MIDCOM COMMUNICATIONS INC, S-1/A, 1997-04-07

MIDCOM COMMUNICATIONS INC
S-1/A, 1997-04-07
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1997

REGISTRATION NO. 333-14427
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 3

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

MIDCOM COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
WASHINGTON 4813 91-1438806
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

1111 THIRD AVENUE
SEATTLE, WA 98101
(206) 628-8000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

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

PAUL P. SENIO

VICE PRESIDENT AND SECRETARY

MIDCOM COMMUNICATIONS INC.
1111 THIRD AVENUE
SEATTLE, WA 98101
(206) 628-4900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------------

Copies to:
THOMAS S. HODGE MICHAEL A. SKINNER JONATHAN K. WRIGHT

HELLER EHRMAN WHITE & MCAULIFFE

6100 COLUMBIA CENTER, 701 FIFTH AVENUE
SEATTLE, WASHINGTON 98104
(206) 447-0900
---------------------

Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 of 1933, 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 of 1933, 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. [ ]
---------------------

THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH THE PROVISIONS OF SECTION 8(A) OF THE SECURITIES ACT OF 1933.

================================================================================
<PAGE> 2

MIDCOM COMMUNICATIONS INC.

CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
FORM S-1 LOCATION OR HEADING
ITEM NUMBER AND CAPTION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Plan of
Distribution
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Selling Securityholders
8. Plan of Distribution....................... Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to Be
Registered............................... Outside Front Cover Page; Prospectus
Summary; Description of Notes;
Description of Capital Stock; Certain
Federal Income Tax Consequences
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information With Respect to the
Registrant............................... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Capitalization;
Selected Financial and Operating Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Selling
Securityholders; Principal Shareholders;
Certain Transactions; Description of
Notes; Description of Capital Stock;
Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>

<PAGE> 3

PROSPECTUS

$97,743,000

MIDCOM COMMUNICATIONS INC.

8 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003
(INTEREST PAYABLE FEBRUARY 15 AND AUGUST 15)

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 11.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------

This Prospectus relates to the public offer and sale of up to $97,743,000
aggregate principal amount of 8 1/4% Convertible Subordinated Notes due 2003
(the "Notes") of MIDCOM Communications Inc. (the "Company" or "Midcom"), and an
indeterminate number of shares (the "Conversion Shares") of the Company's common
stock, par value $.0001 per share (the "Common Stock"), as may be issued upon
conversion of the Notes. The Notes and the Conversion Shares (collectively
referred to herein as the "Securities") may be offered from time to time for the
account of the holders thereof named herein (the "Selling Securityholders"). See
"Selling Securityholders" and "Plan of Distribution." Information concerning the
Selling Securityholders may change from time to time, which changes will be set
forth in an accompanying Prospectus Supplement.

The Notes were originally issued by the Company in a private placement. See
"Prospectus Summary -- The Private Placement." As of the date of this
Prospectus, the aggregate principal amount of Notes outstanding is $97,743,000
and no Notes have been converted into Conversion Shares. Prior to the date of
this Prospectus, there has been no public market for the Notes. Although the
Notes are eligible for trading in the Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") Market, there can be no assurance that an
active trading market for the Notes will develop.

The Notes are convertible into Common Stock at the option of the holder
thereof at any time prior to maturity, unless previously redeemed, at a
conversion price of $14.0875 per share, subject to adjustment in certain events.
The Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "MCCI." The closing sale price of the Common Stock reported on Nasdaq on
April 4, 1997 was $6 3/8 per share.

The Company has been advised by the Selling Securityholders that the Selling
Securityholders, acting as principals for their own account, directly or through
agents, dealers or underwriters to be designated from time to time, may sell the
Notes and the Conversion Shares from time to time on terms to be determined at
the time of sale through customary brokerage channels, negotiated transactions
or a combination of these methods at fixed prices that may be changed, at market
prices then prevailing or at negotiated prices then obtainable. To the extent
required, the aggregate principal amount of the specific Notes or the number of
Conversion Shares to be sold, the names of the Selling Securityholders, the
purchase price, the public offering price, the name of any agent, dealer or
underwriter, the amount of any offering expenses, any applicable commissions or
discounts and any other material information with respect to a particular offer
will be set forth in an accompanying Prospectus Supplement or, if appropriate, a
post-effective amendment to the Registration Statement of which this Prospectus
is a part. Each of the Selling Securityholders reserves the right to accept and,
together with its agents from time to time, to reject in whole or in part any
proposed purchase of the Notes or Conversion Shares to be made directly or
through agents. The aggregate proceeds to the Selling Securityholders from the
sale of the Notes and the Conversion Shares offered by the Selling
Securityholders hereby will be the purchase price of such Notes or Conversion
Shares less any discounts or commissions. The Company will receive no portion of
the proceeds from the sale of the Securities offered hereby and will bear
certain expenses incident to their registration. See "Plan of Distribution." For
information concerning indemnification arrangements between the Company and the
Selling Securityholders, see "Plan of Distribution."

No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. This Prospectus shall not constitute an offer to sell
or a solicitation of an offer to buy, nor shall there be any sale of, any of the
Securities to any person in any jurisdiction in which such an offer,
solicitation or sale would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.

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

THE DATE OF THIS PROSPECTUS IS APRIL 7, 1997.

<PAGE> 4

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context indicates otherwise in this Prospectus (i) all references to "Midcom" or
the "Company" refer to MIDCOM Communications Inc. and its subsidiaries and (ii)
all references to Consolidated Financial Statements refer to the financial
statements of Midcom. This Prospectus contains certain forward-looking
statements which involve known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements of the
Company or industry trends to differ materially from those expressed or implied
by such forward-looking statements. Such factors include, among others, those
discussed in "Risk Factors" and elsewhere in this Prospectus.

THE COMPANY

MIDCOM Communications Inc. provides long distance voice and data
telecommunications services. As primarily a nonfacilities-based reseller, Midcom
principally utilizes the network switching and transport facilities of Tier I
long distance carriers, such as Sprint Corporation ("Sprint"), WorldCom, Inc.
("WorldCom") and AT&T Corp. ("AT&T"), to provide a broad array of integrated
long distance telecommunications services on a seamless and highly reliable
basis. Midcom's service offerings include basic "1 plus" and "800" long distance
service, frame relay data transmission service, wireless service, dedicated
private lines between customer locations and enhanced telecommunications
services such as facsimile broadcast services and conference calling.

Midcom focuses on serving small to medium-sized businesses. The Company
estimates that during the fourth quarter of 1996 it invoiced approximately
100,000 customer locations per month, a significant majority of which were
located in the major metropolitan areas of California, Florida, Illinois, New
York, Ohio and Washington. The Company believes that the larger long distance
carriers, such as AT&T, Sprint, WorldCom and MCI Communications Corporation
("MCI"), tend to focus their sales and customer support efforts on residential
and large commercial customers and do not routinely provide significant pricing
discounts for small to medium-sized businesses. By purchasing large usage
volumes from the facilities-based carriers at wholesale prices, Midcom seeks to
offer its customers more favorable pricing than they could obtain from such
carriers directly. In addition, the Company believes that businesses in this
market segment do not typically have in-house telecommunications expertise and
therefore require more assistance with the assessment and management of their
telecommunications requirements. As a result, the Company believes that it is
able to differentiate its service offerings from the larger carriers in this
market segment on the basis of price, breadth of service offerings, customer
service and support and the ability to provide customized solutions to the
telecommunications requirements of its customers. See "Business -- Marketing and
Sales," "Business -- Competition" and "Business -- Customer Concentrations."

Midcom believes that the Telecommunications Act of 1996 (the
"Telecommunications Act") will substantially expand its market opportunities.
The Telecommunications Act removes substantial legal barriers to competitive
entry into the local telecommunications market and directs incumbent local
exchange carriers to allow competing telecommunications service providers such
as the Company to interconnect their facilities with the local exchange
networks, to lease network components on an unbundled basis and to resell local
telecommunications services. According to Federal Communications Commission
("FCC") and other industry estimates, in 1995 long distance providers reported
revenue of $72.4 billion while local telecommunications providers reported
revenue of $102.9 billion. See "Business -- Industry Background,"
"Business -- Regulation" and "Business -- Competition."

3
<PAGE> 5

Subsequent to its initial public offering in July 1995, Midcom completed
numerous acquisitions of businesses and customer bases. Although these
acquisitions contributed to substantial growth, they placed significant demands
on management resources and disrupted Midcom's normal business operations. In
particular, the Company was not able to consolidate and integrate the sales and
marketing, customer support, billing and other functions of certain acquired
operations as quickly as anticipated. This increased the Company's overall cost
structure and resulted in lower profitability and cash flows. See
"Business -- Acquisitions." Also, during 1995, the Company was in the process of
implementing a new management information system, including the installation of
a new billing system. Problems encountered in this implementation process
contributed to the Company's operational difficulties. In addition, certain
reports generated by the new management information system that were used to
estimate unbilled revenue for the third quarter of 1995 failed to fully reflect
all discounts that were properly included in the bills subsequently sent to the
Company's customers. See "Business -- Information Systems." Primarily as a
result of this failure, reported revenue was overstated for the third quarter of
1995 and the Company's Quarterly Report on Form 10-Q for that period had to be
amended to restate reported results. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Restatement of Results for
the Third Quarter of 1995." In addition, the Company's profitability was reduced
as a result of the Company's supply contract with AT&T which provided for higher
rates than those provided by competitive suppliers, although in October 1996 the
Company and AT&T entered into a new carrier supply contract which provides for
more favorable rates. See "Business -- Suppliers." These factors contributed to
defaults under the Company's then-existing revolving credit facility and caused
the Company's auditors to include going concern disclosure in their report with
respect to the Company's 1995 Consolidated Financial Statements. Similar going
concern disclosure is included in their report with respect to the Company's
1996 Consolidated Financial Statements included in this Prospectus. In
connection with the audit of Midcom's 1995 Consolidated Financial Statements,
Midcom's independent auditors also identified certain material weaknesses in the
Company's internal financial controls. As a result of operational and other
changes implemented by the Company, on March 13, 1997 the Company's independent
auditors reported to the Company's Audit Committee that these material
weaknesses have been corrected. However, there can be no assurance that the
Company will not encounter other internal control weaknesses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Past
Material Weaknesses" and "Description of Certain Indebtedness."

In response to these developments, during the second and third quarters of
1996 Midcom recruited an executive management team with extensive experience and
expertise in the telecommunications industry. In May 1996, the Company hired
William H. Oberlin as its President and Chief Executive Officer, appointed Mr.
Oberlin, Marvin C. Moses and John M. Zrno to its Board of Directors and engaged
Mr. Moses and Mr. Zrno as consultants. In December 1996, Mr. Zrno became
Chairman of the Company's Board of Directors. These individuals formerly held
senior management positions at ALC Communications Corporation ("ALC"), a leading
provider of long distance and other services to small and medium-sized
businesses. During their tenure at ALC, ALC completed a successful turn-around
and experienced profitable growth. From the fiscal year ended December 31, 1991
through the 12 months ended June 30, 1995 (prior to ALC's merger into Frontier
Corporation), ALC's revenue increased from $346.9 million to $677.1 million and
net income increased from $5.3 million to $75.0 million. In addition, in July
1996 the Company appointed Daniel M. Dennis to the Company's Board of Directors.
Mr. Dennis has served in a number of management positions with MCI for over 23
years. See "Management."

Midcom's executive management team has developed a restructuring, network
and marketing strategy which is designed to address the operational challenges
experienced by the Company and

4
<PAGE> 6

increase internally generated sales and profitability. Principal components of
the Company's strategy include the following:

Continue to Build Management Team and Restructure Operations. Midcom
will continue to seek opportunities to augment management with individuals
who have telecommunications industry experience and expertise. Since May
1996, the Company has appointed more than 10 individuals to key operational
management positions. These individuals have extensive experience in the
operation of a telecommunications company, including (i) network design,
implementation and operation, (ii) marketing and sales, (iii) management
information systems and (iv) bill processing and collection. The Company's
management team has focused on, and has substantially completed, the
consolidation and integration of the Company's multiple information and
billing systems and other redundant functions of its acquired long distance
operations and the renegotiation of the Company's existing carrier supply
agreements to obtain more favorable terms. The management team will
continue to focus on integrating the Company's data transmission and
enhanced telecommunications services, enlarging and enhancing the Company's
information system and improving its financial reporting and internal
controls. Midcom believes that the experience and depth of its management
team has improved its ability to address its operational challenges and to
pursue its transition from primarily a nonfacilities-based reseller of long
distance and other telecommunications services to a switch-based provider
of integrated telecommunications services.

Deploy Switching Facilities. The Company has acquired six
state-of-the-art high capacity switches, with local and long distance
functionality. The Company plans to install these switches in areas of the
country where it believes that its volume of long distance traffic and the
regulatory environment and market conditions will permit it to provide
local service at acceptable margins. Moreover, the Company believes that,
in the cities where it intends to deploy switches, there will be
significant local circuit capacity at attractive rates available from
incumbent local exchange carriers, competitive local exchange carriers and
38GHz wireless providers. Using its own switches will enable the Company to
(i) direct customer call traffic over multiple networks which is expected
to minimize costs and improve gross margin, (ii) switch local traffic,
thereby increasing the economic viability of entering the market for local
telecommunications services, (iii) shield proprietary information regarding
its customers from the underlying carriers, thereby increasing customer
control, (iv) facilitate access to call data records and (v) implement
differentiating features and billing enhancements without involving the
underlying carrier. See "Business -- Switching Facilities."

Reorganize and Expand Sales Efforts. To take full advantage of its
planned switching network and expanded product offerings, Midcom has
reorganized its direct sales force into (i) a national and key accounts
group consisting of highly experienced sales personnel focused on larger
customers with sophisticated telecommunications requirements and (ii) a
general accounts group focused on smaller customers. Both groups will be
located in major metropolitan areas where the Company has customer
concentrations sufficient to support a sales and marketing presence and
where the Company believes it has significant market opportunities and can
compete effectively on the basis of price. The Company intends to implement
training programs and financial incentives designed to increase the
cross-selling efforts of its direct sales force and further integrate the
Company's broad array of service offerings. In addition, the Company
intends to increase the number of sales representatives from approximately
35 at the end of July 1996 to over 250 by the end of 1997. The Company
plans to continue to supplement its direct sales force with its network of
resellers and distributors. In addition to its existing non-territorial
distributor network, the Company is in the process of developing a new tier
of distributors who will be offered long-term financial incentives and who
will be required, within selected territories, to market and sell the
Company's service offerings exclusively. The Company believes that the
long-term financial incentives and exclusive marketing arrangements

5
<PAGE> 7

offered to this new tier of distributors will result in improved
performance and increased loyalty to the Company and its service offerings.
See "Business -- Marketing and Sales."

Expand and Enhance Customer Support Efforts. Midcom intends to
support its expanded sales efforts and reduce customer attrition by
continuing to build an enhanced customer service and support operation. The
Company has increased its customer service and support staff from
approximately 45 at the end of July 1996 to approximately 60 at the end of
1996 and intends to further increase this staff through 1997 to the extent
necessary to support growth in sales. This expanded operation is intended
to include (i) a staff of trained customer service representatives
available twenty-four hours a day at a number of integrated customer
service centers, (ii) trained account representatives assigned and
dedicated to individual customers with sophisticated telecommunications
requirements and (iii) teams of technical specialists available to develop
customized solutions for a customer's unique telecommunication needs. See
"Business -- Customer Service."

Resell Local Services and Provide a Single-Source
Solution. Regulatory changes resulting from the Telecommunications Act
significantly expand the number and types of services Midcom is permitted
to offer. As a result, Midcom intends to offer its customers local dial
tone and a variety of other local telecommunications services primarily in
locations where it has a significant sales and marketing presence or where
it plans to deploy switching facilities. The Company believes that its
large and geographically concentrated customer base of small to
medium-sized businesses represents a significant potential market for these
additional services. These additional services will afford the Company the
opportunity to provide its customers with a single-source solution for
local, long distance, wireless and enhanced telecommunications services.
The Company believes that bundling these services will provide substantial
advantages to its customers, including lower overall costs and a higher
level of service due to a single source for ordering, installation,
customer service and account management. In addition, Midcom believes that
offering a single source for telecommunications services will permit the
Company to (i) leverage its significant customer base and increase sales by
increasing its share of the telecommunications expenditures of its
customers and (ii) improve customer control and retention by strengthening
its relationships with its customers. See "Business -- Industry
Background," "Business -- Regulation" and "Business -- Competition."

The Company's ability to implement the foregoing strategy and achieve the
intended positive results is subject to a number of risks and uncertainties, and
there can be no assurance that the strategy will be successfully implemented or
that the intended positive results will be achieved. See "Risk Factors."

Midcom was incorporated in the State of Washington in 1989. Its executive
offices are located at 1111 Third Avenue, Seattle, Washington 98101, and its
telephone number is (206) 628-8000.

RISK FACTORS

Prospective investors are strongly cautioned that an investment in the
Securities offered hereby involves a very high degree of risk. The Company's
ability to halt the deterioration of its results of operations and financial
condition and successfully implement its operating strategy is subject to an
unusual number of material risks and uncertainties. Prospective investors should
not dismiss, as "boilerplate" or "customary" disclosure, the risk factors
contained herein. The contingencies and other risks discussed under the heading
"Risk Factors" could affect the Company in ways not presently anticipated by its
management and thereby impair its ability to continue as a going concern and
materially affect the value of its debt and equity securities, including the
Securities offered hereby. A careful review and understanding of each of the
risk factors contained herein, as well as the other information contained in
this Prospectus, is essential for an investor seeking to make an informed
investment decision with respect to the Securities.

6
<PAGE> 8

THE PRIVATE PLACEMENT

In August and September of 1996, the Company completed a private placement
(the "Private Placement") of $97.7 million in aggregate principal amount of the
Notes pursuant to a Purchase Agreement, dated as of August 15, 1996 (the
"Purchase Agreement"), among the Company, PaineWebber Incorporated
("PaineWebber") and Wheat, First Securities, Inc. ("Wheat, First," and together
with PaineWebber the "Initial Purchasers"). The Notes were sold to qualified
institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as
amended (the "Securities Act"), certain "accredited investors" pursuant to
Regulation D under the Securities Act, and certain non-U.S. persons pursuant to
Regulation S under the Securities Act.

The net proceeds to Midcom from the Private Placement were approximately
$94.2 million, after deducting the discount to the Initial Purchasers and
expenses. The Company used the net proceeds as follows: (i) $34.0 million to
repay in full all obligations under the Company's secured revolving credit
facility with Transamerica Business Credit Corporation and certain other lenders
(the "Transamerica Credit Facility"), (ii) $5.0 million to pay the first
installment of an $8.8 million payment in connection with the satisfaction of
past shortfalls and reduction of the minimum commitment under the Company's
carrier supply contract with AT&T and (iii) $10.0 million to bring current a
number of payment obligations existing prior to the completion of the Private
Placement. The balance of the net proceeds has been and will be used for working
capital, capital expenditures and general corporate purposes.

Pursuant to a Registration Rights Agreement, dated as of August 22, 1996
(the "Registration Rights Agreement"), among the Company and the Initial
Purchasers, the Company has agreed to register under the Securities Act the
public offer and sale of the Securities and has filed with the Securities and
Exchange Commission (the "Commission") a shelf registration statement of which
this Prospectus forms a part (together with all exhibits, schedules, supplements
and amendments thereto, the "Registration Statement"). The Company is required
under the Registration Rights Agreement to maintain the effectiveness of the
Registration Statement for a period of three years from the completion of the
Private Placement or, if shorter, when (i) all the Securities have been sold
pursuant to the Registration Statement or (ii) the date on which there ceases to
be outstanding any Securities. See "Description of Notes -- Registration Rights;
Liquidated Damages."

7
<PAGE> 9

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The summary consolidated financial and operating data presented below is
qualified in its entirety by, and should be read in conjunction with, the
Company's Consolidated Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................... $111,699 $203,554 $148,777
Gross profit.......................................... 32,655 64,008 40,827
Depreciation and amortization......................... 4,134 13,790 32,687
Settlement of contract dispute........................ -- -- 8,800
Restructuring charge(1)............................... -- -- 2,220
Loss on impairment of assets(2)....................... -- 11,830 20,765
Operating income (loss)............................... 824 (23,673) (88,670)
Net loss(3)........................................... (3,029) (33,418) (97,319)
Net loss per share(4)................................. $ (0.31) $ (2.76) $ (6.27)
Shares used in calculating per share data(4).......... 9,930 12,101 15,529
SUPPLEMENTAL OPERATING DATA:
EBITDA(5)............................................. $ 4,958 $ 1,947 $(35,218)
Deficiency of earnings to fixed charges(6)............ $ (3,012) $(29,351) $(97,319)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 30,962
Total assets.............................................................. 79,923
Short-term obligations, including current portion of long-term
obligations............................................................. 12,994
Long-term obligations, less current portion............................... 102,953
Shareholders' deficit..................................................... $(69,284)
</TABLE>

- ---------------
(1) Consists primarily of severance and lease cancellation charges relating to
restructuring of operations in March and April 1996.

(2) Consists of the following: (i) a write-down of the Company's interest in its
joint venture in Russia of $6.8 million in 1995 and $2.0 million in
September 1996, (ii) a $2.5 million write-off in 1995 of the Company's
existing limited capacity switching equipment as a result of its decision to
deploy new, state-of-the-art high capacity switches, (iii) a $2.5 million
partial write-down in 1995 of the Company's capitalized software development
costs for its management information system, (iv) a $17.8 million write-down
of intangible assets in June 1996 and (v) a $1.0 million write-down of
microwave equipment in June 1996.

(3) Includes $3.0 million of original issue discount and $1.1 million of
deferred financing costs written off in the third and fourth quarters of
1995, respectively.

(4) Net loss per share is based on the number of shares as described in Note 1
of the Notes to Consolidated Financial Statements.

8
<PAGE> 10

amortization and depreciation expenses associated with capital equipment and
acquisitions common in this industry. EBITDA does not purport to represent
cash provided by operating activities as reflected in the Company's
consolidated statements of cash flows, is not a measure of financial
performance under generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

(6) For purposes of calculating the deficiency of earnings to fixed charges,
"earnings" consist of income before income taxes plus fixed charges, and
"fixed charges" consist of interest expense, including the amortization of
deferred financing fees, and that portion of rental expense deemed
representative of the interest factor (estimated to be one-third of rental
expense). Because earnings are inadequate to cover fixed charges, the dollar
amount of the coverage deficiency is stated, as required by the rules of the
Commission.

9
<PAGE> 11

FORWARD-LOOKING STATEMENTS AND
THE PRIVATE SECURITIES LITIGATION REFORM ACT

Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in sales, services-per-customer ratio and
profitability; deployment of a network of high capacity local and long distance
switching facilities; introduction of local and other additional
telecommunications services; geographic expansion; increases in sales, customer
service and other personnel; improvements in customer service; sales through new
sales channels; adequacy of available sources of working capital to implement
strategies; negotiation of more favorable carrier supply contacts; and
expectations for growth in the telecommunications industry. Relevant risks and
uncertainties include, but are not limited to, unanticipated actions by
competitors, regulatory or other obstacles which restrict the Company's ability
to implement local or other services, greater than expected costs to open new
offices, install switching equipment or execute other aspects of the Company's
growth strategy, greater than expected customer attrition, inability to hire and
retain key personnel, unfavorable determinations of pending lawsuits or other
disputes, inability to obtain more favorable pricing and other terms from
suppliers, inability to secure additional sources of working capital if and when
needed, inability to manage growth or integrate acquired operations and
regulatory changes. Additional risks and uncertainties include those described
in "Risk Factors" below and those described from time to time in the Company's
other filings with the Commission, press releases and other communications.

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<PAGE> 12

RISK FACTORS

Prospective investors are strongly cautioned that an investment in the
Securities offered hereby involves a very high degree of risk. The Company's
ability to halt the deterioration of its results of operations and financial
condition and successfully implement its operating strategy is subject to an
unusual number of material risks and uncertainties. Prospective investors should
not dismiss, as "boilerplate" or "customary" disclosure, the risk factors set
forth below. The contingencies and other risks discussed below could affect the
Company in ways not presently anticipated by its management and thereby impair
its ability to continue as a going concern and materially affect the value of
its debt and equity securities, including the Securities offered hereby. A
careful review and understanding of each of the risk factors set forth below, as
well as the other information contained in this Prospectus, is essential for an
investor seeking to make an informed investment decision with respect to the
Securities.

ABILITY TO CONTINUE AS A GOING CONCERN; NEED FOR ADDITIONAL WORKING CAPITAL

As a result of Midcom's rapid growth, substantial operating losses, billing
and collection cycle, acquisition strategy and other factors, the Company has
required substantial external working capital. In addition to funds required for
day to day operations, the Company's principal working capital requirements
include capital expenditures (including those associated with the proposed
installation of new switching facilities), interest and principal payable under
the Notes and other contingencies and obligations described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Notes will mature on August
15, 2003. Interest on the Notes is due semi-annually on February 15 and August
15 of each year, in the aggregate amount of approximately $4.0 million for each
payment. The report of the Company's independent auditors with respect to the
Company's 1996 Consolidated Financial Statements included in this Prospectus
states that the Company's recurring operating losses and shareholders' deficit
raise substantial doubt about the Company's ability to continue as a going
concern. Similar going concern disclosure is contained in the auditor's report
with respect to the Company's 1995 Consolidated Financial Statements. The
Company's 1996 Consolidated Financial Statements included in this Prospectus
have been prepared assuming the Company will continue as a going concern and do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result from
this uncertainty.

The Company's available sources of working capital at March 14, 1997
consisted of cash flow from operations and approximately $14.5 million in cash
and short-term, investment grade, interest-bearing securities, which represented
the remaining net proceeds from the Private Placement. Prior to completion of
the Private Placement, the Company had for several months experienced a severe
working capital short-fall which required the Company to seek extended payment
terms from certain of its suppliers, delay payments to many of its suppliers and
other vendors, delay or cancel purchases and take other steps to conserve
operating capital. Also, for several months prior to the completion of the
Private Placement, the Company was in default of certain financial and other
covenants under the Transamerica Credit Facility, although the lenders continued
to permit borrowings under that facility. The existence of defaults under the
Transamerica Credit Facility also constituted defaults under certain of the
Company's capital leases. For these reasons, the auditor's report with respect
to the Company's 1995 Consolidated Financial Statements included the going
concern disclosure referred to above. In connection with the completion of the
Private Placement and the application of the net proceeds therefrom to the
repayment in full of all borrowings under the Transamerica Credit Facility, the
lenders waived all then-existing defaults and amended the financial covenants
under the facility to levels forecasted to be consistent with Midcom's revised
business plan. However, the decline in revenue and related gross profit in the
last two quarters of 1996, due in significant part to the unanticipated loss of
revenue from a customer base which is the subject of a dispute, caused the
Company again to be in default of certain financial covenants under the
Transamerica Credit Facility. See "Business -- Legal Proceedings -- Cherry
Communications

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<PAGE> 13

Lawsuit." Due to the existence of these defaults and an insufficient borrowing
base to satisfy a $20.0 million minimum excess availability requirement, no
borrowings were available to the Company under the Transamerica Credit Facility
and the lenders terminated the facility in January 1997.

In February 1997, the Company entered into a new revolving credit agreement
with Foothill Capital Corporation (the "Foothill Credit Facility") which will
permit borrowings of up to $30.0 million (subject to borrowing base limitations)
secured by substantially all of the assets of the Company. Borrowings under the
Foothill Credit Facility will not be available until satisfaction of a number of
conditions, consisting primarily of final documentation of security
arrangements, which is expected to occur by May 1997. In addition, in February
1997 the Company entered into a lease facility under which approximately $13.0
million is available for acquisition of capital equipment, which the Company
expects to use primarily to finance the purchase of its high capacity switching
equipment. See "Management's Discussion and Analysis of Financial Condition
Results of Operations -- Liquidity and Capital Resources."

As of March 14, 1997, the Company estimated that it will require between
$40.0 million and $50.0 million in order to fund operating losses, working
capital requirements and capital expenditures during the remainder of 1997. The
Company believes that it will be able to satisfy the conditions to borrowing
under the Foothill Credit Facility by May 1997. Assuming borrowings become and
remain available under the Foothill Credit Facility and the Company achieves
anticipated revenue growth, the Company believes that the remaining proceeds
from the Private Placement together with funds available under the Foothill
Credit Facility, leasing facilities and cash flow from operations will be
sufficient to fund the Company's expected working capital requirements. However,
the exact amount and timing of these working capital requirements and the
Company's ability to continue as a going concern will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms achieved by the Company and the timing of capital expenditures.
Furthermore, there can be no assurance that borrowings under the Foothill Credit
Facility will become and remain available or that this facility together with
the Company's other anticipated sources of working capital will be sufficient to
implement the Company's operating strategy or meet the Company's other working
capital requirements. If (i) the Company experiences greater than anticipated
capital requirements, (ii) the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any material claim against it, (iii)
the Company is unable to make borrowings under any of its credit facilities for
any reason, (iv) the implementation of the Company's operating strategy fails to
produce the anticipated revenue growth and cash flows or (v) additional working
capital is required for any other reason, the Company will be required to
refinance all or a portion of its existing debt or obtain additional equity or
debt financing. There can be no assurance that any such refinancing would be
possible or that the Company would be able to obtain additional equity or debt
financing, if and when needed, on terms that the Company finds acceptable. Any
additional equity or debt financing may involve substantial dilution to the
interests of the Company's shareholders and the holders of the Notes. If the
Company is unable to obtain sufficient funds to satisfy its cash requirements,
it will be forced to curtail operations, dispose of assets or seek extended
payment terms from its vendors. There can be no assurance that the Company would
be able to reduce expenses or successfully complete other steps necessary to
continue as a going concern. Such events would materially and adversely affect
the value of the Company's debt and equity securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

RECENT LOSSES AND ANTICIPATED FUTURE LOSSES

The Company has experienced significant losses since its inception. Net
losses for 1994, 1995 and 1996 were approximately $3.0 million, $33.4 million
and $97.3 million, respectively. The execution of the Company's restructuring,
network and marketing strategy will require the Company to substantially
increase its investment in sales, marketing, capital equipment, systems
development

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<PAGE> 14

and other areas. The Company expects that a substantial portion of these
expenditures will be made before the Company realizes a significant increase in
revenue or an improvement in gross margin. The Company therefore expects that,
during at least the first three quarters of 1997, operating costs will increase
both in actual dollars and as a percentage of revenue and net losses will
continue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Introduction."

MATERIAL WEAKNESSES IN INTERNAL FINANCIAL CONTROLS

In connection with the audit of Midcom's 1995 Consolidated Financial
Statements, Midcom's independent auditors identified two conditions which were
characterized as material weaknesses in its internal financial controls. One
material weakness identified by the auditors was the failure of the accounting
and finance systems to provide accurate information necessary to monitor the
Company's financial position, results of operations and liquidity, as
demonstrated by the restatement of the Company's third quarter results and the
difficulties in completing the 1995 year-end audit which resulted in numerous
material adjustments to preliminary fourth quarter results. Factors identified
as contributing to this weakness and requiring immediate attention included
insufficient staffing and systems to accommodate significant growth from
acquisitions, transitional difficulties associated with major new information
and billing systems, inadequate communication between senior management and the
finance department and demands associated with the Company's initial public
offering. The second material weakness identified by the auditors was the
Company's process of estimating unbilled receivables. With respect to this
material weakness, the auditors recommended that the Company review and revise,
as necessary, all policies and procedures with regard to its reconciliation of
unbilled receivables with actual billings to ensure that all unbilled amounts at
a reporting date represent properly recorded revenue. As a result of operational
and other changes implemented by the Company, on March 13, 1997 the Company's
independent auditors reported to the Company's Audit Committee that the material
weaknesses identified in connection with the 1995 audit have been corrected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Past Material Weaknesses" and "Business -- Information Systems."
However, in light of the volume of financial data to be processed, the reliance
upon timely receipt of call data records from suppliers, the anticipated rate of
growth of the Company, the demands on key financial personnel, the potential for
turnover in key finance and accounting positions, the challenges associated with
the integration of acquired businesses and other factors, there can be no
assurance that the Company will not encounter other internal control weaknesses.

RESTATEMENT OF FINANCIAL RESULTS

It is the Company's practice, which is common in the long distance
industry, to include in reported revenue and accounts receivable an amount for
unbilled calls equal to an estimate of the amount that will be billed and
collected for calls occurring in that reporting period. During 1995, the Company
converted its customer billing function for those calls for which it provides
direct billing to a new billing system. The Company experienced difficulties in
implementing the new billing system which caused an increased number of calls to
be billed later than expected by the Company. See "Business -- Information
Systems." Also, in the process of reconciling unbilled accounts as of December
31, 1995 with amounts ultimately billed, the Company discovered that certain
reports generated by its new information management system that were used for
recognizing unbilled revenue for the third quarter of 1995 failed to fully
reflect all discounts that were properly included in the bills subsequently sent
to the Company's customers. Primarily as a result of this failure, reported
revenue was overstated for the third quarter of 1995 and the Company's Quarterly
Report on Form 10-Q for that period had to be amended to restate reported
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Restatement of Results for the Third Quarter of 1995."
In addition, the Company had previously been required to restate its financial
statements for the year ended December 31, 1994 after determining that revenue
and accounts receivable had been overstated by approximately $1.8 million net of
reserves as a result of

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<PAGE> 15

using historical averages of unbilled calls as the basis for its revenue
estimates, a practice that the Company discontinued in the first quarter of
1995. In light of the volume of financial data to be processed, the reliance
upon timely receipt of call data records from suppliers, the anticipated rate of
growth of the Company, the demands on key financial personnel, the potential for
turnover in key finance and accounting positions, the challenges associated with
the integration of acquired businesses and other factors, there can be no
assurance that the Company will not encounter additional billing delays or other
difficulties in future financial reporting.

DISPUTES AND LITIGATION

The Company, its Vice Chairman of the Board of Directors and largest
shareholder, the Company's former President, Chief Executive Officer and a
director, and the Company's former Chief Financial Officer are named as
defendants in a securities action filed in the U.S. District Court for the
Western District of Washington (the "Complaint"). The Complaint was filed on
behalf of a class of purchasers of the Company's Common Stock during the period
beginning on July 6, 1995, the date of the Company's initial public offering,
and ending on March 4, 1996 (the "Class Period"). An amended complaint (the
"Amended Complaint") was filed on July 8, 1996. In November 1996, the Court
granted defendants' motion to dismiss plaintiff's Amended Complaint without
prejudice and plaintiffs refiled a second amended complaint (the "Second Amended
Complaint") on December 19, 1996 with limited changes or amendments. In January
1997, the defendants filed a motion to dismiss the Second Amended Complaint
claiming a failure by plaintiffs to plead with particularity and a failure to
plead facts establishing scienter, both as required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the failure to
establish tracing to the prospectus relating to the Company's initial public
offering, as required under the Securities Act. The Second Amended Complaint
alleges, among other things, that the registration statement and prospectus
relating to the Company's initial public offering contained false and misleading
statements concerning the Company's billing software and financial condition.
The Second Amended Complaint further alleges that, throughout the Class Period,
the defendants inflated the price of the Common Stock by intentionally or
recklessly making material misrepresentations or omissions which deceived the
public about the Company's financial condition and prospects. The Second Amended
Complaint alleges claims under the Securities Act and the Exchange Act as well
as various state laws, and seeks damages in an unstated amount. While the
Company believes that it has substantive defenses to the claims in the Second
Amended Complaint and intends to vigorously defend this lawsuit, it is unable to
predict the outcome of this action. If determined adversely to the Company, this
lawsuit could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Legal
Proceedings -- Class Action Lawsuit."

The Company was informed in May 1996 that the Commission was conducting an
informal inquiry regarding the Company. The Company has voluntarily provided the
documents requested by the Commission. In addition, the Commission has requested
the Company's cooperation in interviewing certain current and former Company
personnel and the Company is in the process of scheduling such interviews.
However, the Company has not been informed whether the Commission intends to
commence formal action against the Company or any of its affiliates. The Company
is, therefore, unable to predict the ultimate outcome of the investigation. In
the event that the Commission elects to initiate a formal enforcement
proceeding, the Company and certain of its current and/or former officers could
be subject to civil or criminal sanctions including monetary penalties and
injunctive measures. Any such enforcement proceeding could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Legal Proceedings -- SEC Investigation."

In addition, by virtue of its rapid growth, past acquisition activities and
large volume of business with suppliers, the Company is involved in litigation
or disputes with sellers of acquired operations, suppliers and other third
parties. See "Business -- Acquisitions, -- Suppliers, and -- Legal Proceedings."

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<PAGE> 16

Although the Company intends to defend its existing litigation and other
disputes vigorously, it is unable to predict the nature or timing of any
resolution of such matters. If the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any claim, it would most likely be
required to make a payment in the form of cash, indebtedness or equity
securities. Depending on the size, type and timing of any such payment, it could
materially impair the Company's limited capital resources or significantly
dilute the Company's existing shareholders. See "-- Ability to Continue as a
Going Concern; Need for Additional Working Capital." In addition, the Company's
pending litigation, investigations and disputes could result in substantial
legal costs to the Company and divert management's attention from the other
business affairs of the Company for substantial periods of time.

MINIMUM VOLUME COMMITMENTS AND SHORTFALLS

Midcom purchases from facilities-based carriers the long distance
telecommunications services that it provides to its customers. The Company has
entered into multiple-year supply contracts with Sprint, WorldCom and AT&T and
from time to time acquires access to telecommunications services on a short-term
basis from a number of other suppliers. To obtain favorable forward pricing from
certain of its suppliers, the Company has committed to purchase minimum volumes
of a variety of long distance services during stated periods whether or not such
volumes are used. In the past, Midcom has fallen short of its minimum volume
commitments with certain carriers and has renegotiated the commitment. For
example, in October 1996, Midcom entered into a renegotiated carrier supply
contract with AT&T pursuant to which, among other things, the minimum volume
commitment was reduced from $117.0 million to $13.7 million for the eighteen
month period following execution of the contract. In November 1996, the Company
paid AT&T $5.0 million as the first installment of $8.8 million to be paid in
connection with satisfaction of past shortfalls and reduction of the remaining
commitment. The Company's minimum volume commitments to all of its carriers as
of March 14, 1997 aggregated approximately $92.0 million, to be used over the
next three years. See Note 15 of Notes to Consolidated Financial Statements.
There can be no assurance that the Company will not incur additional shortfalls
in the future or that it will be able to successfully renegotiate, or otherwise
obtain relief from, its minimum volume commitments in the future. If future
shortfalls occur, the Company may be required to make substantial payments
without associated revenue from customers or the supplier may terminate service
and commence formal action against the Company. Such payments are not presently
contemplated in the Company's capital budgets and would have a material adverse
effect on the Company's business, financial condition and results of operation.
See "Business -- Suppliers."

Because of Midcom's commitments to purchase fixed volumes of use from
certain of its suppliers at predetermined rates, the Company could be adversely
affected if a supplier were to lower the rates it makes available to the
Company's target market without a corresponding reduction in the Company's
rates. Similarly, the Company could be adversely affected if its suppliers fail
to adjust their overall pricing, including prices to the Company, in response to
price reductions of other major carriers. See "Business -- Suppliers" and Note
15 of the Notes to Consolidated Financial Statements.

ABILITY TO IMPLEMENT NETWORK STRATEGY AND ENTER LOCAL MARKETS

A key element of the Company's operating strategy is the deployment of
dedicated switching facilities and the transition from primarily a
nonfacilities-based reseller of long distance and other telecommunications
services to a switch-based provider of integrated telecommunications services.
See "Business -- Company Strategy." The Company's ability to implement its
network strategy may be impaired by technical, operational or other difficulties
encountered in the installation or operation of the Company's sophisticated high
capacity switching equipment. See "Business -- Switching Facilities." In
addition, the Company's ability to enter into the local telecommunications
market may be impaired by certain logistical challenges. Prior to selling local
services to its customers, the Company must complete a number of operational,
marketing and regulatory tasks, including the negotiation of interconnection
agreements with local circuit providers, the development

15
<PAGE> 17

of a billing, provisioning and customer service capability and the creation of a
local marketing, pricing and sales strategy. See "Business -- Regulation" and
"Business -- Products and Services -- Local Service."

ABILITY TO MANAGE GROWTH

The Company intends to pursue substantial growth in connection with the
implementation of its operating strategy. This growth will place significant
demands on the Company's management and systems of financial and internal
controls and will require an increase in the capacity, efficiency and accuracy
of its billing and customer support systems. Moreover, this growth will require
an increase in the number of the Company's personnel, particularly sales,
customer service and technical personnel. The market for such personnel is
highly competitive and there can be no assurance that the Company will be able
to attract the personnel required by its operating strategy. Further, the
Company will be required to expand, train, motivate and manage its employee
base. This will require an increase in the level of responsibility for both
existing and new management personnel. There can be no assurance that the
management skills and systems currently in place, or to be implemented in
connection with the Company's operating strategy, will be adequate or that the
Company will be able to assimilate its new employees successfully. Finally, the
Company has experienced a high level of turnover in its sales force. The Company
believes that this turnover is primarily attributable to the intense competition
for, and the mobility of, qualified sales personnel endemic to the reseller
segment of the telecommunications industry. Although one objective of the
Company's operating strategy is to decrease the level of turnover in its sales
force, there can be no assurance that this objective will be achieved. The
Company's failure to attract and retain sufficient qualified personnel, to
train, motivate and manage such personnel or to otherwise manage its growth
could impair its ability to implement its operating strategy and could have a
material adverse effect on its business, financial condition and results of
operations. See "Business -- Marketing and Sales."

DEPENDENCE UPON MANAGEMENT TEAM

Midcom's ability to implement its operating strategy is highly dependent
upon its ability to retain its senior management team. These individuals are
generally in high demand and are often subject to competing employment
opportunities. Midcom believes that it will need to retain key management
personnel to meet the demands of its business. The loss of William H. Oberlin,
the Company's President and Chief Executive Officer and one of the Company's
directors, or the other key members of the management team could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Company Strategy" and "Management."

CUSTOMER ATTRITION

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RAPID TECHNOLOGICAL CHANGE

The telecommunications industry is characterized by rapidly evolving
technology. Midcom believes that its success will increasingly depend on its
ability to offer, on a timely basis, new services based on evolving technologies
and industry standards. Midcom intends to increase its efforts to develop new
services; however, there can be no assurance that the Company will have the
ability or resources to develop such new services, that new technologies
required for such services will be available to the Company on favorable terms
or that such services and technologies will enjoy market acceptance. Further,
there can be no assurance that the Company's competitors will not develop
products or services that are technologically superior to those used by the
Company or that achieve greater market acceptance. The development of any such
superior technology by the Company's competitors, or the inability of the
Company to successfully respond to such a development, could render Midcom's
existing products or services obsolete and could have a material adverse effect
on the Company's business, financial condition and results of operations.

ABILITY TO INTEGRATE ACQUIRED OPERATIONS

Midcom experienced rapid growth through the end of 1995. A significant
portion of this growth, particularly in 1995, was attributable to acquisitions
of customer bases and of other telecommunications service providers. For a
number of reasons, the Company was not able to consolidate and integrate the
sales and marketing, customer support, billing systems and other functions of
certain of these acquired operations as quickly as anticipated. The Company may
experience difficulties in the integration and consolidation of customer bases
or operations acquired in the future. Pending such integration and
consolidation, it may be necessary for the Company to maintain separate billing
systems and other functions of the acquired operation, which could cause
inefficiencies, add to operational complexity and expense, increase the risk of
billing delays and financial reporting difficulties, increase customer attrition
and impair the Company's efforts to cross-sell the products and services of the
acquired operation. If the Company acquires customer bases or other operations
in the future, difficulties encountered in integrating and consolidating such
operations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Acquisitions"
and "Business -- Information Systems."

DEPENDENCE UPON INTEGRITY OF CALL DATA RECORDS

Midcom depends on the timeliness and accuracy of call data records provided
to it by facilities-based carriers supplying telecommunications services, and
there can be no assurance that accurate information will consistently be
provided by the carriers on a timely basis. Failure of the Company to receive
prompt and accurate call data records from its suppliers will impair the
Company's ability to bill its customers on a timely basis. Such billing delays
could impair the Company's ability to collect amounts owed by its customers. Due
to the multitude of billing rates and discounts which suppliers must apply to
the calls completed by the Company's customers, and due to routine logistical
issues such as the addition or termination of customers, the Company regularly
has disagreements with its suppliers concerning the amounts invoiced for its
customers' traffic. The Company pays its suppliers according to its own
calculation of the amounts owed as recorded on the computer tapes provided by
its suppliers. The Company's computations of amounts owed are frequently less
than the amount shown on the suppliers' invoices. Accordingly, the suppliers may
consider the Company to be in arrears in its payments until the amount in
dispute is resolved. Although these disputes have generally been resolved on
terms favorable to the Company, there can be no assurance that this will
continue to be the case. Future disputes which are not resolved favorably to the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Suppliers."

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<PAGE> 19

DEPENDENCE UPON FACILITIES-BASED CARRIERS

Midcom does not currently own a transmission network and, accordingly,
depends to a large extent on Sprint, WorldCom, AT&T and other facilities-based
carriers for actual transmission of customer calls and other services. Further,
the Company, like all other long distance providers, is dependent upon local
exchange carriers for call origination (carrying the call from the customer's
location to the long distance network of the interexchange carrier selected to
carry the call) and termination (carrying the call off the interexchange
carrier's network to the call's destination). The Company's ability to maintain
and expand its business depends, in part, on its ability to obtain
telecommunication services on favorable terms from facilities-based carriers and
the cooperation of both interexchange and local exchange carriers in initiating
and terminating service for its customers in a timely manner (the process of
initiating service for a customer is referred to as "provisioning"). FCC policy
currently requires all common carriers, including interexchange carriers, to
make their services available for resale and to refrain from imposing
unreasonable restrictions on such resale. Further, the Telecommunications Act
requires all incumbent local exchange carriers both to offer their services for
resale at wholesale rates and to allow access to unbundled network elements at
cost-based rates. The incumbent local exchange carriers are also required by the
Telecommunications Act to provide all interexchange carriers, including the
Company, with equal access for the origination and termination of long distance
calls. If any of these requirements were eliminated, the adverse impact on the
Company could be substantial. Access charges represent a substantial portion of
the Company's current cost of service. The FCC, however, has undertaken to
reform its universal service and access charge rules by May 1997, in order to
rework the current universal service subsidy system and to move access charges
toward the economic cost of originating and terminating long distance traffic.
The level at which the FCC sets access charges and universal service
contributions could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, implementation of a new
access charge structure and repricing of local transport could place many
interexchange carriers, including the Company, at a significant cost
disadvantage relative to larger competitors. The FCC has also imposed on
facilities-based interexchange carriers the obligation to track the
payphone-originated tollfree and access code calls which they carry and to
compensate payphone service providers for such calls, initially on a per-phone,
and, commencing in October 1997, on a per-call basis, in amounts reflective of
soon to be deregulated local coin rates. See "Business -- Regulation."

TERMINATION OF SERVICE UNDER CARRIER SUPPLY CONTRACTS

In the past, the Company has, from time to time, been substantially in
arrears of its payment obligations to AT&T and other suppliers. Although the
Company is generally entitled to be given notice of defaults and an opportunity
to cure under the terms of its agreements with its interexchange suppliers
before such service can be terminated, and although the Company has the ability
to transfer its customers' traffic from one supplier to another, provisioning a
customer that is not serviced by a Midcom switch to an alternate supplier takes
several days. Accordingly, if a major supplier were to decline to continue to
carry the Company's traffic, due to non-payment or otherwise, without sufficient
notice for the Company to make alternate arrangements, there is a possibility
that the customers serviced by that supplier would be temporarily without "1
plus" long distance calling which could have a material adverse effect on the
Company's business, financial condition and results of operation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Suppliers."

COMPETITION

The long distance telecommunications industry is highly competitive. A
number of the Company's current and potential competitors have substantially
greater financial, technical, marketing and other resources than the Company,
and there can be no assurance that the Company will be

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<PAGE> 20

competitive in this environment. The Company's ability to compete may also be
impaired by its leveraged capital structure and limited capital resources.

The long distance telecommunications industry is significantly influenced
by the marketing and pricing activities of the major industry participants,
including AT&T, MCI, Sprint and WorldCom. While the Company believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct sales
efforts on small to medium-sized businesses, these carriers control
approximately 85% of that market. Moreover, AT&T, MCI and Sprint have recently
introduced new service and pricing options that are attractive to smaller
commercial users, and there can be no assurance that they will not market to
these customers more aggressively in the future. AT&T and, as an interim
measure, the structurally separate interexchange affiliates of the seven
regional Bell operating companies have recently been reclassified as
non-dominant carriers and, accordingly, have the same flexibility as the Company
in meeting competition by modifying rates and service offerings without pricing
constraints or extended waiting periods. These reclassifications may make it
more difficult for the Company to compete for long distance customers. See
"Business -- Regulation." In addition, a significant number of large regional
long distance carriers and new entrants in the industry compete directly with
the Company by concentrating their marketing and direct sales efforts on small
to medium-sized commercial users. Activities by competitors including, among
other things, national advertising campaigns, telemarketing programs and the use
of cash or other forms of incentives, contribute to significant customer
attrition in the long distance industry.

The Company contracts for call transmission over networks operated by
suppliers who may also be the Company's competitors. Both the interexchange
carriers and local exchange carriers providing transmission services for the
Company have access to information concerning the Company's customers for which
they provide the actual call transmission. Because these carriers are potential
competitors of the Company, they could use information about the Company's
customers, such as their calling volume and patterns of use, to their advantage
in attempts to gain such customers' business. In addition, the Company's future
success will depend, in part, on its ability to continue to buy transmission
services and access from these carriers at a significant discount below the
rates these carriers otherwise make available to the Company's targeted
customers.

Regulatory trends have had, and may have in the future, a significant
impact on competition in the telecommunications industry. See
"Business -- Regulation." As the result of the Telecommunications Act, the
regional Bell operating companies are now permitted to provide, and are
providing or have announced their intention to provide, long distance service
originating (or in the case of "800" service, terminating) outside their local
service areas or offered in conjunction with other ancillary services, including
wireless services. Following application to and upon a finding by the FCC that a
regional Bell operating company faces facilities-based competition and has
satisfied a congressionally-mandated "competitive checklist" of interconnection
and access obligations, it will also be permitted to provide long distance
service within its local service area. The entry of these well-capitalized and
well-known entities into the long distance service market could significantly
alter the competitive environment in which the Company operates.

The Telecommunications Act also removes most legal barriers to competitive
entry into the local telecommunications market and directs incumbent local
exchange carriers to allow competing telecommunications service providers such
as the Company to interconnect their facilities with the local exchange network,
to lease network components on an unbundled basis and to resell local
telecommunications services. Moreover, the Telecommunications Act seeks to
facilitate the development of local telecommunications competition by requiring
incumbent local exchange carriers, among other things, to allow end users to
retain their telephone numbers when changing service providers and to place
short-haul toll calls without dialing lengthy access codes. In response to these
regulatory changes, AT&T, MCI and many of the Company's other long distance
competitors have announced plans to enter the local telecommunications market.

19
<PAGE> 21

While the Telecommunications Act opens new markets to the Company, the
nature and value of the resultant business opportunities will be dependent in
large part upon subsequent regulatory interpretation of the statute's
requirements. While the FCC has promulgated rules implementing the local
competition provisions of the Telecommunications Act, these rules have been
appealed and key provisions have been "stayed" pending the outcome of the
appeals. Various state regulatory authorities are currently in the process of
implementing the remaining FCC rules. The Company anticipates that incumbent
local exchange carriers will actively resist competitive entry into the local
telecommunications market and will seek to undermine the operations and the
service offerings of competitive providers, leaving carriers such as the Company
which are dependent on incumbent local exchange carriers for network services
vulnerable to anti-competitive abuses. No assurance can be given that the local
competition provision of the Telecommunications Act will be implemented and
enforced by federal and state regulators in a manner which will permit the
Company to successfully compete in the local telecommunications market or that
subsequent legislative and/or judicial actions will not adversely impact the
Company's ability to do so. Moreover, federal and state regulators are likely to
provide incumbent local exchange carriers with increased pricing flexibility for
their services as competition in the local market increases. If incumbent local
exchange carriers are allowed by regulators to lower their rates substantially,
engage in aggressive volume and term discount pricing practices for their
customers, charge excessive fees for network interconnection or access to
unbundled network elements or decline to make services available for resale at
discounted wholesale rates, the ability of the Company to compete in the
provision of local service could be materially and adversely affected.

REGULATION

Federal and state regulations, regulatory actions and court decisions have
had, and may have in the future, negative effects on the Company and its ability
to compete. The Company is subject to regulation by the FCC and by various state
public service or public utility commissions as a non-dominant or resale
provider of long distance services. The Company is required to file tariffs
specifying the rates, terms and conditions of its international services with
the FCC and is required to file tariffs or obtain other approvals in most of the
states in which it operates. Neither the FCC nor the relevant state utility
commissions currently regulate the Company's profit levels, but they often
reserve the authority to do so. The large majority of states require long
distance service providers to apply for authority to provide telecommunications
services and to make filings regarding their activities. The multiplicity of
state regulations makes full compliance with all such regulations a challenge
for multistate providers such as the Company. There can be no assurance that
future regulatory, judicial and legislative changes or other activities will not
have a material adverse effect on the Company or that regulators or third
parties will not raise material issues with regard to the Company's compliance
with applicable laws and regulations.

Pursuant to the terms of the 1984 court decree which required AT&T to
divest its local exchange operations, the regional Bell operating companies were
prohibited from providing long distance telecommunications service between
certain defined geographic areas, known as Local Access Transport Areas or
"LATAs." However, the Telecommunications Act allows for immediate provision by
the regional Bell operating companies of long distance service outside their
respective local telephone service areas as well as long distance service
bundled with wireless, enhanced and certain other services. The
Telecommunications Act also provides a mechanism for eventual entry by the
regional Bell operating companies into the long distance market within their
respective local service areas. The competition faced by the Company will
increase significantly as the regional Bell operating companies expand their
provision of inter-LATA services.

As a result of a 1994 court decision, the Company became obligated to
provide detailed rate schedules in all of its federal tariffs, and the Company
could possibly be liable for damages for following an FCC policy which did not
require the Company to file such detailed schedules of its domestic charges in
the past. The FCC's policy, which would have implemented mandatory

20
<PAGE> 22

detariffing by August 1997, has now been stayed pending determination of the
issue by the federal district court in Washington, D.C. Also, AT&T and, as an
interim measure, the structurally separate interexchange affiliates of the
regional Bell operating companies have recently been reclassified as
non-dominant carriers and, accordingly, have the same flexibility as the Company
in meeting competition by modifying rates and service offerings without pricing
constraints or extended waiting periods. The reclassifications may make it more
difficult for the Company to compete for long distance customers. See
"Business -- Regulation."

When the Company enters the local telecommunications market, it will be
subject to regulation by various state public service and public utility
commissions, often as a facilities-based provider. Virtually all states require
local exchange providers to be certified prior to initiating service and to
maintain on file with the state commissions detailed tariffs specifying rates,
as well as terms and conditions, of service. The Company will be subject to a
higher level of regulatory oversight as a local exchange provider than it has
been as a long distance carrier. Among other things, the Company will be subject
to a variety of additional service quality and consumer protection requirements,
as well as requirements to provide emergency, handicapped and subsidized
services. The states also impose additional reporting and prior approval
requirements on local service providers. The multiplicity and volume of state
regulations governing the provision of local service make full compliance with
all such regulations even more of a challenge for multistate providers such as
the Company than compliance with state regulations governing the provision of
long distance service. As with the Company's provision of long distance service,
there can be no assurance that future regulatory, judicial and legislative
changes or other activities will not have a material adverse effect on the
Company's provision of local exchange service or that regulators or third
parties will not raise material issues with regard to the Company's compliance
with laws and regulations applicable to its provision of such service.

SUBSTANTIAL LEVERAGE

The Company is highly leveraged. As of December 31, 1996, the Company's
total indebtedness and shareholders' deficit was $112.1 million and $69.3
million, respectively. For the year ended December 31, 1996, the Company's
earnings were insufficient to cover its fixed charges by $97.3 million. The
Company's ability to make scheduled payments of the principal of, or interest
on, its indebtedness, including the Notes, will depend on its future
performance, which is subject to economic, financial, competitive and other
factors beyond its control.

SUBORDINATION OF NOTES

The indebtedness evidenced by the Notes is subordinate to the prior payment
in full of all Senior Indebtedness (as defined herein). As of December 31, 1996,
the Company had approximately $15.8 million of Senior Indebtedness outstanding.
In addition, because a portion of the Company's operations is conducted through
its subsidiaries, claims of holders of indebtedness and of other creditors of
such subsidiaries will have priority with respect to the assets and earnings of
such subsidiaries over the claims of creditors of the Company, including holders
of the Notes. As of December 31, 1996, the aggregate liabilities of such
subsidiaries were approximately $3.5 million (excluding intercompany
indebtedness). The Indenture does not limit the amount of additional
indebtedness, including Senior Indebtedness or pari passu indebtedness, that the
Company or any of its subsidiaries may create, incur, assume or guarantee.
During the continuance of any default (beyond any applicable grace period) in
the payment of principal, premium, interest or any other payment due on
Designated Senior Indebtedness (as defined herein), no payment of principal or
interest on the Notes may be made by the Company. In addition, upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization, the payment of the principal and interest on the
Notes will be subordinated to the extent provided in the Indenture to the prior
payment in full of all Senior Indebtedness and will be structurally subordinated
to claims of creditors of each subsidiary of the Company. By reason of this
subordination, in the event of the

21
<PAGE> 23

Company's dissolution, holders of Senior Indebtedness may receive more, ratably,
and holders of the Notes may receive less, ratably, than the other creditors of
the Company. The Company's cash flows and ability to service debt, including the
Notes, are dependent, in part, upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon payments by those subsidiaries to,
the Company. The ability of the Company's subsidiaries to make such
distributions or payments may be subject to contractual or statutory
restrictions. See "Description of Notes -- Subordination."

REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL

In the event of a Change of Control (as defined herein), each holder of
Notes has the right to require that the Company repurchase the Notes in whole or
in part at a redemption price equal to 101% of the principal amount thereof,
plus accrued interest, if any, to the date of repurchase. See "Description of
Notes -- Repurchase of Notes at the Option of Holders Upon a Change of Control."
If a Change of Control were to occur, there can be no assurance that the Company
would have sufficient funds to pay such redemption price for all Notes tendered
by the holders thereof. See "Description of Notes -- Subordination." The
Company's ability to pay such redemption price is, and may in the future be,
limited by the terms of agreements then in place relating to indebtedness that
constitutes Senior Indebtedness. If the Company is required to pay such
redemption price, such payment could have a material adverse effect on the
Company's liquidity, results of operations and financial condition. Moreover,
the Company's repurchase obligation could have the effect of delaying, deferring
or preventing a change of control of the Company and could limit the price that
certain investors might be willing to pay in the future for the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

As of December 31, 1996, there were 15,954,917 outstanding shares of Common
Stock (assuming no redemption of the shares owned by the Company's former
President and Chief Executive Officer; see "Certain Transactions"), of which
9,150,437 shares were "restricted securities" subject to restrictions set forth
in Rule 144 promulgated under the Securities Act. Of the restricted securities,
5,617,272 shares may be sold under Rule 144 and an additional 2,649,319 shares
may be sold under Rule 144 upon the expiration of the applicable one-year
holding period.

As of December 31, 1996, the Company had reserved for issuance 4,108,816
shares of Common Stock under its Amended and Restated 1993 Stock Option Plan
(the "Stock Option Plan") and 256,354 shares of Common Stock for issuance under
its Amended and Restated 1995 Employee Stock Purchase Plan (the "Stock Purchase
Plan"). Under the Stock Option Plan, as of December 31, 1996 options to purchase
3,683,379 shares of Common Stock were outstanding and options to purchase
374,782 shares of Common Stock were exercisable. At December 31, 1996, warrants
to purchase 59,500 shares of Common Stock were outstanding. Also, in March 1997,
the Company issued a warrant to purchase 117,000 shares of Common Stock in
connection with a capital lease financing arrangement, which warrant is fully
exercisable. In addition, the Notes are convertible into Common Stock at the
option of the holder thereof at any time prior to maturity, unless previously
redeemed, at a conversion price of $14.0875 per share, subject to adjustment in
certain events. If the Notes outstanding as of December 31, 1996 were fully
converted, the Company would be obligated to issue to the holders thereof an
aggregate of 6,938,279 shares of Common Stock (not including an indeterminate
number of shares that may be issued in connection with certain anti-dilution and
other provisions).

22
<PAGE> 24

their shares under the Securities Act. Notwithstanding such registration rights,
on November 25, 1996, the Company voluntarily filed with the Commission a
Registration Statement (file no. 333-16681) to register under the Securities Act
the public offer and sale of approximately 1,600,000 of such shares (the "Shelf
Registration Statement"). The Company intends to maintain the effectiveness of
the Shelf Registration Statement for a period of one year. In addition, pursuant
to the Registration Rights Agreement, the Company has agreed to register under
the Securities Act the public offer and sale of the Notes and the Conversion
Shares, subject to certain conditions and limitations. Pursuant to the
Registration Rights Agreement, the Company filed with the Commission the
Registration Statement of which this Prospectus forms a part to register under
the Securities Act the public offer and sale of the Notes and the Conversion
Shares included herein. The Company is required under the Registration Rights
Agreement to maintain the effectiveness of the Registration Statement for a
period of three years from the completion of the Private Placement or, if
shorter, when (i) all the Notes and Conversion Shares have been sold pursuant to
the Registration Statement or (ii) the date on which there ceases to be
outstanding any Notes or Conversion Shares. See "Description of Capital
Stock -- Registration Rights," "Description of Notes -- Registration Rights;
Liquidated Damages," "Selling Securityholders" and "Plan of Distribution."

Sales of substantial amounts of Common Stock in the public market under
Rule 144, pursuant to the exercise of registration rights or otherwise, and even
the potential for such sales, may have a material adverse effect on the
prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.

CONTROL BY PRINCIPAL SHAREHOLDERS

At December 31, 1996, Midcom's directors and executive officers
beneficially owned or had the power to vote approximately 40.0% of the Common
Stock. Although such shareholders will not have the ability to control matters
requiring shareholder approval, they may have the ability to influence the
affairs and management of the Company and the elections of directors. This may
have the effect of delaying, deferring or preventing a change in control of the
Company and could limit the price that certain investors might be willing to pay
in the future for the Common Stock. See "Principal Shareholders."

ANTI-TAKEOVER CONSIDERATIONS

The Company is subject to the anti-takeover provisions of Chapter 23B.17 of
the Washington Business Corporation Act (the "WBCA") which prohibits, subject to
certain exceptions, a merger, sale of assets or liquidation of a corporation
involving a 20% shareholder unless determined to be at a fair price or approved
by disinterested directors or two-thirds of the disinterested shareholders. In
addition, Chapter 23B.19 of the WBCA prohibits a corporation registered under
the Exchange Act from engaging in certain significant transactions with a 10%
shareholder. Significant transactions include, among others, a merger with or
disposition of assets to the 10% shareholder. Further, the Company's Amended and
Restated Articles of Incorporation (the "Articles") require super-majority
shareholder approval of certain business combinations and provide for a
classified Board of Directors with staggered, three-year terms. Also, the
Company has the authority to issue up to 10 million shares of preferred stock in
one or more series and to fix the preferences and other rights thereof without
any further vote or action by the Company's shareholders. The issuance of
preferred stock, together with the effect of other anti-takeover provisions in
the Articles and under the WBCA, may have the effect of delaying, deferring or
preventing a change in control of the Company and could limit the price that
certain investors might be willing to pay in the future for the Common Stock.
See "Description of Capital Stock -- Washington Law" and "Description of Capital
Stock -- Certain Provisions in Amended and Restated Articles of Incorporation
and Bylaws."

23
<PAGE> 25

VOLATILITY OF STOCK PRICE

The market price of the Common Stock has been, and is likely to continue to
be, volatile. There can be no assurance that the market price of the Common
Stock will not fluctuate significantly from its current level. The market price
of the Common Stock could be subject to significant fluctuations in response to
a number of factors, such as actual or anticipated variations in the Company's
quarterly operating results, the introduction of new products by the Company or
its competitors, changes in other conditions or trends in the Company's
industry, changes in governmental regulations, changes in securities analysts'
estimates of the Company's, or its competitors' or industry's, future
performance or general market conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition, stock
markets have experienced extreme price and volume volatility in recent years,
which has had a substantial effect on the market prices of securities of many
smaller public companies for reasons frequently unrelated to the operating
performance of such companies. These broad market fluctuations may have a
material adverse effect on the market price of the Common Stock. See "Trading
Market for Securities -- Price Range of Common Stock."

LIMITATIONS ON DIVIDENDS

Since its incorporation in 1989, the Company has not declared or paid cash
dividends on its Common Stock, and the Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends. In addition,
the terms of the Foothill Credit Facility prohibit the payment of cash dividends
without the consent of the Company's lenders. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

ABSENCE OF EXISTING MARKET FOR THE NOTES

The Notes constitute a new issue of securities with no established trading
market. The Company does not intend to list the Notes on any national securities
exchange or to seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation system. The Company has been advised
by the Initial Purchasers that they intend to make a market in the Notes.
However, the Initial Purchasers are not obligated to do so and any market-making
activities may be discontinued at any time without notice. In addition, such
market-making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act, and may be limited during the pendency of the
Registration Statement of which this Prospectus is a part. Although the Notes
are eligible for trading in the PORTAL Market upon issuance, no assurance can be
given that an active trading market for the Notes will develop or, if such
market develops, as to the liquidity or sustainability of such market. If a
trading market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell them at
all. If a market for the Notes develops, any such market may be discontinued at
any time. Further, if a market for the Notes develops, future trading prices of
the Notes will depend on many factors, including, among other things, prevailing
interest rates, perceptions of the Company's creditworthiness, the Company's
results of operations and the market for similar securities. Depending on
prevailing interest rates, the market for similar securities, the financial
condition of the Company and other factors, the Notes may trade at a discount
from their principal amount.

24
<PAGE> 26

USE OF PROCEEDS

The Notes and the Conversion Shares are offered by the Selling
Securityholders and, accordingly, the Company will not receive any of the
proceeds from the sales thereof. Further, the Company will not receive any
proceeds from the issuance of Conversion Shares upon conversion of the Notes.

TRADING MARKET FOR SECURITIES

PRICE RANGE OF COMMON STOCK

Midcom's Common Stock has been quoted on the Nasdaq National Market since
July 6, 1995 under the symbol "MCCI." The stock prices below are the high and
low closing sales prices on the Nasdaq National Market for the periods
indicated.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
Third Quarter (from July 6, 1995).................................... $16 3/4 $11 1/4
Fourth Quarter....................................................... 18 7/8 13 3/4
1996
First Quarter........................................................ $18 1/4 $ 7
Second Quarter....................................................... 15 1/4 6 1/2
Third Quarter........................................................ 16 10 1/4
Fourth Quarter....................................................... 14 3/16 8 1/2
1997
First Quarter........................................................ 11 1/8 8
Second Quarter (through April 4, 1997)............................... 7 3/8 6 3/8
</TABLE>

On April 4, 1997, the closing sale price reported by the Nasdaq National
Market for the Common Stock was $6 3/8. As of March 14, 1997, there were
approximately 146 holders of record of the Common Stock.

PRICE RANGE OF THE NOTES

The Notes were originally issued on August 22 and September 6, 1996. As of
the date hereof, there is no public market for the Notes, although the Notes
have been eligible for trading in the PORTAL Market.

DIVIDEND POLICY

25
<PAGE> 27

CAPITALIZATION

The following table sets forth the cash, short-term obligations and
capitalization of the Company at December 31, 1996. This table should be read in
conjunction with the Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
Cash and cash equivalents................................................. $ 30,962
========
Short-term obligations, including current portion of long-term
obligations:
Notes payable(1)........................................................ $ 9,680
Capital lease obligations............................................... 3,287
Other................................................................... 27
--------
Total short-term obligations.................................... $ 12,994
========
Long-term obligations, less current portion:
Convertible subordinated notes.......................................... $ 97,743
Long-term debt.......................................................... 800
Capital lease obligations............................................... 610
Other................................................................... 3,800
--------
Total long-term obligations..................................... 102,953
--------
Shareholders' dificit:
Preferred stock, 10,000,000 shares authorized; none issued and
outstanding.......................................................... --
Common stock, $.0001 par value; 90,000,000 shares authorized; 15,803,242
shares issued and outstanding(2)..................................... 68,330
Deferred stock option compensation...................................... (1,707)
Accumulated deficit..................................................... (135,907)
--------
Total shareholders' deficit..................................... (69,284)
--------
Total capitalization...................................................... $ 33,669
========
</TABLE>

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

(1) Notes payable includes $9.0 million payable in connection with two customer
base acquisitions which may be paid in cash or by delivery of shares of
Common Stock, as the Company may elect. See "Business -- Legal
Proceedings -- Cherry Communications Lawsuit."

(2) Does not include (i) 4,108,816 shares reserved for issuance upon exercise of
options under the Stock Option Plan, of which options to purchase 3,683,379
shares were outstanding at December 31, 1996, (ii) 256,354 shares reserved
for issuance under the Stock Purchase Plan, (iii) 59,500 shares reserved
for issuance upon exercise of certain warrants issued to sellers of a
customer base acquired by the Company, (iv) up to 151,675 shares which, as
of December 31, 1996, were held in escrow or subject to release pursuant to
the Company's obligations under agreements entered into in connection with
several acquisitions completed in the second half of 1995, (v)
approximately 501,000 shares that the Company is required to issue in the
event that the market price of the Common Stock is below stated prices on
designated true-up dates and upon the occurrence of certain contingencies
(based on the price of the Common Stock on April 4, 1997 and assuming the
maximum contingent shares are issued) and (vi) shares that may be issued to
Cherry Communications as payment in lieu of a $9.0 million cash payment in
connection with the acquisition of a customer base. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."

26
<PAGE> 28

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................. $27,894 $66,010 $111,699 $203,554 $148,777
Cost of revenue..................................... 14,817 45,363 79,044 139,546 107,950
------- ------- -------- -------- -------
Gross profit........................................ 13,077 20,647 32,655 64,008 40,827
Selling, general and administrative expense......... 11,246 18,125 27,697 62,061 65,025
Depreciation and amortization....................... 295 1,881 4,134 13,790 32,687
Settlement of contract dispute...................... -- -- -- -- 8,800
Restructuring charge(1)............................. -- -- -- -- 2,220
Loss on impairment of assets(2)..................... -- -- -- 11,830 20,765
------- ------- -------- -------- -------
Operating income (loss)........................... 1,536 641 824 (23,673) (88,670)
Interest expense.................................... 951 1,368 2,965 5,288 8,726
Other expense (income).............................. (65) (249) 888 390 (77)
------- ------- -------- -------- -------
Income (loss) before income taxes and
extraordinary item.............................. 650 (478) (3,029) (29,351) (97,319)
Provision (benefit) for income taxes................ (4) 51 -- -- --
------- ------- -------- -------- -------
Loss before extraordinary item.................... 654 (529) (3,029) (29,351) (97,319)
Extraordinary item(3)............................... -- -- -- (4,067) --
------- ------- -------- -------- -------
Net income (loss)................................. $ 654 $ (529) $ (3,029) $(33,418) $(97,319)
======= ======= ======== ======== =======
Per share amounts(4):
Income (loss) before extraordinary item........... $ 0.07 $ (0.05) $ (0.31) $ (2.42) $ (6.27)
Extraordinary item................................ -- -- -- (0.34) --
------- ------- -------- -------- -------
Net income (loss)............................... $ 0.07 $ (0.05) $ (0.31) $ (2.76) $ (6.27)
======= ======= ======== ======== =======
Shares used in calculating per share data........... 9,930 9,930 9,930 12,101 15,529
SUPPLEMENTAL OPERATING DATA:
EBITDA(5)........................................... $ 1,831 $ 2,522 $ 4,958 $ 1,947 $(35,218)
Ratio of earnings to fixed charges(6)............... 1.60 -- -- -- --
Deficiency of earnings to fixed charges(6).......... $ -- $ (478) $ (3,012) $(29,351) $(97,319)
</TABLE>

27
<PAGE> 29

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 1,461 $ 808 $ 960 $ 1,083 $ 30,962
Total assets......................................... 11,090 35,414 66,078 133,331 79,923
Short-term obligations, including current portion of
long-term obligations.............................. 279 8,719 2,241 56,297 12,994
Long-term obligations, less current portion.......... 8,618 16,431 34,022 3,691 102,953
Redeemable preferred stock........................... -- -- 8,597 -- --
Shareholders' equity (deficit)....................... (6,196) (6,565) (6,304) 23,799 (69,284)
</TABLE>

- ---------------
(1) Consists primarily of severance and lease cancellation charges relating to
restructuring of operations in March and April 1996.

(3) Includes $3.0 million of original issue discount and $1.1 million of
deferred financing costs written off in the third and fourth quarters of
1995, respectively.

(4) Net loss per share is based on the number of shares as described in Note 1
of the Notes to Consolidated Financial Statements.

(5) As used herein, "EBITDA" is defined as operating income plus depreciation,
amortization and loss on impairment of assets. EBITDA is commonly used to
measure performance of telecommunications companies because of (i) the
importance of maintaining cash flows in excess of debt-service obligations
due to the capital and acquisition-intensive nature of the
telecommunications industry and (ii) the non-cash effect on earnings of
generally high levels of both amortization and depreciation expenses
associated with capital equipment and acquisitions common in this industry.
EBITDA does not purport to represent cash provided by operating activities
as reflected in the Company's consolidated statements of cash flows, is not
a measure of financial performance under generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(6) For purposes of calculating the ratio and deficiency of earnings to fixed
charges, "earnings" consist of income before income taxes plus fixed
charges, and "fixed charges" consist of interest expense, including the
amortization of deferred financing fees, and that portion of rental expense
deemed representative of the interest factor (estimated to be one-third of
rental expense). Because earnings are inadequate to cover fixed charges, the
dollar amount of the coverage deficiency is stated, as required by the rules
of the Commission.

28
<PAGE> 30

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

Midcom was formed in 1989 and initially operated as an aggregator of long
distance telecommunications services. In 1991, Midcom shifted its focus from
aggregation to providing telecommunications services and, accordingly, began to
(i) enter into volume-based supply agreements with multiple underlying
facilities-based carriers, (ii) establish a knowledgeable direct sales force to
target small and medium-sized business customers, (iii) obtain the necessary
federal and state certifications to provide interstate, intrastate and
international service, (iv) build an infrastructure to bill and service a large
volume of customers and (v) develop enhanced and value-added products and
services to supplement its basic long distance service. As of the date of this
Prospectus, Midcom did not provide its telecommunications services through the
operation of its own transmission network. Rather, Midcom purchases large
volumes of long distance services utilizing transmission networks owned and
operated by various other interexchange carriers, and then resells those
services to its customers. Midcom, or one of its billing agents, receives
monthly records from its underlying carriers which detail the calls made by its
customers, then rates the calls and bills its customers.

Subsequent to its initial public offering in July 1995, Midcom completed
numerous acquisitions of businesses and customer bases. Although these
acquisitions contributed to substantial growth, they placed significant demands
on management resources and disrupted Midcom's normal business operations. In
particular, the Company was not able to consolidate and integrate the sales and
marketing, customer support, billing and other functions of certain acquired
operations as quickly as anticipated. Pending such integration, it was necessary
to maintain billing systems and other functions of certain acquired operations,
which increased the Company's overall cost structure and resulted in lower
profitability and cash flows. See "Business -- Acquisitions." Also, during 1995,
the Company was in the process of implementing a new management information
system, including the installation of a new billing system. Problems encountered
in this implementation process contributed to the Company's operational
difficulties. In addition, certain reports generated by the new management
information system that were used to estimate unbilled revenue for the third
quarter of 1995 failed to fully reflect all discounts that were properly
included in the bills subsequently sent to the Company's customers. See
"Business -- Information Systems." Primarily as a result of this failure,
reported revenue was overstated for the third quarter of 1995 and the Company's
Quarterly Report on Form 10-Q for that period had to be amended to restate
reported results. See "-- Restatement of Results for the Third Quarter of 1995."
In addition, the Company's profitability was reduced as a result of the
Company's supply contract with AT&T which provided for higher rates than those
provided by competitive suppliers, although the Company has entered into a new
carrier supply contract with AT&T which provides for more favorable rates. See
"Business -- Suppliers." These factors contributed to defaults under the
then-existing revolving credit facility and caused the Company's auditors to
include going concern disclosure in their report with respect to the Company's
1995 Consolidated Financial Statements. Similar going concern disclosure is
included in their report with respect to the Company's 1996 Consolidated
Financial Statements included in this Prospectus. See "-- Liquidity and Capital
Resources." The Company's auditors also identified certain material weaknesses
in the Company's internal financial controls in connection with the audit for
the year ended December 31, 1995. See "-- Past Material Weaknesses."

During the second and third quarters of 1996 Midcom recruited an executive
management team with extensive experience and expertise in the
telecommunications industry. This executive management team has developed a
restructuring, network and marketing strategy which is designed to address the
operational challenges experienced by the Company and increase internally
generated sales and profitability. See "Business -- Company Strategy." The
implementation of the Company's restructuring, network and marketing strategy
has required, and will continue to require, the

29
<PAGE> 31

Company to substantially increase its investment in sales, marketing, capital
equipment, systems development and other areas. The Company expects that a
substantial portion of these expenditures will be made before the Company
realizes a significant increase in revenue or an improvement in gross margin.
These expected trends will have a material adverse impact on the Company's near
term profitability and levels of cash flows. See "-- Liquidity and Capital
Resources."

If Midcom successfully implements its operating strategy, it anticipates
that, over the long term, (i) revenue will increase as a result of its
reorganized and expanded direct sales efforts, the development of a new tier of
distributors and reduced customer attrition and (ii) operating expenses will
decrease as a result of deploying its network of switching facilities and
obtaining more favorable terms from its suppliers. As a result of these expected
trends, the Company expects that gross margin as a percentage of revenue will,
over the long term, be comparable to other telecommunications providers despite
an anticipated increase in costs associated with its larger sales force and
customer support efforts. However, the Company's ability to implement its
operating strategy is subject to an unusual number of risks and uncertainties,
and there can be no assurance that the strategy will be successfully implemented
or that the intended positive results will be achieved. See "Forward-Looking
Statements and the Private Securities Litigation Reform Act" and "Risk Factors."

PRIOR ACQUISITIONS

In 1994, Midcom acquired PacNet Inc. ("PacNet") and certain assets of
American Telephone Network, Inc. ("ATN"). In 1995, Midcom acquired Adval, Inc.
("Adval"), Cel-Tech International Corp. ("Cel-Tech"), ADNET Telemanagement, Inc.
("Adnet") and certain assets of Communique Telecommunications, Inc.
("Communique"). With the exception of ATN, the consideration for these
acquisitions was paid primarily in the form of Common Stock and the assumption
of certain liabilities. The consideration for ATN was primarily in the form of
cash and the assumption of certain liabilities, financed principally through
working capital and borrowings under an expired revolving credit facility. In
addition to the acquisitions of businesses, the Company has made numerous
acquisitions of customer bases, including acquisitions of two significant
customer bases from Cherry Communications in September and November 1995. See
"Business -- Acquisitions" and "Business -- Legal Proceedings -- Cherry
Communications Lawsuit."

To date, all business combinations have been accounted for using the
purchase method except for Adval and Adnet which have been accounted for as
pooling of interests transactions. The Company's consolidated financial
statements for the years ended December 31, 1995 and 1994 and the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations for 1995 versus 1994 have been restated to reflect the inclusion of
the accounts and results of operations of Adval and Adnet in both of those
periods. Using the purchase method, the purchase price paid in excess of the
fair market value of the assets acquired is recorded as an intangible asset and
amortized generally over three years using the straight-line method. During the
second quarter of 1996, the Company wrote down certain acquired customer bases
and equipment and recorded a loss on impairment of assets of $18.8 million. A
total of $15.5 million of intangibles associated with acquisitions remained to
be amortized as of December 31, 1996. See Note 6 of the Notes to Consolidated
Financial Statements.

SUPPLIER RELATIONSHIPS

30
<PAGE> 32

responsible for carrying traffic representing more than 46%, 31% and 31% of the
Company's revenue, respectively.

To obtain favorable forward pricing from certain suppliers, the Company has
committed to purchase minimum volumes of a variety of long distance services
during stated periods whether or not such volumes are used. In the past, Midcom
has fallen short of its minimum volume commitments with certain carriers and has
renegotiated the commitment. For example, in October 1996, Midcom entered into a
renegotiated carrier supply contract with AT&T pursuant to which, among other
things, the minimum volume commitment was reduced from $117.0 million to $13.7
million for the eighteen month period following execution of the contract, of
which approximately $10.0 million remained as of the date of this Prospectus.
The Company's minimum volume commitments to all of its carriers as of March 14,
1997 aggregated approximately $92.0 million, to be used over the next three
years. See Note 15 of the Notes to Consolidated Financial Statements. There can
be no assurance that the Company will not incur additional shortfalls in the
future or that it will be able to successfully renegotiate, or otherwise obtain
relief from, its minimum volume commitments in the future. See
"Business -- Switching Facilities," "Business -- Suppliers" and "Risk
Factors -- Minimum Volume Commitments and Shortfalls."

CUSTOMER ATTRITION

Midcom's revenue is affected by customer attrition, a problem inherent in
the long distance industry. The customer attrition experienced by the Company is
attributable to a variety of factors, including the Company's termination of
customers for non-payment and the marketing and sales initiatives of the
Company's competitors such as, among other things, national advertising
campaigns, telemarketing programs and the use of cash or other forms of
incentives. In particular, the Company experienced high initial customer
attrition from acquired customer bases as these customers were transitioned to
the Company's services and systems. The Company believes that this attrition
occurred as a result of difficulties encountered in transitioning acquired
customer bases to the Company's services and systems, a process which often
prompts customers to consider competitive alternatives in the telecommunications
marketplace. Also, where the Company did not acquire the sales channel
associated with an acquired customer base, there was often a period of increased
exposure to competitors as the Company's sales force established a relationship
with its new customers. See "Business -- Competition" and
"Business -- Acquisitions." The Company is aware of the significant impact
customer attrition has on its business. However, because of numerous
acquisitions and lack of historical data concerning its acquired customer bases,
the Company has found it difficult to measure customer attrition in a
consistently meaningful manner. As a consequence, the Company has not formulated
a statistical basis for measuring or reporting customer attrition.

PAST MATERIAL WEAKNESSES

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<PAGE> 33

receivables with actual billings to ensure that all unbilled amounts at a
reporting date represent properly recorded revenue. In response to these
recommendations, the Company hired new finance and accounting personnel,
curtailed acquisitions, reorganized its financial reporting functions to improve
communications between senior management and the finance department and
established a policy of billing substantially all customer call traffic in a
financial reporting period before revenue for the period is reported. See
"Business -- Information Systems." As a result of operational and other changes
implemented by the Company, on March 13, 1997 the Company's independent auditors
reported to the Company's Audit Committee that the material weaknesses
identified in connection with the 1995 audit have been corrected. However, there
can be no assurance that the Company will not encounter other internal control
weaknesses. See "Business -- Information Systems" and "Risk Factors -- Material
Weaknesses in Internal Financial Controls."

RESTATEMENT OF RESULTS FOR THE THIRD QUARTER OF 1995

Midcom announced on March 4, 1996 that it would issue restated financial
statements for the third quarter and nine months ended September 30, 1995 that
would lower previously announced results. The restatement was primarily
attributable to an overrecognition of revenue and unbilled accounts receivable
which occurred during the conversion to a new billing system. In the process of
reconciling unbilled accounts as of December 31, 1995 with amounts ultimately
billed, the Company discovered that certain reports generated by its new
information management system that were used for recognizing unbilled revenue
did not fully reflect all discounts that were properly included in the bills
subsequently sent to the Company's customers. Primarily as a result of this
failure, the Company's Quarterly Report on Form 10-Q for the third quarter of
1995 was amended to report a $3.3 million reduction in revenue and a $4.5
million reduction in accounts receivable, consisting of a $3.8 million reduction
in unbilled accounts receivable and a $0.7 million increase in the allowance for
doubtful accounts. The amended 10-Q also reflects a reclassification of $1.2
million of customer adjustments to revenue to bad debt expense (included in
selling, general and administrative expenses on the statement of operations).
These adjustments resulted in the net loss for the quarter and nine months ended
September 30, 1995 being increased from $3.8 million and $8.0 million,
respectively, to $8.3 million and $12.5 million, respectively. See
"Business -- Information Systems."

SEASONALITY

Due to its predominately commercial customer base, Midcom tends to
experience decreases in customer usage and revenue around national holidays and
traditional vacation periods. The Company anticipates revenue from existing
customers during the last two quarters of the year to be somewhat lower than
during the first two quarters. Historically, however, period-to-period
comparisons have been affected more significantly by acquisitions of customer
bases and customer attrition than by seasonal factors.

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<PAGE> 34

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentages
that certain items bear, except as noted, to total revenue:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenue.................................................. 100.0% 100.0% 100.0%
Cost of revenue.......................................... 70.8 68.6 72.6
----- ----- -----
Gross margin............................................. 29.2 31.4 27.4
Selling, general and administrative expenses............. 24.8 30.5 43.7
Depreciation and amortization............................ 3.7 6.8 22.0
Settlement of contract dispute........................... -- -- 5.9
Restructuring charges.................................... -- -- 1.4
Loss on impairment of assets............................. -- 5.7 14.0
----- ----- -----
Operating income (loss)............................. 0.7 (11.6) (59.6)
Interest expense......................................... (2.6) (2.6) (5.9)
Other income (expense)................................... (0.8) (0.2) 0.1
----- ----- -----
Loss before extraordinary item........................... (2.7) (14.4) (65.4)
Extraordinary item....................................... -- (2.0) --
----- ----- -----
Net loss................................................. (2.7)% (16.4)% (65.4)%
===== ===== =====
SUPPLEMENTAL OPERATING DATA:
EBITDA(1)................................................ 4.4% 1.0% (23.7)%
</TABLE>

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

(1) As used herein, "EBITDA" is defined as operating income plus depreciation,
amortization and loss on impairment of assets.

1996 COMPARED TO 1995

Revenue. Total revenue in 1996 was $148.8 million, a decrease of 26.9%
from revenue of $203.6 million in 1995. This decrease is due primarily to
customer attrition offset in part by increases in revenue from customer bases
acquired in the third and fourth quarters of 1995. The Company expects that
during the first six months of 1997, revenue will begin to increase due to sales
generated by its direct sales force.

Gross Margin. The Company's cost of revenue consists of the cost of
service provided by local and interexchange carriers. Gross margin was 27.4% and
31.4% of total revenue for the years ended December 31, 1996 and 1995,
respectively. The decline in gross margin in 1996 is the result of changes in
the mix of customers, and an increase in fixed costs as a percentage of overall
costs due to the decline in revenue. These factors were offset in part by
negotiation of price reductions with some of the Company's major suppliers, the
full impact of which is not yet reflected in results of operations.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
sales and marketing, customer support and administrative personnel, sales
commissions, bad debt expense, billing fees and professional fees. Selling,
general and administrative expenses increased to $65.0 million in 1996 compared
to $62.1 million in 1995. The increase is due to several factors, including an
increase in payroll and related expenses due to the hiring of additional
personnel, primarily to expand the sales and marketing departments. In addition,
legal and other professional fees increased in 1996 over 1995 due to the number
of outstanding disputes. See "Business -- Legal Proceedings." These increases
were offset in part by reductions in commissions, primarily to distributors, and
certain other

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<PAGE> 35

marketing expenses. The Company employed 527 and 457 persons on a full-time
basis as of December 31, 1996 and 1995, respectively.

Depreciation. Depreciation expense increased to $6.0 million for 1996 from
$4.5 million in 1995. The increase is due to an increase in fixed assets
acquired during 1996 and depreciation of computer systems and equipment related
to the Company's management information system which was placed into service in
the second quarter of 1995. The increase was partially offset by the reduction
in depreciation of limited capacity switching equipment due to the partial
write-off of such equipment in the fourth quarter of 1995.

Amortization. Amortization expense increased to $26.7 million in 1996 from
$9.3 million in 1995. In conjunction with the preparation of the first quarter
financial statements, the Company completed a review of its accounting policies
and practices, including those relating to intangible assets. Based on certain
changes in circumstances that occurred in the first quarter of 1996, including
turnover in personnel, reduction in sales force and continuing attrition of
acquired customer bases, the Company determined that effective January 1, 1996,
a reduction in the estimated useful life of acquired customer bases from 5 years
to 3 years was appropriate. The increase in amortization expense is a result of
the change in the estimated useful life and amortization of customer bases,
non-competition agreements and goodwill resulting from acquisitions completed in
the second half of 1995.

Charge Related to Contract Settlement. On October 31, 1996, the Company
and AT&T executed a Release and Settlement Agreement pursuant to which
substantially all disputes between the Company and AT&T have been resolved. Also
on October 31, 1996, the Company and AT&T executed a new carrier contract
pursuant to which the Company's minimum commitment to AT&T was reduced to $13.7
million to be used over the eighteen month period immediately following the
execution of the agreement. In addition, the new carrier contract provides for
more favorable pricing for certain network services provided by AT&T. In
consideration for the terms of the settlement and the new rate structure, the
Company is required to pay AT&T $8.8 million payable in two installments. The
first payment of $5.0 million was made on November 5, 1996, and the remaining
balance of $3.8 million will be due within 30 days of the Company announcing
quarterly gross revenue in excess of $75.0 million, or upon completion of a
change in control. The Company recorded a charge of $8.8 million in the second
quarter of 1996 in connection with this settlement.

Restructuring Charges. In March and April 1996, the Company made
announcements regarding changes in senior management and the restructuring of
its operations in order to reduce expenses to the level of available capital.
These actions included the layoff of certain employees and contractors and the
closure of six sales offices. As a result, the Company recorded a charge of $1.6
million during the first quarter 1996 and $0.6 million during the second quarter
of 1996, the major components of which relate to severance and lease
cancellation charges. Included in the restructuring charge is approximately $0.4
million relating to the extension of the time period to exercise outstanding
stock options. As of December 31, 1996, $0.8 million of this restructuring
charge remained in accrued liabilities to cover payments to be made in the
future.

Loss on Impairment of Assets. The Company periodically reviews the
carrying value of its long-term assets in accordance with Statement of
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." To the extent that the
estimated future cash inflows attributable to the asset, less estimated future
cash outflows, is less than the carrying amount, an impairment loss is
recognized. In connection with such a review, in 1996 the Company recorded the
following losses on impairments of assets: (i) a $17.8 million write-down of
customer bases, (ii) a $1.0 million write-off of microwave equipment and (iii) a
$2.0 million write-down of its remaining interest in a Russian joint venture.

Other Expenses. Interest expense increased over 1995 primarily due to an
increase in average borrowings outstanding, an increase in average interest
rates, and $1.1 million in fees paid in connection with a temporary bridge loan.
At December 31, 1996, the Company had outstanding

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<PAGE> 36

interest-bearing obligations of $112.1 million, as compared to $58.1 million as
of December 31, 1995. The increase in debt at December 31, 1996 was primarily
due to issuance of the $97.7 million convertible subordinated notes, net of
repayment of outstanding borrowings under a prior credit facility. The Company
discontinued recording its share of the income or losses of a Russian joint
venture as of December 31, 1995, and during the third quarter of 1996 the
remaining investment of $2.0 million was written off to loss on impairment of
assets.

Income Taxes. The Company has incurred losses for all periods presented.
No tax benefit has been recorded with respect to these losses due to the
uncertainty as to the utilization of the Company's net operating loss
carryforward, which totaled approximately $60.0 million as of December 31, 1996.

Net Loss. The substantial increase in net loss in 1996 over 1995 is
attributable to the decline in gross margin, the increase in operating expenses,
the $20.8 million loss on impairment of assets and the restructuring and
settlement charges described above.

1995 COMPARED TO 1994

Revenue. Total revenue in 1995 increased 82.2% to $203.6 million from
$111.7 million in 1994. The increase is primarily attributable to incremental
telecommunications services revenue resulting from acquisitions and, to a lesser
extent, new sales through the Company's combined sales channels, offset by the
impact of attrition. Increased revenue also was partially offset by a decrease
in aggregation fee revenue compared to 1994. The decline in aggregation fees is
due to the attrition of aggregation customers and the Company's efforts to
convert aggregation customers to other Midcom products.

Gross Margin. Cost of revenue grew 76.5% in 1995, primarily as a result of
the increase in revenue as discussed above. The gross margin percentage for 1995
increased to 31.4% versus 29.2% in 1994. Telecommunication services gross margin
increased to 30.8% in 1995, up from 25.2% in 1994. The higher gross margin in
1995 is attributable to several factors, including (1) acquisitions of customer
bases whose mix of customers generally resulted in higher average revenue per
minute and acquisitions of higher margin businesses, such as PacNet, (2)
negotiation of price reductions with some of the Company's interexchange
suppliers as a result of increased traffic volume, and (3) an increase in
traffic over the Company's own switches, all of which were acquired or placed in
service on or after September 30, 1994. These factors were partially offset by
an increase in wholesale revenue as a percentage of total revenue, which carries
a lower gross margin percentage, and a decline in aggregation fee revenue as a
percentage of total revenue, which has no cost of revenue and the write-off of
calls which were not billed during the conversion to the Company's new billing
system.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of total revenue from 24.8% in
1994 to 30.5% in 1995. The increase was due to several factors, including a
substantial increase in bad debt expense and other adjustments given to
customers largely attributable to delays in billing which occurred during the
conversion to the new billing system, higher commission rates associated with a
telemarketing program for lower volume customers, the addition of personnel and
other costs incurred in connection with conversion to the Company's new
information processing systems and costs to open sales offices, some of which
were closed in the first quarter of 1996. Midcom also incurred additional
expenses during 1995 in connection with the maintenance of duplicate billing and
information systems, including those of acquired businesses, and to a lesser
extent, additional personnel costs. The Company employed 457 and 366 persons on
a full-time basis as of December 31, 1995 and 1994, respectively.

Depreciation and Amortization. Depreciation and amortization expense
increased as a percentage of revenue during 1995. This increase reflects the
amortization of customer bases and goodwill, the depreciation of telephone
switching equipment resulting from acquisitions in the second half of 1994 and
throughout 1995 and the depreciation/amortization of significant continued

35
<PAGE> 37

capital investment in computer equipment and software development used to
support internal systems.

Loss on Impairment of Assets. The loss on impairment of assets recorded in
1995 consists of the following: (i) a $6.8 million write-down of the Company's
interest in the joint venture in Russia to reflect the estimated current value
of this investment (see "Business -- Russian Joint Venture"), (ii) a $2.5
million write-off of the Company's current telephone switching equipment as a
result of its decision to migrate to a different switching platform (see
"Business -- Switching Facilities") and (iii) a $2.5 million partial write-down
of the Company's capitalized software for its management information system due
to weaknesses identified in the system (see "Business -- Information Systems").

Interest Expense. Interest expense increased 78.4% to $5.3 million in 1995
from $3.0 million in 1994 primarily due to the increase in average borrowings
outstanding in 1995. At December 31, 1995, the Company had outstanding
interest-bearing obligations of $58.1 million, up from $36.3 million outstanding
as of December 31, 1994. The increase in debt was due to the funding of
acquisitions and the development of management information systems and purchase
of related equipment.

Extraordinary Item. In July 1995, the Company completed an initial public
offering which resulted in net proceeds of $54.2 million to the Company. The
Company used the proceeds to pay down various obligations, including $15.0
million in principal amount of certain subordinated notes. As a result of the
early extinguishment of these notes, the Company expensed as an extraordinary
item in the third quarter of 1995 the unamortized portion of original issue
discount which aggregated approximately $3.0 million. In addition, in the fourth
quarter of 1995, the Company obtained a new credit facility and paid off its
prior revolving credit facility. As a result, the Company was required to
write-off as an extraordinary item during the fourth quarter unamortized
deferred financing costs associated with its prior credit facility totaling
approximately $1.1 million.

Other Expense/Equity in Loss of Joint Venture. Other expense consists
mainly of finance charges and other nonoperating expenses. The Company's portion
of the loss generated by its Russian joint venture, Dal Telecom, was $52,000 in
1995, down from $458,000 in 1994, due mainly to improved operating results of
the joint venture.

Income Taxes. The Company has incurred losses for all periods presented.
No tax benefit was recorded with respect to these losses due to the uncertainty
as to the Company's ability to utilize its net operating loss carryforward which
totaled approximately $19.1 million as of December 31, 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company has experienced significant losses since its inception, with
net losses of approximately $3.0 million, $33.4 million and $97.3 million for
1994, 1995, and 1996, respectively. As a result of these losses, the billing and
collection cycle with its customers, prior acquisition strategy and other
factors, the Company has required substantial external working capital. Given
the Company's billing and collection cycle with its customers and the timing of
its payments to its suppliers, the Company generally pays its suppliers from
thirty to forty-five days prior to the time it is paid by its customers for the
same services. The Company has financed its growth with the proceeds from its
July 1995 initial public offering, bank borrowings, subordinated debt, capital
leases, cash flow from operations, and the issuance of Common Stock and
assumption of indebtedness in connection with acquisitions of businesses and
customer bases.

The Company's cash and cash equivalents balance were $31.0 million at
December 31, 1996 versus $1.1 million at December 31, 1995. During 1996, the
Company used $19.6 million of cash in operations compared to $5.9 million in
1995 and $2.1 million in 1994. In 1996, the Company experienced significant
operating losses which resulted in a use of cash in operating activities. The
Company reduced its unbilled receivables balances from $26.2 million as of
December 31, 1995 to

36
<PAGE> 38

$5.6 million as of December 31, 1996. This was primarily attributable to a
reduction in the backlog of billings which built up during the second half of
1995, and a reduction in the run rate of monthly revenue.

The Company invested $4.3 million to purchase furniture, equipment and
leasehold improvements during 1996, compared to $6.9 million in 1995 and $4.2
million for 1994. During 1995, the Company used $11.4 million in business and
customer base acquisitions as compared to $5.1 million in 1994. Investments of
$4.2 million and $2.6 million were made in the form of advances to a Russian
joint venture in 1994 and 1995, respectively. No similar investments were made
during 1996.

During 1996, the Company received $2.9 million in proceeds in connection
with the exercise of stock options and the purchase of shares under the Stock
Purchase Plan, compared to $0.4 million received in connection with the exercise
of stock options during 1995. In addition, the Company received $54.2 million in
net proceeds from its initial public offering in July 1995, paid $8.6 million to
redeem outstanding preferred stock, and paid $1.3 million to shareholders of
acquired companies.

In August and September of 1996, the Company completed a private placement
(the "Private Placement") of $97.7 million in aggregate principal amount of
8 1/4% Convertible Subordinated Notes due 2003 (the "Notes"). The Notes were
sold to qualified institutional buyers pursuant to Rule 144A under the
Securities Act, certain "accredited investors" pursuant to Regulation D under
the Securities Act and certain non-U.S. persons pursuant to Regulation S under
the Securities Act. The net proceeds to Midcom from the Private Placement were
approximately $94.2 million, which were applied as follows: (i) $34.0 million to
repay in full all obligations under the Company's secured revolving credit
facility with Transamerica Business Credit Corporation and certain other lenders
(the "Transamerica Credit Facility"), (ii) $5.0 million to pay the first
installment of an $8.8 million payment in connection with the satisfaction of
past shortfalls and settlement of other obligations under the Company's carrier
supply contract with AT&T and (iii) $10.0 million to bring current a number of
payment obligations existing prior to the completion of the Private Placement.
The balance of the net proceeds has been and will be used for working capital,
capital expenditures and general corporate purposes.

Interest on the Notes is due semi-annually, on February 15 and August 15 of
each year, commencing February 15, 1997, in the aggregate amount of
approximately $4.0 million per payment. Interest payments will adversely affect
the Company's liquidity. In addition, in the event of a "change of control" of
the Company, as defined in the indenture pursuant to which the Notes were issued
(the "Indenture"), holders of the Notes have the right to require the Company to
repurchase the Notes in whole or in part at a repurchase price equal to 101% of
the principal amount thereof, plus accrued interest, if any, to the date of
repurchase. If the Company is required to repurchase the Notes upon a change of
control, payment of the repurchase price could have a material adverse effect on
the Company's liquidity, results of operation and financial condition. Also, if
the Company is in default under the Indenture, holders of the Notes have the
right to demand immediate repayment of the Notes. If the Company were required
to repay the Notes upon default, such repayment could have a material adverse
effect on the Company's liquidity, results of operation and financial condition.

In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company has elected to repurchase
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price equal to the fair market value of such Common Stock on the
date of Mr. Rao's resignation, as determined by arbitration, to be paid ratably
over a period of 36 months. The Company's election to repurchase such shares of
Common Stock will adversely affect the Company's liquidity. In addition, the
unpaid balance of a promissory note delivered to Cherry Communications
Incorporated ("Cherry Communications") in connection with the acquisitions of
two customer bases is approximately $10.2 million, of which $9.0 million may be
paid in cash or by delivery of Common Stock, as the Company may elect, and the
remaining $1.2

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million is subject to certain hold-back arrangements. The acquired customer
bases have not generated required minimum revenue levels and Cherry
Communications has failed to remit to the Company collections received by Cherry
Communications from a portion of the acquired customers. Accordingly, the
Company has withheld the final three installment payments for the second of the
two acquisitions, payment of invoices for carrier services for the acquired
bases (up to $11.4 million) and accrued customer service charges of $0.8
million. Negotiations between Cherry Communications and the Company failed to
produce a settlement of these disputes which are now the subject of litigation.
As of September 1, 1996, the Company discontinued booking revenue generated by
the customer bases acquired from Cherry Communications which accounted for $2.6
million of revenue during the third quarter of 1996. See "Business -- Legal
Proceedings -- Cherry Communications Lawsuit." In addition, in the event of the
sale or transfer of the majority of the voting stock of Cel-Tech International
Corp. ("Cel-Tech"), a wholly-owned subsidiary of the Company, a payment of a
maximum of $2.0 million would become payable to Cel-Tech's former shareholder.

Prior to completion of the Private Placement, the Company had for several
months experienced a severe working capital short-fall which required the
Company to seek extended payment terms from certain of its suppliers, delay
payments to many of its suppliers and other vendors, delay or cancel purchases
and take other steps to conserve operating capital. Also, for several months
prior to completion of the Private Placement, the Company was in default of
certain financial and other covenants under the Transamerica Credit Facility,
although the lenders continued to permit borrowings under that facility. The
existence of defaults under the Transamerica Credit Facility also constituted
defaults under certain of the Company's capital leases. For these reasons, the
auditor's report with respect to the Company's 1995 Consolidated Financial
Statements included the going concern disclosure referred to above. In
connection with the completion of the Private Placement and the application of
the net proceeds therefrom to the repayment in full of all borrowings under the
Transamerica Credit Facility, which aggregated approximately $34.0 million, the
lenders waived all then-existing defaults and amended the financial covenants
under the facility to levels forecasted to be consistent with Midcom's revised
business plan. However, the decline in revenue and related gross profit in the
last two quarters of 1996, due in significant part to the unanticipated loss of
revenue from a customer base which is the subject of a dispute, caused the
Company again to be in default of certain financial covenants under the
Transamerica Credit Facility. See "Business -- Legal Proceedings -- Cherry
Communications Lawsuit." Due to the existence of these defaults and an
insufficient borrowing base to satisfy a $20.0 million minimum excess
availability requirement, no borrowings were available to the Company under the
Transamerica Credit Facility and the lenders terminated the facility in January
1997.

In February 1997, the Company entered into a new revolving credit facility
with Foothill Capital Corporation (the "Foothill Credit Facility") which will
permit borrowings of up to $30.0 million subject to a borrowing base limitation
of 85% of eligible billed, and 75% of eligible unbilled, receivables. Borrowings
under this facility will bear interest at a prime rate, plus one percent, and

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will be secured by substantially all of the assets of the Company. Under the
terms of the Foothill Credit Facility, the Company is required to maintain
minimum levels of adjusted net worth and is subject to a number of negative
covenants which place limitations on, among other things, capital expenditures,
investments and additional debt. Other covenants preclude payment of cash
dividends and require the Company to obtain the lenders' consent prior to making
any acquisitions. Borrowings under the Foothill Credit Facility will not be
available until satisfaction of a number of conditions, consisting primarily of
final documentation of security arrangements, which is expected to occur by May
1997. In addition, in February 1997 the Company entered into a lease facility
under which approximately $13.0 million is available for purchases of capital
equipment, which the Company expects to use primarily to finance the purchase of
its high capacity switching equipment.

As of March 14, 1997, the Company estimated that it will require between
$40.0 million and $50.0 million in order to fund operating losses, working
capital requirements and capital expenditures during the remainder of 1997,
including an estimated $15.0 million to acquire and install high capacity
switches. The Company believes that it will be able to satisfy the conditions to
borrowing under the Foothill Credit Facility by May 1997. Assuming borrowings
become and remain available under the Foothill Credit Facility and the Company
achieves anticipated revenue growth, the Company believes that the remaining
proceeds from the Private Placement together with funds available under the
Foothill Credit Facility, leasing facilities and cash flow from operations will
be sufficient to fund the Company's expected working capital requirements.
However, the exact amount and timing of these working capital requirements and
the Company's ability to continue as a going concern will be determined by
numerous factors, including the level of, and gross margin on, future sales, the
outcome of outstanding contingencies and disputes such as pending lawsuits,
payment terms obtained from the Company's suppliers and the timing of capital
expenditures. Furthermore, there can be no assurance that borrowings under the
Foothill Credit Facility will become and remain available or that this facility
together with the Company's other anticipated sources of working capital will be
sufficient to implement the Company's operating strategy or meet the Company's
other working capital requirements. If (i) the Company experiences greater than
anticipated capital requirements, (ii) the Company is determined to be liable
for, or otherwise agrees to settle or compromise, any material claim against it,
(iii) the Company is unable to make future borrowings under any of its credit
facilities for any reason, (iv) the implementation of the Company's operating
strategy fails to produce the anticipated revenue growth and cash flows or (v)
additional working capital is required for any other reason, the Company will be
required to refinance all or a portion of its existing debt, sell assets,
curtail operations or obtain additional equity or debt financing. There can be
no assurance that any such refinancing or asset sales would be possible or that
the Company would be able to obtain additional equity or debt financing, if and
when needed, on terms that the Company finds acceptable. Any additional equity
or debt financing may involve substantial dilution to the interests of the
Company's shareholders as well as the holders of the Notes. If the Company is
unable to obtain sufficient funds to satisfy its cash requirements, it will be
forced to curtail operations, dispose of assets or seek extended payment terms
from its vendors. There can be no assurance that the Company would be able to
reduce expenses or successfully complete other steps necessary to continue as a
going concern. Such events would materially and adversely affect the value of
the Company's debt and equity securities.

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BUSINESS

INDUSTRY BACKGROUND

The existing domestic long distance telecommunications industry was
principally shaped by a 1984 court decree (the "Decree") that required the
divestiture by AT&T of its 22 Bell operating companies ("BOCs"), organized the
BOCs under seven regional Bell operating companies ("RBOCs") and divided the
country into some 200 Local Access Transport Areas or "LATAs." The incumbent
local exchange carriers ("ILECs"), which include the seven RBOCs as well as
independent local exchange carriers, were given the right to provide local
telephone service, local access service to long distance carriers and intra-LATA
long distance service (long distance service within LATAs), but the RBOCs were
prohibited from providing inter-LATA service (service between LATAs). The right
to provide inter-LATA service was given to AT&T and the other interexchange
carriers ("IXCs"). Conversely, IXCs were effectively blocked from providing
local telephone service.

A typical inter-LATA long distance telephone call begins with the local
exchange carrier ("LEC") transmitting the call by means of its local network to
a point of connection with an IXC. The IXC, through its switching and
transmission network, transmits the call to the LEC serving the area where the
recipient of the call is located, and the receiving LEC then completes the call
over its local facilities. For each long distance call, the originating LEC
charges an access fee. The IXC also charges a fee for its transmission of the
call, a portion of which consists of a terminating fee which is passed on to the
LEC which delivers the call. To encourage the development of competition in the
long distance market, the Decree required LECs to provide all IXCs with access
to local exchange services "equal in type, quality and price" to that provided
to AT&T. These so-called "equal access" and related provisions were intended to
prevent preferential treatment of AT&T and to level the access charges that the
LECs could charge IXCs, regardless of their volume of traffic. As a result of
the Decree, customers of all long distance companies were eventually allowed to
initiate their calls by utilizing simple "1 plus" dialing, rather than having to
dial longer access or identification numbers and codes.

The Telecommunications Act is expected to significantly alter the
telecommunications industry. The Decree has been lifted and all restrictions and
obligations associated with the Decree have been eliminated by the new
legislation. The seven RBOCs are now permitted to provide long distance service
originating (or in the case of "800" service, terminating) outside their local
service areas or offered in conjunction with other ancillary services, including
wireless services. Following application to the FCC, and upon a finding by the
FCC that an RBOC faces facilities-based competition and has satisfied a
congressionally-mandated "competitive checklist" of interconnection and access
obligations, an RBOC will be permitted to provide long distance service within
its local service area, although in so doing, it will be subject to a variety of
structural and nonstructural safeguards intended to minimize abuse of its market
power in these local service areas. Having opened the interexchange market to
RBOC entry, the Telecommunications Act also removes most legal barriers to
competitive entry by interexchange and other carriers into the local
telecommunications market and directs RBOCs to allow competing
telecommunications service providers such as the Company to interconnect their
facilities with the local exchange network, to acquire network components on an
unbundled basis and to resell local telecommunications services. Moreover, the
Telecommunications Act prevents IXCs that serve greater than five percent of
presubscribed access lines in the U.S. (which includes the nation's three
largest long distance providers) from jointly marketing certain local and long
distance services until the RBOCs have been permitted to enter the long distance
market or for three years, whichever is sooner. This gives all other long
distance providers such as the Company a competitive advantage over the larger
long distance providers in the newly-opened local telecommunications market. As
a result of the Telecommunications Act, long distance carriers such as the
Company will face significant new competition in the long distance telecommu-

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nications market, but will also be afforded significant new business
opportunities in the local telecommunications market. See "-- Competition" and
"-- Regulation."

Legislative, judicial and technological factors have helped to create the
foundation for smaller long distance providers to emerge as legitimate
alternatives to AT&T, MCI and Sprint for long distance telecommunication
services. The FCC has required that all IXCs allow the resale of their services,
and the Decree substantially eliminated different access arrangements as
distinguishing features among long distance carriers. In recent years, national
and regional network providers have substantially upgraded the quality and
capacity of their domestic long distance networks, resulting in significant
excess transmission capacity for voice and data communications. The Company
believes that, as a result of digital fiber optic technology, excess capacity
has been, and will continue to be, an important factor in long distance
telecommunications. As a consequence, not only have smaller long distance
service providers received legal protection to compete with the network-based
carriers, they also represent a source of traffic to carriers with excess
capacity.

THE COMPANY

Midcom provides long distance voice and data telecommunications services.
As primarily a nonfacilities-based reseller, Midcom principally utilizes the
network switching and transport facilities of Tier I long distance carriers,
such as Sprint, WorldCom and AT&T, to provide a broad array of integrated long
distance telecommunications services on a seamless and highly reliable basis.
Midcom's service offerings include basic "1 plus" and "800" long distance
service, frame relay data transmission service, wireless service, dedicated
private lines between customer locations and enhanced telecommunications
services such as facsimile broadcast service and conference calling.

Midcom focuses on serving small to medium-sized businesses. The Company
estimates that during the fourth quarter of 1996 it invoiced approximately
100,000 customer locations, a significant majority of which were located in the
major metropolitan areas of California, Florida, Illinois, New York, Ohio and
Washington. The Company believes that the larger long distance carriers, such as
AT&T, Sprint, WorldCom and MCI, tend to focus their sales and customer support
efforts on residential and large commercial customers and do not routinely
provide significant pricing discounts for small to medium-sized businesses. By
purchasing large usage volumes from the facilities-based carriers at wholesale
prices, Midcom seeks to offer its customers more favorable pricing than they
could obtain from such carriers directly. In addition, the Company believes that
businesses in this market segment do not typically have in-house
telecommunications expertise and therefore require more assistance with the
assessment and management of their telecommunications requirements. As a result,
the Company believes that it is able to differentiate its service offerings from
the larger carriers in this market segment on the basis of price, breadth of
service offerings, customer service and support and the ability to provide
customized solutions to the telecommunications requirements of its customers.
See "-- Marketing and Sales," "-- Competition" and "-- Customer Concentrations."

COMPANY STRATEGY

During the second and third quarters of 1996, Midcom recruited an executive
management team with extensive experience and expertise in the
telecommunications industry. In May 1996, the Company hired William H. Oberlin
as its President and Chief Executive Officer, appointed Mr. Oberlin, Marvin C.
Moses and John M. Zrno to its Board of Directors and engaged Mr. Moses and Mr.
Zrno as consultants. In December 1996, Mr. Zrno became Chairman of the Company's
Board of Directors. These individuals formerly held senior management positions
at ALC Communications Corporation ("ALC"), a leading provider of long distance
and other services to small and medium-sized businesses. During their tenure at
ALC, ALC completed a successful turn-around and experienced profitable growth.
From the fiscal year ended December 31, 1991 through the 12 months ended June
30, 1995 (prior to ALC's merger into Frontier Corporation), ALC's revenue
increased from $346.9 million to $677.1 million and net income increased from
$5.3 million to $75.0

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million. In addition, in July 1996 the Company appointed Daniel M. Dennis to the
Company's Board of Directors. Mr. Dennis has served in a number of management
positions with MCI for over 23 years.

Midcom's executive management team has developed a restructuring, network
and marketing strategy which is designed to address the operational challenges
experienced by the Company and increase internally generated sales and
profitability. Principal components of the Company's strategy are set forth
below. Although the Company believes that its executive management team has the
relevant skills and experience necessary to implement this strategy, its ability
to do so is subject to a number of risks and uncertainties, and there can be no
assurance that this strategy will be successfully implemented or that the
intended positive results will be achieved. See "Risk Factors."

OPERATIONAL RESTRUCTURING STRATEGY

Continue to Build Management Team. Midcom will continue to seek
opportunities to augment management with individuals who have telecommunications
industry experience and expertise. Since May 1996, the Company has appointed
more than 10 individuals to key operational management positions. These
individuals have extensive experience in the operation of a telecommunications
company, including (i) network design, implementation and operation, (ii)
marketing and sales, (iii) management information systems and (iv) bill
processing and collection. Midcom believes that the experience and depth of this
management team will improve the Company's ability to address its current
operational challenges and to pursue its transition from primarily a
nonfacilities-based reseller of long distance and other telecommunications
services to a switch-based provider of integrated telecommunications services.

Integrate and Improve Information Systems. The Company's management team
has focused on, and has substantially completed, the consolidation and
integration of the Company's multiple information and billing systems and other
redundant functions of its acquired long distance operations. The management
team will continue to focus on integrating the Company's data transmission and
enhanced telecommunications services, enlarging and enhancing the Company's
information system and improving its financial reporting and internal controls.
The Company believes that these activities will (i) reduce the overhead and
maintenance costs associated with its management information systems, (ii)
improve the amount and type of information that can be accessed about customers,
sales and operations, (iii) increase the speed with which information can be
processed and (iv) reduce the Company's working capital investment by shortening
the time it takes for the Company to produce and distribute customer bills. See
"-- Information Systems."

Renegotiate Carrier Agreements. The Company currently resells network
switching and transport facilities of long distance carriers such as Sprint,
WorldCom and AT&T. Midcom believes its relationships with these carriers enables
it to provide customers a broad array of integrated long distance
telecommunications services on a seamless and highly reliable basis. Despite the
Company's successful resale of these network facilities, the Company's
profitability was reduced as a result of a supply contract with AT&T which
provided for higher rates than those obtained from alternative suppliers.
However, the Company has entered into a new carrier supply contract with AT&T
which provides for more favorable rates. In addition, in the first quarter of
1997, the Company entered into a new carrier supply contract with Sprint which
also provides for more favorable rates. The Company believes the successful
renegotiation of its supply contracts with AT&T and Sprint and its other
carriers will contribute significantly to the Company's ability to offer
competitive rates and improve its margins while providing the same level of
service to its customers. See "-- Suppliers."

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NETWORK STRATEGY

The Company has acquired six state-of-the-art high capacity switches, three
of which have both local and long distance functionality. The Company plans to
install these switches in areas of the country where it believes that its volume
of long distance traffic and the regulatory environment and market conditions
will permit it to provide local service at acceptable margins. Moreover, the
Company believes that, in the cities where it intends to deploy switches, there
will be significant local circuit capacity at attractive rates available from
competitive local exchange carriers ("CLECs"), ILECs and 38GHz wireless
providers. Using its own switches will enable the Company to (i) direct customer
call traffic over multiple networks which is expected to minimize costs and
improve gross margin, (ii) switch local traffic, thereby increasing the economic
viability of entering the market for local telecommunication services, (iii)
shield proprietary information regarding its customers from the underlying
carriers, thereby increasing customer control, (iv) facilitate access to call
data records and (v) implement differentiating features and billing enhancements
without involving the underlying carrier. See "-- Switching Facilities."

MARKETING STRATEGY

Reorganize and Expand Sales Efforts. To take full advantage of its planned
switching network and expanded product offerings, Midcom has reorganized its
direct sales force into (i) a national and key accounts group consisting of
highly experienced sales personnel focused on larger customers with
sophisticated telecommunications requirements and (ii) a general accounts group
focused on smaller customers. Both groups will be located in major metropolitan
areas where the Company has customer concentrations sufficient to support a
sales and marketing presence and where the Company believes it has significant
market opportunities and can compete effectively on the basis of price. The
Company intends to implement training programs and financial incentives designed
to increase the cross-selling efforts of its direct sales force and further
integrate the Company's broad array of service offerings. In addition, the
Company intends to increase the number of sales representatives from
approximately 35 at the end of July 1996 to over 250 by the end of 1997. The
Company plans to continue to supplement its direct sales force with its network
of resellers and distributors. In addition to its existing non-territorial
distributor network, the Company is in the process of developing a new tier of
distributors who will be offered long-term financial incentives and who will be
required, within selected territories, to market and sell the Company's service
offerings exclusively. The Company believes that the long-term financial
incentives and exclusive marketing arrangements offered to this new tier of
distributors will result in improved performance and increased loyalty to the
Company and its service offerings. See "-- Marketing and Sales."

Expand and Enhance Customer Support Efforts. Midcom intends to support its
expanded sales efforts and reduce customer attrition by continuing to build an
enhanced customer service and support operation. The Company has increased its
customer service and support staff from approximately 45 at the end of July 1996
to approximately 60 at the end of 1996 and intends to further increase this
staff through 1997 to the extent necessary to support growth in sales. This
expanded operation is intended to include (i) a staff of trained customer
service representatives available twenty-four hours a day at a number of
integrated customer service centers, (ii) trained account representatives
assigned and dedicated to individual customers with sophisticated
telecommunications requirements and (iii) teams of technical specialists
available to develop customized solutions for a customer's telecommunication
needs. See "-- Customer Service."

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<PAGE> 45

represents a significant potential market for these additional services. These
additional services will afford the Company the opportunity to provide its
customers with a single-source solution for local, long distance, wireless and
enhanced telecommunications services. The Company believes that bundling these
services will provide substantial advantages to its customers, including lower
overall costs and a higher level of service due to a single source for ordering,
installation, customer service and account management. In addition, Midcom
believes that offering a single source for telecommunications services will
permit the Company to (i) leverage its significant customer base and increase
sales by increasing its share of the telecommunications expenditures of its
customers and (ii) improve customer control and retention by strengthening its
relationships with its customers. See "-- Industry Background," "-- Regulation"
and "-- Competition."

MARKETING AND SALES

Midcom markets its services nationwide through three distinct channels:
direct sales, independent distributors and, on a wholesale basis, other
resellers.

Direct Sales. Midcom believes that direct sales activities are more
effective than advertising for securing and maintaining the business of small to
medium-sized commercial customers. The Company believes that the face-to-face
customer contact afforded by its direct sales activities results in increased
customer loyalty, improves cross-selling opportunities and will ultimately have
a positive effect on revenue. Accordingly, direct sales activities comprise a
substantial portion of the Company's marketing and sales resources. To optimize
the Company's selling efforts, the Company intends to increase the number of its
direct sales representatives, from approximately 35 at the end of July 1996 to
over 250 by the end of 1997, and has reorganized the direct sales force into the
following two groups:

National and Key Accounts. The national and key accounts group
consists of highly experienced sales personnel and concentrates sales
efforts on businesses with sophisticated telecommunications requirements.
Target customers for the national and key accounts group generally include
those which require dedicated access to the Company's long distance points
of presence and a high level of customer service and support. In
particular, the Company expects that these customers will increasingly
require support for data communication applications. Dedicated account
representatives will be assigned to each of these customers. In addition,
these customers will be supported by technical specialist teams trained to
provide customized solutions to their telecommunications problems.

General Accounts. The general accounts group concentrates sales
efforts on businesses with less sophisticated telecommunications
requirements. Typically, these customers do not require dedicated access to
the Company's long distance point of presence and utilize only basic "1
plus" and "800" long distance and cellular service and calling cards.
Moreover, although the Company provides these customers access to its
customer service and support centers, it generally will not assign to them
a dedicated account representative.

Each of these groups will be geographically focused, concentrating on major
metropolitan areas where the Company has customer concentrations sufficient to
support a sales and marketing presence and where the Company believes it has
significant market opportunities and can compete effectively on the basis of
price. At the end of 1996, the Company's direct sales force was located in
Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Detroit, Long Island,
Los Angeles, New Haven, New York, San Francisco and Seattle. The Company plans
to deploy its direct sales force in additional locations during 1997.

Midcom has experienced a high level of turnover in its direct sales force
which has had a negative impact on internally generated sales. The Company
believes that, in the past, difficulties experienced with the Company's
information systems and changes in senior management contributed to this
turnover. However, the Company believes this turnover is now primarily
attributable to the intense competition for, and the mobility of, qualified
sales personnel endemic to the reseller

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<PAGE> 46

segment of the telecommunications industry. The Company has restructured the
commission arrangements and other financial incentives offered to its direct
sales force in order to increase the incentive of its direct sales force to
generate new sales, cross-sell the Company's telecommunications offerings and
bundle high margin services with lower margin services thereby improving the
Company's sales levels and gross margins. In addition, the Company recently
began to offer its direct sales force career advancement opportunities to reward
individual achievement. For example, through the first quarter of 1997, six
sales representatives were promoted from the general accounts group to the
national and key accounts group. The Company believes that appropriate financial
incentives and opportunities for career advancement, along with the recent
additions to the Company's management team and improvements to the Company's
information systems, will result in decreased turnover in its direct sales
force. However, there can be no assurance that turnover in the Company's direct
sales force will be reduced or that any of these other objectives will be
achieved.

Distributors. Midcom supplements its direct sales efforts by marketing
through independent distributors located throughout the country. The Company
enters into distributor agreements with, but is otherwise not affiliated with,
its distributors. Distributors maintain sales offices and sales staff at their
own expense. However, customers provided by distributors belong to the Company,
are billed directly by the Company or one of its billing agents and are in most
instances supported by the Company's customer service centers.

In the past, the Company's distributor network was not organized according
to geographic area or service offerings, and the Company generally granted its
distributors a non-exclusive right to solicit customers, required the
distributor to maintain a minimum quota and offered a commission on business
generated for the Company by the distributor. These non-territorial and
non-exclusive distributor arrangements failed to promote distributor loyalty to
the Company's service offerings and did not enable the Company to use its
distributor network to develop market share in specific geographical areas.

Midcom believes that distributors may have substantial marketing resources
and access to a large base of potential customers. Accordingly, in August 1996,
the Company began to enhance its then existing non-territorial distributor
network of approximately 160 distributors with a new tier of territorial
distributors. To improve performance and increase loyalty to the Company and its
service offerings, the Company offers its new tier of distributors long-term
financial incentives and requires that, within selected territories, the
distributors market and sell the Company's service offerings exclusively. By
making use of territorial limitations, the Company intends to direct the
marketing and sales efforts primarily in cities where it has not developed a
significant marketing presence and which are outside the focus of its direct
sales efforts. Because distributors cover their own costs, the Company believes
that this will be a cost-effective way to increase its market share in these
cities. At the end of 1996, the Company's new tier of distributors consisted of
10 distributors and the Company intends to increase its new tier of distributors
by engaging approximately 20 additional distributors during 1997.

Wholesale to Other Resellers. At the end of 1996, Midcom offered
telecommunications services on a wholesale basis to several small resellers of
long distance services. The Company does not have direct relationships with the
end users of the services purchased by its resellers. Those customers are not
billed by the Company and are not supported by the Company's customer service
centers. Although gross margins on sales to resellers are generally lower than
the Company's average, sales through this channel enable the Company to (i)
enter markets with minimal cost or risk where small resellers have already built
strong direct customer relationships, (ii) increase the volume of services
purchased by the Company from facilities-based carriers, thereby obtaining
higher volume discounts from those carriers and (iii) spread the costs of
acquiring, installing and integrating the Company's switching facilities over a
larger revenue base.

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CUSTOMER SERVICE

Midcom strives to provide superior customer service and believes that
personal contact with potential and existing customers is a significant factor
in customer acquisition and retention. The Company's goal is to have frequent
contact with prospects and customers both through its direct sales
representatives as well as its customer service representatives.

At the end of July 1996, Midcom's customer service and support staff
consisted of approximately 45 employees located at one of the Company's six
customer service centers. To support the planned expansion of Midcom's sales
efforts, Midcom added 15 customer service representatives to its customer
support staff during 1996 and intends to further increase this staff through
1997 to the extent necessary to support growth in sales. In addition, Midcom has
reorganized its customer service and support efforts. This reorganization has
involved the consolidation and integration of Midcom's service centers so that
each is capable of supporting all of Midcom's service offerings. Moreover, the
Company's customer service department has been organized into two groups, each
with its own management and reporting structure. One group consists of customer
service representatives, available twenty-four hours a day at a number of
integrated customer service centers, who primarily respond to customer calls.
The other group consists of account representatives who are dedicated to the
Company's higher volume customers and take proactive measures to pursue
opportunities to cross-sell the Company's various service offerings to such
customers and address their telecommunications needs before they arise. The
account representatives also coordinate customer access to teams of technical
specialists trained to provide customized solutions to the customer's
telecommunications problems. To ensure that customer service representatives and
account representatives have the knowledge required to support the Company's
broad range of service offerings, Midcom intends to allocate a portion of its
customer service resources to training programs for its customer service staff.
In addition, Midcom intends to establish a small group of customer service and
technical specialists who are available exclusively to the direct sales
representatives, customer service representatives, account representatives and
distributors. The Company believes that these changes will improve the level of
customer service and support provided to its customers.

PRODUCTS AND SERVICES

Midcom, primarily through contractual arrangements with facilities-based
carriers, offers small to medium-sized businesses a wide variety of
telecommunications services including basic "1 plus" and "800" long distance
service, frame relay data transmission service, wireless service, dedicated
private lines between customer locations and enhanced and other value-added
telecommunications services. The Company also plans to provide local
telecommunications services in the newly opened local telecommunications market,
and to develop new products and services. Each of these services is discussed
below.

Long Distance. Historically, substantially all of Midcom's revenue
has been generated by basic "1 plus" and "800" long distance services.
Midcom's success as a provider of these basic services has depended on the
volume discounts it has been able to negotiate with underlying carriers and
its ability to direct customer call traffic over the transmission networks
of more than one carrier. As the Company implements its proposed network of
switching facilities, it will increasingly have the ability to choose among
the transmission networks of different carriers to take advantage of the
most favorable rates to different destinations at different times of the
day.

Data Transmission. Through its wholly-owned subsidiary, PacNet,
Midcom offers data transmission services primarily using its own frame
relay switches and a fiber optic transmission network which, at the end of
1996, connected over 40 cities in the Western United States. PacNet is a
member of the UNI-SPAN(R) consortium of frame relay data network providers.
Members of the UNI-SPAN(R) consortium are permitted to contract for access
to frame relay

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networks of other members at favorable rates. In addition to cost savings,
the consortium enables the Company to provide end-to-end connectivity to
its customers on a nationwide basis.

Private Line Services. Midcom provides data transmission service on
private line facilities on a point-to-point basis. This enables high volume
users to send and receive voice and data transmissions between locations on
a highly reliable and cost effective basis.

Enhanced and Other Services. Midcom offers a variety of enhanced and
other value-added services, including the following:

- Fax Broadcast and Fax Mailbox. Through its wholly owned subsidiary,
Adval, Midcom offers facsimile-related services that allow a user to
send a facsimile to many destinations simultaneously (Fax Broadcast)
and to store and retrieve facsimiles in a manner similar to electronic
mail (Fax Mailbox).

- Travel Cards. Midcom's travel cards offer low-cost long distance
service through various flat-rate pricing or per-call fees.

- Conference Calling. Midcom offers a full-featured teleconferencing
service that allows for connection of multiple locations
simultaneously.

- Custom Billing. Midcom provides many of its direct-billed customers
billing and management reports with a level of detail and features
that the major carriers generally provide only to their higher volume
customers. In addition, the Company's customers can choose to have one
centralized bill sent each month to their principal place of business
or individual bills sent to branch offices, with a master copy sent to
the principal place of business. The Company believes that its
value-added billing capability enables its customers to manage their
telecommunications costs more effectively, helps differentiate the
Company's services from services offered by the larger long distance
carriers and will continue to be an important factor in its ability to
successfully compete in its targeted market.

Wireless Services. Midcom offers wireless services in the Pacific
Northwest through Cel-Tech, its wholly-owned subsidiary. Outside the
Pacific Northwest, there is a proliferation of wireless opportunities that
the Company intends to pursue aggressively in order to provide wireless
services in the major markets it serves.

Local Service. Midcom is evaluating opportunities created by the
Telecommunications Act to offer local telecommunications services either on
a resale basis or over its proposed network of switching facilities. The
Company intends to offer local services in large cities where it has (i)
deployed high capacity switches, (ii) a significant customer concentration
and (iii) a sales and customer support presence. The Company believes that
targeting larger cities for local service will be advantageous due to the
availability of multiple local circuit capacity alternatives to the ILECs
and more favorable and less time consuming interconnection negotiations
with the ILECs. The Company's ability to enter into the local
telecommunications market may be impaired by certain logistical challenges.
Prior to selling local services to its customers, the Company must complete
a number of operational, marketing and regulatory tasks, including the
negotiation of interconnection agreements with local circuit providers, the
development of a billing, provisioning and customer service capability and
the creation of a local marketing, pricing and sales strategy. However,
despite these logistical challenges, the Company believes that introducing
local services will enable it to leverage its extensive customer base by
increasing the number of available service offerings.

New Services. Midcom intends to increase its efforts to develop new
telecommunications services based on evolving technologies and changing
industry standards. There can be no assurance, however, that the Company
will have the ability or resources to develop such new

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services, that new technologies required for such services will be
available to the Company on favorable terms or that such services and
technologies will enjoy market acceptance.

Midcom markets its products under a number of registered and common law
service marks, including Infinity(R), Logicall(R), ADNET(TM), Cel-Tech(TM),
Adval(TM), MIDCOM(R), PakLink(R), Elite(TM), Network Observer(TM), Custom
Point(TM) and Infinity Point(TM), as well as various registered logos.

SWITCHING FACILITIES

A key element of the Company's operating strategy is to deploy a national
switching network. The Company believes that successful implementation of its
strategy to increase switching capacity will improve its ability to direct
customer call traffic among networks owned by other long distance carriers in
order to take advantage of the most favorable rates to different destinations at
different times of the day. The Company expects that this will minimize costs
and have a positive impact on gross margin. In addition, the Company expects
that deployment of switches will enable the Company to (i) switch local traffic,
thereby increasing the economic viability of entering the market for local
telecommunications services, (ii) shield proprietary information regarding its
customers from the underlying carriers, thereby increasing customer control,
(iii) facilitate access to call data records and (iv) implement differentiating
features and billing enhancements without involving the underlying carrier.

High Capacity Switches. In the first quarter of 1997, the Company acquired
six state-of-the-art high capacity switches, three of which have both local and
long distance functionality. At the date of this Prospectus, the Company was in
the process of installing these switches in Atlanta, Chicago, Dallas, Los
Angeles, New York and Seattle. The Company believes that, in these locations,
its volume of long distance traffic and the regulatory and market conditions
will permit it to provide local services at acceptable margins. Moreover, the
Company believes that there will be significant local circuit capacity at
attractive rates available from CLECs, ILECs and 38GHz wireless providers in
these locations. The Company estimates that it will take at least until the
second quarter of 1997 to install and fully integrate these switches, at an
aggregate cost of approximately $15.0 million. The Company anticipates employing
on-site technicians at each switch location to provide switch service and
support. In addition, the Company is working to establish a remote service
center staffed with approximately four technicians capable of monitoring and
providing limited service and support for each of its switches twenty-four hours
a day. The Company estimates that this service center will cost approximately
$1.5 million to $2.0 million to establish and will be operational in the second
or third quarter of 1997. There can be no assurance, however, that these
switches will be installed or fully operational, or that a remote service center
will be installed and operational, within anticipated deadlines and budgets, or
that the Company will not encounter technical, operational or other problems in
the installation or operation of this sophisticated switching and monitoring
equipment.

Frame Relay Data Switches. In addition to voice switches, PacNet, a
wholly-owned subsidiary of the Company, offers data transmission services
primarily using its own frame relay switches and a fiber optic transmission
network which, at the end of 1996, connected over 40 cities in the Western
United States. PacNet is a member of the UNI-SPAN(R)consortium of frame relay
data network providers. Members of the UNI-SPAN(R) consortium are permitted to
contract for access to frame relay networks of other members at favorable rates.
In addition to cost savings, the consortium enables the Company to provide
end-to-end connectivity to its customers on a nationwide basis.

Limited Capacity Switches. The Company previously owned and operated
limited capacity switches in nine locations, most of which were acquired through
acquisitions of other telecommunications service providers. As a result of
limitations inherent in these switches and the Company's plans to install a
state-of-the-art high capacity switch network, the Company removed these
switches from service during the third quarter of 1996. The Company may utilize
these limited capacity switches to complement the planned deployment of high
capacity switching facilities; however, there can be no assurance that this will
be feasible.

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ACQUISITIONS

Midcom experienced rapid growth through the end of 1995. A significant
portion of this growth, particularly in 1995, was attributable to acquisitions
of customer bases and of other telecommunications service providers. These
acquisitions were intended to (i) enhance Midcom's sales force capability, (ii)
broaden its service offerings, and (iii) increase its customer base and revenue.

The Company's acquisitions resulted in revenue growth and increased
customer concentrations in certain metropolitan areas which, in turn, increased
the Company's ability to control transmission routing for customers in those
areas in order to lower costs and improve gross margin. However, these
acquisitions placed significant demands on management resources and disrupted
the Company's normal business operations. For a number of reasons, the Company
was not able to consolidate and integrate the sales and marketing, customer
support, billing and other functions of certain acquired operations as quickly
as anticipated. Pending such integration, it was necessary for the Company to
maintain billing systems and other functions of certain acquired operations,
which caused inefficiencies, added operational complexity and expense, increased
the risk of billing delays and financial reporting difficulties and impaired the
Company's ability to cross-sell the various products and services offered by
certain acquired operations. In addition, the Company often experienced high
initial customer attrition from acquired customer bases. The Company believes
this occurred as a result of difficulties encountered in transitioning acquired
customer bases to the Company's services and systems, a process which often
prompts customers to consider competitive alternatives in the telecommunications
marketplace. Also, where the Company did not acquire the sales channel
associated with an acquired customer base, there was often a period of enhanced
exposure to competitors as the Company's sales force became familiar with its
newly acquired customers and established relationships with the appropriate
customer contacts. In addition to problems associated with integration,
consolidation and customer attrition, certain of the Company's acquisitions have
resulted in disputes between the Company and the sellers of the acquired
operations. See "-- Legal Proceedings."

The Company's current strategy is to generate growth primarily through
internal sales and marketing efforts, rather than through the acquisition of
customer bases or other telecommunication service providers. Although growth
through acquisitions is no longer central to the Company's growth strategy, the
Company will consider, on a selective basis, acquisitions which the Company
believes will contribute to its infrastructure, create synergies or which
otherwise have strategic value to the Company. There can be no assurance that
there will not be adverse consequences to the Company from its past or future
acquisitions. Further, there can be no assurance that the Company will be able
to identify attractive acquisition candidates in the future, that acquisitions
pursued by the Company will be completed, or that, if completed, such
acquisitions will be beneficial to the Company. As of the date of this
Prospectus, the Company had no commitment or agreement to make any acquisitions.
Further, the Company is prohibited from making any acquisitions without the
prior approval of its lenders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

INFORMATION SYSTEMS

Telecommunication service providers generally must record and process
massive amounts of data quickly and accurately in order to bill customers in a
timely manner, verify billings from third party carriers, service customer
accounts, respond to customer inquiries and otherwise support operations. These
tasks require sophisticated, high capacity and reliable management information
and billing systems.

In late 1993, Midcom began the development of a proprietary information
system, referred to as "Keystone," designed to integrate its customer
information system, billing system and financial reporting system. The billing
module used in Keystone was designed to replace the Company's existing billing
system. The Company began using the Keystone billing module for a portion of its
customers in February 1995. Due to difficulties encountered during the
implementation of Keystone

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and required modifications to Midcom's customer data base, which delayed full
implementation of the Keystone billing module, the Company continued to bill
most of its customers under its prior billing system until late April 1995. At
that time, the Company completed the conversion to the Keystone billing module.

The Company estimates that in 1995 the number of call data records
processed by the Company grew from approximately 20 million to as many as 35
million per month, each of which had to be identified with the appropriate
customer for proper billing. This growth was attributable in large part to
customers of acquired customer bases and operations. Difficulties encountered
during the implementation of Keystone were compounded by this rapid growth and
contributed to operational difficulties. Partly as a result of these operational
difficulties, the Company was not able to consolidate and integrate the sales
and marketing, customer support, billing and other functions of certain acquired
operations as quickly as anticipated. Pending such integration, it was necessary
for the Company to maintain billing systems and other functions of certain
acquired operations, which, among other things, caused operational
inefficiencies, added complexity and expense to the billing and financial
reporting process and increased the risk of billing delays and financial
reporting difficulties.

During the second, third and fourth quarters of 1995, difficulties in
implementing the new billing system caused an increased number of calls to be
billed later than expected by the Company. Delays in billings contributed to a
significant increase in customer invoice adjustments and bad debt expense in the
fourth quarter of 1995. In addition, in the process of reconciling unbilled
accounts as of December 31, 1995 with amounts ultimately billed, the Company
discovered that certain reports generated by its new information management
system for recognizing unbilled revenue for the third quarter of 1995 failed to
fully reflect all discounts that were properly included in the bills
subsequently sent to the Company's customers. Primarily as a result of this
failure, reported revenue was overstated for the third quarter of 1995 and the
Company's Quarterly Report on Form 10-Q for that period had to be amended to
restate reported results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Restatement of Results for the Third
Quarter of 1995."

In connection with the audit of Midcom's 1995 Consolidated Financial
Statements, Midcom's independent auditors identified two conditions which were
characterized as material weaknesses in its internal financial controls. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Past Material Weaknesses." In response to the recommendations of
the Company's auditors, the Company hired additional finance and accounting
personnel, curtailed acquisitions, reorganized its financial reporting functions
to improve communications between senior management and the finance department
and established the policy of billing substantially all customer call traffic in
a financial reporting period before revenue for the period is reported, thereby
eliminating the need to estimate any material portion of revenue. As part of the
Company's operational restructuring, the Company's management team has focused
on, and has substantially completed, the consolidation and integration of the
Company's multiple information and billing systems and other redundant functions
of its acquired long distance operations. In addition, the management team will
continue to focus on integrating the Company's data transmission and enhanced
telecommunications services, enlarging and enhancing the Company's information
system and improving its financial reporting and internal controls, and it
intends to increase the number of information systems personnel from
approximately 18 full-time employees and seven independent contractors at the
end of July 1996 to approximately 50 full-time employees by the end of 1997. As
a result of these and other restructuring efforts, on March 13, 1997 Midcom's
independent auditors reported to the Company's Audit Committee that the material
weaknesses identified in connection with the 1995 audit have been corrected.

Although Midcom has experienced difficulties in the implementation of its
management information system, it is now able to provide many of its
direct-billed customers billing and management reports with a level of detail
and features that the major carriers generally provide only to their higher

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volume users. The Company is currently able to collect numerous multiple call
data items for each phone call placed by a customer, including customer name,
call origination point, call destination point, billing code, minutes, date,
time and rate code. From this data, the Company can organize the customer's
monthly phone calls into a wide variety of report formats. These reports can
include: (i) state/international codes, (ii) date and hour distributions, (iii)
type of service ("1 plus", "800", etc.), (iv) frequently called numbers, area
codes, cities or states, (v) calling card summaries, (vi) graphic presentation
of data and (vii) color-coded long distance calling activity maps. In addition,
the Company's customers can choose to have one centralized bill sent each month
to their principal place of business or individual bills sent to branch offices,
with a master copy sent to the principal place of business. The Company believes
that its value-added billing capability enables its customers to manage their
telecommunications costs more effectively, helps differentiate the Company's
services from services offered by the larger long distance carriers and will
continue to be an important factor in its ability to successfully compete in its
targeted market.

In light of the volume of financial data to be processed, the reliance upon
timely receipt of call data records from suppliers, the anticipated rate of
growth of the Company, the demands on key financial personnel, the potential for
turnover in key finance and accounting positions, the challenges associated with
the integration of acquired businesses and other factors, there can be no
assurance that the Company will not encounter additional billing delays, other
internal control weaknesses or other difficulties in future financial reporting.

SUPPLIERS

To obtain favorable forward pricing from certain of its suppliers, the
Company has committed to purchase minimum volumes of a variety of long distance
services during stated periods whether or not such volumes are used. As of
September 30, 1996, Midcom's minimum volume commitment under its supply contract
with AT&T, its largest supply contract, was $117.0 million. The Company
estimates that, as of September 30, 1996, it would have been in shortfall of its
minimum commitments to AT&T by approximately $27.6 million based on
then-applicable contract requirements. However, on October 31, 1996, the Company
and AT&T entered into a Release and Settlement Agreement pursuant to which
substantially all disputes between the Company and AT&T were resolved. Also on
October 31, 1996, the Company and AT&T entered into a new carrier contract
pursuant to which the Company's minimum commitment to AT&T was reduced to $13.7
million for the eighteen month period immediately following execution of the
contract, of which approximately $10.0 million remained as of the date of this
Prospectus. In addition, the new carrier contract provides for more favorable
pricing for certain network services provided by AT&T. In consideration for the
terms of the settlement and the new rate structure, the Company is required to
make two payments to AT&T in the aggregate amount of $8.8 million. The first
payment of $5.0 million was made on November 6, 1996. The second payment of $3.8
million will be due within 30 days of Midcom announcing quarterly gross revenue
in excess of $75.0 million, or upon completion of a change in control. In
addition, in the first quarter of 1997 the Company entered into a new carrier
supply contract with Sprint which also provides for more favorable rates. The
Company's minimum volume commitments to all of its carriers as of March 14, 1997
aggregated approximately $92.0 million, to be used over the next three years.
See Note 15 of Notes to Consolidated Financial Statements. There can be no
assurance that the Company will not incur additional shortfalls in the

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future or that it will be able to successfully renegotiate, or otherwise obtain
relief from, its minimum volume commitments in the future. See "Risk
Factors -- Minimum Volume Commitments and Shortfalls."

Because of Midcom's commitments to purchase fixed volumes of use from
certain of its suppliers at predetermined rates, the Company could be adversely
affected if a supplier were to lower the rates it makes available to the
Company's target market without a corresponding reduction in the Company's
rates. Similarly, the Company could be adversely affected if its suppliers
failed to adjust its overall pricing, including prices to the Company, in
response to price reductions of other major carriers. See Note 15 of the Notes
to Consolidated Financial Statements.

Each month, Midcom receives invoices from its suppliers. In those areas in
which the Company intends to direct call traffic through its own switches, it
will receive bills directly from the ILECs for access charges. Due to the
multitude of billing rates and discounts which suppliers must apply to calls
completed by the Company's customers, and due to routine logistical issues such
as the addition or termination of customers, the Company regularly has
disagreements with its suppliers concerning the sums invoiced for its customers'
traffic. The Company pays its suppliers according to its own calculation of
amounts owed as recorded on computer tapes provided by its suppliers. The
Company's computations of amounts owed are frequently less than the amount shown
on the suppliers' invoices. Accordingly, the suppliers may consider the Company
to be in arrears in its payments until the amount in dispute is resolved.
Although these disputes have generally been resolved on terms favorable to the
Company, there can be no assurance that this will continue to be the case. In
accordance with generally accepted accounting principles, the Company records as
an expense amounts in dispute that correspond to the aggregate amount that the
Company believes it will be required to pay and adjusts that amount as the
underlying disputes are resolved.

Midcom, like all other long distance providers, is dependent upon LECs for
call origination (carrying the call from the customer's location to the long
distance network of the IXC selected to carry the call) and termination
(carrying the call off the IXC's network to the call's destination). The
Company's ability to maintain and expand its business depends, in part, on its
ability to obtain telecommunications services on favorable terms from
facilities-based carriers, and the cooperation of both IXCs and LECs in
provisioning services for its customers in a timely manner. FCC policy currently
requires all common carriers, including IXCs, to make their services available
for resale and to refrain from imposing unreasonable restrictions on such
resale. The Telecommunications Act further requires all ILECs both to offer
their services for resale at wholesale rates and to allow access to unbundled
network elements at cost-based rates. The ILECs are also required by the
Telecommunications Act to provide all IXCs, including the Company, with equal
access for the origination and termination of long distance calls. If any of
these requirements were eliminated, the adverse impact on the Company could be
substantial. Access charges represent a substantial portion of the Company's
current cost of service. The FCC, however, has undertaken to reform its
universal service and access charge rules by May 1997 in order to rework the
current universal service subsidy system and to move access charges toward the
economic cost of originating and terminating long distance traffic. The level at
which the FCC sets access charges and universal service contributions could have
a material adverse effect on the Company's business, financial condition and
results of operations. Moreover, implementation of a new access charge structure
and repricing of local transport could place many interexchange carriers,
including the Company, at a significant cost disadvantage relative to larger
competitors. The FCC has also imposed on facilities-based interexchange carriers
the obligation to track the payphone-originated tollfree and access code calls
which they carry and to compensate payphone service providers for such calls,
initially on a per-phone, and, commencing in October 1997, on a per-call basis
in amounts reflective of soon to be deregulated local coin rates. See "--
Regulation."

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COMPETITION

The long distance telecommunications industry is highly competitive. Midcom
believes that the principal competitive factors in this industry include
pricing, customer service, network quality, value-added services and the
flexibility to adapt to changing market conditions. A number of the Company's
current and potential competitors have substantially greater financial,
technical, marketing and other resources than the Company, and there can be no
assurance that the Company will remain competitive in this environment. The
Company's ability to compete may also be impaired by its leveraged capital
structure and limited capital resources.

The long distance telecommunications industry is significantly influenced
by the marketing and pricing activities of the major industry participants,
including AT&T, MCI, Sprint and WorldCom. While the Company believes that AT&T,
MCI and Sprint historically have chosen not to concentrate their direct sales
efforts on small to medium-sized businesses, these carriers control
approximately 85% of that market. Moreover, AT&T, MCI and Sprint have recently
introduced new service and pricing options that are attractive to smaller
commercial users, and there can be no assurance that they will not market to
these customers more aggressively in the future. AT&T and, as an interim
measure, the structurally separate interexchange affiliates of the RBOCs have
recently been reclassified as non-dominant carriers and, accordingly, have the
same flexibility as the Company in meeting competition by modifying rates and
service offerings without pricing constraints or extended waiting periods. These
reclassifications may make it more difficult for the Company to compete for long
distance customers. See "-- Regulation." In addition, a significant number of
large regional long distance carriers and new entrants in the industry compete
directly with the Company by concentrating their marketing and direct sales
efforts on small to medium-sized commercial users. Activities by competitors
including, among other things, national advertising campaigns, telemarketing
programs and the use of cash or other forms of incentives, contribute to
significant customer attrition in the long distance industry.

The Company contracts for call transmission over networks operated by
suppliers who may also be the Company's competitors. Both the IXCs and LECs
providing transmission services for the Company have access to information
concerning the Company's customers for which they provide the actual call
transmission. Because these IXCs and LECs are potential competitors of the
Company, they could use information about the Company's customers, such as their
calling volume and patterns of use, to their advantage in attempts to gain such
customers' business. The Telecommunications Act has strengthened the rules which
govern the privacy of customer proprietary information by expressly prohibiting
telecommunications carriers which receive proprietary information from resale
carriers for purposes of providing telecommunications services to those resale
carriers from using such information for their own marketing purposes. In
addition, the Company's future success will depend, in part, on its ability to
continue to buy transmission services and access from these carriers at a
significant discount below the rates these carriers otherwise make available to
the Company's targeted customers.

Regulatory trends have had, and may have in the future, a significant
impact on competition in the telecommunications industry. See "-- Regulation."
As a result of the Telecommunications Act, the RBOCs are now permitted to
provide, and are providing or have announced their intention to provide, long
distance service originating (or in the case of "800" service, terminating)
outside their local service areas or offered in conjunction with other ancillary
services, including wireless services. Following application to and upon a
finding by the FCC that an RBOC faces facilities-based competition and has
satisfied a congressionally-mandated "competitive checklist" of interconnection
and access obligations, an RBOC will also be permitted to provide long distance
service within its local service area. The entry of these well-capitalized and
well-known entities into the long distance service market could significantly
alter the competitive environment in which the Company operates.

The Telecommunications Act also removes most legal barriers to competitive
entry into the local telecommunications market and directs ILECs to allow
competing telecommunications service

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providers such as the Company to interconnect their facilities with the local
exchange network, to acquire network components on an unbundled basis and to
resell local telecommunications services. Moreover, the Telecommunications Act
seeks to facilitate the development of local telecommunications competition by
requiring ILECs, among other things, to allow end users to retain their
telephone numbers when changing service providers and to place short-haul toll
calls without dialing lengthy access codes. In response to these regulatory
changes, AT&T, MCI and many of the Company's other long distance competitors
have announced plans to enter the local telecommunication market.

While the Telecommunications Act opens new markets to the Company, the
nature and value of the resultant business opportunities will be dependent in
large part upon subsequent regulatory interpretation of the statute's
requirements. While the FCC has promulgated rules implementing the local
competition provisions of the Telecommunications Act, these rules have been
appealed and key provisions have been "stayed" pending the outcome of the
appeals. Various state regulatory authorities are currently in the process of
implementing the remaining FCC rules. The Company anticipates that ILECs will
actively resist competitive entry into the local telecommunications market and
will seek to undermine the operations and the service offerings of competitive
providers, leaving carriers such as the Company which are dependent on ILECs for
network services vulnerable to anti-competitive abuses. No assurance can be
given that the local competition provisions of the Telecommunications Act will
be implemented and enforced by federal and state regulators in a manner which
will permit the Company to compete successfully in the local telecommunications
market or that subsequent legislative and/or judicial actions will not adversely
impact the Company's ability to do so. Moreover, federal and state regulators
are likely to provide ILECs with increased pricing flexibility for their
services as competition in the local market increases. If ILECs are allowed by
regulators to lower their rates substantially, engage in aggressive volume and
term discount pricing practices for their customers, charge excessive fees for
network interconnection or access to unbundled network elements, or decline to
make services available for resale at discounted wholesale rates, the ability of
the Company to compete in the provision of local service could be materially and
adversely affected.

The Company believes that, principally due to its economies of scale and
personalized service, it is able to differentiate its service offerings from the
larger carriers in its targeted market segment on the basis of price, breadth of
service offerings, customer service and support and the ability to provide
customized solutions to the telecommunications requirements of its customers. As
a result, the Company believes that it competes favorably in this market
segment. The Company also believes that its ability to compete in this market
segment will increasingly depend on its ability to offer on a timely basis new
services based on evolving technologies and industry standards. However, there
can be no assurance that new technologies or services will be made available to
the Company on favorable terms.

REGULATION

The terms and conditions under which Midcom provides communications
services are subject to government regulation. Federal laws and FCC regulations
apply to interstate telecommunications, while particular state regulatory
authorities have jurisdiction over telecommunications that originate and
terminate within the same state.

FEDERAL

Midcom is classified by the FCC as a non-dominant carrier and therefore is
subject to relaxed regulation. Historically, the FCC has generally either
excused or presumed compliance by non-dominant carriers with many of the
statutory requirements and regulations to which dominant carriers are subject,
including most reporting, accounting and record keeping obligations. However, a
number of these requirements are imposed, at least in part, on non-dominant
carriers such as the Company whose annual operating revenues exceed $100
million. The FCC retains the jurisdiction to

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impose fines or other penalties on, or to act upon complaints against, any
common carrier, including non-dominant carriers, for failure to comply with its
statutory or regulatory obligations. The FCC also has the authority to impose
more stringent regulatory requirements on the Company and change its regulatory
classification. In the current regulatory atmosphere; however, the Company
believes that the FCC is unlikely to do so. Non-dominant carriers are also
subject to a variety of miscellaneous regulations that, for instance, dictate
the materials required to document and the procedures necessary to verify a
consumer's election to change its preferred long distance telephone provider,
mandate disclosure of rate and other data associated with the provision of
operator services and require contribution to a variety of FCC-mandated funds
and payment of various regulatory and other fees. There has generally been
increased enforcement activity by the FCC and the states with respect to such
regulations, particularly with respect to those regulations governing the
verification of consumer elections to change long distance service providers.

Among domestic carriers, only the ILECs are classified as dominant
carriers, although ILECs currently would only be classified as dominant in their
provision of long distance telecommunications services if they were to provide
such services other than through structurally separate affiliates. As a
consequence, the FCC regulates many of their rates, charges and services to a
greater degree than the Company's, although the FCC is currently evaluating
proposals to streamline and otherwise relax its regulation of the ILECs. AT&T
and, as an interim measure, the structurally separate interexchange affiliates
of the RBOCs have recently been reclassified as non-dominant carriers and,
accordingly, have the same flexibility as the Company in meeting competition by
modifying rates and service offerings without pricing constraints or extended
waiting periods. The impact on the Company of the reclassification of AT&T and
the RBOC interexchange affiliates as non-dominant carriers cannot be determined
at this time, but it could make it more difficult for the Company to compete for
long distance customers.

With the passage of the Telecommunications Act, the RBOCs are now free to
offer long distance service outside their respective local telephone service
areas as well as long distance service bundled with wireless, enhanced and other
ancillary services. Following application to and upon a finding by the FCC that
an RBOC faces facilities-based competition and has satisfied a
congressionally-mandated "competitive checklist" of interconnection and access
obligations, the RBOC will be permitted to provide long distance service within
its local service area, although in so doing, it will be subject to a variety of
structural and nonstructural safeguards intended to minimize abuse of its market
power in these local service areas. As a result of the removal of the legal
barriers to competitive entry into the local market, long distance carriers like
the Company will be allowed to compete with the RBOCs in the provision of local
service. It is impossible to predict the impact of RBOC entry into the long
distance telecommunications market on the Company's business and prospects, but
it could make it more difficult for the Company to compete for long distance
customers.

The Company has all necessary authority to provide domestic interstate
telecommunications services under current laws and regulations. The Company and
one or more of its subsidiaries have been granted authority by the FCC to
provide international telecommunications services through the resale of switched
services of U.S. facilities-based carriers. The FCC reserves the right to
condition, modify or revoke such international authority for violations of
federal law or rules, as well as to approve assignments and transfers of control
of such international authority.

As a result of a stay of the FCC's order to eliminate the filing of
interstate tariffs (which order would have been effective September 23, 1997)
issued by the federal district court in Washington, D.C., the FCC has
reinstituted the requirement that all interstate carriers file such tariffs
pending the court's resolution of the issue. Although the tariffs of
non-dominant carriers, and the rates and charges they specify, are subject to
FCC review, they are presumed to be lawful and are seldom contested. As an
international non-dominant carrier, the Company is required to include, and has
included, detailed rate schedules in its international tariffs, and is permitted
to make tariff filings on a single day's notice. Prior to a 1995 court decision,
Southwestern Bell v. FCC, 43 F.3rd 1515 (D.C. Cir.

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1995), domestic non-dominant carriers were permitted by the FCC to file tariffs
with a "reasonable range of rates" instead of the detailed schedules of
individual charges required of dominant carriers. In reliance on the FCC's past
practice of allowing relaxed tariff-filing requirements for non- dominant
domestic carriers, the Company and most of its competitors did not maintain
detailed rate schedules for domestic offerings in their tariffs. Until the
two-year statute of limitation expires, the Company could be held liable for
damages for its failure to do so, although it believes that such an outcome is
highly unlikely and would not have a material adverse effect on the Company's
operations.

To date, the FCC has exercised its regulatory authority to set rates only
with respect to the rates of dominant carriers, and it has increasingly relaxed
its control in this area. Thus, the FCC does not regulate the rates of the
Company or any other long distance telecommunications provider, including AT&T,
although it would regulate the rates charged by any ILEC that elected to provide
interexchange services other than through a structurally separate affiliate.
While the FCC continues to cap the prices that dominant ILECs may charge to
originate and terminate interstate calls, it has afforded the ILECs a modicum of
geographically-restricted pricing flexibility when they face competition in a
given market. The FCC has indicated that it will initiate in the near future a
comprehensive review of its access charge structure, evaluating embedded costs
and subsidies that produce current access charge levels. The FCC is currently
conducting a rulemaking procedure to implement the universal service provisions
of the Telecommunications Act and will be determining in that proceeding the
contributions that telecommunications companies such as the Company will be
required to make to support universal service. The FCC also has recently
completed a rulemaking proceeding to implement the local competition provisions
of the Telecommunications Act. In that proceeding, the FCC has set forth
comprehensive national rules and guidelines for states and local competitors to
follow that, among other things, govern the interconnection obligations among
telecommunications carriers, including interconnection with the local exchange
network, and access to a minimum set of unbundled network elements, as required
by the Act. The FCC also has set forth pricing methodologies for both the FCC
and the states to follow in implementing the Telecommunications Act's
requirement that interconnection and access to unbundled network elements be
made available by ILECs at cost-based rates with a reasonable profit. The rules
adopted by the FCC in implementing the local competition provisions of the
Telecommunications Act have been appealed and key provisions, including the
pricing methodologies, have been "stayed" pending the outcome of the appeals.

The FCC-styled "trilogy" of access charge reform, universal service and
local competition proceedings comprise the FCC's effort to respond to the
Telecommunications Act's goal of transitioning telecommunications markets to
full competition. The FCC does not expect this framework to be complete until
state public service commissions complete their own efforts to implement and
supplement the Telecommunications Act's provisions. Until the FCC's "trilogy" of
proceedings is completed, and until such state actions are taken, the impact of
the FCC's actions on the Company's access arrangements or access charge
obligations, or more broadly, on the Company's operations in general, cannot be
determined at this time.

The Telecommunications Act grants the FCC authority to forebear from
applying any statutory requirement or regulation to classes of carriers or
services upon a determination that such application is unnecessary and no longer
in the public interest. Utilizing this newly-granted authority, the FCC has
already reduced, and has proposed further reductions in, its regulation of non-
dominant IXCs such as the Company. While the FCC's proposal to adopt mandatory
detariffing has been deferred, the FCC is expected to continue its efforts to
reduce the regulation of non-dominant IXCs.

The microwave licenses held by the Company's subsidiary, PacNet, are
subject to FCC regulation and licensing. PacNet's licenses are for
point-to-point microwave systems operating in the Private Operational Fixed
Microwave Service ("OFS"). Such facilities must be constructed and operated in
strict conformance with their authorizing licenses and FCC rules and policies
and such licenses may not be modified, transferred or assigned without prior FCC
approval. OFS licenses

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may be cancelled or revoked, and fines and other non- monetary penalties imposed
on OFS licensees, for failure to comply with FCC requirements. OFS licenses are
granted for a fixed five-year term, with the potential for renewal. The majority
of PacNet's licenses expire in December 1997 and the balance expire in June
1999. As of the date of this Prospectus, the Company intends to seek renewal of
the microwave licenses for each of PacNet's stations and currently anticipates
that these licenses will be renewed in the ordinary course of business. However,
PacNet has substantially discontinued directing traffic over this microwave
system and is in the process of attempting to sell its microwave equipment and
related licenses. As a result, the Company does not believe that failure to
obtain renewal of microwave licenses upon expiration would adversely affect the
Company. See Note 4 to the Notes to Consolidated Financial Statements. Moreover,
the Company does not expect the Telecommunications Act to significantly impact
the Company's microwave licenses.

STATE

The intrastate long distance telecommunications operations of Midcom are
also subject to various state laws and regulations, including initial
certification, registration and/or notification, as well as various tariffing
and reporting requirements. Currently, the Company is certified and tariffed,
where required, to provide intrastate service to customers throughout the United
States except in Alaska and Hawaii. The Company continuously monitors regulatory
developments in all 50 states and intends to obtain the appropriate certificates
wherever feasible.

Midcom is currently subject to varying levels of regulation in the 48
states in which it provides intrastate long distance telecommunications service.
The large majority of the states require Midcom to apply for certification to
provide intrastate long distance telecommunications service, or at least to
register or to be found exempt from regulation, before commencing such service.
At present, 34 states also require Midcom to file and maintain detailed tariffs
listing its rates for intrastate long distance service. Many states also impose
various reporting requirements and/or require prior approval for transfers of
control of certified carriers, assignments of carrier assets (including customer
bases), carrier stock offerings and/or incurrence by carriers of significant
debt obligations. Certificates of authority can generally be conditioned,
modified, cancelled, terminated or revoked by state regulatory authorities for
failure to comply with state law and/or the rules, regulations, and policies of
the state regulatory authorities. Fines and other penalties, including the
return of all monies received for intrastate traffic from residents of a state,
may be imposed for such violations. Except for the request for approval which,
as of the date of this Prospectus, was pending in Arkansas with respect to the
Company's acquisition of a customer base from Cherry Communications, the Company
has secured approval for its acquisitions of the capital stock, customer bases
or other assets of other telecommunications service providers. With respect to
the Company's acquisition of the customer base from Cherry Communications, the
Arkansas Public Utility Commission has held the docket in abeyance pending
filing of appropriate tariffs by Midcom to cover rates and services applicable
to former customers of Cherry Communications. The Company does not believe that
failure to obtain approval in Arkansas prior to completing the acquisition will
have a material adverse effect on the Company's business, financial condition or
results of operation.

When the Company enters the local telecommunications market, it will be
subject to regulation, often as a facilities-based provider, by state public
service and public utility commissions in the states in which it provides local
exchange service. Virtually all states require local exchange providers to be
certified prior to initiating service and to maintain on file with the state
commissions detailed tariffs specifying rates, as well as terms and conditions,
of service. The Company will be subject to a higher level of regulatory
oversight as a local exchange provider than it has been as a long distance
carrier. Among other things, the Company will be subject to a variety of
additional service quality and consumer protection requirements, as well as
requirements to provide emergency, handicapped and subsidized services. The
states also impose additional reporting and prior approval requirements on local
service providers. Certificates of local authority can generally be conditioned,
modified, cancelled, terminated or revoked by state regulatory authorities for
failure to

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comply with state law and/or the rules, regulations, and policies of the state
commissions. Fines and other penalties may also be imposed for such violations.

RUSSIAN JOINT VENTURE

In December 1993, Midcom contracted to acquire a 50% interest in Dal
Telecom International ("Dal Telecom"), a provider of local, long distance,
international and cellular telecommunications services in the Russian Far East.
To acquire its interest in Dal Telecom, Midcom committed to make a capital
contribution of cash, equipment and services of approximately $12.7 million. As
of December 31, 1995, the Company had invested a total of approximately $8.8
million in the joint venture but was unable to fund additional contributions. In
March 1996, the Company and the joint venture partner agreed to amend the terms
of the joint venture to provide that the Company had a 40% equity interest in
the joint venture.

The Company's commitment to Dal Telecom has required significant amounts of
capital resources and management attention given the logistics of maintaining a
relationship in Russia. As a result, the Company decided that it was in its best
interests to focus on its domestic business and sell its interest in Dal
Telecom. As a result of this decision, the Company wrote down its investment in
Dal Telecom to $2.0 million at December 31, 1995, which was the Company's
estimate of the net recoverable value of its investment in Dal Telecom, and
recorded a loss of approximately $6.8 million on impairment of the asset. This
estimate was based on market information currently available to the Company and
certain assumptions about the future operations of Dal Telecom, over which the
Company had limited control. The Company discontinued recording its share of the
income or losses of Dal Telecom as of December 31, 1995. During the third
quarter of 1996, the remaining investment of $2.0 million was written off to
loss on impairment of assets, as the Company was unable to locate a purchaser
for its interest. There can be no assurance that the Company will be successful
in its efforts to sell its interest in Dal Telecom. See Note 5 of the Notes to
Consolidated Financial Statements.

EMPLOYEES

As of December 31, 1996, the Company employed 527 persons on a full-time
basis. None of the Company's employees are members of a labor union or are
covered by a collective bargaining agreement. The Company has never experienced
a work stoppage and considers its employee relations to be good.

PROPERTIES

As of December 31, 1996, the Company's headquarters in Seattle consisted of
approximately 59,000 square feet of office space under a lease that expires on
November 30, 2004 and that requires minimum annual lease payments in 1997 of
approximately $1.0 million. In addition, as of December 31, 1996, the Company
and its subsidiaries leased an aggregate of approximately 100,000 square feet of
space for 17 offices in 10 states. Management believes its present office
facilities, together with additional space available under expansion options,
are adequate for its operations for the foreseeable future and that similar
additional space can readily be obtained as needed.

CUSTOMER CONCENTRATIONS

The Company estimates that during the fourth quarter of 1996 it invoiced
approximately 100,000 customer locations. Certain Midcom customers receive
multiple billing invoices because they have multiple locations. As of the end of
1996, the Company was unable to aggregate the invoices of such customers to
determine an exact customer count. During 1994, 1995 and 1996, no one customer
accounted for more than 5.0% of Midcom's revenues. Midcom believes that the loss
of any single customer would not have a material adverse effect on its business,
financial condition or results of operations.

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LEGAL PROCEEDINGS

Class Action Lawsuit. The Company, its Vice Chairman of the Board of
Directors and largest shareholder, the Company's former President, Chief
Executive Officer and director and the Company's former Chief Financial Officer
are named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint was
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). An amended complaint
was filed on July 8, 1996 (the "Amended Complaint"). In November 1996, the Court
granted the defendants' motion to dismiss the Amended Complaint without
prejudice and the plaintiffs refiled a second amended complaint on December 19,
1996 (the "Second Amended Complaint"). In January 1997, the defendants filed a
motion to dismiss the Second Amended Complaint (the "Second Motion to Dismiss")
claiming failure by plaintiffs to plead with particularity and failure to plead
facts establishing scienter, both as required under the Exchange Act, and
failure to establish tracing to the prospectus relating to the Company's initial
public offering, as required under the Securities Act. The Second Amended
Complaint alleges, among other things, that the registration statement and
prospectus relating to the Company's initial public offering contained false and
misleading statements concerning the Company's billing software and financial
condition. The Second Amended Complaint further alleges that, throughout the
Class Period, the defendants inflated the price of the Common Stock by
intentionally or recklessly making material misrepresentations or omissions
which deceived the public about the Company's financial condition and prospects.
The Second Amended Complaint alleges claims under the Securities Act and the
Exchange Act as well as various state laws, and seeks damages in an unstated
amount. All discovery proceedings are stayed until defendants' Second Motion to
Dismiss is acted on by the Court. While the Company believes that it has
substantive defenses to the claims in the Second Amended Complaint and intends
to vigorously defend this lawsuit, it is unable to predict the outcome of this
action.

SEC Investigation. The Company was informed in May 1996 that the
Commission was conducting an informal inquiry regarding the Company. The Company
has voluntarily provided the documents requested by the Commission. In addition,
the Commission requested the Company's cooperation in interviewing certain
current and former Company personnel and the Company is in the process of
scheduling such interviews. However, the Company has not been informed whether
or not the Commission intends to commence a formal action against the Company or
any of its affiliates. The Company is, therefore, unable to predict the ultimate
outcome of the investigation. In the event that the Commission elects to
initiate a formal enforcement proceeding, the Company and its current and/or
former officers could be subject to civil or criminal sanctions including
monetary penalties and injunctive measures. Any such enforcement proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Frontier Lawsuits. On August 19, 1996 the Company was served with a
complaint filed in the U.S. District Court for the Eastern District of Michigan
by Frontier Corporation ("Frontier"). This complaint names as defendants the
Company and eleven individuals, all of whom are former employees of Frontier who
resigned their positions with Frontier at various times in the last year. These
individuals include William H. Oberlin, the President and Chief Executive
Officer and a director of the Company, and nine other employees of the Company.
The complaint alleges, among other things, that: (i) certain of the individual
defendants, with the acquiescence and active assistance of the Company, have
engaged in a systematic strategy to hire key employees and independent
contractors of Frontier in violation of various written agreements; (ii) the
individual defendants have used confidential information belonging to Frontier
in their new employment with Midcom in violation of written agreements and
fiduciary duties and (iii) Mr. Oberlin has breached fiduciary duties as a former
employee and officer of Frontier and breached obligations under an employment
agreement with Frontier. The complaint further alleges that: (i) Midcom is in
violation of a non-disclosure agreement between Frontier and Midcom by virtue of
its alleged use of confidential information of

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Frontier obtained through employees hired from Frontier and otherwise; (ii)
Midcom has aided and abetted Mr. Oberlin's alleged breaches of fiduciary duties
and (iii) Midcom and the other defendants have tortiously interfered in
Frontier's contractual relationships with various Frontier employees and
contractors. The complaint seeks: (i) that the defendants be preliminarily and
permanently enjoined from breaching their respective agreements with Frontier;
(ii) that Midcom be enjoined from aiding and abetting certain alleged breaches
of fiduciary duties; (iii) an order that the defendants hold all profits which
Midcom earns as a result of its hiring of the individual defendants and other
Frontier employees as constructive trustees for the benefit of Frontier; (iv) an
accounting of all profits realized by Midcom as a result of its hiring of the
defendants and other Frontier employees; (v) a declaratory judgment on its
various claims; (vi) damages in an unspecified amount; (vii) Frontier's costs,
including reasonable attorney's fees, incurred in bringing the action; and
(viii) other appropriate relief. The Company intends to vigorously defend this
action. Based on the Company's review of the allegations in the complaint and
the underlying facts, the Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's business,
financial condition, results of operations or liquidity.

An affiliate of Frontier has also filed a complaint in the same U.S.
Federal District Court claiming $515,000 for unpaid amounts under a supply
agreement. The Company believes this claim to be without substantial merit and
is vigorously defending it.

Adnet Lawsuit. On August 1, 1996, a complaint (the "Adnet Complaint") was
filed by David and Maria Wiegand, the former shareholders of Adnet, in the
Superior Court of the State of California for the County of Orange against the
Company, the Company's former President and Chief Executive Officer and other
defendants. The Adnet Complaint alleged intentional and negligent
misrepresentation, intentional concealment of facts, breach of contract, breach
of implied covenants of good faith and fair dealing and violation of California
Securities Laws in connection with a merger agreement and related documents (the
"Merger Agreement") and the Company's acquisition of Adnet in December 1995
pursuant thereto. The Wiegands sought recovery of monetary damages in an amount
which they described as "not yet ascertainable, but potentially [in excess of]
$10,000,000." The Wiegands furthermore sought rescission of the Merger
Agreement, restoration of all consideration paid by the Wiegands to the Company
pursuant to the Merger Agreement, punitive damages in an amount to be determined
at trial and attorneys' fees and other costs and expenses of the lawsuit.

In August 1996, the Wiegands agreed to dismiss the Adnet Complaint without
prejudice and not to re-file the Adnet Complaint pending negotiation of a
definitive settlement agreement. In December 1996, the Company entered into a
settlement agreement with David and Maria Wiegand (the "Settlement Agreement")
pursuant to which the parties mutually agreed not to assert against each other
the claims set forth in the Adnet Complaint, claims arising out of the Merger
Agreement and the Company's acquisition of Adnet pursuant thereto and claims
arising out of David Wiegand's employment with the Company or his employment
agreement or non-competition agreement (collectively, the "Claims") until
December 31, 1999 and not after March 31, 2000. In addition, the Settlement
Agreement provides that all Claims will be released on March 31, 2000 or, if
earlier, upon the first to occur of certain Release Events including (a) the
issuance of any shares of Common Stock pursuant to the exercise of the Wiegand
Option (as defined below), (b) the date on which the average closing sale price
of the Common Stock as reported on Nasdaq is at least $20.50 per share and (c) a
change of control of the Company if, in connection therewith, David Wiegand
would be entitled to receive at least $20.50 (in cash or freely tradable
securities) per share of Common Stock issuable upon exercise of the Wiegand
Option. If a Release Event does not occur prior to December 31, 1999, the
Wiegands may assert Claims against the Company provided they do so prior to
March 31, 2000. There can be no assurance that a Release Event will occur prior
to December 31, 1999 and that the Wiegands will not assert Claims against the
Company at that time. In consideration for the Settlement Agreement, the Company
pre-paid certain non-compete fees of approximately $330,000, reimbursed the
Wiegands for approximately $90,000 in legal fees incurred

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in connection with the Claims and the Settlement Agreement, entered into a
consulting agreement with David Wiegand and granted him a fully vested stock
option for the purchase of up to 150,000 shares of Common Stock at an exercise
price of $10.00 per share (the "Wiegand Option").

Cherry Communications Lawsuit. In September and December 1995, the Company
acquired two significant customer bases from Cherry Communications. The first
transaction ("Cherry I") provided for the purchase of long distance customer
accounts having monthly revenue for the three months preceding the date of
closing of $2.0 million, net of taxes, customer credits and bad debt. The second
transaction ("Cherry II") provided for the purchase of long distance customer
accounts having monthly revenue which were to average $2.0 million per month
over the 12 months following the transaction, net of taxes, customer credits and
bad debt. The Company is responsible for the underlying carrier costs associated
with the customer traffic acquired from Cherry Communications at a rate which
would yield to the Company a gross profit on such traffic at an agreed rate. The
purchase price payable with respect to Cherry I was a total of $10.5 million, of
which $5.5 million was paid in cash and the balance was paid by the delivery of
317,460 shares of Common Stock (subject to a possible increase in such number
based on the future value of the Common Stock), of which 126,984 shares are held
in escrow to be applied to indemnity claims or to cover shortfalls in revenue
from the $2.0 million monthly average. The purchase price for Cherry II was
$18.0 million, of which $7.0 million has been paid in cash. Additional
installments of $3.4 million were due in February, March and April of 1996, of
which $400,000 of each installment was to be placed in an escrow account for
satisfaction of indemnity claims or to cover shortfalls in revenue from the $2.0
million monthly average. The parties later agreed that the Company could pay up
to $9.0 million of the Cherry II payments either in cash or by delivery of
shares of Common Stock. Separately, the Company also agreed to pay Cherry
Communications $40,000 per month per customer base for servicing customer
accounts on behalf of the Company. The acquired customer bases have not
generated the required minimum revenue levels and Cherry Communications has
failed to remit to the Company collections received by Cherry Communications
from a portion of the acquired customers. Accordingly, the Company has withheld
the final three installment payments for Cherry II (a total of $9.0 million
excluding escrowed sums), payment of invoices for carrier service for the
acquired bases (up to $11.0 million) and accrued customer service charges of
$840,000. Negotiations between Cherry Communications and the Company failed to
produce a settlement of these disputes.

Cherry Communications filed a lawsuit against the Company in the United
States District Court for the Northern District of Illinois, Eastern Division.
In its First Amended Complaint filed on July 18, 1996, Cherry Communications
seeks recovery of (i) approximately $7.2 million plus interest and attorneys'
fees alleged to be due and owing under a Rebiller/Reseller Agreement for
Switched Services between Cherry Communications and the Company, (ii)
approximately $9.0 million plus interest and attorney's fees alleged to be due
and owing under the November 1, 1995 Customer Base Purchase and Sale Agreement
between Cherry Communications and the Company (the "Cherry II Agreement"), and a
Promissory Note executed in connection with the Cherry II Agreement, (iii)
customer service charges of $40,000 per month for each month of customer service
Cherry Communications has provided to the Company under the September 1, 1995
Customer Base Purchase and Sale Agreement between Cherry Communications and the
Company (the "Cherry I Agreement"); and (iv) customer service charges of $40,000
per month for each month of customer service Cherry Communications has provided
to the Company under the Cherry II Agreement. It is the position of the Company
that Cherry Communications has breached its obligations under the Cherry I
Agreement and the Cherry II Agreement by among other breaches (i) failing to
sell Midcom customer bases having the average monthly revenues required by the
customer base agreements, and (ii) failing to remit to Midcom monies collected
from the customer bases. It is also the position of the Company that, as a
result of Cherry Communication's breaches of the Cherry I Agreement and the
Cherry II Agreement, as amended by certain addenda, that the Company has offsets
and counterclaims against Cherry Communications in excess of the sums it has
withheld from Cherry Communications. The Company is attempting to negotiate a
resolution of

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the disputes. In the event that a settlement is not reached, the Company intends
to vigorously defend the lawsuit filed by Cherry Communications. However, the
Company is unable to predict the outcome of this lawsuit. As a result of this
litigation, as of September 1, 1996, the Company discontinued booking revenue
generated by the customer bases acquired from Cherry Communications.

The Company is also party to other routine litigation incident to its
business and to which its property is subject. The Company's management believes
the ultimate resolution of these matters will not have a material adverse effect
on the Company's business, financial condition or results of operations.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information as to the executive
officers and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------------- --- -----------------------------------
<S> <C> <C>
John M. Zrno............................ 58 Chairman of the Board and Director
Paul Pfleger............................ 61 Vice Chairman of the Board and
Director
William H. Oberlin...................... 52 President, Chief Executive Officer
and Director
Robert L. Nitschke...................... 50 Executive Vice President,
Operations
Robert J. Chamberlain................... 43 Executive Vice President, Chief
Financial Officer, Treasurer and
Assistant Secretary
Paul P. Senio........................... 64 Vice President and Secretary
Steven P. Goldman....................... 37 Vice President, Assistant Secretary
and General Counsel
John M. Orehek(1)(2).................... 42 Director
Scott B. Perper(2)...................... 41 Director
Karl D. Guelich(1)...................... 54 Director
Marvin C. Moses(1)...................... 52 Director
Daniel M. Dennis(2)..................... 48 Director
</TABLE>

- ---------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

JOHN M. ZRNO has served as the Chairman of the Company's Board of Directors
since December 1996. In addition, he has served as a director of the Company and
a consultant to the Company since May 1996. From August 1995 to October 1995,
Mr. Zrno was Vice Chairman of Frontier Corporation, a long distance
telecommunications provider, and was President, Chief Executive Officer and a
director of ALC Communications Corporation ("ALC"), a long distance
telecommunications provider, from August 1988 until its merger with Frontier
Corporation in August 1995.

PAUL PFLEGER has been Vice Chairman of the Company's Board of Directors
since December 1996. In addition, he served as the Chairman of the Company's
Board of Directors from the Company's formation in 1989 until December 1996, and
he served as acting President and Chief Executive Officer of the Company from
April 1996 to May 1996. Mr. Pfleger was a founder and currently is Chairman of
the Board of Directors of SP Investments, Inc. Mr. Pfleger has been Chairman of
the Board of Directors of Interfinancial Real Estate Management Company, a real
estate management company, since 1984 and has been its President since April
1993. Shareholders party to a shareholders' agreement have agreed to vote their
shares to elect Mr. Pfleger to the Board of Directors. This shareholders'
agreement expires on June 7, 1999. See "Description of Capital
Stock -- Shareholders' Agreement."

WILLIAM H. OBERLIN has served as President, Chief Executive Officer and a
director of the Company since May 1996. Prior to joining the Company, Mr.
Oberlin was President and Chief Operating Officer of Frontier Corporation from
August 1995 to November 1995 and was Executive Vice President, Chief Operating
Officer and a director of ALC from October 1988, July 1990 and July 1993,
respectively, until its merger with Frontier Corporation in August 1995.

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ROBERT L. NITSCHKE has served as Executive Vice President, Operations since
October 1996 and Executive Vice President and Chief Operating Officer from
October 1995 to October 1996. Prior to joining the Company, Mr. Nitschke was
Vice President for U.S. Intelco Holdings, a telecommunications holding company,
and President of its subsidiary, USI-Gateway, Inc., a developer of products and
services for local number portability, from July 1995 to October 1995, and was
Vice President of Operations of its subsidiary, U.S. Intelco Network, a billing
aggregation and database and information services provider to local exchange
carriers, from September 1989 to July 1995.

ROBERT J. CHAMBERLAIN has served as Executive Vice President, Treasurer and
Assistant Secretary since October 1996 and as the Chief Financial Officer of the
Company since April 1996. He served as the Company's Senior Vice President of
Finance and Administration from April 1996 to October 1996. He also served as a
consultant to the Company, advising on financial matters, from January 1995 to
May 1995 and from January 1996 to April 1996. Prior to joining the Company, Mr.
Chamberlain was the Vice President of Finance and Operations and Chief Financial
Officer of ElseWare Corporation, a font technology software developer, from
January 1992 to December 1995. Prior to that, Mr. Chamberlain was a partner at
KPMG Peat Marwick.

PAUL P. SENIO has served as Secretary of the Company since 1989, becoming
General Counsel in January 1994. He served as Vice President of the Company from
January 1994 to September 1994 and again from December 1995 to the present. He
served as the Company's Senior Vice President from September 1994 to December
1995. From 1984 to December 1993, Mr. Senio served as General Counsel for
Security Properties Inc., a real estate management company controlled by Paul
Pfleger.

STEVEN P. GOLDMAN was appointed Vice President, Assistant Secretary and
General Counsel of the Company in March 1997. Prior to that he was with AT&T
Wireless Services, Inc. (formerly McCaw Cellular Communications, Inc.), a
wireless services provider, as regulatory counsel from August 1989 to December
1991, Regional Vice President and General Counsel from January 1992 to March
1994, and Vice President -- Law from March 1994 to January 1997.

JOHN M. OREHEK has served as a director of the Company since January 1993.
Mr. Orehek has served as President and Chief Executive Officer of SP Investments
Inc., an investment management company, from 1991 to the present. In addition,
Mr. Orehek has been a director of IREMCO since 1993. From 1987 to 1991, Mr.
Orehek was President of Hallmark Capital Partners, Ltd., a Seattle-based real
estate development corporation.

SCOTT B. PERPER has served as a director of the Company since June 1994.
Mr. Perper has been a Senior Vice President of First Union Corporation, a bank
holding company, and First Union National Bank of North Carolina since January
1990, and an executive of First Union Capital Partners, the private equity and
mezzanine investment arm of First Union Corporation, since February 1989.

KARL D. GUELICH has served as a director of the Company since November 1995
and served as a consultant to the Company from March 1996 to April 1996. Since
March 1993, Mr. Guelich has been in private practice as a certified public
accountant. From June 1964 to February 1993, Mr. Guelich was employed by Ernst &
Young LLP, where he served as the Area Managing Partner for the Pacific
Northwest offices headquartered in Seattle from October 1986 to November 1992.

MARVIN C. MOSES has served as a director of the Company and a consultant to
the Company since May 1996. From August 1995 to January 1996, Mr. Moses was
Executive Vice President and Chief Financial Officer of Frontier Corporation and
from January 1996 to April 1996 Mr. Moses was Vice Chairman and Chief Financial
Officer of Frontier Corporation. He also was Chief Financial Officer and a
director of ALC from October 1988 and September 1989, respectively, until its
merger with Frontier Corporation in August 1995.

DANIEL M. DENNIS has served as a director of the Company since July 1996.
Mr. Dennis served in numerous executive positions since joining MCI in 1973, the
most recent being president of MCI

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Large Accounts, a division of MCI, from February 1996 to August 1996. Although
Mr. Dennis continues to serve as a consultant to MCI, he has resigned from MCI
effective August 1996.

BOARD OF DIRECTORS

Commencing with the annual meeting of the Company's shareholders held in
October 1996, the Company's Board of Directors consists of three classes, each
of which is as nearly equal in number as possible. Class 1 directors have an
initial term of one year; Class 2 directors have an initial term of two years;
and Class 3 directors have an initial term of three years. Following the initial
term, each class has a term of three years. At the annual meeting of the
Company's shareholders held in October 1996, Messrs. Guelich and Perper were
elected as Class 1 directors, Messrs. Dennis, Moses and Orehek were elected as
Class 2 directors and Messrs. Oberlin, Pfleger and Zrno were elected as Class 3
directors. All directors hold office until the annual meeting of shareholders at
which their term expires and until their successors have been duly elected and
qualified. Directors may be removed only for cause by holders of a majority of
the outstanding shares of Common Stock. Officers are elected by, and serve at
the discretion of, the Board of Directors.

The Company has established two standing committees of the Board of
Directors: an Audit Committee and a Compensation Committee. The Audit Committee
reviews the functions of the Company's management and independent auditors
pertaining to the Company's financial statements and performs such other related
duties and functions as are deemed appropriate by the Audit Committee and the
Board of Directors. The Compensation Committee makes recommendations to the
Board of Directors concerning the compensation of the Company's executive
officers and directors and administers the Company's Stock Option Plan and the
Stock Purchase Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors consists of John M.
Orehek, Scott B. Perper and Daniel M. Dennis. None of these individuals has
served at any time as an officer or employee of the Company.

From time to time, the Company has engaged in certain transactions with
members of the Board of Directors and the Compensation Committee. See "Certain
Transactions."

65
<PAGE> 67

EXECUTIVE COMPENSATION

The following table shows compensation paid by the Company for services
rendered during its fiscal years ended December 31, 1994, 1995 and 1996 to (a)
all individuals serving as the Company's Chief Executive Officer during the
fiscal year ended December 31, 1996, (b) the four most highly compensated
individuals (other than any individual described under item (a) above) who were
serving as executive officers of the Company at December 31, 1996 and whose
total annual salary and bonus for the fiscal year ended December 31, 1996
exceeded $100,000; and (c) two additional individuals who would have been
included under item (b) above but for the fact that the individual was not
serving as an executive officer of the Company at December 31, 1996
(collectively, the "Named Executive Officers").

SUMMARY ANNUAL COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
YEAR ENDED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY($) BONUS OPTIONS(#)(1) COMPENSATION(2)
------------------------------ ----------- --------- ------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
William H. Oberlin(3)......... 1996 $ 182,531 $ -- 1,214,724 $ 6,343
President and Chief
Executive Officer
Ashok Rao(4).................. 1996 142,143 -- -- 154,886
President and Chief 1995 292,500 -- 3,000 7,830
Executive Officer 1994 300,000 -- 278,775 3,762
Robert N. Nitschke(5)......... 1996 147,270 -- 25,000 17,218
Executive Vice President, 1995 33,987 -- 50,000 128
Operations
Robert J. Chamberlain(6)...... 1996 84,344 -- 75,000 37,379
Executive Vice President,
Chief Financial Officer,
Treasurer and Asst.
Secretary
Jay T. Caldwell(7)............ 1996 98,781 81,612 -- 3,157
Senior Vice President, 1995 97,500 -- 15,750 3,207
Revenue Management 1994 100,000 -- 5,478 17,289
Eric G. Peterson(8)........... 1996 118,036 -- -- 13,959
Executive Vice President 1995 117,000 -- 1,000 4,105
and Treasurer 1994 118,667 -- 1,663 4,521
</TABLE>

- ---------------
(1) The 1994 amounts include immediately exercisable options granted in March
1995 in lieu of cash bonuses for 1994 to Messrs. Rao, Caldwell and Peterson
of 18,375, 1,663 and 1,103 shares of Common Stock, respectively. These
options are exercisable at $2.29 per share and expire on the tenth
anniversary of the date of grant.

(2) Unless otherwise noted, amounts included under other compensation are for
payments under the Company's 401(k) Plan and payments for term life
insurance premiums.

(3) Mr. Oberlin joined the Company in May 1996 and was paid during 1996 at an
annual rate of $300,000.

(4) Mr. Rao resigned as an officer of the Company in April 1996. Included in
other compensation for 1996 are severance payments of $151,015.

(5) Included in other compensation for 1996 is a reimbursement of $13,643 for
relocation and moving expenses.

(6) Mr. Chamberlain joined the Company in April 1996 and was paid during 1996 at
an annual rate of $120,000. Included in other compensation for 1996 are
consulting payments of $34,896.

66
<PAGE> 68

(7) Mr. Caldwell resigned as an officer of the Company in April 1997. Included
in other compensation for 1994 is a reimbursement of $15,000 for relocation
and moving expenses.

(8) Mr. Peterson resigned as an officer of the Company in May 1996. Included in
other compensation for 1996 are severance payments of $10,000.

STOCK OPTION GRANTS

The following table sets forth further information regarding grants of
options to purchase Common Stock made by the Company pursuant to the Company's
Stock Option Plan during the fiscal year ended December 31, 1996 to each of the
Named Executive Officers.

OPTION GRANTS IN 1996

<TABLE>
<CAPTION>
NUMBER OF PERCENT POTENTIAL REALIZABLE VALUE
SECURITIES OF TOTAL MARKET AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS EXERCISE PRICE ON STOCK PRICE APPRECIATION
OPTIONS GRANTED TO PRICE PER DATE OF FOR OPTION TERM(4)
GRANTED EMPLOYEES SHARE GRANT EXPIRATION -----------------------------------
NAME (#)(1) IN 1996 ($/SH)(2) ($)(3) DATE 0%($) 5%($) 10%($)
- ---------------------- ---------- ---------- --------- -------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William H. Oberlin.... 1,214,724 36.92% $ 8.00 $ 8.00 05/25/06 $ -- $6,111,467 $15,487,658
Jay T. Caldwell....... -- -- $ -- $ -- -- $ -- $ -- $ --
Robert J.
Chamberlain......... 5,000 0.15% $ 7.00 $ 8.00 04/23/06 $ 5,000 $ 30,156 $ 68,750
70,000 2.13% $ 8.00 $14.25 06/07/06 $437,500 $1,064,822 $ 2,027,258
Robert L. Nitschke.... 25,000 0.76% $ 12.00 $12.00 10/29/06 $ -- $ 188,668 $ 478,123
</TABLE>

- ---------------
(1) Generally under the Company's Stock Option Plan, twenty percent of the
options vest for each full year that the optionee renders services to the
Company after the date of grant. The option for the purchase of 5,000 shares
granted to Mr. Chamberlain was fully vested at the time of grant. The
vesting of options may be accelerated at the discretion of the administrator
of the Stock Option Plan.

(2) The exercise price may be paid by delivery of already owned shares, subject
to certain conditions.

(3) The fair market value of the underlying Common Stock on the date of grant is
determined by the Board of Directors in accordance with the terms of the
Company's Stock Option Plan.

(4) Potential realizable value is based on the assumption that the fair market
value of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the option term.
Disclosure of these assumed rates of appreciation are mandated by the rules
of the Commission and do not represent the Company's estimate or projection
of future Common Stock prices. The actual value realized may be greater or
less than the potential realizable value set forth in the table.

67
<PAGE> 69

The following table sets forth certain information as of December 31, 1996
regarding options to purchase Common Stock held as of December 31, 1996 by each
of the Named Executive Officers as well as the exercise of such options during
the fiscal year ended December 31, 1996. In addition, the following table
reports the values for in-the-money options, which values represent the positive
spread between the exercise price of such options and the fair market value of
the Company's Common Stock as of December 31, 1996.

AGGREGATED 1996 YEAR-END OPTIONS

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1996(#) AT DECEMBER 31, 1996($)(2)
ACQUIRED ON VALUE ------------------------------ ---------------------------------
EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
------------ ------------ ----------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
William H.
Oberlin.......... -- $ -- -- 1,214,724 $ -- $607,362
Ashok Rao(3)....... 122,535 $891,151 -- -- $ -- $ --
Robert N.
Nitschke......... -- $ -- 10,000 65,000 $ -- $ --
Robert J.
Chamberlain...... -- $ -- 5,000 70,000 $ 7,500 $ 35,000
Jay T. Caldwell.... -- $ -- 19,928 18,800 $ 59,306 $ 18,506
Eric G.
Peterson(3)...... 89,163 $965,200 1,000 -- $ -- $ --
</TABLE>

- ---------------
(1) Future ability to exercise is subject to vesting and the optionee remaining
employed by the Company.

(2) Calculated on the basis of the closing price of the Company's Common Stock
on December 31, 1996 which was $8.50, less the exercise price. There is no
guarantee that if and when these options are exercised they will have this
value.

(3) Messrs. Rao and Peterson resigned effective April and May 1996,
respectively. Mr. Caldwell resigned effective April 1997.

DIRECTOR COMPENSATION

At the time of the Company's initial public offering on July 6, 1995, the
Company's Stock Option Plan provided for the automatic grant of a Nonqualified
Option (as defined herein) to purchase 8,750 shares of Common Stock to all
non-employee directors of the Company (with certain exclusions that were
eliminated as of November 1995) upon their election to the Board of Directors,
and an additional option to purchase 4,375 shares of Common Stock each
subsequent year, both at a price equal to the fair market value of the Company's
Common Stock on the date of grant. Such options vest at a rate of fifty percent
(50%) per year and expire ten (10) years after the date of grant.

On July 25, 1996, the Board approved an amendment to the Stock Option Plan
to revise the provisions relating to automatic grants of options to purchase
shares of the Company's Common Stock to all non-employee directors. Pursuant to
the Stock Option Plan as amended, non-employee directors are each granted a
Nonqualified Option to purchase 50,000 shares of Common Stock upon initial
election to the Board of Directors at an exercise price equal to the fair market
value of the Common Stock on the date of the grant. Such options vest at a rate
of twenty percent (20%) per year and expire ten years after the date of grant.
The July 1996 Board action also provided for the grant to each non-employee
director then serving on the Board of an option to purchase shares of Common
Stock equal to 50,000 minus the number of shares subject to options granted to
each non-employee director under the Stock Option Plan prior to its amendment.
The vesting schedule of these additional option grants begins on November 9,
1995 with respect to Messrs. Pfleger, Orehek, and Perper and on the date of
election to the Board for all other non-employee directors at a rate of twenty
percent (20%) per year. These options were granted subject to approval by
shareholders of

68
<PAGE> 70

an increase in shares available for purchase under the Stock Option Plan, which
approval was obtained at the annual meeting of the Company's shareholders held
in October 1996.

On March 15, 1996, the Company entered into a consulting agreement with
Karl D. Guelich whereby Mr. Guelich assisted the Company with respect to
financial matters. The consulting agreement provided for monthly compensation of
$20,000. The consulting agreement terminated effective April 30, 1996. Mr.
Guelich was paid a total of $35,000 pursuant to this agreement.

Effective May 1996, the Company entered into consulting agreements with
Marvin C. Moses and John M. Zrno pursuant to which Messrs. Moses and Zrno
(collectively, the "Consultants") have each agreed to provide consulting
services to the Company with respect to (a) identifying and assisting in the
negotiation and closing of new business acquisitions, (b) establishing investor
and other strategic relations, and (c) advising the Company's Board of Directors
on critical strategic financial matters. Under the consulting agreements, the
Consultants are to make themselves reasonably available to the Company's Board
of Directors and are to devote approximately twenty-five percent (25%) of their
time and efforts to the Company's affairs. Pursuant to the consulting
agreements, the Company is required to pay each of the Consultants a retainer of
$8,333 per month. In addition, in connection with the consulting agreements, the
Company has granted to each of these individuals options for the purchase of
253,681 shares of Common Stock pursuant to and in accordance with the Stock
Option Plan. The options vest ratably over a five-year period, with the first
twenty percent (20%) installment vesting in May 1997, and are exercisable for
$8.00 per share. The consulting agreements each terminate after a period of five
years beginning on June 1, 1996, unless terminated earlier in accordance with
the terms thereof. The Company has the right to terminate the consulting
agreements at any time for cause, as defined therein. The Company or either of
the Consultants may terminate the consulting agreements, or reduce the time
required to be devoted to the Company thereunder, at any time upon 30 days prior
written notice, in which case the Consultant's retainer and unvested stock
options shall be reduced proportionately.

STOCK OPTION PLAN

The following summary of the Stock Option Plan is a brief description of
the material provisions of the Stock Option Plan and is qualified in its
entirety by the full text of the Stock Option Plan.

Pursuant to the Stock Option Plan, the Company may grant options to
purchase shares of Common Stock which qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended ("Code") ("Incentive Options") or which do not so qualify ("Nonqualified
Options"). The Compensation Committee of the Board of Directors is currently the
Plan Administrator for the Stock Option Plan. Incentive Options may be granted
to any employee, including employees who are directors, and Nonqualified Options
may be granted to such persons as the Plan Administrator shall select, including
employees, consultants and directors of the Company. The Plan Administrator
determines the terms and conditions of options granted under the Stock Option
Plan, including the exercise price, provided that the exercise price for
Incentive Options must be equal to or greater than the fair market value of the
Common Stock on the date of grant.

Unless otherwise provided by the Plan Administrator, options granted under
the Stock Option Plan vest at a rate of twenty percent (20%) after the first
year and thereafter at twenty percent (20%) per year over a four-year period so
that all options are fully vested after five years. Outstanding options vest, at
the discretion of the Plan Administrator, upon the occurrence of the liquidation
or dissolution of the Company. Options are exercisable for a period of ten years
from the date of grant, except that Incentive Options granted to persons who own
more than ten percent of the Common Stock are exercisable only for a period of
five years from the date of grant. Options granted under the Stock Option Plan
are nontransferable other than by will or the laws of descent and distribution.
Notwithstanding a vesting schedule, the Stock Option Plan provides for the
immediate vesting of options upon the occurrence of certain events. In general,
such events include (i) the purchase by any person of thirty percent (30%) or
more of the Common Stock of the

69
<PAGE> 71

Company pursuant to a tender offer or exchange offer made by any person other
than the Company, and (ii) the approval by the Company's shareholders of any
merger, consolidation, reorganization or other transaction providing for the
conversion or exchange of more than fifty percent (50%) of the outstanding
shares of Common Stock of the Company. Under certain circumstances, accelerated
vesting could have the effect of delaying, deferring or preventing unfriendly
offers or other efforts to obtain control of the Company and could thereby
deprive the shareholders of opportunities to receive a premium on their Common
Stock and could make removal of incumbent management more difficult. On the
other hand, accelerated vesting may induce any person seeking control of the
Company or business combination with the Company to negotiate on terms
acceptable to the Board of Directors. The Stock Option Plan was recently amended
to permit limited transfers of certain options pursuant to newly effective SEC
regulations.

Pursuant to the Company's Stock Option Plan, Nonqualified Options are
automatically granted to non-employee directors of the Company, as described in
"Director Compensation" above.

There was an aggregate of 4,108,806 shares of Common Stock reserved for
issuance pursuant to the Stock Option Plan at December 31, 1996, subject to
adjustment for stock splits and similar changes in the Company's capitalization.
At December 31, 1996, options to purchase an aggregate of 3,683,379 shares of
Common Stock were outstanding under the Stock Option Plan and a total of 425,437
shares of Common Stock remained available for grant. At December 31, 1996,
outstanding options were exercisable at prices ranging from $2.29 to $18.50 per
share. Shares subject to options granted under the Stock Option Plan that have
lapsed or terminated may again be subject to options granted under the Stock
Option Plan.

STOCK PURCHASE PLAN

In December 1994, the Company established the 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"). The Stock Purchase Plan became effective upon
the successful completion of the Company's initial public offering of common
stock. As of December 31, 1996, the Company had reserved up to 256,354 shares of
Common Stock under the Stock Purchase Plan for purchase by employees who meet
certain eligibility requirements. Eligible employees may contribute up to 10% of
their compensation to the Stock Purchase Plan to purchase shares of Common Stock
at 95% of their fair market value on the first or the last day of each six-month
offering period, as defined in the Stock Purchase Plan. The Stock Purchase Plan
establishes a maximum number of shares a participant may purchase during any
period. This maximum number of shares is determined by dividing $12,500 by the
fair market value of a share of Common Stock on the first day of the offering
period. The offering periods generally begin January 1 and July 1, and the first
offering period was September 1, 1995 to December 31, 1995. Shares issued under
the Stock Purchase Plan are freely tradable in the open market, subject, in the
case of affiliates, to the volume, manner of sale, notice and public information
requirements of Rule 144.

EMPLOYMENT AGREEMENT

Effective May 1996, the Company entered into an employment agreement with
William H. Oberlin, the Company's President and Chief Executive Officer. The
agreement provides for a monthly base salary of $25,000 per month as well as
certain other compensation, subject to annual review by the Board of Directors.
The agreement requires that, on or before August 30, 1996, the Company's Board
of Directors formulate and adopt a bonus plan for the year ending December 31,
1996. However, the parties have instead agreed to permit Mr. Oberlin to add an
amount equal to his base salary of $175,000 paid in 1996 to the basis used in
1997 or 1998, as Mr. Oberlin may elect, for purposes of calculating his bonus to
be paid in 1998 or 1999, as the case may be. The agreement further provides that
for each calendar year starting January 1, 1997, the Board of Directors is to
establish a bonus formula structured to pay out one hundred percent of Mr.
Oberlin's base salary if

70
<PAGE> 72

the Company meets certain quantitative and qualitative targets set forth in its
annual business plan, or a greater or lesser percentage of the base salary in
proportion to the amount by which the Company exceeds or falls short of such
targets. The Company's Board of Directors has not yet established the
quantitative and qualitative measurements upon which the 1997 and 1998 bonuses
are to be determined. In connection with entering into the agreement, the
Company has granted Mr. Oberlin options to purchase 1,214,724 shares of Common
Stock pursuant to the Stock Option Plan. The options vest ratably over a
five-year period, with the first twenty percent (20%) installment vesting in May
1997, and are exercisable for $8.00 per share. In the event that Mr. Oberlin's
employment is terminated by the Board of Directors "without cause," or if Mr.
Oberlin voluntarily resigns within 180 days of a "change of control" of the
Company (as such terms are defined in the agreement), Mr. Oberlin is entitled to
two years severance. In the event that Mr. Oberlin's employment is terminated by
mutual agreement, or if Mr. Oberlin voluntarily resigns under certain limited
circumstances, Mr. Oberlin is entitled to 12 months severance. Severance equals
the sum of (i) the annualized base salary at the time of termination, and (ii)
either the average annual bonuses for the fiscal years preceding termination or,
if no bonuses have been established or paid for such period, the annualized base
salary at the time of termination. Severance is payable in equal monthly
installments, without interest, commencing on the last day of the month of
termination. In the event that Mr. Oberlin is entitled to severance, he will
continue to receive medical, life, disability and group term life insurance
benefits (or the cash equivalent thereof), and options granted to him under the
Stock Option Plan will continue to vest, during the applicable severance period
as if his employment had not been terminated. In the event of Mr. Oberlin's
death, vesting of options otherwise vesting over the two-year period following
his death will be accelerated. The agreement also contains a non-interference
provision pursuant to which Mr. Oberlin has agreed, for a period of six months
after the termination of his employment, to preserve the confidentiality of the
Company's customer list, to refrain from actively soliciting the Company's
customers existing at the date of termination and to refrain from soliciting or
hiring the Company's executive or management level employees.

71
<PAGE> 73

SELLING SECURITYHOLDERS

The following table sets forth certain information as of the date hereof
with respect to the aggregate principal amount of the Notes beneficially owned
by each of the Selling Securityholders which may be offered from time to time
pursuant to this Prospectus. Each Selling Securityholder is registering the
entire amount of the Notes set forth opposite its name below. In addition, each
Selling Securityholder is registering the entire number of Conversion Shares
which may be issued upon conversion of the Notes set forth opposite its name
below. The exact number of Conversion Shares which may be issued upon conversion
of the Notes cannot be determined until the date of such conversion, as the
conversion price is subject to adjustment upon the occurrence of certain
dilutive events. See "Description of Notes." At the initial conversion price of
$14.0875 per share, each $1000 principal amount of Notes entitles the holder
thereof to 70.985 shares of Common Stock. Further, because the Selling
Securityholders may sell pursuant to this Prospectus all or some part of the
Securities which they beneficially own and because such offer is not being
underwritten on a firm commitment basis, no estimate can be made of the
principal amount of Notes or the number of Conversion Shares each Selling
Securityholder may retain upon completion of the offering pursuant to this
Prospectus. See "Plan of Distribution."

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NOTES
BENEFICIALLY
NAME OF SELLING SECURITYHOLDER OWNED
- ------------------------------------------------------------------------------ ------------
<S> <C>
Ardsley Partners Fund I, L.P.................................................. $ 1,500,000
Ardsley Partners Fund II, L.P................................................. 1,500,000
Ardsley Partners Institutional Fund, L.P...................................... 1,000,000
Austin Firefighters........................................................... 95,000
Baptist Hospital of Miami..................................................... 65,000
Boston College Endowment...................................................... 235,000
Boston Museum of Fine Arts.................................................... 25,000
Delta Air Lines Master Trust.................................................. 1,890,000
Eaton Vance Total Return Portfolio............................................ 10,000,000
Employer's Reinsurance Corporation............................................ 250,000
Engineers Joint Pension Fund.................................................. 130,000
Equi-Select Growth & Income Portfolio......................................... 200,000
Forrest Fulcrum Fund LP....................................................... 850,000
Forrest Fulcrum Fund LTD...................................................... 300,000
Foundation Account No. 1...................................................... 200,000
Hartford Fire Insurance Company............................................... 500,000
Hatchbeam & Co................................................................ 250,000
Haussmann Holdings............................................................ 3,100,000
John M. Orehek................................................................ 250,000
Lincoln National Convertible Securities Fund.................................. 525,000
Lincoln National Life Insurance............................................... 1,510,000
LSM Ltd....................................................................... 100,000
Marvin C. Moses Trust......................................................... 250,000
MFS Emerging Growth Fund...................................................... 4,600,000
MFS Equity Income Fund........................................................ 5,000
Montgomery Small Cap Partners, L.P............................................ 400,000
Montgomery Small Cap Partners II, L.P......................................... 1,000,000
Montgomery Small Cap Partners III, L.P........................................ 400,000
Museum of Fine Arts, Boston................................................... 100,000
New Hampshire State Retirement System......................................... 610,000
Nicholas Applegate Income & Growth Fund....................................... 785,000
Nosrob........................................................................ 500,000
</TABLE>

72
<PAGE> 74

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NOTES
BENEFICIALLY
NAME OF SELLING SECURITYHOLDER OWNED
- ------------------------------------------------------------------------------ ------------
<S> <C>
Occidental College............................................................ 80,000
OCM Convertible Limited Partnership........................................... $ 150,000
OCM Convertible Trust......................................................... 2,720,000
Paul H. Pfleger............................................................... 450,000
Paloma Securities L.L.C....................................................... 1,000,000
Promutual..................................................................... 510,000
Putnam Balanced Retirement Fund............................................... 250,000
Putnam Convertible Income-Growth Trust........................................ 3,775,000
Putnam Convertible Opportunities & Income Trust............................... 665,000
Quota Fund N.V................................................................ 2,600,000
Robertson Stephens Emerging Growth Fund....................................... 1,000,000
Robertson Stephens Growth & Income Fund....................................... 2,000,000
San Diego City Retirement..................................................... 265,000
San Diego County.............................................................. 925,000
State Employees Retirement Fund of the State of Delaware...................... 690,000
State of Connecticut Combined Investment Funds................................ 2,050,000
Swiss Bank Corporation -- London Branch....................................... 4,300,000
United National Life Insurance................................................ 45,000
Wake Forest University System................................................. 205,000
Weirton Trust................................................................. 170,000
William H. Oberlin Trust Dated 8/19/93........................................ 2,650,000
Winchester Convertible Plus, Ltd.............................................. 800,000
The Zrno Family Living Trust.................................................. 400,000
Unnamed holders of Securities or any future transferees, pledgees, donees or
successors of or from any such unnamed holder............................... 36,918,000
------------
TOTAL.................................................................... $ 97,743,000
============
</TABLE>

Information concerning the Selling Securityholders may change from time to
time and, to the extent required, will be set forth in an accompanying
Prospectus Supplement or, if appropriate, a post-effective amendment to the
Registration Statement of which this Prospectus is a part. In addition,
information concerning the unnamed holders of Securities will be set forth in an
accompanying Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part as
such information becomes available to the Company. No such holder may offer
Securities pursuant to the Registration Statement of which this Prospectus is a
part until such holder is included as a Selling Securityholder in a Prospectus
Supplement or, if appropriate, a post-effective amendment to the Registration
Statement of which this Prospectus is a part. To the Company's knowledge, none
of the Selling Securityholders named above has, or has had within the last three
years, any material relationship with the Company except as set forth in
"Certain Transactions." The following table and the disclosure concerning
material relationships between the Selling Securityholders and the Company in
"Certain Transactions" is based upon information furnished to the Company by the
Trustee, by The Depositary Trust Company and by or on behalf of the Selling
Securityholders. The Company and the Selling Securityholders have agreed to
indemnify each other against certain liabilities arising under the Securities
Act. The Company has agreed to pay all expenses incident to the offer and sale
of the Notes and Conversion Shares to the public pursuant hereto other than
selling commissions and fees. See "Plan of Distribution."

73
<PAGE> 75

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of Midcom's Common Stock, as of December 31, 1996, with respect to (i)
each shareholder known by Midcom to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock, (ii) each director of Midcom,
(iii) each Named Executive Officer and (iv) all directors and executive officers
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.

<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING
NAME AND ADDRESS BENEFICIAL OWNERSHIP SHARES(1)
- ---------------------------------------------------------- -------------------- -----------
<S> <C> <C>
Black Creek Limited Partnership(2)........................ 5,703,657 26.3%
(Paul Pfleger)
1201 Third Avenue
Suite 5400
Seattle, WA 98101
US Online Communications L.L.C.(3)........................ 1,666,667 10.4
1201 Third Avenue
Suite 5400
Seattle, WA 98101
Ashok Rao................................................. 846,723(4) 5.3
5456 E. Mercer Way
Mercer Island, WA 98040
John M. Zrno.............................................. 28,393(5) *
Marvin C. Moses........................................... 17,746(6) *
Daniel M. Dennis.......................................... 0 *
John M. Orehek(7)......................................... 2,178,839 12.0
Scott B. Perper(8)........................................ 21,750 *
Karl D. Guelich........................................... 7,600(9) *
William H. Oberlin........................................ 188,110(10) 1.2
Robert L. Nitschke........................................ 10,000(11) *
Robert J. Chamberlain..................................... 5,000(12) *
Jay T. Caldwell........................................... 26,085(13) *
Eric G. Peterson.......................................... 1,000(14) *
All Executive Officers and Directors as a Group
(12 persons)............................................ 6,544,494(15) 40.0%
</TABLE>

- ---------------
* Less than 1%

(1) This table is based upon information supplied by directors, officers and
principal shareholders. Percentage of ownership is based on 15,954,917
shares of Common Stock outstanding as of December 31, 1996. Beneficial
ownership is determined in accordance with the Rules of the Commission, and
includes voting and investment power with respect to the shares. Shares of
Common Stock subject to options which are currently exercisable or
exercisable within 60 days of December 31, 1996, as well as shares of
Common Stock issuable upon conversion of the Notes, are deemed outstanding
when computing the percentage ownership of the person holding such options
or Notes, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person.

(2) Paul Pfleger, the Vice Chairman of the Company's Board of Directors, has
sole voting and investment power with respect to 3,993,297 shares by virtue
of being the President and sole director of the corporate general partner
of this limited partnership. Mr. Pfleger shares voting and investment power
with respect to 1,666,667 shares of Common Stock owned by US

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<PAGE> 76

Online Communications L.L.C. See footnote (3) below. Includes 11,750 shares
of Common Stock subject to options exercisable within 60 days of December
31, 1996 and 31,943 shares of Common Stock issuable upon conversion of
$450,000 aggregate principal of Notes.

(3) Mr. Pfleger and Mr. Orehek are managers of US Online Communications L.L.C.
(formerly Communications Access L.L.C.) and share voting and investment
power over the shares held by this entity.

(4) Does not include 38,637 shares of Common Stock held in trusts for the
benefit of the children, two nieces and a nephew of Mr. Rao and one
unrelated person, as to which Mr. Rao disclaims beneficial ownership. All
shares owned by Mr. Rao or the trusts will be repurchased by the Company in
connection with Mr. Rao's resignation as President, Chief Executive Officer
and Director of the Company. See "Certain Transactions."

(5) Represents 28,393 shares of Common Stock issuable upon conversion of
$400,000 aggregate principal amount of Notes.

(6) Represents 17,746 shares of Common Stock issuable upon conversion of
$250,000 aggregate principal amount of Notes.

(7) Mr. Orehek has sole voting and investment power with respect to 482,676
shares of Common Stock owned by Madrona Ridge Limited Partnership by virtue
of being the President and sole director of the corporate general partner
of this limited partnership. In addition, Mr. Orehek shares voting and
investment power with respect to 1,666,667 shares of Common Stock held by
US Online Communications L.L.C. See footnote (3) above. Includes 11,750
shares of Common Stock subject to options exercisable within 60 days of
December 31, 1996 and 17,746 shares of Common Stock issuable upon
conversion of $250,000 aggregate principal amount of Notes.

(8) Scott B. Perper is an officer of First Union Corporation. Does not include
640,484 shares of Common Stock held by First Union Corporation, as to which
Mr. Perper disclaims beneficial ownership. Includes 11,750 shares of Common
Stock subject to options exercisable within 60 days of December 31, 1996.

(9) Includes 7,375 shares of Common Stock subject to options exercisable within
60 days of December 31, 1996.

(10) Represents 188,110 shares of Common Stock issuable upon conversion of
$2,650,000 aggregate principal amount of Notes.

(11) Represents 10,000 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1996.

(12) Represents 5,000 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1996.

(13) Includes 26,053 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1996.

(14) Represents 1,000 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1996.

(15) Includes 107,603 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1996 and 283,938 shares of Common Stock
issuable upon conversion of $4,000,000 aggregate principal amount of Notes.

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<PAGE> 77

CERTAIN TRANSACTIONS

In June 1994, the Company entered into a Senior Subordinated Note and
Warrant Agreement with, and completed the sale of $14.8 million principal amount
of senior subordinated notes (the "Subordinated Notes") to, First Union
Corporation ("First Union"). Following the sale of the Subordinated Notes, Scott
B. Perper, a Senior Vice President of First Union, was appointed to serve as a
director on the Company's Board of Directors, and he continues to serve in that
capacity. The Company paid First Union a loan initiation fee of $375,000 in
connection with the issuance of the Subordinated Notes. During 1995, the Company
paid interest on the Subordinated Notes to First Union in the amount of
$782,575. The Company prepaid the Subordinated Notes in full with the proceeds
of its initial public offering.

In connection with the issuance of the Subordinated Notes, the Company also
issued warrants to First Union to purchase up to 640,484 shares of Common Stock
at an exercise price of $.0001 per share. In July 1995, First Union exercised
these warrants for a total of 640,484 shares of Common Stock. The Company has
committed to register the public offer and sale of these shares under the
Securities Act under certain circumstances. See "Description of Capital
Stock -- Registration Rights." First Union has certain preemptive rights to
purchase additional shares of Common Stock offered by the Company, subject to a
number of exceptions. In addition, First Union has certain rights to information
concerning the Company until the shares of Common Stock held by it constitute
less than one percent of the outstanding Common Stock.

In August 1994, the Company entered into a revolving credit agreement with
First Union National Bank of North Carolina ("First Union Bank"), a subsidiary
of First Union, providing for a line of credit of up to $25.0 million, for which
First Union Bank received a commitment fee of $43,750. In March 1995, this
facility was amended to increase the maximum amount of borrowings by $4.0
million to a total of $29.0 million, for which First Union Bank was paid an
additional commitment fee of $80,000. Mr. Perper, a director of the Company, is
also a Senior Vice President of First Union Bank. During 1995, the Company paid
interest of $2,021,055 to First Union Bank in connection with this revolving
credit facility. The revolving credit facility was paid in full and terminated
on November 8, 1995.

In June 1994, the Company issued to Paul Pfleger, Vice Chairman of the
Company's Board of Directors, 859,653 shares of Series A Redeemable Preferred
Stock in consideration of (i) the contribution to the Company by Mr. Pfleger of
two notes payable by the Company to Mr. Pfleger, net of a receivable for the
benefit of the Company from Mr. Pfleger in the amount of $1,233,846 and (ii) the
assumption by Mr. Pfleger of a note payable by the Company by December 31, 2002
to Mr. McCaugherty in the amount of $4,864,795 which included accrued interest
at the rate of 12% per annum. The two notes payable by the Company which were
contributed by Mr. Pfleger were for an aggregate of $6,865,578, including
accrued interest. The Company's receivable from Mr. Pfleger arose from his
assignment to the Company earlier in 1994 of his right to receive payments later
in 1994 from a third party, for which the Company paid $1.2 million. Remaining
principal and accrued interest under the Company's notes payable to Mr. Pfleger,
aggregating $1.9 million, were paid in June 1994, and there were no related
party notes outstanding as of December 31, 1994. In July 1995, the Company
redeemed all of the shares of Series A Redeemable Preferred Stock held by Mr.
Pfleger for $8.6 million.

Paul Pfleger and Ashok Rao, formerly the Company's Chief Executive Officer,
President and a director, own 88% and 12%, respectively, of Quest West, Inc.
("Quest West"), formerly one of two corporate general partners of Quest America
LP ("Quest LP"). John Orehek, a director of the Company, was formerly the sole
limited partner of Quest LP. Messrs. Pfleger, Rao, and Orehek are directors and
Messrs. Rao and Orehek are officers of Quest West. Quest West sold its 84.995%
general partnership interest and Orehek sold the 0.005% limited partnership
interest in Quest LP in June 1995 to Quest America Management Inc. ("Quest
America"), the other corporate general partner of Quest LP, for a total
consideration of $838,000 of which $100,000 was paid in cash and

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<PAGE> 78

the balance represented by a note from Quest America. An option previously
granted to the Company by Messrs. Pfleger, Rao and Orehek to purchase their
interests in Quest West and Quest LP for a total amount equal to the amount paid
to acquire their respective interests was terminated in October 1995 on the
basis that there was no current or potential value to the Company to be realized
upon exercise of the option. Quest LP received approximately $214,000 in
commissions from the Company on 1995 invoices pursuant to a distribution
agreement between Quest LP and the Company. All commissions otherwise due to
Quest LP for the period November 1995 through September 1996 were applied to the
outstanding amounts owed by Quest LP to Midcom for long distance services of
approximately $142,000.

In June 1995, Paul Pfleger and Ashok Rao agreed in writing to indemnify and
hold the Company harmless from any costs, expenses or other liabilities incurred
by the Company in connection with a claim asserted in June 1995 by an affiliate
of the co-general partner of Quest LP that he or an affiliated party is entitled
to purchase 3% of the Company's outstanding stock for $1 million. The Company
believes that no such right exists and that this claim is without merit.

In June 1994, the Company entered into an employment agreement with Ashok
Rao, then the President, Chief Executive Officer and a director of the Company.
In April 1996, Mr. Rao resigned from the Company. The Company and Mr. Rao are
currently negotiating a Resignation Agreement and General Release (the
"Resignation Agreement") to define the terms of Mr. Rao's resignation from the
Company. The terms of the Resignation Agreement are not finalized, but it likely
will include payments to Mr. Rao for 24 months, confirmation of non-competition
and confidentiality agreements signed by Mr. Rao upon joining the Company and
mutual releases of claims. In addition, pursuant to the terms of the
Shareholders' Agreement, the Company has called for the repurchase of all of the
shares of Common Stock owned by Mr. Rao and by certain trusts established by Mr.
Rao (the "Rao Shares"). Because the Company and Mr. Rao have been unable to
reach mutual agreement on the purchase price for the Rao Shares, pursuant to the
Shareholders' Agreement, the purchase price shall be the fair market value of
the Rao Shares as of the date of Mr. Rao's resignation as determined by
arbitration. The Company and Mr. Rao are in disagreement as to the effective
date of Mr. Rao's resignation and whether a restricted security discount should
be applied to the Rao Shares. The purchase price will be payable in 36 equal
monthly installments and will bear interest at a rate of 8% per annum. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock -- Shareholders' Agreement." Under an agreement between Mr. Rao and Paul
Pfleger pursuant to which Mr. Rao purchased the Rao Shares from Mr. Pfleger, Mr.
Pfleger is entitled to receive payments aggregating approximately $2.2 million
out of proceeds received by Mr. Rao from the sale of the Rao Shares.

The Company entered into a consulting agreement with Karl D. Guelich, one
of the Company's directors, which consulting agreement has terminated. See
"Management -- Director Compensation."

The Company has entered into an employment agreement with William H.
Oberlin, the Company's President and Chief Executive Officer and one of its
directors. See "Management -- Employment Agreement."

The Company has entered into consulting agreements with Marvin C. Moses and
John M. Zrno, each a director of the Company. See "Management -- Director
Compensation."

On April 4, 1996, the Company entered into an agreement with Tie
Communications, Inc. ("Tie"), appointing Tie as an independent distributor for
selling the Company's long distance services. Mr. Pfleger and Mr. Orehek
together own 95.2% of Tie. Mr. Moses is a director of Tie. Through December 31,
1996, no commissions had been paid to Tie pursuant to this agreement.

William H. Oberlin, John M. Zrno, Marvin C. Moses, Paul Pfleger and John M.
Orehek beneficially own $2,650,000, $400,000, $250,000, $450,000 and $250,000
principal amount of Notes,

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<PAGE> 79

respectively. Mr. Oberlin is the Company's President and Chief Executive Officer
as well as a director of the Company. Mr. Zrno is Chairman of the Company's
Board of Directors. Mr. Pfleger is Vice Chairman of the Company's Board of
Directors. Messrs. Moses and Orehek are directors of the Company. The foregoing
individuals own the Notes on the same terms, and subject to the same conditions,
applicable to all other holders of the Notes. The Notes held by the foregoing
individuals (or their assignees) and the Conversion Shares issuable upon
conversion of such Notes, are included in the Registration Statement of which
this Prospectus is a part. See "Selling Securityholders."

DESCRIPTION OF NOTES

Set forth below is a summary of certain provisions of the Notes. The Notes
were issued pursuant to an indenture (the "Indenture") between the Company and
IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). The following
summary of the Notes, the Indenture and the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all of the provisions of the Indenture and the Registration
Rights Agreement, including the definitions therein. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
definitions of certain terms used in the following summary are set forth below
under "-- Certain Definitions." Capitalized terms used herein without definition
have the meanings ascribed to them in the Indenture.

As used in this Description of Notes, "the Company" refers to MIDCOM
Communications Inc., exclusive of its subsidiaries.

GENERAL

The Notes are unsecured, subordinated, general obligations of the Company,
and will mature on August 15, 2003. The Notes bear interest from the date of
issuance, or from the most recent date to which interest has been paid or
provided for, at the rate stated on the cover page hereof, payable in arrears on
February 15 and August 15 of each year commencing on February 15, 1997, to
holders of record on the immediately preceding February 1 and August 1. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.

Principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes will be payable at the office or agency of the Company maintained for such
purpose within The City of New York or, at the option of the Company, payment of
interest and Liquidated Damages, if any, may be made by check mailed to the
holders of the Notes named in the register of holders (the "Register")
maintained by the Trustee (such holders referred to herein as the "Holders") at
their respective addresses set forth in the Register; provided that all payments
with respect to Notes the Holders of which have given wire transfer instructions
to the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose.

The Notes have been issued in registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof.

The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness or issuance or
repurchase of securities of the Company. The Indenture contains no covenants or
other provisions to afford protection to Holders of the Notes in the event of a
highly leveraged transaction or a change in control of the Company except to the
extent described under "-- Repurchase of Notes at the Option of Holders Upon a
Change of Control."

CONVERSION RIGHTS

The Holder of any Note has the right to convert such Note, or any portion
thereof which is an integral multiple of $1,000, into shares of Common Stock of
the Company at any time prior to

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maturity (unless earlier redeemed or repurchased), initially at the conversion
price stated on the cover page hereof (which is equivalent to a conversion rate
of 70.985 shares per $1,000 principal amount of Notes), subject to adjustment as
described below (the "Conversion Price"). The right to convert Notes called for
redemption will terminate at the close of business on the Business Day
immediately preceding the Redemption Date (as defined below) (unless the Company
defaults in making the payments due upon redemption, in which case the
conversion right shall not terminate until the close of business on the date
such default is cured and such Notes are redeemed). A Note for which a Holder
has delivered a notice exercising the option of such Holder to require the
Company to repurchase such Note may be converted only if such notice is
withdrawn by a written notice of withdrawal delivered by such Holder to the
Company (or an agent designated by the Company for such purpose) prior to the
close of business on the Repurchase Date (as defined below) in accordance with
the terms of the Indenture. The Notes are convertible at the offices or agencies
of the Company maintained for such purposes in The City of New York.

The Conversion Price is subject to adjustment upon the occurrence of
certain events, including (i) the issuance of shares of Common Stock as a
dividend or distribution on the Common Stock; (ii) the subdivision, combination
or reclassification of the outstanding Common Stock; (iii) the issuance to all
or substantially all holders of Common Stock of rights, warrants or options to
subscribe for or purchase Common Stock (or securities convertible into Common
Stock) at a price per share less than the then current market price per share,
as defined in the Indenture; (iv) the distribution of shares of Capital Stock of
the Company (other than Common Stock), evidences of indebtedness or other assets
(excluding dividends payable exclusively in cash) to all or substantially all
holders of Common Stock; (v) the distribution to all or substantially all of the
holders of Common Stock of rights or warrants to subscribe for Capital Stock
(other than Common Stock) at a price per share less than the then current market
price per share of such Capital Stock; (vi) the issuance of Common Stock for a
price per share less than the current market price per share (determined as set
forth below) on the date the Company fixes the offering price of such additional
shares (other than issuances of Common Stock under certain employee benefit
plans of the Company and certain other issuances described in the Indenture);
(vii) the distribution, by dividend or otherwise, of cash (excluding any cash
portion of a distribution resulting in an adjustment pursuant to clause (iv)
above) to all holders of Common Stock in an aggregate amount that, combined
together with (A) all other distributions of cash that did not trigger a
Conversion Price adjustment to all holders of Common Stock within the 12 months
preceding the date fixed for determining the shareholders entitled to such
distribution plus (B) any cash and the fair market value of consideration that
did not trigger a Conversion Price adjustment payable in respect of any tender
offer by the Company or any of its subsidiaries for Common Stock (as described
in clause (viii) below) consummated within the 12 months preceding the date
fixed for determining the shareholders entitled to such distribution, exceeds
15% of the product of the current market price per share (determined as set
forth below) on the date fixed for the determination of shareholders entitled to
receive such distribution times the number of shares of Common Stock outstanding
on such date; and (viii) the completion of a tender offer made by the Company or
any of its subsidiaries for Common Stock involving an aggregate consideration
that, together with (A) any cash and the fair market value of any consideration
that did not trigger a Conversion Price adjustment paid or payable in respect of
any previous tender offer by the Company or its subsidiary for Common Stock
consummated with the 12 months preceding the consummation of such tender offer
plus (B) the aggregate amount of any distribution of cash that did not trigger a
Conversion Price adjustment (as described in clause (vii) above) to all holders
of Common Stock within the 12 months preceding the consummation of such tender
offer, exceeds 15% of the product of the current market price per share
(determined as set forth below) immediately prior to the expiration of such
offer times the number of shares of Common Stock outstanding at the expiration
of such offer. In the event of a distribution to all or substantially all
holders of Common Stock of rights to subscribe for additional shares of the
Company's Capital Stock (other than those referred to in clause (iii) above),
the Company may, instead of making an adjustment in the Conversion Price, make
proper provisions so that each holder of a Note who converts such Note after the
record date for such distribution and prior

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<PAGE> 81

to the expiration or redemption of such rights shall be entitled to receive upon
such conversion, in addition to shares of Common Stock, an appropriate number of
such rights. No adjustment of the Conversion Price will be made until cumulative
adjustments amount to one percent or more of the Conversion Price as last
adjusted.

If any Note is converted between the Record Date for the payment of
interest and the next succeeding Interest Payment Date, such Note must be
accompanied by funds equal to the interest payable on such succeeding Interest
Payment Date on the principal amount so converted (unless such Note shall have
been called for redemption, in which case no such payment shall be required),
and the interest on the principal amount of the Note being converted will be
paid on such next succeeding Interest Payment Date to the registered holder of
such Note on the immediately preceding Record Date, except as provided in the
Indenture. A Note converted on an Interest Payment Date need not be accompanied
by any payment, and the interest on the principal amount of the Note being
converted will be paid on such Interest Payment Date to the registered holder of
such Note on the immediately preceding Record Date. Subject to the aforesaid
right of the registered holder to receive interest, no payment or adjustment
will be made on conversion for interest accrued on the converted Note or for
dividends on the Common Stock issued on conversion. Fractional shares of Common
Stock shall not be issued upon conversion, but, in lieu thereof, the Company
will pay a cash adjustment based upon the market price of the Common Stock on
the first business day prior to the day of conversion, as provided in the
Indenture.

In the Indenture, the "current market price" per share of Common Stock on
any date shall be deemed to be the average of the Daily Market Prices for the
shorter of (i) 30 consecutive Business Days ending on the last full trading day
on the exchange or market referred to in determining such Daily Market Prices
prior to the time of determination or (ii) the period commencing on the date
next succeeding the first public announcement of the issuance of such rights or
warrants or such distribution through such last full trading day prior to the
time of determination.

In case of any consolidation or merger of the Company with or into any
other corporation, or in the case of any consolidation or merger of another
corporation into the Company in which the Company is the surviving corporation,
involving in either case a reclassification, conversion, exchange or
cancellation of shares of Common Stock, or any sale or transfer of all or
substantially all of the assets of the Company, the Holder of each Note shall,
after such consolidation, merger, sale or transfer, have the right to convert
such Note into the kind and amount of securities or other property, which may
include cash, which such Holder would have been entitled to receive upon such
consolidation, merger, sale or transfer if such Holder had held the Common Stock
issuable upon the conversion of such Note immediately prior to the effective
date of such consolidation, merger, sale or transfer.

OPTIONAL REDEMPTION BY THE COMPANY

The Notes are not redeemable at the Company's option prior to August 15,
2001. Thereafter, the Notes are subject to redemption at the option of the
Company, in whole or in part (in any integral multiple of $1,000), upon not less
than 30 nor more than 60 days' notice, at the following redemption prices
(expressed as percentages of principal amount), if redeemed during the 12-month
period beginning on August 15 of the years indicated:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------- ----------
<S> <C>
2001................................................... 101.179%
2002 and thereafter.................................... 100.000
</TABLE>

in each case together with accrued but unpaid interest and Liquidated Damages,
if any, to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date).

If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities

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exchange or national market system, if any, on which the Notes are listed, or,
if the Notes are not so listed, on a pro rata basis, by lot or by such other
method as the Trustee shall deem fair and appropriate; provided that no Notes of
$1,000 principal amount or less shall be redeemed in part. Notice of any
redemption will be sent, by first-class mail, at least 30 days and not more than
60 days prior to the date fixed for redemption, to the Holder of each Note to be
redeemed to such Holder's last address as then shown upon the registry books of
the Registrar. The notice of redemption must state the Redemption Date, the
Redemption Price and the amount of accrued interest to be paid. Any notice that
relates to a Note to be redeemed in part only must state the portion of the
principal amount equal to the unredeemed portion thereof and must state that on
and after the Redemption Date, upon surrender of such Note, a new Note or Notes
in principal amount equal to the unredeemed portion thereof will be issued. On
and after the Redemption Date, interest will cease to accrue on the Notes or
portion thereof called for redemption, unless the Company defaults in its
obligations with respect thereto.

The Notes will not have the benefit of any sinking fund.

REPURCHASE OF NOTES AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL

The Indenture provides that in the event that a Change of Control (as
defined below) has occurred, each Holder will have the right, at such Holder's
option, pursuant to an irrevocable and unconditional offer by the Company (the
"Repurchase Offer"), to require the Company to repurchase all or any part of
such Holder's Notes (provided, that the principal amount of such Notes must be
$1,000 or an integral multiple thereof) on the date (the "Repurchase Date") that
is no later than 60 days after the occurrence of such Change of Control at a
cash price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest and Liquidated Damages, if any, to the Repurchase Date (the
"Repurchase Price"). The Repurchase Offer shall be made within 30 days following
a Change of Control and shall remain open for a period specified by the Company
but not less than 20 Business Days following its commencement (the "Repurchase
Offer Period"). Upon expiration of the Repurchase Offer Period, the Company
shall purchase all Notes tendered in response to the Repurchase Offer in the
manner described below. If required by applicable law, the Repurchase Date and
the Repurchase Offer Period may be extended to the extent required; however, if
so extended, it shall nevertheless constitute an Event of Default if the
Repurchase Date does not occur within 90 days of the Change of Control.

The Indenture provides that a "Change of Control" will be deemed to have
occurred when: (i) any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable),
other than a Permitted Holder, is or becomes the "beneficial owner," directly or
indirectly, of shares representing more than 50% of the combined total voting
power of the then outstanding securities entitled to vote generally in elections
of directors of the Company ("Voting Stock"), (ii) the Company consolidates with
or merges into any other person or conveys, transfers or leases, whether
directly or indirectly, all or substantially all of its assets to any person, or
any other person merges into the Company, and, in the case of any such
transaction, the outstanding Common Stock of the Company is changed or exchanged
as a result, unless the shareholders of the Company immediately before such
transaction own, directly or indirectly immediately following such transaction,
at least a majority of the combined voting power of the outstanding voting
securities of the corporation resulting from such transaction in substantially
the same proportion inter se as their ownership of the Voting Stock immediately
before such transaction, (iii) at any time the Continuing Directors (as defined
below) do not constitute the majority of the Board of Directors of the Company
(or, if applicable, a successor corporation to the Company), or (iv) the Common
Stock of the Company (or other common stock into which the Notes are then
convertible) is neither listed for trading on a United States national
securities exchange or approved for trading on an established automatic
over-the-counter trading market in the United States. "Continuing Directors"
means, as of any date of determination, any member of the Board of Directors of
the Company who (i) was a member of the Board of Directors on the date

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of the Indenture or (ii) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Continuing Directors who were
members of the Board of Directors at the time of such nomination or election.

On or before the Repurchase Date, the Company will (i) accept for payment
Notes or portions thereof properly tendered pursuant to the Repurchase Offer,
(ii) deposit with the Paying Agent cash sufficient to pay the Repurchase Price
of all Notes so tendered and (iii) deliver to the Trustee Notes so accepted,
together with an Officers' Certificate listing the Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Notes so accepted payment in an amount equal to the Repurchase Price
(together with accrued and unpaid interest), and the Trustee will promptly
authenticate and mail or deliver to such Holders a new Note or Notes equal in
principal amount to any unpurchased portion of the Notes surrendered. Any Notes
not so accepted will be promptly mailed or delivered by the Company to the
Holder thereof. The Company will publicly announce the results of the Repurchase
Offer on or as soon as practicable after the Repurchase Date.

The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. In addition, no assurances can be given that the Company will be
able to acquire the Notes tendered upon the occurrence of a Change of Control.

For purposes of the definition of Change of Control, (i) the terms "person"
and "group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of
the Exchange Act as in effect on the Issuance Date, whether or not applicable;
and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Issuance Date, whether or
not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time or upon
the occurrence of certain events.

The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.

The provisions of the Indenture relating to a Change of Control may not
afford the Holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger, spin-off or similar transaction that may
adversely affect Holders, if such transaction does not constitute a Change of
Control, as set forth above. In addition, the Company may not have sufficient
financial resources available to fulfill its obligation to repurchase the Notes
upon a Change of Control or to repurchase other debt securities of the Company
or its Subsidiaries providing similar rights to the holders thereof.

To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act and the provisions of Regulation 14E and any
other tender offer rules under the Exchange Act and any other securities laws,
rules and regulations that may then be applicable to any offer by the Company to
purchase the Notes at the option of Holders upon a Change in Control.

The right to require the Company to repurchase Notes as a result of the
occurrence of a Change of Control could create an event of default under Senior
Indebtedness as a result of which any repurchase could, absent a waiver, be
blocked by the subordination provision of the Notes. See "-- Subordination."
Failure of the Company to repurchase the Notes when required would result in an
Event of Default with respect to the Notes whether or not such repurchase is
permitted by the subordination provisions.

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SUBORDINATION

The payment of principal, premium, if any, interest and Liquidated Damages,
if any, on the Notes is subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness, whether
outstanding on the date of the Indenture or thereafter incurred. Upon any
distribution to the creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
other similar proceeding relating to the Company or its property, an assignment
for the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of the Senior Indebtedness will be entitled to receive
payment in full of all obligations in respect of such Senior Indebtedness before
the Holders will be entitled to receive any payment with respect to the Notes.

In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Indebtedness then outstanding would be
entitled to payment in full of all obligations in respect of such Senior
Indebtedness before the Holders are entitled to receive any payment or
distribution in respect of the Notes. The Indenture further requires that the
Company promptly notify holders of Senior Indebtedness if payment of the Notes
is accelerated because of an Event of Default.

The Company also may not make any payment upon or in respect of the Notes
if (i) a default in the payment of the principal of, premium, if any, interest,
rent or other Obligations in respect of Designated Senior Indebtedness occurs
and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Indebtedness
that permits holders of the Designated Senior Indebtedness as to which such
default relates to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the Company or other person
permitted to give such notice under the Indenture. Payments on the Notes may and
shall be resumed (a) in the case of a payment default, upon the date on which
such default is cured or waived and (b) in the case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received.
No new period of payment blockage may be commenced unless and until (i) 365 days
shall have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium, if any,
and interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis of a
subsequent Payment Blockage Notice.

By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Indebtedness may
receive more, ratably, and Holders of the Notes may receive less, ratably, than
the other creditors of the Company. Such subordination will not prevent the
occurrences of any Event of Default under the Indenture.

The Notes are obligations exclusively of the Company. Since certain
operations of the Company are conducted through its Subsidiaries, the cash flow
and the consequent ability to service debt, including the Notes, of the Company,
are dependent upon the earnings of its Subsidiaries and the distribution of
those earnings to, or upon loans or other payments of funds by those
Subsidiaries to, the Company. The payment of dividends and the making of loans
and advances to the Company by its Subsidiaries may be subject to statutory or
contractual restrictions, are dependent upon the earnings of those Subsidiaries
and are subject to various business considerations.

Any right of the Company to receive assets of any of its Subsidiaries upon
their liquidation or reorganization (and the consequent right of the Holders of
the Notes to participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors (including trade creditors), except to
the extent that the Company is itself recognized as a creditor of such
Subsidiary, in which case the claims of the Company would still be subordinate
to any security interests in the assets of such Subsidiary and any indebtedness
of such Subsidiary senior to that held by the Company.

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As of December 31, 1996, the Company had approximately $15.8 million of
indebtedness outstanding that would have constituted Senior Indebtedness
(excluding liabilities of a type not required to be reflected as a liability on
the balance sheet of the Company in accordance with GAAP) and approximately $3.5
million of indebtedness outstanding and other obligations of Subsidiaries of the
Company (excluding intercompany liabilities and liabilities of a type not
required to be reflected as a liability on the balance sheet of such
Subsidiaries in accordance with GAAP) as to which the Notes would have been
structurally subordinated. The Indenture does not limit the amount of additional
indebtedness, including Senior Indebtedness, which the Company is permitted to
create, incur, assume or guarantee, nor does the Indenture limit the amount of
indebtedness and other liabilities which any Subsidiary is permitted to create,
incur, assume or guarantee.

In the event that, notwithstanding the foregoing, the Trustee or any Holder
receives any payment or distribution of assets of the Company of any kind in
contravention of any of the terms of the Indenture, whether in cash, property or
securities, including, without limitation by way of set-off or otherwise, in
respect of the Notes before all Senior Indebtedness is paid in full, then such
payment or distribution will be held by the recipient in trust for the benefit
of holders of Senior Indebtedness, and will be immediately paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness.

EVENTS OF DEFAULT AND REMEDIES

The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the provisions described under the caption "-- Repurchase of Notes
at the Option of Holders Upon a Change of Control"; (iv) failure by the Company
for 60 days after notice to comply with any of its other agreements in the
Indenture or the Notes; (v) default under any mortgage, indenture or instrument
under which there is issued or by which there is secured or evidenced any
indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such indebtedness prior to the expiration of
the grace period provided in such indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such indebtedness prior
to its express maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, is an amount which, in the aggregate, is equal to or greater
than $10 million; (vi) failure by the Company or any of its Subsidiaries to pay
final judgments in an amount which, in the aggregate, exceeds $10 million and
which judgments are not paid, discharged, bonded or stayed within 60 days after
their entry; and (vii) certain events of bankruptcy or insolvency with respect
to the Company or any of its Significant Subsidiaries.

If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the

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Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.

The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of all Holders waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
or the principal of, the Notes.

The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.

LIMITATION ON MERGER, SALE OR CONSOLIDATION

The Indenture provides that the Company may not consolidate or merge with
or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company is
the surviving corporation, Person or entity formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; and (iii) immediately after
such transaction no Default or Event of Default exists.

REPORTS

The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders (i) all quarterly and annual financial information
that would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, an audit report
thereon by the Company's certified independent accountants and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing). In addition,
the Company has agreed to furnish to the Holders or beneficial holders of the
Notes or the underlying Common Stock and prospective purchasers of the Notes or
the underlying Common Stock designated by the Holders of the Notes or the
underlying Common Stock, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act until such time
as such securities are no longer "restricted securities" within the meaning of
Rule 144 under the Securities Act.

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS

No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder, by accepting a Note, waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under

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the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.

TRANSFER AND EXCHANGE

A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.

The registered Holder of a Note is treated as the owner of the Note for all
purposes.

AMENDMENT, SUPPLEMENT AND WAIVER

Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).

Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"-- Repurchase of Notes at the Option of Holders Upon a Change of Control"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest or Liquidated Damages, if any, on the Notes (except
a rescission of acceleration of the Notes by the Holders of at least a majority
in aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration), (v) make any Note payable in money other
than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of, premium, if any, interest or Liquidated
Damages, if any, on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption "-- Repurchase of Notes at the Option of Holders Upon a Change
of Control") (viii) modify the conversion or subordination provisions of the
Indenture in a manner adverse to the Holders of the Notes or (ix) make any
change in the foregoing amendment and waiver provisions.

Notwithstanding the foregoing, without the consent of any Holder, the
Company and the Trustee may amend or supplement the Indenture or the Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes
in addition to or in place of certificated Notes, to provide for the assumption
of the Company's obligations to Holders in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders or that does not adversely affect the legal rights under
the Indenture of any such Holder, or to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.

CONCERNING THE TRUSTEE

The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain

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property received in respect of any such claim as security or otherwise. The
Trustee is permitted to engage in other transactions; however, if it acquires
any conflicting interest it must eliminate such conflict within 90 days, apply
to the Commission for permission to continue or resign.

The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.

BOOK-ENTRY, DELIVERY AND FORM

The Notes sold within the United States to qualified institutional buyers
("Qualified Institutional Buyers") have been issued in the form of a Rule 144A
Global Note. The Rule 144A Global Note has been deposited with, or on behalf of,
The Depositary Trust Company ("DTC") and registered in the name of DTC or its
nominee (the "Global Note Holder"). Except as set forth below, the Rule 144A
Global Note may be transferred, in whole and not in part, only to DTC or another
nominee of DTC. Investors may hold their beneficial interests in the Rule 144A
Global Note directly through DTC if they are Participants (as defined below) in
such system or indirectly through organizations that are Participants in such
system.

The Notes originally sold to "accredited investors" (as defined in Rule
501(a)(1), (2), (3), (4) or (7) under the Securities Act and referred to as
"Accredited Investors") who are not Qualified Institutional Buyers have been
issued and registered in certificated form without coupons and bear a legend
containing restrictions on transfers (the "Certificated Notes"). Certificated
Notes are not eligible to be exchanged for an interest in a Global Note.

The Notes sold outside of the United States in reliance on Regulation S
under the Securities Act are represented by a Regulation S Permanent Global
Note. The Regulation S Permanent Global Note will be deposited with a custodian
and will be registered in the name of a nominee of DTC. Cedel Bank, societe
anonyme ("Cedel Bank"), and the Euroclear System ("Euroclear") will hold
beneficial interests in the Regulation S Permanent Global Note on behalf of
their participants through their respective depositaries, which in turn will
hold such beneficial interests in the Regulation S Permanent Global Note in
participants' securities accounts in the depositaries' names on the books of
DTC. In addition, Notes sold outside of the United States in reliance on
Regulation S under the Securities Act may, to the extent permitted by Regulation
S, be issued and registered in certificated form without coupons and will bear a
legend containing restrictions on transfers (the "Regulation S Certificated
Notes"). Any such Regulation S Certificated Notes will be subject to limitations
on any further transfer or exchange in a manner consistent with the requirements
of Regulation S.

A beneficial interest in the Regulation S Permanent Global Note may be
transferred to a person who takes delivery in the form of an interest in the
Rule 144A Global Note only upon receipt by the Trustee of a written
certification from the transferor in the form required by the Indenture to the
effect that such transfer is being made (i)(a) to a person whom the transferor
reasonably believes is a Qualified Institutional Buyer in a transaction meeting
the requirements of Rule 144A or (b) pursuant to another exemption from the
registration requirements under the Securities Act (in which case such
certificate must be accompanied by an opinion of counsel regarding the
availability of such exemption) and (ii) in accordance with all applicable
securities laws of any state of the United States or any other jurisdiction.
Beneficial interests in the Rule 144A Global Note may be transferred to a person
who takes delivery in the form of an interest in the Regulation S Permanent
Global Note, whether before, on or after the 40-day restricted period, only upon
receipt by the

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Trustee of a written certification from the transferor in the form required by
the Indenture to the effect that such transfer is being made in accordance with
Regulation S. Any beneficial interest in one of the Global Notes that is
transferred to a person who takes delivery in the form of an interest in another
Global Note will, upon transfer, cease to be an interest in such Global Note and
become an interest in such other Global Note and, accordingly, will thereafter
be subject to all transfer restrictions and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such an
interest.

Because of time-zone differences, the securities accounts of Euroclear or
Cedel Bank participants (each, a "Member Organization") purchasing an interest
in a Global Note from a Participant that is not a Member Organization will be
credited during the securities settlement processing day (which must be a
business day for Euroclear or Cedel Bank, as the case may be) immediately
following the DTC settlement date. Transactions in interests in a Global Note
settled during any securities settlement processing day will be reported to the
relevant Member Organization on the same day. Cash received in Euroclear or
Cedel Bank as a result of sales of interests in a Global Note by or through a
Member Organization to a Participant that is not a Member Organization will be
received with value on the DTC settlement date, but will not be available in the
relevant Euroclear or Cedel Bank cash account until the business day following
settlement at DTC. The Notes are eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") Market, the National
Association of Securities Dealers' screen-based automated market for trading of
securities eligible for resale under Rule 144A.

Subject to compliance with the transfer restrictions applicable to the
Global Notes described above and in the Indenture, cross-market transfers
between holders of interests in the Rule 144A Global Note, on the one hand, and
direct or indirect account holders at a Member Organization holding interests in
the Regulation S Permanent Global Note, on the other, will be effected through
the DTC in accordance with its rules and the rules of Euroclear or Cedel Bank,
as applicable. Such cross-market transactions will require, among other things,
delivery of instructions by such Member Organization to Euroclear or Cedel Bank,
as the case may be, in accordance with the rules and procedures and within
deadlines (Brussels time) established in Euroclear or Cedel Bank, as the case
may be. If the transaction complies with all relevant requirements, Euroclear or
Cedel Bank, as the case may be, will then deliver instructions to its depositary
to take action to effect final settlement on its behalf.

DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts thereof.
DTC's Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through
Participants or Indirect Participants.

The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Rule 144A Global Notes, or the Regulation S Permanent Global
Notes (each, a "Global Note" and together, the "Global Notes"), DTC will credit
the accounts of Participants designated by the Initial Purchaser with portions
of the principal amount of the Global Notes and (ii) ownership of the Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interests of the Participants), Participants and Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Notes will be limited to

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such extent. For certain other restrictions on the transferability of the Notes,
see "Notice to Investors."

So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Notes are considered the owners or holders thereof under the Indenture
for any purpose, including with respect to the giving of any directions,
instructions or approvals to the Trustee thereunder. Neither the Company nor the
Trustee has any responsibility or liability for any aspect of the records of DTC
or for maintaining, supervising or reviewing any records of DTC relating to the
Notes.

Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable Record Date are payable by the Trustee to or at
the direction of the Global Note Holder in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names Notes, including the Global Notes,
are registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes (including principal, premium, if any, interest and Liquidated Damages,
if any). The Company believes, however, that it is currently the policy of DTC
to immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
Participants and Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of Participants or Indirect Participants.

CERTIFICATED SECURITIES

Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the Trustee, exchange such beneficial
interest for Notes evidenced by registered, definitive Certificated Notes. Upon
any such issuance, the Trustee is required to register such Certificated Notes
in the name of, and cause the same to be delivered to, such person or persons
(or the nominee of any thereof). All such Certificated Notes would be subject to
the legend requirements described herein under "Notice to Investors." In
addition, if (i) the Company notifies the Trustee in writing that DTC is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Notes under the Indenture, then, upon surrender by the
Global Note Holder of its Global Notes, Notes in such form will be issued to
each person that the Global Note Holder and DTC identify as being the beneficial
owner of the related Notes.

Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or DTC in identifying the beneficial owners of Notes and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note Holder or DTC for all purposes.

REGISTRATION RIGHTS; LIQUIDATED DAMAGES

Pursuant to the Registration Rights Agreement, the Company has agreed for
the benefit of the Holders, that (i) it will, at its cost, within 60 days after
the closing of the Private Placement (the "Closing"), file a shelf registration
statement with the Commission to register the public offer and sale of the Notes
and the Conversion Shares under the Securities Act, (ii) it will use its best
efforts to cause such registration statement to be declared effective by the
Commission within 150 days after the Closing, and (iii) it will use its best
efforts to keep such registration statement continuously effective under the
Securities Act until, subject to certain exceptions specified in the
Registration

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Rights Agreement, the third anniversary of the date of the Closing. Pursuant to
the Registration Rights Agreement, the Company has filed with the Commission the
Registration Statement of which this Prospectus is a part. The Company is
permitted to suspend use of this Prospectus during certain periods of time and
in certain circumstances relating to pending corporate developments and public
filings with the Commission and similar events. If (a) the Company had failed to
file the Registration Statement on or before the date specified for such filing
in the Registration Rights Agreement, (b) the Registration Statement is not
declared effective by the Commission on or prior to the date specified for such
effectiveness in the Registration Rights Agreement (the "Effectiveness Target
Date") or (c) the Registration Statement ceases to be effective or usable in
connection with resales of Transfer Restricted Securities (as defined below)
during the periods specified in the Registration Rights Agreement (each such
event a "Registration Default"), then the Company is required to pay damages
("Liquidated Damages") to each Holder named in the Registration Statement, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default in an amount equal to $.05 per week per $1,000 aggregate
principal amount of the Notes held by such Holder. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 aggregate
principal amount of the Notes held by each Holder with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $.25 per week per $1,000 aggregate
principal amount of the Notes held by each Holder. All accrued Liquidated
Damages will be paid by the Company on each Interest Payment Date in cash. Such
payment will be made to the Holder of the Global Notes by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Notes, if any, by wire transfer to the accounts specified by them
or by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.

For purposes of the foregoing, "Transfer Restricted Securities" means the
Notes and the Conversion Shares until (i) the date on which such Notes or
Conversion Shares have been effectively registered under the Securities Act and
disposed of in accordance with the Registration Statement, (ii) the date on
which such Notes or Conversion Shares are distributed to the public pursuant to
Rule 144 under the Securities Act (or any similar provision then in effect) or
are saleable pursuant to Rule 144(k) under the Securities Act and all legends
relating to transfer restrictions have been removed or (iii) the date on which
such Notes or Conversion Shares cease to be outstanding.

Holders of Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Notes or
Conversion Shares included in the Shelf Registration Statement and benefit from
the provisions regarding Liquidated Damages set forth above.

If the Company determines that it is permissible to do so under applicable
law, in lieu of filing or maintaining the effectiveness of the shelf
registration statement with respect to the Notes, the Company may, at its
option, file with the Commission a registration statement with respect to an
issue of notes identical in all material respects to the Notes (the "New Notes")
except as to transfer restrictions and, upon such registration statement
becoming effective, offer the holders of the Notes the opportunity to exchange
their Notes for the New Notes. The Company has not determined that any such
registered exchange offer is permissible under applicable law, and there can be
no assurance that it will do so in the future.

The Company will provide to each registered holder of the Notes or the
Conversion Shares, who is named in the prospectus and who so requests in
writing, copies of the prospectus which will be a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Notes or the Conversion Shares has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes or the
Conversion Shares. A holder of Notes or the Conversion Shares that sells such
securities pursuant to a Shelf Registration Statement generally will be required
to be named as a selling security holder in the related

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prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification and contribution rights and obligations).

SAME-DAY SETTLEMENT AND PAYMENT

The Indenture will require that payments in respect of the Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certificated Notes, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Notes represented by the Global Note are eligible to trade in the
PORTAL Market and to trade in the DTC's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such Notes is, therefore,
required by DTC to be settled in immediately available funds. The Company
expects that secondary trading in the Certificated Notes will also be settled in
immediately available funds.

CERTAIN DEFINITIONS

Set forth below are certain defined terms used in the Indenture and the
Registration Rights Agreement. Reference is made to the Indenture and the
Registration Rights Agreement for a full disclosure of all such terms, as well
as any other capitalized terms used herein for which no definition is provided.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), 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 securities, by agreement or otherwise.

"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.

"Credit Agreement" means that certain Credit Agreement, dated as of
November 8, 1995, by and among the Company, PacNet Inc., Advanced Network
Design, AdVal, Inc., Cel-Tech International Corp. and Transamerica Business
Credit Corporation, as agent for the lenders, as amended, providing for up to
$43 million of revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.

"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.

"Designated Senior Indebtedness" means any particular Senior Indebtedness
having an outstanding principal amount or commitment in excess of $10 million
with respect to which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related

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agreements or documents to which the Company is a party) expressly provides that
such Indebtedness shall be "Designated Senior Indebtedness" for purposes of the
Indenture (provided that such instrument, agreement or other document may place
limitations and conditions on the right of such Senior Indebtedness to exercise
the rights of Designated Senior Indebtedness.)

"GAAP" means generally accepted accounting principles 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 have been approved by a significant segment of the accounting
profession, which are in effect from time to time.

"Global Notes" means the Rule 144A Global Note, the Regulation S Temporary
Global Note and the Regulation S Permanent Global Note.

"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i)(a) for borrowed money (including, but not
limited to, any indebtedness secured by a security interest, mortgage or other
lien on the assets of the Company which is (1) given to secure all or part of
the purchase price of property subject thereto, whether given to the vendor of
such property or to another, or (2) existing on property at the time of
acquisition thereof), (b) evidenced by a note, debenture, bond or other written
instrument, (c) under a lease required to be capitalized on the balance sheet of
the lessee under GAAP, (d) in respect of letters of credit, bank guarantees or
bankers' acceptances (including reimbursement obligations with respect to any of
the foregoing), (e) with respect to Indebtedness secured by a mortgage, pledge,
lien, encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance to which the property or assets of such person are subject, whether
or not the obligation secured thereby shall have been assumed by or shall
otherwise be such person's legal liability, (f) in respect of the balance of
deferred and unpaid purchase price of any property or assets or (g) under
interest rate or currency swap agreements, cap, floor and collar agreements,
spot and forward contracts and similar agreements and arrangements; (ii) with
respect to any obligation of others of the type described in the preceding
clause (i) or under clause (iii) below assumed by or guaranteed in any manner by
such person, contingent or otherwise (and, without duplication, the obligations
of such person under any such assumptions, guarantees or other such
arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.

"Issuance Date" means the date on which the Notes are originally issued and
authenticated under the Indenture.

"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.

"Permitted Designee" means (i) a spouse or child of a Permitted Holder,
(ii) trusts for the benefit of a Permitted Holder or a spouse or child of a
Permitted Holder, (iii) in the event of death or incompetence of a Permitted
Holder, his estate, heirs, executor, administrator, committee or other personal
representative or (iv) any Affiliate of a Permitted Holder.

"Permitted Holders" means Paul Pfleger, John M. Orehek and their Permitted
Designees.

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

"Regulation S" means Regulation S promulgated under the Securities Act.

"Regulation S Permanent Global Note" means a permanent global note that is
deposited with and registered in the name of the Depositary or its nominee,
representing a series of Notes sold in reliance on Regulation S.

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"Rule 144A" means Rule 144A promulgated under the Securities Act.

"Rule 144A Global Note" means a permanent global note that is deposited
with and registered in the name of the Depositary or its nominee, representing a
series of Notes sold in reliance on Rule 144A.

"Senior Indebtedness" means the principal of, premium, if any, and interest
on, rent under, and any other amounts payable on or in respect of the Credit
Agreement and any other Indebtedness of the Company (including, without
limitation, any Obligations in respect of such Indebtedness and, in the case of
Designated Senior Indebtedness, any interest accruing after the filing of a
petition by or against the Company under any Bankruptcy Law, whether or not
allowed as a claim after such filing in any proceeding under such Bankruptcy
Law), whether outstanding on the date of this Indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company (including
all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to the foregoing); provided, however, that Senior
Indebtedness does not include (v) Indebtedness evidenced by the Notes, (w) any
liability for federal, state, local or other taxes owed or owing by the Company,
(x) Indebtedness of the Company to any of its Subsidiaries, (y) trade payables
of the Company, and (z) any particular Indebtedness in which the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall not be senior in right of payment to, or
is pari passu with, or is subordinated or junior to, the Notes.

"Significant Subsidiary" means any subsidiary of the Company that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act and the Exchange Act, as such
Regulation is in effect on the date of the Indenture.

"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).

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DESCRIPTION OF CAPITAL STOCK

The Company's Articles provide for authorized capital of 100,000,000
shares, consisting of 90,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock, par value $.0001 per share ("Preferred Stock").

COMMON STOCK

As of December 31, 1996, there were 15,954,917 outstanding shares of Common
Stock (assuming no redemption of shares owned by the Company's former President
and Chief Executive Officer; see "Certain Transactions"). As of March 14, 1997,
the Common Stock was held of record by 146 persons or entities. Holders of the
Common Stock are entitled to cast one vote for each share held of record on all
matters acted upon at any meeting of the Company's shareholders. Holders of
Common Stock are entitled to receive ratably such dividends if, as and when
declared by the Board of Directors out of funds legally available therefor,
subject to preferences that may be applicable to any outstanding Preferred
Stock. There are no cumulative voting rights, the absence of which will, in
effect, allow the holders of a majority of the outstanding shares of the Common
Stock to elect all of the directors then standing for election. The absence of
cumulative voting rights could have the effect of delaying, deferring or
preventing a change in control of Midcom. In the event of any liquidation,
dissolution or winding up of Midcom, each holder of Common Stock will be
entitled to participate, subject to the rights of any outstanding Preferred
Stock, ratably in all assets of Midcom remaining after payment of liabilities.
Holders of Common Stock have no preemptive or conversion rights. All outstanding
shares of Common Stock are, and all shares of Common Stock issuable upon
conversion of the Notes will be, fully paid and non-assessable.

PREFERRED STOCK

The Board of Directors has the authority to issue 10,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof including dividend rights, conversion
rights, voting rights, redemption rights, liquidation preferences and the number
of shares constituting any series, without any further vote or action by the
shareholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock. In
addition, because the terms of such Preferred Stock may be fixed by the Board of
Directors without shareholder action, the Preferred Stock could be designated
and issued quickly in the event Midcom requires additional equity capital. The
Preferred Stock could also be designated and issued with terms calculated to
defeat a proposed take-over of Midcom, or with terms that may have the effect of
delaying, deferring or preventing a change of control of Midcom. Under certain
circumstances, this could have the effect of decreasing the market price of the
Common Stock.

WARRANTS

Midcom has outstanding three warrants to purchase a total of 59,500 shares
of Common Stock, exercisable through March 28, 1999 at an exercise price of
$7.44 per share, which price is subject to adjustment to prevent dilution. The
warrants were issued in connection with certain non-competition agreements
between the Company and the former shareholders of Telnet Communications, Inc.
Midcom also has outstanding a warrant to purchase 117,000 shares of Common
Stock, exercisable through March 13, 2007 at an exercise price of $10 per share.
The warrant was issued to Comdisco, Inc. ("Comdisco") in connection with a
capital lease financing arrangement. The Company has committed to register the
shares underlying these warrants (but not the warrants) under the Securities Act
under certain circumstances. See "-- Registration Rights."

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ESCROW SHARES AND STABILIZATION SHARES

At December 31, 1996, Midcom had the obligation to release from escrow up
to 151,675 additional shares of Common Stock in connection with its acquisition
of certain customer bases and operations. Midcom has an obligation to release
these shares upon the occurrence of certain contingencies, including, among
others, attainment of specified revenue levels for the acquired customer base,
adjustment of liabilities assumed and receivables purchased, and satisfaction of
general representations and warranties.

In connection with its acquisition of certain customer bases and
operations, Midcom is obligated to issue additional shares of Common Stock in
the event that the market price of the Common Stock is below stated prices on
designated true-up dates. Based on the price of the Common Stock on April 4,
1997 and assuming the maximum shares are issued, approximately an additional
501,000 shares of Common Stock would be issuable as a result of these
obligations.

SHAREHOLDERS AGREEMENT

Midcom has entered into a Shareholders' Agreement dated June 7, 1994 (the
"Shareholders' Agreement") with Paul Pfleger, Ashok Rao, John M. Orehek, and
Trusts for the benefit of each of Siddhartha Rao, Kavita Rao, Divya Rao and
Anjali Rao (collectively the "Founding Shareholders"). The Shareholders'
Agreement provides that Midcom and the Founding Shareholders have a right of
first refusal if Mr. Orehek or Mr. Rao wish to sell their shares and have a
right to purchase Mr. Rao's shares in the event he resigns from the Company.
Following Mr. Rao's resignation as President, Chief Executive Officer and a
director in April 1996, the Company called for the redemption of Mr. Rao's
shares and the shares owned by four trusts to which he had transferred a portion
of his shares. The terms of the redemption will be determined through
arbitration. See "Certain Transactions." Pursuant to the Shareholders'
Agreement, the Founding Shareholders have agreed to vote their shares to elect
Mr. Pfleger and Mr. Rao to the Company's Board of Directors. As part of Mr.
Rao's resignation, the Shareholders' Agreement will be amended to remove the
requirement that the Founding Shareholders vote to elect Mr. Rao to the
Company's Board of Directors. See "Certain Transactions." If, during the term of
the Shareholders' Agreement, Midcom proposes to register any of its Common Stock
under the Securities Act, the Founding Shareholders may require Midcom to
include in such registration shares of Common Stock owned by them, subject to
certain conditions and limitations. See "-- Registration Rights." The
Shareholders' Agreement expires on June 7, 1999. In connection with a transfer
of their Common Stock, Messrs. Pfleger and Orehek have each transferred his
rights and obligations under the Shareholders' Agreement to a limited
partnership of which he is a beneficial owner. The two limited partnerships have
further transferred certain shares of Common Stock to a limited liability
company that also assumed the rights and obligations under the Shareholders'
Agreement. See "Principal Shareholders."

REGISTRATION RIGHTS

The Selling Securityholders and certain other individuals and entities have
certain rights with respect to the registration under the Securities Act of the
public offer and sale of the Securities and certain shares of Common Stock
acquired in connection with various unrelated acquisition and financing
transactions. At December 31, 1996, holders of approximately 9,040,212 shares of
Common Stock (not including shares of Common Stock issuable upon conversion of
the Notes or exercise of outstanding warrants) are entitled to certain rights
with respect to the registration of the public offer and sale of such shares
under the Securities Act.

Under the terms of the Registration Rights Agreement dated as of June 10,
1994 between Midcom, First Union and Robinson-Humphrey, if Midcom proposes to
register any of its securities within five years of its initial public offering,
First Union and Robinson-Humphrey may require Midcom, at its sole expense, to
include in such registration any shares of Common Stock owned by them, subject
to certain conditions and limitations. First Union and Robinson-Humphrey may,
prior

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to the third anniversary of Midcom's initial public offering, demand that Midcom
register their shares up to two times on Form S-1 or Form S-2 and an unlimited
number of times on Form S-3. Midcom will not be obligated to effect any demand
registration within six months after the effective date of a previous demand
registration or a registration in which First Union or Robinson-Humphrey was
entitled to include its shares. In addition, so long as any shares issued to
First Union or Robinson-Humphrey upon exercise of certain warrants remain
outstanding, subject to certain exceptions, the Company shall not, without the
prior written consent of the holders of a majority of such shares: (i) make any
amendment to the Company's Articles or Bylaws, or file any resolution of the
Board of Directors with the Washington Secretary of State containing any
provisions which could adversely affect or otherwise impair the rights of the
holders of such shares; or (ii) enter into, or permit any subsidiary to enter
into, related party transactions. At any time after June 1, 2000, the Company
has the right to purchase all (but not less than all) of the shares issued to
First Union or Robinson-Humphrey upon exercise of their warrants in accordance
with an agreed formula.

Under the terms of the Shareholders' Agreement if, during the term thereof,
Midcom proposes to register any of its Common Stock under the Securities Act,
the Founding Shareholders may require Midcom to include in such registration
shares of Common Stock owned by them, subject to certain conditions and
limitations. All expenses incurred in connection with such registration shall be
borne by Midcom except for the Founding Shareholders' legal fees and any
additional expenses that Midcom would not incur but for the registration of the
Founding Shareholders' shares. See "-- Shareholders' Agreement."

Under the terms of a registration rights agreement between Midcom and the
former shareholders of Telnet Communications, Inc. who acquired warrants to
purchase a total of 59,500 shares of Common Stock, if Midcom proposes to
register Common Stock under the Securities Act for its own account pursuant to
an underwritten offering at any time prior to April 1, 2000, each of these
individuals may require Midcom, at its sole expense, to include in such
registration any shares of Common Stock issued upon exercise of his warrant,
subject to certain conditions and limitations. In addition, these individuals
may each demand that Midcom register such shares one time on Form S-3, subject
to certain conditions and limitations, which rights expire on March 28, 1999.

Under the terms of a registration rights agreement between the Company and
CSA, if the Company proposes to register Common Stock under the Securities Act
for its own account pursuant to an underwritten offering at any time prior to
August 31, 1998, CSA may require the Company, at its sole expense, to include in
such registration any shares of Common Stock owned by CSA that CSA acquired in
connection with the sale of substantially all of its assets to the Company,
subject to certain conditions and limitations. In addition, CSA may demand that
the Company register CSA's shares one time on Form S-3, provided that such
shares would have an aggregate expected selling price of at least $100,000, and
subject to certain other conditions and limitations.

Under the terms of a registration rights agreement between the Company and
Cherry Communications, Cherry Communications may demand, on up to two occasions,
that the Company register on Form S-3 any shares of Common Stock acquired by
Cherry Communications in connection with the Company's purchase from Cherry
Communications of certain customer bases, provided that such shares would have
an aggregate expected selling price of at least $300,000, and subject to certain
other conditions and limitations.

Under the terms of a registration rights agreement among the Company,
Theodore Berns, Donald Dean and WorldCom (each a "Rights Holder"), Rights
Holders holding a majority of the shares of Common Stock held by all Rights
Holders may demand, on up to two occasions, that the Company register the shares
on Form S-3, provided that the shares would have an aggregate expected selling
price of at least $300,000, and subject to certain other conditions and
limitations.

Under the terms of a registration rights agreement between the Company and
Richard E. John, if the Company proposes to register Common Stock under the
Securities Act for its own account pursuant to an underwritten offering or to
register the Common Stock of another pursuant to a

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demand registration at any time prior to August 31, 1998, Mr. John may require
the Company, at its sole expense, to include in such registration any shares of
Common Stock owned by him that he acquired in connection with the Company's
acquisition of Cel-Tech, subject to certain conditions and limitations. In
addition, Mr. John may demand that the Company register his shares one time on
Form S-3, provided that such shares would have an aggregate expected selling
price of at least $200,000, and subject to certain other conditions and
limitations. Under the terms of a revised registration rights agreement between
the Company and Mr. John, the Company has agreed to include up to 81,693 shares
of Common Stock owned by him in the Shelf Registration Statement described
below.

Under the terms of a registration rights agreement among the Company and
four individuals who were shareholders of Fairfield County Telephone Corporation
("Fairfield"), each such individual may demand, on up to three occasions, that
the Company register on Form S-3 any shares of Common Stock owned by him or her
that he or she acquired in connection with the Company's acquisition of
Fairfield, provided that such shares would have an aggregate expected selling
price of at least $300,000, and subject to certain other conditions and
limitations.

Under the terms of a registration rights agreement among the Company and
David Wiegand, formerly the sole shareholder of Adnet, if the Company proposes
to register Common Stock under the Securities Act at any time prior to December
31, 1998, Mr. Wiegand may require the Company, at its sole expense, to include
in such registration any shares of Common Stock owned by him that were acquired
in connection with the Company's acquisition of Adnet, subject to certain
conditions and limitations. In addition, Mr. Wiegand may demand, on up to two
occasions, that the Company register such shares on Form S-3, provided that such
shares would have an aggregate expected selling price of at least $300,000, and
subject to contain other terms and conditions.

Under the terms of a stock purchase warrant issued to Comdisco to purchase
117,000 shares of Common Stock, if Midcom proposes to register Common Stock
under the Securities Act for its own account pursuant to an underwritten
offering at any time prior to June 30, 1998, Comdisco may require the Company to
include in such registration shares of Common Stock issued upon exercise of the
warrant, subject to certain conditions and limitations.

Notwithstanding the foregoing registration rights, the Company has
voluntarily filed with the Commission a Registration Statement on Form S-1 (file
no. 333-16681) (the "Shelf Registration Statement") to register under the
Securities Act the public offer and sale of a substantial portion of the shares
of Common Stock entitled to such registration rights. Although it is not
required to do so, the Company currently intends to maintain the effectiveness
of the Shelf Registration Statement for a period of one year or upon such
earlier time as all the shares of Common Stock included in the Shelf
Registration Statement or any post-effective amendment thereto have been sold
pursuant thereto or are no longer outstanding. The Company will bear all
expenses relating to the Shelf Registration Statement other than underwriting
discounts and commission and fees and disbursements of counsel to the selling
securityholders named therein.

In addition, pursuant to the Registration Rights Agreement, the Company has
agreed to register under the Securities Act the public offer and sale of the
Securities. Pursuant to the Registration Rights Agreement, the Company filed
with the Commission the Registration Statement of which this Prospectus forms a
part. The Company is required under the Registration Rights Agreement to
maintain the effectiveness of the Registration Statement for a period of three
years from the completion of the Private Placement or, if shorter, when (i) all
the Securities have been sold pursuant to the Registration Statement or (ii) the
date on which there ceases to be outstanding any Securities. See "Selling
Securityholders," "Description of Notes -- Registration Rights; Liquidated
Damages" and "Plan of Distribution."

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WASHINGTON LAW

Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. Chapter 23B.17 of
the Washington Business Corporation Act (the "WBCA") prohibits, subject to
certain exceptions, a merger, sale of assets or liquidation of a corporation
involving an "Interested Shareholder" (defined generally as a person or
affiliated group of persons acting in concert or under common control who
beneficially own 20% or more of the corporation's outstanding voting securities)
unless determined to be at a "fair price" or otherwise approved by a majority of
the Company's disinterested directors or the holders of two-thirds of the votes
of each voting group entitled to vote separately on the transaction, excluding
the votes of the Interested Shareholder. In addition, Chapter 23B.19 of the WBCA
prohibits a corporation having a class of securities registered pursuant to
Section 12 of the Exchange Act, with certain exceptions, from engaging in
certain significant business transactions with a person or group of persons
acting in concert or under common control who beneficially acquires 10% or more
of the corporation's outstanding voting securities for a period of five years
after such acquisition. The prohibited transactions include, among others, a
merger with, disposition of assets to, or issuance or redemption of stock to or
from, such person or group of persons, or allowing such person or group of
persons to receive a disproportionate benefit as a shareholder. Notwithstanding
the foregoing, an otherwise prohibited transaction may be consummated if such
transaction is approved by a majority of the members of the board of directors
prior to the date that the third parties became Interested Shareholders. These
provisions could have the effect of delaying, deterring or preventing a change
in control of the Company which, under certain circumstances, could have the
effect of decreasing the market price of the Common Stock.

CERTAIN PROVISIONS IN AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BYLAWS

The WBCA permits amendment of the Articles with the approval of the holders
of a majority of the shares entitled to vote. The holders of outstanding shares
of a class may vote as a class on a proposed amendment if the amendment would
change the number of authorized shares or alter or change the powers,
preferences or special rights of such class. Holders of the same series of stock
have identical voting rights.

The Articles provide that special meetings of the shareholders may be
called by the Chairman of the Board, the President, the Board of Directors or
holders of not less than 30% of the outstanding shares entitled to vote at the
meeting. The Articles provide that certain business combinations, such as a
merger or share exchange with another corporation or the sale of a substantial
part of the Company's assets, must be approved by the holders of not less than
two-thirds of the outstanding Common Stock and any other class of stock entitled
to vote thereon voting as a single class, and the affirmative vote of a majority
of each outstanding series or class, voting as a separate class; provided,
however, that if certain continuing members of the Company's Board of Directors
approve such business combination, it may be approved by not less than a
majority of the holders of outstanding Common Stock and any other class of stock
entitled to vote thereon voting as a single class and the affirmative vote of a
majority of each outstanding series or class, voting as a separate class.

Pursuant to the Articles, the Company's Board of Directors is to be divided
into three classes having staggered, three-year terms. See "Management -- Board
of Directors."

The Company's Bylaws may be amended or repealed by the Board of Directors
or by the vote of holders of not less than two-thirds of the outstanding Common
Stock and any other stock entitled to vote thereon.

It is possible that the provisions described above could have the effect of
delaying, deterring or preventing a change in control or management of the
Company which, under certain circumstances, could have the effect of decreasing
the market value of the Common Stock.

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LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY

As permitted by Section 23B.08.320 of the WBCA, Article 14 of the Company's
Articles eliminates in certain circumstances the personal liability of the
Company's directors to the Company or its shareholders for monetary damages
resulting from breaches of their fiduciary duty. This provision does not
eliminate the liability of directors for (i) acts or omissions that involve
intentional misconduct or a knowing violation of law, (ii) improper declarations
of dividends, or (iii) transactions from which a director derived an improper
personal benefit.

The Company's Bylaws require the Company to indemnify its directors and
officers to the fullest extent permitted by Washington law, including under
circumstances in which indemnification is otherwise discretionary. The Company
maintains officers' and directors' liability insurance of $1 million for members
of its Board of Directors and key employees.

TRANSFER AGENT AND REGISTRAR

The transfer agent for the Common Stock is ChaseMellon Shareholder
Services. The registrar for the Notes is IBJ Schroder Bank & Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

As of December 31, 1996, there were 15,954,917 outstanding shares of Common
Stock (assuming no redemption of the shares owned by the Company's former
President and Chief Executive Officer; see "Certain Transactions") of which
9,150,437 shares were "restricted securities" subject to restrictions set forth
in Rule 144 promulgated under the Securities Act. Of the restricted securities,
5,617,272 shares may be sold under Rule 144 (subject to volume and manner of
sales restrictions), and an additional 2,649,319 shares may be sold under Rule
144 upon the expiration of the applicable one-year holding period.

Of the restricted shares, 151,675 shares are held in escrow and are to be
released pursuant to the Company's obligations under agreements entered into in
connection with several acquisitions completed in the second half of 1995.
Moreover, in connection with certain acquisitions, the Company is required to
issue shares of Common Stock as additional consideration in the event that the
market price of the Common Stock is below stated prices on designated true-up
dates. Based on the price of the Common Stock on April 4, 1997, and assuming the
maximum shares are issued, the Company would be required to issue approximately
501,000 shares of Common Stock pursuant to these requirements. Also, in
connection with the acquisition of a customer base from Cherry Communications,
the Company may elect to issue shares of Common Stock in lieu of a cash payment
of $9.0 million. Based on the price of the Common Stock on April 4, 1997, the
Company would be required to issue approximately 1,411,000 shares of Common
Stock to satisfy this obligation. See "Management's Discussion and
Analysis -- Liquidity and Capital Resources" and "Description of Capital Stock."

As of December 31, 1996, the Company had reserved for issuance 4,108,816
shares of Common Stock under its Stock Option Plan and 256,354 shares of Common
Stock for issuance under its Stock Purchase Plan. Under the Stock Option Plan,
as of December 31, 1996, options to purchase 3,683,379 shares of Common Stock
were outstanding and options to purchase 374,782 shares of Common Stock were
exercisable. Shares issued under the Stock Option Plan and the Stock Purchase
Plan are freely tradable in the open market, subject, in the case of affiliates,
to the volume, manner of sale, notice and public information requirements of
Rule 144. At December 31, 1996, warrants to purchase 59,500 shares of Common
Stock were outstanding. Also, in March 1997, the Company issued a warrant to
purchase 117,000 shares of Common Stock in connection with a capital lease
financing arrangement, which warrant is fully exercisable. In addition, the
Notes are convertible into Common Stock at the option of the holder thereof at
any time prior to maturity, unless previously redeemed, at a conversion price of
$14.0875 per share, subject to

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<PAGE> 101

adjustment in certain events. If the Notes outstanding as of December 31, 1996
were fully converted, the Company would be obligated to issue to the holders
thereof an aggregate of 6,938,279 shares of Common Stock (not including an
indeterminate number of shares that may be issued in connection with certain
anti-dilution and other provisions).

As of December 31, 1996, holders of approximately 9,040,212 shares of
Common Stock acquired in connection with the formation of the Company and
various unrelated acquisition and financing transactions had certain rights with
respect to the registration under the Securities Act of the public offer and
sale of such Common Stock. At December 31, 1996, holders of approximately
2,012,000 of such shares had the right to require the Company to register the
public offer and sale of their shares under the Securities Act. Notwithstanding
such registration rights, on November 25, 1996, the Company voluntarily filed
with the Commission a Registration Statement (file no. 333-16681) to register
under the Securities Act the public offer and sale of approximately 1,600,000 of
such shares (the "Shelf Registration Statement"). The Company intends to
maintain the effectiveness of the Shelf Registration Statement for a period of
one year. In addition, pursuant to the Registration Rights Agreement, the
Company has agreed to register under the Securities Act the public offer and
sale of the Notes and the Conversion Shares, subject to certain conditions and
limitations. Pursuant to the Registration Rights Agreement, the Company filed
with the Commission the Registration Statement of which this Prospectus forms a
part to register under the Securities Act the public offer and sale of the Notes
and the Conversion Shares included herein. The Company is required under the
Registration Rights Agreement to maintain the effectiveness of the Registration
Statement for a period of three years from the completion of the Private
Placement or, if shorter, when (i) all the Notes and Conversion Shares have been
sold pursuant to the Registration Statement or (ii) the date on which there
ceases to be outstanding any Notes or Conversion Shares. See "Description of
Capital Stock -- Registration Rights," "Description of Notes -- Registration
Rights; Liquidated Damages," "Selling Securityholders" and "Plan of
Distribution."

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
within the meaning of Rule 144 ("Restricted Shares") for at least one year,
including the holding period of any prior owner except an affiliate, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of the Company's Common
Stock and (ii) the average weekly trading volume of the Common Stock in the
over-the-counter market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
"affiliate" of the Company at any time during the 90 days preceding a sale, and
who owns Restricted Shares that were purchased from the Company (or any
affiliate) at least two years previously, will be entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.

No prediction can be made as to the effect, if any, that future sales of
shares, the availability of shares for future sale, or the registration of
substantial amounts of currently restricted shares will have on the market price
of the Common Stock prevailing from time to time. Sales of substantial amounts
of Common Stock in the public market, under Rule 144, pursuant to the exercise
of registration rights or otherwise, and even the potential for such sales,
could have a material adverse effect on the prevailing market price of the
Common Stock and impair the Company's ability to raise capital through the sale
of its equity securities.

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<PAGE> 102

PLAN OF DISTRIBUTION

The Selling Securityholders may sell all or a portion of the Notes and the
Conversion Shares offered hereby from time to time while the Registration
Statement of which this Prospectus is a part remains effective. Pursuant to the
Registration Rights Agreement, the Company is obligated to maintain the
effectiveness of the Registration Statement for a period of three years from the
completion of the Private Placement or, if shorter, when (i) all the Securities
have been sold pursuant to the Registration Statement or (ii) the date on which
there ceases to be any outstanding Securities. The Company has been advised by
the Selling Securityholders that the Notes and Conversion Shares may be sold on
terms to be determined at the time of such sale through customary brokerage
channels, negotiated transactions or a combination of these methods, at fixed
prices that may be changed, at market prices then prevailing or at negotiated
prices then obtainable. There is no assurance that the Selling Securityholders
will sell any or all of the Notes or Conversion Shares offered hereby. Each of
the Selling Securityholders reserves the right to accept and, together with its
agents from time to time, to reject in whole or in part any proposed purchase of
the Notes or Conversion Shares to be made directly or through agents. The
Company will receive no portion of the proceeds from the sale of Notes or
Conversion Shares offered hereby. The aggregate proceeds to the Selling
Securityholders from the sale of the Notes and the Conversion Shares offered by
the Selling Securityholders hereby will be the purchase price of such Notes or
Conversion Shares less any discounts or commissions.

The Company has been advised by the Selling Securityholders that the
Selling Securityholders, acting as principals for their own account, may sell
Notes or Conversion Shares from time to time directly to purchasers or through
agents, dealers or underwriters to be designated by the Selling Securityholders
from time to time who may receive compensation in the form of underwriting
discounts, commissions or concessions from the Selling Securityholders and the
purchasers of the Notes or Conversion Shares for whom they may act as agent. The
Selling Securityholders and any agents, broker-dealers or underwriters that
participate with the Selling Securityholders in the distribution of the Notes or
the Conversion Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, in which event any discounts, commissions or concessions
received by such broker-dealers, agents or underwriters and any profit on the
resale of the Notes or the Conversion Shares purchased by them may be deemed to
be underwriting discounts or commissions under the Securities Act.

A Selling Securityholder may elect to engage a broker or dealer to effect
sales of the Securities in one or more of the following transactions: (a) block
trades in which the broker or dealer so engaged will attempt to sell the
Securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus, and (c) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers and dealers engaged
by a Selling Securityholder may arrange for other brokers or dealers to
participate. Broker-dealers may agree with the Selling Securityholders to sell a
specified number of such Securities at a stipulated price, and, to the extent
such broker-dealer is unable to do so acting as agent for a Selling
Securityholder, to purchase as principal any unsold Securities at the price
required to fulfill the broker-dealer commitment to such Selling Securityholder.
Broker-dealers who acquire Securities as principal may thereafter resell such
Securities from time to time in transactions (which may involve crosses and
block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at prices
then related to the then-current market price or in negotiated transactions and,
in connection with such resales, may pay to or receive from the purchasers of
such Securities commissions as described above. To the extent required, the
aggregate principal amount of the specific Notes or the number of Conversion
Shares to be sold, the names of the Selling Securityholders, the purchase price,
the public offering price, the name of any agent, dealer or underwriter, the
amount of any offering expenses, any applicable

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<PAGE> 103

commissions or discounts and any other material information with respect to a
particular offer will be set forth in an accompanying Prospectus Supplement or,
if appropriate, a post-effective amendment to the Registration Statement of
which this Prospectus is a part.

The Securities originally issued by the Company in the Private Placement
contained legends as to their restricted transferability. These legends will not
be necessary with respect to any Securities sold pursuant to, and during the
effectiveness of, the Registration Statement of which this Prospectus is a part.
Upon the transfer by the Selling Securityholders of any of the Securities, new
certificates representing such Securities will be issued to the transferee, free
of any such legends.

To comply with the securities laws of certain states, if applicable, the
Securities will be sold in such states only through registered or licensed
brokers or dealers. In addition, in certain states the Securities may not be
offered or sold unless they have been registered or qualified for sale in such
state or an exemption from the registration or qualification requirement is
available and is complied with.

The Company will pay all expenses incident to the offering and sale of the
Securities to the public other than underwriting discounts, selling commissions
and fees. Pursuant to the Registration Rights Agreement, the Company and the
Selling Securityholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.

Prior to the date hereof, there has been no public market for the Notes and
there can be no assurance regarding the future development of a market for the
Notes. The Notes are eligible for trading on the PORTAL Market; however, no
assurance can be given as to the liquidity of, or trading market for, the Notes.
The Company has been advised by the Initial Purchasers that they intend to make
a market in the Notes. However, the Initial Purchasers are not obligated to do
so and any market-making activities with respect to the Notes may be
discontinued at any time without notice. Accordingly, no assurance can be given
as to the liquidity of or the trading market for the Notes.

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<PAGE> 104

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following discussion is a summary of the material federal income tax
consequences expected to result from the purchase, ownership, conversion and
disposition of the Notes. This summary is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations, judicial authority and administrative rulings and practice.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
below. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Holders. Moreover, no assurance can be
offered that the Internal Revenue Service (the "Service") will not take contrary
positions, and no rulings from the Service have been or will be sought.

The following summary is for general information only. This summary does
not discuss all aspects of federal income taxation that may be relevant to
particular Holders in light of their specific circumstances or to certain types
of Holders that may be subject to special rules (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). EACH PURCHASER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING, CONVERTING AND DISPOSING OF
THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS.

STATED INTEREST

Stated interest on the Notes will be reported to Holders and the Service,
and generally will be taxable to the Holders as ordinary income in accordance
with their methods of accounting for tax purposes.

BACKUP WITHHOLDING

A Holder may be subject to backup withholding at the rate of 31% with
respect to interest paid on and gross proceeds from a sale of, the Notes, unless
(i) the Holder is a corporation or comes within certain other exempt categories
and, when required, demonstrates the relevant facts or (ii) the Holder provides
a correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A Holder who does not provide the Company with his
or her correct taxpayer identification number may be subject to penalties
imposed by the Service. The Company will report to the Holders and the Service
the amount of any "reportable payments" (including stated interest on the Notes)
and any amount withheld with respect to the Notes during the calendar year. The
amount of any backup withholding generally will be allowed as a credit against
the Holder's federal income tax liability, and excess withholdings may entitle
the Holder to a refund.

CONVERSION

A Holder should not recognize gain or loss on the conversion of a Note into
Common Stock, except with respect to cash received in lieu of fractional shares.
(To the extent the Notes converted are subject to accrued market discount, the
amount of the accrued market discount will carry over to the Common Stock on
conversion and will be treated as interest income on disposition of the Common
Stock.) If Common Stock is received by a Holder without recognition of gain or
loss, the holding period of the Common Stock received upon conversion of a Note
will include the period during which the Note was held (provided the Note was a
capital asset in the hands of the Holder prior to the conversion), and the
Holder's aggregate tax basis in the Common Stock will be equal to his or her tax
basis in the Note surrendered, less any tax basis allocable to any fractional
share that otherwise would have been received.

A Holder will recognize taxable gain or loss on cash received in lieu of
fractional shares of Common Stock in an amount equal to the difference between
the amount of cash received and the

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<PAGE> 105

portion of the Holder's adjusted tax basis in the Note allocable to the
fractional shares. The gain or loss should be capital gain or loss if the
fractional shares are capital assets in the hands of the holder and should be
long-term capital gain or loss if the fractional shares have been deemed held
for more than one year.

Adjustments in the conversion price of the Notes made pursuant to the
anti-dilution provisions to reflect distributions to holders of Common Stock may
result in constructive distributions to holders that could be taxable to them as
dividends pursuant to Section 305 of the Code.

TAXABLE DISPOSITION

In general, a Holder will recognize gain or loss upon the sale, exchange,
redemption or other taxable disposition of a Note measured by the difference
between (i) the amount realized (the amount of cash and the fair market value of
property received) and (ii) the Holder's tax basis in the Note (as increased by
any market discount previously included in income by the Holder and decreased by
any amortizable bond premium deducted over the term of the Note). Any such gain
or loss will generally be long-term capital gain or loss, provided the Note was
a capital asset in the hands of the Holder and had been held for more than one
year. If any portion of the amount realized by the Holder is attributable to
accrued but as yet unreported interest income, it will not be taken into account
in determining any gain or loss, and instead will be reportable as ordinary
income.

MARKET DISCOUNT

Purchasers of Notes should be aware that they may be affected by the market
discount provisions of the Code. A purchase at a market discount includes a
purchase at or after the original issue at a price below the stated redemption
price at maturity. Those rules generally provide that, subject to a
statutorily-defined de minimis exception, if a holder of a debt instrument
purchases it at a market discount and later recognizes gain on a disposition of
the debt instrument (including a gift), the lesser of the gain (or appreciation,
in the case of a gift) or the portion of the market discount that accrued while
the debt instrument was held by the holder will be treated as ordinary interest
income at the time of the disposition.

The market discount rules also provide that a holder who acquires a debt
instrument at a market discount (and who does not elect to include the market
discount in income on a current basis) may be required to defer a portion of any
interest expense that may otherwise be deductible on any indebtedness incurred
or maintained to purchase or carry that debt instrument until the holder
disposes of the debt instrument in a taxable transaction.

The Notes provide that they may be redeemed, in whole or in part, before
maturity. If some or all of the Notes are redeemed in part, each holder of a
Note acquired at a market discount would be required to treat the principal
payment as ordinary interest income to the extent of any accrued market discount
on such Note.

A holder of a debt instrument acquired at a market discount may elect to
have market discount accrue on a constant interest rate basis (as opposed to a
straight line basis). In addition, a holder of a debt instrument acquired at a
market discount may elect to include the market discount in income as the
discount accrues, either on a straight line basis or, if elected, on a constant
interest rate basis. The current inclusion election, once made, applies to all
market discount obligations acquired by the holder on or after the first day of
the first taxable year to which the election applies, and may not be revoked
without the consent of the Service. If a Holder elects to include market
discount in income in accordance with the preceding sentence, the rules
described above concerning the recognition of ordinary income on a sale or
certain other dispositions of such a Note and the deferral of interest
deductions on indebtedness related to such a Note would not apply.

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<PAGE> 106

AMORTIZABLE BOND PREMIUM

Purchasers of Notes also should be aware that they may be affected by the
amortizable bond premium provisions of the Code. Generally, if the tax basis of
an obligation held as a capital asset exceeds the amount payable at maturity of
the obligation, the excess may constitute amortizable bond premium that the
holder may elect to amortize under the constant interest rate method and deduct
over the period from his or her acquisition date to the obligation's maturity
date. A Holder who elects to amortize bond premium must reduce his or her tax
basis in the related obligation by the amount of the aggregate deductions
allowable for amortizable bond premium.

In the case of a debt instrument, such as a Note, that may be called at a
premium prior to maturity, an earlier call date of the debt instrument is
treated as the maturity date of the debt instrument and the amount of bond
premium is determined by treating the amount payable on that call date as the
amount payable at maturity if the calculation produces a smaller amortizable
bond premium than the method described in the preceding paragraph. If a holder
of a debt instrument is required to amortize and deduct bond premium by
reference to a certain call date, the debt instrument will be treated as
maturing on that date for the amount payable and, if not redeemed on that date,
the debt instrument will be treated as reissued on that date for the amount so
payable. If a debt instrument purchased at a premium is redeemed prior to its
maturity, a purchaser who has elected to deduct bond premium may be permitted to
deduct any remaining unamortized bond premium as an ordinary loss in the taxable
year of redemption.

The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each potentially
affected Holder is urged to consult his or her tax advisor as to the
consequences of the treatment of any such premium as an offset to interest
income for federal income tax purposes.

The foregoing discussion of certain federal income tax consequences is for
general information only and is not tax advice. Accordingly, each purchaser of
Notes should consult his or her tax advisor with respect to the tax consequences
to him or her of the acquisition, ownership, conversion and disposition of the
Notes, including the applicability and effect of state, local, foreign and other
tax laws.

LEGAL MATTERS

Certain legal matters with respect to the Securities offered hereby will be
passed upon for Midcom by Heller Ehrman White & McAuliffe, Seattle, Washington.

EXPERTS

The Consolidated Financial Statements of Midcom at December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the Securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus regarding the contents of any

105
<PAGE> 107

contract or other document are not necessarily complete and in each instance
reference is hereby made to the copy of such contract to document filed as an
exhibit to the Registration Statement. Copies of the Registration Statement and
the exhibits and scheduled thereto may be inspected, without charge, at the
principal office of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, the New York Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, or obtained upon payment of prescribed rates from the Public
Reference Section of the Commission at its principal office in Washington, D.C.

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files periodic reports, proxy materials and
other information with the Commission. Such reports, proxy materials and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy materials and other information
may also be inspected at the National Association of Securities Dealers, Inc.,
at 1735 K Street, N.W. Washington, D.C. 20006. In addition, the Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

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(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 109

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994............................................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1996, 1995 and 1994................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994............................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE> 110

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Shareholders and Board of Directors
MIDCOM Communications Inc.

We have audited the accompanying consolidated balance sheets of MIDCOM
Communications Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. 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 audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MIDCOM
Communications Inc. at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and has a
shareholders' deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

/s/ ERNST & YOUNG LLP

Seattle, Washington
March 21, 1997

F-2
<PAGE> 111

MIDCOM COMMUNICATIONS INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 1,083 $ 30,962
Accounts receivable, less allowance for doubtful accounts of
$10,581 and $7,802 in 1995 and 1996, respectively.............. 51,814 16,969
Due from related parties.......................................... 502 --
Prepaid expenses and other current assets......................... 2,510 1,548
-------- ---------
Total current assets...................................... 55,909 49,479
Investments in and advances to joint venture...................... 2,000 --
Furniture, equipment and leasehold improvements, net.............. 13,719 11,045
Intangible assets, less accumulated amortization of $12,812 and
$39,532 in 1995 and 1996, respectively......................... 60,781 15,547
Other assets, net................................................. 922 3,852
-------- ---------
Total assets.............................................. $133,331 $ 79,923
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................. $ 6,624 $ 3,179
Carrier accounts payable.......................................... 32,534 17,143
Accrued expenses.................................................. 10,051 10,006
Notes payable..................................................... 14,576 9,680
Interest payable.................................................. 335 2,932
Current portion of long-term obligations.......................... 41,721 3,314
-------- ---------
Total current liabilities................................. 105,841 46,254
Long-term obligations, less current portion......................... 1,844 99,153
Other long-term liabilities......................................... 1,847 3,800
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.0001 par value, 10,000,000 shares authorized no
shares issued or outstanding................................... -- --
Common stock, $.0001 par value, 90,000,000 shares authorized,
15,128,829 and 15,803,242 shares issued and outstanding in 1995
and 1996, respectively......................................... 62,400 68,330
Deferred stock option compensation................................ (13) (1,707)
Accumulated deficit............................................... (38,588) (135,907)
-------- ---------
Total shareholders' equity (deficit)...................... 23,799 (69,284)
-------- ---------
Total liabilities and shareholders' equity (deficit)...... $133,331 $ 79,923
======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 112

MIDCOM COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenue................................................. $111,699 $203,554 $148,777
Cost of revenue......................................... 79,044 139,546 107,950
-------- -------- --------
32,655 64,008 40,827
Operating expenses:
Selling, general and administrative................... 27,697 62,061 65,025
Depreciation.......................................... 1,477 4,481 5,966
Amortization.......................................... 2,657 9,309 26,721
Restructuring charge.................................. -- -- 2,220
Contract settlement................................... -- -- 8,800
Loss on impairment of assets.......................... -- 11,830 20,765
-------- -------- --------
Total operating expenses................................ 31,831 87,681 129,497
-------- -------- --------
Operating income (loss)................................. 824 (23,673) (88,670)
Other income (expense):
Equity in loss of joint venture....................... (458) (52) --
Other income (expense)................................ (430) (338) 77
Interest expense...................................... (2,531) (5,288) (8,726)
Interest expense -- shareholders...................... (434) -- --
-------- -------- --------
Loss before extraordinary item.......................... (3,029) (29,351) (97,319)
Extraordinary item: loss on early redemption of debt.... -- (4,067) --
-------- -------- --------
Net loss................................................ $ (3,029) $(33,418) $(97,319)
======== ======== ========
Per share amounts:
Loss before extraordinary item.......................... $ (0.31) $ (2.42) $ (6.27)
Extraordinary item...................................... -- (0.34) --
-------- -------- --------
Net loss................................................ $ (0.31) $ (2.76) $ (6.27)
======== ======== ========
Shares used in calculating per share data............... 9,930 12,101 15,529
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 113

MIDCOM COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
TOTAL
DEFERRED SHAREHOLDERS'
NUMBER COMMON STOCK OPTION ACCUMULATED EQUITY
OF SHARES STOCK COMPENSATION DEFICIT (DEFICIT)
--------- ------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994............ 8,011 $ 502 $ (104) $ (6,963) $ (6,565)
Conversion from S corporation to C
corporation...................... -- (7,679) -- 7,679 --
Stock issued in acquisition......... 114 1,040 -- -- 1,040
Compensation attributable to stock
options vesting.................. -- -- 20 -- 20
Stock option forfeitures............ -- (54) 50 -- (4)
Issuance of common stock warrant.... -- 3,500 -- -- 3,500
Distributions by acquired company... -- -- -- (1,266) (1,266)
Net loss for the year............... -- -- -- (3,029) (3,029)
------ ------- ------- -------- --------
Balance at December 31, 1994.......... 8,125 (2,691) (34) (3,579) (6,304)
Issuance of compensatory stock
options.......................... -- 268 -- -- 268
Stock issued in acquisitions........ 500 4,757 -- -- 4,757
Compensation attributable to stock
options vesting.................. -- -- 21 -- 21
Stock issued in initial public
offering......................... 5,456 54,182 -- -- 54,182
Stock issued in customer base
acquisitions..................... 331 5,120 -- -- 5,120
Stock issued for exercise of stock
options and warrants and employee
stock purchase plan.............. 717 442 -- -- 442
Distributions by acquired company... -- -- -- (1,269) (1,269)
Conversion of acquired company from
S corporation to C corporation... -- 322 -- (322) --
Net loss for the year............... -- -- -- (33,418) (33,418)
------ ------- ------- -------- --------
Balance at December 31, 1995.......... 15,129 62,400 (13) (38,588) 23,799
Stock issued in acquisitions........ 107 933 -- -- 933
Stock issued for exercise of stock
options and employee stock
purchase plan.................... 567 2,861 -- -- 2,861
Issuance of compensatory stock
options.......................... -- 2,136 (2,136) -- --
Compensation attributable to stock
options vesting.................. -- -- 442 -- 442
Net loss for the year............... -- -- -- (97,319) (97,319)
------ ------- ------- -------- --------
Balance at December 31, 1996.......... 15,803 $68,330 $ (1,707) $(135,907) $ (69,284)
====== ======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 114

MIDCOM COMMUNICATIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in
operating activities:
Net loss.............................................. $ (3,029) $(33,418) $(97,319)
Depreciation.......................................... 1,477 4,481 5,966
Amortization of intangibles........................... 2,657 9,309 26,721
Amortization of deferred financing costs.............. 483 620 896
Loss on impairment of assets.......................... -- 11,830 20,765
Equity in loss of joint venture....................... 458 52 --
Compensation attributable to stock options............ 16 289 862
Noncompetition payments............................... (250) -- --
Loss on sale of assets................................ -- -- 53
Long-term portion of contract settlement.............. -- -- 3,800
Extraordinary item -- write-off of original issue
discount and deferred financing costs.............. -- 4,067 --
Changes in operating assets and liabilities:
Accounts receivable................................... (9,811) (17,784) 34,563
Due from related parties.............................. (606) 138 502
Notes receivable...................................... (348) 390 86
Prepaid expenses and other current assets............. (1,201) (719) 776
Other assets.......................................... 11 (142) (324)
Accounts payable and accrued expenses................. 4,062 (3,559) (4,295)
Carrier accounts payable.............................. 8,236 16,638 (15,391)
Accrued interest payable.............................. (869) 228 2,597
Deferred income....................................... (3,229) (67) --
Other long-term liabilities........................... (202) 1,717 150
-------- -------- --------
Net cash used in operating activities................... (2,145) (5,930) (19,592)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold
improvements.......................................... (4,187) (6,884) (4,309)
Net assets acquired in business and customer base
acquisitions.......................................... (5,089) (11,407) --
Proceeds from sale of assets............................ -- -- 692
Investment in and advances to joint venture............. (4,190) (2,625) --
Loan to related party................................... (1,234) -- --
-------- -------- --------
Net cash used in investing activities................... (14,700) (20,916) (3,617)
-------- -------- --------
FINANCING ACTIVITIES
Repayment of loans from related parties................. (3,617) -- --
Proceeds from notes payable............................. 3,485 -- 333
Repayment of notes payable.............................. (10,592) (21,628) (5,229)
Proceeds from long-term obligations..................... 34,350 69,205 112,743
Repayment of long-term obligations...................... (3,851) (64,841) (53,814)
Proceeds from common stock issued for stock purchase
plan and stock options................................ -- 442 2,861
Issuance of common stock................................ -- 54,182 --
Preferred stock redemption.............................. -- (8,597) --
Distributions to shareholders of acquired companies..... (1,266) (1,269) --
Deferred financing costs................................ (1,512) (525) (3,806)
-------- -------- --------
Net cash provided by financing activities............... 16,997 26,969 53,088
-------- -------- --------
Net increase in cash and cash equivalents............... 152 123 29,879
Cash and cash equivalents at the beginning of year...... 808 960 1,083
-------- -------- --------
Cash and cash equivalents at the end of year............ $ 960 $ 1,083 $ 30,962
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 115

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. NATURE OF OPERATIONS

MIDCOM Communications Inc. ("Midcom" or the "Company") provides long
distance voice and data telecommunications services. As primarily a
nonfacilities-based reseller, Midcom principally utilizes the network switching
and transport facilities of Tier I long distance carriers such as Sprint
Corporation ("Sprint"), WorldCom, Inc. ("WorldCom") and AT&T Corp. ("AT&T") to
provide a broad array of telecommunications services. Midcom's service offerings
include basic "1 plus" and "800" long distance service, frame relay data
transmission service, wireless service, dedicated private lines between customer
locations and enhanced telecommunications services such as facsimile broadcast
services and conference calling. The Company's customers are primarily small to
medium-sized commercial businesses.

Risks and Uncertainties

The Company is subject to certain significant risks and uncertainties that
may affect the amounts reported in the financial statements. These significant
risks and uncertainties include impairment of assets and litigation. Additional
information concerning these risks and uncertainties is included in the notes to
the consolidated financial statements.

Going Concern and Liquidity

The Company incurred operating losses during each of the three years ended
December 31, 1996 and, as of December 31, 1996, had a shareholders' deficit of
$69.3 million. The Company's credit facility at December 31, 1996 was terminated
on January 31, 1997. In February 1997, the Company entered into a new credit
facility with Foothill Capital Corporation (the "Foothill Credit Facility").
However, borrowings under the Foothill Credit Facility will not be available
until satisfaction of a number of conditions, which is expected to occur by May
1997. The consolidated financial statements have been prepared assuming the
Company will continue as a going concern and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets and liabilities that may result from this uncertainty.

Assuming borrowings become and remain available under the Foothill Credit
Facility and the Company achieves anticipated revenue growth, the Company
believes that its existing cash resources together with funds available under
the Foothill Credit Facility, leasing facilities and cash flow from operations
will be sufficient to fund the Company's expected working capital requirements.
However, the exact amount and timing of these working capital requirements and
the Company's ability to continue as a going concern will be determined by
numerous factors, including the level of, and gross margin on, future sales, the
outcome of outstanding contingencies and disputes such as pending lawsuits,
payment terms achieved by the Company and the timing of capital expenditures.
Furthermore, there can be no assurance that borrowings under the Foothill Credit
Facility will become and remain available or that this facility together with
the Company's other anticipated sources of working capital will be sufficient to
implement the Company's operating strategy or meet the Company's other working
capital requirements. If (i) the Company experiences greater than anticipated
capital requirements, (ii) the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any material claim against it, (iii)
the Company is unable to make borrowings under any of its credit facilities for
any reason, (iv) the implementation of the Company's operating strategy fails to
produce the anticipated revenue growth and cash flows or (v) additional working
capital is required for any other reason, the Company will be required to
refinance all or a portion of its existing debt or obtain additional equity or
debt financing. There can be no assurance that any such refinancing would be
possible or that the Company would be able to

F-7
<PAGE> 116

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

obtain additional equity or debt financing, if and when needed, on terms that
the Company finds acceptable. Any additional equity or debt financing may
involve substantial dilution to the interests of holders of the Company's debt
and equity securities.

If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it will be forced to curtail operations, dispose of assets or seek
extended payment terms from its vendors. There can be no assurance that the
Company would be able to reduce expenses or successfully complete other steps
necessary to continue as a going concern. Such events would materially and
adversely affect the value of the Company's debt and equity securities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of MIDCOM
Communications Inc. and its wholly-owned subsidiaries, PacNet Inc. ("PacNet"),
Cel-Tech International Corp. ("Cel-Tech"), AdVal, Inc. ("AdVal") and Advanced
Network Design ("AND") (collectively referred to as "Midcom" or the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation.

The Company's investment in Dal Telecom International ("Dal Telecom"), a
Russian corporate joint venture, was accounted for on the equity method,
adjusted to estimated fair value, in accordance with generally accepted
accounting principles. During 1995 and 1994, the Company recorded its pro rata
share of Dal Telecom's income or loss one month in arrears.

Cash and Cash Equivalents

All short-term investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents.

Revenue Recognition

Resale and transmission revenue and related costs are recognized in the
period the customer utilizes the Company's service. At December 31, 1995 and
1996, net unbilled resale revenue totaled $26,153 and $5,636, respectively.

Financial Instruments and Concentration of Credit Risk

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts and carrier accounts payable, notes payable and
long-term obligations. The fair value of the financial instruments, except
long-term obligations, approximates their recorded value based on the short-term
maturity of the instruments. The fair value of the long-term obligations
approximates their recorded value based on the current rates offered to the
Company for similar debt of the same maturities. The Company does not have
financial instruments with off-balance-sheet risk.

Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable. Concentration of credit
risk with respect to receivables are limited due to diversity in geographic
locations of customers as well as diversity of industries. The Company
continually evaluates the credit worthiness of its customers; however, it
generally does not require collateral. The Company's allowance for doubtful
accounts is based on historical trends, current market conditions and other
relevant factors.

F-8
<PAGE> 117

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Deferred Financing Costs

Financing costs are capitalized and amortized over the term of the related
debt on a straight-line basis which approximates the effective-interest method.
Included in other assets at December 31, 1995 and 1996 are deferred financing
costs of $510 and $3,419, respectively (net of accumulated amortization of $15
and $297, respectively).

Furniture, Equipment and Leasehold Improvements

Furniture, equipment and leasehold improvements are stated at cost.
Maintenance and repairs are expensed as incurred. When properties are retired or
otherwise disposed of, gains and losses are reflected in the consolidated
statement of operations. Depreciation and amortization, which includes
amortization of assets recorded under capital leases, are computed using the
straight-line method over the following useful lives:

<TABLE>
<S> <C>
Buildings and towers................................ 30 years
Transmission equipment.............................. 12 to 15 years
Data processing systems and equipment............... 3 to 5 years
Switches............................................ 5 to 7 years
Furniture, equipment and leasehold improvements..... 3 to 7 years
</TABLE>

Intangible Assets

Intangible assets represent the excess of the purchase price over the
estimated fair value of identifiable assets acquired in business and customer
base acquisitions. Amounts are allocated primarily to customer bases which are
amortized over three years using the straight-line method. Amounts are also
allocated to noncompete agreements and goodwill as applicable, which are
amortized using the straight-line method over terms ranging from 18 months to 25
years.

The Company periodically reviews the carrying value of its intangible
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash inflows
attributable to the asset, less estimated future cash outflows, is less than the
carrying amount, an impairment loss is recognized.

Net Loss Per Share

Net loss per share is based on the weighted average number of common and
equivalent shares outstanding using the treasury stock method. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect, except that pursuant to Securities and Exchange Commission
("SEC") requirements, for periods prior to the Company's initial public
offering, common and equivalent shares issued during the 12-month period prior
to the initial public offering have been included in the calculation as if they
were outstanding for all periods prior to the Company's initial public offering
using the treasury stock method.

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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.

F-9
<PAGE> 118

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Stock Based Compensation

In 1996, the Company adopted the Financial Accounting Standards Statement
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. It defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans and include the cost in the income statement as compensation
expense. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees. The Company has elected to account for compensation
cost for stock option plans in accordance with APB Opinion No. 25.

Reclassifications

Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.

3. CASH AND CASH EQUIVALENTS

The Company's cash and cash equivalents as of December 31 consist of the
following:

<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Cash.................................................... $1,083 $ 1,194
Commercial Paper........................................ -- 19,878
Money Market............................................ -- 9,890
------ -------
$1,083 $30,962
====== =======
</TABLE>

Due to the short-term nature of these investments, changes in market
interest rates would not have a significant impact on the fair value of these
securities. These securities are carried at amortized cost which approximates
fair value.

4. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Major classes of furniture, equipment and leasehold improvements, including
assets under capital leases, as of December 31 consist of the following:

<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Buildings and towers.................................. $ 787 $ 534
Transmission equipment................................ 3,747 3,842
Data processing systems and equipment................. 11,120 12,133
Switches.............................................. -- 141
Furniture, equipment and leasehold improvements....... 4,663 6,974
------- --------
20,317 23,624
Accumulated depreciation and amortization............. (6,598) (12,579)
------- --------
$13,719 $ 11,045
======= ========
</TABLE>

The gross amount of furniture, equipment and leasehold improvements
recorded under capital leases was $6,073 at December 31, 1995 and 1996.

F-10
<PAGE> 119

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Included in furniture, equipment and leasehold improvements are unamortized
development costs related to the Company's proprietary management information
system. This system was placed in service in May 1995 and is being amortized on
a straight-line basis. As a result of billing problems encountered after the
system was placed in service, the Company evaluated the system during the fourth
quarter of 1995 and determined that the system would require additional
enhancements to meet its initial design objectives and that its value had been
impaired. As a result, in 1995 the Company reduced the unamortized costs from
$4,471 to $2,000 and recorded a $2,471 loss on impairment of the asset.

In the fourth quarter of 1995, the Company determined that it intended to
replace certain limited capacity switches, the majority of which were acquired
through acquisitions of other telecommunications service providers, with newer
switches having increased functionality and capacity. As a result of this
decision, the Company wrote off these switches and in 1995 recorded a $2,544
loss on impairment of assets. In June 1996, the Company recorded a $1,000 loss
on impairment of microwave equipment.

5. INVESTMENT IN JOINT VENTURE

In December 1993, Midcom contracted to acquire a 50% interest in Dal
Telecom International ("Dal Telecom"), a provider of local, long distance,
international and cellular telecommunications services in the Russian Far East.
To acquire its interest in Dal Telecom, Midcom committed to make a capital
contribution of cash, equipment and services of approximately $12,700. As of
December 31, 1995, the Company had invested a total of $8,815 in the joint
venture but was unable to fund additional contributions. In March 1996, the
Company and the joint venture partner agreed to amend the terms of the joint
venture to provide that the Company had a 40% equity interest in the joint
venture.

The Company's commitment to Dal Telecom required significant amounts of
capital resources and management attention given the logistics of maintaining a
relationship in Russia. As a result, the Company decided that it was in its best
interests to focus on its domestic business and to sell its interest in Dal
Telecom. As a result of this decision, the Company wrote down its investment in
Dal Telecom to $2,000 at December 31, 1995, which was the Company's estimate of
the net recoverable value of its investment in Dal Telecom, and recorded a
$6,815 loss on impairment of the asset. This estimate was based on market
information currently available to the Company and certain assumptions about the
future operations of Dal Telecom, over which the Company had limited control.
The Company discontinued recording its share of the income or losses of Dal
Telecom as of December 31, 1995. During the third quarter of 1996, the remaining
investment of $2,000 was written off to loss on impairment of assets, as the
Company was unable to locate a purchaser for its interest.

6. BUSINESS COMBINATIONS

During 1994, 1995, and the first three months of 1996, the Company
completed a series of acquisitions from telecommunications companies offering
services similar or complementary to those offered by the Company. Certain of
these acquisitions included the purchase of substantially all of the operating
assets of the acquiree, including customer bases, and in other situations only
specific customer bases. These asset acquisitions have been accounted for using
the purchase method, with the excess of the purchase price over the net tangible
assets acquired being allocated to acquired customer bases, non-compete
agreements and goodwill. Revenue generated from the acquired customer bases are
included in the accompanying statements of operations from the dates of the
acquisitions.

F-11
<PAGE> 120

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The total consideration paid for these acquisitions was $89,769 of which
$74,735 was allocated to intangible assets. These acquisitions generally were
financed through borrowings under the Company's lines of credit, issuance of
debt and stock and assumption of liabilities.

Components of intangible assets at December 31, 1996 and their respective
estimated useful lives were as follows:

<TABLE>
<S> <C> <C>
Customer bases..................................... $49,986 3 years
Non-compete agreements............................. 3,527 2 to 4 years
Goodwill........................................... 1,566 25 years
-------
$55,079
=======
</TABLE>

Based on certain changes in circumstances that occurred in the first
quarter of 1996, including turnover in personnel, reduction in sales force and
continuing attrition of acquired customer bases, the Company determined that
effective January 1, 1996, a reduction in the estimated life of previously
acquired customer bases from 5 years to 3 years was appropriate. This reduction
in estimated life increased amortization expense by $10,260 for the year ended
December 31, 1996. In addition, the Company wrote down certain acquired customer
bases and recorded a loss on impairment of assets of $17,765 during 1996.

Substantially all of the Company's intangible assets consist of acquired
customer bases which are subject to attrition. The estimated useful lives of
these customer bases are based on attrition rates considered standard in the
industry. If the Company's actual attrition rates were to exceed these
estimates, or other unfavorable changes in business conditions were to occur,
the value of the related customer bases would be impaired and future operating
results would be adversely affected.

In connection with certain previous acquisitions, the Company was obligated
to issue or release from escrow additional shares of its common stock or pay
additional cash consideration upon the satisfaction of certain contingencies.
Such contingencies include, among other things, maintenance of specified revenue
levels and satisfaction of general representations and warranties. The
contingency periods range from six months to two years. During 1996, the Company
issued or released from escrow a total of 106,782 shares of common stock and
paid $1,154 in cash to partially satisfy these obligations. As of December 31,
1996, there were a total of 151,675 shares in escrow that may be released upon
the satisfaction of remaining contingencies.

In accordance with applicable accounting standards, the common stock or
other consideration issuable under the contingency arrangements has not been
included in the determination of purchase price, nor have the shares been
considered outstanding for purposes of net loss per share calculations.
Additional consideration will be recorded when the outcome of a contingency is
determined.

The Company is obligated in certain cases to issue additional shares of its
common stock in the event that the market price of such stock, when the shares
become registerable, is less than the price at the acquisition dates. In January
1997, the Company issued 49,233 shares of common stock in partial satisfaction
of these obligations. Based on the Company's stock price on March 21, 1997,
approximately 255,000 additional shares remain to be issued as a result of these
obligations.

7. NOTES PAYABLE

At December 31, 1996 and 1995, the Company had $680 in notes outstanding,
secured by a personal guarantee of the principal shareholder of the Company. The
notes are due upon 30-day

F-12
<PAGE> 121

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

demand, or no later than March 28, 1999. Interest on these notes is payable
monthly, at a rate of prime plus 2% (but in no event lower than 9% or greater
than 13%) per annum. Warrants to purchase up to a total of 59,500 shares of
Common Stock at an exercise price of $7.44 per share, subject to adjustments in
the exercise price related to dilutive activities, were granted to the holders
of the notes. The warrants expire on March 28, 1999.

In connection with a customer base purchase agreement, the Company had a
noninterest-bearing obligation totaling $12,000 as of December 31, 1995. The
unsecured obligation required monthly payments of $3,000 from January through
April 1996, payable in cash or common stock. The Company paid $3,000 to the
seller in January 1996 and has withheld the remaining payments pending
resolution of certain disputes with the seller. Based on the Company's stock
price on March 21, 1997, the Company would be required to issue approximately
986,000 shares of its common stock to satisfy this obligation.

At December 31, 1995, the Company had approximately $2,000 in additional
notes payable to sellers of certain customer bases. These notes bore interest at
rates up to 10% and were paid in full during 1996.

8. LONG-TERM OBLIGATIONS

Long-term obligations as of December 31 consisted of the following:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Convertible subordinated notes payable, maturing on August 15, 2003,
interest at 8 1/4%, interest payable semiannually, convertible into
common stock at the option of the holder at any time prior to
maturity........................................................... $ -- $ 97,743
Senior Revolving Credit Facility with Transamerica Business Credit
Corporation. Applicable interest rate on outstanding advances at
December 31, 1995 was 9%. This facility was secured by
substantially all of the Company's assets. The balance was repaid
in full in 1996.................................................... 37,428 --
Note payable secured by assets acquired, interest payable quarterly
at the prime rate plus 1%. Balance due in full September 30,
1998............................................................... 800 800
Note payable secured by certain property and equipment, interest at
5% to 15%, principal and interest payments due in monthly
installments through May 31, 1997.................................. 408 27
Capital Lease Obligations, interest at 5% to 14.3%, principal and
interest payments due in monthly installments through 2002......... 4,929 3,897
-------- -------
43,565 102,467
Less current portion................................................. 41,721 3,314
-------- -------
$ 1,844 $ 99,153
======== =======
</TABLE>

Principal maturities of long-term debt at December 31, 1996 are as follows:

<TABLE>
<S> <C>
1997..................................................... $ 3,314
1998..................................................... 976
1999..................................................... 142
2000..................................................... 144
2001..................................................... 148
Thereafter............................................... 97,743
--------
Total.................................................. $102,467
========
</TABLE>

F-13
<PAGE> 122

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

In August and September of 1996, the Company completed a private placement
(the "Private Placement") of $97,743 in aggregate principal amount of 8 1/4%
Convertible Subordinated Notes due 2003 (the "Notes"). Interest on the Notes is
due semi-annually, on February 15 and August 15 of each year, commencing
February 15, 1997. The Notes are convertible into shares of the Company's common
stock, at a conversion price of $14.0875 per share (equivalent to a conversion
rate of 70.985 share per $1,000 principal amount of Notes), subject to
adjustment in certain events.

In November 1995, the Company obtained a senior secured revolving credit
facility from Transamerica Business Credit Corporation ("Transamerica") and
certain other lenders (the "Transamerica Credit Facility") which provided for
borrowings of up to $50,000, subject to certain limitations and financial
covenants. The Company was not in compliance with some of these covenants as of
December 31, 1995. The Transamerica Credit Facility was further amended in March
1996 to reduce the overall commitment by the lender from $50,000 to $43,000. The
outstanding balance under the Transamerica Credit Facility was repaid in full in
August 1996 with the proceeds of the Private Placement, and the facility was
terminated on January 31, 1997.

On March 28, 1996, the Company obtained a temporary bridge loan of $15,000
from Transamerica. The bridge loan was secured by substantially all of the
Company's assets, bore interest at 12% and was originally due on April 27, 1996.
The Company paid an initial loan fee of $500 and had the right to extend the due
date of the loan for 30-day periods upon payment of an additional fee of $200
for each 30-day extension, with final payment due by September 24, 1996. This
bridge loan was repaid in August 1996.

The Company recorded an extraordinary item in the third and fourth quarters
of 1995 of $2,992 and $1,075, respectively, related to the write off of original
issue discounts and deferred financing costs.

9. PREFERRED STOCK

During 1994, the Company issued 859,653 shares of Series A Redeemable
Preferred Stock (the "Preferred Stock") to retire shareholder notes payable. The
preferred stock was redeemed at $10 per share in July 1995 with proceeds from
the Company's initial public offering.

10. COMMON STOCK

On July 6, 1995, the Company completed the initial public offering of
shares of its common stock at $11.00 per share, which resulted in net proceeds
of approximately $54,182 to the Company after deducting the expenses of the
offering. The net proceeds were used to repay indebtedness and redeem all of the
outstanding shares of Preferred Stock.

At December 31, 1996, common stock was reserved for the following:

<TABLE>
<S> <C>
Conversion of the Notes......................................... 6,938,279
Exercise and future grant of stock options...................... 4,108,816
Employee stock purchase plan.................................... 256,354
Exercise of outstanding warrants................................ 59,500
----------
Total common stock reserved........................... 11,362,949
==========
</TABLE>

F-14
<PAGE> 123

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

11. STOCK OPTION PLAN

The Company has a stock option plan which provides for the granting of
nonqualified and incentive stock options to purchase up to 4,739,063 shares of
common stock. Options granted become exercisable over vesting periods of up to
five years at exercise prices determined by the Board of Directors, and
generally expire ten years from the date of grant.

Stock options have generally been granted at the fair market value at the
date of grant. However, a limited number of options have been granted at less
than the fair market value, in which case compensation expense has been
recognized over the vesting period based on the excess of the fair market value
stock at the date of grant over the exercise price.

Presented below is a summary of stock option plans activity for the years
shown:

<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
-------- --------------
<S> <C> <C>
Options outstanding at January 1, 1994.......... 484,805 $2.29 - $5.71
Granted....................................... 663,139 $2.29 - $9.14
Canceled...................................... (117,460) $2.29 - $9.14
--------- --------------
Options outstanding at December 31, 1994........ 1,030,484 $2.29 - $9.14
Granted....................................... 740,954 $1.00 - $18.50
Canceled...................................... (365,619) $2.29 - $15.75
Exercises..................................... (66,333) $2.29 - $18.50
--------- --------------
Options outstanding at December 31, 1995........ 1,339,486 $1.00 - $18.50
Granted....................................... 3,545,009 $3.00 - $15.50
Canceled...................................... (637,202) $2.29 - $18.50
Exercises..................................... (563,914) $1.00 - $10.50
--------- --------------
Options outstanding at December 31, 1996........ 3,683,379 $2.29 - $18.50
========= ==============
</TABLE>

At December 31, 1996, a total of 425,437 shares were available for future
issuance under the plans.

The following table summarizes information for options currently
outstanding and exercisable at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 2.29 - $ 6.50... 128,215 8.8 $ 3.69 89,000 $ 3.50
$ 6.51 - $12.00... 3,316,815 9.5 $ 8.85 228,532 $ 9.70
$12.01 - $18.50... 238,349 8.5 $15.69 57,250 $16.96
--------- -------
3,683,379 374,782
--------- -------
</TABLE>

The Company applies APB 25 in accounting for its stock issued to employees.
Had compensation cost for the Company's stock options been recognized based upon
the fair value on the grant date under the methodology prescribed by SFAS 123,
the Company's net loss and net loss per share for the years ended December 31,
1995 and 1996 would have been impacted as indicated in the following table. Note
that due to the adoption methodology prescribed by SFAS 123, the proforma
results shown below only reflect the impact of options granted in 1995 and 1996.
Since

F-15
<PAGE> 124

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

option vesting occurs over five years, the proforma impact shown for 1995 and
1996 is not representative of what the impact will be in future years.

<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Net loss -- as reported............................. $(33,418) $ (97,319)
Net loss -- proforma................................ $(34,066) $(101,549)
Loss per share -- as reported....................... $ (2.76) $ (6.27)
Loss per share -- proforma.......................... $ (2.82) $ (6.54)
</TABLE>

This fair value of options granted (which is amortized to expense over the
option vesting period in determining the proforma impact), is estimated on the
date of grant using the Black Scholes option-pricing model with the following
weighted average assumptions used for grants in 1995 and 1996:

Expected life of option........................................... 3 1/2 yrs
Risk free interest rate........................................... 6.5%
Expected volatility............................................... 60.0%
Dividend yield.................................................... --
</TABLE>

The weighted average fair value of options granted during 1996 and 1995 is
as follows:

<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Fair value of each option granted.................... $7.02 $4.16
Total number of options granted...................... 740,954 3,545,009
Total fair value of all options granted.............. $5,201 $14,747
</TABLE>

In accordance with SFAS 123, the weighted average fair value of stock
options granted is required to be based on a theoretical statistical model using
the preceding Black-Scholes assumptions. In actuality, because company stock
options do not trade on a secondary exchange, employees can receive no value nor
derive any benefit from holding stock options under these plans without an
increase in the market price of Midcom stock. Such an increase in stock price
would benefit all stockholders commensurably.

F-16
<PAGE> 125

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

12. INCOME TAXES

Components of the Company's deferred tax liabilities and assets as of
December 31 are as follows:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Sales reserves and allowances..................... $ 1,326 $ 2,248
Accrued compensation costs........................ -- 322
Provisions not currently deductible............... 376 1,829
Accrued restructuring costs....................... -- 373
Contract settlement............................... -- 1,520
Tax depreciation different than financial
accounting depreciation........................ -- 1,455
Intangible tax amortization different than
financial statement amortization............... 1,832 17,560
Losses and write-down of foreign joint venture.... 3,022 3,769
Net operating loss carry forwards................. 7,648 24,817
-------- --------
Total deferred tax assets......................... 14,204 53,893
Valuation allowance................................. (13,017) (53,502)
-------- --------
Net deferred tax assets............................. $ 1,187 $ 391
-------- --------
Deferred tax liabilities:
Tax depreciation different than financial
accounting depreciation........................ (424) --
Cash to accrual change............................ (763) (391)
-------- --------
Total deferred tax liabilities.................... (1,187) (391)
-------- --------
Net deferred tax liabilities........................ $ -- $ --
======== ========
</TABLE>

On January 1, 1994, when the Company became a C Corporation, a valuation
allowance on deferred tax assets was not required due to the net deferred tax
liability position. At December 31, 1994, the valuation allowance of $316 was
established for the deferred tax assets in excess of deferred tax liabilities.
The valuation allowance was increased $13,333 and $40,485 in 1995 and 1996,
respectively.

The Company has net operating loss carry forwards for federal income tax
purposes available to offset future federal taxable income, if any, of
approximately $60,042 with the following expirations: $4,536 in 2009, $8,770 in
2010 and $46,736 in 2011.

F-17
<PAGE> 126

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The provisions for income taxes differ from the "expected" income tax
benefit as follows for the years ended December 31:

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Computed expected federal tax benefit............... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit................. (6.0)% (6.0)% (6.0)%
Deferred taxes associated with Midcom S Corporation
to C Corporation conversion, January 1, 1994...... 6.8% -- --
Deferred tax asset realization related to
acquisitions...................................... 16.8% -- --
Change in valuation allowance for net deferred tax
assets............................................ 10.4% 38.0% 39.8%
Other............................................... 6.0% 2.0% 0.2%
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>

13. RELATED-PARTY TRANSACTIONS

The largest shareholder of the Company and the Company's former President
and Chief Executive Officer jointly own QuestWest Inc. QuestWest Inc., in turn,
holds approximately an 85% interest in Quest America Limited Partnership ("Quest
LP"). In December 1993, the Company entered into a distribution agreement with
Quest LP that entitles Quest LP to a sales commission from the Company at a rate
equal to the most favorable rate available to other comparable Company
distributors. In October 1995 the largest shareholder sold their interest in
Quest LP to a third party and the most favorable rate clause in the distribution
agreement was eliminated. During 1995 and 1994, Quest LP received $295 and $66,
respectively, in net commissions.

Effective May 1996, the Company entered into an employment agreement with
William H. Oberlin, the Company's President and Chief Executive Officer. The
agreement provides for a base salary of $25 per month and an annual bonus to be
determined each year by the Company's Board of Directors based on certain
quantitative and qualitative targets set forth in the Company's annual business
plan. In connection with entering into the agreement, the Company granted Mr.
Oberlin options to purchase up to 1,214,714 shares of Common Stock pursuant to
the Company's Stock Option Plan. The options vest ratably over a five-year
period. Mr. Oberlin is entitled to up to two years severance (reduced to one
year severance in certain circumstances) in the event of termination. Severance
generally equals the sum of the annualized base salary at the time of
termination and the average annual bonuses for the fiscal years preceding
termination. The agreement also contains a non-interference provision pursuant
to which, for a period of six months following termination of employment, Mr.
Oberlin has agreed to, among other things, preserve the confidentiality of the
Company's customer list and refrain from actively soliciting the Company's
customers existing at the date of termination.

Effective May 1996, the Company entered into consulting agreements with
Marvin C. Moses and John M. Zrno, each a director of the Company, pursuant to
which Messrs. Moses and Zrno have agreed to provide consulting services to the
Company with respect to acquisitions, investor and other strategic relations and
strategic financial matters. Pursuant to the agreements, the Company is required
to pay each of these individuals a retainer of $8.333 per month. In addition, in
connection with the agreements, the Company has granted to each of these
individuals options for the purchase of 253,681 shares of Common Stock pursuant
to the Company's Stock Option Plan. The options vest ratably over a five-year
period. The agreements terminate after a period of five

F-18
<PAGE> 127

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

years beginning on June 1, 1996, unless terminated earlier in accordance with
the terms thereof. The agreements may be terminated by either party at any time
upon 30 days prior written notice.

In June 1994, the Company entered into an employment agreement with Ashok
Rao, the former President and Chief Executive Officer of the Company. The
agreement provided for a base salary of $25 per month. Mr. Rao resigned from the
Company in April 1996. In connection with Mr. Rao's resignation, the Company has
elected to repurchase 885,360 shares of Common Stock held by Mr. Rao and certain
trusts established by Mr. Rao (the "Rao Shares"). See Note 15, below. Under an
agreement between Mr. Rao and Paul Pfleger, Vice Chairman of the Company's Board
of Directors, pursuant to which Mr. Rao purchased the Rao Shares from Mr.
Pfleger, Mr. Pfleger is entitled to receive payments aggregating approximately
$2.2 million out of proceeds received by Mr. Rao from the sale of the Rao Shares
to the Company.

14. EMPLOYEE BENEFIT PLANS

401(k) Salary Deferral and Profit Sharing Plan

Prior to February 1, 1996, the Company maintained a 401(k) Salary Deferral
and Profit Sharing Plan with its affiliate SP Investments Inc. ("SPII").
Effective February 1, 1996, SPII withdrew from the Retirement Plan. The Company
maintains a voluntary defined contribution profit sharing plans covering all
eligible employees as defined in the plan documents. Participating employees may
elect to defer and contribute a stated percentage of their compensation to the
plan, not to exceed the dollar amount set by law. The Company matches 50% of
each employee's contribution up to a maximum of the first 6% of each employee's
compensation.

The Company's matching contributions to the plan were approximately $156,
$253, and $283 for the years ended December 31, 1994, 1995 and 1996,
respectively.

Employee Stock Purchase Plan

In December 1994, the Company established an Employee Stock Purchase Plan
which became effective upon the successful completion of the Company's initial
public offering of common stock. The Company's plan provides that eligible
employees may contribute up to 10% of their base earnings toward the semi-annual
purchase of the Company's common stock. The employee's purchase price is 95% of
the lesser of the fair market value of the stock on the first business day or
the last business day of the semi-annual offering period. The total number of
shares issuable under the plan is 262,500. There were 3,717 shares issued under
the plan during fiscal 1996 at prices ranging from $8.08 to $13.66, and 2,429
shares issued under the plan during fiscal 1995 at a price of $14.61.

15. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its office space and certain equipment under terms of
noncancelable operating leases, which expire on various dates through 2004. The
leases generally require that the Company pay certain maintenance, insurance and
other operating expenses. Rent expense under operating leases for the years
ended December 31, 1994, 1995 and 1996 was $566, $2,535, and $3,281,
respectively.

F-19
<PAGE> 128

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

At December 31, 1996, minimum future lease payments under noncancelable
operating leases are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1997...................................... $ 3,092
1998...................................... 2,797
1999...................................... 2,521
2000...................................... 2,271
2001...................................... 1,765
Thereafter................................ 3,340
-------
Total........................... $15,786
=======
</TABLE>

Commitments with Providers

Under the terms of carrier contracts executed with AT&T and other carriers,
the Company has made commitments to maintain or achieve certain volume levels in
order to obtain special forward pricing. Under some of these contracts, the
Company guarantees to sell a certain amount of long distance volume within a
certain time period or purchase all or a portion of any unused volume. Under
others, if certain volume levels are not achieved during stated periods, pricing
is adjusted going forward to levels justified by current volumes.

At December 31, 1996, minimum future usage commitments are as follows:

<TABLE>
<S> <C>
1997..................................... $ 26,790
1998..................................... 3,287
1999..................................... --
2000..................................... 75,000
--------
Total.......................... $105,077
========
</TABLE>

As of September 30, 1996, Midcom's minimum volume commitment under its
supply contract with AT&T Corp. ("AT&T"), its largest supply contract, was
$117,000. The Company estimated that, as of the last measurement date on
September 30, 1996, it would have been in shortfall of its minimum commitments
to AT&T by approximately $27,600 based on then current contract requirements.
However, on October 31, 1996, the Company and AT&T executed a Release and
Settlement Agreement pursuant to which substantially all disputes between the
Company and AT&T have been resolved. Also on October 31, 1996, the Company and
AT&T executed a new carrier contract pursuant to which the Company's minimum
commitment to AT&T was reduced to $13,700 to be used over the eighteen month
period immediately following execution of the agreement. In addition, the new
carrier contract provides for more favorable pricing for certain network
services provided by AT&T. In consideration for the terms of the settlement and
the new rate structure, the Company is required to pay AT&T $8,800 payable in
two installments. The first payment of $5,000 was made on November 6, 1996, and
the remaining balance of $3,800 will be due within 30 days of Midcom announcing
quarterly gross revenue in excess of $75,000 or upon completion of a change in
control.

At the present time, the Company has achieved or reserved for all of its
required volume commitments. There can be no assurance that the minimum usage
commitments will be achieved in the future, and if such commitments are not
achieved future operating results could be adversely affected.

F-20
<PAGE> 129

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

During the years ended December 31, 1994, 1995 and 1996, the Company relied
on three carriers to carry traffic representing approximately 97%, 67% and 74%
of the Company's revenue, respectively. The Company has the ability to transfer
its customers' traffic from one supplier to another in the event a supplier
declines to continue to carry the Company's traffic. However, such transfers
could result in disruption of service to the customers, with a subsequent loss
of revenue which would adversely affect operating results.

ACQUISITIONS

In connection with several business or customer base acquisition
agreements, the Company is obligated to issue additional consideration upon the
satisfaction of certain contingencies.

SHARE REDEMPTION

In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company has elected to repurchase
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao (the "Rao Shares") at a price equal to the fair market value of the Rao
Shares on the date of Mr. Rao's resignation. The date of resignation and the
amount of the restricted security discount to be applied to the value of the Rao
Shares have been submitted to arbitration. Once determined, the purchase price
is to be paid by the Company in 36 equal monthly installments and will bear
interest at a rate of 8% per annum.

REGULATION

Federal

The Company has all necessary authority to provide domestic interstate and
international telecommunications services under current FCC regulations. Midcom
has filed both domestic and international tariffs with the FCC, and PacNet has,
and is only required to file, international tariffs. Pursuant to a 1995 court
decision, detailed rate schedules now must be filed in lieu of the "reasonable
range of rates" tariff previously accepted by the FCC. In reliance on the FCC's
past practice of allowing relaxed range of rates tariffs for non- dominant
carriers, Midcom and most of its competitors did not maintain detailed rate
schedules. Until the two-year statute of limitations expires, Midcom could be
held liable for damages for its failure to maintain detailed rate schedules,
although it believes that such an outcome is highly unlikely and would not have
a material adverse effect on it. Pursuant to authority granted to it in the 1996
Telecommunications Act, the FCC is considering "mandatory detariffing" for
domestic non-dominant carriers. This proposal (which has been stayed by an order
of the federal district court in Washington, D.C.) would relieve the Company of
its obligation to file tariffs applicable to its domestic interexchange
offerings.

State

The intrastate long distance operations of Midcom are also subject to
various state laws. The majority of states require certification or
registration, which the Company has secured in 47 states and Washington, D.C.
Many states require tariff filings as well.

In certain states, approval for transfers of control and acquisitions of
customer bases must be obtained. Midcom has been successful in obtaining all
necessary regulatory approvals to date, although revisions of tariffs,
authorities and approvals are being made on a continuing basis, and many such
requests are pending at any one time.

F-21
<PAGE> 130

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Some states may assess penalties on long distance service providers for
traffic sold prior to tariff approval or the state's consent to an acquisition.
Such states may require refunds to be made to customers. It is the opinion of
management that such penalties and refunds, if any, would not have a material
adverse effect on the results of operations or financial condition of the
Company.

DISPUTES AND LITIGATION

Class Action Lawsuit. The Company, its Vice Chairman of the Board of
Directors and largest shareholder, the Company's former President, Chief
Executive Officer and director, and the Company's former Chief Financial Officer
are named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint was
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. In November 1996, the Court
granted the defendants' motion to dismiss the amended Complaint. The Amended
Complaint alleges, among other things, that the registration statement and
prospectus relating to the Company's initial public offering contained false and
misleading statements concerning the Company's billing software and financial
condition. The Amended Complaint further alleges that, throughout the Class
Period, the defendants inflated the price of the Common Stock by intentionally
or recklessly making material misrepresentations or omissions which deceived the
public about the Company's financial condition and prospects. The Amended
Complaint alleges claims under the Securities Act and the Exchange Act as well
as various state laws, and seeks damages in an unstated amount. Defendants filed
a motion to dismiss on August 7, 1996 and filed a reply to plaintiffs'
opposition on September 18, 1996. Oral arguments were heard on November 1, 1996.
All discovery proceedings are stayed until defendants' motion to dismiss is
acted on by the Court. While the Company believes that it has substantive
defenses to the claims in the Amended Complaint and intends to vigorously defend
this lawsuit, it is unable to predict the outcome of this action.

SEC Investigation. The Company was informed in May 1996 that the SEC was
conducting an informal inquiry regarding the Company. The Company has
voluntarily provided the documents requested by the Commission. In addition, the
SEC has requested the Company's cooperation in interviewing certain current and
former Company personnel and the Company is in the process of scheduling such
interviews. However, the Company has not been informed whether or not the SEC
intends to commence a formal action against the Company or any of its
affiliates. The Company is, therefore, unable to predict the ultimate outcome of
the investigation. In the event that the SEC elects to initiate a formal
enforcement proceeding, the Company and certain of its current and/or former
officers could be subject to civil or criminal sanctions including monetary
penalties and injunctive measures. Any such enforcement proceeding could have a
material adverse effect on the Company's business, financial condition and
results of operations.

F-22
<PAGE> 131

MIDCOM COMMUNICATIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Noncash investing and financing activities:
Application of related-party accounts receivable to
related-party accounts payable.................... $1,234 $ -- $ --
Conversion of amounts due to related parties to
redeemable preferred stock........................ 8,597 -- --
Issuance of notes payable and assumption of
liabilities for acquisitions of customer bases.... 5,154 42,591 459
Capital lease obligation for equipment............... 2,207 1,892 --
Issuance of notes payable for equipment.............. -- 310 --
Issuance of common stock warrants in connection with
financing......................................... 3,500 -- --
Issuance of common stock for acquisitions............ 1,040 9,877 513
Issuance of note payable for settlement of carrier
accounts payable.................................. -- 3,500 3,800
Cash paid for interest................................. 1,453 4,128 5,074
Cash paid for income taxes............................. 131 25 --
</TABLE>

17. RESTRUCTURING CHARGE

In March and April 1996, the Company made announcements regarding changes
in senior management and the restructuring of its operations in order to reduce
expenses to the level of available capital. These actions included the layoff of
certain employees and contractors and the closure of 6 sales offices. As a
result, the Company recorded a charge of $1,620 during the first quarter 1996
and $600 during the second quarter of 1996, the components of which relate
primarily to severance and lease cancellation charges. Included in the first
quarter restructuring charge is approximately $420 relating to the extension of
the time period to exercise outstanding stock options. As of December 31, 1996,
$807 of this restructuring charge remained in accrued liabilities.

18. SUBSEQUENT EVENTS

In February 1997, the Company entered into an agreement with Foothill
Capital Corporation for a revolving credit facility. Under the terms of the
agreement, the Company will be able to borrow up to $30,000, subject to a
borrowing base limitation of 85% of eligible billed and 75% of eligible unbilled
receivables. Borrowings under this agreement will bear interest at a prime rate,
plus one percent, and will be secured by substantially all of the assets of the
Company. Pursuant to the agreement, the Company is required to maintain minimum
levels of adjusted net worth and is subject to a number of negative covenants
which place limitations on, among other things, capital expenditures,
investments and additional debt. Other covenants preclude payment of cash
dividends and require the Company to obtain the lenders' consent prior to making
any acquisitions. Borrowings under the agreement will not be available until
satisfaction of a number of conditions, consisting primarily of final
documentation of security arrangements, which is expected to occur by May 1997.

On February 18, 1997, the Company announced that it had awarded a supply
agreement to Northern Telecom ("Nortel") for the acquisition of a total of six
DMS-250 and DMS-500 local/long distance switching systems. Scheduled for
completion by mid-1997, the network will handle local, long distance and value
added services. The Company also announced that it had entered into a master
lease agreement with Comdisco, Inc. ("Comdisco"), to provide financing for the
Nortel switches. The initial financing is approximately $13,000. In March 1997,
a warrant for the purchase of up to 117,000 shares of the Company's common stock
was granted to Comdisco in connection with this financing arrangement.

F-23
<PAGE> 132

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY THE NOTES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Forward-looking Statements and
the Private Securities Litigation
Reform Act......................... 10
Risk Factors......................... 11
Use of Proceeds...................... 25
Trading Market for Securities........ 25
Dividend Policy...................... 25
Capitalization....................... 26
Selected Consolidated Financial
and Operating Data................. 27
Management's Discussion and Analysis
of Financial Condition
and Results of Operations.......... 29
Business............................. 40
Management........................... 63
Selling Securityholders.............. 72
Principal Shareholders............... 74
Certain Transactions................. 76
Description of Notes................. 78
Description of Capital Stock......... 94
Shares Eligible for Future Sale...... 99
Plan of Distribution................. 101
Certain Federal Income Tax
Consequences....................... 103
Legal Matters........................ 105
Experts.............................. 105
Available Information................ 105
Index to Financial Statements........ F-1
</TABLE>

======================================================

$97,743,000

MIDCOM
COMMUNICATIONS INC.

8 1/4% CONVERTIBLE SUBORDINATED

NOTES DUE 2003
(INTEREST PAYABLE FEBRUARY 15 AND AUGUST 15)
------------------------

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

APRIL 7, 1997

======================================================
<PAGE> 133

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the issuance and distribution of the securities being registered. All the
amounts shown are estimated, except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market(R) listing
fee.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................... $ 33,704.48
NASD Filing Fee....................................................... 0
Nasdaq National Market(R) Listing Fee................................. 0
Blue Sky Fees and Expenses (includes fees and expenses of counsel).... 5,000
Transfer Agent and Registrar Fees..................................... 0
Accounting Fees and Expenses.......................................... 10,000
Legal Fees and Expenses............................................... 90,000
Printing, Engraving and Delivery Expenses............................. 50,000
Insurance Coverage Acquired for the Offering.......................... 0
Miscellaneous......................................................... 5,000
----------
Total....................................................... $193,704.48
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its directors,
officers, employees and agents against certain liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), provided they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation. The Registrant's Bylaws (Exhibit 3.2 hereto) require the Registrant
to indemnify its officers and directors to the fullest extent permitted by
Washington law.

Section 23B.08.320 of the WBCA authorizes a corporation to limit or
eliminate its directors' liability to the corporation or its shareholders for
monetary damages for breaches of fiduciary duties, other than for (1) acts or
omissions that involve intentional misconduct or a knowing violation of law, (2)
improper declaration of dividends, or (3) transactions from which a director
derives an improper personal benefit. The Registrant's Amended and Restated
Articles of Incorporation (Exhibit 3.1 hereto) contain provisions limiting the
liability of the directors to the Registrant and to its shareholders to the
fullest extent permitted by Washington law.

The above discussion of the WBCA and the Registrant's Bylaws and Amended
and Restated Articles of Incorporation is not intended to be exhaustive and is
qualified in its entirety by such statute, the Bylaws and the Amended and
Restated Articles of Incorporation, respectively.

The Registrant maintains officers' and directors' liability insurance on
its directors and officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On March 13, 1997, the Company issued to Comdisco Inc. a warrant to
purchase 117,000 shares of Common Stock, at an exercise price of $10 per share,
in connection with a capital lease financing arrangement. The Company believes
that the issuance of this warrant was exempt from registration by virtue of
Section 4(2) of the Securities Act as a transaction not involving a public

II-1
<PAGE> 134

offering. The Company has committed to register the shares of Common Stock
issuable upon exercise of the warrant under the Securities Act under certain
circumstances.

On August 22, 1996 and September 6, 1996, the Company completed sales of
$97,743,000 in aggregate principal amount of 8 1/4% Convertible Subordinate
Notes due 2003 (the "Notes"). PaineWebber Incorporated and Wheat, First
Securities, Inc. acted as the Initial Purchasers and resold the notes to
qualified institutional buyers pursuant to Rule 144A promulgated under the
Securities Act, to accredited investors under Regulation D promulgated under the
Securities Act, and to non-U.S. persons pursuant to Regulation S promulgated
under the Securities Act. The Company believes these transactions are exempt
from registration pursuant to Rule 144A, Regulation D and Regulation S
promulgated under Securities Act as transactions not involving a public
offering. The Company filed a Form D and an Amended Form D to perfect an
exemption from registration under Rule 506, as promulgated under Section 4(2) of
the Securities Act, with respect to the sales of the notes to the Initial
Purchasers. The Company has committed to register the Notes, and the shares of
the Company's common stock issuable upon conversion of the Notes (the
"Conversion Shares"), for public offer and sale under the Securities Act. The
Notes and the Conversion Shares are included in this Registration Statement.

On December 29, 1995, the Company issued to David Wiegand 453,240 shares of
Common Stock valued at $18.25 per share in connection with the acquisition of
ADNET Telemanagement, Inc. The Company believes that the issuance of the shares
was exempt from the registration by virtue of Section 4(2) of the Securities Act
as a transaction not involving a public offering. The Company has committed to
register these shares under the Securities Act under certain circumstances.

On November 6, 1995, the Company issued to the shareholders of Fairfield
County Telephone Corporation ("Fairfield") 98,762 shares of Common Stock valued
at $18.25 per share, including 24,691 shares that were deposited into escrow and
are subject to possible redemption by the Company in exchange for all of the
outstanding capital stock of Fairfield. In January 1997, the Company issued a
total of 38,711 additional shares of Common Stock to the foregoing individuals,
on a pro rata basis, as required by the acquisition documents to compensate for
the decrease in value of the Common Stock since the closing of the acquisition.
The Company believes that the issuance of these shares was exempt from the
registration by virtue of Section 4(2) of the Securities Act as a transaction
not involving a public offering. The Company has committed to register these
shares under the Securities Act under certain circumstances.

In September 1995, the Company issued to GE Capital Communications
Services, Inc. ("GE Capital") a warrant to purchase shares of Common Stock with
an aggregate value of $2,000,000 plus additional consideration in exchange for a
portion of GE Capital's customer base. The Company believes that the issuance of
the warrant was exempt from the registration by virtue of Section 4(2) of the
Securities Act as a transaction not involving a public offering. The warrant
expired upon repayment in full of the note payable to GE Capital in the third
quarter of 1996.

On September 29, 1995, the Company issued to the shareholders of AdVal,
Inc. ("Adval") 250,000 shares of Common Stock valued at $15.25 per share in
exchange for all of the outstanding capital stock of Adval. The Company believes
that the issuance of these shares was exempt from the registration by virtue of
Section 4(2) of the Securities Act as a transaction not involving a public
offering. The Company has committed to register these shares under the
Securities Act under certain circumstances.

On September 1, 1995, the Company issued to Cherry Communications
Incorporated ("Cherry Communications") 317,460 shares of Common Stock valued at
$15.75 per share plus additional consideration in exchange for certain assets of
Cherry Communications. The Company believes that the issuance of these shares
was exempt from the registration by virtue of Section 4(2) of the Securities Act
as a transaction not involving a public offering. The Company has committed to
register these shares under the Securities Act under certain circumstances.

II-2
<PAGE> 135

On August 31, 1995, the Company issued to Communications Services of
America, Inc. ("CSA") 20,893 shares of Common Stock valued at $15.25 per share
plus additional consideration in exchange for the customer base of CSA. In
January 1997, the Company issued a total of 10,522 additional shares of Common
Stock to an affiliate of CSA as required by the acquisition documents to
compensate for the decrease in value of the Common Stock since the closing of
the acquisition. The Company believes that the issuance of these shares was
exempt from the registration by virtue of Section 4(2) of the Securities Act as
a transaction not involving a public offering. The Company has committed to
register these shares under the Securities Act under certain circumstances.

On August 19, 1995, the Company issued to the sole shareholder of Cel-Tech
International Corp. ("Cel-Tech") 141,935 shares of Common Stock valued at $16.25
per share in exchange for all of Cel-Tech's outstanding capital stock. In March
1997, the Company issued an additional 9,457 shares of Common Stock pursuant to
a Settlement Agreement and Release dated March 18, 1997. The Company believes
that the issuances of these shares were exempt from the registration by virtue
of Section 4(2) of the Securities Act as a transaction not involving a public
offering. The Company has committed to register these shares under the
Securities Act under certain circumstances.

Effective April 1, 1995, in connection with amendments to certain
non-competition agreements between the Company and the former shareholders of
Telnet Communications Inc., the Company issued to such shareholders warrants to
purchase an aggregate of 59,500 shares of Common Stock exercisable for $7.44 per
share. The Company believes that the issuance of these warrants was exempt from
registration by virtue of Section 4(2) of the Securities Act as transactions not
involving a public offering. The Company has committed to register the shares
issuable upon exercise of the warrants (but not the warrants) under the
Securities Act under certain circumstances.

On January 20, 1995, the Company issued to Communique Telecommunications,
Inc. ("Communique") 371,875 shares of Common Stock valued at $9.14 per share
plus additional consideration in exchange for certain assets of Communique. The
Company believes that the issuance of these shares was exempt from the
registration by virtue of Section 4(2) of the Securities Act as a transaction
not involving a public offering.

In December 1994, the Company issued to the former shareholder of PacNet,
Inc. ("PacNet") 130,000 shares of Common Stock (113,750 shares after giving
effect to the Company's reverse stock split in April 1995) valued at $11.43 per
share plus additional consideration in exchange for all of PacNet's outstanding
shares of capital stock. In addition, the Company issued to this person an
option to purchase 60,000 shares of Common Stock (54,750 shares after giving
effect to the Company's reverse stock split in April 1995) at an exercise price
of $5.71 per share. The Company believes that the issuance of these shares and
the option were exempt from registration by virtue of Section 4(2) of the
Securities Act as a transaction not involving a public offering. The Company has
committed to register the shares (but not the options or the shares issuable
upon exercise thereof) under the Securities Act under certain circumstances.

On June 10, 1994, the Company issued to Paul Pfleger, Vice Chairman of the
Company's Board of Directors, 859,653 shares of Series A Preferred Stock in
consideration for the assignment by Mr. Pfleger to the Company of notes and
receivables in the aggregate amount of $3,731,729 and the assumption by Mr.
Pfleger of the Company's indebtedness to a third party evidenced by a note in
the original principal amount of $4 million, bearing interest at a rate of 12%
per annum and maturing December 31, 2002. The Company believes that the issuance
of the shares was exempt from registration by virtue of Section 4(2) of the
Securities Act. These shares were redeemed by the Company in connection with the
closing of the Company's initial public offering.

On June 10, 1994, the Company issued to First Union Corporation a warrant
to purchase 1,493,059 shares of Nonvoting Common Stock, at an exercise price of
$0.0001 per share. The Company believes that the issuance of the warrant was
exempt from registration by virtue of Section 4(2) of the Securities Act as a
transaction not involving a public offering. In conjunction with

II-3
<PAGE> 136

the closing of the Company's initial public offering, the warrants were amended
and fully exercised resulting in the issuance of 640,478 shares of Common Stock.
The Company has committed to register these shares under the Securities Act
under certain circumstances.

On June 10, 1994, the Company issued to The Robinson-Humphrey Company, Inc.
a warrant to purchase 20,177 shares of Common Stock, at an exercise price of
$0.0001 per share. In connection with the conclusion of that financing the
Company paid a cash fee to Robinson-Humphrey of $444,000. The Company believes
that the issuance of the warrant was exempt from registration by virtue of
Section 4(2) of the Securities Act as a transaction not involving a public
offering. In conjunction with the closing of the Company's initial public
offering, the warrants were amended and fully exercised resulting in the
issuance of 7,641 shares of Common Stock. The Company has committed to register
these shares under the Securities Act under certain circumstances.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

a. Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)* EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation.
3.2 Bylaws.
4.1 Form of Common Stock Certificate.
4.2 See Exhibits numbered 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and Bylaws of the Company defining the rights of
the holders of Common Stock.
4.3 Purchase Agreement dated August 15, 1996 among the Company, PaineWebber
Incorporated and Wheat, First Securities, Inc.
4.4 Indenture dated as of August 22, 1996 between the Company and IBJ Schroder
Bank & Trust Company.
4.5 Registration Rights Agreement dated as of August 22, 1996 by and among the
Company, PaineWebber Incorporated and Wheat, First Securities, Inc.
5.1 Opinion of Heller Ehrman White & McAuliffe.
10.1 Senior Subordinated Note and Warrant Purchase Agreement dated as of June 10,
1994 by and among the Company, First Union Corporation and The Robinson-
Humphrey Company, Inc.
10.6 Warrant Agreement dated as of June 10, 1996 by and among the Company, First
Union Corporation and The Robinson-Humphrey Company, Inc.
10.7 Registration Rights Agreement dated as of June 10, 1994 by and among the
Company, First Union Corporation and The Robinson-Humphrey Company, Inc.
</TABLE>

II-4
<PAGE> 137

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)* EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
10.17 Agreement of Formation and Activities of Russian-American Joint Stock Venture
"Dal Telekom International" dated as of December 5, 1993, by and among the
Company, DalREO, the joint stock company Rostelekom and the state enterprise
Rossvyazinform in the cities of Khabarovsk, Blagoveschensk and Petropavlovsk-
Kamchatski, as amended; Addendum to Agreement Regarding Reorganization of Dal
Telecom International dated as of December 5, 1993, by and between the
Company and DalREO; Amendment to the Agreement on the Joint Venture between
the Company and DalREO dated July 13, 1994; Second Amendment to the Agreement
on the Joint Venture between the Company and DalREO dated December 19, 1994;
Proxy with regard to Voting of Shares of Dal Telecom International dated
December 5, 1993.
10.21 Shareholders Agreement dated as of June 7, 1994 by and among Paul Pfleger,
Ashok Rao, the trust for the benefit of Siddhartha Rao, the trust for the
benefit of Kavita Rao, the trust for the benefit of Divya Rao, the trust for
the benefit of Anjali Rao, John M. Orehek, and the Company.
10.23 Registration Rights Agreement dated as of December 30, 1994 by and between
the Company and Richard W. Stroup.
10.25 Revised and Restated 1993 Stock Option Plan, adopted by the Board of
Directors on December 30, 1993 and the shareholders on December 29, 1994, as
amended by the Board of Directors on February 21, 1994, March 28, 1994,
January 19, 1995 and March 21, 1995, such amendments being approved by the
shareholders on October 7, 1994 and March 30, 1995, and further amended by
the Board of Directors on April 25, 1995, July 26, 1995, November 9, 1995,
July 25, 1996 and January 9, 1997.
**10.26 Amended and Restated 1995 Employee Stock Purchase Plan adopted by the Board
of Directors and the shareholders on December 9, 1994, as amended by the
Board of Directors on December 13, 1995, December 18, 1996 and March 13,
1997.(1)
10.27 Employment Agreement dated as of June 7, 1994 by and between the Company and
Ashok Rao.
10.30 Reseller Service Agreement dated as of December 31, 1992 by and between West
Coast Telecommunications, Inc. and the Company.
10.34 Software License and Services Agreement dated as of October 26, 1993 by and
between ORACLE Corporation and the Company.
10.35 Service Agreement, as amended, dated as of February 7, 1995 by and between
the Company and ORACLE Corporation.
10.36 One Plus Billing and Information Management Services Volume Purchase
Agreement dated March 4, 1995 by and between Zero Plus Dialing, Inc. d/b/a
U.S. Billing and the Company.
10.42 Distributor Agreement dated as of December 28, 1993 by and between the
Company and Quest America L.P. Portions of this exhibit have been omitted
pursuant to an application for an order granting confidential treatment. The
omitted portions have been separately filed with the Commission.
10.50 Agreement and Plan of Reorganization dated as of November 8, 1994 by and
among the Company, P.N. Acquisition Corporation, PacNet, Inc. and Richard W.
Stroup.
</TABLE>

II-5
<PAGE> 138

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)* EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
10.51 Agreement for the purchase of Mid-Com Consultants' Aggregation Customer Base
and Aggregation Plans by Mid-Com Communications, Inc. dated as of January 3,
1995 by and between the Company and Mid-Com Consultants, Inc.
10.52 Asset Purchase Agreement dated as of January 20, 1995 by and between the
Company and Communique Telecommunications, Inc.
10.60 1111 Third Avenue Lease Agreement dated as of March 8, 1994.
10.61 Agreement of Sublease dated January 1, 1994 by and between Bank of New
Zealand and the Company.
10.62 Real Estate Sub-Lease dated as of October 1, 1994 by and between Digital
Telecommunications, Inc. and the Company.
10.66 Option Agreement dated March 6, 1995 by and among Paul H. Pfleger, Ashok Rao,
John M. Orehek and the Company.
10.67 Release and Settlement Agreement dated January 1995. Portions of this exhibit
have been omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been separately filed with
the Commission.
10.73 Overseas Private Investment Corporation Contract of Insurance against
Business Income Loss.
10.74 Overseas Private Investment Corporation Contract of Insurance against
Expropriation Political Violence.
10.75 Letter Agreement dated May 12, 1995 between First Union Corporation and the
Company.
10.78 Registration Rights Agreement dated as of April 1, 1995 by and among the
Company and Darren Narans, Kevin Narans and Steven Tomsic.
10.79 Stock Purchase Warrant issued on April 1, 1995 by the Company to Darren
Narans granting Darren Narans the right to purchase from the Company 12,250
shares of the Company's Common Stock.
10.80 Stock Purchase Warrant issued on April 1, 1995 by the Company to Kevin Narans
granting Kevin Narans the right to purchase from the Company 23,625 shares of
the Company's Common Stock.
10.81 Stock Purchase Warrant issued on April 1, 1995 by the Company to Steven
Tomsic granting Steven Tomsic the right to purchase from the Company 23,625
shares of the Company's Common Stock.
10.83 Letter Agreement dated June 6, 1995 between First Union Corporation, The
Robinson-Humphrey Company, Inc. and the Company.
10.86 Carrier Transport Switched Services Agreement dated June 14, 1995 and amended
November 1, 1995 by and between Sprint Communications Company L.P. and the
Company, amended November 1, 1995. Portions of this exhibit have been omitted
pursuant to an application for an order granting confidential treatment. The
omitted portions have been separately filed with the Commission.
10.87 Telecommunications Services Agreement dated March 27, 1996 by and between
Worldcom Network Service, Inc. d/b/a WilTel and the Company. Portions of this
exhibit have been omitted pursuant to an application for an order granting
confidential treatment. The omitted portions have been separately filed with
the Commission.
</TABLE>

II-6
<PAGE> 139

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)* EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
10.88 Customer Base Purchase and Sale Agreement dated as of September 1, 1995
between Cherry Communications Incorporated and the Company.
10.89 Master Equipment Lease Agreement dated as of September 12, 1995 between
Keycorp Leasing Ltd. and the Company.
10.90 Agreement and Plan of Reorganization dated as of September 29, 1995 among the
Company, AV Acquisition Corporation, AdVal, Inc., AdVal Data Corporation,
Theodore D. Berns and Donald D. Dean.
10.91 Credit Agreement dated as of November 8, 1995 among the Company, PacNet,
AdVal, Cel-Tech(the "Borrowers") and Transamerica Business Credit
Corporation, as agent.
10.92 Revolving Note dated December 20, 1995 in the amount of $30,000,000 made by
the Borrowers to the order of Transamerica Business Credit Corporation.
10.94 Revolving Note dated December 20, 1995 in the amount of $13,000,000 made by
the Borrowers to the order of Nationsbank of Georgia, N.A.
10.95 Stock Pledge Agreement dated as of November 8, 1995 made by the Company in
favor of Transamerica Business Credit Corporation, as agent.
10.96 Security Agreement dated as of November 8, 1995 made by the Borrowers in
favor of Transamerica Business Credit Corporation, as agent.
10.97 Letter Agreement dated March 6, 1996 between the Borrowers and Transamerica
Business Credit Corporation, as agent.
10.98 Letter Agreement dated March 18, 1996 between the Borrowers and Transamerica
Business Credit Corporation, as agent.
10.99 First Amendment to Credit Agreement dated March 28, 1996 between the
Borrowers and Transamerica Business Credit Corporation, as agent.
10.100 Promissory Note dated March 28, 1996 in the amount of $15,000,000 made by the
Company to the order of Transamerica Business Credit Corporation.
10.101 Warrant Purchase Agreement dated March 28, 1996 between the Company and
Transamerica Business Credit Corporation.
10.102 Warrant issued on March 28, 1996 by the Company to Transamerica Business
Credit Corporation.
10.103 Agreement and Plan of Reorganization dated December 29, 1995 among the
Company, ADNET Telemanagement, Inc., David Wiegand and Maria Wiegand.
10.104 Contract Tariff No. 969 effective February 15, 1996 between the Company and
AT&T Corp.
10.105 Second Amendment to Credit Agreement dated July 26, 1996 among the Company,
PacNet, AdVal, Cel-Tech, Advanced Network Design and Transamerica Business
Credit Corporation, as agent.
10.106 Third Amendment to Credit Agreement dated August 21, 1996 between the
Company, PacNet, AdVal, Cel-Tech and Advanced Network Design and Transamerica
Business Credit Corporation.
10.107 Customer Base Purchase and Sale Agreement dated as of November 1, 1995
between the Company and Cherry Communications Incorporated.
10.109 Distributor Agreement dated April 4, 1996 between the Company and Tie
Communications, Inc.
</TABLE>

II-7
<PAGE> 140

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF
REGULATION S-K)* EXHIBIT DESCRIPTION
- ---------------- -----------------------------------------------------------------------------
<C> <S>
10.110 Employment Agreement dated May 24, 1996 between the Company and William H.
Oberlin.
10.111 Consulting Agreement dated May 24, 1996 between the Company and John M. Zrno.
10.112 Consulting Agreement dated May 24, 1996 between the Company and Marvin C.
Moses.
10.113 Settlement Agreement and Release, dated as of December 27, 1996, among David
Wiegand, Maria Wiegand and the Company.
10.114 Consulting Agreement, dated as of November 25, 1996, between the Company and
David Wiegand.
10.115 Stock Option Agreement, dated as of November 25, 1996, between the Company
and David Wiegand.
10.116 Amendment to Agreement and Plan of Reorganization, dated as of December 27,
1995, among the Company, David Wiegand and Maria Wiegand, amending the
Agreement and Plan of Reorganization dated December 29, 1995 among the
Company, ADNET Telemanagement, Inc. and David Wiegand.
10.117 Amendments to Non-Competition Agreements of Maria Wiegand and David Wiegand,
dated as of December 27, 1996, among the Company, Maria Wiegand and David
Wiegand. Portions of this exhibit have been omitted pursuant to an amended
application for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission.
10.118 Release and Settlement Agreement, dated October 31, 1996, between the Company
and AT&T Corp. Portions of this exhibit have been omitted pursuant to an
amended application for an order granting confidential treatment. The omitted
portions have been separately filed with the Commission.
10.119 Carrier Agreement, dated October 31, 1996, between the Company and AT&T Corp.
Portions of this exhibit have been omitted pursuant to an amended application
for an order granting confidential treatment. The omitted portions have been
separately filed with the Commission.
**11.1 Statement re: computation of net loss per share.(2)
**12.1 Statement re: computation of ratios.(3)
21.1 List of significant subsidiaries of the Company.
**23.1 Consent of Ernst & Young LLP, Independent Auditors (See page II-12 hereto).
23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1).
24.1 Power of Attorney.
25.1 Form T-1 Statement of Eligibility and Qualification of the Trustee under the
Trust Indenture Act of 1939.
</TABLE>

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

* Unless otherwise indicated, exhibit was previously filed herewith.

** Exhibit is filed herewith.

(1) Exhibit is incorporated by reference to an identically numbered exhibit
filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Exhibit replaces identically numbered exhibit previously
incorporated herein by reference to the Company's Registration Statement on
Form S-1, file no. 33-90814.

II-8
<PAGE> 141

(2) Exhibit is incorporated by reference to an identically numbered exhibit
filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Exhibit replaces identically numbered exhibit previously
incorporated herein by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.

(3) Exhibit replaces identically numbered exhibit previously filed herewith.

b. Financial Statements.

Consolidated Financial Statements filed as part of this Registration
Statement are listed in the Index to the Financial Statements on page F-1.

c. Financial Statement Schedules.

Consolidated Financial Statement Schedules filed as part of this
Registration Statement are listed in the Index to the Financial Statement
Schedules on page S-1. All other schedules have been omitted because the
information is not required or is not applicable, or because the information
required is included in the Consolidated Financial Statements or the Notes
thereto included elsewhere in this Registration Statement.

ITEM 17. UNDERTAKINGS.

(a) Rule 415 Offering.

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 this 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 this Registration Statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;

(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 as that time shall be deemed
to be the initial bona fide offering thereof;

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

(b) Indemnification for Liabilities

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

II-9
<PAGE> 142

precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

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

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

II-10
<PAGE> 143

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on April 4, 1997.

MIDCOM COMMUNICATIONS INC.

By: /s/ ROBERT J. CHAMBERLAIN
------------------------------------
Robert J. Chamberlain

Executive Vice President and

Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to this Registration Statement has been signed by the following persons in
the capacities indicated below on the 4th day of April, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>

WILLIAM H. OBERLIN* President, Chief Executive Officer and
- --------------------------------------------- Director
William H. Oberlin (Principal Executive Officer)

/s/ ROBERT J. CHAMBERLAIN Executive Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Accounting and
Robert J. Chamberlain Financial Officer)

JOHN M. ZRNO* Director
- ---------------------------------------------
John M. Zrno

PAUL H. PFLEGER* Director
- ---------------------------------------------
Paul H. Pfleger

JOHN M. OREHEK* Director
- ---------------------------------------------
John M. Orehek

SCOTT B. PERPER* Director
- ---------------------------------------------
Scott B. Perper

KARL D. GUELICH* Director
- ---------------------------------------------
Karl D. Guelich

MARVIN C. MOSES* Director
- ---------------------------------------------
Marvin C. Moses

DANIEL M. DENNIS* Director
- ---------------------------------------------
Daniel M. Dennis
</TABLE>

*By: /s/ ROBERT J. CHAMBERLAIN
---------------------------------
Robert J. Chamberlain
Attorney-In-Fact

II-11
<PAGE> 144

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 21, 1997, in the Registration Statement (Form
S-1) and related Prospectus of MIDCOM Communications Inc. for the registration
of $97,743,000 of its 8 1/4% Convertible Subordinated Notes due 2003 (the
"Notes") and an indeterminate number of shares of its common stock, par value
$.0001 per share, as may be issued upon conversion of such Notes.

/s/ ERNST & YOUNG LLP

Seattle, Washington

April 4, 1997

II-12
<PAGE> 145

MIDCOM COMMUNICATIONS INC.

INDEX TO FINANCIAL STATEMENT SCHEDULES

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors on Financial Statement Schedule..... S-2
Schedule II. Valuation and Qualifying Accounts....................................... S-3
</TABLE>

S-1
<PAGE> 146

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE

The Shareholders and Board of Directors
MIDCOM Communications Inc.

We have audited the consolidated financial statements of MIDCOM
Communications Inc. as of December 31, 1995 and 1996, and for each of the three
years in the period ended December 31, 1996, and have issued our report thereon
dated March 21, 1997 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(c) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Seattle, Washington

March 21, 1997

S-2
<PAGE> 147

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS AT END
DESCRIPTION PERIOD EXPENSES -- DESCRIBE --DESCRIBE OF PERIOD
- ------------------------------------------- ------------ ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Reserve and allowances deducted from
assets accounts
Allowance for doubtful accounts.......... $ 1,167 $1,505 $1,948(1) $ (1,748)(3) $ 2,872

YEAR ENDED DECEMBER 31, 1995
Reserve and allowances deducted from
assets accounts
Allowance for doubtful accounts.......... $ 2,872 $9,874 $2,832(1) $ (9,403)(3) $ 10,581
$4,406(2)
YEAR ENDED DECEMBER 31, 1996
Reserve and allowances deducted from
assets accounts
Allowance for doubtful accounts.......... $ 10,581 $9,781 $1,217 $(13,777)(3) $ 7,802
</TABLE>

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

(1) Receivable reserves associated with business and customer base acquisitions.

(2) Amounts primarily charged against revenues.

(3) Amounts written off, net of recoveries.

S-3
<PAGE> 148

MIDCOM COMMUNICATIONS INC.

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGINATION BY
(REFERENCED TO SEQUENTIAL
ITEM 601 OF NUMBERING
REGULATION S-K) EXHIBIT DESCRIPTION SYSTEM
- ---------------- -------------------------------------------------------------- -------------
<C> <S> <C>
*12.1 -- Statement re: computation of ratios........................
</TABLE>

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

* Exhibit replaces identically numbered exhibit previously filed herewith.

<PAGE> 1
EXHIBIT 12.1

MIDCOM COMMUNICATIONS INC.
RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
---------------------------------------------
1992 1993 1994 1995 1996

<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES

Earnings:
Pre-tax income 650 (478) (3,012) (29,351) (97,319)
Fixed charges (see below) 1,092 1,555 3,349 6,121 6,182
----- ----- ------ ------- -------
Total earnings 1,742 1,077 337 23,230 91,137
----- ----- ------ ------- -------
Fixed Charges:
Interest expense 951 1,368 2,965 5,288 5,288
Interest - rental expense(1) 141 187 384 833 894
----- ----- ------ ------- -------
Total fixed charges 1,092 1,555 3,349 6,121 6,182
----- ----- ------ ------- -------

Ratio of earnings to fixed charges 1.60 0.69 0.10 (3.79) (14.74)
Dollar amount of coverage deficiency NA (478) (3,012) (29,351) (97,319)

</TABLE>

Note: If fixed charges exceed earnings, the ratio computation will indicate
less than one-to-one coverage. Pursuant to the rules and regulations of
the Securities and Exchange Commission, ratios less than one should
not be presented. Instead, the applicable registration statement or
report is to state that earnings are inadequate to cover fixed charges
and disclose the dollar amount of the deficiency.

<TABLE>
<S> <C> <C> <C> <C> <C>
(1) Estimated as follows:
Rent expenses 427 566 1,163 2,525 2,710
Interest factor 33% 33% 33% 33% 33%
---------------------------------------------
Interest - rental expense 141 187 384 833 894
=============================================
</TABLE>