USN COMMUNICATIONS INC, S-1/A, 1998-01-07

USN COMMUNICATIONS INC
S-1/A, 1998-01-07
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1998

REGISTRATION NO. 333-38381
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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USN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 4813 36-3947804
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION
ORGANIZATION) CODE NUMBER)

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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)

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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

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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
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........... 9,200,000 $18.00 $165,600,000 $49,575
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</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) $27,273 of the aggregate registration fee was paid on October 21, 1997 and
$22,302 was paid on January 7, 1998.

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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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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 6,400,000
shares of common stock of USN Communications, Inc., par value $.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 1,600,000 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JANUARY 7, 1998
PROSPECTUS

8,000,000 SHARES
USN COMMUNICATIONS, INC.
LOGO
COMMON STOCK
-----------

All of the 8,000,000 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 8,000,000 shares of Common Stock offered hereby, 6,400,000 shares are
being initially offered in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 1,600,000 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 $16.00 and $18.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.

The Company has applied 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 800,000
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 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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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 $1,100,000.

(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 960,000 and 240,000 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 , 1998.
-----------
MERRILL LYNCH & CO.

COWEN & COMPANY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
-----------

The date of this Prospectus is , 1998.
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[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."

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AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (No. 333-38381) (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 fact included in this Prospectus including, without limitation,
such statements under "Prospectus Summary," "Risk Factors," "Pro Forma
Consolidated Financial Statements," "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.

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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 historical financial information and as otherwise noted, all information in
this Prospectus, including share and per share data, has been adjusted to
reflect (i) the conversion of all of the 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 5,943,916 shares of
Common Stock concurrently with the closing of the Offerings (excluding for this
purpose the effect of Common Stock issued in connection with such conversion in
respect of accrued but unpaid dividends on the 9% Preferred Stock and Series A
Preferred Stock subsequent to September 30, 1997) and (ii) the conversion of
each outstanding share of Class A Common Stock into one share 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,
voicemail, paging, teleconferencing, Internet access and other enhanced and
value-added telecommunications services, tailored to meet the needs of its
customers. Upon the consummation of the proposed acquisition of Connecticut
Telephone (as defined), the Company will also offer wireless telephone service
on a resale basis. See "--Proposed Acquisition." The Company primarily focuses
its marketing efforts on 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 selling service to customers in certain states in
the NYNEX Corporation ("NYNEX") region (Massachusetts, New Hampshire, New York
and Rhode Island) and the entire Ameritech Corporation ("Ameritech") region
(Illinois, Indiana, Michigan, Ohio and Wisconsin) and is currently in
negotiations to expand its bundled services offering throughout the 14-state
Bell Atlantic/NYNEX region. Management anticipates implementing service in at
least two additional states by the end of 1998. In August 1997, NYNEX merged
with Bell Atlantic Corporation ("Bell Atlantic"). The Company continues to
operate in the former NYNEX regions, which are now a part of the Bell Atlantic
territory.

During 1997, the Company increased aggregate local access lines in service
from 8,364 lines to 171,962 lines, including the provisioning of 55,371 lines
in the fourth quarter. As of December 31, 1997, the Company had sold 191,069
local access lines, including 55,897 lines which were sold in the fourth
quarter. Services are primarily marketed through an approximately 425 member
direct salesforce in 34 offices located in nine 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
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. 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. Although certain provisions of the
Telecommunications Act restricting the RBOCs' ability to provide in-region
long-distance have been held unconstitutional by a Federal district court,
the Company believes that significant parts of such decision may be reversed
and vacated on appeal, but no assurance can be made as to the outcome of any
appeals. See "Risk Factors--Competition." 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 an interim resale agreement with Bell
Atlantic 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 has or 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 Bell Atlantic/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 while reducing costs.

. 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. 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

5
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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 425 member direct salesforce,
located in 34 offices in Illinois, Indiana, Massachusetts, Michigan, New
Hampshire, New York, Ohio, Rhode Island and Wisconsin. Additionally, the
Company intends to hire approximately 75 new salespeople by the end of 1998
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, vital to expanding its customer base in today's
highly competitive telecommunications industry.

. 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. Upon consummation
of the Proposed Acquisition (as defined), the Company will also offer
wireless telephone service on a resale basis. See "--Proposed Acquisition."
Based on its experience, the Company believes that this marketing and
customer service approach has minimized customer acquisition costs and churn.

6
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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.

. 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.

. 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 continuing legal challenges, the Company does
not believe that any RBOC will provide in-region long distance services on a
significant basis 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 customers to RBOCs' 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 fourth quarter of 1997, the Company provisioned 55,371 local access
lines, an increase of 47% from the number of lines in service on September
30, 1997.

. In October 1997, Merrill Lynch Global Allocation Fund, Inc. ("MLGAFI") and
Merrill Lynch Equity/Convertible Series (Global Allocation Portfolio)
(collectively, "MLAM") exercised an option to purchase $13.0 million
aggregate principal amount at maturity of the Company's 9% Consent
Convertible Subordinated Notes due 2006 (the "Consent Convertible Notes") for
an aggregate purchase price of $10.0 million.

. The Company has entered into a definitive agreement to acquire Connecticut
Telephone, a reseller of telecommunications services which currently provides
cellular service to more than 64,000 subscribers and paging service to more
than 15,000 subscribers in the Connecticut area.

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PROPOSED ACQUISITION

The Company has agreed to acquire all of the outstanding capital stock of
Hatten Communications Holding Company, Inc., a Connecticut corporation doing
business as Connecticut Telephone ("Connecticut Telephone"), pursuant to a
Stock Purchase Agreement, dated as of January 7, 1998, by and among the
Company, Connecticut Telephone and the stockholders of Connecticut Telephone
(the "Stock Purchase Agreement") for approximately $68.0 million, which
includes the assumption or repayment of approximately $13.5 million of existing
indebtedness (the "Proposed Acquisition").

Connecticut Telephone, through its wholly owned subsidiaries, is a reseller
of cellular, paging, long distance and local exchange services. Connecticut
Telephone currently provides cellular service to more than 64,000 subscribers
and paging services to more than 15,000 subscribers in the Connecticut area.
Connecticut Telephone operates through nine retail sales and service facilities
throughout Connecticut and a direct sales force of over 40 persons.

In the event that prior to the closing of the Proposed Acquisition (the
"Closing"), Connecticut Telephone receives a bona fide written proposal for the
acquisition of Connecticut Telephone or a substantial portion of its assets for
consideration in excess of $68.0 million (which includes satisfaction of
obligations for existing indebtedness), the Company will be required to deposit
$2.5 million into an escrow account to secure its obligation to complete the
Proposed Acquisition or the stockholders of Connecticut Telephone will be
entitled to terminate the Stock Purchase Agreement.

The consummation of the Proposed Acquisition is subject to customary closing
conditions, including the receipt of necessary consents, including the consent
of the holders of the Company's 14% Senior Notes (as defined), and approvals
and the entering into of certain employment agreements reasonably satisfactory
to the Company, and the completion of the Offerings. The Stock Purchase
Agreement may be terminated by either the stockholders of Connecticut Telephone
or the Company in the event that the Closing does not occur by March 1, 1998.

It is presently anticipated that the Closing will occur shortly following the
consummation of the Offerings, but there can be no assurance that the Closing
will occur by such date, if at all.

The summary set forth above of the Stock Purchase Agreement is qualified in
its entirety by reference to the Stock Purchase Agreement, a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.

8
<PAGE>

THE OFFERINGS

Common Stock offered by the
Company:

U.S. Offering................

International Offering....... 6,400,000 shares

Total................. 1,600,000 shares

8,000,000 shares(1)

Common Stock to be
outstanding after the
Offerings....................

21,180,387 shares(1)(2)

Use of Proceeds...............
Approximately $56.6 million of the net proceeds
of the Offerings will be used for the
acquisition of Connecticut Telephone, including
the purchase of the outstanding capital stock,
the repayment of certain indebtedness and the
payment of certain fees and expenses related to
the Proposed Acquisition. In the event the
Underwriters' over-allotment options are
exercised, up to $10.0 million of the net
proceeds from such exercise will be used to
repay indebtedness of Connecticut Telephone.
The remaining net proceeds, 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, future 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) shares reserved for issuance upon the exercise of options;
(ii) 2,989,840 shares reserved for issuance upon exercise of outstanding
warrants; (iii) 2,936,090 shares reserved for issuance as of November 30,
1997 upon conversion of the Convertible Notes (as defined); (iv) 988,142
shares to be reserved for issuance upon conversion of the Consent
Convertible Notes; and (v) shares issuable upon conversion of the 9%
Preferred Stock and Series A Preferred Stock with respect to accrued and
unpaid dividends. As of December 31, 1997 on a pro forma basis giving
effect to the Offerings, there were 3,245,540 shares reserved for
issuance upon the exercise of outstanding options, 1,551,400 of which
were vested. Of the vested options, as of December 31, 1997 on a pro
forma basis giving effect to the Offerings, options for 648,560 shares
were exercisable and options for an additional 649,600 shares become
exercisable 180 days after the closing of the Offerings. The remaining
vested options covering 253,240 shares become exercisable at such time,
if any, as the Convertible Notes are converted into Common Stock.

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 12.

9
<PAGE>

SUMMARY HISTORICAL AND PRO FORMA 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 data presented for the Company for the nine month periods
ended September 30, 1996 and September 30, 1997 are derived from the unaudited
financial statements of the Company appearing elsewhere herein, and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the Company's results of operations and financial condition for
those periods. Results of operations for the nine months ended September 30,
1997 are not necessarily indicative of results of operations for the fiscal
year ended December 31, 1997 or indicative of future periods. The summary
unaudited pro forma as adjusted statement of operations data for the year ended
December 31, 1996 and for each of the nine month periods ended September 30,
1996 and September 30, 1997 give effect to the following transactions as if
they had been completed on January 1, 1996: (i) the sale of Series A Preferred
Stock on October 17, 1997 for an aggregate purchase price of $15.0 million;
(ii) 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) into an aggregate of 5,943,916 shares of Common Stock
concurrently with the closing of the Offerings (excluding for this purpose the
effect of Common Stock issued in connection with such conversion in respect of
accrued but unpaid dividends on the 9% Preferred Stock and Series A Preferred
Stock subsequent to September 30, 1997); (iii) the consummation of the
Offerings and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds;" and (iv) the Proposed Acquisition. The summary
unaudited pro forma as adjusted balance sheet data as of September 30, 1997
gives effect to items (i) through (iv) above and the issuance of the Consent
Convertible Notes as if each had been completed on such date. The summary pro
forma data does not purport to be indicative of the Company's actual results of
operations or financial position that would have been reported had such events
actually occurred on the dates specified, nor do they purport to be indicative
of the Company's future results of operations or financial position. The
following summary historical and pro forma consolidated financial data should
be read in conjunction with "Selected Historical Consolidated Financial and
Operating Data," "Pro Forma Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical and pro forma financial statements, including the notes thereto,
of the Company and the historical financial statements, including the notes
thereto, of Connecticut Telephone appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------------------
INCEPTION TO --------------------------------
DECEMBER 31, PRO FORMA PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1996 1997 1997
------------ --------- --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue.... $ 1,737 $ 7,884 $ 9,814 $ 40,132 $ 7,599 $ 29,725 $ 26,998 $ 56,818
Cost of services....... 1,455 9,076 9,256 28,835 6,587 20,931 23,983 42,290
--------- --------- --------- ---------- ---------- ---------- --------- ----------
Gross margin........... 282 (1,192) 558 11,297 1,012 8,794 3,015 14,528
Sales and marketing
expense............... 2,869 5,867 12,612 16,901 5,837 8,815 43,087 47,044
General and
administrative
expense............... 4,686 11,100 20,665 34,770 10,920 21,309 26,882 39,751
Interest expense....... 26 734 1,797 2,871 46 831 8,573 9,540
Interest and other
income (1)............ 152 646 9,469 12,851 8,572 11,110 1,889 4,403
Minority interest...... -- 150 -- -- -- -- -- --
--------- --------- --------- ---------- ---------- ---------- --------- ----------
Net loss............... $ (7,147) $ (18,097) $ (25,047) $ (30,394) $ (7,219) $ (11,051) $ (73,638) $ (77,404)
========= ========= ========= ========== ========== ========== ========= ==========
Accumulated preferred
dividends............. $ 707 $ 3,103 $ 3,691 $ -- $ 3,466 $ -- $ 1,012 $ --
Net loss to common
shareholder........... $ (7,854) $ (21,200) $ (28,738) $ (30,394) $ (10,685) $ (11,051) $ (74,650) $ (77,404)
Net loss per common
share................. $ (6.56) $ (7.01) $ (5.63) $ (1.60) $ (2.44) $ (0.60) $ (10.35) $ (3.66)
Weighted average shares
outstanding........... 1,196,780 3,025,200 5,102,330 19,046,246 4,384,993 18,328,909 7,212,511 21,156,427
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
INCEPTION TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ ------------------
1994 1995 1996 1996 1997
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (2)............... $(7,087) $(15,901) $(30,390) $(14,385) $(64,429)
Cash flows from operating
activities.............. (6,141) (14,308) (24,098) (14,092) (57,822)
Cash flows from investing
activities.............. (1,708) (2,556) 7,274 7,647 (10,071)
Cash flows from financing
activities.............. 13,828 24,589 63,689 64,157 125,018
Depreciation and
amortization............ 186 2,258 2,329 1,360 2,525
Capital expenditures..... 1,728 1,740 2,259 285 10,071
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------------------
PRO FORMA
1994 1995 1996 1996 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 5,979 $13,776 $60,818 $71,390 $117,944 $211,458
Total assets.......... 12,747 20,471 78,052 88,083 179,157 347,550
Long-term debt (net
of current
maturities).......... 3,176 518 59,864 58,352 167,287 189,053
Redeemable preferred
stock................ 15,306 44,396 10,045 9,853 41,048 --
Common stockholders'
equity (deficit)..... (7,830) (28,768) (3,606) 14,022 (58,428) 122,700
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access lines
sold................. 4,630 10,283 35,397 79,321 135,172 191,069
Local access lines in
service.............. 4,356 8,364 18,557 65,142 116,591 171,962
Total employees....... 225 464 641 766 868 1,071
Direct salesforce..... 81 206 256 332 321 426
</TABLE>
- --------

(1) Interest and other income for the year ended December 31, 1996 and the nine
months ended September 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.

11
<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 $15.3 million (excluding the
$8.1 million non-recurring gain) and $73.6 million for the first nine 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 offered hereby. 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 September 30,
1997, the Company had $177.3 million principal amount of long-term debt and
total common stockholders' equity of $122.7 million, as adjusted to give
effect to (i) the sale of Series A Preferred Stock on October 17, 1997 for an
aggregate purchase price of $15.0 million, (ii) 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)
into 5,943,916 shares of Common Stock concurrently with the closing of the
Offerings (excluding for this purpose the effect of Common Stock issued in
connection with such conversion in respect of accrued but unpaid dividends on
the 9% Preferred Stock and Series A Preferred Stock subsequent to September
30, 1997), (iii) the issuance of the Consent Convertible Notes and (iv) the
Offerings (after deducting underwriting discounts and commissions and
estimated expenses of the Offerings and the receipt of the estimated net
proceeds therefrom) and $189.1 million principal amount of long-term debt and
total common stockholders' equity of $122.7 million, as further adjusted to
give effect to the Proposed Acquisition. 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.

12
<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) and
the Convertible Note Indenture (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, following the
consummation of the Proposed Acquisition, will be sufficient to meet planned
capital expenditures and anticipated negative operating cash flow for the
foreseeable future. To the extent that the Company has additional financing
requirements, sources of funding 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. In the fourth
quarter of 1997, however, the Company completed 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 financial condition and results
of operations. Presently, 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 provide 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 financial condition
and 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 properly assess the creditworthiness of
its customers and implement adequate revenue assurance programs could have a
material adverse effect on the Company's financial condition and 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 financial condition and results of operations. In addition, the
accurate and prompt billing

13
<PAGE>

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 material adverse
effect on the Company's financial condition and 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 an agreement with NYNEX. 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.

14
<PAGE>

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. While certain of these combined entities, such as
the entity to be formed by the proposed merger of WorldCom, Inc. and MCI, may
continue to be subject to the joint marketing restrictions in the
Telecommunications Act (as discussed below), others will not be subject to
such restrictions. Any of these combined entities may have resources far
greater than those of the Company and 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 ("PCS") 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 has adopted rules to auction geographical area wide licenses for the
operation of fixed wireless point-to-multipoint 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 February 1998 and the 38
GHz auction is expected to occur later 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 CMRS 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.

15
<PAGE>

that state and has received the approval of the FCC. In August 1997, the FCC
denied the application of Ameritech for in-region long distance authority in
Michigan. The Company anticipates that a number of RBOCs, including Ameritech
and Bell Atlantic, will file additional applications for in-region long
distance authority in 1998. Based on continuing legal challenges, the Company
does not believe that any RBOC will provide in-region long distance services
on a significant basis prior to 1999. The FCC will have 90 days from the date
an application for in-region long distance authority 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 IXCs will be in a position to offer
single-source local and long distance services similar to those offered by the
Company. On December 31, 1997, a United States District Court judge in Texas
held unconstitutional certain sections of the Telecommunications Act,
including Section 271. This decision would permit the RBOCs immediately to
begin offering widespread in-region long distance services. Unless stayed or
overturned on appeal, this decision could have a material adverse effect on
the Company. The FCC and certain IXCs have filed a request for a stay and the
Company expects that the FCC and certain IXCs will file appeals of the
decision with the United States Court of Appeals for the Fifth Circuit.
Although there can be no assurance as to the outcome of this litigation, the
Company believes that significant parts of the District Court decision will be
overturned on appeal.

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 Bell Atlantic/NYNEX resale agreements
contain certain pricing protections, including adjustments in the wholesale
rates to be consistent with any changes in the Ameritech and Bell
Atlantic/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 Bell Atlantic/NYNEX resale agreements ensure that the
Company will receive any lower rate provided to any other reseller, under the
Bell Atlantic/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. In addition, in December 1997, the FCC
issued rules to implement the provisions of the World Trade Organization
Agreement on Basic Telecommunications, which was drafted to liberalize
restrictions on foreign ownership of domestic telecommunications companies and
to allow foreign telecommunications companies to enter domestic markets. The
new FCC rules are presently scheduled to go into effect in February 1998 and
will make it substantially easier for many non-U.S. telecommunications
companies to enter the U.S. market, thus further increasing the number of
competitors. The new rules will also give non-U.S. individuals and
corporations greater ability to invest in U.S. telecommunications companies,
thus increasing the financial and technical resources available to the Company
and its existing and potential competitors.

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

16
<PAGE>

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 typically require certain annual
commitments from the Company. The inability of the Company to meet its minimum
annual commitments or designated 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
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, in the event the Proposed Acquisition is
consummated, wireless telephone service. 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. 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."

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 local and 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

17
<PAGE>

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 relatively 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 would make it more difficult for
the Company and its competitors, including the large IXCs, to use rebundled
unbundled network elements or the "UNE Platform" to enter and compete in the
local exchange market. The FCC, numerous IXCs and various other parties filed
petitions for certiorari with the U.S. Supreme Court on November 19, 1997. 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.

On December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271. This decision would permit the RBOCs immediately to begin offering
widespread in-region long distance services. Unless stayed or overturned on
appeal, this decision could have a material adverse effect on the Company. The
FCC and certain IXCs have filed a request for a stay and the Company expects
that the FCC and certain IXCs will file appeals of the decision with the United
States Court of Appeals for the Fifth Circuit. Although there can be no
assurance as to the outcome of this litigation, the Company believes that
significant parts of the District Court decision may be reversed or vacated on

appeal. In addition, no assurance can be given that other 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

18
<PAGE>

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 financial condition and results of operations could
be materially adversely affected. See "--Proposed Acquisition of Connecticut
Telephone." Furthermore, there can be no assurance that the growth experienced
by the Company in the past will continue.

PROPOSED ACQUISITION OF CONNECTICUT TELEPHONE

The Company recently entered into the Stock Purchase Agreement to acquire all
of the outstanding capital stock of Connecticut Telephone for an aggregate
purchase price of $68.0 million, which includes the assumption or repayment of
approximately $13.5 million of existing indebtedness. The consummation of the
Proposed Acquisition is subject to a number of conditions, including the
consent of the holders of the 14% Senior Notes, and there can be no assurances
that the acquisition will be consummated. See "Prospectus Summary--Proposed
Acquisition."

If consummated, the Proposed Acquisition will involve significant risks and
uncertainties for the Company, including risks related to the integration of
the operations of Connecticut Telephone, the diversion of management's
attention from other business concerns and risks related to entering markets in
which the Company has limited or no direct experience. The success of the
Proposed Acquisition is largely dependent on the ability of the Company to
integrate the operations of Connecticut Telephone into its operations in an
efficient and effective manner. There can be no assurance that there will not
be substantial unanticipated costs or problems associated with the integration
effort. There can be no assurance that, if the Proposed Acquisition is
successfully consummated, it will be integrated on a timely basis or that the
anticipated benefits of the acquisition will be realized. Failure to
effectively accomplish the integration of Connecticut Telephone could have a
material adverse effect on the Company's results of operations and financial
condition.

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 financial condition and
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.

19
<PAGE>

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. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
has advised the Company that it currently intends to make a market in the
Common Stock. However, Merrill Lynch is not obligated to do so, and any
market-making with respect to the Common Stock may be discontinued at any
time, for any reason, without notice at the sole discretion of Merrill Lynch.
In addition, if Merrill Lynch conducts any market-making activities in respect
of the Common Stock, it may be required to deliver a "market-making
prospectus" when effecting offers and sales in the Common Stock, because of
the equity ownership of affiliates of Merrill Lynch. For so long as a market-
making prospectus is required to be delivered, the ability of Merrill Lynch to
make a market in the Common Stock may, in part, be dependent on the ability of
the Company to maintain a current market-making prospectus. 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 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 Company's 9% Convertible Subordinated
Notes due 2004 (the "Convertible Notes") (2,936,090 shares as of November 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 sale pursuant to a shelf registration statement 120 days
following the consummation of the Offerings. In addition, the Company has
agreed to register the Consent Convertible Notes and the shares of Common
Stock issuable upon conversion thereof (988,142 shares as of the date of
issuance of the Consent Convertible Notes) under the Securities Act, which
shares will be available for immediate sale without restriction upon such
conversion and registration.

The 7,212,511 shares of Common Stock outstanding as of November 30, 1997 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 concurrently with the closing of
the Offerings into an aggregate of 5,943,916 shares of Common Stock (excluding
for this purpose the effect of Common Stock issued in connection with such
conversion in respect of accrued but unpaid dividends on the 9% Preferred
Stock and Series A Preferred Stock subsequent to September 30, 1997). 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) 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 December 31, 1997 on a pro forma
basis giving effect to the Offerings, there were 3,245,540 shares reserved for
issuance upon the exercise of outstanding options, 1,551,400 of which were
vested. Of the vested options, as of December 31, 1997 on a pro forma basis
giving effect to the Offerings, options for 648,560 shares were exercisable
and options for an additional 649,600 shares become exercisable 180 days after
the closing of the Offerings. The remaining vested options covering 253,240
shares become exercisable at such time, if any, as the

20
<PAGE>

Convertible Notes are converted into Common Stock. 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 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.
MLAM has agreed to substantially similar restrictions for a period of 180 days
following the date of this Prospectus, subject to certain exceptions.

CONTROL BY EXISTING STOCKHOLDERS

Following the consummation of the Offerings, approximately 60% 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, Inc.,
HarbourVest Partners, LLC, Northwood Capital Partners LLC, Northwood Ventures
LLC, BT Capital Partners, Inc., Prime New Ventures and Fidelity Capital
(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. Additionally, MLAM holds Convertible
Notes which were convertible into 2,936,090 shares of Common Stock as of
November 30, 1997, warrants which are currently exercisable or will be
exercisable following the consummation of the Offerings for an aggregate of
935,940 shares of Common Stock and has also exercised its option to purchase
the Consent Convertible Notes, which will be initially convertible into 988,142
shares of Common Stock on the date of issuance. Following the consummation of
the Offerings, MLAM will hold securities convertible into, or exercisable for,
in the aggregate, approximately 15.5% of the outstanding Common Stock (on a
fully diluted basis).

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 $12.69 in the net tangible book value per share of
Common Stock from the initial public offering price (assuming an initial public
offering price of $17.00 per share). 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."

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<PAGE>

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 $17.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) are estimated to be approximately
$125.4 million ($144.3 million if the Underwriters' over-allotment options are
exercised in full).

The Company currently intends to use approximately $56.6 million of the net
proceeds of the Offerings to finance the Proposed Acquisition, including the
purchase of the outstanding capital stock, the repayment of approximately $1.5
million of indebtedness and the payment of certain fees and expenses related to
the Proposed Acquisition. The $1.5 million of indebtedness to be repaid bears
interest at a rate of 10% per annum. Additionally, in the event the
Underwriters' over-allotment options are exercised, up to $10.0 million of the
net proceeds from such exercise will be used to repay indebtedness of
Connecticut Telephone outstanding under the Second Amended and Restated Master
Credit Facility, dated May 23, 1997 (the "Credit Facility"), between
Connecticut Telephone and BankBoston, N.A. and State Street Bank. Borrowings
under the Credit Facility bear interest at a rate of prime plus 1.25% per annum
(9.75% as of December 31, 1997). In the event the Proposed Acquisition is not
consummated, all of the net proceeds, including the net proceeds from any
exercise of the Underwriters' over-allotment options, will be used for general
corporate purposes as described below.

The remaining 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 its sales,
customer care and provisioning organizations, enhancement of the Company's
billing system and, potentially, future 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."

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<PAGE>

CAPITALIZATION

The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of September 30, 1997, and as adjusted to
give effect to (i) the sale of Series A Preferred Stock on October 17, 1997
for an aggregate purchase price of $15.0 million; (ii) 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)
into an aggregate of 5,943,916 shares of Common Stock concurrently with the
closing of the Offerings (excluding for this purpose the effect of Common
Stock issued in connection with such conversion in respect of accrued but
unpaid dividends on the 9% Preferred Stock and Series A Preferred Stock
subsequent to September 30, 1997); (iii) the issuance of the Consent
Convertible Notes; and (iv) the sale of 8,000,000 shares of Common Stock
offered hereby (assuming an initial public offering price of $17.00 per share
and after deducting underwriting discounts and commissions and estimated
expenses of the Offerings and the receipt of the estimated net proceeds
therefrom) and pro forma to reflect the transactions described in items (i)
through (iv) above, as well as the Proposed Acquisition. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the historical and pro forma
consolidated financial statements, including the notes thereto, of the Company
and the historical consolidated financial statements, including the notes
thereto, of Hatten Communications Holding Company, Inc. appearing elsewhere in
this Prospectus. See "Use of Proceeds" and "Description of Capital Stock."

<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
--------------------------------
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
--------------------------------
AS
HISTORICAL ADJUSTED PRO FORMA
---------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 117,944 $ 268,024 $ 211,458
========= ========= =========
Long-term debt
14 5/8% Senior Discount Notes due 2004....... $ 101,830 $ 101,830 $ 101,830
14% Senior Discount Notes due 2003........... 34,580 34,580 34,580
9% Convertible Subordinated Notes due 2004... 30,188 30,188 30,188
9% Consent Convertible Subordinated Notes due
2006........................................ -- 10,000 10,000
Notes payable and capital lease obligations.. 689 689 12,455
--------- --------- ---------
Total long-term debt...................... 167,287 177,287 189,053
Redeemable Preferred Stock
9% Preferred Stock, par value $1.00 per
share, 30,000 shares authorized; 10,920
shares issued and outstanding (actual); no
shares authorized, issued and outstanding
(as adjusted, pro forma).................... 11 -- --
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, pro forma) ................... 30 -- --
Accumulated unpaid dividends................. 317 -- --
Additional paid-in capital................... 40,690 -- --
--------- --------- ---------
Total redeemable preferred stock.......... 41,048 -- --
Common stockholders' equity (deficit)
Common Stock, $.01 par value, 30,000,000
shares authorized, 7,222,511 shares issued
and outstanding (actual); 100,000,000 shares
authorized, 21,166,427 shares issued and
outstanding (as adjusted, pro forma)(/1/)... 72 212 212
Common Stock held in treasury (10,000
shares)..................................... (1) (1) (1)
Additional paid-in capital................... 73,942 254,930 254,930
Accumulated deficit.......................... (132,441) (132,441) (132,441)
--------- --------- ---------
Total common stockholders' equity
(deficit)................................ (58,428) 122,700 122,700
--------- --------- ---------
Total capitalization.................... $ 149,908 $ 299,987 $ 311,753
========= ========= =========
</TABLE>
- --------

(1) Excludes (i) shares reserved for issuance upon the exercise of options;
(ii) 2,989,840 shares reserved for issuance upon exercise of outstanding
warrants; (iii) 2,936,090 shares reserved for issuance as of November 30,
1997 upon conversion of the Convertible Notes; (iv) 988,142 shares to be
reserved for issuance upon conversion of the Consent Convertible Notes;
and (v) shares issuable upon conversion of the 9% Preferred Stock and
Series A Preferred Stock with respect to accrued and unpaid dividends. As
of December 31, 1997 on a pro forma basis giving effect to the Offerings,
there were 3,245,540 shares reserved for issuance upon the exercise of
outstanding options, 1,551,400 of which were vested. Of the vested
options, as of December 31, 1997 on a pro forma basis giving effect to the
Offerings, options for 648,560 shares were exercisable and options for an
additional 649,600 shares become exercisable 180 days after the closing of
the Offerings. The remaining vested options covering 253,240 shares become
exercisable at such time, if any, as the Convertible Notes are converted
into Common Stock.

23
<PAGE>

DILUTION

As of September 30, 1997, the net tangible deficit of the Common Stock was
$90.0 million, or approximately $12.46 per share outstanding. As of September
30, 1997, the as adjusted net tangible deficit of the Common Stock after giving
effect to (i) the sale of Series A Preferred Stock on October 17, 1997 for an
aggregate purchase price of $15.0 million and (ii) 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)
into an aggregate of 5,943,916 shares of Common Stock concurrently with the
closing of the Offerings (excluding for this purpose the effect of Common Stock
issued in connection with such conversion in respect of accrued but unpaid
dividends on the 9% Preferred Stock and Series A Preferred Stock subsequent to
September 30, 1997) was $33.9 million or approximately $2.58 per share. As of
September 30, 1997, the pro forma net tangible book value of the Common Stock
after giving effect to (i) and (ii) above, and the sale of 8,000,000 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
$17.00 per share, was $91.1 million, or approximately $4.31 per share. This
represents an immediate increase in net tangible book value of $6.89 per share
to existing stockholders and an immediate dilution in net tangible book value
of $12.69 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 September 30, 1997:

<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $17.00
As adjusted net tangible deficit per share.................. $2.58
Increase in net tangible book value per share attributable
to the Offerings........................................... $6.89
Pro forma net tangible book value per share ................ $ 4.31
------
Dilution in net tangible book value per share to new
investors.................................................. $12.69
======
</TABLE>

The following table sets forth, at September 30, 1997 on a pro forma 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 $17.00 per share.

<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 13,156,427 62.2% $ 97,219,134 41.7% $ 7.39
New investors........... 8,000,000 37.8 136,000,000 58.3 17.00
---------- ------ ------------ ------
Total................... 21,156,427 100.0% $233,219,134 100.0%
========== ====== ============ ======
</TABLE>
- --------

(1) Excludes (i) shares reserved for issuance upon the exercise of options;
(ii) 2,989,840 shares reserved for issuance upon exercise of outstanding
warrants; and (iii) 2,936,090 shares reserved for issuance as of November
30, 1997 upon conversion of the Convertible Notes; (iv) 988,142 shares to
be reserved for issuance upon conversion of the Consent Convertible Notes;
and (v) shares issuable upon conversion of the 9% Preferred Stock and
Series A Preferred Stock with respect to accrued and unpaid dividends. As
of December 31, 1997 on a pro forma basis giving effect to the Offerings,
there were 3,245,540 shares reserved for issuance upon the exercise of
outstanding options, 1,551,400 of which were vested. Of the vested options,
as of December 31, 1997 on a pro forma basis giving effect to the
Offerings, options for 648,560 shares were exercisable and options for an
additional 649,600 shares become exercisable 180 days after the closing of
the Offerings. The remaining vested options covering 253,240 shares become
exercisable at such time, if any, as the Convertible Notes are converted
into Common Stock.

24
<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 data presented for the Company for the nine-month periods ended
September 30, 1996 and September 30, 1997 are derived from the unaudited
financial statements of the Company appearing elsewhere herein, and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of the Company's results of operations and financial condition
for those periods. The data for the nine-month period ended September 30, 1997
are not necessary indicative of results for the fiscal year ended December 31,
1997 or indicative of future periods. The selected historical consolidated
financial and operating data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited consolidated financial statements, including the notes thereto, of
the Company appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
INCEPTION TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- ---------------------
ACTUAL 1994 1995 1996 1996 1997
------------ --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue.... $ 1,737 $ 7,884 $ 9,814 $ 7,599 $ 26,998
Cost of services....... 1,455 9,076 9,256 6,587 23,983
--------- --------- --------- ---------- ---------
Gross margin........... 282 (1,192) 558 1,012 3,015
Sales and marketing
expense............... 2,869 5,867 12,612 5,837 43,087
General and
administrative
expense............... 4,686 11,100 20,665 10,920 26,882
Interest expense....... 26 734 1,797 46 8,573
Interest and other
income (1)............ 152 646 9,469 8,572 1,889
Minority interest...... -- 150 -- -- --
--------- --------- --------- ---------- ---------
Net loss............... $ (7,147) $ (18,097) $ (25,047) $ (7,219) $ (73,638)
========= ========= ========= ========== =========
Accumulated preferred
dividends............. $ 707 $ 3,103 $ 3,691 $ 3,466 $ 1,012
Net loss to common
shareholder........... $ (7,854) $ (21,200) $ (28,738) $ (10,685) $ (74,650)
Net loss per common
share................. $ (6.56) $ (7.01) $ (5.63) $ (2.44) $ (10.35)
Weighted average shares
outstanding........... 1,196,780 3,025,200 5,102,330 4,384,993 7,212,511
OTHER DATA:
EBITDA (2)............. $ (7,087) $ (15,901) $ (30,390) $ (14,385) $ (64,429)
Cash flows from
operating activities.. (6,141) (14,308) (24,098) (14,092) (57,822)
Cash flows from
investing activities.. (1,708) (2,556) 7,274 7,647 (10,071)
Cash flows from
financing activities.. 13,828 24,589 63,689 64,157 125,018
Depreciation and
amortization.......... 186 2,258 2,329 1,360 2,525
Capital expenditures... 1,728 1,740 2,259 285 10,071
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 5,979 $13,705 $60,569 $71,390 $117,944
Total assets..................... 12,747 20,471 78,052 88,083 179,157
Long-term debt (net of current
maturities)..................... 3,176 518 59,864 58,352 167,287
Redeemable preferred stock....... 15,306 44,396 10,045 9,853 41,049
Common stockholders' equity
(deficit)....................... (7,830) (28,768) (3,606) 14,022 (58,428)
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Local access lines
sold.................. 4,630 10,283 35,397 79,321 135,172 191,069
Local access lines in
service............... 4,356 8,364 18,557 65,142 116,591 171,962
Total employees........ 225 464 641 766 868 1,071
Direct salesforce...... 81 206 252 325 325 426
</TABLE>
- -------

(1) Interest and other income for the year ended December 31, 1996 and the
nine months ended September 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.

25
<PAGE>

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The pro forma consolidated statements of operations for the year ended
December 31, 1996 and for the nine month periods ended September 30, 1996 and
September 30, 1997 give effect to the following transactions as if they had
been completed on January 1, 1996: (i) the sale of Series A Preferred Stock on
October 17, 1997 for an aggregate purchase price of $15.0 million; (ii) the
conversion of all 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) into an aggregate of 5,943,916 shares of Common Stock
concurrently with the closing of the Offerings (excluding for this purpose the
effect of Common Stock issued in connection with such conversion in respect of
accrued but unpaid dividends on the 9% Preferred Stock and Series A Preferred
Stock subsequent to September 30, 1997); (iii) the consummation of the
Offerings and the application of the estimated net proceeds therefrom as
described in "Use of Proceeds"; and (iv) the Proposed Acquisition. The pro
forma consolidated balance sheet gives effect to items (i) through (iv) above
and the issuance of the Consent Convertible Notes as if each had been completed
as of September 30, 1997.

Due to the difference in fiscal year ends between the Company and Connecticut
Telephone, the following periods were combined for pro forma purposes of
Connecticut Telephone: (i) for the nine month periods ended September 30, 1997
and 1996, audited statements as of April 30, 1997 and 1996 were adjusted by
adding unaudited results for the five months ended September 30, 1997 and 1996
and subtracting unaudited results for the five months ended December 31, 1996
and 1995, respectively; and (ii) for the twelve months ended December 31, 1996,
audited statements as of April 30, 1997 were adjusted by subtracting unaudited
results for the four months ended April 30, 1997 and adding unaudited results
for the four months ended April 30, 1996.

The Company believes that the assumptions used in the pro forma consolidated
financial statements provide a reasonable basis on which to present such
statements. The pro forma consolidated financial statements are provided for
information purposes only and should not be construed to be indicative of the
Company's results of operations or financial position had the Offerings and the
other events described above been consummated on or as of the date assumed, and
are not intended to project the Company's results of operations or its
financial position for any future period or as of any future date. The pro
forma consolidated financial statements and accompanying notes should be read
in conjunction with the audited consolidated financial statements of the
Company and Hatten Communications Holding Company, Inc. and the related notes
thereto appearing elsewhere in this Prospectus.

26
<PAGE>

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING TELEPHONE ACQUISITION
ACTUAL ADJUSTMENTS(1) AS ADJUSTED ACTUAL ADJUSTMENTS(2) PRO FORMA
------------ -------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net service revenue..... $ 9,814,479 $ 9,814,479 $30,316,925 $ 40,131,404
Cost of services........ 9,256,472 9,256,472 19,578,108 28,834,580
------------ ----------- ------------ ----------- ------------ ------------
Gross margin......... 558,007 558,007 10,738,817 11,296,824
Expenses:
Sales and marketing.... 12,612,172 12,612,172 4,288,866 16,901,038
General and
administrative........ 20,664,612 20,664,612 5,585,820 $ 8,519,633 (a) 34,770,065
------------ ----------- ------------ ----------- ------------ ------------
Operating loss.......... (32,718,777) (32,718,777) 864,131 (8,519,633) (40,374,279)
Other income (expense):
Interest and other
income................ 9,469,298 $ 6,254,000 (a) 15,723,298 (359,651) (2,512,266)(b) 12,851,381
Interest expense....... (1,797,112) (1,797,112) (2,094,317) 1,020,908 (c) (2,870,521)
------------ ----------- ------------ ----------- ------------ ------------
Other income
(expense)--net...... 7,672,186 6,254,000 13,926,186 (2,453,968) (1,491,358) 9,980,860
------------ ----------- ------------ ----------- ------------ ------------
Net loss................ $(25,046,591) $ 6,254,000 $(18,792,591) $(1,589,837) $(10,010,991) $(30,393,419)
============ =========== ============ =========== ============ ============
Accumulated preferred
dividends.............. $ 3,690,976 $(3,690,976)(b) $ $ $ $
============ =========== ============ =========== ============ ============
Net loss to common
shareholders........... $(28,737,567) $ 9,944,976 $(18,792,591) $(1,589,837) $(10,010,991) $(30,393,419)
============ =========== ============ =========== ============ ============
Net loss per common
share.................. $ (5.63) $ (0.99) $ (1.60)
============ ============ ============
Weighted average common
and common equivalent
shares outstanding..... 5,102,330 19,046,246 19,046,246
============ ============ ============
</TABLE>

27
<PAGE>

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING TELEPHONE ACQUISITION
ACTUAL ADJUSTMENTS(1) AS ADJUSTED ACTUAL ADJUSTMENTS(2) PRO FORMA
------------ -------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net service revenue..... $ 7,598,705 $ 7,598,705 $22,126,220 $ 29,724,925
Cost of services........ 6,587,126 6,587,126 14,343,950 20,931,076
------------ ----------- ----------- ----------- ----------- ------------
Gross margin......... 1,011,579 1,011,579 7,782,270 8,793,849
Expenses:
Sales and marketing.... 5,837,437 5,837,437 2,977,254 8,814,691
General and
administrative........ 10,919,589 10,919,589 3,999,851 $ 6,389,725 (a) 21,309,165
------------ ----------- ----------- ----------- ----------- ------------
Operating loss.......... (15,745,447) (15,745,447) 805,165 (6,389,725) (21,330,007)
Other income (expense):
Interest and other
income................ 8,572,260 $ 4,690,500 (a) 13,262,760 (225,250) (1,926,869)(b) 11,110,641
Interest expense....... (45,957) (45,957) (1,497,502) 712,127 (c) (831,332)
------------ ----------- ----------- ----------- ----------- ------------
Other income
(expense)--net...... 8,526,303 4,690,500 13,216,803 (1,722,752) (1,214,742) 10,279,309
------------ ----------- ----------- ----------- ----------- ------------
Net loss................ $ (7,219,144) $ 4,690,500 $(2,528,644) $ (917,587) $(7,604,467) $(11,050,698)
============ =========== =========== =========== =========== ============
Accumulated preferred
dividends.............. $ 3,465,976 $(3,465,976)(b) $ $ $ $
============ =========== =========== =========== =========== ============
Net loss to common
shareholders........... $(10,685,120) $ 8,156,476 $(2,528,644) $ (917,587) $(7,604,467) $(11,050,698)
============ =========== =========== =========== =========== ============
Net loss per common
share.................. $ (2.44) $ (0.14) $ (0.60)
============ =========== ============
Weighted average common
and common equivalent
shares outstanding..... 4,384,993 18,328,909 18,328,909
============ =========== ============
</TABLE>

28
<PAGE>

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING AS TELEPHONE ACQUISITION
ACTUAL ADJUSTMENTS(1) ADJUSTED ACTUAL ADJUSTMENTS(2) PRO FORMA
------------ -------------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net service revenue..... $ 26,998,315 $ 26,998,315 $29,819,221 $56,817,536
Cost of services........ 23,983,125 23,983,125 18,306,549 42,289,674
------------ ----------- ------------ ----------- ----------- ------------
Gross margin......... 3,015,190 3,015,190 11,512,672 14,527,862
Expenses:
Sales and marketing.... 43,087,112 43,087,112 3,957,083 47,044,195
General and
administrative........ 26,881,801 26,881,801 6,479,052 $ 6,389,725 (a) 39,750,578
------------ ----------- ------------ ----------- ----------- ------------
Operating loss.......... (66,953,723) (66,953,723) 1,076,537 (6,389,725) (72,266,911)
Other income (expense):
Interest and other
income (expense)...... 1,889,247 $ 4,690,500 (a) 6,579,747 (244,412) (1,932,082)(b) 4,403,253
Interest expense....... (8,572,952) (8,572,952) (3,336,060) 2,368,784 (c) (9,540,228)
------------ ----------- ------------ ----------- ----------- ------------
Other income
(expense)--net...... (6,683,705) 4,690,500 (1,993,205) (3,580,472) 436,702 (5,136,975)
------------ ----------- ------------ ----------- ----------- ------------
Net loss................ $(73,637,428) $ 4,690,500 $(68,946,928) $(2,503,935) $(5,953,023) $(77,403,886)
============ =========== ============ =========== =========== ============
Accumulated preferred
dividends.............. $ 1,012,445 $(1,012,445)(b) $ $ 248,887 $ (248,887)(d) $
============ =========== ============ =========== =========== ============
Net loss to common
shareholders........... $(74,649,873) $ 5,702,945 $(68,946,928) $(2,752,822) $(5,704,136) $(77,403,886)
============ =========== ============ =========== =========== ============
Net loss per common
share.................. $ (10.35) $ (3.26) $ (3.66)
============ ============ ============
Weighted average common
and common equivalent
shares outstanding..... 7,212,511 21,156,427 21,156,427
============ ============ ============
</TABLE>

29
<PAGE>

PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------
CONNECTICUT
CONNECTICUT TELEPHONE
COMPANY OFFERING AS TELEPHONE ACQUISITION PRO
ASSETS ACTUAL ADJUSTMENTS(1) ADJUSTED ACTUAL ADJUSTMENTS(2) FORMA
------ ------------- -------------- ------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents.............. $ 117,943,711 $150,080,000 (a) $ 268,023,711 $ 269,290 $(56,834,570)(a) $ 211,458,431
Accounts receivable, net.. 15,445,860 15,445,860 6,783,003 22,228,863
Prepaid expenses.......... 271,430 271,430 1,103,366 1,374,796
Other current assets...... 338,502 338,502 953,847 1,292,349
------------- ------------ ------------- ----------- ------------ -------------
Total current assets.... 133,999,503 150,080,000 284,079,503 9,109,506 (56,834,570) 236,354,439
Property and Equipment,
net....................... 12,604,307 12,604,307 1,161,379 13,765,686
Other Assets............... 32,553,221 32,553,221 6,619,648 58,256,830 (b) 97,429,699
------------- ------------ ------------- ----------- ------------ -------------
Total Assets............ $ 179,157,031 $150,080,000 $ 329,237,031 $16,890,533 $ 1,422,260 $ 347,549,824
============= ============ ============= =========== ============ =============
<CAPTION>
LIABILITIES, REDEEMABLE
PREFERRED STOCK, AND COMMON
STOCKHOLDERS' EQUITY
(DEFICIT)
- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable.......... $ 17,268,085 $ 17,268,085 $ 3,945,642 $ 21,213,727
Accrued expenses and
other liabilities........ 11,315,296 11,315,296 2,463,404 13,778,700
Capital lease
obligations--current..... 544,213 544,213 544,213
Current maturities on
notes payable............ 121,874 121,874 138,317 260,191
------------- ------------ ------------- ----------- ------------ -------------
Total current
liabilities............ 29,249,468 29,249,468 6,547,363 35,796,831
14 5/8% Senior Discount
Notes, net of Original
Issue Discount............ 101,830,062 101,830,062 101,830,062
14% Senior Discount Notes,
net of Original Issue
Discount.................. 34,579,844 34,579,844 34,579,844
9% Convertible Subordinated
Discount Notes, net of
Original Issue Discount... 30,188,376 30,188,376 30,188,376
9% Consent Convertible
Subordinated Discount
Notes, net of Original
Issue Discount............ $ 10,000,000 (a) 10,000,000 10,000,000
Capital Lease Obligations--
Noncurrent................ 664,421 664,421 664,421
Notes Payable.............. 24,547 24,547 13,265,430 $(1,500,000)(c) 11,789,977
------------- ------------ ------------- ----------- ------------ -------------
Total liabilities....... 196,536,718 10,000,000 206,536,718 19,812,793 (1,500,000) 224,849,511
Redeemable Preferred Stock. 41,048,623 (41,048,623)(a)(b) 4,747,641 (4,747,641)(d)
Common Stockholders' Equity
(Deficit):
Common stock.............. 72,226 139,439 (a)(c) 211,665 799 (799)(d) 211,665
Additional paid-in
capital.................. 73,941,796 180,989,184 (a)(c) 254,930,980 1,794,975 (1,794,975)(d) 254,930,980
Accumulated deficit....... (132,441,255) (132,441,255) (9,465,675) 9,465,675 (b)(d) (132,441,255)
Common stock held in
Treasury: 1997--10,000
shares................... (1,077) (1,077) (1,077)
------------- ------------ ------------- ----------- ------------ -------------
Total common
stockholders' equity
(deficit).............. (58,428,310) 181,128,623 122,700,313 (7,669,901) 7,669,901 122,700,313
------------- ------------ ------------- ----------- ------------ -------------
Total Liabilities,
Redeemable Preferred
Stock, and Common
Stockholders' Equity
(Deficit)................. $ 179,157,031 $150,080,000 $ 329,237,031 $16,890,533 $ 1,422,260 $ 347,549,824
============= ============ ============= =========== ============ =============
</TABLE>

30
<PAGE>

NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

(1) Adjustments to reflect the Offerings.

(a) Represents the interest earned on the net proceeds of the Offerings.

(b) Represents the elimination of accumulated preferred dividends as a
result of the conversion of the 9% Preferred Stock and Series A
Preferred Stock to Common Stock.

(2) Adjustments to reflect the Proposed Acquisition.

(a) Represents the amortization of goodwill. The Company will account for
the Proposed Acquisition using the purchase method of accounting and
will allocate the purchase price to assets acquired and liabilities
assumed based on their estimated fair values. Management is in the
process of reviewing the allocation of the purchase price among certain
assets. As such, the excess purchase price over historical assets has
been allocated to goodwill which is being amortized over seven years.
These amounts may be adjusted upon completion of these analyses.

(b) Represents the net decrease in interest and other income as follows:

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Reduction of interest income
on cash paid for the Proposed
Acquisition.................. $2,841,729 $2,131,296 $2,131,296
Elimination of losses of
subsidiaries of Connecticut
Telephone not acquired by the
Company...................... (329,463) (204,427) (199,214)
---------- ---------- ----------
Net decrease in interest and
other income................. $2,512,266 $1,926,869 $1,932,082
========== ========== ==========
</TABLE>

(c) Represents the reduction of interest expense on certain debt and other
financial instruments not assumed by the Company as part of the
Proposed Acquisition.

(d) Represents the elimination of accumulated preferred dividends due to
the Proposed Acquisition.

31
<PAGE>

NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET

(1) Adjustments to reflect (i) the sale of Series A Preferred Stock on October
17, 1997 for an aggregate purchase price of $15.0 million, (ii) 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) into an aggregate of 5,943,916 shares of Common
Stock (excluding for this purpose the effect of Common Stock issued in
connection with such conversion in respect of accrued but unpaid dividends
on the 9% Preferred Stock and Series A Preferred Stock subsequent to
September 30, 1997), (iii) the issuance of the Consent Convertible Notes
and (iv) the Offerings.

(a) Represents the net proceeds of the Offerings, issuance of the Consent
Convertible Notes and sale of Series A Preferred Stock to the Company
as follows:

<TABLE>
<S> <C>
Proceeds of Offerings..................................... $136,000,000
Fees and expenses of Offerings............................ (10,920,000)
Issuance of the Consent Convertible Notes (net of original
issue discount).......................................... 10,000,000
Issuance of Series A Preferred Stock...................... 15,000,000
------------
$150,080,000
============
</TABLE>

(b) Represents the exchange of 10,920 shares of 9% Preferred Stock and
45,526 shares of Series A Preferred Stock (including accumulated unpaid
dividends) into 5,943,916 shares of Common Stock.

<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
PAR PAID IN
VALUE CAPITAL
-------- ------------
<S> <C> <C>
Common Stock issued in the Offerings (8,000,000
shares; par value $.01).......................... $ 80,000 $125,000,000
Common Stock exchanged for 9% Preferred Stock and
Series A Preferred Stock (5,943,916 shares; par
value $.01)...................................... 59,439 55,989,184
-------- ------------
Total increase.................................. $139,439 $180,989,184
======== ============
</TABLE>

(2) Adjustments to reflect the Proposed Acquisition.

(a) Represents the cash purchase price of Connecticut Telephone, net of
debt assumed by the Company, and costs associated with the Proposed
Acquisition.

(b) Represents the net increase in Other Assets as follows:

<TABLE>
<S> <C>
Goodwill in connection with the Proposed Acquisition....... $60,502,345
Dividend of investment in Smartlink Development, L.P. to a
former owner of Connecticut Telephone..................... (2,245,515)
-----------
Net increase in other assets............................... $58,256,830
===========
</TABLE>

(d) Represents the elimination of the preferred stock, common stock and
accumulated deficit of Connecticut Telephone.

32
<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 (as defined).

In August 1997, MLAM, the current holder of all of the 14% Senior Discount
Notes due 2003 (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 private
placement of units consisting of $152.7 million in aggregate principal amount
at maturity of the Company's 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
(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 the Consent Convertible Notes on terms
substantially similar to the Convertible Notes for an aggregate purchase price
of $10.0 million. The option was exercised by MLAM on October 24, 1997.
Additionally, the Company granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange 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.

33
<PAGE>

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 the
billing and information systems and personnel required to support the
Company's operations and growth as well as bad debts, customer allowances and
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 and added over 250 employees
in 1996 and over 600 employees in 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 also entered into a definitive agreement to acquire Connecticut
Telephone for approximately $68.0 million, which includes the assumption or
repayment of approximately $13.5 million of existing indebtedness. See "Risk
Factors--Proposed Acquisition of Connecticut Telephone."

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. Due to these factors, the Company recorded a charge of $2.8 million in
the third quarter of 1997. In response to these events, the Company's revenue
assurance and margin utilization systems and operating controls are being
strengthened. Gross margins will be lower than originally anticipated for 1997
and estimated bad debt provisions and customer allowances will be higher than
expected as a percent of revenue, 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 was completed during the
fourth quarter of 1997.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996

Net service revenue increased 255% to $27.0 million for the nine months
ended September 30, 1997 from $7.6 million for the nine months ended September
30, 1996. The number of local access lines sold in the third quarter of 1997
was 55,851 and cumulative access lines sold at September 30, 1997 were
135,172. The number of local access lines provisioned in the third quarter of
1997 was 51,449 and cumulative local access lines provisioned as of September
30, 1997 were 116,591.

Gross margin for the nine months ended September 30, 1997 increased 198% to
$3.0 million compared to $1.0 million for the nine months ended September 30,
1996. 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. In addition, the
Company has continued to negotiate price reductions with its carriers, the
full impact of which is not yet fully reflected in the results of operations.

34
<PAGE>

Sales and marketing expense increased $37.2 million from $5.8 million for
the nine months ended September 30, 1996 to $43.1 million for the nine months
ended September 30, 1997. The increase was due primarily to the substantial
increase in the number of sales and marketing employees from approximately 130
at September 30, 1996 to approximately 530 at September 30, 1997. The higher
head count resulted in increases to salaries and benefits of approximately
$22.6 million, recruitment, training and travel costs of approximately $5.7
million, and facility and office related expenses of approximately $3.3
million. Additionally, advertising and promotional costs increased
approximately $4.3 million due to product launches in the Company's target
markets.

General and administrative expense increased $16.0 million to $26.9 million
for the nine months ended September 30, 1997 versus $10.9 million for the nine
months ended September 30, 1996. The increase was due primarily to the
substantial increase in the number of operations and administrative employees
from approximately 90 at September 30, 1996 to over 320 at September 30, 1997.
The higher head count resulted in increases to salaries and benefits of
approximately $7.3 million, facility and office costs of approximately $1.4
million, and recruitment, training and travel costs of approximately $1.6
million. Professional fees increased approximately $1.2 million, primarily
relating to the development and expansion of the Company's customer service,
billing and administrative information systems and facilities. Billing costs
increased approximately $1.6 million due to a corresponding increase in
revenue. Additionally, as noted above, the Company recorded a charge of $2.8
million in the third quarter of 1997 for estimated additional provisions for
bad debt and customer allowances to cover instances of toll fraud and other
matters.

Interest and other income decreased to $1.9 million for the nine months
ended September 30, 1997 from $8.6 million for the nine months ended September
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, which was
somewhat offset by additional interest income earned on the higher average
cash balance.

Interest expense increased to $8.6 million for the nine months ended
September 30, 1997 from $46,000 for the nine months ended September 30, 1996.
This increase was due primarily to interest expense attributable to the 14%
Senior Notes and Convertible Notes issued in September 1996 and the 14 5/8%
Senior Notes issued in August 1997.

As a result of the factors described above, the Company had a net loss of
$73.6 million for the nine months ended September 30, 1997 compared to a net
loss of $7.2 million for the nine months ended September 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

35
<PAGE>

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 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.

36
<PAGE>

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 and private placements of debt securities. As of
September 30, 1997, the Company had cash and cash equivalents of $117.9
million and working capital of $104.8 million. The Company's operating
activities utilized cash of approximately $57.8 million for the nine month
period ended September 30, 1997, versus $14.1 million for the nine month
period ended September 30, 1996.

The Company's investing activities in 1997 have consisted primarily of
property and equipment purchases of $10.1 million for the nine month period
ended September 30, 1997, primarily related to sales office expansion in
several of the Company's target markets. In 1998, the Company anticipates
spending approximately $20.0 million for capital expenditures, a substantial
portion of which 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. In 1996, the Company's investing activities consisted
of $9.5 million in proceeds received in February 1996 from the December 1995
sale of facilities in Ohio, partially offset by a $1.6 million purchase of the
remaining minority interest of a subsidiary in the third quarter 1996 and
capital expenditures of $0.3 million for the nine month period ended September
30, 1996.

The Company's financing activities generated $125.0 million for the nine
months ended September 30, 1997. On August 18, 1997, the Company raised $30.2
million through the sale of its Series A Preferred Stock and $96.5 million of
net proceeds through the 1997 Private Placement. Additionally, 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.

The Company's financing activities generated $64.2 million for the nine
months ended September 30, 1996. 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 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
Convertible Notes (the "1996 Private Placement"). The aggregate purchase price
of the Units was $30.2 million, and the aggregate purchase price of the
Convertible Notes was $27.6 million. 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 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.).

Approximately $56.6 million of the net proceeds of the Offerings will be
used to finance the Proposed Acquisition, including the purchase of the
outstanding capital stock of Connecticut Telephone, the repayment

37
<PAGE>

of certain indebtedness of Connecticut Telephone and the payment of certain
fees and expenses related to the Proposed Acquisition. In the event the
Underwriters' over-allotment options are exercised, up to $10.0 million of the
net proceeds of such exercise will be used to repay indebtedness of
Connecticut Telephone. The Company believes that the remaining net proceeds of
the Offerings will be sufficient to meet planned capital expenditures and
anticipated negative operating cash flow for the foreseeable future. To the
extent that the Company has additional financing requirements, sources of
funding 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.

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 connection with its financial statements for
the fourth quarter of 1997.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The statements, which will
not impact the results of operations, financial position or cash flows of the
Company and do not have a material effect on the financial statements as
previously presented, are effective for financial statements issued for
periods ending after December 15, 1997 and will be adopted by the Company in
connection with its financial statements for the fourth quarter of 1997.

38
<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. Although certain
provisions of the Telecommunications Act restricting the RBOCs' ability to
provide in-region long distance services have been held unconstitutional by a
Federal district court, the Company believes that significant parts of such
decision may be reversed and vacated on appeal, but no assurance can be made
as to the outcome of any appeals. See "Business--Competition." 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.

39
<PAGE>

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, voicemail, paging, teleconferencing, Internet access
and other enhanced and value-added telecommunications services, tailored to
meet the needs of its customers. Upon the consummation of the Proposed
Acquisition, the Company will also offer wireless telephone service on a
resale basis. See "Prospectus Summary--Proposed Acquisition" and "Risk
Factors--Proposed Acquisition." The Company primarily focuses its marketing
efforts on 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 selling service to customers in certain states in
the NYNEX region (Massachusetts, New Hampshire, New York and Rhode Island) and
the entire Ameritech region (Illinois, Indiana, Ohio, Michigan and Wisconsin)
and is currently in negotiations to expand its bundled services offering
throughout the 14-state Bell Atlantic/NYNEX region. Management anticipates
implementing service in at least two additional states by the end of 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.

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. Although certain provisions of the Telecommunications Act
restricting the RBOCs' ability to provide in-region long-distance have been
held unconstitutional by a Federal district court, the Company believes that
significant parts of such decision may be reversed and vacated on appeal,
but no assurance can be made as to the outcome of any appeals. See "Risk
Factors--Competition." 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 an d 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

40
<PAGE>

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 an interim resale agreement with Bell
Atlantic 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 has or 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 Bell
Atlantic/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 while reducing
costs.

. 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. 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 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 425 member direct salesforce,
located in 34 offices in Illinois, Indiana, Massachusetts, Michigan, Ohio,
New Hampshire, New York, Rhode Island and Wisconsin. Additionally, the
Company intends to hire approximately 75 new sales people by the end of 1998
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, vital to expanding its customer base in today's
highly competitive telecommunications industry.

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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
provison local service.

GROWTH STRATEGY

. 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. Upon consummation
of the Proposed Acquisition, the Company will also offer wireless telephone
service on a resale basis. See "Prospectus Summary--Proposed Acquisition."
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.

. 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.

. 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 continuing legal challenges, the Company does
not believe that any RBOC will provide in-region long distance services on a
significant basis, 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.

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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 customers to RBOCs' 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 17,000 customers as of December 31,
1997.

The Company's services are currently sold through an approximately 425 member
direct salesforce, located in 34 offices in Illinois, Indiana, Massachusetts,
Michigan, Ohio, New Hampshire, New York, Rhode Island and Wisconsin. 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

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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 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 customers, 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
Bell Atlantic 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 Bell Atlantic/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 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 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
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).

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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.

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.

Bell Atlantic/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 Bell Atlantic/NYNEX
resale agreement contains pricing protections designed to maintain the
competitiveness of discounted rates provided to the Company. Under the New
York Bell Atlantic/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
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 level of discounts of
resold services varies based on the nature of the services. The New York Bell
Atlantic/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 Bell Atlantic/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 Bell Atlantic 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 Bell Atlantic will enter into a
long-term resale agreement for Massachusetts similar to the New York Bell
Atlantic/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

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discounted rates on carrier services. The agreement provides for an annual
commitment for each of the final 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.

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 some 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.
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. While certain of these combined entities, such as
the entity to be formed by the proposed merger of WorldCom, Inc. and MCI, may
continue to be subject to the joint marketing restrictions in the
Telecommunications Act, others will not be subject to such restrictions. Any
of these combined entities may have resources far greater than those of the
Company. 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, PCS, 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

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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 wireless 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 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 has adopted rules to auction geographical area wide licenses
for the operation of fixed wireless point-to-multipoint 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 February 1998 and the 38
GHz auction is expected to occur later 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 CMRS 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.

Section 271 of the Telecommunications Act prohibits an RBOC from providing
long-distance service that originates or terminates in one of its in-region
states until the RBOC has satisfied certain statutory conditions in that state
and has received the approval of the FCC. In August 1997, the FCC denied the
application of Ameritech for in-region long distance authority in Michigan. The
Company anticipates that a number of RBOCs, including Ameritech and Bell
Atlantic, will file additional applications for in-region long distance
authority in 1998. However, based on continuing legal challenges, the Company
does not believe any RBOC will provide in-region long distance services on a
significant basis prior to 1999. The FCC will have 90 days from the date an
application for in-region long distance authority 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 IXCs will be in a position to offer single-
source local and long distance services similar to those offered by the
Company. On December 31, 1997, a United States District Court judge in Texas
held unconstitutional certain sections of the Telecommunications Act, including
Section 271. This decision would permit the RBOCs immediately to begin offering
widespread in-region long distance services. Unless stayed or overturned on
appeal, this decision could have a material adverse effect on the Company. The
FCC and certain IXCs have filed a request for a stay and the Company expects
that the FCC and certain IXCs will file appeals of the decision with the United
States Court of Appeals for the Fifth Circuit. Although there can be no
assurance as to the outcome of this litigation, the Company believes that
significant parts of the District Court decision may be reversed or vacated on
appeal.

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degree of flexibility with regard to pricing of their services as competition
increases. Although the Ameritech and Bell Atlantic/NYNEX resale agreements
contain certain pricing protections, including adjustments in the wholesale
rates to be consistent with any changes in the Ameritech and Bell
Atlantic/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 Bell Atlantic/NYNEX resale agreements ensure that the
Company will receive any lower rate provided to any other reseller, under the
Bell Atlantic/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 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. In addition, in December 1997 the FCC
issued rules to implement the provisions of the World Trade Organization
Agreement on Basic Telecommunications, which was drafted to liberalize
restrictions on foreign ownership of domestic telecommunications companies and
foreign telecommunications companies to enter domestic markets. The new FCC
rules are presently scheduled to go into effect in February 1998 and will make
it substantially easier for many non-U.S. telecommunications companies to
enter the U.S. market, thus further increasing the number of competitors. The
new rules will also give non-U.S. individuals and corporations greater ability
to invest in U.S. telecommunications companies, thus increasing the financial
and technical resources available to the Company and its existing and
potential competitors.

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 first half of 1998. 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.

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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
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 and Bell Atlantic, 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.

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.

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. On
December 31, 1997, a United States District Court judge in Texas held
unconstitutional certain sections of the Telecommunications Act, including
Section 271. This decision would permit the RBOCs immediately to begin offering
widespread in-region long-distance services. Unless stayed or overturned on
appeal, this decision could have a material adverse effect on the Company. The
FCC and certain IXCs have filed a request for a stay and the Company expects
that the FCC and certain IXCs will file appeals of the decision with the United
States Court of Appeals for the Fifth Circuit. Although there can be no
assurance as to the outcome of this litigation, the Company believes that
significant parts of the District Court decision may be reversed or vacated on
appeal.

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

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<PAGE>

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
under Section 271 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. On December 16, 1997, the FCC revised and approved universal
service contribution factors for the first quarter of 1998. In support of high-
cost and low-income universal service programs during the first quarter of
1998, the FCC required carriers to contribute 3.19% of half of the revenues
collected from their interstate and international services during the first
half of 1997. In support of universal service programs for schools, libraries
and rural health care institutions, the FCC required carriers to contribute
0.72% of half of the revenues collected from their intrastate, interstate and
international services during the first half of 1997.

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 17% to 25%. Although
this portion of the FCC's

50
<PAGE>

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 the first half of 1998. 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
the Company and its competitors, including the Company and large IXCs, to use
rebundled unbundled network elements or the "UNE Platform" to enter and
compete in the local exchange market. The FCC, numerous IXCs and various other
parties filed petitions for certiorari with the U.S. Supreme Court on November
19, 1997. The Company cannot predict at this time the outcome of the appeals
or reconsideration processes. On December 31, 1997, a United States District
Court judge in Texas held unconstitutional certain sections of the
Telecommunications Act, including Section 271, which prohibits an RBOC from
providing long distance service that originates or terminates in one of its
in-region states until the RBOC has satisfied certain statutory conditions in
that state and has received the approval of the FCC. This decision would
permit the RBOCs immediately to begin offering widespread in-region long
distance services. Unless stayed or overturned on appeal, this decision could
have a material adverse effect on the Company. The FCC and certain IXCs have
filed a request for a stay and the Company expects that the FCC and certain
IXCs will file appeals of the decision with the United States Court of Appeals
for the Fifth Circuit. Although there can be no assurance as to the outcome of
this litigation, the Company believes that significant parts of the District
Court decision may be reversed or vacated on appeal.

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 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 were
required to implement number portability in the top 100 markets by October 1,
1997 and are required to complete it by December 31, 1998. In smaller markets,
RBOCs must implement number portability within six months of a request
therefore commencing

51
<PAGE>

December 31, 1998. Other LECs were 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 for other
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 except as expressly provided in 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 34 facilities, principally sales facilities, in Boston,
Massachusetts, Chicago, Illinois, Detroit, Michigan, Cleveland and Columbus,
Ohio and New York City, New York, as well as in a number of areas surrounding
such cities and in other significant urban areas in Michigan, New York and Ohio
and elsewhere in the states served by the Company. 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.

EMPLOYEES

As of December 31, 1997, the Company employed 1,071 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.

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<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....... 51 Chairman of the Board, President, Chief Executive Officer and Director
Dennis B. Dundon........ 53 Chief Operating Officer
Ronald W. Gavillet...... 38 Executive Vice President, Strategy & External Affairs
Gerald J. Sweas......... 50 Executive Vice President and Chief Financial Officer
Ryan Mullaney........... 41 Executive Vice President, Sales
Steven J. Parrish....... 42 Executive Vice President, Operations
Thomas A. Monson........ 37 Vice President, General Counsel and Secretary
Thad J. Pellino......... 36 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
James P. Hynes.......... 50 Director
Donald J. Hofmann, Jr... 40 Director
William A. Johnston..... 45 Director
Ian M. Kidson........... 39 Director
Paul S. Lattanzio....... 34 Director
David C. Mitchell....... 56 Director
Eugene A. Sekulow....... 66 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 and Chairman of
the Board since October 1997. 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 and is a member of the Executive Committee of the Association for Local
Telecommunications Services.

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

53
<PAGE>

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, 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

54
<PAGE>

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.

Lane Foster, Vice President, Human Resources and Organizational 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 served as Chairman of the Board of the Company from December
1996 until October 1997. 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
Networks, Inc. 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.

James P. Hynes, Director, was elected a director of the Company in December
1997. Mr. Hynes is a Managing Director of Fidelity Capital and he was the
founder of and serves as the Chairman of the Board of COLT Telecom Group plc
("COLT"), a European provider of competitive telecommunications services. Mr.
Hynes has managed Fidelity Capital's Telecommunications and Technology Group
since 1990 and has served as Chairman of the Board of COLT since its inception
in 1992. Prior to joining Fidelity Capital, Mr. Hynes was the President of
Fidelity Telecommunications. He has also held senior telecommunications and
systems positions at Chase Manhattan Corp., Bache and Co., Inc. and
Continental Corporation. In his role at Fidelity Capital, Mr. Hynes serves on
the Board of Directors of several companies, including COLT and is also
founder and Chairman of MetroRED Telecom S.A., a provider of competitive
telecommunications services in Latin America.

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 by the management
team of 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,

55
<PAGE>

and Highland Capital Partners, as well as on the board of directors of
Centennial Security Holdings, Inc., Epoch Networks, Inc., Golden Sky Systems,
Inc., The Marks Group, Inc., and MultiTechnology Corp. Internationally, he
serves on the board of directors of Esprit Telecom Group plc. 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. or an affiliate from 1984.
Currently, Mr. Lattanzio serves on the board of directors of Administaff,
Inc., an employee leasing company, and of Genesis Teleserve, a teleservices
company. Mr. Lattanzio received his B.S. degree in economics from the
University of Pennsylvania's Wharton School of Business.

David C. Mitchell, Director, was elected a director of the Company in
December 1997. Mr. Mitchell serves as an adviser to RCN Corporation, a single-
service, facilities-based provider of telecommunications services to the
residential market, and is a director of Commonwealth Telephone Enterprises,
Inc., a provider of telephone and related services, and of Cable Michigan,
Inc., a cable operator. RCN Corporation and Cable Michigan, Inc. were spun off
from C-TEC Corporation, where Mr. Mitchell had served as an adviser and
director since 1993, with C-TEC Corporation then changing its name to
Commonwealth Telephone Enterprises, Inc. Prior to joining C-TEC, Mr. Mitchell
was with Personal Source Technologies and Frontier Corporation. Mr. Mitchell
is also on the board of Marine Midland Bank-Rochester, Finger Lakes Long Term
Care Insurance Co. and IBS International Corp.

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, certain non-employee directors are designated by certain
stockholders pursuant to existing agreements. See "Certain Relationships and
Related Transactions." Following the consummation of the Offerings, such right
to designate directors will be terminated.

The Board has approved a plan, effective upon consummation of the Offerings,
pursuant to which the Board will be comprised of (i) current members J. Thomas
Elliott, Richard J. Brekka, Donald J. Hofmann, Jr., James P. Hynes, William A.
Johnston, Ian M. Kidson, Paul S. Lattanzio, David C. Mitchell, and Eugene A.
Sekulow; and (ii) Dennis B. Dundon, currently the Chief Operating Officer of
the Company, and Ronald W. Gavillet, currently Executive Vice President,
Strategy & External Affairs of the Company. Prior to or following consummation
of the Offerings, the Company intends to nominate an additional independent
director for election to the Board. The Board has also agreed that at the
first annual meeting of stockholders following consummation of the Offerings,
the size of the Board will be reduced to nine members, and Messrs. Hofmann,
Kidson and Lattanzio will not stand for reelection to the Board.

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 March 31, 1998. The identity of the independent
director has not yet been determined and may not be determined until after
completion of the Offerings.

56
<PAGE>

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. Upon the consummation of the Offerings, the Class I directors will
be Donald J. Hofmann, Jr., Ian M. Kidson, Paul S. Lattanzio; the Class II
directors will be Richard J. Brekka, Dennis B. Dundon, Ronald W. Gavillet and
Eugene A. Sekulow; and the Class III directors will be J. Thomas Elliott,
William A. Johnston, David C. Mitchell and James P. Hynes. The Company intends
to nominate an additional independent director to serve as a Class I director
prior to or following consummation of the Offerings. 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. The
Board has agreed that at the first annual meeting of stockholders following
the consummation of the Offerings the size of the Board will be reduced to
nine members, and Messrs. Hofmann, Kidson and Lattanzio will not stand for
reelection to the Board. 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.

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.

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.

57
<PAGE>

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 and the four 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.................... 1997 $195,000 $ 97,500(1) --
President and Chief Executive
Officer 1996 182,500 97,500(2) --
1995(3) 139,165 -- $75,000
Ronald W. Gavillet................... 1997 185,000 92,500(1) 15,000(4)
Executive Vice President, Strategy &
External Affairs 1996 167,600 92,500(2) --
1995 135,000 50,000(5) --
Ryan Mullaney........................ 1997 125,000 120,062(6) --
Executive Vice President, Sales 1996 21,634 25,000 --
1995(7) -- -- --
Gerald J. Sweas...................... 1997 150,000 60,000(1) --
Executive Vice President & Chief
Financial Officer 1996 14,423 20,000(2) --
1995(8) -- -- --
Steven J. Parrish.................... 1997 142,200 56,000(1) --
Executive Vice President, Operations 1996 49,539 -- --
1995(9) -- -- --
</TABLE>
- --------

(1) Represents estimated bonus earned with respect to 1997 to be paid in 1998.

(2) Represents bonus earned with respect to 1996 and paid in 1997.

(3) 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.

(4) Represents payment with respect to vacation accrued in 1996.

(5) Represents amounts paid in 1996 with respect to bonuses earned in prior
periods, primarily in 1995.

(6) $101,562 has been paid and $18,500 has been estimated.

(7) Mr. Mullaney commenced employment with the Company in October 1996.

(8) Mr. Sweas commenced employment with the Company in November 1996.

(9) Mr. Parrish commenced employment with the Company in January 1996.

58
<PAGE>

OPTION GRANTS

The following table sets forth the aggregate number of stock options granted
to each of the Named Executive Officers during the fiscal year ended December
31, 1997. 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....... 230,000 9.91 8.80 9/4/04 3,215,400 4 ,903,600
Ronald W. Gavillet...... 230,000 9.91 8.80 9/4/04 3,215,400 4,903,600
Ryan Mullaney........... 75,000 3.23 8.80 9/4/04 1,048,500 1,599,000
Gerald J. Sweas......... 100,000 4.31 8.80 9/4/04 1,398,000 2,132,000
Steven J. Parrish....... 47,000 2.03 8.80 9/4/04 657,060 1,002,040
</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 $17.00 (the midpoint of the initial public
offering price range) 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 stock options by the Named Executive Officers during the fiscal year ended
December 31, 1997 and the December 31, 1997 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....... -- -- 114,705/489,545 1,932,779/6,259,333
Ronald W. Gavillet...... -- -- 133,940/414,650 2,258,429/4,997,353
Ryan Mullaney........... -- -- 37,500/112,500 480,500/1,095,500
Gerald J. Sweas......... -- -- 55,000/155,000 707,250/1,527,250
Steven J. Parrish....... -- -- 40,250/68,000 678,213/840,350
</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 $17.00 (the midpoint of the initial public offering price
range). However, there is no established trading market for the Common
Stock, and no representation is made that the Common Stock actually has
such value.

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

59
<PAGE>

Company and its affiliates and to promote the success of the Company's
business. The 1994 Plan is administered by a committee appointed by the Board
of Directors. 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. Under the 1994 Plan, the per share exercise price of the
options shall be determined by the committee administering the 1994 Plan and
may be (i) fixed at the time of grant, (ii) float in accordance with a
predetermined formula or (iii) any combination thereof. 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. Further, if an optionee
retires without prior Board of Directors approval or is terminated for cause,
all options previously not exercised generally 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. In the event of a "Sale" or a "Qualified Public
Offering" (as defined in the 1994 Plan), the Committee has discretion to make
outstanding options immediately exercisable. Some of the option agreements
under the 1994 Plan provide that in the event of a Change in Control (as
defined in the 1994 Plan), the options shall automatically become immediately
exercisable.

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 ("SARs"),
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,

60
<PAGE>

although 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 the event of a change of control (as defined in the
Omnibus Securities Plan) all options and SARs become fully vested and
exercisable and restrictions on restricted stock lapse and pro rata portions
of performance awards become payable.

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 and 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 then 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.

61
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On August 18, 1997, in connection with the 1997 Private Placement, the
Company sold approximately 30,200 shares of Series A Preferred Stock, for an
aggregate purchase price of $30.2 million. The new equity was purchased by
existing Company stockholders and affiliates of certain stockholders. Such
Series A Preferred Stock will be converted into Common Stock concurrently with
the closing of the Offerings. In exchange for its Consent allowing the Company
to consummate the 1997 Private Placement, the Company paid a consent fee to
MLAM consisting of, among other things, warrants to purchase 145,160 shares of
Common Stock, at an exercise price of $.01 per share, and an option to
purchase the Consent Convertible Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."

On September 30, 1996, BT Securities Corporation, Chase Securities Inc. and
CIBC Wood Gundy Securities Corp. purchased a portion of the 14% Senior Notes,
the related warrants and the Convertible Notes from the Company pursuant to
the 1996 Private Placement. All of the 14% Senior Notes, the related warrants
and the Convertible Notes were immediately resold to MLGAFI, whose adviser is
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

62
<PAGE>

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.

63
<PAGE>

STOCK OWNERSHIP

The following table sets forth as of November 30, 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>
Merrill Lynch Global 3,872,030 34.93 20.29 17.34 12.77
Allocation Fund, Inc...
800 Scudders Mill Road
Plainsboro, New Jersey
08536
HarbourVest Partners, 3,442,373 37.82 20.13 15.42 11.35
LLC ...................
One Financial Center,
44th Floor
New York, New York
10017-3903
Chase Venture Capital 2,309,717 29.05 14.48 10.35 7.62
Associates, L.P. (3)...
380 Madison Ave., 12th
Floor
New York, New York
10017-2070
CIBC Wood Gundy 2,309,717 29.05 14.48 10.35 7.62
Ventures, Inc. (3).....
425 Lexington Avenue
New York, New York
10017-3903
BT Capital Partners, 1,710,566 22.04 10.85 7.66 5.64
Inc. (4)...............
130 Liberty Street
New York, New York
10017-2070
Fidelity Capital........ 1,704,300 19.11 10.07 7.63 5.62
82 Devonshire Street
Boston, Massachussetts
02109
Prime New Ventures...... 569,679 7.70 3.70 2.67 1.88
600 Congress Suite 3000
One American Center
Austin, Texas 78701
J. Thomas Elliott (4) .. 205,955 2.82 1.35 * *
Ronald W. Gavillet (4).. 118,565 1.62 * * *
Thomas C. Brandenburg .. 109,082 1.51 * * *
Richard J. Brekka....... 75,000 1.03 * * *
Dean M. Greenwood (5)... 596,679 8.07 3.70 2.67 1.88
James P. Hynes (5)...... 1,704,300 19.11 10.07 7.63 5.62
Donald J. Hofmann, Jr. 2,309,717 29.05 14.48 10.35 7.62
(5)....................
William A. Johnston (5). 3,442,373 37.82 20.13 15.42 11.35
Ian M. Kidson (6)....... 2,309,717 29.05 14.48 10.35 7.62
Paul S. Lattanzio ...... -- * * * *
David C. Mitchell....... -- * * * *
Ryan Mullaney........... 37,500 * * * *
Steven J. Parrish....... 30,625 * * * *
Eugene A. Sekulow....... -- * * * *
Gerald J. Sweas......... 55,000 * * * *
All directors and
executive officers of
the Company as a group
(21 persons)........... 11,051,333 85.44 52.79 49.39 36.44
</TABLE>

64
<PAGE>

- --------
*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) These shares include exercisable options.

(5) Each director disclaims beneficial ownership of any shares of Common Stock
or Preferred Stock which he does not directly own.

65
<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 November 30, 1997, assuming the conversion of all outstanding shares
of 9% Preferred Stock and Series A Preferred Stock into Common Stock
(excluding for this purpose the effect of Common Stock issued in connection
with such conversion in respect of accrued but unpaid dividends on the 9%
Preferred Stock and Series A Preferred Stock), there were 13,120,387 shares of
Class A Common Stock issued and outstanding, held of record by 35 stockholders
and 9,206,000 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 one share 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 Harris Trust and
Savings Bank.

LISTING

The Company has applied 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 5,943,916 shares of Common Stock
(excluding for this purpose the effect of Common Stock issued in connection
with such conversion in respect of accrued but unpaid dividends on the 9%
Preferred Stock and Series A Preferred Stock subsequent to September 30,
1997).

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.

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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 (i) February 15, 1998 or (ii)
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. The Company has also agreed to register the shares of
Common Stock issuable upon conversion of the Consent Convertible Notes.

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

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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 to the fullest extent provided in Section 145 of the DGCL ("Section
145"). 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. As permitted by Section 145, the Company's Restated Bylaws
provide that the Company shall 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.

In accordance with Section 145, the Company's Restated Bylaws also provide
that the Company shall 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 Company 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.

The Company's Restated Bylaws further provide that to the extent that a
director or officer of the Company 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 the Restated Bylaws shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the Company is empowered to purchase and maintain insurance
on behalf of a director or officer of the Company against any liability
asserted against him in any such capacity, or arising out of his status as
such, whether or not the Company would have the power to indemnify him against
such liabilities under the Restated Bylaws.

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

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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

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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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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 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 also granted MLAM an option, which was exercised on October 24,
1997, to purchase $13.0 million aggregate principal amount at maturity of
Consent Convertible Notes for a purchase price of $10.0 million. The Consent
Convertible Notes will have terms substantially similar to the Convertible
Notes but with a conversion price of $10.121 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 21,180,387 shares of
Common Stock (22,380,387 shares if the Underwriters' over-allotment options are
exercised in full). Of these shares, the 8,000,000 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.

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The remaining 13,180,387 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 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
12,156,352 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"). MLAM
has agreed to substantially similar restrictions for a period of 180 days
following the date of this Prospectus.

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 21,180,387 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 November 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. The Company also has outstanding Convertible Notes that are convertible
for 2,936,090 shares of Common Stock as of November 30, 1997. The Company has
filed and has agreed to keep effective a shelf registration statement with
respect to the warrants, the shares of Common Stock issuable upon exercise of
the warrants and the shares of Common Stock issuable upon conversion of the
Convertible Notes.

As of December 31, 1997 on a pro forma basis giving effect to the Offerings,
there were 3,245,540 shares reserved for issuance upon the exercise of
outstanding options, 1,551,400 of which were vested. Of the vested options, as
of December 31, 1997 on a pro forma basis giving effect to the Offerings,
options for 648,560 shares were exercisable and options for an additional
649,600 shares become exercisable 180 days after the closing of the Offerings.
The remaining vested options covering 253,240 shares become exercisable at such
time, if any, as the Convertible Notes are converted into Common Stock.

The Company intends to file a Registration Statement on Form S-8 to register
an aggregate of 4,074,130 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.

The Original Purchasers are entitled to certain rights with respect to the
registration of approximately 12,387,648 shares of Common Stock for resale
under the Securities Act. See "Description of Capital Stock--Registration
Rights."

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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 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

73
<PAGE>

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.

74
<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...........................................
Cowen & Company.................................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
---------
Total...................................................... 6,400,000
=========
</TABLE>

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Cowen &
Company 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, Cowen International
L.P. and Donaldson, Lufkin & Jenrette International are acting as
representatives (the "International Representatives"), providing for the
concurrent offer and sale of 1,600,000 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

75
<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 960,000 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 240,000
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 Company has been advised by the U.S. Underwriters that they intend
to make a market for the Common Stock, however, the U.S. Underwriters are not
obligated to do so. Any market-making may be discontinued at any time and
there is no assurance that an active public market for the Common Stock will
develop or, that if such a market develops, that it will continue. This
Prospectus has been prepared for use by Merrill Lynch in connection with
offers and sales of the Common Stock which may be made by them from time to
time in market-making transactions at negotiated prices relating to prevailing
market prices at the time of such sale. Merrill Lynch may act as principal or
agent in such transactions. 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.

76
<PAGE>

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

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"
meeting certain standards ("QIU"). In accordance with this requirement,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has assumed the
responsibilities of acting as QIU and will recommend a maximum public offering
price for the Common Stock in compliance with the requirements of Rule 2720. In
connection with the Offering, DLJ is performing due diligence investigations
and reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which the Prospectus forms a part. As compensation
for the services of DLJ as QIU, the Company has agreed to pay DLJ $5,000. In
accordance with such requirements, DLJ 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 DLJ acted as initial
purchasers in connection with the 1997 Private Placement, for which they
received customary discounts.

77
<PAGE>

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
and 1995 and for the years ended December 31, 1996 and 1995 and the period from
April 20, 1994 (inception) to December 31, 1994 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.

The consolidated financial statements of Hatten Communications Holding
Company, Inc. and Subsidiaries as of April 30, 1997 and 1996 and for the years
then ended, have been included in the Prospectus in reliance upon the report by
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

The report of KPMG Peat Marwick LLP covering the April 30, 1997 consolidated
financial statements contains an explanatory paragraph that states that the
Company executed a recapitalization of its stock and a refinancing of its
existing debt on May 23, 1997.

78
<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.

79
<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).

80
<PAGE>

INDEX TO USN COMMUNICATIONS, INC. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
CONDENSED
CONSOLIDATED
FINANCIAL
STATEMENTS
(UNAUDITED)
FOR THE NINE
MONTH PERIODS
ENDING
SEPTEMBER 30,
1996 AND
SEPTEMBER 30,
1997 AND AS OF
DECEMBER 31,
1996.......... F-2
INDEPENDENT
AUDITORS'
REPORT........ F-8
CONSOLIDATED
FINANCIAL
STATEMENTS:
Consolidated
Balance
Sheets...... F-9
Consolidated
Statements
of
Operations.. F-10
Consolidated
Statements
of
Redeemable
Preferred
Stock....... F-11
Consolidated
Statements
of Common
Stockholders'
Deficit..... F-12
Consolidated
Statements
of Cash
Flows....... F-13
Notes to
Consolidated
Financial
Statements.. F-14

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

<CAPTION>
PAGE
----
<S> <C> <C>
INDEPENDENT
AUDITORS'
REPORT........ F-25
CONSOLIDATED
FINANCIAL
STATEMENTS:
Consolidated
Balance
Sheets at
April 30,
1997 and
1996........ F-26
Consolidated
Statements
of
Operations
for the
years ended
April 30,
1997 and
1996........ F-27
Consolidated
Statements
of
Stockholder's
Deficit for
the years
ended April
30, 1997 and
1996........ F-28
Consolidated
Statements
of Cash
Flows for
the years
ended April
30, 1997 and
1996........ F-29
Notes to
Consolidated
Financial
Statements.. F-30
</TABLE>

F-1
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER
30, DECEMBER
ASSETS 1997 31, 1996
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $117,943,711 $60,818,478
Accounts receivable, net.......................... 15,445,860 3,004,408
Prepaid expenses.................................. 271,430 187,051
Other receivables................................. 338,502 172,567
------------ -----------
Total current assets............................ 133,999,503 64,182,504
Property and Equipment--Net......................... 12,604,307 3,507,350
Other Assets........................................ 32,553,221 10,362,438
------------ -----------
Total Assets.................................... $179,157,031 $78,052,292
============ ===========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' DEFICIT
----------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................. $ 17,268,085 $ 7,907,654
Accrued expenses and other liabilities............ 11,315,296 3,176,762
Capital lease obligations--current................ 544,213 277,844
Current maturities on notes payable............... 121,874 386,522
------------ -----------
Total current liabilities....................... 29,249,468 11,748,782
14 5/8% Senior Discount Notes, net of Original Issue
Discount........................................... 101,830,062 --
14% Senior Discount Notes, net of Original Issue
Discount........................................... 34,579,844 31,242,614
9% Convertible Subordinated Discount Notes, net of
Original Issue Discount............................ 30,188,376 28,259,555
Capital Lease Obligations--Noncurrent............... 664,421 312,280
Notes Payable....................................... 24,547 49,727
------------ -----------
Total liabilities............................... 196,536,718 71,612,958
Redeemable Preferred Stock:
9% Cumulative Convertible Pay-In-Kind Preferred
stock: par value, $1; 30,000 shares authorized;
10,920 and 10,000 shares outstanding at 1997 and
1996............................................. 10,920 10,000
9% Cumulative Convertible Pay-In-Kind Preferred
Stock, Series A: par value $1; 150,000 shares
authorized; 30,209 shares outstanding at 1997.... 30,209 --
Accumulated unpaid dividends...................... 317,195 225,000
Additional paid-in capital........................ 40,690,299 9,810,185
------------ -----------
Total redeemable preferred stock................ 41,048,623 10,045,185
Common Stockholders' Deficit:
Common stock: par value, $.01; 30,000,000 shares
authorized; 7,222,511 and 7,185,260 shares issued
at 1997 and 1996................................. 72,226 71, 853
Additional paid-in capital........................ 73,941,796 54,114,755
Accumulated deficit............................... (132,441,255) (57,791,382)
Common stock held in Treasury: 1997 and 1996--
10,000 shares.................................... (1,077) (1,077)
------------ -----------
Total common stockholders' deficit.............. (58,428,310) (3,605,851)
------------ -----------
Total Liabilities, Redeemable Preferred Stock, and
Common Stockholders' Deficit....................... $179,157,031 $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>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1997 1996
-------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net service revenue.............................. $ 26,998,315 $ 7,598,705
Cost of services................................. 23,983,125 6,587,126
------------- -------------
Gross profit................................. 3,015,190 1,011,579
Expenses:
Sales and marketing............................ 43,087,112 5,837,437
General and administrative..................... 26,881,801 10,919,589
------------- -------------
Operating loss................................... (66,953,723) (15,745,447)
Other income (expense):
Interest income................................ 1,883,861 472,667
Interest expense............................... (8,572,952) (45,957)
Other income................................... 5,386 8,099,593
------------- -------------
Other income (expense)--net.................. (6,683,705) 8,526,303
------------- -------------
Net loss......................................... $ (73,637,428) $ (7,219,144)
============= =============
Accumulated preferred dividends.................. $ 1,012,445 $ 3,465,976
============= =============
Net loss to common shareholders.................. $ (74,649,873) $ (10,685,120)
============= =============
Net loss per common share........................ $ (10.35) $ (2.44)
============= =============
Weighted average common and common equivalent
shares outstanding.............................. 7,212,511 4,384,993
============= =============
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-3
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED

DECEMBER 31, 1996

<TABLE>
<CAPTION>
SERIES A
9% PIK 9% PIK SERIES A-2 SERIES A ACCUMULATED ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED UNPAID PAID-IN
STOCK STOCK STOCK STOCK DIVIDENDS CAPITAL TOTAL
--------- --------- ---------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $26,235 $16,200 $ 3,810,000 $ 40,543,605 $ 44,396,040
Accumulated dividends
on Series A and A-2
preferred stock...... 3,465,976 3,465,976
Conversion of Series A
and A-2 preferred
stock to Class A
common stock......... (26,235) (16,200) (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 dividends
on 9% PIK preferred
stock................ 225,000 225,000
------- ------- ------- ------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 10,000 225,000 9,810,185 10,045,185
Issuance of 30,209
shares of Series A 9%
PIK preferred stock.. $30,209 30,178,863 30,209,072
Costs incurred related
to issuance of Series
A 9% PIK preferred
stock................ (218,079) (218,079)
Accumulated dividends
on 9% PIK preferred
stock................ 695,250 695,250
Accumulated dividends
on Series A 9% PIK
preferred stock...... 317,195 317,195
Payment of dividends
on 9% PIK preferred
stock................ 920 (920,250) 919,330 --
------- ------- ------- ------- ----------- ------------ ------------
BALANCE, SEPTEMBER 30,
1996 (UNAUDITED)....... $10,920 $30,209 $ -- $ -- $ 317,195 $ 40,690,299 $ 41,048,623
======= ======= ======= ======= =========== ============ ============
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-4
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK
COMMON PAID-IN ACCUMULATED HELD IN
STOCK CAPITAL DEFICIT TREASURY TOTAL
------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... $31,374 $ 254,718 $ (29,053,815) $(28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 26,763 47,835,253 47,862,016
Issuance of 50,000
shares of common
stock................ 500 5,000 5,500
Compensation grants of
220,000 shares of
common stock......... 2,200 30,800 33,000
Repricing of common
stock................ 11,016 (11,016)
Repurchase of 10,000
shares of common
stock................ $(1,077) (1,077)
Issuance of stock
warrants............. 6,000,000 6,000,000
Accumulated dividends
on 9% PIK preferred
stock................ (3,690,976) (3,690,976)
Net loss.............. (25,046,591) (25,046,591)
------- ----------- ------------- ------- ------------
BALANCE, DECEMBER 31,
1996................... 71,853 54,114,755 (57,791,382) (1,077) (3,605,851)
Issuance of 37,251
shares of common
stock................ 373 3,723 4,096
Issuance of stock
warrants............. 19,351,727 19,351,727
Compensation expense
on stock options..... 471,591 471,591
Accumulated dividends
on 9% PIK preferred
stock................ (695,250) (695,250)
Accumulated dividends
on Series A 9%
preferred stock...... (317,195) (317,195)
Net loss.............. (73,637,428) (73,637,428)
------- ----------- ------------- ------- ------------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)....... $72,226 $73,941,796 $(132,441,255) $(1,077) $(58,428,310)
======= =========== ============= ======= ============
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-5
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(73,637,428) $(7,219,144)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 1,902,049 254,049
Amortization of organization costs and
intangibles.................................... 622,884 1,105,748
Non-cash interest on debt obligation............ 8,456,677 --
Stock compensation award expense................ 471,591 33,000
Gain on disposal of assets...................... -- (8,078,901)
Changes in:
Accounts receivable, net...................... (12,441,452) (1,469,127)
Prepaid expenses.............................. (84,379) 109,434
Other receivables............................. (165,935) (229,940)
Other assets.................................. (444,960) (18,205)
Accounts payable.............................. 9,360,431 1,440,563
Accrued expenses and other liabilities........ 8,138,534 (19,641)
------------ -----------
Net cash flows from operating activities.... (57,821,988) (14,092,164)
Cash flows from investing activities:
Purchase of property and equipment................ (10,071,051) (284,774)
Proceeds from sale of assets...................... -- 9,532,600
Purchase of Minority Interest..................... -- (1,601,207)
------------ -----------
Net cash flows from investing activities.... (10,071,051) 7,646,619
Cash flows from financing activities:
Issuance of common stock.......................... 4,096 3,300
Issuance of preferred stock....................... 30,209,072 10,000,000
Financing costs................................... (218,079) (147,389)
Repurchase of common stock........................ -- (1,077)
Proceeds from Senior Notes........................ 100,001,276 30,203,375
Proceeds from Convertible Notes................... -- 27,644,400
Debt acquisition costs............................ (4,436,579) (2,732,664)
Deposits.......................................... 57,758 (393,884)
Repayment of notes payable........................ (289,828) (335,442)
Repayment of capital lease obligations............ (309,445) (83,774)
------------ -----------
Net cash flows from financing activities.... 125,018,271 64,156,845
------------ -----------
Net increase in cash................................ 57,125,232 57,711,300
Cash and cash equivalents--Beginning of period...... 60,818,479 13,766,040
------------ -----------
Cash and cash equivalents--End of period............ $117,943,711 $71,477,340
============ ===========
Supplemental cash flow information:
Dividends Paid in Kind............................ $ 920,250 --
============ ===========
Dividends Declared................................ $ 1,012,445 $ 3,465,976
============ ===========
Issuance of Stock Warrants........................ $ 19,351,727 $ 6,000,000
============ ===========
Conversion of Series A and Series A-2 Preferred
Stock to Class A Common Stock.................... -- $47,862,016
============ ===========
Capital Lease Obligations Incurred................ $ 927,955 $ 537,478
============ ===========
Cash Paid for Interest............................ $ 91,993 $ 68,000
============ ===========
Cash Paid for Income Taxes........................ -- --
============ ===========
</TABLE>

See notes to Condensed Consolidated Financial Statements.

F-6
<PAGE>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE PERIOD ENDING SEPTEMBER 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 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 audited
consolidated financial statements and notes thereto included herein. The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.

2. PRIVATE PLACEMENT OFFERING

On August 18, 1997, the Company received approximately $96.5 million in
cash, net of commissions paid, in exchange for the issuance of 152,725 units
consisting of $152.7 million aggregate principal amount at maturity of 14 5/8%
Senior Discount Notes due 2004 ("14 5/8% Senior Notes") and warrants to
purchase 2,053,900 shares of Class A Common Stock. In connection with this
offering, the Company paid a consent fee to the holders of the outstanding 14%
Senior Discount Notes due 2003 ("14% Senior Notes") and 9% Convertible
Subordinated Notes due 2004 ("9% Convertible Notes") consisting of warrants to
purchase 145,160 shares of Class A Common Stock. The Company also granted
those holders an option, which was exercised on October 24, 1997, to purchase
up to $10.0 million in aggregate proceeds to the Company of convertible notes
of the Company on terms substantially similar to the existing 9% Convertible
Notes. Additionally, the Company granted to holders of the 14% Senior Notes an
option, for a specified period of time, to exchange 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 14 5/8% Senior Notes were sold at a unit price, before commissions, of
$654.78 per $1,000 face amount. These notes will accrete interest at an annual
rate of 14 5/8% from August 18, 1997 to August 15, 2000. Thereafter, the notes
will bear interest at an annual rate of 14 5/8%, and will be payable
semiannually in arrears in cash.

3. CHANGES IN EQUITY

In August 1997, the Board of Directors authorized the issuance of up to
150,000 shares of a series of $1 par value preferred stock designated as 9%
Cumulative Convertible Pay-in-Kind Preferred Stock, Series A ("Series A
Preferred Stock"). In connection with the Private Placement Offering
(described in Note 2), the Company issued 30,209 shares of its Series A
Preferred Stock to certain of its existing shareholders and their affiliates,
for an aggregate purchase price of $30.2 million.

In September 1997, the Board of Directors approved a nine-for-one stock
dividend on the Class A Common Stock. Share and per share data have been
adjusted to reflect this stock dividend.

4. RECLASSIFICATIONS

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

F-7
<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, and 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 (September 4, 1997 as to Note 22)

Chicago, Illinois

F-8
<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........................... $60,818,478 $ 13,766,040
Accounts receivable, net of allowances for doubtful
accounts of $223,000 (1996) and $193,000 (1995).... 3,004,408 1,184,453
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;
25,000,000 and 5,000,000 authorized at 1996 and
1995;
7,185,260 and 3,137,290 shares issued at 1996 and
1995 .............................................. 71,853 31,374
Additional paid-in capital.......................... 54,114,755 254,718
Accumulated deficit................................. (57,791,382) (29,053,815)
Treasury stock, 10,000 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-9
<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 preferred dividends....... $ 3,690,976 $ 3,103,000 $ 707,000
============ ============ ===========
Net loss per common share............. $ (5.63) $ (7.01) $ (6.56)
============ ============ ===========
Weighted average common and common
equivalent shares outstanding........ 5,102,330 3,025,200 1,196,780
============ ============ ===========
</TABLE>

See notes to Consolidated Financial Statements.

F-10
<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-11
<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 1,778,400
shares of common
stock................ $17,784 $ 220,655 $ $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................... 17,784 5,795 (7,853,789) (7,830,210)
Issuance of 1,358,990
shares of common
stock................ 13,590 251,413 265,003
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................... 31,374 254,718 (29,053,815) (28,767,723)
Conversion of Series A
and A-2 Preferred
Stock to Class A
Common Stock......... 26,763 47,835,253 47,862,016
Issuance of 50,000
shares of common
stock................ 500 5,000 5,500
Compensation grants of
220,000 shares of
common stock......... 2,200 30,800 33,000
Repricing of common
stock................ 11,016 (11,016)
Repurchase of 10,000
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................... $71,853 $54,114,755 $(57,791,382) $(1,077) $ (3,605,851)
======= =========== ============ ======= ============
</TABLE>

See notes to Consolidated Financial Statements.

F-12
<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)
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................... (23,910,383) (14,247,032) (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.................. 47,052,438 7,786,818 5,979,222
Cash and cash equivalents--Beginning
of year.............................. 13,766,040 5,979,222
------------ ------------ -----------
Cash and cash equivalents--End of
year................................. $ 60,818,478 $ 13,766,040 $ 5,979,222
============ ============ ===========
Supplemental cash flow information--
See Note 3
</TABLE>

See notes to Consolidated Financial Statements.

F-13
<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 315,000 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-14
<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-15
<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 $3,398,105 $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-16
<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-17
<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-18
<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,
respectively.

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 615,500 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-19
<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 2,676,300 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 1,358,990 to
2,460,560 and the purchase price decreased from $0.195 to $0.1077 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-20
<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 319,610
options to purchase Class A Common Stock at an exercise price of $0.15 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. 66,370 of these options become exercisable as
the Convertible Notes are converted to Class A Common Stock, and 253,240 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...................... 190,500 $ 0.11 213,000 $0.11
Granted................. 1,033,240 0.11-9.60 213,000 $0.11
Exercised............... (50,000) 0.11
Cancelled............... (64,750) 0.11 (22,500) 0.11
--------- ------- -------
Outstanding at December
31..................... 1,108,990 0.11-9.60 190,500 0.11 213,000 0.11
========= ======= =======
Options exercisable at
December 31............ 106,620 0.11-0.15 100,240 0.11 --
========= ======= =======
</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-21
<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-22
<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-23
<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.

22. SUBSEQUENT EVENT

On September 4, 1997, the Board of Directors approved a nine-for-one stock
dividend on the Common Stock. Average shares outstanding and all per share
amounts included in the accompanying financial statements and notes are based
on the increased number of shares giving retroactive effect to the stock
dividend.

* * * * *

F-24
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholder

Hatten Communications Holding Company, Inc.:

We have audited the accompanying consolidated balance sheets of Hatten
Communications Holding Company, Inc. and subsidiaries as of April 30, 1997 and
1996 and the related consolidated statements of operations, stockholder's
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

As discussed in note 12, the Company executed a recapitalization of its
stock and a refinancing of its existing debt on May 23, 1997.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hatten
Communications Holding Company, Inc. and subsidiaries as of April 30, 1997 and
1996 and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

June 20, 1997

F-25
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
ASSET (note 8)
Current assets:
Cash and cash equivalents........................... $ 287,760 1,205,778
Accounts receivable (note 2)........................ 5,408,650 3,715,127
Inventory (note 3).................................. 927,402 637,589
Prepaid expenses and other current assets........... 703,303 496,892
Related party receivable (note 4)................... 187,949 114,283
----------- ----------
Total current assets............................ 7,515,064 6,169,669
----------- ----------
Property and equipment (note 5)....................... 1,968,739 1,387,828
Less: accumulated depreciation...................... 918,401 679,080
----------- ----------
Property and equipment, net..................... 1,050,338 708,748
----------- ----------
Cellular lines, net of accumulated amortization of
$88,381.............................................. 3,823,124 --
Investment in and advances to Smartlink (note 6)...... 2,640,074 2,572,287
Financing fees, net of accumulated amortization of
$256,552 and $150,045 in 1997 and 1996, respectively. 298,695 228,594
Other assets.......................................... 22,114 22,051
----------- ----------
$15,349,409 9,701,349
=========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt (note 8).......... $ 812,521 --
Notes payable-current (note 7(a))................... 295,944 --
Capital lease obligations (note 9(a))............... -- 16,625
Accounts payable:
Trade............................................. 1,121,863 648,399
Springwich Cellular Limited Partnership........... 1,790,225 2,173,733
Bell Atlantic Nynex Mobile........................ 1,273,905 1,409,741
Accrued expenses.................................... 760,936 616,357
Deferred revenue.................................... 675,843 463,180
Customer deposits................................... 70,853 79,474
Income taxes payable (note 10)...................... 13,000 16,011
----------- ----------
Total current liabilities....................... 6,815,090 5,423,520
----------- ----------
Subordinated note payable (note 7(b))................. 2,000,000 2,000,000
Long-term debt, excluding current portion (note 8).... 12,875,250 5,747,493
----------- ----------
Total liabilities............................... 21,690,340 13,171,013
----------- ----------
Commitments (notes 8 and 9(b))........................
Stockholder's deficit (note 8):
Common stock, $.01 par value; 11,850 shares
authorized, 8,150 shares issued and outstanding.... 82 82
Stock warrant....................................... 2,902,920 4,000,000
Accumulated deficit................................. (9,243,933) (7,469,746)
----------- ----------
Total stockholder's deficit..................... (6,340,931) (3,469,664)
----------- ----------
$15,349,409 9,701,349
=========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-26
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Revenues............................................... $32,712,066 24,840,061
Cost of revenues....................................... 20,603,029 16,281,470
----------- ----------
Gross profit....................................... 12,109,037 8,558,591
----------- ----------
New subscriber acquisition costs (note 1(k))........... 4,790,975 3,411,848
General and administrative expenses.................... 6,213,937 4,668,551
----------- ----------
11,004,912 8,080,399
----------- ----------
Operating profit................................... 1,104,125 478,192
Other income (expense):
Equity in loss of Smartlink (note 6)................. (408,547) (93,589)
Interest income...................................... 50,536 41,832
Interest expense (note 8)............................ (2,248,575) (826,701)
Amortization of financing fees....................... (194,888) (76,252)
Other, net........................................... (20,833) (9,988)
----------- ----------
Loss before income taxes........................... (1,718,182) (486,506)
Income tax expense (note 10)........................... 56,005 16,811
----------- ----------
Net loss........................................... $(1,774,187) (503,317)
=========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-27
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT

FOR THE YEARS ENDED APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TREASURY STOCKHOLDER'S
STOCK WARRANT DEFICIT STOCK DEFICIT
------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR BUSINESS
(NOTE 1(A))
Balances at April 30,
1995 (Unaudited)....... $2,000 -- (2,968,347) -- (2,966,347)
Net income.............. -- -- 216,517 -- 216,517
------ ---------- ---------- ---------- ----------
Balances at January 31,
1996 (Unaudited)....... $2,000 -- (2,751,830) -- (2,749,830)
====== ========== ========== ========== ==========
SUCCESSOR BUSINESS (NOTE
1(A))
Balances at January 31,
1996................... $ 163 -- (2,749,993) -- (2,749,830)
Issuance of stock
warrant................ -- 4,000,000 -- -- 4,000,000
Purchase of treasury
shares................. -- -- -- (4,000,000) (4,000,000)
Retirement of treasury
shares................. (81) -- (3,999,919) 4,000,000 --
Net loss................ -- -- (719,834) -- (719,834)
------ ---------- ---------- ---------- ----------
Balances at April 30,
1996................... 82 4,000,000 (7,469,746) -- (3,469,664)
Issuance of stock
warrant................ -- 250,000 -- -- 250,000
Repurchase of stock
warrant................ -- (1,347,080) -- -- (1,347,080)
Net loss................ -- -- (1,774,187) -- (1,774,187)
------ ---------- ---------- ---------- ----------
Balances at April 30,
1997................... $ 82 2,902,920 (9,243,933) -- (6,340,931)
====== ========== ========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-28
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED APRIL 30, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(1,774,187) (503,317)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Equity in loss of Smartlink....................... 408,547 93,589
Depreciation and amortization..................... 434,209 252,721
Accretion of original issue discount.............. 1,071,870 247,493
Provision for doubtful accounts................... 852,383 481,194
Increase in accounts receivable................... (2,545,906) (873,719)
Increase in inventory............................. (289,813) (54,794)
Increase in prepaid expenses and other current
assets........................................... (206,411) (137,713)
(Increase) decrease in other assets............... (63) 3,639
(Decrease) increase in accounts payable........... (45,880) 482,122
Increase in accrued expenses...................... 144,579 103,517
Increase in deferred revenue...................... 212,663 111,554
(Decrease) increase in customer deposits.......... (8,621) 23,244
Increase in income taxes payable.................. (3,011) 7,529
----------- ----------
Net cash provided by (used in) operating
activities..................................... (1,749,641) 237,059
----------- ----------
Cash flows from investing activities:
Investment in and advances to Smartlink............. (500,000) (2,117,000)
Purchase of cellular lines.......................... (3,580,755) --
Capital expenditures................................ (580,911) (341,739)
Related party receivable............................ (50,000) --
----------- ----------
Net cash used in investing activities........... (4,711,666) (2,458,739)
----------- ----------
Cash flows from financing activities:
Proceeds provided by long-term debt................. 9,086,690 5,500,000
Repayment of long-term debt......................... (3,565,362) (4,237,915)
Repayment of note payable........................... (34,806) (2,000,000)
Repayment of capital lease obligations.............. (16,625) (23,178)
Issuance of stock warrants.......................... 250,000 4,000,000
Payment of financing fees........................... (176,608) (249,048)
Write-off of financing fees......................... -- 73,720
----------- ----------
Net cash provided by financing activities....... 5,543,289 3,063,579
----------- ----------
Increase (decrease) in cash and cash equivalents...... (918,018) 841,899
Cash and cash equivalents:
Beginning of year................................... 1,205,778 363,879
----------- ----------
End of year......................................... $ 287,760 1,205,778
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.......................................... $ 1,147,146 467,930
=========== ==========
Income taxes...................................... $ 59,266 8,232
=========== ==========
</TABLE>

Supplemental disclosure of non-cash transactions:

During fiscal 1997, the Company repurchased certain outstanding stock
warrants. As a result, $1,347,080 of proceeds originally recorded as issuance
of stock warrant was reallocated to long-term debt (see Note 8). Also during
1997, the Company purchased cellular lines in exchange for notes payable in
the amount of $330,750.

During fiscal 1996, the Company purchased treasury stock for $4,000,000 by
issuing a note payable in the same amount. Also during 1996, the Company
accepted a note in the amount of $870,315 from a related party in settlement
of an equal amount owed to the Company.

See accompanying notes to consolidated financial statements.

F-29
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies:

(a) Description of Business

Hatten Communications Holding Company, Inc. (the "Company") is a holding
company for its wholly-owned investments in Connecticut Telephone and
Communications Systems, Inc. ("CTEL"), Connecticut Mobilecom, Inc.
("Mobilecom"), and Whitecap Technologies, Inc. ("Whitecap"). CTEL and
Mobilecom are resellers of cellular, long distance and paging services to
approximately 55,000 subscribers in Connecticut. Whitecap is a holding company
for its interests in Smartlink, Inc. and Smartlink Development, L.P. Smartlink
Inc. is the general partner of Smartlink Development L.P., a communications
development company.

The 1996 results of operations presented in the accompanying Consolidated
Statements of Operations includes the combined results of CTEL and Mobilecom
("Predecessor business") for the period May 1, 1995 to January 31, 1996, and
the results of the Company ("Successor business") from February 1 to April 30,
1996.

Hatten Communications Holding Company, Inc. was formed on January 31, 1996.
On that date, the shareholders of CTEL and Mobilecom assigned their interest
in the predecessor business to the Company in exchange for an equivalent
interest in the Company. The transaction was entirely between related parties
and was accounted for as if a pooling-of-interests business combination had
been consummated. The historical values of all assets and liabilities of CTEL
and Mobilecom were carried forward to the Company. Whitecap was also formed on
January 31, 1996 as a wholly-owned subsidiary of the Company. Whitecap
acquired its initial interests in Smartlink, Inc. and Smartlink Development,
L.P. on January 31, 1996. Through equity ownership in affiliated entities, the
sole shareholder of the Company effectively has a controlling voting interest
in Smartlink, Inc. and Smartlink Development, L.P. The Company's investments
in Smartlink, Inc. and Smartlink Development, L.P. are accounted for using the
equity method.

(b) Principles of Consolidation

The consolidated financial statements include the accounts of Hatten
Communications Holding Company, Inc. and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.

Revenue from cellular, long distance and paging services is recognized on a
monthly basis based on services used by subscribers during that month. Revenue
from the sale of cellular and paging equipment is recognized at the point of
sale.

(d) Cash Equivalents

For financial statements purposes, the Company considers all cash
instruments with original maturities of three months or less to be cash
equivalents.

(e) Inventory

Inventory includes cellular and paging equipment and accessories and is
valued at the lower of cost or market using the first-in, first-out method.

F-30
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(f) Property and Equipment

Property and equipment are stated at historical cost. Depreciation is
provided over the estimated useful lives of the respective assets using
accelerated cost recovery methods.

(g) Cellular Lines

Cellular lines represents the cost of direct acquisition of subscribers from
other cellular companies. During fiscal 1997, the Company completed two
acquisitions of cellular lines with an aggregate purchase price of $3,911,505.
The cost of cellular lines is being amortized over 48 months, the related
estimated churn period of the cellular lines. Accumulated amortization totaled
$88,381 at April 30, 1997. Amortization expense totaled $88,381 for the year
ended April 30, 1997.

(h) Financing Fees

Financing fees represent legal and other costs incurred to secure financing
for operations. The fees are being amortized over 36 months using the
straight-line method.

(i) Deferred Revenue

The Company bills access charges for cellular services to its customers one
month in advance. Deferred revenue represents the portion of access charges
billed to customers not yet earned by the Company.

(j) Income Taxes

Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered and
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

(k) New Subscriber Acquisition Costs

New subscriber acquisition costs include all costs associated with obtaining
new subscribers, except the cost of hardware discounts. Acquisition costs
include marketing, advertising, retail store operations, and initial hardware
installation costs. Discounts on cellular phones and other hardware are
included in "Cost of Revenues" in the accompanying Consolidated Statements of
Operations and totaled approximately $1,365,000 and $1,100,000 for the years
ended April 30, 1997 and 1996, respectively.

(l) 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-31
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
1997 1996
Accounts receivable consists of the following: ---------- ---------
<S> <C> <C>
Billed accounts receivable................................ $5,256,361 3,917,527
Unbilled accounts receivable.............................. 1,172,632 654,503
---------- ---------
Gross accounts receivable............................... 6,428,993 4,572,030
Allowance for doubtful accounts............................. (1,020,343) (856,903)
---------- ---------
Net accounts receivable................................. $5,408,650 3,715,127
========== =========
</TABLE>

Unbilled accounts receivable represent charges for airtime revenue earned
but not yet billed to customers. All unbilled accounts receivable were billed
within one month after year-end.

(3) INVENTORY

Inventory consists of the following:

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cellular phones and accessories................................ $845,332 538,266
Dispatch equipment and accessories............................. 82,070 99,323
-------- -------
$927,402 637,589
======== =======
</TABLE>

(4) RELATED PARTY TRANSACTIONS

(a) Receivable

During fiscal 1997, the Company made advances of $50,000 to its Chief
Executive Officer. The advances are non-interest bearing and do not have
stated repayment terms.

(b) Leases

The Company leases certain space for its corporate offices and retail
outlets from its sole stockholder. See note 9(b).

(5) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
USEFUL LIFE 1997 1996
------------- ---------- ---------
<S> <C> <C> <C>
Store equipment.............................. 5-7 years $ 336,834 239,607
Office equipment............................. 5-7 years 879,660 619,657
Dispatch equipment........................... 5 years 88,047 82,533
Leasehold improvements....................... 31.5-39 years 450,899 331,075
Furniture and fixtures....................... 7 years 160,560 83,749
Automobiles.................................. 5 years 52,739 31,207
---------- ---------
$1,968,739 1,387,828
========== =========
</TABLE>

F-32
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(6) INVESTMENT IN SMARTLINK

At April 30, 1997, the Company owned approximately 18.7% of Smartlink, Inc.
and effectively owned approximately 24.6% of Smartlink Development, L.P.
(together "Smartlink") as a result of cash investments made on January 31,
1996 and December 31, 1996. Smartlink designs, markets, and sells specialized
mobile radio technology to commercial customers. Smartlink is emerging from
the development stage, during which time it has incurred cumulative losses.
The Company has recognized its share of Smartlink's net loss through April 30,
1997. The Company's investment in Smartlink was $2,114,864 and $2,023,411 as
of April 30, 1997 and 1996, respectively. Summarized financial information of
Smartlink as of and for the year ended December 31, 1996, Smartlink's fiscal
year end, is as follows:

<TABLE>
<S> <C>
Condensed Statement of Operations:
Net sales................................................... $ 268,665
Net loss.................................................... 2,240,004
Condensed Balance Sheet:
Current assets.............................................. $ 834,701
Noncurrent assets........................................... 288,355
----------
$1,123,056
==========
Current liabilities........................................... $1,646,570
Noncurrent liabilities........................................ 427,747
Partners' equity (deficit).................................... (951,261)
----------
$1,123,056
==========
</TABLE>

The Company periodically evaluates the recoverability of its investment in
Smartlink. Through April 30, 1997, the Company has not recorded any write-down
on its investment as no impairment has occurred.

The Company (and the Predecessor business prior to January 31, 1996) made
advances to Smartlink over several years. On January 31, 1996, Smartlink
settled its receivable balance by issuing a $870,315 note to the Company. The
note accrues interest at 7% per annum. The note provides for 36 monthly
principal and interest payments of $15,000 through March 1999 with a final
payment of $483,142 due in April 1999.

During fiscal 1996, Smartlink prepaid $200,000 on the note in addition to
the regularly scheduled payments. During fiscal 1997, the Company approved the
making of interest only payments by Smartlink on the note. The note will be
repaid under its original terms in fiscal 1998 with the additional principal
deferred during fiscal 1997 paid with the final payment in April 1999. The
balance of the note was $663,159 at April 30, 1997 and 1996.

(7) NOTES PAYABLE

(a) Notes Payable--Current

In March 1997, the Company issued a note payable in the amount of $330,750
to an unaffiliated company in exchange for cellular lines purchased from that
company. The note is non-interest bearing and is payable in nine equal monthly
installments of $36,750 through December 1997.

(b) Subordinated Note Payable

During fiscal 1996, the Company repurchased and retired stock of a former
owner pursuant to a certain Assignment and Assumption of Option to Purchase
Stock dated January 31, 1996. In exchange, the Company issued a $4,000,000
subordinated note, of which $2,000,000 was payable immediately upon issuance
of the note. The note accrued interest at 7% per annum through January 1997
and 8.25% through April 1997, payable monthly. The remaining unpaid balance of
the note is payable in one installment of $2,000,000 on January 31, 1999. See
Note 12.

F-33
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(8) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Revolving credit note payable to bank, bearing interest
at the bank's base rate plus 1%, due on January 31,
1999................................................... $ 2,612,694 --
Term loan payable to bank, bearing interest at the
bank's base rate plus 1%, due in monthly installments
of $29,762 through December 1998 with a final
installment of $1,815,474 due January 31, 1999......... 2,440,476 --
Acquisition loan note payable to bank, bearing interest
at the bank's base rate plus 1%, due in monthly
installments of $44,048 through December 1998 with a
final installment of $2,863,088 due January 31, 1999... 3,700,000 --
Note payable to limited partnership, bearing interest at
10% per annum, due January 31, 1999.................... 4,916,443 5,747,493
Various notes payable, secured by automobiles........... 18,158 --
----------- ---------
Total long-term debt................................ 13,687,771 5,747,493
Less current portion.................................... 812,521 --
----------- ---------
Long-term portion................................... $12,875,250 5,747,493
=========== =========
</TABLE>

The Company entered into a Master Credit Agreement ("Credit Agreement") with
Bank of Boston on January 30, 1997, which provided borrowings under revolving
credit notes of up to $4,000,000 and a term loan in the amount of $2,500,000.
The proceeds from the revolving credit notes and the term loan were used to
repay existing indebtedness and to provide working capital. The Credit
Agreement was amended on April 16, 1997 to provide additional borrowings under
an acquisition loan note in the amount of $3,700,000. The proceeds of the
acquisition loan note were used to purchase additional cellular lines from an
unaffiliated Company. Borrowings under the Credit Agreement accrue interest at
the bank's base rate plus 1% (9.5% at April 30, 1997) and are due January 31,
1999. In addition, a commitment fee of 0.5% is payable monthly on the
unborrowed portion of the amount committed under the revolving credit notes.

The Credit Agreement contains certain restrictive covenants of which the
Company was in compliance at April 30, 1997.

The Company entered into a Note and Warrant Purchase Agreement ("Note
Agreement") with a limited partnership (the "Purchaser") on January 31, 1996.
Under the Agreement, the Company issued to the Purchaser senior notes in the
aggregate principal amount of $9,500,000 and a common stock purchase warrant
for 1,975 shares of the common stock of the Company. A portion of the proceeds
from the Note Agreement were used to pay notes payable outstanding at January
31, 1996. Interest on the senior note accrues at 10% per annum and is payable
quarterly. The senior note matures January 31, 1999. The common stock purchase
warrant is exercisable from January 31, 1996 through January 31, 1999, at a
price of $.01 per share.

The $9,500,000 proceeds were recorded as $5,500,000 in long-term debt with
the remaining $4,000,000 recorded as issuance of stock warrant representing
the estimated fair value of the warrant issued. The original issue discount on
the debt will accrete over the life of the loan so that the principal balance
will be $9,500,000 at maturity. The effective interest rate used to calculate
the accretion of the original issue discount is approximately 28%.

F-34
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On August 8, 1996, the Company issued to the Purchaser an additional senior
note in the principal amount of $500,000. The proceeds were used to increase
the Company's investment in Smartlink. Interest on the senior note accrues at
10% per annum and is payable quarterly. The senior note matures January 31,
1999. Concurrent with the issuance of the additional senior note, the Company
issued to the Purchaser a Consolidating and Substitute Common Stock Purchase
Warrant (the "Warrant"). The Warrant effectively increased the number of
shares of common stock that can be purchased from 1,975 to 2,101 on the same
terms as noted above. The incremental number of shares, or 126 shares, were
considered granted as part of the additional senior note.

The $500,000 proceeds from the additional senior note were recorded as
$250,000 in long-term debt with the remaining $250,000 recorded as issuance of
stock warrant representing the estimated fair value of the warrant issued. The
original issue discount on the debt will accrete over the life of the loan so
that the principal balance will be $500,000 at maturity. The effective
interest rate used to calculate the accretion of the original issue discount
is approximately 28%.

Under the Note Agreement, the notes are subject to prepayment, in whole or
in part, at the option of the Company in integral multiples of $100,000 of
prepaid principal. In addition, the Company had the right to repurchase
warrants exercisable into shares of common stock, pro rata from the holders
thereof and subject to certain adjustment provisions of the agreement, at a
repurchase price of $.01 per share through January 31, 1997. In order to
exercise its repurchase right, the Company was obligated to prepay at least
$500,000 in principal in integral multiples of $500,000. On January 30, 1997,
the Company exercised its prepayment right and repaid $3,500,000 principal
amount of the notes and repurchased that portion of the common stock warrant
representing 774 shares of common stock at $.01 per share. As a result of
repurchase of the warrant, $1,347,080 of proceeds originally recorded as
issuance of stock warrant was reallocated to long-term debt.

For the year ended April 30, 1997, $1,071,870 of the original issue discount
was accreted and is included in interest expense on the accompanying 1997
Consolidated Statement of Operations. For the year ended April 30, 1996,
$247,493 was accreted and is included in interest expense on the accompanying
1996 Consolidated Statement of Operations.

The Note Agreement contains certain restrictive covenants. The Company was
not in compliance with a covenant limiting the annual amount of capital
expenditures and a covenant requiring a minimum operating cash flow to
consolidated interest expense ratio. The capital expenditures covenant limits
the aggregate annual capital expenditures to $500,000. The aggregate capital
expenditures for fiscal 1997 totaled $580,911. The operating cash flow
covenant requires that the ratio of operating cash flow to consolidated
interest expense be at least 1.15 to 1.0 for the year ended April 30, 1997.
The ratio for the period is 1.14 to 1.0. The Company received waivers of the
violations from the holder of the notes. See note 12.

Maturities of long-term debt for the next two years are as follows: 1998,
$812,521; 1999, $12,875,250.

(9) LEASE OBLIGATIONS

(a) Capital

The Company leased telephone equipment under two capital leases. The
equipment had a historical cost of $68,708 and is included in property and
equipment in the Consolidated Balance Sheets. The Company repaid its
obligations in full during fiscal 1997.

(b) Operating

The Company leases space for its corporate offices and retail outlets under
nine separate operating leases which expire at various times through August
2002. The Company also leases certain office equipment and vehicles. Total
rent expense for the years ended April 30, 1997 and 1996 was $502,173 and
$462,547,

F-35
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

respectively, of which approximately $163,000 and $149,000 respectively, was
paid to the Company's sole stockholder as lessor of the related properties.
Future minimum lease payments under operating leases are as follows:

<TABLE>
<S> <C>
Year ending April 30:
1998........................................................ $ 563,099
1999........................................................ 469,565
2000........................................................ 250,422
2001........................................................ 251,587
2002........................................................ 163,255
----------
Total future minimum lease payments....................... $1,697,928
==========
</TABLE>

(10) INCOME TAXES

Income tax expense consists of the following for the years ended April 30,
1997 and 1996:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
1997
Federal......................................... $ -- -- --
State........................................... 56,005 -- 56,005
------- ----- ------
$56,005 -- 56,005
======= ===== ======
1996
Federal......................................... $ 9,039 -- 9,039
State........................................... 7,772 -- 7,772
------- ----- ------
$16,811 -- 16,811
======= ===== ======
</TABLE>

The Company has not recorded any federal income tax expense for the year
ended April 30, 1997 because the Company has a consolidated net loss for the
year and will file a consolidated federal tax return. The Company has recorded
state income tax expense for the year ended April 30, 1997 because the Company
is required to pay taxes on the stand-alone net income of CTEL despite the
consolidated net loss. In addition, the minimum state tax expense has been
recorded for each of the companies in the consolidated group which had net
losses for the year.

The Company has recorded federal and state income tax expense for the year
ended April 30, 1996 based on net income generated by Mobilecom in the period
May 1, 1995 through January 31, 1996, as part of the Predecessor business. No
federal income tax expense has been recorded for the Successor business
because the Company has a consolidated net loss for the period ended April 30,
1996 and filed a consolidated federal tax return. The minimum state tax
expense has been recorded for the Successor business for the period ended
April 30, 1996.

The net current deferred tax asset totaled $0 and $541,700 at April 30, 1997
and 1996, respectively, and consisted primarily of temporary differences for
accounts receivable, principally for allowances for uncollectible accounts and
cellular fraud; inventory, principally due to reserves for obsolescence; sales
commissions not yet deductible for tax purposes; reserve for self-insured
medical costs not yet deductible for tax purposes; and the differences in the
timing of revenue recognition for book and tax purposes.

The net noncurrent deferred tax asset totaled $541,500 and $505,200 at April
30, 1997 and 1996, respectively, and consisted of $394,440 and $444,400 of
federal and $147,060 and $60,800 of state net operating loss carryforwards
which expire at various times through fiscal 2012.

F-36
<PAGE>

HATTEN COMMUNICATIONS HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

Management has concluded that it is more likely than not that the Company
will not have sufficient taxable income of an appropriate character within the
carryback and carryforward period permitted by current tax law to allow for
the utilization of the deductible amounts generating the deferred tax assets
and, therefore, a valuation allowance of $541,500 and $1,046,900 has been
established to reduce total deferred tax assets to zero at April 30, 1997 and
1996, respectively.

(11) RETIREMENT PLAN

The Company sponsors a defined contribution retirement plan, covering
substantially all employees of the Company who are at least 21 years of age
and have completed one year of continuous service with the Company. The
Company does not make matching or discretionary contributions to the Plan.

(12) SUBSEQUENT EVENT

On May 23, 1997, the Company executed a Recapitalization Agreement and
entered into the Second Amended and Restated Master Credit Agreement with its
bank. The following transactions were consummated as part of the agreements:

The maximum borrowings available under the Master Credit Agreement was
increased to $17,000,000 and all rights under the Master Credit Agreement were
assigned to CTEL as the principal borrower. The revolving loans made under the
agreement bear interest at the bank's base rate plus 1.25%. CTEL immediately
obtained a revolving loan in the approximate amount of $11,100,000 and
advanced the money to the Company. The Company used the proceeds to repay
existing indebtedness as described below.

The Company repaid in full the revolving credit notes, term loan, and
acquisition loan note, all of which were outstanding at April 30, 1997.

The Company repaid $500,000 of the subordinated note payable to a former
owner which was outstanding at April 30, 1997.

The Company paid a dividend of $1,749,898 and a bonus payment of $220,102 to
its executive officers.

Pursuant to the Recapitalization Agreement, the Company authorized the
following classes of stock: (i) 71,650 shares of Class A Common Stock, $.01
par value, of which 71,650 shares were issued to the sole stockholder in
exchange for all of his shares of the Company; (ii) 33,350 shares of Class B
Common Stock, $.01 par value, of which no shares were issued; and (iii) 7,000
shares of Series A Cumulative Redeemable Preferred Stock, $.01 par value, of
which 7,000 shares were issued to third-party investors.

The Company exchanged its notes payable to the limited partnership which
were outstanding at April 30, 1997 for 6,000 shares of Series A Cumulative
Preferred Stock, a cash payment of $500,000, and a warrant to purchase up to
12,300 shares of Class B Common Stock. In lieu of issuing to the limited
partnership an additional warrant certificate to purchase these shares, the
limited partnership surrendered its warrant to purchase 14,000 shares which
its held at April 30, 1997 in exchange for a consolidating warrant to purchase
an aggregate of 26,300 shares of the Company's Class B Common Stock. Hatten
also issued 1,000 shares of Series A Cumulative Preferred Stock and a warrant
to purchase up to 2,050 shares of Class B Common Stock to a third-party
investor in exchange for $1,000,000.

F-37
<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............................................................... 12
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Capitalization............................................................. 23
Dilution................................................................... 24
Selected Historical Consolidated Financial and Operating Data.............. 25
Pro Forma Consolidated Financial Statements................................ 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 33
Industry Overview.......................................................... 39
Business................................................................... 40
Management................................................................. 53
Certain Relationships and Related Transactions............................. 62
Stock Ownership............................................................ 64
Description of Capital Stock............................................... 66
Description of Certain Indebtedness........................................ 70
Shares Eligible for Future Sale............................................ 71
Certain United States Federal Tax Consequences
to Non-United States Holders.............................................. 73
Underwriting............................................................... 75
Legal Matters.............................................................. 78
Experts.................................................................... 78
Glossary................................................................... 79
Index to Financial Statements.............................................. F-1
</TABLE>

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

8,000,000 SHARES

LOGO

USN COMMUNICATIONS, INC.

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.

COWEN & COMPANY

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

, 1998

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

PRELIMINARY PROSPECTUS DATED JANUARY 7, 1998
PROSPECTUS

8,000,000 SHARES
USN COMMUNICATIONS, INC.
LOGO
COMMON STOCK
-----------

Of the 8,000,000 shares of Common Stock offered hereby, 1,600,000 shares are
being initially offered outside the United States and Canada by the
International Managers (the "International Offering") and 6,400,000 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 has applied for the quotation of the Common Stock on the Nasdaq
National Market under the symbol "USNC."

(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,100,000.

COWEN INTERNATIONAL L.P.

DONALDSON, LUFKIN & JENRETTE INTERNATIONAL

-----------

The date of this Prospectus is , 1998.
<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...........................................
Cowen International L.P...............................................
Donaldson, Lufkin & Jenrette International............................
---------
Total............................................................. 1,600,000
=========
</TABLE>

Merrill Lynch International, Cowen International L.P. and Donaldson, Lufkin
& Jenrette International 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, Cowen & Company and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "U.S. Representatives"), providing for the concurrent
offer and sale of 6,400,000 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.

75
<PAGE>

The Company has granted to the International Managers an option to purchase
up to an aggregate of 240,000 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 960,000 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

76
<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 has been made to list the Common Stock on the Nasdaq National
Market under the symbol "USNC."

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"
meeting certain standards ("QIU"). In accordance with this requirement,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has assumed the
responsibilities of acting as QIU and will recommend a maximum public offering
price for the Common Stock in compliance with the requirements of Rule 2720.
In connection with the Offerings, DLJ is performing due diligence
investigations and reviewing and participating in the preparation of this
Prospectus and the Registration Statement of which the Prospectus forms a
part. As compensation for the services of DLJ as QIU, the Company has agreed
to pay DLJ $5,000. In accordance with such requirements, DLJ 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 DLJ 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.

77
<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.

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

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

8,000,000 SHARES

LOGO

USN COMMUNICATIONS, INC.

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH INTERNATIONAL

COWEN INTERNATIONAL L.P.

DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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................ $ 49,575
NASD Fees.......................................................... 17,060
Blue Sky Fees and Expenses......................................... 2,000*
Transfer Agent and Registrar Fees and Expenses..................... 5,000*
Printing and Engraving Expenses.................................... 280,000*
Legal Fees and Expenses............................................ 350,000*
NASDAQ Stock Exchange Listing Fees................................. 50,000*
Accounting Fees and Expenses....................................... 250,000*
Miscellaneous...................................................... 96,365*
----------
Total.......................................................... $1,100,000*
==========
</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 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 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 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.

II-1
<PAGE>

(2) 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.

(3) 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.

(4) 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.

(5) 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 Partners IV--Direct Fund
L.P., 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.

(6) 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.

(7) 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 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.

(8) 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-

II-2
<PAGE>

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.

(9) 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.

(10) On October 17, 1997, Fidelity Communications International, Inc. and
Fidelity Investors Limited Partnership (collectively, "Fidelity") 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* Form of 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* Form of 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 August 15, 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").
4.2+ 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").
4.3+++ Supplemental Indenture No. 1, dated as of August 12, 1997, by and
between the Registrant and the Trustee, to the Convertible Note
Indenture.
4.4+ 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").
4.5++ Supplemental Indenture, dated as of March 17, 1997, by and between the
Registrant and the Trustee, to the 14% Senior Note Indenture.
4.6+++ Supplemental Indenture No. 2, dated as of August 18, 1997, by and
between the Registrant and the Trustee, to the 14% Senior Note
Indenture.
4.7* Form of Common Stock Certificate.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 November 18, 1996, by and between
the Registrant and Gerald J. Sweas.
10.4++ Employment Agreement, dated as of October 21, 1996, by and between
the Registrant and Ryan Mullaney.
10.5+ Form of Employment Agreement between the Registrant and certain
officers of the Registrant.
10.6+++ Amended and Restated 1994 Stock Option Plan of the Registrant.
10.7+++ 1997 Omnibus Securities Plan.
10.8+ Consulting Agreement, dated January 24, 1995, by and between the
Registrant and Eugene A. Sekulow.
10.9+ Form of Indemnification Agreement between the Registrant and certain
directors and officers 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.
10.20+ Amended and Restated Stockholders Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.21+++ First Amendment to Registration Rights Agreement, dated as of June
10, 1994, by and among the Registrant and the Initial Investors.
10.22+ 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").
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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+++ Third Amendment to Purchase Agreement, dated as of July 21, 1995, by
and among the Registrant and the Original Purchasers.
10.26+ Amended and Restated Registration Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors.
10.27+ Amended and Restated Stockholders Agreement, dated as of July 21,
1995, by and among the Registrant, the Original Purchasers and the
Stockholders.
10.28+++ Purchase Agreement, dated as of October 17, 1997, by and among the
Registrant, Fidelity International, Inc. and Fidelity Investors
Limited Partners.
10.29+ Purchase Agreement, dated as of September 25, 1996, by and among the
Registrant and the purchasers named therein, relating to the 9%
Preferred Stock.
10.30+ 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").
10.31+ Amendment No. 1 to Asset Purchase Agreement, dated as of October 27,
1995, by and among UTS, Quest United, QAM, Lavin, Elliott, and Quest.
10.32+ 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.
10.33+ Resale Local Exchange Service Agreement, dated July 8, 1996, by and
between New York Telephone Company and UTS.
10.34+ Agreement for Resale Services, dated as of April 26, 1996, by and
between the Registrant and Ameritech on behalf of Ameritech Michigan.
10.35+ 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.
10.36+ Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
10.37+ Warrant Agreement, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.38+++ Registration Rights Agreement dated as of August 15, 1997, by and
among the Registrant and the Initial Purchasers named therein.
10.39+++ Warrant Agreement, dated as of August 15, 1997, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.40+++ Consent Warrant Agreement dated as of August 25, 1997, by and between
the Registrant and Harris Trust and Savings Bank, as Warrant Agent.
10.41* Stock Purchase Agreement dated as of January 7, 1998, by and between
the Registrant, Mark C. Hatten, FSC Corp. and Triumph-Connecticut
Limited Partnership.
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.01++ Computation of Net Loss per share of Common Stock.
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).
23.3 Consent of KPMG Peat Marwick LLP.
25.1** Power of Attorney.
</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 333-37621.
*To be filed by amendment.

**Previously filed.

(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 AMENDMENT TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY
OF CHICAGO, STATE OF ILLINOIS ON JANUARY 7, 1998.

USN COMMUNICATIONS, INC.

/s/ J. Thomas Elliott
By: _________________________________
J. Thomas Elliott

Chairman of the Board, President
and Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON JANUARY 7, 1998 BY
THE FOLLOWING PERSONS ON THE DATES AND IN THE CAPACITIES INDICATED.

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

Richard J. Brekka* Director
___________________________________________
Richard J. Brekka

Donald J. Hofmann, Jr.* Director
___________________________________________
Donald J. Hofmann, Jr.

Paul S. Lattanzio* Director
___________________________________________
Paul S. Lattanzio

Thomas C. Brandenburg* Director
___________________________________________
Thomas C. Brandenburg

William A. Johnston* Director
___________________________________________
William A. Johnston

Eugene A. Sekulow* Director
___________________________________________
Eugene A. Sekulow

Dean M. Greenwood* Director
___________________________________________
Dean M. Greenwood

Director
___________________________________________
James P. Hynes

Ian Kidson* Director
___________________________________________
Ian Kidson

Director
___________________________________________
David C. Mitchell

/s/ Gerald J. Sweas Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
Gerald J. Sweas Officer and Principal Accounting Officer)

</TABLE>

/s/ Thomas A. Monson

*By_____________________________

Thomas A. Monson

Attorney-in-fact

II-7

<PAGE>

INDEPENDENT AUDITORS' CONSENT

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

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-38381 on Form S-1 of USN Communications, Inc. of our report dated March 14,
1997 (September 4, 1997 as to Note 22), 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 "Experts" in such Registration
Statement.

/s/ DELOITTE & TOUCHE LLP
- ------------------------------
DELOITTE & TOUCHE LLP

January 7, 1998
Chicago, Illinois

<PAGE>

The Board of Directors
Hatten Communications Holding Company, Inc.:

We consent to the inclusion of our report dated June 20, 1997, with respect to
the consolidated balance sheets of Hatten Communications Holding Company, Inc.
and subsidiaries as of April 30, 1997 and 1996, and the related consolidated
statements of operations, stockholder's deficit, and cash flows for each of the
years in the two-year period ended April 30, 1997, which report appears in Form
S-1 (No. 333-38381) of USN Communications, Inc.

As discussed in note 12, the Company executed a recapitalization of its stock
and a refinancing of its existing debt on May 23, 1997.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

Providence, Rhode Island
January 5, 1998