USN COMMUNICATIONS INC, S-1, 1998-03-13

USN COMMUNICATIONS INC
S-1, 1998-03-13
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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)

DELAWARE 4813 36-3947804
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
IDENTIFICATION 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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COPY TO:
THOMAS A. MONSON, ESQ.VICE PRESIDENT GARY P. CULLEN, ESQ.
AND GENERAL COUNSEL SKADDEN, ARPS, SLATE, MEAGHER & FLOM
USN COMMUNICATIONS, INC. (ILLINOIS)
10 SOUTH RIVERSIDE PLAZA, SUITE 401 333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606 CHICAGO, ILLINOIS 60606
(312) 906-3600 (312) 407-0700
(NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO
PUBLIC: From time to time after the effective date of this Registration
Statement.

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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. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration 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,
please check the following box. [_]

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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE(1)
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<S> <C> <C> <C> <C>
9% Consent Convertible
Subordinated Notes due
2006................... 13,022,600 $767.90 $10,000,000(2) $2,950
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Common Stock, par value
$.01 per share(3)...... -- -- -- --
</TABLE>
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(1) As described below, pursuant to Rule 429 under the Securities Act of 1933,
as amended (the "Securities Act"), the Prospectus filed as part of this
Registration Statement relates to additional securities of the Registrant,
previously registered under its Registration Statement on Form S-1 (File
No. 333-16947), for which a Registration Fee in the amount of $8,378 was
remitted to the Commission and under its Registration Statement on Form S-
1 (File No. 333-41235), for which a Registration Fee in the amount of $7
was remitted to the Commission.
(2) The proposed maximum offering price with respect to the 9% Consent
Convertible Subordinated Notes is based on the actual issue price of
$10,000,000.
(3) Represents shares issuable upon conversion of the 9% Consent Convertible
Subordinated Notes. Pursuant to Rule 457(i) under the Securities Act, no
registration fee is payable with respect thereto.

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PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUS FILED AS PART
OF THIS REGISTRATION STATEMENT RELATES TO THE SECURITIES REGISTERED HEREBY AND
ALSO RELATES TO THE FOLLOWING SECURITIES PREVIOUSLY REGISTERED BY THE
REGISTRANT (I) 1,527,250 WARRANTS TO PURCHASE COMMON STOCK AND 2,053,900
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS PREVIOUSLY
REGISTERED UNDER ITS REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-41235)
AND (II) $36,000,000 AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF CONVERTIBLE
SUBORDINATED NOTES, 48,500 WARRANTS TO PURCHASE COMMON STOCK AND UP TO
4,240,378 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE CONVERTIBLE
NOTES AND EXERCISE OF THE WARRANTS PREVIOUSLY REGISTERED UNDER ITS
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-16947).

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 WITHOUT THE DELIVERY OF A FINAL PROSPECTUS +
+SUPPLEMENT AND ACCOMPANYING PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE +
+ACCOMPANYING 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, DATED MARCH 13, 1998

PROSPECTUS
LOGO
USN COMMUNICATIONS, INC.
9% CONVERTIBLE SUBORDINATED NOTES DUE 2004
9% CONSENT CONVERTIBLE SUBORDINATED NOTES DUE 2006
WARRANTS TO PURCHASE COMMON STOCK
COMMON STOCK

This Prospectus relates to (i) $36.0 million in aggregate principal amount at
maturity of 9% Convertible Subordinated Notes due 2004 (the "Original Notes"),
(ii) $13.0 million in aggregate principal amount at maturity of 9% Consent
Convertible Subordinated Notes due 2006 (the "Consent Notes" and, together with
the Original Notes, the "Convertible Notes"), (iii) 1,590,266 warrants to
purchase an aggregate of 2,989,840 shares, subject to adjustment under certain
circumstances, of Common Stock, par value $.01 per share (the "Common Stock")
of USN Communications, Inc. (the "Company") at an initial exercise price of
$.01 per share (collectively, the "Warrants") and (iii) up to 7,726,129 shares
of Common Stock which includes (a) up to 4,736,289 shares of Common Stock
issuable upon conversion of the Convertible Notes (the "Convertible Note
Shares") and (b) 2,989,840 shares of Common Stock issuable upon exercise of the
Warrants (collectively, the "Warrant Shares") which may be offered for sale
from time to time by the selling securityholders (the "Selling
Securityholders"). See "Selling Securityholders." This Prospectus also relates
to the initial issuance of the Convertible Note Shares by the Company. The
Convertible Notes, the Warrants, the Convertible Note Shares and the Warrant
Shares are collectively referred to herein as the "Securities." The Company
will not receive any proceeds from the sale of the Securities by the Selling
Securityholders but will receive proceeds upon the exercise of the Warrants of
$.01 per share.

The Original Notes and the Consent Notes may be converted into Common Stock
at a conversion price of $10.436 and $10.121 per share, respectively, in each
case subject to adjustment under certain circumstances. The Convertible Notes
will accrete interest at a rate of 9% per annum, compounded semiannually, to an
aggregate principal amount of $36 million by September 30, 1999 with respect to
the Original Notes and $13 million by January 13, 2001 with respect to the
Consent Notes. Thereafter the Original Notes or the Consent Notes, as
applicable, will bear interest at a rate of 9% per annum, payable in cash
semiannually. For the period from the date of issuance until September 30, 1999
with respect to the Original Notes, and January 13, 2001 with respect to the
Consent Notes, the number of shares into which the Convertible Notes are
convertible will increase as the interest on the Convertible Notes accretes. On
, 1998, the Convertible Notes were, in the aggregate, convertible into
shares of Common Stock. On , 1998, the Consent Notes were, in the
aggregate, convertible into shares of Common Stock. Assuming no adjustment
to the Conversion Price and no conversion of any Convertible Notes prior to
that date, on September 30, 1999 the Original Notes will be, in the aggregate,
convertible into 3,449,598 shares of Common Stock and on January 13, 2001 the
Consent Notes will be, in the aggregate, convertible into 1,286,691 shares of
Common Stock.

The Convertible Notes are senior unsecured obligations of the Company which
are subordinated in right of payment to $201.2 million in aggregate principal
amount at maturity of Senior Notes (as defined). Otherwise, the Convertible
Notes rank pari passu in right of payment to all existing and future senior
indebtedness of the Company. The Convertible Notes are effectively subordinated
to all existing and future liabilities and obligations of the Company's
subsidiaries (approximately $29.3 million as of September 30, 1997, excluding
intercompany indebtedness). The Company's subsidiaries have no obligation to
pay amounts due on the Convertible Notes and have not guaranteed the
Convertible Notes as of the date hereof; however, if a subsidiary guarantees
any other indebtedness of the Company, such subsidiary will be obligated to
guarantee the Convertible Notes. The Senior Note Indentures (as defined) permit
the Company and its subsidiaries to incur, under certain circumstances,
additional indebtedness. See "Certain Other Indebtedness."
(cover page continued on next page)

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SEE "RISK FACTORS," BEGINNING ON PAGE 15, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE SECURITIES.

-----------

THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

-----------

The date of this Prospectus is March , 1998.
<PAGE>

(cover page continued from previous page)

The sale and/or distribution of the Securities by the Selling
Securityholders may be effected from time to time through brokers, agents,
dealers or underwriters in one or more transactions (which may involve crosses
and principal trades, including block transactions), in special offerings,
exchange distributions or secondary distributions, or otherwise, at market
prices prevailing at the time of the sale, at prices related to such
prevailing market prices or at negotiated prices. To the extent required, the
specific Securities to be sold, the name of the Selling Securityholders, the
purchase price, the public offering price, the name of any such brokers,
agents, dealers or underwriters, and any applicable commission or discount
with respect to a particular offer will be set forth in an accompanying
Prospectus Supplement. See "Plan of Distribution."

Upon any sale of the Securities, the Selling Securityholders and the
participating agents, brokers or dealers may be deemed to be underwriters as
that term is defined in the Securities Act of 1933, as amended (the
"Securities Act"), and commissions or discounts or any profit realized on the
resale of such Securities held by them may be deemed to be underwriting
commissions or discounts under the Securities Act.

No underwriter is initially being utilized in connection with this offering.
The Company will pay all expenses incurred in connection with this offering,
other than fees and expenses of the Selling Securityholders. See "Plan of
Distribution."

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "USNC." On March 11, 1998, the last reported sale price of the Common
Stock, as reported on the Nasdaq National Market, was $22.75 per share. See
"Price Range of Common Stock and Dividend Policy."

Prior to the date of this Prospectus, there has been no public market for
the Convertible Notes and the Warrants. The Company does not currently intend
to list the Convertible Notes or the Warrants on any securities exchange or to
seek approval for quotation through any automated quotation system. The
Company has been advised by the Initial Purchasers in connection with the sale
of the Convertible Notes and the Warrants (collectively, the "Initial
Purchasers") that they intend to make a market for such securities; however
the Initial Purchasers 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 Convertible Notes or the Warrants will develop or, that if such
a market develops, that it will continue. This Prospectus has been prepared
for use by the Initial Purchasers in connection with offers and sales of the
Convertible Notes or the Warrants 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 sale. Such Initial Purchasers may act as
principal or agent in such transactions. See "Plan of Distribution."

2
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AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the Securities 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. Under the terms of an indenture, dated as
of September 30, 1996 (the "Original Indenture"), and an indenture, dated as
of January 13, 1998 (the "Consent Indenture" and, together with the Original
Indenture, the "Convertible Note Indentures"), each by and between the Company
and Harris Trust and Savings Bank, as trustee (the "Trustee"), a warrant
agreement, dated as of September 30, 1996 (the "1996 Warrant Agreement"), a
warrant agreement, dated as of August 15, 1997 (the "1997 Warrant Agreement"),
and a warrant agreement, dated as of August 25, 1997 (the "Consent Warrant
Agreement" and, together with the 1996 Warrant Agreement and the 1997 Warrant
Agreement, the "Warrant Agreements"), each by and between the Company and
Harris Trust and Savings Bank, as warrant agent (the "Warrant Agent"), the
Company will be required to file with the Commission, and to furnish holders
of the Convertible Notes and the Warrants, as applicable, with, the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act, including reports on Forms 10-K, 10-Q and 8-K.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and related notes appearing elsewhere in this Prospectus. Unless the
context indicates otherwise, all references to the Company or USN refer to USN
Communications, Inc. and its subsidiaries. Please refer to the Glossary for the
definitions of certain capitalized terms used herein and elsewhere in this
Prospectus without definition.

THE COMPANY

USN is one of the fastest growing competitive local exchange carriers
("CLECs") in the United States. The Company offers a bundled package of
telecommunications products, including local and long distance telephony, voice
mail, paging, teleconferencing, Internet access and other enhanced and value-
added telecommunications services, tailored to meet the needs of its customers.
The Company also offers wireless telephone service on a resale basis. 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 providing 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 Connecticut 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 445 member
direct salesforce in 44 offices located in ten 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:

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of any appeals. The District Court judge subsequently stayed this decision.
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 entered 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
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 445 member direct salesforce,
located in 44 offices in Connecticut, 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

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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. The Company also
offers wireless telephone service on a resale basis. 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.

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continuing legal challenges, on a significant basis the Company does not
believe that any RBOC will provide in-region long distance services prior to
1999. As a non-facilities based provider, the Company believes it is able to
build a customer base quickly and efficiently without incurring significant
costs and the developmental delays inherent in constructing network and
transmission facilities. In addition, the Company's proprietary software
interface systems facilitate its rapid customer acquisition strategy by
allowing it to provision high volumes of access lines.

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

. On January 13, 1998, Merrill Lynch Global Allocation Fund, Inc. ("MLGAFI")
and Merrill Lynch Equity/Convertible Series (Global Allocation Portfolio)
(collectively, "MLAM") purchased $13.0 million aggregate principal amount at
maturity of the Company's Consent Notes for an aggregate purchase price of
$10.0 million.

. On February 9, 1998, the Company completed an initial public offering of
8,600,000 shares of Common Stock (the "Initial Public Offering"), resulting
in net proceeds to the Company of approximately $127.9 million. On March 3,
1998, the Company issued an additional 28,861 shares for net proceeds of
approximately $.4 million solely to cover the underwriters' over-allotment
option.

. On March , 1998, MLAM exchanged (the "Exchange") $31.5 million aggregate
principal amount at maturity of the Company's 14% Senior Discount Notes due
2003 (the "14% Senior Notes") for $ million aggregate principal amount at
maturity of the Company's 14 5/8% Senior Discount Notes due 2004 (the "14
5/8% Senior Notes" and, together with the 14% Senior Notes, the "Senior
Notes") pursuant to an option previously granted by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

RECENT ACQUISITION

On February 20, 1998, the Company acquired (the "Acquisition") 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 for approximately $68.0 million, including the repayment
of approximately $14.0 million of existing indebtedness.

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.

7
<PAGE>

SUMMARY DESCRIPTION OF THE SECURITIES

CONVERTIBLE NOTES

Original Notes............ $36,000,000 aggregate principal amount at maturity
of 9% Convertible Subordinated Notes due 2004.

Consent Notes............. $13,000,000 aggregate principal amount at maturity
of 9% Consent Convertible Subordinated Notes due
2006.

Maturity Date............. The Original Notes mature on September 30, 2004.
The Consent Notes mature on January 13, 2006.

Yield..................... 9% per annum (computed on a semiannual bond
equivalent basis) and calculated from September 30,
1996 with respect to the Original Notes and January
13, 1998 with respect to the Consent Notes.

Interest.................. The Original Notes accrete interest at a rate of
9%, compounded semiannually to an aggregate
principal amount of $36.0 million by September 30,
1999. Thereafter, the Original Notes will bear
interest at the rate of 9% per annum and will be
payable in cash semiannually on March 30 and
September 30 of each year, commencing March 30,
2000.

The Consent Notes accrete interest at a rate of 9%,
compounded semiannually to an aggregate principal
amount of $13.0 million by January 13, 2001.
Thereafter, the Consent Notes will bear interest at
the rate of 9% per annum and will be payable in
cash semiannually on January 13 and July 12 of each
year, commencing July 12, 2001.

Original Issue Discount... For federal income tax purposes, the Convertible
Notes are treated as having been issued with
"original issue discount" generally equal to the
difference between the issue price of the
Convertible Notes and the sum of all payments
(whether designated as principal or interest) to be
made thereon. Each holder of a Convertible Note
must include in gross income for federal income tax
purposes a portion of such original issue discount
for each day during each taxable year in which it
holds such Convertible Note. See "Certain Federal
Income Tax Considerations."

Sinking Fund.............. None.

Optional Redemption....... The Original Notes are not redeemable, in whole or
in part, at any time prior to September 30, 2000.
The Consent Notes are not redeemable, in whole or
in part, at any time prior to January 13, 2002. At
any time from September 30, 2000 to September 30,
2002, with respect to the Original Notes, and from
January 13, 2002 to January 13, 2004, with respect
to the Consent Notes, the Company may redeem all
but not less than all of the Original Notes or the
Consent Notes, as applicable, if the Price (as
defined in the Convertible Note Indentures) of the
Common Stock is at least 150% of the Conversion
Price for 30 consecutive days, at a redemption
price equal to 100% of the principal amount thereof
plus accrued and unpaid interest, if any, to the
date of redemption; provided, that if the Common
Stock is not traded on a U.S. national securities
exchange or approved for trading on an established

8
<PAGE>

automated over-the-counter trading market in the
United States and not quoted on a consolidated
transaction reporting tape, the Convertible Notes
will not be redeemable during such period.
Thereafter, the Company may redeem, in whole or in
part, the Convertible Notes at a redemption price
equal to 100% of the principal amount thereof, plus
accrued and unpaid interest, if any.

Conversion Rights and
Initial Conversion
Price....................
The Convertible Notes are convertible into Common
Stock, at the option of the holders of Convertible
Notes prior to redemption or final maturity of the
Convertible Notes, at a conversion price of $10.436
per share, with respect to the Original Notes, and
$10.121 per share, with respect to the Consent
Notes, in each case, subject to adjustment as
described below and as described in "Description of
Convertible Notes." The right to convert
Convertible Notes that have been called for
redemption will terminate at the close of business
on the business day preceding the redemption date.

Adjustment of Conversion In the event that the Company consummates a sale or
Price.................... sales of any class of Capital Stock for an amount,
individually or in the aggregate, in excess of $5
million (each, a "Reset Event") and at the time of
such sale or sales, the equity valuation of the
Company is less than $122.5 million based upon such
sale or sales, then on the date of the consummation
of any such Reset Event (the "Reset Date"), the
Conversion Price shall be adjusted (the "Conversion
Reset") to equal 115% of the price (the "Conversion
Reset Price") at which such sale or sales were
consummated; provided, that if such sale or sales
are consummated more than nine months after a
Qualified Public Offering at a total equity
valuation of the Company of at least $122.5
million, then no Conversion Reset will be required.
In the event that the Conversion Price before such
calculation shall be equal to or less than the
Conversion Reset Price, then no additional
adjustment to the Conversion Price shall be made.
See "Description of Convertible Notes--Conversion
Rights."

Ranking................... The Convertible Notes are senior, unsecured
subordinated obligations of the Company. The
Convertible Notes are subordinated in right of
payment to the Senior Notes. Otherwise, the
Convertible Notes rank pari passu in right of
payment with all other existing and future
unsecured indebtedness of the Company. The
Convertible Notes are effectively subordinated to
any secured indebtedness of the Company to the
extent of the value of the assets securing such
indebtedness. As a holding company that conducts
virtually all of its business through subsidiaries,
the Company currently has no source of operating
cash flow other than from dividends and
distributions from its subsidiaries. The Company's
subsidiaries have no obligation to pay amounts due
on the Convertible Notes and will not guarantee the
Convertible Notes; provided, that if a subsidiary
guarantees any Indebtedness of the Company, such
subsidiary will be obligated to guarantee the
Convertible Notes. Therefore, the Convertible Notes
are effectively subordinated to all liabilities of
the Company's subsidiaries, including

9
<PAGE>

trade payables. Any rights of the Company and its
creditors, including the holders of the Convertible
Notes, to participate in a distribution of the
assets of any of the Company's subsidiaries upon
any liquidation or reorganization of any such
subsidiary are subject to the prior claims of that
subsidiary's creditors (including trade creditors).
See "Risk Factors--Holding Company Structure;
Source of Repayment of Notes; Effective
Subordination of Convertible Notes to Indebtedness
of Subsidiaries" and "--Subordination of
Convertible Notes."

Change of Control......... Upon a Change of Control, each holder of the
Convertible Notes will have the right to require
the Company to repurchase all or any part of such
holder's Convertible Notes at a price equal to 101%
of the Accreted Value or 101% of the principal
amount thereof, as the case may be, plus accrued
and unpaid interest, if any, thereon, to the date
of repurchase. See "Description of Convertible
Notes--Repurchase at the Option of Holders upon a
Change of Control."

Termination of Trading.... Upon a Termination of Trading (as defined herein),
each holder of a Convertible Note will have the
right to require the Company to repurchase all or
any part of such holder's Convertible Notes at a
price equal to 100% of the Accreted Value or 100%
of the principal amount thereof, as the case may
be, plus accrued and unpaid interest, if any,
thereon to the date of repurchase. See "Description
of Convertible Notes--Right to Require Repurchase
of Convertible Notes Upon a Termination of
Trading."

Guarantees................ The Convertible Note Indentures provide that any
subsidiary that guarantees Indebtedness of the
Company will guarantee unconditionally on a senior
basis (except with respect to the Senior Notes and
the Senior Note Guarantees), the payment of
principal, premium, if any, interest, if any, on
the Convertible Notes and amounts payable upon a
Change of Control, an Asset Sale Offer or a
Termination of Trading. See "Description of
Convertible Notes--Certain Covenants--Limitation on
Issuances of Guarantees by Restricted
Subsidiaries."

Certain Covenants......... The Convertible Note Indentures contain certain
limited covenants which, among other things,
restrict the ability of the Company and certain of
its subsidiaries to sell assets or engage in
mergers or acquisitions. In addition, the
Convertible Note Indentures impose limits on the
ability of certain of the Company's subsidiaries to
issue guarantees. See "Description of Convertible
Notes--Certain Covenants," "--Assets Sales" and "--
Consolidation, Merger, Conveyance, Lease or
Transfer."

For additional information concerning the Convertible Notes, see "Description
of Convertible Notes."

10
<PAGE>

WARRANTS

1996 Warrants............. 48,500 warrants which, when exercised, would
entitle the holders thereof to purchase, in the
aggregate, 790,780 shares of Common Stock (equal to
approximately % of the outstanding shares of
Common Stock, on a fully diluted basis as of
, 1998). Each 1996 Warrant entitles the
holder thereof to purchase 16.30474 shares of
Common Stock (subject to adjustment as described
herein) at an exercise price of $.01 per share. The
1996 Warrants may be exercised at any time on or
prior to September 30, 2003. See "Description of
Warrants--Certain Terms."

1997 Warrants............. 1,527,250 warrants which, when exercised, would
entitle the holders thereof to purchase, in the
aggregate, 2,053,900 shares of Common Stock
(equal to approximately % of the
outstanding shares of the Common Stock on a
fully-diluted basis as of , 1998).
Each 1997 Warrant entitles the holder thereof
to purchase 1.34484 shares of Common Stock
(subject to adjustment as described herein) at
an exercise price of $.01 per share. The 1997
Warrants may be exercised at any time on or
prior to August 15, 2004. See "Description of
Warrants--Certain Terms."

Consent Warrants.......... 14,516 warrants, which, when exercised, would
entitle the holders thereof to purchase, in the
aggregate, 145,160 shares of Common Stock
(equal to approximately % of the
outstanding shares of Common Stock, on a fully-
diluted basis as of , 1998). Each
Consent Warrant entitles the holder thereof to
purchase 10 shares of Common Stock (subject to
adjustment as described herein) at an exercise
price of $.01 per share. The Consent Warrants
may be exercised at any time on or prior to
August 15, 2004. See "Description of Warrants--
Certain Terms."

Adjustments............... The number of shares of Common Stock for which
a Warrant is exercisable and the purchase price
thereof are subject to adjustment from time to
time upon the occurrence of certain events,
including, among other things, certain
issuances of options or convertible securities,
certain dividends and distributions and certain
changes in options and convertible securities.
A Warrant does not entitle the holder thereof
to receive any dividends paid on Common Stock.

For additional information concerning the Warrants, see "Description of
Warrants."

COMMON STOCK

Common Stock.............. 7,726,129 shares of Common Stock of the Company,
consisting of the Convertible Note Shares and the
Warrant Shares.

Convertible Note Shares... 4,736,289 shares of Common Stock available for
issuance by the Company upon conversion of the
Convertible Notes by the holders thereof.

Warrant Shares............ 2,989,840 shares of Common Stock available for
issuance by the Company upon exercise of the
Warrants by the holders thereof.

11
<PAGE>

Voting Rights............. Holders of Common Stock are entitled to one vote
per share on all matters submitted to a vote of the
stockholders.

Dividends................. Holders of Common Stock have the right to receive
dividends when and as dividends are declared by the
Board of Directors of the Company, subject to the
rights of any holders of preferred stock. See
"Description of Capital Stock." The Company intends
to retain its earnings, if any, and therefore does
not anticipate paying dividends in the foreseeable
future. In addition, the Senior Note Indentures (as
defined) include significant limitations on the
Company's ability to pay dividends to the holders
of Common Stock. See "Price Range of Common Stock
and Dividends."

Liquidation Rights........ Upon any liquidation, dissolution or winding up of
the affairs of the Company, whether voluntary or
involuntary, any assets remaining after
satisfaction of the rights of creditors and the
rights of any holders of preferred stock will be
distributed to the holders of Common Stock. See
"Description of Capital Stock."

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

For additional information concerning the Common Stock, see "Description of
Capital Stock."

REGISTRATION RIGHTS

Under the terms of a registration rights agreement, dated as of September 30,
1996 (the "1996 Registration Rights Agreement"), between the Company and Smith
Barney, Inc., BT Securities Corporation, Chase Securities Inc. and CIBC Wood
Gundy Securities Corp. (collectively, the "1996 Initial Purchasers") and a
registration rights agreement, dated as of August 15, 1997 (the "1997
Registration Rights Agreement" and, together with the 1996 Registration Rights
Agreement, the "Registration Rights Agreements"), between the Company and
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson Lufkin &
Jenrette Securities Corporation (collectively, the "1997 Initial Purchasers")
the Company is required to keep the Registration Statement of which this
Prospectus forms a part effective for a specified period. The Company has also
granted to MLAM registration rights comparable to the registration rights
contained in the 1997 Registration Rights Agreement with respect to the Consent
Warrants and the shares of Common Stock issuable upon the exercise of the
Consent Warrants and registration rights comparable to those contained in the
1996 Registration Rights Agreement with respect to the Consent Notes and the
shares issuable upon the conversion of the Consent Notes. See "Registration
Rights."

RISK FACTORS

Prospective investors in the Securities 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 15.

12
<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 summary financial data as of and for the nine-month
periods ended September 30, 1996 and 1997, respectively, are derived from, and
should be read in conjunction with, the unaudited financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus. In
the opinion of management, such interim financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) necessary to
fairly present the information presented for such periods. Results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of results of operations for a full year or indicative of future
periods. The summary unaudited pro forma 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
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 preferred
stock into Common Stock concurrently with the closing of the Initial Public
Offering; (iii) the Initial Public Offering; and (iv) the 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 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.

<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
INCEPTION TO UNAUDITED
DECEMBER 31, PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------------ --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net service revenue... $ 1,737 $ 7,884 $ 9,814 $ 40,132 $ 7,599 $ 26,998 $ 56,818
Cost of services...... 1,455 9,076 9,256 28,835 6,587 23,983 42,290
--------- --------- --------- ---------- --------- --------- ----------
Gross margin.......... 282 (1,192) 558 11,297 1,012 3,015 14,528
Sales and marketing
expense.............. 2,869 5,867 12,612 16,901 5,837 43,087 47,044
General and
administrative
expense.............. 4,686 11,100 20,665 34,770 10,920 26,882 40,182
Interest expense...... 26 734 1,797 2,871 46 8,573 9,540
Interest and other
income (1)........... 152 646 9,469 9,439 8,572 1,889 1,844
Minority interest..... -- 150 -- -- -- -- --
--------- --------- --------- ---------- --------- --------- ----------
Net loss.............. $ (7,147) $ (18,097) $ (25,047) $ (33,806) $ (7,219) $ (73,638) $ (80,394)
========= ========= ========= ========== ========= ========= ==========
Accumulated preferred
dividends............ $ 707 $ 3,103 $ 3,691 $ -- $ 3,466 $ 1,012 $ --
Net loss to common
shareholder.......... $ (7,854) $ (21,200) $ (28,738) $ (33,806) $ (10,685) $ (74,650) $ (80,394)
Net loss per common
share................ $ (6.56) $ (7.01) $ (5.63) $ (1.77) $ (2.44) $ (10.35) $ (3.80)
Weighted average
shares outstanding... 1,196,780 3,025,200 5,102,330 19,046,246 4,384,993 7,212,511 21,156,427
OTHER DATA:
EBITDA (2)............ $ (7,087) $ (15,901) $ (30,390) $ (14,385) $ (64,429)
Cash flows from
operating activities. (6,141) (14,247) (23,910) (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
Ratio of earnings to
fixed charges (3).... -- -- -- -- --
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------------------
UNAUDITED
PRO FORMA
1994 1995 1996 1996 1997 1997
------------ --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.......... $ 5,979 $ 13,766 $ 60,818 $ 71,390 $ 117,944 $ 204,018
Total assets.......... 12,747 20,471 78,052 88,083 179,157 341,360
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) 115,260
</TABLE>

13
<PAGE>

<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> <C>
OPERATING DATA:
Local access line
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. While 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.
(3) The ratio of earnings to fixed charges is computed by dividing pretax
income (loss) from operations before interest charges by interest expense.
Earnings were insufficient to cover fixed charges for the periods ended
December 31, 1994, 1995 and 1996 by $7.1 million, $17.4 million and $23.2
million, respectively, and for the nine-month periods ended September 30,
1996 and 1997 by $7.2 million and $65.1 million, respectively.

14
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, prospective
investors in the Securities 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
Securities 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' equity. As of September 30, 1997,
the Company had $177.3 million principal amount of long-term debt and a total
common stockholders' equity of $115.3 million, as adjusted to give effect to
(i) the sale of preferred stock on October 17, 1997 for an aggregate purchase
price of $15.0 million, (ii) the conversion of the Company's preferred stock
into Common Stock concurrent with the closing of the Initial Public Offering,
(iii) the issuance of the Consent Notes and (iv) the Initial Public Offering.
See "Capitalization."

The Company's ability to make cash payments with respect to the Convertible
Notes, to repay its obligations on the Convertible Notes at maturity and to
satisfy its other debt obligations 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 the Convertible Notes when required or to repay its
obligations on the Convertible Notes at maturity. See "Description of
Convertible Notes." In addition, cash interest will commence accruing on the
14 5/8% Senior Notes on August 15, 2000 and the 14% Senior Notes on March 30,
2000. See "--Future Cash Obligations." The indentures with respect to the
Senior Notes (collectively, the "Senior Note Indentures") permit the Company
and its subsidiaries to incur additional Indebtedness under certain
circumstances, including up to $45 million under a Credit Facility (as defined
in the Senior Note Indentures), $30 million of which may be secured. 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.

The degree to which the Company is leveraged could have important
consequences to the holders of the Securities, including the following: (i)
the Company will have significant and increasing cash interest expense

15
<PAGE>

and significant principal repayment obligations with respect to outstanding
indebtedness, including the Senior Notes and the Convertible Notes; (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 and the Convertible Note Indentures, the
ability of the Company to sell assets is restricted. See "Description of
Convertible Notes" and "Certain Other Indebtedness."

FUTURE CASH OBLIGATIONS

Since inception, the Company's consolidated cash flow from operations has
been negative. As a result, the Company has financed fixed charges (including
interest on existing indebtedness) and operating expenses with proceeds
principally from the sale of (i) the 14% Senior Notes, the Original Notes and
the 1996 Warrants (collectively, the "1996 Private Placement"), (ii) the 14
5/8% Senior Notes and the 1997 Warrants (the "1997 Private Placement") and
(iii) the Initial Public Offering. Commencing August 15, 2000, cash interest
on the 14 5/8% Senior Notes will accrue semiannually at the rate of 14 5/8%
per annum (approximately $22.3 million per year). Commencing September 30,
1999 and January 13, 2001, cash interest on the Original Notes and Consent
Notes, respectively, will accrue semiannually at the rate of 9% per annum
(approximately $3.2 million per year and $1.2 million per year, respectively),
and commencing March 30, 2000, cash interest on the 14% Senior Notes will
accrue semiannually at the rate of 14% per annum (approximately $6.8 million
per year). The fully accreted principal amount of the 14 5/8% Senior Notes,
14% Senior Notes, Original Notes and Consent Notes of $152.7 million, $48.5
million, $36 million and $13 million, respectively, will become due on August
15, 2004, September 30, 2003, September 30, 2004 and January 13, 2006,
respectively. Pursuant to the Consent (as defined), holders of the 14% Senior
Notes may exchange the remaining outstanding 14% Senior Notes for 14 5/8%
Senior Notes which have a higher rate of interest and would therefore increase
the Company's cash obligations. Many factors, certain of which are beyond the
Company's control, will affect its performance and, therefore, its ability to
meet its ongoing obligations to repay the Convertible Notes and other debt.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."

ADDITIONAL CAPITAL REQUIREMENTS

The Company believes it will have sufficient capital 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 contributions
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.

HOLDING COMPANY STRUCTURE; SOURCE OF REPAYMENT OF CONVERTIBLE NOTES; EFFECTIVE
SUBORDINATION OF CONVERTIBLE NOTES TO INDEBTEDNESS OF SUBSIDIARIES

As a holding company that conducts virtually all of its business through
subsidiaries, the Company has no source of operating cash flow other than
dividends and distributions from its subsidiaries. In order to pay cash
interest on the Convertible Notes, when cash interest is payable thereon, and
to repay the principal amount of the Convertible Notes at maturity or to
redeem or repurchase the Convertible Notes, the Company will be required to
obtain dividends or distributions from its subsidiaries, refinance its
indebtedness or raise funds in a public or private equity or debt offering.
However, the Senior Note Indentures limit the Company's ability to incur
additional indebtedness.

If the Company is required to conduct an offering of its capital stock or to
refinance the Convertible Notes, its ability to do so on acceptable terms, if
at all, will be affected by several factors, including financial market

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<PAGE>

conditions and the value and performance of the Company at the time of such
offering or refinancing, which in turn may be affected by many factors,
including economic and industry cycles. There can be no assurance that an
offering of the Company's capital stock or a refinancing of the Convertible
Notes can or will be completed on satisfactory terms, that such offering or
refinancing would be sufficient to enable the Company to make any payments
with respect to the Convertible Notes if required or that such offering or
refinancing would be permitted by the terms of the debt instruments of the
Company and its subsidiaries then in effect.

The Senior Notes are senior obligations of the Company, pari passu in right
of payment with certain other indebtedness of the Company and not secured by
any assets of the Company or its subsidiaries. The Convertible Notes are
subordinated to the Senior Notes. Otherwise, the Convertible Notes are pari
passu in right of payment with certain other indebtedness of the Company and
are not secured by any assets of the Company or its subsidiaries. The Senior
Note Indentures permit the Company to enter into a Credit Facility under which
the Company may incur up to $45 million of Indebtedness (as defined), $30
million of which may be secured. If such Indebtedness is secured, the
Convertible Notes will be effectively subordinated to such Indebtedness to the
extent of the value of the assets securing such Indebtedness. The Company's
subsidiaries have no obligation to pay amounts due on the Convertible Notes
and have not guaranteed the Convertible Notes as of the date hereof; however,
if a subsidiary guarantees any Indebtedness of the Company in the future, such
subsidiary will be obligated to guarantee the Convertible Notes. See
"Description of Convertible Notes--Certain Covenants" and "--Limitation on
Issuances of Guarantees by Restricted Subsidiaries." Therefore, the
Convertible Notes, if not guaranteed in the future, will be effectively
subordinated to all existing liabilities of the Company's subsidiaries,
including trade payables. As of September 30, 1997, total liabilities of the
Company's subsidiaries (after the elimination of loans and advances by the
Company to its subsidiaries) on a combined consolidated basis were
approximately $29.3 million. Any rights of the Company and its creditors,
including the holders of the Convertible Notes, to participate in a
distribution of the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.

SUBORDINATION OF CONVERTIBLE NOTES

The Convertible Note Indentures do not permit the creation of any class of
Indebtedness other than the Senior Notes that will rank senior to the
Convertible Notes. By reason of the subordination of the Convertible Notes, in
the event of insolvency, bankruptcy, liquidation, reorganization, dissolution
or winding up of the business of the Company or upon a default in payment with
respect to the Senior Notes or an event of default with respect to the Senior
Notes resulting in the acceleration thereof, the assets of the Company will be
available to pay the amounts due on the Convertible Notes only after all
Senior Notes have been paid in full or provision for such payment has been
made. In addition, holders of the Convertible Notes are effectively
subordinated to the claims of all existing and future third party liabilities
(including trade payables and other non-debt obligations) of the subsidiaries
of the Company, to the extent of the assets of such subsidiaries. In the event
of the insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of the business of any subsidiary of the Company, creditors of such
subsidiary generally will have the right to be paid in full before any
distribution is made to the Company or the holders of the Convertible Notes.
See "Description of Convertible Notes--Subordination of Convertible Notes."

In general, the covenants relating to the Convertible Notes are considerably
more limited in scope than the covenants in the Senior Note Indentures and
hence afford the holders of the Convertible Notes commensurately less
protection. While the Convertible Note Indentures contain a cross-default
provision to the Senior Note Indentures, the response by the holders of the
Convertible Notes to any default will largely be dictated by the response of
the holders of the Senior Notes, including any waiver or de-acceleration on
their part. Certain holders of Convertible Notes are also currently holders of
Senior Notes. See "Description of Convertible Notes--Events of Default."

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.

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<PAGE>

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 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
carriers' 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."

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<PAGE>

COMPETITION

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

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

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<PAGE>

unlicensed wireless radio devices, and other services that use existing point-
to-point wireless channels on other frequencies. In February 1998, the FCC
commenced 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-point and point-to-multipoint
communications services in the 38 GHz band, although many 38 GHz licenses have
already been issued nationwide. 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. The FCC also has
indicated that it plans to propose rules for the issuance of licenses in the
24 GHz band for Digital Electronic Message Service ("DEMS"), which also is
designed to offer high capacity, wide area fixed point-to-multipoint service,
and many 24 GHz DEMS licenses have already been issued nationwide. 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 in certain cases 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. The FCC has
to date denied each application for such approval, including 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
certain states in 1998. 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. 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.

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 three RBOCs that are
parties in the case, including Bell Atlantic, immediately to begin offering
widespread in-region long distance services. Unless overturned on appeal, this
decision could have a material adverse effect on the Company. The District
Court judge subsequently stayed this decision and the FCC and certain IXCs
have filed 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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<PAGE>

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 went 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 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 the
resale agreements also contain carryover provisions which permit the Company
to carryforward volume shortfalls and may serve to delay, or possibly
eliminate, the payment of a significant portion of any shortfall the Company
may experience. While these "carryover pools" may provide the Company with
some additional time to build its customer base, any underutilization charges
or rate increases could have a material adverse effect on the financial
condition and results of operations of the Company.

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

LACK OF EXPERIENCE OFFERING ADDITIONAL PRODUCTS AND SERVICES

The Company's strategy includes offering additional telecommunications
products and services, including wireless telephone service. Entry into new
markets entails risks associated with the state of development of the

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<PAGE>

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 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. A number of RBOCs, state regulatory commissions and
other parties have asked the FCC to reconsider these and other regulations
implementing the Telecommunications Act. 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

22
<PAGE>

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. The FCC, numerous
IXCs and various other parties filed petitions for certiorari with the U.S.
Supreme Court, which accepted the case for review on January 26, 1998. The
Supreme Court is not expected to issue a decision before the end of 1998. Some
of the same parties and certain other parties also have asked the FCC to
reconsider these and other regulations implementing the Telecommunications Act.
In October 1997, the Eighth Circuit 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. On January 22, 1998, the same court ruled that
the FCC cannot apply its local competition pricing rules in reviewing
applications of the RBOCs for authorization to provide long distance service
that originates and certain long distance services that terminate in one of
their in-region states. If upheld, this decision would make it somewhat easier
for the RBOCs to enter the market for in-region long distance services and
would make it more costly for facilities-based competitors to enter the local
exchange market. The Company cannot predict the outcome of the FCC's
reconsideration or the Supreme Court 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 three RBOCs that are parties in the
case, including Bell Atlantic, 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 District
Court judge has stayed this decision and the FCC and certain IXCs have filed
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 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 "--Acquisition of Connecticut Telephone."
Furthermore, there can be no assurance that the growth experienced by the
Company in the past will continue.

23
<PAGE>

ACQUISITION OF CONNECTICUT TELEPHONE

On February 20, 1998, the Company acquired all of the outstanding capital
stock of Connecticut Telephone for an aggregate purchase price of $68.0
million, which includes the repayment of approximately $14.0 million of
existing indebtedness. The Acquisition involves 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
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 the Acquisition 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.

ORIGINAL ISSUE DISCOUNT; POSSIBLE TAX AND OTHER LEGAL CONSEQUENCES FOR HOLDERS
OF CONVERTIBLE NOTES AND THE COMPANY

The Convertible Notes were issued at a substantial discount from their
principal amount at maturity. Cash payments of interest on the Original Notes
and the Consent Notes will not be paid prior to 2000 and 2001, respectively.
However, original issue discount (i.e., the difference between the "stated
redemption price at maturity" of the Convertible Notes and the "issue price"
of the Convertible Notes) has accrued from the issue date and will be
includable as interest income periodically in a holder's gross income for
federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Certain Federal Income Tax
Considerations--Taxation of the Convertible Notes--Original Issue Discount."
Similar results may apply under state tax laws. In addition, to the extent the
Convertible Notes constitute corporate acquisition indebtedness under Section
279 of the Internal Revenue Code of 1986, as amended (the "Code"), the maximum
amount of interest or original issue discount the Company can deduct with
respect thereto may be limited. See "Certain Federal Income Tax
Considerations--Certain Potential Federal Income Tax Consequences to the
Company."

If a bankruptcy case were to be commenced by or against the Company under
the United States Bankruptcy Code, the claim of a holder of the Convertible
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial offering price and (ii) that portion of
the original issue discount

24
<PAGE>

that is not deemed to constitute "unmatured interest" for purposes of the
United States Bankruptcy Code. Any original issue discount that had not
amortized as of the date of any such bankruptcy filing would constitute
"unmatured interest."

VOLATILITY OF STOCK PRICE; ABSENCE OF A PUBLIC MARKET FOR CONVERTIBLE NOTES
AND WARRANTS

The Common Stock is quoted on the Nasdaq National Market; however, there can
be no assurance that an active trading market in the Common Stock will develop
or be sustained. Additionally, 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.

There is currently no public market for the Convertible Notes and the
Warrants. There can be no assurance as to the liquidity of any markets that
may develop for such securities, the ability of holders to sell such
securities or the price at which such securities would be sold. Future trading
prices of the Convertible Notes and Warrants will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Each of the Initial
Purchasers has advised the Company that it intends to make a market for the
Convertible Notes and the Warrants. However, the Initial Purchasers are not
obligated to do so and any market making may be discontinued at any time
without notice. Therefore, there can be no assurance that an active trading
market for the Convertible Notes or the Warrants will develop or if one does
develop, that it will be sustained. The Company does not intend to apply for
listing of the Convertible Notes or the Warrants on any securities exchange or
to seek approval for quotation through any automated quotation system.

ABSENCE OF DIVIDENDS

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

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 Original Notes (2,936,090 shares as of
November 30, 1997 and accreting to 3,449,598 shares by September 30, 1999) and
the Consent Notes (988,142 shares as of January 13, 1998 and accreting to
1,286,691 shares by January 13, 2001), and the 2,989,840 shares of Common
Stock issuable upon exercise of Warrants will be available for sale pursuant
to the shelf registration statement of which this Prospectus is a part, on or
after June 9, 1998.

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. 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. See "Certain Relationships and Related
Transactions" and "Registration Rights." In addition, as of December 31, 1997
on a pro forma basis giving effect to the Initial Public Offering, there were
3,245,540 shares reserved for issuance upon the exercise of outstanding
options, 1,526,400 of which were vested. The Company has registered the shares
of Common Stock reserved or to be available for issuance under the Company's
existing stock option plans.

25
<PAGE>

CONTROL BY EXISTING STOCKHOLDERS; CERTAIN ANTITAKEOVER MATTERS

As of the date of this Prospectus, approximately 60% of the outstanding
Common Stock is 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 the Fidelity Entities (as defined)
(collectively, the "Original Purchasers"). Consequently, management and the
Original Purchasers 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 Original
Notes, Consent Notes, 1996 Warrants Consent Warrants which are currently
convertible into or exercisable for an aggregate of shares of Common
Stock (equal to approximately % of the outstanding shares of Common Stock on
a fully-diluted basis as of , 1998).

CHANGE OF CONTROL

In the event of a Change of Control (as defined in the Convertible Note
Indentures), the Company will be required to offer to repurchase all of the
outstanding Convertible Notes at 101% of the Accreted Value or 101% of the
principal amount thereof, as the case may be, plus any accrued and unpaid
interest thereon, if any, to the date of repurchase. The exercise by the
holders of the Convertible Notes of their rights to require the Company to
offer to purchase Convertible Notes upon a Change of Control could also cause
a default under other indebtedness of the Company, even if the Change of
Control itself does not, because of the financial effect of such repurchase on
the Company. The Company's ability to pay cash to any of the holders of
Convertible Notes upon a repurchase may be limited by the Company's then
existing capital resources. There can be no assurance that in the event of a
Change of Control, the Company will have, or will have access to, sufficient
funds or will be contractually permitted under the terms of outstanding
indebtedness to pay the required purchase price for any Convertible Notes. See
"Description of Convertible Notes."

ANTI-TAKEOVER PROVISIONS

The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") and its By-Laws (the "By-Laws") 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
Certificate of Incorporation provides for a classified Board of Directors and
allows 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 By-Laws, among other things,
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."

26
<PAGE>

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the Securities by
the Selling Securityholders, but will receive proceeds upon the exercise of
the Warrants of $.01 per share.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock began trading on the Nasdaq National Market on
February 4, 1998 under the symbol "USNC." The high and low closing sales
prices for the Common Stock from February 4, 1998 through March 11, 1998, as
reported on the Nasdaq National Market, were $22.75 and $16.00, respectively.

On March 11, 1998, the last reported sales price of the Common Stock, as
reported on the Nasdaq National Market, was $22.75 per share. There were
approximately 45 holders of record on such date.

The Company has never declared or paid any cash dividends on its Common
Stock. 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
"Certain Other Indebtedness."

27
<PAGE>

CAPITALIZATION

The following table sets forth the total cash and cash equivalents and
capitalization of the Company as of September 30, 1997, and pro forma as
adjusted to give effect to (i) the sale of 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 preferred stock into Common Stock concurrently
with the closing of the Initial Public Offering; (iii) the issuance of the
Consent Notes; (iv) the Initial Public Offering and (v) the Acquisition. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the "Pro Forma Consolidated
Financial Statements" and the historical financial statements, including the
notes thereto, of the Company and the consolidated financial statements,
including the notes thereto, of Hatten Communications Holding Company, Inc.
appearing elsewhere in this Prospectus. See "Description of Capital Stock."
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
---------------------------
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
---------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 117,944 $ 204,018
========= =========
Long-term debt
14 5/8% Senior Discount Notes due 2004............. $ 101,830 $ 101,830
14% Senior Discount Notes due 2003................. 34,580 34,580
9% Convertible Subordinated Notes due 2004......... 30,188 30,188
9% Consent Convertible Subordinated Notes due 2006. -- 10,000
Notes payable and capital lease obligations........ 689 12,455
--------- ---------
Total long-term debt............................ 167,287 189,053
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/)......... 72 211
Common Stock held in treasury (10,000 shares)...... (1) (1)
Additional paid-in capital......................... 73,942 247,491
Accumulated deficit................................ (132,441) (132,441)
--------- ---------
Total common stockholders' equity (deficit)..... (58,428) 115,260
--------- ---------
Total capitalization.......................... $ 149,907 $ 304,313
========= =========
</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 Original Notes; and (iv) 988,142 shares
reserved for issuance as of January 13, 1998 upon conversion of the
Consent Notes.

28
<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>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
INCEPTION TO -------------------- --------------------
DECEMBER 31, UNAUDITED
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
shareholders.......... $ (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) (14,247) (23,910) (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
Ratio of earnings to
fixed charges (3)..... -- -- -- -- --
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
UNAUDITED
1994 1995 1996 1996 1997
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 5,979 $ 13,766 $ 60,818 $ 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 41,048
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 line 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. While 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.
(3) The ratio of earnings to fixed charges is computed by dividing pretax
income (loss) from operations before interest charges by interest expense.
Earnings were insufficient to cover fixed charges for the periods ended
December 31, 1994, 1995 and 1996 by $7.1 million, $17.4 million and $23.2
million, respectively and for the nine-month periods ended September 30,
1996 and 1997 by $7.2 million and $65.1 million, respectively.

29
<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 preferred stock on October
17, 1997 for an aggregate purchase price of $15.0 million; (ii) the conversion
of all the outstanding shares of preferred stock into Common Stock
concurrently with the closing of the Initial Public Offering; (iii) the
consummation of the Initial Public Offering; and (iv) the Acquisition. The pro
forma consolidated balance sheet gives effect to items (i) through (iv) above
and the issuance of the Consent 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 eight 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 Initial Public
Offering 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.

30
<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(3) PRO FORMA(4)
------------ -------------- ------------ ----------- -------------- ------------
<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 income (loss). (32,718,777) (32,718,777) 864,131 (8,519,633) (40,374,279)
Other income (expense):
Interest and other
income (expense)...... 9,469,298 9,469,298 (359,651) 329,463 (b) 9,439,110 (a)
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 7,672,186 (2,453,968) 1,350,371 6,568,589
------------ ----------- ------------ ----------- ----------- ------------
Net loss................ $(25,046,591) $(25,046,591) $(1,589,837) $(7,169,262) $(33,805,690)
============ =========== ============ =========== =========== ============
Accumulated preferred
dividends.............. $ 3,690,976 $(3,690,976)(a) $ $ $ $
============ =========== ============ =========== =========== ============
Net loss to common
shareholders........... $(28,737,567) $(3,690,976) $(25,046,591) $(1,589,837) $(7,169,262) $(33,805,690)
============ =========== ============ =========== =========== ============
Net loss per common
share.................. $ (5.63) $ (1.32) $ (1.77)
============ ============ ============
Weighted average common
and common equivalent
shares outstanding..... 5,102,330 19,046,246 19,046,246
============ ============ ============
</TABLE>

31
<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(3) PRO FORMA(4)
------------ -------------- ----------- ----------- -------------- ------------
<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 income (loss). (15,745,447) (15,745,447) 805,165 (6,389,725) (21,330,007)
Other income (expense):
Interest and other
income (expense)...... 8,572,260 8,572,260 (225,250) 204,427(b) 8,551,437 (a)
Interest expense....... (45,957) (45,957) (1,497,502) 712,127 (c) (831,332)
------------ ----------- ----------- ----------- ----------- ------------
Other income
(expense)--net...... 8,526,303 8,526,303 (1,722,752) 916,554 7,720,105
------------ ----------- ----------- ----------- ----------- ------------
Net loss................ $ (7,219,144) $(7,219,144) $ (917,587) $(5,473,171) $(13,609,902)
============ =========== =========== =========== =========== ============
Accumulated preferred
dividends.............. $ 3,465,976 $(3,465,976)(a) $ $ $ $
============ =========== =========== =========== =========== ============
Net loss to common
shareholders........... $(10,685,120) $(3,465,976) $(7,219,144) $ (917,587) $(5,473,171) $(13,609,902)
============ =========== =========== =========== =========== ============
Net loss per common
share.................. $ (2.44) $ (0.39) $ (0.74)
============ =========== ============
Weighted average common
and common equivalent
shares outstanding..... 4,384,993 18,328,909 18,328,909
============ =========== ============
</TABLE>

32
<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(2) ADJUSTMENTS(3) PRO FORMA(4)
------------ -------------- ------------ ----------- -------------- ------------
<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 6,919,281 $ 6,380,725 (a) 40,181,807
------------ ----------- ------------ ----------- ----------- ------------
Operating income (loss). (66,953,723) (66,953,723) 636,308 (6,380,725) (72,698,140)
Other income (expense):
Interest and other
income (expense)...... 1,889,247 1,889,247 (244,413) 199,214 1,844,048 (a)
Interest expense....... (8,572,952) (8,572,952) (1,265,732) 298,456 (c) (9,540,228)
------------ ----------- ------------ ----------- ----------- ------------
Other income
(expense)--net...... (6,683,705) (6,683,705) (1,510,145) 497,670 (7,696,180)
------------ ----------- ------------ ----------- ----------- ------------
Net loss................ (73,637,428) (73,637,428) (873,837) (5,883,055) (80,394,320)
============ =========== ============ =========== =========== ============
Accumulated preferred
dividends.............. $ 1,012,445 $(1,012,445)(a) $ 639,695 $ (639,695)(d) $ --
============ =========== ============ =========== =========== ============
Net loss to common
shareholders........... $(74,649,873) $(1,012,445) $(73,637,428) $(1,513,532) $(5,243,360) $(80,394,320)
============ =========== ============ =========== =========== ============
Net loss per common
share.................. $ (10.35) $ (3.48) $ (3.80)
============ ============ ============
Weighted average common
and common equivalent
shares outstanding..... 7,212,511 21,156,427 21,156,427
============ ============ ============
</TABLE>

33
<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 $142,640,000 (a) $ 260,583,711 $ 269,290 $(56,834,570)(a) $ 204,018,431
Accounts receivable, net.. 15,445,860 15,445,860 6,783,003 22,228,863
Prepaid expenses.......... 271,430 271,430 646,274 917,704
Inventory................. 881,498 881,498
Other current assets...... 338,502 338,502 425,759 (316,145)(b) 448,116
------------- ------------ ------------- ----------- ------------ -------------
Total current assets.... 133,999,503 142,640,000 276,639,503 9,005,824 (57,150,715) 228,494,612
Property and Equipment,
net....................... 12,604,307 12,604,307 1,161,379 13,765,686
Other Assets............... 32,553,221 32,553,221 6,421,682 60,124,624 (c) 99,099,527
------------- ------------ ------------- ----------- ------------ -------------
Total Assets............ $ 179,157,031 $142,640,000 $ 321,797,031 $16,588,885 $ 2,973,909 $ 341,359,825
============= ============ ============= =========== ============ =============
<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 $ 4,797,337 $ 22,065,422
Accrued expenses and
other liabilities........ 11,315,296 11,315,296 2,861,710 14,177,006
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 7,797,364 37,046,832
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)(d) 11,789,977
------------- ------------ ------------- ----------- ------------ -------------
Total liabilities....... 196,536,718 10,000,000 206,536,718 21,062,794 (1,500,000) 226,099,512
Redeemable Preferred Stock. 41,048,623 (41,048,623)(a)(b) 4,747,641 (4,747,641)(e) --
Put Warrants............... 5,794,974 (5,794,974)(e) --
Common Stockholders' Equity
(Deficit):
Common stock.............. 72,226 139,439 (a)(c) 211,665 717 (717)(e) 211,665
Additional paid-in
capital.................. 73,941,796 173,549,184 (a)(c) 247,490,980 247,490,980
Accumulated deficit....... (132,441,255) (132,441,255) (15,017,241) 15,017,241 (c)(e) (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) 173,688,623 115,260,313 (15,016,524) 15,016,524 115,260,313
------------- ------------ ------------- ----------- ------------ -------------
Total Liabilities,
Redeemable Preferred
Stock, and Common
Stockholders' Equity
(Deficit)................. $ 179,157,031 $142,640,000 $ 321,797,031 $16,588,885 $ 2,973,909 $ 341,359,825
============= ============ ============= =========== ============ =============
</TABLE>

34
<PAGE>

NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

(1) Adjustments to reflect the Initial Public Offering.

(a) Represents the elimination of accumulated preferred dividends as a
result of the conversion of preferred stock to Common Stock.

(2) Excludes extraordinary loss on early extinguishment of debt of
approximately $1.6 million, pursuant to the recapitalization of
Connecticut Telephone in May 1997.

(3) Adjustments to reflect the Acquisition.

(a) Represents the amortization of goodwill. The Company will account for
the 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 elimination of losses of a subsidiary and losses from an
equity investment of Connecticut Telephone not acquired by the Company.

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

(d) Represents the elimination of accumulated preferred dividends,
accretion on the redeemable preferred stock and accretion on the common
stock put warrants due to the Acquisition.

(4) Pro Forma Adjusted Balances.

(a) Excludes interest that would have been earned on the net proceeds of
the Initial Public Offering, net of the acquisition costs of
Connecticut Telephone, of approximately $3.0 million, $2.3 million and
$2.3 million for the year ended, December 31, 1996, the nine-month
periods ended September 30, 1996 and 1997, respectively, as if the
Initial Public Offering had occurred at the beginning of the earliest
period presented at an assumed interest rate of 5%.

35
<PAGE>

NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET

(1) Adjustments to reflect (i) the sale of 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 preferred stock into Common Stock, (iii)
the issuance of the Consent Notes and (iv) the Initial Public Offering.

(a) Represents the net proceeds of the Offerings, issuance of the Consent
Notes and issuance of preferred stock to the Company as follows:

<TABLE>
<S> <C>
Proceeds of Initial Public Offering....................... $128,000,000
Fees and expenses of Initial Public Offering.............. (10,360,000)
Issuance of the Consent Notes (net of original issue
discount)................................................ 10,000,000
Issuance of preferred stock............................... 15,000,000
------------
$142,640,000
============
</TABLE>

(b) Represents the exchange of preferred stock into Common Stock.

<TABLE>
<CAPTION>
COMMON
STOCK ADDITIONAL
PAR PAID-IN
VALUE CAPITAL
-------- ------------
<S> <C> <C>
Common Stock issued in the Initial Public
Offering (8,000,000 shares; par value $.01)..... $ 80,000 $117,560,000
Common Stock exchanged for preferred stock
(5,943,916 shares; par value $.01).............. 59,439 55,989,184
-------- ------------
Total increase................................. $139,439 $173,549,184
======== ============
</TABLE>

(2) Adjustments to reflect the Acquisition.

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

(b) Represents the dividend of notes receivable from an equity investment
of Connecticut Telephone not acquired by the Company to a former owner.

<TABLE>
<S> <C>
Goodwill in connection with the Acquisition................ $62,834,967
Elimination of notes receivable from an equity investment
of Connecticut Telephone not acquired by the Company...... (464,828)
Dividend of investment in Smartlink Development, L.P. to a
former owner of Connecticut Telephone..................... (2,245,515)
-----------
Net increase in other assets............................... $60,124,624
===========
</TABLE>

(d) Represents the repayment of a subordinated note payable to a former
owner.

(e) Represents the elimination of the redeemable preferred stock, put
warrants, common stock and accumulated deficit of Connecticut
Telephone.

36
<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 executed various other agreements in
1996 and 1997 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 capital contributions, sales of
preferred stock and by the proceeds from private placements of its debt
securities.

In connection with the 1997 Private Placement, MLAM, the current beneficial
holders of all of the 14% Senior Notes and Original Notes consented (the
"Consent") to the amendment of the 14% Senior Note Indenture and the Original
Indenture to allow the Company to consummate the 1997 Private Placement. In
connection with the Consent, the Company paid a consent fee to MLAM consisting
of warrants to purchase 145,160 shares of Class A Common Stock, at an exercise
price of $.01 per share. The Company also granted to MLAM an option to
purchase the Consent Notes, which have terms substantially similar to the
Original Notes, for an aggregate purchase price of $10.0 million. The Consent
Notes were issued on January 13, 1998. Additionally, the Company has granted
to holders of the 14% Senior Notes an option, for a specified period of time,
to exchange all, or a portion, 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. On March , 1998, the MLAM exchanged
$31.5 million aggregate principal amount at maturity of 14% Senior Notes for $
million aggregate principal amount at maturity of 14 5/8% Senior Notes.

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

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

37
<PAGE>

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. On
February 20, 1998, the Company acquired all of the outstanding capital stock
of Connecticut Telephone for approximately $68.0 million including the
repayment of approximately $14.0 million of existing indebtedness. See "Risk
Factors--Recent 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 local 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 profit 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.

38
<PAGE>

Sales and marketing expenses increased $37.3 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
headcount 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 expenses 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 headcount 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 in correlation with increased 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 debts
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 the 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 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.

39
<PAGE>

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

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

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.

40
<PAGE>

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

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

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has funded its operations primarily through
cash from its investors 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. On January 13, 1998, the Company issued
and sold the Consent Notes for an aggregate purchase price of $10.0 million.

On February 9, 1998, the Company issued and sold 8,600,000 shares of Common
Stock in its Initial Public Offering for net proceeds of approximately $128
million. On March 3, 1998, the Company issued and sold 28,861 additional
shares solely to cover underwriters' over-allotment options for net proceeds
of $.4 million. $68.0 million of the net proceeds of the Initial Public
Offering were used to finance the Acquisition, including the purchase of the
outstanding capital stock of Connecticut Telephone, the repayment of
indebtedness and the payment of certain fees and expenses related to the
Acquisition.

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 the 1996 Warrants and (ii) $36.0 million in aggregate
principal amount at maturity of Original Notes. The aggregate purchase price
of the Units was $30.2 million, and the aggregate purchase price of the
Original 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

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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.).

The Company believes that the remaining net proceeds of the Initial Public
Offering 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, is effective for financial
statements issued for periods ending after December 15, 1997 and will be
adopted by the Company in the fourth quarter of 1997.

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 fiscal
years beginning after December 15, 1997 and will be adopted by the Company in
1998.

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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, including that 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. See "Risk Factors--Competition."

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BUSINESS

INTRODUCTION

USN is one of the fastest growing CLECs in the United States. The Company
offers a bundled package of telecommunications products, including local and
long distance telephony, voicemail, paging, teleconferencing, Internet access
and other enhanced and value-added telecommunications services, tailored to
meet the needs of its customers. The Company also offers wireless telephone
service on a resale basis. 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 Connecticut 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.

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 445 member
direct salesforce in 44 offices located in ten states. As part of its
customer-focused product offering, the Company provides personalized customer
service, 24 hours a day, 365 days per year, through its two regional customer
care centers.

COMPETITIVE ADVANTAGES

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

. COMPLEMENTARY RELATIONSHIPS WITH RBOCS. The Company believes that the RBOCs'
networks will continue to be the predominant means for providing local
telecommunications services to the Company's target customers for the
foreseeable future. Accordingly, the Company has positioned itself to take
advantage of the opportunities created by the Telecommunications Act by
leveraging its complementary relationships with the RBOCs. The
Telecommunications Act requires the RBOCs to complete a number of
"checklist" items in order to qualify for long distance entry in their local
service areas. Although certain provisions of the Telecommunications Act,
including that 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. The District Court judge subsequently stayed this decision. 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.

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. 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 entered or plans to enter certain additional states by reselling local
services pursuant to state-mandated wholesale discounts. The Company
estimates, based on data compiled by the FCC, that the regions covered by the
current comprehensive Ameritech and NYNEX resale agreements include access to
over 10 million business access lines. Management believes that upon
expansion into the remaining Bell Atlantic/NYNEX region and the Ameritech
region, the Company will have access to approximately 20 million business
access lines. The Company continuously evaluates opportunities to enter into
agreements with additional RBOCs and 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.

. 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 445-member direct salesforce,
located in 44 offices in Connecticut, Illinois, Indiana, Massachusetts,
Michigan, New Hampshire, New York, Ohio, 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, vitally important to
expanding its customer base in today's highly competitive telecommunications
industry environment.

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

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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. The Company also
offers wireless telephone service on a resale basis. 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.

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

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this revenue base and deter migration of such 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 445
member direct salesforce, located in 44 offices in Connecticut, Illinois,
Indiana, Massachusetts, Michigan, New Hampshire, New York, Ohio, 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 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

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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 in the remaining Bell Atlantic/NYNEX region and the Ameritech
region, the Company will have access to approximately 20 million business
access lines. The Company continuously evaluates opportunities to enter into
agreements with additional RBOCs, long distance carriers and enhanced and
other value-added service providers in order to aggressively build its
customer base as well as to provide additional services to its existing
customers while reducing costs.

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

Ameritech Resale Agreements

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

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

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

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

NYNEX Resale Agreement

On July 9, 1996, the Company executed a resale agreement with NYNEX to
provide for the resale of local exchange services for the State of New York at
discounted rates based on a ten-year term. The New York 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 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.

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Enhanced and Other Value-Added Telecommunications Services

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

COMPETITION

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

In the local exchange market, the Company also faces competition or
prospective competition from one or more CLECs, many of which have
significantly greater financial resources than the Company, and from other
competitive providers, including 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 mobile 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
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.

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The Company will also face competition from other fixed wireless services,
including MMDS, LMDS and 38 GHz wireless communications systems, WCS, FCC Part
15 unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies. The FCC commenced an
auction for LMDS licenses in all markets for the provision of high capacity,
wide-area fixed wireless point-to-multipoint systems. 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. The FCC also has indicated that it plans to propose
rules for the issuance of licenses in the 24 GHz band for DEMS, which also is
designed to offer high capacity, wide area fixed point-to-multipoint service,
and many 24 GHz DEMS licenses have already been issued nationwide. 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.

In addition, the FCC has adopted rules to auction geographical area wide
licenses for the operation of fixed wireless point-to-point point-to-
multipoint communications services in the 38 GHz band. The 38 GHz auction is
expected to occur later in 1998. The Company also faces competition from
entities which already offer, or are licensed to offer, 38 GHz services, such
as Advanced Radio Telecommunications, Inc. ("ART"), WinStar Communications,
Inc. ("WinStar") and BizTel, Inc. ("BizTel"). Teligent could also face
competition in certain aspects of its existing and proposed businesses from
competitors providing wireless services in other portions of the radio
spectrum, such as CAI Wireless Systems Inc. a provider of wireless Internet
access services, and CellularVision, a provider of wireless television
services which, in the future, also may provide wireless Internet access and
other local telecommunications services. In many instances, these providers
hold licenses for other frequencies (such as 28 GHz) that enable them to
provide comparable telecommunications services to those of the Company in
geographic areas which encompass or overlap the Company's market areas.
Additionally, some of these entities include among their stockholders major
telecommunications entities, such as Ameritech with respect to ART and AT&T
with respect to WinStar and BizTel. Teleport Communications Group, Inc.
("Teleport") has announced its exercise of an option to acquire BizTel,
subject to FCC and other regulatory approvals, and AT&T has announced its
agreement to acquire Teleport. Due to the relative ease and speed of
deployment of fixed wireless-based technologies, the Company could face
intense price competition from these and other wireless-based service
providers. The Company believes that additional entities having greater
resources than the Company could acquire licenses to provide 38 GHz, MMDS,
LMDS, WCS, DEMS or other fixed wireless services.

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from the date an application for in-region long distance authority is filed to
decide whether to grant or deny the application. 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.

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 three RBOCs that are
parties in the case, including Bell Atlantic, 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
District Court judge has stayed his decision and the FCC and certain IXCs have
filed 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.

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 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 went 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

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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 expected in 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. 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 ILEC 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). 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. RBOC in-region
services must be provided through a separate subsidiary for three years,
unless extended by the FCC. The FCC to date has denied each such application
filed, including 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. 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.

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

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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 the ability to
resell 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 three RBOCs that are parties in
the case, including Bell Atlantic, 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 District
Court judge has granted the requests of the FCC and certain IXCs 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 preempt state and local statutory
and regulatory barriers to entry, thus accelerating the process of creating a
competitive environment in all markets. This preemption of state laws barring
local competition and the relaxation of regulatory restraints should enhance
the Company's ability to expand its service offerings nationwide. At the same
time, the Telecommunications Act will also substantially increase the
competition the Company will face in its various markets.

The Telecommunications Act permits the Company, as a telecommunications
carrier with less than 5% of nationwide presubscribed access lines, to offer
unrestricted 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 of 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. 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. All telecommunications carriers, including the Company,
that provide interstate or international 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. In addition, the new regulations require a
reseller, such as the Company, to begin contributing to the universal service
programs for low-income consumers and high-cost, rural and insular areas on
the basis of the reseller's interstate and international revenues. Several
parties have appealed various parts of the new FCC rules, including the
revenue basis on which contributions are determined. The FCC issues revised
universal service contribution factors for each quarter of 1998. These vary
slightly from quarter to quarter. As an example, 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.

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

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

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

A number of RBOCs, state regulatory commissions and other parties filed
requests for reconsideration by the FCC of various parts of the rules
announced by the FCC in August 1996, including those provisions (a) limiting
competitors' ability to purchase for resale certain types of service that the
RBOC is no longer marketing to new customers ("grandfathered services"), and
(b) establishing pricing methodologies and interim default rates for resold
services and unbundled network elements. The FCC is conducting a proceeding to
consider the various petitions for reconsideration, and a decision is expected
in 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). The FCC,
numerous IXCs and various other parties filed petitions for certiorari with
the U.S. Supreme Court, which accepted the case for review on January 26,
1998. The Supreme Court is not expected to issue a decision before the end of
1998. Some of the same parties and certain other parties also have asked the
FCC to reconsider these and other regulations implementing the
Telecommunications Act. In October 1997, the Eighth Circuit 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. On January 22, 1998, the same court ruled that the FCC cannot apply
its local competition pricing rules in reviewing applications of the RBOCs for

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authorization to provide long distance service that originates and certain
long distance services that terminate in one of their in-region states. If
upheld, this decision would make it somewhat easier for the RBOCs to enter the
market for in-region long distance services and would make it more costly for
facilities-based competitors to enter the local exchange market. The Company
cannot predict the outcome of the FCC's reconsideration or the Supreme Court
proceedings.

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 three RBOCs that are
parties in the case, including Bell Atlantic, 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
District Court judge has stayed his decision and the FCC and certain IXCs have
filed 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.
This process is ongoing and should be completed by the end of 1998. 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 have begun
to implement number portability in the top 100 markets, 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
December 31, 1998. 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.

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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 43 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, Ohio
and Connecticut. 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. As of February
20, 1998 approximately 180 employees were added due to the Acquisition. 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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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 and Marketing
Steven J. Parrish....... 42 Executive Vice President, Operations
Thomas A. Monson........ 37 Vice President, General Counsel and Secretary
Thad J. Pellino......... 36 Vice President, Business Assurance and Analysis
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
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 Kidson.............. 39 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 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
Communications 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,

58
<PAGE>

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

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

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

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

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

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

59
<PAGE>

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.

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.P. to make
communications investments in the United States. From February 1992 until May
1997, 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. 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.

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.

James P. Hynes, Director, was elected a director of the Company in December
1997. Mr. Hynes is a Managing Director of Fidelity Capital, a division of FMR
Corp., where he directed development of and currently 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, and directed the development of, and serves as the Chairman of,
MetroRED Telecommunications S.A., a provider of competitive telecommunications
services in Latin America.

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, and Highland Capital
Partners, as well as on the board of directors of 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 Capital Partners, 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 JBK Arena Co.
and Interactive Media Corporation. Mr. Kidson received a B.S.C. degree and an
M.B.A. degree from McMaster University.

60
<PAGE>

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 Sound 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.

The Company is required by the terms of the 14% Senior Note Indenture 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.

CLASSIFIED BOARD OF DIRECTORS

The Company's Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes as nearly equal in number as possible
with the directors in each class serving staggered three-year terms. The Class
I directors are Donald J. Hofmann, Jr. and Ian M. Kidson; the Class II
directors are Richard J. Brekka, Dennis B. Dundon, Ronald W. Gavillet and
Eugene A. Sekulow; and the Class III directors are 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.
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 annual meeting of stockholders in
1999, the size of the Board will be reduced to nine members, and Messrs.
Hofmann and Kidson 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 Executive Committee consists of Messrs. Brekka, Elliott, Hynes and
Mitchell. The Executive Committee is responsible for overseeing the Company's
Operations.

The Audit Committee consists of Messrs. Hofmann, Mitchell 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 Compensation Committee consists of Messrs. Brekka, Hynes and Johnston.
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.

61
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee consists of Messrs. Brekka, Hynes,
Johnston, 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. In the future, 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.

62
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal year 1997 earned by or awarded to the
Chief Executive Officer, the former Chief Executive Officer and the five other
most highly compensated executive officers of the Company whose combined
salary and bonus exceeded $100,000 during the fiscal year ended December 31,
1997 (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) --
Chairman of the Board, President and
Chief Executive 1996 182,500 97,500(2) --
Officer 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 and
Marketing 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.

63
<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
PERCENT OF ANNUAL RATE OF STOCK
NUMBER OF TOTAL OPTIONS PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM ($)(1)
OPTIONS FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED(#) YEAR(%) ($/SHARE) DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Thomas Elliott....... 230,000 9.91 8.80 9/4/04 2,907,552 4 ,495,344
Ronald W. Gavillet...... 230,000 9.91 8.80 9/4/04 2,907,552 4,495,344
Ryan Mullaney........... 75,000 3.23 8.80 9/4/04 948,115 1,465,873
Gerald J. Sweas......... 100,000 4.31 8.80 9/4/04 1,264,153 1,954,498
Steven J. Parrish....... 47,000 2.03 8.80 9/4/04 594,152 918,614
</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 as of December 31, 1997 equals the initial
public offering price of $16.00 and increases at the rate indicated,
effective as of December 31 of each subsequent full calendar year during
the option term. However, no representation is made 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 1,818,074/5,769,788
Ronald W. Gavillet...... -- -- 133,940/414,650 2,124,489/4,582,703
Ryan Mullaney........... -- -- 37,500/112,500 443,000/983,000
Gerald J. Sweas......... -- -- 55,000/155,000 652,250/1,372,250
Steven J. Parrish....... -- -- 40,250/74,000 637,963/766,350
</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 as of December 31, 1997 equals the initial public offering
price of $16.00.

64
<PAGE>

BENEFIT PLANS

1994 Amended and Restated Stock Option Plan

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

Options granted under the 1994 Plan generally become exercisable six months
after the date of the grant at a rate of 25% of the shares subject to the
option and thereafter, at a rate of 25% at the end of each six month period
for a total of two years, except that certain options granted to Messrs.
Sweas, Mullaney and Monson in connection with their employment agreements
become exercisable with respect to 50% on the one-year anniversary of the date
of grant and with respect to 25% on the 18-month and 24-month anniversaries of
the date of grant. 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 Company's 9% Cumulative Convertible
Pay-In-Kind Preferred Stock (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. Certain of such options
are exercisable with respect to Messrs. Elliott and Gavillet, only upon
conversion from time to time of the Original Notes into shares of Common
Stock. Options to purchase 72,410 shares became immediately exercisable upon
the consummation of the Initial Public Offering.

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

65
<PAGE>

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, 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 initially covered 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 1997 annual base salaries for Messrs.
Elliott, Dundon, Gavillet, Sweas, Mullaney and Parrish were $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.

66
<PAGE>

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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On August 18, 1997, in connection with the 1997 Private Placement, the
Company sold 30,209 shares of the Company's Series A Cumulative Convertible
Pay-In-Kind Preferred Stock (the "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 was converted into Common Stock concurrently with the closing
of the Company's Initial Public Offering.

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, the Consent Warrants and an option to purchase the Consent
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 Original Notes from the Company pursuant to the
1996 Private Placement. All of the 14% Senior Notes, the related warrants and
the Original 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 in the Initial Public Offering. 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. Upon the consummation of the Initial Public Offering,
each outstanding share of Class A common stock was converted into one share of
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 Initial Public Offering, the rights of the Original
Purchasers pursuant to such agreements, other than registration rights, were
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 and
Series A-2 10% Cumulative Preferred Stock 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% Cumulative Convertible Pay-In-Kind
Preferred Stock (the "9% Preferred Stock"), for an aggregate purchase price of
$10 million. The 9% Preferred Stock was converted into Common Stock
concurrently with the closing of the Initial Public Offering.

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<PAGE>

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

In 1997 and in January 1998, the Company has made advances totaling $279,745
to Ryan Mullaney, Executive Vice President, Sales and Marketing. These
advances are represented by demand notes that bear interest at the prime rate
and provide that a condition of the exercise of Mr. Mullaney's options is the
satisfactory arrangement for the contemporaneous repayment of the notes. In
December 1995, Mr. J. Thomas Elliott, Chairman of the Board, President and
Chief Executive Officer of the Company, executed an interest-free promissory
note in favor of the Company in the principal amount of $75,000. Such
promissory note was originally payable by January 2, 1997, but such date has
been extended to a date as yet undetermined.

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<PAGE>

STOCK OWNERSHIP

The following table sets forth as of February 15, 1998, the number of shares
of Common Stock and the percentage of the outstanding shares 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>
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OWNED OF CLASS
- --------------------------------------- ------------ --------
<S> <C> <C>
Merrill Lynch Global Allocation Fund, Inc................ %
800 Scudders Mill Road
Plainsboro, New Jersey 08536
HarbourVest Partners, LLC (2)............................ 3,442,373
One Financial Center, 44th Floor
New York, New York 10017-3903
Chase Venture Capital Associates, L.P. (3)............... 2,309,717
380 Madison Ave., 12th Floor
New York, New York 10017-2070
CIBC Wood Gundy Ventures, Inc. (3)....................... 2,309,717
425 Lexington Avenue
New York, New York 10017-3903
BT Capital Partners, Inc. (3)............................ 1,710,566
130 Liberty Street
New York, New York 10017-2070
Fidelity Entities (4).................................... 1,704,300
82 Devonshire Street
Boston, Massachusetts 02109
J. Thomas Elliott (5) ................................... 205,955
Ronald W. Gavillet (5)................................... 118,565
Richard J. Brekka (5).................................... 75,000
Dean M. Greenwood (6).................................... 569,679
Donald J. Hofmann, Jr. (6)............................... 2,309,717
James P. Hynes (6)....................................... 1,704,300
William A. Johnston (6).................................. 3,442,373
Ian M. Kidson (6)........................................ 2,309,717
Paul S. Lattanzio ....................................... --
David C. Mitchell........................................ --
Ryan Mullaney (5)........................................ 37,500
Steven J. Parrish (5).................................... 30,625
Eugene A. Sekulow........................................ --
Gerald J. Sweas (5)...................................... 55,000
All directors and executive officers of the Company as a
group (20 persons)...................................... 10,915,251
</TABLE>

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<PAGE>

- --------
(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.
(2) HarbourVest Partners IV--Direct Fund L.P. beneficially owns 1,738,073
shares of Common Stock. HarbourVest Partners V--Direct Fund L.P.
beneficially owns 1,704,300 shares of Common Stock. Both entities are
under the common control of HarbourVest Partners, LLC.
(3) Chase Venture Capital Associates, L.P., CIBC Wood Gundy Ventures, Inc. and
BT Capital Partners, Inc. are affiliates of The Chase Manhattan
Corporation, Canadian Imperial Bank of Commerce, and Bankers Trust New
York Corporation, respectively.
(4) FMR Corp., a Massachusetts corporation ("FMR") is the parent of its
wholly-owned subsidiary Fidelity Communications International, Inc. the
owner of 1,136,200 shares of Common Stock. FMR Corp. is also related to
Fidelity Investors Limited Partnership ("FILP"), the owner of 568,100
shares of Common Stock, through common ownership by certain shareholders
and employees of FMR, of the general partner of FILP and of limited
partnership interests in FILP.
(5) These shares include exercisable options.
(6) Each director disclaims beneficial ownership of any shares of Common Stock
which he does not directly own.

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DESCRIPTION OF CONVERTIBLE NOTES

For purposes of this description of the Convertible Notes, the term
"Company" refers to USN Communications, Inc. and does not include its
subsidiaries except for purposes of financial data determined on a
consolidated basis.

GENERAL

The Original Notes were issued pursuant to the Original Indenture and the
Consent Notes were issued pursuant to the Consent Indenture. The terms of the
Convertible Notes include those stated in the applicable Convertible Note
Indenture and those made a part thereof by reference to the Trust Indenture
Act of 1939 as in effect on the date of the Indenture (the "Trust Indenture
Act"). The following summaries of certain provisions of the Convertible Note
Indentures do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the provisions of the applicable
Convertible Note Indenture. Copies of the Convertible Note Indentures have
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The statements and definitions of terms under this
caption relating to the Convertible Notes and the Convertible Note Indentures
are summaries and do not purport to be complete. Such summaries make use of
certain terms defined in the Convertible Note Indentures and are qualified in
their entirety by express reference thereto. Certain terms used herein are
defined below under "--Certain Definitions."

The Original Notes and Consent Notes are general unsecured obligations of
the Company limited in aggregate principal amount at Stated Maturity to $36
million and $13 million, respectively. The Convertible Notes 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 are effectively subordinated to any secured
indebtedness of the Company to the extent of the assets securing that
indebtedness (including up to $30 million of indebtedness under a Credit
Facility permitted by the Senior Note Indentures). The Company's Subsidiaries
have no direct obligation to pay amounts due on the Convertible Notes and have
not guaranteed the Convertible Notes as of the date hereof; however, if a
Restricted Subsidiary guarantees any indebtedness of the Company, such
Restricted Subsidiary will be obligated to guarantee the Convertible Notes on
a senior subordinated basis. See "--Certain Covenants--Limitation on Issuances
of Guarantees by Restricted Subsidiaries." As a result, the Convertible Notes
effectively will be subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's Subsidiaries (including
trade payables). As of September 30, 1997, the total outstanding indebtedness
and other liabilities (including trade payables and other non-debt
obligations) of the Company that would rank pari passu in right of payment
with the Convertible Notes was approximately $0.7 million. As of September 30,
1997, the total outstanding indebtedness and other liabilities (including
trade payables and other non-debt obligations) of the Company's Subsidiaries
on a combined consolidated basis (after the elimination of loans and advances
by the Company) was approximately $29.3 million. Of that amount, approximately
$0.7 million in indebtedness was secured by Liens on the assets of the
borrowing Subsidiaries.

The operations of the Company are conducted in large part through its
Subsidiaries and, therefore, the Company is dependent upon cash flow from
those entities to meet its obligations. Any rights (other than claims based
upon valid pari passu loans and advances made by the Company) of the Company
and its creditors, including the holders of Convertible Notes, to participate
in the distribution of the assets of any of the Company's Subsidiaries upon
any liquidation or reorganization of any such Subsidiary will be subject to
the prior claims of that Subsidiary's creditors (including trade creditors).
Accordingly, the Company anticipates that the primary source of cash to pay
the Company's obligations under the Convertible Notes will be derived from the
operations of the Restricted Subsidiaries. The Convertible Note Indentures
permit under certain circumstances the creation of, or the designation of
existing Restricted Subsidiaries as, Unrestricted Subsidiaries. Such
Unrestricted Subsidiaries will not generally be subject to the covenants
applicable to the Company and the Restricted

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<PAGE>

Subsidiaries. See "Risk Factors--Substantial Leverage," "--Future Cash
Obligations" and "--Holding Company Structure; Source of Repayment of
Convertible Notes; Effective Subordination of Notes to Indebtedness of
Subsidiaries."

The Convertible Note Indentures do not contain any restrictions on the
payment of dividends or the making of distributions, investments or certain
other restricted payments or any financial covenants and contain no covenants
or other provisions against a dramatic decline in credit quality of the
Convertible Notes, except as described below in "--Right to Require Repurchase
of Convertible Notes Upon a Termination of Trading."

PRINCIPAL, MATURITY AND INTEREST

Original Notes. On September 30, 1996, the Company issued $36 million
aggregate principal amount at maturity of Original Notes at a discount to
their aggregate principal amount to generate gross proceeds to the Company of
approximately $28 million. The Original Notes will mature on September 30,
2004. The Original Notes will accrete interest at the rate of 9% per annum,
compounded semiannually, to an aggregate principal amount of $36 million by
September 30, 1999. Although for U.S. federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income,
will be recognized by a holder as such discount accretes from the Issue Date
of the Original Notes, no interest will be payable prior to September 30,
1999. See "Certain Federal Income Tax Considerations--Taxation of the
Convertible Notes--Original Issue Discount." From and after September 30,
1999, interest on the Original Notes will accrue at the rate of 9% per annum
and will be payable in cash semiannually on March 30 and September 30, of each
year commencing March 30, 2000, to the holders of record of Original Notes at
the close of business on March 15 and September 15 immediately preceding such
interest payment date. Interest on the Original Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from September 30, 1999. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.

If the Company does not comply with certain deadlines with respect to
registration of the Original Notes for resale under a shelf registration
statement, holders of the Original Notes will be entitled to Special Interest.

Consent Notes. On January 13, 1998, the Company issued $13 million aggregate
principal amount at maturity of Consent Notes at a discount to their aggregate
principal amount to generate gross proceeds to the Company of approximately
$10 million. The Consent Notes will mature on January 13, 2006. The Consent
Notes will accrete interest at the rate of 9% per annum, compounded
semiannually, to an aggregate principal amount of $13 million by January 13,
2001. Although for U.S. federal income tax purposes a significant amount of
original issue discount, taxable as ordinary income, will be recognized by a
holder as such discount accretes from the Issue Date of the Consent Notes, no
interest will be payable prior to January 13, 2001. See "Certain Federal
Income Tax Considerations--Taxation of the Convertible Notes--Original Issue
Discount." From and after January 13, 2001, interest on the Consent Notes will
accrue at the rate of 9% per annum and will be payable in cash semiannually on
January 13 and July 12 of each year commencing January 13, 2001, to the
holders of record of Consent Notes on the close of business on June 30 and
December 31 immediately preceding such interest payment date. Interest on the
Consent Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from January 13, 2001. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.

General. Principal of, premium, if any, and interest and, with respect to
the Original Notes, Special Interest, if any, on the Convertible Notes will be
payable at the office or agency of the Company maintained for such purpose,
which office shall be maintained in the Borough of Manhattan, The City of New
York. At the option of the Company, interest and Special Interest may be paid
by check mailed to the registered holders at their registered addresses. The
Convertible Notes were issued without coupons and in fully registered form
only, in denominations of $1,000 and integral multiples thereof.

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<PAGE>

CONVERSION RIGHTS OF CONVERTIBLE NOTES

The Convertible Notes are convertible into the Convertible Note Shares, at
the option of the holders of Convertible Notes, at any time after the 60th day
following the date of original issuance of the Convertible Notes and prior to
redemption or final maturity of the Convertible Notes, at a conversion price
of $10.436 per share with respect to the Original Notes, and $10.121 per share
with respect to the Consent Notes, in each case subject to adjustment (each,
the "Conversion Price") as described below. The right to convert Convertible
Notes which have been called for redemption will terminate at the close of
business on the business day preceding the redemption date. In the event that
the Company consummates a sale or sales of any class of Capital Stock for an
amount, individually or in the aggregate, in excess of $5,000,000 (each, a
"Reset Event") and at the time of such sale or sales, the equity valuation of
the Company based upon such sale or sales
(as evidenced by a Board Resolution delivered to the Convertible Note Trustee)
is less than $122,500,000, then on the date of the consummation of any such
Reset Event (the "Reset Date"), the Conversion Price shall be adjusted (the
"Conversion Reset") to equal 115% of the price (the "Conversion Reset Price")
at which such sale or sales were consummated; provided, that if such sale or
sales are consummated more than nine months after a Qualified Public Offering
at a total equity valuation of the Company of at least $122,500,000, then no
Conversion Reset will be required. In the event that the Conversion Price
before such calculation shall be equal to or less than the Conversion Reset
Price, then no additional adjustment to the Conversion Price shall be made.

Subject to certain exceptions, the Conversion Price will be subject to
adjustment on the occurrence of certain events including: (i) the payment by
the Company of dividends (or the making of other distributions) with respect
to any class of Capital Stock payable in Common Stock or other shares of the
Company's Capital Stock, (ii) subdivisions, combinations and reclassifications
of Common Stock, (iii) the issuance to all holders of Common Stock of rights,
options or warrants entitling them to subscribe for Common Stock, or of
securities convertible into or exchangeable for shares of Common Stock, in
either case for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock (determined as provided in the
Convertible Note Indentures), (iv) the issuance or sale of shares of Common
Stock, or securities convertible into or exchangeable for shares of Common
Stock, for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock (determined as provided in the
Convertible Note Indentures), other than the Warrants, (v) the distribution to
all holders of Common Stock of any of the Company's assets, debt securities or
any rights or warrants to purchase securities (excluding those rights and
warrants referred to in clause (iii) above and excluding cash dividends or
other cash distributions from current or retained earnings) and (vi) certain
other events which could have the effect of depriving holders of the
Convertible Notes of all or any of the conversion rights in respect of any
Convertible Note.

No adjustment in the Conversion Price will be required unless such
adjustment would require an increase or decrease of at least 1.0% in the
Conversion Price; provided, that any adjustment which is not made will be
carried forward and taken into account in any subsequent adjustment.

In addition to the foregoing adjustments, the Company will be permitted to
reduce the Conversion Price as it considers to be advisable in order that any
event treated for United States federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Stock
or, if that is not possible, to diminish any income taxes that are otherwise
payable because of such event. In the case of any consolidation or merger of
the Company with any other Person (other than one in which no change is made
in the Common Stock), or any sale or transfer of all or substantially all of
the assets of the Company, the holder of any Convertible Note then outstanding
will have the right thereafter to convert such Convertible Note only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock into which such Convertible Note might have been converted
immediately prior to such consolidation, merger, sale or transfer; and
adjustments will be provided for events subsequent thereto that are as nearly
equivalent as practical to the Conversion Price adjustments described above.

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<PAGE>

Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price (determined as provided in the applicable Convertible Note
Indenture) at the close of business on the day of conversion. If any
Convertible Notes are surrendered for conversion during the period from the
close of business on any regular record date through and including the next
succeeding interest payment date (except any such Convertible Notes called for
redemption), such Convertible Notes when surrendered for conversion must be
accompanied by payment in next day funds of an amount equal to the interest
thereon which the registered Holder on such record date is to receive. Except
as described in the preceding sentence, no interest will be payable by the
Company on converted Convertible Notes with respect to any interest payment
date subsequent to the date of conversion. No other payment or adjustment for
interest or dividends is to be made upon conversion.

SUBORDINATION OF CONVERTIBLE NOTES

The payment of the principal of and premium, if any, and interest
(including, with respect to the Original Notes, Special Interest, if any) on
the Convertible Notes will, to the extent set forth in the Convertible Note
Indentures, be subordinated in right of payment to the prior payment in full
of the Senior Notes and all other obligations of the Company and the
Guarantors, if any, under the Senior Notes, the Senior Note Guarantees, if
any, and the Senior Note Indentures (the "Senior Indebtedness"). If there is a
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Company or a Guarantor, as applicable, the holders of all
Senior Indebtedness will be entitled to receive payment in full of all amounts
due or to become due thereon or provision for such payment in money or money's
worth must be made before the holders of the Convertible Notes will be
entitled to receive any payment in respect of the principal of or premium, if
any, or interest (including, with respect to the Original Notes, Special
Interest, if any) on the Convertible Notes. In the event of the acceleration
of the Maturity of the Convertible Notes, the holders of all Senior
Indebtedness will first be entitled to receive payment in full in cash of all
amounts due thereon or provision for such payment in money or money's worth
before the holders of the Convertible Notes will be entitled to receive any
payment for the principal of or premium, if any, or interest (including, with
respect to the Original Notes, Special Interest, if any) on the Convertible
Notes. No payments on account of principal of or premium, if any, or interest
(including, with respect to the Original Notes, Special Interest, if any) on
the Convertible Notes or on account of the purchase or acquisition of
Convertible Notes may be made if there has occurred and is continuing a
default in any payment with respect to Senior Indebtedness, any acceleration
of the maturity of any Senior Indebtedness or if any judicial proceeding is
pending with respect to any such default.

OPTIONAL REDEMPTION

The Original Notes and Consent Notes are not redeemable prior to September
30, 2000 or January 13, 2002, respectively. During the period from September
30, 2000 to September 30, 2002 or January 13, 2002 to January 13, 2004,
respectively, the Company may redeem all but not less than all of the Original
Notes and Consent Notes, respectively, upon not less than 30 nor more than 60
days' notice, if the Closing Price (as defined in the Convertible Note
Indentures) of the Common Stock is at least 150% of the applicable Conversion
Price for thirty consecutive days, at a redemption price equal to 100% of the
principal amount at Stated Maturity thereof plus accrued and unpaid interest,
if any, and, with respect to the Original Notes, Special Interest, if any;
provided that if the Common Stock is not traded on a U.S. national securities
exchange or approved for trading on an established automated over-the-counter
trading market in the United States and not quoted on a consolidated
transaction reporting tape, the Convertible Notes will not be redeemable
during such period. On or after September 30, 2002, with respect to the
Original Notes, or January 13, 2004, with respect to the Consent Notes, the
Convertible Notes will be subject to redemption at the option of the Company,
in whole or in part, upon not less than 30 nor more 60 days' notice, at 100%
of the principal amount thereof at Stated Maturity, plus accrued and unpaid
interest, if any, and, with respect to the Original Notes, Special Interest,
if any.

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MANDATORY REDEMPTION

Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control," "--Asset Sales," and "--Right to Require Repurchase of
Convertible Notes Upon a Termination of Trading," the Company is not required
to make mandatory redemption payments or sinking fund payments with respect to
the Convertible Notes.

REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL

Upon the occurrence of a Change of Control, each holder of Convertible Notes
shall have the right to require the Company to repurchase all or any part
(equal to $1,000 principal amount or an integral multiple thereof) of such
holder's Convertible Notes pursuant to an irrevocable and unconditional offer
described below (the "Change of Control Offer") at a purchase price (the
"Change of Control Purchase Price") equal to 101% of the Accreted Value of
such Convertible Notes (or portions thereof) on any Change of Control Payment
Date (as
defined herein) occurring prior to September 30, 1999 or January 13, 2001, as
applicable, plus accrued and unpaid interest, if any, and, with respect to the
Original Notes, Special Interest, if any, thereon to such Change of Control
Payment Date, or 101% of the principal amount at Stated Maturity of such
Convertible Notes (or portions thereof), on any Change of Control Payment Date
occurring on or after September 30, 1999 or January 13, 2001, as applicable,
plus accrued and unpaid interest, if any, and, with respect to the Original
Notes, Special Interest, if any, to such Change of Control Payment Date.

Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each holder stating,
among other things: (1) that a Change of Control Offer is being made pursuant
to the covenant in the Convertible Note Indentures entitled "Repurchase at the
Option of Holders upon a Change of Control" and that all Convertible Notes
properly tendered will be accepted for payment; (2) the Change of Control
Purchase Price and the purchase date (the "Change of Control Payment Date"),
which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed; (3) that any Convertible Notes or portions thereof not
properly tendered will continue to accrete in value or accrue interest, as the
case may be, and accrue Special Interest, if applicable; (4) that, unless the
Company defaults in the payment of the Change of Control Purchase Price, all
Convertible Notes or portions thereof accepted for payment pursuant to the
Change of Control Offer shall cease to accrete in value or accrue interest, as
the case may be, and accrue Special Interest, if applicable, from and after
the Change of Control Payment Date; (5) that holders electing to have any
Convertible Notes or portions thereof purchased pursuant to a Change of
Control Offer will be required to surrender the Convertible Notes, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
Convertible Notes completed, to a paying agent (the "Paying Agent") at the
address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that holders
will be entitled to withdraw their election if the Paying Agent receives, not
later than the close of business on the second Business Day preceding the
Change of Control Payment Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the holder, the principal amount of
Convertible Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Convertible Notes or portions thereof
purchased; (7) that holders whose Convertible Notes are being purchased only
in part will be issued new Convertible Notes equal in principal amount to the
unpurchased portion of the Convertible Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount at Stated Maturity or an
integral multiple thereof; and (8) the instructions and any other information
necessary to enable holders to accept a Change of Control Offer or effect
withdrawal of such acceptance.

The Company will comply with the requirements of Section 14(e) under the
Securities Exchange Act of 1934, as amended, and any other securities laws and
regulations, to the extent such laws and regulations are applicable, in
connection with the repurchase of Convertible Notes pursuant to a Change of
Control Offer.

On the Change of Control Payment Date, the Company will (1) accept for
payment Convertible Notes or portions thereof properly tendered pursuant to
the Change of Control Offer, (2) irrevocably deposit with the Paying Agent in
immediately available funds an amount equal to the Change of Control Purchase
Price in respect of all Convertible Notes or portions thereof so tendered,
including accrued and unpaid interest, if any, and, with

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respect to the Original Notes, Special Interest, if any, thereon and (3)
deliver, or cause to be delivered, to the Trustee the Convertible Notes so
accepted together with an Officers' Certificate listing the Convertible Notes
or portions thereof tendered to the Company and accepted for payment. The
Paying Agent shall promptly mail to each holder of Convertible Notes so
accepted payment in an amount equal to the Change of Control Purchase Price,
including interest and Special Interest, if applicable, for such Convertible
Notes and the Trustee shall promptly authenticate and mail to each holder a
new Convertible Note equal in principal amount at Stated Maturity to any
unpurchased portion of the Convertible Notes surrendered, if any; provided,
that each such new Convertible Note shall be in a principal amount at Stated
Maturity of $1,000 or any integral multiple thereof. The Company will announce
publicly the results of a Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.

The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Convertible Notes upon a Change of
Control may deter a third party from acquiring the Company in a transaction
that constitutes a Change of Control. If a Change of Control Offer is made,
there can be no assurance that the Company will have sufficient funds to pay
the Change of Control Purchase Price for all Convertible Notes tendered by
holders seeking to accept the Change of Control Offer. In addition,
instruments governing other Indebtedness of the Company may prohibit the
Company from purchasing any Convertible Notes prior to their Stated Maturity,
including pursuant to a Change of Control Offer. In the event that a Change of
Control Offer occurs at a time when the Company does not have sufficient
available funds to pay the Change of Control Purchase Price for all
Convertible Notes tendered pursuant to such offer or at a time when the
Company is prohibited from purchasing the Convertible Notes (and the Company
is unable either to obtain the consent of the holders of the relevant
Indebtedness or to repay such Indebtedness), an Event of Default (as defined
herein) would occur under the Convertible Note Indentures. In addition, one of
the events that constitutes a Change of Control under the Convertible Note
Indentures is a sale, conveyance, transfer or lease of all or substantially
all of the assets of the Company or of the Company and its Restricted
Subsidiaries taken as a whole. The Convertible Note Indentures will be
governed by New York law, and there is no established quantitative definition
under New York law of "substantially all" of the assets of a corporation.
Accordingly, if the Company and/or its Restricted Subsidiaries were to engage
in a transaction in which it or they disposed of less than all of the assets
of the Company or less than all of the assets of the Company and its
Restricted Subsidiaries taken as a whole, a question of interpretation could
arise as to whether such disposition was of "substantially all" of its or
their assets, as the case may be, and whether the Company was required to make
a Change of Control Offer.

Except as described herein with respect to a Change of Control and except
for the covenant described below in "--Right to Require Repurchase of
Convertible Notes Upon a Termination of Trading," the Convertible Note
Indentures do not contain any other provisions that permit holders of
Convertible Notes to require that the Company repurchase or redeem Convertible
Notes in the event of a takeover, recapitalization or similar restructuring.
The foregoing provisions may not necessarily afford the holders of the
Convertible Notes protection in the event of a highly leveraged transaction,
including a reorganization, restructuring, merger or other similar transaction
involving the Company, that may adversely affect the holders because (i) such
transactions may not involve a shift in voting power or beneficial ownership
or, even if they do, may not involve a shift of the magnitude required under
the definition of Change of Control to require the Company to make a Change of
Control Offer or (ii) such transactions may include an actual shift in voting
power or beneficial ownership to a Strategic Investor or to a Permitted Holder
which is excluded under the definition of Change of Control from the amount of
shares involved in determining whether or not the transaction involves a shift
of the magnitude required to trigger the provisions.

ASSET SALES

The Company will not, and will not permit any Restricted Subsidiary to
consummate an Asset Sale (as defined herein) unless (i) no Event of Default
under the Convertible Note Indentures shall have occurred and be continuing or
shall occur as a consequence thereof; (ii) the Company or such Restricted
Subsidiary, as the case may be, receives net consideration at the time of such
Asset Sale at least equal to the Fair Market Value (as evidenced by a Board
Resolution of the Company delivered to the Trustee) of the Property or assets
sold or

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otherwise disposed of; (iii) at least 75% of the consideration received by the
Company or such Restricted Subsidiary for such Property or assets consists of
Cash Proceeds; and (iv) the Company or such Restricted Subsidiary, as the case
may be, uses the Net Cash Proceeds from such Asset Sale in the manner set
forth below.

Within 270 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option reinvest an amount equal to
the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets and/or (ii) apply an amount equal to such Net Cash
Proceeds (or remaining Net Cash Proceeds) to the permanent reduction of
Indebtedness of the Company (other than Indebtedness owing to a Restricted
Subsidiary) that is pari passu in right of payment with the Convertible Notes
or to the permanent reduction of Indebtedness of any Restricted Subsidiary
that is pari passu in right of payment with such Restricted Subsidiary's
Guarantee, if applicable (other than Indebtedness to the Company or another
Restricted Subsidiary).
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets and/or reduce pari passu Indebtedness of the Company
or Indebtedness of its Restricted Subsidiaries shall constitute Excess
Proceeds.

If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $5 million, the Company shall, on a date (the "Asset Sale Payment
Date") which shall be no earlier than 30 days nor later than 40 days
subsequent to the date on which the Company sends notice to Holders of the
Asset Sale Offer, which shall be within 30 days of the date on which such
Excess Proceeds exceed $5 million, use such Excess Proceeds to make offers (A)
to purchase (each an "Asset Sale Offer") (i) first, on a pro rata basis from
all holders of Senior Notes in an aggregate principal amount equal to the
maximum principal amount that may be purchased out of the then-existing Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal
to 100% of the Accreted Value of such Senior Notes on any Asset Sale Payment
Date occurring prior to September 30, 1999, plus accrued and unpaid interest,
if any, and Special Interest, if any, to the Asset Sale Payment Date, or 100%
of the principal amount at Stated Maturity of such Senior Notes on any Asset
Sale Payment Date occurring on or after September 30, 1999, plus accrued and
unpaid interest, if any, and Special Interest, if any, to such Asset Sale
Payment Date, and (ii) thereafter, if any Excess Proceeds remain upon
completion of such purchases of the Senior Notes, on a pro rata basis from all
holders of Convertible Notes, in an aggregate principal amount equal to the
maximum principal amount that may be purchased out of Excess Proceeds, at an
Asset Sale Purchase Price in cash equal to 100% of the Accreted Value of such
Convertible Notes on any Asset Sale Payment Date occurring prior to September
30, 1999, with respect to the Original Notes, or January 13, 2001, with
respect to the Consent Notes, plus accrued and unpaid interest, if any, and
Special Interest, if applicable, to the Asset Sale Payment Date, or 100% of
the principal amount at Stated Maturity of such Convertible Notes on any Asset
Sale Payment Date occurring on or after September 30, 1999, with respect to
the Original Notes, and January 13, 2001, with respect to the Consent Notes,
plus accrued and unpaid interest, if any, and Special Interest, if applicable,
to such Asset Sale Payment Date, in accordance with the procedures set forth
in the applicable Indenture and (B) to the substantially concurrent repayment
or redemption of Pari Passu Indebtedness (if any) if required by the
instruments relating to such Pari Passu Indebtedness (which repayment or
redemption, in the case of a revolving credit arrangement or multiple advance
arrangement, reduces the commitment thereunder). The Excess Proceeds to be so
applied may be applied such that the portion to be applied to the repayment or
redemption of Pari Passu Indebtedness shall not exceed an amount equal to the
product obtained by multiplying such Excess Proceeds by a fraction, the
numerator of which is the outstanding principal amount of Pari Passu
Indebtedness that, pursuant to the instruments relating thereto, is required
to be repaid or redeemed with proceeds from such Asset Sale or Asset Sales and
the denominator of which is the sum of the (i) aggregate principal amount of
the Senior Notes then outstanding plus (ii) the aggregate principal amount of
outstanding Pari Passu Indebtedness that, pursuant to the instruments relating
thereto, is required to be repaid or redeemed with proceeds from such Asset
Sale or Asset Sales. Upon completion of any Asset Sale Offer (including
payment of the Asset Sale Purchase Price), any surplus Excess Proceeds that
were the subject of such offer shall cease to be Excess Proceeds, and the
Company may then use such amounts for general corporate purposes.

The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Notes pursuant to an Asset Sale Offer.

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RIGHT TO REQUIRE REPURCHASE OF CONVERTIBLE NOTES UPON A TERMINATION OF TRADING

In the event of any Termination of Trading occurring after the Issue Date
and on or prior to Maturity, each holder of Convertible Notes will have the
right, at the holder's option, to require the Company to repurchase all or any
part of such holder's Convertible Notes on the date (the "Repurchase Date")
that is 30 days after the date the Company gives notice of the Termination of
Trading as described below at a price (the "Repurchase Price") equal to 100%
of the Accreted Value of such Convertible Notes on any Repurchase Date
occurring prior to September 30, 1999 or January 13, 2001 with respect to the
Original Notes or the Consent Notes, respectively, together with accrued and
unpaid interest, if any, and, with respect to the Original Notes, Special
Interest, if any, thereon to the Repurchase Date, or 100% of the principal
amount at Stated Maturity of such Convertible Notes on any Repurchase Date
occurring on or after September 30, 1999 or January 13, 2001, as applicable,
together with accrued and unpaid interest, if any, and, with respect to the
Original Notes, Special Interest, if any, thereon to the Repurchase Date. On
or prior to the Repurchase Date, the Company shall deposit with the Trustee or
a Paying Agent an amount of money sufficient to pay the Repurchase Price of
the Convertible Notes which are to be repaid on or promptly following the
Repurchase Date.

Failure by the Company to provide timely notice of a Termination of Trading,
as provided for below, or to repurchase the Convertible Notes when required
under the preceding paragraph will result in an Event of Default under the
Convertible Note Indentures whether or not such repurchase is permitted by the
subordination provisions of the Convertible Note Indentures.

On or before the 15th day after the occurrence of a Termination of Trading,
the Company is obligated to mail to all holders of Convertible Notes a notice
of the occurrence of such Termination of Trading, the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price for
Convertible Notes and the procedures which the holder must follow to exercise
this right. To exercise the repurchase right, the holder of a Convertible Note
must deliver, on or before the close of business on the Repurchase Date,
irrevocable written notice to the Company (or an agent designated by the
Company for such purpose) and to the Convertible Note Trustee of the holder's
exercise of such right, together with the certificates evidencing the
Convertible Notes with respect to which the right is being exercised, duly
endorsed for transfer. Such written notice is irrevocable.

A "Termination of Trading," shall occur if the Common Stock (or other common
stock into which the Convertible Notes are then convertible) had been listed
for trading on a U.S. national securities exchange or approved for trading on
an established automated over-the-counter trading market in the United States
and are thereafter neither so listed nor so approved.

The right to require the Company to repurchase Convertible Notes as a result
of the occurrence of a Termination of Trading could create an Event of Default
under the Senior Note Indentures, as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provisions of the Convertible
Notes. Failure by the Company to repurchase the Convertible Notes when
required will result in an Event of Default under the Convertible Note
Indentures whether or not such repurchase is permitted by the subordination
provisions. The Company's ability to pay cash to the holders of Convertible
Notes upon a repurchase may be limited by certain financial covenants
contained in the other then existing Indebtedness of the Company.

The foregoing provisions would not necessarily afford holders of the
Convertible Notes protection in the event of highly leveraged or other
transactions involving the Company or the Restricted Subsidiaries that may
adversely affect such holders. In addition, the foregoing provisions may
discourage open market purchases of the Common Stock or a non-negotiated
tender or exchange offer for such Common Stock and, accordingly, may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.

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CERTAIN COVENANTS

Set forth below are certain covenants contained in the Convertible Note
Indentures. Certain terms capitalized below but not defined shall have the
meanings ascribed to them under the caption "Certain Definitions."

Limitation on Issuances of Guarantees by Restricted Subsidiaries

The Convertible Note Indentures provide that the Company may not permit any
Restricted Subsidiary, directly or indirectly, to guarantee any Indebtedness
of the Company ("Guaranteed Indebtedness") unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to
the applicable Convertible Note Indenture providing for a Guarantee of payment
of the Convertible Notes by such Restricted Subsidiary (a "Convertible Note
Guarantee") and (ii) such Restricted Subsidiary waives and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee, provided, that any Restricted
Subsidiary may guarantee any Credit Facility so long as such Restricted
Subsidiary enters into a Guarantee ranking pari passu with its guarantee under
such Credit Facility. The Convertible Note Indentures further provide that if
the Guaranteed Indebtedness is pari passu with the Convertible Notes, then the
guarantee of such Guaranteed Indebtedness shall be pari passu with or
subordinated to the Guarantee; and if the Guaranteed Indebtedness is
subordinated to the Convertible Notes, then the guarantee of such Guaranteed
Indebtedness shall be subordinated to the Guarantee at least to the extent
that the Guaranteed Indebtedness is subordinated to the Convertible Notes. In
addition, each Convertible Note Guarantee of a Restricted Subsidiary will be
subordinated to the Senior Note Guarantee of such Restricted Subsidiary.

Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon the release or discharge of the guarantee which
resulted in the creation of such Restricted Subsidiary's Guarantee, except a
discharge or release by, or as a result of, payment under such guarantee.

Restricted and Unrestricted Subsidiaries

The Convertible Note Indentures provide that the Company may designate a
Subsidiary (including a newly formed or newly acquired Subsidiary) of the
Company or any of its Restricted Subsidiaries as an Unrestricted Subsidiary;
provided, that so long as the Senior Notes remain outstanding and the Senior
Note Indentures have not been satisfied or discharged, (i) immediately after
giving effect to the transaction, the Company could incur $1.00 of additional
Indebtedness pursuant to the provision of the Senior Note Indentures which
place a limitation on indebtedness and (ii) such designation is at the time
permitted under the provision in the Senior Note Indentures governing
restricted payments. Notwithstanding any provisions of this covenant, all
Subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries.
As of the date hereof, all of the Company's Subsidiaries are Restricted
Subsidiaries and, accordingly, are subject to all of the covenants relating to
Restricted Subsidiaries set forth in the Senior Note Indentures.

Reports

The Convertible Note Indentures provide that, whether or not the Company is
subject to Section 13(a) or 15(d) of the Exchange Act, or any successor
provision thereto, the Company shall file with the Commission the annual
reports, quarterly reports and other documents which the Company would have
been required to file with the Commission pursuant to such Section 13(a) or
15(d) or any successor provision thereto if the Company were subject thereto,
such documents to be filed with the Commission on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required to file them. The Company shall
also (whether or not it is required to file reports with the Commission),
within 30 days of each Required Filing Date, (i) transmit by mail to all
holders of Convertible Notes, as their names and addresses appear in the
applicable Security Register, without cost to such holders or Persons, and
(ii) file with the Trustee, copies of the

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annual reports, quarterly reports and other documents (without exhibits) which
the Company has filed or would have filed with the Commission pursuant to
Section 13(a) or 15(d) of the Exchange Act, any successor provisions thereto
or this covenant. The Company shall not be required to file any report with
the Commission if the Commission does not permit such filing.

CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER

The Convertible Note Indentures provide that the Company will not, in any
transaction or series of transactions, consolidate with, or merge with or
into, any other Person or permit any other Person to merge with or into the
Company (other than a merger of a Restricted Subsidiary into the Company in
which the Company is the continuing corporation), or sell, convey, assign,
transfer, lease or otherwise dispose of all or substantially all of the
Property and assets of the Company and the Restricted Subsidiaries taken as a
whole to any other Person, unless:

(i) either (a) the Company shall be the continuing corporation or (b) the
corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest and, with respect to the
Original Notes, Special Interest, if any, on all the related Convertible
Notes and the performance of the Company's covenants and obligations under
the Convertible Note Indentures;

(ii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or
Event of Default under the Convertible Note Indentures shall have occurred
and be continuing or would result therefrom;

(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Company (or the Surviving Entity, if
the Company is not continuing) shall have a Consolidated Net Worth equal to
or greater than the Consolidated Net Worth of the Company immediately prior
to such transaction.

In connection with any consolidation, merger, transfer of assets or other
transactions contemplated by this provision, the Company shall deliver, or
cause to be delivered, to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an Officers' Certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
conveyance or transfer and the supplemental indenture in respect thereto
comply with the provisions of the Convertible Note Indentures and that all
conditions precedent in the Convertible Note Indentures relating to such
transactions have been complied with.

Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, the foregoing paragraphs,
the Surviving Entity shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Convertible Note
Indentures and the related Convertible Notes with the same effect as if such
Surviving Entity had been named as the Company in the Convertible Note
Indentures; and when a Surviving Person duly assumes all of the obligations
and covenants of the Company pursuant to the Convertible Note Indentures and
the Convertible Notes, except in the case of a lease, the predecessor Person
shall be relieved of all such obligations.

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EVENTS OF DEFAULT

Each of the following is an "Event of Default" under the Convertible Note
Indentures:

(a) default in the payment of interest (or, with respect to the Original
Notes, Special Interest, if any) on any Convertible Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;

(b) default in the payment of the principal of (or premium, if any, on)
any Convertible Note at its maturity, upon optional redemption, required
repurchase (including pursuant to a Change of Control Offer, an Asset Sale
Offer, or a repurchase offer upon a Termination of Trading of the Common
Stock) or otherwise or the failure to make an offer to purchase any such
Convertible Note as required;

(c) failure by the Company to perform or comply with the provisions
described under "--Repurchase at the Option of the Holders upon a Change of
Control," "--Asset Sales," "--Consolidation, Merger, Conveyance, Lease or
Transfer" or "--Right to Require Repurchase of Convertible Notes upon a
Termination of Trading;"

(d) default in the performance, or breach, of any covenant or warranty of
the Company in the Convertible Note Indentures (other than a covenant or
warranty addressed in (a), (b) or (c) above) and continuance of such
Default or breach for a period of 45 days after written notice thereof has
been given to the Company by the Trustee or to the Company and the Trustee
by holders of at least 25% of the aggregate principal amount at Stated
Maturity of the outstanding Convertible Notes;

(e) Indebtedness of the Company or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by
the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $5 million;

(f) the entry by a court of competent jurisdiction of one or more final
nonappealable judgments against the Company or any Restricted Subsidiary in
an uninsured or unindemnified aggregate amount in excess of $5 million
which is not discharged, waived, appealed, stayed, bonded or satisfied for
a period of 60 consecutive days;

(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar law or
(ii) a decree or order adjudging the Company or any Significant Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Significant Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency, or similar
law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or ordering the
winding up or liquidation of the affairs of the Company or any Significant
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days;

(h) (i) the commencement by the Company or any Significant Restricted
Subsidiary of a voluntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by the Company or any Significant Restricted Subsidiary to the entry of a
decree or order for relief in respect of the Company or any Significant
Restricted Subsidiary in an involuntary case or proceeding under U.S.
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding
against the Company or any Significant
Restricted Subsidiary; or (iii) the filing by the Company or any
Significant Restricted Subsidiary of a petition or answer or consent
seeking reorganization or relief under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other

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similar law; or (iv) the consent by the Company or any Significant
Restricted Subsidiary to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee,
trustee, sequestrator or similar official of the Company or any Significant
Restricted Subsidiary or of any substantial part of the Property or assets
of the Company or any Significant Restricted Subsidiary, or the making by
the Company or any Significant Restricted Subsidiary of an assignment for
the benefit of creditors; or (v) the admission by the Company or any
Significant Restricted Subsidiary in writing of its inability to pay its
debts generally as they become due; or (vi) the taking of corporate action
by the Company or any Significant Restricted Subsidiary in furtherance of
any such action; or

(i) the occurrence and continuation of an Event of Default under the
Senior Note Indentures for a period of 30 consecutive days after written
notice of the occurrence of such Event of Default has been given to the
Company by the Trustee or a holder or holders of Convertible Notes, which
notice states that such an event constitutes a Default under the applicable
Convertible Note Indenture.

If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount at Stated Maturity of the Original Notes or the Consent
Notes, as applicable, may declare the Default Amount, premium, if any, and any
accrued and unpaid interest (and, with respect to the Original Notes, Special
Interest, if any) on all such Convertible Notes then outstanding to be
immediately due and payable by a notice in writing to the Company (and to the
Trustee if given by holders of such Convertible Notes), and upon any such
declaration all amounts payable in respect of such Convertible Notes will
become and be immediately due and payable. If any Event of Default specified
in clause (g) or (h) above occurs, the Default Amount, premium, if any, and
any accrued and unpaid interest (and, with respect to the Original Notes,
Special Interest, if any) on such Convertible Notes then outstanding shall
become immediately due and payable without any declaration or other act on the
part of the Trustee or any holder of such Convertible Notes. In the event of a
declaration of acceleration because an Event of Default set forth in clause
(e) above has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled if the event of default
triggering such Event of Default pursuant to clause (e) shall be remedied, or
cured or waived by the holders of the relevant Indebtedness within 60 days
after such event of default; provided, that no judgment or decree for the
payment of the money due on the Convertible Notes has been obtained by the
Trustee as provided in the Convertible Note Indentures. In the event of a
declaration of acceleration because an Event of Default set forth in clause
(i) above has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled (A) if the Senior Notes have
been repaid, (B) if the Event of Default under the Senior Note Indenture
triggering such Event of Default pursuant to clause (i) above shall be
remedied or cured, or waived by the holders of the Senior Notes, or (C) if the
Senior Notes have been accelerated, then the acceleration of the Senior Notes
shall have been rescinded within 60 days of the occurrence of such Event of
Default under the Senior Note Indentures, and, in the case of clause (A), (B)
or (C) above, the Senior Note Trustee so certifies to the Trustee, provided
that any such event described in clause (A), (B) or (C) above must occur prior
to the commencement of enforcement proceedings with respect to the Convertible
Note Indentures. Until September 30, 1999 with respect to the Original Notes
or January 13, 2001 with respect to the Consent Notes, the "Default Amount"
shall equal the Accreted Value of the Convertible Notes. Thereafter, the
Default Amount shall equal 100% of principal amount at Stated Maturity of the
Convertible Notes. Under certain circumstances, the holders of a majority in
principal amount at Stated Maturity of the outstanding Convertible Notes, by
notice to the Company and the Trustee, may rescind an acceleration and its
consequences. Subject to all provisions of the applicable Convertible Note
Indenture and applicable law, the holders of a majority in aggregate principal
amount at Stated Maturity of the applicable Convertible Notes at the time
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred on the Trustee.

The holders of a majority in aggregate principal amount at Stated Maturity
of the Original Notes or the Consent Notes, as applicable, then outstanding by
notice to the Trustee may on behalf of the holders of all such Convertible
Notes waive any existing Default or Event of Default and its consequences
under the applicable Convertible Note Indenture except a continuing Default or
Event of Default in the payment of interest (and, with

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respect to the Original Notes, Special Interest, if any) on, premium, if any,
on or the principal of, such Convertible Notes. Subject to the provisions of
the Convertible Note Indentures relating to the duties of the Trustee, the
Trustee is under no obligation to exercise any of its rights or powers under
the Convertible Note Indentures at the request, order or direction of any of
the holders, unless such holders have offered to the Trustee reasonable
security or indemnity. Subject to the provisions of the Convertible Note
Indentures and applicable law, the holders of a majority in aggregate
principal amount at Stated Maturity of the Original Notes or the Consent
Notes, as applicable, at the time outstanding have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust or power conferred upon the Trustee.

The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Convertible Note Indentures, and the Company is
required within five Business Days after becoming aware of any Default or
Event of Default, to deliver to the Trustee a statement describing such
Default or Event of Default, its status and what action the Company is taking
or proposes to take with respect thereto.

AMENDMENT, SUPPLEMENT AND WAIVER

The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of Convertible Notes, enter into one or
more indentures supplemental to the Convertible Note Indentures, (i) to
evidence the succession of another Person to the Company and the assumption by
such successor of the covenants and obligations of the Company in the
Convertible Note Indentures and the Convertible Notes; (ii) to add to the
covenants of the Company, for the benefit of the holders, or to surrender any
right or power conferred upon the Company by the Convertible Note Indentures;
(iii) to add any additional Events of Default; (iv) to provide for
uncertificated Convertible Notes in addition to or in place of certificated
Convertible Notes; (v) to evidence and provide for the acceptance of
appointment under the Convertible Note Indentures of a successor Trustee; (vi)
to cure any ambiguity in the Convertible Note Indentures, to correct or
supplement any provision in the Convertible Note Indentures which may be
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Convertible Note
Indentures; provided, that such actions shall not adversely affect the
interests of the holders in any material respect; (vii) to secure the
Convertible Notes; (viii) to provide for Guarantees as required under the
Convertible Note Indentures; (ix) to make provision with respect to the
conversion rights of the holders of Convertible Notes in the event of a
consolidation, merger or sale of assets involving the Company; or (x) to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Convertible Note Indentures under the Trust Indenture
Act.

With the consent of the holders of not less than a majority in aggregate
principal amount at Stated Maturity of the outstanding Original Notes or
Consent Notes, as applicable, the Company and the Trustee may enter into one
or more indentures supplemental to the applicable Convertible Note Indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the applicable Convertible Note Indenture
or modifying in any manner the rights of the holders; provided, that no such
supplemental indenture shall, without the consent of the holder of each
outstanding Convertible Note: (i) change the Stated Maturity of the principal
of, or any installment of interest (including, with respect to the Original
Notes, Special Interest, if any) on, any Convertible Note, or reduce the
Accreted Value or principal amount thereof at Stated Maturity (or premium, if
any), or the interest thereon that would be due and payable upon Stated
Maturity thereof, or reduce the Default Amount that would be due and payable
upon Stated Maturity thereof, or change the place of payment where, or the
coin or currency in which, any Convertible Note, or any premium or interest
(including, with respect to the Original Notes, Special Interest, if any)
thereon is payable, or impair the right to institute suit for the enforcement
of any such payment on or after the Stated Maturity thereof; (ii) reduce the
percentage in principal amount of such outstanding Convertible Notes, the
consent of whose holders is necessary for any such supplemental indenture or
required for any waiver of compliance with certain provisions of the
applicable Convertible Note Indenture or any Convertible Note Guarantees or
certain Defaults thereunder; (iii) make any changes in the subordination
provisions of the Convertible Notes or any Convertible Note Guarantees that
would

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adversely affect the holders of the Convertible Notes; (iv) modify the
obligations of the Company to make offers to purchase Convertible Notes upon a
Change of Control or from the proceeds of Asset Sales or, in the case of a
Termination of Trading of the Common Stock, the obligation of the Company to
repurchase the Convertible Notes; or (v) modify any provision of this
paragraph (except to increase any percentage set forth herein).

The holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding Original Notes or Consent Notes may, on
behalf of the holders of all such Convertible Notes, waive any past Default
under the applicable Convertible Note Indenture and its consequences, except
Default in the payment of the principal of (or premium, if any) or interest on
any Convertible Note, or in respect of a covenant or provision hereof which
under the proviso to the prior paragraph cannot be modified or amended without
the consent of the holder of each outstanding Convertible Note affected.

SATISFACTION AND DISCHARGE OF THE CONVERTIBLE NOTE INDENTURES; DEFEASANCE

The Company may terminate its obligations under the Convertible Notes and
the applicable Convertible Note Indenture when (i) either (A) all outstanding
Convertible Notes have been delivered to the Trustee for cancellation or (B)
all such Convertible Notes not theretofore delivered to the Trustee for
cancellation have become due and payable within one year or are to be called
for redemption within one year under irrevocable arrangements satisfactory to
the Trustee for the giving of notice of redemption by the Trustee in the name
and at the expense of the Company, and the Company has irrevocably deposited
or caused to be deposited with the Trustee funds or U.S. Government
Obligations in an amount sufficient to pay and discharge the entire
indebtedness on the Convertible Notes not theretofore delivered to the Trustee
for cancellation, for principal of (premium, if any, on) and interest
(including, with respect to the Original Notes, Special Interest, if any) to
the date of deposit or maturity or date of redemption; (ii) the Company has
paid or caused to be paid all sums then due and payable by the Company under
the applicable Convertible Note Indenture; and (iii) the Company has delivered
an Officers' Certificate and an Opinion of Counsel relating to compliance with
the conditions set forth in such Convertible Note Indenture; provided that,
notwithstanding the provisions above, the holders of Convertible Notes will
retain their conversion rights until the applicable redemption date.

The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Convertible Notes, and the applicable Convertible
Note Indenture shall cease to be of further effect as to all outstanding
Convertible Notes (except as to (i) rights of registration of transfer,
substitution and exchange of the Convertible Notes and the Company's right of
optional redemption, (ii) rights of holders to receive payments of principal
of, premium, if any, and interest (including, with respect to the Original
Notes, Special Interest, if applicable) on the Convertible Notes (but not the
Change of Control Purchase Price or the Asset Sale Purchase Price) and any
rights of the holders with respect to such amounts, (iii) the rights,
obligations and immunities of the Trustee under the applicable Convertible
Note Indenture, (iv) conversion rights under the applicable Convertible Note
Indenture, and (v) certain other specified provisions in the Convertible Note
Indentures) or (b) cease to be under any obligation to comply with certain
restrictive covenants including those described under "--Certain Covenants,"
after the irrevocable deposit by the Company with the Trustee, in trust for
the benefit of the holders, at any time prior to the Stated Maturity of the
Original Convertible Notes or the Consent Convertible Notes, respectively, of
(A) money in an amount, (B) U.S. Government Obligations which through the
payment of interest and principal will provide, not later than one day before
the due date of payment in respect of such Convertible Notes, money in an
amount, or (C) a combination thereof, sufficient to pay and discharge the
principal of, and interest (including, with respect to the Original
Convertible Notes, Special Interest, if applicable) on, such Convertible Notes
then outstanding on the dates on which any such payments are due in accordance
with the terms of the applicable Convertible Note Indenture and of such
Convertible Notes. Such defeasance or covenant defeasance shall be deemed to
occur only if certain conditions are satisfied, including, among other things,
delivery by the Company to the Trustee of an opinion of outside counsel
acceptable to the Trustee to the effect that (i) such deposit, defeasance and
discharge will not be deemed, or result in, a taxable event for federal income
tax purposes with respect to the holders; and (ii) the Company's deposit will
not result in the trust or the Trustee being subject to regulation under the
Investment Company Act of 1940.

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THE TRUSTEE

Harris Trust and Savings Bank is the Trustee under each of the Convertible
Note Indentures and its current address is 111 West Monroe, Chicago, Illinois
60603.

The holders of not less than a majority in aggregate principal amount at
Stated Maturity of the outstanding Original Notes and the Consent Notes have
the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. Except during the continuance of an Event of Default under the
Convertible Note Indentures, the Trustee will perform only such duties as are
specifically set forth in the Convertible Note Indentures. The Convertible
Note Indentures provide that in case an Event of Default shall occur (which
shall not be cured or waived), the Trustee will be required, in the exercise
of its rights and powers under the Convertible Note Indentures, to use the
degree of care of a prudent person in the conduct of such person's own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Convertible Note Indentures
at the request of any of the holders of the Convertible Notes, as the case may
be, unless such holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS

No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Convertible Notes or the Convertible Note Indentures or for any claim based
on, in respect of, or by reason of, such obligations or their creation, solely
by reason of its status as a director, officer, employee, incorporator or
stockholder of the Company. Pursuant to the terms of the Convertible Note
Indentures, by accepting a Convertible Note each holder waives and releases
all such liability (but only such liability). The Convertible Note Indentures
provide that the waiver and release are part of the consideration for issuance
of the Convertible Notes. Nonetheless, such waiver may not be effective to
waive liabilities under the federal securities laws and it has been the view
of the Commission that such a waiver is against public policy as expressed in
the Securities Act and is therefore unenforceable.

GOVERNING LAW

The Convertible Note Indentures and the Convertible Notes are governed by
the laws of the State of New York, without regard to principles of conflicts
of law.

TRANSFER AND EXCHANGE

A holder may transfer or exchange Convertible Notes in accordance with the
applicable Convertible Note Indenture. The Company, the Registrar and the
Trustee may require a holder, among other things, to furnish appropriate
endorsements and transfer documents and the Company may require a holder to
pay any taxes and fees required by law or permitted by the applicable
Convertible Note Indenture.

CERTAIN DEFINITIONS

Set forth below is a summary of certain of the defined terms used in the
Convertible Note Indenture. Reference is made to the Convertible Note
Indenture for the full definition of all such terms, as well as any
capitalized terms used herein for which no definition is provided.

"Accreted Value" means, for any Specified Date, the amount provided below
for each $1,000 principal amount at Stated Maturity of the Convertible Notes:

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(a) If the Specified Date occurs on one of the following dates (each a
"Convertible Note Semi-Annual Accrual Date"), the Accreted Value will equal
the amount set forth below for such Convertible Note Semi-Annual Accrual
Date:

<TABLE>
<CAPTION>
ACCRETED
VALUE OF ORIGINAL
SEMI-ANNUAL ACCRUAL DATE NOTES
------------------------ -----------------
<S> <C>
March 30, 1997........................ $ 802.45
September 30, 1997.................... 838.56
March 30, 1998........................ 876.30
September 30, 1998.................... 915.73
March 30, 1999........................ 956.94
September 30, 1999.................... 1,000.00

ACCRETED
VALUE OF ORIGINAL
SEMI-ANNUAL ACCRUAL DATE NOTES
------------------------ -----------------
July 12, 1998......................... $ 802.45
January 13, 1999...................... 838.56
July 12, 1999......................... 876.30
January 13, 2000...................... 915.73
July 12, 2000......................... 956.94
January 13, 2001...................... 1,000.00
</TABLE>

(b) if the Specified Date occurs before the first applicable Convertible
Note Semi-Annual Accrual Date, the Accreted Value will equal the sum of (i)
$767.90 and (ii) an amount equal to the product of (y) the Accreted Value
of the first applicable Convertible Note Semi-Annual Accrual Date less the
original issue price multiplied by (z) a fraction, the numerator of which
is the number of days from the applicable Issue Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of which
is the number of days elapsed from the applicable Issue Date to the first
applicable Convertible Note Semi-Annual Accrual Date, using a 360-day year
of twelve 30-day months;

(c) if the Specified Date occurs between two Convertible Note Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (i) the Accreted
Value for the Convertible Note Semi-Annual Accrual Date immediately
preceding such Specified Date and (ii) an amount equal to the product of
(y) the Accreted Value for the immediately following Convertible Note Semi-
Annual Accrual Date less the Accreted Value for the immediately preceding
Convertible Note Semi-Annual Accrual Date multiplied by (z) a fraction, the
numerator of which is the number of days from the immediately preceding
Convertible Note Semi-Annual Accrual Date to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or

(d) if the Specified Date occurs after the last Convertible Note Semi-
Annual Accrual Date, the Accreted Value will equal $1,000.

"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a
Subsidiary of such specified Person.

"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of the Company and of each other Subsidiary of the Company;
provided that any lender under a Credit Facility shall not be deemed to be an
Affiliate solely as the result of the Credit Facility; and provided, further,
that neither the Company nor any of its Wholly-Owned Restricted Subsidiaries
shall be

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deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"under common control with" and "controlled by"), and as used with respect to
any Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of Voting Stock, by agreement or otherwise;
provided, that beneficial ownership of 10% or more of the Voting Stock of a
Person (on a fully diluted basis) shall be deemed to be control.

"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger) by such Person or any of its
Restricted Subsidiaries to any Person other than to such Person or a
Restricted Subsidiary of such Person, in one transaction or a series of
related transactions (each hereinafter referred to as a "Disposition"), of (a)
Capital Stock of or other equity interests in any Restricted Subsidiary (other
than director's qualifying shares) except as provided in clause (iv) of this
definition, (b) all or substantially all of the assets of any division or line
of business of such Person or of any of the Restricted Subsidiaries or (c)
Property or assets of such Person or any of its Restricted Subsidiaries, the
Fair Market Value of which exceeds $500,000, other than (i) a Disposition of
Property in the ordinary course of business and consistent with industry
practice, (ii) a Disposition of Eligible Cash Equivalents, (iii) a Disposition
of an Investment that constitutes a Restricted Payment under the Senior Note
Indenture permitted under the first paragraph of the covenant described in "--
Restricted Payments," (iv) a Disposition of no more than ten percent of the
Common Stock of USN Solutions, Inc. on a fully diluted basis pursuant to the
exercise of the USN Solutions Option, (v) a Disposition by the Company in
connection with a transaction permitted under "--Consolidation, Merger,
Conveyance, Lease or Transfer" and (vi) contribution of assets to any
Unrestricted Subsidiary constituting an Investment permitted by the Indenture.

"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present
value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person) of the payments during the remaining
term of the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest date
on which the lessee may terminate such lease without penalty or upon payment
of a penalty (in which case the rental payments shall include such penalty).

"Board of Directors" means, with respect to any Person, the Board of
Directors (or similar governing body) of such Person or any committee of the
Board of Directors (or similar governing body) duly authorized to act on
behalf of such Board (or similar governing body).

"Board Resolution" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination and certified as such.

"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability
on the face of a balance sheet of such Person in accordance with GAAP and the
stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may
be terminated by the lessee without payment of a penalty.

"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however
designated) in such Person and any rights (other than Indebtedness convertible
into an equity interest), warrants or options to acquire an equity interest in
such Person.

"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale of
Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash or Eligible Cash
Equivalents; provided that with regard to an Asset Sale, any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any

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Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes or Guarantees, if any) which are assumed by the
transferee of any such assets and from which the Company and such Restricted
Subsidiary are completely released shall be deemed Cash Proceeds.

"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer, or lease (other than to the Company or any Wholly-Owned Restricted
Subsidiary of the Company), whether direct or indirect, of all or
substantially all of the assets of the Company or of the Company and its
Restricted Subsidiaries taken as a whole to any "person" or "group" (within
the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any
successor provision to either of the foregoing, including any group acting for
the purpose of acquiring, holding or disposing of securities within the
meaning of Rule 13d-5(b)(i) under the Exchange Act) shall have occurred; (ii)
any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act),
other than any Permitted Holder or Permitted Holders, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of
the total voting power of all classes of the Voting Stock of the Company
(including any warrants or options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is
greater than or equal to the total voting power percentage then beneficially
owned by the Permitted Holders in the aggregate; or (iii) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election or appointment by such board or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.

"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to vote in the election of directors of such Person and any
rights (other than Indebtedness convertible into such Capital Stock), warrants
or options to acquire such Capital Stock of such Person.

"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Restricted Subsidiaries, as determined on a
consolidated basis in accordance with GAAP, less amounts attributable to
Disqualified Stock of such Person.

"Credit Facility" means one or more credit agreements, loan agreements or
similar agreements providing for working capital advances, term loans, letter
of credit facilities or similar advances, loans or facilities to the Company,
with a bank or syndicate of banks or other financial institutions, as such may
be amended, renewed, extended, supplemented, refinanced and replaced or
refunded from time to time.

"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.

"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the date on
which the Convertible Notes mature.

"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits,
certificates of deposit or Eurodollar deposits of any commercial bank
organized in the United States having capital and surplus in excess of $500
million with a maturity date not more than one year from the date of
acquisition, (iii) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (ii)
above, (iv) direct obligations issued

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by any state of the United States of America or any political subdivision of
any such state or any public instrumentality thereof maturing, or subject to
tender at the option of the holder thereof within ninety days after the date
of acquisition thereof and, at the time of acquisition, having a rating of A
or better from Standard & Poor's or A-2 or better from Moody's, (v) commercial
paper issued by the parent corporation of any commercial bank organized in the
United States having capital and surplus in excess of $500 million and
commercial paper issued by others having one of the two highest ratings
obtainable from either of Standard & Poor's or Moody's and in each case
maturing within 270 days after the date of acquisition, (vi) overnight bank
deposits and bankers' acceptances at any commercial bank organized in the
United States having capital and surplus in excess of $500 million, (vii)
deposits available for withdrawal on demand with a commercial bank organized
in the United States having capital and surplus in excess of $500 million and
(viii) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (i) through (vi).

"Exchange Rate Obligation" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.

"Fair Market Value" means, with respect to any asset or Property, the sale
value that could be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors of the Company or a Restricted Subsidiary, as applicable.

"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indentures shall utilize GAAP as in effect on the Issue
Date.

"guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"guaranteed," "guaranteeing" and "guarantor" shall have meanings correlative
to the foregoing).

"Guarantee" means a guarantee of the payment of the Senior Notes and/or the
Convertible Notes, as applicable, executed and delivered by a Restricted
Subsidiary as required by the covenant described under "--Limitation on
Issuances of Guarantees by Restricted Subsidiaries" and "Guarantees" means,
collectively, the Senior Note Guarantees and the Convertible Note Guarantees,
if any.

"Guarantor" means a Restricted Subsidiary that executes and delivers a
Guarantee.

"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness
or other obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Indebtedness or obligation on the balance sheet of such
Person (and "incurrence," "incurred," "incurrable" and "incurring" shall have
meanings correlative to the foregoing); provided that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an incurrence of such Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Restricted
Subsidiary of the Company shall be deemed to have been incurred at the time at
which it becomes a Restricted Subsidiary.

"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, guarantees or other

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similar instruments, including, without limitation, any such obligations
incurred in connection with acquisition of Property, assets or businesses,
excluding trade accounts payable made in the ordinary course of business which
are not more than 90 days overdue or which are being contested in good faith
and by appropriate proceedings, (iii) any reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) any obligation of such
Person issued or assumed as the deferred purchase price of Property, assets or
services (but excluding trade accounts payable or accrued liabilities arising
in the ordinary course of business, which in either case are not more than 90
days overdue or which are being contested in good faith and by appropriate
proceedings, and for which adequate reserves are being maintained on the books
of the Company in accordance with GAAP), (v) any Capital Lease Obligation of
such Person, (vi) the maximum fixed redemption or repurchase price of
Disqualified Stock of such Person and, to the extent held by other Persons,
the maximum fixed redemption or repurchase price of Disqualified Stock of such
Person's Restricted Subsidiaries, at the time of determination, (vii) the
notional amount of any Interest Hedging Obligations or Exchange Rate
Obligations of such Person at the time of determination, (viii) any
Attributable Indebtedness with respect to any Sale and Leaseback Transaction
to which such Person is a party and (ix) any obligation of the type referred
to in clauses (i) through (viii) of this definition of another Person and all
dividends and distributions of another Person the payment of which, in either
case, such Person has guaranteed or is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise. For purposes of the preceding
sentence, the maximum fixed repurchase price of any Disqualified Stock that
does not have a fixed repurchase price shall be calculated in accordance with
the terms of such Disqualified Stock as if such Disqualified Stock were
repurchased on any date on which Indebtedness shall be required to be
determined pursuant to the Senior Note Indentures; provided that if such
Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the maximum
liability of any guarantees at such date; provided, that for purposes of
calculating the amount of Notes outstanding at any date, the amount of such
Notes shall be the Accreted Value thereof as of such date, unless cash
interest has commenced to accrue pursuant to the applicable Indenture, in
which case the amount of such Notes outstanding will be the aggregate
principal amount thereof at Stated Maturity; and provided, further, that for
purposes of calculating the amount of any non-interest bearing or other
discount security (other than the Notes), such Indebtedness shall be deemed to
be the principal amount thereof that would be shown on the balance sheet of
the issuer dated such date prepared in accordance with GAAP but that such
security shall be deemed to have been incurred only on the date of the
original issuance thereof.

"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement,
interest rate cap, collar or floor agreement or other similar agreement or
arrangement designed to protect against or manage such Person's or any of its
Restricted Subsidiaries' exposure to fluctuations in interest rates.

"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) acquisition of any shares of Capital
Stock, bonds, notes, debentures or other securities of such Person, or (iii)
acquisition, by purchase or otherwise, of all or substantially all of the
business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude accounts receivable and other
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices. The amount of an Investment shall be the original cost
of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property or assets other
than cash, such Property or assets shall be valued at its Fair Market Value at
the time of such transfer. The Company shall be deemed to make an "Investment"
in the amount of the Fair Market Value of the assets of a Subsidiary at the
time that such Subsidiary is designated as an Unrestricted Subsidiary.

"Issue Date" means the date on which the Convertible Notes were first
authenticated and delivered under the applicable Convertible Note Indenture.

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"Joint Venture" means a Telecommunications Company of which less than 50
percent of the Voting Stock is held by the Company; provided that the
management and operations of such Person are controlled by a Strategic
Investor or by the Company pursuant to (i) the charter documents of such
Person, or (ii) an agreement among the holders of the Voting Stock of such
Person, or (iii) a management agreement between the Company and such Person.

"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, easement, encumbrance,
preference, priority or other security or similar agreement or preferential
arrangement of any nature whatsoever on or with respect to such Property or
other asset (including, without limitation, any conditional sale or title
retention agreement having substantially the same economic effect as any of
the foregoing).

"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
applicable Indenture, whether at Stated Maturity, on the Change of Control
Payment Date or purchase date established pursuant to the terms of the
applicable Indenture with regard to a Change of Control Offer, an Asset Sale
Offer or an offer to repurchase upon a Termination of Trading of the Common
Stock of the Company, as applicable, or by declaration of acceleration, call
for redemption or otherwise.

"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or
such Restricted Subsidiary incurred in connection with such sale, including,
without limitation, all legal, title and recording tax expenses, commissions
and other fees and expenses incurred (but excluding any finder's fee or
broker's fee payable to any Affiliate of such Person) and all federal, state,
foreign and local taxes arising in connection with such sale that are paid or
required to be accrued as liability under GAAP by such Person or its
Restricted Subsidiaries, (ii) all payments made or required to be made by such
Person or its Restricted Subsidiaries on any Indebtedness which is secured by
such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale and (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
such Person) in Restricted Subsidiaries of such Person as a result of such
transaction; provided that, in the event that any consideration for a
transaction (which would otherwise constitute Net Cash Proceeds) is required
to be held in escrow pending determination of whether a purchase price
adjustment will be made, such consideration (or any portion thereof) shall
become Net Cash Proceeds only at such time as it is released to such Person or
its Restricted Subsidiaries from escrow; provided, further, that any non-cash
consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at
such time, and shall thereafter be applied in accordance with the Indentures.

"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President, the Chief Executive
Officer, the Chief Operating Officer or a Vice President, and by the Chief
Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary of the Company or a
Restricted Subsidiary and delivered to the Trustee, which shall comply with
the applicable Indenture.

"Pari Passu Indebtedness" means any Indebtedness (secured or unsecured) of
the Company or any Guarantor that ranks pari passu in right of payment with
the Senior Notes or the Senior Note Guarantees, as applicable.

"Permitted Holders" means Thomas C. Brandenburg, J. Thomas Elliott and
Ronald W. Gavillet and Chase, CIBC, Hancock (currently known as Harbourvest
Partners, LLC), BT, the Northwood Entities, Enterprise (currently known as
Prime New Ventures) and Merrill Lynch Global Allocation Fund, Inc., and any of
their respective Subsidiaries (or a wholly-owned Subsidiary of the sole
stockholder of any of the foregoing Persons).

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"Person" means any individual, corporation, partnership, joint venture,
limited liability company, trust, unincorporated organization or government or
any agency or political subdivision thereof or other entity.

"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.

"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.

"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Company pursuant to an effective
reqistration statement filed under the Securities Act.

"Qualified Public Offering" means a Public Equity Offering resulting in net
proceeds to the Company of at least $35 million.

"Restricted Subsidiary" means (i) with respect to any Person other than the
Company and its Subsidiaries, a Subsidiary of such Person and (ii) with
respect to the Company and its Subsidiaries, any Subsidiary of the Company
that has not been classified as an "Unrestricted Subsidiary."

"Significant Restricted Subsidiary" means, a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.

"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.

"Strategic Investor" means, with respect to any relevant transaction, a
Telecommunications Company which, both as of the Business Day immediately
before the day of the closing of such transaction and the Business Day
immediately after the day of closing of such transaction, has, or whose parent
has, an equity market capitalization, a net asset value or annual revenues of
at least $2 billion on a consolidated basis. For purposes of this definition,
the term "parent" means any Person of which the relevant Strategic Investor is
a Subsidiary.

"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50%
of the outstanding partnership or similar interests of which are owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries
of such Person, or by such Person and one or more other Subsidiaries of such
Person and (iii) any limited partnership of which such Person or any
Subsidiary of such Person is a general partner.

"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses to use
copyrighted material) that are utilized by such Person, directly or
indirectly, for the design, development, construction, installation,
integration, operation, management or provision of telecommunications systems
and/or services, including without limitation, any businesses or services in
which the Company is currently engaged and including any computer systems used
in a Telecommunications Business. Telecommunications Assets shall also include
stock, joint venture or partnership interests in another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided, further, that if such stock, joint
venture or partnership interests are held by the Company or a Restricted
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to
the applicable Indenture unless such Person is a Joint Venture. The
determination of what constitutes Telecommunication Assets shall be made by
the Board of Directors and evidenced by a Board Resolution delivered to the
applicable Trustee.

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"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in (i) above or (iii) evaluating, participating or pursuing any other
activity or opportunity that is related to those specified in (i) or (ii)
above and includes, without limitation, any business in which the Company and
its Restricted Subsidiaries are currently engaged.

"Telecommunications Company" means any Person substantially all of the
assets of which consist of Telecommunications Assets.

"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S.
Government Obligation which is so specified and held, provided that (except as
required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal or interest of the U.S. Government Obligation
evidenced by such depository receipt.

"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
Indentures.

"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the Board of Directors or comparable body of such Person.

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DESCRIPTION OF WARRANTS

For purposes of this description of the Warrants, the term "Company" refers
to USN Communications, Inc. and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.

GENERAL

The 1996 Warrants were issued on September 30, 1996 pursuant to the 1996
Warrant Agreement. The 1997 Warrants were issued on August 18, 1997 and the
Consent Warrants were issued on August 25, 1997 pursuant to the 1997 Warrant
Agreement and the Consent Warrant Agreement, respectively. The Warrants are
subject to all terms in the applicable Warrant Agreement and holders of
Warrants are referred to the applicable Warrant Agreement, copies of which are
available from the Company on request, for a complete statement of such terms.
The statements and definitions of terms under this caption relating to the
Warrants are summaries and do not purport to be complete.

Each 1996 Warrant, 1997 Warrant and Consent Warrant entitle the holder
thereof to purchase 16.30474 shares, 1.34484 shares and 10 shares of Common
Stock, respectively, from the Company, subject to adjustment under certain
circumstances, at a price of $.01 per share. Subject to certain limitations,
the Warrants may be exercised at any time beginning 180 days from the date of
original issuance thereof and on or prior to the close of business on a date
eight years following the applicable Issue Date (the "Expiration Date").
Warrants that are not exercised by the applicable Expiration Date will expire.
The Company will give notice of expiration not less than 90 nor more than 120
days prior to the applicable Expiration Date to registered holders of the then
outstanding Warrants.

CERTAIN TERMS

Exercise

In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set
forth in the Warrant Certificate and payment in full of the Exercise Price for
each Warrant Share or other security as to which a Warrant is being exercised.
Payment for securities upon exercise of a Warrant may be made in cash or by
certified check, official bank check or bank cashier's check payable to the
order of the Company. Upon the exercise of any Warrant in accordance with the
applicable Warrant Agreement, the Warrant Agent shall instruct the Company to
transfer promptly to, or upon the written order of, the holder of such Warrant
appropriate evidence of ownership of any Warrant Share or other securities or
property to which such holder is entitled, registered or otherwise placed in
such name or names as such holder may direct in writing, and the Company shall
deliver such evidence of ownership to the person or persons entitled to
receive the same, including, without limitation, any cash payable to adjust
for fractional interests in Warrant Shares issuable upon such exercise. If
less than all of the Warrants evidenced by a Warrant Certificate are to be
exercised, a new Warrant Certificate will be issued for the remaining number
of Warrants. All Warrant Shares or other securities issuable by the Company
upon the exercise of the Warrants shall be validly issued, fully paid and
nonassessable.

No fractional Warrant Shares will be issued upon exercise of the Warrants.
If any fraction of a Warrant Share would, except for the foregoing provision,
be issuable upon the exercise of any Warrants (or specified portion thereof),
the Company will pay an amount in cash equal to the Current Market Price (as
defined in the applicable Warrant Agreement) per share of Common Stock, as
determined on the trading day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction, computed to the nearest
whole cent.

Certificates for Warrants will be issued in global form or registered form
as definitive warrant certificates and no service charge will be made for
registration of transfer or exchange upon surrender of any Warrant Certificate
at the office of the Warrant Agent maintained for that purpose. The Company
may require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration or transfer or
exchange of Warrant Certificates.

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Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then effective under,
or the exercise of such Initial Warrants is exempt from the registration
requirements of, the Securities Act. See "Registration Rights."

Adjustments

Subject to certain exceptions, the Exercise Price and the number of Warrant
Shares issuable upon exercise of the Warrants will be subject to adjustment on
the occurrence of certain events including: (i) the payment by the Company of
dividends (or the making of other distributions) with respect to Common Stock
payable in Common Stock or other shares of the Company's capital stock, (ii)
subdivisions, combinations and reclassifications of Common Stock, (iii) the
issuance to all holders of Common Stock of rights, options or warrants
entitling them to subscribe for Common Stock, or of securities convertible
into or exchangeable for shares of Common Stock, in either case for
consideration per share of Common Stock which is less than the Current Market
Price per share of Common Stock, (iv) the issuance or sale of shares of Common
Stock for consideration per share of Common Stock which is less than the
Current Market Price per share of Common Stock and (v) the distribution to all
holders of Common Stock of any of the Company's assets, debt securities or any
rights or warrants to purchase securities (excluding those rights and warrants
referred to in clause (iii) above and excluding cash dividends or other cash
distributions from current or retained earnings).

No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least 1.0% in the Exercise Price;
provided, that any adjustment which is not made will be carried forward and
taken into account in any subsequent adjustment.

Mergers, Consolidations and Certain Other Transactions

Except as otherwise provided herein, in the event the Company consolidates
with, merges with or into, or sells all or substantially all of its property
and assets to another Person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of a share of Common Stock is
entitled to receive upon completion of such consolidation, merger or sale of
assets. If the Company merges or consolidates with, or sells all or
substantially all of its property and assets to, another Person and, in
connection therewith, consideration to the holders of Common Stock in exchange
for their shares is payable solely in cash, or in the event of the
dissolution, liquidation or winding-up of the Company, then the holders of the
Warrants will be entitled to receive distributions on an equal basis with the
holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such
event, less the Exercise Price. Upon receipt of such payment, if any, the
Warrants will expire and the rights of the holders thereof will cease.

In case of any such merger, consolidation or sale of assets, the surviving
or acquiring Person and, in the event of any dissolution, liquidation or
winding-up of the Company, the Company, shall deposit promptly with the
Warrant Agent the funds or other consideration, if any, necessary to pay the
holders of the Warrants. After such funds and the surrendered Warrant
Certificate are received, the Warrant Agent shall make payment by delivering a
check in such amount as is appropriate (or, in the case of consideration other
than cash, shall transfer such other consideration as is appropriate) to such
Person or Persons as it may be directed in writing by the holders surrendering
such Warrants.

No Rights as Stockholders

The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions with respect to the Common Stock, receive
notice of any meeting of the stockholders of the Company, consent to any
action of the stockholders of the Company, receive notice of any other
stockholder meetings, or to any other rights as stockholders of the Company.

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RESERVATION OF SHARES

The Company has authorized and reserved for issuance such number of shares
of Class A Common Stock as shall be issuable upon the exercise of all
outstanding Warrants. Such shares of Class A Common Stock, when paid for and
issued, will be duly and validly issued, fully paid and non-assessable, free
of preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issue thereof.

AMENDMENT

From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the applicable Warrant
Agreement for certain purposes, including, without limitation, curing defects
or inconsistencies or making any change that does not materially adversely
affect the rights of any holder. Any amendment or supplement to the Warrant
Agreement that has a material adverse effect on the interests of the holders
of the Warrants issued thereunder shall require the written consent of the
holders of a majority of such outstanding Warrants. The consent of each holder
of the Warrants affected shall be required for any amendment pursuant to which
the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (other than pursuant
to adjustments provided in the applicable Warrant Agreement).

REGISTRATION RIGHTS

With respect to the Original Notes, the 1996 Warrants, the Warrant Shares
issuable upon exercise of the 1996 Warrants and the shares issuable upon
conversion of the Original Notes, the Company has entered into the 1996
Registration Rights Agreement, for the benefit of the holders of the Original
Notes and the 1996 Warrants. With respect to the 1997 Warrants and the Warrant
Shares issuable upon exercise of the 1997 Warrants, the Company has entered
into the 1997 Registration Rights Agreement for the benefit of the holders of
the 1997 Warrants. The Company has also granted the holders of the Consent
Warrants registration rights comparable to those set forth in the 1997
Registration Rights Agreement and has granted the holders of the Consent Notes
registration rights comparable to those set forth in the 1996 Registration
Rights Agreement. Pursuant to the Registration Rights Agreements, the Company
is required to keep the Registration Statement, of which this Prospectus forms
a part, effective for a specified time period. If the Registration Statement
ceases to be effective or fails to be usable for its intended purpose without
being succeeded immediately by a post-effective amendment to such Registration
Statement that cures such failure and that is itself declared effective for a
period of more than 30 consecutive business days, then commencing on the day
following the date on which such default occurs, the Company agrees to pay to
each holder of the Original Notes during the first 90-day period immediately
following the default Special Interest. The amount of Special Interest payable
to each such holder shall increase by an additional 0.5% per annum for each
subsequent 90-day period during which such default continues, up to a maximum
rate of 1.5% per annum. Special Interest shall cease to be payable when the
Registration Statement again becomes effective or usable. A holder of Original
Notes who is not entitled to the benefits of the Registration Statement (i.e.,
such holder has not elected to include information in the Registration
Statement) shall not be entitled to such Special Interest. Pursuant to the
terms of the Registration Rights agreements, holders of 1996 Warrants, 1997
Warrants and Original Notes may not dispose of such securities until June 9,
1998, 120 days following the consummation of the Initial Public Offering.
Reference is made to the 1996 Registration Rights Agreement and the 1997
Registration Rights Agreement, copies of which have been filed as exhibits to
the Registration Statement, for further information with respect to the
provisions of such agreements. In addition, the Company has entered into an
agreement, pursuant to which the Original Purchasers may, subject to certain
limitations, require the Company to register for public resale all or part of
the Common Stock held by the Original Purchasers. See "Risk Factors--Shares
Eligible for Future Sale" and "Certain Relationships and Related
Transactions."

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CERTAIN OTHER INDEBTEDNESS

The Company issued $48.5 million in aggregate principal amount at maturity
of 14% Senior Notes on September 30, 1996 and $152.7 million in aggregate
principal amount at maturity of 14 5/8% Senior Notes on August 18, 1997. 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
indebtedness of the Company, and will be 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 or
August 15, 2000, as applicable, cash interest will accrue on the 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, create restrictions on the ability of certain subsidiaries to
make distributions on their capital stock or to issue capital stock, create
liens, enter into transactions with affiliates or related persons, sell assets
or consolidate, merge or sell all or substantially all of their assets 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, to the redemption date. 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.

In connection with the Consent, the Company has granted the holders of the
14% Senior Notes the option to exchange all, or a portion, of the 14% Senior
Notes for 14 5/8% Senior Notes having an aggregate principal amount at
maturity equal to the 14% Senior Notes. Holders of the 14% Senior Notes
exchanged $31.5 million aggregate principal at maturity of 14% Senior Notes
for $ aggregate principal at maturity 14 5/8% Senior Notes on March ,
1998. Holders of the remaining 14% Senior Notes may exchange such notes for 14
5/8% Senior Notes prior to February 18, 1999.

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists 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

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

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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 Common Stock is quoted on the Nasdaq National Market under the symbol
"USNC."

PREFERRED STOCK

Currently, the Company has no shares of Preferred Stock designated for
issuance and no shares outstanding of Preferred Stock.

The Board of Directors has 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.

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.

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 194 of the Delaware General Corporation Law (the "DGCL")
or (iv) for any transaction from which the director derived an improper
personal benefit.

This provision is intended to afford directors additional protection and
limit their potential liability from suits alleging a breach of the duty of
care by a director. As a result of the inclusion of such a provision,
stockholders may be unable to recover monetary damages against directors for
actions taken by them that constitute negligence or gross negligence or that
are otherwise in violation of their fiduciary duty of care, although it may be
possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available to stockholders
in any particular situation, stockholders may not have an effective remedy
against a director in connection with such conduct.

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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 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 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 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 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 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 BYLAW PROVISIONS

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

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The Certificate of Incorporation also provides 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 Certificate of Incorporation and the Bylaws provide that special meetings
of stockholders may be called by a majority of the Board of Directors of the
Company. Stockholders are not 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 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 Certificate of Incorporation provides that the
Bylaws 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 Certificate of Incorporation and the Bylaws 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, 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
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

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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.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following summary describes the material United States federal income
tax consequences of an investment in the Securities, as well as certain
potential federal income tax consequences to the Company with respect to the
Securities. Except where noted, it deals only with Convertible Notes and
Warrants held as capital assets by United States Holders (as defined) and does
not deal with special situations, such as those of foreign persons, dealers in
securities, financial institutions, life insurance companies, holders whose
"functional currency" is not the U.S. dollar, or special rules with respect to
integrated transactions of which the ownership of common stock is a part (such
as certain hedging transactions), or certain "straddle" transactions.
Furthermore, the discussion below is based upon the provisions of the Code,
and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed
below. PROSPECTIVE PURCHASERS CONSIDERING AN INVESTMENT IN THE CONVERTIBLE
NOTES, INITIAL WARRANTS OR COMMON STOCK ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE SPECIFIC
TO THEM AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER
TAXING JURISDICTION.

Prospective purchasers should recognize that the present U.S. federal income
tax treatment of an investment in the Securities may be modified by
legislative, judicial or administrative action at any time, and that such
action may affect investments previously made. In addition, the recently
enacted Taxpayer Relief Act of 1997 could affect an investment in Securities
in that, among other things, it reduces the rate of federal income tax imposed
on capital gains of individual taxpayers for capital assets held more than
eighteen months (and reduces such rate even further for capital assets
acquired after the year 2000 and held more than five years). Prospective
purchasers should consult their own tax advisors concerning the effect on them
of such new legislation.

UNITED STATES HOLDERS

As used herein, "United States Holder" means a beneficial owner of a
Security who or which is (i) a citizen or resident of the United States, (ii)
a corporation organized in or under the laws of the United States or any state
thereof or the District of Columbia, or (iii) an estate otherwise subject to
United States federal income taxation on a net income basis in respect of a
Security, and any trust if a court within the United States can exercise
primary supervision over the administration of the trust and one or more
United States fiduciaries have the authority to control substantial decisions
of the trust.

TAXATION OF THE CONVERTIBLE NOTES

Original Issue Discount. The Convertible Notes were issued with original
issue discount ("OID") for federal income tax purposes. Accordingly, each
holder of Convertible Notes generally will be required to include OID in
income as it accrues on a yield-to-maturity basis over the term of the
Convertible Notes in advance of cash payments attributable to such income
(regardless of whether the holder is a cash or accrual basis taxpayer). The
amount of OID with respect to a Convertible Note equals the excess of the
stated redemption price at maturity of such Convertible Note over its issue
price. The stated redemption price at maturity includes all payments required
to be made on the Convertible Notes whether denominated as principal or
interest (other than payments subject to remote or incidental contingencies).
The Company intends to treat the payment of Special

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Interest, if any, as subject to such contingencies, which treatment is binding
on holders of Convertible Notes unless a holder explicitly discloses on its
tax return for the taxable year that includes the acquisition date of
Convertible Notes that its treatment is different. The Company's treatment is
not, however, binding on the Internal Revenue Service (the "IRS"). The issue
price of the Original Notes and the Consent Notes was the initial price at
which a substantial portion of the Original Notes and the Consent Notes was
sold (not including sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters or wholesalers) which was
$767.90 per Convertible Note.

A holder of a debt instrument that bears OID is required to include in gross
income an amount equal to the sum of the daily portions of OID for each day
during the taxable year in which the holder holds the debt instrument. The
daily portions of OID are determined by allocating to each day in an accrual
period the pro rata portion of the OID that is allocable to the accrual
period. The amount of OID that is allocable to an accrual period with respect
to the Convertible Notes is generally equal to the product of the adjusted
issue price of the Convertible Notes at the beginning of the accrual period
(the issue price of the Convertible Notes determined as described above,
generally increased by all prior accruals of OID and decreased by the amount
of payments made on the Convertible Notes) and the Convertible Notes' yield-
to-maturity (the discount rate, which, when applied to all payments under the
Convertible Notes, results in a present value equal to the issue price of the
Convertible Notes). In the case of the final accrual period, the allocable OID
generally is the difference between the amount payable at maturity and the
adjusted issue price at the beginning of the accrual period. All payments on a
Convertible Note generally will be viewed first as a payment of previously
accrued OID (to the extent thereof), with payments considered made from the
earliest accrual period, and then as a payment of principal.

The Company will furnish annually to the IRS and to holders (other than with
respect to certain exempt holders, including, in particular, corporations)
information with respect to the OID accruing while the Convertible Notes were
held by the holders.

Premium. If a holder purchases a Convertible Note for an amount that is
greater than such Convertible Note's stated redemption price at maturity, such
holder will be considered to have purchased such Convertible Note with
"amortizable bond premium" equal in amount to such excess, and generally will
not be required to include OID in income. A holder may elect to amortize such
premium, using a constant yield method, over the remaining term of such
Convertible Note with reference to either the amount payable on maturity or,
if it results in a smaller premium attributable to the period through the
earlier call date, with reference to the amount payable on the earlier call
date. An election to amortize bond premium applies to all taxable debt
obligations then owned and thereafter acquired by the holder and may be
revoked only with the consent of the IRS.

If a holder of a Convertible Note purchases the Convertible Note for an
amount greater than the Convertible Note's adjusted issue price but less than
such Convertible Note's stated redemption price at maturity, then the holder
will be required to include annual accruals of OID in gross income in
accordance with the rules described above; however, the amount of OID
includable in income will be reduced to reflect such acquisition premium. The
includable OID (as otherwise determined) will be reduced by an amount equal to
the OID multiplied by a fraction, the numerator of which is such excess and
the denominator of which is the OID for the period from the date of
acquisition until the maturity date.

Market Discount. If a holder purchases a Convertible Note for an amount that
is less than its adjusted issue price, by at least .025% of its adjusted issue
price times the number of remaining whole years to maturity, then such holder
will be considered to have purchased such Convertible Note with "market
discount" equal in amount to such difference between the adjusted issue price
and purchase price. In that event, gain realized by the holder upon the sale,
retirement or certain other dispositions of the Convertible Note will be
treated as ordinary interest income to the extent of the accrued market
discount. Market discount on a Convertible Note will be treated as accruing
ratably over such Note's term, or, at the holder's election, under a constant
yield method. In addition, such holder will be required to defer the deduction
of a portion of the interest paid on any indebtedness incurred or continued to
purchase or carry the Convertible Note (unless such holder elects to include
market

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discount in income currently as it accrues, on either a ratable or constant
yield basis). Such election, once made, applies to all market discount bonds
acquired by the taxpayer on or after the first day of the taxable year to
which such election applies, and may not be revoked without the consent of the
IRS.

Disposition of Convertible Notes. A holder will generally recognize gain or
loss upon the sale, exchange, retirement or other disposition of Convertible
Notes equal to the difference between the amount realized on the disposition
and the holder's adjusted tax basis in the Convertible Notes. A holder's
adjusted tax basis in a Convertible Note will generally be the cost of the
Convertible Note, increased by any OID previously included in income by such
holder (and the accrual of market discount, if any, which the holder has
previously included in income) and decreased by the amount of any deductions
for amortizable bond premium. Except as described above under "Market
Discount," such gain or loss generally would be capital gain or loss and would
be long-term capital gain or loss if the holding period for the Convertible
Notes is more than one year.

Backup Withholding. Under certain circumstances, a holder may be subject to
backup withholding at a 31% rate on payments received with respect to the
Convertible Notes. This withholding generally applies only if the holder (i)
fails to furnish his or her social security or other taxpayer identification
number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS
that he or she has failed to report payment of interest and dividends properly
and the IRS has notified the Company that he or she is subject to backup
withholding or (iv) fails, under certain circumstances, to provide a certified
statement, signed under penalty of perjury, that the TIN provided is his or
her correct number and that he or she is not subject to backup withholding.
Any amount withheld from a payment to a holder under the backup withholding
rules is allowable as a credit against such holder's federal income tax
liability, provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and foreign individuals
who comply with certain certification requirements) are not subject to backup
withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.

CERTAIN POTENTIAL FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY

The Convertible Notes may constitute "corporate acquisition indebtedness"
if, among other things, the proceeds of the Notes are used to pay for the
purchase of stock or at least two-thirds of the operating assets of another
corporation. To the extent the Convertible Notes constitute corporate
acquisition indebtedness, under Section 279 of the Code the maximum amount of
interest or original issue discount the Company can deduct with respect
thereto in any taxable year is $5 million, reduced by any interest incurred on
indebtedness to acquire stock or operating assets but which does not qualify
as corporate acquisition indebtedness.

WARRANTS

Exercise. No gain or loss will be recognized for federal income tax purposes
upon exercise of a Warrant (except that gain will be recognized to the extent
cash is received in lieu of fractional shares). A holder's initial tax basis
in an Initial Warrant will be equal to the price the holder pays for such
Warrant. A holder's initial tax basis in a Contingent Warrant will be equal to
the fair market value on the date of issuance, assuming such holder receives
the Contingent Warrant from the Company as a result of the failure by the
Company to consummate a Qualified Public Offering or Qualified Sale of the
Company. The tax basis of shares of Common Stock acquired upon exercise of a
Warrant will be equal to the sum of (i) the holder's tax basis in such Warrant
and (ii) the exercise price. The holding period of such Common Stock acquired
upon exercise of the Warrants will begin on the date of exercise of the
Warrant, unless the Warrant is treated as stock for federal income tax
purposes (as discussed below). In the event the Warrant is treated as stock,
the holding period of the Common Stock acquired upon exercise will include the
period during which the Warrants were held.

Disposition. In general, the sale, exchange or other taxable disposition of
a Warrant will result in gain or loss to the holder in an amount equal to the
difference between the amount realized on such sale, exchange or other
disposition and the holder's tax basis in the Warrant. Such gain or loss
generally will be long-term capital gain or loss if the Warrant is held by the
holder for more than one year at the time of the disposition and the

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Common Stock issuable upon exercise of such Warrant would have been a capital
asset if acquired by the holder. However, the IRS might assert that the
Warrants represent an equity interest in the Company because, among other
things, the Warrants are exercisable for nominal consideration. In the event
the Warrants are treated as stock for federal income tax purposes, the sale of
Warrants to the Company should be governed by the stock redemption provisions
of Section 302 of the Code. In such a case, redemptions of Warrants by the
Company would be treated as a dividend and taxed as ordinary income to the
extent of the Company's current and accumulated earnings and profits, unless,
taking into account certain constructive ownership rules, the holder
terminated his entire equity interest in the Company or the redemption was
"not essentially equivalent to a dividend." In a published ruling, the IRS has
indicated that a holder whose actual and constructive stock ownership in an
issuer was minimal and who exercised no control over corporate affairs was
generally entitled to capital gain or loss treatment upon the redemption of
his stock so long as his percentage stock ownership was thereby reduced.

Expiration. The expiration of a Warrant should generally result in a long-
term capital loss to the holder equal to the holder's tax basis in the Warrant
if the Warrant is held by the holder for more than one year at the time of the
expiration and the Common Stock issuable upon exercise of the Warrant would
have been a capital asset if acquired by him.

Adjustments to Conversion Ratio. Adjustments made to the number of shares
that may be acquired upon the exercise of a Warrant, or the failure to make
such adjustments, may result in a taxable distribution to the holders of
Warrants pursuant to Section 305 of the Code.

CONVERSION OF CONVERTIBLE NOTES

Exercise. A holder's conversion of Convertible Notes into Common Stock
generally will not be a taxable event (except with respect to cash received in
lieu of a fractional share of Common Stock) for federal income tax purposes. A
holder's basis in the Common Stock received upon conversion generally will be
the same as the holder's basis (exclusive of any tax basis allocable to a
fractional share) in the underlying Convertible Note. A holder's holding
period in the Common Stock received upon conversion generally will include the
holding period in the underlying Convertible Note.

Adjustments to Conversion Ratio. Adjustments made to the number of shares
that may be acquired upon the conversion of the Convertible Notes, or the
failure to make such adjustments, may result in a taxable distribution to the
holders of Convertible Notes pursuant to Section 305 of the Code.

PLAN OF DISTRIBUTION

The Securities may be offered by the Selling Securityholders from time to
time in transactions for their own account at negotiated prices. The Selling
Securityholders may effect the sale of the Securities by selling the
Securities to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders or the purchasers of Securities for whom such broker-
dealers may act as agent or to whom they sell as principal, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions). The Selling Securityholders and any broker-dealers that act in
connection with the sale of the Securities might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act and
any commissions received by them and any profit on the resale of the
Securities as principal might be deemed to be underwriting discounts and
commissions under the Securities Act.

At the time a particular sale of any of the Securities is made, to the
extent required, a Prospectus Supplement will be distributed which will set
forth the amount of Securities being sold and the terms of the sale, including
the name or names of any underwriters, brokers, dealers or agents (whether
such party is acting as a principal or

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as agent for the Selling Securityholders), any discounts, commissions,
concessions and other items constituting compensation from the Selling
Securityholders and any discounts, commissions or concessions allowed or re-
allowed or paid to dealers.

The Company will pay all expenses incident to the sale of the Securities
other than the fees and expenses of the Selling Securityholders and
underwriting discounts and commissions.

This Prospectus has been prepared for use by the Initial Purchasers in
connection with offers and sales of the Convertible Notes and Warrants, which
may be made by them from time to time in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Such Purchasers may act as principal or agent in such transactions. Each of
the Initial Purchasers has advised the Company that it intends to make a
market for the Convertible Notes and Warrants; however, the Initial Purchasers
are not obligated to do so. Any market making may be discontinued at any time
without notice. Therefore, there can be no assurance that an active trading
market for the Convertible Notes and Warrants will develop or if one does
develop, that it will be sustained. The Company does not intend to apply for
listing of any of the Convertible Notes and Warrants on any securities
exchange or to seek approval for quotation through any automated quotation
system.

SELLING SECURITYHOLDERS

The Registration Statement of which this Prospectus forms a part has been
filed pursuant to Rule 415 under the Securities Act to afford the holders of
the Securities the opportunity to sell such Securities in a public transaction
rather than pursuant to an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to avail itself of that
opportunity, a holder must notify the Company in writing of its intention to
sell Securities and request that the Company file a supplement to this
Prospectus or an amendment to the Registration Statement, if required,
identifying such holder as a Selling Securityholder and disclosing such other
information concerning the Selling Securityholder and the Securities to be
sold as may then be required by the Securities Act and the rules of the
Commission. No offer or sale pursuant to this Prospectus may be made by any
holder until such a request has been made and until any such supplement has
been filed or any such amendment has become effective.

LEGAL MATTERS

The validity of the Securities was passed upon for the Company by Skadden,
Arps, Slate, Meagher & Flom (Illinois).

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 (which expresses an unqualified opinion and includes an explanatory
paragraph concerning substantial doubt about the entity's ability to continue
as a going concern) 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, and the financial statements of Connecticut Mobilecom, Inc. as of
and for the year ended April 30, 1995, have been included in the Prospectus in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.

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The report of KPMG Peat Marwick LLP covering the April 30, 1997 consolidated
financial statements of Hatten Communications Holding Company, Inc. and
Subsidiaries 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.

The financial statements of Connecticut Telephone and Communications
Systems, Inc. as of April 30, 1995 and for the fiscal year then ended included
in this Prospectus have been audited by Kostin, Ruffkess & Company, LLC,
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.

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GLOSSARY

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

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.

107
<PAGE>

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).

108
<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
Stockholders'
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

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.

<CAPTION>
PAGE
----
<S> <C> <C>
INDEPENDENT
AUDITORS'
REPORT........ F-38
FINANCIAL
STATEMENTS:
Balance Sheet
at April 30,
1995........ F-39
Statement of
Income and
Deficit for
the year
ended April
30, 1995.... F-40
Statement of
Cash Flows
for the year
ended April
30, 1995.... F-41
Notes to
Financial
Statements.. F-42

CONNECTICUT MOBILECOM, INC.

<CAPTION>
PAGE
----
<S> <C> <C>
INDEPENDENT
AUDITORS'
REPORT........ F-45
FINANCIAL
STATEMENTS:
Balance Sheet
at April 30,
1995........ F-46
Statement of
Operations
for the year
ended April
30, 1995.... F-47
Statement of
Stockholders'
Deficit for
the year
ended April
30, 1995.... F-48
Statement of
Cash Flows
for the year
ended April
30, 1995.... F-49
Notes to
Financial
Statements.. F-50
</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%, 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

Providence, Rhode Island
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>
ASSETS (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 (notes 4 and 6)............ 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 --
Note payable (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) Note Payable

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, secured by substantially all assets of the
Company................................................ $ 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, secured
by substantially all assets of the Company............. 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,
secured by substantially all assets of the Company..... 3,700,000 --
Note payable to limited partnership, bearing interest at
10% per annum, due January 31, 1999, secured by
substantially all assets of the Company................ 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>

INDEPENDENT AUDITORS' REPORT

To The Board of Directors
Connecticut Telephone and Communication Systems, Inc.

We have audited the accompanying balance sheet of Connecticut Telephone and
Communication Systems Inc. as of April 30, 1995, and the related statements of
income and deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Connecticut Telephone and
Communication Systems, Inc. as of April 30, 1995, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

Kostin, Ruffkess & Company, llc

West Hartford, Connecticut
May 24, 1995

F-38
<PAGE>

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.

BALANCE SHEET
APRIL 30, 1995

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................ $ 236,244
Trade accounts receivable (net of allowance for doubtful
accounts of $71,000)........................................... 2,542,720
Inventory....................................................... 465,314
Prepaid and other expenses...................................... 205,885
Related party receivable........................................ 311,857
-----------
Total current assets.......................................... 3,762,020
-----------
Property and equipment............................................ 964,005
Less: accumulated depreciation.................................. (455,700)
-----------
508,305
-----------
Cellular accounts................................................. 1,212,354
Less: accumulated amortization.................................. (1,212,354)
-----------
--
-----------
Other assets:
Deposits........................................................ 9,354
Financing fees (net of accumulated amortization of $94,880)..... 108,431
-----------
117,785
-----------
$ 4,388,110
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable--current portion.................................. $ 887,037
Leases payable--current portion................................. 24,504
Accounts payable: trade......................................... 598,729
SNET............................................................ 1,582,792
Accrued expenses and taxes...................................... 430,517
Income tax payable.............................................. 250
Deferred revenue................................................ 211,268
Customer deposits............................................... 54,998
-----------
Total current liabilities..................................... 3,790,095
-----------
Long-term debt:
Notes payable--net of current portion........................... 3,350,878
Leases payable--net of current portion.......................... 15,299
-----------
Total long-term debt.......................................... 3,366,177
-----------
Stockholders' deficit:
Common stock, $1 par value; 1,000 shares authorized, issued and
outstanding.................................................... 1,000
Deficit......................................................... (2,769,162)
-----------
(2,768,162)
-----------
$ 4,388,110
===========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-39
<PAGE>

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.

STATEMENT OF INCOME AND DEFICIT
FOR THE YEAR ENDED APRIL 30, 1995

<TABLE>
<S> <C>
Sales revenue............................................... $16,181,443
Cost of sales............................................... 11,328,221
-----------
Gross profit................................................ 4,853,222
New subscriber acquisition costs............................ 1,663,986
General and administrative expenses......................... 2,961,117
-----------
228,119
Other income (expenses):
Amortization of financing fees.............................. (177,628)
Interest income............................................. 3,230
Interest expense............................................ (403,338)
Other, net.................................................. (21,868)
Income taxes................................................ (250)
-----------
Net loss.................................................... (371,735)
Deficit, beginning of year.................................. (2,397,427)
-----------
Deficit, end of year........................................ $(2,769,162)
===========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-40
<PAGE>

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS , INC.

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1995

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $(371,735)
Adjustments to reconcile net income to cash provided by operating
activities:
Unrealized loss on investment................................... 23,017
Gain on sale.................................................... (278)
Amortization and depreciation................................... 280,466
(Increase) decrease in:
Accounts receivable........................................... (900,751)
Inventory..................................................... 86,209
Prepaid expenses.............................................. 54,616
Deposits...................................................... 460
Related party receivable...................................... (311,857)
Increase (decrease) in:
Accounts payable.............................................. 753,774
Accrued expenses and taxes.................................... 200,907
Customer deposits............................................. 2,121
Deferred revenue.............................................. 211,268
---------
Net cash flows provided by operating activities..................... 28,217
---------
Cash flows from investing activities:
Proceeds from sale................................................ 4,500
Purchase of equipment............................................. (120,288)
Investment........................................................ (23,017)
---------
Cash flows used in investing activities............................. (138,805)
---------
Cash flows from financing activities:
Proceeds received from long-term debt............................. 280,000
Repayment of debt................................................. (891,788)
Repayment of stockholder loan..................................... 75,000
---------
Net cash flows used in financing activities......................... (536,788)
Net decrease in cash and equivalents................................ (647,376)
Cash and equivalents, beginning of year............................. 883,620
---------
Cash and equivalents, end of year................................... $ 236,244
=========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-41
<PAGE>

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.

NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1995

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Business

The Company provides telecommunication services to cellular phone users in
Connecticut.

Inventory

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

Property and Equipment

Property and equipment are stated at cost. Depreciation expense has been
computed using accelerated methods over the useful lives of the assets.

Cellular Accounts

Cellular accounts represent lines purchased by Connecticut Telephone. These
accounts are stated at cost. Amortization has been computed using the
straight-line method over a three year term.

Finance Fees

Finance fees represent legal fees incurred to obtain bank financing. These
fees are being amortized over sixty months.

Deferred Revenue

Statement of Cash Flows

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. The following is supplementary cash flows
information:

<TABLE>
<S> <C>
Interest paid.................................................... $403,785
Income taxes paid................................................ 250
</TABLE>

NOTE 2--PROPERTY AND EQUIPMENT:

Equipment and furniture are summarized by major classifications as follows:

<TABLE>
<S> <C>
Store equipment................................................. $133,482
Office equipment................................................ 377,083
Other equipment................................................. 43,710
Rental equipment................................................ 56,264
Leasehold improvements.......................................... 286,735
Automobiles..................................................... 33,464
Office furniture................................................ 33,267
--------
964,005
Less: accumulated depreciation................................ 455,700
--------
$508,305
========
</TABLE>

F-42
<PAGE>

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.

NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3--INVESTMENT:

The Company has an investment in a real estate limited partnership, which
has gone into bankruptcy. This investment has been written down to $1 and the
Company has recorded an unrealized loss of $23,016.

NOTE 4--NOTES PAYABLE:

Note Payable--Springwich Cellular Limited Partnership

Payable in monthly installments of $24,000 including principal and interest
through December 1996. Monthly principal and interest installments from
January through December 1997 will be $44,000 with a final payment equal to
the outstanding balance in January 1998.

Interest is charged at 1% over prime, which at April 30, 1995 was 9.0%. The
balance owed on this note at April 30, 1995 was $1,217,382.

Note Payable--Fleet Bank

Payable in monthly installments of $47,248 plus interest through November
1997 with a final payment equal to the outstanding principal balance in
December 1997.

Interest is charged at a per annum rate equal to 1% over the prime, which at
April 30, 1995 was 9.0%. The balance owed on this note at April 30, 1995 was
$2,880,533.

Both notes are secured by a first priority security interest in all Company
assets. In addition, there is a collateral assignment of $5,000,000 of life
insurance proceeds on the president of the Company. Also, the notes contain
certain restrictive covenants pertaining to financial ratios, number of
telephone lines and cash flow coverage. The Company was in violation of
certain covenants which have been waived by the bank.

Note Payable--Fleet Bank, Short-term

The Company has a revolving promissory note with a maximum borrowing of
$280,000. Interest is to be charged using a combination of the 30 and 90 day
LIBOR rates. The interest rate being charged as of April 30, 1995 was 8.8125%.
The balance owed on this note at April 30, 1995 was $140,000. Payments of
interest and principal of $70,000 are made monthly.

Total interest expense for the year ended April 30, 1995 was $411,915.
Principal payments due on notes payable are as follows:

<TABLE>
<CAPTION>
APRIL 30,
---------
<S> <C>
1996.......................... $ 887,037
1997.......................... 845,862
1998.......................... 2,505,016
</TABLE>

NOTE 5--CAPITAL LEASE:

The Company acquired a telephone system and financed the purchase through
two capital leases. The cost of this new equipment totalled $68,708, which was
capitalized into office equipment. At April 30, 1995, accumulated amortization
amounted to $26,645. These leases have been capitalized and are being
amortized over the term of the leases.

F-43
<PAGE>

CONNECTICUT TELEPHONE AND COMMUNICATION SYSTEMS, INC.

NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)

Minimum future lease payments under these capital leases are as follows:

<TABLE>
<CAPTION>
APRIL 30, AMOUNT
--------- -------
<S> <C>
1996............................................................. $30,370
1997............................................................. 15,957
-------
Total minimum lease payments..................................... 46,327
Less: amount representing interest............................... (6,524)
-------
Present value of net minimum lease payments...................... $39,803
=======
</TABLE>

NOTE 6--RELATED PARTY TRANSACTIONS:

The Company has an expense reimbursement agreement with a corporation which
is owned by a stockholder of Connecticut Telephone and Communication Systems,
Inc. The agreement was created to reimburse the Company for various operating
expenses paid on behalf of the affiliate. Amount due at April 30, 1995 was
$311,857, which is included in accounts receivable on the balance sheet. Total
expense reimbursements for the year ended April 30, 1995 was $1,243,768.

The Company was owed $75,000 from a majority stockholder. This note was
repaid in 1994.

Connecticut Telephone and Communication Systems, Inc. leases five of their
operating facilities from Company stockholders. Rent is paid on a month to
month basis. (See Note 8)

The related party receivable represents amounts due from a company with
common ownership for its share of allocated overhead. There are no specific
terms of repayment.

NOTE 7--INCOME TAXES:

There is no provision for income taxes due to current year operating losses.
Approximately $2,425,000 remains to reduce future Federal taxable income, if
any, through 2010. Approximately $2,423,000 remains to reduce future State
taxable income, if any, expiring in various years through 2000.

NOTE 8--LONG-TERM LEASES:

The Company leases its store buildings under operating leases. Connecticut
Telephone and Communication Systems, Inc. is responsible for its own insurance
and property taxes. Rent expense for the year ended April 30, 1995 was
$352,956, of which $289,200 was paid to Company stockholders.

Minimum future rental payments under noncancellable operating leases having
remaining terms in excess of one year are as follows:

<TABLE>
<CAPTION>
APRIL 30, AMOUNT
--------- --------
<S> <C>
1996............................................................ $ 59,500
1997............................................................ 28,000
1998............................................................ 28,000
1999............................................................ 28,000
2000............................................................ 7,002
--------
Total minimum future rental payments.......................... $150,502
========
</TABLE>

NOTE 9--ECONOMIC DEPENDENCY:

The Company obtains substantially all of its services from one source. At
April 30, 1995, the Company owed this supplier approximately $2,879,021.

NOTE 10--OFF BALANCE SHEET RISK:

During the year ended April 30, 1995, the Company had an excess of $100,000
in a single bank. Amounts over $100,000 are not insured by the Federal Deposit
Insurance Corporation.

F-44
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Connecticut Mobilecom, Inc.:

We have audited the accompanying balance sheet of Connecticut Mobilecom,
Inc. as of April 30, 1995 and the related statements of operations,
stockholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Connecticut Mobilecom,
Inc. as of April 30, 1995 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Providence, Rhode Island
January 16, 1998

F-45
<PAGE>

CONNECTICUT MOBILECOM, INC.

BALANCE SHEET

APRIL 30, 1995

<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash.................................................................. $ 127,635
Accounts receivable, net of allowance for doubtful accounts of
$94,160.............................................................. 779,882
Inventory............................................................. 117,481
Prepaid expenses and other current assets............................. 153,294
----------
Total current assets.............................................. 1,178,292
----------
Property and equipment (note 2)......................................... 87,135
Less accumulated depreciation......................................... 51,962
----------
Property and equipment, net....................................... 35,173
----------
Related party receivable (note 3)....................................... 836,678
Intangible assets, net of accumulated amortization of $58,704........... 21,087
----------
Total assets...................................................... $2,071,230
==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C>
Current liabilities:
Accounts payable:
Trade............................................................... $ 199,541
Bell Atlantic Nynex Mobile.......................................... 1,368,689
Accrued expenses...................................................... 89,697
Customer deposits..................................................... 1,232
Deferred revenue...................................................... 140,358
Income taxes payable (note 4)......................................... 858
Related party payable (note 3)........................................ 469,040
----------
Total current liabilities......................................... 2,269,415
----------
Stockholders' deficit:
Common stock, no par value, $.50 stated value, 5,000 shares
authorized, 2,000 shares issued and outstanding...................... 1,000
Accumulated deficit................................................... (199,185)
----------
Total stockholders' deficit....................................... (198,185)
----------
Total liabilities and stockholders' deficit....................... $2,071,230
==========
</TABLE>

See accompanying notes to financial statements.

F-46
<PAGE>

CONNECTICUT MOBILECOM, INC.

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED APRIL 30, 1995

<TABLE>
<S> <C>
Revenues........................................................... $4,340,364
Cost of revenues................................................... 2,545,052
----------
Gross profit................................................... 1,795,312
----------
New subscriber acquisition costs................................... 560,145
General and administrative expenses................................ 1,358,089
----------
1,918,234
----------
Operating loss................................................. (122,922)
Other income (expense):
Interest income.................................................. 19,067
Interest expense................................................. (7,606)
Amortization of intangible assets................................ (23,972)
Other, net....................................................... (87)
----------
Loss before income taxes....................................... (135,520)
Income tax expense................................................. 858
----------
Net loss....................................................... $ (136,378)
==========
</TABLE>

See accompanying notes to financial statements.

F-47
<PAGE>

CONNECTICUT MOBILECOM, INC.

STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE YEAR ENDED APRIL 30, 1995

<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
------ ----------- -------------
<S> <C> <C> <C>
Balances at April 30, 1994 (unaudited)......... $1,000 (62,807) (61,807)
Net loss....................................... -- (136,378) (136,378)
------ -------- --------
Balances at April 30, 1995..................... $1,000 (199,185) (198,185)
====== ======== ========
</TABLE>

See accompanying notes to financial statements.

F-48
<PAGE>

CONNECTICUT MOBILECOM, INC.

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED APRIL 30, 1995

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.......................................................... $(136,378)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................... 53,151
Provision for doubtful accounts................................. 85,432
Increase in accounts receivable................................. (298,979)
Increase in inventory........................................... (23,520)
Increase in prepaid expenses and other current assets........... (31,044)
Increase in accounts payable.................................... 773,744
Increase in accrued expenses.................................... 23,341
Decrease in customer deposits................................... (8,768)
Increase in deferred revenue.................................... 40,781
Increase in income taxes payable................................ 608
---------
Net cash provided by operating activities..................... 478,368
---------
Cash flows from investing activities:
Additions to property and equipment............................... (32,657)
---------
Net cash used in investing activities......................... (32,657)
---------
Cash flows from financing activities:
Increase in advances to related entity............................ (734,177)
Change in other related party receivable/payable.................. 415,227
---------
Net cash used in financing activities......................... (318,950)
---------
Increase in cash and cash equivalents............................... 126,761
Cash and cash equivalents:
Beginning of year................................................. 874
---------
End of year....................................................... $ 127,635
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................ $ 7,606
=========
Income taxes.................................................... $ 250
=========
</TABLE>

See accompanying notes to financial statements.

F-49
<PAGE>

CONNECTICUT MOBILECOM, INC.

NOTES TO FINANCIAL STATEMENTS

APRIL 30, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies:

(a) Description of Business

Connecticut Mobilecom, Inc. (the "Company") is a reseller of cellular and
paging services to subscribers in Connecticut.

(b) Revenue Recognition

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

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

(d) Inventory

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

(e) 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.

(f) Intangible Assets

Intangible assets includes cellular lines which represents the cost of
direct acquisition of subscribers from other cellular companies. The cost of
cellular lines is being amortized over 36 months using the straight-line
method. Amortization expense totaled $23,972 for the year ended April 30,
1995.

(g) Deferred Revenue

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

(h) Income Taxes

F-50
<PAGE>

CONNECTICUT MOBILECOM, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(i) New Subscriber Acquisition Costs

(j) 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,
including estimates of useful lives of cellular lines, 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.

(2) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
USEFUL
LIFE
---------
<S> <C> <C>
Office equipment........................................ 5-7 years $18,155
Dispatch equipment...................................... 5 years 68,980
-------
$87,135
=======
</TABLE>

(3) RELATED PARTY TRANSACTIONS

Connecticut Mobilecom, Inc. has provided an unsecured working capital loan
to an entity which is partially owned by a stockholder of the Company.
Interest is being charged at variable rates. The balance at April 30, 1995 was
$836,678. Interest income in the amount of $11,461 was recognized on the loan
during the year ended April 30, 1995. See Note 5.

The Company has an expense reimbursement agreement with a corporation which
is owned by the stockholders of Connecticut Mobilecom, Inc. The agreement was
created to reimburse the affiliate for various operating expenses paid on
behalf of the Company. Amounts owed at April 30, 1995 were $311,857. Total
expense reimbursements for the year ended April 30, 1995 were $1,243,768.
Interest expense in the amount of $7,606 was recognized on the amounts owed
during the year ended April 30, 1995.

As of April 30, 1995, the Company owed a majority stockholder $157,183. This
loan is non-interest bearing. See Note 5.

The Company leases its operating facility from a stockholder under an
operating lease agreement scheduled to expire in December 1998. Rent is paid
on a monthly basis at $4,330 per month. Connecticut Mobilecom, Inc. is
responsible for its own insurance and property taxes. Rent expense for the
year ended April 30, 1995 was $51,960. Future minimum lease payments for the
fiscal years ended April 30 are as follows: 1996--$51,960; 1997--$51,960;
1998--$51,960; 1999--$34,640.

(4) INCOME TAXES

Federal income tax expense totaled $608 for the year ended April 30, 1995.
The minimum state tax expense of $250 has been recorded for the year ended
April 30, 1995.

F-51
<PAGE>

CONNECTICUT MOBILECOM, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The net current deferred tax asset totaled $65,000 at April 30, 1995, and
consisted primarily of temporary differences for accounts receivable,
principally for allowances for uncollectible accounts, and the differences in
the timing of revenue recognition for book and tax purposes.

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 $65,000 has been established to
reduce total deferred tax assets to zero at April 30, 1995.

(5) SUBSEQUENT EVENTS

The Company formalized its working capital loan arrangement with the related
entity on July 15, 1995 by accepting a note in the amount of $436,840 and
converting $542,000 in amounts due from the related entity into an investment
in the related entity. The total amount of $978,840 represented the amount
outstanding as of the date of the note, which amount included additional
advances made after April 30, 1995, including accrued interest thereon.

On January 31, 1996, the stockholders of the Company contributed all of the
outstanding shares of the Company to Hatten Communications Holding Company,
Inc. ("Hatten") in exchange for an equivalent interest in Hatten. At that
date, the Company became a wholly-owned subsidiary of Hatten. Subsequent to
the recapitalization, the loan due to the stockholder of the Company was
repaid.

F-52
<PAGE>

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

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER
OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
TO SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.

-----------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Disclosure Regarding Forward-Looking Statements............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 15
Use of Proceeds............................................................ 27
Price Range of Common Stock and Dividend Policy............................ 27
Capitalization............................................................. 28
Selected Historical Consolidated Financial and Operating Data.............. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................. 37
Industry Overview: The Local Telecommunications Service Industry........... 43
Business................................................................... 44
Management................................................................. 58
Certain Relationships and Related Transactions............................. 67
Stock Ownership............................................................ 69
Description of Convertible Notes........................................... 71
Description of Warrants.................................................... 94
Registration Rights........................................................ 96
Certain Other Indebtedness................................................. 97
Description of Capital Stock............................................... 97
Certain Federal Income Tax Considerations.................................. 101
Plan of Distribution....................................................... 104
Selling Securityholders.................................................... 105
Legal Matters.............................................................. 105
Experts.................................................................... 105
Glossary................................................................... 107
Index to Consolidated Financial Statements................................. F-1
</TABLE>

-----------

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

---------------
PROSPECTUS
---------------

LOGO

USN COMMUNICATIONS, INC.

9% CONVERTIBLE SUBORDINATED
DISCOUNT NOTES DUE 2004

9% CONVERTIBLE SUBORDINATED
DISCOUNT NOTES DUE 2006

WARRANTS TO PURCHASE CLASS A
COMMON STOCK

CLASS A COMMON STOCK

DECEMBER 16, 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.................. $ 2,950
Printing and Engraving Expenses...................................... 100,000*
Legal Fees and Expenses.............................................. 60,000*
Accounting Fees and Expenses......................................... 44,000*
--------
Total............................................................ $206,950*
========
</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.

(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

II-1
<PAGE>

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 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. (now known as HarbourVest 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 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 stated
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., HarbourVest Venture Partners V-Direct Fund L.P. and
Prime VIII, L.P. purchased, in the aggregate, 30,209 shares of 9.0% Cumulative
Convertible Pay-In-Kind Preferred Stock, Series A (the "Series A Preferred
Stock"), for an aggregate

II-2
<PAGE>

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
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 purchased, in the aggregate, 15,000
shares of Series A Preferred Stock, for an aggregate purchase price of $15
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.

(11) On January 13, 1998, MLAM purchased $13,022,600 aggregate principal at
maturity of 9% Consent Convertible Subordinated Notes due 2006 (the "Consent
Notes") for an aggregate purchase price of $10,000,000. The Consent Notes 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.

(12) On February 9, 1998, concurrent with the consummation of the Company's
initial public offering, all outstanding shares of Series A Preferred Stock
and 9% Preferred Stock were converted into shares of Common Stock. The
shares of Common Stock were not registered under the Securities act pursuant
to the exemption from registration set forth in section 31 3(a)(9) of the
Securities Act.

(13) On March , 1998, MLAM exchanged $31.5 million aggregate principal
amount at maturity of 14% Senior Notes for million aggregate principal
amount at maturity of 14 5/8% Senior Notes. The 14 5/8% Senior Notes were not
registered in reliance upon the exemption from registration set forth in
Section 3 (a)(9) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-38381).)
3.3 Amended and Restated Bylaws of the Registrant. (Incorporated by
reference to the Registrant's Registration Statement on Form S-1 (File
No. 333-38381).)
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"). (Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (File No. 333-37621).)
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"). (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
4.3 Supplemental Indenture No. 1, dated as of August 12, 1997, by and
between the Company and the Trustee, to the Convertible Note
Indenture. (Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (File No. 333-37621).)
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------- DESCRIPTION
<C> <S>
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"). (Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (File No. 333-16265).)
4.5 Supplemental Indenture, dated as of March 17, 1997, by and between the
Company and the Trustee, to the 14% Senior Note Indenture.
(Incorporated by reference to the Registrant's 1996 Annual Report on
Form 10-K (File No. 333-16265).)
4.6 Supplemental Indenture No. 2, dated as of August 18, 1997, by and
between the Company and the Trustee, to the 14% Senior Note Indenture.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-37621).)
4.7 Form of Convertible Note (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-
37621).).
4.9 Form of Common Stock Certificate. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1 (File No. 333-38381).)
4.10 Indenture, dated as of January 13, 1998, by and between the Registrant
and Harris Trust and Savings Bank, as Trustee, for the Registrant's 9%
Consent Convertible Subordinated Notes due 2006 (the "Consent Note
Indenture"). (Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (File No. 333-38381).)
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. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
10.2 Employment Agreement, dated as of July 18, 1996, by and between the
Registrant and Ronald W. Gavillet. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
10.3 Employment Agreement, dated as of November 18, 1996, by and between
the Company and Gerald J. Sweas. (Incorporated by reference to the
Registrant's 1996 Annual Report on Form 10-K (File No. 333-16265).)
10.4 Employment Agreement, dated as of October 21, 1996, by and between the
Company and Ryan Mullaney. (Incorporated by reference to the
Registrant's 1996 Annual Report on Form 10-K (File No. 333-16265).)
10.5 Form of Employment Agreement between the Registrant and certain
officers of the Registrant. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
10.6 Amended and Restated 1994 Stock Option Plan of the Registrant.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-37621).)
10.7 Omnibus Securities Plan. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-37621).)
10.8 Consulting Agreement, dated January 24, 1995, by and between the
Registrant and Eugene A. Sekulow. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
10.9 Form of Indemnification Agreement between the Registrant and certain
directors and officers of the Registrant. (Incorporated by reference
to the Registrant's Registration Statement on Form S-4 (File No. 333-
16265).)
10.10 Promissory Note, dated December 15, 1995, between the Registrant and
J. Thomas Elliott. (Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (File No. 333-16265).)
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------- DESCRIPTION
<C> <S>
10.11 Amended and Restated Registration Agreement, dated as of June 22,
1995, by and among the Registrant and the Investors. (Incorporated by
reference to the Registrant's Registration Statement on Form S-4 (File
No. 333-16265).)
10.12 First Amendment to Amended and Restated Registration Agreement, dated
as of October 17, 1997, by and among the Registrant and the Investors.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-37621).)
10.13 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"). (Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (File No. 333-16265).)
10.14 Amendment No. 1 to Asset Purchase Agreement, dated as of October 27,
1995, by and among UTS, Quest United, QAM, Lavin, Elliott, and Quest.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-16265).)
10.15 Resale Local Exchange Service Agreement, dated July 8, 1996, by and
between New York Telephone Company and UTS. (Incorporated by reference
to the Registrant's Registration Statement on Form
S-4 (File No. 333-16265).)
10.16 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. (Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (File No. 333-16265).)
10.17 Agreement for Resale Services, dated as of April 26, 1996, by and
between the Registrant and Ameritech on behalf of Ameritech Michigan.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-16265).)
10.18 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. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
10.19 Registration Rights Agreement dated as of September 30, 1996, by and
among the Registrant and the Initial Purchasers named therein.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-16265).)
10.20 Warrant Agreement, dated as of September 30, 1996, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent and
Amendment 1 thereto. (Incorporated by reference to the Registrant's
Registration Statement on Form S-4 (File No. 333-16265).)
10.21 Registration Rights Agreement dated as of August 15, 1997, by and
among the Registrant and the Initial Purchasers named therein.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-37621).)
10.22 Warrant Agreement, dated as of August 15, 1997, by and between the
Registrant and Harris Trust and Savings Bank, as Warrant Agent.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-38381).)
10.23 Consent Warrant Agreement dated as of August 25, 1997, by and between
the Registrant and Harris Trust and Savings Bank, as Warrant Agent.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-38381).)
10.24 Stock Purchase Agreement dated as of January 7, 1998, by and between
the Registrant, Mark C. Hatten, Triumph-Connecticut Limited
Partnership, Solomon Schechter Day School of Greater Hartford, Inc.,
FSC Corp. and Hatten Communications Holding Company, Inc.
(Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-38381).)
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.01 Computation of Net Loss per Common Share. (Incorporated by reference
to the Registrant's 1996 Annual Report on Form 10-K (File No. 333-
16265).)
12.1 Computation of Earnings to Fixed Charges, (Incorporated by reference
to the Registrant's Registration Statement on Form S-4 (File No.333-
16265).)
21.1 Subsidiaries of the Registrant. (Incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No. 333-16265).)
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.
23.4 Consent of Kostin, Ruffkess & Company LLC.*
25.1 Power of Attorney (Included as part of the Signature page hereto).
25.2 Statement of Eligibility and Qualification on form T-1 under the Trust
Indenture Act of 1939 of Harris Trust and Savings Bank as Trustee
under the Consent Note Indenture.
</TABLE>

- --------
* To be filed by amendment.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.

The undersigned Registrant hereby further undertakes:

(4) That, 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
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective;

(5) That, 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

II-6
<PAGE>

(6) 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-7
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO,
STATE OF ILLINOIS ON MARCH 13, 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
REGISTRATION STATEMENT HAS BEEN SIGNED ON MARCH 13, 1998 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Thomas Elliott and Thomas A. Monson his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

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

/s/ Richard J. Brekka Director
____________________________________
Richard J. Brekka

/s/ Dennis B. Dundon Chief Operating Officer and
____________________________________ Director
Dennis B. Dundon

/s/ Ronald W. Gavillet Executive Vice President,
____________________________________ Strategy & External
Ronald W. Gavillet Affairs, and Director

/s/ James P. Hynes Director
____________________________________
James P. Hynes

/s/ Donald J. Hofmann, Jr. Director
____________________________________
Donald J. Hofmann, Jr.

</TABLE>

II-8
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ William A. Johnston Director
____________________________________
William A. Johnston

/s/ Ian Kidson Director
____________________________________
Ian Kidson

/s/ Paul S. Lattanzio Director
____________________________________
Paul S. Lattanzio

/s/ David C. Mitchell Director
____________________________________
David C. Mitchell

/s/ Eugene A. Sekulow Director
____________________________________
Eugene A. Sekulow

/s/ Gerald J. Sweas Executive Vice President and
____________________________________ Chief Financial Officer
Gerald J. Sweas (Principal Financial
Officer)
</TABLE>

II-9

<PAGE>

EXHIBIT 23.3

The Boards of Directors
Hatten Communications Holding Company, Inc. and
Connecticut Mobilecom, 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 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.

We consent to the inclusion of our report dated January 16, 1998, with
respect to the balance sheet of Connecticut Mobilecom, Inc. as of April 30,
1995, and the related statements of operations, stockholders' deficit, and
cash flows for the year then ended, which report appears in Form S-1 of USN
Communications, Inc.

We consent to the reference to our firm under the heading "Experts" in this
registration statement.

/s/ KPMG Peat Marwick LLP

Providence, Rhode Island
March 11, 1998

<PAGE>

Exhibit 25.2

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM T-1

Statement of Eligibility
Under the Trust Indenture Act of 1939
of a Corporation Designated to Act as Trustee

Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2) ______

HARRIS TRUST AND SAVINGS BANK
(Name of Trustee)

Illinois 36-1194448
(State of Incorporation) (I.R.S. Employer Identification No.)

111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices)

Judith Bartolini, Harris Trust and Savings Bank,
311 West Monroe Street, Chicago, Illinois, 60606
312-461-2527 phone 312-461-3525 facsimile
(Name, address and telephone number for agent for service)

USN COMMUNICATIONS, INC.
(Name of obligor)

Delaware 36-3947804
(State of Incorporation) (I.R.S. Employer Identification No.)

10 South Riverside Plaza, Suite 401
Chicago, Illinois 60606
(Address of principal executive offices)

9% Consent Convertible Subordinated Notes due 2006
(Title of indenture securities)
<PAGE>

1. GENERAL INFORMATION. Furnish the following information as to the Trustee:

(a) Name and address of each examining or supervising authority to which it
is subject.

Commissioner of Banks and Trust Companies, State of Illinois,
Springfield, Illinois; Chicago Clearing House Association, 164 West
Jackson Boulevard, Chicago, Illinois; Federal Deposit Insurance
Corporation, Washington, D.C.; The Board of Governors of the Federal
Reserve System, Washington, D.C.

(b) Whether it is authorized to exercise corporate trust powers.

Harris Trust and Savings Bank is authorized to exercise corporate
trust powers.

2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the Trustee,
describe each such affiliation.

The Obligor is not an affiliate of the Trustee.

3. thru 15.

NO RESPONSE NECESSARY

16. LIST OF EXHIBITS.

1. A copy of the articles of association of the Trustee is now in effect
which includes the authority of the trustee to commence business and to
exercise corporate trust powers.

A copy of the Certificate of Merger dated April 1, 1972 between Harris
Trust and Savings Bank, HTS Bank and Harris Bankcorp, Inc. which
constitutes the articles of association of the Trustee as now in effect
and includes the authority of the Trustee to commence business and to
exercise corporate trust powers was filed in connection with the
Registration Statement of Louisville Gas and Electric Company, File No.
2-44295, and is incorporated herein by reference.

2. A copy of the existing by-laws of the Trustee.

A copy of the existing by-laws of the Trustee was filed in connection
with the Registration Statement of Commercial Federal Corporation, File
No. 333-20711, and is incorporated herein by reference.

3. The consents of the Trustee required by Section 321(b) of the Act.

(included as Exhibit A on page 2 of this statement)

4. A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.

(included as Exhibit B on page 3 of this statement)

1
<PAGE>

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
HARRIS TRUST AND SAVINGS BANK, a corporation organized and existing under the
laws of the State of Illinois, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago, and State of Illinois, on the 9th day of March, 1998.

HARRIS TRUST AND SAVINGS BANK

By: /s/ J. Bartolini
-------------------------
J. Bartolini
Vice President

EXHIBIT A

The consents of the trustee required by Section 321(b) of the Act.

Harris Trust and Savings Bank, as the Trustee herein named, hereby consents that
reports of examinations of said trustee by Federal and State authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.

HARRIS TRUST AND SAVINGS BANK

By: /s/ J. Bartolini
-------------------------
J. Bartolini
Vice President

2
<PAGE>

EXHIBIT B

Attached is a true and correct copy of the statement of condition of Harris
Trust and Savings Bank as of December 31, 1997, as published in accordance with
a call made by the State Banking Authority and by the Federal Reserve Bank of
the Seventh Reserve District.

[LOGO OF HARRIS BANK]
HARRIS BANK

Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603

of Chicago, Illinois, And Foreign and Domestic Subsidiaries, at the close of
business on December 31, 1997, a state banking institution organized and
operating under the banking laws of this State and a member of the Federal
Reserve System. Published in accordance with a call made by the Commissioner of
Banks and Trust Companies of the State of Illinois and by the Federal Reserve
Bank of this District.

Bank's Transit Number 71000288

<TABLE>
<CAPTION>
THOUSANDS
ASSETS OF DOLLARS
<S> <C> <C>
Cash and balances due from depository institutions:
Non-interest bearing balances and currency and coin..................... $ 1,252,381
Interest bearing balances............................................... $ 598,062
Securities:....................................................................
a. Held-to-maturity securities $ 0
b. Available-for-sale securities $ 3,879,399
Federal funds sold and securities purchased under agreements to resell i $ 71,725
Loans and lease financing receivables:
Loans and leases, net of unearned income................................ $8,813,821
LESS: Allowance for loan and lease losses............................... $ 99,678
----------

Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b).................................................... $ 8,714,143
Assets held in trading accounts................................................ $ 136,538
Premises and fixed assets (including capitalized leases)....................... $ 221,312
Other real estate owned........................................................ $ 642
Investments in unconsolidated subsidiaries and associated companies............ $ 103
Customer's liability to this bank on acceptances outstanding................... $ 46,480
Intangible assets.............................................................. $ 279,897
Other assets................................................................... $ 653,101
----------------------

TOTAL ASSETS $15,853,783
======================
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits:
In domestic offices.......................................................... $ 8,926,635
Non-interest bearing.................................................... $3,692,891
Interest bearing........................................................ $5,233,744
In foreign offices, Edge and Agreement subsidiaries, and IBF's............... $ 1,763,669
Non-interest bearing.................................................... $ 22,211
Interest bearing........................................................ $1,741,458
Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and
in IBF's:
Federal funds purchased & securities sold under agreements to repurchase..... $ 2,693,600
Trading Liabilities............................................................ 82,861
Other borrowed money:
a. With remaining maturity of one year or less................................ $ 601,799
b. With remaining maturity of more than one year.............................. $ 0
Bank's liability on acceptances executed and outstanding....................... $ 46,480
Subordinated notes and debentures.............................................. $ 325,000
Other liabilities.............................................................. $ 134,309
----------------------
TOTAL LIABILITIES $14,574,353
======================

EQUITY CAPITAL
Common stock................................................................... $ 100,000
Surplus........................................................................ $ 601,026
a. Undivided profits and capital reserves..................................... $ 573,416
b. Net unrealized holding gains (losses) on available-for-sale securities..... $ 4,988
----------------------
TOTAL EQUITY CAPITAL $ 1,279,430
======================
Total liabilities, limited-life preferred stock, and equity capital............ $15,853,783
======================
</TABLE>

I, Pamela Piarowski, Vice President of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
is true to the best of my knowledge and belief.

PAMELA PIAROWSKI
1/30/98

We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and, to the best of our
knowledge and belief, has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and the
Commissioner of Banks and Trust Companies of the State of Illinois and is true
and correct.

EDWARD W. LYMAN,
ALAN G. McNALLY,
RICHARD E. TERRY
Directors.