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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-12386
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INCOMNET, INC.

(Exact Name of Registrant as Specified in its Charter)

CALIFORNIA 95-2871296
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)

2801 MAIN STREET 92614
IRVINE, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)

(949) 251-8000
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR
VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days: Yes / / No /X/

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. /X/

The aggregate market value of the voting common stock held by non-affiliates
of the Registrant computed by reference to the average of closing bid and asked
price as reported on the NASDAQ System on April 7, 1999 was approximately $14.64
million.

The number of outstanding shares of Incomnet, Inc.'s common stock as of
April 15, 1999 was 19,933,000 shares, all of one class.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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TABLE OF CONTENTS

PAGE
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PART I

ITEM 1. BUSINESS................................................................................. 1

ITEM 2. PROPERTIES............................................................................... 14

ITEM 3. LEGAL PROCEEDINGS........................................................................ 14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 20

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 21

ITEM 6. SELECTED FINANCIAL DATA.................................................................. 23

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 24

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... 31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. 31

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 32

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 33

ITEM 11. EXECUTIVE COMPENSATION................................................................... 36

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 48

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 51

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMS 8-K........................ 55

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements that are based upon
certain estimates, projections and other forward-looking statements within the
meaning of the Securities Litigation Reform Act of 1995 with respect to
Incomnet, Inc. ("Incomnet") and its subsidiary, Incomnet Communications
Corporation ("ICC"). Forward-looking statements give Incomnet's expectations or
forecast of future events. These statements can be identified by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "expect," "project," "plan," "believe," "anticipate," "intend,"
and other words and terms of similar meanings in connection with disclosures of
future operating or financial performance. In particular, these statements
relate to future actions, prospective performance or results of current and
anticipated products, sales, efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results.

All of the forward-looking statements contained in the Annual Report on Form
10-K or in other Incomnet publications may turn out to be wrong. They can be
affected by inaccurate assumptions or by known or unknown risks and
uncertainties. Many such factors will be important in determining actual or
future results. Consequently, no forward-looking statement can be guaranteed.
Incomnet's actual results may vary materially and there are no guarantees about
the performance of Incomnet stock.

Incomnet undertakes no obligation to correct or update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Future disclosures on related subjects in Incomnet's reports to the SEC may
update some of Incomnet's disclosures (including Forms 10-Q and 8-K filed in the
future) contained herein.

Some of the facts that could cause uncertainties are:

- New competitors and intensification of price competition from other
long-distance providers;

- New products that make ICC's products and services obsolete;

- Adverse state, federal and local government regulations governing the
telecom industry;

- Inability to obtain additional capital as needed;

- Loss of customers;

- Technical problems with ICC's billing system, products and services;

- Departure of key Representatives and inability to attract new
Representatives;

- Litigation and administrative proceedings;

- Departure or retirement of key executives; and

- Costs and risks of entering and expanding into new markets and new
services.

PART I

ITEM 1. BUSINESS

Incomnet is the parent company of ICC, a company that provides discount long
distance and telecommunication services to residential consumers and businesses
throughout the United States. ICC's telecommunication services are sold by ICC's
network of independent sales representatives ("Representatives"). During 1998,
Incomnet was also the parent company of Auto Dismantler Network ("AutoNetwork")
and GenSource Corporation ("GenSource"). Incomnet also owns an interest in Rapid
Cast, Inc. (now known as Optical Dynamics Corporation) ("RCI").

Incomnet sold the assets of its subsidiary AutoNetwork on March 20, 1998 for
$1.3 million in cash and notes. AutoNetwork is a provider of information
services to licensed automobile dismantlers in the

western United States. The subscribers to AutoNetwork services receive
up-to-date information about the availability of used automobile parts for
purchase, sale or exchange.

In February 1995, Incomnet acquired a 51% ownership interest in RCI. In
early 1997, Incomnet's percentage interest in RCI was reduced to 33% on a
fully-diluted basis by the sale of additional shares of RCI to new investors.
During the third quarter of 1998, Incomnet sold a portion of its RCI stock and
further reduced its percentage ownership interest in RCI to 17.4%.

On March 9, 1999, Incomnet sold its common stock of GenSource, a company
that develops and markets software for use by companies that self-insure various
types employee and business related claims. Incomnet retained an approximate 15%
interest in GenSource in the form of GenSource Preferred Stock. See Item
1--"Sale of GenSource."

Incomnet has no expectation of continuing involvement with the management of
any of these entities, has assigned a value of $200,000 to its remaining equity
interest in RCI and has assigned no value to its remaining equity interest in
GenSource. These entities, previously accounted for as segments, have been
accounted for as discontinued operations in 1998. Incomnet has also reclassified
prior years to present the operating results of the three businesses as
discontinued operations. See Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Discontinued Operations."

Incomnet was incorporated under the laws of California on January 31, 1974.

SIGNIFICANT BUSINESS AND MANAGEMENT CHANGES IN 1998

Incomnet underwent significant business and management changes during 1998.
Its business was streamlined with the sale of the assets of AutoNetwork in early
1998, the sale of a portion of Incomnet's RCI stock and a discontinuance of
Incomnet's involvement and influence over management of RCI in late 1998 and the
sale of the Common Stock of GenSource in early 1999. As a result of these
divestitures, Incomnet's sole focus is the telecommunications business of ICC.

In early 1998, Incomnet's former management proposed to sell ICC's telecom
business which was rapidly deteriorating due to a number of factors including:

- Sanctions against ICC imposed by the Orange County District Attorney in
late 1997 and in early 1998 and by the California Public Utilities
Commission and related compliance obligations following allegations that
ICC had improperly switched customers' long distance carriers.

- ICC's failed attempt at a public offering of its common stock in September
1997 and ICC management's distraction during that process.

- The departure of certain of ICC's key independent Representatives
resulting in a decline in ICC's customer base and revenues.

- ICC's inability to obtain additional debt or equity financing due to its
declining revenues.

- Incomnet management's inability to control the activities of ICC due to a
management separation agreement that insulated ICC from Incomnet's
management and control. This agreement was terminated in late 1998.

As ICC's revenues declined during the first quarter of 1998 and the
retention and recruitment of new Representatives became more difficult, ICC
incurred significant operating deficits. By February 1998, ICC had borrowed all
available funds under its credit facility with First Bank & Trust of Newport
Beach ("First Bank"). During that time, ICC was engaged in discussions regarding
alternatives for selling all or a portion of ICC's business. As a result of
those efforts, a newly formed entity controlled by John R. Dennis (the "Proposed
Buyer") emerged as a potential purchaser and source of capital or financing for
ICC.

THE PROPOSED ICC ASSET SALE

On March 31, 1998, Incomnet and the Buyer entered into an asset purchase
agreement to sell substantially all of the assets of ICC (the "ICC Asset Sale
Agreement"). The ICC Asset Sale Agreement was then expected to be completed on
or before June 30, 1998.

Throughout the second quarter of 1998, ICC's operations continued to
deteriorate. In early 1998, a number of key Representatives announced that they
were terminating their relationship with ICC and filed suit against ICC claiming
various disagreements with ICC's management. By February 1998, ICC was in
default under its credit facility with First Bank which was due and payable in
June 1998 and, by July 1998, ICC was in default under its contractual
obligations to its primary service provider, WorldCom Network Services, Inc.
("WorldCom").

In May 1998, shareholder John P. Casey informed Incomnet's Board of his
opposition to the proposed ICC Asset Sale Agreement. By June 15, 1998, Mr. Casey
had acquired 21% of the then outstanding shares of Incomnet Common Stock.

The ICC Asset Sale Agreement was ultimately terminated when the Proposed
Buyer insisted on new terms given the continued deterioration of ICC's business.
These additional terms were not acceptable to the Board of Incomnet. On July 1,
1998, Incomnet announced that the proposed ICC Asset Sale Agreement had been
terminated.

THE SEPTEMBER '98 BOARD CHANGE

Shortly after termination of the ICC Asset Sale Agreement, the Incomnet
Board entered into negotiations with Mr. Casey (who was then a 30% shareholder)
concerning a change in the Board and management of Incomnet and ICC. As these
negotiations were taking place, ICC's business was suffering further losses in
the number of Representatives and customers. Part of the deterioration was due
to the departures of Jerry Ballah (a former ICC executive) and Christopher
Mancuso (a former consultant to ICC) who left ICC to form a competing telecom
company and their efforts to hire away key Representatives and employees and
induce customers to terminate ICC as their long distance carrier.

As of September 1, 1998, ICC remained in default under both its service
agreement with WorldCom and its financial obligations to First Bank. On a number
of occasions commencing in August 1998 WorldCom and First Bank threatened to
foreclose on their collateral consisting of all of ICC's subscriber base and
customer accounts. WorldCom was also demanding a management change. Incomnet's
and ICC's management prepared various financial analyses and the Incomnet
directors concluded that if WorldCom could not be satisfied, new financing could
not be obtained and a management change could not be achieved in the short term,
ICC might be forced to file for protection under the bankruptcy laws.

On September 29, 1998, the Board Change Agreement among Incomnet, Mr. Casey
and the six directors of Incomnet (the "Board Change Agreement") was completed.
Throughout this Form 10-K, the directors (or Board) and officers who currently
hold office are referred to as the "New Board," "New Management," or "New
Directors and Officers," while the directors and officers who held office prior
to September 29, 1998 will be referred to herein as the "Former Board" or
"Former Directors and Officers."

Following the Board Change Agreement, five of the six directors of Incomnet
were replaced and Denis Richard was appointed as the new President and CEO of
Incomnet and ICC. In December 1998, Incomnet appointed Stephen Garcia as its
Controller, and, in January 1999, Incomnet appointed George Blanco as its new
Chief Financial Officer.

Immediately following the Board Change, New Management was successful in
getting WorldCom and First Bank to continue to forebear from taking any action
against ICC's assets so that the New Management had an opportunity to obtain new
financing. Within the time period required under the forebearance agreement with
WorldCom and First Bank, New Management also successfully negotiated and
completed a bridge financing in November 1998 and a term loan financing in
December 1998. The proceeds from these financings were used to completely pay
off the FirstBank loan obligations and to pay all amounts in default to
WorldCom, thus preventing First Bank and WorldCom from seizing ICC's assets
without filing for protection under the bankruptcy laws.

New Management was also immediately faced with many challenges in various
management and marketing areas, including:

- Restructuring management responsibilities and hiring new managers and
executives.

- Rebuilding the number of active Representatives and invigorating their
sales activities.

- Renegotiating a reduction of the severance packages with former
executives.

- Managing and/or attempting to resolve numerous pending litigation matters.

- Negotiating with the former holders of Preferred Stock who had claimed
that they were entitled to receive in excess of 11 million shares of
Incomnet's Common Stock due to Incomnet's inability to deliver common
stock when they tendered their Preferred Stock for conversion to common in
mid-1998.

- Negotiating a more favorable contract with WorldCom, including a reduction
in the rate schedules and the take-or-pay provisions of the contract.

Since the Board Change on September 29, 1998, the following developments
have occurred:

- On December 15, 1998, Incomnet completed a financing from Ironwood Telecom
LLC. See "Recent Developments--Financings" below.

- In March 1999, preliminary approval of a settlement agreement was entered
by the court presiding over Incomnet's pending class action lawsuit on
more favorable terms than those proposed in December 1997. The settlement
is subject to final court approval.

- In September 1998, the Orange County District Attorney lifted a
restriction imposed on ICC to wait 24 hours before verifying that a new
customer wanted to sign up for ICC's telephone service. This restriction
had been a significant impediment to signing up new customers.

- In December 1998, the California Public Utilities Commission lifted
certain verification requirements for new customers which had been an
additional impediment to signing up new customers.

- In October 1998, ICC renegotiated its contract with WorldCom. The
renegotiation resulted in immediate decreases in ICC's long distance
telephone rates which have been passed on to new customers through the
introduction of new marketing programs. In addition, WorldCom released its
security interest in ICC's customer accounts and subscriber base and
significantly reduced ICC's overall purchase commitment.

- ICC has taken steps to revitalize its network marketing organization and
has expanded to a nationwide focus on recruiting new Representatives.
Since the closing of the Ironwood Facility in mid-December (discussed
below), ICC has added approximately 2,600 new Representatives. While ICC
views its network of Representatives as its primary source for obtaining
new customers, ICC has taken steps to target certain markets and customers
with other channels of marketing such as telemarketing, affinity programs
and direct sales. However, such channels have not yet been developed.

- John P. Casey and Ironwood purchased Incomnet's outstanding convertible
Preferred Stock and all associated rights under arrangements that require
Mr. Casey and Ironwood to hold the stock for repurchase by Incomnet at a
price representing no actual profit except, in the case of Ironwood, for a
carrying cost factor. The estimated repurchase price is $0.42 per share
(the "Repurchase Price"). Those transactions have the effect of avoiding
dilution to Incomnet's shareholders of more than 10 million shares at an
estimated per share purchase price of $.19 (I.E., the estimated conversion
price the former Preferred Holders paid for their Preferred Stock on an
as-converted-to-Common Stock-basis). If Incomnet is not financially or
legally able to repurchase the Preferred Stock, Ironwood and Mr. Casey are
obligated to make the common stock underlying such Preferred Stock
available for sale to all shareholders at the Repurchase Price plus the
costs of such offering.

- ICC obtained a $12.5 million credit facility with Foothill Capital
Corporation dated as of April 9, 1999. This facility was obtained to
assist in executing Incomnet's strategic plan and fund ICC's operations.

ICC'S BUSINESS

GENERAL.

ICC is a provider of long distance telephone services, prepaid calling
cards, telephone travel cards and inbound 800 services to residential and
business customers. ICC operates as a "switchless reseller" in that billing and
customer services are provided by ICC while actual transmission services or
switching of calls is handled by a major carrier. ICC obtains long distance
telecommunication transmission services from a carrier at high volume wholesale
rates and resells those services at retail rates. These services are sold
through ICC's network of Representatives.

ICC's services are sold to customers nationwide, although approximately 64%
of ICC's customers are located in California. Following is a description of
ICC's key products and services:

ICC's long distance and "Dial 1" telephone services permit customers to make
outbound long distance calls from any local telephone line by simply dialing a
"1," the area code and the seven-digit telephone number. This service may be
used for both domestic and international calling. During calendar years 1998,
1997 and 1996, long distance services represented approximately 92%, 80% and 75%
of Incomnet's total net sales from continuing operations.

ICC sells calling cards that allow the user to place calls from anywhere in
the U.S. or Canada to any location in the world with the charges for such calls
billed with the user's long distance service. ICC also offers prepaid calling
cards that allow customers to purchase and pay in advance for a card that allows
the user a fixed amount of telephone usage. During calendar years 1998, 1997 and
1996, prepaid calling cards represented approximately 5%, 8% and 7% of
Incomnet's total net sales from continuing operations.

ICC also offers pager services and 800 services although these products have
not represented a significant amount of Incomnet's revenues. ICC plans to expand
its line of products, including a branded internet service over the next four
months.

ICC's other source of revenues is the fees ICC charges to Representatives
for marketing materials and services. During calendar years 1998, 1997 and 1996,
these marketing revenues represented approximately 3%, 12% and 18% of Incomnet's
total net sales from continuing operations. The decline in marketing revenues
was primarily due to the decrease in new Representatives.

MARKETING AND SALES REPRESENTATIVES.

ICC's services are marketed primarily through a network marketing system of
Representatives. ICC authorizes and trains Representatives to resell its
services to residential and small business customers and allows the individual
Representatives to build up their own sales force of other Representatives. The
Representatives are provided incentives to recruit new subscribers and expand
their own Representative sales force. ICC believes that this marketing system
reduces its marketing costs, subscriber attrition rate and subscriber
acquisition costs. As of December 31, 1998, ICC had approximately 14,000
Representatives in its network marketing program that pay fees to maintain
active status but all Representatives are not necessarily actively subscribing
new customers. Since mid-December 1998 when the Ironwood Facility was closed,
approximately 2,600 new Representatives have joined ICC's network of
Representatives.

The sales cycle for long distance service consists of Representatives adding
other Representatives to their sales force who in turn sell to new customers. A
new Representative initially has 30 days to sell new subscribers and add
customers to be eligible for certain bonuses. New customers are added to the
network within seven to ten days and are billed on periodic cycles approximately
30 days after being merged into the system as a new customer.

Once a Representative has signed up a long distance telephone customer with
one or more of ICC's services or products, the customer becomes an ICC customer.

ICC's customers pay for their services through:

- Direct billing from ICC;

- Billing from customers' local exchange carrier ("Local Carrier");

- Direct billing on customers' credit cards; and

- Prepayment on calling card products.

ICC has a number of billing and collection agreements with unaffiliated
companies by which ICC's customers are billed through their Local Carrier. Since
September 1997, ICC has decreased the amount of billing through Local Carriers
due to the increasing lag time for receipt of payment. Virtually all new
customers in 1998 receive direct billing from ICC. Approximately 40% of ICC's
customers currently are billed directly by ICC and ICC expects that percentage
to increase over time assuming that ICC successfully implements its recently
acquired billing software. See Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness Disclosure."

ICC pays each Representative a commission based upon the amount of telephone
services used by customers who are originated by that Representative. If the
customers originated by a Representative's use certain targeted amounts of
services, the Representative's commission percentage is increased. ICC also pays
override commissions to Representatives if certain targeted amounts of services
are used by a Representative's own customers as well as those telephone
customers sourced by the Representative's sales force. Representatives are also
eligible for a bonus based upon a percentage of all telephone services billed by
ICC to retail customers if certain minimum quotas are achieved by the
Representative. In addition, ICC pays sales quota bonuses to Representatives for
assisting other Representatives in obtaining certain minimum quotas of new
retail long distance business.

WORKING CAPITAL

Incomnet's short term capital needs primarily relate to:

- Funding continuing operations and implementation of management's strategic
plan.

- Funding payments to ICC's carrier which generally are due and payable
prior to receipt of payment from ICC's customers.

- Costs associated with upgrading or replacing computer hardware and
software. In February 1999 ICC committed to invest in a new direct billing
system that will permit ICC to deliver bills to customers for multiple
services and to complete its plan to convert most, if not all, customers
to direct billing.

OPERATING SUMMARY

Following is a summary of the Net Sales, Gains/Losses and Total Assets of
Incomnet for the three most recent calendar years. The line items identified as
"Continuing Operations" relate to Incomnet and its subsidiary, ICC. The line
items identified as "Discontinued Operations" relate to Incomnet's former
subsidiaries, RCI, GenSource and AutoNetwork.

(000'S OMITTED)

DESCRIPTION 1998 1997 1996
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(RESTATED)

Net Sales From Continuing Operations.......................................... $ 54,868 $ 121,831 $ 97,870
Loss from Continuing Operations............................................... $ (17,633) $ (14,057) $ (6,607)
Loss from Discontinued Operations............................................. $ (1,475) $ (1,561) $ (30,192)
Net loss...................................................................... $ (19,108) $ (15,618) $ (37,676)
Total Assets.................................................................. $ 24,420 $ 41,340 $ 33,730
Net Assets (Liabilities) of Discontinued Operations........................... $ 531 $ 5,707 $ (335)

RECENT DEVELOPMENTS

FINANCINGS.

On December 15, 1998, Incomnet completed a $16.8 million financing from
Ironwood Telecom LLC (the "Ironwood Facility"). The Ironwood Facility bears
interest at the rate of 12%, payable quarterly, and the principal and unpaid
interest is due on December 31, 2000. The Ironwood Facility is secured by
substantially all of the assets of Incomnet and ICC and ICC guaranteed payment
of the facility. A majority of the proceeds of this loan were used to pay off in
full amounts owed by ICC to First Bank, to make payments to cure defaults to
WorldCom and for general corporate purposes.

In connection with the Ironwood Facility and the Ironwood Bridge Loan that
preceded the Ironwood Facility, Ironwood received an origination fee of $500,000
and an aggregate of 3.6 million warrants. Of the 3.6 million warrants, 1.0
million warrants have an exercise price of $2.25 per share and 2.6 million
warrants have an exercise price of $1.00 per share. The warrants have 5-year
terms.

In November 1998, Ironwood paid approximately $1.09 million to purchase
approximately 370 shares of Incomnet Preferred Stock from five former holders of
Incomnet Series A and Series B Preferred Stock (the "Ironwood Preferred").
Ironwood is obligated to hold the Ironwood Preferred for redemption by Incomnet
at any time before April 30, 2000 if Incomnet is financially able to do so. If
Incomnet does not repurchase the Ironwood Preferred by that date, the Ironwood
Preferred is convertible into 2,328,000 shares of Incomnet Common Stock and
Ironwood and Incomnet have agreed that such Common Stock will be offered to all
shareholders on a pro rata basis at a price equal to the sum of (i) the price
that Ironwood paid for the Ironwood Preferred; (ii) the expenses incurred by
Ironwood (including legal and accounting expenses); and (iii) a carrying charge
equal to an annual 18% interest rate.

In November 1998, Ironwood also loaned $2.1 million to Mr. Casey (the "Casey
Preferred Loan") to purchase 1,598,211 shares of Incomnet Series A and Series B
Preferred Stock. Incomnet is obligated

to repurchase Mr. Casey's Preferred Stock by November 5, 1999, if Incomnet is
financially able to do so, at a price representing no actual profit to Mr.
Casey. If Incomnet is unable to repurchase the Casey Preferred, Incomnet is
obligated to offer the 8,454,970 shares of Common Stock into which Mr. Casey's
Preferred Stock is presently convertible to Incomnet's Shareholders at a price
representing no actual profit to Mr. Casey. ICC has guaranteed payment of the
Casey Preferred Loan.

On April 9, 1999, ICC obtained a $12.5 million credit facility from Foothill
Capital Corporation (the "Foothill Facility") which ICC plans to use to execute
its strategic plan and to fund ICC's operations. The loan is secured by all of
ICC's assets and certain assets of Incomnet. In connection with the Foothill
Facility, Ironwood and Foothill entered into an Intercreditor and Subordination
Agreement whereby Ironwood agreed to subordinate its right to receive payment on
its debt from Incomnet and Ironwood's interests in Incomnet's and ICC's assets
to Foothill. In consideration for that subordination, Incomnet agreed to issue
warrants to Ironwood to purchase 1.25 million shares of Common Stock. These
warrants have an exercise price of $1.00 per share and have a five-year term.

REBUILDING THE MARKETING PROGRAM.

ICC's services are primarily sold by its Representatives. In early 1998, a
number of ICC's key Representatives (the "Key Representatives") resigned due to
disagreements with Former Management. By mid-1998, an ICC consultant and a
former ICC executive who oversaw the Representatives, Christopher Mancuso and
Jerry Ballah, left ICC and formed a competing telecom sales organization. ICC's
marketing program was seriously hindered by the efforts of this competing
organization to hire away employees and induce Representatives and customers to
leave ICC.

By late 1998, ICC had reached a working and financial settlement with the
Key Representatives who agreed to continue to sell ICC's products and services
and assist ICC in rebuilding ICC's network marketing organization of
Representatives. ICC's rebuilding efforts were assisted by the decisions of the
California Public Utilities Commission and Orange County District Attorney to
lift certain restrictions and relax some of the verification procedures for
signing up new customers. Under the new procedures, when a customer decides to
switch to using ICC's services, the customer can call an independent
verification service or an independent verification service can call the new
customer to confirm the customer's switch to ICC without any mandatory waiting
period.

Since the Board Change in September 1998, ICC has taken a number of positive
steps in rebuilding its network marketing organization including:

- Temporarily reducing the start-up marketing kit fees for new
Representatives as part of a "pre-launch" sales program.

- Establishing monthly recognition and awards events to reward and provide
incentives to the top performing Representatives.

- Establishing regional promotional events where the Key Representatives
promote joining ICC's network of Representatives.

- Developing incentive programs that make ICC more competitive in attracting
new Representatives.

- Developing new marketing materials that will assist Representatives in
their sales efforts.

WORLDCOM CONTRACT.

Since September 1995, ICC has had a carrier contract with WorldCom. The
contract was renegotiated in October 1998 by ICC's New Management. The new
contract has reduced minimum purchase requirements and reduced wholesale long
distance rates. WorldCom also agreed to release its security interest over ICC's
customer base thereby giving ICC the ability to obtain new secured

financing. Under the new terms, Incomnet has agreed to purchase $250 million in
long distance service over a three-year period, with the option to extend any
shortfall purchase requirements for an additional two-year period. The contract
provides for periodic rate reviews.

In March 1998, WorldCom extended credit to ICC of up to $3 million at an
interest rate of 18% per annum under terms of the prior carrier contract. On
December 15, 1998, ICC repaid its obligation to WorldCom in full out of proceeds
from the Ironwood Facility.

SECURITIES CLASS ACTION SETTLEMENT.

In 1995, Incomnet was sued in a class action lawsuit claiming various
securities law violations. A tentative settlement had been reached in 1997 but
was never finalized due to Incomnet's deteriorating financial condition. In late
1998, Incomnet entered into a new written settlement with the class plaintiffs.
The settlement calls for a cash payment of $500,000, the payment of up to
$100,000 of costs and the issuance of 1.375 million to 4.125 million shares of
Incomnet common stock, depending upon the share price at the time of issuance.
Preliminary court approval of the settlement was entered on March 22, 1999 and a
hearing to obtain final court approval is scheduled for May 1999.

STRATEGY

Incomnet's objective is to become a leading provider of telecom services in
the United States. Incomnet intends to increase its market share in existing
markets and to expand its network of Representatives and customers into new
markets through strategic acquisitions and internal growth.

The principal elements of Incomnet's business strategy include the
following:

- Expanding ICC's network of Representatives.

ICC's network of Representatives is a continuing differentiated
distribution channel that enables ICC to grow at an accelerated pace and
still be very cost effective. The network of Representatives primarily
sells to a "warm" market (I.E., friends, business associates and family)
and increases their own earnings potential by building their own network of
Representatives to assist in the selling process. Because the
Representatives primarily sell to their own warm market, there is a greater
chance to retain customers without having to compete solely on price.

ICC's strategy is to provide a wide range of opportunities for its
Representatives, whether a Representative works on a part-time basis to
supplement other income or whether a Representative desires a full-time
professional and entrepreneurial opportunity. Expanding the training
support of Representatives currently is a top priority for ICC. In
addition, ICC is developing more extensive marketing support materials for
its Representatives to assist them in successful marketing and sales. ICC
is continually reviewing its compensation plans for representatives and
seeks to design compensation that is fair and competitive with other sales
organizations and innovative in the network marketing environment. ICC also
is continuously evaluating various alternative incentive programs to help
maintain a high level of enthusiasm and improve results by its
Representatives.

- Expanding ICC's channels of marketing.

While ICC views its network of Representatives as its primary source for
new telecom customers, ICC is looking to target particular markets and
customers with other types of marketing. ICC has recently engaged
telemarketing companies to generate sales in certain targeted markets. ICC
is also evaluating direct sales for certain markets and types of customers
as well as affinity marketing programs. ICC believes that strategic
acquisitions of other telecom companies with other channels of marketing
could assist in this diversification effort.

- Expanding the type of customer.

Historically, ICC has focused on residential customers. ICC has plans to
expand its marketing efforts to small and mid-size businesses. This
includes developing an infrastructure of employees who are sophisticated
about the needs and services required by business customers. ICC also
believes that it can expand its customers through strategic acquisitions
of other telecom companies. Currently, Incomnet customers are concentrated
in California, Hawaii, Texas, Washington, New York, Illinois and Florida.

- Expanding the types of telecom products and services to existing
customers.

ICC is in the process of positioning itself as an internet provider. ICC
believes that by having a branded internet service that is billed with
long distance service, ICC will increase customer loyalty and will reduce
customer turnover. ICC is expanding its calling card services so that they
can be used worldwide and is also expanding its pager services. ICC is
also considering offering expanded features and services that will be
important to small and mid-size businesses.

- While ICC has no current plans to build its own network, it may consider
doing so in the future if its business expands and if building such a
network could achieve economies of scale.

COMPETITION

The telecommunications industry is highly competitive and price competition
for long distance services has been intense and is expected to increase.

ICC's primary competitors are AT&T, Sprint and MCI WorldCom. These
competitors have more prominent name recognition than ICC, have larger numbers
of established customers, and have greater financial, technical, personnel,
marketing and other resources. These large long distance carriers have begun to
offer local services in certain markets and are expected to expand those
activities as opportunities are presented. The trend toward consolidation,
mergers, acquisitions and strategic alliances in the telecom industry has
increased the level of competition faced by ICC and is expected to continue to
do so in the future.

In addition to the main carriers, ICC faces increasing competition from
local exchange carriers, satellite carriers, and may eventually compete with
public utilities and cable companies. ICC also may face competition from
companies offering long distance data and voice services over the internet.

ICC also competes for its Representatives with other telecommunication
companies as well as other network marketing companies that use independent
sales representatives. ICC must continuously evaluate its commission schedules
and incentives to stay competitive with other sales organizations (E.G.,
American Communications Network and Excel).

The telecommunications industry is rapidly changing with new technologies,
introduction of new products and services, new strategic alliances and a
changing regulatory landscape. ICC plans to compete in the rapidly evolving
telecommunications industry by offering quality services at competitive rates
and by offering services primarily though personalized network marketing. ICC
believes that acquiring customers through the personal relationships of its
Representatives will create a more loyal customer base and will reduce the need
for ICC to offer deep discounts although ICC recognizes that its prices must
remain competitive. In addition, ICC believes that bundling a variety of
telecommunication services and presenting customers with a fully integrated
monthly billing statement for all services will allow it to penetrate markets
more rapidly and build customer loyalty. ICC believes that customers prefer one
company to be accountable for all their telecommunication services and that a
face-to-face sales and service strategy is the most effective method of
acquiring and maintaining its customer base.

REGULATION

HISTORICAL PERSPECTIVE.

The local and long distance telephone market was primarily serviced by AT&T
until January 1, 1984 when AT&T and the Justice Department reached an agreement
which Federal District Court Judge Harold A. Greene ratified in his order
modifying an earlier 1956 Decree ("Order"). Pursuant to the Order, local
telephone service was to be provided by Bell Operating Companies ("BOC") which
were split off and legally separated from AT&T. AT&T would then provide long
distance service as an interexchange carrier.

Under Judge Greene's Order, the BOCs were required to provide access to
their local network to all interexchange providers. In addition, the Order
limited the amount of territory in which the BOCs could provide telephone
services. The Order established new fairly small BOC service areas called Local
Access and Transport Areas ("LATAs"). The BOCs were forbidden from providing
interexchange service between LATAs ("interLATA") as that service was reserved
for AT&T and its competitors.

Similarly, GTE was subject to a Consent Decree which created several GTE
Operating Companies ("GTOC") which provided local telephone service and access
to their local telephone network to all interexchange providers. Additionally,
the GTOCs were also forbidden from providing long distance or interLATA service.

THE TELECOMMUNICATIONS ACT OF 1996.

The Telecommunications Act of 1996 ("Telecommunications Act") lifted the
restrictions contained in the AT&T Decree and the GTE Decree, thereby
eliminating certain restrictions on the BOCs and GTOCs from providing long
distance services and engaging in telecommunications equipment manufacturing.
The new statutory provisions permit the BOCs to enter the long distance market
under certain circumstances. As of the date of enactment of the legislation, a
BOC is no longer restricted from providing interLATA long distance service
outside of those markets in which it provides local exchange service (referred
to as "out-of-region" long distance service). A BOC may provide long distance
service within the regions in which it also provides local exchange service
(referred to as "in-region" service) if it satisfies certain procedural and
substantive requirements and upon obtaining FCC approval on a state-by-state
basis.

The GTOCs are permitted to enter the long distance market as of the date of
enactment without regard to limitations by region, although the necessary state
and/or federal regulatory approval that are otherwise applicable to the
provision of intrastate and/or interstate long distance service will need to be
obtained, and the GTOCs are subject to the provisions of the 1996
Telecommunications Act that impose interconnection and other requirements on
Local Carriers.

Incomnet expects that some or all of the BOCs will seek to provide
out-of-region long distance service. Certain of them have already taken steps to
provide out-of-region service in multiple states. It is not known when, and
under what specific condition, other applications will be granted by the state
regulatory commissions in those states. Several of the BOCs have unsuccessfully
sought authority from the FCC to provide in-region long distance service in
various states. While no application had yet been granted by the FCC, it is
expected that most or all of the BOCs will eventually be granted authority to
provide in-region long distance service in many or all states.

The Telecommunications Act also addresses a wide range of other
telecommunications issues that will potentially affect ICC's operations,
including provisions pertaining to regulatory forbearance by the FCC; the
imposition of additional liability for the unauthorized switching of
subscribers' long distance carriers; the creation of new opportunities for
competitive local service providers; provisions pertaining to interconnection;
provisions pertaining to universal service and access charge reform and
requirements pertaining to the treatment and confidentiality of subscriber
network information. The

legislation requires the FCC to conduct a large number of proceedings to adopt
rules and regulations to implement the new statutory provisions and
requirements. It is unknown at this time precisely the nature and extent of the
impact that the legislation and regulatory developments will have on ICC.

REGULATORY SCHEME APPLICABLE TO ICC.

ICC's telecommunications services are subject to government regulation.
Federal laws and the Federal Communications Commission's ("FCC") regulations
generally apply to interstate and international telecommunications, while
individual state regulatory authorities such as Public Utilities Service
Commissions ("PUC") generally have jurisdiction over aspects of
telecommunications that originate and terminate within the same state. In
addition, ICC's network marketing program is or may be subject to or affected by
extensive federal and state regulation.

ICC is classified by the FCC as a non-dominant carrier, and therefore is
subject to minimal federal regulation. The FCC requires ICC to file tariffs, but
does not extensively review the rates, terms or conditions, although the FCC has
the statutory authority to do so. Non-dominant carriers are required by statutes
to offer interstate and international services under rates, terms and conditions
that are just, reasonable, and not discriminatory. The FCC imposes only minimal
reporting requirements on non-dominant carriers which includes certain
reporting, accounting, and record keeping obligations.

As part of these reporting requirements, ICC currently has separate tariffs
on file with the FCC covering its domestic interstate and international
services. Although the tariffs of non-dominant carriers and the rates and
charges they specify are subject to FCC review, they are presumed to be lawful
and are seldom contested. ICC, as a telecommunications carrier, also is subject
to a variety of FCC regulations that for instance, govern the method in which a
consumer's long distance carrier can be changed, require pay phone owners to be
compensated for 800/888 calls originating from their pay phones, and require
certain documentation and verification prior to billing consumers for
non-telecommunications products and services.

ICC is subject to varying levels of regulation in the states in which it is
currently authorized to provide intrastate telecommunications services. The vast
majority of the states require ICC to apply for certification to provide
intrastate telecommunications services, or to register or to be found exempt
from regulation, before commencing intrastate service. The vast majority of the
states also require ICC to file and maintain detailed tariffs listing their
rates for intrastate service. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of certified
carriers, and/or for corporate reorganization; acquisitions of
telecommunications operations; assignments of carrier assets, including
subscriber bases; carrier stock offerings; and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations,
and policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state may be imposed for such violations. If state regulatory
agencies conclude that ICC has taken steps without obtaining the required
authority, they may impose one or more of the sanctions listed above.

ICC's network marketing system is or may be subject to or affected by
extensive government regulation, including, without limitation, state regulation
of marketing practices and federal and state regulation of the offer and sale of
business franchises, business opportunities, and securities. In addition, the
Internal Revenue Service and state taxing authorities in any of the states where
ICC has Representatives could classify the Representatives as employees of ICC
(as opposed to independent contractors). ICC believes that it is in compliance
with the requirements of federal and state regulatory authorities in each
jurisdiction. A final determination by any other jurisdiction that the
Representatives are employees could cause ICC to be subject to penalties and
interest on taxes not withheld, require ICC to withhold taxes in the future, and
require ICC to pay unemployment insurance. Additionally, an

adverse determination by any one could influence the decisions of regulatory
authorities in other jurisdictions. Any or all of such factors could adversely
affect the way ICC does business and could affect ICC's ability to attract
potential Representatives. While the regulations governing network marketing are
complex and vary from state to state, ICC believes that it is in compliance with
and has from time to time modified its network marketing program to comply with
interpretations of various regulatory authorities.

Various governmental agencies monitor direct selling activities, and ICC has
occasionally been requested to supply information regarding its marketing plan
to certain of such agencies. Although ICC believes that its network marketing
system is in substantial compliance with laws and regulations of each state
relating to direct selling activities, there is no assurance that legislation
and regulations adopted in particular jurisdictions in the future will not
adversely affect ICC's operations.

EMPLOYEES

Incomnet has sales offices in Irvine, California and Honolulu, Hawaii. As of
December 31, 1998, ICC employed or contracted with 22 general and administrative
personnel, 12 marketing and sales personnel and 78 programming, operations,
information technology and customer services personnel.

SALE OF GENSOURCE

Prior to March 9, 1999, Incomnet owned 100% of GenSource Corporation, a
computer software developer for insurance-related claims administration
("GenSource"). On March 9, 1999, Incomnet sold all of the Common Stock of
GenSource in exchange for the cancellation of $1,775,000 in debt owed by
Incomnet to the former owners of GenSource. Incomnet retained an approximate 15%
interest in GenSource in shares of GenSource preferred stock. As part of the
sale of GenSource stock, Incomnet settled litigation brought by the former
owners of the debt that was canceled as part of the transaction. See also the
discussion of Discontinued Operations in Item 7 below.

INVESTMENT IN RAPID CAST

As of December 31, 1998, Incomnet owned approximately 6.2 million shares of
Common Stock of RCI which constitutes an approximately 17.4% interest in RCI.
During 1998, Incomnet sold an aggregate of 4.5 million shares of RCI with total
proceeds of $2,700,000. Incomnet is holding its remaining interest in RCI for
sale in the future as circumstances warrant. Incomnet has not entered into any
agreements regarding the sale of its RCI stock. See also the discussion of
Discontinued Operations in Item 7 below.

ITEM 2. PROPERTIES

Incomnet does not own any real estate. Incomnet and its subsidiary ICC
currently lease approximately 64,000 square feet of office space in Irvine,
California at the rate of approximately $72,000 per month. The lease has a
non-cancelable term of five years ending in April 2002, and provides for seven
extension periods of five years each at lease rates based on increases in the
Consumer Price Index. Incomnet has subleased approximately 18,300 square feet of
its Irvine facility providing a monthly savings of approximately $20,000.

ICC also leases approximately 9,900 square feet of office space in Honolulu,
Hawaii. That lease expires in 2007. The lease provides for a termination option
in the year 2002. The monthly lease payments averaged $38,059 during 1998 and
increase by 6% on a bi-annual basis through the term of the lease. Management is
currently evaluating options to sublease and/or reduce its obligations under
this lease.

Incomnet's former GenSource subsidiary leased approximately 8,000 square
feet of office space for its facilities in Valencia, California. That lease
expires on August 31, 1999. GenSource was obligated to make lease payments at
the rate of $6,208 per month through March 31, 1999. Commencing April 1, 1999 to
the balance of the lease, the rate is adjusted based on increases in the
Consumer Price Index. Incomnet's obligation ceased with regard to this lease
obligation when Incomnet sold its ownership of GenSource common stock in March
1999.

ITEM 3. LEGAL PROCEEDINGS

Following is a description of certain pending and recently completed legal
proceedings in which Incomnet is a party. No assurance can be given that any of
these legal proceedings will not have a material adverse impact on the business,
financial condition or results of operation of Incomnet.

PENDING AND RECENTLY COMPLETED LEGAL PROCEEDINGS

SANDRA GAYLES, ET AL. V. SAM D. SCHWARTZ, ET AL. On October 17, 1995,
Incomnet was served with a complaint in a class action lawsuit entitled SANDRA
GAYLES, ET AL. V. SAM D. SCHWARTZ AND INCOMNET, INC., Case No. CV95-0399 AWT
(BQRx), filed in the United States District Court for the Central District of
California. As amended, the complaint alleges that Incomnet violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder because Incomnet failed to disclose and falsely denied
the existence of a non-public investigation of Incomnet by the Securities and
Exchange Commission. The complaint also claims that Incomnet and its President
and former Chairman of the Board of Directors, Sam D. Schwartz, violated
Sections 10(b), 16(a), 20(a) and 23(a) of the Securities Exchange Act of 1934,
and Section 25400 of the California Corporations Code, because they did not
disclose until August 1995 purchases and sales of Incomnet's stock made in the
open market by an affiliate of Mr. Schwartz between September 1994 and August
1995. The amended complaint seeks compensatory damages, interest, attorneys'
fees and costs, and other extraordinary, equitable and injunctive relief as may
be appropriate. On January 11, 1996, the court certified the case as a class
action pursuant to the parties' stipulation.

On October 7, 1997, Incomnet reached a tentative settlement of the lawsuit.
The proposed 1997 settlement consisted of an agreement by Incomnet to pay
$500,000 in cash plus 1.5 million shares of Common Stock. If the value of such
stock was not worth at least $8.15 million, Incomnet would have been required to
make up the difference between the value of the stock and $8.15 million by
issuing warrants with 5-year terms. Accordingly, the tentative settlement had a
total settlement value of $8.65 million. Because of the decline in the value of
Incomnet's stock beginning in July 1997, this proposed settlement could not
proceed under its terms. In 1998, Incomnet and the class plaintiffs began to
negotiate new settlement terms.

In September 1998, Incomnet entered into a new written settlement agreement
with the class plaintiffs. The settlement agreement is subject to court approval
and satisfaction of certain other conditions. The terms of the settlement
include payment to the plaintiffs of a total of $500,000, reimbursement of
certain expenses up to a maximum of $100,000 and issuance of a certain number of
shares of Incomnet's Common Stock based on a formula. The maximum number of
shares of Incomnet Common Stock that will be issued in accordance with the
formula under the settlement agreement is 4,125,000, assuming a $1 per share
trading price at the time the formula is applied. The minimum number of shares
of Common Stock that will be issued under the settlement agreement is 1,375,000
shares, assuming a $3 per share trading price at the time the formula is
applied. Prior to completion of the settlement agreement and issuance of the
shares in accordance with that agreement, Incomnet's shareholders must approve
an amendment to Incomnet's Articles of Incorporation to increase the authorized
number of shares of Common Stock. It is anticipated that the closing of the
settlement agreement and issuance of shares will occur no earlier than June
1999. The Court has preliminarily approved the settlement. A hearing on final
approval is scheduled for May 20, 1999. There can be no assurance that this new
settlement will be approved and consummated. Should the settlement not be
approved, Incomnet intends to vigorously defend the lawsuit. The case is still
in the discovery phase.

In separate litigation pending in California state court, Mr. Schwartz seeks
indemnification from Incomnet with respect to any judgments, legal fees or other
costs incurred in connection with his defense of this lawsuit. Incomnet intends
to vigorously defend itself against Mr. Schwartz's indemnification claims.

On or about March 24, 1998, the plaintiffs in this suit plus several
additional plaintiffs commenced a parallel state court action entitled JAMES A.
BELTZ, ET. AL. V. SAMUEL D. SCHWARTZ AND RITA L. SCHWARTZ, STEPHEN A. CASWELL,
JOEL W. GREENBERG, INCOMNET, INC., DAVID BODNER, AND MURRAY HUBERFELD, Case No.
MC 98-00674, in the State of Minnesota, County of Hennepin. This state lawsuit
brings causes of action for violations of Minnesota statutes covering securities
fraud, consumer fraud, control person liability and conspiracy to defraud based
on the same factual allegations pleaded in the federal suit. Plaintiffs allege
losses of over $1.8 million and the lawsuit seeks unspecified damages. The case
will enter the discovery phase should court-sponsored mediation efforts fail to
resolve the parties' disputes. Incomnet plans to vigorously defend this lawsuit.

In separate litigation pending in California state court, Mr. Schwartz and
Rita Schwartz seek indemnification from Incomnet with respect to any judgments,
legal fees or other costs incurred in their defense of these two lawsuits.
Incomnet intends to vigorously defend itself against Mr. and Mrs. Schwartz's
indemnification claims.

SILVA RUN WORLDWIDE LIMITED V. INCOMNET, INC., ET AL. Incomnet was a
defendant in a lawsuit entitled SILVA RUN WORLDWIDE LIMITED V. INCOMNET, INC.,
SAM D. SCHWARTZ, KALIBER MANAGEMENT, INC., BEAR STEARNS & CO., INC., LESLIE
SOLMONSON, RONALD F. SEALE, MARINER RESERVE FUND, COMPANIA DI INVESTIMENTO
ANTILLANO, COUTTS & CO. AG, SALVATORE M. FRANZELLA, PETER G. EMBIRICOS, AND JOS
SCHUETZ, originally filed in the United States District Court for the Southern
District of New York. The complaint stated that the plaintiff was a purchaser of
Incomnet's stock in July 1995. The complaint alleged that Incomnet and Mr.
Schwartz, violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder, and committed common law fraud, as
a result of false and misleading statements made by the defendants and
undisclosed trading in Incomnet's stock engaged in by Mr. Schwartz and his
affiliate. The complaint also alleged that Mr. Schwartz and his affiliate owed a
fiduciary duty to the plaintiff that was breached by their conduct. The
complaint also alleged other causes of action against other unrelated
defendants. Plaintiff claimed economic losses of approximately $2.7 million.

Incomnet answered the complaint in November 1996 and moved to have it
transferred to California. In March 1997, the claims relating to Incomnet, Sam
Schwartz and Kaliber Management, Inc. were ordered severed and transferred from
the court in New York to the same federal court in California which is hearing
the GAYLES class action lawsuit. In November 1998, this transferee court
dismissed all of the federal claims and all but one of the state law claims on
the ground that plaintiff had not opted out of the GAYLES class action lawsuit.
As a result of this ruling, Silva Run Worldwide Limited moved to extend the time
by which it may opt out of the class. The court granted this motion and allowed
Silva Run Worldwide Limited the opportunity to opt out and continue its action
against Incomnet and Mr. Schwartz based upon alleged violations of both federal
and state law. Incomnet plans to vigorously defend this lawsuit.

INCOMNET, INC. V. SAM D. SCHWARTZ. Incomnet filed a lawsuit against Mr.
Schwartz, on April 25, 1997, alleging fraud, breach of fiduciary duty,
negligence, and breach of contract, and seeking declaratory relief and the
imposition of a constructive trust. The lawsuit, entitled INCOMNET, INC., V. SAM
D. SCHWARTZ, Case No. LC 040 840, was filed in the Superior Court of California,
Los Angeles County. In the lawsuit, Incomnet alleges that Mr. Schwartz failed to
disclose to Incomnet or its Board of Directors that he would obtain a direct
financial benefit in connection with certain transactions considered or entered
into by Incomnet during the period from 1993 to 1995. Incomnet further alleges
that Mr. Schwartz fraudulently induced it to enter into a severance agreement
with him on November 27, 1995, and that he breached his fiduciary duty to
Incomnet by self dealing, acting in bad faith and concealing material facts.
Incomnet seeks payment from Mr. Schwartz of the actual damages incurred by it as
a result of Mr. Schwartz's conduct, as well as interest, punitive damages,
attorney's fees and costs, and reimbursement of all payments previously made to
Mr. Schwartz pursuant to the severance agreement. Furthermore, Incomnet seeks a
declaratory judgment that Mr. Schwartz committed acts or omissions involving
known misconduct, the absence of good faith, an improper personal benefit, a
reckless disregard of his duties to Incomnet and its shareholders, an unexcused
pattern of inattention, and a violation of Sections 310 and 317 of the
California Corporations Code.

On June 24, 1997, Mr. Schwartz answered Incomnet's lawsuit against him
denying the allegations and counterclaiming for (i) enforcement of any payments
due under his severance agreement with Incomnet, (ii) indemnification against
third party claims, and (iii) payment of the same settlement to him as was paid
to certain prior note holders who purchased convertible notes from Incomnet on
February 8, 1995. Incomnet intends to vigorously prosecute this action and
defend against Mr. Schwartz's counterclaims. The lawsuit is in the discovery
phase. A trial date is set for February 2, 2000.

RITA SCHWARTZ V. INCOMNET, INC. On or about December 2, 1997, Rita
Schwartz, a former member of the Board of Directors of Incomnet and the wife of
Mr. Schwartz, filed the case of RITA SCHWARTZ V. INCOMNET, INC., Case No. BC 182
151, in the Superior Court of California, Los Angeles County. Mrs. Schwartz
seeks reimbursement of the legal expenses which she incurred as a result of an
investigation by the Securities and Exchange Commission of Incomnet and as a
defendant in the BELTZ opt-out cases, which are ongoing. Mrs. Schwartz claims
that because she is a former member of the Board of Directors, she is entitled
to reimbursement for her legal fees based upon the Articles of Incorporation of
Incomnet. The lawsuit is presently in the discovery phase. Incomnet plans to
vigorously defend this lawsuit. A trial date is set for February 2, 2000.

ROBERT AND NANCY ZIVITZ V. JOEL GREENBERG, ET AL. On August 27, 1998, Nancy
Zivitz, a former director of Incomnet, and her husband, filed a lawsuit entitled
ROBERT AND NANCY ZIVITZ V. JOEL GREENBERG, ET AL, Case No. 98C 5350, in the
United States District Court for the Northern District of Illinois, against Mr.
Schwartz, his wife Rita Schwartz, a former director of Incomnet, and Joel
Greenberg, a former director and officer of Incomnet, in the United States
District Court in the Northern District of Illinois. The complaint asserts
claims of common law fraud and civil conspiracy based on allegations that
defendants conspired to drive up the price of Incomnet stock by making false
statements regarding Incomnet and that defendants engaged in insider trading.
While Incomnet has not been named in the lawsuit, Mr. and Mrs. Schwartz have
commenced a third party action against Incomnet seeking indemnification with
respect to costs incurred in defending the lawsuit. Incomnet intends to
vigorously oppose this claim. Mr. Greenberg has made written demands for
indemnification and seeks an advance to cover his legal fees in the case.

JACOBS V. INCOMNET, INC. On December 23, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, filed an action against Incomnet
in the Superior Court of the State of California, Los Angeles County, entitled
EDWARD R. JACOBS V. INCOMNET, INC., Case No. BC 202857. Mr. Jacobs claims that
Incomnet has failed to pay amounts allegedly owed to him pursuant to a
settlement agreement with Incomnet, dated November 13, 1996. Mr. Jacobs seeks
compensatory damages of $453,000, unspecified consequential damages, interest
and attorneys' fees and costs. Incomnet has answered the complaint and has
asserted a cross-complaint against Mr. Jacobs. Incomnet intends to vigorously
defend the lawsuit.

LAWSUITS BY TWO FORMER OWNERS OF GENSOURCE CORPORATION. On September 23,
1998, Jerry C. Buckley and Ralph Flygare, two former owners of GenSource
Corporation, filed a lawsuit entitled JERRY BUCKLEY, RALPH FLYGARE ET AL. VS.
INCOMNET, INC., GENSOURCE CORPORATION AND MARK RICHARDSON, Case No. LC 046 449,
in the Superior Court of the State of California, Los Angeles County. In the
lawsuit, the plaintiffs alleged that Incomnet defaulted on payments under
promissory notes between Incomnet and the plaintiffs and sought damages of
approximately $1.2 million. This lawsuit was settled and dismissed as part of
the sale of GenSource in March 1999. The sale of GenSource also resolved
potential lawsuits by two other former shareholders of GenSource.

misappropriation of trade secrets, intentional interference with business
relationships, fraud and related claims in connection with defendants' start-up
of a competing business and solicitation of ICC's employees and independent
sales representatives and diversion of ICC's telephone customers to businesses
owned or controlled by defendants. ICC filed its second amended complaint in
February 1999.

In September 1998, Mr. Ballah answered the original complaint and filed a
cross-complaint against ICC alleging that ICC failed to make payments of
$250,000 under a consulting agreement with him. Mr. Ballah alleges claims for
breach of contract and breach of the implied covenant of good faith and fair
dealing and asserts a claim based on work, labor and services rendered. In the
same cross-complaint, an affiliate of Mr. Ballah, defendant World Technologies,
Inc. ("World Tech"), alleges that ICC breached an agreement under which World
Tech would become the exclusive network marketing company for ICC. World Tech
also alleges claims of fraud, negligent misrepresentation and unjust enrichment,
and seeks an accounting.

On July 21, 1998, the court entered a stipulated restraining order enjoining
the defendants in the lawsuit from, among other things, directly or indirectly
attempting to induce any ICC employee or independent sales representative to
work or perform services for the defendants. ICC's motion for preliminary
injunction is currently scheduled for hearing on April 21, 1999. Incomnet plans
to continue to vigorously prosecute this action.

ACTIONS BY FORMER INDEPENDENT SALES REPRESENTATIVES. On May 22, 1998,
former ICC independent sales representatives Mercedes Chan and Chatri
Jhunjhnuwala filed a lawsuit in the Superior Court of the State of California,
Orange County, against Incomnet, ICC, and others entitled MERCEDES CHAN AND
CHATRI JHUNJHNUWALA VS. INCOMNET, INC., NATIONAL TELEPHONE & COMMUNICATIONS,
INC. ET. AL., Case No. 794636. In the lawsuit, the plaintiffs allege that
defendants induced them to become independent representatives of ICC and to
incur sign-up fees and other costs based on false representations concerning the
business of ICC and the amount of commission and bonus payments that could be
earned as independent representatives of ICC. Plaintiffs assert claims for
fraud, breach of contract, wrongful discharge, negligent misrepresentation and
other causes of action and seek general, compensatory, special and punitive
damages. The case is in the discovery phase. A trial date is set for August 30,
1999. Incomnet intends to vigorously defend this lawsuit.

On October 29, 1998, former ICC independent sales representative Chutapa
Varavarn commenced an action in the Superior Court of the State of California,
Orange County, entitled CHUTAPA VARAVARN V. INCOMNET, INC., ET AL., Case No.
801412. The factual and legal allegations are substantially similar to the
allegations in the CHAN lawsuit and plaintiff seeks damages, including punitive
damages. Incomnet intends to vigorously defend this lawsuit.

On August 20, 1998, former ICC independent sales representative Rick Bergen
commenced an action in the Superior Court of the State of California, Orange
County, entitled RICK BERGEN V. INCOMNET, ET AL., Case No. 798468. Plaintiff
contends that ICC failed to make certain payments and commissions based on his
development of sales territories and wrongfully deprived him of other income.
Plaintiff asserts claims for fraud, unfair business practices, negligence,
wrongful discharge and unpaid wages and seeks compensatory and punitive damages.
The case is in the discovery phase and a trial date is set for October 4, 1999.
Incomnet intends to vigorously defend this lawsuit.

On May 26, 1998, former ICC independent sales representative Chuanxu Zang
and another party commenced an action against ICC in state court in Fairfax
County, Virginia, entitled CHUANXU ZANG, ET AL. V. NATIONAL TELEPHONE &
COMMUNICATIONS, INC., Circuit Court Case No. 171965, involving a dispute
regarding the Plaintiff's purchase of long distance telephone calling cards from
ICC. On March 5, 1999, the Fairfax County Circuit Court stayed the action and
ordered that Plaintiffs submit their dispute to arbitration in Orange County,
California, in accordance with the arbitration provision contained in

Mr. Zang's independent representative agreement. Plaintiffs have not yet
commenced an arbitration proceeding. Incomnet intends to continue to vigorously
defend this action.

On February 17, 1999, former ICC independent sales representatives Kevin
Porter, Robin Kasten, and Larry Tate attempted to commence separate arbitration
proceedings against Incomnet and ICC, alleging, INTER ALIA, that Incomnet and
ICC failed to make payments owed to them. The complaints in these arbitration
proceedings purport to assert various causes of action against Incomnet and ICC,
including claims for purported fraud, unfair business practices, breach of
contract, negligence and conversion. The plaintiffs in these separate
arbitration proceedings seek unspecified damages, including punitive damages.
Plaintiffs are required under the terms of their independent representative
agreements with ICC to commence any proceedings against ICC before the American
Arbitration Association, but have not yet done so. Incomnet and ICC have not yet
filed answering statements in these actions, and no trial date has been set.
Incomnet intends to vigorously defend itself in these arbitration proceedings.

JACOBS ARBITRATION. On March 19, 1999, Edward Jacobs, former President and
Chief Executive Officer of ICC, commenced an arbitration action against ICC
before the American Arbitration Association, seeking relief in the amount of
$549,776.92, plus interest and attorneys' fees, based upon an alleged breach of
an employment agreement by ICC. ICC has not yet filed an answering statement,
and a trial date has not yet been set. Incomnet plans to vigorously defend this
arbitration proceeding.

JACOBS V. ICC (LABOR COMMISSION). On August 12, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, initiated a proceeding against ICC
before the Labor Commissioner of the California Department of Industrial
Relations, known as EDWARD R. JACOBS V. NATIONAL TELEPHONE & COMMUNICATIONS,
INC., Case No. 18-34441-002-182/031. In this Labor Commission proceeding, Mr.
Jacobs claims that he is owed compensation for earned and unused vacation time
totaling $106,153.86, plus penalties and attorneys' fees. ICC denies that it has
any such obligation to Mr. Jacobs. The hearing on Mr. Jacobs' claims commenced
on March 11, 1999, but was not completed. The hearing is currently set to
continue on June 21, 1999. Incomnet intends to continue to vigorously defend
this proceeding.

LAWSUIT BY COMMUNICATIONS CONSULTING, INC. On June 23, 1998, Communications
Consulting, Inc. ("CCI"), filed a lawsuit against National Telephone &
Communications, Inc. entitled COMMUNICATIONS CONSULTING, INC. V. NATIONAL
TELEPHONE & COMMUNICATIONS, INC., Case No. 795910, in the Superior Court of the
State of California, Orange County. CCI claims that ICC improperly terminated a
consulting agreement between CCI and ICC and owes CCI a sum of $127,037.50,
interest and reasonable costs, fees and expenses associated with its lawsuit.
The case is in the discovery phase and a trial date is set for July 26, 1999.
Incomnet intends to vigorously defend this lawsuit.

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. In August 1994, Incomnet
was notified by the Pacific Regional Office of the Securities and Exchange
Commission that the Commission had initiated an informal inquiry of Incomnet. In
September 1994, the Commission issued a formal order of private investigation.
The Commission's investigation subsequently focused on press releases issued by
Incomnet on January 17 and 18, 1995, and September 6, 1995, and on a report on
Form 8-K issued by Incomnet on August 28, 1995, which the Commission alleged
contained untrue statements of material fact. On May 14, 1998 Incomnet and two
former directors of Incomnet, Stephen A. Caswell and Joel W. Greenberg, entered
into an Offer of Settlement and Order with the Commission pursuant to which they
agreed, without admitting or denying any wrongdoing, not to violate Section
10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-2,
13a-11 and 13a-13 promulgated thereunder. No civil penalties or other financial
sanctions were imposed on any of the parties. The final administrative order was
entered by the SEC on July 30, 1998.

POTENTIAL LAWSUITS. Approximately 50 members of the class in the GAYLES
class action lawsuit against Incomnet have opted out of the class and may file
separate lawsuits against Incomnet. If such claims are filed as legal
complaints, Incomnet will seek to have them consolidated with other pending
lawsuits, if appropriate, or will defend them separately.

A claim may be asserted against Incomnet by Jerry Ballah with respect to a
settlement agreement Incomnet entered into in November 1996. Mr. Jacobs, who was
a party to the settlement, has already commenced a lawsuit in connection with
the settlement agreement. The amount of the damages that may be asserted by Mr.
Ballah is estimated to be approximately $535,000 plus accrued interest, and
possible consequential damages. Incomnet intends to vigorously defend any claims
made against it or ICC by Mr. Ballah.

John R. Dennis and JRD, Inc. may commence an action against ICC based upon
an alleged breach of a purported agreement by which Mr. Dennis and JRD, Inc.
were to provide consulting services to ICC. Absent the existence of such
agreement, Mr. Dennis and JRD, Inc. seek recovery based on alleged benefits they
claim to have provided to ICC as a result of certain alleged activities.
Incomnet believes this case lacks merit and is preparing to respond to any
litigation that may be brought.

From time to time, Incomnet is also involved in litigation arising from the
ordinary course of business, the ultimate resolution of which may or may not
have a material adverse effect on the financial condition or results of
operations of Incomnet.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET INFORMATION

Incomnet's common stock is quoted on the Nasdaq SmallCap Market under the
symbol "ICNT." The following table sets forth the range of high and low bid
prices and the last bid price for Incomnet's common stock during the periods
indicated.

YEAR ENDED DECEMBER 31, 1998:

QUARTER HIGH LOW LAST BID
- ------------------------------------------------------ --------- --------- -----------

4th Quarter........................................... 2 3/4 1 13/32 1 3/4
3rd Quarter........................................... 2 3/8 1/4 2 1/8
2nd Quarter........................................... 3/4 5/32 5/16
1st Quarter........................................... 1 3/4 15/32 3/4

YEAR ENDED DECEMBER 31, 1997:

QUARTER HIGH LOW LAST BID
- ------------------------------------------------------ --------- --------- -----------

4th Quarter........................................... 3 13/16 1 1/16 1 3/16
3rd Quarter........................................... 5 3/16 2 15/16 3 5/8
2nd Quarter........................................... 5 1/2 2 11/16 4 7/8
1st Quarter........................................... 5 1/16 2 13/16 3 1/8

On April 12, 1999, the last sale price per share of Incomnet's common stock,
as quoted by the Nasdaq SmallCap Stock Market, was $.9688.

On April 12, 1999 Incomnet's 19,933,000 shares of common stock outstanding
were held by approximately 4,200 shareholders, including shareholders of record
and shareholders whose stock is held in street name.

DIVIDENDS

Incomnet has not paid cash dividends on its Common Stock during the past
three years. Payment of dividends is within the discretion of Incomnet's Board
of Directors and will depend, among other factors, on earnings, capital
requirements and operating and financial conditions. At the present time,
Incomnet has neither the plans nor the financial resources to declare or pay any
dividends on its Common Stock.

Incomnet's ability to pay dividends is restricted by the Foothill Facility.
The Foothill Facility provides that as long as (i) no event of default on the
Foothill Facility has occurred and is continuing and (ii) ICC has not less than
$2 million of available funds under the facility after giving effect to any
dividend, ICC may pay dividends to Incomnet to cover general and administrative
expenses as historically conducted and to cover accrued dividends on Incomnet
preferred stock up to a maximum of $20 million of preferred stock.

RECENT SALES OF UNREGISTERED SECURITIES

In November and December 1998, Incomnet issued to Ironwood Telecom LLC
("Ironwood") warrants to purchase an aggregate of 3,600,000 shares of Incomnet
Common Stock (the "Ironwood

Warrants"). The Ironwood Warrants were issued in connection with the Ironwood
Facility. The Ironwood Warrants were issued in three tranches:

- The first tranche was issued on November 4, 1998 and entitle Ironwood to
purchase 500,000 shares of Incomnet's Common Stock at an exercise price of
$1.00 per share. Those warrants are exercisable immediately and for a
five-year period ending November 4, 2003.

- The second tranche of warrants was issued on November 16, 1998 and entitle
Ironwood to purchase 100,000 shares of Incomnet's Common Stock at an
exercise price of $1.00 per share. Those warrants are exercisable
immediately and for a five-year period ending November 16, 2003.

- The third tranche of warrants was issued on December 15, 1998 and entitled
Ironwood to purchase an aggregate of 3,000,000 shares of Incomnet's Common
Stock. Those warrants entitled Ironwood to purchase (i) 2,000,000 shares
of Incomnet's Common Stock at an exercise price of $1.00 per share (the
exercise price and number of shares are subject to adjustment based on
Incomnet's operating results), exercisable during the period commencing on
the date Incomnet's Articles of Incorporation are amended to provide for a
sufficient number of shares of Common Stock to allow for such exercise
(the "Amendment Date") and ending five years from the Amendment Date; and
(ii) 1,000,000 shares of Incomnet Common Stock at an exercise price of
$2.25 per share (the exercise price and number of shares are subject to
adjustment based on Incomnet's operating results), exercisable during the
five-year period commencing December 15, 1999 and ending December 15,
2004.

- As of April 13, 1999, none of the Ironwood Warrants have been exercised.

The securities issued in the foregoing transactions were offered and sold
under the exemption provided by Section 4(2) of the Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to
Incomnet's statements of operations data for each of the years ended December
31, 1998, 1997 and 1996 and with respect to balance sheet data at December 31,
1998 and 1997 are derived from the audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K and are qualified by
reference to those financial statements. The statement of operations data for
the years ended December 31, 1994 and 1995 and with respect to balance sheet
data at December 31, 1994, 1995 and 1996, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K. The
following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements for Incomnet and the notes thereto
along with Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Annual Report on Form 10-K.

YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1998 1996 1995 1994
--------- --------- --------- ---------
1997(2)
-----------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENTS OF OPERATIONS DATA (1):
Net sales from continuing operations........................ $ 54,868 $ 121,831 $ 97,870 $ 83,202 $ 45,614
(Loss) income from continuing operations.................... (17,633) (14,057) (6,607) 2,576 3,655
(Loss) gain from discontinued operations.................... (1,475) (1,561) (30,192) (1,210) 416
Cumulative effect of accounting change...................... -- -- (877) -- --
--------- ----------- --------- --------- ---------
Net (loss) income........................................... $ (19,108) $ (15,618) $ (37,676) $ 1,366 $ 4,071
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------

BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE (1):
From continuing operations.................................. $ (1.03) $ (1.08) $ (0.50) $ 0.20 $ 0.38
From discontinued operations................................ (0.09) (0.11) (2.26) (0.09) 0.04
From cumulative effect of accounting change................. -- -- (0.06) -- --
--------- ----------- --------- --------- ---------
Net (loss) earnings......................................... $ (1.12) $ (1.19) $ (2.82) $ 0.11 $ 0.42
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------

BALANCE SHEET DATA AT DECEMBER 31 (1):
Total assets................................................ $ 24,420 $ 41,340 $ 33,730 $ 55,938 $ 26,152
Long-term obligations....................................... $ 16,819 $ 2,855 $ 1,003 $ 11 $ 1
Net assets (liabilities) of discontinued operations......... $ 531 $ 5,707 $ (335) $ 27,745 $ 784

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

(1) All years have been adjusted to reflect certain financial statement
reclassifications made related to certain entities disposed of during 1998
and early 1999 that have been reflected as discontinued operations. See Item
7."Management's Discussion and Analysis of Financial Condition and Results
of Operations--Discontinued Operations."

(2) Amounts for 1997 have also been restated to reflect a $7.2 million increase
in stockholders' equity in accordance withe the equity method of accounting
for the Company's RCI investment. Additionally, operating results for RCI
for 1997 have been restated to reflect additional losses of $2.0 million.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Discontinued Operations."

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Following is management's discussion and analysis of certain significant
factors, which have affected the consolidated results of operations and
financial condition of Incomnet during the period included in the accompanying
consolidated financial statements. This discussion should be read in conjunction
with the consolidated financial statements and associated notes set forth
beginning on page F-1 of this Form 10-K.

The following discussion and analysis of financial condition and results of
operations contains statements that are based upon certain estimates,
projections and other forward-looking statements within the meaning of the
Securities Litigation Reform Act of 1995. See "Special Note Regarding
Forward-Looking Statements" on page 1 of this Form 10-K.

OVERVIEW

Incomnet is the parent company of Incomnet Communications Corporation (ICC),
a company that provides long distance and telecommunication services to
residential customers and businesses throughout the United States. ICC's
telecommunication services are sold by ICC's network of independent sales
representatives.

During 1998, Incomnet was also the parent company of Auto Dismantler Network
(AutoNetwork) and GenSource Corporation (GenSource). Incomnet also owns an
interest in Rapid Cast, Inc. (RCI) (now known as Optical Dynamics Corporation).
Incomnet's business was streamlined with the sale of the assets of AutoNetwork
in early 1998, the sale of a portion of Incomnet's RCI stock and on
discontinuance of Incomnet's involvement and influence over management of RCI in
late 1998 and the sale of GenSource in 1999 (See Discontinued Operations).

RESULTS OF CONTINUING OPERATIONS

The following table sets forth, as a percentage of total net sales, certain
consolidated statements of operations data for the periods indicated:

YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----- ----- -----

Total net sales.................................................... 100% 100% 100%
Cost of sales...................................................... 63 70 66
--- --- ---
Gross profit..................................................... 37 30 34
Operating expenses:
General and administrative....................................... 48 24 29
Depreciation and amortization.................................... 6 2 2
Bad debt expense................................................. 7 5 6
Impairment of long-lived assets.................................. 3 -- --
Other operating expense.......................................... 3 10 3
Total operating expenses....................................... 67 41 40
--- --- ---
Operating loss..................................................... (30) (11) (6)
Interest expense................................................... 3 -- --
Income tax (benefit) expense....................................... (1) 1 1
--- --- ---
Loss from continuing operations.................................... (32) (12) (7)
Loss from discontinued operations.................................. (3) (1) (31)
--- --- ---
Net loss........................................................... (35)% (13)% (38)%
--- --- ---
--- --- ---

Incomnet reported a loss from continuing operations of $17.6 million for the
year ended December 31, 1998, compared to a loss from continuing operations of
$14.1 million and $6.6 million for the same periods in 1997 and 1996,
respectively. For the comparative periods presented, Incomnet's results of
continuing operations include Incomnet, Inc. and its subsidiary ICC. The results
from operations for the discontinued business segments is reported separately as
discontinued operations. (See Discontinued Operations below).

NET SALES. Incomnet's revenues primarily consist of revenues from long
distance telephone services and marketing program fees paid by Representatives
for marketing materials, services and pre-paid calling cards. A portion of
marketing program revenues are deemed related to continuing support obligations
and are deferred and recognized over the twelve-month contractual service
periods.

Net sales declined $67 million or 55% from $122 million in 1997 to $55
million in 1998 primarily due to significant business changes discussed in more
detail under "Item 1, Business--Significant Business and Management Changes in
1998" ("Significant Business Changes"). The Significant Business Changes caused
the Company to lose existing Representatives and prevented the Company from
attracting new Representatives at a sufficient rate to maintain the size of the
customer base. The loss of Representatives who generally sold to a "warm" market
(i.e., friends, business associates and family members) resulted in higher than
normal customer attrition and reduced the Company's ability to add customers.
The attrition of customers caused the telephone services revenue to decrease $54
million or 50% from $107 million in 1997 to $53 million in 1998. The inability
to attract new Representatives caused marketing revenues to decrease $13 million
or 88% from $15 million in 1997 to $2 million in 1998.

Total net sales increased $24 million or 24% from $98 million in 1996 to
$122 million in 1997 as a result of the significant expansion of ICC's
telecommunications customer base and Representative growth during the first half
of 1997. Incomnet experienced strong growth momentum through the first part of
1997 and abruptly stalled when the PUC and Orange County District Attorney
imposed certain restrictions. Marketing program sales decreased $2 million or
14% from $17 million in 1996 to $15 million in 1997 due to both a price decrease
to Representatives for materials and services and the restrictions imposed in
the fourth quarter of 1997.

COST OF SALES. Cost of sales includes direct costs for both telephone
services and marketing programs. Cost of sales for telephone services includes
the cost of service provided by WorldCom and commissions paid to
Representatives. Marketing program cost of sales include (i) bonus commissions
for assisting new Representatives obtain certain minimum levels of retail long
distance subscribers and related long distance usage, (ii) compensation and
related costs of ICC's employees providing marketing support, (iii) related
overhead and (iv) the cost of providing business forms, and promotional and
presentation materials.

Cost of sales decreased $51 million or 60% from $86 million in 1997 to $35
million in 1998. This change was principally attributable to decreases in
carrier costs associated with a decline in telephone service sales volumes, an
overall decline in sales commissions, and lower average per unit cost for
telecommunication services in 1998.

Cost of sales increased $22 million or 33% from $64 million in 1996 to $86
million in 1997 and was attributable to the increase in carrier costs associated
with increased telephone service sales by ICC in 1997.

GROSS MARGIN. Telephone services gross margins are principally affected by
changes in product mix, telephone services average per unit cost, and changes in
commissions paid on telephone usage. Marketing program gross margins are
principally affected by the promotional and customer acquisition bonuses paid to
the Representatives.

The gross margin percentage for telephone services increased to 39% in 1998
from 32% in 1997. The increase was primarily due to a 1997 promotional
international product that carried a negative margin, and lower per unit
telephone service carrier costs in 1998.

The gross margin percentage for telephone services declined to 32% in 1997
compared to 42% in 1996 due to a negative margin promotional product mentioned
above that ran for six months.

Marketing program sales declined to $1.7 million in 1998 from $15.0 million
in 1997. The decrease in marketing program gross margins in 1998 compared to
1997 was primarily due to the extraordinary decline in sales volume which could
not support the relatively fixed cost structure of the underlying marketing
support functions.

Marketing program sales decreased to $15 million in 1997 from $17 million in
1996. The decrease in marketing program gross margins in 1997 compared to 1996
was primarily due to the reduction in prices for marketing materials and
services without a proportional decrease in promotional and customer acquisition
bonuses.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
costs to provide billing and collection of telephone services, support services
for subscribers, cost of the information systems, and personnel to support
Incomnet's operations.

Although general and administrative costs for Incomnet decreased to $26.0
million in 1998 from $28.7 million in 1997, they increased as a percentage of
net sales to 48% in 1998 from 24% in 1997. This increase as a percentage of net
sales was attributable to an increase in legal costs associated with the
potential sale of ICC in 1998, the change in control at Incomnet, and the
Significant Business Changes.

Net sales increased $24 million or 24% from $98 million in 1996 to $122 in
1997, but general and administrative costs increased by only 1%. As such,
general and administrative costs as a percentage of net sales decreased to 24%
in 1997 compared to 29% in 1996. Incomnet benefited during 1997 from reduced
legal fees, and reduced fees resulting from an increase in the number of
customers billed directly by Incomnet rather than through the local exchange
carriers.

Total general and administrative costs for 1999 will continue to be high as
a percentage of net sales due to the base costs of needed infrastructure support
including facilities, customer service, and other back office operations.
Although Incomnet is undertaking a prudent reduction plan, significant cost
reductions could negatively impact support services needed to rebuild the
business. As Incomnet rebuilds its revenues and exceeds break-even, substantial
growth should be supported with incrementally small cost increases.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $.6
million or 23% in 1998 to $3.4 million compared to $2.8 million in 1997. This
increase was attributable to increased investment in 1997 in computer hardware
and software, furniture and equipment, and leasehold improvements.

Depreciation and amortization increased $0.9 million or 46% in 1997 to $2.8
million compared to $1.9 million in 1996. This increase was attributable
primarily to leasehold improvements made to Incomnet's Irvine headquarters and
Hawaii sales office and by the continuing investment in computer hardware and
software, furniture and equipment, and leasehold improvements required to
support its sales expansion.

BAD DEBT EXPENSE. Bad debt expense increased in 1998 to 7% of net sales or
$3.9 million compared to 1997 bad debt expense of $5.5 million or 5% of net
sales. Bad debt expense in 1998 increased primarily due to a write-off of $0.6
million associated with a note from a former officer. Bad

debt expense associated with Incomnet's telecommunications net sales was
approximately 6% in 1998 compared to 5% in 1997.

The increase in ICC's bad debt expense in 1998 compared to 1997 was due
primarily to a change in the number of telephone customers billed directly by
ICC rather than through their local telephone carrier. ICC also experienced a
higher than expected bad debt rate for direct-billed customers in 1998. As
Incomnet continues to increase its base of direct billed customers, it has taken
steps to improve collections by restructuring and outsourcing key collection
functions to a third party service provider.

Bad debt expense in 1997 decreased to 5% of net sales compared to 6% of net
sales in 1996. This decrease was due primarily to an increase in customers
billed by their local telephone carriers which had been more effective in
collecting delinquent accounts than ICC.

IMPAIRMENT OF LONG-LIVED ASSETS. During 1998, Incomnet completed its
evaluation of the recoverability of certain long-lived assets at ICC. In
connection with this evaluation, Incomnet recorded a $1.6 million non-cash
write-down of the carrying value of certain leasehold improvements to their
estimated fair value.

OTHER EXPENSES. For 1998, other expenses of $1.6 million consisted
primarily of a loss on disposal of equipment of $0.8 million and $0.5 million
associated with the settlement of the Public Utilities Commission's action
against ICC in 1998 and $0.1 million for various legal settlements and related
expenses.

Other expenses of $12.5 million in 1997 were primarily attributable to the
settlement of the class action lawsuit for $8.7 million, which was renegotiated
in 1998 [see "Item 3. Legal Proceedings-- Class Action and Related Lawsuits"],
settlement of the State of California and California Public Utilities Commission
actions against ICC for $1.6 million, and design costs and leasehold
improvements of $0.9 million associated with certain abandoned capital
improvements.

NET OPERATING LOSS CARRYFORWARDS. At December 31, 1998, Incomnet had
available net operating loss carryforwards for federal and state income tax
purposes of approximately $32 million and $9 million, respectively, expiring in
various years between 2000 and 2018. Due to the change in ownership provisions
of the Tax Reform Act of 1986, net operating loss carryforwards for Federal and
state income tax reporting purposes are subject to annual limitations.

DISCONTINUED OPERATIONS

Incomnet sold its interest in three businesses previously reported as
business segments. Accordingly, these segments have been accounted for as
discontinued operations in 1998. Incomnet has also reclassified prior years to
present the operating results of the three businesses as discontinued
operations.

- GenSource--In March 1999, Incomnet sold its interest in the common stock
of the computer software business segment, consisting of GenSource
Corporation (GenSource), a developer and marketer of software programs
used to administer insurance-related claims, such as workers' compensation
and short-term and long-term disability. The sale was made to a group of
private investors in exchange for the release from liability of Incomnet
under promissory notes to the former owners of GenSource of approximately
$1,775,000. In addition, Incomnet paid $10,000 in cash for certain
transaction expenses and received 15,507 shares of convertible preferred
stock in GenSource with a stated value of $32.25 per share. No value was
assigned to the preferred stock which represents an approximately 15%
interest in GenSource on a fully-diluted basis. In connection with the
disposition of GenSource, Incomnet expects to recognize a gain of
approximately $1.4 million. Incomnet has no expectation of continuing
involvement with GenSource.

- AutoNetwork--In March 1998, Incomnet sold the network services business
segment to a group of private investors for $1,300,000. The segment
consisted of Auto Dismantler Network (AutoNetwork), a monthly subscription
service that auto dismantlers use to buy, sell and trade used parts that
have been salvaged from automobiles damaged in traffic collisions. During
the year ended December 31, 1998, Incomnet recognized a gain on the
disposition of AutoNetwork of $535,000.

- Rapid Cast--Incomnet acquired 51% of the common stock of RCI (10.2 million
of the 20 million outstanding shares) in February 1995. Initially, RCI was
accounted for using the equity method of accounting. However, by the
second quarter of 1995, control was determined to be other than temporary
and RCI was consolidated with Incomnet. In January 1997, RCI sold 8
million new shares of its common stock in a private placement and issued
an additional 2.3 million shares in other transactions, reducing
Incomnet's investment in RCI to approximately 33% and requiring the equity
method of accounting for its remaining interest in RCI. In its
consolidated financial statements for the year ended December 31, 1997 as
originally reported, Incomnet gave no recognition to the increase in its
share of RCI's net equity resulting from the sale by RCI of its common
stock because prior management was not satisfied that the sale would
provide sufficient resources to allow RCI to become successful. However,
the accompanying consolidated financial statements have been restated to
reflect a $7.2 million increase in consolidated stockholders' equity in
accordance with the equity method of accounting. Additionally, operating
results for RCI for 1997 and for the first nine months of 1998 have been
restated to reflect additional losses of $2.0 million and $1.3 million,
respectively, to account for Incomnet's share of RCI's net losses under
the equity method of accounting. In the third quarter of 1998, Incomnet
sold a portion of its investment in RCI to outside investors, which
resulted in a net gain on the disposition of $2.6 million. In the fourth
quarter of 1998, Incomnet decided to streamline its operations to focus
solely on its telecommunications business. As part of that effort,
Incomnet has determined to dispose of its investment in RCI and expects
that this will occur in 1999. At December 31, 1998, Incomnet holds a 17.4%
ownership interest in RCI, with a carrying value of $200,000, and warrants
for the purchase of 2.6 million additional RCI shares of common stock at
exercise prices ranging from $0.75 to $2.25 per share. Incomnet has no
expectation of continuing involvement with RCI.

Summarized financial information for the discontinued operations are as
follows (IN THOUSANDS):

DECEMBER 31
--------------------
1998 1997
--------- ---------

Current assets............................................................ $ 992 $ 812
Total assets.............................................................. 1,433 6,480
Total liabilities (current)............................................... (902) (773)
Net assets of discontinued operations..................................... 531 5,707

YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------

Revenues......................................................... $ 3,530 $ 3,313 $ 6,093

The net assets of the discontinued operations as of December 31, 1998
represent the net assets of GenSource of $331,000 and RCI of $200,000, which
have been classified as current assets as of December 31, 1998. The net assets
of discontinued operations at December 31, 1997 are comprised of $3,280,000,
$827,000 and $1,600,000 of GenSource, AutoNetwork and RCI, respectively.

LIQUIDITY AND CAPITAL RESOURCES

For the years ended December 31, 1998, 1997 and 1996, Incomnet recognized
net losses from continuing operations of $17.6 million, $14.1 million and $6.6
million, respectively. In addition, Incomnet realized net losses from its
discontinued operations aggregating $1.5 million, $1.6 million and $30.2 million
during the respective annual periods. As a result, at December 31, 1998,
Incomnet has an accumulated deficit and net capital deficiency of $84.7 million
and $15.8 million, respectively, and its current liabilities exceed its current
assets by approximately $13.1 million.

Additionally, beginning in August 1997 and continuing through the year ended
December 31, 1998, Incomnet experienced declining revenues due to decreases in
the number of telephone customers and the number of active Representatives.
These decreases are the result of the Significant Business Changes. Management
believes the improvements that have occurred in the third quarter of 1998 and
since the change in the composition of the Board of Directors on September 30,
1998 in part alleviate these conditions. A more detailed discussion of these
improvements are outlined in "Item 1, Business-- The September '98 Board
Change."

Incomnet is also taking steps to revitalize ICC's network marketing
organization, including developing new telecommunications products that are more
competitive, working closer with its Representatives to help them better
understand the products and services provided by ICC, developing new commission
and bonus programs that will make ICC more competitive in attracting new
Representatives, and expanding its focus on Representative recruiting from
primarily a Southern California focus to a nationwide program. Management
believes its new marketing plans will revitalize ICC's efforts to attract
additional representatives. In addition to revitalizing its network marketing
organization, ICC also is continuing a cost control program that is anticipated
to result in a more efficient operation and a reduced cost structure overall.
Lastly, Incomnet is seeking additional financing that may take the form of
either additional debt or equity.

To meet its need for additional financing and support its operating
requirements, in December 1998, Incomnet obtained $16.6 million from Ironwood
Telecom LLC (Ironwood) under a secured term loan facility. In April 1999,
Incomnet obtained a line-of-credit facility providing for borrowings, based on
eligible accounts receivable, up to a maximum of $12.5 million from Foothill
Capital. In addition, Incomnet has had recent discussions with Ironwood
regarding the possible conversion into equity of some or all of Incomnet's $16.6
million debt obligation under the Ironwood Facility.

Incomnet is also seeking to arrange for additional equity. To assist in its
financing efforts, Incomnet has engaged a financial advisor to help locate
additional sources of equity financing. No assurances can be given that Incomnet
will be successful in raising additional equity financing through this financial
advisor or at all.

Incomnet has also engaged a financial advisor to assist Incomnet in
connection with its equity capital raising efforts. No assurances can be given
that Incomnet will be successful in raising additional equity capital through
this financial advisor or at all.

Management believes Incomnet has sufficient sources of financing to continue
operations throughout 1999 at planned levels of operations. However, there are
no assurances that Incomnet will attain planned levels of operations.
Ultimately, Incomnet's long-term success is dependent upon its ability to
successfully execute its strategic plan, obtain additional long-term financing,
complete its Year 2000 remediation, and ultimately attain sustained profitable
operations. (See Note 1 of the Notes to Consolidated Financial Statements).

CONTINUING OPERATIONS. Cash flows used in operating activities in 1998 was
$7.6 million. This was primarily due to the loss from continuing operations of
$17.6 million offset by non-cash expenses of $7.4 million, a $4.6 million
decline in accounts receivable, $3.6 million used to bring the balance

payable to WorldCom from 60 to 30 days and changes of $1.6 million in other
working capital accounts.

Incomnet used $0.2 million in investing activities primarily consisting of
purchases of computer hardware and software and leasehold improvements.
Incomnet's financing cash flows were primarily from the funding of the Ironwood
Facility (discussed above) and repayment of its previous line of credit with
First Bank.

DISCONTINUED OPERATIONS. Cash provided by (used in) discontinued operations
(see discussion on Discontinued Operations above) was $3.7 million, $1.5 million
and ($2.1) million for the years ended December 31, 1998, 1997 and 1996,
respectively. The cash provided or used by discontinued operations arose from
normal operations and gain or losses on disposition of the segments.

CAPITAL EXPENDITURES. Incomnet acquired approximately $0.4 million of
facilities and equipment in the year ended December 31, 1998. The capital for
these acquisitions was primarily provided through capital leases. To meet its
planned capital requirements over the next 12 months, Incomnet believes that it
will spend approximately $3.9 million. Some of these capital expenditures will
assist Incomnet and ICC to modernize its information systems, broaden its
product offering and realize process efficiencies. Because Incomnet presently
does not have the capital for such anticipated expenditures, it will have to
finance or lease these capital expenditures.

LITIGATION. Incomnet is subject to pending litigation and has taken a
reserve of $8.5 million associated with anticipated legal settlement of the
class action lawsuit. Incomnet is a defendant in other pending litigation that
may have a material adverse effect on Incomnet's financial condition and results
of operation. No reserves have been set up for this litigation [see "Part I.
Item 3. Legal Proceedings and Notes to Consolidated Financial Statements--Note
11--"Litigation"].

YEAR 2000 READINESS DISCLOSURE

Many existing computer systems and applications use only two digits to
identify a year in their respective date fields without considering the impact
of the upcoming change in the century. These systems need to be corrected or
replaced with systems that are Year 2000 ("Y2K") compliant.

Incomnet and ICC have identified the major information technology (e.g.,
computer hardware and software) ("IT") and non-information technology (e.g.,
heating and air-conditioning systems) ("non-IT") systems that must either be
upgraded or replaced to meet the needs of operations and to be Y2K compliant.
These changes will result in a combination of software, hardware and equipment
upgrades or replacements. Some of the key systems identified by ICC were: the
internal financial system; the billing and customer service system; the
independent representative tracking and commission system; the calling card
system; the internal corporate telephone exchange, the security and
communications systems.

Since the Board Change in September 1998, Incomnet has spent or committed to
spend approximately $3 million to upgrade or replace certain of its IT and
non-IT systems for strategic business purposes (the "Strategic Systems
Commitment"). Many of these expenditures are expected to be paid out over a
number of years. As of December 31, 1998, approximately $200,000 of the
Strategic Systems Commitment has been spent on upgrades and replacements and an
estimated $500,000 was spent during the first quarter of 1999. An ancillary
benefit of those expenditures is that the new hardware and software is Y2K
compliant. In addition, ICC has budgeted $200,000 to upgrade or replace existing
IT and non-IT systems (the "Upgrade Commitment") for the specific purpose of
becoming Y2K compliant. Approximately $60,000 of the upgrade commitment was
spent during the first quarter of 1999. Incomnet and ICC currently estimate that
all key upgrades and replacements of IT and non-IT systems will be completed and
tested by October 1999.

Incomnet has dedicated internal resources and personnel to the Y2K problem
and has already acquired most of the IT and non-IT upgrades to existing
equipment.

During the first quarter of 1999, ICC sent out questionnaires to its key
suppliers and vendors, including WorldCom, its underlying carrier, USBI, a local
carrier clearing house, and LITE and SBC Communications with whom ICC has
billing and collection services agreements. To date, none of the responses to
the questionnaires has caused Incomnet or ICC to believe that its key service
providers or vendors are at risk of not being Y2K compliant before December 31,
1999; however, approximately 5 vendors of non-critical systems or products have
not yet returned their questionnaires. Incomnet and ICC currently expect to
receive responses to all questionnaires by June 30, 1999.

One of ICC's most significant Y2K risks is its automated billing system. In
order to permit ICC to perform more direct and integrated billing, ICC invested
in a new billing system in the first quarter of 1999. ICC has received
assurances that the new billing system is Y2K compliant. ICC plans to commence
testing the new system in June and July 1999 and currently expects that it will
be fully operational by October 1999.

While Incomnet and ICC currently believe that all key IT and non-IT systems
will be Y2K compliant by October 1999, there can be no assurance at this time
that ICC will be able to make all necessary changes, that all of Incomnet's and
ICC's systems or applications are or will be Y2K compliant, that such upgrades
will be completed on a timely basis at reasonable costs, or that such upgrades
will be able to anticipate and correct all of the problems triggered by the
actual impact of Y2K. There can be no assurance, even if Incomnet and ICC
achieve Y2K compliance in their own products and services, that systems provided
to Incomnet or ICC by outside suppliers will be Y2K compliant. There also can be
no assurance that such impact will not result in a material disruption or have a
material adverse effect on Incomnet's or ICC's business, results of operation or
financial condition.

The most likely worst-case scenario at ICC which management has identified
to date is that, due to unanticipated implementation problems, ICC's new billing
system may not be fully operational by December 31, 1999. In the event
implementation of the new billing system is delayed, the Company has developed a
contingency plan which contemplates transferring the billing and collection
function to one or more of the local exchange carriers or third party billing
services that the Company currently uses to bill a portion of its customer base.
In the event, the Company is unable to implement its contingency plan, the
Company may be unable to bill and collect some or all of its revenue for an
indeterminable amount of time, which could cause ICC to cease operations.
Incomnet plans to conduct Y2K testing of its new billing system in June and July
1999 to address this worst-case scenario.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incomnet is exposed to changes in interest rate risk to the extent of its
borrowings under its $12.5 million credit facility with Foothill Capital
Corporation entered into in April 1999. Borrowings under that credit facility
bear interest at the prime rate plus one percent (1%). However, at December 31,
1998, that credit facility was not in existence and Incomnet's other existing
debt was at fixed interest rates. Therefore, for the year ended December 31,
1998, Incomnet had no exposure to interest rate movement on its debt. Under its
current policies, Incomnet does not intend to use interest rate derivative
instruments to manage exposure to interest rate changes under its credit
facility with Foothill Capital.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is included as a separate section following Item
14 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On January 7, 1999, Incomnet appointed the accounting firm of Ernst & Young
LLP ("Ernst & Young") as independent accountants to audit Incomnet's
consolidated financial statements for the fiscal year ended December 31, 1998.
On that date, Incomnet also dismissed Stonefield Josephson, Inc. ("Stonefield"),
the accounting firm that previously audited Incomnet's consolidated financial
statements. The decision to change accountants was approved by Incomnet's Board
of Directors. Incomnet elected to change auditors to facilitate the attraction
of new Board members and key executives and to assist in the evaluation of
complex issues related to the restructuring of Incomnet's debt and plans to grow
ICC's business.

Stonefield's reports on Incomnet's financial statements for the past two
fiscal years ended December 31, 1997 contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, other than on March 12, 1998, Stonefield had previously
reported that Incomnet's losses and liabilities in excess of assets as of
December 31, 1997 gave rise to substantial doubt about Incomnet's ability to
continue as a going concern.

At the time of the change of auditors, there were no disagreements between
Incomnet and Stonefield on any matter of accounting principles or practices,
financial statement disclosure, auditing scope or procedure. Within Incomnet's
two most recent fiscal years and any subsequent interim period preceding its
dismissal, Stonefield did not advise Incomnet that: (i) Incomnet should change
its internal controls; (ii) Stonefield could no longer rely on management's
representations; (iii) Stonefield was unwilling to be associated with the
financial statements prepared by Incomnet's management; (iv) Incomnet needed to
expand the scope of Stonefield's audit; or (v) information had come to
Stonefield's attention that may materially impact fairness or reliability of a
previously issued audit report or underlying financial statements.

Prior to its engagement as Incomnet's independent accountants, Ernst & Young
had audited the financial statements of Rapid Cast, Inc. (now named Optical
Dynamics Corporation), currently a 17.4% owned investee of Incomnet, for each of
the three years in the period ended December 31, 1997, and of ICC, Incomnet's
principal operating subsidiary, for the year ended December 31, 1996.
Stonefield, in connection with its audit of the consolidated financial
statements of Incomnet, also audited the financial statements of ICC for the
year ended December 31, 1996 and Stonefield's report relating to its audit of
Incomnet's consolidated financial statements for such year was included in
Incomnet's Annual Report on Form 10-K for the year ended December 31, 1996,
without reference to, or reliance on, the audit of ICC's financial statements
undertaken by Ernst & Young.

Except for the reports delivered by Ernst & Young in connection with the
audits of the financial statements of Rapid Cast, Inc. and ICC described in the
preceding paragraph, during Incomnet's two most recent fiscal years and any
subsequent interim period prior to engaging Ernst & Young as Incomnet's
independent accountants, no written report was provided by Ernst & Young to
Incomnet; and Incomnet has not consulted with Ernst & Young in any matter that
was considered an important factor to Incomnet in reaching its decision as to
the accounting, auditing or financial reporting issue regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or (ii) the type of audit opinion that might be rendered
on Incomnet's consolidated financial statements.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

As of April 15, 1999 the following persons serve as directors and executive
officers of Incomnet and ICC. Each officer serves at the pleasure of Incomnet's
Board of Directors. In accordance with the Board Change Agreement and subject to
applicable law, Incomnet agreed to nominate Dr. Silverman as a director at the
next annual meeting.

DIRECTORS

JOHN P. CASEY
CHAIRMAN OF THE BOARD

AGE: 50

DIRECTOR SINCE: September 29, 1998

PRINCIPAL OCCUPATION: Vice Chairman of Meridian Investments, Inc., an NASD registered
broker-dealer ("Meridian")

RECENT BUSINESS Since 1981, Mr. Casey has been the Senior Vice President,
EXPERIENCE: Financial Marketing for Meridian and since October 1998, its Vice
Chairman. Meridian is a privately held company and Mr. Casey
believes that it is one of the largest originators of tax credit
equity in the United States. Mr. Casey is primarily responsible
for the design of financial marketing plans for Meridian. Since
October 1998, Mr. Casey has also served as a director of ICC,
Incomnet's wholly owned subsidiary.

OTHER DIRECTORSHIPS: Val-u-net; 1-800-Database; Make-a-Wish Foundation

R. SCOTT EISENBERG

AGE: 39

DIRECTOR SINCE: October 2, 1998

PRINCIPAL OCCUPATION: Vice President, Product Management for CyberCash

RECENT BUSINESS Since June 1996, Mr. Eisenberg has been the Director, Product
EXPERIENCE: Management for CyberCash, a leading provider of payment solutions
for internet and real-world storefronts. From March 1993 until he
joined CyberCash in June 1996, Mr. Eisenberg held key management
positions with MCI Telecommunications in its internet services
sector and long distance telephone services sector. From 1989 to
1993, Mr. Eisenberg was a partner in an investment banking firm
where he advised emerging growth companies in connection with
equity and debt financings and mergers and acquisitions.

JOHN P. HILL, JR.

AGE: 38

DIRECTOR SINCE: September 29, 1998

PRINCIPAL OCCUPATION: Administrative Manager, Quince Associates

RECENT BUSINESS Mr. Hill is the Administrative Manager of Quince Associates, a
EXPERIENCE: privately held company with investments in real estate, retail
convenience stores, restaurants, technology and various other
public and private companies. Since 1989, he has also served as
President of Trans Pacific Stores, Ltd., a privately held operator
of retail stores. Since 1997, Mr. Hill has served as a director of
Covol Technologies, Inc., a publicly traded technology development
company based in Utah. Prior to 1989, Mr. Hill was the Chief
Financial Officer for various privately held retail and restaurant
companies. Since October 1, 1998, Mr. Hill has also served as a
director of ICC.

OTHER DIRECTORSHIPS: Covol Technologies, Inc.

DENIS RICHARD

AGE: 38

DIRECTOR SINCE: October 2, 1998

PRINCIPAL OCCUPATION: President and Chief Executive Officer of Incomnet (since September
29, 1998) and Chairman, President and Chief Executive Officer of
ICC (since October 2, 1998)

RECENT BUSINESS From 1995 until he joined Incomnet in October 1998, Mr. Richard
EXPERIENCE: held executive management positions at Teleglobe Inc. and its
affiliates. Teleglobe is one of the world's largest
intercontinental telecommunications companies. In January 1996,
Mr. Richard was appointed Vice President, Law & Corporate Affairs
for Teleglobe International Corp. Prior to this appointment, he
served as Director of Special Projects for Teleglobe Inc. From
1989 until he joined Teleglobe in 1995, Mr. Richard was Senior
Counsel with BCE Inc., where he was involved in many of that
company's telecommunications investment activities, as well as
heading several other divestiture and reorganization projects.

DR. HOWARD P. SILVERMAN

AGE: 58

DIRECTOR SINCE: January 20, 1977

PRINCIPAL OCCUPATION: Independent Consultant, Investment Banking

RECENT BUSINESS From November 1996 to October 1997, Dr. Silverman served as an
EXPERIENCE: investment banking consultant with Andrew, Alexander, Wise & Co.
From May 1995 to November 1996, Dr. Silverman served as Vice
President of Corporate Finance for Rickel & Associates. From 1991
until he joined Rickel, he served as an independent consultant to
development stage and middle market companies. From 1985 to 1991,
he was the founder and Chairman of the Board of Vision Sciences, a
company that developed, manufactured and marketed in-office lens
casting systems.

MICHAEL A. STEIN

AGE: 49

DIRECTOR SINCE: September 29, 1998

PRINCIPAL OCCUPATION: Executive Vice President and Chief Financial Officer of Nordstrom,
Inc.

RECENT BUSINESS In October 1998, Mr. Stein became the Executive Vice President and
EXPERIENCE: Chief Financial Officer of Nordstrom, Inc., a fashion specialty
retailer with 97 stores located in 22 states. At Nordstrom, Mr.
Stein is responsible for all of Nordstrom's financial operations
and strategic planning. From 1993 through September 1998, Mr.
Stein was the Executive Vice President and Chief Financial Officer
of Marriott International, Inc. At Marriott, Mr. Stein was
responsible for Marriott's treasury, corporate and project
finance, investor relations, controllership, tax, risk management
and internal audit functions. Mr. Stein joined Marriott in 1989 as
its Vice President, Finance and Chief Accounting Officer. Prior to
joining Marriott, Mr. Stein spent 18 years with Arthur Andersen
LLP where he was a partner.

EXECUTIVE OFFICERS (OTHER THAN MR. RICHARD)

GEORGE P. BLANCO

AGE: 42

EXECUTIVE OFFICER SINCE: January 19, 1999

PRINCIPAL OCCUPATION: Executive Vice President, Chief Financial Officer and Secretary of
Incomnet and ICC

RECENT BUSINESS From August 1987 through September 1994 Mr. Blanco was employed by
EXPERIENCE: PriceWaterhouseCoopers LLP in both the Consulting and Financial
Advisory Services practices. He was admitted to the partnership of
PriceWaterhouseCoopers LLP in May 1994. He left that firm in
October of 1994 to co-found Baymark Strategies LLC, a financial
and business consulting advisory company providing turnaround
consulting, capital sourcing, bankruptcy advisory and debt
restructuring services. In January 1998, Mr. Blanco returned to
PriceWaterhouseCoopers LLP as Managing Director of the Financial
Advisory Services Division where he specialized in business
recovery services until he joined Incomnet in January of 1999.

TIMOTHY M. CIACCIO

AGE: 41

EXECUTIVE OFFICER SINCE: January 18, 1999

PRINCIPAL OCCUPATION: Senior Vice President, Operations and Chief Information Officer
for ICC

RECENT BUSINESS Since joining ICC on August 18, 1997, Mr. Ciaccio has been
EXPERIENCE: responsible for all technology related issues and the day-to-day
operations of information technology at ICC which includes
application programming, systems operation, network operations and
technical support functions. During the period May 1996 through
August 1997, Mr. Ciaccio was Vice President and Information
Technology and Chief Information Officer for NextWave Telecom,
Inc. and during the prior year was the Vice President, Chief
Information Officer, for Los Angeles Cellular Telephone Company
where he was responsible for long-range planning, strategic
direction, developing, integrating, acquiring and supporting
business applications. During the period 1991 through 1995, Mr.
Ciaccio was director of information services for Nutrilite
Products, Inc., a manufacturer of vitamins and food supplements,
where he was responsible for the information technology department
and corporate strategic planning.

STEPHEN A. GARCIA

AGE: 40

EXECUTIVE OFFICER SINCE: December 14, 1998

PRINCIPAL OCCUPATION: Controller for Incomnet and ICC

RECENT BUSINESS Mr. Garcia joined ICC in April 1997 as Assistant Controller. In
EXPERIENCE: December of 1998, Mr. Garcia became the Controller for Incomnet
and Corporate Controller for ICC. From March 1993 to March 1997,
Mr. Garcia served as Controller for Melles Girot, Inc., a
wholly-owned subsidiary of J. Bibby and Sons, PLC, based in
England. Melles Girot is a manufacturer and worldwide distributor
of photonic (lasers, optics and optical mechanical) components.
Prior to joining Melles Girot, Mr. Garcia served for one year as
assistant controller for a reference lab and diagnostic kit
manufacturer and, prior to that, he was a senior accountant for
Deloitte & Touche. Mr. Garcia is a certified public accountant.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Incomnet's directors, executive officers and holders
of more than 10% of Incomnet's Common Stock to file with the Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of Incomnet. Based on a review of the filings submitted
to Incomnet and written representations by Incomnet's directors and officers,
Incomnet believes that during the fiscal year ended December 31, 1998, its
officers, directors and holders of more than 10% of Incomnet's Common Stock
complied with all Section 16(a) filing requirements.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

The following table discloses compensation received by Incomnet's new and
former Chief Executive Officer and the most highly paid current and former
executive officers of Incomnet and its wholly owned subsidiary, ICC, for fiscal
year ending December 31, 1998 as well as their compensation for each of the
fiscal years ending December 31, 1997 and December 31, 1996.

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
(A) (B) (C) (D) (E) (F) (G) (H)
SECURITIES
UNDERLYING
RESTRICTED OPTIONS/ ALL OTHER
NAME AND PRINCIPAL OTHER ANNUAL STOCK AWARD(S) SARS COMPENSATION
POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) (#) ($)

CURRENT NAMED OFFICERS
DENIS RICHARD, 1998 $ 73,750 $353,000 $41,268(1) $2,600,000(2)
CEO and President
of Incomnet and
Chairman, CEO and
President of ICC
DEBRA A.L. CHUCKAS, 1998 $181,973(6) $ 20,000(7)
Director, Customer
Service of ICC
1997 $177,129(6) 100,000(15)
1996 $ 87,023
TIMOTHY M. CIACCIO, 1998 $160,445(8) $ 20,000(7) $ 138(5)
Senior Vice
President,
Operations and
Information
Officer of ICC
1997 $ 55,607(8) 50,000(15)

FORMER NAMED OFFICERS
MELVYN REZNICK, 1998 $278,838 $100,000(9)
Chairman and
President of
Incomnet
1997 $276,116 $175,000
1996 $175,000 175,000(12)
EDWARD JACOBS, 1998 $253,977 $ 13,430
Chairman of ICC
1997 $472,106 $13,334 528,847(13)
1996 $379,502 $15,970
JAMES QUANDT, 1998 $397,708(10) $114,100 $105,538(11)
President and CEO
of ICC
1997 $462,486(10) $122,707 600,000(14)
MICHAEL KEEBAUGH, 1998 $181,618(3) $ 65,000(4) $ 1,297(5)
Executive VP and
Chief Operating
Officer of ICC
1997 $166,158(3) 100,000(15) $ 467(5)

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

(1) Consists of $29,937 in relocation expenses and $11,331 for temporary
housing.

(2) On September 29, 1998, and in connection with this employment agreement,
Mr. Richard was granted 13 shares of Incomnet Series C Preferred Stock
convertible into 1.3 million shares of Incomnet Common Stock. The $2.6
million value

assigned to the 13 shares of Preferred Stock granted to Mr. Richard
specified in the table was determined in accordance with the rules of the
SEC and is based on the closing sale price of Common Stock as reported on
the Nasdaq SmallCap Market on the date of grant of the Series C Preferred
Stock multiplied by the 1.3 million shares of Common Stock issuable upon
conversion of Mr. Richard's 13 shares of Series C Preferred Stock. As of
December 31, 1998 that value, in accordance with the SEC's rules, would
have been $2,275,000. Those values do not take into account the significant
restrictions applicable to such Preferred Stock, including a right of
repurchase by Incomnet if Mr. Richard desires to sell his stock or Mr.
Richard's employment is terminated without good reason or Mr. Richard's
employment is terminated for "cause" as defined in his employment
agreement. The right of repurchase will be calculated based on an
as-converted-to-common basis reduced by $2.1775 for each as-converted
common share. Accordingly, if the right to repurchase was triggered, Mr.
Richard would be entitled to the difference between the then current market
price and $2.1775 per share. Given (i) Incomnet's financial circumstances
at the time of grant, (ii) no underlying shares of Common Stock were
available to be issued upon conversion of his Preferred Stock, (iii) the
repurchase right of Incomnet that, if exercised, would provide value to Mr.
Richard only if the Common Stock increased in value over $2.1775 per share
and (iv) the other restrictions on the Preferred Stock and Common Stock
issuable upon conversion thereof, the restricted stock award had nominal
value to Mr. Richard when granted.

(3) Includes $1,297 in vested 401(k) matching contributions paid by ICC during
1998 and $156 in vested matching 401(k) contributions during 1997. Mr.
Keebaugh terminated his employment with ICC effective April 2, 1999.

(4) Mr. Keebaugh was paid a retention bonus of $20,000 and a signing bonus of
$45,000.

(5) Represents unvested portion of ICC's 401(k) matching contribution for the
specified year.

(6) Includes $1,765 in vested 401(k) matching contributions paid by ICC during
1998 and $623 in vested 401(k) matching contributions during 1997. Prior to
April 7, 1999, Ms. Chuckas served as Senior Vice President, Marketing
Support. Effective April 7, 1999, Ms. Chuckas' s title was changed to
Director, Customer Service and her compensation was significantly reduced
at that date.

(7) Represents retention in bonus paid in August, 1998. In April 1998, ICC
approved a retention bonus plan for 44 key employees. The plan was put in
place in contemplation of the proposed sale of ICC as described in Item 1
of this Form 10-K.

(8) Includes $139 in matching vested 401(k) contributions paid by ICC during
1998 and $156 in vested matching 401(k) contributions during 1997.

(9) In accordance with Mr. Reznick's severance agreement with Incomnet, Mr.
Reznick was entitled to a lump sum payment of $100,000 in December 1998,
but he elected to defer that payment until January 1999.

(10) Includes $946 in vested 401(k) matching contributions paid by ICC during
1998 and $556 in vested 401(k) matching contributions during 1997.

(11) Represents severance payment pursuant to Mr. Quandt's severance agreement
with ICC dated November 2, 1998.

(12) Represents options to purchase 175,000 shares of Incomnet Common Stock at
$4.37 per share. As described below under the caption
"Employment/Severance Contracts," Mr. Reznick's options were terminated
except for 50,000 options which may be exercised at $4.37 per share
through September 1, 2003.

(13) Represents options to purchase 528,847 shares of ICC Stock. These options
expired and were not exercised.

(14) Represents options to purchase 600,000 shares of ICC Stock. These options
expired and were not exercised.

(15) Represents options to purchase ICC Stock. These options were terminated on
January 18, 1999. On that date, each of Messrs. Keebaugh and Ciaccio and
Ms. Chuckas were granted options to purchase 100,000 shares of Incomnet
Common Stock at $1.78125 per share. These new options vest over a 2-year
period ending December 31, 2000.

SUMMARY OF STOCK OPTION COMPENSATION

Incomnet's 1996 Stock Option Plan allows grants of stock options and other
rights relating to Common Stock. No grant of stock options under the 1996 Stock
Option Plan was made in 1998 and no stock options were exercised during 1998.

The Incomnet and ICC stock options granted to Named Executive Officers that
were outstanding as of December 31, 1998 are as follows:

FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT 12/31/98 AT 12/31/98
(#) EXCERCISABLE / (#) ($) EXCERCISABLE / ($)
NAME UNEXERCISABLE UNEXERCISABLE
(A) (B) (C)

NAMED OFFICERS
MICHAEL KEEBAUGH 50,000 / 50,000(1) 0(2)
(ICC Options)
DEBRA A.L. CHUCKAS 50,000 / 50,000(1) 0(2)
(ICC Options)
TIMOTHY M. CIACCIO 0 / 50,000(1) 0(2)
(ICC Options)
MELVYN REZNICK 50,000 / 0 0(3)
(Incomnet Options)

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

(1) These options to purchase ICC stock were terminated on January 18, 1999. On
that date, each of Messrs. Keebaugh and Ciaccio and Ms. Chuckas were granted
an option to purchase 100,000 shares of Incomnet Common Stock at an exercise
price of $1.78125 per share of which 25% vest on June 30 and December 31,
1999 and June 30 and December 31, 2000. These Incomnet options terminate at
the earlier of January 18th, 2002 or 90 days after termination of employment
by Incomnet or ICC. Mr. Keebaugh terminated his employment effective April
2, 1999 and, therefore, his Incomnet options will terminate before they are
vested. Effective April 7, 1999, Ms. Chuckas' Incomnet options were reduced
to 50,000 and her vesting schedule changed so that 33% of these Incomnet
options vest at December 31, 1999, 2000 and 2001.

(2) The exercise price of these options is $3.50 per share. ICC stock is not
publicly traded and there is no market for ICC stock. ICC is Incomnet's only
subsidiary. Incomnet's stock closed at $1.75 on December 31, 1998.
Accordingly, Incomnet has concluded that none of these options were
"in-the-money" as of December 31, 1998.

(3) Mr. Reznick's options have an exercise price of $4.37. On December 31, 1998,
Incomnet's stock closed at $1.75 per share. Mr. Reznick resigned effective
September 29, 1999.

Incomnet has not repurchased any stock options previously granted to
executive officers, directors or key consultants during 1998. Incomnet plans to
discontinue the 1996 Stock Option Plan, provided that shareholders approve a new
Equity Incentive Stock Plan that is expected to be included in the proxy
statement for the 1999 annual meeting of shareholders. Incomnet further plans to
substitute all outstanding employee options under the 1996 Stock Option Plan
with the new options on substantially identical terms under the Equity Incentive
Stock Plan. These Substituted Options will count against the share limit under
the new Equity Incentive Stock Plan.

OTHER INCENTIVE PLANS

Incomnet and ICC currently do not have any long-term incentive plans or
compensation plans for its executive officers and directors. However, in April
1998, ICC announced the adoption of a one-time

retention bonus program in anticipation of the proposed sale of ICC. The
retention bonus plan provided for a bonus to key employees provided that such
employees continued to be employed by ICC on the tenth day following the sale of
ICC or 60 days following termination of a sale of ICC. The proposed sale of ICC
was terminated in mid-1998 and retention bonuses in the aggregate amount of
$253,031 were paid in August 1998 to 44 key employees of ICC. The average
retention bonus paid to an employee was $5,751 and the highest individual
retention bonus paid was $20,000.

COMPENSATION OF DIRECTORS--STANDARD ARRANGEMENTS

COMPENSATION FOR NON-EMPLOYEE DIRECTORS.

During 1998, each of the non-employee New Directors (other than Mr. Casey)
was granted an option to purchase ten shares of Series D Preferred Stock of
Incomnet (the "New Director Options"). Each share of Series D Preferred is
convertible into 10,000 shares of Incomnet Common Stock. The exercise price for
the Series D Preferred Stock was based on the market price for the underlying
Common Stock at the time of grant. The options vest over a two-year period with
four shares vesting immediately and three shares vesting on each of the first
two anniversary dates of the grants. Three of the outside directors have an
exercise price of $21,875 for each share of Series D (or $2.1875 per common
share on an as-converted-to-common basis) and one director has an exercise price
of $22,500 for each share of Series D (or $2.25 per common share on an
as-converted-to-common basis). The New Director Options have a term of ten
years.

These options were granted in consideration of the New Directors' commitment
to join the New Board and, in the case of Dr. Silverman, to continue to serve on
the Board, at a time when Incomnet and ICC were facing financial and operating
difficulties. These difficulties are discussed in more detail in Item 1 of this
Form 10-K.

During 1998, the New Directors received no retainer fees or meeting fees but
were reimbursed for their out-of-pocket expenses relating to Board membership.
Mr. Richard received no additional compensation for his services as a director
other than reimbursement of expenses relating to Board membership.

For fiscal year 1999, the non-employee New Directors (other than Mr. Casey)
will each receive $1,000 for each board meeting held in person plus
reimbursement of out-of-pocket expenses attendant to board membership. The
non-employee New Directors will not be compensated for telephone meetings or
committee meetings unless a committee meeting is in person and on a day that no
in-person board meeting is held. No stock or options will be granted to
non-employee directors during 1999 in recognition of the 1998 option grants in
September 1998.

It is anticipated that each non-employee director elected at the annual
meeting of shareholders to be held in 2000 will be granted an option to purchase
10,000 shares of Incomnet Common Stock at the then market price.

During 1999, Mr. Richard will not be entitled to any additional compensation
for his services as a director other than reimbursement of expenses related to
board membership.

CHAIRMAN COMPENSATION ARRANGEMENTS.

On September 29, 1998, Mr. Casey and Incomnet entered into an agreement (the
"Casey Services Agreement"), under which Mr. Casey agreed to perform certain
duties as Chairman of the Board of the Directors of Incomnet. The Casey Services
Agreement provides that Mr. Casey will be entitled to a quarterly service fee
based on the fair market value of Incomnet's Common Stock at the end of each
fiscal quarter during the term of the Agreement. Under the Casey Services
Agreement, the fair market value of Incomnet's Common Stock is generally equal
to the average closing price of the Common Stock for the last five trading days
during the applicable fiscal quarter. If the fair market value of the

Common Stock is less than $4.00 per share at the end of each fiscal quarter for
the term of the Agreement, Mr. Casey will be entitled to a service fee of $1.00
for that quarter. If the fair market value of the Common Stock is $4.00 or more
at the end of each calendar quarter, Mr. Casey will be entitled to a service fee
equal to the product of (i) $25,000, (ii) the number determined by dividing the
fair market value of the Common Stock by four. Generally, this will result in a
$25,000 quarterly service fee for Mr. Casey if the market price of the Common
Stock is $4.00, and an additional $25,000 for each additional $4.00 increase in
the market price of the Common Stock.

The maximum fee Mr. Casey would be entitled to receive in any fiscal quarter
is $250,000. During 1998 no payments were made to Mr. Casey under the Casey
Services Agreement.

COMPENSATION OF DIRECTORS--OTHER ARRANGEMENTS

During the period January 1, 1998 to September 29, 1998, the Former
Directors, who were not employees of Incomnet, received no compensation for
their services as directors other than reimbursement of their out-of-pocket
expenses related to Board membership.

EMPLOYMENT/SEVERANCE CONTRACTS

RICHARD EMPLOYMENT AGREEMENT.

On September 29, 1998, Incomnet and ICC entered into an employment agreement
with Denis Richard, pursuant to which Mr. Richard agreed to serve as President
and Chief Executive Officer of Incomnet and its subsidiary, ICC. Mr. Richard was
asked to join Incomnet at a particularly difficult time for Incomnet due to the
following factors:

- ICC was in default on its primary credit facility with First Bank.

- ICC had defaulted on obligations to its primary service provider,
WorldCom. WorldCom was threatening to enforce its security interest in
ICC's customer accounts.

- As a condition to their continued forbearance, First Bank and WorldCom
required that new management of ICC be selected.

- ICC and Incomnet were having difficulties obtaining new sources of
financing and the Former Board was evaluating bankruptcy alternatives.

- Many Incomnet and ICC executives had been fired or were voluntarily
terminated.

- The California Public Utilities Commission, California Attorney General
and Orange County District Attorney had imposed operating restrictions on
ICC in connection with settlements following allegations of unauthorized
switching of consumers' long distance service providers to ICC.

- Incomnet and ICC were embroiled in numerous litigation matters, including
a class action litigation against Incomnet and former directors and
officers.

- Competitors were trying to hire away ICC's key independent sales
representatives.

- There was a failed attempt to conduct an initial public offering of ICC
and the proposed sale of ICC was terminated a few months prior to Mr.
Richard joining Incomnet.

All of the above factors and the fact that Mr. Richard was being asked to
leave the stable environment of his former employer, Teleglobe Inc., for a
company in extremely difficult financial position contributed to the Board's
decision to approve an employment package that contained equity incentives for
Mr. Richard that would have value only if Incomnet's and ICC's financial
difficulties could be favorably resolved.

The Richard Employment Agreement commenced on September 29, 1998 and
terminates on December 31, 2001. The Richard Employment Agreement obligates
Incomnet and ICC to nominate Mr. Richard as a director of Incomnet and ICC (and
Chairman of the Board of ICC), if Mr. Richard so requests during the term of his
agreement. Mr. Richard was appointed as a director of ICC (and as its Chairman)
on October 1, 1998 and a director of Incomnet on October 2, 1998.

Mr. Richard's annual base salary during 1998 was $325,000. In addition, Mr.
Richard received a one-time signing bonus of $353,000. If Mr. Richard terminates
his employment voluntarily on or before December 14, 1999 without "good reason,"
as defined in the Richard Employment Agreement, he must return a pro-rated
portion of his signing bonus. He is also eligible to participate in the
Executive Bonus Plan of Incomnet and may receive up to 100% of his then current
base salary as a bonus, as determined by Incomnet's Compensation Committee,
provided, however, that Mr. Richard is entitled to a minimum guaranteed bonus in
fiscal 1999 and 2000 equal to 50% of his then current base salary. Mr. Richard
is also entitled to certain fringe benefits under the Richard Employment
Agreement, including a car allowance, a temporary housing allowance (for six
months), and broker and closing costs on the sale and purchase of his residence
and moving expenses.

Under the Richard Employment Agreement, Incomnet issued to Mr. Richard 13
shares of Incomnet's Series C Preferred Stock. The Series C Preferred Stock will
be convertible into an aggregate of 1.3 million shares of Incomnet's Common
Stock at such time as Incomnet's Articles of Incorporation have been amended to
increase the authorized number of shares of Incomnet's Common Stock to satisfy
the conversion. The 13 shares of Series C Preferred Stock will be entitled to
vote with the holders of Incomnet's Common Stock on all matters submitted to
shareholders on as converted to common basis (I.E., the right to vote as if the
Series C Preferred Stock were converted to 1.3 million shares of Common Stock).
Mr. Richard has certain rights to require Incomnet to register the Common Stock
under the Securities Act of 1933, as amended, following the first anniversary of
the commencement of his employment with Incomnet.

Under the Richard Employment Agreement, the shares of Series C Preferred
Stock and the shares of Incomnet's Common Stock that would be issued upon
conversion of the Series C Preferred Stock are subject to (i) a 30-day right of
first refusal in favor of Incomnet (the "Company Repurchase Right") if Mr.
Richard at any time desires to sell, transfer or assign any such securities; and
(ii) a right in favor of Incomnet to repurchase all, but not less than all, such
securities if Mr. Richard terminates voluntarily without good reason or is
terminated by Incomnet for "cause" (as defined in the Richard Employment
Agreement) prior to the first anniversary of the Employment Agreement (the
"Company Repurchase Option"). The Purchase Price for the securities purchased by
Incomnet under Incomnet Repurchase Right or Incomnet Repurchase Option will be
the then current per share market price of Incomnet's Common Stock reduced by
$2.1775 (calculated on an as-converted common basis, if the securities being
transferred are Series C Preferred Stock). The grant of the Series C Preferred
Stock by Incomnet to Mr. Richard is deemed to be compensation from Incomnet to
Mr. Richard and, due to the various restrictions and Incomnet's rights of
repurchase, the current compensation value to Mr. Richard is minimal. No
consideration will be paid by Mr. Richard either for the issuance of the Series
C Preferred Stock or upon the conversion of the Series C Preferred Stock into
shares of Common Stock.

Under the Richard Employment Agreement, Incomnet is obligated to pay Mr.
Richard severance if Mr. Richard terminates for good reason or is terminated by
Incomnet without cause. His severance arrangement calls for continued payment of
base salary for 18 months or, if longer, until December 31, 2001 and
reimbursement of health insurance premiums for 18 months or, if earlier, until
December 31, 2001.

Incomnet is also obligated to indemnify Mr. Richard against certain
liabilities relating to his service to Incomnet and ICC and provide coverage for
Mr. Richard under commercially reasonable

directors' and officers' liability insurance during the term of his employment
and for three years thereafter.

If Mr. Richard is terminated for cause or voluntarily terminates his
employment without good reason, Mr. Richard is prohibited under the Richard
Employment Agreement from competing (as described in the Agreement) against
Incomnet or ICC and from soliciting employees of Incomnet and ICC, both for a
period of 18 months following employment termination.

BLANCO EMPLOYMENT AGREEMENT.

On January 19, 1999, Incomnet entered into an employment agreement with
George Blanco pursuant to which Mr. Blanco agreed to serve as Executive Vice
President and Chief Financial Officer of Incomnet.

Mr. Blanco's annual base salary is $250,000 and is subject to annual review
and increase as determined by the Board during the term of the employment
agreement which ends on December 31, 2001. In addition, Mr. Blanco received a
one-time signing bonus of $100,000. If Mr. Blanco terminates his employment with
Incomnet during the one year following the payment of his signing bonus without
"good reason" (as defined in his employment agreement), he must return a
pro-rated portion of his signing bonus. He is also eligible to receive a bonus
in each year of his employment agreement with a guaranteed minimum annual bonus
for fiscal year 1999 of at least $75,000. Thereafter, his entire bonus will be
determined at the discretion of the Board. Mr. Blanco is also entitled to
certain fringe benefits under his employment agreement including a car allowance
and certain relocation expenses.

Incomnet granted Mr. Blanco an option to purchase 500,000 shares of Incomnet
Common Stock at an exercise price of $1.71875 which was the market price on
January 19, 1999. The option vests as follows: 125,000 options on June 30, 1999
and 20,834 options each month thereafter until November 30, 2000 with a final
vesting of 20,822 on December 31, 2000. In accordance with this schedule, Mr.
Blanco's stock options will be fully vested on December 31, 2000 and will expire
on December 31, 2008. In the event of a "change of control" of Incomnet (as
defined in Mr. Blanco's agreement), Mr. Blanco's options shall automatically
become vested and exercisable in full. In the event that Mr. Blanco terminates
"with good reason" or Incomnet terminates Mr. Blanco "without cause" (as defined
in his agreement), his stock option will automatically become vested and
exercisable in full.

Under Mr. Blanco's employment agreement, Incomnet is obligated to pay Mr.
Blanco severance if Mr. Blanco terminates his employment for good reason or is
terminated without cause. If Mr. Blanco terminates his employment for good
reason, his severance calls for continued payment for 18 months or until
December 31, 2001. If Mr. Blanco's employment is terminated by Incomnet without
cause, then he is entitled to severance payments of a lump sum of three months
salary and continued payment under his salary until September 30, 2001.

REZNICK SEVERANCE AGREEMENT.

On September 29, 1998, Incomnet reached a severance agreement with Melvyn
Reznick, Incomnet's former President and Chief Executive Officer, to settle the
terms of an employment agreement between Incomnet and Mr. Reznick that would
have required Incomnet to pay an aggregate of $1.1 million over a period of four
years to fulfill the terms of the contract. Under the terms of the Severance
Agreement, Mr. Reznick agreed to voluntarily leave his position at Incomnet in
consideration for severance payments of up to $500,000 over a 2-year period and
retained approximately 337,000 Incomnet stock options. On November 2, 1998,
Incomnet's new management renegotiated the Severance Agreement with Mr. Reznick
under which he agreed to reduce his severance payments to $162,499. In addition,
Mr. Reznick agreed to terminate all of his stock options, except for 50,000
stock options at an exercise price of $4.37 per share.

QUANDT SEVERANCE AGREEMENT.

On July 1, 1998, ICC reached a severance agreement with Mr. Quandt, ICC's
former President and Chief Executive Officer, to settle the terms of an
employment agreement that would have required ICC to pay an aggregate of
$960,000 over a period of two years to fulfill the terms of the contract. Under
the terms of the Severance Agreement, Mr. Quandt agreed voluntarily to leave his
position at ICC in consideration for severance payments of up to $240,000 over a
one-year period. On November 2, 1998, Incomnet's new management renegotiated the
Severance Agreement with Mr. Quandt, under which he agreed to reduce the
severance payments to $144,061. ICC also agreed to pay Mr. Quandt a lump sum of
$50,000 on or before July 1, 2000 if: (i) ICC enters into a merger in which ICC
or its shareholders retain less than 50% interest in the new company, (ii) ICC
sells substantially all of its assets, or (iii) there is a public offering of
ICC's Common Stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

There are no "interlocks" as defined by the SEC, with respect to any
director who currently serves as a member of the Compensation Committee. The
following non-employee directors serve on the Compensation Committee: John Hill,
Jr., Howard Silverman and Michael A. Stein. It should be pointed out that while
not required by the SEC's rules to be disclosed in this section as an "Insider
Participation," Mr. Hill has a 1% financial interest in Ironwood Telecom LLC who
provided financing to Incomnet during 1998 as discussed below under
"Transactions with Management."

Prior to September 29,1998, the Former Compensation Committee consisted of
Dr. Howard P. Silverman and Nancy Zivitz. There were no "interlocks" as defined
by the SEC with respect to Former Directors who served on the Former
Compensation Committee during 1998, except that Incomnet had loaned $277,995 to
Former Compensation Committee member, Nancy Zivitz. That loan had an interest
rate of 10% and was repaid in full on July 24, 1998.

REPORT OF THE COMPENSATION COMMITTEE

The New Compensation Committee was appointed during the last quarter of 1998
following the Board Change on September 29, 1998.

During the first half of 1998, Incomnet and its subsidiary, ICC, were
focused on the proposal to sell ICC. When the Former Compensation Committee met
concerning executive compensation, there was a decision to freeze salaries for
executives and institute a retention bonus program to help ensure continued
employment by key employees through the then proposed sale period or through the
termination of the proposed sale of ICC. Retention bonuses were paid to a total
of 44 employees in August 1998 following the termination of the sale of ICC.

While objectives and goals may have been established for individual
employees in early 1998 by individual managers, the members of the New
Compensation Committee did not take part in the formulation of any Company-wide
policies or procedures for setting compensation for 1998 other than considering
year-end bonuses for employees.

The New Compensation Committee met in January 1999 to establish a
compensation philosophy and a set of procedures and objectives on a
going-forward basis. The discussion that follows concerning compensation
philosophy and cash and equity based compensation is the product of the New
Compensation Committee's discussions regarding compensation of executives in
1999.

COMPENSATION PHILOSOPHY.

The current compensation philosophy is based on the premise that the
achievements of Incomnet and ICC result from the coordinated efforts of all
individuals working toward common objectives.

Incomnet and ICC strive to achieve those objectives through teamwork that is
focused on meeting the expectations of sales representatives, customers and
shareholders.

The goals of the compensation program are:

- To enable Incomnet and ICC to attract, retain and reward talented,
qualified and experienced management;

- To tie executive compensation to Incomnet's and ICC's short term and long
term performance;

- To link executives' and management's goals with the interests of the
shareholders; and

- To reward individual achievement.

Incomnet and ICC achieve these goals through paying competitively, paying
for sustained performance and striving for fairness in administrating its pay.

CASH-BASED COMPENSATION.

SALARY. Incomnet and ICC establish salary ranges for employees by reviewing
compensation for management positions in telecommunications companies and
publicly-held companies with revenues of $50 million to $200 million per year.
Incomnet and ICC then create a salary range based on the results of the peer
group analysis. The range is designed to place an executive officer above or
below the midpoint in the range, according to that officer's overall individual
performance. Overall individual performance is measured against the following
factors:

- Long-term strategic goals set by supervisors or managers;

- Short-term business goals;

- Profitability;

- The development of employees;

- The ability of Incomnet and ICC to pay;

- The fostering of teamwork; and

- Other Company values.

In both setting goals and measuring an executive officer's performance
against those goals, Incomnet and ICC take into account the performance of their
competitors and general economic and market conditions. None of the factors
included in Incomnet's and ICC's goals is assigned a specific weight. Instead,
Incomnet and ICC recognize that these factors may change in order to adapt to
specific business challenges and to changing economic and marketplace
conditions.

BONUSES. Incentive bonuses are dependent upon individual and Company
performance. Incomnet and ICC will review management compensation near-year-end
1999 to determine if bonuses for management and key employees are appropriate.
However, until Incomnet's and ICC's current financial position becomes cash flow
positive, the Company will look primarily to stock options as a means to provide
incentive compensation. In that regard, Incomnet is proposing for shareholder
approval an equity incentive plan.

EQUITY-BASED COMPENSATION.

STOCK INCENTIVE PROGRAM. Incomnet plans to adopt a stock incentive plan
that will cover employees and Representatives of Incomnet and ICC. The purpose
of this program is to provide long term incentives to employees of Incomnet and
ICC to work to maximize shareholder value. Incomnet and ICC also recognize that
a stock incentive program is a necessary element of a competitive

compensation package for their employees. The proposed program utilizes vesting
periods to encourage employees to continue in the employ of Incomnet or ICC and
thereby acts as a retention device for employees. Incomnet believes that the
program will encourage employees to maintain a long-term perspective. If the
stock incentive plan is approved by shareholders, Incomnet plans to grant stock
options annually to a broad-based group representing a substantial majority of
the total employee population of Incomnet and ICC.

In determining the size of an option award for an executive officer, the
Compensation Committee's primary considerations will be the "grant value" of the
award and the performance of the officer measured against the same performance
criteria described above under "Cash-based Compensation" which is used to
determine salary. To determine the grant value guidelines for option awards,
Incomnet plans to survey the same group of companies it surveys for salary
purposes. In addition to considering the grant value and the officer's
performance, the Compensation Committee also plans to consider the number of
outstanding unvested options that the officer holds and the size of previous
option awards to that officer. The Compensation Committee does not expect to
assign specific weights to these items.

CEO COMPENSATION.

Denis Richard was appointed as the President and Chief Executive Officer
("CEO") of Incomnet on September 29, 1998 and of ICC on October 1, 1998. His
employment agreement was approved by the Board on September 29, 1998. In setting
the compensation for Mr. Richard, the Board sought to:

- Provide compensation competitive with other companies;

- Provide an equity incentive that would encourage Mr. Richard to accept the
CEO position immediately;

- Reimburse Mr. Richard for compensation and benefits that he left behind at
his former employer; and

- Motivate Mr. Richard to vigorously pursue the difficult task of making ICC
profitable.

The Board gave considerable weight to the fact that Mr. Richard was asked to
join Incomnet and ICC at a time when Incomnet and ICC were in a financial crisis
and facing extraordinary operating difficulties including: (i) the default by
ICC on its primary credit facility and ICC's difficulties in obtaining new
sources of financing; (ii) the default by ICC under its contract with its
primary service provider, WorldCom Network Services, Inc., and WorldCom's
threats to terminate service and enforce its rights concerning ICC's customer
accounts; (iii) the hiring away of key independent sales representatives; and
(iv) recent terminations of most of Incomnet's and ICC's senior executives.

In approving Mr. Richard's compensation, the Board considered the advice of
a compensation consultant (the "Consultant") in confirming the reasonableness of
the proposed compensation to Mr. Richard under his employment contract. The
Consultant reviewed Mr. Richard's employment contract and compared it to
compensation for CEO's of companies with revenues between $100 million and $200
million. The Consultant's findings were as follows:

- Mr. Richard's salary of $325,000 per year was competitive with companies
of that size;

- Mr. Richard's benefits and perquisites were appropriate;

- Mr. Richard's hiring bonus of $353,000 and relocation payments were fairly
typical and did not seem excessive;

- The severance and non-competition provisions were customary and
reasonable;

- The change-of-control provisions were within a reasonable range; and

- The equity grant of 13 shares of restricted Preferred Stock convertible
into 1.3 million shares of Common Stock seemed appropriate under the
circumstances.

After review of the Consultant's report and consideration of all relevant
factors, the Compensation Committee concluded that Mr. Richard's compensation
was fair and reasonable to Incomnet and ICC.

COMPENSATION COMMITTEE

John P. Hill, Jr.

Howard P. Silverman

Michael A. Stein

PERFORMANCE GRAPH

Incomnet's Common Stock is quoted on the Nasdaq SmallCap Market under the
trading symbol ICNT. The following chart shows a 5-year comparison of cumulative
total returns for Incomnet's Common Stock, the Nasdaq U.S. Stock Index ("Nasdaq
Composite") and Nasdaq Telecommunications Stock Index ("Nasdaq Telecom"). The
table assumes that $100 was invested at the close of trading on the last trading
day in 1993.

NOTE: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

INCOMNET, INC. NASDAQ COMPOSITE NASDAQ TELECOM

1993 $100.00 $100.00 $100.00
1994 231.75 97.76 83.45
1995 73.02 138.46 109.26
1996 47.62 170.01 111.72
1997 18.89 208.30 163.84
1998 27.78 293.52 270.01

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The tables below show how much Incomnet voting stock is owned by:

- Each beneficial owner of 5% or more of Incomnet's voting stock;

- Each director;

- Each of the executive officers named in the Summary Compensation Table
(the "Named Officers") at Item 11 of this Form 10-K; and

- All directors and executive officers as a group.

The number of shares of Incomnet voting stock beneficially owned by each
entity, director and Named Officer is determined under rules of the Commission,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual has the sole or shared voting power or investment power
and also any shares which the individual or entity has the right to acquire as
of June 15, 1999 through the exercise of any stock option or other right.

Unless otherwise indicated, each individual has sole investment and voting
power (or shares such powers with his or her spouse) with respect to the shares
set forth in the following table.

SECURITY OWNERSHIP OF BENEFICIAL OWNERS OF 5% OR MORE OF INCOMNET'S VOTING STOCK
AND CURRENT DIRECTORS AND NAMED OFFICERS

PERCENT OF
INCOMNET INCOMNET SERIES C VOTING
NAME COMMON STOCK PREFERRED STOCK STOCK
- ----------------------------------------------------------------- -------------- ------------------- -----------

5% HOLDERS:
Ironwood Telecom LLC............................................. 3,850,000(1) -- 15.4(2)

DIRECTORS:
John P. Casey.................................................... 6,137,504(3) -- 28.9(4)
Denis Richard.................................................... 1,300,000(5) 13(5) 6.1(5)
R. Scott Eisenberg............................................... 40,000(6) -- (8)
John P. Hill, Jr................................................. 40,000(6) -- (8)
Howard P. Silverman.............................................. 75,000(7) -- (8)
Michael A. Stein................................................. 40,000(6) -- (8)

OFFICERS (OTHER THAN MR. RICHARD):
George P. Blanco................................................. -- -- --
Debra A. L. Chuckas.............................................. 1,000 -- (8)
Timothy M. Ciaccio............................................... 5,000 -- (8)
Stephen A. Garcia................................................ 11,200 -- (8)

SECURITY OWNERSHIP OF FORMER DIRECTORS AND FORMER NAMED OFFICERS

PERCENT OF
INCOMNET INCOMNET SERIES C VOTING
NAME COMMON STOCK PREFERRED STOCK STOCK
- ----------------------------------------------------------------- -------------- ------------------- -----------

Melvyn Reznick................................................... 103,400(9) -- (8)
Edward R. Jacobs................................................. -- -- --
James R. Quandt.................................................. -- -- --
Michael J. Keebaugh(10).......................................... -- -- --

All current and former directors and executive officers as a
group (14 persons)............................................. 11,603,105 13 45.49%(4)

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

(1) Ironwood's address is 555 Zang Street, Suite 300, Lakewood, Colorado 80228.
Ironwood owns warrants to purchase up to 4.85 million shares of Common
Stock (the "Ironwood Warrants") of which 3.85 million have an exercise
price of $1.00 per share and 1.0 million have an exercise price of $2.25
per share. Exercise of the Ironwood Warrants is conditioned upon
shareholder approval of an amendment to Incomnet's Articles of
Incorporation to increase the number of authorized shares of Incomnet's
Common Stock (the "Authorizing Amendment"). One million of the 4.85 million
warrants may not be exercised until December 15, 1999. In addition to the
Ironwood Warrants, Ironwood owns 369.6 shares of non-voting preferred
stock. Ironwood is obligated to hold the preferred stock until April 30,
2000, during which time Incomnet is required to repurchase the preferred
stock if it is financially able to do so. If Incomnet does not repurchase
Ironwood's Preferred Stock, Ironwood and Incomnet are obligated to offer
the Common Stock underlying the Preferred Stock to all Incomnet
shareholders on a pro-rata basis. Mr. John P. Hill, Jr., a director of
Incomnet, individually owns approximately 1% of Ironwood.

(2) Computed on the basis of 21.233 million shares of voting stock outstanding
as of April 15, 1999, plus 3.85 million shares that would be issued upon
exercise of the Warrants by Ironwood following shareholder approval of an
increase in the number of authorized shares of Incomnet Common Stock. The
percentage does not take into account Incomnet stock that could be issued
in the future relating to outstanding options, warrants, restricted stock
awards and shares that may be issued in settlement of litigation.

(3) Includes 102,000 shares held in various trusts and accounts for the benefit
of Mr. Casey's minor children. Does not include non-voting Series A and
Series B Preferred Shares of Incomnet which Mr. Casey is obligated to sell
back to Incomnet prior to November 5, 1999, as described above under Item 1
of this Form 10-K. If Incomnet is unable to redeem such Series A and B
Preferred Stock, Incomnet has agreed to convert such Preferred Stock into
8,459,970 shares of Common Stock and Mr. Casey has agreed to offer such
Common Stock to all shareholders on a pro rata basis at a price
representing actual profit to Mr. Casey. Also does not include shares that
may be issued to Mr. Casey in lieu of cash reimbursement of certain
expenses relating to the Board Change Agreement as described in Item 13 of
this Form 10-K below. Mr. Casey has pledged the proceeds of any sale of his
Common Stock to Trans Pacific Stores Ltd. and has secured a loan from
Ironwood Telecom LLC with his shares of Series A and B Preferred Stock.

(4) Percentage of the 21.233 million currently outstanding shares of Voting
Stock, plus 4,045,000 shares that could be issued in respect of options and
warrants specified in the table for Ironwood Telecom and Messrs. Eisenberg,
Hill Silverman and Stein. The percentage does not take into account
additional shares that could be issued in the future as a result of
outstanding warrants, options, restricted stock awards and shares that may
be issued in settlement of litigation.

(5) Mr. Richard owns 100% of the outstanding Incomnet Series C Preferred Stock.
The 13 shares of Series C Preferred Stock are convertible into 1.3 million
shares of Common Stock. Incomnet currently has no authorized but unissued
Common Stock. If a proposal to increase the number of shares of Common
Stock is approved by shareholders, Mr. Richard would be entitled to convert
his 13 shares of Series C Preferred Stock into 1.3 million shares of Common
Stock. The Series C Preferred Stock was granted to Mr. Richard in
connection with his employment and is subject to certain restrictions,
including Incomnet's rights to repurchase such stock. The percentage of
Voting Stock reported as owned by Mr. Richard, assumes 19.933 million
shares of Incomnet Common Stock currently outstanding and 1.3 million
additional shares that would be issued to Mr. Richard upon conversion of
his Preferred Stock, assuming the shareholders approve the proposal to
increase the authorized number of shares of Common Stock and Mr. Richard
elects to convert his Preferred Stock into Common Stock. Mr. Richard is
entitled to vote his Preferred Stock on an as-converted-to-Common
Stock-basis in all matters presented for a vote of holders of Common Stock.
The percentage does not take into account additional shares of Incomnet
Common Stock that could be issued in the future relating to outstanding
options, warrants, restricted stock awards and shares that may be issued in
settlement of litigation.

(6) Represents an option to purchase 4 shares of Series D Preferred at $21,875
per share in the case of Messrs. Hill and Stein and $22,500 per share in
the case of Mr. Eisenberg. Each share of Series D Preferred Stock is
convertible into 10,000 shares of Common Stock. Exercise is subject to
Incomnet increasing its authorized Common Stock. Does not include options
granted to each of Messrs. Hill, Stein and Eisenberg to purchase an
additional 6 shares of Series D Preferred at $21,875 per share in the case
of Messrs. Hill and Stein and $22,500 per share in the case of Mr.
Eisenberg that have not yet vested.

(7) Includes an option to purchase 4 shares of Series D Preferred Stock at
$21,875 per share and an option to purchase 35,000 shares of Common Stock
at $4.25 per share. Each share of Series D Preferred Stock is convertible
into 10,000 shares of Common Stock. Exercise is subject to Incomnet
increasing its authorized Common Stock. Does not include options granted to
purchase an additional 6 shares of Series D Preferred Stock at $21,875 per
share that have not yet vested.

(8) Less than 1%.

(9) Includes an option to purchase 50,000 shares of Common Stock at $4.32 per
share. This option expires September 1, 2003.

(10) Mr. Keebaugh terminated his employment with ICC effective April 2, 1999
and is currently a consultant to ICC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As described below, Incomnet has entered into or was a party to a number of
transactions with its directors, officers and holders of 5% of Incomnet's voting
stock.

THE BOARD CHANGE AGREEMENT.

On September 29, 1998, Incomnet consummated the Board Change Agreement among
the Former Directors, John P. Casey and Incomnet.

As a result of the Board Change Agreement, five new directors were
appointed. In addition to the change in the composition of the Board of
Directors, the Board Change Agreement obligates Incomnet, subject to applicable
law, to nominate Dr. Silverman for re-election to the Board at the next annual
meeting of Incomnet's shareholders. Further, the Board Change Agreement
obligates Incomnet to form and appoint members to an Audit Committee,
Compensation Committee and a Disinterested Director Committee and to offer Dr.
Silverman the opportunity to be a member on each of those committees.

Under the Board Change Agreement, Mr. Casey was obligated to exercise his
option to acquire 1,598.211 shares of Series A and Series B Preferred Stock (the
"Casey Preferred"). Incomnet has the right to repurchase the Casey Preferred at
a repurchase price equal to Mr. Casey's purchase price plus his carrying costs.
That price is estimated to be $.42 per share (the "Repurchase Price") on an
as-converted-to Common Stock-basis. Mr. Casey is obligated under the Board
Change Agreement to hold the Preferred Stock until November 5, 1999. If Incomnet
is not financially able to repurchase the Casey Preferred Stock before November
5, 1999, Mr. Casey is obligated to tender the Casey Preferred to Incomnet for
conversion on November 5, 1999 and the Company is then obligated to offer the
stock to all shareholders at the Repurchase Price plus the cost of the offering.

Incomnet is obligated under the Board Change Agreement to reimburse Mr.
Casey for certain costs and expenses associated with the events surrounding the
Board Change.

LOAN TO FORMER DIRECTOR.

In November 1996, Incomnet extended a loan to Former Director, Nancy Zivitz,
and her spouse. In early 1997 the loan was extended. The principal amount of the
loan was $277,955 with an annual interest rate of 10%. On July 24, 1998, Ms.
Zivitz repaid the loan in full.

SEVERANCE AGREEMENTS WITH FORMER MANAGEMENT.

In September 1998, Incomnet and its former President and Chairman, Melvyn H.
Reznick entered into a severance agreement that was subsequently amended in
November, 1998 as described in Item 11 of this Form 10-K.

On July 1, 1998, Incomnet's subsidiary, ICC, reached a severance agreement
with James Quandt, ICC's former President and Chief Executive Officer, that was
subsequently amended in November, 1998 as described in Item 11 of this Form
10-K.

On July 1, 1998, ICC entered into a severance agreement with Victor
Streufert, ICC's former Senior Vice President and Chief Financial Officer,
pursuant to which ICC was to pay Mr. Streufert up to $480,000 over a 2-year
period. On November 2, 1998, Incomnet entered into an amended arrangement under
which the severance payments were reduced to $75,185. Mr. Streufert will be
entitled to an additional $37,500 if, on or before July 1, 2000, (i) ICC enters
into a merger in which ICC or its shareholders retain less than a 50% interest
in the new company, (ii) ICC sells substantially all of its assets, or (iii)
there is a public offering of ICC's stock.

Incomnet had entered into an employment agreement with Stephen Caswell, a
former officer employee of Incomnet under which Mr. Caswell was entitled to
severance in the amount of $260,000. In October, 1998 Incomnet and Mr. Caswell
agreed to amend his employment arrangement under which Mr. Caswell will continue
to be employed through April 30, 1999, after which his employment may be
extended at Incomnet's option for an additional six months or Mr. Caswell will
receive a severance payment of $30,000. Mr. Caswell also agreed to terminate all
of his outstanding Incomnet stock options. Mr. Caswell's employment was
terminated in March 1999.

AGREEMENTS WITH MR. CASEY.

On September 29, 1998, Mr. Casey entered into a services agreement with
Incomnet as described in Item 11 of this Form 10-K. No amounts were paid to Mr.
Casey under his Service Agreement in 1998.

In accordance with the Board Change Agreement completed on September 28,
1998, the New Board agreed to reimburse Mr. Casey for certain of his
out-of-pocket costs and expenses relating to his efforts to replace the board
and key management of Incomnet. In light of Incomnet's current financial
position, Mr. Casey has agreed to accept payment for his out-of-pocket costs in
shares of Incomnet Common Stock. The New Board agreed to the reimbursement in
stock of Mr. Casey's expenses, provided that shareholders also approve the
reimbursement. The categories of Mr. Casey's proposed reimbursements are his
out-of-pocket expenses relating to: (i) filings made with the Securities and
Exchange Commission and other regulatory agencies in connection with the Board
Change Agreement; (ii) the negotiations with WorldCom, First Bank, institutional
investors and potential providers of debt and equity to Incomnet; (iii)
settlement of the class action; (iv) obtaining directors' and officers'
insurance coverage; (v) negotiations and documentation of the Board Change
Agreement and related documents and preparation of the Information Statement to
shareholders concerning the Board Change; (vi) due diligence prior to entering
into the Board Change Agreement; and (vii) negotiating and documenting the
transactions, whereby Mr. Casey acquired 1598.211 shares of Series A and Series
B Preferred Stock that Mr. Casey agreed to sell back to Incomnet prior to
November 5, 1999 at a price representing no actual profit to Mr. Casey. Incomnet
has reimbursed a total of $228,310 to Mr. Casey and Mr. Casey is owed an
additional $910,192.

Mr. Casey borrowed $2,124,790 to purchase the Casey Preferred under a loan
from Ironwood. Mr. Casey is obligated to pay that loan on the earlier of the
repurchase of the Casey Preferred Stock by Incomnet or any rights offering of
the common stock underlying the Casey Preferred Stock. ICC has guaranteed Mr.
Casey's obligations to repay the loan to Ironwood used to purchase the Casey
Preferred Stock.

In January 1999, Mr. Casey agreed to guarantee Incomnet's obligation to
issue up to 900,000 shares pursuant to options granted to five officers of
Incomnet and ICC. Incomnet currently has insufficient authorized common stock to
issue any shares of Common Stock if such officers should elect to exercise their
options. Incomnet plans to request shareholder approval of a proposal to
increase the authorized number of shares of Common Stock. If any such officer
who was granted options elects to exercise his or her options prior to Incomnet
obtaining an increase in the authorized number of common stock, Mr. Casey has
agreed to transfer some his shares to Incomnet to permit Incomnet to complete
such exercise. In such event, Incomnet will reimburse Mr. Casey in an equal
number of shares of Common Stock. Once Incomnet has sufficient authorized common
stock, the guarantee by Mr. Casey will terminate.

IRONWOOD FINANCINGS.

On December 15, 1998, Incomnet completed a secured credit financing with
Ironwood Telecom LLC. Ironwood provided a total of $16.6 million under this
facility and an additional $1.09 million in

connection with the purchase of outstanding Incomnet Preferred Stock which it is
obligated to hold for repurchase by Incomnet or a rights offering to
shareholders. John Hill, Jr., a director of Incomnet and ICC, indirectly owns
approximately 1% of Ironwood. The amount borrowed from Ironwood by Incomnet
bears interest at the rate of 12% per year, payable quarterly, with principal
and accrued interest due on December 31, 2000. In connection with the credit
facility, Incomnet issued warrants to purchase 2 million shares of Common Stock
at an exercise price of $1.00 per share, and 1 million shares of Common Stock at
an exercise price of $2.25 per share, subject to adjustment based on Incomnet's
operating results. The Ironwood credit facility was secured by all of the assets
of Incomnet and ICC and was guaranteed by ICC. However, effective April 9, 1999,
Ironwood agreed to subordinate its priority interest in ICC's assets in exchange
for 1.25 million warrants to purchase Incomnet Common Stock with an exercise
price of $1.00 per share. These warrants have a term of five years. Prior to
December 15, 1998 Ironwood provided $6 million (i) in bridge financing; and (ii)
on behalf of Incomnet in connection with the exercise by Mr. Casey of an option
to purchase outstanding Incomnet Preferred Stock. Ironwood received 600,000
warrants with an exercise price of $1.00 in connection with the bridge
financing. The principal amount under the bridge facility was refinanced under
the Ironwood secured credit facility described above.

DISGORGEMENT OF SHORT SWING PROFITS TO THE COMPANY BY A FORMER DIRECTOR.

On January 8, 1998, David Wilstein, a director of Incomnet, disclosed in a
Form 4 that he had purchased 65,000 shares of Incomnet's Common Stock on January
5, 6, and 7, 1998 and sold 65,000 shares of Incomnet's Common Stock on December
1, 1997 at a higher price. On January 12, 1998, Incomnet informed Mr. Wilstein
that he had generated a short swing profit pursuant to Section 16(b) of the
Securities Exchange Act of 1934. On January 26, 1998, Mr. Wilstein paid to
Incomnet short swing profits plus interest of $95,456.

ICC LOAN TO FORMER OFFICER.

On March 31, 1997, ICC made a loan to Jerry Ballah in the original principal
amount of $550,219. The loan accrued interest at the annual rate of 5.83%. The
entire principal amount and accrued interest under the loan were due on March
31, 1999. Mr. Ballah failed to make payments of principal and interest on the
loan when due. ICC has demanded that Mr. Ballah pay $614,375 constituting the
principal amount and all accrued interest owing to ICC. Mr. Ballah has not
complied with ICC's demand for repayment of this loan.

CONVERTIBLE DEBT UNITS.

In April 1997, ICC entered into certain arrangements with Jerry Ballah and
Edward R. Jacobs which would permit those persons to acquire common stock of ICC
through the issuance of ICC's convertible debt units. Under the arrangements
with Mr. Ballah, ICC issued Mr. Ballah 1,257,116 convertible debt units in the
aggregate principal amount of $3,771,348 (or $3 per debt unit). Interest at the
annual rate of 6.49% on the $3,771,348 principal amount is payable by ICC to Mr.
Ballah annually on April 11 of each year in which the debt units are
outstanding. The principal amount owing by ICC to Mr. Ballah under the debt
units is due on April 11, 2002.

The purchase price for each debt unit issued to Mr. Ballah was $3 per unit
or $3,771,348 in the aggregate. Mr. Ballah paid the purchase price to acquire
the debt units by delivery of a promissory note payable by him in the principal
amount of $3,771,348. This promissory note accrues interest at the annual rate
of 6.74% payable annually on April 11 of each year in which the note is
outstanding. The principal amount owing by Mr. Ballah to ICC under his
promissory note is due on April 11, 2002.

The terms of Mr. Ballah's promissory note described above mirror the
requirements of ICC under the convertible debt units with the exception that Mr.
Ballah owes interest to ICC annually under his

promissory note at an annual rate of 0.25% greater than the interest rate owing
by ICC to Mr. Ballah under the convertible debt units. This difference in
interest rates requires Mr. Ballah to make an annual payment to ICC on April 11,
1998, 1999, 2000, 2001 and 2002 of $9,428.37 in each such year. Given that the
principal and interest amount owing by ICC under the convertible debt units is
completely offset by the principal amount and interest owing by Mr. Ballah to
ICC under his promissory note, during the period in which ICC's convertible debt
units are outstanding, ICC will not be obligated to pay Mr. Ballah any amount
under the convertible debt units.

ICC's debt units are convertible into common stock of ICC at the conversion
ratio of $3 per outstanding principal amount of the debt unit. Thus, the
outstanding aggregate principal amount of the debt units issued to Mr. Ballah of
$3,771,348 is convertible into 1,257,116 shares of ICC's common stock
($3,771,348 aggregate principal amount divided by $3 conversion ratio per share
of ICC common stock equals 1,257,116 shares of ICC common stock). In addition,
in order to convert the debt units into ICC's common stock, Mr. Ballah must pay
a conversion price of $0.01 per share or $12,571 in the aggregate (1,257,116
shares multiplied by $.01 conversion price per share equals $12,571 aggregate
conversion price).

Mr. Ballah has not made the required payment under his promissory note of
$9,428.37 to ICC on April 11, 1998 and 1999. Thus, he is in default under his
promissory note obligations owing to ICC. His promissory note is secured by the
convertible debt units issued by ICC.

Mr. Jacobs has been issued convertible debt units to ICC in exchange for the
delivery of Mr. Jacobs' promissory note in the principal amount of $4,221,345 on
substantially the same terms as described above for Mr. Ballah. Mr. Jacobs has
made the required payments of interest under his promissory note of $10,553 in
each of April 1998 and 1999.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMS 8-K

(A) (1) FINANCIAL STATEMENTS.

Reports of Independent Auditors

Consolidated Balance Sheet at December 31, 1998 and 1997

Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996

Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and
1996

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996

Notes to Consolidated Financial Statements

(2) FINANCIAL STATEMENT SCHEDULE. The following Financial Statement Schedule is submitted herewith:

Schedule II--Valuation and Qualifying Accounts at December 31, 1998, 1997 and 1996

All other schedules are omitted as the required information is not present
or is not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated financial
statements or notes thereto.

(3) LIST OF EXHIBITS

EXHIBIT NO. DESCRIPTION
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2.1 Asset Purchase Agreement between NTC Acquisition, Inc. and National Telephone & Communications, Inc.,
dated March 31, 1998. Incorporated by reference from Exhibit 99.1 attached to Incomnet's Form 8-K,
filed with the Securities and Exchange Commission on April 8, 1998.

2.2 Agreement to Purchase AutoNetwork Assets between Incomnet, Inc. and AutoSkill, Inc., dated March 20,
1998. Incorporated by reference from Exhibit 10.24 attached to Incomnet's Annual Report on Form
10-K, for the fiscal year ending December 31, 1997, filed with the Securities and Exchange
Commission on April 15, 1998.

3.1 Articles or Incorporation and amendments thereto.

3.2 Certificate of Determination for Series A 2% Convertible Preferred Stock. Incorporated by reference
from Exhibit 3.3 attached to Incomnet's Pre-effective Amendment No. 1 to the Form S-3 filed with
the Securities and Exchange Commission on October 21, 1996.

3.3 Certificate of Determination for Series B 6% Convertible Preferred Stock. Incorporated by reference
from Exhibit 3.7 attached to Incomnet's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on November 22, 1997.

3.4 Certificate of Determination for Series C.

3.5 Certificate of Determination for Series D.

3.6 Revised Bylaws of Incomnet, Inc., dated January 18, 1999.

10.1 Form of Warrant to Purchase 510,000 Shares of RCI Common Stock dated February 7, 1995. Incorporated
by reference from Exhibit 4.5 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 13, 1996.

10.2 Form of Warrant to Purchase RCI Common Stock, dated April 1996 in connection with bridge loans made
to RCI from April 1996 through January 1997. Incorporated by reference from Exhibit 4.6 attached to
Incomnet's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on
May 13, 1996.

10.3 Form of Warrant to Purchase Shares of Incomnet, Inc., in connection with a December 1996 settlement
with Robert Cohen, Jeff Rubin, and related parties, expiring December 9, 1999. Incorporated by
reference from Exhibit 4.7 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed
with the Securities and Exchange Commission on March 24, 1997.

10.4 Form of Warrant to Purchase Shares of Incomnet, Inc., in connection with the settlement of STEVENS V.
SCHWARTZ AND INCOMNET, INC., expiring December 17, 2001. Incorporated by reference from Exhibit 4.8
attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3 Registration Statement filed with
the Securities and Exchange Commission on March 24, 1997.

10.5 Employment Agreement between NTC and James R. Quandt, dated January 6, 1997. Incorporated by
reference from Exhibit 10.32 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3,
filed with the Securities and Exchange Commission on March 24, 1997.

EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------

10.6 Letter of Acknowledgment for Amended and Restated Management Incentive Agreement Between NTC and
Incomnet, Inc., dated January 28, 1997. Incorporated by reference from Exhibit 10.31 attached to
Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the Securities and Exchange
Commission on March 24, 1997.

10.7 Settlement Agreements entered into on February 14, 1996, between Incomnet and various note holders,
including Arthur Caplan, Jules Nordlicht, Rita Folger, Richard S. Jaffe, Kenneth Lebow, Lenore
Katz, and Moshe Miller. Incorporated by reference from Exhibit 10.20 attached to Incomnet's
Registration Statement on Form S-3 filed with the Securities and Exchange Commission on May 13,
1996.

10.8 Carrier Switched Services Agreement with Wiltel, Inc., dated September 15, 1995. Incorporated by
reference from Exhibit 10.14 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 13, 1996 and declared effective on October 31, 1996.
(Portions of this Agreement have been redacted. Incomnet has requested that the Securities and
Exchange Commission grant confidential treatment to the redacted portions of the Agreement.)

10.9 Settlement Agreement Between Joel W. Greenberg and Incomnet, Inc. dated May 9, 1996. Incorporated by
reference from Exhibit 99.A attached to Incomnet's Report on Form 8-K, dated June 18, 1996,
relating to the settlement agreement with Joel W. Greenberg and his resignation as a director of
Incomnet.

10.10 Form of Registration Rights Agreement Between Incomnet, Inc. and Purchasers of Series A Convertible
Preferred Stock dated September 27, 1996. Incorporated by reference from Incomnet's Pre-effective
Amendment No. 1 to Form S-3, filed with the Securities and Exchange Commission on October 21, 1996.

10.11 Management Incentive Agreement with ICC (formerly NTC), dated October 14, 1996. Incorporated by
reference from Exhibit 10.27 attached to Incomnet's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on November 22, 1996.

10.12 Settlement Agreements by and among Incomnet, Inc., Edward Jacobs and Jerry Ballah dated November 13,
1996. Incorporated by reference from Exhibit 10.28 attached to Incomnet's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on November 22, 1996.

10.13 Rapid Cast, Inc. Shareholder's Agreement, dated January 15, 1997. Incorporated by reference from
Exhibit 10.29 attached to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the
Securities and Exchange Commission on March 24, 1997.

10.14 Registration Rights Agreement for Rapid Cast, Inc., dated January 15, 1997. Incorporated by reference
from Exhibit 10.20 to Incomnet's Pre-Effective Amendment No. 1 to Form S-3, filed with the
Securities and Exchange Commission on March 24, 1997.

10.15 Settlement and Mutual Release Agreement between Incomnet, Inc. and various parties including Robert
Cohen, Alan Cohen, Jeff Rubin, Jeff Cohen, Broadway Partners, Lenore Katz, and Allyson Cohen, dated
December 9, 1996. Incorporated by reference from Exhibit 10.33 attached to Incomnet's Pre-Effective
Amendment No. 1 to Form S-3, filed with the Securities and Exchange Commission on March 24, 1997.

10.16 Revised Standard Lease by ICC (formerly NTC) for space in Honolulu, Hawaii dated November 20, 1996.
Incorporated by reference from Exhibit 10.15 attached to Incomnet's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission on April
15, 1997.

EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------

10.17 Promissory Note and Business Loan Agreement dated March 27, 1997 between National Telephone and
Communications, Inc. and First Bank and Trust, Irvine Regional Office. Incorporated by reference
from Exhibit 10.16 attached to Incomnet's Annual Report on Form 10-K for the fiscal year ending
December 31, 1996, filed with the Securities and Exchange Commission on April 15, 1997.

10.18 Amended and Restated Management Incentive Agreement Between ICC (formerly NTC) and Incomnet, Inc.,
dated January 28, 1997. Incorporated by reference from Incomnet's Pre-effective Amendment to Form
S-3, filed with the Securities and Exchange Commission on March 24, 1997.

10.19 Amendment to Employment Agreement between Incomnet, Inc. and Melvyn H. Reznick, dated June 5, 1997.
Incorporated by reference from Exhibit 10.36 attached to Incomnet's Pre-effective Amendment No. 2
to Form S-3, filed with the Securities and Exchange Commission on July 9, 1997.

10.20 Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated June 5, 1997. Incorporated
by reference from Exhibit 10.37 attached to Incomnet's Pre-effective Amendment No. 2 to Form S-3,
filed with the Securities and Exchange Commission on July 9, 1997.

10.21 Employment Agreement between National Telephone & Communications, Inc. and Edward R. Jacobs, dated
July 25, 1997. Incorporated by reference from Exhibit 10.3 attached to Incomnet's Quarterly Report
on Form 10-Q, for the quarterly period ending September 30, 1997, filed with the Securities and
Exchange Commission on November 13, 1997.

10.22 Office Lease between ICC (formerly NTC) and The Carter Family Investment Partnership, LP, commencing
April 18, 1997. Incorporated by reference from Incomnet's report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1997.

10.23 Commitment Letter provided by Ironwood Telecom LLC to Incomnet, Inc. to provide Incomnet with a
secured credit facility, dated October 30, 1998. Incorporated by reference from Exhibit 10.1
attached to Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed
with the Securities and Exchange Commission on November 17, 1998.

10.24 Bridge Loan and Security Agreement between Incomnet, Inc. and Ironwood Telecom LLC, dated November 4,
1998. Incorporated by reference from the Exhibit 10.2 attached to Company's Report on Form 10-Q for
the quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.

10.25 Bridge Loan Note executed by Incomnet, Inc. in favor of Ironwood Telecom LLC, dated November 4, 1998.
Incorporated by reference from Exhibit 10.3 attached to Incomnet's Report on Form 10-Q for the
quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.

10.26 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC,
dated November 4, 1998, relating to Incomnet Inc.'s Bridge Loan Note. Incorporated by reference
from Exhibit 10.5 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.

EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------

10.27 Guaranty executed by National Telephone & Communications, Inc. in favor of Ironwood Telecom LLC,
dated November 4, 1998, relating to Mr. Casey's Secured Promissory Note. Incorporated by reference
from Exhibit 10.7 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.

10.28 Severance Agreement between Incomnet, Inc. and Melvyn Reznick, dated September 29, 1998, and
amendment thereto dated November 1, 1998. Incorporated by reference from Exhibit 10.7 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.

10.29 Separation Agreement between Incomnet, Inc. and James R. Quandt, dated July 1, 1998, and amendment
thereto dated October 30, 1998. Incorporated by reference from Exhibit 10.8 attached to Incomnet's
Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the Securities
and Exchange Commission on November 16, 1998.

10.30 Separation Agreement between Incomnet, Inc. and Victor C. Streufert, dated July 1, 1998, and
amendment thereto dated October 30, 1998. Incorporated by reference from Exhibit 10.9 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.

10.31 Amendment to Employment Agreement between Incomnet, Inc. and Stephen A. Caswell, dated October 29,
1998. Incorporated by reference from Exhibit 10.10 attached to Incomnet's Report on Form 10-Q for
the quarterly period ending September 30, 1998 filed with the Securities and Exchange Commission on
November 16, 1998.

10.32 Settlement and Release Agreement between Incomnet, Inc. and the Cohen Parties, including Dr. Robert
Cohen, Stefanie Rubin, Allyson Cohen, Jeffrey Cohen, Jeffrey Rubin, Dr. Alan Cohen, Lenore Katz,
Broadway Partners and Meryl Cohen, custodian for Gabrielle Cohen, Erica Cohen, Jaclyn Cohen and
Nicole Cohen, dated November 5, 1998. Incorporated by reference from Exhibit 10.11 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.

10.33 Settlement and Release Agreement Among Incomnet, Inc., Ironwood Telecom LLC, Ellen Cohen and Martin
Fabrikant, dated November 5, 1998. Incorporated by reference from Exhibit 10.12 attached to
Incomnet's Report on Form 10-Q for the quarterly period ending September 30, 1998 filed with the
Securities and Exchange Commission on November 16, 1998.

10.34 Stock Purchase and Release Agreement Among Gary Kaplowitz, Alan Rothstein, S&R Holdings, Ironwood
Telecom LLC, Incomnet, Inc. and John P. Casey, dated November 4, 1998. Incorporated by reference
from Exhibit 10.13 attached to Incomnet's Report on Form 10-Q for the quarterly period ending
September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.

10.35 Employment Agreement by and among Incomnet, Inc., National Telephone & Communications, Inc., and
Denis Richard, dated September 29, 1998. Incorporated by reference from Exhibit 10.2 attached to
Incomnet's Report on Form 8-K, as filed with the Securities and Exchange Commission on October 14,
1998.

EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------

10.36 Acknowledgment Letter of Services Agreement Between Incomnet, Inc. and John P. Casey, dated September
29, 1998. Incorporated by reference from Exhibit 10.2 attached to Incomnet's Report on Form 8-K,
filed with the Securities and Exchange Commission on October 14, 1998.

10.37 Board Change Agreement among Incomnet, Inc., the Current Directors of Incomnet, Inc. and John P.
Casey, dated 28, 1998. Incorporated by reference from Exhibit 10.1 attached to Incomnet's Report on
Form 8-K, filed with the Securities and Exchange Commission on August 31, 1998.

10.38 Standard Sublease Between National Telephone & Communications, Inc., and Vision Capital Services
Corporation and Performance Capital Management, Inc., dated July 28, 1998. Incorporated by
reference from Exhibit 10.17 attached to Incomnet's Report on Form 10-Q for the quarterly period
ending September 30, 1998 filed with the Securities and Exchange Commission on November 16, 1998.

10.39 Warrant Agreement dated as of November 4, 1998 between Incomnet, Inc., and Ironwood Telecom LLC
relating to the issuance of 500,000 Incomnet, Inc. Warrants. Incorporated by reference from Exhibit
10.4 attached to Incomnet's report on Form 10-Q for the quarterly period ending September 30, 1998
filed with the Securities & Exchange Commission on November 16, 1998.

10.40 Warrant Agreement dated as of November 16, 1998 between Incomnet, Inc., and Ironwood Telecom LLC
relating to the issuance of 100,000 Incomnet, Inc. Warrants.

10.41 Registration Rights Agreement dated as of November 4, 1998 between Incomnet, Inc. and Ironwood
Telecom LLC.

10.42 Loan and Security Agreement dated as of December 15, 1998 among Incomnet, Inc., Incomnet
Communications Corporation and Ironwood Telecom LLC.

10.43 Term Note dated December 15, 1998 issued by Incomnet, Inc. in the original principal amount of
$8,374,610.64 payable to Ironwood Telecom LLC.

10.44 WorldCom Promissory Note dated December 15, 1998, issued by Incomnet, Inc. in the original principal
amount of $3,456,151.56 payable to Ironwood Telecom LLC.

10.45 Amended and Restated First Bank Promissory Note dated December 15, 1998 issued by Incomnet, Inc. in
the original principal amount of $4,954,707.80 payable to Ironwood Telecom LLC.

10.46 Guaranty dated as of December 15, 1998, by Incomnet Communications Corporation in favor of Ironwood
Telecom LLC.

10.47 Warrant to Purchase 2,000,000 Shares of Common Stock of Incomnet, Inc. dated December 15, 1998 issued
by Incomnet, Inc. to Ironwood Telecom LLC.

10.48 Warrant to Purchase 1,000,000 Shares of Common Stock of Incomnet, Inc. dated December 15, 1998 issued
by Incomnet, Inc. to Ironwood Telecom LLC.

10.49 Employment Agreement between Incomnet, Inc. and George P. Blanco dated January 19, 1999.

10.50 Incomnet, Inc. Equity Incentive Stock Plan, approved by the Board of Directors of Incomnet, Inc. on
January 18, 1999.

10.51 Incomnet, Inc. Employee Stock Purchase Plan, approved by the Board of Directors of Incomnet, Inc. on
January 18, 1999.

EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------

10.52 Settlement Agreement and Mutual General Release among Incomnet, Inc., GenSource Corporation, Jerry C.
Buckley, Ralph M. Flygare, Robert Reisbaum and E.V. Schmidt dated as of March 9, 1999.

10.53 Telecommunications Services Agreement and Rate Schedule between WorldCom Network Services, Inc. and
Incomnet Communications Corporation dated as of November 1, 1998. (Portions of this Agreement have
been redacted. Incomnet has requested that the Securities and Exchange Commission grant
confidential treatment to the redacted portions of the Agreement.)

10.54 Program Enrollment Terms Agreement between WorldCom Network Services, Inc. and Incomnet
Communications Corporation dated as of November 1, 1999. (Portions of this Agreement have been
redacted. Incomnet has requested that the Securities and Exchange Commission grant confidential
treatment to the redacted portions of the Agreement.)

10.55 Service Schedule Agreement between WorldCom Network Services, Inc. and Incomnet Communications
Corporation dated as of November 1, 1998. (Portions of this Agreement have been redacted. Incomnet
has requested that the Securities and Exchange Commission grant confidential treatment to the
redacted portions of the Agreement.)

10.56 Amendment No. 1 to Telecommunications Services Agreement and Program Enrollment Terms between ICC and
WorldCom effective March 12, 1999. (Portions of this Agreement have been redacted. Incomnet has
requested that the Securities and Exchange Commission grant confidential treatment to the redacted
portions of the Agreement.)

10.57 Loan and Security Agreement between ICC and Foothill Capital Corporation dated as of April 9, 1999.

10.58 Intellectual Property Security Agreement between ICC and Foothill Capital Corporation dated as of
April 9, 1999.

10.59 Security Agreement between Incomnet, Inc. and Foothill Capital Corporation dated as of April 9, 1999.

10.60 Intercreditor and Subordination Agreement between Foothill Capital Corporation and Ironwood Telecom
LLC dated as of April 9, 1999.

10.61 Warrant issued to Ironwood Telecom LLC to purchase 1,250,000 shares of Incomnet Common Stock dated
April 9, 1999.

10.62 Key Independent Representative Stock Option Plan for ICC adopted as of February 28, 1997.
Incorporated by reference from Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3 filed with
the Securities and Exchange Commission July 9, 1997.

10.63 1996 Senior Executive and Consultant Convertible Debt Plan for ICC adopted as of February 28, 1997.
Incorporated by reference from Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3, filed with
the Securities and Exchange Commission July 9, 1997.

10.64 ICC Directors Stock Option Plan adopted as of February 28, 1997. Incorporated by reference from
Exhibit 10.34 to Incomnet's Amendment No. 2 to Form S-3 filed with the Securities and Exchange
Commission on July 9, 1997.

10.65 ICC 1996 Stock Option Plan adopted February 28, 1997. Incorporated by reference from Exhibit 10.34 to
Incomnet's Amendment No. 2 to Form S-3 filed with the Securities and Exchange Commission on July 9,
1997.

10.66 Promissory Note executed by Jerry Ballah in favor of ICC dated as of April 11, 1997 in the amount of
$3,771,348.

EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------

10.67 Convertible Debt Unit dated as of April 11, 1997 issued to Jerry Ballah.

10.68 Convertible Debt Plan Grant Agreement dated as of April 11, 1997 between ICC and Jerry Ballah dated
April 11, 1997.

10.69 Convertible Debt Unit Pledge Agreement between Jerry Ballah and ICC dated as of April 11, 1997.

10.70 Promissory Note executed by Edward R. Jacobs in favor of ICC dated as of April 11, 1997 in the amount
of $3,021,345.

10.71 Convertible Debt Unit dated as of April 11, 1997 issued to Edward R. Jacobs.

10.72 Convertible Debt Plan Grant Agreement between ICC and Edward R. Jacobs dated April 11, 1997.

10.73 Convertible Debt Unit dated as of April 11, 1997 issued to Edward R. Jacobs.

10.74 Promissory Note executed by Edward R. Jacobs in favor of ICC dated as of April 11, 1997 in the amount
of $1,200,000.

10.75 Convertible Debt Plan Grant Agreement between ICC and Edward R. Jacobs dated April 11, 1997.

10.76 Convertible Debt Unit Pledge Agreement between Edward R. Jacobs and ICC dated as of April 11, 1997.

10.77 Promissory Note in the amount of $550,219.77 executed by Jerry Ballah in favor of ICC dated March 31,
1997.

10.78 Amendment to Registration Rights Agreement between Ironwood and Incomnet dated as of April 9, 1999.

10.79 Consent and Amendment No. 1 to Loan and Security Agreement between Ironwood and Incomnet dated as of
April 9, 1999.

21 Subsidiaries of the Registrant.

27 Financial data schedule (Article 5 of Regulation S-X).

(B) RECENTLY FILED REPORTS ON FORM 8-K

The following report on Form 8-K was filed by Incomnet during the fiscal
year ended December 31, 1998:

Report on Form 8-K--Changes in Control of Registrant, dated September 29,
1998 and filed with the Securities and Exchange Commission on October 14,
1998.

INDEX TO FINANCIAL STATEMENTS

PAGE
---------

INCOMNET, INC.

Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2

Report of Stonefield, Josephson, Inc., Independent Auditors................................................ F-3

Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. F-4

Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................. F-5

Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and
1996..................................................................................................... F-6

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. F-7

Notes to Consolidated Financial Statements................................................................. F-9

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Incomnet, Inc.

We have audited the accompanying consolidated balance sheet of Incomnet,
Inc. as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) with respect to the year ended December 31, 1998. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Incomnet, Inc. at December 31, 1998 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule with respect to information for the year ended
December 31, 1998, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.

/S/ ERNST & YOUNG LLP

April 9, 1999
Orange County, California

F-2

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Incomnet, Inc.

We have audited the consolidated balance sheet of Incomnet, Inc. and
subsidiaries as of December 31, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for the two years in the period
ended December 31, 1997, and the schedule listed in Item 14 for the two years
ended December 31, 1997. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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 and schedule are
free of material misstatement. 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.

As set forth in Note 1 to the consolidated financial statements, in
connection with adopting the equity method of accounting for Rapid Cast, Inc.
("RCI"), the Company adjusted the carrying amount of its investment to equal its
equity interest in the net assets of RCI. Accordingly, the 1997 financial
statements reflect an increase in shareholders' equity of $7.2 million and
equity in loss of $2.0 million (included in discontinued operations) over
amounts previously reported, for which the Company reported a gain on
disposition of $2.6 million in 1998.

/s/ Stonefield Josephson, Inc.

Santa Monica, California
March 12, 1998,
except for Note 1, as to which the date is
April 14, 1999

F-3

INCOMNET, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31
--------------------
1998 1997
--------- ---------
(RESTATED)
(IN THOUSANDS,
EXCEPT SHARE DATA)

ASSETS
Current assets:
Cash........................................................................... $ 3,772 $ 754
Accounts receivable, less allowance for doubtful accounts of $3,298 and $2,698
at December 31, 1998 and 1997, respectively.................................. 5,579 13,402
Notes receivable from employees and shareholders, net of allowance of $925 and
$209 at December 31, 1998 and 1997, respectively............................. -- 840
Net assets of discontinued operations.......................................... 531 5,707
Prepaid expenses and other current assets...................................... 424 1,086
--------- ---------
Total current assets............................................................. 10,306 21,789
Facilities and equipment, net.................................................... 9,287 14,445
Goodwill, net of accumulated amortization of $1,830 and $1,534 at
December 31, 1998 and 1997, respectively....................................... 3,950 4,246
Deposits and other assets........................................................ 877 860
--------- ---------
Total assets..................................................................... $ 24,420 $ 41,340
--------- ---------
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 3,002 $ 9,605
Accrued expenses............................................................... 2,188 3,820
Accrued litigation settlement.................................................. 8,500 8,650
Accrued excise taxes........................................................... 3,009 1,869
Current portion of long-term debt.............................................. 2,307 9,383
Deferred revenue............................................................... 1,007 1,633
Other current liabilities...................................................... 3,386 946
--------- ---------
Total current liabilities........................................................ 23,399 35,906

Long-term debt, excluding current portion........................................ 16,819 2,855

Commitments and contingencies (NOTES 2, 10 AND 11)

Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares--100,000
Issued and outstanding shares--2,056 and 4,029 at December 31, 1998 and 1997,
respectively (Aggregate liquidation preference of $2,204 at December 31,
1998)...................................................................... 1,802 3,758
Common stock, no par value:
Authorized shares--20,000,000
Issued and outstanding shares--19,933,000 and 12,740,721 at December 31, 1998
and 1997, respectively..................................................... 67,114 64,386
Accumulated deficit............................................................ (84,714) (65,565)
--------- ---------
Total shareholders' equity (deficit)............................................. (15,798) 2,579
--------- ---------
Total liabilities and shareholders' equity (deficit)............................. $ 24,420 $ 41,340
--------- ---------
--------- ---------

SEE ACCOMPANYING NOTES.

F-4

INCOMNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

Net sales:
Telephone services.................................................. $ 53,131 $ 106,878 $ 80,474
Marketing program................................................... 1,737 14,953 17,396
--------- --------- ---------
Total net sales....................................................... 54,868 121,831 97,870

Cost of sales:
Telephone services.................................................. 32,673 73,022 46,317
Marketing program................................................... 1,974 12,826 18,153
--------- --------- ---------
Total cost of sales................................................... 34,647 85,848 64,470
--------- --------- ---------
Gross profit.......................................................... 20,221 35,983 33,400

Operating expenses:
General and administrative.......................................... 25,953 28,722 28,442
Depreciation and amortization....................................... 3,448 2,812 1,926
Bad debt expense.................................................... 3,852 5,495 5,945
Impairment of long-lived assets..................................... 1,633 -- --
Other operating expense............................................. 1,577 12,527 2,968
--------- --------- ---------
Total operating expenses.............................................. 36,463 49,556 39,281
--------- --------- ---------
Operating loss........................................................ (16,242) (13,573) (5,881)

Interest expense, net of interest income of $218, $91 and $178 for
1998, 1997 and 1996, respectively................................... (1,844) (283) (89)
--------- --------- ---------
Loss from continuing operations before income tax (benefit) expense
and cumulative effect of accounting change.......................... (18,086) (13,856) (5,970)
Income tax (benefit) expense.......................................... (453) 201 637
--------- --------- ---------
Loss from continuing operations....................................... (17,633) (14,057) (6,607)
--------- --------- ---------
Discontinued operations:
Loss from operations of discontinued optical systems, network
services and computer software businesses less applicable income
tax benefit of $8,449 in 1996..................................... (4,610) (1,561) (30,192)
Gain on disposal of optical systems, network services and computer
software businesses............................................... 3,135 -- --
--------- --------- ---------
Loss from discontinued operations................................... (1,475) (1,561) (30,192)
Cumulative effect of accounting change, net of tax of $10............. -- -- (877)
--------- --------- ---------
Net loss.............................................................. $ (19,108) $ (15,618) $ (37,676)
--------- --------- ---------
--------- --------- ---------
Basic and diluted loss per common share:
From continuing operations.......................................... $ (1.03) $ (1.08) $ (0.50)
From discontinued operations........................................ (0.09) (0.11) (2.26)
From cumulative effect of accounting change......................... -- -- (0.06)
--------- --------- ---------
--------- --------- ---------
Net loss per share.................................................. $ (1.12) $ (1.19) $ (2.82)
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares.............................. 17,255 13,578 13,370
--------- --------- ---------
--------- --------- ---------

SEE ACCOMPANYING NOTES.

F-5

INCOMNET, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

PREFERRED STOCK COMMON STOCK
-------------------- ------------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- --------- ------------- --------- ------------ ----------
(IN THOUSANDS, EXCEPT SHARE DATA)

Balance at December 31, 1995...................... -- $ -- 13,262,648 $ 55,392 $ (12,844) $ 42,548
Common stock issued in litigation settlement.... -- -- 107,033 436 -- 436
Issuance of preferred stock, net................ 2,440 2,355 -- -- -- 2,355
Cumulative effect of accounting change.......... -- -- -- -- 877 877
Other, net...................................... -- -- -- -- 86 86
Net loss........................................ -- -- -- -- (37,676) (37,676)
--------- --------- ------------- --------- ------------ ----------
Balance at December 31, 1996...................... 2,440 2,355 13,369,681 55,828 (49,557) 8,626
Equity method adjustments related to Rapid
Cast.......................................... -- -- -- 7,217 -- 7,217
Preferred stock converted to common stock....... (845) (845) 386,006 845 -- --
Retirement of common stock in connection with
16(b) settlement -- -- (1,047,966) -- -- --
Issuance of preferred stock, net................ 2,434 2,248 -- -- -- 2,248
Common stock issued in litigation settlement.... -- -- 33,000 100 -- 100
Issuance of warrants............................ -- -- -- 36 -- 36
Dividend with respect to beneficial conversion
feature ($426 per share) -- -- -- 360 (360) --
Other, net...................................... -- -- -- -- (30) (30)
Net loss (restated)............................. -- -- -- -- (15,618) (15,618)
--------- --------- ------------- --------- ------------ ----------
Balance at December 31, 1997 (restated)........... 4,029 3,758 12,740,721 64,386 (65,565) 2,579
Preferred stock converted to common stock....... (1,986) (1,986) 6,666,458 1,986 -- --
Common stock issued for dividends in arrears
($21 per share) on preferred stock
conversions................................... -- -- 101,035 41 (41) --
Preferred stock issued for services rendered.... 13 25 -- -- -- 25
Common stock issued for cash.................... -- -- 283,000 200 -- 200
Common stock issued for services rendered....... -- -- 26,786 81 -- 81
Common stock issued in litigation settlement.... -- -- 115,000 86 -- 86
Stock options issued for services rendered...... -- 5 -- 6 -- 11
Warrants issued in litigation settlement........ -- -- -- 49 -- 49
Warrants issued related to long-term debt....... -- -- -- 279 -- 279
Net loss........................................ -- -- -- -- (19,108) (19,108)
--------- --------- ------------- --------- ------------ ----------
Balance at December 31, 1998...................... 2,056 $ 1,802 19,933,000 $ 67,114 $ (84,714) $ (15,798)
--------- --------- ------------- --------- ------------ ----------
--------- --------- ------------- --------- ------------ ----------

SEE ACCOMPANYING NOTES.

F-6

INCOMNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
(IN THOUSANDS)

OPERATING ACTIVITIES
Net loss:...................................................... $ (19,108) $ (15,618) $ (37,676)
Less loss from discontinued operations....................... 1,475 1,561 30,192
Less cumulative effect of accounting change.................. -- -- 877
--------- --------- ---------
Loss from continuing operations.............................. (17,633) (14,057) (6,607)
Adjustments to reconcile loss from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization................................ 3,448 2,812 1,926
Provision for uncollectible accounts receivable.............. 3,244 5,319 5,682
Provision for uncollectible notes receivable................. 608 176 263
Impairment of long-lived assets.............................. 1,633 -- --
Loss on disposal of equipment................................ 815 -- --
Amortization of original issue discount...................... 191 -- --
Other, net................................................... 252 136 436
Changes in operating assets and liabilities:
Accounts receivable........................................ 4,579 (6,732) (6,563)
Other current assets....................................... 645 (361) (232)
Accounts payable........................................... (6,603) (2,485) 3,982
Accrued expenses........................................... (1,632) (1,869) 3,891
Accrued litigation settlement.............................. (150) 8,650 --
Accrued excise taxes....................................... 1,140 211 (119)
Deferred revenue........................................... (626) (2,408) 2,851
Other current liabilities.................................. 2,440 946 --
--------- --------- ---------
Net cash (used in) provided by operating activities............ (7,649) (9,662) 5,510

INVESTING ACTIVITIES
Additions to facilities and equipment, net..................... (428) (3,515) (4,639)
(Increase) decrease in notes receivable........................ 232 (255) (58)
Increase in other assets....................................... -- -- 553
--------- --------- ---------
Net cash used in investing activities.......................... (196) (3,770) (4,144)

FINANCING ACTIVITIES
Proceeds from (repayments of) line of credit, net.............. $ (8,440) $ 8,440 $ --
Proceeds from issuance of long-term debt, net.................. 18,930 176 --
Repayment of long-term debt.................................... (3,528) (433) (999)
Proceeds from issuance of preferred stock, net................. -- 2,248 2,355
Proceeds from issuance of common stock, net.................... 200 -- --
Other, net..................................................... -- (30) --
--------- --------- ---------
Net cash provided by financing activities...................... 7,162 10,401 1,356
--------- --------- ---------
Net cash provided by (used in) continuing operations........... (683) (3,031) 2,722
Net cash provided by (used in) discontinued operations......... 3,701 1,524 (2,112)
--------- --------- ---------

F-7

INCOMNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(RESTATED)
(IN THOUSANDS)

Net increase (decrease) in cash................................ 3,018 (1,507) 610
Cash at beginning of year...................................... 754 2,261 1,651
--------- --------- ---------
Cash at end of year............................................ $ 3,772 $ 754 $ 2,261
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non cash investing and financing transactions:

CONTINUING OPERATIONS
Assets acquired under capital leases......................... $ 14 $ 855 $ 1,772

DISCONTINUED OPERATIONS
-- 7,217 --
Interest in additional equity of Rapid Cast, Inc.............
Assumption of liabilities in connection with purchase of
GenSource.................................................. -- 1,910 --
Write-off of patents for Rapid Cast.......................... -- -- (39,146)

SEE ACCOMPANYING NOTES.

F-8

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Incomnet, Inc. (the Company or Incomnet), through its wholly owned
subsidiary, Incomnet Communications Corporation, Inc. (ICC) (formerly known as
National Telephone & Communications, Inc.) is an inter-exchange carrier and
reseller of discount long distance telephone services to residential and small
business customers nationwide, although approximately 64% of the Company's
customers are located in California. Other products include 800-number services
and calling card products. Service is provided by procuring long distance
telecommunications transmission services from a long distance communication
carrier at wholesale rates for high volume usage and reselling those services at
discount retail rates. ICC uses a network of independent representatives to sell
its telecommunications related services to retail customers. ICC is responsible
for the servicing and billing of the customers as well as the collection of
monies owed by the customers for their use of ICC's telephone services and
products.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.

DISCONTINUED OPERATIONS

The Company sold most of its interest in three businesses previously
reported as business segments. Accordingly, these segments have been accounted
for as discontinued operations in 1998. The Company has also reclassified prior
years to present the operating results of the three businesses as discontinued
operations.

- GenSource--In March 1999, the Company sold its interest in the common
stock of the computer software business segment, consisting of GenSource
Corporation (GenSource), a developer and marketer of software programs
used to administer insurance-related claims, such as workers' compensation
and short-term and long-term disability. The sale was made to a group of
private investors in exchange for the release from liability of the
Company under promissory notes to the former owners of GenSource of
approximately $1,775,000. In addition, the Company paid $10,000 in cash
for certain transaction expenses and received 15,507 shares of convertible
preferred stock in GenSource with a stated value of $32.25 per share. No
value was assigned to the preferred stock, which represents an
approximately 15% interest in GenSource on a fully-diluted basis. In
connection with the disposition of GenSource, the Company expects to
recognize a gain of approximately $1,394,000. The Company has no
expectation of continuing involvement with GenSource.

- AutoNetwork--In March 1998, the Company sold the network services business
segment to a group of private investors for $1,254,000 in cash and notes.
The segment consisted of Auto Dismantler Network (AutoNetwork), a monthly
subscription service that auto dismantlers use to buy, sell and trade used
parts that have been salvaged from automobiles. During the year ended
December 31, 1998, the Company recognized a gain on the disposition of
AutoNetwork of $535,000.

F-9

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- Rapid Cast--The Company acquired 51% of the common stock of Rapid Cast,
Inc. (RCI) (10.2 million of the then 20 million outstanding shares) in
February 1995. Initially, RCI was accounted for using the equity method.
However, by the second quarter of 1995, control was determined to be other
than temporary and RCI was consolidated with the Company. In January 1997,
RCI sold 8 million new shares of its common stock in a private placement
and issued an additional 2,344,000 shares in other transactions, reducing
the Company's investment in RCI to approximately 33% and requiring the
equity method of accounting for its remaining interest in RCI. In its
consolidated financial statements for the year ended December 31, 1997 as
originally reported, the Company gave no recognition to the increase in
its share of RCI's net equity resulting from the sale by RCI of its common
stock because prior management was not satisfied that the sale would
provide sufficient resources to allow RCI to become successful. However,
the accompanying consolidated financial statements have been restated to
reflect a $7.2 million increase in consolidated stockholders' equity in
accordance with the equity method of accounting. Additionally, operating
results for RCI for 1997 and for the first nine months of 1998 have been
restated to reflect additional losses of $2.0 million and $1.3 million,
respectively, to account for the Company's share of RCI's net losses under
the equity method of accounting. In the third quarter of 1998, the Company
sold a portion of its investment in RCI to outside investors, which
resulted in a net gain on the disposition of $2.6 million. In the fourth
quarter of 1998, the Company decided to streamline its operations to focus
solely on its telecommunications business. As part of that effort, the
Company has determined to dispose of its investment in RCI and expects
that this will occur in 1999. At December 31, 1998, the Company holds a
17.4% ownership interest in RCI, with a carrying value of $200,000, and
warrants for the purchase of 2.6 million additional RCI shares of common
stock at exercise prices ranging from $0.75 to $2.25 per share. The
Company has no expectation of continuing involvement with Rapid Cast.

Summarized financial information for the discontinued operations are as
follows (IN THOUSANDS):

DECEMBER 31
----------------------
1998 1997
--------- -----------
(RESTATED)

Current assets........................................................... $ 992 $ 812
Total assets............................................................. 1,433 6,480
Total liabilities (current).............................................. (902) (773)
Net assets of discontinued operations.................................... 531 5,707

YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------

Revenues......................................................... $ 3,530 $ 3,313 $ 6,093

The net assets of the discontinued operations as of December 31, 1998
represent the net assets of GenSource of $331,000 and RCI of $200,000, which
have been classified as current assets as of December 31, 1998. The net assets
of discontinued operations at December 31, 1997 are comprised of $3.280,000,
$827,000 and $1,600,000 of GenSource, AutoNetwork and RCI, respectively.

F-10

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates made in preparing the consolidated
financial statements include the allowance for doubtful accounts, income tax
valuation allowance, litigation settlement costs, certain accrued liabilities
and future undiscounted cash flows used in the analysis of the impairment of
long-lived assets. Actual results could differ from those estimates.

REVENUE AND RELATED COST RECOGNITION

The Company recognizes revenue and cost of sales as follows:

TELEPHONE SERVICES

Long distance telecommunications service revenues are generated when
customers make long distance telephone calls from their business or residential
telephones or by using any of the Company's telephone calling cards. Proceeds
from prepaid telephone calling cards are recorded as deferred revenue when the
cash is received, and recognized as revenue as the telephone service is
provided.

Telephone services cost of sales include the cost of long distance service
provided by the Company's long distance carrier, WorldCom Network Services, Inc.
(WorldCom), and commissions paid to independent representatives.

MARKETING PROGRAM

ICC markets its products through a multi-level, network marketing program of
independent sales representatives (ISRs). ICC authorizes and trains the ISRs to
sell its services to residential and small business customers, and allows the
ISRs to develop their own organizational group of other ISRs or "downline" sales
force.

Marketing program revenues are derived from the sale of marketing supplies,
training and continuing support services to ISRs. Payment for all such materials
and services is generally required at the point-of-purchase or the inception of
the ISR agreements. A portion of such revenue is deemed related to training and
continuing support obligations and is deferred and recognized after the training
is provided and, over the twelve-month contractual service period for continuing
support, respectively. Commencing in 1998, the Company deferred an amount equal
to the amounts that the Company charges when these elements are sold separately.

Marketing program cost of sales includes: bonus commissions paid to ISRs for
assisting new ISRs to obtain certain minimum levels of new retail long distance
subscribers; compensation and related costs of the Company's employees providing
marketing support; related overhead; and the cost of providing training,
business forms, and promotional and presentation materials. All bonuses are
expensed by the Company when earned by the ISRs.

F-11

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETING COMMISSIONS AND BONUSES

The Company maintains a separate bank account for the payment of marketing
commissions. Funding of this account is adjusted regularly to provide for
management's estimates of required reserve balances. ICC pays three types of
commissions. First, ICC pays commissions on long distance usage for customers
directly signed up by each ISR. These commissions are owed when customers use
ICC's long distance telephone service. ICC also pays override commissions on
long distance usage for customers who are in an ISRs "downline". These
commissions are owed when customers are billed for long distance usage if
certain minimum levels of retail telephone business are achieved by the ISR and
his or her "downline." Lastly, ICC pays bonus commissions to the sponsors of the
ISRs when new ISRs sign up a specified number of customers within a minimum time
period. These bonus commissions are owed after the new customers are activated
on ICC's telephone service.

ADVERTISING

The cost of advertising is expensed as incurred. The Company incurred
$93,000, $486,000 and $456,000 in advertising costs during 1998, 1997 and 1996,
respectively.

CONCENTRATION OF CREDIT AND BUSINESS RISK

The Company sells its telephone and related services to individuals and
small businesses nationwide, although approximately 64% of the Company's
customers are located in California. The Company's customers pay for their long
distance calling usage either through direct billing by the Company, through
billing from the customer's local exchange carrier ("LEC"), through direct
billing of the customer's major credit card, or by prepaying for long distance
time in the case of certain calling card products. In certain states, the
Company has an agency agreement with an unaffiliated company which bills
customers' local intrastate calls through the local telephone company. The
Company believes that it does not have any significant concentrations of credit
risks with its end-user customers or ISRs. Accounts receivables due from LECs at
December 31, 1998 and 1997 aggregated $3,703,000 and $9,784,000, respectively.

The Company performs periodic credit evaluations of its customers' financial
position and generally does not require collateral. Credit losses have been
within management's expectations and amounts provided for uncollectible
accounts.

The Company's financial position and results of operations may be
significantly and adversely impacted in the event that the purchases of long
distance telephone services by the Company do not meet the minimum purchase
requirements under the amended long distance service purchase commitment
agreement with WorldCom discussed in Note 10.

F-12

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FACILITIES AND EQUIPMENT

Facilities and equipment are stated at cost. The Company capitalizes the
costs associated with purchasing, developing and enhancing its computer
software. Depreciation and amortization are provided using the straight-line
method over estimated useful lives of the respective assets as follows:

Computer hardware and software 3 to 5 years
Furniture and office equipment 5 to 10 years
Leasehold improvements 10 years

The ten year useful life assigned to the leasehold improvements of the
Company's primary facility in Irvine has been estimated based upon the five-year
non-cancelable lease term plus the assumed exercise of the first five-year
option provided for in the April 1997 lease agreement described in NOTE 10.

GOODWILL

Goodwill, representing the excess of purchase price over the fair value of
the net assets of ICC, is amortized on a straight-line basis over its estimated
useful life of 20 years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Unless otherwise indicated, the fair value of the Company's financial
instruments approximate their carrying values.

LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
recoverability test is performed at the individual entity level based on
undiscounted net cash flows. Based upon its analysis, the Company believes that
no impairment of the carrying value of its long-lived assets, inclusive of
goodwill, existed at December 31, 1998. The Company's analysis was based on an
estimate of future undiscounted cash flows using forecasts contained in the
Company's strategic plan. It is at least reasonably possible that the Company's
estimate of future undiscounted cash flows may change during 1999. If the
Company's estimate of future undiscounted cash flow should change or if the
strategic plan is not achieved, future analyses may indicate insufficient future
undiscounted cash flows to recover the carrying value of the Company's
long-lived assets, in which case such assets would be written down to estimated
fair value.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related interpretations, in
accounting for its employee stock options because the alternative fair value
accounting provided for under Statement of Financial Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION(SFAS 123), requires the use of option
valuation models that were not developed for use in valuing employee stock
options as discussed in NOTE 8. Under APB 25, because the exercise prices of the
Company's employee stock options generally equal the market price

F-13

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the underlying stock on the date of grant, no compensation expense is
recognized. Options granted to consultants, independent representatives and
other nonemployees are accounted for using the fair value method as prescribed
by SFAS 123.

INCOME TAXES

Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities based on
enacted tax laws and rates applicable to the period in which differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to amounts which are more likely than
not to be realized.

NET LOSS PER SHARE

Basic and diluted loss per share is computed based on the weighted average
number of common shares outstanding during each period since common stock
equivalents are antidilutive. Because the impact of options, warrants, and other
convertible instruments (21,437,000, 9,322,000 and 4,004,000 in 1998, 1997 and
1996, respectively) are antidilutive, there is no difference between the loss
per share amounts computed for basic and diluted purposes. Loss per share from
continuing operations has been increased as follows (in thousands):

1998 1997 1996
----------- ----------- ---------

Loss from continuing operations.......................... $ (17,633) $ (14,057) $ (6,607)
Beneficial conversion feature of preferred stock
(NOTE 8)............................................... -- (360) --
Preferred stock dividends................................ (41) (88) --
Preferred stock dividends in arrears..................... (91) (105) (12)
----------- ----------- ---------
Loss from continuing operations applicable to common
shareholders........................................... $ (17,765) $ (14,610) $ (6,619)
----------- ----------- ---------
----------- ----------- ---------

COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130), which
establishes standards for reporting and displaying comprehensive income and its
components in the financial statements. For the years ended December 31, 1998,
1997 and 1996, the Company did not have any material components of other
comprehensive income as defined in SFAS 130.

SEGMENT REPORTING

The Company operates in one industry segment, marketing and reselling of
long distance telephone services to residential and small business customers
nationwide, although approximately 64% of the Company's customers are located in
California. No single customer accounted for as much as 10% of net sales in
1998, 1997 or 1996.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION (SFAS 131). This standard

F-14

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. SFAS 131 also
requires that all public business enterprises report information about the
revenues derived from the enterprise's products or services (or groups of
similar products or services), the countries in which the enterprise earns
revenues and hold assets and major customers regardless of whether that
information is used in making operating decisions. However, SFAS 131 does not
require an enterprise to report information that is not prepared for internal
use if reporting it would be impractical. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
SFAS 131 in 1998. The adoption of SFAS 131 did not have any impact on the
Company's financial position or results of operations.

RECLASSIFICATIONS

Certain amounts reported in prior years have been reclassified to conform
with the current year presentation.

2. OPERATIONS AND FINANCING

For the years ended December 31, 1998, 1997 and 1996, the Company recognized
net losses from continuing operations of $17,633,000, $14,057,000 and
$6,607,000, respectively. In addition, the Company realized net losses from its
discontinued operations aggregating $1,475,000, $1,561,000 and $30,192,000
during the respective annual periods. As a result, at December 31, 1998, the
Company has an accumulated deficit and net capital deficiency of $84,714,000 and
$15,798,000, respectively, and its current liabilities exceed its current assets
by approximately $13,093,000.

To meet its need for additional financing to meet its operating
requirements, in December 1998, the Company obtained $16.6 million from Ironwood
Telecom LLC (Ironwood) under a secured term loan facility, and in April 1999,
the Company obtained a line-of-credit facility providing for borrowings, based
on eligible accounts receivable, up to a maximum of $12.5 million. Accordingly,
management believes the Company has sufficient sources of financing to continue
operations throughout 1999 at planned levels of operations. The Company is
seeking to arrange additional financing that may take the form of either
additional debt or equity, but there is currently no committed source of such
additional financing.

Additionally, beginning in August 1997 and continuing through the year ended
December 31, 1998, the Company experienced declining revenues due to decreases
in the number of telephone customers and the number of active ISRs. These
decreases are the result of a number of factors including the following:

- Sanctions imposed by the California Public Utilities Commission in the
first quarter of 1998 and related compliance obligations imposed under a
stipulation among ICC, the California Attorney General and the Orange
County District Attorney. The sanctions and compliance obligations
followed findings that ICC had engaged in unauthorized switching of
customers' interexchange

F-15

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. OPERATIONS AND FINANCING (CONTINUED)
carriers during 1997. The order also required that several former senior
executives and directors leave the Company.

- ICC's failed attempt at a public offering of its common stock in September
1997.

- The termination of the proposed sale of all or substantially all of ICC's
assets to a third party in July 1998.

- The operational distraction caused by the Company's focus on the
regulatory actions against the Company, the aborted IPO and the potential
sale of ICC.

- The departure of several key ISRs to form a competitive telecommunications
marketing company and their efforts to hire Company employees and to
induce ISRs and telephone customers to leave ICC and join them in their
new operations.

Management believes the following improvements that have occurred in the
third quarter of 1998 and since the change in the composition of the Board of
Directors on September 29, 1998 in part alleviate these conditions.

- In April 1999, the Company obtained a line-of-credit facility providing
for borrowings, based on eligible accounts receivable, up to a maximum of
$12.5 million. Borrowings under this facility are secured by an interest
in substantially all the assets of the Company. The Company plans to use
the proceeds of the line-of-credit financing to execute its strategic plan
and fund operating requirements.

- In December 1998, the Company received $16.6 million from Ironwood Telecom
LLC (Ironwood) under a secured term loan facility to meet the Company's
short-term financing needs. The proceeds from this financing principally
were used to satisfy the Company's obligations to its long distance
carrier, WorldCom, its former lender, First Bank, and to pay certain
accrued liabilities. In April 1999, in connection with obtaining the
line-of-credit facility, Ironwood subordinated its interest in the assets
of the Company and adopted the financial covenants set forth in the
line-of-credit facility.

- In March 1999, the Company sold its interest in the common stock of
GenSource to the former owners of GenSource for forgiveness of notes
payable to the former owners aggregating $1,775,000. In connection with
the sale, the Company also received preferred stock of GenSource,
representing a 15% equity interest on a fully diluted basis, and the legal
dispute with the former owners of GenSource was settled.

- In October 1998, ICC renegotiated its contract with WorldCom resulting in
a decrease of the "take or pay" provisions of the contract from $1.1
billion to $250 million over a three year period, with the ability to
extend the contract for two additional years if necessary. The new
contract also resulted in an immediate decrease in the Company's telephone
rates, which allowed the Company to develop and market its new long
distance telephone service programs that management believes are among the
most competitive in the industry.

- In September 1998, the Company entered into a revised settlement agreement
for its pending class action lawsuit on terms more favorable than those
outlined in the proposed settlement in December 1997. The September 1998
proposed settlement is subject to final court approval.

F-16

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. OPERATIONS AND FINANCING (CONTINUED)
- In September 1998, the District Attorney of Orange County lifted a
restriction that required ICC to wait 24 hours before verifying that a new
customer wanted to sign up for ICC's telephone service. This restriction
had been a significant impediment to signing up new customers. The
verification procedures for signing up new customers were also reduced.

- In the third quarter of 1998, the Company sold 4.5 million shares of its
holdings of 10.7 million shares of Rapid Cast, raising cash of $2.7
million. The Company also anticipates selling its remaining ownership of
6.2 million shares of Rapid Cast, when appropriate, although it presently
has no specific arrangements to sell such shares.

- In July 1998, ICC settled a lawsuit with one of its leading former ISRs,
who has rejoined the Company's marketing network and is playing an
important role in the effort to revitalize ICC's network marketing
operations.

- In November 1998, John P. Casey, Chairman of the Board of Directors, and
Ironwood purchased substantially all of the then outstanding convertible
preferred stock and associated rights from certain former preferred
shareholders under arrangements that require Mr. Casey and Ironwood to
hold the stock for approximately one year. This provides an opportunity
for the Company to redeem such stock for a price representing no actual
profit except, in the case of Ironwood, for a carrying cost factor. The
Company hopes to redeem the preferred stock, if financially able, prior to
expiration of the redemption period. The redemption price is currently
estimated at $3.5 million, exclusive of costs and interest (the "Preferred
Price"). These arrangements provide a means of potentially avoiding a
dilution to the Company's shareholders of more than 10 million shares.
However, there is no assurance that the Company will have sufficient funds
to redeem the preferred stock. If the Company is not financially able to
redeem the preferred stock, Mr. Casey and Ironwood are obligated to offer,
on a pro-rata basis, the common stock issuable upon the conversion of the
preferred stock to the Company's common stockholders at the Preferred
Price plus certain costs adjusted for carrying costs and other expenses.

- Management is currently implementing the remediation phase of its project
to make its information systems year 2000 compliant. Remediation and
testing are expected to be complete at various dates through October 1999
including replacement of its mission critical billing and accounts
receivable system. In the event implementation of the new billing system
is delayed, the Company has developed a contingency plan which
contemplates transferring the billing and collection function to one or
more of the local exchange carriers or third party billing services that
the Company currently uses to bill a portion of its customer base.

ICC is also taking steps to revitalize its network marketing organization,
including developing new telecommunications products that are more competitive,
working closer with its ISRs to help them better understand the products and
services provided by ICC, developing new commission and bonus programs that will
make ICC more competitive in attracting new ISRs, and expanding its focus on ISR
recruiting from primarily a Southern California program to a nationwide program.
Management believes its new marketing plans will revitalize the Company's
efforts to recruit additional representatives. In addition to revitalizing its
network marketing organization, ICC also is undertaking a cost reduction program
that is anticipated to result in a more efficient operation and a reduced cost
structure. Lastly, the Company is seeking additional financing that may take the
form of either additional debt or equity.

F-17

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

2. OPERATIONS AND FINANCING (CONTINUED)

Management believes the Company has sufficient sources of financing to
continue operations throughout 1999 at planned levels of operations. However,
due to uncertainties inherent in the achievement of management's strategic plan,
there is no assurance that the Company will attain planned levels of operations.
Ultimately, the Company's long-term success is dependent upon its ability to
successfully execute its strategic plan, obtain additional long-term financing,
complete its year 2000 remediation, and ultimately attain sustained profitable
operations.

3. RELATED PARTY TRANSACTIONS

On March 31, 1997, the Company extended a loan to a former ISR in the amount
of $583,000. The note and accrued interest was due on March 31, 1999. At
December 31, 1998, the loan is fully reserved.

On November 5, 1996, the Company extended to a director of the Company a
loan of $278,000 at an interest rate of 10% per annum. The loan was repaid in
full, including interest, in July 1998, and the pledged stock was returned to
the director.

In 1995, the Company extended a loan to a former officer of the Company in
the amount of $342,000 used, in part, to purchase shares of the Company's common
stock. The loan is secured by 20,000 shares of common stock and, at December 31,
1998, is fully reserved.

See other related party disclosures in Note 2, "Operations and Financing"
and Note 3, "Shareholders' Equity."

4. FACILITIES AND EQUIPMENT

Facilities and equipment consist of the following:

DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)

Leasehold improvements..................................... $ 7,230 $ 9,643
Computer hardware and software............................. 6,420 6,605
Furniture and equipment.................................... 3,164 3,290
--------- ---------
16,814 19,538
Less accumulated depreciation and amortization............. (7,527) (5,093)
--------- ---------
$ 9,287 $ 14,445
--------- ---------
--------- ---------

Assets under capital leases at December 31, 1998, are $2,248,000, net of
accumulated amortization of $878,000. Amortization of equipment leased under
capital leases is included in depreciation and amortization expense in the
consolidated statement of operations.

5. IMPAIRMENT OF LONG-LIVED ASSETS

During 1998, the Company completed its evaluation of the recoverability of
certain long-lived assets at ICC. In connection with this evaluation, the
Company recorded a $1,633,000 non-cash write-down of the carrying value of
certain leasehold improvements to their estimated fair value.

F-18

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

6. LONG-TERM DEBT

Long-term debt consists of the following:

DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)

Ironwood term loan, net of original issue discount of $543.............. $ 16,057 $ --
Notes payable to former owners of GenSource............................. 1,775 1,910
Capital lease obligations............................................... 1,294 1,888
Revolving line-of-credit................................................ -- 8,440
--------- ---------
19,126 12,238
Less current portion of long-term debt.................................. 2,307 9,383
--------- ---------
$ 16,819 $ 2,855
--------- ---------
--------- ---------

IRONWOOD TERM LOAN

The Ironwood term loan bears interest at 12%, payable quarterly, is due
December 31, 2000 and is secured by substantially all of the assets of the
Company.

For arranging the term loan, Ironwood received an origination fee of
$400,000 and warrants in two tranches. The first tranche of warrants entitles
Ironwood to purchase two million shares of the Company's common stock at an
exercise price of $1.00 per share. These warrants are exercisable until 2004.
The second tranche of warrants entitles Ironwood to purchase one million shares
of the Company's common stock at an exercise price of $2.25 per share. These
warrants are exercisable on December 15, 1999 and for a period of five years
thereafter. The exercise price will be reduced and the number of warrants will
be increased in both tranches if the Company does not meet certain performance
targets in the fourth quarter of 1999 and the year 2000. The first and second
tranche of warrants were assigned values of approximately $124,000 and $40,000,
respectively, determined by independent appraisal. The value assigned to the
warrants and the origination fee (together, the original issue discount)
associated with the issuance of the term financing aggregated $564,000, and is
being recognized as additional interest expense over the term of the loan. The
remaining original issue discount is $543,000 at December 31, 1998. In April
1999, in connection with obtaining the line-of-credit facility, Ironwood agreed
to subordinate its right to receive payment on its debt from the Company and its
interest in the assets of the Company and adopted the financial covenants set
forth in the line-of-credit facility. In consideration for that subordination,
Incomnet agreed to issue warrants to Ironwood to purchase 1.25 million shares of
common stock. These warrants have an exercise price of $1.00 per share and a
five-year term.

CAPITAL LEASE OBLIGATIONS

The capital lease obligations are payable in variable monthly installments
through February 2003, bear interest at effective rates ranging from 5.65% to
11.06% and are secured by property and equipment with a net book value of
approximately $1,370,000 at December 31, 1998.

F-19

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

6. LONG-TERM DEBT (CONTINUED)
NOTES TO FORMER OWNERS OF GENSOURCE

In May 1997, the Company issued promissory notes payable to the former
owners of GenSource in connection with the acquisition of GenSource. The notes
obligated the Company to pay the former owners an aggregate of $1,927,000 over a
period of five years, plus interest of 8%, with payments commencing in May 1998.
In June 1998, the Company defaulted on payments under notes with two of the
former owners which total approximately $1,239,000. In March 1999, the Company
sold its interest in the common stock of Gensource in exchange for release from
liability of the Company under the promissory notes to the former owners of
GenSource. (SEE ALSO NOTE 1--"DISCONTINUED OPERATIONS" AND "NOTE
11--LITIGATION")

LINE OF CREDIT

On April 9, 1999, the Company entered into a loan and security agreement
(the Line of Credit) with a financial institution. Under the Line of Credit, the
financial institution agreed to make advances to the Company, based on eligible
receivables, of up to $12.5 million. Borrowings under the Line of Credit will
bear interest at the lender's reference rate plus 1%, but in no event less than
7%. The reference rate at the date of the agreement was 7.75%. The Line of
Credit expires in April 2002, is secured by substantially all the assets of the
Company, restricts expenditures for dividend distributions and certain capital
expenditures, and requires the Company to maintain minimum levels of tangible
net worth over the term of the agreement.

MINIMUM PAYMENTS

Principal payments on long-term debt are $2,307,000 in 1999, $16,939,000 in
2000, $236,000 in 2001 and $187,000 in 2002.

7. INCOME TAXES

Significant components of the provision for (benefit from) income taxes are
as follows:

YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)

Continuing operations--current:
Federal............................................ $ (100) $ -- $ 263
State.............................................. (353) 201 374
--------- --------- ---------
Total continuing operations.......................... (453) 201 637
--------- --------- ---------

Discontinued operations--deferred:
Federal.............................................. -- -- (7,182)
State................................................ -- -- (1,267)
--------- --------- ---------
Total discontinued operations........................ -- -- (8,449)
--------- --------- ---------
$ (453) $ 201 $ (7,812)
--------- --------- ---------
--------- --------- ---------

F-20

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

7. INCOME TAXES (CONTINUED)

The following is a reconciliation from the statutory federal income tax rate
to the Company's effective tax rate for income taxes provided on continuing
operations:

1998 1997 1996
----- ----- -----

Federal statutory tax rate................... (34.0%) (34.0%) (34.0%)
Losses producing no current tax benefit...... 31.9 33.9 28.8
Goodwill amortization........................ 0.6 0.1 5.2
State taxes.................................. (2.0) 1.5 6.2
Non-deductible expenses...................... 1.0 -- 4.5
----- ----- -----
Effective tax rate........................... (2.5%) 1.5% 10.7%
----- ----- -----
----- ----- -----

The components of the Company's deferred tax assets and liabilities are as
follows:

DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)

Deferred tax assets:
Net operating loss carryforwards...................... $ 11,569 $ 8,799
Allowance for doubtful accounts....................... 3,022 2,505
Accruals not currently deductible..................... 1,666 4,084
Other................................................. 546 126
--------- ---------
Total deferred tax assets............................... 16,803 15,514
Deferred tax liabilities--
Property and equipment, principally due to differences
in depreciation..................................... 87 2,345
--------- ---------
Total deferred taxes.................................... 16,716 13,169
Less valuation allowance................................ (16,716) (13,169)
--------- ---------
Net deferred taxes...................................... $ -- $ --
--------- ---------
--------- ---------

At December 31, 1998, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately $32
million and $9 million, respectively, expiring in various years between 2000 and
2018. Due to the change in ownership provisions of the Tax Reform Act of 1986,
net operating loss carryforwards for Federal and state income tax reporting
purposes are subject to annual limitations. Should a change in ownership occur,
net operating loss carryforwards may be limited as to use in future years.

F-21

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY

PREFERRED STOCK

The Company is authorized to issue up to 100,000 shares of preferred stock,
no par value. At December 31, preferred stock authorized, issued and outstanding
was as follows:

1998 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)

Redeemable convertible nonvoting preferred stock, Series A, stated value
$1,000 per share:
Authorized--4,000
Issued and outstanding--801 and 1,595 shares in 1998 and 1997, liquidation
preference of $837 at December 31, 1998................................. $ 716 $ 1,510
Redeemable convertible nonvoting preferred stock, Series B, stated value
$1,000 per share:
Authorized--2,900 shares
Issued and outstanding--1,242 and 2,434 shares in 1998 and 1997,
liquidation preference of $1,354 at December 31, 1998................... 1,056 2,248
Convertible preferred stock, Series C, stated value $1,000 per share:
Authorized--25 shares
Issued and outstanding--13, liquidation preference of $13 at December 31,
1998.................................................................... 25 --
Convertible preferred stock, Series D, stated value $100 per share:
Authorized--50 shares
Issued and outstanding--none.............................................. 5 --
--------- ---------
Total preferred stock....................................................... $ 1,802 $ 3,758
--------- ---------
--------- ---------

REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (Series A Preferred)--The
Series A Preferred has a cumulative noncompounded annual dividend of 2% payable
in cash or stock at the Company's option upon conversion of the preferred stock
into common stock, and prior to the payment of any dividends on the common
stock. The Series A Preferred has a liquidation preference of stated value per
share plus all cumulative unpaid dividends, whether or not declared by the
Company's Board of Directors. Upon any liquidation or change of control of the
Company (i.e. transfer of more than 50% of its voting stock), the Series A
Preferred shareholders are entitled to the first priority in payment from the
Company's assets, before any payments are made on the Company's common stock or
other series of preferred stock, until the liquidation preference is paid in
full. The Series A Preferred shareholders may convert each share of Series A
Preferred into the number of shares of the Company's common stock calculated as
stipulated in the Company's Articles of Incorporation. If for any reason a
registration statement covering the shares of common stock issuable upon the
conversion of the Series A Preferred is not in effect with the Securities and
Exchange Commission at the time of a valid conversion by a Series A Preferred
shareholder, then the Conversion Price is reduced by 3% per month for each of
the first three months that the effectiveness of the registration is late. The
Company has the right to cause a conversion of the Series A Preferred Stock into
common stock on the same terms at any time after one year after the Series A
Preferred Stock is issued. The Company has the right to redeem the Series A
Preferred for its issuance price plus cumulative unpaid dividends if the
Company's

F-22

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
stock trades at a price which averages $2.00 per share or less for any period of
five consecutive trading days after the Series A Preferred is issued. The
conversion price is subject to adjustment under certain conditions.

REDEEMABLE CONVERTIBLE SERIES B PREFERRED STOCK (Series B Preferred)--The
Series B Preferred has a cumulative noncompounded annual dividend of 6% payable
in cash or stock at the Company's option at conversion and prior to the payment
of any dividends on the Company's common stock. No dividends may be declared or
paid on the Series B Preferred until all cumulative unpaid dividends have been
declared and paid on the outstanding Series A Preferred. The Series B Preferred
has a liquidation preference of stated value per share plus all cumulative
unpaid dividends, whether or not declared by the Company. No liquidation
preference may be paid to the holders of Series B Preferred until the full
liquidation preference has been paid to the holders of the outstanding Series A
Preferred. The Series B Preferred shareholders may convert each share of Series
B Preferred into the number of shares of the Company's common stock calculated
as stipulated in the Company's Articles of Incorporation. If for any reason a
registration statement covering the shares of common stock issuable upon the
conversion of the Series B Preferred is not in effect with the Securities and
Exchange Commission at the time of a valid conversion by a Series B Preferred
shareholder, then the Conversion Price is reduced by 3% per month for each of
the first three months that the effectiveness of the registration is late. The
Company has the right to cause a conversion of the Series B Preferred Stock into
common stock on the same terms at any time after one year after the Series B
Preferred Stock is issued. The Company has the right to redeem the Series B
Preferred for its issuance price plus cumulative unpaid dividends if the
Company's stock trades at a price which averages $2.00 per share or less for any
period of five consecutive trading days after the Series B Preferred is issued.
The conversion price is subject to adjustment under certain conditions.

In connection with the sale of the Series B Preferred in 1997, a portion of
the proceeds has been allocated to a beneficial conversion feature, which is the
right of the preferred shareholder to convert the securities into common stock
after the earlier of 120 days after the date of the issuance or the date the
securities are registered. Accordingly, the difference between the conversion
price and fair value of stock into which it is convertible, equal to $360,000
for the Series B Preferred, has been allocated to common stock. This amount has
been recognized as a dividend to the preferred shareholders over the minimum
period in which the shareholders could have realized that return, and net loss
applicable to common stock has been increased in calculating loss per share. Net
loss applicable to common stock has also been increased in calculating loss per
share for the dividends in arrears on both series of preferred stock.

CONVERTIBLE SERIES C PREFERRED STOCK (Series C Preferred)--Each share of
Series C Preferred can converted into shares of common stock, at the conversion
ratio stipulated in the Articles of Incorporation, at the option of the holder
in whole or in part at any time; provided that the number of shares of common
stock authorized are sufficient to issue shares of common stock upon conversion.
Series C Preferred shareholders are entitled to a number of votes equal to the
number of shares of common stock into which the preferred shares could have been
converted immediately prior to the record date for such vote. Series C Preferred
holders have the right to receive any dividend or distribution declared on the
common stock of the Company on an as-converted-to common stock basis. The Series
C Preferred has a liquidation preference of stated value per share plus all
cumulative

F-23

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
unpaid dividends. Such payment will be subject to prior payment in full or
liquidation preferences with respect to Series A and Series B Preferred Stock.
Payments to Series C Preferred on liquidation will be made pari passu with the
Series D Preferred Stock discussed below but prior and in preference to the
Company's common shareholders.

CONVERTIBLE SERIES D PREFERRED STOCK (Series D Preferred)--Each share of
Series D Preferred will be converted into shares of common stock, at the
conversion ratio stipulated in the Articles of Incorporation, at the option of
the holder in whole or in part at any time; provided that the number of shares
of common stock authorized are sufficient to issue shares of common stock upon
conversion. Series D Preferred holders are entitled to a number of votes equal
to the number of shares of common stock into which the preferred shares could
have been converted immediately prior to the record date for such vote. Series D
Preferred holders have the right to any dividend or distribution declared on the
common stock of the Company. Series D Preferred has a liquidation preference of
stated value per share, plus all cumulative unpaid dividends. Such payment will
be subject to prior payment in full of liquidation preferences with respect to
Series A and Series B Preferred stock. Payments to Series D Preferred on
liquidation will be made pari passu with Series C Preferred but prior and in
preference to the Company's common shareholders.

COMMON STOCK ISSUABLE

At December 31, 1998, a total of 21,437,000 shares of common stock are
potentially issuable for conversion of convertible preferred stock, exercise of
options and exercise of warrants, as well as for settlement of pending
litigation as described in the table below. The conversion or exercise of such
claims on the common stock of the Company are subject to the approval by the
Company's shareholders of an increase in the number of authorized shares of
common stock (Stock Approval) which is expected to occur June 15, 1999.

COMMON SHARES
ISSUABLE ON
CONVERSION, EXERCISE
OR SETTLEMENT
---------------------
(IN THOUSANDS)

Convertible preferred stock............................................ 12,112
Warrants............................................................... 4,490
Litigation settlement (maximum per tentative settlement)............... 4,125
Common stock options................................................... 410
Preferred stock options................................................ 300
------
21,437
------
------

F-24

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)

ACQUISITION OF PREFERRED SHARES BY THE CHAIRMAN OF THE BOARD

In connection with the exercise of an option to acquire shares of Series A
and Series B Preferred pursuant to a previous agreement reached between the
Company's Chairman and certain preferred stock owners on November 5, 1998,
Ironwood loaned the Chairman approximately $2.1 million, the proceeds of which
were used to exercise the option. The Chairman is obligated to allow the Company
to repurchase the preferred stock at his acquisition cost (approximately $2.4
million in the aggregate or $0.29 per share of common stock after conversion)
plus expenses, including the interest charged under the loan to the Chairman
from Ironwood. If the Company is not able to repurchase the preferred stock by
November 5, 1999, these shares will be converted into common stock and offered
for sale in a rights offering to the Company's common shareholders at a purchase
price equal to the Chairman's acquisition cost plus expenses. The preferred
stock is convertible into approximately 8.5 million shares of the Company's
common stock.

TRANSACTIONS WITH OTHER PREFERRED HOLDERS

On November 4, 1998, Ironwood entered into transactions similar to the
Chairman's option exercise transaction with five holders of preferred stock (the
Other Preferred Holders). Under these transactions, Ironwood agreed to purchase
shares of Series A and Series B Preferred convertible into an aggregate of
approximately 2.3 million shares of the Company's common stock (the Other
Preferred Stock). Ironwood paid an aggregate amount of approximately $1.1
million to these five holders. Under the agreements between the Company and
Ironwood, Ironwood is obligated to allow the Company to redeem the Other
Preferred Stock at its acquisition cost (approximately $1.1 million in the
aggregate or $0.48 per share of common stock after conversion) plus expenses,
including a carrying charge of 18% per annum on the purchase price paid by
Ironwood. If the Company is not able to repurchase the Other Preferred Stock by
April 30, 2000, under these agreements, the Other Preferred Stock will be
converted into common stock and offered for sale in a rights offering to the
Company's common shareholders at a purchase price equal to Ironwood's
acquisition cost plus interest and expenses.

For arranging certain interim financing, the loan to the Chairman, and
payments to the Other Preferred Shareholders, Ironwood received an origination
fee of $100,000 and warrants to purchase 600,000 shares of the Company's common
stock at an exercise price of $1.00. All of the warrants issued in connection
with the interim financing have a five year term exercisable until 2003. The
value assigned to these warrants of $116,000, based on independent appraisal,
and the origination fee have been reflected as additional interest expense in
the accompanying statement of operations for the year ended December 31, 1998.

In consideration for the settlement of certain claims against the Company,
the Company issued warrants to purchase 244,870 shares of common stock to two
holders of Other Preferred Stock, exercisable at $1.00 per share. The two
holders also obtained registration rights which will require the Company to
register the common stock underlying these warrants under certain circumstances.
The Company also issued warrants to purchase 18,000 shares of common stock to
three holders of Other Preferred Stock, exercisable at $1.09 per share. These
warrants were valued at approximately $47,000 and $1,000, respectively, and have
been reflected as a litigation settlement cost in the accompanying statement of
operations for the year ended December 31, 1998. On September 29, 1998, the
Company granted 13 shares of the Series C Preferred to the Company's Chief
Executive Officer. These preferred

F-25

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
shares are convertible into 1.3 million shares of the Company's common stock.
The estimated fair value of these Series C Preferred shares, determined by
independent appraisal, approximated $25,000 and was charged to compensation
expense in the accompanying statement of operations.

DIVIDENDS

Dividends on the Series A and B Preferred are due only upon conversion of
the preferred to common stock. Cumulative dividends in arrears at December 31,
1998 aggregate $36,000 or $45 per share on the Series A Preferred and $112,000
or $90 per share on the Series B preferred. During 1998, 1,986 shares of Series
A and Series B Preferred were converted to 6,666,458 shares of common stock.
Dividends of $41,000 were recorded in connection with this conversion. During
1997, 845 shares of Series A and Series B Preferred were converted to 386,006
shares of common stock.

STOCK OPTIONS

Effective February 5, 1996, the Company adopted a qualified stock option
plan that replaced a previous plan adopted in 1994. This plan is for directors,
employees and key consultants of the Company and allows for the issuance of up
to 1.5 million shares of common stock at an exercise price equal to the fair
market value of the Company's common stock on the date of grant.

CONSULTANT OPTION

On September 29, 1998, the Company granted an option to purchase 75,000
shares of the Company's common stock at $2.00 per share (i.e., the closing
market price on September 29, 1998) to a consultant to the Company (the
"Consultant Option"). The shares of common stock issuable under the Consultant
Option are subject to Stock Approval. The Consultant Option may be exercised at
any time during the 10-year period following date of issuance. This option was
valued at $6,000 and has been reflected in general and administrative expense in
the accompanying statement of operations for the year ended December 31, 1998.

DIRECTOR STOCK OPTION GRANTS

On September 29 and October 2, 1998, the board approved the grant of an
option to purchase 10 shares of a Series D Preferred to each of the Company's
three new outside directors (the "Director Options"). The Director Options have
a term of ten years and vest over a two-year period. Each share of preferred
stock will be convertible into 10,000 shares of the Company's common stock or a
total of 300,000 common shares. The exercise price for the Director Options was
based on the closing price for the Company's common stock at the time of the
grants of $2.19 per share.

A fourth director was granted an option to purchase 100,000 shares of the
Company's common stock at the exercise price of $2.25. The option has a term of
ten years, vests over a two-year period, and expires on October 2, 2008.

The Consultant Option and Director Options were granted pursuant to an
exemption from registration under section 4(2) of the Securities Act of 1933 on
the basis that each of the recipients had the appropriate investment intent and
the offering was targeted to a select group of officers, directors and one
consultant.

F-26

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION ACTIVITY

A summary of the Company's stock option activity, and related information
for the years ended December 31 follows (in thousands, except per share data):

1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
----------- ----------- ----------- ----------- ----------- -----------

Outstanding at beginning of the year............ 945 $ 4.60 780 $ 4.68 300 $ 4.87
Granted......................................... 175 2.14 165 4.25 505 4.56
Forfeited/expired............................... 710 $ 4.64 -- -- 25 $ 4.56
----- ----- -----------
Outstanding at end of the year.................. 410 $ 3.49 945 $ 4.60 780 $ 4.68
----- ----- -----------
----- ----- -----------
Exercisable at end of the year.................. 360 $ 3.34 645 $ 4.53 390 $ 4.64
----- ----- -----------
----- ----- -----------
Weighted-average fair value of options granted
during the year............................... $ 205 $ 1.17 $ 482 $ 2.92 $ 1,823 $ 3.61
----- ----- -----------
----- ----- -----------

Options outstanding under the 1996 plan are exercisable for a period of five
years after vesting through termination of the plan in February 2006. The number
of options available for grant under the 1996 plan was 1,090,000 at December 31,
1998.

Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: dividend yield of 0.0% for
all three years; volatility factors of the expected market price of the
Company's common stock of 121%, 66% and 71%; risk-free interest rates of 5.25%,
6.25% and 5.25%; and a weighted-average expected life of five years for the
options for all three years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

F-27

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for loss per share
information):

1998 1997 1996
---------- ---------- ----------

Pro forma net loss from continuing
operations................................ $ (17,766) $ (14,138) $ (7,133)
Pro forma net loss.......................... $ (19,241) $ (15,699) $ (38,202)
Pro forma net loss per common share--from
continuing operations-- basic and
diluted................................... $ (1.04) $ (1.08) $ (0.53)
Pro forma net loss per common share--basic
and diluted............................... $ (1.12) $ (1.20) $ (2.86)

ICC MANAGEMENT INCENTIVE PLANS

A Management Incentive Agreement dated January 28, 1997 provides for the
establishment of three stock option plans and one convertible debt plan for the
purchase of securities of the Company's subsidiary, ICC. The exercise price of
all stock options issued under the option plans will not be less than the fair
market value of ICC's common stock on the date of grant. In addition, the
conversion price of the convertible debt issued under the convertible debt plan
will not be less than the fair market value of ICC's common stock on the date of
the issuance of the convertible debentures.

The ICC incentive plans were put in place in conjunction with the proposed
IPO of ICC in 1997. That IPO was terminated in the third quarter of 1997. As a
result, management has decided to no longer grant or issue additional options
under these plans.

KEY INDEPENDENT SALES REPRESENTATIVES STOCK OPTION PLAN. A total of
2,884,615 shares of ICC common stock are reserved for issuance under this plan.
Options to purchase 892,171 shares of ICC's common stock were granted to key
independent sales representatives who were corporate team members on February
28, 1997. The stock option plan provides for 50% of the awards issued to vest on
June 30, 1998 and the remaining 50% will vest on June 30, 1999. At December 31,
1998, this plan had 594,921 options outstanding.

EXECUTIVES, EMPLOYEES AND KEY CONSULTANTS STOCK OPTION PLAN. A total of
3,705,001 shares of common stock are reserved for issuance under this plan.
Options representing 1,446,026 of these reserved shares are subject to a
time-in-service only vesting requirement. Options representing 1,682,051 of the
reserved shares will vest in four equal annual installments on the anniversary
of the grant date, subject to the acceleration. No more than 480,770 shares
issuable pursuant to options reserved under the above provisions may be issued
to persons eligible to receive convertible debt units under the Senior Executive
and Consultant Convertible Debt Plan.

Additional options representing 576,924 shares will be reserved under this
plan for issuance to persons eligible to receive convertible debt units under
the Senior Executive and Consultant Convertible Debt Plan. These options were
granted upon the creation of the plan but do not vest until

F-28

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
January 31, 2002. The vesting of these options will accelerate if the Company
achieves revenues for any calendar quarter ending prior to January 1, 2000, as
follows:

NUMBER OF SHARES
QUARTERLY REVENUES VESTING
- ------------------ -----------------------

1$00 million...... 192,308
1$25 million...... 192,308
1$80 million...... 192,308

Options to purchase 3,127,544 shares of ICC's common stock were granted
under this plan in the first half of 1997. At December 31, 1998, 463,450 options
are outstanding under this plan.

BOARD OF DIRECTORS PLAN. A total of 300,000 shares are reserved for issuance
under this plan. Each director of ICC will be eligible to receive an option to
purchase up to 25,000 shares of ICC common stock. Such options vest in four
equal annual installments on each anniversary date of the option grant date.
There are no options outstanding under this plan at December 31, 1998.

SENIOR EXECUTIVE AND CONSULTANT CONVERTIBLE DEBT PLAN. A total of 2,664,231
shares are reserved for issuance under this plan. On April 11, 1997, ICC issued
2,664,231 convertible debt units in the aggregate principal amount of $7,993,000
(or $3.00 per debt unit) to the former senior executives of the Company. The
convertible debt units are due on April 11, 2002, bear interest at 6.49% and are
convertible at $3.01 per unit into 2,664,231 shares of common stock of ICC.

The purchase price for each debt unit issued was $3.00 per unit or
$7,993,000 in the aggregate. The former executives paid the purchase price to
acquire the debt units by delivery of promissory notes payable to ICC for the
entire purchase price. The promissory notes are also due on April 11, 2002 and
bear interest at 6.74%. The convertible debt units and the related promissory
notes have been offset in the accompanying consolidated financial statements.
The Company has considered these transactions as equivalents to stock option
issuances since no cash has traded hands and the primary value, if any, from
this transaction would be the convertibility of the convertible debt units into
shares of ICC's Common Stock as indicated above. The Company is in dispute with
the holders of these instruments related to other matters (Note
11--"Litigation").

F-29

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the ICC stock option activity, including the convertible debt
units treated as stock option equivalents, and related information for the years
ended December 31 follows (in thousands, except per share data):

1998 1997
------------------------------ ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------- --------------- ----------- ---------------

Outstanding at the beginning of the
year................................ 6,061 $ 3.30 -- $ --
Granted............................. -- -- 6,784 3.33
Exercised........................... -- -- -- --
Forfeited........................... 2,338 3.50 723 3.55
----- ----- ----------- -----
----- ----- ----------- -----
Outstanding at the end of the year.... 3,723 $ 3.15 6,061 $ 3.30
----- ----- ----------- -----
----- ----- ----------- -----
Exercisable at the end of the year.... 3,174 $ 3.15 2,689 $ 3.30
----- ----- ----------- -----
----- ----- ----------- -----
Weighted-average fair value of options
granted during the year............. -- -- $ 22,591 $ 3.33
----- -----------
----- -----------

WARRANTS

The Company has issued warrants to purchase the Company's common stock to
certain individuals or organizations as follows (in thousands, except per share
data):

NUMBER OF OUTSTANDING EXERCISE PRICE PER
DATE ISSUED AT 12/31/98 SHARE EXPIRATION
- --------------------------- ----------------------- ------------------- -----------

5/9/96................... 100 6.00 5/9/01
5/9/96................... 50 7.00 5/9/01
12/9/96................... 360 3.75 12/9/99
12/17/96................... 12 2.94 12/17/01
7/29/97................... 50 3.50(2) 7/29/99
11/3/97................... 55 2.00(2) 11/3/99
1/21/98................... 18 1.09 1/21/01
11/4/98................... 500 1.00(1) 11/04/03
11/5/98................... 245 1.00 11/5/01
11/16/98................... 100 1.00(1) 11/16/03
12/15/98................... 1,000 2.25(1) 5/20/04
12/15/98................... 2,000 1.00(1) 12/15/04
-----
4,490
-----
-----

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

(1) These warrants were issued pursuant to the Ironwood Bridge Loan and Term
Loan financing. The exercise price and the number of shares issuable are
subject to adjustment. The holder has been granted registration rights with
respect to the common stock underlying these warrants. (See Note 7)

F-30

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

8. SHAREHOLDERS' EQUITY (CONTINUED)
(2) These warrants were issued as part of two Series B Convertible Preferred
Stock offerings by the Company on July 29, 1997 and November 3, 1997,
respectively.

SHORT SWING PROFITS

In January 1996, the Company was served with a derivative shareholders
lawsuit entitled RICHARD MORALES VS. INCOMNET, INC. AND SAM D. SCHWARTZ, 96
Civil 0225 in the United States District Court for the Southern District of New
York, alleging violations of Section 16(b) of the Securities Exchange Act of
1934, as amended, and demanding that the Company assert claims against Mr.
Schwartz for the payment of short-swing profits plus interest. Mr. Schwartz has
retained separate counsel for this action. In early July 1996, Mr. Schwartz
deposited 800,000 shares of his Incomnet, Inc. common stock into a
court-approved escrow account with the Company's New York counsel as security
for his obligation to pay short swing profits. On February 21, 1997, the
plaintiffs and Sam Schwartz entered into a stipulated settlement pursuant to
which Mr. Schwartz agreed to pay $4,250,000 to the Company as full payment of
his short swing profit obligation to the Company. On July 10, 1997, the United
States District Court for the Southern District of New York gave final approval
to the settlement of the lawsuit. In the final settlement, Mr. Schwartz
delivered to the Company 1,047,966 shares of the Company's common stock and
$600,000 in cash for attorney's fees and expenses directly to the shareholder's
counsel.

F-31

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

9. OTHER OPERATING EXPENSE

The major components of Other Operating Expense are as follows for the years
ended December 31 (in thousands):

1998 1997 1996
--------- --------- ---------

Loss on disposal of equipment...................... $ 815 $ -- $ --
Settlement of Public Utilities Commission action
against ICC and related fines.................... 462 1,652 --
Settlement of actions with officers/shareholders... 99 -- 2,750
Legal expenses related to aborted ICC spin-off..... 19 478 --
Settlement of class action......................... -- 8,687 --
Related liquidated damages......................... -- 621 --
Abandonment of asset after PUC action.............. -- 900 --
Other, net......................................... 182 189 218
--------- --------- ---------
$ 1,577 $ 12,527 $ 2,968
--------- --------- ---------
--------- --------- ---------

10. COMMITMENTS

LEASES

The Company leases its office and operating facilities and certain equipment
under noncancelable leases. In April 1997, the Company entered into a new lease
agreement on its primary facility in Irvine. The lease provides for an original
non-cancelable term of five years ending in April 2002 and seven five-year
extension periods at lease rates based on the consumer price index. The Company
subleases a portion of this space under a noncancelable four year agreement with
monthly income of approximately $20,000. The sublease is dated September 1998
and expires in April 2002. The aggregate future minimum rentals to be received
under this sublease is $806,000 at December 31, 1998.

Future minimum annual rentals under operating lease arrangements at December
31, 1998 are as follows (in thousands):

OPERATING
LEASES
-----------

1999............................................................................... $ 2,011
2000............................................................................... 1,610
2001............................................................................... 1,330
2002............................................................................... 646
2003............................................................................... 371
Thereafter......................................................................... 1,189
-----------
Total minimum lease payments....................................................... $ 7,157
-----------
-----------

Although the Company is not obligated to exercise any of the extension
period renewals for the Irvine facility, management expects to exercise the
first five-year renewal.

Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$2,565,000, $2,068,000, and $800,000, respectively. Sublease income was $81,000
in 1998.

F-32

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

10. COMMITMENTS (CONTINUED)
WORLDCOM CONTRACT

Since September 1995, the Company has had a carrier contract with WorldCom.
Pursuant to the contract, renegotiated in October 1998, the Company has agreed
to purchase $250 million in telephone service over a three-year period, with the
ability to extend any shortfall purchase requirements for an additional two
years. In addition, WorldCom released its security interest in ICC's customer
accounts and subscriber base.

Minimum purchase requirements under the WorldCom contract are as follows (in
millions):

YEARS ENDING DECEMBER 31, COMMITMENT
- -------------------------------------------------------------------------------- -------------

1999............................................................................ $ 24.5
2000............................................................................ 50.5
2001............................................................................ 52.5
------
$ 127.5
------
------

During the years ended December 31, 1998, 1997, and 1996, the Company
purchased $28.6 million, $59.4 million and $44.4 million, respectively, of
telephone services from WorldCom under its purchase commitment. In March 1998,
WorldCom extended credit to ICC of up to $3 million at an interest rate of 18%
per annum under terms of the prior carrier contract. On December 15, 1998, ICC
repaid its obligation to WorldCom out of proceeds from the Ironwood term loan.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with the Company's
Chief Executive Officer, Chief Financial Officer and a services agreement with
the Chairman. These agreements provide for aggregate annual salary and fees of
up to approximately $1.2 million. The agreements are three years in duration and
expire through December 2001.

OTHER COMMITMENTS

The Company has also guaranteed the obligations of the Chairman to Ironwood
in the amount of $2.1 million in connection with the Chairman's purchase of
preferred stock (Note 8). In addition, the Company has also agreed to pay
certain of the Chairman's legal expenses of approximately $312,000 incurred in
connection with the preferred stock transaction.

In April 1998, the Company settled litigation with an affiliate. As a part
of that settlement, the Company is obligated to pay the affiliate $50,000 per
month for sixteen months for services to be rendered by the affiliate under the
settlement agreement. In addition, the Company committed to pay rent expense on
behalf of the affiliate in the amount of $22,000 per month for six months.

F-33

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION

The following is a description of certain pending legal proceedings in which
Incomnet is a party. No assurance is given that any of these legal proceedings
will not have a material adverse impact on the business, financial condition or
results of operation of Incomnet.

On October 7, 1997, Incomnet reached a tentative settlement of the lawsuit.
The proposed 1997 settlement consisted of an agreement by Incomnet to pay
$500,000 in cash plus securities with a value of $8.15 million for a total
settlement value of $8.65 million. Because of a decline in the value of
Incomnet's stock beginning in July 1997, this proposed settlement could not
proceed under its terms. In 1998, Incomnet and the class plaintiffs began to
negotiate new settlement terms.

In September 1998, Incomnet entered into a new written settlement agreement
with the class plaintiffs. The settlement agreement is subject to court approval
and satisfaction of certain other conditions. The terms of the settlement
include payment to the plaintiffs of a total of $500,000, reimbursement of
certain expenses up to a maximum of $100,000 and issuance of a certain number of
shares of Incomnet's common stock based on a formula. The maximum number of
shares of Incomnet common stock that are to be issued in accordance with the
formula under the settlement agreement is 4,125,000, assuming a $1 per share
trading price at the time the formula is applied. The minimum number of shares
of common stock that are to be issued under the settlement agreement is
1,375,000 shares, assuming a $3 per share trading price at the time the formula
is applied. Prior to completion of the settlement agreement and issuance of the
shares in accordance with that agreement, Incomnet's shareholders must approve
an amendment to Incomnet's Articles of Incorporation to increase the authorized
number of shares of common stock. It is anticipated that the closing of the
settlement agreement and issuance of shares will occur no earlier than June
1999. The Court has preliminarily approved the settlement. A hearing on final
approval is scheduled for May 20, 1999. There is no assurance that this new
settlement will be approved and consummated. Should the settlement not be
approved, Incomnet intends to vigorously defend the lawsuit. The case is still
in the discovery phase. The Company accrued the orginal settlement amount of
$8.65 million in the accompanying balance sheet and statement of operations for
the year ended December 31, 1997. The Company does not intend to adjust the
accrued litigation settlement in the consolidated financial statements until
closing and final approval of the settlement agreement, approval of the related
amendments to the articles of

F-34

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION (CONTINUED)
incorporation to increase the authorized number of shares of common stock of the
Company and elimination of any other uncertainties related to the settlement.

The following lawsuits are in varying stages of the legal process and, as a
result, the Company is unable to estimate the probability of the outcome or a
range of potential loss, if any.

JAMES A. BELTZ, ET AL. V. SAMUEL D. SCHWARTZ, ET AL. On July 22, 1997,
Incomnet was named in a lawsuit, JAMES A. BELTZ, ET. AL. V. SAMUEL D. SCHWARTZ,
RITA SCHWARTZ, STEPHEN A. CASWELL, JOEL W. GREENBERG, INCOMNET, INC., DAVID
BODNER AND MURRAY HUBERFELD, Case No. 97-1678 (MJD/AJB), in the United States
District Court for the District of Minnesota. The lawsuit was filed by
approximately twenty plaintiffs who were allowed to opt out of the GAYLES class
action lawsuit to pursue a lawsuit on their own. The complaint alleges that Mr.
Schwartz and the other defendants created a fraudulent scheme to drive up the
price of Incomnet's stock in violation of Sections 9, 10(b) and 20(a) of the
Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and
Minnesota law. The lawsuit alleges losses by the plaintiffs of approximately
$1.5 million and seeks unspecified damages. The case is in the discovery phase.
On or about March 24, 1998, the plaintiffs in this suit plus several additional
plaintiffs commenced a parallel state court action entitled JAMES A. BELTZ, ET.
AL. V. SAMUEL D. SCHWARTZ AND RITA L. SCHWARTZ, STEPHEN A. CASWELL, JOEL W.
GREENBERG, INCOMNET, INC., DAVID BODNER, AND MURRAY HUBERFELD, Case No. MC
98-00674, in the State of Minnesota, County of Hennepin. This state lawsuit
brings causes of action for violations of Minnesota statutes covering securities
fraud, consumer fraud, control person liability and conspiracy to defraud based
on the same factual allegations pleaded in the federal suit. Plaintiffs allege
losses of over $1.8 million and the lawsuit seeks unspecified damages. The case
will enter the discovery phase should court-sponsored mediation efforts fail to
resolve the parties' disputes. Incomnet plans to vigorously defend this lawsuit.

F-35

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION (CONTINUED)
causes of action against other unrelated defendants. Plaintiff claimed economic
losses of approximately $2.7 million.

On June 24, 1997, Mr. Schwartz answered Incomnet's lawsuit against him
denying the allegations and counterclaiming for (i) enforcement of any payments
due under his severance agreement with Incomnet, (ii) indemnification against
third party claims, and payment of the same settlement to him as was paid to
certain prior noteholders who purchased convertible notes from Incomnet on
February 8, 1995. Incomnet intends to vigorously prosecute this action and
defend against Mr. Schwartz's counterclaims. The lawsuit is in the discovery
phase. A trial date is set for February 2, 2000.

F-36

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION (CONTINUED)
Mrs. Schwartz seeks reimbursement of the legal expenses which she incurred as a
result of an investigation by the Securities and Exchange Commission of Incomnet
and as a defendant in the BELTZ opt-out cases, which are ongoing. Mrs. Schwartz
claims that because she is a former member of the Board of Directors, she is
entitled to reimbursement for her legal fees based upon the Articles of
Incorporation of Incomnet. The lawsuit is presently in the discovery phase.
Incomnet plans to vigorously defend this lawsuit. A trial date is set for
February 2, 2000.

LAWSUITS BY TWO FORMER OWNERS OF GENSOURCE CORPORATION. On September 23,
1998, Jerry C. Buckley and Ralph Flygare, two former owners of GenSource
Corporation, filed a lawsuit entitled JERRY BUCKLEY, RALPH FLYGARE ET AL. VS.
INCOMNET, INC., GENSOURCE CORPORATION AND MARK RICHARDSON, Case No. LC 046 449,
in the Superior Court of the State of California, Los Angeles County. In the
lawsuit, the plaintiffs alleged that Incomnet defaulted on payments under
promissory notes between Incomnet and the plaintiffs and sought damages of
approximately $1.2 million. This lawsuit was settled and dismissed as part of
the sale of GenSource back to the former owners in March 1999. The sale of
GenSource also resolved potential lawsuits by two other former shareholders of
GenSource.

F-37

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION (CONTINUED)

ICC V. JERRY BALLAH, ET AL. On July 21, 1998, ICC sued Jerry Ballah, a
former officer, director and consultant, and others in an action entitled
NATIONAL TELEPHONE & COMMUNICATIONS, INC. V. JERRY BALLAH, WORLD TECHNOLOGIES
MARKETING, INC., ET AL., Case No. 797154, in the Superior Court of California,
Orange County. ICC asserts claims against Mr. Ballah and other defendants for
breach of contract, misappropriation of trade secrets, intentional interference
with business relationships, fraud and related claims in connection with
defendants' start-up of a competing business and solicitation of ICC's employees
and independent sales representatives and diversion of ICC's telephone customers
to businesses owned or controlled by defendants. ICC filed its second amended
complaint in February 1999.

On October 29, 1998, former ICC independent sales representative Chutapa
Varavarn commenced an action in the Superior Court of the State of California,
Orange County, entitled CHUTAPA VARAVARN V. INCOMNET, INC., ET AL.,Case No.
801412. The factual and legal allegations are substantially similar to the
allegations in the CHAN lawsuit and plaintiff seeks damages, including punitive
damages. Incomnet intends to vigorously defend this lawsuit.

F-38

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION (CONTINUED)
commissions based on his development of sales territories and wrongfully
deprived him of other income. Plaintiff asserts claims for fraud, unfair
business practices, negligence, wrongful discharge and unpaid wages and seeks
compensatory and punitive damages. The case is in the discovery phase and a
trial date is set for October 4, 1999. Incomnet intends to vigorously defend
this lawsuit.

JACOBS ARBITRATION. On March 19, 1999, Edward Jacobs, former President and
Chief Executive Officer of ICC, commenced an arbitration action against ICC
before the American Arbitration Association, seeking relief in the amount of
$549,777, plus interest and attorneys' fees, based upon an alleged breach of an
employment agreement by ICC. ICC has not yet filed an answering statement, and a
trial date has not yet been set. Incomnet plans to vigorously defend this
arbitration proceeding.

JACOBS V. ICC (LABOR COMMISSION). On August 12, 1998, Edward Jacobs, former
President and Chief Executive Officer of ICC, initiated a proceeding against ICC
before the Labor Commissioner of the California Department of Industrial
Relations, known as EDWARD R. JACOBS V. NATIONAL TELEPHONE & COMMUNICATIONS,
INC., Case No. 18-34441-002-182/031. In this Labor Commission proceeding, Mr.
Jacobs claims that he is owed compensation for earned and unused vacation time
totaling $106,154, plus penalties and attorneys' fees. ICC denies that it has
any such obligation to Mr. Jacobs. The hearing on Mr. Jacobs' claims commenced
on March 11, 1999, but was not completed. The hearing is currently set to
continue on June 21, 1999. Incomnet intends to continue to vigorously defend
this proceeding.

F-39

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

11. LITIGATION (CONTINUED)
agreement between CCI and ICC and owes CCI a sum of $127,038, interest and
reasonable costs, fees and expenses associated with its lawsuit. The case is in
the discovery phase and a trial date is set for July 26, 1999. Incomnet intends
to vigorously defend this lawsuit.

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. In August 1994, Incomnet
was notified by the Pacific Regional Office of the Securities and Exchange
Commission that the Commission had initiated an informal inquiry of Incomnet. In
September 1994, the Commission issued a formal order of private investigation.
The Commission's investigation subsequently focused on press releases issued by
Incomnet on January 17 and 18, 1995, and September 6, 1995, and on a report on
Form 8-K issued by Incomnet on August 28, 1995, which the Commission alleged
contained untrue statements of material fact. On May 14, 1998, Incomnet and two
former directors of Incomnet, Stephen A. Caswell and Joel W. Greenberg, entered
into an Offer of Settlement and Order with the Commission pursuant to which they
agreed, without admitting or denying any wrongdoing, not to violate Section
10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-2,
13a-11 and 13a-13 promulgated thereunder. No civil penalties or other financial
sanctions were imposed on any of the parties. The final administrative order was
entered by the SEC on July 30, 1998.

From time to time, Incomnet is also involved in litigation arising from the
ordinary course of business, the ultimate resolution of which is not expected to
have a material adverse effect on the financial condition, results of operations
or cash flows of Incomnet.

12. PROFIT SHARING PLAN

The Company sponsors a 401(k) savings plan implemented during 1997 for
employees who are 21 years of age or older and have been employed by the Company
for at least six months. Plan participants are allowed to contribute up to 15%
of their base annual compensation. The plan also provides for the Company to
make a discretionary matching contribution. The profit sharing

F-40

INCOMNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998

12. PROFIT SHARING PLAN (CONTINUED)
contribution and related expense for the years ended December 31, 1998 and 1997
was $57,000 and $47,000.

13. FOURTH QUARTER ADJUSTMENTS

During the fourth quarter 1998, the Company changed its method of estimating
deferred marketing revenue. The impact of adopting this change in estimation
methodology resulted in the restatement of previously filed interim reports on
Form 10-Q for the quarterly periods ended March 31, June 30, and September 30,
1998 to increase/(reduce) marketing revenues recognized by $(435,000), $242,000
and $75,000, respectively. The impact of adopting this change on the Company's
consolidated financial statements for the year ended December 31, 1998, was to
reduce marketing program revenue recognized by $144,000.

F-41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: April 15, 1999

INCOMNET, INC.
(Registrant)

By: /s/ DENIS RICHARD
-----------------------------------------
Denis Richard
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------

President and Chief
/s/ DENIS RICHARD Executive Officer and
- ------------------------------ Director (Principal April 15, 1999
Denis Richard Executive Officer)

Executive Vice President,
/s/ GEORGE P. BLANCO Chief Financial Officer
- ------------------------------ and Secretary (Principal April 15, 1999
George P. Blanco Financial Officer)

/s/ STEPHEN A. GARCIA
- ------------------------------ Controller April 15, 1999
Stephen A. Garcia

/s/ JOHN P. CASEY
- ------------------------------ Chairman of the Board April 15, 1999
John P. Casey

/s/ SCOTT EISENBERG
- ------------------------------ Director April 15, 1999
Scott Eisenberg

/s/ JOHN HILL, JR.
- ------------------------------ Director April 15, 1999
John Hill, Jr.

S-1

SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------

/s/ DR. HOWARD SILVERMAN
- ------------------------------ Director April 15, 1999
Dr. Howard Silverman

/s/ MICHAEL A. STEIN
- ------------------------------ Director April 15, 1999
Michael A. Stein

S-2

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
INCOMNET, INC.

BALANCE AT
BEGINNING AMOUNTS CHARGED
OF TO COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
----------- ----------------- ------------- ---------------

Year ended December 31, 1998:
Deducted from asset accounts:
Accounts receivable allowance for doubtful
accounts....................................... $ 2,698 $ 3,244 $ (2,644) $ 3,298
Notes receivable allowance for doubtful
accounts....................................... 209 608 108 925
----------- ------ ------------- ------
Total.............................................. $ 2,907 $ 3,852 $ (2,536) $ 4,223
----------- ------ ------------- ------
----------- ------ ------------- ------
Year ended December 31, 1997(2):
Deducted from asset accounts:
Accounts receivable allowance for doubtful
accounts....................................... $ 4,142 $ 5,319 $ (6,763) $ 2,698
Notes receivable allowance for doubtful
accounts....................................... 209 176 (176) 209
----------- ------ ------------- ------
Total.............................................. $ 4,351 $ 5,495 $ (6,939) $ 2,907
----------- ------ ------------- ------
----------- ------ ------------- ------
Year ended December 31, 1996(2):
Deducted from asset accounts:
Accounts receivable allowance for doubtful
accounts....................................... $ 1,988 $ 5,682 $ (3,528) $ 4,142
Notes receivable allowance for doubtful
accounts....................................... 209 263 (263) 209
----------- ------ ------------- ------
Total.............................................. $ 2,197 $ 5,945 $ (3,791) $ 4,351
----------- ------ ------------- ------
----------- ------ ------------- ------

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

(1) Uncollectible amounts written off, net of recoveries.

(2) Amounts for 1997 and 1996 have been adjusted to reflect reclassifications
made related to discontinued operations. See Note 1--Discontinued Operations
in the Notes to Consolidated Financial Statements elsewhere herein for
further information.

S-3

LIST OF EXHIBITS