USN COMMUNICATIONS INC, S-1, 1997-10-21

USN COMMUNICATIONS INC
S-1, 1997-10-21
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997

REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
USN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 4813 36-3947804
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
--------------
10 SOUTH RIVERSIDE PLAZA, SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
--------------
THOMAS A. MONSON, ESQ.VICE PRESIDENT AND GENERAL COUNSEL
USN COMMUNICATIONS, INC.
10 SOUTH RIVERSIDE PLAZA, SUITE 401
CHICAGO, ILLINOIS 60606
(312) 906-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:
GARY P. CULLEN, ESQ. BRUCE S. MENDELSOHN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & STEPHEN E. OLDER, ESQ.
FLOM (ILLINOIS) AKIN, GUMP, STRAUSS, HAUER &
333 WEST WACKER DRIVE FELD, L.L.P.
CHICAGO, ILLINOIS 60606 1333 NEW HAMPSHIRE AVE., N.W.
(312) 407-0700 WASHINGTON, DC 20036
(202) 887-4000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share......... $ $90,000,000 $27,273
</TABLE>
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(1) Includes shares of Common Stock that the Underwriters have the option
to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>

EXPLANATORY NOTE

This Registration Statement contains a Prospectus relating to an offering in
the United States and Canada ("U.S. Offering") of an aggregate of
shares of common stock of USN Communications, Inc., par value of $.01 per
share (the "Common Stock"), together with separate Prospectus pages relating
to a concurrent offering outside of the United States and Canada
("International Offering") of an aggregate of shares of Common Stock.
The complete Prospectus for the U.S. Offering follows immediately after this
Explanatory Note. After such Prospectus are the following alternate pages for
the International Offering: a front cover page, an "Underwriting" section and
a back cover page. All other pages of the Prospectus for the U.S. Offering are
identical and are to be used for both the U.S. Offering and the International
Offering. The complete Prospectus for each of the U.S. Offering and
International Offering in the exact forms in which they are to be used after
effectiveness of this Registration Statement will be filed with the Securities
and Exchange Commission pursuant to Rule 424(b).
<PAGE>

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

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 21, 1997
SHARES
USN COMMUNICATIONS, INC.
LOGO
COMMON STOCK
-----------
All of the shares of Common Stock, par value $.01 per share (the
"Common Stock"), being offered hereby are being offered by USN Communications,
Inc., a Delaware corporation ("USN" or the "Company").

Of the shares of Common Stock offered hereby, shares
are being initially offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and shares of Common Stock are
being offered in a concurrent offering outside the United States and Canada by
the International Managers (the "International Offering" and, together with the
U.S. Offering, the "Offerings"). The initial public offering price and the
aggregate underwriting discount per share will be identical for both Offerings.
See "Underwriting."

Prior to the Offerings, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price per share of
Common Stock will be between $ and $ per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.

The Company will apply for the quotation of the Common Stock on the Nasdaq
National Market under the symbol "USNC."

At the Company's request, the U.S. Underwriters have reserved up to
shares for sale at the initial public offering price to certain of the
Company's employees, members of their immediate families and other individuals
who are business associates of the Company (including certain vendors and
consultants), in each case, as such parties have expressed an interest in
purchasing such shares. The number of shares available for sale to the general
public will be reduced to the extent these individuals purchase such reserved
shares. Any reserved shares not purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares
offered hereby.

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC- TUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............ $ $ $
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Total(3)............. $ $ $
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</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at $ .
(3) The Company has granted the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to an aggregate of and additional shares
of Common Stock, respectively, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1997.
-----------
MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
-----------
The date of this Prospectus is , 1997.
<PAGE>

[MAP SHOWING USN LOCAL SERVICE AREAS]

CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF SHARES OF COMMON STOCK TO STABILIZE THEIR MARKET PRICE,
PURCHASES OF SHARES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE SHARES OF COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

2
<PAGE>

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock covered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed or
incorporated by reference as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the
matter involved, and each such statement is qualified in its entirety by such
reference.

The Company is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with
the Commission. The Registration Statement and the exhibits and schedules
thereto and reports and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the
regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661 at prescribed rates. Copies of such material may also
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy statements and other information regarding registrants that file
electronically with the Commission.

The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and will
make available copies of quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including statements containing the words "believes," "anticipates," "expects"
and words of similar import. All statements other than statements of
historical facts included in this Prospectus including, without limitation,
such statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and located elsewhere herein, regarding the Company or any of the
transactions described herein, including the timing, financing, strategies and
effects of such transactions, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from expectations are disclosed in this
Prospectus, including, without limitation, in conjunction with the forward-
looking statements in this Prospectus and/or under "Risk Factors." The Company
does not intend to update these forward-looking statements.

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and related notes appearing elsewhere in this Prospectus. Except for
the consolidated audited financial statements and the historical financial data
and as otherwise noted, all information in this Prospectus, including share and
per share data, has been adjusted to reflect (i) a nine-for-one stock dividend
declared by the Company on September 4, 1997, (ii) the conversion of all
outstanding shares of the Company's 9.0% Cumulative Convertible Pay-In-Kind
Preferred Stock (the "9% Preferred Stock") and 9.0% Cumulative Convertible Pay-
In-Kind Preferred Stock, Series A (the "Series A Preferred Stock") into an
aggregate of 5,907,876 shares of Common Stock concurrent with the closing of
the Offerings and (iii) the conversion of each outstanding share of Class A
Common Stock into shares of Common Stock, par value $.01 per share (the
"Common Stock"). Unless otherwise indicated, (i) the information in this
Prospectus assumes that the Underwriters' over-allotment options have not been
exercised and (ii) all references to the Company or USN refer to USN
Communications, Inc. and its subsidiaries. Please refer to the Glossary for the
definitions of certain capitalized terms used herein and elsewhere in this
Prospectus without definition.

THE COMPANY

USN is one of the fastest growing competitive local exchange carriers
("CLECs") in the United States. The Company offers a bundled package of
telecommunications products, including local and long distance telephony, voice
mail, paging, teleconferencing, Internet access and other enhanced features,
tailored to meet the needs of its customers. The Company primarily targets
small and medium-sized businesses with telecommunications usage of less than
$5,000 per month. The Company's strategy is to continue to increase its
customer base by being more flexible, innovative and responsive to the needs of
its target customers than the regional Bell operating companies ("RBOCs") and
the first-tier interexchange carriers ("IXCs"), which have historically
concentrated their sales and marketing efforts on residential and large
business customers. The Company primarily differentiates itself with a value-
based marketing strategy by providing an integrated, customized package of
telecommunications services on a single bill and responsive customer care.

The Company is presently providing service to customers in certain states in
the NYNEX Corporation ("NYNEX") region (New York and Massachusetts) and the
Ameritech Corporation ("Ameritech") region (Illinois, Ohio and Michigan) and is
currently in negotiations to expand its bundled services offering throughout
the 14-state Bell Atlantic/NYNEX region and the 5-state Ameritech region.
Management anticipates implementing service in at least two additional states
in these regions by the end of 1997 and four more states in these regions in
1998. In August 1997, NYNEX merged with Bell Atlantic. The Company continues to
operate in the former NYNEX regions, which are now a part of the Bell Atlantic
territory.

During the first nine months of 1997, the Company increased aggregate local
access lines sold from 10,283 lines to 135,172 lines, a compound growth rate of
more than 33% per month, including the sale of 55,851 lines in the third
quarter alone. As of September 30, 1997, the Company had 116,591 access lines
in service, including 51,449 lines which were provisioned in the third quarter.
Services are primarily marketed through an approximately 325 member direct
salesforce in 27 offices located in five states. As part of its customer-
focused product offering, the Company provides personalized customer service,
24 hours a day, 365 days per year, through its two regional customer care
centers.

COMPETITIVE ADVANTAGES

Providing local exchange services is a highly complex process that requires
overcoming significant barriers to entry. Since inception, the Company has
spent significant time, resources and capital to enter the local market. In the
process, it has gained substantial experience in this complicated market
segment. Consequently, the Company believes it has the following competitive
advantages:

4
<PAGE>

. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act of 1996
(the "Telecommunications Act") by leveraging its complementary relationships
with the RBOCs. The Telecommunications Act requires the RBOCs to complete a
number of "checklist" items in order to qualify for long distance entry in
their local service areas. By moving aggressively to enter into resale
agreements and to develop electronic interfaces with the RBOCs, the Company
believes it has positioned itself to play a key role in enabling the RBOCs to
meet a number of those requirements. The Company was the first to enter into
comprehensive resale agreements with Ameritech and NYNEX, served as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic and is currently
one of the largest CLECs in terms of access lines in service in the Ameritech
and NYNEX markets. Consequently, the Company is often requested by state and
federal regulators to provide information on the Company's experiences. The
Company believes its complementary relationships with the RBOCs have
facilitated the Company's rapid growth in its existing markets and enabled it
to become a valuable and viable resale channel partner. The Company further
believes, based on discussions with RBOC officials and industry experts, that
the RBOCs will continue to develop strong resale channel partners in an
effort to mitigate the potential negative effects of facilities-based
competition.

. UNIQUE RESALE AGREEMENTS. The Company has executed comprehensive local
exchange resale agreements with Ameritech for the greater metropolitan
Chicago area, Ohio and Michigan, and with NYNEX for the State of New York. In
addition to the cost advantages associated with the term and volume
commitment contracts, these contracts provide "most favored nation" and other
pricing protections designed to maintain the competitiveness of rates and
position the Company to purchase capacity at rates at least as favorable as
those of other potential resellers of Ameritech and NYNEX local services. In
addition, the Company has executed interim resale agreements with Ameritech
for the State of Wisconsin and with NYNEX for the State of Massachusetts. The
Company is currently in negotiations to expand its resale agreements
throughout the 14-state combined Bell Atlantic/NYNEX region and the 5-state
Ameritech region. In advance of completing these negotiations, the Company
plans to enter certain additional states by reselling local service pursuant
to state-mandated wholesale discounts. The Company estimates, based on data
compiled by the Federal Communications Commission ("FCC"), that the regions
covered by the current comprehensive Ameritech and NYNEX resale agreements
include access to over 10 million business access lines. Management believes
that upon expansion into the remaining Bell Atlantic/NYNEX region and the
Ameritech region, the Company will have access to approximately 20 million
business access lines. The Company continuously evaluates opportunities to
enter into agreements with additional RBOCs, other local and long distance
service providers and enhanced and other value-added service providers in
order to aggressively build its customer base as well as to provide
additional services to its existing customers.

. PROPRIETARY ELECTRONIC PROVISIONING AND INTERFACE SYSTEMS. By serving as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic, the Company was
among the first CLECs to develop electronic provisioning systems for resale
of RBOC services. In addition, the Company is currently developing and
expects to test the provisioning of rebundled network elements in the fourth
quarter of 1997. Development of provisioning systems is critical for carriers
seeking to grow rapidly in the complex, competitive local telecommunications
market. These systems must address the numerous technical configurations
associated with local service, including correctly coding customers into data
bases for 911, 411, white pages and customer service, as well as provisioning
thousands of local services, known as universal service ordering codes
("USOCs"). Electronic provisioning between the Company and its RBOC vendors
allows the Company to provision a significantly greater volume of lines than
would be possible if transmitting orders by mail or facsimile. Moreover,
because the proprietary systems developed by the Company lessen manual input
and reduce repetitive data entry, the Company experiences improved efficiency
and accuracy in transmitted orders, thereby reducing costs and increasing
customer satisfaction. The Company believes it has established an industry
leadership position in the deployment of these systems, and it is committed
to their continuous improvement.

5
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. LARGEST DIRECT SALESFORCE AMONG CLECS IN ITS MARKETS. The Company's services
are currently sold through an approximately 325 member direct salesforce,
located in 27 offices in Illinois, Ohio, Michigan, New York and
Massachusetts. Additionally, the Company intends to hire approximately 175
new salespeople over the next 12 months to expand service in the Ameritech
and combined Bell Atlantic/NYNEX regions. The Company primarily recruits
salespeople with experience in selling competitive telecommunications
services to businesses in the markets where they are based. The Company's
salesforce is trained in-house with a rigorous customer-focused training
program that promotes activity-based selling. Salespeople are given an
incentive through a commission structure, with a target of 50% of a
salesperson's compensation based on performance. The Company believes its
large, experienced, face-to-face salesforce has been, and will continue to
be, vitally important to expanding its customer base in today's highly
competitive telecommunications industry environment.

. STRATEGIC FLEXIBILITY. The Company believes that its business strategy
affords it more flexibility to take advantage of regulatory and industry
dynamics than its facilities-based competitors. For example, the FCC's
position on unbundled network elements has evolved to the point where
competitors are now able to purchase on an economic basis unbundled network
elements from the RBOCs and rebundle them into an alternative local service
option. The Company expects to exploit this opportunity by rebundling network
elements, thus expanding its products offering and improving its strategic
position. In addition, the increased construction by facilities-based CLECs
has improved the value of the Company's services by creating alternative
resale partners other than RBOCs. The Company is currently evaluating
proposals from facilities-based CLECs to provision local service.

GROWTH STRATEGY

The Company's objective is to be a leading provider of integrated local and
long distance services and other telecommunications products to small and
medium-sized businesses in its target markets. The Company expects to achieve
this goal through the successful implementation of its growth strategy which
includes the following:

. PROVIDE AN INTEGRATED TELECOMMUNICATIONS SOLUTION. A key element in building
its customer base while minimizing churn has been, and will continue to be,
the implementation of a marketing and operating strategy which emphasizes an
integrated telecommunications solution to its target market. To a large
extent, the Company's target customers have not previously been provided the
opportunity to purchase bundled services. The Company attracts and retains
customers by combining responsive customer care with a pricing package to
provide high-quality service at a cost which is usually afforded to only
large business customers. Specifically, the Company provides a single source
and bill for integrated local and long distance telephony, voicemail, paging,
teleconferencing, Internet access and other enhanced and value-added
telecommunications services, with a single point of contact for customer
service, product inquiries, repairs and billing questions. Based on its
experience, the Company believes that this marketing and customer service
approach has minimized customer acquisition costs and churn.

. FOCUS ON LARGE, UNDERSERVED MARKET. The Company utilizes a direct sales
approach and primarily focuses its marketing efforts on small and medium-
sized businesses with telecommunications usage of less than $5,000 per month.
The Company believes this target market is best served by a direct sales
approach because most of these customers do not employ in-house
telecommunications specialists and in most cases obtain services from various
vendors. The Company's experience indicates that these customers prefer a
single source for all their telecommunications requirements, including
products, billing and service. The Company believes that its gross margins on
services provided to its target market are generally higher than for larger
business customers. Since the RBOCs and the first-tier IXCs primarily
concentrate their sales and marketing efforts on residential and large
business customers, the Company will continue to focus its marketing on this
underserved market to rapidly expand its customer base.

6
<PAGE>

their entire service territories. There is currently no competing network with
the product breadth, capacity and geographic reach of the RBOC networks. By
contrast, facilities-based CLECs are currently limited primarily to servicing
customers in areas where they have network facilities.

. RAPID MARKET ENTRY. The Company believes its ability to enter a market early
and provide ubiquitous service will continue to allow it to rapidly build a
customer base across a large geographic area prior to the lifting of
regulatory restrictions on the ability of first-tier IXCs and RBOCs to offer
integrated services. Based on recent public announcements, the Company does
not believe that any RBOC will provide in-region long distance services prior
to 1999. As a non-facilities based provider, the Company believes it is able
to build a customer base quickly and efficiently without incurring
significant costs and the developmental delays inherent in constructing
network and transmission facilities. In addition, the Company's proprietary
software interface systems facilitate its rapid customer acquisition strategy
by allowing it to provision high volumes of access lines.

. EXPAND LOCAL SERVICES. The Company plans to expand its local services
offering, positioning it to offer a full range of local services over a broad
geographic area at a competitive cost, by: (i) entering into term and volume
resale agreements in new territories with RBOCs; (ii) entering into resale
agreements with one or more facilities-based CLECs; (iii) rebundling network
elements from RBOCs; and (iv) reselling local service in new territories
pursuant to state-mandated wholesale discounts prior to entering into resale
agreements with RBOCs and/or facilities-based CLECs in such territories. The
Company believes, based on its experience and industry analysts' reports, as
well as recent regulatory and industry developments, that RBOCs have an
incentive to continue to negotiate wholesale agreements with respect to small
and medium-sized businesses to stabilize this revenue base and deter
migration of such RBOCs' current customers to facilities-based competitors.
The Company also believes that its demonstrated sales and provisioning
expertise is attractive to facilities-based CLECs which may not be having
similar success.

The Company, a Delaware corporation (formerly United USN, Inc.), was formed
and commenced operations in April 1994. The Company's principal executive
office is located at 10 S. Riverside Plaza, Suite 401, Chicago, Illinois 60606,
and its telephone number is (312) 906-3600.

RECENT DEVELOPMENTS

. In the third quarter of 1997, the Company provisioned 51,449 local access
lines, an increase of 80% from the number of lines in service on June 30,
1997.

. In August 1997, the Company raised $96.5 million in net proceeds through a
private placement (the "1997 Private Placement") of units consisting of
$152.7 million aggregate principal amount at maturity of 14 5/8% Senior
Discount Notes due 2004 (the "14 5/8% Senior Notes") and warrants to purchase
2,053,900 shares of Common Stock.

. Since August 1, 1997, the Company has raised $45.2 million from sales of its
Series A Preferred Stock.

. By June 1997, the Company had launched PC-based teleconferencing, bundled
paging services and bundled Internet access services.

7
<PAGE>

THE OFFERINGS

Common Stock offered by the
Company:
U.S. Offering................ shares
International Offering....... shares
Total................. shares(1)

Common Stock to be
outstanding after the
Offerings....................
shares(1)(2)

Use of Proceeds............... The net proceeds of the Offerings, including
the net proceeds from any exercise of the
Underwriters' over-allotment options, will be
used for general corporate purposes, including
funding the expansion of the Company's sales,
customer care and provisioning organizations,
enhancement of the Company's billing system
and, potentially, acquisitions. See "Use of
Proceeds."

Proposed Nasdaq National "USNC."
Market Symbol................

- --------
(1) Assumes no exercise of the over-allotment options granted by the
Company to the Underwriters.
(2) Excludes (i) 3,421,160 shares reserved for issuance upon the exercise
of options, of which are currently exercisable; (ii) 2,989,840
shares reserved for issuance upon exercise of outstanding warrants; and
(iii) 2,892,695 shares reserved for issuance as of September 30, 1997
upon conversion of the Convertible Notes (as defined). No shares have
been reserved for issuance upon conversion of any Consent Convertible
Notes (as defined) which may be issued by the Company.

RISK FACTORS

Prospective purchasers of the Common Stock should carefully consider the
information set forth in this Prospectus, and in particular, should evaluate
the factors set forth under "Risk Factors" beginning on page 10.

8
<PAGE>

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following summary historical consolidated financial data for the periods
from inception of the Company in April 1994 to December 31, 1994 and for the
fiscal years ended December 31, 1995 and December 31, 1996 was derived from,
and should be read in conjunction with, the consolidated audited financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus. The summary financial data as of and for the six-month periods
ended June 30, 1996 and 1997, respectively, are derived from, and should be
read in conjunction with, the unaudited financial statements of the Company and
the related notes thereto included elsewhere in this Prospectus. In the opinion
of management, such interim financial statements reflect all adjustments
(consisting solely of normal recurring adjustments) necessary to fairly present
the information presented for such periods. Results of operations for the six
months ended June 30, 1997 are not necessarily indicative of results of
operations for a full year or indicative of future periods.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30,
INCEPTION TO DECEMBER 31, -----------------------
DECEMBER 31, ----------------------
1994 1995 1996 1996 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net service
revenue........... $ 1,737 $ 7,884 $ 9,814 $ 4,804 $ 11,721
Cost of services... 1,455 9,076 9,256 4,078 10,520
-------- -------- -------- -------- --------
Gross margin....... 282 (1,192) 558 726 1,201
Sales and marketing
expense........... 2,869 5,867 12,612 3,546 27,335
General and
administrative
expense........... 4,686 11,100 20,665 6,336 15,013
Interest expense... 26 734 1,797 20 4,129
Interest and other
income (1)........ 152 646 9,469 8,449 1,013
Minority interest.. -- 150 -- -- --
-------- -------- -------- -------- --------
Net loss........... $ (7,147) $(18,097) $(25,047) $ (727) $(44,263)
======== ======== ======== ======== ========
Accumulated unpaid
preferred
dividends......... $ 707 $ 3,810 $ 225 $ 6,145 $ 235
Net loss to common
shareholder....... $ (7,854) $(21,907) $(25,272) $ (6,872) $(44,498)
Net loss per common
share............. $ (65.63) $ (72.42) $ (49.53) $ (16.12) $ (61.70)
Weighted average
shares
outstanding....... 119,678 302,520 510,233 426,378 721,251
OTHER DATA:
EBITDA (2)......... $ (7,087) $(15,901) $(30,390) $ (8,996) $(40,105)
Cash flows from
operating
activities........ (6,141) (14,308) (24,098) (9,178) (37,505)
Cash flows from
investing
activities........ (1,708) (2,556) 7,274 9,188 (7,171)
Cash flows from
financing
activities........ 13,828 24,589 63,689 (549) (422)
Depreciation and
amortization...... 186 2,258 2,329 160 1,042
Capital
expenditures...... 1,728 1,740 2,259 345 7,171
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1997 1997 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access line
sold.............. 4,630 10,283 35,397 79,321 135,172
Local access lines
in service........ 4,356 8,364 18,557 65,142 116,591
Total employees.... 225 464 641 766 868
Direct salesforce.. 81 206 252 325 325
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents....... $ 5,979 $ 13,705 $ 60,569 $ 13,227 $ 15,720
Total assets....... 12,747 20,471 78,052 19,898 44,146
Long-term debt (net
of current
maturities)....... 3,176 518 59,864 350 63,466
Redeemable
preferred stock... 15,306 44,396 10,045 46,532 10,505
Common
stockholders'
deficit........... (7,830) (28,768) (3,606) (31,596) (48,026)
</TABLE>
- --------
(1) Interest and other income for the year ended December 31, 1996 and the six
months ended June 30, 1996 includes a gain of $8.1 million realized on the
sale of the Company's switching facilities in Ohio.
(2) EBITDA consists of operating income (loss) before depreciation and
amortization. EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles. EBITDA is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results and as a tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs. See the Consolidated Statements
of Cash Flows of the Company and the related notes to the Consolidated
Financial Statements thereto included herein.

9
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock should consider carefully the following
factors.

NEGATIVE CASH FLOW AND OPERATING LOSSES; LIMITED OPERATING HISTORY

The Company has experienced operating losses from its inception in April
1994 through the date of this Prospectus, excluding the effect of a one-time
non-recurring gain, and has, to date, not generated positive cash flow. For
the period from April 20, 1994 to December 31, 1994 and the fiscal year ended
December 31, 1995, the Company's operating losses were $7.3 million and $18.2
million, respectively. These operating losses were primarily the result of the
one-time installation costs and fixed ongoing costs related to switching
facilities of the Company which were sold in February 1996, and the sales and
marketing and general and administrative expenses required to build the
Company's sales, customer, management information and marketing
infrastructure. Excluding an $8.1 million non-recurring gain on the sale of
such switching facilities, the Company would have lost $33.1 million for the
year ended December 31, 1996. The Company lost $8.8 million (excluding the
$8.1 million non-recurring gain) and $44.3 million for the first six months of
1996 and 1997, respectively. The Company expects to realize additional
operating losses on a consolidated basis while it continues to expand and
develop its service offerings and its customer base. There can be no assurance
that the Company will be able to develop or expand its customer base or that
it will achieve profitability in future years.

The Company has a limited operating history. Prospective investors,
therefore, have limited historical financial information about the Company
upon which to base an evaluation of its performance and an investment in the
Common Stock. Given the Company's limited operating history, there can be no
assurance that the Company will be able to achieve or sustain positive cash
flow from operating activities or to implement its growth strategy. See
"Business--Growth Strategy."

SUBSTANTIAL LEVERAGE

The Company has and will continue to have consolidated indebtedness that is
substantial in relation to its stockholders' deficit. As of August 31, 1997,
the Company had $164.9 million principal amount of long-term debt and total
common stockholders' equity of $ million as adjusted to give effect to (i)
the sale of 15,000 shares of Series A Preferred Stock on October 17, 1997,
(ii) the distribution of the applicable pay-in-kind dividend on the 9%
Preferred Stock on September 26, 1997, (iii) the conversion of all of the
outstanding shares of 9% Preferred Stock and Series A Preferred Stock
(including the shares of Series A Preferred Stock sold on October 17, 1997)
concurrently with the closing of the Offerings into an aggregate of 5,907,876
shares of Common Stock and (iv) the sale of shares of Common Stock
offered hereby (after deducting underwriting discounts and commissions and
estimated expenses of the Offerings and the receipt of the estimated net
proceeds therefrom). See "Capitalization."

The Company's ability to make cash payments with respect to its outstanding
indebtedness and to repay its obligations on such indebtedness at maturity
will depend on its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond the Company's control. Because the Company
currently has a consolidated cash flow deficit, there can be no assurance that
the Company will be able to make cash interest payments on its outstanding
indebtedness when required or to repay its obligations at maturity. See
"Description of Certain Indebtedness." The Company and its subsidiaries may
incur additional indebtedness under certain circumstances. If the Company is
unable to service its indebtedness, it will be forced to examine alternative
strategies that may include actions such as reducing or delaying capital
expenditures, restructuring or refinancing its indebtedness, the sale of
assets or of the Company's ownership interest in its subsidiaries or seeking
additional equity and/or debt financing. There can be no assurance that any of
these strategies could be effected on satisfactory terms, if at all.

10
<PAGE>

The degree to which the Company is leveraged could have important
consequences to the holders of the Common Stock, including the following: (i)
the Company will have significant and increasing cash interest expense and
significant principal repayment obligations with respect to outstanding
indebtedness; (ii) the Company's degree of leverage and related debt service
obligations may make it more vulnerable than some of its competitors to the
effects of an economic downturn or other adverse developments; and (iii) the
Company's ability to obtain additional financing could be impaired. In
addition, pursuant to the terms of the Senior Note Indentures (as defined), the
ability of the Company to sell assets is restricted. See "Description of
Certain Indebtedness."

ADDITIONAL CAPITAL REQUIREMENTS

The Company believes that the net proceeds of the Offerings will be
sufficient to meet planned capital expenditures and anticipated negative
operating cash flow for the foreseeable future. Sources of funding for the
Company's future financing requirements may include public offerings or private
placements of equity and/or debt securities, bank loans and additional capital
contribution from new or existing stockholders. There can be no assurance that
additional financing will be available to the Company or, if available, that it
can be obtained on a timely basis and on terms acceptable to the Company and
within the limitations contained in the Senior Note Indentures. Failure to
obtain such financing could result in the delay or abandonment of the Company's
development and expansion plans.

DEPENDENCE ON BILLING SERVICES AND IMPLEMENTATION

The accurate and prompt billing of the Company's customers is essential to
the Company's operations and future profitability. Historically the Company has
relied on two third-party vendors to provide billing services and is currently
in the process of transitioning to a single vendor. No assurances can be made
that the transition to a single vendor will not adversely affect the Company's
results of operations. The Company relies, to a significant extent, on its
billing vendor to rate, print and mail its customers' bills, and the Company is
not in a position to control the management of or the provisioning of billing
services by such vendor. In addition, such vendor has limited financial
resources and personnel, and the Company's expected growth may strain such
vendor's available resources. The Company is currently exploring a number of
alternatives with respect to its billing services, but there can be no
assurance that any such alternatives will be successfully implemented. The
failure of any third-party vendor to provision all of the billing services
required by the Company or the failure by the Company to implement other
alternatives could have a material adverse effect on the results of operations
of the Company.

In addition, the Company is dependent upon the prompt collection of payment
of its customers' bills and, in turn, upon the creditworthiness of its
customers and the continued implementation of adequate revenue assurance
programs. The failure of its customers to pay their bills in a timely manner or
the Company's failure to continue to implement adequate revenue assurance
programs could have a material adverse effect on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."

DEPENDENCE ON RELATIONSHIP WITH THIRD-PARTY FACILITIES-BASED PROVIDERS

The Company does not own any part of a local exchange network or a long
distance network. As a result, the Company depends entirely on facilities-based
carriers for the transmission of customer phone calls. For each local exchange
market in which the Company operates, there currently is a single provider from
whom the Company can purchase local exchange services on a ubiquitous basis.
Under the Telecommunications Act, the Company is entitled to access to local
exchange services in such markets. Although the Company believes that its
relations with its underlying carriers are good, the termination of any of the
Company's contracts with its carriers or a reduction in the quality or increase
in cost of such carriers' services could have a material adverse effect on the
Company's results of operations. In addition, the accurate and prompt billing
of the Company's customers is dependent upon the timeliness and accuracy of
call detail records provided by the carriers whose service the Company resells.
There can be no assurance that the current carriers will continue to provide,
or that new carriers will provide, accurate information on a timely basis, and
such carrier's failure to do so could have a

11
<PAGE>

material adverse effect on the Company's results of operations. For example,
there have been a number of provisioning and billing difficulties related to
the local and long distance services provided to business customers in
Manhattan, New York pursuant to the NYNEX LSO agreement. The problems included
failure to provision customers, lost customer traffic information and receipt
by customers of multiple billings for the same service. Much of the difficulty
was due to the nature of the private local network with dedicated facilities
designed for resale purposes. NYNEX required the services of a third-party
billing vendor to help implement the billing portion of the arrangement. The
Company has now contracted directly with that vendor for billing and systems
support in order to avoid problems associated with such provisioning. However,
because other RBOCs with which the Company may enter into agreements do not
have significant experience handling large volumes of resold local exchange
traffic, there can be no assurance as to the quality of the service that the
Company will receive or that similar problems will not occur.

In addition, physical damage, power loss and software defects of the RBOCs,
the Company or its billing vendor may cause interruption in service and/or
reduced capacity for the Company's customers. In the event that the Company's
long distance carriers are unable to handle the growth in customer usage, the
Company could transfer such traffic to a carrier that had sufficient capacity,
but there can be no assurance that additional capacity will be available. If
any of the local exchange carriers ("LECs") are unable to handle the
provisioning or growth in customer usage, then the Company would be required to
use another local carrier, which could be difficult in light of the limited
development of facilities-based competitive local exchange networks. In the
event the Company otherwise elects to use other carriers, the charges for such
services may exceed those under the existing contracts, which could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Vendor Agreements."

COMPETITION

The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will continue to intensify in the future due to
regulatory changes, including continued implementation of the
Telecommunications Act, and the increase in the size, resources and number of
market participants. In each of its markets, the Company faces competition for
local service from larger, better capitalized incumbent providers.
Additionally, the long distance market is already significantly more
competitive than the local exchange market because the incumbent local exchange
carriers ("ILECs"), including the RBOCs, have historically had a monopoly
position within the local exchange market.

In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including non-facilities-based providers like the
Company. For example, AT&T Corp. ("AT&T"), MCI Communications Corporation
("MCI") and Sprint Corporation ("Sprint"), among other carriers, have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the ILECs' or other providers' services.
In fact, certain competitors, including AT&T, MCI and Sprint, have entered into
interconnection agreements with Ameritech with respect to the States of
Illinois, Michigan and Ohio. These competitors either have begun or in the near
future likely will begin offering local exchange service in those states,
subject to the joint marketing restrictions under the Telecommunications Act
described below. In addition, some of these competitors have entered into
interconnection agreements with NYNEX and either have begun or in the near
future likely will begin offering local exchange service in New York and
Massachusetts, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities that currently offer or are
potentially capable of offering switched services include CLECs, cable
television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large customers who
build private networks. Many facilities-based CLECs and long distance carriers,
for example, have committed substantial resources to building their networks or
to purchasing CLECs or IXCs with complementary facilities. By building or
purchasing a network or entering into interconnection agreements or resale
agreements with incumbent ILECs, including RBOCs, a facilities-based provider
can offer single source local and long distance services similar to those
offered by the Company. Such additional alternatives may provide such
competitors with greater flexibility and a lower cost structure than the

12
<PAGE>

Company. In addition, some of these CLECs and other facilities-based providers
of local exchange service are acquiring or being acquired by IXCs that are not
subject to joint marketing restrictions. These combined entities may provide a
bundled package of telecommunications products, including local and long
distance telephony, that is in direct competition with the products offered by
the Company.

With respect to wireless telephone system operators, the FCC has authorized
cellular, personal communications service and other commercial mobile radio
service ("CMRS") providers to offer wireless services to fixed locations,
rather than just to mobile customers, in whatever capacity such CMRS providers
choose. Previously, cellular providers could provide service to fixed locations
only on an ancillary or incidental basis. This authority to provide fixed as
well as mobile services will enable CMRS providers to offer wireless local loop
service and other services to fixed locations (e.g., office and apartment
buildings) in direct competition with the Company and other providers of
traditional fixed telephone service. In addition, in August 1996, the FCC
promulgated regulations that classify CMRS providers as telecommunications
carriers, thus giving them the same rights to interconnection and reciprocal
compensation under the Telecommunications Act as other non-LEC
telecommunications carriers, including the Company.

The Company will also face competition from other fixed wireless services,
including Multichannel Multipoint Distribution Service ("MMDS"), 28 GHz Local
Multipoint Distribution Service ("LMDS") and 38 GHz wireless communications
systems, 2.8 GHz Wireless Communications Service ("WCS"), FCC Part 15
unlicensed wireless radio devices, and other services that use existing point-
to-point wireless channels on other frequencies. The FCC has announced plans to
hold an auction for LMDS licenses in all markets for the provision of high
capacity, wide-area fixed wireless point-to-multipoint systems. In addition,
the FCC proposed rules to auction geographical area wide licenses for the
operation of fixed wireless point-to-point communications services in the 38
GHz band, although many 38 GHz licenses have already been issued nationwide.
The LMDS auction is scheduled to begin in December 1997 and the 38 GHz auction
is expected to occur in 1998. The MMDS service, also known as "wireless cable,"
also currently competes for metropolitan wireless broadband services. At
present, wireless cable licenses are used primarily for the distribution of
video programming and have only a limited capability to provide two-way
communications needed for wireless broadband telecommunications services, but
there can be no assurance that this will continue to be the case. The FCC has
initiated a proceeding to determine whether to provide wireless cable operators
with greater technical flexibility to offer two-way services. Cellular,
personal communications services ("PCS") and other mobile service providers may
also offer fixed services over their licensed frequencies. Finally, the FCC has
allocated a number of spectrum blocks for use by wireless devices that do not
require site or network licensing. A number of vendors have developed such
devices that may provide competition to the Company, in particular for certain
low data-rate transmission services.

Under the Telecommunications Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services. Also, the largest long distance carriers
(AT&T, MCI, Sprint and any other carrier with 5% or more of the pre-subscribed
access lines) are prevented under the Telecommunications Act from bundling
local services resold from an RBOC in a particular state with their long
distance services until the earlier of (i) February 8, 1999 or (ii) the date on
which the RBOC whose services are being resold obtains in-region long distance
authority in that state. The RBOCs are currently allowed to offer certain in-
region "incidental" long distance services (such as cellular, audio and visual
programming and certain interactive storage and retrieval functions) and to
offer virtually all out-of-region long distance services.

13
<PAGE>

source local and long distance services similar to those offered by the
Company. While new business opportunities will be made available to the Company
through the Telecommunications Act and other federal and state regulatory
initiatives, regulators are likely to provide the ILECs with an increased
degree of flexibility with regard to pricing of their services as competition
increases. Although the Ameritech and NYNEX resale agreements contain certain
pricing protections, including adjustments in the wholesale rates to be
consistent with any changes in the Ameritech and NYNEX retail rates, if the
ILECs elect to lower their rates and sustain lower rates over time, this may
adversely affect the revenues of the Company and place downward pressure on the
rates the Company can charge. While the Ameritech and NYNEX resale agreements
ensure that the Company will receive any lower rate provided to any other
reseller, under the NYNEX resale agreement if such lower rate is provided to a
reseller committing to both a longer term and a greater volume commitment, the
Company receives the lower rate, but must negotiate with Bell Atlantic a
reasonable transition to similar commitments. If the Company cannot
successfully negotiate such a transition with Bell Atlantic, then the Company
may be unable to maintain the lowest rate. The Company believes the effect of
lower rates may be offset by the increased revenues available by offering new
products and services to its target customers, but there can be no assurance
that this will occur. In addition, if future regulatory decisions afford the
LECs excessive pricing flexibility or other regulatory relief, such decisions
could have a material adverse effect on the Company.

Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to customer
needs. While the Company believes that it currently has certain advantages
relating to the timing, ubiquity and cost savings resulting from its resale
agreements, there is no assurance that the Company will be able to maintain
these advantages. A continuing trend toward business combinations and alliances
in the telecommunications industry may create significant new competitors to
the Company. Many of the Company's existing and potential competitors have
financial, technical and other resources significantly greater than those of
the Company.

ABILITY TO MEET MINIMUM COMMITMENTS; TERMINATION OF AGREEMENTS

Substantially all of the resale agreements between the Company and local
exchange carriers or long distance carriers contain term and volume
commitments. The local exchange resale agreements typically provide a minimum
usage which requires the Company to have a minimum number of lines in place at
the end of the applicable measurement period (typically one year). The long
distance resale agreements also typically require certain annual commitments
from the Company. The inability of the Company to meet its minimum annual
commitments or thresholds may result in substantial underutilization charges,
and, in the case of the long distance agreements, a significant increase in the
rates charged to the Company. The majority of the resale agreements also
contain carryover provisions which permit the Company to carryforward volume
shortfalls and may serve to delay, or possibly eliminate, the payment of a
significant portion of any shortfall the Company may experience. While these
"carryover pools" may provide the Company with some additional time to build
its customer base, any underutilization charges or rate increases could have a
material adverse effect on the financial condition and results of operations of
the Company.

Each of the resale agreements contains termination provisions which, among
other things, require the Company to pay termination charges if the Company
terminates an agreement prior to the end of term. The incurrence of any
termination charges could have a material adverse effect on the Company's
financial condition and results of operations.

LACK OF EXPERIENCE OFFERING ADDITIONAL PRODUCTS AND SERVICES

The Company's strategy includes offering additional telecommunications
products and services, including cellular phone service in the future. Entry
into new markets entails risks associated with the state of development of the
markets, intense competition from companies already operating in those markets,
potential competition from companies that may have greater financial resources
and experience than the Company and increased selling and marketing expenses.
The Company has not provided any cellular products or services to date. There
can be no assurance that the Company's products or services will receive market
acceptance in a timely manner, if at all, or that prices and demand in new
markets will be at a level sufficient to provide profitable operations. See
"Industry Overview" and "Business--Competition."

14
<PAGE>

REGULATION AND RISKS OF THE TELECOMMUNICATIONS ACT

The Company is currently subject to federal and state government regulation
of its telecommunications services. The Company is regulated at the federal
level by the FCC. It is required to obtain and maintain an FCC certificate in
connection with its international services, and to file and maintain both
domestic and international tariffs containing the currently effective rates,
terms and conditions of service for its resale long distance services. The FCC
issued regulations eliminating this tariffing requirement for all interstate
nondominant carriers, except for, under certain circumstances, the RBOCs. Those
regulations have been stayed on appeal by third parties, and the Company is
currently required to file tariffs with the FCC.

The intrastate long distance telecommunications operations of the Company are
also subject to various state laws and regulations. The Company must obtain and
maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. In most states, the
Company must also file and obtain prior regulatory approval of tariffs for
intrastate services. In addition, the Company must update or amend the tariffs
and, in some cases, the certificates of public convenience and necessity, when
rates are adjusted or new products are added to the local and long distance
services offered by the Company. Challenges by third parties to the Company's
tariffs filed with the FCC or the state regulatory commissions could cause the
Company to incur substantial legal and administrative expenses.

The Telecommunications Act has already resulted in comprehensive changes in
the regulatory environment for the telecommunications industry as a whole, and
will have a material impact on the local exchange industry and the competitive
environment in which the Company operates. The Company believes that the speed
with which additional competition in local exchange services develops will
depend on a number of factors, including the extent to which each ILEC actively
attempts to maintain its local exchange market share or to enter new lines of
business, particularly, in the case of RBOCs, the in-region long distance
business. While each ILEC now has the duty to negotiate on a good-faith basis
access and interconnection agreements with facilities-based competitors and
resale agreements with competitors such as the Company, the timing and terms of
such agreements are at least in part within the control of the ILEC. An ILEC
that places the highest priority on maintaining its market share in local
exchange service may have less incentive to negotiate such agreements swiftly
or on terms favorable to potential competitors. Indeed, numerous potential
competitors, including AT&T, have requested, under the provisions of the
Telecommunications Act, that various state regulatory authorities arbitrate
their negotiations with various RBOCs and GTE Corporation ("GTE") because they
have been unable to reach agreement with those RBOCs and GTE for access and
interconnection to provide competitive local exchange services. In addition,
all negotiated resale and long distance agreements must be submitted to and
approved by the relevant state public service commission. The speed with which
additional competition in local exchange services develops will also depend on
the effect of the rules and policies recently adopted by the FCC and individual
states in implementing the relevant provisions of the Telecommunications Act.
If competition in local exchange services develops slowly, the ability of the
Company to compete may be adversely affected.

The concept of resale of local exchange services is a new development in the
telecommunications industry, and the Company cannot predict how the relevant
provisions of the Telecommunications Act will be interpreted and implemented by
the FCC, state regulators, courts and the ILECs. In August 1996, the FCC issued
regulations that, among other things, established pricing methodologies and
interim default rates for resold ILEC services and unbundled LEC network
elements. In July 1997, the U.S. Court of Appeals for the Eighth Circuit struck
down certain of the rules (including the provisions establishing pricing
methodologies and default rates for resold services and unbundled network
elements). The appeals court concluded that the Telecommunications Act granted
the states the authority to set the rates for interconnection, unbundled
network elements and resold services and that the FCC therefore lacked
jurisdiction to issue the pricing rules or to preempt state pricing rules.
Although many state commissions followed the FCC's pricing rules prior to the
Eighth Circuit decision and are not likely to repudiate these actions, carriers
seeking entry into the competitive local exchange market have expressed concern
about the lack of uniformity in pricing that may result from the court's
rejection of national pricing rules. The Company cannot predict the impact of
the Eighth Circuit's decision on the Company's operations. In October 1997, the
same court issued an order clarifying that the RBOCs were not required to
rebundle unbundled network elements that competing carriers had purchased
separately. If upheld, this ruling

15
<PAGE>

would make it more difficult for competitors, including the large IXCs, to use
rebundled unbundled network elements or the "UNE Platform" to enter the local
exchange market. The FCC is expected to appeal the Eighth Circuit's decisions
to the U.S. Supreme Court. Some of the same parties and certain other parties
also have asked the FCC to reconsider these and other regulations implementing
the Telecommunications Act. The Company cannot predict the outcome of the FCC's
reconsideration or the court of appeals proceedings, either of which could have
a material adverse impact on the Company. In addition, no assurance can be
given that changes in current federal or state legislation or regulations would
not materially adversely affect the Company. See "Business--Government
Regulation" and "--Competition."

ABILITY TO MANAGE GROWTH; RAPID EXPANSION OF OPERATIONS

The Company's officers have had limited experience in managing companies as
large and as rapidly growing as the Company. The Company's strategy of
continuing its growth and expansion will place additional demands upon the
Company's current management and other resources and will require additional
working capital, information systems and management, operational and other
financial resources. The continued growth of the Company will depend on various
factors, including, among others, federal and state regulation of the
telecommunications industry, competition, and the ability of LECs, including
the RBOCs, to provision the Company's additional customers. Not all of the
foregoing factors are within the control of the Company. In particular, there
can be no assurance that the RBOCs with which the Company has resale agreements
will be able to provision new customers in a timely manner. The Company's
ability to manage growth successfully will require the Company to continue to
enhance its operational, managerial, financial and information systems and
controls. The Company has modified and will continue to modify its billing and
customer care systems to address the resale of local services under the
Ameritech and NYNEX agreements. However, there can be no assurance that such
systems will be adequate to manage the Company's anticipated expansion. No
assurance can be given that the Company will be able to manage its expanding
operations and, if the Company's management is unable to manage growth
effectively, the Company's business, operating results and financial condition
could be materially adversely affected. Furthermore, there can be no assurance
that the growth experienced by the Company in the past will continue.

DEPENDENCE ON KEY PERSONNEL

The Company believes that its continued success will depend to a significant
extent upon the abilities and continued efforts of its management, particularly
members of its senior management team. Many of the Company's executive officers
and other key employees have only recently joined the Company. The loss of the
services of any of such individuals could have a material adverse effect on the
Company's results of operations. The success of the Company will also depend,
in part, upon the Company's ability to identify, hire and retain additional key
management personnel, including senior management, who are also being sought by
other businesses. Competition for qualified personnel in the telecommunications
industry is intense. The inability to identify, hire and retain such personnel
could have a material adverse effect on the Company's results of operations.
See "Management--Executive Officers and Directors."

IMPACT OF TECHNOLOGICAL CHANGE

The telecommunications industry has been characterized by rapid technological
change, frequent new service introductions and evolving industry standards. For
example, increases in technological capabilities or efficiencies could create
an incentive for more entities to enter the facilities-based local exchange
business. Similarly, such changes could result in lower retail rates for
telecommunications services, which could have a material adverse effect on the
Company's ability to price its services competitively. Although the effect of
technological change on the future business of the Company cannot be predicted,
it could have a material adverse effect on the Company's business, results of
operations and financial condition.

ABSENCE OF A PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offerings, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or be
sustained or that after the Offerings the market price of the

16
<PAGE>

Common Stock will not decline below the initial public offering price. The
market price of the Common Stock is likely to be highly volatile. Factors such
as delays by the Company in achieving its expansion goals, fluctuations in the
Company's operating results, announcements of new services offered by the
Company or its competitors, changes in earnings estimates of securities
analysts, regulatory changes and general market conditions, among other things,
could cause the market price of the Common Stock to fluctuate substantially.
The initial public offering price will be determined pursuant to negotiations
between the Company and the representatives of the Underwriters, and may not be
indicative of the market price for the Common Stock after the Offerings. See
"Underwriting."

ABSENCE OF DIVIDENDS

The Company has never paid a cash dividend on the Common Stock and does not
anticipate paying any such dividend in the foreseeable future. Earnings, if
any, which might be generated from operations of the Company will be used to
finance growth of the Company. See "Dividend Policy." The Senior Note
Indentures include significant limitations on the Company's ability to pay
dividends to the holders of Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market
or the perception that such sales could occur could have a material adverse
effect on the price of the Common Stock. All of the shares of Common Stock
issuable upon the conversion of the Convertible Notes (2,892,695 shares as of
September 30, 1997 and accreting to 3,449,598 shares by September 30, 1999) and
the 2,989,840 shares of Common Stock issuable upon exercise of warrants will be
available for immediate sale pursuant to a shelf registration statement. In
addition, if any Consent Convertible Notes are issued, the Company has agreed
to register the Consent Convertible Notes and the shares of Common Stock
issuable upon conversion thereof under the Securities Act, which shares will be
available for immediate sale without restriction upon such conversion and
registration. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."

The 7,212,511 shares of Common Stock outstanding as of the date of this
Prospectus are "restricted securities" under the Securities Act and may be sold
only if they are registered or qualify for an exemption from registration under
the Securities Act. In addition, the outstanding shares of 9% Preferred Stock
and Series A Preferred Stock will be converted concurrent with the closing of
the Offerings into an aggregate of 5,907,876 shares of Common Stock. Pursuant
to a registration agreement dated as of June 22, 1995, as subsequently amended,
the Company has granted certain registration rights to the Original Purchasers
(as defined) and certain subsequent investors covering a substantial majority
of the outstanding Common Stock and all of the Common Stock to be issued upon
conversion of the 9% Preferred Stock and the Series A Preferred Stock. See
"Certain Relationships and Related Transactions" and "Description of Capital
Stock--Registration Rights." In addition, as of the date of this Prospectus,
the Company has outstanding options to purchase 3,421,160 shares of Common
Stock, of which are currently exercisable. The Company intends to file a
registration statement on Form S-8 to register shares of Common Stock reserved
or to be available for issuance under the Company's existing stock option
plans.

Except for the issuance by the Company of Common Stock pursuant to existing
stock option plans or upon the exercise of currently existing warrants, the
Company, its directors and executive officers and certain existing stockholders
have agreed not to, directly or indirectly, sell, offer to sell, grant any
option for sale of, or dispose of, any capital stock of the Company or any
security convertible or exchangeable into, or exercisable for, such capital
stock, or, in the case of the Company, file any registration statement with
respect to any of the foregoing pursuant to the Securities Act without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on
behalf of the Underwriters for a period of 180 days following the date of this
Prospectus.

CONTROL BY EXISTING STOCKHOLDERS

Following the consummation of the Offerings, over % of the outstanding
Common Stock will be owned by the management of the Company and Chase Venture
Capital Associates, L.P., CIBC Wood Gundy Ventures,

17
<PAGE>

Inc., HarbourVest Partners, LLC, Northwood Capital Partners LLC, Northwood
Ventures LLC, BT Capital Partners, Inc. and Prime New Ventures (collectively,
the "Original Purchasers"). Consequently, management and the Original
Purchasers will have the ability to control the election of all the members of
the Company's Board of Directors and the outcome of all corporate actions
requiring stockholder approval. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."

ANTI-TAKEOVER PROVISIONS

In connection with the Offerings, the Company's Certificate of Incorporation
will be amended and restated (the "Restated Certificate of Incorporation") and
its By-Laws will be amended and restated (the "Restated By-Laws") and will
contain certain provisions that may have the effect of discouraging, delaying
or making more difficult a change in control of the Company or preventing the
removal of incumbent directors even if a majority of the Company's stockholders
were to deem such an attempt to be in the best interests of the Company. Among
other things, the Restated Certificate of Incorporation will provide for a
classified Board of Directors and to allow the Board of Directors to issue up
to 10,000,000 shares of preferred stock and fix the rights, privileges and
preferences of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. Any such issuance of shares of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
the Restated By-Laws, among other things, will limit the manner in which
directors may be nominated by stockholders and limit the manner in which
proposals may be made at stockholder meetings. The Company is also subject to
Section 203 of the Delaware General Corporation Law (the "DGCL"), which could
have the effect of delaying or preventing a change of control of the Company.
To the extent that these provisions discourage takeover attempts, they could
deprive stockholders of opportunities to realize takeover premiums for their
shares or could depress the market price of the Common Stock. See "Description
of Capital Stock--Certain Charter and By-Law Provisions" and "--Certain
Statutory Provisions."

IMMEDIATE AND SUBSTANTIAL DILUTION OF SHARES

Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution of $ in the net tangible book value per share of
Common Stock from the initial public offering price. In the event the Company
issues additional shares of Common Stock in the future, purchasers of Common
Stock in the Offerings may experience further dilution in the net tangible book
value per share of Common Stock. See "Dilution."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock being
offered hereby (assuming an initial public offering price of $ per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) are estimated to be approximately
$ million ($ million if the Underwriters' over-allotment options are
exercised in full).

The Company intends to use the net proceeds of the Offerings for general
corporate purposes, including funding the expansion of its sales, customer care
and provisioning organizations, enhancement of the Company's billing system
and, potentially, acquisitions. Pending application of the net proceeds of the
Offerings as described herein, the Company intends to invest such proceeds in
investment-grade, short-term, interest-bearing securities.

DIVIDEND POLICY

The Company anticipates substantial net losses and negative cash flow for the
foreseeable future. It is anticipated that earnings, if any, which may be
generated from operations of the Company will be used to finance the growth of
the Company and that cash dividends will not be paid to holders of Common
Stock. The Senior Note Indentures include significant limitations on the
Company's ability to pay dividends to the holders of Common Stock. See
"Description of Certain Indebtedness."

18
<PAGE>

CAPITALIZATION

The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of August 31, 1997 and as adjusted to give
effect to (i) the sale of 15,000 shares of Series A Preferred Stock on October
17, 1997 for an aggregate purchase price of $15 million, (ii) the distribution
of the applicable pay-in-kind dividend on the 9% Preferred Stock on September
26, 1997, (iii) the conversion of all of the outstanding shares of 9%
Preferred Stock and Series A Preferred Stock (including the shares of Series A
Preferred Stock sold on October 17, 1997) upon the closing of the Offerings
into an aggregate of shares of Common Stock and (iv) the sale of
shares of Common Stock offered hereby (after deducting underwriting
discounts and commissions and estimated expenses of the Offerings and the
receipt of the estimated net proceeds therefrom). This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and related
notes thereto included elsewhere in this Prospectus. See "Use of Proceeds" and
"Description of Capital Stock."

<TABLE>
<CAPTION>
AS OF
AUGUST 31, 1997
----------------------
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
----------------------
AS
HISTORICAL ADJUSTED
----------- ---------
<S> <C> <C>
Cash and cash equivalents............................... $ 123,923
========== =========
Long-term debt
14 5/8% Senior Discount Notes due 2004................. $ 100,001
14% Senior Discount Notes due 2003..................... 34,203
9% Convertible Subordinated Notes due 2004............. 29,972
Notes payable and capital lease obligations............ 747
---------- ---------
Total long-term debt................................ 164,923
Redeemable Preferred Stock
9% Preferred Stock, par value $1.00 per share, 30,000
shares authorized;
10,450 shares issued and outstanding (actual); no
shares authorized,
issued and outstanding (as adjusted).................. 10
9% Preferred Stock, Series A, par value $1.00 per
share, 150,000 shares authorized, 30,209 shares issued
and outstanding (actual); no shares authorized,
issued and outstanding (as adjusted).................. 30
Accumulated unpaid dividends........................... 235
Additional paid-in capital............................. 40,265
---------- ---------
Total Preferred Stock............................... 40,540
Common stockholders' deficit
Common Stock, $.01 par value, 30,000,000 shares
authorized, 7,222,511 shares issued and outstanding
(actual); 100,000,000 shares authorized,
shares issued and outstanding (as adjusted)(/1/)...... 7
Common Stock held in treasury.......................... (1)
Additional paid-in capital............................. 72,671
Accumulated deficit.................................... (117,771)
---------- ---------
Total common stockholders' deficit.................. (45,094)
---------- ---------
Total capitalization.............................. $ 160,369
========== =========
</TABLE>
- --------
(1) Excludes (i) 3,421,160 shares reserved for issuance upon the exercise of
options, of which are currently exercisable; (ii) 2,989,840 shares
reserved for issuance upon exercise of outstanding warrants; and (iii)
2,892,695 shares reserved for issuance upon conversion of the Convertible
Notes. No shares have been reserved for issuance upon conversion of any
Consent Convertible Notes which may be issued by the Company.

19
<PAGE>

DILUTION

As of August 31, 1997, the net tangible deficit of the Common Stock was
$ , or approximately $ per share outstanding. As of August 31,
1997, the as adjusted net tangible book value of the Common Stock after giving
effect to (i) the sale of 15,000 shares of Series A Preferred Stock on October
17, 1997 for an aggregate purchase price of $15 million, (ii) the distribution
of the applicable pay-in-kind dividend on the 9% Preferred Stock on September
26, 1997, (iii) the conversion of all of the outstanding shares of 9%
Preferred Stock and Series A Preferred Stock (including the shares of Series A
Preferred Stock sold on October 17, 1997) upon the closing of the Offerings
into an aggregate of shares of Common Stock and (iv) the sale of
shares of Common Stock offered hereby (after deducting underwriting
discounts and commissions and estimated expenses of the Offerings and the
receipt of the estimated net proceeds therefrom), assuming an initial public
offering price of $ per share, the midpoint of the initial public
offering price range, was $ , or approximately $ per share. This
represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution in net tangible book
value of $ per share to new investors in the Offerings. The net tangible
deficit per share of Common Stock represents the amount of the Company's
tangible assets less its liabilities divided by the number of shares of Common
Stock outstanding.

The following table illustrates this dilution in net tangible book value per
share to new investors at August 31, 1997:

<TABLE>
<S> <C> <C>
Assumed initial public offering price.................. $
Actual net tangible deficit per share.................. $
Increase in net tangible book value per share
attributable to the Offerings......................... $
As adjusted net tangible book value per share ......... $
Dilution in net tangible book value per share to new
investors............................................. $
</TABLE>

The following table sets forth, at August 31, 1997 on an as adjusted basis,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing holders of Common Stock and by the new investors, before
deducting estimated underwriting discounts and offering expenses payable by
the Company, at the assumed initial public offering price of $ per share,
the midpoint of the initial public offering price range.

<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION
-------------- --------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ % $ % $
New investors................
Total........................ % $ % $
</TABLE>
- --------
(1) Excludes (i) 3,421,160 shares reserved for issuance upon the exercise of
options, of which are currently exercisable; (ii) 2,989,840 shares
reserved for issuance upon exercise of outstanding warrants; and (iii)
2,892,695 shares reserved for issuance upon conversion of the Convertible
Notes at September 30, 1997. No shares have been reserved for issuance
upon conversion of any Consent Convertible Notes which may be issued by
the Company.

20
<PAGE>

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table presents selected historical consolidated financial data
for the period from inception of the Company in April 1994 to December 31, 1994
and for the fiscal years ended December 31, 1995 and 1996. The data for the
periods ending December 31, 1994, 1995 and 1996 has been derived from
consolidated financial statements (including those set forth elsewhere in this
Prospectus) which have been audited by Deloitte & Touche LLP, independent
auditors. The selected financial data as of and for the six-month periods
ending June 30, 1996 and 1997, respectively, are derived from, and should be
read in conjunction with, the unaudited financial statements of the Company and
the related notes thereto included elsewhere in this Prospectus. In the opinion
of management, such interim financial statements reflect all adjustments
(consisting solely of normal recurring adjustments) necessary to fairly present
the information presented for such periods. The information set forth below
should be read in conjunction with the consolidated financial statements of the
Company and the related notes appearing elsewhere in this Prospectus. Results
of operations for the six months ended June 30, 1997 are not necessarily
indicative of results of operations for a full year or indicative of future
periods.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED JUNE
INCEPTION TO DECEMBER 31, 30,
DECEMBER 31, ---------------------- -----------------------
1994 1995 1996 1996 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net service
revenue............ $ 1,737 $ 7,884 $ 9,814 $ 4,804 $ 11,721
Cost of services.... 1,455 9,076 9,256 4,078 10,520
-------- -------- --------- -------- --------
Gross margin........ 282 (1,192) 558 726 1,201
Sales and marketing
expense............ 2,869 5,867 12,612 3,546 27,335
General and
administrative
expense............ 4,686 11,100 20,665 6,336 15,013
Interest expense.... 26 734 1,797 20 4,129
Interest and other
income (1)......... 152 646 9,469 8,449 1,013
Minority interest... -- 150 -- -- --
-------- -------- --------- -------- --------
Net loss............ $ (7,147) $(18,097) $ (25,047) $ (727) $(44,263)
======== ======== ========= ======== ========
Accumulated unpaid
preferred
dividends.......... $ 707 $ 3,810 $ 225 $ 6,145 $ 235
Net loss to common
shareholders....... $ (7,854) $(21,907) $ (25,272) $ (6,872) $(44,498)
Net loss per common
share.............. $ (65.63) $ (72.42) $ (49.53) $ (16.12) $ (61.70)
Weighted average
shares
outstanding........ 119,678 302,520 510,233 426,378 721,251
OTHER DATA:
EBITDA (2).......... $ (7,087) $(15,901) $ (30,390) $ (8,996) $(40,105)
Cash flows from
operating
activities......... (6,141) (14,308) (24,098) (9,178) (37,505)
Cash flows from
investing
activities......... (1,708) (2,556) 7,274 9,188 (7,171)
Cash flows from
financing
activities......... 13,828 24,589 63,689 (549) (422)
Depreciation and
amortization....... 186 2,258 2,329 160 1,042
Capital
expenditures....... 1,728 1,740 2,259 345 7,171
<CAPTION>
AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1997 1997 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access line
sold.............. 4,630 10,283 35,397 79,321 135,172
Local access lines
in service........ 4,356 8,364 18,557 65,142 116,591
Total employees.... 225 464 641 766 868
Direct salesforce.. 81 206 252 325 325
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........ $ 5,979 $ 13,705 $ 60,569 $ 13,227 $ 15,720
Total assets........ 12,747 20,471 78,052 19,898 44,146
Long-term debt (net
of current
maturities)........ 3,176 518 59,864 350 63,466
Redeemable
preferred stock.... 15,306 44,396 10,045 46,532 10,505
Common
stockholders'
deficit............ (7,830) (28,768) (3,606) (31,596) (48,026)
</TABLE>
- --------
(1) Interest and other income for the year ended December 31, 1996 and the six
months ended June 30, 1996 includes a gain of $8.1 million realized on the
sale of the Company's switching facilities in Ohio.
(2) EBITDA consists of operating income (loss) before depreciation and
amortization. EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles. EBITDA is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results and as a tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs. See the Consolidated Statements
of Cash Flows of the Company and the related notes to the Consolidated
Financial Statements thereto included herein.

21
<PAGE>

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

The following discussion and analysis should be read in conjunction with the
"Selected Historical Consolidated Financial and Operating Data" and the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.

OVERVIEW

Initially, the Company entered the local telecommunications market as a
facilities-based CLEC with network facilities in Ohio. Due to the high costs
associated with the initial construction, installation and expansion of each
local network facility, including right-of-way costs, franchise fees,
interconnection charges and other operating expenses and in anticipation of
the impact of the passage of the Telecommunications Act the Company refocused
its operations. The Company sold its existing facilities in Ohio and certain
other assets in February 1996, and transferred certain liabilities with
respect to those facilities, to pursue a non-facilities-based approach to the
local telecommunications market. As part of the Company's strategy to refocus
its operations, the Company, through a newly formed wholly owned acquisition
subsidiary, Quest United, Inc. ("Quest"), acquired certain assets and assumed
certain liabilities of Quest America, L.P., a telecommunications reseller and
consulting firm, in October 1995 (the "Quest Acquisition").

The Company negotiated for the first total service resale agreement with
Ameritech for local services, which was signed in November 1995, and
negotiated with NYNEX for a similar comprehensive local resale agreement which
was signed in July 1996. The Company also consummated various other agreements
in 1996 with certain carriers for the resale of long distance and enhanced and
other value-added services. The Company commenced the marketing and
provisioning of services under those agreements during the latter half of
1996. Although management believes that its current strategy will have a
positive effect on the Company's results of operations over the long-term,
through an increase in its customer base and product offerings, this strategy
is expected to have a negative effect on the Company's results of operations
over the short-term. The Company anticipates losses and negative cash flow for
the foreseeable future, attributable in part to significant investments in
operating, sales, marketing, management information systems and general and
administrative expenses. To date, the Company's growth, including capital
expenditures, has been funded primarily by the capital contributions of the
Original Purchasers and recent sales of Series A Preferred Stock and by the
proceeds from the 1996 Private Placement (as defined) and the 1997 Private
Placement.

In connection with the 1997 Private Placement, Merrill Lynch Global
Allocation Fund, Inc. ("MLGAFI") and Merrill Lynch Equity/Convertible Series
(Global Allocation Portfolio) (collectively, "MLAM"), the current holders of
all of the 14% Senior Notes and Convertible Notes consented (the "Consent") to
the amendment of the indentures with respect to the 14% Senior Notes and the
Convertible Notes to allow the Company to consummate the 1997 Private
Placement. In connection with the Consent, the Company paid a consent fee to
MLAM consisting of warrants to purchase 145,160 shares of Common Stock, at an
exercise price of $.01 per share. The Company also granted to MLAM an option
to purchase up to $10 million of a newly created series of convertible notes
of the Company on terms substantially similar to the Convertible Notes (the
"Consent Convertible Notes") and granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange all, but not less than
all, of the 14% Senior Notes for 14 5/8% Senior Notes having an accreted value
equal to the accreted value of such 14% Senior Notes at the time of such
exchange.

The Company's net service revenue consists primarily of sales revenue from
telecommunications resale services net of certain adjustments, including
unbillable call records. The Company bills its customers for local and long
distance usage based on the type of local service utilized, the number, time
and duration of calls, the geographic location of the terminating phone
numbers and the applicable rate plan in effect at the time of the call.

Cost of services includes the cost of local and long distance services
charged by carriers for recurring charges, per minute usage charges and
feature charges, as well as the cost of fixed facilities for dedicated
services and special regional calling plans.

Sales and marketing expense consists of the costs of providing sales and
other support services for customers including salaries of salesforce
personnel. General and administrative expense consists of the costs of

22
<PAGE>

the billing and information systems and personnel required to support the
Company's operations and growth as well as all amortization expenses.
Depreciation is allocated throughout sales, marketing, general and
administrative expense based on asset ownership.

The Company has experienced significant growth in the past and, depending on
the extent of its future growth, may experience significant strain on its
management, personnel and information systems. To accommodate this growth, the
Company will continue to implement and improve operational, financial and
management information systems. In an effort to support its growth, the
Company added several senior management positions, over 250 employees in 1996
and added over 300 employees in the first six months of 1997. Also, the
Company is implementing new information systems that will provide improved
recordkeeping for customer information and management of uncollectible
accounts and fraud control.

The Company has to date outsourced certain billing services to two outside
vendors. The significant growth experienced by the Company over the past year
has strained the capabilities of the Company's internal billing systems and
those of the billing vendor supporting the sales pursuant to the Ameritech
resale agreements. As a result, the Company has experienced delays in
accurately billing its customers in a timely manner and instances of toll
fraud. Therefore, the Company's revenue assurance and margin utilization
systems and operating controls are being strengthened. These events have
resulted in increased customer credits and allowances and higher provisions
for uncollectible revenues and bad debt expense than originally planned. Gross
margins will be lower than originally anticipated for 1997 since some billings
from carriers may not be billed to customers.

As a result of evaluating the capabilities of the Company's two billing
vendors to support the anticipated growth of the Company, a decision was made
to transition to a single vendor that has the strongest current capabilities
and the best potential to support the expansion and related increased number
of customers and access lines of the Company. The Company selected the billing
vendor that has supported its sales pursuant to the NYNEX resale agreement for
the past two years. The transition to a single vendor is expected to be
completed during the fourth quarter of 1997.

The Company anticipates that it will record a pre-tax charge in the third
quarter of 1997 in the range of $3.0 million to $3.5 million to cover the
above described one time non-recurring billing platform related costs.

RESULTS OF OPERATIONS

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

Net service revenue increased 144% to $11.7 million for the six months ended
June 30, 1997 from $4.8 million for the six months ended June 30, 1996. The
cumulative number of local access lines sold and in service as of June 30,
1997 was 79,321 and 65,142, respectively, compared to 3,995 lines sold and in
service as of June 30, 1996. The substantial increase in net service revenue
and local access lines was due primarily to the significant change in the
Company's business strategy and the corresponding deployment of a large direct
sales organization. This business strategy change resulted in a substantial
increase in the customer base in the Company's geographic markets (from
approximately 1,200 customers in service at June 30, 1996 to approximately
6,000 customers in service at June 30, 1997).

Gross margin for the six months ended June 30, 1997 increased 66% to $1.2
million compared to $0.7 million for the six months ended June 30, 1996. Gross
margin for the first six months of 1997 for the new resale products was 13.5%,
which was slightly ahead of expectations. Consolidated gross margins are
expected to continue to improve each quarter as the mix of revenues from
higher margin products increases and the mix of revenue from the lower margin
legacy products decreases. Due to the significant change in the Company's
business strategy and corresponding change in cost structure from the original
facilities-based business, the year to year gross margins are not comparable.

Sales and marketing expense increased $23.8 million from $3.5 million for
the six months ended June 30, 1996 to $27.3 million for the six months ended
June 30, 1997. The increase was due primarily to the aforementioned increase
in the number of sales and marketing employees which resulted in increases to
salaries and benefits of approximately $12.4 million, recruitment, training
and travel costs of approximately $4.0 million,

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and facility and office related expenses of approximately $1.9 million.
Additionally, advertising and promotional costs increased approximately $3.8
million due to product launches in the Company's target markets.

General and administrative expense increased $8.7 million to $15.0 million
for the six months ended June 30, 1997 versus $6.3 million for the six months
ended June 30, 1996. The increase was due primarily to the aforementioned
increase in the number of operations and administrative employees which
resulted in increases to salaries and benefits of approximately $4.5 million,
facility and office costs of approximately $0.8 million, and training and
travel costs of approximately $0.5 million. Additionally, professional fees
increased approximately $0.8 million, primarily relating to the development and
expansion of the Company's customer service, billing and administrative
information systems and facilities.

Interest and other income decreased to $1.0 million for the six months ended
June 30, 1997 from $8.4 million for the six months ended June 30, 1996 due
primarily to an $8.1 million non-recurring gain on the sale of the Company's
switching facilities in Ohio in February 1996.

Interest expense increased to $4.1 million for the six months ended June 30,
1997 from $20,000 for the six months ended June 30, 1996. This increase was due
primarily to interest expense attributable to the 14% Senior Notes and
Convertible Notes issued in September 1996.

As a result of the factors described above, the Company had a net loss of
$44.3 million for the six months ended June 30, 1997 compared to a net loss of
$0.7 million for the six months ended June 30, 1996.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Net service revenue increased to $9.8 million for the year ended December 31,
1996 from $7.9 million for the year ended December 31, 1995. The increase in
net service revenue was due primarily to a 36% increase in the customer base in
the Company's geographic markets (from approximately 1,250 customers at the end
of 1995 to approximately 1,700 customers at the end of 1996) and the revenues
attributable to the Quest Acquisition which primarily consisted of commissions
earned from carriers on telecommunications services provided to their
customers. Approximately $1.4 million in increased revenues was attributable to
the addition of new customers, primarily in Ohio, and approximately $0.5
million was attributable to revenues gained from the Quest Acquisition.

Gross margin of $0.6 million for the year ended December 31, 1996 improved
from the negative margin of $1.2 million for the year ended December 31, 1995
due primarily to the elimination of fixed costs upon the sale of the switching
facilities in Ohio and a $1.4 million sales and related margin adjustment for
1995 revenue purportedly not billed by NYNEX to the Company's customers under
the billing and collection agreement. In 1996, the Company recovered
approximately $0.9 million from NYNEX and is continuing to pursue additional
amounts.

Sales and marketing expense increased $6.7 million, or 114%, from $5.9
million for the year ended December 31, 1995 to $12.6 million for the year
ended December 31, 1996. The increase was due primarily to an increase in the
number of sales and marketing employees from approximately 115 at the end of
1995 to over 300 at the end of 1996, which resulted in increases to salaries
and benefits of $3.9 million, travel, training and entertainment costs of $1.0
million and recruitment costs of $0.8 million. Additionally, advertising costs
increased $0.9 million due to product launches in the Company's target markets.

General and administrative expense increased $9.6 million, or 86%, to $20.7
million for the year ended December 31, 1996 versus $11.1 million for the year
ended December 31, 1995. The increase was due primarily to an increase in the
number of operations and administrative employees from approximately 90 at the
end of 1995 to approximately 160 at the end of 1996, which resulted in
increases to salaries and benefits of $2.5 million and facility costs of $1.2
million. Additionally, fees paid to consultants and other professionals
increased over $1.0 million, primarily relating to the development and
expansion of the Company's customer service, billing and administrative
information systems and facilities. Amortization expense increased $0.8 million
due primarily

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to a full year of amortization expense related to the Quest Acquisition in 1996
versus approximately eight months in 1995. Additionally, $1.7 million of
expense was incurred relating to the settlement of a derivative action filed by
a minority shareholder.

Interest and other income increased to $9.5 million for the year ended
December 31, 1996 from $0.6 million for the year ended December 31, 1995 due
primarily to an $8.1 million non-recurring gain on the sale of the Company's
switching facilities in Ohio in February 1996.

As a result of the factors described above, the Company's net loss increased
to $25.1 million for the year ended December 31, 1996 from $18.1 million for
the year ended December 31, 1995.

Year Ended December 31, 1995 Compared to Inception to December 31, 1994

The results for fiscal 1995 are not comparable with the results for fiscal
1994 as fiscal 1995 represents a full fiscal year and fiscal 1994 represents
approximately eight months of operations since the Company's inception in April
1994.

Net service revenue increased to $7.9 million in fiscal 1995 from $1.7
million in fiscal 1994. This increase was due to a full year of operations and
a 34% increase in the customer base (from approximately 930 customers at
December 31, 1994 to approximately 1,250 customers at December 31, 1995).

Cost of services increased to $9.1 million in fiscal 1995 from $1.5 million
in fiscal 1994. The increase was due to the one-time installation costs and
fixed ongoing costs related to the Ohio switching facilities, as well as
increased costs associated with an increase in the number of subscribers.

Sales and marketing expense increased $3.0 million, or 103%, to $5.9 million
in fiscal 1995 from $2.9 million in fiscal 1994. Approximately $1.5 million of
the increase was due to the impact of a full year of operation in 1995 versus
approximately eight months in 1994. The inclusion of expenses related to the
operations of Quest in 1995 contributed an additional $0.8 million to the
increase.

General and administrative expense increased $6.4 million, or 136%, to $11.1
million in fiscal 1995 from $4.7 million in fiscal 1994. Approximately $2.0
million of the increase was due to the impact of a full year of operation in
1995 versus approximately eight months in 1994. An additional $2.0 million was
attributable to depreciation and amortization and other expenses related to the
Quest Acquisition. The remaining increase is a result of increased personnel
and expenses required to build the Company's customer service and information
systems and office facilities.

Interest and other income increased to $0.6 million in fiscal 1995 from $0.2
million in fiscal 1994, due to significantly higher investable cash balances in
fiscal 1995 resulting from the proceeds of the issuance of $26.3 million of
preferred and common stock, as well as fiscal 1995 being a full year.

Interest expense increased to $0.7 million in fiscal 1995 from $26,000 in
fiscal 1994. This increase was due to interest expense associated with the
capitalized leases for the Ohio switch sites which began in December 1994.

As a result of the factors described above, the Company's net loss increased
to $18.1 million for fiscal 1995 from $7.1 million for fiscal 1994.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has funded its operations primarily through cash
from its investors. As of June 30, 1997, the Company had cash and cash
equivalents of $15.7 million and working capital of $6.4 million. The increase
in the Company's current assets, excluding cash, and current liabilities is
primarily due to the substantial increase in the size of the business. The
Company's operating activities utilized cash of approximately $37.5 million for
the six month period ended June 30, 1997, versus $9.2 million for the six month
period ended June 30, 1996.

The Company's investing activities have consisted primarily of property and
equipment purchases of $7.2 million for the six month period ended June 30,
1997, and $0.3 million for the six month period ended June 30, 1996. In 1997,
these expenditures were primarily related to sales office expansion in several
of the Company's target markets. In February 1996, the Company received $9.5
million in proceeds from the December 1995 sale of facilities in Ohio.

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<PAGE>

In 1997, the Company anticipates having approximately $15.0 million of
capital expenditures (of which approximately $9.2 million has been expended as
of August 31, 1997). A substantial portion of the capital plan has been
allocated to investments in information technology to support the growth of
the customer base with more robust provisioning, billing and customer care
systems. The anticipated continued high growth in the customer base in 1998
will require a similar level of investment in information technology.

On October 17, 1997, the Company issued and sold Series A Preferred Stock
for an aggregate purchase price of $15.0 million pursuant to agreements
contemplated by a letter of intent dated August 6, 1997. On August 18, 1997,
the Company raised $30.2 million through the sale of its Series A Preferred
Stock. Also on August 18, 1997, the Company raised $96.5 million of net
proceeds through the 1997 Private Placement.

On September 30, 1996, the Company raised $10.0 million through the sale to
the Original Purchasers of its 9% Preferred Stock. Also on September 30, 1996,
the Company raised approximately $55.0 million, net of issuance costs, through
the sale to MLGAFI of (i) 48,500 Units consisting of $48.5 million in
aggregate principal amount at maturity of 14% Senior Discount Notes due 2003
(the "14% Senior Notes") and warrants to purchase an aggregate of 790,780
shares of Common Stock and (ii) $36.0 million in aggregate principal amount at
maturity of 9% Convertible Subordinated Discount Notes due 2004 (the
"Convertible Notes"). The aggregate purchase price of the Units was $30.2
million, and the aggregate purchase price of the Convertible Notes was $27.6
million (collectively the "1996 Private Placement"). In 1995 and 1994, the
Company's financing activities consisted primarily of raising capital in the
form of equity investments from venture capital organizations. During 1995 and
1994, the Company raised $26.3 million and $14.2 million, respectively, net of
issuance costs. In 1995, the Company also assumed notes payable to investors
in the Quest Acquisition.

The Company believes that the net proceeds of the Offerings will be
sufficient to meet planned capital expenditures and anticipated negative
operating cash flow for the foreseeable future. Sources of funding for the
Company's future financing requirements may include public offerings or
private placements of equity and/or debt securities and additional capital
contributions from new or existing stockholders. An additional source may
include bank financing, although the Company currently does not have available
a credit facility. There can be no assurance that additional financing will be
available to the Company, or, if available, that it can be obtained on a
timely basis and on terms acceptable to the Company and within limitations
contained in the Senior Note Indentures. Failure to obtain such financing
could result in the delay or abandonment of the Company's development and
expansion plans.

The Company incurred net losses of $25.1 million, $18.1 million and $7.1
million in 1996, 1995 and 1994, respectively. Accordingly, no provision for
current Federal or state income taxes has been made to the financial
statements. At December 31, 1996, the Company and its subsidiaries had net
operating loss carry-forwards for Federal income tax purposes of approximately
$46.1 million. The ability of the Company or the Company's subsidiaries, as
the case may be, to utilize their net operating loss carry-forwards to offset
future taxable income may be subject to certain limitations contained in the
Internal Revenue Code of 1986, as amended (the "Code"). These operating losses
begin to expire in 2009 for Federal income tax purposes. Of the net operating
loss carry-forwards remaining at December 31, 1996, $12.3 million can be
applied only against future taxable income of the Company's subsidiary USN
Communications Northeast, Inc. (formerly United Telemanagement Services,
Inc.).

INFLATION

Management believes that inflation has not had a material effect on the
Company's results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which
simplifies the method for computing earnings per share. Under the new
requirements, primary earnings per share will be replaced with basic earnings
per share. The statement, which will not impact the results of operations,
financial position or cash flows of the Company and does not have a material
effect on the earnings per share previously presented, is effective for
financial statements issued for periods ending after December 15, 1997 and
will be adopted by the Company in the fourth quarter of 1997.

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<PAGE>

INDUSTRY OVERVIEW

Prior to 1984, AT&T dominated both the local exchange and long distance
marketplace by owning the operating entities that provided both local exchange
and long distance services to most of the U.S. population. While long distance
competition began to emerge in the late 1970s, the critical event triggering
the growth of long distance competition was the breakup of AT&T and the
separation of its local and long distance businesses as mandated by the
Modified Final Judgment relating to the breakup of AT&T (the "MFJ"). To foster
competition in the long distance market, the MFJ prohibited AT&T's divested
local exchange businesses, the RBOCs, from acting as a single source provider
of telecommunications services.

The Telecommunications Act, which was enacted on February 8, 1996, is
considered to be the most comprehensive reform of the nation's
telecommunications laws and affects the development of competition for local
telecommunications services. Specifically, certain provisions of the
Telecommunications Act provide for: (i) the removal of legal barriers to entry
to the local telecommunications services market; (ii) the interconnection of
ILEC networks with competitors' networks; (iii) the establishment of procedures
and requirements to be followed by the RBOCs, including the requirement that
RBOCs offer local services for resale in order to enter into the long distance
and telecommunications equipment manufacturing markets; and (iv) the relaxation
of the regulation of certain telecommunications services provided by LECs and
others. The Company believes the Telecommunications Act will promote
significant growth in the local telecommunications market as new market
entrants, including resellers such as the Company, provide expanded service
offerings and increased levels of customer service.

Industry sources estimate that in 1996 the total revenues from local and long
distance telecommunications services were approximately $185 billion, of which
approximately $107 billion were derived from local exchange services and
approximately $78 billion from inter-LATA long distance services. According to
FCC information, aggregate revenues for local and long distance services grew
at a compounded annual rate of approximately 5.5% between 1991 and 1996.
Although the MFJ established the preconditions for competition in the market
for long distance services in 1984, the market for local exchange services has
until recently been virtually closed to competition and has largely been
dominated by regulated monopolies. Efforts to open the local exchange market
began in the late 1980s on a state-by-state basis when competitive access
providers ("CAPs") began offering dedicated private line transmission and
access services. These types of services together currently account for
approximately 12% of the total local exchange revenues. CAPs were restricted,
often by state laws, from providing the other, more frequently used services
such as basic and switched services, which today account for approximately 88%
of local exchange revenues.

The Telecommunications Act further increases the opportunities available to
competitive local providers by requiring the RBOCs and other ILECs to offer
various network elements such as switching, transport and loops (i.e., the
facilities connecting a customer's premises to a LEC central office) on an
unbundled and non-discriminatory basis. RBOCs also are required to offer their
retail services at wholesale rates for resale by other companies, including the
Company. By offering such services, the RBOCs are also meeting certain of the
requirements contained in the Telecommunications Act in order to gain FCC
approval to provide in-region long distance services. The Company believes
regulatory reform, together with increased demand from the large underserved
small and medium-sized business market, will provide growth opportunities for
competitive local carriers who develop integrated billing and information
systems and have significant management and operational expertise. This new
market opportunity will permit competitive providers who can manage the
operational and marketing implementation to offer a full range of local
telecommunications services, including local calling, custom calling features
and intra-LATA toll services to virtually any customer in the United States.
The Company believes that carriers such as the Company providing competitive
local exchange services have the opportunity to gain market share in the local
exchange market just as long distance competitors gained market share from AT&T
in the long distance market. In addition, competitors, including the Company
and major IXCs, will be able to take advantage of the unbundling and resale
requirements imposed on the RBOCs and other ILECs under the Telecommunications
Act, thereby accelerating entry of competitors that previously have not
invested in local distribution facilities.

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BUSINESS

INTRODUCTION

USN is one of the fastest growing CLECs in the United States. The Company
offers a bundled package of telecommunications products, including local and
long distance telephony, voice mail, paging, teleconferencing, Internet access
and other enhanced features, tailored to meet the needs of its customers. The
Company primarily targets small and medium-sized businesses with
telecommunications usage of less than $5,000 per month. The Company's strategy
is to continue to increase its customer base by being more flexible,
innovative and responsive to the needs of its target customers than the RBOCs
and the first-tier IXCs, which have historically concentrated their sales and
marketing efforts on residential and large business customers. The Company
primarily differentiates itself with a value-based marketing strategy by
providing an integrated, customized package of telecommunications services on
a single bill and responsive customer care.

The Company is presently providing service to customers in certain states in
the NYNEX region (New York and Massachusetts) and the Ameritech region
(Illinois, Ohio and Michigan) and is currently in negotiations to expand its
bundled services offering throughout the 14-state Bell Atlantic/NYNEX region
and the 5-state Ameritech region. Management anticipates implementing service
in at least two additional states in these regions by the end of 1997 and four
more states in these regions in 1998. In August 1997, NYNEX merged with Bell
Atlantic. The Company continues to operate in the former NYNEX regions, which
are now a part of the Bell Atlantic territory.

During the first nine months of 1997, the Company increased aggregate local
access lines sold from 10,283 lines to 135,172 lines, a compound growth rate
of more than 33% per month, including the sale of 55,851 lines in the third
quarter alone. As of September 30, 1997, the Company had 116,591 access lines
in service, including 51,449 lines which were provisioned in the third
quarter. Services are primarily marketed through an approximately 325 member
direct salesforce in 27 offices located in five states. As part of its
customer-focused product offering, the Company provides personalized customer
service, 24 hours a day, 365 days per year, through its two regional customer
care centers.

COMPETITIVE ADVANTAGES

Providing local exchange services is a highly complex process that requires
overcoming significant barriers to entry. Since inception, the Company has
spent significant time, resources and capital to enter the local market. In
the process, it has gained substantial experience in this complicated market
segment. Consequently, the Company believes it has the following competitive
advantages:

. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act by
leveraging its complementary relationships with the RBOCs. The
Telecommunications Act requires the RBOCs to complete a number of
"checklist" items in order to qualify for long distance entry in their local
service areas. By moving aggressively to enter into resale agreements and to
develop electronic interfaces with the RBOCs, the Company believes it has
positioned itself to play a key role in enabling the RBOCs to meet a number
of those requirements. The Company was the first to enter into comprehensive
resale agreements with Ameritech and NYNEX, served as the systems beta
customer for Ameritech, NYNEX and Bell Atlantic and is currently one of the
largest CLECs in terms of access lines in service in the Ameritech and NYNEX
markets. Consequently, the Company is often requested by state and federal
regulators to provide information on the Company's experiences. The Company
believes its complementary relationships with the RBOCs have facilitated the
Company's rapid growth in its existing markets and enabled it to become a
valuable and viable resale channel partner. The Company further believes,
based on discussions with RBOC officials and industry experts, that the
RBOCs will continue to develop strong resale channel partners in an effort
to mitigate the potential negative effects of facilities-based competition.

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<PAGE>

. UNIQUE RESALE AGREEMENTS. The Company has executed comprehensive local
exchange resale agreements with Ameritech for the greater metropolitan
Chicago area, Ohio and Michigan, and with NYNEX for the State of New York.
In addition to the cost advantages associated with the term and volume
commitment contracts, these contracts provide "most favored nation" and
other pricing protections designed to maintain the competitiveness of rates
and position the Company to purchase capacity at rates at least as favorable
as those of other potential resellers of Ameritech and NYNEX local services.
In addition, the Company has executed interim resale agreements with
Ameritech for the State of Wisconsin and with NYNEX for the State of
Massachusetts. The Company is currently in negotiations to expand its resale
agreements throughout the 14-state combined Bell Atlantic/NYNEX region and
the 5-state Ameritech region. In advance of completing these negotiations,
the Company plans to enter certain additional states by reselling local
service pursuant to state-mandated wholesale discounts. The Company
estimates, based on data compiled by the FCC, that the regions covered by
the current comprehensive Ameritech and NYNEX resale agreements include
access to over 10 million business access lines. Management believes that
upon expansion into the remaining Bell Atlantic/NYNEX region and the
Ameritech region, the Company will have access to approximately 20 million
business access lines. The Company continuously evaluates opportunities to
enter into agreements with additional RBOCs, other local and long distance
service providers and enhanced and other value-added service providers in
order to aggressively build its customer base as well as to provide
additional services to its existing customers.

. PROPRIETARY ELECTRONIC PROVISIONING AND INTERFACE SYSTEMS. By serving as the
systems beta customer for Ameritech, NYNEX and Bell Atlantic, the Company
was among the first CLECs to develop electronic provisioning systems for
resale of RBOC services. In addition, the Company is currently developing
and expects to test the provisioning of rebundled network elements in the
fourth quarter of 1997. Development of these provisioning systems is
critical for carriers seeking to grow rapidly in the complex, competitive
local telecommunications market. These systems must address the numerous
technical configurations associated with local service, including correctly
coding customers into data bases for 911, 411, white pages and customer
service, as well as provisioning thousands of local services, known as
universal service ordering codes ("USOCs"). Electronic provisioning between
the Company and its RBOC vendors allows the Company to provision a
significantly greater volume of lines than would be possible if transmitting
orders by mail or facsimile. Moreover, because the proprietary systems
developed by the Company lessen manual input and reduce repetitive data
entry, the Company experiences improved efficiency and accuracy in
transmitted orders, thereby reducing costs and increasing customer
satisfaction. The Company believes it has established an industry leadership
position in the deployment of these systems, and it is committed to their
continuous improvement.

. LARGEST DIRECT SALESFORCE AMONG CLECS IN ITS MARKETS. The Company's services
are currently sold through an approximately 325 member direct salesforce,
located in 27 offices in Illinois, Ohio, Michigan, New York and
Massachusetts. Additionally, the Company intends to hire approximately 175
new sales people over the next 12 months to expand service in the Ameritech
and combined Bell Atlantic/NYNEX regions. The Company primarily recruits
salespeople with experience in selling competitive telecommunications
services to businesses in the markets where they are based. The Company's
salesforce is trained in-house with a rigorous customer-focused training
program that promotes activity-based selling. Salespeople are given an
incentive through a commission structure, with a target of 50% of a
salesperson's compensation based on performance. The Company believes its
large, experienced, face-to-face salesforce has been, and will continue to
be, vitally important to expanding its customer base in today's highly
competitive telecommunications industry environment.

. STRATEGIC FLEXIBILITY. The Company believes that its business strategy
affords it more flexibility to take advantage of regulatory and industry
dynamics than its facilities-based competitors. For example, the FCC's
position on unbundled network elements has evolved to the point where
competitors are now able to purchase on an economic basis unbundled network
elements from the RBOCs and rebundle them into an alternative local service
option. The Company expects to exploit this opportunity by rebundling
network elements, thus expanding its products offering and improving its
strategic position. In addition, the increased construction by facilities-
based CLECs has improved the value of the Company's services by creating
alternative resale

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partners other than RBOCs. The Company is currently evaluating proposals from
facilities-based CLECs to provison local service.

GROWTH STRATEGY

. LEVERAGE UBIQUITOUS NETWORKS. The Company believes that a key factor in its
success has been its ability to provide through the RBOC networks the
complete range of local services currently provided by RBOCs across their
entire service territories. There is currently no competing network with the
product breadth, capacity and geographic reach of the RBOC networks. By
contrast, facilities-based CLECs are currently limited primarily to servicing
customers in areas where they have network facilities.

. EXPAND LOCAL SERVICES. The Company plans to expand its local services
offering, positioning it to offer a full range of local services over a broad
geographic area at a competitive cost, by: (i) entering into term and volume
resale agreements in new territories with RBOCs; (ii) entering into resale
agreements with one or more facilities-based CLECs; (iii) rebundling network
elements from RBOCs; and (iv) reselling local service in new territories
pursuant to state-mandated wholesale discounts prior to entering into resale
agreements with RBOCs and/or facilities-based CLECS in such territories. The
Company believes, based on its experience and industry analysts' reports, as
well as recent regulatory and industry developments, that RBOCs have an
incentive to continue to negotiate wholesale agreements with respect to small
and medium-sized businesses to stabilize

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this revenue base and deter migration of such RBOCs' current customers to
facilities-based competitors. The Company also believes that its demonstrated
sales and provisioning expertise is attractive to facilities-based CLECs which
may not be having similar success.

SALES AND MARKETING

The Company's customers include small and medium-sized businesses which
principally have telecommunications usage of less than $5,000 per month. The
Company believes that the RBOCs and large IXCs historically have chosen not to
concentrate their sales and marketing efforts on this business segment, which
the Company believes represents a significant portion of the telecommunications
market. Through radio and newspaper advertising, as well as various marketing
programs, the Company has sought to establish itself as a recognized brand name
for its products and services emphasizing responsive customer support,
competitive product and pricing packages and a targeted sales and marketing
strategy. The Company had in excess of 6,000 customers as of June 30, 1997.

The Company's services are currently sold through an approximately 325 member
direct salesforce, located in 27 offices in Illinois, Ohio, Michigan, New York
and Massachusetts. The sales personnel make direct calls to prospective and
existing customers to outline the range of services offered and discuss the
benefits of the Company's integrated service offerings, enhanced customer care
and potential savings. The Company is planning to supplement its direct sales
organization with outbound telemarketing and indirect sales efforts. The
Company believes this marketing approach will increase market coverage and
reduce marketing and customer acquisition costs.

The Company has recruited and continues to recruit a direct salesforce in
each of the markets in which it operates. The Company primarily recruits
salespeople with experience in selling competitive telecommunications services
to businesses in the markets where they are based. The Company's salesforce is
trained in-house with a rigorous customer-focused training program that
promotes activity-based selling. The salesforce makes calls to prospective
customers from potential customer modules created by acquiring business
databases sorted by target characteristics (e.g. size of business and number of
telephone lines). Salespeople are given an incentive through a commission
structure, with a target of 50% of a salesperson's compensation based on such
person's performance.

CUSTOMER CARE

The Company maintains an emphasis on customer care to differentiate itself
from its competitors and reduce churn. By providing each customer with an
account representative, the Company is able to provide ongoing personalized
contact to address the clients' needs. In addition, the Company has established
a 24-hours-per-day, 365-days-per-year, customer care center to facilitate
customer care and customer service requests. At the Company's customer care
centers, customers' calls are answered by experienced customer care
representatives, many of whom are cross-trained in the provisioning process.
The Company believes that the superior customer service, face-to-face sales
process and integrated service offering provide the Company with a competitive
advantage over the existing local service providers.

MANAGEMENT INFORMATION SYSTEMS

The Company is committed to the continued development and successful
implementation of billing and customer care systems that provide accurate and
timely information to both the Company and its customers. The proprietary
electronic interfaces of the Company's management information systems for the
provisioning of services to the Company's customers have been developed in
cooperation with Ameritech and NYNEX. Provisioning of service to customers is
accomplished through the Company's proprietary systems, which are designed to
interface with the RBOCs' systems through a variety of delivery mechanisms. The
Company believes this method of development has been, and will continue to be a
critical element to successfully providing local telecommunications services
and provides the Company with a competitive advantage, as the RBOCs have an

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economic and strategic incentive to work with resellers that have
sophisticated information systems that can electronically interface with the
RBOCs' systems. The Company's experience in developing these systems allows it
to offer services quickly in new markets. The customer care systems have been
developed and continue to be enhanced in a client/server environment allowing
for flexibility to accommodate an expanding customer base, efficient entry
into new markets and rapid development of additional functionality.

The Company's billing systems are designed to provide access to a broad
range of information on individual subscribers, including their call volume,
patterns of usage and billing history. This same information is used by the
Company to identify customer trends and will allow for proactive support of
the Company's marketing efforts.

The Company currently outsources the rating, printing and mailing of
customer bills. Since these functions require a high volume of processing in a
limited time frame, the Company has determined that currently the most
economical way to process bills is to outsource this function. The customer
usage information for billing and the tables and procedures used in the rating
of call records are maintained separately by the Company to manage the ongoing
needs of each customer. Standard management reports are generated for every
billing cycle.

VENDOR AGREEMENTS

Introduction

The Company has executed comprehensive local exchange resale agreements with
Ameritech for the greater metropolitan Chicago area, Ohio and Michigan, and
with NYNEX for the State of New York. In addition, the Company has executed
interim resale agreements with Ameritech for the State of Wisconsin and with
NYNEX for the State of Massachusetts. The Company estimates, based on data
compiled by the FCC, that the regions covered by the current comprehensive
Ameritech and NYNEX resale agreements include access to over 10 million
business access lines. Management believes that upon expansion in the
remaining Bell Atlantic/NYNEX region and the Ameritech region, the Company
will have access to approximately 20 million business access lines. The
Company continuously evaluates opportunities to enter into agreements with
additional RBOCs, long distance carriers and enhanced and other value-added
service providers in order to aggressively build its customer base as well as
to provide additional services to its existing customers while reducing costs.

The Company currently has a long distance resale agreement with MCI. Such
agreement allows the Company to offer its customers integrated local and long
distance telecommunications services. In addition, such agreement has allowed
the Company to enter and establish itself as a telecommunications provider in
strategically targeted markets prior to establishing a local exchange resale
agreement.

Ameritech Resale Agreements

Pursuant to the Ameritech resale agreements, the Company purchases local
exchange services at discounted rates based on a ten-year term. These
agreements contain pricing protections designed to maintain the
competitiveness of the Company's discounted rates and position the Company to
purchase capacity at rates at least as favorable as those of competitors that
have or may eventually negotiate a resale agreement. The level of discounts of
the resold services provided under these agreements vary based on the state
and the nature of services resold (i.e., access lines, local calls, toll calls
or features).

Services offered for resale include most of the telecommunications products
and services engineered and provided by Ameritech, such as local exchange
calling and attendant features including call waiting, call forwarding, caller
ID and three-way calling. The rates for these services are filed with the
public utilities commission of each respective state. The Company also has an
agreement with Ameritech for the resale of certain non-tariffed services to
its customers, including inside wire maintenance.

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The Ameritech resale agreements include a Minimum Commitment of resold access
lines per region covered. The Minimum Commitment in Illinois is 150,000
business access lines and in Ohio and Michigan, 100,000 business access lines
and 10,000 residential lines. The Minimum Commitment is not a limitation on the
Company's overall ability to sell access lines at discounted rates. However, if
the Company fails to meet its Minimum Commitment, the Company is subject to an
underutilization charge equal to the number of unutilized lines multiplied by a
fixed average business line rate. The measurement period of the Minimum
Commitment does not commence, however, until the completion of an 18-month
"ramp up" period which gives the Company the ability to build its customer
base. In addition, the Ameritech resale agreements provide a "carryforward"
provision designed to minimize the potential for any liability resulting from a
failure to meet the Minimum Commitment by carrying forward underutilization
amounts which may be met in the future.

If the Company does not meet its Minimum Commitment by the end of the ten-
year term with the benefit of the carryforward provision, the Company has the
option to either pay a penalty based on the aggregate number of unutilized
lines or subscribe on a monthly basis to an equivalent number of lines during
the next three-year period. In the event the Company terminates any of the
Ameritech resale agreements prior to their expiration, the Company is subject
to a termination charge.

NYNEX Resale Agreement

On July 9, 1996, the Company executed a resale agreement with NYNEX to
provide for the resale of local exchange services for the State of New York at
discounted rates based on a ten-year term. The New York NYNEX resale agreement
contains pricing protections designed to maintain the competitiveness of
discounted rates provided to the Company. Under the New York NYNEX resale
agreement, the Company receives the lowest rate and/or most favorable term
provided to any reseller; however, if a lower rate is provided to a reseller
committing to both a longer term and a greater volume commitment, the Company
receives the lower rate but must negotiate with NYNEX a reasonable transition
to similar commitments. If the Company cannot successfully negotiate such a
transition with NYNEX, then the Company may be unable to maintain the lowest
rate. The level of discounts of resold services varies based on the nature of
the services. The New York NYNEX resale agreement contains a Minimum Commitment
of 100,000 business access lines. In the event the Company does not satisfy the
Minimum Commitment after a trial period and ramp-up period, the Company is
subject to an underutilization charge. However, the New York NYNEX resale
agreement also contains a carryforward provision designed to minimize the
potential of an underutilization charge. The Company has also executed an
interim resale agreement with NYNEX for Massachusetts. This agreement does not
contain a term and volume commitment, but was designed to allow the Company to
begin reselling services in Massachusetts expeditiously in a manner consistent
with state regulatory developments. Although there can be no assurance, it is
expected that the Company and NYNEX will enter into a long-term resale
agreement for Massachusetts similar to the New York NYNEX resale agreement.

Long Distance Agreements

The Company has an agreement with MCI pursuant to which MCI provides a wide
range of long distance telecommunications services to the Company's customers.
Services offered for resale from MCI include a variety of inbound, outbound,
calling card and international services. In addition, the Company also resells
teleconferencing, debit cards, branded operator services and private line
services.

The Company's long distance carrier agreement with MCI became effective
August 1, 1996 and contains a 33-month term. It requires the Company to achieve
certain monthly dollar targets in order to qualify for discounted rates on
carrier services. The agreement provides for an annual commitment for each of
the remaining two years of the contract term. If the Company does not meet its
annual commitment during any annual period of the term, an underutilization
charge shall apply in an amount equal to 15% of the difference between the
committed amount and the actual usage. However, the Company may carry forward
up to 10% of the initial annual commitment for a period of up to three months
in the following annual period.

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Enhanced and Other Value-Added Telecommunications Services

The Company has agreements to offer on a resale basis enhanced and other
value-added services such as Internet access and paging. In addition, the
Company has entered into an agreement for the exclusive rights in the United
States and Canada to distribute a Windows-based teleconferencing product which
allows the conference host to conduct a conference call using point and click
graphics directly from a personal computer without having to make
teleconference reservations.

COMPETITION

The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. The Company
expects that competition will continue to intensify in the future due to
regulatory changes, including the continued implementation of the
Telecommunications Act, and the increase in the size, resources and number of
market participants. In each of its markets, the Company faces competition for
local service from larger, better capitalized incumbent providers.
Additionally, the long distance market is already significantly more
competitive than the local exchange market, because the ILECs, including the
RBOCs, have historically had a monopoly position within the local exchange
market.

In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including non-facilities-based providers like the
Company. For example, AT&T, MCI and Sprint, among other carriers, have each
begun to offer local telecommunications services in major U.S. markets using
their own facilities or by resale of the ILECs' or other providers' services.
In fact, certain competitors, including AT&T, MCI and Sprint, have entered
into interconnection agreements with Ameritech with respect to the States of
Illinois, Michigan and Ohio. These competitors either have begun or in the
near future likely will begin offering local exchange service in those states,
subject to the joint marketing restrictions under the Telecommunications Act
described below. In addition, some of these competitors have entered into
interconnection agreements with NYNEX and either have begun or in the near
future likely will begin offering local exchange service in New York and
Massachusetts, subject to such joint marketing restrictions. In addition to
these long distance service providers, entities that currently offer or are
potentially capable of offering switched services include CLECs, cable
television companies, electric utilities, other long distance carriers,
microwave carriers, wireless telephone system operators and large customers
who build private networks. Many facilities-based CLECs and long distance
carriers, for example, have committed substantial resources to building their
networks or to purchasing CLECs or IXCs with complementary facilities. By
building or purchasing a network or entering into interconnection agreements
or resale agreements with ILECs, including RBOCs, a facilities-based provider
can offer single source local and long distance services similar to those
offered by the Company. Such additional alternatives may provide such
competitors with greater flexibility and a lower cost structure than the
Company. In addition, some of these CLECs and other facilities-based providers
of local exchange service are acquiring or being acquired by IXCs that are not
subject to joint marketing restrictions. These combined entities may provide a
bundled package of telecommunications products, including local and long
distance telephony, that is in direct competition with the products offered by
the Company.

With respect to wireless telephone system operators, the FCC has authorized
cellular, personal communications service, and other CMRS providers to offer
wireless services to fixed locations, rather than just to mobile customers, in
whatever capacity such CMRS providers choose. Previously, cellular providers
could provide service to fixed locations only on an ancillary or incidental
basis. This authority to provide fixed as well as mobile services will enable
CMRS providers to offer wireless local loop service and other services to
fixed locations (e.g., office and apartment buildings) in direct competition
with the Company and other providers of traditional fixed telephone service.
In addition, in August 1996, the FCC promulgated regulations that classify
CMRS providers as telecommunications carriers, thus giving them the same
rights to interconnection and reciprocal compensation under the
Telecommunications Act as other non-LEC telecommunications carriers, including
the Company.

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The Company will also face competition from other fixed wireless services,
including MMDS, LMDS and 38 GHz wireless communications systems, WCS, FCC Part
15 unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies. The FCC has announced
plans to hold an auction for LMDS licenses in all markets for the provision of
high capacity, wide-area fixed wireless point-to-multipoint systems. In
addition, the FCC proposed rules to auction geographical area wide licenses
for the operation of fixed wireless point-to-point communications services in
the 38 GHz band, although many 38 GHz licenses have already been issued
nationwide. The LMDS auction is scheduled to begin in December 1997 and the 38
GHz auction is expected to occur in 1998. The MMDS service, also known as
"wireless cable," also currently competes for metropolitan wireless broadband
services. At present, wireless cable licenses are used primarily for the
distribution of video programming and have only a limited capability to
provide two-way communications needed for wireless broadband
telecommunications services, but there can be no assurance that this will
continue to be the case. The FCC has initiated a proceeding to determine
whether to provide wireless cable operators with greater technical flexibility
to offer two-way services. Cellular, PCS and other mobile service providers
may also offer fixed services over their licensed frequencies. Finally, the
FCC has allocated a number of spectrum blocks for use by wireless devices that
do not require site or network licensing. A number of vendors have developed
such devices that may provide competition to the Company, in particular for
certain low data-rate transmission services.

Under the Telecommunications Act and related federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
availability of broad-based local resale and introduction of facilities-based
local competition are required before the RBOCs may provide in-region
interexchange long distance services. Also, the largest long distance carriers
(AT&T, MCI, Sprint and any other carrier with 5% or more of the pre-subscribed
access lines) are prevented under the Telecommunications Act from bundling
local services resold from an RBOC in a particular state with their long
distance services until the earlier of (i) February 8, 1999 or (ii) the date
on which the RBOC whose services are being resold obtains in-region long
distance authority in that state. The RBOCs are currently allowed to offer
certain in-region "incidental" long distance services (such as cellular, audio
and visual programming and certain interactive storage and retrieval
functions) and to offer virtually all out-of-region long distance services.

In August 1997, the FCC denied the application of Ameritech, the RBOC in
three states where the Company operates, for in-region long distance authority
in Michigan. The Company anticipates that a number of RBOCs, including
Ameritech, will file additional applications in 1998. However, based on recent
public announcements, the Company does not believe any RBOC will provide in-
region long distance services prior to 1999. The FCC will have 90 days from
the date such an application is filed to decide whether to grant or deny the
application. Once the RBOCs are allowed to offer widespread in-region long
distance services, both they and the largest interexchange carriers will be in
a position to offer single-source local and long distance services similar to
those offered by the Company. While new business opportunities will be made
available to the Company through the Telecommunications Act and other federal
and state regulatory initiatives, regulators are likely to provide the ILECs
with an increased degree of flexibility with regard to pricing of their
services as competition increases. Although the Ameritech and NYNEX resale
agreements contain certain pricing protections, including adjustments in the
wholesale rates to be consistent with any changes in the Ameritech and NYNEX
retail rates, if the ILECs elect to lower their rates and sustain lower rates
over time, this may adversely affect the revenues of the Company and place
downward pressure on the rates the Company can charge. While the Ameritech and
NYNEX resale agreements ensure that the Company will receive any lower rate
provided to any other reseller, under the NYNEX resale agreement if such lower
rate is provided to a reseller committing to both a longer term and a greater
volume commitment, the Company receives the lower rate, but must negotiate
with NYNEX a reasonable transition to similar commitments. If the Company
cannot successfully negotiate such a transition with NYNEX, then the Company
may be unable to maintain the lowest rate. The Company believes the effect of
lower rates may be offset by the increased revenues available by offering new
products and services to its target customers, but there can be no assurance
that this will occur. In addition, if future regulatory decisions afford the
LECs excessive pricing flexibility or other regulatory relief, such decisions
could have a material adverse effect on the Company.

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Competition for the Company's products and services is based on price,
quality, network reliability, service features and responsiveness to customers
needs. While the Company believes that it currently has certain advantages
relating to the timing, ubiquity and cost savings resulting from its resale
agreements, there is no assurance that the Company will be able to maintain
these advantages. A continuing trend toward business combinations and alliances
in the telecommunications industry may create significant new competitors to
the Company. Many of the Company's existing and potential competitors have
financial, technical and other resources significantly greater than those of
the Company.

GOVERNMENT REGULATION

The Company is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company's provision of
local exchange services is regulated by the states. The Company must be
separately certified in each state to offer local exchange services. No state,
however, subjects the Company to price cap or rate-of-return regulation. FCC
approval is required for the resale of international facilities and services.
The FCC has determined that nondominant carriers, such as the Company, are
required to file interstate tariffs on an ongoing basis, setting forth the
Company's rates and operating procedures. Such tariffs can currently be
modified on one day's notice. The FCC recently issued regulations to eliminate
this tariff filing requirement for all nondominant carriers, such as the
Company and all other nondominant interexchange carriers (except possibly the
RBOCs in certain circumstances), effective in late 1997. Various carriers have
filed suit to overturn the FCC regulations, and the U.S. Court of Appeals for
the D.C. Circuit has stayed the regulations pending its decision in that
appeal, which is not expected until the end of 1997. The FCC has recently ruled
that RBOCs providing out-of-region long distance service through separate
subsidiaries from their local telephone operations qualify for nondominant
treatment. Out-of-region RBOC services provided through unseparated entities,
however, are subject to full dominant carrier regulation, including the
requirement to submit cost support with tariffs and to file tariffs on at least
15 to 45 days' notice, depending on various factors. The FCC has indicated that
RBOC in-region service, when authorized, will be subject to nondominant
regulatory status. See "Risk Factors--Regulation and Risks of the
Telecommunications Act."

Legislation. On February 8, 1996, President Clinton signed into law the
Telecommunications Act, comprehensive federal telecommunications legislation
affecting all aspects of the telecommunications industry. The
Telecommunications Act establishes a national policy that promotes local
exchange competition. The Telecommunications Act requires that local and state
barriers to entry into the local exchange market be removed and establishes
broad uniform standards under which the FCC and the state commissions are to
implement local competition and co-carrier arrangements in the local exchange
market. Under certain conditions and subject to reasonable exceptions, ILECs
are now required to make available for resale to new entrants all services
offered by the LEC on a retail basis. The Telecommunications Act also imposes
significant obligations on the RBOCs and other ILECs, including the obligation
to interconnect their networks with the networks of competitors. Each ILEC is
required not only to open its network but also to "unbundle" the network. The
FCC issued regulations in August 1996 defining a minimum set of elements which
must actually be unbundled, and each state may augment this list if it wishes.
States have begun and, in a number of cases, completed regulatory proceedings
to determine the pricing of these unbundled network elements and services, and
the results of these proceedings will determine whether it is economically
attractive to use these elements.

The RBOCs have an added incentive to open their local exchange networks to
facilities-based competition because Section 271 of the Telecommunications Act
provides for the removal of the current ban on RBOC provision of in-region
inter-LATA toll service and equipment manufacturing. This ban will be removed
only after the RBOC demonstrates to the FCC, which must consult with the
Department of Justice and the relevant state commissions, that the RBOC has (1)
met the requirements of the Telecommunications Act's 14-point competitive
checklist and (2) entered into an approved interconnection agreement with one
or more unaffiliated, facilities-based competitors in some portion of the state
pursuant to which such competitors provide both business and residential
service (or that by a date certain no such competitors have "requested"
interconnection as defined in the Telecommunications Act). RBOC in-region
services must be provided through a separate subsidiary for three years, unless
extended by the FCC. In August 1997, the FCC denied the application of

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Ameritech, the RBOC in three states where the Company operates, for in-region
long distance authority in Michigan. The Company anticipates that a number of
RBOCs, including Ameritech, will file additional applications in 1998.
However, based on recent public announcements, the Company does not believe
any RBOC will provide in-region long distance services prior to 1999. If the
FCC determines that the RBOC's entry into in-region provision of long distance
in that state is in the public interest and that the RBOC has met the 14-point
checklist, it must authorize the RBOC to provide such services. SBC
Communications Inc., the parent of RBOCs in Oklahoma and other southwestern
states, filed a lawsuit in June 1997 challenging the constitutionality of
Section 271 and seeking to have it declared void. The Company cannot predict
the outcome of this litigation.

Under the 14-point competitive checklist, in order to obtain in-region long
distance authority an RBOC must first demonstrate to the FCC, among other
things, that, within a particular state, it offers competing LECs the
following: interconnection as required under the Telecommunications Act; non-
discriminatory access to unbundled network elements at just and reasonable
rates; non-discriminatory access to its poles, ducts, conduits, and rights-of-
way; unbundled local loop transmission, unbundled local transport, and
unbundled local switching; non-discriminatory access to 911 services;
directory assistance, operator call completion services, and white pages
directory listings for competing local carriers' customers; non-discriminatory
access to call routing databases; number portability (i.e., the ability of a
customer to keep the same telephone number when switching local telephone
service providers); dialing parity (i.e., the ability of customers of one
telephone service provider to call customers of other providers without
dialing access codes); reciprocal compensation arrangements for the
termination of calls between competing local networks; and permitting resale
of its telecommunications services.

The Telecommunications Act is intended to eliminate state and local
statutory and regulatory barriers to entry, thus accelerating the process of
creating a competitive environment in all markets. This preemption of state
laws barring local competition and the relaxation of regulatory restraints
should enhance the Company's ability to expand its service offerings
nationwide. At the same time, the Telecommunications Act will also
substantially increase the competition the Company will face in its various
markets.

The Telecommunications Act permits the Company, as a telecommunications
carrier with less than 5% of nationwide presubscribed access lines, to offer
single-source combined packages of local and long distance services. In
contrast, AT&T, MCI and Sprint may not bundle in an RBOC's territory their
local services resold from an RBOC and in-region long distance service until
the earlier of (i) February 8, 1999 or (ii) the date the RBOC is authorized to
enter the inter-LATA long distance market in that state.

Federal Regulation. The Telecommunications Act in some sections is self-
executing, but in most cases the FCC must issue regulations that identify
specific requirements before the Company and its competitors can proceed to
implement the changes the Telecommunications Act prescribes. The Company
actively monitors all pertinent FCC proceedings and has participated in some
of these proceedings. The FCC already has completed most of these rulemaking
proceedings. The outcome of these various ongoing FCC rulemaking proceedings
or judicial appeals or such proceedings could materially affect the Company's
operations.

In May 1997, the FCC issued new regulations regarding the implementation of
the universal service program and the assessment of access charges on carriers
retaining access to local exchange networks. All telecommunications carriers,
including the Company, that provide interstate services are required to
contribute, on an equitable and nondiscriminatory basis, to the preservation
and advancement of universal service pursuant to a universal funding service
mechanism established by the FCC. Both the access charge and universal service
regimes were substantially revised. As a result of these changes, the costs of
business and multiple residential telephone lines are expected to increase. In
addition, the new regulations require a reseller, such as the Company, to
begin contributing to the universal service programs for low-income consumers
and high-cost, rural and insular areas on the basis of the reseller's
interstate and international revenues. Several parties have appealed various
parts of the new FCC rules, including the revenue basis on which contributions
are determined. The Company is unable to predict the final formula for
universal service contribution or its own level of contribution.

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The Telecommunications Act provides that individual state utility commissions
can, consistent with FCC regulations, prohibit resellers from reselling a
particular service to specific categories of customers to whom the ILEC does
not offer that service at retail. In August 1996, the FCC issued detailed
regulations providing that many such limitations are presumptively unreasonable
and that states may enact such prohibitions on resale only in certain limited
circumstances. In particular, the FCC concluded that while it would be
permissible to prohibit the resale of certain residential or other subsidized
services to end users that would be ineligible to receive such services
directly from the LEC, all other "cross-class" selling restrictions, including
those on volume discount and flat-rated offerings to business customers, would
be presumed unreasonable. An ILEC may rebut this presumption, however, by
demonstrating that the class restriction is reasonable and nondiscriminatory.
The FCC also rejected claims by several ILECs to provide for several exceptions
to the general resale obligation. For instance, it refused to create a general
exception for all promotional or discounted offerings, including contract and
customer-specific offerings. The FCC did, however, conclude that short-term
promotional prices (i.e., those offered for 90 days or less) are not "retail
rates" and thus are not subject to the wholesale rate obligation. ILECs may not
offer consecutive 90-day promotions to avoid these resale obligations.

The Telecommunications Act also provides that state commissions shall be
given an opportunity to determine the wholesale rates for local
telecommunications services (i.e., the rates charged by ILECs to resellers such
as the Company) on the basis of retail rates less "avoided costs," i.e.,
marketing, billing, collection and other administrative costs avoided by the
ILEC when it sells at wholesale. In August 1996 the FCC issued detailed
regulations establishing an interim default discount of between 17% to 25%.
Although this portion of the FCC's rules has been overturned on appeal (see
below), in practice state commissions have generally adopted discount
percentages that fall within the 17-25% default range.

In August 1996, the FCC also issued regulations that, among other things, set
minimum standards governing the terms and prices of interconnection and access
to unbundled ILEC network elements. These regulations indirectly affect the
price at which the Company's new facilities-based competitors may ultimately
provide service. The Telecommunications Act provides that state commissions
shall determine the rates charged for such unbundled elements on the basis of
cost plus a reasonable profit. The FCC declined to issue detailed regulations
governing the relationship between these two pricing standards, leaving the
interpretation and implementation of the two standards to the states. The
Company is unable to predict the final form of such state regulation, or its
potential impact on the Company or the local exchange market in general. At the
same time, the FCC imposed minimum obligations regarding the duty of ILECs to
negotiate interconnection or resale arrangements in good faith.

A number of RBOCs, state regulatory commissions and other parties filed
requests for reconsideration by the FCC of various parts of the rules announced
by the FCC in August 1996, including those provisions (a) limiting competitors'
ability to purchase for resale certain types of service that the RBOC is no
longer marketing to new customers ("grandfathered services"), and (b)
establishing pricing methodologies and interim default rates for resold
services and unbundled network elements. The FCC is conducting a proceeding to
consider the various petitions for reconsideration, and a decision is expected
in 1997. In addition, many of the same parties and certain other parties have
filed court appeals challenging the same FCC rules. In July 1997, the Eighth
Circuit Federal Court of Appeals struck down certain parts of the rules
(including the provisions establishing pricing methodologies and default rates
for resold services and unbundled network elements). In October 1997, the same
court issued an order clarifying that the RBOCs were not required to rebundle
unbundled network elements that competing carriers had purchased separately. If
upheld, this ruling would make it more difficult for competitors, including the
large IXCs, to use rebundled unbundled network elements or the "UNE Platform"
to enter the local exchange market. The FCC is expected to appeal the decisions
to the U.S. Supreme Court. The Company cannot predict at this time the outcome
of the appeals or reconsideration processes.

In August 1997, the FCC issued rules transferring responsibility for
administering and assigning local telephone numbers from the RBOCs and a few
other LECs to a neutral entity in each geographic region in the United States.
In August 1996, the FCC issued new numbering regulations that (a) prohibit
states from creating new area codes that could unfairly hinder LEC competitors
(including the Company) by requiring their customers

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to use 10 digit dialing while existing ILEC customers use 7 digit dialing, and
(b) prohibit ILECs (which are still administering central office numbers
pending selection of the neutral administrator) from charging "code opening"
fees to competitors (such as the Company) unless they charge the same fee to
all carriers including themselves. In addition, each carrier is required to
contribute to the cost of numbering administration through a formula based on
net telecommunications revenues. In July 1996, the FCC released rules to
permit both residential and business consumers to retain their telephone
numbers when switching from one local service provider to another (known as
"number portability"). RBOCs are required to implement number portability in
the top 100 markets by October 1, 1997 and to complete it by December 31,
1998. In smaller markets, RBOCs must implement number portability within six
months of a request therefore commencing December 31, 1998. Other LECs are
required to implement number portability by October 31, 1997 only in those of
the top 100 markets where the feature is requested by another LEC. Non-RBOC
LECs are not required to implement number portability in additional markets
until December 31, 1998 and then only in markets where the feature is
requested by another LEC. The Company already offers number portability as it
provides local service obtained from the incumbent RBOCS. This allows
customers to switch to the Company's services and still retain their existing
telephone numbers.

In addition, the FCC authorized cellular and other CMRS to provide wireless
services to fixed locations (rather than to mobile customers), including
offering wireless local loop service, in whatever capacity such provider
determines. Previously, many CMRS providers could provide fixed services on
only an ancillary or incidental basis. In addition, in August 1996 the FCC
promulgated regulations that classify CMRS providers as telecommunications
carriers, thus giving them the same rights to interconnection and reciprocal
compensation under the Telecommunications Act as other non-LEC
telecommunications carriers, including the Company.

State Regulation. Historically, certain of the Company's resold local and
long distance services have been classified as intrastate and therefore
subject to state regulation. As its local service business and product lines
has expanded, the Company has offered more intrastate service and become
increasingly subject to state regulation. The Telecommunications Act maintains
the authority of individual state utility commissions to impose their own
regulation of local exchange services so long as such regulation is not
inconsistent with the requirements of the Telecommunications Act. In all
states where certification is required, the Company's operating subsidiaries
are certificated as common carriers. In all states, the Company believes that
it operates with the appropriate state regulatory authorization. The Company
currently is authorized to provide intrastate toll or a combination of local
and intrastate toll service in more than 40 states. These authorizations vary
in the scope of the intrastate services permitted.

The Telecommunications Act provides that the Company's resale agreements
must be submitted to the applicable state utility commission for approval, and
it places strict limitations on the bases on which a state commission can
reject such an agreement. If the state commission does not act within 90 days
after the agreement is submitted for approval, then the agreement is deemed
approved. In addition, if a state commission fails to act to enforce an
agreement, the FCC can (upon request of a party) take jurisdiction over the
matter. A state commission's decisions regarding implementation and
enforcement of an agreement are appealable to the federal district court in
that state.

PROPERTIES

The Company leases 27 facilities, principally sales facilities, in Boston,
Massachusetts, Chicago, Illinois, Detroit, Michigan, Cleveland and Columbus,
Ohio and New York City, as well as in a number of areas surrounding such
cities and in other significant urban areas in Michigan, New York and Ohio.
The Company maintains its corporate headquarters in Chicago, Illinois.
Although the Company's facilities are adequate at this time, the Company
believes that it will be required to lease additional facilities, particularly
in new metropolitan areas where the Company enters RBOC resale agreements.

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EMPLOYEES

As of September 30, 1997, the Company employed 868 people. The Company's
employees are not unionized, and the Company believes its relations with its
employees are good. In connection with its marketing and sales efforts and the
conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or collective
bargaining agreements. The Company believes that its success will depend in
part on its ability to attract and retain highly qualified employees.

LEGAL MATTERS

From time to time the Company is party to routine litigation and proceedings
in the ordinary course of its business. The Company and its subsidiaries are
not aware of any current or pending litigation that the Company believes would
have a material adverse effect on the Company's results of operations or
financial condition. The Company and its subsidiaries continue to participate
in regulatory proceedings before the FCC and state regulatory agencies
concerning the authorization of services and the adoption of new regulations.

40
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table provides certain information regarding the executive
officers and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
J. Thomas Elliott....... 50 Chairman of the Board, President, Chief Executive Officer and Director
Dennis B. Dundon........ 52 Chief Operating Officer
Ronald W. Gavillet...... 38 Executive Vice President, Strategy & External Affairs
Gerald J. Sweas......... 49 Executive Vice President and Chief Financial Officer
Ryan Mullaney........... 41 Executive Vice President, Sales
Steven J. Parrish....... 41 Executive Vice President, Operations
Thomas A. Monson........ 37 Vice President, General Counsel and Secretary
Thad J. Pellino......... 35 Vice President, Marketing
Neil A. Bethke.......... 37 Vice President, Information Systems
Ellen C. Craig.......... 59 Vice President, Regulatory Affairs
Lane Foster............. 53 Vice President, Human Resources and Organizational Development
Thomas C. Brandenburg... 61 Director
Richard J. Brekka....... 36 Director
Dean M. Greenwood....... 54 Director
Donald J. Hofmann, Jr... 39 Director
William A. Johnston..... 45 Director
Ian M. Kidson........... 38 Director
Paul S. Lattanzio....... 34 Director
Eugene A. Sekulow....... 65 Director
</TABLE>

Each director serves until his successor is duly elected and qualified.
Officers serve at the discretion of the Board of Directors.

J. Thomas Elliott, Chairman of the Board, President and Chief Executive
Officer, has been the Chief Executive Officer since April 1996. Mr. Elliott
joined the Company in 1995 as a result of the Company's acquisition of Quest,
a company which he co-founded. From 1991 to 1993, Mr. Elliott was Senior Vice-
President of Sales and Marketing of Wiltel Communications Systems. From 1990
to 1991, Mr. Elliott was President and Chief Executive Officer of Call Net
Inc. (Canada's first alternative long distance company) and Lightel Inc., its
affiliate fiber optic facility provider. Subsequently, these companies were
combined to form Sprint Canada. Mr. Elliott holds B.A. and M.A. degrees in
economics from the University of Windsor.

Dennis B. Dundon, Chief Operating Officer, joined the Company in April 1997.
From 1991 to 1996, Mr. Dundon served as President and Chief Executive Officer
of EMI Communications Corp. ("EMI"), a regional telecommunications company,
until EMI was acquired by Intermedia Communications, Inc. From June 1996 to
March 1997, Mr. Dundon served as Senior Vice President of Intermedia, a CLEC.
From 1988 to 1991, Mr. Dundon was President and owner of DBD Associates, Inc.,
a consulting firm providing services to the telecommunications sector. Mr.
Dundon is a past Chairman and Director of the Competitive Telecommunications
Association. Mr. Dundon holds a B.S. degree from Clarkson University and an
M.B.A. degree from the University of Rochester.

Ronald W. Gavillet, Executive Vice President, Strategy & External Affairs,
has performed the Company's legal, regulatory and strategic functions since
1994. Prior to joining the Company, Mr. Gavillet spent more than four years,
from 1985 to 1987 and from 1992 to 1994, with MCI in a number of senior legal
and regulatory positions. Between these periods at MCI, Mr. Gavillet was in
private law practice representing competitive carriers such as Teleport
Communication Group, Inc., Centex Telemanagement Inc., Centel Corp., Sprint
Corp. and Telesphere Communications Inc. Mr. Gavillet holds B.A. and B.S.
degrees from Southern Illinois University,

41
<PAGE>

a J.D. degree from Catholic University of America's Columbus School of Law and
a Master of Management degree from Northwestern University's Kellogg School of
Management and serves on the Telecommunications Resellers Association Local
Services Council.

Gerald J. Sweas, Executive Vice President and Chief Financial Officer, joined
the Company in November 1996. From 1989 to 1996, Mr. Sweas was Vice President
Finance and Administration, Treasurer and Chief Financial Officer of Norand
Corporation, a wireless data communications networks company. Mr. Sweas holds a
B.B.A. degree from Loyola University in Chicago, Illinois and an M.B.A. degree
from the University of Wisconsin (Madison) and is a Certified Public
Accountant.

Ryan Mullaney, Executive Vice President, Sales, joined the Company in October
1996. From 1995 to 1996, Mr. Mullaney served as Vice President, Sales, USA West
for Citizens Telecom, a medium-sized telecommunications company, where he
managed sales in 13 states. From 1993 to 1995, Mr. Mullaney was Director of
Member Development for McLeod Telemanagement Organization, where his duties
included management of the company's field sales and service organization. From
1991 to 1993, Mr. Mullaney was National Sales Director of Centex
Telemanagement, responsible for developing sales in the national market. Mr.
Mullaney has a B.A. degree from the University of Nevada, Las Vegas.

Steven J. Parrish, Executive Vice President, Operations, joined the Company
in January 1996 initially as a consultant and later assumed a full-time
position. Prior to joining the Company, Mr. Parrish spent more than 12 years
with Illinois Bell in various planning and operations positions. Mr. Parrish
moved to Ameritech in 1991 where he helped start the Information Industry
Services business unit as Vice President of Business Development and Vice
President of Marketing and Sales for Network Providers. Mr. Parrish holds a
bachelor's degree in electrical engineering from the University of Illinois and
an M.B.A. degree from the Illinois Institute of Technology.

Thomas A. Monson, Vice President, General Counsel and Secretary, joined the
Company in January 1997. From 1989 to 1996, Mr. Monson was Associate General
Counsel of Envirodyne Industries, Inc., a $650 million public company, where he
performed various corporate law, securities regulation, litigation and
corporate operations support activities. Mr. Monson holds a B.S. degree from
the University of Illinois and a J.D. degree from Harvard Law School.

Thad J. Pellino, Vice President, Marketing, joined the Company in August
1995. From 1988 through 1995, Mr. Pellino was with MCI where he held a variety
of marketing and business development positions, which included responsibility
for the design of customized telecommunication packages for mid-size and long
distance carriers. Mr. Pellino received his bachelor's degree in
marketing/business administration from the University of Illinois.

Neil A. Bethke, Vice President, Information Systems, joined the Company
initially as a consultant in 1995 and assumed a full-time position in May 1996.
From 1994 to 1996 Mr. Bethke served as principal for New Resources Corporation,
a medium-sized consulting company specializing in client/server technology
development for large service-oriented companies. From 1988 to 1994, Mr. Bethke
served at Quantum Chemical Corporation and Sara Lee Corporation as Director of
MIS, responsible for the reengineering of business processes through document
routing and wide area network database management. Mr. Bethke holds a B.S.
degree from the University of Wisconsin.

Ellen C. Craig, Vice President, Regulatory Affairs, joined the Company in
April 1997. From 1994 to 1997, Ms. Craig served as a consultant to investment
banking and telecommunications companies on domestic and international
utilities and telecommunications issues. From 1989 to 1994, Ms. Craig served as
Chairman and Commissioner of the Illinois Commerce Commission. She holds a B.A.
degree from Cardinal Cushing College and a J.D. degree from The John Marshall
Law School.

42
<PAGE>

Lane Foster, Vice President, Human Resources and Organization Development,
joined the Company in May 1997. From 1991 to 1996, Mr. Foster served as
Director of Human Resources and Corporate Real Estate for Nextel
Communications, a telecommunications company. From 1980 to 1991, Mr. Foster
served as Director of Human Resources for MCI Telecommunications. Mr. Foster
attended the University of North Dakota and graduated from the University of
Southern California--Center for Telecommunications Senior Leadership Program.

Thomas C. Brandenburg, Director, has been a director of the Company since
founding the Company in 1994. Prior to joining the Company, Mr. Brandenburg was
the co-founder and principal of a telecommunications consulting firm with a
service bureau-based enhanced service company. In 1983, Mr. Brandenburg was the
co-founder and principal of LiTel Communications, Inc. (now LCI International).
Mr. Brandenburg holds a B.A. degree from the University of Notre Dame.

Richard J. Brekka, Director, has been a director of the Company since April
1994. Mr. Brekka is a Managing Partner of MW&I Partners, a merchant banking
fund, and has formed Dolphin Communications, L.L.C. to make communications
investments in the United States. From 1992 to 1996, he was a Managing Director
of CIBC Wood Gundy Capital ("CIBC"), the merchant banking division of Canadian
Imperial Bank of Commerce, and a director and the President of CIBC Wood Gundy
Ventures, Inc., an indirect wholly owned subsidiary of Canadian Imperial Bank
of Commerce. Mr. Brekka joined CIBC in February 1992. Currently, Mr. Brekka
serves on the board of directors of Orion Network Systems, Inc., Telesystem
International Wireless, Inc., and Epoch Internet. Mr. Brekka received a B.S.
degree in finance from the University of Southern California, and an M.B.A.
degree from the University of Chicago.

Dean M. Greenwood, Director, was elected as a director of the Company in
February 1997. Mr. Greenwood is Vice President of Prime Management Group and
has been an officer of that company since 1992. Mr. Greenwood is also a
Managing Director of Prime New Ventures. Mr. Greenwood holds a B.B.A. degree
and a J.D. degree from the University of Texas at Austin.

Donald J. Hofmann, Jr., Director, has been a director of the Company since
April 1994. Mr. Hofmann has been a General Partner of Chase Capital Partners
(formerly known as Chemical Venture Partners) since 1992. Chase Capital
Partners is the sole general partner of Chase Venture Capital Associates, L.P.
Prior to joining Chase Capital Partners, he was head of MH Capital Partners,
Inc., the equity investment arm of Manufacturers Hanover. Mr. Hofmann holds a
B.B.A. degree from Hofstra University and an M.B.A. degree from Harvard
Business School.

William A. Johnston, Director, was elected a director of the Company in June
1994. Mr. Johnston has been a Managing Director of HarbourVest Partners, LLC
since January 1997. HarbourVest Partners, LLC was formed to acquire Hancock
Venture Partners, Inc. where Mr. Johnston had served in various capacities
since 1983. Currently, Mr. Johnston serves on the advisory boards of The
Centennial Funds, Austin Ventures, and Highland Capital Partners, as well as on
the board of directors of Centennial Security Holdings, Inc., Epoch Internet,
MultiTechnology Corp., The Marks Group, Inc., and Masada Security Corporation.
Internationally, he serves on the board of directors of Telesystem
International Wireless Corporation and Esprit Telecom. Mr. Johnston received a
B.A. degree from Colgate University and an M.A. degree from Syracuse University
School of Management.

Ian M. Kidson, Director, has served as a director of the Company since April
1997. Mr. Kidson is a Managing Director of CIBC Wood Gundy Capital, the
merchant banking division of the Canadian Imperial Bank of Commerce. He joined
CIBC in 1984. Currently, Mr. Kidson serves on the board of directors of
Centennial Security Holdings, Inc. and JBK Arena Co. Mr. Kidson received a
B.S.C. degree and an M.B.A. degree from McMaster University.

Paul S. Lattanzio, Director, was appointed a director of the Company in
August 1995. Mr. Lattanzio served as a Managing Director of BT Capital
Partners, Inc., an affiliate of Bankers Trust New York Corp. until September
1997. He continues to provide consulting services to BT Capital Partners, Inc.
and acts as its representative with respect to its investment in USN. Mr.
Lattanzio was employed by BT Capital Partners, Inc.

43
<PAGE>

or an affiliate from 1984. Currently, Mr. Lattanzio serves on the board of
directors of Administaff, Inc., an employee leasing company. Mr. Lattanzio
received his B.S. degree in economics from the University of Pennsylvania's
Wharton School of Business.

Eugene A. Sekulow, Director, was elected a director of the Company in August
1995. Mr. Sekulow served as Executive Vice President of NYNEX Corporation from
December 1991 to 1993. From 1986 to 1991, he served as President of NYNEX
International Company. Since his retirement from NYNEX in 1993, Mr. Sekulow has
founded his own telecommunications consultancy where he has been retained by
European, U.S., Japanese, Southeast Asian and Canadian companies. Currently,
Mr. Sekulow serves on the board of directors of RSL Communications, Inc. Mr.
Sekulow attended the University of Stockholm and the University of Oslo. He
earned an M.A. degree in political science and economics and a Ph.D. degree
from Johns Hopkins University.

Currently, directors are designated by the Original Purchasers pursuant to
existing agreements. Following the consummation of the Offerings, such right to
designate directors will be terminated.

The Board has approved a plan to reconstitute itself by December 31, 1997,
pursuant to which the Board will be comprised of (i) current members
, , and ;
(ii) , currently [title]; and (iii) two newly elected independent
directors.

The Company is required by the terms of the 14% Senior Note Indenture (as
defined) to elect a disinterested director with experience in the
telecommunications industry by each of December 31, 1997 and March 31, 1998.
The identity of the independent directors has not yet been determined and may
not be determined until after completion of the Offerings.

CLASSIFIED BOARD OF DIRECTORS

The Company's Restated Certificate of Incorporation will provide for a
classified Board of Directors consisting of three classes as nearly equal in
number as possible with the directors in each class serving staggered three-
year terms. The Class I directors will be ; the Class II directors will
be ; and the Class III directors will be . The terms of the Class
I, II and III directors will expire initially in 1998, 1999 and 2000,
respectively. At each annual meeting of the stockholders of the Company, the
successors to the class of directors whose term expires at such meeting will be
elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. See
"Description of Capital Stock."

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has established an Audit Committee, a Finance Committee and a
Compensation Committee. Each of these committees is responsible to the full
Board of Directors, and their activities are therefore subject to approval of
the Board of Directors. The functions performed by these committees are
summarized below.

The Audit Committee consists of Messrs. Hofmann, Greenwood and Sekulow. The
Audit Committee is responsible for reviewing the internal accounting controls
of the Company, meeting and conferring with the Company's certified public
accountants and reviewing the results of the accountants' auditing engagement.

The Finance Committee consists of Messrs. Brekka, Elliott, Hofmann, Johnston
and Lattanzio. The Finance Committee is responsible for evaluating the
Company's capital requirements and overseeing the Company's efforts at meeting
its financial needs through capital markets transactions.

The Compensation Committee consists of Messrs. Brekka, Johnston and
Lattanzio. The Compensation Committee establishes compensation and benefits for
the Company's senior executives. The Committee also determines the number and
terms of stock options granted to employees, directors and consultants of the
Company under the Company's stock option plans.

44
<PAGE>

DIRECTORS' COMPENSATION

The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committees thereof, but non-employee
directors are reimbursed for certain expenses in connection with attendance for
Board and committee meetings. Following the consummation of the Offerings, the
Company's non-employee directors will receive customary compensation and will
be reimbursed for out-of pocket expenses incurred in connection with attending
meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee consists of Messrs. Brekka, Johnston and
Lattanzio, none of whom is currently an employee or officer of the Company. No
executive officer of the Company served during fiscal year 1996 as a member of
a compensation committee or as a director of any entity of which any of the
Company's directors serves as an executive officer.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal year 1996 earned by or awarded to the Chief
Executive Officer, the former Chief Executive Officer and the five other most
highly compensated executive officers of the Company whose combined salary and
bonus exceeded $100,000 during the fiscal year ended December 31, 1996 (the
"Named Executive Officers").

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
---------------- ALL OTHER
YEAR SALARY BONUS COMPENSATION
---- -------- ------- ------------
<S> <C> <C> <C> <C>
J. Thomas Elliott..................... 1996 $182,500 $97,500(1) --
President and Chief Executive Officer 1995(2) 139,165 -- $75,000
1994 -- -- --
Ronald W. Gavillet.................... 1996 167,600 92,500(1) --
Executive Vice President, Strategy 1995 135,000 50,000(3) --
& External Affairs 1994(4) 7,788 -- --
Thad J. Pellino....................... 1996 96,700 33,000(1) --
Vice President, Marketing 1995(5) 31,058 33,125(5) --
1994 -- -- --
Neil A. Bethke........................ 1996(6) 69,711 31,250(1) --
Vice President, Information Systems 1995 -- -- --
1994 -- -- --
Thomas C. Brandenburg................. 1996 190,000 -- --
Former Chief Executive Officer 1995 167,692 -- --
1994 174,615 -- --
Robert J. Luth........................ 1996 150,000 -- 50,000(7)
Former Chief Financial Officer 1995 141,635 37,500(3) 69,806(7)
1994 89,170 -- --
Kevin J. Burke........................ 1996 101,000 -- --
Former Vice President, Network
Engineering 1995 123,808 -- --
and Technical Support 1994 -- -- --
</TABLE>
- --------
(1) Represents the bonus that was earned with respect to 1996 and paid in 1997.
(2) Includes Mr. Elliott's compensation as an officer of Quest America, LP
prior to the acquisition of its business by the Company. The $75,000
included as other compensation represents the amount Mr. Elliott received
for consulting service to the Company prior to the Company's acquisition of
the business of Quest America, LP.
(3) Represents amounts paid in 1996 with respect to bonuses earned in prior
periods, primarily in 1995.
(4) Mr. Gavillet commenced employment with the Company in November 1994.
(5) Mr. Pellino commenced employment with the Company in August 1995.
(6) Mr. Bethke commenced employment with the Company in May 1996.
(7) Includes amounts reimbursed by the Company for life and disability
insurance premiums and temporary living expenses.

45
<PAGE>

OPTION GRANTS

The following table sets forth the aggregate number of post-split stock
options granted to each of the Named Executive Officers during the fiscal year
ended December 31, 1996. Options are exercisable for Common Stock of the
Company.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($)(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR (%) ($/SHARE) DATE 5% 10%
---- ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Thomas Elliott....... 75,000 7.2 0.15 6/28/06
299,250 28.7 0.15 9/30/06
Ronald W. Gavillet...... 61,500 5.9 0.15 6/28/06
218,590 20.9 0.15 9/30/06
Thad J. Pellino......... 20,000 1.9 0.15 6/28/06
14,940 1.4 0.15 9/30/06
Neil A. Bethke.......... 20,000 1.9 0.15 6/28/06
14,940 1.4 0.15 9/30/06
</TABLE>
- --------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the options, that the per share fair market
value of the Common Stock is the midpoint of the initial public offering
price range (on a post-split basis) and increases at the rate indicated,
effective as of December 31 of each subsequent full calendar year during
the option term. However, there is no established trading market for the
Common Stock, and no representation is made that the Common Stock actually
has such value or that the rates of increase in value can or will be
achieved.

The following table sets forth certain information concerning the exercise
of post-split stock options by the Named Executive Officers during the fiscal
year ended December 31, 1996 and the December 31, 1996 aggregate value of
unexercised options held by each of the Named Executive Officers.

OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT FISCAL
SHARES FISCAL YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
J. Thomas Elliott....... -- -- 18,750/355,500 /
Ronald W. Gavillet...... -- -- 53,875/264,715 /
Thad J. Pellino......... -- -- 5,000/ 29,940 /
Neil A. Bethke.......... -- -- 5,000/ 29,940 /
Robert J. Luth.......... 20,000 189,000 18,500/ 0 /
</TABLE>
- --------
(1) The information disclosed assumes, solely for purposes of illustrating the
value of in-the-money options, that the per share fair market value of the
Common Stock is $9.60 (on a post-split basis) as of December 31, 1996.
However, there is no established trading market for the Common Stock, and
no representation is made that the Common Stock actually has such value.

46
<PAGE>

BENEFIT PLANS

1994 Amended and Restated Stock Option Plan

In September 1996, the Board of Directors adopted, and the stockholders
subsequently approved, the Amended and Restated 1994 Stock Option Plan (the
"1994 Plan"), which was originally adopted by the Board of Directors and
subsequently approved by the stockholders in September 1994. A total of
1,004,520 shares of Common Stock have been reserved for issuance under the
1994 Plan. The purposes of the 1994 Plan are to attract and retain qualified
personnel, to provide additional incentives to employees, officers and
directors of the Company and its affiliates and to promote the success of the
Company's business. Under the 1994 Plan, the Company may grant incentive or
non-qualified stock options to employees, officers and directors. However, to
the extent that the aggregate fair market value of the Common Stock issued to
any person exceeds $100,000, such options must be treated as nonqualified
stock options.

Options granted under the 1994 Plan generally become exercisable six months
after the date of the grant at a rate of 25% of the shares subject to the
option and thereafter, at a rate of 25% at the end of each six month period
for a total of two years, except that certain options granted to Messrs.
Sweas, Mullaney and Monson in connection with their employment agreements
become exercisable with respect to 50% on the one-year anniversary of the date
of grant and with respect to 25% on the 18-month and 24-month anniversaries of
the date of grant. The maximum term of a stock option under the 1994 Plan is
ten years. If an optionee terminates his or her service for reasons other than
death, disability, retirement, resignation or discharge for cause, the
optionee may exercise only those option shares vested as of the date of
termination. If, however, an optionee retires without prior Board of Directors
approval or is terminated for cause, all options previously not exercised
expire and are forfeited. In addition, the Company has the option to
repurchase all or any part of the shares issued or issuable upon exercise, if
an optionee's employment terminates for any reason whatsoever. Options are
subject to adjustment under certain circumstances.

The 1994 Plan may be amended at any time by the Board of Directors, although
certain amendments require the consent of the participants of the 1994 Plan.
The 1994 Plan will terminate in September 2004, unless earlier terminated by
the Board of Directors.

1996 Option Grants Outside of the 1994 Stock Option Plan

In connection with the issuance of the 9% Preferred Stock and the
consummation of the 1996 Private Placement, Messrs. Elliott, Gavillet,
Parrish, Pellino and Bethke were granted 182,340, 119,960, 6,000, 3,120 and
3,120 additional options, respectively, and certain other employees were
granted a total of 11,110 additional options, to purchase a corresponding
number of shares of Common Stock at an exercise price of $.15 per share. Such
options are exercisable only upon conversion from time to time of the 9%
Preferred Stock, in the case of all such employees, or, as the case may be
with respect to Messrs. Elliott and Gavillet, of the Convertible Notes, into
shares of Common Stock. In connection with the consummation of the Offerings
and the conversion of the 9% Preferred Stock, options to purchase 72,410
shares of Common Stock will become immediately exercisable.

Omnibus Securities Plan

In August 1997, the Board of Directors adopted and the stockholders approved
the Omnibus Securities Plan of USN Communications, Inc. (the "Omnibus
Securities Plan"). A total of 2,750,000 shares have been reserved for issuance
under the Omnibus Securities Plan. The purpose of the Omnibus Securities Plan
is to benefit the Company's stockholders by encouraging high levels of
performance by individuals whose performance is a key element in achieving the
Company's continued success, and to enable the Company to recruit, reward,
retain and motivate employees for the benefit of the Company and its
stockholders. Under the Omnibus Securities Plan, the Company may grant
incentive or non-qualified stock options, stock appreciation rights,
restricted stock awards, performance awards and other stock based awards.
Employees of the Company and its subsidiaries and non-employee directors of
the Company are eligible to participate in the Omnibus Securities Plan. The
Omnibus Securities Plan is administered by the Compensation Committee, which
determines among other things, the terms and recipients of the awards. The
Omnibus Securities Plan may be amended by the Board of Directors, although

47
<PAGE>

certain amendments require the consent of the participants. The Omnibus
Securities Plan will terminate in 2007 unless earlier terminated by the Board
of Directors.

In September 1997, the Compensation Committee authorized the grant of stock
options to substantially all non-executive officer employees of the Company or
its subsidiaries. These options have an exercise price of $8.80 per share,
with one-third of the options vesting on the earlier of the completion of a
qualified public offering of the Company's Common Stock or the first
anniversary of the date of grant, and with an additional one-third of the
options vesting on each of the two anniversaries following the initial vesting
date. These options cover a total of 958,500 shares. In addition, in September
1997, the Compensation Committee authorized the grant of options for a total
of 1,137,000 shares of Common Stock to the Company's 11 executive officers and
a grant of options for a total of 75,000 shares of Common Stock to the
Company's Chairman. These options also have an exercise price of $8.80 per
share.

401(k) Plan

In January 1995, the Company adopted the Employee 401(k) Profit Sharing Plan
(the "401(k) Plan") covering all of the Company's employees. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company on behalf of all
participants. The Company has not made any contributions to date. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code of
1986, as amended, so that contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn, and contributions by the Company, if any, will be
deductible by the Company when made.

EMPLOYMENT AGREEMENTS

All of the Company's executive officers have entered into employment
agreements with the Company. Each agreement provides for an initial term of
two or three years and automatic one-year renewals, and sets forth a base
salary and target annual bonus. The annual base salaries for Messrs. Elliott,
Dundon, Gavillet, Sweas, Mullaney and Parrish are $195,000, $185,000,
$185,000, $150,000, $125,000 and $140,000, respectively. Each agreement
provides that the executive shall receive certain payments in the event his or
her employment is terminated other than for cause, including but not limited
to all amounts earned, accrued and owing to the executive and certain
severance payments. In addition, each agreement contains noncompetition and
nonsolicitation provisions.

The employment agreements also provide that, in the event of a Change of
Control, the options held by the executive shall become exercisable and any
restrictions on such options shall lapse. Upon a Change of Control, the
Company shall pay to each of Messrs. Elliott, Gavillet and Sweas, within the
10-day period following such Change of Control, an amount equal to the pro
rata portion on the annual bonus that would have been payable to such
executive during such year, assuming the achievement of all performance goals.
Under each employment agreement, a "Change in Control" occurs if (i) a person
or entity becomes the beneficial owner of 35% or more of the combined voting
power of the Company's securities, (ii) the current directors, or individuals
who are approved by two-thirds of the current directors, cease to constitute a
majority of the board of the Company or (iii) certain mergers or liquidations
of the Company occur.

Mr. Elliott's and Mr. Gavillet's agreements provide for certain anti-
dilution rights with respect to their ownership of common stock, including the
right, in the event the Company sells shares of any class of stock, to
purchase a certain percentage (3.8% for Mr. Elliott and 2.5% for Mr. Gavillet)
of such shares on the same terms and conditions as the shares being sold. In
addition, their agreements provide that if the current stockholders sell any
of their shares of capital stock of the Company to a third party under certain
circumstances, each of Messrs. Elliott and Gavillet has the right to sell the
same percentage of his shares of capital stock as the percentage of shares
that the current stockholders are selling, on the same terms and for the same
consideration.

48
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On August 18, 1997, in connection with the 1997 Private Placement, the
Original Purchasers purchased from the Company approximately 30,200 shares of
Series A Preferred Stock, for an aggregate purchase price of $30.2 million.
Such Series A Preferred Stock will be converted into Common Stock concurrently
with the closing of the Offerings.

On September 30, 1996, BT Securities Corporation, Chase Securities Inc. and
CIBC Wood Gundy Securities Corp. purchased the 14% Senior Notes, the related
warrants and the Convertible Notes from the Company pursuant to the 1996
Private Placement, all of which were immediately resold to MLGAFI, an
affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the
Initial Purchasers in the 1997 Private Placement and one of the U.S.
Representatives of the Underwriters. BT Securities Corporation, Chase
Securities Inc. and CIBC Wood Gundy Securities Corp. are affiliates of BT
Capital Partners, Inc., Chase Venture Capital Associates, L.P. and CIBC Wood
Gundy Ventures, Inc., respectively, which are stockholders of the Company. See
"Stock Ownership." BT Securities Corporation, Chase Securities Inc. and CIBC
Wood Gundy Securities Corp. each received commissions of approximately
$188,000 of the $1,880,053 in connection with the 1996 Private Placement.

In September 1996, in connection with the 1996 Private Placement, the
Certificate of Incorporation of the Company was amended to provide for the
authorization of two classes of common stock, Class A Common Stock and Class B
Common Stock. Each outstanding share of common stock of the Company existing
on the date of the 1996 Private Placement was converted into one share of
Class A Common Stock. Prior to the consummation of the Offerings, the Restated
Certificate of Incorporation will authorize a single class of Common Stock and
each outstanding share of Class A Common Stock will be converted into one
share of Common Stock. See "Description of Capital Stock--Common Stock."

In connection with the 1996 Private Placement and the 1997 Private
Placement, by requisite vote, the Original Purchasers waived Preemptive Rights
and Registration Rights held by them pursuant to agreements entered into with
respect to earlier investments in the Company. Concurrent with the
consummation of the Offerings, the rights of the Original Purchasers pursuant
to such agreements, other than registration rights, will be terminated. In
connection with the 1996 Private Placement the Original Purchasers also
approved, and the Company took all necessary action to effect prior to the
consummation of the 1996 Private Placement, the amendment of the terms of the
Company's Series A 10% Senior Cumulative Preferred Stock (the 10% "Series A
Preferred") and Series A-2 10% Cumulative Preferred Stock (the "10% Series A-2
Preferred") to provide for and effectuate the conversion of the shares of each
such series of Preferred Stock into newly issued shares of Class A Common
Stock, which conversion was consummated on September 30, 1996.

Also in connection with the 1996 Private Placement, the Original Purchasers
purchased from the Company shares of its 9% Preferred Stock, for an aggregate
purchase price of $10 million. The 9% Preferred Stock will be converted into
Common Stock concurrently with the closing of the Offerings.

In March 1996, the Company effected a recapitalization pursuant to which the
Company issued an aggregate of 1,101,570 shares of common stock (which was
converted to Class A Common Stock in September 1996) to the Original
Purchasers for no cash consideration in order to settle a dispute relating to
the price per share of the Common Stock paid by the Original Purchasers for
Common Stock purchased in 1995. The dispute stemmed from, in part, the
Company's operating performance as compared with the operating performance
projected by the Company at the time of such investment. As part of the
recapitalization, the Company also caused its then existing 10% Series A-2
Preferred Stock to be senior to the 10% Series A Preferred Stock with respect
to redemption, dividends and liquidation in further settlement of the dispute
referred to above.

In December 1995, Mr. J. Thomas Elliott, President and Chief Executive
Officer of the Company, executed an interest-free promissory note in favor of
the Company in the principal amount of $75,000. Such promissory note was
originally payable by January 2, 1997, but such date has been extended to a
date as yet undetermined.

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STOCK OWNERSHIP

The following table sets forth as of October 17, 1997 the number of shares
of Common Stock and the percentage of the outstanding shares of such class
that are beneficially owned by (i) each person that is the beneficial owner of
more than 5% of the outstanding shares of Common Stock, (ii) each of the
directors and the Named Executive Officers of the Company and (iii) all of the
current directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE BENEFICIALLY OWNED ON
BENEFICIALLY OWNED A FULLY DILUTED BASIS (2)
------------------- ---------------------------
NAME AND ADDRESS OF NUMBER OF SHARES PRIOR TO AFTER PRIOR TO AFTER
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERINGS OFFERINGS OFFERINGS OFFERINGS
- ------------------- ------------------ --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
HarbourVest Partners, 3,442,373 37.82
LLC ...................
One Financial Center,
44th Floor
New York, New York
10017-3903
Chase Venture Capital 2,309,717 29.05
Associates, L.P. (3)...
380 Madison Ave., 12th
Floor
New York, New York
10017-2070
CIBC Wood Gundy 2,309,717 29.05
Ventures, Inc. (3).....
425 Lexington Avenue
New York, New York
10017-3903
BT Capital Partners, 1,710,566 22.04
Inc. (3)...............
130 Liberty Street
New York, New York
10017-2070
Fidelity Capital........ 1,704,300 19.11
82 Devonshire Street
Boston, MA 02109
Prime New Ventures...... 596,680 8.07
600 Congress Suite 3000
One American Center
Austin, Texas 78701
Merrill Lynch Global 3,841,230 34.75
Allocation Fund, Inc.
(4)....................
800 Scudders Mill Road
Plainsboro, New Jersey
08536
Richard J. Brekka (5)... 75,000 1.03
J. Thomas Elliott (5) .. 205,955 2.82
Ronald W. Gavillet (5).. 118,565 1.62
Thomas C. Brandenburg .. 109,082 1.51
Robert J. Luth.......... 38,500 *
Dean M. Greenwood (6)... 596,680 8.07
Donald J. Hofmann, Jr. 2,309,717 29.05
(6)....................
William A. Johnston (6). 3,442,373 37.82
Ian M. Kidson (6) ...... 2,309,717 29.05
Paul S. Lattanzio ...... -- *
Eugene A. Sekulow....... -- *
All directors and
executive officers of
the Company as a group
(19 persons)........... 19,296,034 83.19
</TABLE>
- --------
*Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting and investment power with respect to the
shares. As to each stockholder, the percentage ownership is calculated by
dividing (i) the sum of the number of shares of Common Stock owned by such
stockholder plus the number of shares of Common Stock that such
stockholder would receive upon the exercise of currently exercisable
options and warrants or the conversion of convertible securities held by
such stockholder (the "Conversion Shares") by (ii) the sum of the total
number of outstanding shares of Common Stock plus the total number of such
stockholder's Conversion Shares. The number of shares deemed outstanding
gives effect to the conversion into Common Stock of all outstanding shares
of 9% Preferred Stock and Series A Preferred Stock.
(2) Percentage beneficially owned on a fully diluted basis as to each
stockholder is calculated by dividing such stockholder's Conversion Shares
by the sum of the total number of outstanding shares of Common Stock plus
the total number of Conversion Shares held by all stockholders.
(3) Chase Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc. and
BT Capital Partners, Inc. are affiliates of Chase Manhattan Corporation,
Canadian Imperial Bank of Commerce, and Bankers Trust New York
Corporation, respectively.
(4) MLGAFI also has an option to purchase the Consent Convertible Notes.
(5) These shares include exercisable options.
(6) Each director disclaims beneficial ownership of any shares of Common Stock
or Preferred Stock which he does not directly own.

50
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company's current certificate of incorporation authorizes 30,300,000
shares of capital stock, consisting of 30,050,000 shares of Common Stock, par
value $.01 per share, of which 30,000,000 shares are designated as Class A
Common Stock and 50,000 shares are designated as Class B Common Stock, and
250,000 shares of Preferred Stock, par value $1.00 per share. In connection
with the Offerings, the Company's Certificate of Incorporation will be amended
and restated (the "Restated Certificate of Incorporation") to authorize the
issuance of 110,000,000 shares of capital stock, consisting of 100,000,000
shares of Common Stock, par value $.01 per share, and 10,000,000 shares of
Preferred Stock, par value $1.00 per share. Set forth below is a description
of the capital stock of the Company.

COMMON STOCK

As of October 17, 1997, assuming the conversion of all outstanding shares of
9% Preferred Stock and Series A Preferred Stock into Common Stock, there were
13,120,387 shares of Class A Common Stock issued and outstanding, held of
record by stockholders and 9,303,695 shares of Class A Common Stock
issuable upon the exercise of outstanding options and warrants and the
conversion of Convertible Notes. Each outstanding share of Class A Common
Stock will be converted into shares of Common Stock concurrently with
the closing of the Offerings. There are no shares of Class B Common Stock
currently outstanding.

The holders of Common Stock are entitled to receive dividends when and as
dividends are declared by the Board of Directors of the Company out of funds
legally available therefor, provided that if any shares of Preferred Stock are
at the time outstanding, the payment of dividends on the Common Stock or other
distributions may be subject to the declaration and payment of full cumulative
dividends on outstanding shares of Preferred Stock. Holders of Common Stock
are entitled to one vote per share on all matters submitted to a vote of the
stockholders, including the election of directors. Upon any liquidation,
dissolution or winding up of the affairs of the Company, whether voluntary or
involuntary, any assets remaining after the satisfaction in full of the prior
rights of creditors and the aggregate liquidation preference of any Preferred
Stock then outstanding will be distributed to the holders of Common Stock
ratably in proportion to the number of shares held by them.

TRANSFER AGENT AND REGISTRAR OF COMMON STOCK

The transfer agent and registrar for the Common Stock is
.

LISTING

The Company will apply for the quotation of the Common Stock on the Nasdaq
National Market under the symbol "USNC."

PREFERRED STOCK

Currently, the Company has 180,000 shares of Preferred Stock designated for
issuance, of which 30,000 have been designated as 9% Preferred Stock and
150,000 of which have been designated as Series A Preferred Stock. There are
currently 10,920 and 45,209 shares outstanding of 9% Preferred Stock and
Series A Preferred Stock, respectively. All outstanding shares of 9% Preferred
Stock and Series A Preferred Stock will be converted concurrently with the
closing of the Offerings for an aggregate of 5,907,876 shares of Common Stock.

Following the closing of the Offerings and the conversion of all outstanding
shares of Preferred Stock, the Board of Directors will have the authority to
issue up to 10,000,000 shares of Preferred Stock from time to time in one or
more series with such preferences, terms and rights as the Board of Directors
may determine without further action by the stockholders of the Company.
Accordingly, the Board of Directors has the power to fix the dividend rate and
to establish the provisions, if any, relating to dividends, voting rights,
redemption rates, sinking funds, liquidation preferences and conversion rights
for any series of Preferred Stock issued in the future.

51
<PAGE>

One of the effects of undesignated Preferred Stock may be to enable the Board
of Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.

WARRANTS

As of September 30, 1997, the Company had outstanding warrants to purchase an
aggregate of 2,989,840 shares of Common Stock (the "Warrants"). The Warrants
were issued in connection with the 1996 Private Placement, the 1997 Private
Placement and the Consent and are subject to all of the terms of their
respective warrant agreements.

Each Warrant entitles the holder thereof to purchase a specified number of
shares, subject to adjustment under certain circumstances, at an exercise price
of $.01 per share. Warrants to purchase an aggregate of 790,780 shares of
Common Stock are currently exercisable and may be exercised at any time on or
prior to September 30, 2003. Warrants to purchase an aggregate of 2,199,060
shares of Common Stock will become exercisable upon the first to occur of (i)
60 days following the consummation of the Offerings, (ii) February 15, 1998 or
(iii) earlier upon the occurrence of certain circumstances, and such warrants
may be exercised at any time on or prior to August 15, 2004.

The Company has authorized and reserved for issuance 2,989,840 shares of
Common Stock issuable upon the exercise of outstanding Warrants.

REGISTRATION RIGHTS

The Company has entered into registration rights agreements with respect to
the warrants, the shares of Common Stock issuable upon exercise of the
warrants, the Convertible Notes and the shares of Common Stock issuable upon
conversion of the Convertible Notes. The Company is required to file and keep a
registration statement effective with respect to such securities for a
specified period of time. Additionally, the Company has entered into an Amended
and Restated Registration Agreement, dated as of June 22, 1995, as subsequently
amended, pursuant to which the Company has agreed to grant to the Original
Purchasers and certain subsequent purchasers certain registration rights.
Subject to certain limitations, the Original Purchasers may require the Company
to register for public resale all or part of the Common Stock held by the
Original Purchasers.

LIMITATION OF LIABILITY OF DIRECTORS

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

This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of
care by a director. As a result of the inclusion of such a provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable

52
<PAGE>

remedies are found not to be available to stockholders in any particular
situation, stockholders may not have an effective remedy against a director in
connection with such conduct.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

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

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

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

CERTAIN CHARTER AND BY-LAW PROVISIONS

The Restated Certificate of Incorporation will provide for the Board of
Directors to be divided into three classes, with staggered three-year terms. As
a result, only one class of directors will be elected at each annual

53
<PAGE>

meeting of stockholders of the Company, with the other classes continuing for
the remainder of their respective terms. See "Management--Classified Board of
Directors."

The Restated Certificate of Incorporation also will provide that directors
may be removed from office only for cause and only by the affirmative vote of
the holders of at least two-thirds of the total outstanding voting stock of the
Company. Vacancies on the Board of Directors, including those resulting from an
increase in the number of directors, may be filled only by the remaining
directors, not by stockholders.

Any action required or permitted to be taken by the stockholders of the
Company may be effected only at an annual or special meeting of stockholders
and will not be permitted to be taken by written consent in lieu of a meeting.
The Restated Certificate of Incorporation and the Restated By-Laws also will
provide that special meetings of stockholders may be called by a majority of
the Board of Directors of the Company. Stockholders will not be permitted to
call a special meeting or to require that the Board of Directors call a special
meeting of stockholders.

Certain provisions contained in the Restated Certificate of Incorporation,
including those relating to the size and classification of the Board of
Directors, the removal of directors, the prohibition on action by written
consent and the calling of special meetings, may only be amended by the
affirmative vote of the holders of at least two-thirds of the total outstanding
voting stock of the Company. In addition, the Restated Certificate of
Incorporation will provide that the Restated By-Laws may only be amended by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting stock of the Company or by a vote of two-thirds of the members of the
Board of Directors in office.

The Restated Certificate of Incorporation and the Restated By-Laws will
establish an advance notice procedure for nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors,
as well as for other stockholder proposals to be considered at annual meetings
of stockholders. In general, notice of intent to nominate a director or raise
business at such meeting must be received by the Company not less than 60 nor
more than 90 days prior to the scheduled annual meeting, and must contain
certain specified information concerning the person to be nominated or the
matter to be brought before the meeting.

The foregoing provisions could have the effect of discouraging, delaying or
making more difficult certain attempts to acquire the Company or to remove
incumbent directors even if a majority of the Company's stockholders were to
deem such an attempt to be in the best interests of the Company and its
stockholders.

CERTAIN STATUTORY PROVISIONS

Section 203 of the DGCL contains certain provisions that may make more
difficult the acquisition of control of the Company by means of a tender offer,
open market purchases, proxy fight or otherwise. These provisions are designed
to encourage persons seeking to acquire control of the Company to negotiate
with the Board of Directors. However, these provisions could have the effect of
discouraging a prospective acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. To the extent that these
provisions discourage takeover attempts, they could deprive stockholders of
opportunities to realize takeover premiums for their shares or could depress
the market price of shares. Set forth below is a description of the relevant
provisions of Section 203 of the DGCL. The description is intended as summary
only and is qualified in its entirety by reference to Section 203 of the DGCL.

Section 203 of the DGCL prohibits certain "business combination" transactions
between a publicly held Delaware corporation, such as the Company after the
Offerings, and any "interested stockholder" for a period of three years after
the date on which such stockholder became an interested stockholder, unless (i)
the board of directors approves, prior to such date, either the proposed
business combination or the proposed acquisition of stock which resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction in which the stockholder becoming an interested stockholder, the
interested stockholder acquires at least 85% of those shares of the voting
stock of the corporation which are not held by the directors, officers or

54
<PAGE>

certain employee stock plans or (iii) on or subsequent to the consummation
date, the business combination with the interested stockholder is approved by
the board of directors and also approved at a stockholders' meeting by the
affirmative vote of the holders of at least two-thirds of the outstanding
shares of the corporation's voting stock other than shares held by the
interested stockholder. For purposes of Section 203, a "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. A corporation
may, at its option, exclude itself from the coverage of Section 203 by amending
its charter or by-laws by action of its stockholders to exempt itself from
coverage, provided that such by-law or charter amendment shall not become
effective until 12 months after the date it is adopted. The Company has not
elected to opt out of Section 203 of the DGCL pursuant to its terms.

DESCRIPTION OF CERTAIN INDEBTEDNESS

SENIOR NOTES

The Company issued $48.5 million in aggregate principal amount at maturity of
14% Senior Notes on September 30, 1996 pursuant to an indenture between the
Company and Harris Trust and Savings Bank, as trustee (the "14% Senior Note
Indenture") and $152.7 million in aggregate principal amount at maturity of 14
5/8% Senior Notes on August 18, 1997 pursuant to an indenture between the
Company and Harris Trust and Savings Bank as trustee (the "14 5/8% Senior Note
Indenture" and, together with the 14% Senior Note Indenture, the "Senior Note
Indentures"). The Senior Notes are general, unsecured obligations of the
Company and rank pari passu in right of payment with all existing and future
senior unsecured and unsubordinated indebtedness of the Company, and is senior
in right of payment to all existing and future subordinated indebtedness of the
Company. The 14% Senior Notes were issued with original issue discount and,
until March 30, 2000, accrete interest at a rate of 14% per annum, compounded
semiannually, to an aggregate principal amount of $48.5 million. The 14 5/8%
Senior Notes were also issued with original issue discount and, until August
15, 2000, will accrete interest at a rate of 14 5/8% per annum, compounded
semiannually, to an aggregate principal amount of $152.7 million. After March
30, 2000 and August 15, 2000, respectively, cash interest will accrue on the
14% Senior Notes and the 14 5/8% Senior Notes, and will be payable on March 30
and September 30 of each year, commencing September 30, 2000, with respect to
the 14% Senior Notes, and February 15 and August 15 of each year, commencing
February 15, 2001, with respect to the 14 5/8% Senior Notes.

The Senior Note Indentures contain certain covenants which, among other
things, restrict the ability of the Company and certain subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of the
Company's capital stock or make certain other restricted payments, make
investments, sell capital stock of certain subsidiaries, engage in sale and
leaseback transactions, create restrictions on the ability of certain
subsidiaries to make distributions on their capital stock or to issue capital
stock or to issue guarantees, create liens, enter into transactions with
affiliates or related persons, sell assets or consolidate, merge or sell all or
substantially all of their assets and engage in businesses other than the
telecommunications business.

From September 30, 2001 to September 30, 2003, the 14% Senior Notes will be
redeemable at the Company's option, in whole or in part, at the prices set
forth in the 14% Senior Note Indenture plus accrued and unpaid interest, if
any, to the redemption date. The 14 5/8% Senior Notes will be redeemable at the
Company's option, in whole or in part, on or after August 15, 2002 at the
redemption prices set forth in the 14 5/8% Senior Note Indenture plus accrued
and unpaid interest, if any, and Special Interest (as defined in the 14 5/8%
Senior Note Indenture), if any, to the date of redemption. The Company may also
redeem the 14% Senior Notes or the 14 5/8% Senior Notes on or prior to
September 30, 1999 or August 15, 2000, respectively, out of the proceeds of any
Public Equity Offering (as defined in the Senior Note Indentures). In the event
that the Company elects to redeem the 14 5/8% Senior Notes out of the proceeds
of any Public Equity Offering on or prior to September 30, 1999, the holders of
the 14% Senior Notes shall have the right, but not the obligation, to cause the
Company to offer to repurchase the 14% Senior Notes on a pro rata basis
together with the 14 5/8% Senior Notes and to receive the same redemption
premium as the holders of the 14 5/8% Senior Notes.

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<PAGE>

In connection with the Consent, the Company has granted to holders of the 14%
Senior Notes an option, for a specified period of time, to exchange all, but
not less than all, of the 14% Senior Notes for 14 5/8% Senior Notes having an
accreted value equal to the accreted value of the 14% Senior Notes at the time
of exchange.

CONVERTIBLE NOTES

The Company issued $36.0 million in aggregate principal amount at maturity of
the Convertible Notes on September 30, 1996 pursuant to an indenture between
the Company and Harris Trust and Savings Bank as trustee (the "Convertible Note
Indenture"). The Convertible Notes are general unsecured obligations of the
Company, are subordinated in right of payment to the Senior Notes and rank pari
passu in right of payment with all other existing and future unsecured
indebtedness of the Company. The Convertible Notes were issued with original
issue discount and will mature on September 30, 2004. The Convertible Notes
will accrete interest at the rate of 9% per annum, compounded semiannually, to
an aggregate principal amount of $36.0 million by September 30, 1999. After
September 30, 1999, interest on the Convertible Notes will accrue at the rate
of 9% per annum and will be payable semiannually on March 30 and September 30
of each year, commencing March 30, 2000.

The Convertible Notes are convertible into Common Stock, at the option of the
holders thereof, at any time after the 60th day following the date of original
issuance of the Convertible Notes and prior to redemption or fixed maturity of
the Convertible Notes, at a conversion price of $10.436 per share (the
"Conversion Price"), subject to adjustment under certain circumstances.

From September 30, 2000 to September 30, 2002 the Company may redeem all, but
not less than all, of the Convertible Notes, if the Closing Price (as such term
is defined in the Convertible Note Indenture) of the Common Stock is at least
150% of the Conversion Price for thirty consecutive days, at a redemption price
set forth in the Convertible Note Indenture plus accrued and unpaid interest
and Special Interest (as such term is defined in the Convertible Note
Indenture), if any, to the redemption date. On or after September 30, 2002, the
Convertible Notes will be redeemable at the Company's option, in whole or in
part, at a redemption price equal to 100% of the principal amount plus accrued
and unpaid interest, if any, and Special Interest (as defined in the
Convertible Note Indenture), if any, to the redemption date. Under certain
circumstances as described in the Convertible Note Indenture, holders of
Convertible Notes have an option to require the Company to repurchase all or
any part of such holder's Convertible Notes.

The Company has also granted MLAM an option to purchase the Consent
Convertible Notes with terms substantially similar to the Convertible Notes but
with a conversion price of $101.21 per share, subject to adjustment under
certain circumstances.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offerings, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offerings. Sales of
substantial amounts of shares of Common Stock in the public market or the
perception that such sales could occur could have a material adverse effect on
the price of the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. See "Risk Factors--Shares
Eligible for Future Sale."

After the Offerings, the Company will have outstanding shares of
Common Stock ( shares if the Underwriters' over-allotment options are
exercised in full). Of these shares, the shares offered hereby will be
freely tradeable in the public market without restriction under the Securities
Act, unless such shares are held by "affiliates" of the Company, as that term
is defined in Rule 144, or are subject to certain lock-up agreements as
described below.

The remaining 13,120,387 shares of Common Stock outstanding upon completion
of the Offerings will be "restricted securities" as that term is defined in
Rule 144 (the "Restricted Shares"). The Restricted Shares were

56
<PAGE>

issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act. Restricted Shares may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under the Securities Act, including an exemption
under Rule 144 which is summarized below.

Pursuant to "lock-up" agreements, except for the issuance by the Company of
Common Stock pursuant to existing stock option plans or upon exercise of
currently existing warrants, the Company, the directors and executive officers
of the Company and certain existing stockholders, who collectively hold
12,606,728 of such Restricted Shares, have agreed not to, directly or
indirectly, sell, offer to sell, grant any option for sale of, or dispose of,
any capital stock of the Company or any security convertible or exchangeable
into, or exercisable for, such capital stock, or, in the case of the Company,
file any registration statement with respect to any of the foregoing pursuant
to the Securities Act without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters for a period
of 180 days following the date of this Prospectus (the "Lock-Up Period"). Upon
termination of the Lock-Up Period, approximately shares of the
Restricted Shares will be eligible for immediate sale in the public market,
subject to certain volume, manner of sale, and other limitations under Rule
144. In addition, of the Restricted Shares not subject to lock-up agreements,
approximately shares will be eligible for immediate sale, without
limitation under Rule 144(k).

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares of the Company
are aggregated) who has beneficially owned Restricted Shares for at least one
year (including the holding period of any prior owner who is not an affiliate
of the Company) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock (approximately shares immediately
after the Offerings) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a report on Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner who is
not an affiliate of the Company) is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

As of September 30, 1997, the Company had outstanding warrants to purchase an
aggregate of 2,989,840 shares of Common Stock at an exercise price of $.01 per
share. None of such shares will be subject to lock-up agreements as described
above and all such shares will be available for sale in the public market
within 60 days following the closing of the Offerings. The Company has filed
and has agreed to keep effective a shelf registration statement with respect to
the warrants and the shares of Common Stock issuable upon exercise of the
warrants.

As of September 30, 1997, options to purchase a total of 3,421,160 shares of
Common Stock were outstanding under the Company's applicable stock option
plans. Of such shares, an aggregate of approximately 2,376,970 shares will be
subject to lock-up agreements as described above. As of September 30, 1997,
579,500 shares of Common Stock were available for future option grants under
the Omnibus Securities Plan.

The Company intends to file after the effective date of the Offerings, a
Registration Statement on Form S-8 to register an aggregate of 4,000,662 shares
of Common Stock reserved for issuance under applicable stock option plans. Such
Registration Statement will become effective automatically upon filing. Shares
issued under such plans, after the filing of the Registration Statement on Form
S-8, may be sold in the open market, subject, in the case of certain holders,
to the Rule 144 limitations applicable to affiliates, the above-referenced
lock-up agreements and vesting and exercisability restrictions imposed by the
Company.

57
<PAGE>

The Original Purchasers and certain subsequent investors are entitled to
certain rights with respect to the registration of shares for resale under the
Securities Act. See "Description of Capital Stock--Registration Rights."

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of Common Stock by
a holder that, for United States Federal income tax purposes, is not a "United
States person" (a "Non-United States Holder"). This discussion is based upon
the United States Federal tax law now in effect, which is subject to change,
possibly retroactively. For purposes of this discussion, a "United States
person" means a citizen or resident of the United States; a corporation,
partnership, or other entity created or organized in the United States or under
the laws of the United States or of any political subdivision thereof; an
estate whose income is includible in gross income for United States Federal
income tax purposes regardless of its source; or a "United States Trust." A
United States Trust is (a) for taxable years beginning after December 31, 1996,
or if the trustee of a trust elects to apply the following definition to an
earlier taxable year, any trust if, and only if, (i) a court within the United
States is able to exercise primary supervision over the administration of the
trust and (ii) one or more United States trustees have the authority to control
all substantial decisions of the trust, and (b) for all other taxable years,
any trust whose income is includible in gross income for United States Federal
income tax purposes regardless of its source. This discussion does not consider
any specific facts or circumstances that may apply to a particular Non-United
States Holder. Prospective investors are urged to consult their tax advisors
regarding the United States Federal tax consequences of acquiring, holding, and
disposing of Common Stock, as well as any tax consequences that may arise under
the laws of any foreign, state, local, or other taxing jurisdiction.

DIVIDENDS

Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business
within the United States by the Non-United States Holder (or if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by such Non-United States Holder), in which case the dividend will
be subject to the United States Federal income tax on net income on the same
basis that applies to United States persons generally. In the case of a Non-
United States Holder which is a corporation, such effectively connected income
also may be subject to the branch profits tax (which is generally imposed on a
foreign corporation on the repatriation from the United States of effectively
connected earnings and profits). Non-United States Holders should consult any
applicable income tax treaties that may provide for a lower rate of withholding
or other rules different from those described above. A Non-United States Holder
may be required to satisfy certain certification requirements in order to claim
treaty benefits or otherwise claim a reduction of or exemption from withholding
under the foregoing rules.

GAIN ON DISPOSITION

A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder or, if tax
treaties apply, is attributable to a United States permanent establishment
maintained by the Non-United States Holder, (ii) in the case of a Non-United
States Holder who is nonresident alien individual and holds the Common Stock as
a capital asset, such holder is present in the United States for 183 or more
days in the taxable year of disposition

58
<PAGE>

or either such individual has a "tax home" in the United States or the gain is
attributable to an office or other fixed place of business maintained by such
individual in the United States, (iii) the Company is or has been a "United
States real property holding corporation" for United States Federal income tax
purposes (which the Company does not believe that it is or likely to become)
and the Non-United States Holder holds or has held, directly or indirectly, at
any time during the five-year period ending on the date of disposition, more
than 5% of the Common Stock or (iv) the Non-United States Holder is subject to
tax pursuant to the Internal Revenue Code of 1986, as amended, provisions
applicable to certain United States expatriates. Gain that is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder will be subject to the United States Federal
Income tax on net income on the same basis that applies to United States
persons generally (and, with respect to corporate holders, under certain
circumstances, the branch profits tax) but will not be subject to withholding.
Non-United States Holders should consult any applicable treaties that may
provide for different rules.

FEDERAL ESTATE TAXES

Common Stock owned or treated as owned by an individual who is not a citizen
or resident of the United States at the date of death will be included in such
individual's estate for United States Federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING

The Company must report annually to the Internal Revenue Service and to each
Non-United States Holder the amount of dividends paid to, and the tax withheld
with respect to, such holder, regardless of whether any tax was actually
withheld. This information may also be made available to the tax authorities of
a country in which the Non-United States Holder resides.

Under current United States Treasury regulations, United States information
reporting requirements and backup withholding tax at a rate of 31% will
generally apply to dividends paid on the Common Stock to a Non-United States
Holder and to payments to a Non-United States Holder by a United States office
of a broker of the proceeds of a sale of Common Stock unless the holder
certifies its Non-United States Holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of
Common Stock by foreign offices of United States brokers, or foreign brokers
with certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise
establishes an exemption.

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.

On October 10, 1997, final Treasury Regulations were published in the Federal
Register concerning the withholding of tax and reporting for certain amounts
paid to Non-United States Holders. These Treasury Regulations are generally
effective for payments made after December 31, 1998. Among other things, such
Treasury Regulations require a withholding agent, such as the Company, to have
documentary evidence in its records that the holder is a Non-United States
Holder eligible for treaty benefits in order to reduce the rate of withholding
pursuant to such treaty. Non-United States Holders would generally be required
to provide new certificates documenting their foreign status by December 31,
1999 where the Company holds documentation given under the prior Regulations.
In addition, such Regulations provide for withholding and information reporting
rules where a foreign partnership, qualified intermediary or certain other
agents provide documentation (or fail to provide documentation) on behalf of
the beneficial owner of Common Stock. Prospective investors should consult
their tax advisors concerning the effect of such Treasury Regulations on their
ownership of Common Stock.

59
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement") between the Company and each of the underwriters
named below (the "U.S. Underwriters"), the Company has agreed to sell to each
of the U.S. Underwriters, and each of the U.S. Underwriters has severally
agreed to purchase from the Company, the aggregate number of shares of Common
Stock set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER
OF
U.S. UNDERWRITERS SHARES
----------------- --------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
--------
Total........................................................
========
</TABLE>

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "U.S. Representatives") of the U.S. Underwriters.

The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States and
Canada (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters"), for whom Merrill Lynch International and Donaldson,
Lufkin & Jenrette Securities Corporation are acting as representatives (the
"International Representatives"), providing for the concurrent offer and sale
of shares of Common Stock in the International Offering. The closings
with respect to the U.S. Offering and the International Offering are
conditioned upon one another.

The U.S. Underwriters have advised the Company that they propose initially
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share of Common Stock. The
U.S. Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of Common Stock on sales to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed. The public offering price, concession and discount
per share of Common Stock are identical under the U.S. Purchase Agreement and
the International Purchase Agreement.

The several U.S. Underwriters have agreed, subject to the terms and
conditions set forth in the U.S. Purchase Agreement, to purchase all of the
shares of Common Stock being sold pursuant to such agreement if any of the
shares of Common Stock being sold pursuant to such agreement are purchased.
Under certain circumstances the commitments of non-defaulting U.S.
Underwriters may be increased.

The U.S. Underwriters have advised the Company that they do not intend to
confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.

The U.S. Underwriters and the International Managers have entered into an
Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the International Managers and any dealer to whom they sell shares
of Common Stock will not offer to sell or sell shares of Common Stock to
United States or Canadian persons, and the U.S. Underwriters and any dealer to
whom they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to non-United States or Canadian persons or to persons they
believe intend to resell to non-United States or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement. The
Intersyndicate Agreement also provides, among other things, that sales may be
made between the U.S. Underwriters and the International Managers of such
number of shares of Common Stock as may be mutually agreed. The price of

60
<PAGE>

any shares of Common Stock so sold shall be the public offering price, less an
amount not greater than the selling concession.

The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of additional shares of Common Stock, exercisable in whole or
in part for 30 days after the date of this Prospectus, solely to cover over-
allotments, if any, at the public offering price, less applicable underwriting
discounts. To the extent that the U.S. Underwriters exercise this option, the
U.S. Underwriters have severally agreed, subject to certain conditions, to
purchase approximately the same percentage of shares of Common Stock that the
number of shares of Common Stock to be purchased by each of them, as shown in
the above table, bears to the total number of shares of Common Stock initially
offered hereby. The Company has granted to the International Managers an
option to purchase up to an aggregate of additional shares of Common
Stock, exercisable in whole or in part for 30 days after the date of this
Prospectus, solely to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters. All or a portion of an over-allotment option
in either of the Offerings may be allocated to cover an over-allotment in the
other Offering.

The Company has agreed to indemnify the U.S. Underwriters against certain
liabilities, including liabilities under the Securities Act and other
applicable securities laws, or to contribute to payments the U.S. Underwriters
may be required to make in respect thereof.

Pursuant to "lock-up" agreements, except for the issuance by the Company of
Common Stock pursuant to existing stock option plans or upon exercise of
currently existing warrants, the Company, its directors and executive officers
and certain holders of the Common Stock have agreed not to, directly or
indirectly, sell, offer to sell, grant any option for sale of, or dispose of,
any capital stock of the Company or any security convertible or exchangeable
into, or exercisable for, such capital stock, or, in the case of the Company,
file any registration statement with respect to any of the foregoing pursuant
to the Securities Act without the prior written consent of Merrill Lynch on
behalf of the Underwriters, for a period of 180 days following the date of
this Prospectus. See "Shares Eligible for Future Sale."

In connection with the Offerings, the U.S. Underwriters and the
International Managers may engage in transactions that stabilize, maintain or
otherwise affect the price of the shares of Common Stock. Specifically, the
U.S. Underwriters and the International Managers may over-allot the offering,
creating a short position. In addition, the U.S. Underwriters and the
International Managers may bid for, and purchase shares of Common Stock in the
open market to cover short sales or to stabilize the price of the shares of
Common Stock. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing the shares of Common Stock in the
Offerings if the syndicate repurchases previously distributed shares of Common
Stock in syndicate covering transactions, stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the shares of Common Stock above independent market levels. The U.S.
Underwriters and the International Managers are not required to engage in
these activities and may end any of these activities at any time.

Prior to the Offerings, there has been no public market for the Common
Stock. The public offering price will be determined by negotiations among the
Company and the U.S. Representatives. Among the factors to be considered in
such negotiations are an assessment of the Company's recent results of
operations, the future prospects of the Company and its industry in general,
market prices of securities of companies engaged in activities similar to
those of the Company and prevailing conditions in the securities market. There
can be no assurance that an active market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the
Offerings at or above the public offering price.

Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "USNC."

61
<PAGE>

individuals who are business associates of the Company (including certain
vendors and consultants), in each case, as such parties have expressed an
interest in purchasing such shares. The number of shares available for sale to
the general public will be reduced to the extent these individuals purchase
such reserved shares. Any reserved shares not purchased will be offered by the
U.S. Underwriters to the general public on the same basis as the other shares
offered hereby.

Prior to the consummation of the Offerings, MLGAFI, an affiliate of Merrill
Lynch, beneficially owned more than 10% of the Common Stock on a fully diluted
basis. Accordingly, the offering of the Common Stock will be conducted in
compliance with the requirements of Rule 2720 ("Rule 2720") of the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Under
the provisions of Rule 2720, the public offering price of the securities can be
no higher than that recommended by a "qualified independent underwriter," as
such term is defined in Rule 2720. In accordance with such requirements,
Donaldson, Lufkin & Jenrette Securities Corporation has agreed to serve as a
"qualified independent underwriter" and will conduct due diligence
investigations and recommend a maximum price for the Common Stock. Pursuant to
the provisions of Rule 2720, NASD members may not execute transactions in
Common Stock offered hereby to any accounts over which they exercise
discretionary authority without prior written approval of the customer.

Certain of the U.S. Underwriters and their respective affiliates have
provided from time to time, and expect to provide in the future, financial
advisory and investment banking services for, and/or have normal banking
relationships with, the Company and its affiliates, for which they receive
customary compensation. In addition, Merrill Lynch and Donaldson, Lufkin &
Jenrette Securities Corporation acted as initial purchasers in connection with
the 1997 Private Placement, for which they received customary discounts.

LEGAL MATTERS

Certain legal matters in connection with the Offerings will be passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom (Illinois) and certain
legal matters will be passed upon for the Underwriters by Akin, Gump, Strauss,
Hauer & Feld, L.L.P., Washington, D.C.

EXPERTS

The consolidated financial statements of the Company as of December 31, 1996,
1995 and 1994 and for the fiscal years then ended included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.

62
<PAGE>

GLOSSARY

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

CLEC (Competitive Local Exchange Carrier)--A company that provides its
customers with an alternative to the local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services.

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

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

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

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

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

DEDICATED SERVICES--Special access, switched transport and private line
services.

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

ILECS (Incumbent Local Exchange Carriers)--Companies providing local
telephone services.

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

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

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

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

63
<PAGE>

LOCAL LOOP UNBUNDLING--Allows competitors to selectively gain access to ILEC
wires which connect ILEC central offices with customer premises.

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

PRIVATE LINE--A private, dedicated telecommunications line connecting
different locations (excluding long distance carrier POPs).

PROVISIONING--The process of initiating a carrier's service to a customer.

SPECIAL ACCESS SERVICES--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CLEC, which lines or
circuits run to or from the long distance carrier POPs. Examples of special
access services are telecommunications lines running between POPs of a single
long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from a subscriber to its long distance
carrier POP. Special access services do not require the use of switches.

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

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

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

SWITCHED TRAFFIC--Telecommunications traffic along a switched network.

USOC (UNIVERSAL SERVICE ORDERING CODE)--Identifies a particular service or
equipment under tariff (not necessarily universal any longer).

64
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE SIX MONTH
PERIODS ENDING JUNE 30, 1996 AND AS OF DECEMBER 31, 1996 AND JUNE 30,
1997..................................................................... F-2
INDEPENDENT AUDITORS' REPORT.............................................. F-6
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets............................................. F-7
Consolidated Statements of Operations................................... F-8
Consolidated Statements of Redeemable Preferred Stock................... F-9
Consolidated Statements of Common Stockholders' Deficit................. F-10
Consolidated Statements of Cash Flows................................... F-11
Notes to Consolidated Financial Statements.............................. F-12
</TABLE>

F-1
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER
ASSETS 1997 31, 1996
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 15,720,248 $60,818,478
Accounts receivable, net.......................... 8,029,610 3,004,408
Prepaid expenses.................................. 683,353 187,051
Other receivables................................. 179,128 172,567
------------ -----------
Total current assets............................ 24,612,339 64,182,504
Property and Equipment--Net......................... 10,081,179 3,507,350
Other Assets........................................ 9,452,057 10,362,438
------------ -----------
Total Assets.................................... $ 44,145,575 $78,052,292
============ ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' DEFICIT
----------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................. $ 9,723,803 $ 7,907,654
Accrued expenses and other liabilities............ 7,953,322 3,176,762
Capital lease obligations--current................ 401,812 277,844
Current maturities on notes payable............... 121,722 386,522
------------ -----------
Total current liabilities....................... 18,200,659 11,748,782
Capital Lease Obligations--Noncurrent............... 478,235 312,280
Notes Payable....................................... 26,513 49,727
14% Senior Discount Notes, net of Original Issue
Discount........................................... 33,429,596 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount............................ 29,531,236 28,259,555
------------ -----------
Total liabilities............................... 81,666,239 71,612,958
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
stock: par value, $1; 30,000 shares authorized;
10,450 and 10,000 shares outstanding at 1997 and
1996............................................. 10,450 10,000
Accumulated unpaid dividends...................... 235,126 225,000
Additional paid-in capital........................ 10,259,735 9,810,185
------------ -----------
Total redeemable preferred stock................ 10,505,311 10,045,185
Common Stockholders' Deficit:
Common stock: par value, $.01; 2,500,000 shares
authorized; 722,251 and 718,526 shares issued at
1997 and 1996.................................... 7,223 7,185
Additional paid-in capital........................ 54,482,126 54,179,423
Accumulated deficit............................... (102,514,247) (57,791,382)
Common stock held in Treasury: 1997 and 1996--
1,000 shares..................................... (1,077) (1,077)
------------ -----------
Total common stockholders' deficit.............. (48,025,975) (3,605,851)
------------ -----------
Total Liabilities, Redeemable Preferred Stock, and
Common Stockholders' Deficit....................... $ 44,145,575 $78,052,292
============ ===========
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-2
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1997 1996
------------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net service revenue.................................. $ 11,721,290 $4,803,557
Cost of services..................................... 10,519,835 4,078,236
------------ ----------
Gross margin..................................... 1,201,455 725,321
Expenses:
Sales and marketing................................ 27,335,250 3,545,805
General and administrative......................... 15,013,143 6,335,803
------------ ----------
Operating loss....................................... (41,146,938) (9,156,287)
Other income (expense):
Interest income.................................... 1,009,451 352,590
Interest expense................................... (4,129,201) (19,539)
Other income....................................... 3,948 8,096,117
------------ ----------
Other income (expense)--net...................... (3,115,802) 8,429,168
------------ ----------
Net loss............................................. $(44,262,740) $ (727,119)
============ ==========
Accumulated unpaid preferred dividends............... $ 235,126 $6,144,668
============ ==========
Net loss per common share............................ $ (61.70) $ (16.12)
============ ==========
Weighted average common and common equivalent shares
outstanding......................................... 721,251 426,378
============ ==========
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-3
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-------------------------
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(44,262,740) $ (727,119)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 1,042,319 159,672
Amortization of organization costs and
intangibles.................................... 611,529 357,588
Interest accreted on debt obligation............ 4,083,363 --
Stock compensation award expense................ 298,644 33,000
Gain on disposal of assets...................... -- (8,078,901)
Changes in:
Accounts receivable, net...................... (5,025,205) (1,002,454)
Prepaid expenses.............................. (496,300) 57,866
Other receivables............................. (6,561) (163,850)
Other assets.................................. (342,866) 98,691
Accounts payable.............................. 1,816,148 148,381
Accrued expenses and other liabilities........ 4,776,561 (60,435)
------------ -----------
Net cash flows from operating activities.... (37,505,108) (9,177,561)
Cash flows from investing activities:
Purchase of property and equipment................ (7,171,245) (344,712)
Proceeds from sale of assets...................... -- 9,532,600
------------ -----------
Net cash flows from investing activities.... (7,171,245) 9,187,888
Cash flows from financing activities:
Issuance of common stock.......................... 4,098 3,301
Repurchase of common stock........................ -- (1,077)
Deposits.......................................... 17,018 (230,671)
Repayment of notes payable........................ (288,013) (277,766)
Repayment of capital lease obligations............ (154,980) (43,214)
------------ -----------
Net cash flows from financing activities.... (421,877) (549,427)
------------ -----------
Net decrease in cash................................ (45,098,230) (539,100)
Cash and cash equivalents--Beginning of period...... 60,818,478 13,766,040
Cash and cash equivalents--End of period............ $ 15,720,248 $13,226,940
============ ===========
Supplemental cash flow information:
Dividends Paid in Kind............................ $ 450,000 --
============ ===========
Dividends Declared but Unpaid..................... $ 235,126 $ 2,334,668
============ ===========
Capital Lease Obligations Incurred................ $ 444,903 $ 352,116
============ ===========
Cash Paid for Interest............................ $ 49,862 $ 19,631
============ ===========
Cash Paid for Income Taxes........................ -- --
============ ===========
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-4
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE PERIOD ENDING JUNE 30, 1997

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The interim financial statements reflect all adjustments,
consisting solely of normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's latest annual report on Form 10-K. The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.

2. GAIN CONTINGENCY

In 1995, a subsidiary of the Company, USN Communications Northeast, Inc.
("USNCN"), submitted a claim of approximately $1.4 million with TelCo One
requesting that certain revenues, purportedly not billed by TelCo One to its
USNCN customers, be paid to USNCN. In the fourth quarter of 1996, USNCN
recorded $867,000 of this claim as revenue. In 1997, this claim was resolved
at the amount previously recorded as revenue, to the mutual satisfaction of
both parties.

3. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

F-5
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois

We have audited the accompanying consolidated balance sheets of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1996
and 1995, the related consolidated statements of operations, redeemable
preferred stock, common stockholders' deficit and cash flows for the years
ended December 31, 1996 and 1995 and for the period from April 20, 1994
(Inception) to December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years ended December 31, 1996 and 1995 and for the period
from April 20, 1994 (Inception) to December 31, 1994, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning this matter are also described in Note 20. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

DELOITTE & TOUCHE LLP

March 14, 1997

F-6
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $60,569,365 $ 13,705,025
Accounts receivable, net of allowances for doubtful
accounts of $223,000 (1996) and $193,000 (1995).... 3,004,408 1,184,453
Interest receivable................................. 249,113 61,015
Prepaid expenses.................................... 187,051 171,111
Notes receivable.................................... 150,000
Other receivables................................... 22,567
Net assets held for sale............................ 1,453,699
----------- ------------
Total current assets.............................. 64,182,504 16,575,303
Property and Equipment--net........................... 3,507,350 1,214,647
Other Assets.......................................... 10,362,438 2,681,255
----------- ------------
Total Assets...................................... $78,052,292 $ 20,471,205
=========== ============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' DEFICIT
--------------------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 7,907,654 $ 2,734,122
Accrued expenses and other liabilities.............. 3,176,762 1,106,010
Current maturities on notes payable................. 386,522 409,348
Capital lease obligations--current.................. 277,844 75,192
----------- ------------
Total current liabilities......................... 11,748,782 4,324,672
Capital Lease Obligations--Noncurrent................. 312,280 81,391
Notes Payable......................................... 49,727 436,825
14% Senior Discount Notes, net of Original Issue
Discount............................................. 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount.............................. 28,259,555
----------- ------------
Total liabilities................................. 71,612,958 4,842,888
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
Stock.............................................. 10,000
Series A 10% Senior Cumulative Preferred Stock...... 16,200
Series A-2 10% Senior Cumulative Preferred Stock.... 26,235
Accumulated unpaid dividends........................ 225,000 3,810,000
Additional paid-in capital.......................... 9,810,185 40,543,605
----------- ------------
Total redeemable preferred stock.................. 10,045,185 44,396,040
Common Stockholders' Deficit:
Common stock: $.01 par value;
2,500,000 and 500,000 authorized at 1996 and 1995;
718,526 and 315,729 shares issued at 1996 and 1995
................................................... 7,185 3,137
Additional paid-in capital.......................... 54,179,423 282,955
Accumulated deficit................................. (57,791,382) (29,053,815)
Treasury stock, 1,000 shares at 1996................ (1,077)
----------- ------------
Total common stockholders' deficit................ (3,605,851) (28,767,723)
----------- ------------
Total Liabilities, Redeemable Preferred Stock and
Common Stockholders' Deficit..................... $78,052,292 $ 20,471,205
=========== ============
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net service revenue................... $ 9,814,479 $ 7,883,890 $ 1,737,461
Cost of services...................... 9,256,472 9,075,749 1,454,882
------------ ------------ -----------
Gross margin...................... 558,007 (1,191,859) 282,579
------------ ------------ -----------
Expenses:
Sales and marketing................. 12,612,172 5,867,200 2,869,463
General and administrative.......... 20,664,612 11,100,661 4,685,894
------------ ------------ -----------
Operating loss........................ (32,718,777) (18,159,720) (7,272,778)
------------ ------------ -----------
Other income (Expense):
Interest income..................... 1,376,429 586,946 152,099
Interest expense.................... (1,797,112) (733,566) (26,110)
Gain on sale of switch-based
facilities......................... 8,078,901
Other income........................ 13,968 59,314
------------ ------------ -----------
Other income (expense)--net....... 7,672,186 (87,306) 125,989
------------ ------------ -----------
Net loss before minority interest..... (25,046,591) (18,247,026) (7,146,789)
Minority interest share in loss of
USNCN................................ 150,000
------------ ------------ -----------
Net loss.............................. $(25,046,591) $(18,097,026) $(7,146,789)
============ ============ ===========
Accumulated unpaid preferred
dividends............................ $ 225,000 $ 3,810,000 $ 707,000
============ ============ ===========
Net loss per common share............. $ (49.53) $ (72.42) $ (65.63)
============ ============ ===========
Weighted average common and common
equivalent shares outstanding........ $ 510,233 $ 302,520 $ 119,678
============ ============ ===========
</TABLE>

See notes to consolidated financial statements.

F-8
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK

YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

<TABLE>
<CAPTION>
SERIES
9% PIK SERIES A A-2 ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED UNPAID PAID-IN-
STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 16,200
shares of Series A
10% Senior Cumulative
preferred stock...... $16,200 $15,212,824 $15,229,024
Costs incurred related
to issuance of stock. (630,474) (630,474)
Accumulated unpaid
preferred dividends.. $ 707,000 707,000
------- ---------- ----------- -----------
Balance, December 31,
1994................... 16,200 707,000 14,582,350 15,305,550
Issuance of 26,235
shares of Series A-2
10% Senior Cumulative
preferred stock...... $26,235 26,208,765 26,235,000
Costs incurred related
to issuance of stock. (247,510) (247,510)
Accumulated unpaid
preferred dividends.. 3,103,000 3,103,000
------- ------- ---------- ----------- -----------
Balance, December 31,
1995................... $16,200 $26,235 $3,810,000 $40,543,605 $44,396,040
======= ======= ========== =========== ===========
Accumulated unpaid
preferred dividends.. 3,465,976 3,465,976
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... (16,200) (26,235) (7,275,976) (40,543,605) (47,862,016)
Issuance of 10,000
shares of 9% PIK
preferred stock...... $10,000 9,990,000 10,000,000
Costs incurred related
to issuance of 9% PIK
preferred stock...... (179,815) (179,815)
Accumulated unpaid
preferred dividends
on 9% PIK preferred
stock................ 225,000 225,000
------- ------- ------- ---------- ----------- -----------
Balance, December 31,
1996................... 10,000 $ 225,000 $ 9,810,185 $10,045,185
======= ======= ======= ========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-9
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT

YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON PAID-IN ACCUMULATED STOCK HELD
STOCK CAPITAL DEFICIT IN TREASURY TOTAL
------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, April 20, 1994.
Issuance of 177,840
shares of common
stock................ $1,778 $ 236,661 $ $238,439
Costs incurred related
to issuance of stock. (214,860) (214,860)
Accumulated unpaid
preferred dividends.. $ (707,000) (707,000)
Net loss.............. (7,146,789) (7,146,789)
------ ----------- ------------ ------------
Balance, December 31,
1994................... 1,778 21,801 (7,853,789) (7,830,210)
Issuance of 135,899
shares of common
stock................ 1,359 263,644 265,003
Costs incurred related
to issuance of stock. (2,490) (2,490)
Accumulated unpaid
preferred dividends.. (3,103,000) (3,103,000)
Net loss.............. (18,097,026) (18,097,026)
------ ----------- ------------ ------------
Balance, December 31,
1995................... 3,137 282,955 (29,053,815) (28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 2,676 47,859,340 47,862,016
Issuance of 5,000
shares of common
stock................ 50 5,450 5,500
Compensation grants of
22,000 shares of
common stock......... 220 32,780 33,000
Repricing of common
stock................ 1,102 (1,102)
Repurchase of 1,000
shares of common
stock................ $(1,077) (1,077)
Issuance of stock
warrants............. 6,000,000 6,000,000
Accumulated unpaid
preferred dividends.. (3,690,976) (3,690,976)
Net loss.............. (25,046,591) (25,046,591)
------ ----------- ------------ ------- ------------
Balance, December 31,
1996................... $7,185 $54,179,423 $(57,791,382) $(1,077) $ (3,605,851)
====== =========== ============ ======= ============
</TABLE>

F-10
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(25,046,591) $(18,097,026) $(7,146,789)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization..... 558,236 1,288,991 159,685
Amortization of organization costs
and intangibles.................. 1,770,936 969,271 26,376
Interest accreted on debt
obligation....................... 1,654,394
Stock compensation award expense.. 33,000
Gain on disposal of assets........ (8,078,901) (16,274)
Changes in:
Accounts receivable............. (1,819,956) (322,245) (862,208)
Interest receivable............. (188,098) (61,015)
Prepaid expenses................ (38,468) 13,082 (37,624)
Other receivables............... (172,567)
Other assets.................... (14,948)
Account payable................. 4,819,840 1,578,757 953,465
Accrued expenses and other
liabilities.................... 2,424,642 338,412 766,532
------------ ------------ -----------
Net cash flows from operating
activities................... (24,098,481) (14,308,047) (6,140,563)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment.. (2,258,969) (1,739,542) (1,728,327)
Proceeds from sale of assets........ 9,532,600
Purchase of subsidiary.............. (892,287)
Organization costs.................. (161,702)
Cash acquired from purchase of
subsidiaries....................... 331,975
Issuance of noncurrent notes
receivable......................... (150,000)
Proceeds from note receivable....... 76,204
------------ ------------ -----------
Net cash flows from investing
activities................... 7,273,631 (2,555,625) (1,708,054)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from Senior Notes.......... 30,203,375
Proceeds from Convertible Notes..... 27,644,400
Debt acquisition costs.............. (2,920,239)
Issuance of preferred stock......... 10,000,000 26,235,000 14,850,000
Issuance of common stock............ 5,500 265,003 150,000
Costs incurred related to issuance
of stock........................... (179,815) (250,000) (845,334)
Repurchase of common stock.......... (1,077)
Deposits............................ (494,603) (20,855) (555,270)
Proceeds from borrowings............ 180,000
Payments on assumed indebtedness.... (350,412) (1,459,458)
Proceeds from notes payable......... 46,645 73,504
Repayment of notes payable.......... (59,512) (71,588) (8,330)
Repayment of capital lease
obligation......................... (158,427) (155,272) (16,731)
------------ ------------ -----------
Net cash flows from financing
activities................... 63,689,190 24,589,475 13,827,839
------------ ------------ -----------
Net increase in cash.................. 46,864,340 7,725,803 5,979,222
Cash and cash equivalents--Beginning
of year.............................. 13,705,025 5,979,222
------------ ------------ -----------
Cash and cash equivalents--End of
year................................. $ 60,569,365 $ 13,705,025 $ 5,979,222
============ ============ ===========
Supplemental cash flow information--
See Note 3
</TABLE>

See notes to consolidated financial statements.

F-11
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD FROM
APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

1. ORGANIZATION AND ACQUISITIONS

USN Communications, Inc., formerly United USN, Inc. ("USN") was incorporated
under the laws of the State of Delaware on April 20, 1994 and was initially
funded in 1994 through capital contributions totaling $15 million in cash,
before financing costs. In June 1995 and September 1996, USN received
additional capital contributions of approximately $26 million and $10 million,
respectively. USN holds controlling investments in three companies: US Network
Corporation, USN Communications Northeast, Inc. (formerly United Telemanagement
Services, Inc.), and USN Communications Midwest, Inc. USN and its subsidiaries
operate in a single business segment, primarily as a reseller of a broad range
of telecommunications services in various cities in the Midwest and the
Northeast regions of the U.S.

On April 20, 1994, USN purchased US Network Corporation ("US Network") and
its 100% subsidiary, FoneNet/Ohio, Inc., in exchange for 1,350 shares of
United's preferred stock and 31,500 shares of its common stock. This
transaction was accounted for as a purchase and was valued at US Network's net
book value of approximately $467,000. The consolidated financial statements
include the results of operations of US Network since April 20, 1994.

In July 1994, USN purchased a 50.1% ownership interest in USN Communications
Northeast, Inc. ("USNCN") for approximately $2 million. USNCN provides
telecommunications services to business customers in New York and
Massachusetts. USN has had substantive control of USNCN since its inception.
Therefore, the consolidated financial statements include the results of
operations for USNCN since its commencement of operations in 1994. In December
1995, USN's ownership in USNCN increased to 83.9% as a result of additional
investments approximating $9.4 million. In July 1996, USN's ownership in USNCN
increased to 100% as a result of an additional investment of $150,000.

In June 1995, USNCN (through a newly formed subsidiary, Quest United, Inc.)
purchased specific assets and assumed certain liabilities of an independent
telephone services company Quest America, L.P. ("Quest"), for cash of $950,000
and notes payable to investors of Quest of $842,985 (the "Acquisition"). The
Acquisition has been accounted for as a purchase, and such assets and
liabilities were recorded at their then fair values (which approximated their
historical cost bases) as of the Acquisition date. The excess of the cost of
the Acquisition over the net assets acquired has been ascribed to various
intangible assets (principally customer lists, employment contracts and work
force in place). The consolidated statement of operations for the year ended
December 31, 1996 and 1995 include Quest's revenues and expenses from the
Acquisition date forward.

In January 1995, USN Communications Midwest, Inc. ("USNCM") was incorporated
as a wholly owned subsidiary of USN. USNCM began operations in July 1996 and
provides telecommunication services to business customers in Illinois, Ohio and
Michigan.

2. SUMMARY OF ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows:

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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

F-12
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of USN Communications, Inc. and its
subsidiaries (the "Company"). Significant intercompany balances and
transactions have been eliminated in consolidation.

Revenue Recognition--The Company recognizes revenues in the period in which
telephone services are provided. For the operating unit which the Company has
operated as a commission agent only, revenues are recorded at the net
commissions earned.

Cash and Cash Equivalents--Cash and cash equivalents are defined as cash in
banks, time deposits and highly liquid short-term investments with initial
maturities of three months or less.

Recourse Provisions--Until June 1996, USNCN utilized a third-party billing
and collection agency (the "Agency") to process and factor its accounts
receivable, yet retained the risk of loss on amounts that were deemed to be
uncollectible in the normal course of business. The Agency charged USNCN an
allowance for estimated bad debts on factored accounts receivable, subject to
the recourse provisions, using prior collection experience and industry
statistics. Adjustments were made between actual loss experience and estimated
bad debt expenses on a periodic basis by the Agency. At December 31, 1996,
there were no factored receivables subject to such adjustment. At December 31,
1995, factored receivables of approximately $828,000 were subject to such
adjustment.

Fair Value of Financial Instruments--The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. The carrying values of
long-term debt and notes payable are reasonable estimates of their fair values
as the interest rates approximate rates currently available to the Company for
instruments with similar terms and remaining maturities.

Property and Equipment--Purchases of property and equipment are carried at
cost. Depreciation is provided on the straight-line basis. Furniture and
fixtures are depreciated over five years. Computer equipment is depreciated
over three years. Leasehold improvements and assets leased under capital leases
are amortized over the shorter of the related lease term or the estimated
useful life of the asset.

Intangible Assets--Costs incurred in the formation of the Company are being
amortized on a straight-line basis over five years. The intangible assets
associated with the acquisition of Quest are being amortized on a straight-line
basis over two years. Debt acquisition costs are being amortized over the life
of the related debt. The value of the warrants issued with the Senior Notes are
being amortized over the life of those notes.

Stock-based Compensation--During 1996, the Company implemented Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 allows the Company to recognize
compensation under the "intrinsic value" method prescribed by Accounting
Principles Board Opinion No. 25, and requires the pro forma disclosure of net
income and earnings per share as if the fair value method had been applied.

Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation.

F-13
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- ----------- ----------
<S> <C> <C> <C>
Capital lease obligations incurred
(Notes 5
and 9)................................. $591,967 $33,398,105 $3,137,119
======== =========== ==========
Fair value of Quest America Management
L.P. noncash assets acquired in 1995... $ 414,726
Consideration incurred in connection
with the Acquisition (including
$950,000 in cash advances) (Note 1).... 3,104,588
-----------
Liabilities assumed..................... $ 2,689,862
===========
Note payable incurred to finance
insurance policies (Note 11)........... $ 58,650 $ 72,000
=========== ==========
Fair value of US Network's noncash
assets acquired........................ $ 623,659
Common and preferred stock issued in
connection with the acquisition (Note
1)..................................... 467,463
----------
Liabilities assumed..................... $ 156,196
==========
Note payable to UTS minority
shareholder............................ $ 149,708
Proceeds received upon issuance of note
payable................................ (73,504)
----------
Note receivable from UTS minority
shareholder............................ $ 76,204
==========
</TABLE>

Cash paid for interest in 1996 and 1995 was approximately $32,000 and
$613,000, respectively. No cash was paid in 1994 for interest and in 1996, 1995
and 1994 for income taxes.

4. RELATED PARTY TRANSACTIONS

Notes receivable at December 31, 1996 includes a $75,000 non-interest bearing
note due to the Company from a corporate officer.

F-14
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NET ASSETS HELD FOR SALE

On December 29, 1995, the Company entered into an agreement to sell its
switch-based facilities in Ohio for $9.5 million in cash plus the assumption of
capital and operating leases. The transaction closed on February 29, 1996 and a
gain of approximately $8.1 million was realized and recorded at that time. The
Company will continue to serve its Ohio customer base as a reseller of
telecommunication services.

The net assets held at December 31, 1995 in conjunction with this sale were
as follows:

<TABLE>
<S> <C>
Switching equipment........................................... $6,233,557
Leasehold improvements........................................ 1,781,260
Outside plant and equipment................................... 423,424
Furniture and equipment....................................... 318,355
----------
8,756,596
Less accumulated depreciation................................. (1,181,587)
----------
Net property and equipment.................................... 7,575,009
Deposits...................................................... 100,532
----------
Total assets.................................................. 7,675,541
Less liabilities assumed:
Accrued liabilities......................................... 15,204
Capital lease obligations................................... 6,206,638
----------
Net assets held for sale...................................... $1,453,699
==========
</TABLE>

Additionally, approximately $2.0 million in operating leases were assumed by
the buyer. The Company remains contingently liable on capital and operating
leases assumed by the buyer until expiration.

6. PROPERTY AND EQUIPMENT

Property and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Furniture and equipment........................... $3,940,719 $1,364,479
Leasehold improvements............................ 392,601 117,902
---------- ----------
4,333,320 1,482,381
Less accumulated depreciation..................... (825,970) (267,734)
---------- ----------
Total......................................... $3,507,350 $1,214,647
========== ==========
</TABLE>

F-15
<PAGE>

USN COMMUNICATION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. OTHER ASSETS

Other assets at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Stock warrants (net of accumulated amortization:
1996--$214,286).................................. $ 5,785,714
Debt acquisition costs (net of accumulated
amortization: 1996--$98,064)..................... 2,822,175
Deposits.......................................... 1,044,098 $ 426,902
Goodwill (net of accumulated amortization:
1996--$2,337,015; 1995--$923,850) ............... 588,819 2,001,985
Organization costs (net of accumulated
amortization:
1996--$118,853; 1995--$73,432)................... 108,257 153,677
Other............................................. 13,375 98,691
----------- ----------
Total............................................. $10,362,438 $2,681,255
=========== ==========
</TABLE>

8. ACCRUED EXPENSES

Accrued expenses at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Payroll and benefits................................ $1,515,197 $ 548,775
Professional services............................... 814,388 163,540
Excise taxes........................................ 575,790 117,812
Rent................................................ 6,600 4,380
Interest payable.................................... 21,764
Other............................................... 264,787 249,739
---------- ----------
Total............................................... $3,176,762 $1,106,010
========== ==========
</TABLE>

9. CAPITAL LEASE OBLIGATIONS

The Company leases certain furniture and equipment under capital leases at
December 31 as follows:

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment............................... $841,359 $221,855
Less accumulated amortization......................... (261,905) (73,003)
-------- --------
Total................................................. $579,454 $148,852
======== ========
</TABLE>

Future minimum lease payments at December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997.......................... 341,883
1998.......................... 288,865
1999.......................... 54,422
---------
Total minimum lease payments.. 685,170
Less imputed interest......... (95,046)
---------
Present value of minimum lease
payments..................... 590,124
Less current portion.......... (277,844)
---------
Long-term lease obligations... $ 312,280
=========
</TABLE>

F-16
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OPERATING LEASES

The Company leases certain office space and equipment under operating leases.
Future minimum lease commitments under noncancelable operating leases as of
December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997......................... 2,113,254
1998......................... 2,206,947
1999......................... 1,737,457
2000......................... 1,530,196
Thereafter................... 2,531,822
-----------
Total.................... $10,119,676
===========
</TABLE>

Rent expense for the years ended December 31, 1996 and 1995 and the period
from April 20, 1994 to December 31, 1994 was approximately $1,024,000, $867,000
and $214,000, respectively.

11. NOTES PAYABLE

The Company issued a note payable of $58,650 in 1995 to finance an insurance
policy. The note was payable in nine monthly installments through August 1996.
Interest was payable at 6.45%. The principal balance was paid in full at
December 31, 1996.

In 1995, the Company issued an additional note payable of $46,353 to finance
improvements to an office space. The note requires monthly principal payments
of $831 through July 2001. Interest is payable at 8%. At December 31, 1996 and
1995, the outstanding principal balances were $37,573 and $44,777,
reepectively.

In connection with the acquisition of Quest, USNCN assumed notes payable to
investors of Quest. The notes bear interest at 8% and the balances outstanding
at December 31, 1996 and 1995 total $398,676 and $749,088, respectively. The
notes require quarterly principal and interest payments in 1996 and 1997 and in
the first quarter of 1998.

Maturities on notes payable are as follows:

<TABLE>
<S> <C>
1997............................ $386,522
1998............................ 27,204
1999............................ 8,474
2000............................ 9,178
2001............................ 4,871
--------
Total....................... $436,249
========
</TABLE>

12. PRIVATE PLACEMENT OFFERING

On September 30, 1996, the Company received approximately $55 million in
cash, net of commissions paid, in exchange for 48,500 units consisting of $48.5
million aggregate principal amount at maturity of 14% Senior Discount Notes
("Senior Notes") due 2003 and warrants to purchase 61,550 shares of Class A
Common Stock, and 36,000 units consisting of $36 million aggregate principal
amount at maturity of 9% Convertible Subordinated Notes ("Convertible Notes")
due 2004.

The Senior Notes were sold at a unit price, before commissions, of $622.75
per $1,000 face amount. These notes will accrete interest at an annual rate of
14% from September 30, 1996 to March 31, 2000. Thereafter, the notes will bear
interest at an annual rate of 14%, and will be paid semiannually in arrears, on
the aggregate principal amount at maturity of $48.5 million.

F-17
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Convertible Notes were sold at a unit price, before commissions, of
$767.90 per $1,000 face amount. These notes will accrete interest at an annual
rate of 9% from September 30, 1996 to September 30, 1999. Thereafter, the notes
will bear interest at an annual rate of 9%, and will be paid semiannually in
arrears, on the aggregate principal amount at maturity of $36 million.

13. REDEEMABLE PREFERRED STOCK

The Board of Directors authorized 20,000 shares of Series A 10% Senior
Cumulative Preferred Stock ("Series A") and 30,000 shares of Series A-2 10%
Senior Cumulative Preferred Stock ("Series A-2"), with par values of $1 in 1994
and 1995, respectively. On December 31, 1995, 16,200 shares of Series A and
26,235 shares of Series A-2 were outstanding.

In September 1996, the Board of Directors and the existing shareholders
approved the conversion of all outstanding Series A and Series A-2 Preferred
Stock to shares of Class A Common Stock. The conversion was consummated on
September 30, 1996 and 267,630 shares of Class A Common Stock were issued in
exchange for the outstanding Series A and Series A-2 Preferred Stock, including
dividends accrued through the conversion date.

In September 1996, the Board of Directors authorized the issuance of up to
30,000 shares of $1 par value preferred stock designated as 9% Cumulative
Convertible Pay-in-Kind Preferred Stock ("9% Preferred Stock"). In connection
with the Private Placement Offering (Note 12), the Company issued 10,000 shares
of its 9% Preferred Stock to its existing shareholders, for an aggregate
purchase price of $10.0 million.

Dividends--Dividends on the 9% Preferred Stock accrue semiannually at a rate
of 9% per annum, are fully cumulative and are payable through the issuance of
additional shares of 9% Preferred Stock. No dividends have been declared or
paid on the preferred stock.

Liquidation--Upon any liquidation, dissolution or winding up of the Company,
holders of the 9% Preferred Stock will be entitled to receive their full
liquidation preference and stated value of $1,000 per share, together with
accrued and unpaid dividends, prior to the distribution of any assets of the
Company to the holders of Class A Common Stock.

Redemption--Shares of 9% Preferred Stock are not redeemable at the option of
the Company, but are subject to mandatory redemption in 2006 at the stated
value, together with all accrued and unpaid dividends to the redemption date.

Conversion--Each share of 9% Preferred Stock is convertible into 7.0623
shares of Class A Common Stock, at any time, in whole or in part, at the option
of the holders thereof.

14. COMMON STOCK

In 1996, a 1995 transaction in which Class A Common Stock was issued was
repriced, whereby the number of shares issued increased from 135,899 to 246,056
and the purchase price decreased from $1.95 to $1.077 per share.

Dividends--The holders of Class A Common Stock are entitled to receive
dividends as dividends are declared by the Board of Directors of the Company
out of funds legally available therefor, provided that if any shares of
Preferred Stock are at the time outstanding, the payment of dividends on the
Class A Common Stock or other distributions may be subject to the declaration
and payment of full cumulative dividends on outstanding shares of Preferred
Stock.

F-18
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Liquidation--Upon any liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, any assets remaining after
the satisfaction in full of the prior rights of creditors and the aggregate
liquidation preference of any Preferred Stock then outstanding will be
distributed to the holders of Class A Common Stock.

15. STOCK OPTION PLAN

The Company has granted options to acquire shares of common stock to certain
officers and other employees under the 1994 Stock Option Plan. These options
generally become exercisable at a rate of 25% every six months over a period
of two years after the date of grant, although with respect to certain grants
no vesting occurs until twelve months after the grant date.

In connection with the financing described in Note 12 and the issuance of
the 9% Preferred Stock described in Note 13, the Company granted 31,961
options to purchase Class A Common Stock at an exercise price of $1.50 per
share. These options were not issued under the 1994 Stock Option Plan, but
rather were issued pursuant to separate stock option agreements between the
Company and the option holders. 6,637 of these options become exercisable as
the Convertible Notes are converted to Class A Common Stock, and 25,324 of
these options become exercisable as shares of 9% Preferred Stock are converted
to Class A Common Stock.

Stock option transactions are summarized as follows:

<TABLE>
<CAPTION>
PRICE PER PRICE PER PRICE PER
1996 SHARE 1995 SHARE 1994 SHARE
------- ----------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 19,050 $ 1.10 21,300 $1.10
Granted................. 103,324 1.10-96.00 21,300 $1.10
Exercised............... (5,000) 1.10
Cancelled............... (6,475) 1.10 (2,250) 1.10
------- ------ ------
Outstanding at December
31..................... 110,899 1.10-96.00 19,050 1.10 21,300 1.10
======= ====== ======
Options exercisable at
December 31............ 10,662 1.10-1.50 10,024 1.10 --
======= ====== ======
</TABLE>

For pro forma information regarding net loss and loss per common share, the
fair value for the options awarded in 1996 and 1994 was estimated as of the
date of the grant using a Black-Scholes option valuation model with the
following weighted average assumptions for 1996 and 1994, respectively: risk-
free interest rates of 4.95% and 4.97%; dividend yields of 0%; volatility of
0%; and an expected life of the option of ten years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Therefore, in the year
of adoption and subsequently affected years, the effect of applying SFAS 123
for providing pro forma net loss and loss per common share are not likely to
be representative of the effects on reported income in future years. The
effect on the Company's reported net loss, on a pro forma basis, was not
material for 1996, 1995 and 1994.

The Black-Scholes option valuation model used by the Company was developed
for use in estimating the fair value of fully tradable 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. It is management's opinion that the Company's
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, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.

F-19
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

16. EMPLOYEE BENEFIT PLAN

On January 1, 1995, the Company adopted a qualified 401(k) plan covering all
eligible employees in which the Company contributions are discretionary.
Employees are permitted to make annual contributions through salary deductions
up to 15% of their annual salary. The plan can be amended or terminated at any
time by the Board of Directors. The Company made no contributions to the plan
in 1996 or 1995.

17. INCOME TAXES

The Company incurred net losses of $25,046,591, $18,097,026 and $7,146,789 in
1996, 1995 and 1994, respectively. Accordingly, no provision for current
Federal or state income taxes has been made to the financial statements.

The Company's deferred tax asset components are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss carry-forwards............. $(18,285,000) $(9,121,000)
Accrued liabilities and asset valuation
reserves..................................... (172,000) (195,000)
Amortization of intangibles................... 790,000 (309,000)
------------ -----------
Subtotal.................................. 19,247,000 9,625,000
Valuation allowance........................... (19,247,000) (9,625,000)
------------ -----------
Total..................................... $ -- $ --
============ ===========
</TABLE>

As of December 31, 1996 and 1995 the Company had not recognized deferred
income tax assets related to deductible temporary differences and cumulative
net operating losses. The ability of the Company to fully realize deferred tax
assets in future years is contingent upon its success in generating sufficient
levels of taxable income before the statutory expiration periods for utilizing
such net operating losses lapses. After an assessment of all available
evidence, including historical and projected operating trends, the Company was
unable to conclude that realization of such deferred tax assets in the near
future was more likely than not. Accordingly, a valuation allowance was
recorded to offset the full amount of such assets.

At December 31, 1996, the Company had net operating loss carry-forwards for
income tax purposes of approximately $46,120,000. The expiration periods for
utilizing these operating losses begin in 2009 for Federal tax purposes. Of the
net operating loss carry-forwards available at December 31, 1996, $12,286,000
can be applied only against future taxable income of USNCN. In addition, if the
Company or the Company's subsidiaries experience an "ownership change" within
the meaning of Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), the net operating loss carry-forwards allocable to such entity
will be subject to an annual limitation in an amount generally equal to the
value of the entity immediately before the ownership change at the long-term
tax-exempt rate (the "Section 382 limitation"). Any unused Section 382
limitation in one year is added to the limitation for the next year. Generally,
an ownership change occurs with respect to an entity if the aggregate increase
in the percentage stock ownership (by value) of such entity by one or more of
its five-percent stockholders exceeds 50 percentage points within a testing
period. The tax laws for determining whether an ownership change of an entity
has occurred are complex and subject to differing interpretations in certain
respects. It is possible that the Company or the Company's subsidiaries have
experienced an ownership change under Section 382 of the Code and that the
Company or the Company's subsidiaries may experience an ownership change as a
result of the Company's future transactions including, but not limited to, the
issuance of the Warrants and consummation of one or more public offerings of
Common Stock. In such event, the ability of the Company or the Company's
subsidiaries to utilize their operating loss carry-forwards to offset future
taxable income would be subject to limitations as discussed above.

F-20
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

18. MINORITY INTEREST IN USNCN

In September 1996, all minority shareholders interests' in USNCN were
repurchased, increasing the Company's ownership of USNCN's outstanding common
stock to 100%. Prior to this transaction , no minority interest in USNCN had
been recorded, as losses applicable to the minority interest in USNCN exceeded
the minority interest in the equity capital of USNCN, and there was no
obligation of the minority interest to make good on such losses.

19. COMMITMENTS

In 1995 and 1996 the Company entered into agreements with two independent
telecommunications companies ("TelCos") to allow the Company to resell the
TelCos local telephone service in various regional markets. The agreements have
terms of up to ten years and contain minimum purchase commitments of local
access lines, ranging from zero to 150,000 lines. These commitments are
measured by the number of lines in place on the last day of each 12-month
period. The agreements allow for ramp-up periods before any commitment levels
are required to be met. So long as the Company maintains cumulative net
shortfalls lower than established caps, no payments will be due to the TelCos
other than for normal usage. Even if no lines were sold by the Company, the
earliest required payment for any shortfall amount is in 1999.

In July 1996, the Company entered into an agreement with a third
telecommunications company to allow the Company to resell long distance
telephone service. The agreement is for a term of 33 months and contains an
annual purchase commitment of $12 million, with a minimum monthly commitment of
$600,000 to qualify for the contract rates. The agreement allows for a ramp-up
period before commitment levels are required to be met.

In 1994, USNCN executed an exclusive agreement with an independent
telecommunications company ("TelCo One"), whereby TelCo One allows USNCN to
establish a local private network on its infrastructure in which to provide
service to customers. The majority of USNCN's local service customers are
provided access to this network and, accordingly, a substantial portion of
USNCN's revenue is earned through the use of these access rights. Under this
agreement, TelCo One provides network maintenance and access to telephone
switches. The initial term of the agreement expires in 2004.

20. FUTURE OPERATING PLANS

Although the Company had working capital of approximately $52.4 million and
total redeemable preferred stock and common stockholders' deficit of
approximately $6.4 million, projected cash usage in 1997 combined with an
anticipated net loss in 1997, absent the infusion of additional capital
resources, is anticipated to fully deplete the Company's working capital prior
to December 31, 1997. Such events would raise substantial doubt about the
Company's ability to continue as a going concern. Although the Company's
management believes that the Company will be able to raise sufficient funds,
through capital contributions or additional equity or debt financings, to meet
its operating expenses and other cash requirements, there can be no assurance
that the Company would be able to complete such contributions or financing, or
that any such contributions or financing would be completed on terms
satisfactory to the Company.

21. CONTINGENCIES

Loss Contingency--In April 1995, a derivative action was filed by a minority
interest owner of USNCN against the Company and specific officers and
directors. In July 1996, the Company settled the dispute for $1.7 million.

F-21
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Gain Contingency--In 1995, USNCN submitted a claim of approximately $1.4
million with TelCo One requesting that certain revenues, purportedly not billed
by TelCo One to its customers, be paid to USNCN. During 1996, USNCN has
recorded $867,000 of this claim as revenue. TelCo One is in the process of
reviewing USNCN's remaining claim and has not formally concluded on the amount
or terms of a settlement. While USNCN believes its claim has merit, it is
unable to predict, at this time, whether they will be successful in fully
resolving this matter favorably.

* * * * *

F-22
<PAGE>

[LOGO OF USN COMMUNICATIONS]

1997 CUMULATIVE ACCESS LINES

[GRAPH GOES HERE]

150,000
120,000
90,000
60,000
30,000
0
15,103
19,875
35,397
50,664
60,802
79,321
95,271
108,574
135,172
10,920
13,357
18,557
31,189
43,260
65,142
76,259
87,847
116,591
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep

- -------------------------------------------------------------
[ ] Cumulative Lines Provisioned [ ] Cumulative Lines Sold
- -------------------------------------------------------------
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Disclosure Regarding Forward-Looking Statements............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 10
Use of Proceeds............................................................ 18
Dividend Policy............................................................ 18
Capitalization............................................................. 19
Dilution................................................................... 20
Selected Historical Consolidated Financial and Operating Data.............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 22
Industry Overview.......................................................... 27
Business................................................................... 28
Management................................................................. 41
Certain Relationships and Related Transactions............................. 49
Stock Ownership............................................................ 50
Description of Capital Stock............................................... 51
Description of Certain Indebtedness........................................ 55
Shares Eligible for Future Sale............................................ 56
Certain United States Federal Tax Consequences
to Non-United States Holders.............................................. 58
Underwriting............................................................... 60
Legal Matters.............................................................. 62
Experts.................................................................... 62
Glossary................................................................... 63
Index to Financial Statements.............................................. F-1
</TABLE>

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

LOGO

USN COMMUNICATIONS, INC.

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.

DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION

, 1997

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

SHARES
USN COMMUNICATIONS, INC.
LOGO
COMMON STOCK
-----------
All of the shares of Common Stock, par value $.01 per share (the
"Common Stock"), being offered hereby are being offered by USN Communications,
Inc., a Delaware corporation ("USN" or the "Company").

Of the shares of Common Stock offered hereby, shares
are being initially offered outside the United States and Canada by the
International Managers (the "International Offering") and shares of
Common Stock are being offered in a concurrent offering in the United States
and Canada by the U.S. Underwriters (the "U.S. Offering" and, together with the
International Offering, the "Offerings"). The initial public offering price and
the aggregate underwriting discount per share will be identical for both
Offerings. See "Underwriting."

The Company will apply for the quotation of the Common Stock on the Nasdaq
National Market under the symbol "USNC."

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1997.
-----------
MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
-----------
The date of this Prospectus is , 1997.
<PAGE>

[ALTERNATE PAGES FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") between the Company and each of the
underwriters named below (the "International Managers"), the Company has
agreed to sell to each of the International Managers, and each of the
International Managers has severally agreed to purchase from the Company, the
aggregate number of shares of Common Stock set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ----------
<S> <C>
Merrill Lynch International..........................................
Donaldson, Lufkin & Jenrette Securities Corporation..................
----------
Total............................................................
==========
</TABLE>

Merrill Lynch International and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as representatives (the "International
Representatives") of the International Managers.

The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain United States underwriters (the "U.S. Underwriters"
and, together with the International Managers, the "Underwriters"), for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson, Lufkin &
Jenrette Securities Corporation are acting as representatives (the "U.S.
Representatives"), providing for the concurrent offer and sale of
shares of Common Stock in the U.S. Offering. The closings with respect to the
International Offering and the U.S. Offering are conditioned upon one another.

The International Managers have advised the Company that they propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Common Stock. The International Managers may allow, and such dealers may
reallow, a discount not in excess of $ per share of Common Stock on sales
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed. The public offering
price, concession and discount per share of Common Stock are identical under
the International Purchase Agreement and the U.S. Purchase Agreement.

The several International Managers have agreed, subject to the terms and
conditions set forth in the International Purchase Agreement, to purchase all
of the shares of Common Stock being sold pursuant to such agreement if any of
the shares of Common Stock being sold pursuant to such agreement are
purchased. Under certain circumstances the commitments of non-defaulting
International Managers may be increased.

The International Managers have advised the Company that they do not intend
to confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.

The International Managers and the U.S. Underwriters have entered into an
Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to non-
United States or Canadian persons or to persons they believe intend to resell
to non-United States or Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to United States or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement. The
Intersyndicate Agreement also provides, among other things, that sales may be
made between the International Managers and the U.S. Underwriters of such
number of shares of Common Stock as may be mutually agreed. The price of any
shares of Common Stock so sold shall be the public offering price, less an
amount not greater than the selling concession.

2
<PAGE>

The Company has granted to the International Managers an option to purchase
up to an aggregate of additional shares of Common Stock, exercisable in
whole or in part for 30 days after the date of this Prospectus, solely to
cover over-allotments, if any, at the public offering price, less applicable
underwriting discounts. To the extent that the International Managers exercise
this option, the International Managers have severally agreed, subject to
certain conditions, to purchase approximately the same percentage of shares of
Common Stock that the number of shares of Common Stock to be purchased by each
of them, as shown in the above table, bears to the total number of shares of
Common Stock initially offering hereby. The Company has granted to the U.S.
Underwriters an option to purchase up to an aggregate of additional
shares of Common Stock, exercisable in whole or in part for 30 days after the
date of this Prospectus, solely to cover over-allotments, if any, on terms
similar to those granted to the International Managers. All or a portion of an
over-allotment option in either of the Offerings may be allocated to cover an
over-allotment in the other Offering.

The Company has agreed to indemnify the International Managers against
certain liabilities, including liabilities under the Securities Act and other
applicable securities laws, or to contribute to payments the International
Managers may be required to make in respect thereof.

Pursuant to "lock-up" agreements, except for the issuance by the Company of
Common Stock pursuant to existing stock option plans or upon exercise of
currently existing warrants, the Company, its directors and executive officers
and certain holders of the Common Stock have agreed not to, directly or
indirectly, sell, offer to sell, grant any option for sale of, or dispose of,
any capital stock of the Company or any security convertible or exchangeable
into, or exercisable for, such capital stock, or, in the case of the Company,
file any registration statement with respect to any of the foregoing pursuant
to the Securities Act without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, on behalf of the Underwriters, for a
period of 180 days following the date of this Prospectus. See "Shares Eligible
for Future Sale."

In connection with the Offerings, the International Managers and the U.S.
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the shares of Common Stock. Specifically, the
International Managers and the U.S. Underwriters may over-allot the offering,
creating a short position. In addition, the International Managers and the
U.S. Underwriters may bid for, and purchase shares of Common Stock in the open
market to cover short sales or to stabilize the price of the shares of Common
Stock. Finally, the underwriting syndicate may reclaim selling concessions
allowed for distributing the shares of Common Stock in the Offerings if the
syndicate repurchases previously distributed shares of Common Stock in
syndicate covering transactions, stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares
of Common Stock above independent market levels. The International Managers
and the U.S. Underwriters are not required to engage in these activities and
may end any of these activities at any time.

Each International Manager has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date of
the Offerings, will not offer and sell any shares of Common Stock to persons
in the United Kingdom, except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their businesses, or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
shares of Common Stock in, from or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of the
shares of Common Stock to a person who is of a kind described in Article 11(3)
of the Financial Services At 1986 (Investment Advertisements) (Exemptions)
Order 1996, or to any person to whom the document may otherwise lawfully be
issued or passed on.

Prior to the Offerings, there has been no public market for the Common
Stock. The public offering price will be determined by negotiations among the
Company and the International Representatives. Among the factors to be
considered in such negotiations are an assessment of the Company's recent
results of operations, the future

3
<PAGE>

prospects of the Company and its industry in general, market prices of
securities of companies engaged in activities similar to those of the Company
and prevailing conditions in the securities market. There can be no assurance
that an active market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offering at or above
the public offering price.

Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "USNC."

At the Company's request, the U.S. Underwriters have reserved up to
shares for sale at the initial public offering price to certain of
the Company's employees, members of their immediate families and other
individuals who are business associates of the Company (including certain
vendors and consultants), in each case, as such parties have expressed an
interest in purchasing such shares. The number of shares available for sale to
the general public will be reduced to the extent these individuals purchase
such reserved shares. Any reserved shares not purchased will be offered by the
U.S. Underwriters to the general public on the same basis as the other shares
offered hereby.

Prior to the consummation of the Offerings, MLGAFI, an affiliate of Merrill
Lynch, beneficially owned more than 10% of the Common Stock on a fully diluted
basis. Accordingly, the offering of the Common Stock will be conducted in
compliance with the requirements of Rule 2720 ("Rule 2720") of the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Under
the provisions of Rule 2720, the public offering price of the securities can
be no higher than that recommended by a "qualified independent underwriter,"
as such term is defined in Rule 2720. In accordance with such requirements,
Donaldson, Lufkin & Jenrette Securities Corporation has agreed to serve as a
"qualified independent underwriter" and will conduct due diligence
investigations and recommend a maximum price for the Common Stock. Pursuant to
the provisions of Rule 2720, NASD members may not execute transactions in
Common Stock offered hereby to any accounts over which they exercise
discretionary authority without prior written approval of the customer.

Certain of the International Managers and their respective affiliates have
provided from time to time, and expect to provide in the future, financial
advisory and investment banking services for, and/or have normal banking
relationships with, the Company and its affiliates, for which they receive
customary compensation. In addition, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation acted as
initial purchasers in connection with the 1997 Private Placement, for which
they received customary discounts.

Purchasers of the shares of Common Stock may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the public offering price set forth on the cover page
hereof.

4
<PAGE>

[ALTERNATE PAGES FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK OF-
FERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICA-
TION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPEC-
TUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS DOCUMENT IS
BEING DISTRIBUTED IN THE UNITED KINGDOM ONLY TO PERSONS OF A KIND DESCRIBED IN
ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT OF 1988 (INVESTMENT ADVERTISEMENTS)
(EXEMPTIONS) ORDER 1995 OR TO WHOM IT WOULD OTHERWISE BE LAWFUL SO TO DO.

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

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

LOGO

USN COMMUNICATIONS, INC.

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH INTERNATIONAL

DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION

, 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses paid or payable in connection
with the offering of the Common Stock being registered hereby:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................... $ 27,273
NASD Fees............................................................. 9,500
Printing and Engraving Expenses....................................... *
Legal Fees and Expenses............................................... *
NASDAQ Stock Exchange Listing Fees.................................... *
Accounting Fees and Expenses.......................................... *
--------
Total............................................................. $
========
</TABLE>
*Estimated

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection
with any suit or proceeding to which they are a party so long as they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct
to have been unlawful. The Registrant's Certificate of Incorporation and By-
laws provide that the Registrant shall indemnify its directors and such
officers, employees and agents as the Board of Directors may determine from
time to time, to the fullest extent permitted by Section 145 of the DGCL. The
Registrant has entered into indemnification agreements with its directors and
certain of its officers, employees and agents, which provide that the
Registrant shall indemnify such parties pursuant to Section 145 of the DGCL.

Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for
breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct, or knowing violation of the law,
and the unlawful purchase or redemption of stock or payment of unlawful
dividends or the receipt of improper personal benefits cannot be eliminated or
limited in this manner. The Registrant's Certificate of Incorporation and By-
Laws include a provision which eliminates, to the fullest extent permitted,
director liability for monetary damages for breaches of fiduciary duty.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(1) On November 2, 1994, Chase Capital Partners (now known as Chase Venture
Capital Associates, L.P.), CIBC Wood Gundy Securities Corp. (now known as CIBC
Wood Gundy Ventures, Inc.) and Hancock Venture Capital Associates (now known
as HarbourVest Partners LLC) purchased from the Registrant 7,425 shares of
Series A 10% Senior Cumulative Preferred Stock ("10% Series A Preferred
Stock") and 69,630 shares of Class A Common Stock for a total purchase price
of $7,500,000. The shares of 10% Series A Preferred Stock were not registered
under the Securities Act of 1933, as amended (the "Securities Act") on the
basis that it was a transaction by an issuer not involving any public offering
in accordance with Section 4(2) under the Securities Act.

(2) On June 22, 1995, Chase Capital Partners (now known as Chase Venture
Capital Associates, L.P.), CIBC Wood Gundy Securities Corp. (now known as CIBC
Wood Gundy Ventures, Inc.), Hancock Venture

II-1
<PAGE>

Capital Associates (now known as HarbourVest Partners, LLC), Northwood Capital
Partners LLC, Northwood Ventures and BT Capital Partners, Inc. purchased from
the Registrant 23,760 shares of Series A 10% Cumulative Preferred Stock, par
value $1.00 ("Series A-2 Preferred Stock"), at a price of $1,000 per share for
a total purchase price of $23,760,000 and 123,078 shares of Class A Common
Stock at a price of $1.95 per share for a total purchase price of $240,000. The
shares of Series A-2 Preferred Stock were not registered under the Securities
Act on the basis that it was a transaction by an issuer not involving any
public offering in accordance with Section 4(2) under the Securities Act.

(3) On July 21, 1995, Enterprises & Transcommunications, L.P. purchased from
the Registrant 2,475 shares of Series A-2 Preferred Stock at a price of $1,000
per share for a total purchase price of $2,475,000 and 12,821 shares of Class A
Common Stock at a price of $1.95 per share for a total purchase price of
$25,000. The shares of Series A-2 Preferred Stock were not registered under the
Securities Act on the basis that it was a transaction by an issuer not
involving any public offering in accordance with Section 4(2) under the
Securities Act.

(4) Pursuant to a recapitalization, in March 1996, Chase Capital Partners
(now known as Chase Venture Capital Associates, L.P.), CIBC Wood Gundy
Securities Corp. (now known as CIBC Wood Gundy Ventures, Inc.), Hancock Venture
Capital Associates (now known as HarbourVest Partners, LLC), Northwood Capital
Partners LLC, Northwood Ventures, BT Capital Partners, Inc. and Enterprises &
Transcommunications, L.P. purchased, in the aggregate, 110,157 shares of Common
Stock for no cash consideration in order to settle a dispute relating to the
price per share paid for previously purchased shares of Common Stock. The
shares of Common Stock were not registered under the Securities Act on the
basis that it was a transaction by an issuer not involving any public offering
in accordance with Section 4(2) under the Securities Act.

(5) On September 30, 1996, the Registrant caused its outstanding shares of
10% Series A Preferred Stock and Series A-2 Preferred Stock to be converted
into newly issued shares of Class A Common Stock for no cash consideration. The
shares of Common Stock were not registered under the Securities Act on the
basis that it was a transaction by an issuer not involving any public offering
in accordance with Section 4(2) under the Securities Act.

(6) On September 30, 1996, Chase Capital Partners (now known as Chase Venture
Capital Associates, L.P.), CIBC Wood Gundy Securities Corp. (now known as CIBC
Wood Gundy Ventures, Inc.), Hancock Venture Capital Associates (now known as
HarbourVest Partners LLC), Northwood Capital Partners LLC, Northwood Ventures,
BT Capital Partners, Inc. and Enterprises & Transcommunications, L.P.
purchased, in the aggregate, 10,000 shares of 9.0% Cumulative Convertible Pay-
In-Kind Preferred Stock ("9% Preferred Stock") for an aggregate purchase price
of $10.0 million. The shares of 9% Preferred Stock were not registered under
the Securities Act on the basis that it was a transaction by an issuer not
involving any public offering in accordance with Section 4(2) under the
Securities Act.

(7) On September 30, 1996, the Registrant sold to Smith Barney Inc., BT
Securities Corporation, Chase Securities Inc. and CIBC Wood Gundy Securities
Corp. (a) 48,500 units, each consisting of $1,000 principal amount at maturity
14% Senior Discount Notes due 2003 (the "14% Senior Notes") and warrants to
purchase approximately 1.27 shares of Class A Common Stock (on a pre-split
basis), subject to adjustment under certain circumstances, at an exercise price
of $.01 per share and (b) $36.0 million in aggregate principal amount at
maturity of 9% Convertible Subordinated Discount Notes due 2004 (the
"Convertible Notes") for an aggregate purchase price of $57,847,775. In
connection with this sale, Smith Barney Inc. received approximately $1,316,000
in commissions, and BT Securities Corporation, Chase Securities Inc. and CIBC
Wood Gundy Securities Corp. each received approximately $188,000, resulting in
net proceeds to the Registrant of $55,967,775. These securities were
immediately resold to Merrill Lynch Global Allocation Fund, Inc. pursuant to
Rule 144A of the Securities Act.

(8) On August 18, 1997, the Registrant sold to Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Donaldson Lufkin & Jenrette Securities Corporation
152,725 units (the "1997 Private Placement"), each

II-2
<PAGE>

consisting of $1,000 aggregate principal amount at maturity of 14 5/8% Senior
Discount Notes due 2004 and ten warrants, each warrant entitling the holder to
purchase .134484 shares of Class A Common Stock (on a pre-split basis), subject
to adjustment under certain circumstances for an aggregate purchase price of
$100 million. In connection with this sale, Merrill Lynch, Pierce, Fenner &
Smith Incorporated received $2,275,046 in commissions and Donaldson, Lufkin &
Jenrette Securities Corporation received $1,224,998 in commissions. These
securities were immediately resold to certain institutional investors pursuant
to Rule 144A of the Securities Act.

(9) On August 18, 1997, Chase Venture Capital Associates, L.P., CIBC Wood
Gundy Ventures, Inc., Northwood Capital Partners LLC, Northwood Ventures, BT
Capital Partners, Inc., Hancock Venture Partners V-Direct Fund L.P. and Prime
VIII, L.P. purchased, in the aggregate, 30,209 shares of 9.0% Cumulative
Convertible Pay-In-Kind Preferred Stock, Series A (the "9% Series A Preferred
Stock"), for an aggregate purchase price of $30.2 million. The shares of Series
A Preferred Stock were not registered under the Securities Act on the basis
that it was a transaction by an issuer not involving any public offering, in
accordance with Section 4(2) under the Securities Act.

(10) On August 25, 1997, the Registrant issued to Merrill Lynch Global
Association Fund, Inc. and Merrill Lynch Equity/Convertible Series
(collectively, "MLAM"), warrants to purchase an aggregate of 145,160 shares of
Class A Common Stock at an exercise price of $.01 per share for no cash
consideration. The warrants were issued in exchange for MLAM's consent, as the
holder of all of the 14% Senior Notes and the Convertible Notes, to allow the
Company to consummate the 1997 Private Placement. The shares of Common Stock
were not registered under the Securities Act on the basis that it was a
transaction not involving any public offering, in accordance with Section 4(2)
under the Securities Act.

(11) On October 17, 1997, Fidelity Communications International, Inc. and
Fidelity Investors Limited Partnership purchased, in the aggregate, 15,000
shares of 9% Series A Preferred Stock, for an aggregate purchase price of $15
million. The shares of 9% Series A Preferred Stock were not registered under
the Securities Act on the basis that it was a transaction by an issuer not
involving any public offering, in accordance with Section 4(2) under the
Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of U.S. Purchase Agreement.
1.2* Form of International Purchase Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Amended Certificate of Designations, Powers, Rights and Preferences of
9.0% Cumulative Convertible Pay-In-Kind Preferred Stock (the "9%
Preferred Stock") of the Registrant.
3.3* Amended and Restated Bylaws of the Registrant.
3.4+ Certificate of Designations, Powers, Rights and Preferences of 9.0%
Cumulative Convertible Pay-In-Kind Preferred Stock, Series A of the
Registrant.
4.1+ Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 9% Convertible Subordinated Discount Notes due 2004 (the
"Convertible Note Indenture").
4.2+ First Supplemental Indenture, dated as of , 1997, by and between
the Registrant and the Trustee, to the Convertible Note Indenture.
4.3+ Indenture, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Trustee, for the
Registrant's 14% Senior Discount Notes due 2003 (the "14% Senior Note
Indenture").
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.4++ Supplemental Indenture, dated as of March 17, 1997, by and between the
Registrant and the Trustee, to the 14% Senior Note Indenture.
4.5+ Supplemental Indenture No. 2, dated as of August 18, 1997, by and
between the Registrant and the Trustee, to the 14% Senior Note
Indenture.
4.6+ Indenture, dated as of August 18, 1997, by and between the Registrant
and Harris Trust and Savings Bank, as Trustee, for the Registrant's 14
5/8% Senior Discount Notes due 2004 (the "14 5/8% Senior Note
Indenture").
5.1* Legal Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois).
10.1 Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and J. Thomas Elliott.
10.2+ Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and Ronald W. Gavillet.
10.3++ Employment Agreement, dated as of October 21, 1996, by and between the
Registrant and Ryan Mullaney.
10.4++ Employment Agreement, dated as of November 18, 1996, by and between
the Registrant and Gerald J. Sweas.
10.5+ Consulting Agreement, dated January 24, 1995, by and between the
Registrant and Eugene A. Sekulow.
10.6+ Form of Employment Agreement between the Registrant and certain
officers of the Registrant.
10.7+ Form of Indemnification Agreement between the Registrant and certain
directors and officers of the Registrant.
10.8* 1997 Omnibus Securities Plan.
10.9+ Amended and Restated 1994 Stock Option Plan of the Registrant.
10.10+ Promissory Note, dated December 15, 1995, between the Registrant and
J. Thomas Elliott.
10.11+ Purchase Agreement, dated as of April 20, 1994, by and among the
Registrant, CIBC Wood Gundy Ventures, Inc. ("CIBC") and Chemical
Venture Capital Associates ("Chemical").
10.12+ First Amendment to Purchase Agreement, dated as of June 10, 1994, by
and among the Registrant, CIBC, Chemical and Hancock Venture Partners
IV--Direct Fund, L.P. ("Hancock," and together with CIBC and Chemical,
the "Initial Investors").
10.13* Second Amendment to Purchase Agreement, dated as of April 20, 1994, by
and among the Registrant and the Initial Investors.
10.14+ Third Amendment to Purchase Agreement, dated as of November 1, 1994,
by and among the Registrant and the Initial Investors.
10.15+ Fourth Amendment to Purchase Agreement, dated as of June 22, 1995, by
and among the Registrant and the Initial Investors.
10.16+ Stockholders Agreement, dated as of April 20, 1994, by and among the
Registrant, CIBC, Chemical and the stockholders of the Registrant
listed on a schedule attached thereto (the "Stockholders").
10.17+ First Amendment to Stockholders Agreement, dated as of June 10, 1994,
by and among the Registrant, the Initial Investors and the
Stockholders.
10.18+ Registration Rights Agreement, dated as of April 20, 1994, by and
among the Registrant, CIBC and Chemical.
10.19+ First Amendment to Registration Rights Agreement, dated as of June 10,
1994, by and among the Registrant and the Initial Investors.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.20+ Purchase Agreement, dated as of June 22, 1995, by and among the
Registrant, CIBC, Chemical, Hancock, BT Capital Partners, Inc.,
Northwood Capital Partners LLC and Northwood Ventures (collectively,
the "Investors").
10.21+ Amended and Restated Stockholders Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.22+ Amended and Restated Registration Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.23+ First Amendment to Purchase Agreement, dated as of July 21, 1995, by
and among the Registrant, the Investors and Enterprises &
Transcommunications, L.P. (collectively, the "Original Purchasers").
10.24+ Second Amendment to Purchase Agreement, dated as of March 5, 1996, by
and among the Registrant and the Original Purchasers.
10.25+ Amended and Restated Stockholders Agreement, dated as of July 21,
1995, by and among the Registrant, the Original Purchasers and the
Stockholders.
10.26+ Purchase Agreement, dated as of September 25, 1996, by and among the
Registrant and the purchasers named therein, relating to the 9%
Preferred Stock.
10.27+ Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
10.28+ Warrant Agreement, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.29+ Warrant Agreement, dated as of August 18, 1997, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.30+ Consent Warrant Agreement dated as of August 25, 1997, by and between
the Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.31+ Registration Rights Agreement dated as of August 18, 1997, by and
among the Registrant and the Initial Purchasers named therein.
10.32* Purchase Agreement, dated as of October 17, 1997, by and among the
Registrant, Fidelity International, Inc. and Fidelity Investors
Limited Partners.
10.33+ Asset Purchase Agreement, dated as of June 13, 1995, by and among
United Telemanagement Services, Inc. ("UTS"), Quest United, Inc.
("Quest United"), Quest America Management, Inc. ("QAM"), Edward H.
Lavin, Jr. ("Lavin"), J. Thomas Elliott ("Elliott") and Quest America,
LP ("Quest").
10.34+ Amendment No. 1 to Asset Purchase Agreement, dated as of October 27,
1995, by and among UTS, Quest United, QAM, Lavin, Elliott, and Quest.
10.35+ Resale Local Exchange Service Confirmation of Service Order, dated
October 31, 1995, by and between the Registrant and Ameritech
Information Industry Services ("Ameritech") on behalf of Illinois Bell
Telephone Company.
10.36+ Resale Local Exchange Service Agreement, dated July 8, 1996, by and
between New York Telephone Company and UTS.
10.37+ Agreement for Resale Services, dated as of April 26, 1996, by and
between the Registrant and Ameritech on behalf of Ameritech Michigan.
10.38+ Local Exchange Telecommunications Services Resale Agreement, dated May
21, 1996, by and between the Registrant and Ameritech on behalf of The
Ohio Bell Telephone Company.
11.01++ Computation of Net Loss per share of Common Stock.
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21.1+ Subsidiaries of the Registrant.
23.1** Consent of Deloitte & Touche LLP.
23.2* Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included
in its opinion filed as Exhibit 5.1).
25.1** Power of Attorney (included on signature page).
</TABLE>
- --------
+Incorporated by reference to the Registrant's Registration Statement on
Form S-4, file number 333-16265.
++Incorporated by reference to the Registrant's Form 10-K, file number 333-
16265, filed on March 31, 1997.
+++Incorporated by reference to the Registrant's Registration Statement on
Form S-4, file number 333- .
*To be filed by amendment.
**Filed herewith.

(b) Financial Data Schedules

None.

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

ITEM 17. UNDERTAKINGS

(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.

The undersigned Registrant hereby further undertakes that:

(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective;

(3) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and

(4) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

II-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO,
STATE OF ILLINOIS ON OCTOBER 21, 1997.

USN COMMUNICATIONS, INC.

/s/ J. Thomas Elliott
By: _________________________________
J. Thomas Elliott
Chairman of the Board, President
and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS J. THOMAS ELLIOTT, GERALD J. SWEAS AND THOMAS
A. MONSON WITH FULL POWER TO ACT ALONE, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT,
WITH THE POWER OF SUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-
EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO SIGN ANY
REGISTRATION STATEMENT FOR THE SAME OFFERING COVERED BY THIS REGISTRATION
STATEMENT THAT IS TO BE EFFECTIVE UPON FILING PURSUANT TO RULE 462(B)
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AND ALL POST-EFFECTIVE
AMENDMENTS THERETO, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT FULL POWER AND AUTHORITY TO
DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE
AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT MAY LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE DATES
AND IN THE CAPACITIES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Thomas Elliott Chairman of the Board, October 21, 1997
____________________________________ President and Chief
J. Thomas Elliott Executive Officer
(Principal Executive
Officer)

/s/ Richard J. Brekka Director October 21, 1997
____________________________________
Richard J. Brekka

/s/ Donald J. Hofmann, Jr. Director October 21, 1997
____________________________________
Donald J. Hofmann, Jr.

/s/ Paul S. Lattanzio Director October 21, 1997
____________________________________
Paul S. Lattanzio

/s/ Thomas C. Brandenburg Director October 21, 1997
____________________________________
Thomas C. Brandenburg

</TABLE>

II-7
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William A. Johnston Director October 21, 1997
____________________________________
William A. Johnston

/s/ Eugene A. Sekulow Director October 21, 1997
____________________________________
Eugene A. Sekulow

/s/ Dean M. Greenwood Director October 21, 1997
____________________________________
Dean M. Greenwood

/s/ Ian Kidson Director October 21, 1997
____________________________________
Ian Kidson

/s/ Gerald J. Sweas Executive Vice President and October 21, 1997
____________________________________ Chief Financial Officer
Gerald J. Sweas (Principal Financial
Officer and Principal
Accounting Officer)

</TABLE>

II-8

<PAGE>

INDEPENDENT AUDITORS' CONSENT

Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois

We consent to the use in this Registration Statement of USN Communications, Inc.
on Form S-1 of our report dated March 14, 1997, which expresses an unqualified
opinion and includes an explanatory paragraph concerning substantial doubt about
the entity's ability to continue as a going concern, appearing in the
Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the headings "Selected Historical
Consolidated Financial and Operating Data" and "Independent Auditors" in such
Registration Statement.

October 21, 1997
Chicago, Illinois