<PAGE>
 
                      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 June 30, 1998

                                      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 0-23683


                           USN COMMUNICATIONS, INC.
                           ------------------------
            (Exact name of registrant as specified in its charter)



                Delaware                            36-3947804
                --------                            ----------
   (State or other jurisdiction of       (I.R.S. Employer Identification No.)
    incorporation or organization)



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



       Registrant's telephone number, including area code (312) 906-3600
                                                          --------------


                                      N/A
--------------------------------------------------------------------------------
  (Former name, former address and former fiscal year, if changed since last
                                    report)

     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 [ ]

     As of July 31, 1998, there were 23,483,519 shares outstanding of the
registrant's Common Stock, par value $.01 per share.

                          Exhibit Index is on page 21.
<PAGE>
 
[CAPTION] 
<TABLE> 
                         PART I. FINANCIAL INFORMATION

 Item 1.  FINANCIAL STATEMENTS

 USN COMMUNICATIONS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                                                                             June 30,         December 31,
                                                                              1998               1997
                                                                            --------         ------------
<S>                                                                        <C>                <C> 
 ASSETS
 CURRENT ASSETS:
   Cash and cash equivalents                                               $ 56,372,059       $ 87,454,418
   Marketable equity securities                                                     -            8,180,824
   Accounts receivable, net of allowance for doubtful accounts of            
     $8,409,000 at 1998 and $4,537,000 at 1997                               58,463,801         23,917,093
   Inventory                                                                  1,249,205                -
   Other current assets                                                       6,136,085          1,443,575
                                                                          -------------      -------------
        Total current assets                                                122,221,150        120,995,910
Property and equipment-net                                                   31,990,041         16,802,065
Goodwill, net of accumulated amortization of $1,202,000 at 1998              48,778,948                -
Other assets                                                                 53,998,288         33,402,271
                                                                          -------------      -------------
        Total assets                                                      $ 256,988,427      $ 171,200,246
                                                                          -------------      -------------

 LIABILITIES, REDEEMABLE PREFERRED STOCK AND
  COMMON STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
   Accounts payable                                                        $ 34,336,208       $ 20,485,168
   Accrued expenses and other liabilities                                    16,533,312          7,178,373
   Capital lease obligations and notes payable                                  585,926            559,223
                                                                           ------------       ------------
        Total current liabilities                                            51,455,446         28,222,764

14 5/8% Senior Discount Notes, net of Original Issue Discount               138,119,210        105,486,381
14% Senior Discount Notes, net of Original Issue Discount                    13,423,146         35,790,140
9% Convertible Subordinated Discount Notes, net of                          
   Original Issue Discount                                                   32,256,657         30,867,615
9% Consent Convertible Notes, net of Original Issue Discount                 10,412,500                -
Capital lease obligations and notes payable                                     534,632            555,960
                                                                           ------------        -----------

        Total liabilities                                                   246,201,591        200,922,860

REDEEMABLE PREFERRED STOCK:
    9% Cumulative Convertible Pay-In-Kind Preferred Stock:  par                     
      value $1; 30,000 shares authorized at 1997;  10,920 shares
      outstanding at December 31,1997                                               -               10,920
    9% Cumulative Convertible Pay-In-Kind Preferred Stock,                          
      Series A: par value $1;  150,000 shares authorized at 1997;  
      45,209 shares outstanding at December 31, 1997                                -               45,209
    Accumulated unpaid dividends                                                    -            1,516,355
    Additional paid-in-capital                                                      -           55,704,861
                                                                           ------------       ------------
        Total redeemable preferred stock                                            -           57,277,345

 COMMON STOCKHOLDERS' EQUITY (DEFICIT):
   Common stock, $.01 par value, 100,000,000 shares authorized
     at June 30, 1998 and 30,000,000 shares authorized at December 31,
     1997; 23,376,791 and  7,282,511 shares issued at                           
     June 30, 1998 and December 31, 1997, respectively                          233,768             72,826
   Additional paid-in capital                                               259,999,781         74,642,145
   Treasury stock, 10,000 shares                                                 (1,077)            (1,077)
   Accumulated other comprehensive income:
     Unrealized gain on available-for-sale securities                               -            8,180,824
   Accumulated deficit                                                     (249,445,636)      (169,894,677)
                                                                          -------------      -------------
       Total common stockholders' equity (deficit)                           10,786,836        (86,999,959)
                                                                          -------------      -------------
 TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND
   COMMON STOCKHOLDERS' EQUITY (DEFICIT)                                  $ 256,988,427      $ 171,200,246
                                                                          -------------      -------------

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

                                       2
<PAGE>

<TABLE> 
<CAPTION> 
 
USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                                                                                       Three Months Ended June 30,
                                                                                  ------------------------------------
                                                                                       1998                    1997
                                                                                  ------------             -----------
<S>                                                                               <C>                      <C> 
 NET SERVICE REVENUE                                                              $ 49,632,595             $ 7,804,451
 COST OF SERVICES                                                                   38,600,944               7,084,813
                                                                                  ------------             -----------
      Gross profit                                                                  11,031,651                 719,638
 EXPENSES:
   Sales and marketing                                                              26,964,355              17,144,604
   General and administrative                                                       24,318,354               8,550,800
                                                                                  ------------            ------------
 OPERATING LOSS                                                                   (40,251,058)            (24,975,766)
 OTHER INCOME (EXPENSE):
   Interest income                                                                   1,224,887                 366,161
   Interest expense                                                                (7,443,380)             (2,092,874)
   Realized gain on sale of marketable securities                                   11,714,411               -
   Other income                                                                          3,273                     643
                                                                                --------------          --------------
      Other income (expense) - net                                                   5,499,191             (1,726,070)
                                                                                --------------          --------------
 NET LOSS                                                                       $ (34,751,867)          $ (26,701,836)
                                                                                ==============          ==============
 ACCUMULATED PREFERRED DIVIDENDS                                                     -                       $ 235,126
                                                                                ==============          ==============
 NET LOSS TO COMMON SHAREHOLDERS                                                $ (34,751,867)          $ (26,936,962)
                                                                                --------------          --------------
NET LOSS PER COMMON SHARE  - BASIC AND DILUTED                                        $ (1.50)                $ (3.74)
                                                                                ==============          ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED                      23,131,582               7,206,033
                                                                                ==============          ==============
                                                                                
</TABLE> 
See Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>

<TABLE> 
<CAPTION> 
 
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                                                                                       Six Months Ended June 30,
                                                                                 -------------------------------------
                                                                                      1998                    1997
                                                                                 -------------           -------------
<S>                                                                              <C>                      <C> 
NET SERVICE REVENUE                                                               $ 82,053,133            $ 11,721,290
 COST OF SERVICES                                                                   65,237,455              10,519,835
                                                                                  ------------            ------------
      Gross profit                                                                  16,815,678               1,201,455
 EXPENSES:
   Sales and marketing                                                              51,389,532              27,335,250
   General and administrative                                                       44,406,195              15,013,143
                                                                                  ------------            ------------
 OPERATING LOSS                                                                   (78,980,049)            (41,146,938)
 OTHER INCOME (EXPENSE):
   Interest income                                                                   2,793,304               1,009,451
   Interest expense                                                               (14,505,913)             (4,129,201)
   Realized gain on sale of marketable securities                                   11,714,411               -
   Other income                                                                          6,022                   3,948
                                                                                  ------------            ------------
      Other income (expense) - net                                                       7,824             (3,115,802)
                                                                                  ------------            ------------
 NET LOSS                                                                       $ (78,972,225)          $ (44,262,740)
                                                                                ==============          ==============
 ACCUMULATED PREFERRED DIVIDENDS                                                     $ 578,734               $ 460,126
                                                                                ==============          ==============
 NET LOSS TO COMMON SHAREHOLDERS                                                $ (79,550,959)          $ (44,722,866)
                                                                                --------------          --------------
 NET LOSS PER COMMON SHARE  - BASIC AND DILUTED                                       $ (4.22)                $ (6.22)
                                                                                ==============          ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED                      18,851,767               7,190,902
                                                                                ==============          ==============
</TABLE> 

See Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>

<TABLE> 
<CAPTION> 

 
USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND YEAR ENDED DECEMBER 31, 1997
____________________________________________________________________________________________________________________________


                                                          Series A
                                               9 % PIK     9% PIK      Accumulated     Additional
                                              Preferred   Preferred      Unpaid          Paid-in
                                                Stock       Stock       Dividends        Capital          Total
                                              ---------   ---------    -----------     ----------         -----
<S>                                           <C>         <C>           <C>            <C>              <C>  
BALANCE, DECEMBER 31, 1996                    $10,000                    $225,000      $9,810,185      $10,045,185
Issuance of 920 shares of 9% PIK Preferred                                                           
  Stock as payment of dividends                   920                   (920,251)         919,331             - 
Issuance of 45,209 shares of Series A 9%                                                                 
  PIK Preferred Stock                                      $45,209                     45,163,863       45,209,072 
Costs incurred related to issuance of                                                   
  Series A 9% PIK Preferred Stock                                                       (188,518)        (188,518)
Accumulated dividends on 9% PIK Preferred Stock                           940,957                          940,957
Accumulated dividends on Series A 9% PIK                                
  Preferred Stock                                                       1,270,649                        1,270,649
                                               ------      -------      ---------      ----------      -----------
BALANCE, DECEMBER 31, 1997                     10,920       45,209      1,516,355      55,704,861       57,277,345
                                               ------      -------      ---------      ----------      ----------- 
Accumulated dividends on 9% PIK                                                                            
   Preferred Stock                                                        113,847                          113,847
Accumulated dividends on Series A 9%                                                                        
   PIK Preferred Stock                                                    464,887                          464,887
Conversion of 9% PIK and Series A 9%
   PIK Preferred Stock to common stock        (10,920)    (45,209)     (2,095,089)   (55,704,861)     (57,856,079)
                                              --------    --------     -----------   ------------    ------------
BALANCE, JUNE 30, 1998                        $    -      $    -       $       -      $       -       $       -    
                                              ========    ========     ===========    ===========     ============ 
</TABLE> 

See Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>

<TABLE> 
<CAPTION> 
 
USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------------------------------------------------------
                                                                               ACCUMULATED
                                                 ADDITIONAL      COMMON           OTHER            ACCUMU-
                                     COMMON       PAID-IN      STOCK HELD     COMPREHENSIVE         LATED
                                      STOCK       CAPITAL     IN TREASURY        INCOME            DEFICIT           TOTAL
                                    ---------    ----------   -----------     --------------    -------------     ------------
<S>                                 <C>         <C>           <C>             <C>               <C>               <C>  
BALANCE, DECEMBER 31, 1996          $71,853     $ 54,114,755     $ (1,077)                      $ (57,791,382)    $ (3,605,851)

 Issuance of 97,251 shares of           973          531,125                                                           532,098
  common stock
 Compensation expense on stock                       644,538                                                           644,538
  options
 Issuance of stock warrants                       19,351,727                                                        19,351,727
 Accumulated dividends on 9% PIK
  Preferred Stock                                                                                    (940,957)        (940,957)
 Accumulated dividends on Series                                                                   
  A 9% PIK Preferred Stock                                                                         (1,270,649)      (1,270,649) 
 Comprehensive income (loss):
    Net loss                                                                                     (109,891,689)    (109,891,689)
    Other comprehensive income
     (loss), net of  tax:                                                          
       Unrealized gain of                                                        
        available-for-sale 
        securities                                                                $8,180,824                          8,180,824
                                                                                                                   ------------
    Comprehensive loss                                                                                             (101,710,865)
                                    --------    ------------      --------     -----------      -------------      ------------
BALANCE, DECEMBER 31, 1997            72,826      74,642,145        (1,077)      8,180,824       (169,894,677)      (86,999,959)
                                    --------    ------------      --------     -----------      -------------      ------------
Issuance of 8,628,861 shares of       
 common stock                         86,288     137,975,487                                                        138,061,775
Costs incurred related to issuance                                                                                             
 of stock                                        (10,764,324)                                                       (10,764,324)
Accumulated dividends on 9% PIK                                                                                                
 Preferred Stock                                                                                      (113,847)        (113,847)
Accumulated dividends on Series A                                                                                              
 9% PIK Preferred Stock                                                                               (464,887)        (464,887) 
Conversion of 9% PIK and Series A
 9% PIK  Preferred Stock to common 
 stock                                61,301      57,794,778                                                         57,856,079
Issuance of 1,335,233 shares of
 common stock upon exercise of        
 warrants and options                 13,353           5,801                                                             19,154
Compensation expense on stock                        
 options                                             345,894                                                            345,894
Comprehensive income (loss):
     Net loss                                                                                     (78,972,225)      (78,972,225)
     Other comprehensive income 
      (loss), net of  tax:
        Unrealized gain on                                                         
         available-for-sale 
         securities                                                              3,533,587                            3,533,587
        Realized gain on sale of                                                
         marketable securities                                                 (11,714,411)                         (11,714,411)
                                                                                                                   ------------
     Comprehensive loss                                                                                             (87,153,049)
                                    --------    ------------      --------     -----------      -------------      ------------
BALANCE, JUNE 30, 1998              $233,768    $259,999,781      $ (1,077)    $      -         $(249,445,636)     $ 10,786,836
                                    --------    ------------      --------     -----------      -------------      ------------
</TABLE> 
See Notes to Condensed Consolidated Financial Statements.

 
                                       6
<PAGE>

<PAGE>

<TABLE> 
<CAPTION> 
 
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)

                                                                                     Three Months Ended June 30,
                                                                                --------------------------------------
                                                                                     1998                    1997
                                                                                --------------          --------------
<S>                                                                             <C>                     <C> 
 CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                                       $ (34,751,867)          $ (26,701,836)
 Adjustments to reconcile net loss to net cash flows from
    operating activities:
   Depreciation and amortization                                                     4,440,148                 927,959
   Non-cash interest on debt obligations                                             7,393,866               2,067,172
   Stock compensation award expense                                                    172,947                 172,947
   Gain on sale of marketable securities                                          (11,714,411)                     -
  Changes in:
     Accounts receivable                                                          (11,667,200)             (3,896,224)
     Allowance for doubtful accounts                                                   724,493                 213,096
     Other assets                                                                  (3,400,870)               (351,444)
     Accounts payable                                                                5,879,201               3,107,807
     Accrued expenses                                                              (3,115,039)               3,997,178
                                                                                --------------          --------------
         Net cash flows from operating activities                                 (46,038,732)            (20,463,345)

 CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                                               (11,601,771)             (4,253,860)
 Proceeds from sale of marketable securities                                        11,714,411                    -   
                                                                                --------------           -------------
         Net cash flows from investing activities                                      112,640             (4,253,860)

 CASH FLOWS FROM FINANCING ACTIVITIES:
 Issuance of common stock                                                               13,038                   4,098
 Deposits                                                                          (5,726,676)                (15,532)
 Repayment of capital lease obligations and notes payable                            (150,836)               (288,940)
                                                                                --------------           -------------
         Net cash flows from financing activities                                  (5,864,474)               (300,374)
                                                                                --------------           -------------
 NET DECREASE IN CASH                                                             (51,790,566)            (25,017,579)
 CASH AND CASH EQUIVALENTS - Beginning of period                                   108,162,625              40,737,827
                                                                                --------------           -------------
 CASH AND CASH EQUIVALENTS - End of period                                        $ 56,372,059            $ 15,720,248
                                                                                ==============           =============
 SUPPLEMENTAL CASH FLOW INFORMATION:
 Declared dividends                                                                       -                  $ 235,126
                                                                                ==============           =============
 Capital lease obligations incurred                                                       -                  $ 444,903
                                                                                ==============           =============
 Cash paid for interest                                                               $ 45,478                $ 23,398
                                                                                ==============           =============
 Cash paid for income taxes                                                                -                       -   
                                                                                ==============           =============

</TABLE> 

See Notes to Condensed Consolidated Financial Statements.

                                       7
<PAGE>
 
USN COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                                      SIX MONTHS ENDED JUNE 30,
                                                                                -------------------------------------
                                                                                    1998                    1997
                                                                                --------------          -------------
 <S>                                                                            <C>                     <C> 
 CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                                        $(78,972,225)            $(44,262,740)
 Adjustments to reconcile net loss to net cash flows from
    operating activities:
   Depreciation and amortization                                                     6,675,471               1,653,848
   Non-cash interest on debt obligations                                            14,411,113               4,083,363
   Stock compensation award expense                                                    345,894                 298,644
   Gain on sale of marketable securities                                           (11,714,411)                     -
   Changes in:
     Accounts receivable                                                           (30,029,104)             (5,342,353)
     Allowance for doubtful accounts                                                 1,969,154                 317,148
     Other assets                                                                   (3,690,390)               (845,727)
     Accounts payable                                                                8,747,685               1,816,148
     Accrued expenses                                                                5,974,449               4,776,561
                                                                                 -------------            ------------
         Net cash flows from operating activities                                  (86,282,364)            (37,505,108)

 CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                                                (17,365,207)             (7,171,245)
 Proceeds from sale of marketable securities                                        11,714,411                      -
 Purchase of subsidiary, net of cash acquired                                      (69,053,616)                     -
                                                                                 -------------            ------------ 
        Net cash flows from investing activities                                  (74,704,412)              (7,171,245)

 CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from Consent Convertible Notes                                            10,000,000                      -
 Issuance of common stock                                                          138,080,929                   4,098
 Costs incurred related to issuance of stock                                       (10,764,324)                     -
 Deposits                                                                           (7,116,900)                 17,018
 Repayment of capital lease obligations and notes payable                             (295,288)               (442,993)
                                                                                 -------------             ----------- 
         Net cash flows from financing activities                                  129,904,417                (421,877)
                                                                                 -------------             ----------- 
 NET DECREASE IN CASH                                                              (31,082,359)            (45,098,230)

 CASH AND CASH EQUIVALENTS - Beginning of period                                    87,454,418              60,818,478
                                                                                 -------------             ----------- 
 CASH AND CASH EQUIVALENTS - End of period                                        $ 56,372,059            $ 15,720,248
                                                                                 =============            ============
 SUPPLEMENTAL CASH FLOW INFORMATION:
 Conversion of preferred stock to common stock                                    $ 57,856,079                      -
                                                                                 =============            ============ 
 Declared dividends                                                               $    578,734            $    460,126
                                                                                 =============            ============ 
 Capital lease obligations incurred                                               $    287,617            $    444,903
                                                                                 =============            ============ 
 Dividends paid in kind                                                                     -             $    450,000
                                                                                 =============            ============ 
 Cash paid for interest                                                           $     90,764            $     49,862
                                                                                 =============            ============ 
 Cash paid for income taxes                                                                 -                       -  
                                                                                 =============            ============  
</TABLE> 
See Notes to Condensed Consolidated Financial Statements.

                                       8
<PAGE>
 
                   USN COMMUNICATIONS, INC. AND SUBSIDIARIES

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                 JUNE 30, 1998


1    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     The unaudited, condensed consolidated financial statements of USN
Communications, Inc. (the "Company") included herein have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The interim financial statements reflect all adjustments, consisting
only of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.


2    NEW ACCOUNTING PRONOUNCEMENTS

     On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income", which establishes standards
for reporting and display of comprehensive income and its components. Other
comprehensive income consists solely of unrealized gains on available-for-sale
securities.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"),
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
It establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is evaluating SFAS 133 to determine
its impact on the consolidated financial statements.


3    ACCOUNTS RECEIVABLE

     Accounts receivable consists of the following (in thousands):
<TABLE> 
<CAPTION> 
                                               June 30,            December 31,
                                                 1998                 1997
                                              ----------           -----------
<S>                                           <C>                  <C> 
Billed                                         $44,288                $10,790
Unbilled                                        22,585                 17,664
                                               -------                -------  
Gross accounts receivable                       66,873                 28,454
Allowance for doubtful accounts                 (8,409)                (4,537)
                                               -------                -------    
Net accounts receivable                        $58,464                $23,917
                                               =======                =======  
</TABLE> 

                                       9
<PAGE>
 
     Unbilled accounts receivable comprises access charges, features and usage
for revenue earned but not yet billed to customers. A majority of the unbilled
accounts receivable were billed within 30 days after the quarter.


4    PRIVATE PLACEMENT OFFERINGS

     In August 1997, in connection with the 1997 private placement offering, the
Company issued an option to the holders of the 14% Senior Discount Notes due
2003 (the "14% Senior Notes") to purchase $13.0 million aggregate principal
amount at maturity of the Company's 9% Convertible Subordinated Discount Notes
due 2006 ("Consent Notes") for an aggregate purchase price of $10 million and
convertible into common stock at a conversion price of $10.121 per share based
on accreted value at the time of conversion. Pursuant to the option, which was
exercised by the holders in October 1997, the Consent Notes were sold in January
1998 at a price of $767.90 per $1,000 face amount. These notes will accrete
interest at an annual rate of 9%, compounded semiannually, until January 13,
2001. Thereafter interest will be paid semiannually in arrears in cash.

     In March 1998, the holders of the 14% Senior Notes exchanged $31.5 million
aggregate principal amount at maturity of the Company's 14% Senior Notes for
$33.6 million aggregate principal amount at maturity of the Company's 14 5/8%
Senior Discount Notes due 2004 (the "14 5/8% Senior Notes").


5    CHANGES IN EQUITY

     In February 1998, the Company issued and sold 8,600,000 shares of Common
Stock (of which 600,000 shares were sold pursuant to the underwriters'
over-allotment options) in its initial public offering for net proceeds of
approximately $127.0 million. In March 1998, the Company issued and sold 28,861
additional shares pursuant to the exercise of the underwriters' over-allotment
option for net proceeds of $0.4 million. In conjunction with the initial public
offering, all of the Company's outstanding 9% Cumulative Convertible Pay-In-Kind
Preferred Stock ("9% Preferred Stock") and 9% Cumulative Convertible Pay-In-Kind
Preferred Stock, Series A ("Series A Preferred Stock"), including dividends
accrued through the conversion date, were converted to 6,130,175 shares of Class
A Common Stock. At the time of the initial public offering, all of the shares of
the Company's Class A Common Stock were converted to an equal number of the
Company's newly created common stock.

     In the first half of 1998, the Company issued 1,335,233 shares of Common
Stock in conjunction with the exercise of Warrants and stock options.


                                       10
<PAGE>
 
6    ACQUISITION

     On February 20, 1998, the Company used a portion of the net proceeds from
its initial public offering to acquire all of the outstanding capital stock of
Hatten Communications Holding Company, Inc., a Connecticut corporation ("Hatten
Communications"), pursuant to a Stock Purchase Agreement dated January 7, 1998,
for approximately $69.1 million, net of cash acquired, including the repayment
of approximately $14.0 million of existing indebtedness and the payment of
certain fees and expenses.

     The acquisition was recorded under the purchase method of accounting, and
accordingly, the results of operations of Hatten Communications have been
included in the consolidated financial statements since the date of acquisition.
The purchase price has been allocated to assets acquired and liabilities assumed
based on their fair market value at the date of the acquisition as summarized
below (in thousands):

               <TABLE> 
               <CAPTION> 
               <S>                                        <C> 
               Current assets                             $ 8,317
               Long-term assets                             1,291
               Intangible assets                           17,961
               Goodwill                                    49,981
               Current liabilities                         (8,496)
                                                          ------- 
               Purchase price                             $69,054
                                                          =======   
               </TABLE> 

     Goodwill of approximately $50.0 million is being amortized on a
straight-line basis over 15 years. Additionally, the fair market value ascribed
to the acquired customer list of $15.0 million, included in intangible assets,
is being amortized on a straight-line basis over 5 years. Management is in the
process of reviewing the final allocation of the purchase price.

     The following table reflects unaudited pro forma combined results of
operations of the Company and Hatten Communications on the basis that the
acquisition had taken place on January 1, 1997 (in thousands, except per 
share data): 
<TABLE> 
<CAPTION> 
                                                  Pro Forma Six Months Ended        
                                                            June 30,                
                                                  --------------------------        
                                                     1998             1997          
                                                  ----------       ---------        
<S>                                               <C>              <C>              
Net service revenue                                $ 88,151         $ 30,182        
Net loss to common shareholders                    $(81,294)        $(50,352)       
Net loss per common share - basic and diluted      $  (4.31)        $  (7.00)       
Weighted average common shares outstanding           18,852            7,191         
</TABLE> 

                                       11
<PAGE>
 
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

Overview

     Since the passage of the Telecommunications Act, the Company has focused
its operations on the acquisition of a large number of customers and on
maintaining strong customer relationships through a direct sales approach and
with scaleable, high-volume provisioning and other systems and responsive
customer care. The Company has executed this strategy through the bundled
offering of telecommunications services. This enables the Company to maintain
strategic flexibility in its service offerings, including the development of
facilities-based services, as the Company determines is appropriate.

     The Company entered into the first total service resale agreement with
Ameritech Corporation for local services in November 1995, and entered into a
comprehensive local resale agreement in July 1996 with NYNEX Corporation (now
Bell Atlantic Corporation). The Company also consummated various other
agreements in 1996 with certain carriers for the resale of long distance and
enhanced and other value-added services. The Company commenced the marketing and
provisioning of services under those agreements during the latter half of 1996.
The Company has continued to develop additional services to meet the needs of
its target market through the acquisition of Hatten Communications in February
1998. Hatten Communications resells wireless communications services, including
cellular and paging.

     The Company intends to leverage its significant customer base, attract new
customers and expand its profit margins by pursuing the staged development of a
facilities-based platform. The first step in its development program is the
introduction of high speed data transmission through DSL technology followed by
switched long distance service and switched local service. The Company expects
to provide DSL services to certain customers on a trial basis in the fourth
quarter of 1998 and on a commercial basis in the first half of 1999; switched
long distance service in the second half of 1999 and switched local service in
the first half of 2001. Although management believes that, through an increase
in its customer base and service offerings, its current strategy will have a
positive effect on the Company's results of operations over the long-term, the
Company anticipates losses and negative cash flow for the foreseeable future,
attributable in part to significant investments in operating, sales, marketing,
management information systems and general and administrative expenses. To date,
the Company's growth, including capital expenditures, has been funded primarily
by capital contributions, sales of preferred stock and by the proceeds from the
private placement or public offering of debt and equity securities.

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

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

                                       12

<PAGE>
 
     Sales and marketing expense consists of the costs of providing sales and
other support services for customers including salaries of salesforce personnel.
General and administrative expense consists of the costs of the billing and
information systems and personnel required to support the Company's operations
and growth as well as bad debts and the amortization of organization costs and
intangible assets, other than deferred financing costs, the amortization of
which is included in interest expense. Depreciation is allocated throughout
sales and marketing expense and general and administrative expense based on
asset usage.

     The Company has experienced significant growth in the past and, depending
on the extent of its future growth, may experience significant strain on its
management, personnel and information systems. While adding additional employees
during the last year, the Company has undertaken a number of initiatives to
enhance the accuracy and efficiency of its recordation of new customer orders
and the efficiency and consistency of its provisioning process. The Company is
now in the process of realigning and resizing various departments which will
reduce overall employee levels.

Results of Operations

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997

     Net service revenue increased to $49.6 million for the three months ended
June 30, 1998 from $7.8 million for the three months ended June 30, 1997. The
number of local access lines in service at June 30, 1998 was 276,319 compared to
65,142 as of June 30, 1997. The net increase in access lines was 50,235 lines
for the second quarter of 1998 compared to 46,585 lines for the second quarter
of 1997. The increase in net service revenue was due primarily to the
substantial increase in the Company's installed base and the corresponding
increase in the customer base in the Company's geographic markets as well as the
acquisition of Hatten Communications in the first quarter, which added $12.1
million to net service revenue.

     Gross profit increased to $11.0 million for the three months ended June 30,
1998 from $0.7 million for the three months ended June 30, 1997. The gross
margin percentage was 22.2% for the second quarter of 1998, up from 9.2% for the
second quarter of 1997 and 17.8% for the first quarter of 1998. The increase in
gross profit is attributable to the above mentioned increase in customer base,
improvements in the Company's billing systems and revenue assurance processes
and the acquisition of Hatten Communications.

     Sales and marketing expenses increased $9.9 million, or 57%, from $17.1
million for the three months ended June 30, 1997 to $27.0 million for the three
months ended June 30, 1998. The increase was due primarily to an increase in the
number of sales and marketing employees from approximately 520 at June 30, 1997
to approximately 935 at June 30, 1998 to support the growth in the customer
base. This increase in headcount resulted in increases to salaries and benefits
of approximately $5.9 million, facility and office related expenses of
approximately $2.2 million, travel and training costs of approximately $1.0
million and recruitment costs of approximately $0.4 million. Additionally,


                                      13
<PAGE>
 
mass marketing expenses increased approximately $1.2 million related to the
Company's telemarketing strategy. These increases were offset by a decrease of
$1.1 million in advertising costs.

     General and administrative expenses increased $15.7 million, or 184%, to
$24.3 million for the three months ended June 30, 1998 versus $8.6 million for
the three months ended June 30, 1997. The increase was due primarily to an
increase in the number of operations and administrative employees from
approximately 240 at June 30, 1997 to approximately 715 at June 30, 1998 to
support the growth in the customer base, which resulted in increases to salaries
and benefits of approximately $5.3 million, facility related costs of
approximately $4.8 million, professional fees of approximately $2.1 million,
billing costs of approximately $1.3 million and increased bad debt expense of
approximately $1.2 million.

    Interest and other income increased to $12.9 million for the three months
ended June 30, 1998 from $0.4 million for the three months ended June 30, 1997
due primarily to a gain on the sale of marketable securities in the second
quarter of 1998.

    Interest expense increased to $7.4 million for the three months ended June
30, 1998 from $2.1 million for the three months ended June 30, 1997. This
increase was due primarily to interest expense attributable to the 14 5/8%
Senior Notes issued in August 1997 and the Consent Notes issued in January 1998.


    As a result of the factors described above, the Company had a net loss of
$34.8 million for the three months ended June 30, 1998 compared to a net loss of
$26.7 million for the three months ended June 30, 1997. Net loss per common
share for the second quarter of 1998 was $1.50 compared to $3.74 for the second
quarter of 1997. The second quarter 1998 EBITDA was a negative $35.8 million
versus a negative $24.0 million in the second quarter of 1997.


Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

     Net service revenue increased to $82.1 million for the six months ended
June 30, 1998 from $11.7 million for the six months ended June 30, 1997. The net
increase in access lines was 104,357 lines for the first six months of 1998
compared to 56,778 lines for the first six months of 1997. The increase in net
service revenue is attributable to the above mentioned increase in customer base
as well as the acquisition of Hatten Communications in the first quarter, which
added $16.8 million to net service revenue.

     Gross profit increased to $16.8 million for the six months ended June 30,
1998 from $1.2 million for the six months ended June 30, 1997. The gross margin
percentage was 20.5% for the first six months of 1998, up from 10.3% for the
first six months of 1997. The increase in gross profit is attributable to the
above mentioned increase in customer base, improvements in the Company's billing
systems and revenue assurance processes, as well as the acquisition of Hatten
Communications in the first quarter of 1998.

     Sales and marketing expenses increased $24.1 million, or 88%, from $27.3
million for the six months ended June 30, 1997 to $51.4 million for the six
months ended June 30, 1998. The increase was due primarily to increased
headcount, which resulted in increases to salaries and benefits of


                                      14
<PAGE>
 
approximately $15.7 million, facility and office related expenses of
approximately $3.8 million, travel and training costs of approximately $2.7
million and recruitment costs of approximately $1.7 million. Additionally, mass
marketing expenses increased approximately $2.0 million related to the Company's
telemarketing strategy. These increases were offset by a decrease of $2.0
million in advertising costs.

     General and administrative expenses increased $29.4 million, or 196%, to
$44.4 million for the six months ended June 30, 1998 versus $15.0 million for
the six months ended June 30, 1997. The increase was due primarily to increased
headcount, which resulted in increases to salaries and benefits of approximately
$8.9 million, facility related costs of approximately $7.4 million, professional
fees of approximately $4.5 million, increased bad debt expense of approximately
$3.4 million and billing costs of approximately $3.2 million.

     Interest and other income increased to $14.5 million for the six months
ended June 30, 1998 from $1.0 million for the six months ended June 30, 1997 due
primarily to the above mentioned gain on the sale of marketable securities.

     Interest expense increased to $14.5 million for the six months ended June
30, 1998 from $4.1 million for the six months ended June 30, 1997. This increase
was due primarily to interest expense attributable to the 14 5/8% Senior Notes
issued in August 1997 and the Consent Notes issued in January 1998.

     As a result of the factors described above, the Company had a net loss of
$79.0 million for the six months ended June 30, 1998 compared to a net loss of
$44.3 million for the six months ended June 30, 1997. Net loss per common share
for the six months ended June 30, 1998 was $4.22 compared to $6.22 for the six
months ended June 30, 1997. EBITDA for the first six months of 1998 was a
negative $72.3 million versus a negative $39.5 million in the first six months
of 1997.


LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has funded its operations primarily through
proceeds from the issuance of debt and equity securities. As of June 30, 1998,
the Company had cash and cash equivalents of $56.4 million and working capital
of $70.8 million. The Company's operating activities utilized cash of
approximately $46.0 million and $86.3 million for the three and six month
periods ended June 30, 1998, respectively, and $20.5 million and $37.5 million
for the three and six month periods ended June 30, 1997, respectively.

     The Company's investing activities for the three months ended June 30, 1998
of $113,000 consist of $11.6 million for the purchase of property and equipment
related to the development of systems infrastructure and the increase in
computer equipment and office buildouts related to the corresponding increase in
headcount, offset by the $11.7 million proceeds from the sale of marketable
securities. Investing activities for the six months ended June 30, 1998 consist
of $69.1 million for the purchase of Hatten Communications and property and
equipment purchases of $17.4 million related to the areas mentioned above. For
the three and six month periods ended June 30, 1997, the Company's investing
activities consisted of $4.3 million and $7.2 million, respectively, of property
and equipment purchases for sales office expansions in the Company's geographic
markets. The

                                       15
<PAGE>
 
Company anticipates approximately $11 million of additional capital
expenditures in the last six months of 1998. This amount includes expenditures
for information systems, leasehold improvements, and facilities for the initial
deployment of DSL services.

     The Company's financing activities utilized $5.9 million for the three
month period ended June 30, 1998 and generated $129.9 for the six month period
ended June 30, 1998. In January 1998, the Company issued $13.0 million aggregate
principal amount at maturity of Consent Notes for an aggregate purchase price of
$10.0 million. In February 1998, the Company issued and sold 8,600,000 shares of
Common Stock (of which 600,000 shares were sold pursuant to the underwriters'
over-allotment options) in its initial public offering for net proceeds of
approximately $127.0 million. In March 1998, the Company issued and sold 28,861
additional shares pursuant to the exercise of the underwriters' over-allotment
option for net proceeds of $0.4 million. Additionally, the Company utilized cash
for deposits related to sales office expansions totaling $5.7 million and $7.1
million for the three and six month periods ended June 30, 1998, respectively.
Cash utilized for financing activities for the three and six month periods ended
June 30, 1997 of approximately $300,000 and $422,000 related primarily to the
repayment of capital lease obligations and notes payable.

     The Company will require additional capital in the fourth quarter in order
to meet planned capital expenditures and to fund its operations due to the
Company's negative operating cash flow position. Sources of funding for the
Company's future financing requirements may include public offerings or private
placements of equity and/or debt securities and additional capital contributions
from new or existing stockholders. The Company has entered into a letter of
intent with respect to the sale of $30 million to $50 million of equity
securities and has engaged in discussions with other parties that are interested
in investing in the Company. The Company anticipates that such investment, if
made, would be completed in conjunction with a high yield debt offering. An
additional or alternative source of potential financing may be bank financing,
although the Company currently does not have an available credit facility. There
can be no assurance that any additional financing will be available to the
Company, or, if available, that it can be obtained on a timely basis and on
terms acceptable to the Company and within limitations contained in the
indentures with respect to the Company's 14% Senior Notes and 14 5/8% Senior
Notes. Failure to obtain such financing will result in the delay or abandonment
of the Company's development and expansion plans and could have a material
adverse effect on the Company's results of operations and financial condition.


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

     This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, including
statements containing the words "believes," "anticipates, "expects" and words of
similar import. All statements other than statements of historical facts
regarding the Company or any of the transactions described herein are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Actual results
may differ materially from those projected in forward-looking statements. The
Company believes that its primary risk factors include, but are not limited to:
the number and size of competitors in its markets; law and regulatory policy;
dependence on technology and third parties, including provisioning and billing
systems and services; and the mix of products and services offered in its target
markets. The Company undertakes no obligation to update publicly any forward-

                                      16

<PAGE>

 
looking statements whether as a result of new information, future events or
otherwise. Any statements should be evaluated in light of these important
factors.


                                       17
<PAGE>
 
                          PART II  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     From time to time the Company is party to routine litigation and
proceedings in the ordinary course of its business. The Company and its
subsidiaries are not aware of any current or pending litigation that the Company
believes would have a material adverse effect on the Company's results of
operations or financial condition. The Company and its subsidiaries continue to
participate in regulatory proceedings before the FCC and state regulatory
agencies concerning the authorization of services and the adoption of new
regulations.

ITEM 2.  CHANGES IN SECURITIES

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         (a)  The Company's 1998 Annual Meeting of Stockholders was held on May
              29, 1998, in Chicago, Illinois (the "Annual Meeting").

         (b)  Dennis B. Dundon and James P. Hynes were elected to the Board of
              Directors at the Annual Meeting. Richard J. Brekka, Ronald W.
              Gavillet, Eugene A. Sekulow, J. Thomas Elliott, William H.
              Johnston and David C. Mitchell continued to serve as directors
              following the Annual Meeting.

         (c)  (i) A total of 17,123,721 votes (74.0% of all votes entitled to
              vote at the Annual Meeting) were represented by proxy or ballot at
              the Annual Meeting. The stockholders of the Company were requested
              to elect two directors as nominated by management. Both nominees
              were elected as indicated by the following vote tabulation:


                    Name                   For                      Withheld
                    ----                   ---                      --------
               Dennis B. Dundon          17,100,746                  22,975
               James P. Hynes            17,100,746                  22,975


              (ii) The stockholders were requested to ratify the appointment of
              Deloitte & Touche LLP as the Company's independent auditors for
              the fiscal year ending December 31, 1998. The appointment of
              Deloitte & Touche LLP was ratified by stockholders, as 17,097,625
              votes were cast for the proposal, 12,826 votes were cast against
              the proposal, and 13,270 votes abstained.

                                      18
<PAGE>
 
ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  EXHIBITS

              27. Financial Data Schedule

         (b)  REPORTS ON FORM 8-K

     Form 8-K/A dated May 6, 1998 to report certain financial statements and pro
forma financial information relating to the Company's acquisition of Hatten
Communications.


                                       19
<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.

                                            USN COMMUNICATIONS, INC.
                                                 (Registrant)


Date:  August 13, 1998                         /s/ GERALD J. SWEAS
                                            ------------------------------
                                            Executive Vice President and 
                                             Chief Financial Officer
                                            (Duly authorized officer and 
                                              principal financial officer 
                                              of the registrant)

                                       20
<PAGE>
 
                               INDEX TO EXHIBITS


                                                          SEQUENTIALLY
EXHIBIT                                                     NUMBERED
NUMBER                  EXHIBIT DESCRIPTION                   PAGE
------                  -------------------                   ----

   27                  Financial Data Schedule                  22

         

                                      21