         --
    3.4       Amended and Restated By-Laws of the Company. ........................         --
    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       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"). .............................................         ++
    4.3       March 11, 1996 Supplement to 1995 indenture..........................       ++++
    4.4       Initial Global Note dated November 14, 1995. ........................         ++
    4.5       Warrant Agreement dated November 14, 1995, between the Company and
              Smith Barney Inc. and Salomon Brothers Inc. .........................        +++
    4.6       Initial Global Warrant dated November 14, 1995. .....................        +++
    4.7       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"). ........................................      +++++
    4.8       Supplemental Indenture dated as of January 13, 1997, between the
              Company and The Chase Manhattan Bank, as trustee, to the Indenture
              dated November 14, 1995, as amended, relating to the Company's 13%
              Senior Discount Notes due 2005. .....................................       ++++
    4.9       Supplemental Indenture dated as of January 13, 1997, between the
              Company and The Chase Manhattan Bank, as trustee, to the Indenture
              dated March 26, 1996, as amended, relating to the Company's 12 3/4%
              Senior Discount Notes due 2006. .....................................       ++++
    4.10      Supplemental Indenture dated as of July 7, 1997, between the Company
              and The Chase Manhattan Bank, as trustee, to the Indenture dated
              November 14, 1995, as amended, relating to the Company's 13% Senior
              Discount Notes due 2005. ............................................         --
    4.11      Supplemental Indenture dated as of July 7, 1997, between the Company
              and The Chase Manhattan Bank, as trustee, to the Indenture dated
              March 26, 1996, as amended, relating to the Company's 12 3/4% Senior
              Discount Notes due 2006. ............................................         --
</TABLE>
 
                                      II-2
<PAGE>   137
 
<TABLE>
<CAPTION>
                                                                                     INCORPORATION
EXHIBIT NO.                                DESCRIPTION                                BY REFERENCE
- -----------   ---------------------------------------------------------------------  --------------
<C>           <S>                                                                    <C>
    4.12      Specimen Certificate of the Company's 14.75% Redeemable Preferred
              Stock due 2008. .....................................................         --
    4.13      Warrant Agreement dated as of July 10, 1997, between the Company and
              The Chase Manhattan Bank, as warrant agent. .........................         --
    4.14      Form of Warrant. ....................................................         --
    4.15      Indenture dated as of July 23, 1997, between the Company and The
              Chase Manhattan Bank, as trustee, relating to the Company's 13 3/4%
              Senior Notes due 2007. ..............................................         --
    4.16      Escrow and Disbursement Agreement dated as of July 23, 1997, among
              the Company, The Bank of New York, as escrow agent, and The Chase
              Manhattan Bank, as trustee, relating to the Company's 13 3/4% Senior
              Notes due 2007. .....................................................         --
    5.1       Opinion of Riley M. Murphy, General Counsel of 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 Agreement. ........................       ++++
   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. .......       ++++
   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. ................................................................       ****
</TABLE>
 
                                      II-3
<PAGE>   138
 
<TABLE>
<CAPTION>
                                                                                     INCORPORATION
EXHIBIT NO.                                DESCRIPTION                                BY REFERENCE
- -----------   ---------------------------------------------------------------------  --------------
<C>           <S>                                                                    <C>
   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. ..........................       ****
   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 Rights Agreement dated November 9, 1995, between the
              Company and certain 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...........        (o)
   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....................................          *
</TABLE>
 
                                      II-4
<PAGE>   139
 
<TABLE>
<CAPTION>
                                                                                     INCORPORATION
EXHIBIT NO.                                DESCRIPTION                                BY REFERENCE
- -----------   ---------------------------------------------------------------------  --------------
<C>           <S>                                                                    <C>
   10.52      Registration Rights Agreement dated as of July 10, 1997, among the
              Company, BT Securities Corporation, Alex. Brown & Sons Incorporated,
              The Huff Alternative Income Fund, L.P., General Motors Domestic Group
              Pension Trust, Societe Generale Securities Corporation, ING Baring
              (U.S.) Securities, Inc. and McDermott Inc. Master Trust. ............         --
   10.53      Registration Rights Agreement dated as of July 23, 1997 among the
              Company and BT Securities Corporation as representatives of the
              Initial Purchasers named therein. ...................................         --
   10.54      Supplemental Registration Rights Agreement, dated as of July 10,
              1997, among the Company, The Huff Alternative Income Fund, L.P.,
              General Motors Domestic Group Pension Trust and McDermott Inc. Master
              Trust. ..............................................................       (oo)
   10.55      Supplemental Registration Agreement, dated as of July 23, 1997,
              between the Company and W.R. Huff Asset Management Co., L.L.C. on
              behalf of certain of its managed accounts. ..........................
                                                                                          ----
   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. ...................................       (oo)
   23.2       Consent of Riley M. Murphy (included in Exhibit 5.1) ................
                                                                                          ----
   24.1       Power of Attorney (included on page II-8). ..........................       (oo)
   25.1       Statement of Eligibility and Qualification on Form T-1 of The Chase
              Manhattan Bank under the Indenture dated July 23, 1997. .............
                                                                                           ---
</TABLE>
 
- ---------------
         * Previously filed as an exhibit to the Company's Registration
           Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
           reference thereto.
 
        ** Previously filed as an exhibit to the Company's Current Report on
           Form 8-K dated June 26, 1995, and incorporated herein by reference
           thereto.
 
      *** Previously filed as an exhibit to the Company's Quarterly Report on
          Form 10-QSB for the fiscal quarter ended March 31, 1995, and
          incorporated herein by reference thereto.
 
     **** Previously filed as an exhibit to the Company's Annual Report on Form
          10-KSB for the fiscal year ended June 30, 1995, and incorporated
          herein by reference thereto.
 
         + Previously filed as an exhibit to the Company's Transition Report on
           Form 10-KSB for the transition period from July 1, 1996 to December
           31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
           fiscal quarter ended June 30, 1997, both of which are incorporated
           herein by reference thereto.
 
        ++ Previously filed as an exhibit to the Company's Registration
           Statement on Form S-4 (File No. 33-80305) and incorporated herein by
           reference thereto.
 
      +++ Previously filed as an exhibit to the Company's Registration Statement
          on Form SB-2 (File No. 33-80673) and incorporated herein by reference
          thereto.
 
     ++++ Previously filed as an exhibit to the Company's Registration Statement
          on Form SB-2 (File No. 333-20867) and incorporated herein by reference
          thereto.
 
    +++++ 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.
 
 +++++++ To be filed by amendment.
 
         - 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 Quarterly Report on
           Form 10-QSB for the fiscal quarter ended June 30, 1997 and
           incorporated by reference hereto.
 
      --- Previously filed as an exhibit to the Company's Registration Statement
          on Form S-4 (File No. 333-     ) and incorporated herein by reference
          thereto.
 
     ---- To be filed by amendment.
 
                                      II-5
<PAGE>   140
 
         (o)  Previously filed as an exhibit to the Company's Definitive Proxy
              Statement filed on October 14, 1996 and incorporated herein by
              reference thereto.
 
        (oo)  Filed herewith.
 
ITEM 17. UNDERTAKINGS.
 
     (a) The undersigned registrant hereby undertakes:
 
          (1) to file, during any period in which offers or sales are being made
     hereunder, a post-effective amendment to this registration statement:
 
             (i) to include any prospectus required by section 10(a)(3) of the
        Securities Act of 1933;
 
             (ii) to reflect in the prospectus any facts or events arising after
        the effective date of this registration statement (or the most recent
        post-effective amendment hereto) which, individually or in the
        aggregate, represent a fundamental change in the information set forth
        in the registration statement. Notwithstanding the foregoing, any
        increase or decrease in the volume of securities offered (if the total
        dollar value of securities offered would not exceed that which was
        registered) and any deviation from the low or high end of the estimated
        maximum offering range may be reflected in the form of prospectus filed
        with the Commission pursuant to Rule 424(b) if, in the aggregate, the
        changes in volume and price represent no more than a 20% change in the
        maximum aggregate offering price set forth in the "Calculation of
        Registration Fee" table in the effective registration statement;
 
             (iii) to include any material information with respect to the plan
        of distribution not previously disclosed in this registration statement
        or any material change to such information in this registration
        statement;
 
             provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) will
        not apply if the information required to be included in a post-effective
        amendment by those paragraphs is contained in periodic reports filed by
        the registrant pursuant to section 13 or section 15(d) of the Securities
        Exchange Act of 1934 that are incorporated by reference in the
        registration statement.
 
          (2) that, for the purpose of determining any liability under the
     Securities Act of 1933, each such post-effective amendment shall be deemed
     to be a new registration statement relating to the securities offered
     herein, and the offering of such securities at that time shall be deemed to
     be the initial bona fide offering thereof.
 
          (3) to remove from registration by means of a post-effective amendment
     any of the securities being registered which remain unsold at the
     termination of the offering.
 
     (b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
 
     (h) 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
 
                                      II-6
<PAGE>   141
 
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.
 
     (i) The undersigned registrant hereby undertakes that:
 
          (1) for purposes of determining any liability under the Securities Act
     of 1933, 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 pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective; and
 
          (2) for purposes of determining any liability under the Securities Act
     of 1933, each post-effective amendment that contains a form of prospectus
     shall be deemed to be a new registration statement relating to the
     securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
     (l) 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.
 
     (j) For purposes of determining any liability under the Securities Act,
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-7
<PAGE>   142
 
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ANNAPOLIS JUNCTION, STATE
OF MARYLAND, ON THIS 18TH DAY OF SEPTEMBER, 1997.
 
                                          AMERICAN COMMUNICATIONS SERVICES,
                                          INC.,
                                          Registrant
 
                                          By:    /s/ ANTHONY J. POMPLIANO
 
                                            ------------------------------------
                                                    Anthony J. Pompliano
                                                 Executive Chairman of the
                                                     Board of Directors
 
                               POWER OF ATTORNEY
 
     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Anthony J. Pompliano and David L. Piazza and each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact, and each of them, and agents or their substitutes may
lawfully do or cause to be done by virtue hereof.
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
 
<TABLE>
<CAPTION>
               SIGNATURE                               TITLE                       DATE
- ----------------------------------------  --------------------------------  -------------------
<S>                                       <C>                               <C>
 
                    /s/                      Executive Chairman of the       September 18, 1997
          ANTHONY J. POMPLIANO                   Board of Directors
- ----------------------------------------   (Principal Executive Officer)
          Anthony J. Pompliano
                    /s/                       Chief Financial Officer        September 18, 1997
            DAVID L. PIAZZA                   (Principal Financial and
- ----------------------------------------        Accounting Officer)
            David L. Piazza
 
                    /s/                               Director               September 18, 1997
          GEORGE M. MIDDLEMAS
- ----------------------------------------
          George M. Middlemas
 
                    /s/                               Director               September 18, 1997
             EDWIN M. BANKS
- ----------------------------------------
             Edwin M. Banks
 
                    /s/                               Director               September 18, 1997
        CHRISTOPHER L. RAFFERTY
- ----------------------------------------
        Christopher L. Rafferty
</TABLE>
 
                                      II-8
<PAGE>   143
 
<TABLE>
<CAPTION>
               SIGNATURE                               TITLE                       DATE
- ----------------------------------------  --------------------------------  -------------------
 
<S>                                       <C>                               <C>
 
                    /s/                               Director               September 18, 1997
           BENJAMIN P. GIESS
- ----------------------------------------
           Benjamin P. Giess
 
                    /s/                               Director               September 18, 1997
          OLIVIER L. TROUVEROY
- ----------------------------------------
          Olivier L. Trouveroy
 
                    /s/                               Director               September 18, 1997
             PETER C. BENTZ
- ----------------------------------------
             Peter C. Bentz
</TABLE>
 
                                      II-9
<PAGE>   144
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                                            SEQUENTIALLY
                                                                            INCORPORATION     NUMBERED
EXHIBIT NO.                           DESCRIPTION                           BY REFERENCE        PAGE
- -----------   ------------------------------------------------------------  -------------   ------------
<C>           <S>                                                           <C>             <C>
    3.1       Second Restated Certificate of Incorporation of the
              Company.                                                             --
    3.2       Certificate of Designations of the Company's 14.75%
              Redeemable Preferred Stock due 2008.                                 --
    3.3       Certificate of Amendment of the Certificate of Designations
              of the Company's 14.75% Redeemable Preferred Stock due
              2008.                                                                --
    3.4       Amended and Restated By-Laws of the Company.                         --
    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       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").            ++
    4.3       March 11, 1996 Supplement to 1995 indenture.                       ++++
    4.4       Initial Global Note dated November 14, 1995.                         ++
    4.5       Warrant Agreement dated November 14, 1995, between the
              Company and Smith Barney Inc. and Salomon Brothers Inc.             +++
    4.6       Initial Global Warrant dated November 14, 1995.                     +++
    4.7       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").         +++++
    4.8       Supplemental Indenture dated as of January 13, 1997, between
              the Company and The Chase Manhattan Bank, as trustee, to the
              Indenture dated November 14, 1995, as amended, relating to
              the Company's 13% Senior Discount Notes due 2005.                  ++++
    4.9       Supplemental Indenture dated as of January 13, 1997, between
              the Company and The Chase Manhattan Bank, as trustee, to the
              Indenture dated March 26, 1996, as amended, relating to the
              Company's 12 3/4% Senior Discount Notes due 2006.                  ++++
    4.10      Supplemental Indenture dated as of July 7, 1997, between the
              Company and The Chase Manhattan Bank, as trustee, to the
              Indenture dated November 14, 1995, as amended, relating to
              the Company's 13% Senior Discount Notes due 2005.                    --
    4.11      Supplemental Indenture dated as of July 7, 1997, between the
              Company and The Chase Manhattan Bank, as trustee, to the
              Indenture dated March 26, 1996, as amended, relating to the
              Company's 12 3/4% Senior Discount Notes due 2006.                    --
    4.12      Specimen Certificate of the Company's 14.75% Redeemable
              Preferred Stock due 2008.                                            --
    4.13      Warrant Agreement dated as of July 10, 1997, between the
              Company and The Chase Manhattan Bank, as warrant agent.              --
    4.14      Form of Warrant.                                                     --
    4.15      Indenture dated as of July 23, 1997, between the Company and
              The Chase Manhattan Bank, as trustee, relating to the
              Company's 13 3/4% Senior Notes due 2007.                             --
    4.16      Escrow and Disbursement Agreement dated as of July 23, 1997,
              among the Company, The Bank of New York, as escrow agent,
              and The Chase Manhattan Bank, as trustee, relating to the
              Company's 13 3/4% Senior Notes due 2007.                             --
</TABLE>
<PAGE>   145
 
<TABLE>
<CAPTION>
                                                                                            SEQUENTIALLY
                                                                            INCORPORATION     NUMBERED
EXHIBIT NO.                           DESCRIPTION                           BY REFERENCE        PAGE
- -----------   ------------------------------------------------------------  -------------   ------------
<C>           <S>                                                           <C>             <C>
    5.1       Opinion of Riley M. Murphy, General Counsel of 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 Agreement.                       ++++
   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.                                                            ++++
   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.                                                   *
</TABLE>
<PAGE>   146
 
<TABLE>
<CAPTION>
                                                                                            SEQUENTIALLY
                                                                            INCORPORATION     NUMBERED
EXHIBIT NO.                           DESCRIPTION                           BY REFERENCE        PAGE
- -----------   ------------------------------------------------------------  -------------   ------------
<C>           <S>                                                           <C>             <C>
   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.                                                              ****
   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 Rights Agreement dated November 9, 1995,
              between the Company and certain 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.                                              ++
</TABLE>
<PAGE>   147
 
<TABLE>
<CAPTION>
                                                                                            SEQUENTIALLY
                                                                            INCORPORATION     NUMBERED
EXHIBIT NO.                           DESCRIPTION                           BY REFERENCE        PAGE
- -----------   ------------------------------------------------------------  -------------   ------------
<C>           <S>                                                           <C>             <C>
   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.         (o)
   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      Registration Rights Agreement dated as of July 10, 1997,
              among the Company, BT Securities Corporation, Alex. Brown &
              Sons Incorporated, The Huff Alternative Income Fund, L.P.,
              General Motors Domestic Group Pension Trust, Societe
              Generale Securities Corporation, ING Baring (U.S.)
              Securities, Inc. and McDermott Inc. Master Trust.                    --
   10.53      Registration Rights Agreement dated as of July 23, 1997
              among the Company and BT Securities Corporation as
              representatives of the Initial Purchasers named therein.             --
   10.54      Supplemental Registration Rights Agreement, dated as of July
              10, 1997, among the Company, The Huff Alternative Income
              Fund, L.P., General Motors Domestic Group Pension Trust and
              McDermott Inc. Master Trust.                                       (oo)
   10.55      Supplemental Registration Agreement, dated as of July 23,
              1997, between the Company and W.R. Huff Asset Management
              Co., L.L.C. on behalf of certain of its managed accounts.
                                                                                 ----
   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.                                  (oo)
   23.2       Consent of Riley M. Murphy (included in Exhibit 5.1).
                                                                                 ----
   24.1       Power of Attorney (included on page II-7).                         (oo)
   25.1       Statement of Eligibility and Qualification on Form T-1 of
              The Chase Manhattan Bank under the Indenture dated July 23,
              1997.
                                                                                  ---
</TABLE>
 
- ---------------
         * Previously filed as an exhibit to the Company's Registration
           Statement on Form SB-2 (File No. 33-87200) and incorporated herein by
           reference thereto.
 
        ** Previously filed as an exhibit to the Company's Current Report on
           Form 8-K dated June 26, 1995, and incorporated herein by reference
           thereto.
 
      *** Previously filed as an exhibit to the Company's Quarterly Report on
          Form 10-QSB for the fiscal quarter ended March 31, 1995, and
          incorporated herein by reference thereto.
 
     **** Previously filed as an exhibit to the Company's Annual Report on Form
          10-KSB for the fiscal year ended June 30, 1995, and incorporated
          herein by reference thereto.
 
         + Previously filed as an exhibit to the Company's Transition Report on
           Form 10-KSB for the transition period from July 1, 1996 to December
           31, 1996, and the Company's Quarterly Report on Form 10-QSB for the
           fiscal quarter ended June 30, 1997, both of which are incorporated
           herein by reference thereto.
 
        ++ Previously filed as an exhibit to the Company's Registration
           Statement on Form S-4 (File No. 33-80305) and incorporated herein by
           reference thereto.
 
      +++ Previously filed as an exhibit to the Company's Registration Statement
          on Form SB-2 (File No. 33-80673) and incorporated herein by reference
          thereto.
<PAGE>   148
 
     ++++ Previously filed as an exhibit to the Company's Registration Statement
          on Form SB-2 (File No. 333-20867) and incorporated herein by reference
          thereto.
 
    +++++ 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.
 
 +++++++ To be filed by amendment.
 
         - 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 Quarterly Report on
           Form 10-QSB for the fiscal quarter ended June 30, 1997 and
           incorporated by reference hereto.
 
      --- Previously filed as an exhibit to the Company's Registration Statement
          on Form S-4 (File No. 333-               ) and incorporated herein by
          reference thereto.
 
     ---- To be filed by amendment.
 
         (o) Previously filed as an exhibit to the Company's Definitive Proxy
             Statement filed on October 14, 1996 and incorporated herein by
             reference thereto.
 
         (oo) Filed herewith.

<PAGE>   1
                                                                   EXHIBIT 10.54

                   SUPPLEMENTAL REGISTRATION RIGHTS AGREEMENT


         SUPPLEMENTAL REGISTRATION RIGHTS AGREEMENT, dated as of July 10, 1997,
among American Communications Services, Inc., a Delaware corporation (the
"COMPANY"), The Huff Alternative Income Fund, L.P. (the "FUND"), General Motors
Domestic Group Pension Trust and McDermott Inc. Master Trust (individually, a
"HOLDER" and collectively, the "HOLDERS").

         The Company and the Holders are parties to a Purchase Agreement (the
"PURCHASE AGREEMENT"), dated as of July 10, 1997, pursuant to which the Holders
are acquiring units, consisting of shares of the Company's 14-3/4% Redeemable
Preferred Stock due 2008 and certain warrants (the "WARRANTS") issued pursuant
to a Warrant Agreement (the "WARRANT AGREEMENT"), dated as of July 10, 1997,
between the Company and The Chase Manhattan Bank, as Warrant Agent. The Company,
BT Securities Corporation, Alex. Brown & Sons Incorporated and the Holders are
parties to a Registration Rights Agreement (the "REGISTRATION RIGHTS
AGREEMENT"), dated as of July 10, 1997. Capitalized terms used herein and not
otherwise defined shall have the meanings given to them in the Registration
Rights Agreement.

         NOW, THEREFORE, in order to induce the Holders to enter into the
Purchase Agreement and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

         1. From and after the Effectiveness Period, any Holder of Registrable
Preferred Stock having in the aggregate a Liquidation Preference (as defined in
the Company's Second Restated Certificate of Incorporation) with respect to the
Registrable Preferred Stock then held by it of at least $10 million may request
in writing that the Company effect the registration of such Registrable
Preferred Stock under the Securities Act, specifying in such written request the
intended method or methods of disposition thereof. The Company shall thereupon
promptly notify all Holders then holding Registrable Preferred Stock in writing
of the receipt of such request and each such Holder may elect (by written notice
sent to the Company within ten days from the date of such Holder's receipt of
the notice from the Company) to have all or any part of its Registrable
Preferred Stock included in such registration pursuant to this Agreement. The
Company shall use its best commercial efforts to effect the registration as soon
as is practicable under the Securities Act of all shares of Registrable
Preferred Stock with respect to which the Company has received timely notice in
writing hereunder, to the extent required to permit the disposition (in
accordance with the intended method or methods of distribution described in such
written request) of the Registrable Preferred Stock so registered; provided,
that the Company shall not effect more than three registrations of Registrable
Preferred Stock pursuant to this Agreement.

         2. From and after the Warrant Shelf Registration Period (as defined in
the Warrant Agreement), any Holder of Warrants may request in writing that the
Company effect the registration of Warrants then held by it under the Securities
Act, specifying in such written request the intended method or methods of
disposition thereof. The Company shall thereupon promptly notify all Holders
then holding Warrants in writing of the receipt of such request and each such
Holder may elect (by written notice sent to the Company within ten days from the
date of such Holder's receipt of the notice from the Company) to have all or any
part of its Warrants included in such registration pursuant to this Agreement.
The Company shall use its best commercial efforts to effect the registration as
soon as possible under the Securities Act of all Warrants with respect to which
the Company has received timely notice in writing hereunder, to the extent
required to permit the disposition (in accordance with the intended method or
methods of distribution described in such written request) of the Warrants so
registered; provided, that the
<PAGE>   2
Company shall not effect more than three registrations of Warrants pursuant to
this Agreement.

         3. From and after the Common Shelf Registration Period (as defined in
the Warrant Agreement), any Holder of Warrant Shares (as defined in the Warrant
Agreement) may request in writing that the Company effect the registration of
Warrant Shares then held by it under the Securities Act, specifying in such
written request the intended method or methods of disposition thereof. The
Company shall thereupon promptly notify all Holders then holding Warrant Shares
in writing of the receipt of such request and each such Holder may elect (by
written notice sent to the Company within ten days from the date of such
Holder's receipt of the notice from the Company) to have all or any part of its
Warrant Shares included in such registration pursuant to this Agreement. The
Company shall use its best commercial efforts to effect the registration as soon
as possible under the Securities Act of all Warrant Shares with respect to which
the Company has received timely notice in writing hereunder, to the extent
required to permit the disposition (in accordance with the intended method or
methods of distribution described in such written request) of the Warrant Shares
so registered; provided, that the Company shall not effect more than three
registrations of Warrant Shares pursuant to this Agreement.

         4. (a) If a registration hereunder is to be underwritten, the Holders
of a majority of the Registrable Preferred Stock, Warrants or Warrant Shares, as
the case may be, to be registered in such registration shall select the managing
underwriter(s); provided, that such managing underwriter(s) shall be reasonably
acceptable to the Company. If any such registration involves an underwritten
offering, all decisions as to the number of shares to be included in such
offering, the sale price, the underwriting discount and other aspects of the
offering shall be made by Holders then holding a majority of the Registrable
Preferred Stock, Warrants or Warrant Shares, as the case may be, validly
requested to be registered in the offering, upon the advice of the managing
underwriter or underwriters (collectively, the "Underwriters"). If the
Underwriters advise the Holders participating in the offering that, in their
judgment, the inclusion in such offering of some of the Registrable Securities,
Warrants or Warrant Shares, as the case may be, validly requested to be
registered would create a substantial risk that the proceeds per unit will be
materially reduced or the number of shares of Registrable Preferred Stock,
Warrants or Warrant Shares, as the case may be, proposed to be included in the
offering is too large a number to be reasonably sold, then each Holder
participating in the offering shall reduce the amount of Registrable Preferred
Stock, Warrants or Warrant Shares, as the case may be, to be registered and
offered on a pro rata basis in accordance with the amount of Registrable
Preferred Stock, Warrants or Warrant Shares, as the case may be, originally
requested to be registered.

         (b) In order to count as an "effected" registration hereunder, the
relevant registration statement shall not have been withdrawn and all shares
properly registered pursuant to it in accordance with this Agreement (excluding
any overallotment shares) shall have been sold.


         (c) Notwithstanding anything to the contrary herein, the Company shall
have the right to defer the filing of any registration statement requested
pursuant to this Agreement for a period not to exceed 90 days if in the good
faith determination of the Board of Directors of the Company the filing of such
registration statement would interfere with any material financing, acquisition,
corporate reorganization or other material transaction or development involving
the Company; provided, that during the pendency of any such 90-day period, the
Company may not issue any securities, whether or not in a public offering,
except for issuances of Common Stock pursuant to an acquisition or other
business combination transaction or upon exercise of options or warrants
outstanding prior to such period.

         (d) In connection with any registration effected hereunder involving an

                                        2
<PAGE>   3
underwritten offering, (i) the representations of each Holder to the
underwriters shall be several, rather than joint with any other Holders
participating in the underwriting, and shall be limited to information provided
by the Holder for inclusion in the prospectus as to the identity of such Holder,
the amount of securities of the Company owned and to be sold by such Holder, and
any material relationships and related transactions between the Company and such
Holder and (ii) each Holder's indemnification and contribution obligations with
respect to the underwriters shall be several, rather than joint, limited in
amount to the proceeds received by such Holder from the sale of Registrable
Preferred Stock, Warrants or Warrant Shares, as the case may be, in the offering
and limited further to material misstatements or omissions from written
information such Holder provides to the Company with respect to clause (i) above
for use in the prospectus.

         (e) In connection with any registration hereunder, the Company shall
bear the reasonable fees and expenses of one counsel for the Fund and one
counsel selected by a majority of the other Holders as a group, not to exceed
$20,000 each.

         (f) No less than six months shall elapse between any registrations
effected pursuant to this Agreement; provided, that any registration statement
filed pursuant to this Agreement shall, upon the request of the relevant
Holders, include any combination of the Registrable Preferred Stock, Warrants
and Warrant Shares.

         5. The provisions of Sections 1 and 5 through 9 of the Registration
Rights Agreement, with the exception of Sections 9(a), (c), (d), (k) and (l)
thereof, are hereby incorporated by reference into this Agreement, to apply to a
registration properly requested in writing hereunder as if it were a Shelf
Registration thereunder; provided, that:

         (a) in the event of any inconsistency between the terms of this
Agreement and the terms of the Registration Rights Agreement or the Warrant
Agreement, the terms of this Agreement shall govern;

         (b) in connection with any claim for indemnification in which the
Holders are entitled to separate legal representation as provided and subject to
the limitations in Section 7(c) of the Registration Rights Agreement, the
Company shall bear the reasonable fees and expenses actually incurred of one
counsel for the Fund and one counsel selected by a majority of the other
Holders; and

         (c) if (i) during any period in which a registration statement filed
pursuant to this Agreement is effective, the Company or any of its subsidiaries
shall file a registration statement with the SEC under the Securities Act (other
than in connection with the registration of securities issuable pursuant to an
employee stock option, stock purchase or similar plan or pursuant to a merger,
exchange offer or a transaction of the type specified in Rule 144 under the
Securities Act) with respect to its common stock or similar securities or
securities convertible into, or exchangeable or exercisable for, such securities
and (ii) with reasonable prior notice, the Company (in the case of a
non-underwritten offering by the Company pursuant to such registration
statement) advises the Holders in writing that a public sale or distribution of
Registrable Preferred Stock, Warrants or Warrant Shares, as the case may be,
would materially adversely affect such offering or the underwriter (in the case
of an underwritten offering by the Company pursuant to such registration
statement) advises the Company in writing (in which case the Company shall
notify the Holders) that a public sale or distribution of Registrable Preferred
Stock, Warrants or Warrant Shares, as the case may be, would adversely impact
such offering, then each Holder shall not, to the extent not inconsistent with
applicable law, effect any public sale or distribution of Registrable Preferred
Stock, Warrants or Warrant Shares, as the case may be, or otherwise dispose of
any securities of the Company of the same type of securities to be so registered
during the period (a "SUSPENSION PERIOD") commencing 15 days prior to the
effective date of such

                                        3
<PAGE>   4
registration statement and ending on the earliest of (A) 90 days from the
effective date of such registration statement, (B) the abandonment of such
offering and (C) if such offering is an underwritten offering, the termination
in whole or in part of any "holdback" period obtained by the underwriter in such
offering from the Company in connection therewith.

         6. (a) The Company and the Holders agree that the Holders will suffer
damages if the Company fails to honor its obligations hereunder and that it
would not be feasible to ascertain the extent of such damages. Accordingly, from
and during the continuation of an Additional Payment Event (as defined below),
the Company shall pay to each Holder of Registrable Preferred Stock, Warrants or
Warrant Shares, as the case may be, for which a registration has been properly
requested hereunder, as liquidated damages, an amount equal to the Additional
Payment Amount (as defined below), which shall accrue, cumulate and be payable
in cash, as and when dividends are payable with respect to the Registrable
Preferred Stock held by such Holder.

         (b) For purposes of this Agreement, the term "ADDITIONAL PAYMENT EVENT"
shall mean (i) the failure of the Company to file a registration statement with
respect to a registration properly requested in writing pursuant to this
Agreement within 150 days of the Company's receipt of the relevant registration
request, (ii) the failure of a registration statement filed pursuant to this
Agreement to become effective within 195 days of the Company's receipt of the
relevant registration request or (iii) the exercise by the Company of its rights
under Section 5(c) hereof if as a result of the exercise of such rights by the
Company any Holder is prohibited from selling its Registrable Preferred Stock,
Warrants or Warrant Shares, as the case may be, under an effective registration
statement filed with respect to such Registrable Preferred Stock, Warrants or
Warrant Shares, as the case may be, pursuant to this Agreement during more than
two Suspension Periods (a "SUBSEQUENT SUSPENSION PERIOD") in any two-year
period. The Additional Payment Event shall continue until (i) the filing of the
relevant registration statement (in the case of clause (i) of the preceding
sentence), (ii) the relevant registration statement is declared effective (in
the case of clause of (ii) of the preceding sentence) or (iii) the end of the
relevant Subsequent Suspension Period (in the case of clause (iii) of the
preceding sentence).

         (c) For purposes of this Agreement, the term "ADDITIONAL PAYMENT
AMOUNT" shall mean (i) if the securities sought to be registered consist of
Registrable Preferred Stock or Warrants, an amount per share of Registrable
Preferred Stock or per Warrant, as the case may be, sought to be registered,
that would be equal to an additional dividend of 0.50% of the Liquidation
Preference of one share of Registrable Preferred Stock, and (ii) if the
securities sought to be registered consist of Warrant Shares, an amount per
Warrant Share sought to be registered equal to (x) the amount that would be
equal to an additional dividend of 0.50% of the Liquidation Preference of one
share of Registrable Preferred Stock, divided by (y) the maximum number of
Warrant Shares for which each outstanding Warrant may then be exercised.

         7. (a) The provisions of this Agreement may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, other than with the prior written consent of the Holders of
not less than 75% of the (i) Registrable Preferred Stock (in the case of
provisions relating to the Registrable Preferred Stock), (ii) Warrants (in the
case of provisions relating to the Warrants) and (iii) Warrant Shares (in the
case of provisions relating to the Warrant Shares). Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders whose Registrable
Preferred Stock, Warrants or Warrant Shares, as the case may be, are being sold
pursuant to a Registration Statement and that does not directly or indirectly
affect, impair, limit or compromise the rights of other such Holders may be
given by Holders of at least a majority of Registrable Preferred Stock, Warrants
or Warrant Shares, as the case may be, being sold by such Holders pursuant to
such Registration Statement; provided, however, that the provisions of this
sentence may not be amended, modified or supplemented

                                        4
<PAGE>   5
except in accordance with the provisions of the immediately preceding sentence.

         (b) all notices and other communications to the Holders under this
Agreement shall be sent to the following addresses:

                                    THE HUFF ALTERNATIVE INCOME FUND, L.P.
                                    1776 On the Green
                                    67 Park Place
                                    Morristown, NJ 07960
                                    Attn:  Joseph R. Thornton, Esq.

                                    GENERAL MOTORS DOMESTIC GROUP PENSION TRUST
                                    1 Mellon Bank Center
                                    500 Grant Street 3700
                                    Pittsburgh, PA.  15288-0001
                                    Attn:  Laurie Adams

                                    McDERMOTT INC. MASTER TRUST
                                    P.O. Box N 7796
                                    Norfolk House
                                    Frederick Street
                                    Nassau, Bahamas
                                    Attn:  Richard Tyner

                                    with copies to:

                                    Proskauer Rose LLP
                                    1585 Broadway
                                    New York, NY 10036
                                    Attn:  Peter G. Samuels, Esq.

                                    and

                                    Dewey Ballantine
                                    1301 Avenue of the Americas
                                    New York, NY 10019
                                    Attn: Jonathan Freedman, Esq.


         (c) The provisions of this Agreement shall supersede any inconsistent
provisions of Section 9(l) of the Registration Rights Agreement.

         (d) This Agreement shall be binding upon and shall inure to the benefit
of the Company and its successors and assigns and the Holders, from time to
time, of Registrable Preferred Stock, Warrants and Warrant Shares; provided,
that the Agreement shall not apply to any shares of Registrable Preferred Stock
or any Warrants or Warrant Shares that have been transferred to a person who may
resell such Registrable Preferred Stock, Warrants or Warrant Shares pursuant to
Rule 144(k) under the Securities Act. 














                                        5
<PAGE>   6
     IN WITNESS WHEREOF, the undersigned have executed this Supplemental
Registration Rights Agreement as of the date first above written.



                           AMERICAN COMMUNICATIONS SERVICES, INC.

                               
                           By:  /s/ Riley M. Murphy
                               ______________________________________
                                    Title: Executive Vice President/Secretary


                           THE HUFF ALTERNATIVE INCOME FUND, L.P.


                           By:     WRH PARTNERS, L.L.C., General Partner


                           By:  /s/ Joseph R. Thornton    
                                ___________________________________
                                    Joseph R. Thornton
                                    Attorney-in-Fact

                           GENERAL MOTORS DOMESTIC
                           GROUP PENSION TRUST

                           By:  MELLON BANK N.A. Solely in its
                           Capacity as Trustee for the
                           General Motors Domestic Group
                           Pension Trust (as directed by
                           General Motors Investment Management Corp.)
                           and not in its individual capacity


                           By:  /s/ Laurie A. Adams
                              ____________________________________
                                    Name:  Laurie A. Adams
                                    Title: Trust Officer


                           MCDERMOTT INC. MASTER TRUST


                           By: /s/  Richard Tyner 
                               ______________________________________
                                    Name: Richard Tyner
                                    Title:    Member of the Investment Committee

                                        6

<PAGE>   1
 
                                                                    EXHIBIT 23.1
 
The Board of Directors
American Communications Services, Inc.:
 
     We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts" and "Selected Consolidated Financial Data"
in the prospectus.
 
                                          KPMG Peat Marwick LLP
 
Washington, DC
September 17, 1997


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