<PAGE>
 
================================================================================
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                         _____________________________
                                        
                                   FORM 10-Q
                                        
    [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934.

              For the Quarterly Period Ended September 30, 1997.

                                      OR

   [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934.
                                        
       For the Transition Period from   __________   to  ____________ .

                     Commission File Number:    000-26118
                         
                         _____________________________
                                        

                           MIDCOM Communications Inc.
             (Exact name of registrant as specified in its charter)


          Washington                                        91-1438806
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization                          Identification No.)
 
   26899 Northwestern Hwy, Suite 120                           48034
        Southfield, Michigan                 
(Address of principal executive offices)                     (Zip Code)


      Registrant's telephone number, including area code:  (248) 304-1780
                                        
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ].

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.


             Class                             Outstanding at October 31, 1997
-------------------------------                ------------------------------- 
Common Stock, $0.0001 par value                          16,193,546

                              Page 1 of 16 pages.
                           Exhibit Index at Page 16.

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

<PAGE>
 
                           MIDCOM COMMUNICATIONS INC.
                                        
                                   FORM 10-Q
                                        
               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

                               TABLE OF CONTENTS
                                        
                                                                        PAGE
                                                                        ----
PART I.   FINANCIAL INFORMATION

ITEM 1.   Financial Statments                                             3
 
ITEM 2.   Management's Discussion and Analyais of Financial Condition
          and Results of Operations                                      11
 
PART II.  OTHER INFORMATION
 
ITEM 1.   Legal Proceedings                                              14
 
ITEM 3.   Defaults Upon Senior Securities                                14
 
ITEM 5.   Other Information                                              14
 
ITEM 6.   Exhibits and Reports on Form 8-K                               14


                                       2
<PAGE>
 
PART I.    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

                          MIDCOM COMMUNICATIONS INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
 <TABLE>
 <CAPTION>
(IN THOUSANDS)                                       SEPTEMBER 30,  DECEMBER 31,
                                                         1997           1996
--------------------------------------------------------------------------------
                                                      (Unaudited)

<S>                                                     <C>           <C>

                                  ASSETS
 
Current assets:                                   
  Cash and cash equivalents                           $  1,532       $ 30,962
  Accounts receivable, less allowance for doubtful
    accounts of $6,184 and $7,802, respectively         20,421         16,969 
  Prepaid expenses and other current assets              1,820          1,548
                                                      --------       --------
         Total current assets                           23,773         49,479
     
Furniture, equipment and leasehold improvements, net    24,126         11,045
Intangible assets, less accumulated amortization of
  $49,199 and $39,532, respectively                      6,402         15,547
Other assets and deferred charges, net                   3,891          3,852
                                                      --------       --------
                                                      $ 58,192       $ 79,923
                                                      ========       ========

                     LIABILITIES AND SHAREHOLDERS' DEFICIT
 
Current liabilities:
  Notes payable                                       $113,872       $  9,680
  Line of credit                                        20,734              -
  Current portion of capital lease obligations          14,501          3,314
  Accounts payable                                       8,524          3,179
  Carrier accounts payable                              25,316         17,143
  Accrued expenses and other current liabilities        16,160         12,938
                                                      --------       --------
         Total current liabilities                     199,107         46,254

Long-term obligations, less current portion                  -         99,153
Other long-term liabilities                              3,800          3,800
 
Shareholders' deficit:
  Common stock                                          62,063         68,330
  Deferred compensation                                 (1,321)        (1,707)
  Accumulated deficit                                 (205,457)      (135,907)
                                                      --------       ---------
         Total shareholders' deficit                  (144,715)       (69,284)
                                                      --------       --------  
                                                      $ 58,192       $ 79,923
                                                      ========       ========

--------------------------------------------------------------------------------
</TABLE>
      See Notes to Unaudited Condensed Consolidated Financial Statements.

                                       3
<PAGE>
 

                          MIDCOM COMMUNICATIONS INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                    Three Months Ended      Nine Months Ended 
                                       September 30,          September 30,
                                    ------------------      -----------------
                                     1997        1996        1997       1996

(In thousands, except per share data)
-------------------------------------------------------------------------------
<S>                                 <C>         <C>         <C>        <C> 
 
Revenue                            $ 24,920    $ 30,730    $ 74,339    $124,590
Cost of revenue                      18,586      22,292      54,809      89,828
                                   --------    --------    --------    --------
Gross profit                          6,334       8,438      19,530      34,762
 
Operating expenses:
  Selling, general and 
    administrative                   22,090      15,734      62,646      48,048
  Depreciation                        1,348       1,653       4,133       4,327
  Amortization                          924       5,321       9,524      21,857
  Settlement of contract dispute        --          --          --        8,800
  Relocation of corporate 
    headquarters                      2,136         --        4,866         --
  Restucturing charge                   --          --          --        2,220
  Loss on impairment of assets          --        2,000         --       20,765
                                   --------    --------    --------    --------
                                     26,498      24,708      81,169     106,017
                                   --------    --------    --------    --------
Operating loss                      (20,164)    (16,270)    (61,639)    (71,255)
 
Other expense (income):
  Interest expense, net               3,600       2,049       8,337       5,959
  Other expense (income), net          (175)        (60)       (427)        206
                                   --------    --------    --------    --------
Loss before provision for income
    taxes                           (23,589)    (18,259)    (69,549)    (77,420)
Provision for income taxes              --          --          --          --
                                   --------    --------    --------    --------
Net loss                           $(23,589)   $(18,259)   $(69,549)   $(77,420)
                                   --------    --------    --------    --------
Net loss per share                 $  (1.56)   $  (1.16)   $  (4.51)   $  (5.01)
                                   --------    --------    --------    --------

Weighted average common
  shares outstanding                 15,125      15,681      15,438      15,442
                                   --------    --------    --------    --------
===============================================================================

      See Notes to Unaudited Condensed Consolidated Financial Statements.

</TABLE>

                                       4
<PAGE>
 
                          MIDCOM COMMUNICATIONS INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                          Nine months ended
                                                            September 30,
                                                          1997         1996
(In thousands)   
--------------------------------------------------------------------------------
<S>                                                     <C>         <C>
Net cash used in operating activities                   $(40,150)   $ (6,591)
                                                        --------    --------
Investing activities:
  Purchases of furniture, equipment and leasehold
    improvements                                          (7,370)     (1,729)
  Net assets acquired in acquisition                        (291)        --
  Proceeds from sale of assets                                33         673
                                                        --------    --------
    Net cash used in investing activities                 (7,628)     (1,056)
                                                        --------    --------
Financing activities:
  Borrowings under line of credit                         43,735         --
  Repayments of line of credit                           (23,001)        --
  Proceeds from issuance of convertible subordinated
    notes payable                                            --       97,743
  Proceeds from notes payable                                --          333
  Repayment of notes payable                                (921)     (3,946)
  Proceeds from long-term obligations                      6,544      15,000
  Repayment of long-term obligations,
    including capital leases                              (1,165)    (53,687) 
  Deferred financing costs                                  (480)     (3,569) 
  Repurchase of common shares                             (6,544)        --
  Proceeds from common stock issued for stock purchase
    plan and stock options                                   180       2,828
                                                        --------     -------
    Net cash provided by financing activities             18,348      54,702
                                                        --------     -------
Net (decrease) increase in cash                          (29,430)     47,055
Cash and cash equivalents at beginning of period          30,962       1,083
                                                        --------     -------
Cash and cash equivalents at end of period              $  1,532     $48,138
                                                        ========     =======
================================================================================

      See Notes to Unaudited Condensed Consolidated Financial Statements.

</TABLE>

                                       5
<PAGE>
 
1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements
include the accounts of MIDCOM Communications Inc. and its wholly-owned
subsidiaries, collectively referred to as "Midcom" or the "Company." The
unaudited interim condensed consolidated financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The accompanying unaudited
condensed consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and related notes thereto
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 31, 1997.
 
     On November 7, 1997, Midcom and three of its wholly-owned subsidiaries,
PacNet Inc. ("PacNet"), Ad Val, Inc. ("Adval") and Cel-Tech International Corp.
("Cel-Tech"), each filed a petition (collectively, the "Petitions") for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the Eastern District of Michigan (the
"Bankruptcy Court"), Case Nos. 97-59044-S, 59052-G, 59064-G and 59057-S,
respectively, with such cases to be jointly administered by the Bankruptcy
Court under Case No. 97-59044-S, and are currently operating their respective
businesses as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code and subject to the jurisdiction of the Bankruptcy Court. The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the filing under Chapter 11 of the Bankruptcy
Code and related circumstances, including the Company's leveraged financial
structure and losses from operations, such realization of assets and liquidation
of liabilities is subject to significant uncertainty. While under the protection
of Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose
of assets, and liquidate or settle liabilities, for amounts other than those
reflected in the accompanying unaudited condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts reported in such financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. The appropriateness of
using the going concern basis depends upon, among other things, confirmation of
a plan of reorganization, future profitable operations, the ability to comply
with the terms of any debtor-in-possession credit facility and the ability to
generate sufficient cash from operations and financing arrangements to meet
obligations. 

     The information furnished in the accompanying unaudited condensed
consolidated financial statements reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the reporting of operating segment information by
publicly held companies in interim financial reports and annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997. The
adoption of SFAS 131 will have no impact on the Company's consolidated results
of operations, financial position or cash flows.

     In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 is effective for financial statements for years ending
after December 15, 1997. As of December 31, 1997, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share (referred to in SFAS No. 128 as basic earnings per share), the
dilutive stock options will be excluded. There is no expected impact on primary
earnings per share. The Company has not yet determined the impact of SFAS 128 on
the calculation of fully diluted earnings per share (referred to in SFAS No. 128
as diluted earnings per share).

2.   LIQUIDITY, CAPITAL RESOURCES, BANKRUPTCY FILING AND OTHER SUBSEQUENT EVENTS

     The Company has operated at substantial losses since its inception. Net
losses were approximately $69.5 million, $97.3 million and $33.4 million for the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995, respectively. As a result of these losses, significant attrition in
certain acquired customer bases, investments in business expansion and various
other factors, the Company has required substantial external working capital. As
of September 30, 1997, the book value of the Company's assets was approximately
$58.2 million, total debt outstanding was approximately $149.1 million, and the
Company had a negative net worth of approximately $144.7 million.

     In its Quarterly Report on Form 10-Q for the quarter ended June 30,1997, 
the Company disclosed that, in addition to borrowings available under its
revolving credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"), and financing available under its capital lease
facilities, the Company would require between $20 million and $30 million of
additional capital in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997. In August
1997, the Company obtained an $8 million bridge loan from Foothill (the
"Foothill Bridge Loan"). The Foothill Bridge Loan had an interest rate of 15%
per annum and was payable in full on November 1, 1997.  In addition, on October 
10, 1997, the Company completed a private placement of 875,000 shares of Common 
Stock. The Company received net proceeds from the private placement of 
approximately $5.5 million which were used for working capital purposes in 
October 1997.

     In early September 1997, the Company received a term sheet from a major
financial institution for an equity financing ranging from $40 million to $50
million. Due diligence with respect to the proposed equity financing commenced
immediately with the goal of closing the financing by October 31, 1997. In
addition, throughout September and October 1997, the Company continued to pursue
other short-term financing. However, at the end of October 1997, the Company had
not been successful in its efforts to close the proposed equity financing or
obtain additional financing.

     On November 4, 1997, as a result of the Company's failure to repay the
Foothill Bridge Loan in full when due, Foothill gave notice of a default under
the Foothill Credit Facility and ceased making any further advances to the
Company or any of its subsidiaries. In addition to the repayment of the Foothill
Bridge Loan, the Company was required to make substantial payments to Sprint
Communications Company ("Sprint"), and several of the Company's suppliers
threatened termination of services.

     Faced with the imminent termination of service by the Company's principal
long-distance carriers, on November 7, 1997, the Company and three of its 
wholly-owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and
are currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. The Petitions were filed in order to allow
the Company and its subsidiaries to continue operations while obtaining relief
from the immediate collection of obligations owed to Foothill, Sprint and other
creditors.

     The voluntary filing of a petition for relief under the Bankruptcy Code
constitutes a default under the Foothill Credit Facility, the Company's
equipment lease facilities, the Indenture relating to the Company's $97.7
aggregate principal amount of 8 1/4% Subordinated Convertible Notes due 2003 and
the note payable to Ashok Rao in connection with the redemption of certain
shares of Common Stock (see Note 6, "Stock Repurchase," below). Accordingly,
approximately $112.1 million of long-term indebtedness has been reclassified as
current liabilities as of September 30, 1997. Since it is not possible to
predict the impact of a sale or liquidation of the Company, no other adjustments
have been made to the historical carrying values of the assets and liabilities.

     The Company has arranged for debtor-in-possession financing (the "Foothill
DIP Facility") from Foothill. In connection with the Foothill DIP Financing, the
Company incurred a loan fee of $250,000. The Foothill DIP Facility consists of a
revolving credit facility with borrowing availability of up to $8.5 million,
subject to the Company's satisfaction of various terms and conditions, bears
interest at prime plus 4% on receivable based advances and 18% on overadvances
and expires on January 15, 1997. There can be no assurance that borrowings
available under the Foothill DIP Facility will be adequate to meet the Company's
working capital needs or that the Company will not require additional debt or
equity financing in the future, and there can be no assurance that any such
additional debt or equity financing, if needed, would be available to the
Company on acceptable terms or at all. In addition, the Company is currently
attempting to solicit offers to purchase all or portions of its assets. There
can be no assurance that any such transaction will be available to the Company
on acceptable terms or at all. The Company is also undertaking aggressive cost-
cutting measures, including the lay-off on November 7, 1997 of 170 of its 790
employees. Further cost-cutting measures will be required if the Company is
unable to complete a sale of all or part of its business or obtain additional
sources of working capital in the near-term. Cost-cutting measures, particularly
those affecting the Company's sales and service functions, could have a material
adverse effect on the Company's ability to generate revenue.

     The Company is required to submit a plan of reorganization to the
Bankruptcy Court. The Company is in the process of developing a plan of
reorganization, which the Company expects will involve the sale of all or part
of its business. There can be no assurance that the Company will be successful
in completing a sale of all or part of its business. In addition, there can be
no assurance that the Bankruptcy Court will approve the Company's reorganization
plan. If the Company is unable to find a buyer for all or part of its business,
or if the Company's reorganization plan is not approved, the Company may be
forced to liquidate.

3.   ACQUISITION OF PHOENIX NETWORK, INC. AND TRANS NATIONAL COMMUNICATIONS

     On November 10, 1997, the Company announced that the August 13, 1997 merger
agreements with Phoenix Network, Inc. ("Phoenix") and Trans National
Communications ("TNC") had been terminated. On October 31, 1997, Phoenix
notified the Company of its intent to terminate the merger agreement, effective
November 5, 1997, due to alleged material breaches by the Company, including the
Company's termination of its agreement with Sprint and the deterioration of the
Company's financial condition. In addition, on November 6, 1997, TNC notified
the Company of its intent to terminate its purchase agreements with Phoenix that
Phoenix had assigned to the Company.

4.   RELOCATION OF CORPORATE HEADQUARTERS AND RESTRUCTURING CHARGES

     In May 1997, the Company announced its intention to relocate its corporate
headquarter functions based in Seattle, Washington to Southfield, Michigan,
where the Company's Chief Executive Officer and other key executives maintained
offices. During the third quarter of 1997, the Company completed the relocation
of various corporate support functions, including human resources, legal,
finance and information services, affecting approximately 130 employees, to
temporary office space in Southfield. The Company had originally planned to move
these corporate support functions to permanent office space in Southfield when
it became available in December 1997; however, in light of the recent
deterioration of the Company's financial condition, those plans are being re-
evaluated.

     In June 1997, the Company recorded a restructuring charge of $2.5 million,
consisting primarily of the cost of severance and loss on disposal of assets in
connection with the corporate headquarters relocation. This restructuring charge
is included in the corporate headquarters relocation expenses reported on the
accompanying unaudited condensed consolidated statement of operations for the
nine-month period ended September 30, 1997. As of September 30, 1997, $0.4
million of this restructuring charge remained in accrued liabilities.

     During the third quarter of 1997, the Company incurred approximately $2.1
million of expenses related to the corporate headquarters relocation. If the
corporate headquarters relocation is completed as originally planned, the
Company now estimates that an additional $0.8 million of expenses would be
incurred in the fourth quarter of 1997.

5.   BUSINESS COMBINATIONS COMPLETED IN PRIOR YEARS

     On January 27, 1997, in connection with a customer base acquisition
 completed on July 31, 1995, the Company issued to the assignee of
 Communications Services of America, Inc. ("CSA") 10,522 shares of common stock
 valued at $10.38 per share, and in April 1997, the Company issued an

                                       6
<PAGE>
 
                          MIDCOM COMMUNICATIONS INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

additional 18,536 additional shares to compensate for the decrease in value of
the common stock since the closing of the acquisition.

     On January 22, 1997, in connection with a customer base acquisition 
completed in September 30, 1995, the Company issued to the shareholders of
Fairfield County Telephone Corporation ("Fairfield") 38,711 shares of common
stock valued at $10.25, and in April 1997 the Company issued an additional
59,631 shares to compensate for the decrease in value of the common stock since
the closing of the acquisition.

     In January 1997, the Company issued to Richard John 9,457 shares of common
stock valued at $9.38 per share, and in August 1997, the Company issued to
Richard John 60,000 shares of common stock valued at $8.56 per share in
connection with the acquisition of Cel-Tech International Corp.

6.   STOCK REPURCHASE

     In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company redeemed, in April 1997,
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price of $6.80 per share (plus interest at 8% from April 1996), to
be paid in equal monthly installments over a period of 36 months, beginning May
1997.

7.   STOCK OPTION PLAN

     In July 1997, the Company reduced the exercise price of 1.344 million
employee stock options with a weighted average exercise price of approximately
$8.85 per share to $5.19 per share.

                                       7
<PAGE>
 
                          MIDCOM COMMUNICATIONS INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.   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.

9.   DISPUTES AND LITIGATION

     BANKRUPTCY FILING. On November 7, 1997, Midcom and three of its wholly-
owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and are
currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. See Note 1, "Basis of Presentation,"
above.

     SPRINT SETTLEMENT. The Company has had a series of ongoing disputes
relating to service and billing with Sprint Communications Company ("Sprint"),
one of its primary suppliers. For this and other reasons, on September 18, 1997,
the Company discontinued its payments to Sprint and, on October 10, 1997, the
Company received a notice of default from Sprint. On October 29, 1997, the
Company entered into a settlement with Sprint whereby it agreed to pay Sprint
$1,250,000 on October 31, 1997, November 7, 1997 and November 14, 1997;
$4,000,000 on November 21, 1997; and thereafter, so long as Sprint continues to
provide service to the Company, weekly payments equal to the lesser of
$2,000,000 or the current amount outstanding. Sprint and the Company agreed to
arbitrate the Company's claims against Sprint up to an aggregate of $5,000,000
and the parties agreed that the Company would transition its traffic to its own
or other networks over the ninety day period ending January 29, 1998.

     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
were 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").  In April 1997, the
Board of Directors of the Company unanimously approved the terms of a settlement
of all claims against the Company and all of the individual defendants.  The
settlement, which is subject to Court approval and which admits no liability or
fault, provides for the payment of $1.0 million in cash by the Company's
insurance carrier, and the issuance of approximately 420,000 shares of the
Company's common stock, subject to adjustments depending upon the fair market
value of the stock on the date that the settlement is approved by the Court.

     SEC INVESTIGATION. The Company was informed in May 1996 that the Commission
was conducting an informal inquiry regarding the Company. In May 1997 the
Company learned that a formal order of investigation had been entered by the
Commission. The Company believes that the focus of the investigation is on (i)
the accuracy of disclosures in certain documents filed by the Company with the
SEC; (ii) whether the Company had maintained adequate books and records and had
adequate internal controls; and (iii) whether records had been falsified. The
Company has voluntarily provided documents requested by the Commission, is in
the process of furnishing additional requested documents, and has cooperated
with the Commission in scheduling interviews with certain former Company
personnel. The Company is unable to predict the ultimate outcome of the
investigation. The Company and certain of its former employees could be subject
to civil or criminal sanctions including monetary penalties and injunctive
measures. If imposed on the Company, such penalties and injunctive measures
could have a material adverse effect on the Company's business, financial
condition and results of operation.

     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"). The complaint named as defendants the
Company and eleven individuals, all of whom are former employees of Frontier who
resigned their positions with
                             
                                       8
<PAGE>
 
                          MIDCOM COMMUNICATIONS INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Frontier. Frontier agreed to dismiss all of the individual defendants in the
case except William H. Oberlin, the Company's President and CEO. Moreover, in
September 1997, the Court dismissed certain causes of action in the context of a
summary judgment hearing. The surviving claims are 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 Frontier obtained through
employees hired from Frontier and otherwise; and (ii) Midcom and Mr. Oberlin
tortuously 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 Midcom hold
all profits which it earns as a result of its hiring of the individual defendant
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 defendant 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 has recently filed a
motion to dismiss the action and it awaits a hearing on this motion.

     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. The Company's motion to dismiss on statute of
limitations grounds was granted in part and remaining matters have been
transferred to the FCC as a matter of primary jurisdiction.

     On November 6, 1997, the Company and Frontier agreed to enter into a
settlement pursuant to which Frontier would dismiss all claims against the
Company and Mr. Oberlin. The settlement would provide, among other things, that,
over the next three years, Midcom will transfer approximately $40.5 million of
long distance traffic to Frontier and Frontier will transfer approximately
$20.25 million of long distance traffic to Midcom. There is some uncertainty as
to whether the settlement creates a pre-petition or post-petition claim, which 
issue is to be decided by the District Court.

     CHERRY COMMUNICATIONS LAWSUIT.  In September and December 1995, the Company
purchased 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 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 indemnify 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  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

                                       9
<PAGE>
 
                          MIDCOM COMMUNICATIONS INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(the "Cherry II Agreement"), and a Promissory Note executed in connection with
the Cherry II Agreement, (iii) customer service charges of $840,000. 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 accounts. 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 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 purchased from
Cherry Communications. In October 1997, Cherry filed a petition for relief under
Chapter 11 of the Bankruptcy Code.

     DISCOM ARBITRATION. Discom Corporation ("Discom"), a former distributor of
the Company, in an arbitration proceeding in New York against the Company has
filed to increase the amount of its claim against the Company to approximately
$8.0 million purportedly based upon a lost profit and damage analysis of its
expert. The Company has not yet had an opportunity to depose Discom's expert,
but preliminary indications are that the evaluation is seriously flawed and that
the Company's own expert testimony will more accurately reflect the maximum
possible damage claim of $250,000 to $500,000, which amount has been escrowed by
the Company. The Company disputes that any amounts are owed to Discom and it is
vigorously defending the case. Arbitration dates were scheduled in August,
September and October 1997 with a decision by the arbitration panel expected by
the end of fiscal 1997.

     OTHER LITIGATION.  The Company is also party to other routine litigation
incidental 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.

                                       10
<PAGE>
 
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

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 the Company's ability to successfully relocate its headquarters
and the impact of such relocation on operations; the Company's ability to
improve its provisioning process and reduce customer attrition; adequacy of
available sources of working capital; the confirmation of a plan of
reorganization by the Bankruptcy Court and the Company's ability to continue its
operations as a going concern. 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 relocate the Company's executive
offices, greater than expected declines in sales, inability to hire and retain
key personnel, unfavorable determinations of pending lawsuits or other disputes,
inability to secure additional sources of working capital and regulatory
changes. Additional risks and uncertainties include those described in the
Company's Annual Report on Form 10-K and other filings with the Securities and
Exchange Commission, press releases and other communications.

BANKRUPTCY FILINGS AND PROCEEDINGS

     On November 7, 1997, Midcom and three of its wholly-owned subsidiaries,
PacNet Inc. ("PacNet"), Ad Val, Inc. ("Adval") and Cel-Tech International Corp.
("Cel-Tech"), each filed a petition (collectively, the "Petitions") for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the Eastern District of Michigan (the
"Bankruptcy Court"), Case Nos. 97-59044-S, 59052-G, 59064-G and 59057-S,
respectively, with such cases to be jointly administered by the Bankruptcy
Court under Case No. 97-59044-S, and are currently operating their respective
businesses as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code and subject to the jurisdiction of the Bankruptcy Court. The
Petitions were filed in order to allow the Company and its subsidiaries to
continue operations while obtaining relief from the immediate collection of
obligations owed to creditors. The Company's unaudited condensed consolidated
financial statements included in this Report have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the filing under Chapter 11 of the Bankruptcy Code and
related circumstances, including the Company's leveraged financial structure and
losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the protection of
Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the Company's unaudited condensed consolidated financial statements
included in this Report. Further, a plan of reorganization could materially
change the amounts reported in such financial statements, which do not give
effect to all adjustments of the carrying value of assets or liabilities that
might be necessary as a consequence of a plan of reorganization. The
appropriateness of using the going concern basis depends upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
the ability to comply with the terms of any debtor-in-possession credit facility
and the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.













RESULTS OF OPERATIONS

<TABLE> 
<CAPTION> 

                                                Three months ended
                                ---------------------------------------------
                                September 30,    June 30,       September 30, 
(In millions)                       1997           1997             1996
-----------------------------------------------------------------------------
<S>                             <C>              <C>            <C> 
Revenue                           $ 24.9           $25.1            $30.7
Gross profit                         6.3             6.9              8.4
Selling, general and                22.1            22.5             15.7
  administrative                 
Depreciation and amortization        2.3             5.7              7.0
Operating loss                     (20.2)          (23.8)           (16.3)
Net loss                          ($23.6)         ($26.2)          ($18.3)

Net loss per share                ($1.56)         ($1.71)          ($1.16)
-----------------------------------------------------------------------------
</TABLE> 

     REVENUE. Revenue for the quarter ended September 30, 1997 decreased by
18.9% from $30.7 million in the third quarter of 1996 to $24.9 million.  Year-
to-date revenue of $74.3 million represents a 40.3% decrease from the $124.6
million reported for the same period in 1996. The decrease is attributable to
customer attrition in acquired customer bases and loss of revenue from a
customer base which is the subject of a dispute, offset by an increase in
revenue generated by the Company's internal sales force. Revenue for the third
quarter of 1997 decreased slightly compared to the $25.1 for the second quarter
of 1997. This decrease is attributable to pricing pressure on long distance
service as well as continued provisioning problems. Due to Midcom's position as
a switchless reseller, it has historically been dependent upon its underlying
carriers for provisioning of end-user services. Midcom has experienced
difficulties in provisioning, in a timely manner, all orders for services that
it receives. This has resulted in the loss of revenue and customers. At times,
the Company has been unable to provision as many as half of the orders for
service it receives. There are a number of potential causes for failing to
correctly provision an order in a timely manner--many of which affect other
telecommunications carriers to a greater or lesser degree. Such causes include
weaknesses in Midcom's own internal systems and procedures relating to order
entry and credit; the internal systems and procedures used by underlying
carriers, the LECs and others; the nature and time of interactions between
Midcom, the underlying carriers, the LECs and others; and the use of PIC
restrictions which may make it more difficult to change from one long distance
company to another. Midcom continues to improve its own systems and procedures
and to work with its underlying carriers, the LECs and others to reduce
incidences of provisioning problems. In addition, Midcom believes that the
implementation of its network strategy will substantially improve its ability to
correctly provision its orders in a timely manner by giving it better visibility
and more control of the entire provisioning process. However, there can be no
assurance that the Company will be successful in its efforts to improve its
provisioning process.

     GROSS MARGIN. The Company's cost of revenue primarily consists of the cost 
of service provided by local and interexchange carriers. Gross margin was 25.4%
and 26.3% for the quarter and nine month periods ended September 30, 1997,
respectively, versus 27.5% and 27.9% for the same periods in 1996, respectively.
The decline in gross margin is the result of changes in the mix of customers,
and pricing pressure on long distance services. These factors were offset in
part by negotiation of price reductions with some of the Company's major
suppliers. Gross margin decreased from the second quarter 1997 level of 27.3%. 
This decrease is mainly attributable to decreased margins experienced in the 
frame relay segment of the business resulting from capacity build out to 
accommodate future sales as well as increased dependence on off-net services due
to the expansion of the geographic area serviced by the Company. As new sales 
utilize network capacity and services are interconnected to the Midcom network, 
it is expected that margins will improve.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support, marketing and direct sales personnel;
commissions; professional fees; and bad debt expense. Selling, general and
administrative expenses increased to $22.1 million for the third quarter of 1997
compared to $15.7 million for the third quarter of 1996. For the nine-month
period ended September 30, 1997, selling, general and administrative expenses
increased to $62.6 million from $48.0 million for the same period in 1996. At
September 30, 1997 and September 30, 1996, the Company employed 728 and 452
persons on a full-time basis, respectively. The increase in selling, general and
administrative expenses is due to the increase in payroll, commissions, travel
and other costs relating to the Company's significantly expanded sales and
marketing efforts. The Company also increased customer support staffing in
anticipation of higher call volume resulting from the expanded sales efforts and
also to improve service quality.

     DEPRECIATION. Depreciation decreased to $1.3 million for the quarter ended
September 30, 1997 from $1.7 million for the quarter ended September 30, 1996.
For the nine-month period ended September 30, 1997, depreciation decreased to
$4.1 million from $4.3 million for the same period in 1996. The decrease in
depreciation is a result of the Company's write-off, by means of a June 1997
restructuring charge, of certain assets disposed of in connection with the
relocation of the Company's corporate headquarters from Seattle, Washington to
Southfield, Michigan. The Company is

                                       11
<PAGE>
 
finalizing the installation of six state-of-the-art high capacity switches at an
aggregate estimated cost of $15.0 million.  The Company expects that, as a
result of the deployment of these switches, depreciation will increase.

     AMORTIZATION.  Amortization decreased to $0.9 million for the quarter ended
September 30, 1997 from $5.3 million for the quarter ended September 30, 1996.
For the nine-month period ended September 30, 1997, amortization decreased to
$9.5 million from $21.9 million for the same period in 1996. The decrease in
amortization is primarily a result of the Company's decision in June 1996 to
reduce the estimated useful life of acquired customer bases from 5 years to 3
years, which increased amortization in 1996. In addition, certain of these
acquired customer bases became fully amortized in June 1996 and again in July
1997, which reduced amortization in 1997.

     RELOCATION OF CORPORATE HEADQUARTERS AND RESTRUCTURING CHARGES. In May
1997, the Company announced its intention to relocate its corporate headquarter
functions based in Seattle, Washington to Southfield, Michigan, where the
Company's Chief Executive Officer and other key executives maintained offices.
During the third quarter of 1997, the Company completed the relocation of
various support functions, including human resources, legal, finance and
information services, affecting approximately 130 employees, to temporary office
space in Southfield. The Company originally planned to move these corporate
support functions to permanent office space in Southfield when it became
available in December 1997; however, in light of the recent deterioration of the
Company's financial condition, those plans are being re-evaluated.

     In June 1997, the Company recorded a restructuring charge of $2.5 million,
consisting primarily of the cost of severance and loss on disposal of assets in
connection with the corporate headquarters relocation. This restructuring charge
is included in the corporate headquarters relocation expense reported on the
Company's unaudited condensed consolidated operations included with this Report
for the nine-month period ended September 30, 1997. As of September 30, 1997,
$0.4 million of this restructuring charge remained in accrued liabilities.

     During the third quarter of 1997, the Company incurred approximately $2.1
million of expenses related to the corporate headquarters relocation. If the
corporate headquarters relocation is completed as originally planned, the
Company now estimates that an additional $0.8 million of expenses would be
incurred in the fourth quarter of 1997.

     OTHER EXPENSES. Interest expense for the quarter and nine months ended
September 30, 1997 increased over the corresponding periods in 1996 primarily
due to an increase in average borrowings outstanding. At September 30, 1997,
June 30, 1997, December 31, 1996 and September 30, 1996, the Company had
outstanding interest-bearing obligations of $149.1 million, $125.1 million,
$112.1 million and $112.4 million, respectively. The increase from December 31,
1996 to September 30, 1997 was due primarily to increased borrowings under the
Company's revolving credit facility and bridge loan; the note payable to Ashok
Rao, the Company's former President and Chief Executive Officer, executed in
connection with the redemption of 885,360 shares of the Company's common stock
held by Mr. Rao and certain trusts established by Mr. Rao; and increased capital
lease obligations incurred in connection with the acquisition of furniture and
equipment, including the installation of the Company's new high-capacity
switches and other network enhancements.

     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 Company's net operating loss carryforward.

     NET LOSS. For the quarter ended September 30, 1997, the Company reported a
net loss of $23.6 million ($1.56 per share) compared to a net loss of $18.3
million ($1.16 per share) for the same period in 1996. For the nine

                                       12
<PAGE>
 
months ended September 30, 1997, the Company reported a net loss of $ 69.5
million ($ 4.51 per share) versus a net loss of $ 77.4 million ($ 5.01 per
share) for the same period in 1996. The substantial increase in net loss for the
quarter ended September 30, 1997 over the corresponding period in 1996 is
attributable to the declines in revenue and gross margin, as well as increases
in selling, general and administrative expenses, the relocation of the Company's
corporate headquarters, and the increase in interest expense, offset by the
reduction of amortization. The decrease in net loss for the nine months ended
September 30, 1997 compared to the corresponding period in 1996 is a result of
the impairment losses, restructuring charges, contract dispute settlement and
higher amortization expense recognized in 1996, offset by higher revenue in 1996
and the increases in selling, general and administrative expenses, the
relocation of the Company's corporate headquarters and the increase in interest
expense in 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has operated at substantial losses since its inception. Net
losses were approximately $69.5 million, $97.3 million and $33.4 million for the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995, respectively. As a result of these losses, significant attrition in
certain acquired customer bases, investments in business expansion and various
other factors, the Company has required substantial external working capital. As
of September 30, 1997, the book value of the Company's assets was approximately
$58.2 million, total debt outstanding was approximately $149.1 million, and the
Company had a negative net worth of approximately $144.7 million.

     In its Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
the Company disclosed that, in addition to borrowings available under its
revolving credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"), and financing available under its capital lease
facilities, the Company would require between $20 million and $30 million of
additional capital in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997.  In August
1997, the Company obtained an $8 million bridge loan from Foothill (the
"Foothill Bridge Loan").  The Foothill Bridge Loan had an interest rate of 15%
per annum and was payable in full on November 1, 1997. In addition, on October 
10, 1997, the Company completed a private placement of 875,000 shares of Common 
Stock. The Company received net proceeds from the private placement of 
approximately $5.5 million which were used for working capital purposes in 
October 1997.

     In early September 1997, the Company received a term sheet from a major
financial institution for an equity financing ranging from $40 million to $50
million. Due diligence with respect to the proposed equity financing commenced
immediately with the goal of closing the financing by October 31, 1997. In
addition, throughout September and October 1997, the Company continued to pursue
other short-term financing. However, at the end of October 1997, the Company had
not been successful in its efforts to close the proposed equity financing or
obtain additional financing.

     On November 4, 1997, as a result of the Company's failure to repay the 
Foothill Bridge Loan in full when due, Foothill gave notice of a default under
the Foothill Credit Facility and ceased making any further advances to the
Company or any of its subsidiaries. In addition to the repayment of the Foothill
Bridge Loan, the Company was required to make substantial payments to Sprint
Communications Company ("Sprint"), and several of the Company's suppliers
threatened termination of services.

     Faced with the imminent termination of service by the Company's principal
long-distance carriers, on November 7, 1997, the Company and three of its 
wholly-owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and
are currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. The Petitions were filed in order to allow
the Company and its subsidiaries to continue operations while obtaining relief
from the immediate collection of obligations owed to Foothill, Sprint and other
creditors.

     The voluntary filing of a petition for relief under the Bankruptcy Code
constitutes a default under the Foothill Credit Facility, the Company's
equipment lease facilities, the Indenture relating to the Company's $97.7
aggregate principal amount of 8 1/4% Subordinated Convertible Notes due 2003 and
the note payable to Ashok Rao in connection with the redemption of certain
shares of Common Stock (see Note 6 to the Company's Unaudited Condensed
Consolidated Interim Financial Statements included in this Report). Accordingly,
approximately $112.1 million of long-term indebtedness has been reclassified as
current liabilities as of September 30, 1997. Since it is not possible to
predict the impact of a sale or liquidation of the Company, no other adjustments
have been made to the historical carrying values of the assets and liabilities.

     The Company has arranged for debtor-in-possession financing (the "Foothill
DIP Facility") from Foothill. In connection with the Foothill DIP Financing, the
Company incurred a loan fee of $250,000. The Foothill DIP Facility consists of a
revolving credit facility with borrowing availability of up to $8.5 million,
subject to the Company's satisfaction of various terms and conditions, bears
interest at prime plus 4% on receivable based advances and 18% on overadvances
and expires on January 15, 1997. There can be no assurance that borrowings
available under the Foothill DIP Facility will be adequate to meet the Company's
working capital needs or that the Company will not require additional debt or
equity financing in the future, and there can be no assurance that any such
additional debt or equity financing, if needed, would be available to the
Company on acceptable terms or at all. In addition, the Company is currently
attempting to solicit offers to purchase all or portions of its assets. There
can be no assurance that any such transaction will be available to the Company
on acceptable terms or at all. The Company is also undertaking aggressive cost-
cutting measures, including the lay-off on November 7, 1997 of 170 of its 790
employees. Further cost-cutting measures will be required if the Company is
unable to complete a sale of all or part of its business or obtain additional
sources of working capital in the near-term. Cost-cutting measures, particularly
those affecting the Company's sales and service functions, could have a material
adverse effect on the Company's ability to generate revenue.

     The Company is required to submit a plan of reorganization to the
Bankruptcy Court. The Company is in the process of developing a plan of
reorganization, which the Company expects will involve the sale of all or part
of its business. There can be no assurance that the Company will be successful
in completing a sale of all or part of its business. In addition, there can be
no assurance that the Bankruptcy Court will approve the Company's reorganization
plan. If the Company is unable to find a buyer for all or part of its business,
or if the Company's reorganization plan is not approved, the Company may be
forced to liquidate.

                                       13
<PAGE>
 
PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

     The information required by Part II, Item 1, of Form 10-Q is incorporated
herein by reference to Note 9 to the Company's Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Report.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

     The information required by Part II, Item 3,of Form 10-Q is incorporated
herein by reference to Note 2 to the Company's Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Report and Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources included in Part I, Item 2 of this Report.

ITEM 5.    OTHER INFORMATION

     On November 10, 1997, the Company announced that the August 13, 1997 merger
agreements with Phoenix Network, Inc. ("Phoenix") and Trans National
Communications ("TNC") had been terminated. On October 31, 1997, Phoenix
notified the Company of its intent to terminate the merger agreement, effective
November 5, 1997, due to alleged material breaches by the Company, including the
Company's termination of its agreement with Sprint and the deterioration of the
Company's financial condition. In addition, on November 6, 1997, TNC notified
the Company of its intent to terminate its purchase agreements with Phoenix that
Phoenix had assigned to the Company.

     The Company's Common Stock is currently listed on the Nasdaq Stock Market. 
On November 7, 1997, Nasdaq notified the Company that the Common Stock would be 
de-listed from the Nasdaq Stock Market effective November 17, 1997.  The notice 
also stated that, because the Company had filed a petition for relief under 
Chapter 11 of the Bankruptcy Code, the letter "Q" would be appended to the
Company's trading symbol effective November 12, 1997. Although the Company
intends to pursue available procedural remedies, there can be no assurance that
the Common Stock will continue to be listed on the Nasdaq Stock Market after
November 17, 1997. If the Common Stock were de-listed from the Nasdaq Stock
Market, the liquidity of the Common Stock would be significantly diminished
which would likely result in a material decrease in the market price for the
Common Stock. These events would materially and adversely affect the Company's
ability to obtain financing through the sale of Common Stock or securities
convertible into Common Stock and, ultimately, could have a material adverse
effect on the Company's business, financial condition and results of operations.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

<TABLE> 
<CAPTION> 

<S>              <C> 
     10.1        Amendment Number Three, dated as of September 17, 1997, to Loan and Security 
                 Agreement by and among Midcom Communications Inc., Adval, Inc., Adval Data 
                 Corporation, Advanced Network Design, Cel-Tech International Corp. and PacNet, 
                 Inc., as borrowers, and Foothill Capital Corporation, as lender.

     10.2        Warrant to Purchase 100,000 Shares of Common Stock by Foothill Capital Corporation.

     11.1        Statement re: computation of net loss per share.

     27.1        Financial Data Schedule.

</TABLE> 

___________________
(b)  Reports on Form 8-K

          The Company filed Current Reports on Form 8-K on September 12, 1997
          and on September 24, 1997. There were no other Current Reports on Form
          8-K filed by the Company during the period covered by this Report.
                              
                                      14
<PAGE>
 
                                   SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                           MIDCOM Communications Inc.
                                                  (Registrant)

-----------------------------
Date:  November 14, 1997
                        
                                                 /s/ Kevin Smith
                                           --------------------------------
                                               Executive Vice President &
                                                Chief Financial Officer
                                             (Principal Financial Officer)

                                      15
<PAGE>
 
                           MIDCOM COMMUNICATIONS INC.
                                        
                               INDEX TO EXHIBITS

<TABLE> 
<CAPTION> 

    EXHIBIT
    NUMBER
(REFERENCED TO
  ITEM 601 OF                        EXHIBIT
Regulation S-K)                    DESCRIPTION
---------------                    -----------
<S>              <C> 
     10.1        Amendment Number Three, dated as of September 17, 1997, to Loan and Security 
                 Agreement by and among Midcom Communications Inc., Adval, Inc., Adval Data 
                 Corporation, Advanced Network Design, Cel-Tech International Corp. and PacNet, 
                 Inc., as borrowers, and Foothill Capital Corporation, as lender.

     10.2        Warrant to Purchase 100,000 Shares of Common Stock by Foothill Capital Corporation.

     11.1        Statement re: computation of net loss per share.

     27.1        Financial Data Schedule.

</TABLE> 

                                       16