<PAGE>   1
________________________________________________________________________________



                                  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, 1996.

                                       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.)

        1111 THIRD AVENUE, SEATTLE WA                     98101
   (Address of principal executive offices)             (Zip Code)



       Registrant's telephone number, including area code: (206) 628-8000

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 issuer's classes of
common stock, as of the latest practicable date.

<TABLE>
<S>                                                           <C>
                        Class                                 Outstanding at October 31, 1996
   -----------------------------------------------            -------------------------------
           Common Stock, $0.0001 par value                               15,799,515
</TABLE>



                               Page 1 of 25 pages.
                            Exhibit Index at Page 26.
<PAGE>   2
                           MIDCOM COMMUNICATIONS, INC.

                                    FORM 10-Q

                For the Quarterly Period Ended September 30, 1996

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                             PAGE
                                                                             ----

<S>                                                                           <C>
PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements                                              3

Item 2.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                         14

PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings                                                 22

Item 3.     Defaults Upon Senior Securities                                   22

Item 4.     Submission of Matters to a Vote of Security Holders               22

Item 6.     Exhibits and Reports on Form 8-K                                  24
</TABLE>



                                                                               2
<PAGE>   3
PART I.     FINANCIAL INFORMATION

Item 1.     Financial Statements


                           MIDCOM COMMUNICATIONS INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
(In thousands)                                                      September 30, 1996    December 31, 1995
-----------------------------------------------------------------------------------------------------------
                                                                        (Unaudited)
<S>                                                                      <C>                   <C>     
ASSETS

Current assets:
    Cash and cash equivalents                                            $  48,138             $  1,083
    Accounts receivable, less allowance for doubtful accounts
       of $8,026 and $10,581, respectively                                  20,266               51,814
    Due from related parties                                                    71                  502
    Prepaid expenses and other current assets                                2,266                2,510
                                                                         ---------             --------
          Total current assets                                              70,741               55,909

    Property, plant and equipment, net                                      10,130               13,719
    Investments in joint venture                                                --                2,000
    Intangible assets, less accumulated amortization
       of $34,646 and $12,812, respectively                                 22,098               60,781
    Other assets and deferred charges, net                                   3,795                  922
                                                                         ---------             --------
                                                                         $ 106,764             $133,331
                                                                         ---------             --------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
    Accounts payable                                                     $   6,222             $  7,397
    Carrier accounts payable                                                21,437               32,534
    Accrued expenses and other current liabilities                           9,299                9,613
    Notes payable                                                           10,963               14,576
    Current portion of long-term obligations                                 2,962               41,721
                                                                         ---------             --------
       Total current liabilities                                            50,883              105,841

Long-term obligations, less current portion                                  1,889                1,844
Convertible subordinated notes payable                                      97,743                   --
Other long-term liabilities                                                  5,948                1,847

Shareholders' equity (deficit)
    Common stock                                                            66,831               62,400
    Deferred compensation                                                     (522)                 (13)
    Accumulated deficit                                                   (116,008)             (38,588)
                                                                         ---------             --------
                                                                           (49,699)              23,799
                                                                         ---------             --------
                                                                         $ 106,764             $133,331
                                                                         =========             ========
</TABLE>





           See notes to condensed consolidated financial statements.


                                                                               3
<PAGE>   4
                           MIDCOM COMMUNICATIONS INC.

                       CONDENSED STATEMENTS OF OPERATIONS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            Three months ended            Nine months ended
                                                               September 30,                 September 30,
                                                          -----------------------      ------------------------
(In thousands, except per share data)                       1996          1995           1996           1995
-------------------------------------                     --------      ---------      ---------      ---------
                                                                       (Restated)                     (Restated)

<S>                                                       <C>           <C>            <C>            <C>      
Revenue                                                   $ 30,730      $  50,029      $ 124,590      $ 147,409

Cost of revenue                                             22,292         35,379         89,828        100,661
                                                          --------      ---------      ---------      ---------
Gross profit                                                 8,438         14,650         34,762         46,748

Operating expenses:
     Selling, general and administrative                    15,734         15,171         48,048         42,654
     Depreciation                                            1,653          1,242          4,327          3,180
     Amortization                                            5,321          2,244         21,857          5,204
     Settlement of contract dispute                             --             --          8,800             --
     Restructuring charges                                      --             --          2,220             --
     Loss on impairment of assets                            2,000             --         20,765             --
                                                          --------      ---------      ---------      ---------
                                                            24,708         18,657        106,017         51,038
                                                          --------      ---------      ---------      ---------

Operating loss                                             (16,270)        (4,007)       (71,255)        (4,290)

Other income (expense)
     Interest expense, net                                  (2,049)          (759)        (5,959)        (4,105)
     Equity in loss of joint venture                            --           (113)            --           (279)
     Other income (expense), net                                60            (24)          (206)          (252)
                                                          --------      ---------      ---------      ---------
                                                            (1,989)          (896)        (6,165)        (4,636)
                                                          --------      ---------      ---------      ---------
Loss before provision for income taxes
     and extraordinary item                                (18,259)        (4,903)       (77,420)        (8,926)
Provision for income taxes                                      --             18             --             18
                                                          --------      ---------      ---------      ---------
Loss before extraordinary item                             (18,259)        (4,921)       (77,420)        (8,944)

Extraordinary item:  loss on early redemption of debt           --         (2,992)            --         (2,992)
                                                          --------      ---------      ---------      ---------
Net loss                                                  $(18,259)     $  (7,913)     $ (77,420)     $ (11,936)
                                                          ========      =========      =========      ========= 

Per share amounts:
     Loss before extraordinary item                       $  (1.16)     $   (0.34)     $   (5.01)     $   (0.77)
     Extraordinary item                                         --          (0.21)            --          (0.25)
                                                          --------      ---------      ---------      ---------
Net loss                                                  $  (1.16)     $   (0.55)     $   (5.01)     $   (1.02)
                                                          ========      =========      =========      ========= 


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

Weighted average common
     shares outstanding                                     15,681         14,373         15,442         11,648
                                                          ========      =========      =========      ========= 
</TABLE>





           See notes to condensed consolidated financial statements.


                                                                               4
<PAGE>   5
                           MIDCOM COMMUNICATIONS INC.

                       CONDENSED STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                     Nine months ended September 30,
(In thousands)                                                              1996          1995
--------------                                                            --------      --------
                                                                                        (Restated)

<S>                                                                       <C>           <C>     
Net cash provided by (used in) operating activities                       $ (6,591)     $    992
                                                                          --------      --------

Investing activities:
     Purchases of plant and equipment                                       (1,729)       (6,648)
     Net assets acquired in business and customer base acquisitions             --       (10,458)
     Investment in and advances to joint venture                                --        (2,524)
     Proceeds from sale of customer base                                       692            --
     Other, net                                                                (19)           --
                                                                          --------      --------
        Net cash used in investing activities                               (1,056)      (19,630)
                                                                          --------      --------

Financing activities:
     Repayment of notes payable                                             (3,946)      (12,153)
     Proceeds from notes payable                                               333            --
     Proceeds from long-term obligations                                    15,000         8,695
     Repayment of long-term obligations                                    (53,687)      (22,695)
     Proceeds from issuance of convertible subordinated notes payable       97,743            --
     Deferred financing costs                                               (3,569)          (80)
     Proceeds from common stock issued for stock
        purchase plan and stock options                                      2,828           329
     Proceeds from issuance of common stock                                     --        53,986
     Preferred stock redemption                                                 --        (8,597)
     Distributions to shareholders of acquired companies                        --          (287)
                                                                          --------      --------
        Net cash provided by financing activities                           54,702        19,198
                                                                          --------      --------

Net increase in cash                                                        47,055           560
Cash at beginning of period                                                  1,083           960
                                                                          --------      --------
Cash at end of period                                                     $ 48,138      $  1,520
                                                                          ========      ========
</TABLE>




            See notes to condensed consolidated financial statements.


                                                                               5
<PAGE>   6
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1.          BASIS OF PRESENTATION

            The accompanying 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 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 April 16, 1996, as
subsequently amended.

            The information furnished 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.

            The Company incurred operating losses during each of the three years
ended December 31, 1995 and, as of September 30, 1996, had an accumulated
deficit of $115.9. The report of the Company's independent auditors with respect
to the Company's Consolidated Financial Statements for the year ended December
31, 1995 states that the Company's recurring operating losses, working capital
deficiency and past credit facility defaults raise substantial doubt about the
Company's ability to continue as a going concern. The Company's condensed
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments that might
result from the outcome of this uncertainty. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

2.          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, the Company
wrote-down certain acquired customer bases, equipment, and investment in a joint
venture, and recorded a loss on impairment of assets totaling $20.8 million
during 1996.

3.          SETTLEMENT OF CONTRACT DISPUTE

            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
$117.0 million. 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 $27.6 million 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 $13.3 million 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 $8.8
million payable in two installments. The first payment of $5.0 million was made
on November 6, 1996, and the remaining balance 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.


                                                                               6
<PAGE>   7
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


4.          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 6 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 components
of which relate primarily to severance and lease cancellation charges. Included
in the first quarter restructuring charge is approximately $0.4 million relating
to the extension of the time period to exercise outstanding stock options. As of
September 30, 1996, $1.0 million of this restructuring charge remained in
accrued liabilities.

5.          BUSINESS COMBINATIONS

            In September 1995, the Company acquired all of the outstanding stock
of AdVal, Inc. ("AdVal") and in December 1995, the Company acquired all of the
outstanding stock of ADNET Telemanagement, Inc. ("Adnet") and its wholly-owned
subsidiary, Advanced Network Design in transactions accounted for as poolings of
interests. As a result, the consolidated financial statements for all periods
prior to the acquisitions have been restated to include the accounts and results
of operations of AdVal and Adnet. (See Note 7 below.)

            In addition, since March 31, 1995, the Company has supplemented its
growth through several acquisitions of smaller providers of telecommunications
services. Certain of these acquisitions included the purchase of substantially
all of the operating assets of the acquired business including customer bases,
and in other situations, only specific customer bases were acquired. All such
acquisitions have been accounted for using the purchase method with the excess
of the purchase costs over the net tangible assets acquired being primarily
allocated to acquired customer bases, non-competition agreements and goodwill.
Financial results from the acquired operations have been included in the
Company's results from the respective dates of acquisition. As a result, the
financial results for the 1996 and 1995 periods presented are not directly
comparable.

            In connection with several of the transactions described above, the
Company has an obligation to issue or release from escrow up to a maximum of
178,632 additional shares of its common stock upon the satisfaction of certain
contingencies. Such contingencies include, among other things, maintenance of
specified revenue levels for the acquired customer base, adjustment of
liabilities assumed and receivables purchased, and satisfaction of general
representations and warranties. The contingency periods range from six months to
two years. The Company was also obligated to pay additional cash pursuant to a
customer base purchase agreement, based upon revenue levels for such customer
base. In October 1996, $1.2 million was paid to satisfy this obligation. 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 subsidiary of the Company,
a payment of a maximum of $2.0 million would become payable to the former
shareholder.

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


                                                                               7
<PAGE>   8
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



            The Company is also 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. Based on a closing stock price of $10.75 as of November 8, 1996 for the
Company's common stock, approximately 198,577 additional shares would be
issuable as a result of these obligations.

6.          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 and the number
of shares issued in the Company's initial public offering whose net proceeds
were used to redeem the Series A Redeemable Preferred Stock. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect except that pursuant to the requirements of the Commission,
common and equivalent shares issued during the twelve month period prior to the
filing with the Commission of the registration statement with respect to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods prior to the completion of the Company's
initial public offering in July 1995 using the treasury stock method.

7.          DISPUTES AND LITIGATION

            CLASS ACTION LAWSUIT. The Company, its 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 purports
to be 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. 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
Commission was conducting an informal inquiry regarding the Company's initial
public offering and the restatement of its 1995 third quarter results. The
Company has voluntarily provided the documents requested by the Commission, but
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 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.


                                                                               8
<PAGE>   9
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



            FRONTIER LAWSUIT. 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.
These individuals include William H. Oberlin, the President and Chief Executive
Officer and a director of the Company, Charles I. Gragg III, the Executive Vice
President of Marketing 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 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 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 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.

            ADNET LAWSUIT. On August 1, 1996, a lawsuit was filed 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 to be named at a later date by David and Maria Wiegand, the former
shareholders of Adnet. The plaintiffs agreed to dismiss this action without
prejudice as described below. Adnet was acquired by the Company on December 29,
1995 in exchange for 453,250 shares of Common Stock, of which 45,325 shares (the
"Adnet Escrow Shares") were placed in escrow to be held until December 28, 1996
for satisfaction of certain contingencies. Adnet provides long distance services
to medium-to-large businesses. The acquisition was accomplished through the
merger of Adnet into the Company and has been accounted for as a pooling of
interests. On October 1, 1996, Mr. Wiegand resigned as vice president of the
Company. He had been in charge of the operations of the Adnet division since its
acquisition by Midcom. At the date of closing of this acquisition, the last
reported sale price for the Company's Common Stock as reported by Nasdaq
National Market was $18.25. During 1996 (through October 31, 1996), the Common
Stock has traded as low as $6.50 per share. The complaint alleged intentional
misrepresentations, intentional concealment of facts, negligent
misrepresentation, breach of contract, breach of implied covenant of good faith
and fair dealing and violation of California Securities Laws in connection with
the acquisition. The plaintiffs sought recovery of monetary damages in an amount
which the plaintiffs describe as "not yet ascertainable, but potentially [in
excess of] $10,000,000." The plaintiffs furthermore sought rescission of the
Merger Agreement, restoration of all consideration paid by the plaintiffs to the
Company pursuant to the Merger Agreement, an order enjoining the Company from
undertaking any acts which would further merge Adnet into the Company, and which
would prevent the plaintiffs from being accorded full relief upon rescission of
the Merger Agreement, punitive damages in an amount to be determined at trial
and attorneys' fees and other costs and expenses of suit.


                                                                               9
<PAGE>   10
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



            The plaintiffs' claims are based in part on the restatement by the
Company of its financial results for the third quarter and the nine months ended
September 30, 1995 from those reported in its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 as originally filed in November 1995. The
restated results, which were first announced in March 1996, reflected a $3.3
million reduction in revenue and $4.5 million reduction in accounts receivable
for the quarter and the nine months ended September 30, 1995. These and other
adjustments resulted in the Company's net loss for the quarter and the 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. The
Company had represented in the Merger Agreement with Adnet that the financial
statements included in its filings with the Commission "fairly present the . . .
financial position of MIDCOM . . . as of the dates thereof and its . . . results
of operations and cash flow for the periods then ended . . . are correct and
complete in all respects."

            On August 8, 1996 the Company and the plaintiffs entered into an
agreement whereby the plaintiffs agreed to dismiss the complaint without
prejudice and not to re-file the complaint before August 31, 1996, and the
parties agreed to meet before August 31, 1996 to pursue a negotiated settlement
of the plaintiffs' claims. In connection with the execution of this agreement,
the Company agreed to release the Adnet Escrow Shares to the plaintiffs.
Although as of the date of this Quarterly Report, the plaintiffs have not
re-filed their complaint, the parties have not negotiated a settlement to the
plaintiffs' claims. If the Company is unable to reach an agreement with the
plaintiffs to settle their claims, it is likely that the complaint will be
re-filed. Although the Company would vigorously defend this action, it cannot
predict the outcome of these claims.

            CHERRY COMMUNICATIONS LAWSUIT. In September and December 1995, the
Company acquired two significant customer bases from Cherry Communications
Incorporated ("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, although the terms of the Revolving Credit Facility, as
described below, prohibit the Company from paying any portion of this obligation
in cash without the lenders' prior written consent. 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 $11.4 million through September 30, 1996)
and accrued customer service charges through September 30, 1996 of $840,000.
Negotiations between Cherry Communications and the Company failed to produce a
settlement of these disputes.


                                                                              10
<PAGE>   11
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



            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 substantial offsets and counterclaims against
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.

            CEL-TECH LAWSUIT. On April 30, 1996, a lawsuit was filed in the
Superior Court of the State of Washington, King County, against the Company and
certain of its officers and directors by the former owner of Cel-Tech seeking
rescission of his sale of Cel-Tech to the Company. The complaint alleged
misrepresentation of facts concerning the value of the Company's Common Stock
and breach of contract. In addition to rescission of the sale transaction,
plaintiff sought unspecified damages and an injunction placing Cel-Tech under
the plaintiff's control until resolution of the dispute. The Plaintiff has filed
a second amended complaint in order to seek damages in lieu of rescission. On
October 28, 1996, the Court dismissed without prejudice the plaintiff's claim
for rescission under the Washington Securities Act; however, the case continues
with respect to the plaintiff's breach of contract and fraud claims. The Company
believes there is no merit to the allegations in the portion of the amended
complaint which has not been dismissed, and plans to file a motion for summary
judgment with respect to the amended complaint and to otherwise vigorously
defend this lawsuit. However, the Company is unable to predict the outcome of
this lawsuit.

            DISCOM LAWSUIT. On July 2, 1993, a complaint was filed in the
Superior Court of the State of New Jersey, Bergen County, Law Division, by
Discom Corporation ("Discom") against the Company, Paul Pfleger, who is the
largest shareholder and Chairman of the Board of Directors, and Pamcom, Inc., a
corporation wholly owned by Mr. Pfleger ("Pamcom"), alleging unjustified
customer provisioning delays, customer rejections, improper changes in pricing
policies and failure to deal in good faith causing a breach of contract with a
third party beneficiary. Discom seeks compensatory damages of $3.0 million for
lost profits and lost commissions. Claims against Mr. Pfleger were dismissed on
jurisdictional grounds. The Company has filed counterclaims against Discom for
unfair competition and trademark infringement. Discom was a distributor of
aggregation services under a contract between AT&T and Midcom Consultants, Inc.
("Consultants"). In exchange for the right to place its own aggregation
customers under Consultant's contract with AT&T, the Company provided
provisioning, billing and other support services 


                                                                              11
<PAGE>   12
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


for all aggregation customers under Consultant's aggregation contract, including
Discom's customers. In January 1995, the Company acquired certain of the assets
and liabilities of Consultants. Pamcom, Inc., the sole remaining co-defendant in
this action, was the sole shareholder of Consultants at the time of the alleged
events that are the subject of this action. On October 25, 1995, Discom filed
notice for arbitration in New York against Consultants alleging breach of the
distributor agreement between the parties. The Company moved to consolidate the
pending litigation between Discom and the Company with Discom's claim in
arbitration against Consultants. Pursuant to an order of the Superior Court, the
entire case has been transferred to arbitration in New York for disposition of
the claims and counterclaims. A hearing by a panel of arbitrators has been
indefinitely post-poned. The Superior Court proceeding has been stayed with
jurisdiction reserved solely to resolve any discovery disputes. The Company has
deposited $645,000 in an interest-bearing escrow account, which the Company
believes exceeds the total of all commissions payable to Discom from August 1,
1993 through December 31, 1995. Although the outcome of any litigation or
arbitration is uncertain, the Company believes that it has significant defenses
to the claims of Discom and intends to vigorously defend itself in this matter
and believes that the outcome of this matter will not have a material adverse
effect on the Company's business, financial condition, results of operations or
liquidity.

            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.

8.          ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES PAYABLE

            In August and September of 1996, the Company completed a private
placement (the "Private Placement") of approximately $97.7 million in 
aggregate principal amount of 8-1/4% Convertible Subordinated Notes due 2003 
(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"). Interest on the Notes 
will be paid 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, par value $.0001 per share (the "Common Stock"), at a 
conversion price of $14.0875 per share (equivalent to a conversion rate of 
70.985 shares per $1,000 principal amount of Notes), subject to adjustment in 
certain events.

            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) $15.0
million to repay in full a bridge loan (the "Bridge Loan") made by Transamerica
Business Credit Corporation ("Transamerica"), (ii) $19.0 million to repay in
full the revolving loans (the "Revolving Loans") under the Company's secured
revolving credit facility with Transamerica and certain other lenders (the
"Revolving Credit Facility"), (iii) $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 (iv) $10.0 million to bring 
current a number of payment obligations existing prior to the completion of 
the Private Placement. In addition, the Company anticipates using 
approximately $22.0 million of the net proceeds to acquire and install high 
capacity switches. The balance of the net proceeds has been and will be used 
for additional working capital, additional capital expenditures and general 
corporate purposes.

            The Notes were sold to qualified institutional buyers pursuant to
Securities and Exchange Commission Rule 144A under the Securities Act of 1933
(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 Notes have not been registered under the
Securities Act and may not be offered or sold in the United States absent
registration under the Securities Act or an 

                                                                              12
<PAGE>   13
                           MIDCOM COMMUNICATIONS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


exemption from such registration requirements. However, 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 the public offer and sale of the Notes and the shares of
Common Stock issuable upon conversion of the Notes (the "Conversion Shares").
Pursuant to the Registration Rights Agreement, the Company filed a shelf
registration statement (the "Shelf Registration Statement") with the Commission
on October 18, 1996 to register the public offer and sale of the Notes and the
Conversion Shares. The Company is required under the Registration Rights
Agreement to maintain the effectiveness of the Shelf 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 Shelf Registration Statement or (ii) the date on which there ceases to be
outstanding any Notes or Conversion Shares.


                                                                              13
<PAGE>   14
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 in this report 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 stated expectations. Forward-looking statements in
this report include those concerning anticipated growth in revenue, the
estimated costs of the deployment of a network of high capacity local and long
distance switching facilities, the availability of the Revolving Credit Facility
and the ability of the Company to renew the Revolving Credit Facility after its
expiration, the adequacy of available sources of working capital to implement
the Company's operating strategies and the impact on the Company's business,
results of operation and financial condition of certain litigation to which the
Company is party. Relevant risks and uncertainties include 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, acquire switching equipment or execute other aspects of the
Company's growth strategy, greater than expected declines in sales, 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 and other risks and uncertainties identified elsewhere herein
in connection with such forward looking statements. Additional risks and
uncertainties include those described in the Company's Interim Report on Form
8-K as filed with the Commission on August 2, 1996, the Company's Annual 
Report on Form 10-K for the year ended December 31, 1995 and those described 
from time to time in the Company's other filings with the Securities and 
Exchange Commission, press releases and other communications. Although the 
Company believes that all forward-looking statements are reasonable, there 
can be no assurance that actual results, achievements, performance or 
developments will not differ materially from those expressed or implied by 
such forward-looking statements.


                                                                              14
<PAGE>   15
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>
                                           Three months ended  Nine months ended
                                              September 30,       September 30,
                                             ---------------     --------------
                                             1996      1995      1996      1995
                                             -----     -----     -----     ---- 
                                                    (Restated)          (Restated)

<S>                                         <C>       <C>       <C>       <C>    
Revenue                                     100.0 %   100.0 %   100.0 %   100.0 %

Cost of revenue                              72.5      70.7      72.1      68.3
                                            -----     -----     -----     ---- 

Gross margin                                 27.5      29.3      27.9      31.7

Operating expenses:
     Selling, general and administrative     51.2      30.3      38.6      28.9
     Depreciation                             5.4       2.5       3.5       2.2
     Amortization                            17.3       4.5      17.5       3.5
     Settlement of contract dispute            --        --       7.0        --
     Restructuring charges                     --        --       1.8        --
     Loss on impairment of assets             6.5        --      16.7        --
                                            -----     -----     -----     ---- 

Operating loss                              (52.9)     (8.0)    (57.2)     (2.9)

Other expense:
     Interest expense                        (6.7)     (1.5)     (4.8)     (2.8)
     Other expense, net                       0.2      (0.3)     (0.1)     (0.3)
                                            -----     -----     -----     ---- 
                                             (6.5)     (1.8)     (4.9)     (3.1)
Extraordinary item                             --      (6.0)       --      (2.1)
                                            -----     -----     -----     ---- 
Net loss                                    (59.4)    (15.8)    (62.1)     (8.1)
                                            =====     =====     =====     =====  
</TABLE>


            REVENUE. For the third quarter of 1996, the Company reported a 38.6%
decrease in revenue to $30.7 million from $50.0 million reported in the third
quarter of 1995. Year-to-date revenue of $124.6 million represents a 15.5%
decrease from the $147.4 million reported for the same period in 1995. Third
quarter 1996 revenue decreased $10.1 million from the second quarter 1996
revenue of $40.8 million due to customer attrition, the sale of its low-end fax
broadcasting business,  and a dispute with Cherry Communications, the seller of
another acquired customer base. As a result of the litigation between Cherry
Communications and the Company, 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 down from $7.9 million of revenue during the second
quarter of 1996.  In addition, the bankruptcy of the seller of a customer base
acquired by the Company has adversely affected the Company's ability to generate
revenue from that customer base.  The decrease in 1996 periods as compared
to the year earlier periods is attributable to the above factors and the Company
expects that during the remainder of 1996 revenue will continue to decline due 
to customer attrition, seasonality and other factors.

            GROSS MARGIN. The Company's cost of revenue consists of the cost of
services provided by local and interexchange carriers. Gross margin was 27.5%
and 27.9% as a percent of total revenue for the third quarter and nine month
periods in 1996, respectively, versus 29.3% and 31.7%, respectively for the same
periods in 1995. The decline in gross margin is primarily attributable to
changes in the mix of customers. These factors were offset in part by
negotiation of price reductions with some of the Company's suppliers.


                                                                              15
<PAGE>   16
            SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support and marketing personnel, compensation costs for
direct sales personnel, commissions and other costs related to indirect
distribution and bad debt expense. Selling, general and administrative expenses
increased to $15.7 million for the third quarter of 1996 compared to $15.2
million for the same period in 1995. For the nine month period, selling, general
and administrative expenses increased $5.3 million to $48.0 million from $42.7
million in the same period of 1995. The increase is due to several factors,
including an increase in bad debt expense, an increase in legal, accounting and
other professional contractor fees, an increase in fees paid to third party
billing agents, and the addition of sales force personnel and related
recruiting, travel and training costs. These increases were offset, in part, by
reductions in commission expenses, and facilities-related costs. The Company
employed 452 and 428 persons on a full-time basis as of September 30, 1996 and
1995, respectively.

            DEPRECIATION. Depreciation expense increased to $1.7 million in the
third quarter of 1996 from $1.2 million in the same period of 1995. For the nine
months ended September 30, 1996, depreciation was $4.3 million versus $3.2
million in the same period of 1995. The increase is primarily attributable to
the depreciation of computer systems and equipment related to the Company's
billing and 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 telephone switching equipment due to the partial write-off of
such equipment in the fourth quarter of 1995.

            AMORTIZATION. Amortization expense increased to $5.3 million in the
third quarter of 1996 from $2.2 million in the same period of 1995. Year-to-date
amortization was $21.9 million in 1996 versus $5.2 million for the same period
of 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 SETTLEMENT OF CONTRACT DISPUTE. On July 19, 1996,
the Company and AT&T Corp., executed a letter of intent to settle anticipated
shortfalls of minimum commitments under the Company's supply contract with AT&T
as well as all other pending disputes between the Company and AT&T and to
negotiate a new contract to reduce the Company's minimum commitment to AT&T
from approximately $117 million to $17 million. The letter of intent also
provided for the payment by the Company to AT&T of $8.8 million in two
installments. The Company recorded a charge of $8.8 million in the second
quarter of 1996 with respect to this 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 $13.3 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
Midcom announcing quarterly gross revenue in excess of $75.0 million, or upon
completion of a change in control.


                                                                              16
<PAGE>   17
            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 6 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 September 30, 1996, $1.0 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, the Company wrote-down certain
acquired customer bases, equipment, an investment in a joint venture, and
recorded a loss on long-term assets totaling $20.8 million during 1996.

            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
$15.0 million Bridge Loan. At September 30, and June 30, 1996, the Company had
outstanding interest-bearing obligations of $113.6 million and $58.0 million,
respectively, as compared to $58.1 million as of December 31, 1995. The increase
in debt at September 30, 1996 was primarily due to issuance of the $97.7 million
convertible subordinated notes, net of repayment of the Bridge Loan and the
revolving loans under the Company's Revolving 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 Company's net operating loss
carryforward.

            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 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.

            NET LOSS. The substantial increase in net loss in 1996 periods over
the corresponding periods in 1995 is attributable to the declines in gross
margin, the increases in operating expenses, the $20.8 million loss on
impairment of assets related to acquired customer bases, equipment, and
investment in a joint venture, the restructuring charges and the settlement
payments described above.


                                                                              17
<PAGE>   18
LIQUIDITY AND CAPITAL RESOURCES

            Historically, the Company has experienced rapid growth, which has
required substantial working capital to finance receivables, capital
expenditures and acquisitions and service indebtedness. Given the Company's
billing and collection cycle with its customers and suppliers, the Company
generally pays its underlying 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 balances were $48.1 million at September 30, 1996
versus $1.1 million at December 31, 1995. Net cash used in operations was $6.6
million for the first nine months of 1996 versus $992,000 generated by
operations in the same period of 1995. During the first nine months of 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 $28.0 million as of December 31, 1995 to $9.9 million as of September 30,
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.

            During the first nine months of 1996, the Company invested $1.7
million to purchase property, plant and equipment compared to $6.6 million for
the same period the prior year. During the first nine months of 1995, the
Company used $10.5 million in business and customer base acquisitions and $2.5
million in advances to a Russian joint venture.  No similar investments were
made during the first nine months of 1996. For the first nine months of 1996,
the Company received $2.8 million in proceeds in connection with the exercise of
stock options and the purchase of shares under the Company's stock purchase
plan, compared to $329,000 received in connection with the exercise of stock
options during the first nine months of 1995. In addition, the Company received
$54.0 million in net proceeds from its initial public offering in July 1995,
paid $8.6 million to redeem outstanding preferred stock, and paid $287,000 to
shareholders of acquired companies.

            The Company has experienced significant losses since its inception,
with net losses of approximately $3.0 million, $33.4 million and $77.4 million
for 1994, 1995 and the nine months ended September 30, 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.

            In August and September of 1996, the Company completed a private
placement (the "Private Placement") of approximately $97.7 million in aggregate
principal amount of 8-1/4% Convertible Subordinated Notes due 2003 (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 are convertible into shares of the Company's
common stock, par value $.0001 per share (the "Common Stock"), at a conversion
price of $14.0875 per share (equivalent to a conversion rate of 70.985 shares
per $1,000 principal amount of Notes), subject to adjustment in certain events.

            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) $15.0
million to repay in full a bridge loan (the "Bridge Loan") made by Transamerica
Business Credit Corporation ("Transamerica"), (ii) $19.0 million to repay in
full the revolving loans (the "Revolving Loans") under the Company's secured
revolving credit facility with Transamerica and certain other lenders (the
"Revolving Credit Facility"), (iii) $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 (iv) $10.0 million to bring current a number of payment
obligations existing prior to the completion of the 


                                                                              18
<PAGE>   19
Private Placement. In addition, the Company anticipates using approximately
$22.0 million of the net proceeds to acquire and install high capacity switches.
The balance of the net proceeds has been and will be used for additional
working capital, additional capital expenditures and general corporate purposes.


            Interest on the Notes will be paid 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 may 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 may 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 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 through September 30, 1996)
and accrued customer service charges through September 30, 1996 of $840,000.
Negotiations between Cherry Communications and the Company failed to produce a
settlement of these disputes and Cherry Communications has filed suit against
the Company seeking to recover alleged past due amounts. The Company was
obligated to pay additional cash pursuant to a customer base purchase agreement,
based upon revenue levels for such customer base.  In October 1996, $1.2 million
was paid to satisfy this obligation.  In addition, in the event of the sale or
transfer of the majority of the voting stock of Cel-Tech, a payment of a maximum
of $2.0 million would become payable to the former shareholder.

      The Company's available sources of working capital consist of cash flows
from operations, approximately $48.1 million at September 30, 1996 in cash and
short-term, investment grade, interest-bearing securities, which funds represent
the remaining net proceeds from the Private Placement, and possible available
borrowings under the Revolving Credit Facility. 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. As a result, a number of suppliers placed the Company on
credit hold and/or initiated collection actions. Also, for several months prior
to completion of the Private Placement, the Company was in default of certain
financial and other covenants under its Revolving Credit Facility, although the
lenders continued to permit borrowings under that facility. In addition, the
report of the Company's independent auditors with respect to the Company's
Consolidated Financial Statements for the year ended December 31, 1995 states
that the Company's recurring operating losses, working capital deficiency and
credit agreement defaults raise substantial doubt about the Company's ability to
continue as a going concern. The nature of this opinion itself constituted a
default under the Revolving Credit Facility. In 


                                                                              19
<PAGE>   20
connection with the completion of the Private Placement and the application of
the net proceeds therefrom to the repayment in full of the Bridge Loan and the
Revolving Loans, which aggregated approximately $34.0 million, the lenders under
the Revolving Credit Facility waived all existing defaults and amended the
financial covenants under the Revolving Credit Facility to levels forcasted to 
be consistent with Midcom's revised business plan. The Company's maximum 
borrowing availability under the Revolving Credit Facility, as amended, is 
$43.0 million, subject to a borrowing base equal to 85% of the Company's 
eligible accounts receivable less a minimum excess availability requirement of
$20.0 million for the months of August 1996 through February 1997, declining 
in stages to $8.0 million for the months of September through November 1997. 
As of September 30, 1996, after giving effect to the amendment, the Company's 
borrowing base was less than the minimum excess availability.

            The Company estimates that it will require between $40.0 million and
$50.0 million during 1996 and 1997 in order to fund (i) operating losses, (ii)
working capital requirements and (iii) capital expenditures, including an
estimated $22.0 million to acquire and install high capacity switches. The
Company expects that the remaining proceeds of the Private Placement, together
with funds available under the Revolving Credit Facility and cash flows from
operations, will be sufficient to fund these requirements during 1996 and 1997.
However, the exact amount and timing of these capital requirements 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 and payment terms obtained from the Company's suppliers and the
timing of capital expenditures. The Revolving Credit Facility expires in
November 1997. There can be no assurance that the Company will be able to renew
the Revolving Credit Facility upon its expiration or that the Company will be
able to replace the Revolving Credit Facility on terms that the Company finds
acceptable. Further, there can be no assurance that the net proceeds of the 
Private Placement together with funds available under the Revolving Credit 
Facility and cash flows from operations will be sufficient to fully implement 
the Company's operating strategy or meet its other capital requirements. If 
(i) the Company experiences greater than anticipated capital requirements, 
(ii) it is determined to be liable for, or otherwise agrees to settle or 
compromise, any material claim against it, (iii) it is unable to make future 
borrowings under the Revolving Credit Facility for any reason or (iv) the 
Company is unable to produce anticipated cash flows from operations, the 
Company may be required to refinance all or a portion of its existing debt, 
sell assets 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 will 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. The failure of
the Company to complete one or more of such alternatives or otherwise obtain
sufficient funds to satisfy its cash requirements could prevent the Company from
implementing its operating strategy and, ultimately, could force the Company to
seek protection under the federal bankruptcy laws. Such events would materially
and adversely affect the value of the Company's debt and equity securities.

            The report of the Company's independent auditors with respect to the
Company's consolidated financial statements for the year ended December 31, 
1995 states that the Company's recurring operating losses, working capital 
deficiency and past credit facility defaults raise substantial doubt about the 
Company's ability to continue as a going concern. The Company's consolidated 
financial statements have been prepared assuming that the Company will 
continue as a going concern and do not include any adjustments that might 
result from the outcome of this uncertainty.


                                                                              20
<PAGE>   21
ADOPTION OF  ACCOUNTING STANDARDS

            In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." This pronouncement
establishes accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This standard defines a fair value based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Companies which elect to continue
using the rules of APB Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if this new statement had been applied.
Effective January 1, 1996, the Company adopted Statement 123 and elected to
continue following the guidance of APB Opinion No. 25.




                                                                              21
<PAGE>   22
PART II.    OTHER INFORMATION


Item 1.                 Legal Proceedings

            See the information contained in "Note 7 -- Disputes and Litigation"
in Item 1 of Part I above which information is, by this reference, incorporated
herein.


Item 3.                 Defaults Upon Senior Securities

            Under the Revolving Credit Facility, the Company is subject to
certain operating and financial covenants. During 1996, the Company was in
default of several of these covenants, including the requirement that the
Company achieve EBITDA of at least $4.0 million for the quarter ended December
31, 1995. The report of the Company's independent auditors with respect to the
Company's consolidated financial statements states that the Company's recurring
operating losses, working capital deficiency and credit agreement defaults raise
substantial doubt about the Company's ability to continue as a going concern.
The nature of this opinion itself constituted a default under the Revolving
Credit Facility. In connection with the completion of the Private Placement and
the application of the net proceeds therefrom to the repayment in full of the
Bridge Loan and the Revolving Loans, the lenders under the Revolving Credit
Facility waived all existing defaults and amended the financial covenants under
the Revolving Credit Facility to levels forcasted to be consistent with the 
Company's revised business plan.

            The existence of defaults under the Revolving Credit Facility 
constituted defaults under three of the Company's capital lease facilities. 
Defaults under two of these leases were cured when the defaults under the 
Revolving Credit Facility were cured. The Company is still in default under one
capital lease facility and is negotiating with the lessor to cure the remaining
defaults.


Item 4.       Submission of Matters to a Vote of Security Holders

The annual meeting of MIDCOM Communications Inc.'s shareholders was held on
October 29, 1996. The following proposals were submitted to a vote:

a)    To elect eight directors to hold office for initial terms ranging 
      between one to three years, or until their respective successors are 
      elected and qualified. The proposal passed with the following number of 
      votes:

<TABLE>
<CAPTION>
                                                          Affirmative         Withheld
                                                          ----------------------------
<S>                                                        <C>                 <C>    
         Class I for a One Year Term
         Karl D. Guelich                                   12,916,181          177,264
         Scott B. Perper                                   12,916,581          176,864

         Class II for a Two Year Term
         Daniel M. Dennis                                  12,916,181          177,264
         Marvin Moses                                      12,916,381          177,264
         John M. Orehek                                    12,916,781          176,664

         Class III for a Three Year Term
         William H. Oberlin                                12,916,381          177,064
         Paul Pfleger                                      12,916,381          177,064
         John M. Zrno                                      12,916,381          177,064
</TABLE>


                                                                              22
<PAGE>   23
b)    To approve an amendment to the MIDCOM Communications, Inc. 1993 Stock
      Option Plan ("the Plan") to increase the number of shares of Common 
      Stock authorized for issuance under the Plan by an additional 3,000,000 
      shares. This proposal passed with 9,524,598 affirmative votes, 1,569,710
      negative votes, 135,504 withheld and 1,863,633 abstentions.

c)    To approve an amendment to the Plan to permit and ratify the grant of 
      options to certain incumbent directors. This proposal passed with
      11,557,147 affirmative votes, 1,144,350 negative votes, 138,584 withheld
      and 253,364 abstentions.

d)    To approve an amendment to the Plan to create a maximum number of 
      options that may be granted thereunder to any one employee in any three 
      consecutive fiscal years. This proposal passed with 12,621,500 
      affirmative votes, 80,780 negative votes, 137,804 withheld and 253,361 
      abstentions.


                                                                              23
<PAGE>   24
Item 6.                 Exhibits and Reports on Form 8-K

(a)  Exhibits

  10.1         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.

  10.2         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.

  10.3         Distributor Agreement dated April 4, 1996 between the Company and
               Tie Communications, Inc.

  10.4         Employment Agreement dated May 24, 1996 between the Company and
               William H. Oberlin. The company has requested that certain
               portions of this exhibit be granted confidential treatment.

  10.5         Consulting Agreement dated May 24, 1996 between the Company and
               John M. Zrno.

  10.6         Consulting Agreement dated May 24, 1996 between the Company and
               Marvin C. Moses.

  11.1         Statement re: computation of per share earnings.

  27.1         Financial Data Schedule.


(b)  Reports on Form 8-K

            The following Current Reports on From 8-K were filed by the Company
            during the quarter covered by this Quarterly Report on Form 10-Q.

            1) Current report on Form 8-K filed with the Commission on August 2,
               1996 reporting preliminary results for the quarter ended June 30,
               1996 and other matters.

            2) Current report on Form 8-K filed with the Commission on August 9,
               1996 regarding the complaint filed by the former shareholders of
               ADNET Telemanagement.

                                                                              24
<PAGE>   25
                                    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)

                                       /s/     Robert J. Chamberlain
                                       ________________________________________
Date:  November 11, 1996                       Robert J. Chamberlain
                                             Executive Vice President &
                                               Chief Financial Officer


                                                                              25
<PAGE>   26
                           MIDCOM COMMUNICATIONS INC.

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER
 (REFERENCED TO                                                                      PAGINATION BY
   ITEM 601 OF                          EXHIBIT                                        SEQUENTIAL
 REGULATION S-K)                      DESCRIPTION                                   NUMBERING SYSTEM
 ---------------                      -----------                                   ----------------
<S>            <C>                                                                  <C> 

  10.1         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.

  10.2         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.

  10.3         Distributor Agreement dated April 4, 1996 between the Company and
               Tie Communications, Inc.

  10.4         Employment Agreement dated May 24, 1996 between the Company and
               William H. Oberlin. The company has requested that certain
               portions of this exhibit be granted confidential treatment.

  10.5         Consulting Agreement dated May 24, 1996 between the Company and
               John M. Zrno.

  10.6         Consulting Agreement dated May 24, 1996 between the Company and
               Marvin C. Moses.

  11.1         Statement re: computation of per share earnings.

  27.1         Financial Data Schedule.
</TABLE>
                                                                              26