<PAGE>
 
                           UNITED STATES SECURITIES
                            AND EXCHANGE COMMISSION
 
                                   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: 333-53841
 
                                 WAM!NET INC.
            (Exact name of registrant as specified in its charter)
 
              MINNESOTA                                41-1795247
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
   incorporation or organization)
 
                            6100 WEST 110TH STREET
                         MINNEAPOLIS, MINNESOTA 55438
                   (Address of principal executive offices)
                                  (Zip Code)
 
                                (612) 886-5100
             (Registrant's telephone number, including area code)
 
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 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 [_]  No [X]
 
As of June 30, 1998 there were 9,277,362 shares of the Corporation's Common
Stock, par value $.01 per share, outstanding.
 
Total number of pages in this report: 18
 
<PAGE>
 
                                  WAM!NET INC.
 
                               INDEX TO FORM 10-Q
 
PART I--Financial Information
<TABLE>
<CAPTION>
                                                                          PAGE NO.
                                                                          --------
<S>                                                                       <C>
    ITEM 1--Financial Statements
      Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
       December 31, 1997................................................      3
      Consolidated Statements of Operations for the three and six months
       in the periods ended June 30, 1998 and 1997 (unaudited)..........      5
      Consolidated Statements of Cash Flows for the six months in the
       periods ended June 30, 1998 and 1997 (unaudited).................      6
      Notes to Consolidated Financial Statements (unaudited)............      8
    ITEM 2--Management's Discussion and Analysis of Results of
          Operations and Financial Condition............................     10
    ITEM 3--Quantitative and Qualitative Disclosures About Market Risk..     16
PART II--Other Information
    ITEM 4--Submission of Matters to a Vote of Security Holders.........     16
    ITEM 5--Other Information...........................................     17
    ITEM 6--Exhibits and Reports on Form 8-K............................     17
Signatures--............................................................     18
</TABLE>
 
                                       2
<PAGE>
 
                         PART I--FINANCIAL INFORMATION
 
ITEM 1--FINANCIAL INFORMATION
 
                                  WAM!NET INC.
 
                          CONSOLIDATED BALANCE SHEETS
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                        JUNE 30,   DECEMBER 31,
                                                          1998         1997
                                                       ----------- ------------
                                                       (UNAUDITED)
<S>                                                    <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents...........................  $ 46,559     $   274
  Investments.........................................       --          --
  Accounts receivable, net of allowance of $40 and
   $10, respectively..................................     3,407         459
  Inventory...........................................     1,137          --
  Prepaid expenses and other current assets...........     2,115         554
                                                        --------     -------
    Total current assets..............................    53,218       1,287
Property and equipment:
  Network equipment...................................    28,726      15,618
  Other support equipment.............................    12,456       5,242
  Furniture and fixtures..............................     2,319       1,078
  Leasehold improvements..............................       426         259
                                                        --------     -------
                                                          43,927      22,197
  Accumulated depreciation............................     8,200       2,877
                                                        --------     -------
                                                          35,727      19,320
  Goodwill, net of accumulated amortization of $2,003
   and $6, respectively...............................    30,791         479
  Deferred Charges....................................     3,575         --
                                                        --------     -------
    Total assets......................................  $123,311     $21,086
                                                        ========     =======
</TABLE>
 
                                       3
<PAGE>
 
                                  WAM!NET INC.
 
                    CONSOLIDATED BALANCE SHEETS (CONTINUED)
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                         JUNE 30,   DECEMBER 31,
                                                           1998         1997
                                                        ----------- ------------
                                                        (UNAUDITED)
<S>                                                     <C>         <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Accounts payable....................................   $  5,402     $  2,460
  Accrued salaries and wages..........................      1,155          360
  Accrued expenses....................................      1,887        2,159
  Current portion of equipment financing and
   obligations under capitalized leases...............      4,336        3,129
  Accrued taxes payable...............................        763          --
                                                         --------     --------
    Total current liabilities.........................     13,543        8,108
Long-term debt:
  Subordinated notes payable..........................     23,004       21,784
  Line of credit......................................        --        14,431
  Equipment financing.................................      9,926        6,434
  13.25% Senior Discounted Notes......................    115,375          --
Redeemable Preferred Stock, Class A, $10.00 par value:
  Authorized shares--100,000, issued and outstanding
   shares--100,000....................................      1,000        1,000
Shareholders' deficit:
  Undesignated shares, $.01 par value--9,900,000
  Common Stock, $.01 par value:
    Authorized shares--490,000,000
    Issued and outstanding shares--9,277,362 and
     6,699,740 at June 30, 1998 and December 31,
     1997.............................................         93           67
    Additional paid-in capital........................     53,819       11,771
    Accumulated deficit...............................    (93,443)     (42,509)
    Cumulative foreign currency translation
     adjustment.......................................         (6)         --
                                                         --------     --------
    Total shareholders' deficit.......................    (39,537)     (30,671)
                                                         --------     --------
    Total liabilities and shareholders' deficit.......   $123,311     $ 21,086
                                                         ========     ========
</TABLE>
 
 
                            See accompanying notes.
 
                                       4
<PAGE>
 
                                  WAM!NET INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED     SIX MONTHS ENDED
                                        JUNE 30,              JUNE 30,
                                   --------------------  --------------------
                                     1998       1997       1998       1997
                                   ---------  ---------  ---------  ---------
                                                 (UNAUDITED)
<S>                                <C>        <C>        <C>        <C>
Revenues:
  WAM!NET revenues................ $   1,905  $     250  $   3,225  $     367
  Less rebates....................      (481)       --        (752)       (46)
                                   ---------  ---------  ---------  ---------
Net WAM!NET user fees.............     1,424        250      2,473        321
Software and hardware sales.......     3,919        --       4,742        --
Other service fees................        12         54         21         59
                                   ---------  ---------  ---------  ---------
    Total revenues................     5,355        304      7,236        386
Operating expenses:
  Network communication fees......     3,803      1,373      6,900      2,151
  Cost of software and hardware...     1,214        --       1,475        --
  Network operations..............     6,036      1,244      9,349      2,192
  Sales and marketing.............     4,570      2,068      6,922      3,243
  General and administrative......     4,731      1,090     19,198      2,067
  Depreciation and amortization...     4,104        534      6,026        822
                                   ---------  ---------  ---------  ---------
                                      24,458      6,309     49,870     10,475
                                   ---------  ---------  ---------  ---------
Loss from operations..............   (19,103)    (6,005)   (42,634)   (10,095)
Other income (expense):
  Interest income.................       855         36      1,149        186
  Interest (expense)..............    (6,004)      (751)    (9,449)    (1,523)
                                   ---------  ---------  ---------  ---------
Net loss.......................... $ (24,252) $  (6,720) $ (50,934) $ (11,432)
  Less preferred dividends........       (18)       (18)       (35)       (35)
                                   ---------  ---------  ---------  ---------
Net loss applicable to common
 stock............................ $ (24,270) $  (6,738) $ (50,969) $ (11,467)
                                   =========  =========  =========  =========
Net loss applicable per common
 share............................ $   (2.93) $   (1.04) $   (6.15) $   (1.77)
                                   =========  =========  =========  =========
Weighted average number of common
 shares outstanding............... 8,294,741  6,478,950  8,294,741  6,478,950
                                   =========  =========  =========  =========
</TABLE>
 
 
                            See accompanying notes.
 
                                       5
<PAGE>
 
                                  WAM!NET INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                               JUNE 30,
                                                           ------------------
                                                             1998      1997
                                                           --------  --------
                                                              (UNAUDITED)
<S>                                                        <C>       <C>
OPERATING ACTIVITIES
Net loss.................................................. $(50,934) $(11,467)
Adjustments to reconcile net loss to net cash used in
 operating activities:
  Noncash interest expense related to warrants............    7,430       613
  Capitalized financing costs.............................   (1,916)      --
  Value of stock options issued to employees and
   consultants............................................   12,030       --
  Foreign currency translation adjustment.................      (34)      --
  Depreciation and amortization...........................    6,124       822
  Loss on disposal of property and equipment..............       27       --
  Changes in operating assets and liabilities:
    Accounts receivable...................................      698      (182)
    Inventory.............................................      198       --
    Prepaid expenses and other current assets.............   (1,562)      (20)
    Accounts payable......................................    2,023       357
    Income taxes..........................................     (345)      --
    Accrued expenses......................................    1,282      (138)
                                                           --------  --------
Net cash used in operating activities.....................  (24,979)  (10,015)
INVESTING ACTIVITIES
Purchases of property and equipment.......................  (18,917)   (9,583)
Purchase of 4-Sight (net of cash acquired)................  (16,350)      --
                                                           --------  --------
Net cash used in investing activities.....................  (35,267)   (9,583)
FINANCING ACTIVITIES
Proceeds from exercise of stock options...................        7       --
Proceeds from 13.25% Senior Discount Notes................  120,626       --
Proceeds from line of credit..............................    5,203     6,000
Payments on line of credit................................  (24,003)      --
Interest expense added to subordinated notes payable......      --        702
Proceeds from equipment financing.........................    6,823       --
Payments on bridge financing..............................      --     (1,075)
Payments on equipment financing...........................   (2,125)      (42)
                                                           --------  --------
Net cash provided by financing activities.................  106,531     5,585
                                                           --------  --------
(Decrease) increase in cash and cash equivalents..........   46,285   (14,013)
Cash and cash equivalents at beginning of period..........      274    14,444
                                                           --------  --------
Cash and cash equivalents at end of period................ $ 46,559  $    431
                                                           ========  ========
</TABLE>
 
                            See accompanying notes.
 
                                       6
<PAGE>
 
                                  WAM!NET INC.
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                               ------------------
                                                                 1998     1997
                                                               --------- --------
                                                                 (UNAUDITED)
<S>                                                            <C>       <C>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
  Conversion of accrued interest to subordinated debt......... $     918 $  --
  Issuance of common stock relating to acquisition............    20,000    --
  Warrant valuation reclassed to deferred charges from line of
   credit.....................................................     4,104    --
  Accumulated and unpaid dividends............................        35     35
  Conversion of convertible subordinated debenture for common
   stock......................................................        25    --
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
  Cash paid for interest......................................     1,132    989
</TABLE>
 
 
 
 
 
                            See accompanying notes.
 
                                       7
<PAGE>
 
                                 WAM!NET INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. CONSOLIDATED FINANCIAL STATEMENTS
 
The accompanying consolidated financial statements have been prepared by
WAM!NET Inc. (the "Company") without audit and reflect all adjustments
(consisting only of normal and recurring adjustments and accruals) which are,
in the opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission,
but omit certain information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. These
financial statements should be read in conjunction with the Company's audited
Consolidated Financial Statements for the year ended December 31, 1997, as
included in Amendment No. 2 to the Company's Registration Statement on Form S-
4 (File No. 333-53841), as filed with the Securities and Exchange Commission
on July 29, 1998. The December 31, 1997 balance sheet was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
 
2. CONSOLIDATION
 
  The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: FreeMail, Inc., NetCo Communications of
Canada, Inc. and WAM!NET U.K. Limited (formerly 4-Sight Limited). All
intercompany transactions have been eliminated.
 
3. NET LOSS PER SHARE
 
  In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which the Company adopted on December 31, 1997.
All loss per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements. Basic
earnings per share is computed on the basis of the average number of common
shares outstanding. Diluted earnings per share is not presented as the effect
of outstanding options and warrants is antidilutive.
 
4. DEBT OFFERING
 
  On March 5, 1998, the Company sold 208,530 Units. Each Unit consists of $1
principal amount at maturity of 13 1/4% Senior Discount Notes due 2005
("Notes") and three warrants. The aggregate principal amount of the Notes
payable at maturity is $208,530. The sale of the Units resulted in net
proceeds to the Company of $120,622. Cash interest does not accrue nor is it
payable on the Notes prior to March 1, 2002. Thereafter, cash interest on the
Notes will accrue on the Notes at a rate of 13 1/4% per annum (calculated on a
semiannual bond equivalent basis) and will be payable semiannually in arrears
on March 1 and September 1 of each year, commencing September 1, 2002.
 
  In connection with the Notes, the Company issued 625,590 warrants to
purchase a total of 1,257,436 shares of common stock. Each warrant entitles
the holder to purchase 2.01 shares of common stock at an exercise price of
$.01 per share. The warrants were deemed to have a value of $10,047, which
will be amortized as interest expense over the life of the Notes. The fair
value of the warrants was computed at the date of issuance using the Black-
Scholes pricing model with the following assumptions: (i) price of common
stock of $8.00; (ii) exercise price of warrant of $.01; (iii) dividend yield
of 0.0%; (iv) volatility of common stock of 0.45; (v) expected life of warrant
of 8 years; and (vi) risk-free interest rate of 6.5%. The unamortized value of
the warrants has been reflected in the financial statements as a reduction of
the Notes.
 
 
                                       8
<PAGE>
 
                                 WAM!NET INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. ACQUISITION
 
  In March 1998, the Company purchased all of the outstanding capital stock of
4-Sight Limited, a private limited company organized under the laws of the
United Kingdom ("4-Sight"), for $20 million in cash plus related acquisition
expenses of $500 and 2,500,000 shares of the Company's common stock valued at
$20,000. In addition, the former shareholders of 4-Sight will be entitled to
receive up to an additional 750,000 shares of the Company's common stock in
the event certain sales objectives are met over the next three years.
 
  The acquisition was accounted for under the purchase method of accounting
and, accordingly, the operating results of 4-Sight have been included in the
consolidated operating results since the date of acquisition.
 
  On acquisition, approximately $31,928 of goodwill was recorded, which is
being amortized on a straight-line basis over 5 years. The following table
shows the pro forma consolidated results of operations as if 4-Sight had been
acquired as of the beginning of the periods presented:
 
<TABLE>
<CAPTION>
                                                                      SIX MONTHS
                                                                        ENDED
                                                                       JUNE 30,
                                                                         1998
                                                                      ----------
                                                                      UNAUDITED
<S>                                                                   <C>
Revenues.............................................................  $ 10,715
Net loss.............................................................  $(50,979)
Net loss per share...................................................  $  (6.15)
</TABLE>
 
  The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
 
 
                                       9
<PAGE>
 
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
  The following discussion and analysis is based on the historical and pro
forma results of WAM!NET Inc. (the "Company") and should be read in
conjunction with the Company's Financial Statements included herein.
 
OVERVIEW
 
  The Company was organized in September 1994 and commenced operations in
March 1995. From March 1995 through February 1996, the Company was engaged
primarily in the design and development of a network of Company-owned
national, regional and local hubs ("Distribution Hubs") interconnected
redundantly with high-bandwidth leased telephone circuits (the "WAM!NET
Network") and a managed, high-speed digital data delivery network service (the
"WAM!NET Service"). The Company announced the commercial release of the
WAM!NET Service in February 1996 at a major trade show for the printing,
publishing, advertising, pre-press, corporate communication and graphic arts
industries (collectively, "Graphic Arts"). Through June 30, 1998,
approximately 1,140 customers had contracted for the WAM!NET Service at a
total of 1,960 customer sites. As of that date, the WAM!NET Service had been
installed at 972 customer sites, with the balance of the contracted sites
expected to be installed during the second half of 1998.
 
  The Company has entered into a strategic alliance with WorldCom, Inc.
("WorldCom") that includes equity and debt investments and operating loan
guarantees totaling approximately $50.0 million. WorldCom is currently
entitled to designate a majority of the Board of Directors of the Company and,
through its ownership of convertible debt and warrants, has the right to
acquire a majority of the common stock, par value $.01 per share (the "Common
Stock") of the Company. WorldCom also provides telecommunication and other
services to the Company on a nonexclusive basis. The Company anticipates that
its relationship with WorldCom will enable it to access the worldwide
infrastructure, sales and marketing work force, telephony technologies, high
bandwidth carrier service and other services of WorldCom and its affiliates,
including UUNet Technologies, Inc.
 
  On March 13, 1998, the Company consummated the purchase of 4-Sight Limited,
a private limited company incorporated under the laws of England and Wales
("4-Sight"), for $20 million in cash and 2.5 million shares of Common Stock
(which may be increased to 3.25 million shares subject to the satisfaction of
certain conditions) (the "4-Sight Acquisition"). 4-Sight develops and
distributes ISDN data transmission software and related products and
applications targeted to the Graphic Arts industry, with particular emphasis
on European, Asian and North American markets. At December 31, 1997, 4-Sight's
customer base exceeded 30,000 locations, including 3,000 sites in the United
States. The Company expects that the 4-Sight Acquisition will enable the
Company to achieve broader market coverage in the Graphic Arts market by
combining 4-Sight's international presence and penetration of the lower volume
user market with the Company's domestic presence and penetration of the higher
volume user market.
 
  Due to costs associated with the design, development, installation and
operation of the WAM!NET Network and its related applications, the Company has
operated at a loss since inception and expects to incur substantial operating
losses for the years ending December 31, 1998 and 1999. The Company has
incurred an accumulated deficit of approximately $93.4 million through June
30, 1998.
 
  Revenue. The Company's revenue is derived primarily from WAM!NET Service
contracts which are usually annual, automatically renewable service contracts
with a minimum monthly fee and additional charges for usage exceeding the
monthly minimum. The Company offers the WAM!NET Service at scaled minimum
usage fees, generally ranging from $250 per month to $3,000 per month. Service
installation typically lags contract signing by approximately 90 days due to
the time required to obtain telephone service installation from local
telephone companies. The Company begins to earn gross revenue following
installation of service at a customer's premise. The Company also incurs
service rebates that offset the gross revenue generated by the
 
                                      10
<PAGE>
 
Company. Free trial periods under the Company's various promotional programs
have ranged from 60 days to six months and have been extended to 60% of the
Company's customer base to date. As a result, the Company's generation of net
revenue from any customer may lag contract signing by a period of three to
nine months, a practice that is not customary in the digital data delivery
industry but is a key component in the Company's market penetration strategy.
The Company's experience with promotional programs has been favorable to date,
with approximately 99% of customers continuing to subscribe to the WAM!NET
Service following expiration of the promotional period extended to them. The
Company expects the use of promotional programs in the Graphic Arts industry
to decline with increasing penetration of the market, but the Company will
likely use similar promotional programs to introduce the WAM!NET Service to
its other targeted industries. The Company also plans to continue to develop
new, Industry Smart applications to increase the volume of files transferred
over the WAM!NET Network.
 
  Revenue is primarily driven by the number of installed customer locations,
the length of time a customer has been using the service, the number of work
flow partners with whom a customer exchanges data and the size of the files
exchanged.
 
  Network Communications Fees. Network communications fees include both the
costs of the high bandwidth carrier services interconnecting the Company's
national infrastructure of network operations centers ("NOCs") and
Distribution Hubs and the costs of local telephone circuits connecting network
access devices ("NADs") to the nearest Distribution Hub. Local telephone
circuit ("last mile") connections account for approximately 60% of these
charges, with significant differences between urban and rural connection
costs. National carrier service, provided primarily by WorldCom, accounts for
most of the balance of these charges. Network communication fees are generally
a fixed monthly cost per circuit. The excess of these fees over revenue
represents excess capacity costs which the Company expects will decline with
increasing utilization of the WAM!NET Network. The Company actively seeks to
obtain and deploy technologies that will reduce the costs of last mile
connections, including wireless technologies and remote dial-up capabilities.
The Company also intends to use its network management tools to optimize
existing and planned network capacity as volume increases and traffic patterns
begin to emerge. The Company plans to consider new pricing for its services
which take into account the significant cost differential between urban and
rural last mile connections. The Company also believes it may benefit from
growing competition among telephony and communications providers for the
provision of last mile connectivity.
 
  Network Operations Expense. Network operations expense represents costs
directly associated with developing, maintaining, managing and servicing the
WAM!NET Network. Such costs include direct labor, vendor service fees, point-
of-presence charges and research and development charges which are often
incurred in advance of receiving revenue. The Company's currently installed
NOCs, which account for the substantial majority of direct labor and network
operating costs, are capable of providing for and managing the Company's
current and planned North American operations. Costs associated with the
development of "WAM!BASE," a remote data archiving, retrieval and distribution
system, and "WAM!PROOF," an application enabling remote proofing, and other
network applications are also contained in network operations expense and are
incurred in advance of revenue receipt. The Company expects that network
operations costs will increase as the WAM!NET Network expands; however, the
cost of network operations as a percentage of revenue is expected to decline.
 
  Sales and Marketing Expense. The Company's sales and marketing efforts are
intended to create awareness of the WAM!NET Service, communicate its potential
for work flow enhancement, demonstrate its reliability and establish strong
brand recognition. As a result, the Company aggressively markets the WAM!NET
Service through a combination of trade journal advertising, trade show
attendance, promotional programs, direct field sales, tele-sales, cooperative
sales presentations and active participation in industry sponsored seminars
and publications. The Company expects to continue to incur significant sales
and marketing expenses to obtain increased penetration of the Graphic Arts
industry, to generate increased traffic among customers and to market the
WAM!NET Service to other targeted industries.
 
 
                                      11
<PAGE>
 
  General and Administrative Expense. The Company's general and administrative
expense includes administrative salaries, related overhead and professional
service fees. These costs reflect expenditures related to the rapid growth and
expansion of the Company's administrative infrastructure necessary to manage
its expanding operations, costs incurred in 1997 for relocation to its new
administrative and network operations facility and professional service fees
for financing activities, contract negotiations and acquisitions. The Company
expects to continue to incur substantial general and administrative expense as
the Company deploys the WAM!NET Service internationally.
 
  Depreciation and Amortization. To facilitate entry into its target markets,
the Company furnishes its customers with all the hardware and software
necessary for them to use the WAM!NET Service on a turn-key, pay-by-use basis.
As a result, the Company retains ownership of the NADs it furnishes to
customers for their use of the WAM!NET Service. Accordingly, the Company does
not anticipate selling NADs (or other hardware and non-4-Sight software) as a
means of raising revenues. Depreciation and amortization expense includes
depreciation of NADs, Distribution Hubs and equipment located in the NOCs. The
Company's network infrastructure is organized to use the most expensive
equipment in the NOCs, less expensive equipment for Distribution Hubs and the
least expensive equipment in the NADs. The Company anticipates substantial
capital investments for additional Distribution Hubs to be located in North
America and internationally, WAM!BASE storage facilities to be located in the
existing NOCs and NADs to be located at customer premises. As a result, the
Company anticipates that depreciation and amortization expense will continue
to increase in future periods commensurate with future equipment purchases.
 
RESULTS OF OPERATIONS
 
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 COMPARED WITH THREE AND SIX
MONTH PERIODS ENDED JUNE 30, 1997
 
 Revenue
 
  Revenues from the WAM!NET Service for the three and six month periods ended
June 30, 1998 were $1,905,232 and $3,225,257, respectively, an increase of
$1,655,003 or 661.2% and $2,858,350 or 779.0% over the comparable periods of
the previous year. This increase was due to a 446.1% increase in the number of
subscribers to the WAM!NET Service, from approximately 178 installed customer
sites on June 30, 1997 to approximately 972 installed customer sites on June
30, 1998. At June 30, 1998, the Company had contracts to install NADs at
approximately 988 customer sites pending installation of telephony services.
Service rebates arising from promotional programs for the three and six month
periods ended June 30, 1998 were $481,250 and $752,250, respectively, an
increase of $435,250 or 946.2% and $706,250 or 1,535.3%, respectively, over
the comparable periods of the previous year.
 
  Revenues from software and hardware sales for the three and six month
periods ended June 30, 1998 were $3,919,322 and $4,741,322, respectively, an
increase from $0 over the comparable periods of the previous year. Revenues
from software and hardware sales are a result of the Company's acquisition of
4-Sight, an international software manufacturer and distributor, which was
consummated as of March 13, 1998.
 
  Other service fee revenues for the three and six month periods ended June
30, 1998 were $11,644 and $20,644, respectively, a decrease of $42,399 or
78.6% and $38,507 or 65.1% over the comparable periods of the previous year.
Other service fee revenue is primarily derived from minor transactions with
currently existing WAM!NET Service customers, which includes consulting
services. The decrease reflects a minor decrease in customer consulting hours
during both the three and six month periods ended June 30, 1998.
 
 Operating Expenses
 
  Network communications fees for the three and six month periods ended June
30, 1998 were $3,802,896 and $6,899,592, respectively, an increase of
$2,429,849 or 177.0% and $4,748,864 or 220.8% over the comparable periods of
the previous year. These increases were primarily due to the growth of the
WAM!NET Network from 178 customers receiving services on June 30, 1997 to 972
customers receiving services on June 30, 1998, an increase of 794 customers or
446.1%.
 
                                      12
<PAGE>
 
  Cost of software and hardware sales for the three and six month periods
ended June 30, 1998 was $1,214,419 and $1,475,419, respectively, an increase
from $0 over the comparable periods of the previous year. Costs of software
and hardware sales are a result of the Company's acquisition of 4-Sight, which
was consummated as of March 13, 1998.
 
  Network operations expenses for the three and six month periods ended June
30, 1998 were $6,035,573 and $9,349,575, respectively, an increase of
$4,791,213 or 385.0% and $7,157,575 or 326.5% over the comparable periods of
the previous year. These increases were primarily due to the increase in the
size of the WAM!NET Network and the Company's enhanced efforts to release
global products and accompanying services by the end of 1998.
 
  Sales and marketing expenses for the three and six month periods ended June
30, 1998 were $4,569,937 and $6,922,466, respectively, an increase of
$2,502,044 or 121.0% and $3,679,344 or 113.5% over the comparable periods of
the previous year. These increases primarily resulted from the costs
associated with the Company's efforts to enhance global sales and marketing
functions for its products during 1998.
 
  General and administrative expenses for the three and six month periods
ended June 30, 1998 were $4,730,768 and $19,197,678, respectively, an increase
of $3,640,824 or 334.0% and $17,131,518 or 828.8% over the comparable periods
of the previous year. These increases are primarily due to a $11,539,000 non-
cash charge relating to officer compensation expense. This expense arose after
the Company's board of directors elected an accelerated vesting period for
options granted to selected officers. The additional increases in general and
administrative expenses were due to vastly increased operational support
requirements due to the rapid expansion of the Company's global services and
corporate facilities.
 
  Depreciation and amortization for the three and six month periods ended June
30, 1998 were $4,104,331 and $6,025,579, respectively, an increase of
$3,569,893 or 668.0% and $5,203,839 or 633.3%, respectively, over the
comparable periods of the previous year. As a percentage of gross WAM!NET
Service revenue, depreciation and amortization was 126.7% and 186.8% for the
three and six month periods ended June 30, 1998, as compared to 525.3% and
224.0% for the comparable periods of the previous year. The increase in
depreciation and amortization expense is due to both an increase in WAM!NET
Network equipment that has been installed to service the increasing number of
WAM!NET Service customers, and the impact of the 4-Sight Acquisition which
resulted in the recognition of $32.4 million in goodwill. The 4-Sight goodwill
is being amortized over a 60 month period, resulting in approximately a $1.62
million charge per fiscal quarter.
 
  Interest expense for the three and six month periods ended June 30, 1998 was
$6,004,451 and $9,448,733, respectively, an increase of $5,224,527 or 669.9%
and $7,925,633 or 520.4%, respectively, over the comparable periods of the
previous year. These increases were primarily due to the Company's financing
of its 1997 and 1998 operations through the issuance of various debt
instruments, including approximately $24.0 million of long term subordinated
notes to WorldCom, $15.2 million of equipment financing and $208.5 million of
13 1/4% Senior Discount Notes due 2005 ("Notes") issued in March 1998.
 
 Income Taxes
 
  For the three and six month periods ended June 30, 1998, the Company
experienced net operating losses of $24.3 million and $51.0 million,
respectively, and paid no income taxes. The Company paid no income taxes in
1997. These losses are available to offset future taxable income through the
year 2013 and are subject to the limitations of Section 382 of the internal
Revenue Code of 1986, as amended. These limitations may result in expiration
of net operating loss carry forwards before they can be utilized.
 
                                      13
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  From inception through June 30, 1998, the Company has derived substantially
all of its operating capital from the issuance of short- and long-term debt
instruments. At June 30, 1998, the Company had a total of approximately $166.6
million in long-term debt, of which approximately $2.2 million becomes payable
during 1998.
 
  The Company's source of liquidity since inception has primarily come from
the issuance of debt and equity instruments and from credit facilities and
other borrowings. The Company has received approximately $161.2 million net
cash proceeds from the issuance of long- and short-term debt and
collateralized equipment financing. An additional $2.0 million of net cash
proceeds has been received from the sale of equity securities. The Company has
utilized these proceeds by investing $33.0 million into its global WAM!NET
Network and investing $20.3 million to acquire 4-Sight. Since inception the
Company has also expended $55.9 million to fund its operating activities. To
date the Company has not generated cash from operating activities and remains
dependent upon its ability to generate operating capital for its global
expansion from credit facilities or other borrowings, or the issuance of
additional long- and short-term debt and equity instruments.
 
  During September of 1997, the Company established a revolving credit
facility with The First Bank of Chicago (the "Revolving Credit Facility"), the
proceeds of which were used by the Company to fund its operations and purchase
WAM!NET Network equipment. The maximum amount that can be borrowed under the
Revolving Credit Facility is $25.0 million. The Revolving Credit Facility was
established under an agreement with WorldCom, by which WorldCom guaranteed the
Company's obligations under the Revolving Credit Facility. At June 30, 1998,
the Company had $0 borrowed under the Revolving Credit Facility. Interest and
principal on the Revolving Credit Facility become payable in July 1999.
Borrowings by the Company under the Revolving Credit Facility require the
prior consent of WorldCom.
 
  In December 1997, the Company acquired the outstanding common stock of
FreeMail, Inc. ("FreeMail"). In connection with the acquisition, the Company
issued 125,000 shares of Common Stock, with a fair value of approximately
$488,000, as consideration. The Company is also obligated to pay the former
shareholders of FreeMail as additional contingent consideration on a quarterly
basis amounts equal to five percent of the gross collected revenue derived by
the Company from certain identified FreeMail products; however, the total
amounts of the quarterly payments shall not exceed $3,012,500. As of June 30,
1998, the Company did not record a liability relating to the FreeMail revenue
since no revenue was collected.
 
  On March 5, 1998, the Company consummated an offering (the "Initial
Offering") of 208,530 units, each consisting of $1,000 principal amount at
maturity of Notes and three warrants. Each warrant initially entitles the
holder to purchase 2.01 shares of Common Stock at an exercise price of $.01
per share, subject to adjustment. The Company received net proceed from the
Initial Offering of approximately $120.6 million. Cash interest does not
accrue nor is payable on the Notes prior to March 1, 2002. Thereafter, cash
interest on the Notes will accrue at a rate of 13 1/4% per annum (calculated
on a semi-annual bond equivalent basis) and will be payable semi-annually in
arrears on March 1 and September 1 of each year, commencing September 1, 2002.
The Company used the proceeds of the Initial Offering as follows: (i) $20.0
million to pay the cash portion of the 4-Sight Acquisition, (ii) approximately
$25.0 million to repay the borrowings under the Revolving Credit Facility and
(iii) the balance to be used further the Company's business development and
expansion strategy, to enhance the WAM!NET Service infrastructure and develop
additional value-added features and services, to optimize marketing, sales and
customer support and service capabilities, and for working capital and other
general corporate purposes.
 
  The Company intends to pursue one or more financings in 1998, totalling
approximately $100.0 million, for which it has received indications of
interest from certain financial institutions. The Company believes that the
net proceeds of the Initial Offering and such financings together with
expected cash from operations will be sufficient to finance the Company's
operations through September 30, 1999. This includes the purchase and
installation of all necessary WAM!NET Network and WAM!BASE equipment required
for both national and international operations, marketing and sales
activities, continued development of enhancements to the
 
                                      14
<PAGE>
 
WAM!NET Service and service of its debt obligations. The Company believes that
the net proceeds from the Initial Offering together with expected cash from
operations will be sufficient to finance the Company's operations through
March 31, 1999. The Company intends to invest an additional $30.0 million in
its global WAM!NET Network infrastructure by December 31, 1998 and an
additional $45.0 million in its global WAM!NET Network infrastructure by
December 31, 1999. These investments are necessitated by the need to grow the
global communications network to provide contracted services to the Company's
rapidly expanding customer base. The Company's inability to secure an
additional $100.0 million in funding by March 31, 1999 would adversely affect
its ability to expand the WAM!NET Network during 1999 to meet rapidly growing
demand for global network services. If the Company is unable to obtain
additional financing when needed, it may be required to significantly scale
back expansion plans and, depending upon cash flow from its existing business,
reduce the scope of its plans and operations.
 
  In September 1996, the Company issued to WorldCom a $5.0 million Convertible
Subordinated Note due September 30, 1999 (the "WorldCom Convertible Note"). At
any time prior to September 30, 1999, WorldCom may convert the principal
amount of the WorldCom Convertible Note into shares of Common Stock at a
conversion price of $1.00 per share, subject to adjustment in the event of
stock splits, reorganizations or recapitalizations. In addition, in November
1996, the Company and WorldCom entered into a Preferred Stock, Subordinated
Note and Warrant Purchase Agreement (the "WorldCom Agreement"). Pursuant to
the WorldCom Agreement, the Company, among other things, issued to WorldCom
warrants to purchase on or before December 31, 2000 up to 20,787,500 shares of
Common Stock at an initial exercise price of $0.962 per share, subject to
adjustment in the event of stock splits, reorganizations or recapitalizations
(the "WorldCom Warrants"). The exercise price automatically increases by the
amount of $0.016 per share on the last day of each calendar quarter, subject
to certain abatement provisions, and is currently $1.03 per share. The
WorldCom Agreement provides that if the Company is not publicly held by the
year 2000, the Company's managers and Board of Directors will obtain an
independent valuation by a nationally recognized investment bank of the fair
market value per share of the Company's Common Stock, without any premium
allocated for any controlling interest (the "Tender Valuation"). Upon receipt
of the Tender Valuation, WorldCom may, but is not required to tender (the
"First Tender") to purchase all outstanding shares of Common Stock and all
outstanding options, warrants, convertible securities and other rights to
purchase shares of Common Stock for at least the per share amount of the
Tender Valuation. If the owners of a majority of the then outstanding shares
of the Company's Common Stock (excluding shares held by WorldCom or its
affiliates) reject the First Tender, WorldCom will have 60 days following such
rejection to again tender (the "Second Tender") to purchase the same
securities. Subject to certain conditions, WorldCom will sell and the Company
will purchase the WorldCom Warrants, any shares acquired upon exercise of the
WorldCom Warrants and any shares acquired upon the conversion of the WorldCom
Convertible Note (collectively, the "WorldCom Securities") if (i) WorldCom
fails to make the First Tender within 90 days after receipt of the Tender
Valuation; (ii) owners of a majority of the then outstanding shares of Common
Stock (excluding shares held by WorldCom or its affiliates) reject the First
Tender and WorldCom makes no Second Tender; or (iii) owners of a majority of
the then outstanding shares of Common Stock (excluding shares held by WorldCom
or its affiliates) reject the Second Tender. The Company's purchase price for
the WorldCom Securities will be as follows: (a) if WorldCom fails to make the
First Tender, an amount equal to the Tender Valuation (or the spread between
the Tender Valuation and the exercise price in the case of warrants); (b) if
the First Tender is rejected by the Company's shareholders and WorldCom does
not make the Second Tender, an amount equal to the purchase price offered by
WorldCom in the First Tender (or the spread between the offer price and the
exercise price in the case of warrants); and (c) if the Second Tender is
rejected by the Company's shareholders, an amount equal to the purchase price
offered by WorldCom in the Second Tender (or the spread between the offer
price and the exercise price in the case of warrants). The Company will have
nine months in which to pay the purchase price for the WorldCom Securities. If
the Company fails to timely pay the purchase price for the WorldCom
Securities, WorldCom will be relieved of all obligations to sell such
securities to the Company, the Company will have no right to cause WorldCom to
sell such securities and the Company will not be obligated to pay the purchase
price for such securities. The parties have agreed to waive their respective
obligations thereunder if the Company determines to become, and thereafter
becomes, a publicly-held company.
 
                                      15
<PAGE>
 
  During 1997 the Company, on a pro forma basis after giving effect to the 4-
Sight Acquisition, received less than 5% of its total revenue from sales and
operations in Asian countries. As a result, the Company had limited exposure
to the particular risks attendant to doing business in Asia and did not
experience any material adverse effects from the Asian economic crisis;
however, the Company presently intends to expand its operations in that
region. The Company is currently unable to determine the effect, if any, that
recent economic downturns in Asia, particularly Japan, will have on the
Company's future business, operating results or liquidity, although the
Company intends to exercise prudence and sound business judgment prior to
making any future investments in Asia.
 
  Currently, the Company does not employ currency hedging strategies to reduce
the risks associated with the fluctuation of foreign currency exchange rates.
The Company presently denominates all of its contracts in U.S. dollars. 4-
Sight denominates all of its contracts in pounds sterling except for its U.S.
sales, which are denominated in U.S. dollars, or its German sales, which are
denominated in German marks. The Company is unable to determine what effect,
if any, the adoption and use of the euro, the single European currency to be
introduced in January of 1999, will have on the Company's business, operating
results, liquidity and financial condition.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
  In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income."  Statement 130 is effective for financial statements for fiscal years
beginning after December 15, 1997. This standard defines comprehensive income
as the changes in equity of an entity except those resulting from shareholder
transactions. All components of comprehensive income are required to be
reported in a new financial statement. The adoption of Statement 130 did not
have a material effect on the Company's financial statements.
 
  In June 1997, the FASB also issued Statement 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement 131 is effective
for financial statements for periods beginning after December 31, 1997.
Statement 131 establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. The adoption of
Statement 131 did not have a material effect on the Company's financial
statements.
 
  In October 1997, the AICPA issued Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), which superseded Statement of Position 91-1
for periods beginning after December 15, 1997. The adoption of SOP 97-2 did
not have a material effect on the timing of the Company's revenue recognition
or cause changes to its revenue recognition policies.
 
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
 
                          PART II--OTHER INFORMATION
 
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  The annual meeting of shareholders of the Company was held on May 30, 1998.
There were 9,377,112 shares of Common Stock outstanding as of the record date
for the meeting and 7,613,015 shares of Common Stock were represented in
person or by proxy at the meeting. The following matters were voted upon:
 
  (a) The five nominees for election to the Board of Directors of the Company,
      Edward J. Driscoll, III, Robert L. Hoffman, Charles T. Cannada, K.
      William Grothe, Jr. and Curtis G. Gray, were elected. Each
 
                                      16
<PAGE>
 
     nominee respectively received 7,150,560 votes for, 33,890 votes against,
     his election, with 428,565 abstentions.
 
  (b) An amendment to the Company's Articles of Incorporation (i) to increase
     the authorized capital to 500,000,000 million shares, consisting of
     490,000,000 shares of Common Stock, 100,000 shares of preferred stock,
     par value $10.00 per share, and 9,900,000 shares of undesignated stock;
     and (ii) to amend the requirement regarding the Board of Directors
     determination of the value of non-monetary consideration received for
     shares of capital stock of the Company, was approved by a vote of
     7,543,015 to 70,000.
 
  (c) An amendment to the Company's 1994 Stock Option Plan to amend the number
     of shares which may be issued pursuant to options granted under such plan
     to 7,000,000 shares of Common Stock was approved by a vote of 7,557,460
     to 55,555.
 
  (d) The Company's 1998 Combined Stock Option Plan, which permits incentive
     and non-statutory stock options for eligible employees of the Company and
     its subsidiaries, including employees in the United Kingdom and
     potentially other foreign national employees, was approved by a vote of
     7,543,015 to 70,000.
 
ITEM 5--OTHER INFORMATION
 
  On July 30, 1998, the Company commenced an offer to exchange (the "Exchange
Offer") up to $208,530,000 in aggregate principal amount at maturity of its
13% Senior Discount Notes due 2005, Series B (the "Exchange Notes") for up to
$208,530,000 in aggregate principal amount at maturity of its 13% Senior
Discount Notes due 2005, Series A (the "Original Notes" and, together with the
Exchange Notes, the "Notes"), that were issued and sold on March 5, 1998 in
reliance on exemptions from registration under the Securities Act of 1933, as
amended. The terms of the Exchange Notes will be substantially similar
(including principal amount, interest rate, maturity and ranking) to the terms
of the Original Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes (i) are freely transferable by holders
thereof (except in certain limited cases as described in the registration
statement relating to the Exchange Notes) and will be issued without any
covenant regarding their registration. The Exchange Offer will expire at 5:00
p.m., New York City time, on August 28, 1998, unless extended.
 
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
 
  a.Exhibits:
 
<TABLE>
     <C>   <S>
     3.1   Amended and Restated Articles of Incorporation of the Company.**
     10.19 Amended and Restated 1994 Stock Option Plan.*
     10.20 1998 Combined Stock Option Plan.**
</TABLE>
 
    -------
    *  Incorporated herein by reference to the identically numbered exhibit
       to the Company's Registration Statement on Form S-4, Registration No.
       333-53841, as filed with the Securities and Exchange Commission on
       May 28, 1998.
 
    ** Incorporated herein by reference to the identically numbered exhibit
       to Amendment No. 1 to the Company's Registration Statement on Form S-
       4, Registration No. 333-53841, as filed with the Securities and
       Exchange Commission on July 10, 1998.
 
  b.Current Reports on Form 8-K:
 
    The Corporation did not file any reports on Form 8-K during the three
    months ended June 30, 1998.
 
                                      17
<PAGE>
 
                                   SIGNATURE
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
 
                                          WAM!NET INC.
 
Date: August 11, 1998
 
                                          By: /s/ Edward J. Driscoll III
                                              ---------------------------  
                                              Edward J. Driscoll III
                                              President and Chief Executive
                                              Officer
 
                                      18