SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                 FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
                    THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                            Commission file number
  December 31, 1996                                        333-16265

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

                                    None

Securities registered pursuant to Section 12(g) of the Act:

                                    None

           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 _____
NO   X

           Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.   X

           The number of shares of Registrant's Class A Common Stock, par
value $.01 per share, outstanding as of March 15, 1997: 717,526 shares.
There are no outstanding shares of the Registrant's Class B Common Stock,
par value $.01 per share.


                                   PART I

Item 1.    BUSINESS

Introduction

           USN Communications, Inc., formerly United USN, Inc. (the
"Company"), a Delaware corporation, was formed and commenced operations in
April 1994. The Company is a rapidly growing provider of integrated local
and long distance telecommunications services in the United States. The
Company resells telecommunications services of certain regional Bell
operating companies ("RBOCs") and certain long distance carriers to provide
an integrated solution of local and long distance services to the
underserved small and medium-sized business segment. The Company primarily
focuses its marketing efforts on businesses with telecommunications usage
of less than $5,000 per month. The Company's approach simplifies the
subscriber's telecommunications procurement and management tasks and
provides for the easy addition of customized services, such as special
local and long distance pricing and enhanced and other value-added calling
and billing features designed to meet specific subscriber needs.

           The Company's goal is to be more flexible, innovative and
responsive to the needs of its subscribers than the RBOCs and the large
long distance carriers, which primarily concentrate their sales and
marketing efforts on residential and large commercial subscribers. Market
research combined with the Company's experience indicates that its target
subscribers prefer a single source and single bill for all of their
telecommunications needs. The Company provides local service obtained from
the incumbent RBOCs at wholesale rates, which allows subscribers to switch
to local service provided by the Company without changing their existing
telephone numbers or adding new facilities or equipment. The Company
provides long distance services by purchasing bulk capacity from long
distance carriers and reselling those services to the Company's
subscribers. By providing an integrated, customized package of local, long
distance and enhanced and other value-added services on a single bill
through its proprietary software and responsive subscriber care systems,
the Company believes that it provides a differentiated and competitive
product.

           The Company obtains its resold local services pursuant to
comprehensive local exchange resale agreements with Ameritech Corporation
("Ameritech") for the greater metropolitan Chicago area, Ohio and Michigan
(collectively, the "Ameritech Resale Agreements") and with NYNEX
Corporation ("NYNEX") for the states of New York and Massachusetts (the
"NYNEX Resale Agreements"). The Company has also entered into a limited
service offering ("LSO") agreement with NYNEX for the resale of Centrex
services over a private local network which provides access to the majority
of business lines in Manhattan, New York. After a nine month systems test
period with Ameritech, the Company commenced service in Illinois in August
1996, followed by Ohio in October 1996. The Company completed a systems
test period in New York in October 1996 and started offering service in
November 1996. The Company began service in Michigan at the end of 1996 and
commenced service in Massachusetts in March 1997. Additionally, the Company
has contracted with certain long distance carriers, including MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint") to
provide capacity for its long distance traffic. The Company continuously
seeks to enter into agreements with additional RBOCs, long distance
carriers and enhanced and other value-added service providers in order to
aggressively build its subscriber base as well as to provide additional
services to its existing subscribers while reducing costs. See "--Vendor
Agreements."

Market Opportunity

           The Telecommunications Act of 1996 (the "Telecommunications
Act") is expected to result in a fundamental change in the competitive
structure of the local exchange market, greatly accelerating changes that
have been under way for several years as a result of policy initiatives of
the Federal Communications Commission (the "FCC") and ongoing deregulatory
trends at the state level. Specifically, the Telecommunications Act lifted
regulatory barriers to entry into the local market, required the resale of
local services by the RBOCs and put in place various measures designed to
further the development of a competitive market, all of which benefit the
Company.

Subscribers and Marketing

           The Company's subscribers include small and medium-sized
businesses which principally have telecommunications usage of less than
$5,000 per month. The Company believes that the RBOCs and large
interexchange carriers historically have chosen not to concentrate their
sales and marketing efforts on this business segment, which the Company
believes represents a significant portion of the telecommunications service
market. Through radio and newspaper advertising as well as various
marketing programs, the Company has sought to establish itself as a
recognized brand name for its products and services emphasizing responsive
subscriber support systems, competitive product and pricing packages and a
targeted sales and marketing strategy. The Company had approximately 1,700
customers as of December 31, 1996.

           The Company's services are currently sold through a direct sales
effort, but the Company plans to expand its sales efforts to a
multi-channel marketing approach, which combines both direct and indirect
sales efforts. The Company believes this marketing approach would increase
market coverage and reduce marketing costs and subscriber acquisition
costs. The Company focuses on the structuring, management and control of
its marketing programs in order to effectively integrate with the billing
and information systems of the RBOCs.

           The Company has recruited and continues to recruit a direct
sales force in each of the markets in which it operates. The Company
recruits salespeople with experience in selling competitive
telecommunications services in the markets where they are based. The
Company's sales force is trained in-house with a rigorous
subscriber-focused training program that promotes activity-based selling
with a uniquely designed program for subscriber acquisition. The sales
force makes calls to prospective subscribers from potential subscriber
modules created by acquiring business databases sorted by target
characteristics (e.g., size of business and number of telephone lines).
Salespeople are given an incentive through a commission structure, with a
target of 50% of a salesperson's compensation based on such person's
performance.

Management Information Systems

Introduction

           The Company is committed to the continued development and
successful implementation of billing and subscriber care systems that
provide accurate and timely information to both the Company and its
subscribers. The proprietary interfaces of the Company's management infor-
mation systems for the provisioning of services to the Company's customers
have been developed in cooperation with Ameritech and NYNEX, with which the
Company has entered into resale agreements. The Company believes this
method of development is a critical element to successfully providing local
telecommunications services and is an advantage, as the RBOCs have an
economic and strategic incentive to work with resellers that have
sophisticated information systems that can interface efficiently with the
RBOCs' systems. The Company believes its experience in developing these
systems will allow it to offer services quickly in new markets. The
subscriber care systems have been developed and continue to be enhanced in
a client/server environment allowing for flexibility to accommodate an
expanding subscriber base, efficient entry into new markets and rapid
development of additional functionality.

           As a result of the Ameritech Resale Agreements and the NYNEX
Resale Agreements, as well as changes in the Company's subscriber base and
product mix, the Company has modified its billing and subscriber care
systems. The new systems were developed to run in a multi-site wide area
network configuration allowing the Company to decentralize certain data
processing and subscriber care activities as desired. Due to the modular
nature of this hardware and software setup, new centers may be added by the
Company to accommodate subscriber growth and entry into additional
territories.

           The systems are designed to provide access to a broad range of
information on individual subscribers, including their call volume,
patterns of usage and billing history. This same information is used by the
Company to identify subscriber trends and will allow for proactive support
of the Company's marketing efforts.

           The Company expects to continue to pursue a strategy of growth
and expansion, which will place additional demands on the Company's billing
and subscriber care systems. In the past the Company has experienced a
number of billing and provisioning problems under its LSO agreement with
NYNEX. Although the Company believes that the NYNEX-related problem has
been substantially resolved and that its billing and subscriber care
systems have been adequate to date for its business, there can be no
assurance that the problems will not recur or that new billing and
provisioning difficulties will not arise in the course of the Company's
execution of its business strategy. Such difficulties, if they were to
occur, could have a material adverse effect on the Company's business,
operating results and financial condition.

           The anticipated high growth in the subscriber base in 1997 and
1998 following the recent significant expansion of the field sales
organization is likely to put substantial stress on the legacy billing and
subscriber care systems. The Company intends to invest a significant
portion of its capital plan for 1997 and 1998 to develop more robust
billing and subscriber care systems.

Billing and Management Systems

           The Company currently outsources the rating, printing and
mailing of subscriber bills. Since these functions require a high volume of
processing in a limited time frame, the Company has determined that the
most economical way currently to process bills is to share the hardware
resources with others. The subscriber usage information for billing and the
tables and procedures used in the rating of call records are maintained
separately by the Company to manage the ongoing needs of each subscriber.
Standard management reports are generated for every billing cycle.

Provisioning and Subscriber Information/Subscriber Care

           Provisioning of service to subscribers is accomplished through
the Company's proprietary systems. The provisioning gateway systems are
designed to interface with the RBOCs' systems through a variety of delivery
mechanisms, including Internet mail, direct connect, fax and network data
mover. Information regarding new subscribers is electronically requested
from the RBOCs and long-distance carriers, evaluated by the Company in
terms of credit risk and potential revenue and subsequently processed into
the Company's subscriber care system. In addition, the Company's
information systems generate margin analysis reports on existing businesses
of the Company and accounts receivable information.

Vendor Agreements

Introduction

           The Company has executed comprehensive local exchange resale
agreements, including the Ameritech Resale Agreements for the greater
metropolitan Chicago area, Ohio and Michigan, and the NYNEX Resale
Agreements for the states of New York and Massachusetts. Additionally,
the Company has entered into an LSO agreement with NYNEX for the resale of
Centrex over a private local network which provides access to a majority of
the business lines in Manhattan, New York. The Company estimates, based on
data compiled by the FCC, that the regions covered by the Ameritech Resale
Agreements and the NYNEX Resale Agreements include access to over 10
million business access lines and over 20 million residential access
lines. The Company continuously evaluates opportunities to enter into
agreements with additional RBOCs, long distance carriers and enhanced and
other value-added service providers in order to aggressively build its
subscriber base as well as to provide additional services to its existing
subscribers while reducing costs.

           The Company currently has long distance resale agreements with
MCI and Sprint. Such agreements allow the Company to offer its subscribers
integrated local and long distance telecommunications services. In
addition, such agreements have allowed the Company to enter and establish
itself as a telecommunications provider in strategically targeted markets
prior to establishing a local exchange resale agreement.

Ameritech Resale Agreements

           Pursuant to the Ameritech Resale Agreements, the Company
purchases local exchange services at discounted rates based on a ten-year
term. These agreements contain pricing protections designed to maintain the
competitiveness of the Company's discounted rates and position the Company
to purchase capacity at rates at least as favorable as those of competitors
that have or may eventually negotiate a resale agreement. The level of
discounts of the resold services provided under these agreements vary based
on the state and the nature of services resold (i.e., access lines, local
calls, toll calls or features).

           Services offered for resale include most of the
telecommunications products and services engineered and provided by
Ameritech, such as local exchange calling and attendant features including
call waiting, call forwarding, caller ID and three-way calling. The rates
for these services are filed with the public utilities commission of each
respective state. The Company also has an agreement with Ameritech for the
resale of certain non-tariffed services to its subscribers, including
inside wire maintenance.

           The Ameritech Resale Agreements include a minimum commitment of
resold access lines per region covered. The minimum commitment in Illinois
is 150,000 business access lines and in Ohio and Michigan, 100,000 business
access lines and 10,000 residential lines. The minimum commitment is not a
limitation on the Company's overall ability to sell access lines at
discounted rates. However, if the Company fails to meet its minimum
commitment, the Company is subject to an underutilization charge equal to
the number of unutilized lines multiplied by a fixed average business line
rate. The measurement period of the minimum commitment does not commence,
however, until the completion of a three month trial or "beta period" and
an 18 month "ramp up" period which gives the Company the ability to build
its subscriber base. In addition, the Ameritech Resale Agreements provide a
"carryforward" provision designed to minimize the potential for any
liability resulting from a failure to meet the minimum commitment by
carrying forward underutilization amounts which may be met in the future.

           If the Company does not meet its minimum commitment by the end
of the ten-year term, with the benefit of the carryforward provision, the
Company has the option to either pay a penalty based on the aggregate
number of unutilized lines or subscribe on a monthly basis to an equivalent
number of lines during the next three-year period. In the event the Company
terminates any of the Ameritech Resale Agreements prior to their expiration
without cause, the Company is subject to a termination charge.

NYNEX Resale Agreements

           On July 9, 1996, the Company executed a resale agreement with
NYNEX to provide for the resale of local exchange services for the state of
New York at discounted rates based on a ten-year term. The New York NYNEX
Resale Agreement contains pricing protections designed to maintain the
competitiveness of discounted rates provided to the Company. Under the New
York NYNEX Resale Agreement, the Company receives the lowest rate and/or
most favorable term provided to any reseller; however, if a lower rate is
provided to a reseller committing to both a longer term and a greater
volume commitment, the Company receives the lower rate but must negotiate
with NYNEX a reasonable transition to similar commitments. If the Company
cannot successfully negotiate such a transition with NYNEX, then the
Company may be unable to maintain the lowest rate. The level of discounts
of resold services varies based on the nature of the services. The New York
NYNEX Resale Agreement contains a minimum commitment of 100,000 business
access lines. In the event the Company does not satisfy the minimum
commitment after a beta period and ramp-up period, the Company is subject
to an underutilization charge. However, the NYNEX Resale Agreement also
contains a carryforward provision designed to minimize the potential of an
underutilization charge. The Company has also executed an interim resale
agreement with NYNEX for Massachusetts. This agreement does not contain a
term and volume commitment, but was designed to allow the Company to begin
reselling services in Massachusetts expeditiously in a manner consistent
with state regulatory developments. It is expected that the Company and
NYNEX will enter into a long-term resale agreement for Massachusetts
similar to the New York NYNEX Resale Agreement.

NYNEX Limited Service Offering

           Since 1994, the Company has offered Centrex over a private local
network, which allows the Company to provide integrated local exchange
service and long distance service, on a resale basis to the majority of
business lines of Manhattan, New York. The Company has access to 23 NYNEX
switches over a private local network and dedicated lines at discounted
rates based on volume of traffic. The Company believes the LSO agreement
will complement services provided under the NYNEX Resale Agreement by
allowing the Company to package specifically tailored telecommunications
services. The LSO agreement contains a minimum commitment of 10,000 local
exchange access lines. The Company has not met this minimum commitment due
to NYNEX provisioning delays. The LSO Agreement provides that provisioning
delays allow the Company to postpone its obligation to meet the minimum
commitment.

Long Distance Agreements

           The Company primarily uses MCI to provide a wide range of long
distance telecommunications services to its customers. Services offered
for resale from MCI include a variety of inbound, outbound, calling card
and international services. In addition, the Company also resells
teleconferencing, debit cards, branded operator services and private line
services.

           The Company's primary long distance carrier agreement is with
MCI, which became effective August 1, 1996 and contains a 33-month term. It
requires the Company to achieve certain monthly dollar targets in order to
qualify for discounted rates on carrier services. After a nine-month
"ramp-up" period, the agreement provides for an annual commitment for each
of the two years following the "ramp-up" period. If the Company does not
meet its annual commitment during any annual period of the term, an
underutilization charge shall apply in an amount equal to 15% of the
difference between the committed amount and the actual usage. However, the
Company may carry forward up to 10% of the initial annual commitment for a
period of up to three months in the following annual period.

Enhanced and Other Value-Added Telecommunications Services

           The Company is in the process of negotiating agreements to offer
on a resale basis enhanced and other value-added services such as Internet
access, paging and voicemail. In addition, the Company has entered into an
agreement for the exclusive rights in the United States and Canada to
distribute a Windows-based teleconferencing product which allows the
conference host to conduct a conference call using point and click graphics
directly from a personal computer without having to make teleconference
reservations.

Competition

           The Company operates in a highly competitive environment and has
no significant market share in any market in which it operates. The Company
expects that competition will intensify in the future due to regulatory
changes, including the enactment of the Telecommunications Act and the
increase in the size, resources and number of market participants. In each
of its markets, the Company faces competition for local service from
larger, better capitalized incumbent providers, many of whom have greater
financial resources than the Company. Additionally, the long distance
market is already significantly more competitive than the local exchange
market, because the RBOCs have historically had a monopoly position within
the local exchange market. The incumbent local exchange carriers ("LECs")
have long-established relationships with their subscribers and provide
those subscribers with various transmission and switching services that the
Company, in many cases, has only recently begun to offer.

           In the local exchange market, the Company also faces competition
or prospective competition from one or more competitive access providers
("CAPs"), which have significantly greater financial resources than the
Company, and from other competitive providers, including
non-facilities-based providers like the Company. For example, AT&T, MCI and
Sprint, among other carriers, have each begun or indicated their intention
to begin offering local telecommunication services in major U.S. markets
using their own facilities or by resale of the LECs' or other providers'
services. In fact, certain competitors, including MCI, Sprint and AT&T,
have entered into interconnection agreements with Ameritech with respect to
the states of Illinois, Michigan and Ohio. These competitors either have
begun or will in the first half of 1997 likely begin offering local
exchange service in those states, subject to the joint marketing
restrictions under the Telecommunications Act described below. In addition,
some of these competitors have entered into interconnection agreements with
NYNEX and either have begun or in the first half of 1997 will likely begin
offering local exchange service in New York and Massachusetts, subject to
such joint marketing restrictions. In addition to these long distance
service providers, entities potentially capable of offering switched
services include CAPs, cable television companies, electric utilities,
other long distance carriers, microwave carriers, wireless telephone system
operators and large subscribers who build private networks. Many
facilities-based CAPs and long distance carriers, for example, have
committed substantial resources to building their networks. By building a
network, a facilities-based provider can enter the local exchange market by
using its own network, or entering into interconnection agreements or
resale agreements with incumbent LECs, including RBOCs. Such additional
alternatives may provide the CAPs with greater flexibility and a lower cost
structure than the Company.

           With respect to wireless telephone system operators, the FCC
recently authorized cellular, personal communications service and other
commercial mobile radio service ("CMRS") providers to offer wireless
services to fixed locations, rather than just to mobile subscribers, in
whatever capacity such CMRS providers choose. Previously, cellular
providers could provide service to fixed locations only on an ancillary or
incidental basis. This authority to provide fixed as well as mobile
services will enable CMRS providers to offer wireless local loop service
and other services to fixed locations (e.g., office and apartment
buildings) in direct competition with the Company and other providers of
traditional fixed telephone service. In addition, in August 1996 the FCC
promulgated regulations that classify CMRS providers as telecommunications
carriers, thus giving them the same rights to interconnection and
reciprocal compensation under the Telecommunications Act as other non-LEC
telecommunications carriers, including the Company.

           Under the Telecommunications Act and related federal and state
regulatory initiatives, barriers to local exchange competition are being
removed. The availability of broad-based local resale and introduction of
facilities-based local competition are required before the RBOCs may
provide in-region interexchange long distance services. Also, the largest
long distance carriers (AT&T, MCI, Sprint and any other carrier with 5% or
more of the pre-subscribed access lines) are prevented under the
Telecommunications Act from bundling local services resold from an RBOC in
a particular state with their long distance services until the earlier of
(i) February 8, 1999 or (ii) the date on which the RBOC whose services are
being resold obtains in-region long distance authority in that state. The
RBOCs are currently allowed to offer certain in-region "incidental"
long-distance services (such as cellular, audio and visual programming and
certain interactive storage and retrieval functions) and to offer virtually
all out-of-region long distance services.

           In January 1997, Ameritech, the RBOC in three states where the
Company operates, filed and subsequently withdrew an application for
in-region long distance authority in Michigan. The Company anticipates that
Ameritech will again file an application with respect to Michigan as well
as most or all of its other states--including Illinois and Ohio. Other
RBOCs, including NYNEX in New York, are expected to file such applications
as early as the first half of 1997. The FCC will have 90 days from the date
such an application is filed to decide whether to grant or deny the
application. Once the RBOCs are allowed to offer widespread in-region long
distance services, both they and the largest interexchange carriers will be
in a position to offer single-source local and long distance services
similar to those offered by the Company. While new business opportunities
will be made available to the Company through the Telecommunications Act
and other federal and state regulatory initiatives, regulators are likely
to provide the incumbent LECs with an increased degree of flexibility with
regard to pricing of their services as competition increases. Although the
Ameritech Resale Agreements and the NYNEX Resale Agreements contain certain
pricing protections, including adjustments in the wholesale rates to be
consistent with any changes in the Ameritech and NYNEX retail rates, if the
incumbent LECs elect to lower their rates and sustain lower rates over
time, this may adversely affect the revenues of the Company and place
downward pressure on the rates the Company can charge. While the Ameritech
and NYNEX Resale Agreements ensure that the Company will receive any lower
rate provided to any other reseller, under the NYNEX Resale Agreement if
such lower rate is provided to a reseller committing to both a longer term
and a greater volume commitment, the Company receives the lower rate, but
must negotiate with NYNEX a reasonable transition to similar commitments.
If the Company cannot successfully renegotiate such a transition with
NYNEX, then the Company may be unable to maintain the lowest rate. The
Company believes the effect of lower rates may be offset by the increased
revenues available by offering new products and services to its target
subscribers, but there can be no assurance that this will occur. In
addition, if future regulatory decisions afford the LECs excessive pricing
flexibility or other regulatory relief, such decisions could have a
material adverse effect on the Company.

           Competition for the Company's products and services is based on
price, quality, network reliability, service features and responsiveness to
subscriber needs. While the Company believes that it currently has certain
advantages relating to the timing, ubiquity and cost savings resulting from
its resale agreements, there is no assurance that the Company will be able
to maintain these advantages. A continuing trend toward business
combinations and alliances in the telecommunications industry may create
significant new competitors to the Company. Many of the Company's existing
and potential competitors have financial, technical and other resources
significantly greater than those of the Company.

Government Regulation

           The Company is subject to varying degrees of federal, state,
local and international regulation. In the United States, the Company is
most heavily regulated by the states, especially for the provision of local
exchange services. The Company must be separately certified in each state
to offer local exchange services. No state, however, subjects the Company
to price cap or rate-of-return regulation. FCC approval is required for the
resale of international facilities and services. The FCC has determined
that nondominant carriers, such as the Company, are required to file
interstate tariffs on an ongoing basis, setting forth the Company's rates
and operating procedures. Such tariffs can currently be modified on one
day's notice. The FCC recently issued regulations to eliminate this tariff
filing requirement for all nondominant carriers, such as the Company and
all other nondominant interexchange carriers (except possibly the RBOCs in
certain circumstances), effective in late 1997. The FCC has recently ruled,
subject to its consideration of the issue in another pending FCC
proceeding, that RBOCs providing out-of-region long distance service
through separate subsidiaries from their local telephone operations qualify
for nondominant treatment. Out-of-region RBOC services provided through
unseparated entities, however, are subject to full dominant carrier
regulation, including the requirement to submit cost support with tariffs
and to file tariffs on at least 15 to 45 days' notice, depending on various
factors. The FCC has not yet indicated whether RBOC in-region service, when
authorized, will be subject to dominant or nondominant regulatory status.

           Legislation. On February 8, 1996, President Clinton signed into
law the Telecommunications Act, comprehensive federal telecommunications
legislation affecting all aspects of the telecommunications industry. The
Telecommunications Act establishes a national policy that promotes local
exchange competition. The Telecommunications Act requires that local and
state barriers to entry into the local exchange market be removed and
establishes broad uniform standards under which the FCC and the state
commissions are to implement local competition and co-carrier arrangements
in the local exchange market. Under certain conditions and subject to
reasonable exceptions, incumbent LECs will be required to make available
for resale to new entrants all services offered by the LEC on a retail
basis. The Telecommunications Act also imposes significant obligations on
the RBOCs and other incumbent LECs, including the obligation to
interconnect their networks with the networks of competitors. Each
incumbent LEC would be required not only to open its network but also to
"unbundle" the network. The FCC issued regulations in August 1996 defining
a minimum set of elements which must actually be unbundled, and each state
may augment this list if it wishes. The pricing of these unbundled network
elements and services will determine whether it is economically attractive
to use these elements.

           In addition to the required network unbundling applicable to all
incumbent LECs, the RBOCs have an added incentive to open their local
exchange networks to facilities-based competition because the
Telecommunications Act provides for the removal of the current ban on RBOC
provision of in-region inter-LATA toll service and equipment manufacturing.
This ban will be removed only after the RBOC demonstrates to the FCC, which
must consult with the Department of Justice and the relevant state
commissions, that the RBOC has (1) met the requirements of the
Telecommunications Act's 14-point competitive checklist and (2) entered
into an approved interconnection agreement with at least one unaffiliated,
facilities-based competitor in some portion of the state pursuant to which
such competitor provides both business and residential service (or that by
a date certain no such competitors have "requested" interconnection as
defined in the Telecommunications Act). RBOC in-region services must be
provided through a separate subsidiary for three years, unless extended by
the FCC. In January 1997, Ameritech, the RBOC in three states where the
Company operates, filed and subsequently withdrew an application for
in-region long distance authority in Michigan. The Company anticipates
that Ameritech will again file an application with respect to Michigan as
well as most or all of its other states--including Illinois and Ohio. Other
RBOCs, including NYNEX in New York, are expected to file such applications
as early as the first half of 1997. If the FCC determines that the RBOC's
entry into in-region provision of long distance in that state is in the
public interest and that the RBOC has met the 14-point checklist, it must
authorize the RBOC to provide such services.

           Under the 14-point competitive checklist, in order to obtain
in-region long distance authority an RBOC must first demonstrate to the
FCC, among other things, that, within a particular state, it offers
competing LECs the following: interconnection as required under the
Telecommunications Act; non-discriminatory access to unbundled network
elements at just and reasonable rates; non-discriminatory access to its
poles, ducts, conduits and rights-of-way; unbundled local loop
transmission, unbundled local transport and unbundled local switching;
non-discriminatory access to 911 services; directory assistance, operator
call completion services and white pages directory listings for competing
local carriers' subscribers; non-discriminatory access to call routing
databases; number portability (i.e., the ability of a subscriber to keep
the same telephone number when switching local telephone service
providers); dialing parity (i.e., the ability of subscribers of one
telephone service provider to call subscribers of other providers without
dialing access codes); reciprocal compensation arrangements for the
termination of calls between competing local networks; and permitting
resale of its telecommunications services.

           While state-by-state regulatory activity has to date brought
resale co-carrier arrangements or initiatives to various degrees of
completion in nearly all states, the Telecommunications Act is intended to
accelerate the process and create a competitive environment in all markets,
eliminating state and local statutory and regulatory barriers to entry.
This preemption of state laws barring local competition and the relaxation
of regulatory restraints should enhance the Company's ability to expand its
service offerings nationwide. In contrast, by removing barriers to entry
into the local exchange market and at the same time enabling multiple
carriers to compete with the Company in the provision of local and long
distance services, ultimately allowing the RBOCs and large interexchange
carriers to offer their own packages of single-source local/long distance
services, the Telecommunications Act will substantially increase the compe-
tition the Company will face.

           In addition to providing the Company with a national framework
to achieve local exchange resale carrier status in local exchange markets,
the Telecommunications Act permits the Company, as a telecommunications
carrier with less than 5% of nationwide presubscribed access lines, to
continue to offer single-source combined packages of local and long
distance services. In contrast, AT&T, MCI and Sprint may not bundle in an
RBOC's territory their local services resold from an RBOC and in-region
long distance service until the earlier of (i) February 8, 1999 or (ii) the
date the RBOC is authorized to enter the inter-LATA long distance market in
that state.

           The Telecommunications Act also creates a new Federal-State
Joint Board for the purpose of making recommendations to the FCC regarding
the implementation of a largely revised universal service program. All
telecommunications carriers, including the Company, that provide interstate
services are required to contribute, on an equitable and nondiscriminatory
basis, to the preservation and advancement of universal service pursuant to
a specific and predictable universal service mechanism to be established by
the FCC. The Federal-State Joint Board issued recommendations regarding the
scope and funding of universal service in December 1996, but those
recommendations are not binding. The FCC may exempt certain classes of
carriers from having to contribute to the universal service fund. The
Company is unable to predict the final formula for universal service
contribution or its own level of contribution.

           Federal Regulation. The Telecommunications Act in some sections
is self-executing, but in most cases the FCC must issue regulations that
identify specific requirements before the Company and its competitors can
proceed to implement the changes the Telecommunications Act prescribes. The
FCC already has commenced several of these rulemaking proceedings.

           The Company actively monitors all pertinent FCC proceedings and
has participated in some of these proceedings. The Telecommunications Act
provides that individual state utility commissions can, consistent with FCC
regulations, prohibit resellers from reselling a particular service to
specific categories of subscribers to whom the incumbent LEC does not offer
that service at retail. In August 1996, the FCC issued detailed regulations
providing that many such limitations are presumptively unreasonable and
that states may enact such prohibitions on resale only in certain limited
circumstances. In particular, the FCC concluded that while it would be
permissible to prohibit the resale of certain residential or other
subsidized services to end users that would be ineligible to receive such
services directly from the LEC, all other "cross-class" selling
restrictions, including those on volume discount and flat-rated offerings
to business customers, would be presumed unreasonable. An incumbent LEC may
rebut this presumption, however, by demonstrating that the class
restriction is reasonable and nondiscriminatory. The FCC also rejected
claims by several incumbent LECs to provide for several exceptions to the
general resale obligation. For instance, it refused to create a general
exception for all promotional or discounted offerings, including contract
and customer-specific offerings. The FCC did, however, conclude that
short-term promotional prices (i.e., those offered for 90 days or less) are
not "retail rates" and thus are not subject to the wholesale rate
obligation. Incumbent LECs may not offer consecutive 90-day promotions to
avoid these resale obligations.

           The Telecommunications Act also provides that state commissions
shall be given an opportunity to determine the wholesale rates for local
telecommunications services (i.e., the rates charged by incumbent LECs to
resellers such as the Company) on the basis of retail rates less "avoided
costs," i.e., marketing, billing, collection and other administrative costs
avoided by the incumbent LEC when it sells at wholesale. In August 1996 the
FCC issued detailed regulations identifying such avoided costs, and also
included in such category "avoidable" costs. To determine the specific
value of avoided and avoidable costs applicable to each service of a
particular incumbent LEC, the FCC required the state public service
commissions to conduct detailed cost studies consistent with the FCC
regulations governing what constitutes avoided and avoidable costs. Until
such time that these costs studies are completed, the FCC established an
interim default discount of between 17% and 25%. Accordingly, until such
time that a state determines the actual level of avoided and avoidable
costs pursuant to the FCC's regulations, it may require incumbent LECs to
discount their retail offerings by 17% to 25%, provided that actual cost
studies are completed within a reasonable time. The Telecommunications Act
also provides that state commissions shall determine the rates charged for
unbundled elements of the incumbent LEC's network on the basis of cost plus
a reasonable profit. In August 1996, the FCC declined to issue detailed
regulations governing the relationship between these two pricing standards,
leaving the interpretation and implementation of the two standards to the
states. The Company is unable to predict the final form of such state
regulation, or its potential impact on the Company or the local exchange
market in general.

           In August 1996, the FCC also issued regulations that, among
other things, set minimum standards governing the terms and prices of
interconnection and access to unbundled incumbent LEC network elements.
These regulations indirectly affect the price at which the Company's new
facilities-based competitors may ultimately provide service. At the same
time, the FCC imposed minimum obligations regarding the duty of incumbent
LECs to negotiate interconnection or resale arrangements in good faith.

           A number of RBOCs, state regulatory commissions and other
parties have filed requests for reconsideration by the FCC of various parts
of the rules announced by the FCC in August 1996, including those
provisions (a) limiting competitors' ability to purchase for resale certain
types of service that the RBOC is no longer marketing to new customers
("grandfathered services"), and (b) establishing pricing methodologies and
interim default rates for resold services and unbundled network elements.
The FCC is conducting a proceeding to consider the various petitions for
reconsideration, and a decision is expected in the first half of 1997. In
addition, many of the same parties and certain other parties have filed
court appeals challenging the same FCC rules. All the court appeals have
been consolidated before the Eighth Circuit Federal Court of Appeals, which
has stayed the effect of certain parts of the rules (including the
provisions establishing pricing methodologies and default rates for resold
services and unbundled network elements) pending its decision in the
appeals. The U.S. Supreme Court declined to dissolve the stay, and the
court of appeals' decision is not expected before the middle of 1997. The
Company cannot predict at this time the outcome of the appeals or
reconsideration processes.

           In July 1996, the FCC mandated that over the course of the next
year responsibility for administering and assigning local telephone numbers
be transferred from the RBOCs and a few other LECs to a neutral entity. In
August 1996, the FCC issued regulations which address certain of these
issues, but leave others for decision by the states and the still-to-be
selected neutral numbering plan administrator. The new FCC numbering
regulations (a) prohibit states from creating new area codes that could
unfairly hinder LEC competitors (including the Company) by requiring their
customers to use 10 digit dialing while existing incumbent LEC customers
use 7 digit dialing, and (b) prohibit incumbent LECs (which are still
administering central office numbers pending selection of the neutral
administrator) from charging "code opening" fees to competitors (such as
the Company) unless they charge the same fee to all carriers including
themselves. In addition, each carrier is required to contribute to the cost
of numbering administration through a formula based on net
telecommunications revenues. In July 1996, the FCC released rules to permit
both residential and business consumers to retain their telephone numbers
when switching from one local service provider to another (known as "number
portability"). RBOCs are required to implement number portability in the
top 100 markets by October 1, 1997 and to complete it by December 31, 1998.
In smaller markets, RBOCs must implement number portability within six
months of a request therefor commencing December 31, 1998. Other LECs,
including the Company, are required to implement number portability by
October 31, 1997 only in those of the top 100 markets where the feature is
requested by another LEC. Similarly, the Company and other non-RBOC LECs
are only required to implement number portability by December 31, 1998 in
those additional markets where the feature is requested by another LEC. The
Company already offers number portability as it provides local service
obtained from the incumbent RBOCs. This allows subscribers to switch to the
Company's services and still retain their existing telephone numbers.

           In addition, the FCC recently authorized cellular and other CMRS
providers to offer wireless services to fixed locations (rather than just
to mobile subscribers), including offering wireless local loop service, in
whatever capacity such provider determines. Previously, many CMRS providers
could provide fixed services on only an ancillary or incidental basis. In
addition, in August 1996 the FCC promulgated regulations that classify CMRS
providers as telecommunications carriers, thus giving them the same rights
to interconnection and reciprocal compensation under the Telecommunications
Act as other non-LEC telecommunications carriers, including the Company.

           State Regulation. Historically, certain of the Company's resold
local and long distance services were classified as intrastate and
therefore subject to state regulation. As its local service business and
product lines has expanded, the Company has offered more intrastate service
and become increasingly subject to state regulation. The Telecommunications
Act maintains the authority of individual state utility commissions to
impose their own regulation of local exchange services so long as such
regulation is not inconsistent with the requirements of the
Telecommunications Act. In all states where certification is required, the
Company's operating subsidiaries are certificated as common carriers. In
all states, the Company believes that it operates with the appropriate
state regulatory authorization. The Company currently is authorized to
provide intrastate toll or a combination of local and intrastate toll
service in more than 40 states. These authorizations vary in the scope of
the intrastate services permitted.

           The Telecommunications Act provides that the Company's resale
agreements must be submitted to the applicable state utility commission for
approval, and it places strict limitations on the bases on which a state
commission can reject such an agreement. If the state commission does not
act within 90 days after the agreement is submitted for approval, then the
agreement is deemed approved. In addition, if a state commission fails to
act to enforce an agreement, the FCC can (upon request of a party) take
jurisdiction over the matter. A state commission's decisions regarding
implementation and enforcement of an agreement are appealable to the
federal district court in that state.

Employees

           As of December 31, 1996, the Company employed approximately 450
people. The Company's employees are not unionized, and the Company believes
its relations with its employees are good. In connection with its marketing
and sales efforts and the conduct of its other business operations, the
Company uses third party contractors, some of whose employees may be
represented by unions or collective bargaining agreements. The Company
believes that its success will depend in part on its ability to attract and
retain highly qualified employees.


Item 2.    PROPERTIES

           The Company leases twenty-seven facilities, principally sales
facilities, in Boston, Massachusetts, Chicago, Illinois, Detroit, Michigan,
Cleveland and Columbus, Ohio and New York City, as well as in a number of
areas surrounding such cities and in other significant urban areas in
Michigan, New York and Ohio. The Company maintains its corporate
headquarters in Chicago, Illinois. Although the Company's facilities are
adequate at this time, the Company believes that it may have to lease
additional facilities, particularly in new metropolitan areas where the
Company enters RBOC resale agreements.


Item 3.    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 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

           No matters were submitted to a vote of the Company's
securityholders during the fourth quarter of fiscal 1996.


                                  PART II

Item 5.    MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS

           No established public trading market exists for the Company's
common equity. As of March 15, 1997, there were approximately 32 holders of
record of the Company's Class A Common Stock, par value $.01 per share, and
no holders of record of the Company's Class B Common Stock, par value $.01
per share.

           The Company has not declared any dividends on its common equity
in the two most recent fiscal years. Pursuant to the terms of the Company's
Certificate of Designations, Powers, Rights and Preferences of 9.0%
Cumulative Convertible Pay-In-Kind Preferred Stock, the Company may not pay
or declare any dividend or make any distribution upon the Company's common
stock. In addition, under the terms of an indenture governing the Company's
14% Senior Discount Notes due 2003, the Company may not declare any
dividend or make any distribution on any of its capital stock (other than
dividends, distributions or payments made solely in nonredeemable capital
stock of the Company) unless certain financial conditions are satisfied and
no default under such indenture has occurred or shall occur as a
consequence thereof.

Item 6.    SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

           The following table presents selected historical consolidated
financial data for the period from inception of the Company in April 1994
to December 31, 1994 and for the fiscal years ended December 31, 1995 and
1996. The selected financial data has been derived from consolidated
financial statements of the Company. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements of the Company and the related notes appearing elsewhere in this
report.

<TABLE>
<CAPTION>

                                                                 Inception to
                                                                  December 31,         Fiscal Year Ended December 31,
                                                                      1994                 1995                     1996
                                                                ----------------       -------------              --------
                                                                  (in thousands, except per share information and ratios)

Statement of Operations Data:
<S>                                                            <C>                  <C>                        <C>
   Net service revenue................................         $      1,737         $       7,884              $       9,814
   Cost of services...................................                1,455                 9,076                      9,256
                                                               ------------         -------------              -------------
   Gross margin.......................................                  282                (1,192)                       558
   Sales and marketing expense........................                2,869                 5,867                     12,612
   General and administrative expense.................                4,686                11,100                     20,665
   Interest expense...................................                   26                   734                      1,797
   Interest and other income(1).......................                  152                   646                      9,469
   Minority interest..................................                   --                   150                         --
                                                               ------------         -------------              -------------
   Net loss...........................................         $     (7,147)        $     (18,097)             $     (25,047)
                                                               =============        ==============             =============
   Accumulated unpaid preferred dividends.............         $        707         $       3,810              $         225
   Net loss to common shareholders....................         $     (7,854)        $     (21,907)             $     (25,272)
   Net loss per common share..........................         $     (65.63)        $      (72.42)             $      (49.53)
   Weighted average shares outstanding................              119,678               302,520                    510,233

                                                                                      December 31,
                                                               ------------------------------------------------------------
                                                                    1994                  1995                       1996
                                                                 ------------         -------------                --------
Balance Sheet Data:
   Cash and cash equivalents..........................         $      5,979         $      13,705              $      60,569
   Total assets.......................................               12,747                20,471                     78,052
   Long-term debt (net of current maturities).........                3,176                   518                     59,864
   Redeemable preferred stock.........................               15,306                44,396                     10,045
   Common stockholders' deficit.......................               (7,830)              (28,768)                    (3,606)

                                                                 Inception to
                                                                  December 31,             Fiscal Year Ended December 31,
                                                                    1994                 1995                          1996
                                                               ----------------       -------------                 --------
                                                                             (in thousands, except ratios)
Other Data:
    EBITDA(2)..........................................         $     (7,087)        $     (15,901)             $     (30,390)
    Cash flows from operating activities...............               (6,141)              (14,308)                   (24,098)
    Cash flows from investing activities...............               (1,708)               (2,556)                     7,274
    Cash flows from financing activities...............               13,828                24,589                     63,689
    Depreciation and amortization......................                  186                 2,258                      2,329
    Capital expenditures...............................                1,728                 1,740                      2,259
    Ratio of earnings to fixed charges(3)..............                   --                    --                         --

</TABLE>

--------
(1)   Interest and other income for the year ended December 31, 1996
      includes a gain of $8.1 million realized on the sale of the Company's
      switching facilities in Ohio.
(2)   EBITDA consists of operating income (loss) before depreciation and
      amortization. While EBITDA should not be construed as a substitute
      for operating income or a better indicator of liquidity than cash
      flow from operating activities, which are determined in accordance
      with generally accepted accounting principles, EBITDA is included
      because management believes that certain investors find it to be a
      useful tool for measuring the ability of the Company to service its
      debt. EBITDA is not necessarily a measure of the Company's ability to
      fund its cash needs. See the Consolidated Statements of Cash Flows of
      the Company and the related notes to the Consolidated Financial
      Statements thereto included herein.
(3)   The ratio of earnings to fixed charges is computed by dividing pretax
      income (loss) from operations before interest charges by interest
      expense. Earnings were insufficient to cover fixed charges for the
      periods ended December 31, 1994, 1995 and 1996 by $7.0 million, $16.8
      million and $22.6 million, respectively.


Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS

Overview

           The Company commenced operations in April 1994 as a provider of
local and long distance telecommunications services to meet the needs of
small and medium-sized business subscribers, through the purchase of US
Network Corporation ("US Network"). US Network had four months of
operations prior to being acquired by the Company. Operations during this
four month period included limited administrative expenses and no revenues,
and assets consisted primarily of cash and organization costs. In October
1995, the Company, through a newly formed wholly owned acquisition
subsidiary, Quest United, Inc. ("Quest"), acquired certain assets and
assumed certain liabilities of Quest America, LP., a telecommunications
reseller and consulting firm (the "Quest Acquisition").

           Initially, the Company entered the local telecommunications
market as a facilities-based CAP with network facilities in Ohio. Due to
the high costs associated with the initial construction, installation and
expansion of each local network facility, including right-of-way costs,
franchise fees, interconnection charges and other operating expenses and in
anticipation of the impact of the passage of the Telecommunications Act of
1996, the Company refocused its operations. The Company sold its existing
facilities in Ohio and certain other assets in February 1996, and
transferred certain liabilities with respect to those facilities, to pursue
a non-facilities-based approach to the local telecommunications market.

           The Company negotiated for the first broad based resale
agreement with Ameritech for local services, which was signed in November
1995, and negotiated with NYNEX for a comprehensive local resale agreement
which was signed in July 1996. 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. Although management believes that its current strategy
will have a positive effect on the Company's results of operations over the
long-term, by continuing to seek other providers of local, long distance
and enhanced and other value-added services in order to increase its
subscriber base and product offerings and reduce expenses, this strategy is
expected to have a negative effect on the Company's results of operations
over the short-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 the capital
contributions of Chase Venture Capital Associates, L P., CIBC Wood Gundy
Ventures, Inc., Hancock Venture Partners IV - Direct Fund, L.P., BT Capital
Partners, Inc., Northwood Capital Partners LLC, Northwood Ventures and
Enterprises & Transcommunications, LP and by the proceeds from the
September 30, 1996 sale to Merrill Lynch Global Allocation Fund, Inc. of
debt securities and warrants to purchase common stock, which are described
in detail under the caption "Liquidity and Capital Resources."

           The Company's net service revenue, which is recognized on a
resale basis, primarily consists of sales revenue from telecommunications
services. The Company bills its subscribers for local and long distance
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. Net service revenue
for the Quest operations, which is recognized on an agency basis, primarily
consists of commissions earned from carriers on telecommunications services
provided to their subscribers.

           Cost of services includes the cost of local and long distance
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. In 1995, cost of
services also included fixed and one-time charges associated with the Ohio
switching facilities owned by the Company. These costs were transferred to
a third party subsequent to December 31, 1995, when the obligations with
respect to the switching facilities were effectively transferred.

           Sales and marketing expense consists of the costs of providing
sales and other support services for subscribers. 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 all depreciation and amortization expenses.

           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. To accommodate
this growth, the Company will continue to implement and improve
operational, financial and management information systems. In an effort to
support its growth, the Company added several senior management positions
and over 250 employees in 1996. Also, the Company is implementing new
information systems that will provide improved recordkeeping for subscriber
information and management of uncollectible accounts and fraud control.

Results of Operations

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

           Net service revenue increased to $9.8 million for the year ended
December 31, 1996 from $7.9 million for the year ended December 31, 1995.
The increase in net service revenue was due primarily to a 36% increase in
the subscriber base in the Company's geographic markets (from approximately
1,250 customers at the end of 1995 to approximately 1,700 customers at the
end of 1996) and the revenues attributable to the Quest Acquisition which
primarily consist of commissions earned from carriers on telecommunications
services provided to their subscribers. Approximately $1.4 million in
increased revenues is attributable to the addition of new customers,
primarily in Ohio, and approximately $0.5 million is attributable to
revenues gained from the Quest Acquisition.

           Gross margin of $0.6 million for the year ended December 31,
1996 improved from the negative margin of $1.2 million for the year ended
December 31, 1995 due primarily to the elimination of fixed costs upon the
sale of the switching facilities in Ohio and a $1.4 million sales and
related margin adjustment for 1995 revenue purportedly not billed by NYNEX
to the Company's customers under the billing and collection agreement. In
1996, the Company recovered approximately $0.9 million from NYNEX and is
continuing to pursue additional amounts.

           Sales and marketing expenses increased $6.7 million, or 114%,
from $5.9 million for the year ended December 31, 1995 to $12.6 million for
the year ended December 31, 1996. The increase was due primarily to an
increase in the number of sales and marketing employees from approximately
115 at the end of 1995 to over 300 at the end of 1996, which resulted in
increases to salaries and benefits of $3.9 million, travel, training and
entertainment costs of $1.0 million and recruitment costs of $0.8 million.
Additionally, advertising costs increased $0.9 million due to product
launches in the Company's target markets.

           General and administrative expenses increased $9.6 million, or
86%, to $20.7 million for the year ended December 31, 1996 versus $11.1
million for the year ended December 31, 1995. The increase was due
primarily to an increase in the number of operations and administrative
employees from approximately 90 at the end of 1995 to approximately 160 at
the end of 1996, which resulted in increases to salaries and benefits of
$2.5 million and facility costs of $1.2 million. Additionally, fees paid to
consultants and other professionals increased over $1.0 million, primarily
relating to the development and expansion of the Company's customer
service, billing and administrative information systems and facilities.
Amortization expense increased $0.8 million due primarily to a full year of
amortization expense related to the Quest Acquisition in 1996 versus eight
months in 1995. Additionally, $1.7 million of expense was incurred relating
to the settlement of a derivative action filed by a minority shareholder.

           Interest and other income increased to $9.5 million for the year
ended December 31, 1996 from $646,000 for the year ended December 31, 1995
due primarily to an $8.1 million non-recurring gain on the sale of the
Company's switching facilities in Ohio in February 1996.

           Interest expense increased to $1.8 million for the year ended
December 31, 1996 from $734,000 for the year ended December 31, 1995. This
increase was due primarily to interest expense attributable to the Senior
Notes and Convertible Notes issued in September 1996, which are described
in more detail under the caption "Liquidity and Capital Resources."

           As a result of the factors described above, the Company's net
loss increased to $25.1 million for the year ended December 31, 1996 from
$18.1 million for the year ended December 31, 1995.

Year Ended December 31, 1995 versus Inception to December 31, 1994

           The results for fiscal 1995 are not comparable with the results
for fiscal 1994 as fiscal 1995 represents a full fiscal year and fiscal
1994 represents approximately eight months of operations since the
Company's inception in April 1994.

           Net service revenue increased to $7.9 million in fiscal 1995
from $1.7 million in fiscal 1994. This increase was due to a full year of
operations and a 34% increase in the subscriber base (from approximately
930 customers at December 31, 1994 to approximately 1,250 customers at
December 31, 1995).

           Cost of services increased to $9.1 million in fiscal 1995 from
$1.5 million in fiscal 1994. The increase was due to the one-time
installation costs and fixed ongoing costs related to the Ohio switching
facilities, as well as increased costs associated with an increase in the
number of subscribers.

           Sales and marketing expenses increased $3.0 million, or 103%, to
$5.9 million in fiscal 1995 from $2.9 million in fiscal 1994. Approximately
$1.5 million of the increase is due to the impact of a full year of
operation in 1995 versus approximately eight months in 1994. The inclusion
of expenses related to the operations of Quest in 1995 contributed an
additional $0.8 million to the increase.

           General and administrative expenses increased $6.4 million, or
136%, to $11.1 million in fiscal 1995 from $4.7 million in fiscal 1994.
Approximately $2.0 million of the increase is due to the impact of a full
year of operation in 1995 versus approximately eight months in 1994. An
additional $2.0 million was attributable to depreciation and amortization
and other expenses related to the Quest Acquisition. The remaining increase
is a result of increased personnel and expenses required to build the
Company's customer service and administrative information systems and
office facilities.

           Interest and other income increased to $646,000 in fiscal 1995
from $152,000 in fiscal 1994, due to significantly higher investable cash
balances in fiscal 1995 resulting from the proceeds of the issuance of
$26.3 million of preferred and common stock, as well as fiscal 1995 being a
full year.

           Interest expense increased to $734,000 in fiscal 1995 from
$26,000 in fiscal 1994. This increase was due to interest expense
associated with the capitalized leases for the Ohio switch sites which
began in December 1994.

           As a result of the factors described above, the Company's net
loss increased to $18.1 million for fiscal 1995 from $7.1 million for
fiscal 1994.

Liquidity and Capital Resources

           Since inception, the Company has funded its operations primarily
through cash from its investors. As of December 31, 1996, the Company had
cash and cash equivalents of $60.6 million and working capital of $52.4
million. The Company's operating activities utilized cash of approximately
$24.1 million for the year ended December 31, 1996, $14.3 million for the
year ended December 31, 1995 and $6.1 million for the period ended December
31, 1994.

           The Company's investing activities have consisted primarily of
property and equipment purchases of $2.3 million, $1.7 million and $1.7
million for the years ended December 31, 1996, 1995 and 1994, respectively.
In 1996, these expenditures were primarily related to the buildout of new
office space. In 1995 and 1994, these expenditures were primarily for fiber
optic rings, leasehold improvements and furniture in Ohio that were sold in
February 1996. In addition, the Company entered into capital leases of $0.6
million, $3.4 million and $3.1 million in 1996, 1995 and 1994,
respectively, related to furniture and equipment and, in 1995 and 1994, the
Ohio switch sites. The Company remains contingently liable on the 1994 and
1995 Ohio leases, but the Company believes that it has secured adequate
protection from the assignee. In February 1996, the Company received $9.5
million in proceeds from the December 1995 sale of the Ohio facilities.

           In 1997 the Company anticipates having approximately $12 million
of capital expenditures. A significant portion of the capital plan has been
allocated to investments in information technology to support the growth of
the subscriber base with more robust billing and subscriber care systems.
The anticipated continued high growth in the subscriber base in 1998 will
require a continued high level of investment in information technology in
1998.

           On September 30, 1996, the Company raised $10 million through
the sale to Chase Venture Capital Associates, L.P., CIBC Wood Gundy
Ventures, Inc., Hancock Venture Partners IV - Direct Fund, L.P., Northwood
Capital Partners LLC, Northwood Ventures, BT Capital Partners, Inc. and
Enterprises & Transcommunications, L.P. of 10,000 shares of 9% Cumulative
Convertible Pay-In-Kind Preferred Stock (the "9% Preferred Stock"). Also on
September 30, 1996, the Company raised approximately $55 million, net of
issuance costs, through the sale to Merrill Lynch Global Allocation Fund,
Inc. of (i) 48,500 units (the "Units") consisting of $48.5 million in
aggregate principal amount at maturity of 14% Senior Discount Notes due
2003 (the "Senior Notes") and warrants to purchase 61,550 shares, subject
to adjustment under certain circumstances, of Class A Common Stock, par
value $.01 per share, of the Company, at an initial exercise price of $.01
per share, and (ii) $36.0 million in aggregate principal amount at maturity
of 9% Convertible Subordinated Discount Notes due 2004 (the "Convertible
Notes"). The aggregate purchase price of the Units was $30,203,375, and the
aggregate purchase price of the Convertible Notes was $27,644,400. In 1995
and 1994, the Company's financing activities consisted primarily of raising
capital in the form of Common Stock and Preferred Stock placements with
venture capital organizations. During 1995 and 1994, the Company raised
$26.3 million and $14.2 million, respectively, net of issuance costs. In
1995, the Company also assumed notes payable to investors in the Quest
Acquisition.

           Although at December 31, 1996, the Company had working capital
of approximately $52.4 million and total redeemable preferred stock and
common stockholders' equity of approximately $6.4 million, projected cash
usage in 1997 combined with an anticipated net loss in 1997, absent the
infusion of additional capital resources, is anticipated to fully deplete
the Company's working capital prior to December 31, 1997. Such events would
place substantial doubt about the Company's ability to continue as a going
concern. Although the Company's management believes that the Company will
be able to raise sufficient funds, through capital contributions or
additional equity or debt financings, to meet its operating expenses and
other cash requirements, there can be no assurance that the Company would
be able to complete such contributions or financing or that any such
contributions or financing would be completed on terms satisfactory to the
Company.

           The Company incurred net losses of $25.1 million, $18.1 million
and $7.1 million in 1996, 1995 and 1994, respectively. Accordingly, no
provision for current federal or state income taxes has been made to the
financial statements. At December 31, 1996, the Company and its
subsidiaries had net operating loss carry-forwards for Federal income tax
purposes of approximately $46.1 million. The ability of the Company or the
Company's subsidiaries, as the case may be, to utilize their net operating
loss carry-forwards to offset future taxable income may be subject to
certain limitations contained in the Internal Revenue Code of 1986, as
amended (the "Code"). These operating losses begin to expire in 2009 for
Federal income tax purposes. Of the net operating loss carry-forwards
remaining at December 31, 1996, $12.3 million can be applied only against
future taxable income of the Company's subsidiary USN Communications
Northeast, Inc. (formerly United Telemanagement Services, Inc.).

Inflation

           Management believes that inflation has not had a material effect
on the Company's results of operations.


Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The financial statements required by this statement are set
forth on pages F-1 through F-14.


Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES

                     None.


                                  PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

           The following table provides certain information regarding the
executive officers and directors of the Company.

           Name              Age         Position

Richard J. Brekka .........  36    Chairman of the Board
J. Thomas Elliott .........  50    President, Chief Executive Officer and
                                     Director
Ronald W. Gavillet.........  37    Executive Vice President, Strategy &
                                     External Affairs
Gerald J. Sweas............  49    Executive Vice President and Chief
                                     Financial Officer
Ryan Mullaney .............  40    Executive Vice President, Sales
Steven J. Parrish .........  41    Executive Vice President, Operations
Thomas A. Monson ..........  36    Vice President, General Counsel and
                                     Secretary
Thad J. Pellino ...........  35    Vice President, Marketing
Neil A. Bethke ............  37    Vice President, Information Systems
Thomas C. Brandenburg......  60    Director
Dean M. Greenwood   .......  53    Director
Donald J. Hofmann, Jr......  39    Director
William A. Johnston  ......  45    Director
Paul S. Lattanzio  ........  33    Director
Eugene A.  Sekulow  .......  65    Director

           Each director serves until his successor is duly elected and
qualified. Officers serve at the discretion of the Board of Directors.

           Richard J. Brekka, Chairman of the Board, has been a director of
the Company since April 1994. He is a Managing Director of CIBC Wood Gundy
Capital, the merchant banking division of Canadian Imperial Bank of
Commerce, and is a director and the President of CIBC Wood Gundy Ventures,
Inc. ("CIBC"), an indirect wholly owned subsidiary of Canadian Imperial
Bank of Commerce. Mr. Brekka joined CIBC in February 1992. Currently, Mr.
Brekka serves on the board of directors of Orion Network Systems, Inc.,
MultiTechnology Corp., Telesystem International Wireless N.V., and Epoch
Networks, Inc. (formerly HLC-- Internet, Inc.), and on the Board of
Advisors of Telecom Partners L.P. Mr. Brekka received a B.S. in finance
from the University of Southern California and an M.B.A. from the
University of Chicago.

           J. Thomas Elliott, President and Chief Executive Officer, has
been the Chief Executive Officer since April 1996. Mr. Elliott joined the
Company in 1995 as a result of the acquisition of certain assets and
assumption of certain liabilities of Quest, a company which he co-founded.
From 1991 to 1993, Mr. Elliott was Senior Vice President of Sales and
Marketing of Wiltel Communications Systems. From 1990 to 1991, Mr. Elliott
was President and Chief Executive Officer of Call Net Inc. (Canada's first
alternative long distance company) and Lightel Inc., its affiliate fiber
optic facility provider. Subsequently, these companies were combined to
form Sprint Canada. Mr. Elliott holds a bachelor's and master's degree in
economics from the University of Windsor.

           Ronald W. Gavillet, Executive Vice President, Strategy &
External Affairs, has performed the Company's legal, regulatory and
strategic functions since 1994. Prior to joining the Company, Mr. Gavillet
spent more than four years, from 1985 to 1987 and from 1992 to 1994, with
MCI in a number of senior legal and regulatory positions. While at MCI, Mr.
Gavillet developed and implemented the firm's regulatory policies in
Illinois, Indiana, Michigan, Ohio and Wisconsin and negotiated sales
agreements with national accounts. Mr. Gavillet holds a B.A. and B.S. from
Southern Illinois University, a J.D. from Catholic University of America's
Columbus School of Law and a Master of Management degree from Northwestern
University's Kellogg School of Management and serves on the
Telecommunications Resellers Association Local Services Council.

           Gerald J. Sweas, Executive Vice President and Chief Financial
Officer, joined the Company in November 1996. From 1989 to 1996, Mr. Sweas
was Vice President Finance and Administration, Treasurer and Chief
Financial Officer of Norand Corporation, a wireless data communications
networks company. Mr. Sweas holds a B.B.A. from Loyola University in
Chicago, Illinois and an M.B.A. from the University of Wisconsin (Madison)
and is a Certified Public Accountant.

           Ryan Mullaney, Executive Vice President, Sales, joined the
Company in October 1996. From 1995 to 1996, Mr. Mullaney served as Vice
President, Sales, USA West for Citizens Telecom, a medium-sized
telecommunications company, where he managed sales in 13 states. From 1993
to 1995, Mr. Mullaney was Director of Member Development for McLeod
Telemanagement Organization, where his duties included management of the
company's field sales and service organization. From 1991 to 1993, Mr.
Mullaney was National Sales Director of Centex Telemanagement, responsible
for developing sales in the national market. Mr. Mullaney has a B.A. from
the University of Nevada, Las Vegas.

           Steven J. Parrish, Executive Vice President, Operations, joined
the Company in January 1996 initially as a consultant and assumed a
full-time position. Prior to joining the Company, Mr. Parrish spent more
than 12 years with Illinois Bell in various planning and operations
positions. Mr. Parrish moved to Ameritech in 1991 where he helped start the
Information Industry Services business unit as Vice President of Business
Development and Vice President of Marketing and Sales for Network
Providers. Mr. Parrish holds a bachelor's degree in electrical engineering
from the University of Illinois and an MBA from the Illinois Institute of
Technology.

           Thomas A. Monson, Vice President, General Counsel and Secretary,
joined the Company in January 1997. From 1989 to 1996, Mr. Monson was
Associate General Counsel of Envirodyne Industries, Inc., a $650 million
public company, where he performed various corporate law, securities
regulation, litigation and corporate operations support activities. Mr.
Monson holds a B.S. from the University of Illinois and a J.D. from Harvard
Law School.

           Thad J. Pellino, Vice President, Marketing, joined the Company
in August 1995. From 1988 through 1995, Mr. Pellino was with MCI where he
held a variety of marketing and business development positions, which
included responsibility for the design of customized telecommunication
packages for mid-size and long distance carriers. Mr. Pellino received his
bachelor's degree in marketing/business administration from the University
of Illinois.

           Neil A. Bethke, Vice President, Information Systems, joined the
Company initially as a consultant in 1995 and assumed a full-time position
in May 1996. From 1994 to 1996 Mr. Bethke served as principal for New
Resources Corporation, a medium-sized consulting company specializing in
client/server technology development for large service-oriented companies.
From 1988 to 1994, Mr. Bethke served at Quantum Chemical Corporation and
Sara Lee Corporation as Director of MIS, responsible for the reengineering
of business processes through document routing and wide area network
database management. Mr. Bethke holds a B.S. from the University of
Wisconsin.

           Thomas C. Brandenburg, Director, has been a director of the
Company since founding the Company in 1994. Prior to joining the Company,
Mr. Brandenburg was the co-founder and principal of a telecommunications
consulting firm with a service bureau-based enhanced service company. In
1983, Mr. Brandenburg was the co-founder and principal of LiTel Communica-
tions, Inc. (now LCI International). Mr. Brandenburg is a graduate of the
University of Notre Dame.

           Dean M. Greenwood, Director, was elected as a director of the
Company in February 1997. Mr. Greenwood is Vice President of Prime
Management Group and has been an officer of that company since 1992. Mr.
Greenwood holds a B.B.A. and a J.D. from the University of Texas at Austin.

           Donald J. Hofmann, Jr., Director, has been a director of the
Company since April 1994. Mr. Hofmann has been a General Partner of Chase
Capital Partners (formerly known as Chemical Venture Partners) since 1992.
Chase Capital Partners is the sole general partner of Chase Venture Capital
Associates, L.P. Prior to joining Chase Capital Partners, he was head of MH
Capital Partners, Inc., the equity investment arm of Manufacturers Hanover.

           William A. Johnston, Director, was elected a director of the
Company in June 1994. Mr. Johnston has been a Managing Director of HVP
Partners, LLC since January 1997. HVP Partners, LLC was formed to acquire
Hancock Venture Partners, Inc., where Mr. Johnston has served in various
capacities since 1983. Currently, Mr. Johnston serves on the advisory
boards of The Centennial Funds, Austin Ventures, and Highland Capital
Partners, as well as on the board of directors of Centennial Security,
Inc., HLC-Internet, Inc., MultiTechnology Corp., The Marks Group, Inc., and
Masada Security Corporation. Internationally, he serves on the board of
directors of Telesystem International Wireless Corporation and Esprit
Telecom. Mr. Johnston received a bachelor's degree from Colgate University
and a master's degree from Syracuse University School of Management.

           Paul S. Lattanzio, Director, was appointed a director of the
Company in August 1995. Currently, Mr. Lattanzio is a Managing Director of
BT Capital Partners, Inc., an affiliate of Bankers Trust New York Corp. Mr.
Lattanzio has been employed by BT Capital Partners, Inc. or an affiliate
since 1984. Mr. Lattanzio received his B.S. in economics from the
University of Pennsylvania's Wharton School of Business.

           Eugene A. Sekulow, Director, was elected a director of the
Company in August 1995. Mr. Sekulow served as Executive Vice President of
NYNEX Corporation from December 1991 to 1993. From 1986 to 1991, he served
as President of NYNEX International Company. Since his retirement from
NYNEX in 1993, Mr. Sekulow has founded his own telecommunications
consultancy where he has been retained by European, U.S., Japanese,
Southeast Asian and Canadian companies. Mr. Sekulow attended the University
of Stockholm and the University of Oslo. He earned an M.A. in political
science and economics and a Ph.D. from Johns Hopkins University.

           The Board of Directors of the Company consists of eight persons,
including one outside director, one appointed by CIBC Wood Gundy Ventures,
Inc., one appointed by Chase Venture Capital Associates, L.P., one
appointed by Hancock Venture Partners IV Direct Fund, L.P., one appointed
by BT Capital Partners, Inc. and one appointed by Enterprises & Trans-
communications, L.P.

Directors' Compensation

           The Company's policy is not to pay compensation to its
directors.

Compensation Committee Interlocks and Insider Participation

           The Company's Compensation Committee consists of Messrs. Brekka,
Johnston and Lattanzio, none of whom is currently an employee or officer of
the Company. No executive officer of the Company served during fiscal year
1996 as a member of a compensation committee or as a director of any entity
of which any of the Company's directors serves as an executive officer.


Item 11.   EXECUTIVE COMPENSATION

Summary Compensation Table

           The following table sets forth certain information concerning
the cash and non-cash compensation during fiscal year 1996 earned by or
awarded to the Chief Executive Officer and to the four other most highly
compensated executive officers of the Company whose combined salary and
bonus exceeded $100,000 during the fiscal year ended December 31, 1996 (the
"Named Executive Officers").

<TABLE>
<CAPTION>

                                                Annual Compensation
                                                                                            All Other
                                               Year          Salary          Bonus        Compensation

<S>                                          <C>         <C>               <C>             <C>
J. Thomas Elliott
  President and Chief Executive Officer       1996       $    182,500      $  97,500(1)         --
                                              1995(2)         139,165           --          $ 75,000
                                              1994             --               --              --

Ronald W. Gavillet                            1996            167,600         92,500(1)         --
  Executive Vice President, Strategy          1995            135,000         50,000(3)         --
  & External Affairs                          1994(4)           7,788           --              --

Thad J. Pellino                               1996             96,700         33,000(1)         --
  Vice President, Marketing                   1995(5)          31,058         33,125(3)         --
                                              1994             --               --              --

Neil A. Bethke                                1996(6)          69,711         31,250(1)         --
 Vice President, Information Systems          1995             --               --              --
                                              1994             --               --              --

Thomas C. Brandenburg                         1996            190,000           --              --
  Former Chief Executive Officer              1995            167,692           --              --
                                              1994            174,615           --              --

Robert J. Luth                                1996            150,000           --               50,000(7)
  Former Chief Financial Officer              1995            141,635         37,500(3)          69,806(7)
                                              1994             89,170           --              --

Kevin J. Burke                                1996            101,000           --              --
  Former Vice President, Network Engineering  1995            123,808           --              --
  and Technical Support                       1994             --               --              --

</TABLE>

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

(1)   Represents the bonus that was earned with respect to 1996 and paid
      in 1997.
(2)   Includes Mr. Elliott's compensation as an officer of Quest America,
      LP prior to the acquisition of its business by the Company. The
      $75,000 included as other compensation represents the amount Mr.
      Elliott received for consulting services to the Company prior to the
      Company's acquisition of the business of Quest America, LP.
(3)   Represents amounts paid in 1996 with respect to bonuses earned in
      prior periods, primarily in 1995.
(4)   Mr. Gavillet commenced employment with the Company in November 1994.
(5)   Mr. Pellino commenced employment with the Company in August 1995.
(6)   Mr. Bethke commenced employment with the Company in June 1996.
(7)   Includes amounts reimbursed by the Company for life and disability
      insurance premiums and temporary living expenses.


Option Grants

           The following table sets forth the aggregate number of stock
options granted to each of the Named Executive Officers during the fiscal
year ended December 31, 1996. Options are exercisable for Class A Common
Stock, par value $.01 per share, of the Company.

<TABLE>
<CAPTION>


                     OPTION GRANTS IN LAST FISCAL YEAR

                                                                                                      POTENTIAL REALIZABLE VALUE
                                                                                                       AT ASSUMED ANNUAL RATE OF
                                                  PERCENT OF TOTAL                                     STOCK PRICE APPRECIATION
                        NUMBER OF SECURITIES       OPTIONS GRANTED                                      FOR OPTION TERM ($)(1)
                         UNDERLYING OPTIONS        TO EMPLOYEES IN      EXERCISE PRICE   EXPIRATION   ---------------------------
         NAME                GRANTED (#)             FISCAL YEAR           ($/SHARE)        DATE         5%            10%
         ----           --------------------     ------------------     -------------   -----------      --            ---

<S>                              <C>                      <C>              <C>              <C>  <C> <C>           <C>
J. Thomas Elliott                7,500                    7.3%             $   1.50         6/28/96  $1,105,725    $ 1,686,450
                                29,925                   29.0%                 1.50         9/30/96   4,411,843      6,728,936

Ronald W. Gavillet               6,150                    6.0%                 1.50         6/28/96     906,695      1,382,889
                                21,859                   21.2%                 1.50         9/30/96   3,222,672      4,915,215

Thad J. Pellino                  2,000                    1.9%                 1.50         6/28/96     294,860        449,720
                                 1,494                    1.4%                 1.50         9/30/96     220,260        335,941

Neil A. Bethke                   2,000                    1.9%                 1.50         6/28/96     294,860        449,720
                                 1,494                    1.4%                 1.50         9/30/96     220,260        335,941

</TABLE>

(1)    The information disclosed assumes, solely for purposes of
       demonstrating potential realizable value of the options, that the
       per share fair market value of the Class A Common Stock is $96.00
       per share as of December 31, 1996 and increases at the rate
       indicated, effective as of December 31 of each subsequent year
       during the option term. However, there is no established trading
       market for the Class A Common Stock, and no representation is made
       that the Class A Common Stock actually has such value or that the
       rates of increase in value can or will be achieved.

           The following table sets forth certain information concerning
the exercise of stock options by the Named Executive Officers during the
fiscal year ended December 31, 1996 and the December 31, 1996 aggregate
value of unexercised options held by each of the Named Executive Officers.

<TABLE>
<CAPTION>


 OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES (1)

                                                            NUMBER OF SECURITIES UNDERLYING    VALUE OF UNEXERCISED IN-THE-
                                                                UNEXERCISED OPTIONS AT            MONEY OPTIONS AT FISCAL
                                                                 FISCAL YEAR-END (#)                  YEAR-END ($) (1)
                                                            --------------------------------    ---------------------------
                             SHARES
                           ACQUIRED ON          VALUE
         NAME             EXERCISE (#)      REALIZED ($)      Exercisable/Unexercisable        Exercisable/Unexercisable
         ----             ------------      ------------      -------------------------        -------------------------

<S>                        <C>              <C>                <C>                              <C>
J. Thomas Elliott              --                --               1,875 / 35,550                  177,188 / 3,359,475

Ronald W. Gavillet             --                --               5,388 / 26,471                  510,706 / 2,501,510

Thad J. Pellino                --                --                 500 / 2,994                    47,250 / 282,933

Neil A. Bethke                 --                --                 500 / 2,994                    47,250 / 282,933

Robert J. Luth                2,000            189,000               1,850 / 0                        175,565 /0

</TABLE>

(1)   The information disclosed assumes, solely for purposes of
      illustrating the value of in-the-money options, that the per share
      fair market value of the Class A Common Stock is $96.00 as of
      December 31, 1996. However, there is no established trading market
      for the Class A Common Stock, and no representation is made that the
      Class A Common Stock actually has such value.


Benefit Plans

1994 Stock Option Plan

           In September 1994, the Board of Directors adopted the 1994 Stock
Option Plan (the "1994 Plan"), which was subsequently approved by the
stockholders in September 1994. A total of 100,452 shares of Class A Common
Stock have been reserved for issuance under the 1994 Plan. The purposes of
the 1994 Plan are to attract and retain qualified personnel, to provide
additional incentives to employees, officers and directors of the Company
and its affiliates and to promote the success of the Company's business.
Under the 1994 Plan, the Company may grant incentive or non-qualified stock
options to employees, officers and directors. However, to the extent that
the aggregate fair market value of the Class A Common Stock issued to any
person exceeds $100,000, such options must be treated as nonqualified stock
options.

           Options granted under the 1994 Plan generally become exercisable
six months after the date of the grant at a rate of 25% of the shares
subject to the option and thereafter, at a rate of 25% at the end of each
six month period for a total of two years, except that certain options
granted to Mr. Sweas, Mr. Mullaney and Mr. Monson in connection with their
employment agreements will be exercisable with respect to 50% of such
options on the one-year anniversary of the date of grant and with respect
to 25% of such options on each of the 18-month and 24-month anniversaries
of the date of grant. The maximum term of a stock option under the 1994
Plan is ten years. If an optionee terminates his or her service for reasons
other than death, disability, retirement, resignation or discharge for
cause, the optionee may exercise only those option shares vested as of the
date of termination. If, however, an optionee retires without prior Board
of Directors approval or is terminated for cause, all options not
previously exercised expire and are forfeited. In addition, the Company has
the option to repurchase all or any part of the shares issued or issuable
upon exercise, if an optionee's employment terminates for any reason
whatsoever.

           The 1994 Plan may be amended at any time by the Board of
Directors, although certain amendments require the consent of the
participants of the 1994 Plan. The 1994 Plan will terminate in September
2004, unless earlier terminated by the Board of Directors.

1996 Option Grants Outside of the 1994 Stock Option Plan

           In connection with the issuance of the 9% Preferred Stock
(described below) and the consummation of the Private Placement (described
below), Messrs. Elliott, Gavillet, Parrish, Pellino and Bethke were granted
18,234, 11,996, 600, 312 and 312 additional options, respectively, to
purchase a corresponding number of shares of Class A Common Stock at an
exercise price of $1.50 per share. Such options are exercisable only upon
conversion from time to time of the 9% Preferred Stock, in the case of all
such employees, or, as the case may be with respect to Messrs. Elliott and
Gavillet, of the Convertible Notes (described below), into shares of Class
A Common Stock.

401(k) Plan

           In January 1995, the Company adopted the Employee 401(k) Profit
Sharing Plan (the "401(k) Plan") covering all of the Company's employees.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the lesser of 15% of eligible compensation or the
statutorily prescribed annual limit ($9,500 in 1996) and have the amount of
such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but
does not require, additional contributions to the 401(k) Plan by the
Company on behalf of all participants. The Company has not made any
contributions to date. The 401(k) Plan is intended to qualify under Section
401 of the Code so that contributions by employees or by the Company to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn, and contributions by the Company, if any, will
be deductible by the Company when made.

Employment Agreements

           In July 1996, Messrs. J. Thomas Elliott, President and Chief
Executive Officer, and Ronald W. Gavillet, Executive Vice President,
Strategy & External Affairs, entered into employment agreements with the
Company. In November 1996, Mr. Gerald J. Sweas entered into an agreement
with the Company pursuant to which he became the Company's Executive Vice
President and Chief Financial Officer. The terms of such agreements are for
a period of three years subject to automatic one-year renewals at each
anniversary unless otherwise notified by the Company. The agreements
establish a base salary to be paid each year which may be increased
annually at the discretion of the Board of Directors. The annual base
salaries of Messrs. Elliott, Gavillet and Sweas are $195,000, $185,000 and
$150,000, respectively. In addition, subject to the attainment of certain
performance objectives, each is entitled to an annual bonus. With respect
to Messrs. Elliott and Gavillet, the agreements provide certain preemptive
rights such that, if the Company raises capital by selling shares of any
class of stock, each executive will have a right to purchase a certain
percentage (3.8% for Mr. Elliott and 2.5% for Mr. Gavillet) of such shares
on the same terms and conditions as the shares are being sold to others.
Each of Messrs. Elliott's and Gavillet's agreements also provides that if
the current shareholders sell any of their shares of Company stock to a
third party under certain circumstances, each executive has a right to sell
the same percentage of his shares of Company stock as the percentage of
their shares that the current shareholders are selling, on the same terms
and for the same consideration. With respect to each of Messrs. Elliott and
Gavillet, if their employment is terminated by the Company without "Cause"
or by either executive with "Good Reason" or during a "Window Period" (each
as defined in the respective agreement): (i) all amounts earned, accrued or
owing to the executive shall be paid as soon as practicable, (ii) the
Company must pay a lump sum equal to one year's base salary and, if the
executive complies with the noncompete and nonsolicitation provisions of
the agreement for the two-year period following termination, will pay the
executive an additional one year's base salary in equal installments over
that two-year period, and (iii) the Company must maintain in full force and
effect all employee benefit plans for the benefit of the executive for the
longer of a two-year period or the remaining term of the executive's
agreement. With respect to Mr. Sweas, if his employment is terminated by
the Company without "Cause" or by him with "Good Reason" (each as defined
in his agreement): (i) all amounts earned, accrued or owing to him shall be
paid as soon as practicable; (ii) the Company must pay a lump sum equal to
the sum of (A) any annual bonus paid to Mr. Sweas for a fiscal year
completed prior to the date of termination, plus (B) a pro rata portion of
the annual bonus that would have been payable to Mr. Sweas in the year of
such termination, assuming the achievement of all performance goals, plus
(C) if Mr. Sweas complies with the noncompete and nonsolicitation
provisions of his agreement for the 18-month period following termination,
the greater amount of Mr. Sweas' highest annual base salary during the term
of his agreement or the aggregate amount of base salary payable to Mr.
Sweas through the end of the term of such agreement; and (iii) the Company
must maintain in full force and effect all employee benefit plans for the
benefit of Mr. Sweas for the longer of a one-year period or the remaining
term of his agreement. If the executive's employment is terminated under
any other circumstances, the executive will not receive any of the
above-described severance pay and benefits. With respect to Messrs. Elliott
and Gavillet, upon a Change in Control the executive's options will become
exercisable and the restrictions on Mr. Elliott's restricted shares will
lapse. With respect to Mr. Sweas, upon a Change of Control the Company
shall pay, in exchange for the cancellation of any options and the
surrender of any shares held by him, an amount equal to the fair market
value of the shares held by Mr. Sweas or issuable upon exercise of any such
options (less the applicable exercise price). Upon a Change of Control, the
Company shall pay to each of Messrs. Elliott, Gavillet and Sweas, within
the 10-day period following such Change of Control, an amount equal to the
pro rata portion of the annual bonus that would have been payable to such
executive during such year, assuming the achievement of all performance
goals. Under each employment agreement, a "Change in Control" occurs if (i)
a person or entity becomes the beneficial owner of 35% or more of the
combined voting power of the Company's securities, (ii) the current
directors, or individuals who are approved by two-thirds of the current
directors, cease to constitute a majority of the board of the Company or
(iii) certain mergers or liquidations of the Company occur. Messrs. Elliott
and Gavillet have agreed not to compete with the Company in the network
telecommunications services business or to solicit customers or employees
of the Company for their term of employment with the Company and for an
additional period of two years thereafter and Mr. Sweas has agreed to
similar restrictions for the term of his employment with the Company and
for an additional period of 18 months thereafter.

           In January 1997, Mr. Ryan Mullaney entered into an employment
agreement with the Company. Mr. Mullaney's agreement provides for a base
salary of $125,000 and an annual bonus (targeted at $75,000) based upon
certain performance standards established by the Board of Directors of the
Company. The agreement also provides that Mr. Mullaney will be entitled to
receive certain payments in the event that his employment is terminated
other than for cause. Mr. Mullaney has agreed not to compete with the
Company during the term of his employment and for a specified period
thereafter.

           Each of the other key employees (including Steven J. Parrish,
Executive Vice President, Operations, Thomas A. Monson, Vice President,
General Counsel and Secretary, Thad J. Pellino, Vice President of Marketing
and Neil A. Bethke, Vice President of Information Systems) have also
entered into employment agreements with the Company as of July 18, 1996
with respect to Messrs. Parrish, Pellino and Bethke, and as of January 6,
1997 with respect to Mr. Monson. The terms of the employment agreements are
for a period of two years subject to automatic one-year renewal upon each
anniversary unless otherwise notified by the Company. Each agreement
specifies the base salary to be received by the executive, and provides for
annual adjustment of base salary by the Board of Directors. The following
annual base salaries were approved effective July 31, 1996: Mr. Parrish -
$140,000, Mr. Bethke - $125,000 and Mr. Pellino - $110,000. The annual base
salary for Mr. Monson, provided in his employment agreement, is $143,000.
Each of these executives is also entitled to annual bonuses in the range of
15% to 30% of base salary, subject to the attainment of certain performance
objectives. If the Company terminates the employment of any such officer
without "Cause" or, if the officer terminates his employment with "Good
Reason" (both as defined in the respective agreements), the officer is
entitled to receive benefits and payments similar to those discussed above
for Messrs. Elliott and Gavillet. No "Window Period" will apply to such
officers. Upon a Change in Control, the executive's options will become
exercisable. Each officer has agreed not to compete with the Company in the
network telecommunications services business or to solicit customers or
employees of the Company during the term of his employment and for a period
of one year following voluntary or involuntary termination.

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The following table sets forth as of February 28, 1997, the
number of shares of Class A Common Stock and the percentage of the
outstanding shares of such class that are beneficially owned by (i) each
person that is the beneficial owner of more than 5% of the outstanding
shares of Class A Common Stock, (ii) each of the directors and the Named
Executive Officers of the Company and (iii) all of the current directors
and executive officers of the Company as a group.

                                                           Class A
                                                         Common Stock

                                                      Number of    Percent
Name and Address of Beneficial Owner(1)             Shares Owned   of Class

Merrill Lynch Global Allocation Fund, Inc.(2).......  333,505       31.73%
   800 Scudders Mill Road
   Plainsboro, New Jersey  08536

BT Capital Partners, Inc.(3)........................  129,043       17.67%
   130 Liberty Street
   New York, New York 10017-2070

Chase Venture Capital Associates, L.P.(3)...........  174,257       23.72%
   380 Madison Ave., 12th Floor
   New York, New York 10017-2070

CIBC Wood Gundy Ventures, Inc.(3)...................  174,257       23.72%
   425 Lexington Avenue
   New York, New York 10017-3903

Hancock Venture Partners IV-Direct Fund L.P.(3).....  172,248       23.45%
   One Financial Center, 44th Floor
   New York, New York 10017-3903

Enterprises & Transcommunications, L.P.(3)..........   43,003        5.96%
   600 Congress Suite 3000
   One American Center
   Austin, Texas 78701

Thomas C. Brandenburg(4)(5).........................   22,216        3.10%
Richard J. Brekka(5)................................  174,257       23.72%
J. Thomas Elliott...................................   12,875        1.79%
Ronald W. Gavillet(6)...............................    5,388            *
Robert J. Luth......................................    3,850            *
Dean M. Greenwood(5)................................   43,003        5.96%
Donald J. Hofmann, Jr.(5)...........................  174,257       23.72%
William A. Johnston(5)..............................  172,248       23.45%
Paul S. Lattanzio(5)................................  129,043       17.67%
Eugene A. Sekulow...................................        0            0
All directors and executive officers of
the Company as a group (15 persons).................  737,637       92.76%

--------
      * Less than one percent.
(1)   Beneficial ownership is determined in accordance with the rules of
      the Securities and Exchange Commission and includes voting and
      investment power with respect to the shares. As to each stockholder,
      the percentage ownership is calculated by dividing (i) the sum of the
      number of shares of Class A Common Stock owned by such stockholder
      plus the number of shares of Class A Common Stock that such
      stockholder would receive upon the exercise of warrants or the
      conversion of convertible securities held by such stockholder (the
      "Conversion Shares") by (ii) the sum of the total number of
      outstanding shares of Class A Common Stock plus the number of
      Convertible Shares held by such stockholder.
(2)   Represents shares for which warrants are exercisable after March 29,
      1996 and shares into which convertible notes are convertible. Also,
      Merrill Lynch Global Allocation Fund, Inc. is entitled to receive
      additional warrants to purchase common stock under certain
      circumstances pursuant to the indentures governing debt securities
      purchased from the Company.
(3)   BT Capital Partners, Inc., Chase Venture Capital Associates, L.P.,
      CIBC Wood Gundy Ventures, Inc., Hancock Venture Partners IV and
      Enterprises & Transcommunications, L.P. are affiliates of Bankers
      Trust New York Corporation, Chase Manhattan Corporation, Canadian
      Imperial Bank of Commerce, Hancock Venture Partners, Inc., and Prime
      Cable Income Partners LP, respectively.
(4)   Includes 11,108 shares subject to a voting trust for David Montville.
      Mr. Brandenburg, as the voting trust agent, disclaims beneficial
      ownership with respect to the shares held in trust.
(5)   Each director disclaims beneficial ownership of any shares of Common
      Stock or Preferred Stock which he does not directly own.
(6)   These shares are subject to exercisable options held by Mr. Gavillet.


Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           On September 30, 1996, BT Securities Corporation, Chase
Securities Inc. and CIBC Wood Gundy Securities Corp. purchased securities
from the Company which were immediately resold to Merrill Lynch Global
Allocation Fund, Inc. pursuant to Rule 144A of the Securities Act of 1933,
as amended. BT Securities Corporation, Chase Securities Inc. and CIBC Wood
Gundy Securities Corp. are affiliates of BT Capital Partners, Inc., Chase
Venture Capital Associates, L.P. and CIBC Wood Gundy Ventures, Inc.,
respectively, which are stockholders of the Company. BT Securities
Corporation, Chase Securities Inc. and CIBC Wood Gundy Securities Corp.
each received commissions of approximately $188,000.

           In September 1996, in connection with the private placement (the
"Private Placement") described above, the Certificate of Incorporation of
the Company was amended to provide for the authorization of two classes of
common stock, Class A Common Stock and Class B Common Stock (collectively,
the "Common Stock"). The rights of such classes are identical, except that
Class A Common Stock is entitled to one vote per share, while Class B
Common Stock is not entitled to any voting rights, except as required by
law. In addition, each outstanding share of Common Stock of the Company
existing on the date of the Private Placement was converted into one share
of Class A Common Stock.

           In connection with the Private Placement, by requisite vote, the
Original Purchasers (as defined below) waived certain preemptive rights and
registration rights held by them pursuant to agreements entered into with
respect to earlier investments in the Company. The Original Purchasers also
approved, and the Company took all necessary action to effect prior to the
consummation of the Private Placement, the amendment of the terms of the
Company's Series A Preferred Stock and Series A-2 Preferred Stock to
provide for and effectuate the conversion of the shares of each such series
of Preferred Stock into newly issued shares of Class A Common Stock, which
conversion was consummated on September 30, 1996.

           Also in connection with the Private Placement, the Original
Purchasers purchased from the Company shares of its newly created 9%
Cumulative Convertible PIK Preferred Stock, par value $1.00 per share (the
"9% Preferred Stock"), for an aggregate purchase price of $10 million.

           In March 1996, the Company effected a recapitalization
(described below) pursuant to which the Company issued an aggregate of
110,157 shares of common stock to CIBC Wood Gundy Ventures, Inc., Chase
Venture Capital Associates, L.P. (formerly Chemical Venture Capital
Associates), Hancock Venture Partners IV - Direct Fund L.P., BT Capital
Partners, Inc., Northwood Capital Partners LLC, Northwood Ventures and
Enterprises & Transcommunications, L.P. (collectively, the "Original
Purchasers") for no consideration in order to settle a dispute relating to
the price per share paid by the Original Purchasers for common stock
purchased in 1995. The dispute stemmed from, in part, the Company's actual
operating performance as compared with the operating performance projected
by the Company at the time of such investment. As part of the
recapitalization, the Company also caused its Series A-2 Preferred Stock to
be senior to its Series A Preferred Stock with respect to redemption,
dividends and liquidation in further settlement of the dispute referred to
above.

           In December 1995, Mr. J. Thomas Elliott, President and Chief
Executive Officer of the Company, executed a promissory note in favor of
the Company in the principal amount of $75,000. Such promissory note was
originally payable by January 2, 1997, but such date has been extended to a
date as yet undetermined.

Item 14.   EHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
           ON FORM 8-K

Financial Statements and Schedules

           The financial statements which are filed with this Form 10-K are
set forth in the Index to Financial Statements at Page F-1 which
immediately precedes such documents.

Exhibits

           The following exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act, and are referred to and incorporated
herein by reference to such filings.

Exhibit
Number               Exhibit

3.1        Amended and Restated Certificate of Incorporation of the
           Company. (2)

3.2        Certificate of Designations, Powers, Rights and Preferences of
           9% Cumulative Convertible Pay-In-Kind Preferred Stock (the 9%
           Preferred Stock") of the Company. (1)

3.3        Bylaws of the Company. (1)

4.1        Indenture, dated as of September 30, 1996, by and among the
           Company and Harris Trust and Savings Bank, as Trustee, for the
           Company's 9% Convertible Subordinated Discount Notes due 2004.(1)

4.2        Indenture, dated as of September 30, 1996, by and between the
           Company and Harris Trust and Savings Bank, as Trustee, for the
           Company's 14% Senior Discount Notes due 2003 (the "Senior Note
           Indenture"). (1)

4.3        Registration Rights Agreement dated as of September 30, 1996, by
           and among the Company and the Initial Purchasers named therein.(1)

4.4        Warrant Agreement, dated as of September 30, 1996, by and
           between the Company and Harris Trust and Savings Bank, as
           Warrant Agent. (1)

4.5        Supplemental Indenture, dated as of March 17, 1997, by and
           between the Company and the Trustee, to the Senior Note
           Indenture.(2)

10.1       Employment Agreement, dated as of July 18, 1996, by and between
           the Company and J. Thomas Elliott. (1)

10.2       Employment Agreement, dated as of July 18, 1996, by and between
           the Company and Ronald W. Gavillet. (1)

10.3       Form of Employment Agreement between the Company and certain
           officers of the Company. (1)

10.4       1994 Stock Option Plan of the Company. (1)

10.5       Form of Indemnification Agreement between the Company and
           certain directors and officers of the Company. (1)

10.6       Consulting Agreement, dated January 24, 1995, by and between the
           Company and Eugene A. Sekulow. (1)

10.7       Promissory Note, dated December 15, 1995, between the Company
           and J. Thomas Elliott. (1)

10.8       Purchase Agreement, dated as of September 25, 1996, by and among
           the Company and the purchasers named therein, relating to the 9%
           Preferred Stock. (1)

10.9       Purchase Agreement, dated as of April 20, 1994, by and among the
           Company, CIBC Wood Gundy Ventures, Inc. ("CIMBC") and Chemical
           Venture Capital Associates ("Chemical"). (1)

10.10      Purchase Agreement, dated as of April 20, 1994, by and among the
           Registrant, CIBC, Chemical and the stockholders of the Company
           listed on a schedule attached thereto (the "Stockholders"). (1)

10.11      Registration Rights Agreement, dated as of April 20, 1994, by
           and among the Company, CIBC and Chemical. (1)

10.12      First Amendment to Purchase Agreement, dated as of June 10,
           1994, by and among the Company, CIBC, Chemical and Hancock
           Venture Partners IV - Direct Fund, L.P. ("Hancock," and together
           with CIBC and Chemical, the "Initial Investors"). (1)

10.13      First Amendment to Stockholders Agreement, dated as of June 10,
           1994, by and among the Company, the Initial Investors and the
           Stockholders. (1)

10.14      First Amendment to Registration Rights Agreement, dated as of
           June 10, 1994, by and among the Company and the Initial
           Investors. (1)

10.15      Third Amendment to Purchase Agreement, dated as of November 1,
           1994, by and among the Company and the Initial Investors. (1)

10.16      Asset Purchase Agreement, dated as of June 13, 1995, by and
           among United Telemanagement Services, Inc. ("UTS"), Quest
           United, Inc. ("Quest United"), Quest America Management, Inc.
           ("QAM"), Edward H. Lavin, Jr. ("Lavin"), J. Thomas Elliott
           ("Elliott") and Quest America, LP ("Quest"). (1)

10.17      Fourth Amendment to Purchase Agreement, dated as of June 22,
           1995, by and among the Company and the Initial Investors. (1)

10.18      Purchase Agreement, dated as of June 22, 1995, by and among the
           Company, CIBC, Chemical Hancock, BT Capital Partners, Inc.,
           Northwood Capital Partners LLC and Northwood Ventures
           (collectively, the "Investors"). (1)

10.19      Amended and Restated Stockholders Agreement, dated as of June
           22, 1995, by and among the Company and the Investors. (1)

10.20      Amended and Restated Registration Agreement, dated as of June
           22, 1995, by and among the Company and the Investors. (1)

10.21      Amended and Restated Stockholders Agreement, dated as of July
           21, 1995, by and among the Company, the Investors and
           Enterprises & Transcommunications, L.P. (collectively the
           "Original Purchasers"). (1)

10.22      Amended and Restated Stockholders Agreement, dated as of July
           21, 1995, by and among the Company, the Original Purchasers and
           the Stockholders. (1)

10.23      Amendment No. 1 to Asset Purchase Agreement, dated as of October
           27, 1995, by and among UTS, Quest United, QAM, Lavin, Elliott,
           and Quest. (1)

10.24      Second Amendment to Purchase Agreement, dated as of March 5,
           1996, by and among the Company and the Original Purchasers. (1)

10.25      Resale Local Exchange Service Agreement, dated July 8, 1996, by
           and between New York Telephone Company and UTS. (1)

10.26      Resale Local Exchange Service Confirmation of Service Order
           dated October 31, 1995, by and between the Company and Ameritech
           Information Industry Services ("Ameritech") on behalf of
           Illinois Bell Telephone Company. (1)

10.27      Agreement for Resale Services, dated as of April 26, 1996, by
           and between the Company and Ameritech on behalf of Ameritech
           Michigan. (1)

10.28      Local Exchange Telecommunications Services Resale Agreement,
           dated May 21, 1996, by and between the Company and Ameritech on
           behalf of The Ohio Bell Telephone Company. (1)

10.29      Employment Agreement, dated as of November 18, 1996, by and
           between the Company and Gerald J. Sweas. (2)

10.30      Employment Agreement, dated as of October 21, 1996, by and
           between the Company and Ryan Mullaney. (2)

11         Computation of Net Loss per Common Share.(2)

12.1       Computation of Earnings to Fixed Charges. (2)

21.1       Subsidiaries of the Company. (1)

27.1       Financial Data Schedule.(2)

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

(1)        Incorporated by reference to United USN. Inc.'s Registration
           Statement on Form S-4 (File No. 333-16265).

(2)        Filed herewith.


Executive Compensation Plans and Arrangements

           Included in the preceding list of exhibits are the following
management contracts or compensatory plans or arrangements:

Exhibit
Number                                    Exhibit

10.1       Employment Agreement, dated as of July 18, 1996, by and between
           the Company and J. Thomas Elliott.

10.2       Employment Agreement, dated as of July 18, 1996, by and between
           the Company and Ronald W. Gavillet.

10.3       Form of Employment Agreement between the Company and certain
           officers of the Company.

10.4       1994 Stock Option Plan of the Company.

10.29      Employment Agreement, dated as of November 18, 1996, by and
           between the Company and Gerald J. Sweas.

10.30      Employment Agreement, dated as of October 21, 1996, by and
           between the Company and Ryan Mullaney.

Reports on Form 8-K

           No forms 8-K were filed by the Company during the fourth quarter
of fiscal 1996.


                                 SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, USN Communications, Inc. has caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized on the ___ day of March, 1997.

                                        USN COMMUNICATIONS, INC.


                                        By:  /s/ J. Thomas Elliott
                                             J. Thomas Elliott
                                             President and Chief Executive
                                             Officer

           Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the following
persons in the capacities and on the dates indicated.

           Signature                     Title                    Date


     /s/ J. Thomas Elliott        President, Chief Executive    March   , 1997
--------------------------------  Officer and Director
       J.  Thomas Elliott         (Principal Executive Officer)


      /s/ Richard J. Brekka       Chairman of the Board         March   , 1997
--------------------------------
        Richard J. Brekka


    /s/ Thomas C. Brandenburg     Director                      March   , 1997
--------------------------------
      Thomas C. Brandenburg


      /s/ Dean M. Greenwood       Director                      March   , 1997
--------------------------------
        Dean M. Greenwood


   /s/ Donald J. Hofmann, Jr.     Director                      March   , 1997
_________________________________
     Donald J. Hofmann, Jr.


     /s/ William A. Johnston      Director                      March   , 1997
--------------------------------
       William A. Johnston


      /s/ Paul S. Lattanzio       Director                      March   , 1997
--------------------------------
        Paul S. Lattanzio


      /s/ Eugene A. Sekulow       Director                      March   , 1997
--------------------------------
        Eugene A. Sekulow


       /s/ Gerald J. Sweas        Executive Vice President      March   , 1997
________________________________  and Chief Financial Officer
         Gerald J. Sweas          (Principal Financial Officer)


     /s/ Letitia D. Bonthron      Controller                    March   , 1997
--------------------------------  (Principal
       Letitia D. Bonthron        Accounting Officer)






                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                 PAGE

INDEPENDENT AUDITORS' REPORT                                      F-2

CONSOLIDATED FINANCIAL STATEMENTS:

   Consolidated Balance Sheets                                    F-3

   Consolidated Statements of Operations                          F-4

   Consolidated Statements of Redeemable Preferred Stock          F-5

   Consolidated Statements of Common Stockholders' Deficit        F-6

   Consolidated Statements of Cash Flows                          F-7

   Notes to Consolidated Financial Statements                     F-8



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
USN Communications, Inc.
Chicago, Illinois

We have audited the accompanying consolidated balance sheets of USN
Communications, Inc. and subsidiaries (the "Company") as of December 31,
1996 and 1995, the related consolidated statements of operations,
redeemable preferred stock, common stockholders' deficit and cash flows
for the years ended December 31, 1996 and 1995 and for the period from
April 20, 1994 (Inception) to December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996 and
1995 and for the period from April 20, 1994 (Inception) to December 31,
1994, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 20 to
the financial statements, the Company's recurring losses from operations
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning this matter are also described in Note 20.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

March 14, 1997


<TABLE>
<CAPTION>


USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

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


                                                               LIABILITIES, REDEEMABLE PREFERRED STOCK,
ASSETS                                1996         1995        AND COMMON STOCKHOLDERS' DEFICIT          1996          1995

CURRENT ASSETS:                                                CURRENT LIABILITIES:

<S>                               <C>          <C>             <C>                                     <C>           <C>
  Cash and cash equivalents       $60,569,365  $13,705,025     Accounts payable                     $ 7,907,654   $ 2,734,122
  Accounts receivable, net of                                  Accrued expenses and other
    allowances for doubtful                                      liabilities                          3,176,762     1,106,010
    accounts of $223,000 (1996)                                Current maturities on notes payable      386,522       409,348
    and $193,000 (1995)             3,004,408    1,184,453     Capital lease obligations - current      277,844        75,192
  Interest receivable                 249,113       61,015
    Prepaid expenses                  187,051      171,111                                          -----------    ----------
  Notes receivable                    150,000                    Total current liabilities           11,748,782     4,324,672
  Other receivables                    22,567
  Net assets held for sale                       1,453,699     Capital lease obligations -
                                 ------------  -----------       noncurrent                             312,280        81,391
                                                               Notes payable                             49,727       436,825
      Total current assets         64,182,504   16,575,303     14% Senior Discount Notes,
                                                                 net of Original Issue Discount      31,242,614
PROPERTY AND EQUIPMENT, NET         3,507,350    1,214,647     9% Convertible Subordinated
                                                                 Discount Notes, net of Original
OTHER ASSETS                       10,362,438    2,681,255       Issue Discount                      28,259,555
                                                                                                    -----------     ----------
                                                                   Total Liabilities                 71,612,958      4,842,888

                                                               REDEEMABLE PREFERRED STOCK:
                                                               9% Cumulative Convertible Pay-
                                                                 In-Kind Preferred Stock                 10,000
                                                               Series A-2 10% Senior Cumulative
                                                                 Preferred Stock                                        26,235
                                                               Series A 10% Senior Cumulative
                                                                 Preferred Stock                                        16,200
                                                               Accumulated unpaid dividends             225,000      3,810,000
                                                               Additional paid-in-capital             9,810,185     40,543,605
                                                                                                     ----------     ----------
                                                                 Total redeemable preferred stock    10,045,185     44,396,040

                                                               COMMON STOCKHOLDERS' DEFICIT:
                                                               Common stock, $.01 par value;
                                                                 2,500,000 and 500,000
                                                                 authorized at 1996 and 1995;
                                                                 718,526 and 313,729 shares
                                                                 issued at 1996 and 1995                  7,185          3,137
                                                               Additional paid-in capital            54,179,423        282,955
                                                               Accumulated deficit                  (57,791,382)   (29,053,815)
                                                               Treasury stock, 1,000 shares
                                                                 at 1996                                 (1,077)
                                                                                                   ------------     -----------
                                 ------------  ------------    Total common stockholders' deficit    (3,605,851)   (28,767,723)
                                                                                                    -----------     -----------

                                                               TOTAL LIABILITIES, REDEEMABLE
                                                                 PREFERRED STOCK AND COMMON
TOTAL ASSETS                      $78,052,292  $20,471,205       STOCKHOLDERS' DEFICIT              $78,052,292       $20,471,205
                                 ============  ===========                                          ===========       ===========
</TABLE>


See notes to consolidated financial statements.


<TABLE>
<CAPTION>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

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


                                             1996                1995                 1994

<S>                                     <C>                 <C>                 <C>
NET SERVICE REVENUE                     $   9,814,479       $   7,883,890       $    1,737,461

COST OF SERVICES                            9,256,472           9,075,749            1,454,882
                                        -------------       -------------        -------------

      Gross margin                            558,007          (1,191,859)             282,579

EXPENSES:
  Sales and marketing                      12,612,172           5,867,200            2,869,463
  General and administrative               20,664,612          11,100,661            4,685,894
                                        -------------       -------------        -------------

OPERATING LOSS                            (32,718,777)        (18,159,720)          (7,272,778)

OTHER INCOME (EXPENSE):
  Interest income                           1,376,429             586,946              152,099
  Interest expense                         (1,797,112)           (733,566)             (26,110)
  Gain on sale of switch-based
    facilities                              8,078,901
  Other income                                 13,968              59,314
                                        -------------       -------------

      Other income (expense) - net          7,672,186             (87,306)             125,989
                                         ------------       -------------        -------------

NET LOSS BEFORE MINORITY INTEREST         (25,046,591)        (18,247,026)          (7,146,789)

MINORITY INTEREST SHARE IN LOSS
  OF USNCN                                                        150,000
                                          -----------         -----------        -------------
NET LOSS                                $ (25,046,591)      $ (18,097,026)      $   (7,146,789)
                                          ===========         ===========         =============

ACCUMULATED UNPAID PREFERRED
  DIVIDENDS                             $     225,000       $   3,810,000       $      707,000
                                         ============         ===========         ============

NET LOSS PER COMMON SHARE               $      (49.53)      $      (72.42)     $       (65.63)
                                         =============       =============       =============

WEIGHTED AVERAGE COMMON AND
  COMMON EQUIVALENT SHARES
  OUTSTANDING                                 510,233              302,520             119,678
                                         =============        ============        ============

</TABLE>


See notes to consolidated financial statements.



<TABLE>
<CAPTION>


USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

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


                                               9% PIK       SERIES A-2    SERIES A     ACCUMULATED    ADDITIONAL
                                              PREFERRED      PREFERRED   PREFERRED        UNPAID       PAID-IN
                                                STOCK          STOCK       STOCK        DIVIDENDS      CAPITAL        TOTAL

BALANCE, APRIL 20, 1994

<S>                                              <C>           <C>        <C>           <C>            <C>            <C>
  Issuance of 16,200 shares of Series A
    10% Senior Cumulative preferred stock                                $ 16,200                   $ 15,212,824  $ 15,229,024

  Costs incurred related to issuance of
    stock                                                                                               (630,474)     (630,474)

  Accumulated unpaid preferred dividends                                             $  707,000                        707,000
                                                            ---------    --------    ----------      -----------   -----------

BALANCE, DECEMBER 31, 1994                                                 16,200       707,000       14,582,350    15,305,550

  Issuance of 26,235 shares of Series A-2
    10% Senior Cumulative preferred stock                   $ 26,235                                  26,208,765    26,235,000

  Costs incurred related to issuance of
    stock                                                                                               (247,510)     (247,510)

  Accumulated unpaid preferred dividends                                              3,103,000                      3,103,000
                                                            --------     --------    ----------      -----------    ----------
                                                             26,235       16,200      3,810,000       40,543,605    44,396,040

  Accumulated unpaid preferred dividends                                              3,465,976                      3,465,976

  Conversion of Series A and A-2 Preferred
    Stock to Class A Common Stock                           (26,235)     (16,200)    (7,275,976)     (40,543,605)  (47,862,016)

  Issuance of 10,000 shares of 9% PIK
    preferred stock                             $10,000                                                9,990,000    10,000,000

  Costs incurred related to issuance
    of 9% PIK preferred stock                                                                           (179,815)     (179,815)

  Accumulated unpaid preferred dividends
     on 9% PIK preferred stock                                                          225,000                        225,000
                                                -------    --------     --------      ---------       ----------   ------------

  BALANCE, DECEMBER 31, 1996                    $10,000   $             $               225,000     $  9,810,185  $ 10,045,185
                                                =======    ========     ========      =========       ==========   ============

</TABLE>


See notes to consolidated financial statements.


<TABLE>
<CAPTION>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

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


                                                                    ADDITIONAL                       COMMON
                                                    COMMON            PAID-IN        ACCUMULATED   STOCK HELD
                                                     STOCK            CAPITAL          DEFICIT     IN TREASURY         TOTAL

BALANCE, APRIL 20, 1994

<S>                                                    <C>            <C>         <C>                 <C>           <C>
  Issuance of 177,840 shares of common stock         $ 1,778     $   236,661                                     $    238,439

  Costs incurred related to issuance of stock                       (214,860)                                        (214,860)

  Accumulated unpaid preferred dividends                                         $    (707,000)                      (707,000)

  Net loss                                           _______    ____________        (7,146,789)                    (7,146,789)
                                                                                  ------------                    -----------

BALANCE, DECEMBER 31, 1994                             1,778           21,801       (7,853,789)                    (7,830,210)

  Issuance of 135,899 shares of common stock           1,359         263,644                                          265,003

  Costs incurred related to issuance of stock                        (2,490)                                           (2,490)

  Accumulated unpaid preferred dividends                                            (3,103,000)                    (3,103,000)

  Net loss                                           _______     ___________       (18,097,026)                   (18,097,026)
                                                                                  ------------                   ------------

BALANCE, DECEMBER 31, 1995                             3,137          282,955      (29,053,815)                   (28,767,723)

  Conversion of Series A and A-2 Preferred
     Stock to Class A Common Stock                     2,676       47,859,340                                      47,862,016

  Issuance of 5,000 shares of common stock                50            5,450                                           5,500

  Compensation grants of 22,000 shares of
    common stock                                         220           32,780                                          33,000

  Repricing of common stock                            1,102           (1,102)

  Repurchase of 1,000 shares of common stock                                                        $(1,077)           (1,077)

  Issuance of stock warrants                                         6,000,000                                        6,000,000

  Accumulated unpaid preferred dividends                                            (3,690,976)                    (3,690,976)

  Net loss                                           _______     ___________       (25,046,591)     _______       (25,046,591)
                                                                                  ------------                   ------------

BALANCE, DECEMBER 31, 1996                           $ 7,185     $54,179,423      $(57,791,382)     $(1,077)     $ (3,605,851)
                                                     =======     ===========      ============      =======      ============
</TABLE>



<TABLE>
<CAPTION>

USN COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

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

                                                                     1996             1995              1994
CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                           <C>               <C>              <C>
  Net loss                                                    $(25,046,591)     $(18,097,026)    $ (7,146,789)
  Adjustments to reconcile net loss to net cash flows
    from operating activities:

    Depreciation and amortization                                  558,236         1,288,991          159,685
    Amortization of organization costs and intangibles           1,770,936           969,271           26,376
    Interest accreted on debt obligation                         1,654,394
    Stock compensation award expense                                33,000
    Gain on disposal of assets                                  (8,078,901)          (16,274)
    Changes in:

      Accounts receivable                                       (1,819,956)         (322,245)        (862,208)
      Interest receivable                                         (188,098)          (61,015)
      Prepaid expenses                                             (38,468)           13,082          (37,624)
      Other receivables                                           (172,567)
      Other assets                                                 (14,948)

      Account payable                                            4,819,840         1,578,757          953,465
      Accrued expenses and other liabilities                     2,424,642           338,412          766,532
                                                              ------------      ------------     ------------

        Net cash flows from operating activities               (24,098,481)      (14,308,047)      (6,140,563)

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchase of property and equipment                            (2,258,969)       (1,739,542)      (1,728,327)
  Proceeds from sale of assets                                   9,532,600
  Purchase of subsidiary                                                            (892,287)
  Organization costs                                                                                 (161,702)
  Cash acquired from purchase of subsidiaries                                                         331,975
  Issuance of noncurrent notes receivable                                                            (150,000)
  Proceeds from note receivable                                                       76,204
                                                               -----------      ------------      -----------

      Net cash flows from investing activities                   7,273,631       (2,555,625)      (1,708,054)

CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from Senior Notes                                    30,203,375
  Proceeds from Convertible Notes                               27,644,400
  Debt acquisition costs                                        (2,920,239)
  Issuance of preferred stock                                   10,000,000        26,235,000       14,850,000
  Issuance of common stock                                           5,500           265,003          150,000
  Cost incurred related to issuance of stock                      (179,815)         (250,000)        (845,334)
  Repurchase of common stock                                        (1,077)

  Deposits                                                        (494,603)          (20,855)        (555,270)
  Payments on assumed indebtedness                                (350,412)       (1,459,458)
  Repayment of capital lease obligation                           (158,427)         (155,272)         (16,731)
  Repayment of notes payable                                       (59,512)          (71,588)          (8,330)
  Proceeds from notes payable                                                         46,645           73,504
  Proceeds from borrowings                                                                            180,000
                                                            --------------    --------------      ------------

      Net cash flows from financing activities                  63,689,190        24,589,475       13,827,839
                                                            --------------    --------------      -----------

NET INCREASE IN CASH                                            46,864,340         7,725,803        5,979,222

CASH AND CASH EQUIVALENTS - Beginning of year                   13,705,025         5,979,222        _________
                                                            --------------    --------------

CASH AND CASH EQUIVALENTS - End of year                       $ 60,569,365      $ 13,705,025     $  5,979,222
                                                              ============      ============     ============

SUPPLEMENTAL CASH FLOW INFORMATION - See Note 3

See notes to consolidated financial statements.
</TABLE>




USN COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND

PERIOD FROM APRIL 20, 1994 (INCEPTION) TO DECEMBER 31, 1994

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

 1.      ORGANIZATION AND ACQUISITIONS

         USN Communications, Inc., formerly United USN, Inc. ("USN") was
         incorporated under the laws of the State of Delaware on April
         20, 1994 and was initially funded in 1994 through capital
         contributions totaling $15 million in cash, before financing
         costs. In June 1995 and September 1996, USN received additional
         capital contributions of approximately $26 million and $10
         million, respectively. USN holds controlling investments in
         three companies: US Network Corporation, USN Communications
         Northeast, Inc. (formerly United Telemanagement Services, Inc.),
         and USN Communications Midwest, Inc. USN and its subsidiaries
         operate in a single business segment, primarily as a reseller of
         a broad range of telecommunication services in various cities in
         the Midwest and the Northeast regions of the U.S.

         On April 20, 1994, USN purchased US Network Corporation ("US
         Network") and its 100% subsidiary, FoneNet/Ohio, Inc., in
         exchange for 1,350 shares of USN's preferred stock and 31,500
         shares of its common stock. This transaction was accounted for
         as a purchase and was valued at US Network's net book value of
         approximately $467,000. The consolidated financial statements
         include the results of operations of US Network since April 20,
         1994.

         In July 1994, USN purchased a 50.1% ownership interest in USN
         Communications Northeast, Inc. ("USNCN") for approximately $2
         million. USNCN provides telecommunications services to business
         customers in New York and Massachusetts. USN has had substantive
         control of USNCN since its inception. Therefore, the
         consolidated financial statements include the results of
         operations for USNCN since its commencement of operations in
         1994. In December 1995, USN's ownership in USNCN increased to
         83.9% as a result of additional investments approximating $9.4
         million. In July 1996, USN's ownership in USNCN increased to
         100% as a result of an additional investment of $150,000.

         In June 1995, USNCN (through a newly formed subsidiary, Quest
         United, Inc.) purchased specific assets and assumed certain
         liabilities of an independent telephone services company, Quest
         America, L.P. ("Quest"), for cash of $950,000 and notes payable
         to investors of Quest of $842,985 (the "Acquisition"). The
         Acquisition has been accounted for as a purchase, and such
         assets and liabilities were recorded at their then fair values
         (which approximated their historical cost bases) as of the
         Acquisition date. The excess of the cost of the Acquisition over
         the net assets acquired has been ascribed to various intangible
         assets (principally customer lists, employment contracts and
         work force in place). The consolidated statement of operations
         for the year ended December 31, 1996 and 1995 include Quest's
         revenues and expenses from the Acquisition date forward.

         In January 1995, USN Communications Midwest, Inc. ("USNCM") was
         incorporated as a wholly owned subsidiary of USN. USNCM began
         operations in July 1996 and provides telecommunication services
         to business customers in Illinois, Ohio and Michigan.


 2.      SUMMARY OF ACCOUNTING POLICIES

         A summary of the significant accounting policies applied in the
         preparation of the accompanying consolidated financial
         statements follows:

         USE OF ESTIMATES - The preparation of financial statements in
         conformity with generally accepted accounting principles
         requires management to make estimates and assumptions that
         affect the reported amounts of assets and liabilities and
         disclosure of contingent assets and liabilities at the date of
         the financial statements, and the reported amounts of revenue
         and expenses during the reporting period. Actual results could
         differ from those estimates.

         PRINCIPLES OF CONSOLIDATION - The accompanying consolidated
         financial statements include the accounts of USN Communications,
         Inc. and its subsidiaries (the "Company"). Significant
         intercompany balances and transactions have been eliminated in
         consolidation.

         REVENUE RECOGNITION - The Company recognizes revenues in the
         period in which telephone services are provided. For the
         operating unit which the Company has operated as a commission
         agent only, revenues are recorded at the net commissions earned.

         CASH AND CASH EQUIVALENTS - Cash and cash equivalents are
         defined as cash in banks, time deposits and highly liquid
         short-term investments with initial maturities from dates of
         acquisition of three months or less.

         RECOURSE PROVISION - Until June 1996, USNCN utilized a
         third-party billing and collection agency (the "Agency") to
         process and factor its accounts receivable, yet retained the
         risk of loss on amounts that were deemed to be uncollectible in
         the normal course of business. The Agency charged USNCN an
         allowance for estimated bad debts on factored accounts
         receivable, subject to the recourse provisions, using prior
         collection experience and industry statistics. Adjustments were
         made between actual loss experience and estimated bad debt
         expenses on a periodic basis by the Agency. At December 31,
         1996, there were no factored receivables subject to such
         adjustments. At December 31, 1995, factored receivables of
         approximately $828,000 were subject to such adjustment.

         FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of
         financial instruments included in current assets and liabilities
         approximate fair values due to the short-term maturities of
         these instruments. The carrying values of long-term debt and
         notes payable are reasonable estimates of their fair values as
         the interest rates approximate rates currently available to the
         Company for instruments with similar terms and remaining
         maturities.

         PROPERTY AND EQUIPMENT - Purchases of property and equipment are
         carried at cost. Depreciation is provided on the straight-line
         basis. Office furniture and equipment are depreciated over five
         years. Computer equipment is depreciated over 3 years. Leasehold
         improvements and assets leased under capital leases are
         amortized over the shorter of the related lease term or the
         estimated useful life of the asset.

         INTANGIBLE ASSETS - Costs incurred in the formation of the
         Company are being amortized on a straight-line basis over five
         years. The intangible assets associated with the acquisition of
         Quest are being amortized on a straight-line basis over two
         years. Debt acquisition costs are being amortized over the life
         of the related debt. The value of the warrants issued with the
         Senior Notes are being amortized over the life of those notes.

         STOCK-BASED COMPENSATION - During 1996, the Company implemented
         Statement of Financial Accounting Standards No. 123 "Accounting
         for Stock Based Compensation" ("SFAS No. 123"). SFAS No. 123
         allows the Company to recognize compensation under the
         "intrinsic value" method prescribed by Accounting Principles
         Board Opinion No. 25, and requires the pro forma disclosure of
         net income and earnings per share as if the fair value method
         had been applied.

         RECLASSIFICATIONS - Certain prior year amounts have been
         reclassified to conform to the current year presentation.

 3.      SUPPLEMENTAL CASH FLOW INFORMATION

         Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>

                                                                          1996           1995           1994

<S>                                                                       <C>          <C>            <C>
         Capital lease obligations incurred (Notes 5 and 9)             $591,967      $33,398,105    $3,137,119
                                                                        ========      ===========    ==========

         Fair value of Quest America Management L.P.

           noncash assets acquired in 1995                                             $  414,726
         Consideration incurred in connection with the
           Acquisition including $950,000 in cash advances)

           (Note 1)                                                                     3,104,588
                                                                                       ----------

         Liabilities assumed                                                           $2,689,862
                                                                                       ==========
         Note payable incurred to finance insurance policies

           (Note 11)                                                                   $   58,650   $    72,000
                                                                                       ==========   ===========

         Fair value of US Network's noncash assets acquired                                          $  623,659
         Common and preferred stock issued in connection
           with the acquisition (Note 1)                                                                467,463
                                                                                                     ----------

         Liabilities assumed                                                                         $  156,196
                                                                                                     ==========

         Note payable to UTS minority shareholder                                                    $  149,708
         Proceeds received upon issuance of note payable                                                (73,504)
                                                                                                      ---------

         Note receivable from UTS minority shareholder                                               $   76,204
                                                                                                     ==========
</TABLE>

         Cash paid for interest in 1996 and 1995 was approximately
         $32,000 and $613,000, respectively. No cash was paid in 1994 for
         interest and in 1996, 1995 and 1994 for income taxes.

 4.      RELATED PARTY TRANSACTIONS

         Notes receivable at December 31, 1996 includes a $75,000
         non-interest bearing note due to the Company from a corporate
         officer.


 5.      NET ASSETS HELD FOR SALE

         On December 29, 1995, the Company entered into an agreement to
         sell its switch-based facilities in Ohio for $9.5 million in
         cash plus the assumption of capital and operating leases. The
         transaction closed on February 29, 1996 and a gain of
         approximately $8.1 million was realized and recorded at that
         time. The Company will continue to serve its Ohio customer base
         as a reseller of telecommunication services.

         The net assets held at December 31, 1995 in conjunction with
this sale were as follows:

              Switching equipment                        $ 6,233,557
              Leasehold improvements                       1,781,260
              Outside plant and equipment                    423,424
              Furniture and equipment                        318,355
                                                         -----------

                                                           8,756,596

              Less accumulated depreciation               (1,181,587)

              Net property and equipment                   7,575,009
              Deposits                                       100,532

              Total assets                                 7,675,541

              Less liabilities assumed:

                Accrued liabilities                           15,204
                Capital lease obligations                  6,206,638

              Net assets held for sale                   $ 1,453,699
                                                         ===========

         Additionally, approximately $2.0 million in operating leases
         were assumed by the buyer. The Company remains contingently
         liable on capital and operating leases assumed by the buyer
         until expiration.

 6.      PROPERTY AND EQUIPMENT

         Property and equipment at December 31 consist of:

                                                     1996          1995

              Furniture and equipment             $3,940,719     $1,364,479
              Leasehold improvements                 392,601        117,902
                                                  ----------     ----------

                                                   4,333,320      1,482,381
              Less accumulated depreciation        (825,970)      (267,734)
                                                 ----------     ----------

              Total                               $3,507,350     $1,214,647
                                                  ==========     ==========

<TABLE>
<CAPTION>

 7.      OTHER ASSETS

         Other assets at December 31 consist of:

                                                              1996         1995

<S>                                                          <C>            <C>
              Stock warrants (net of accumulated
                amortization:  1996 - $214,286)            $ 5,785,714
              Debt acquisition costs (net of accumulated
                amortization:  1996 - $98,064)               2,822,175
              Deposits                                       1,044,098    $  426,902
              Goodwill (net of accumulated amortization:
                1996 - $2,337,015; 1995 - $923,850)            588,819     2,001,985
              Organization costs (net of accumulated
                amortization:  1996 - $118,853;
                1995 - $73,432)                                108,257       153,677
              Other                                             13,375        98,691
                                                           -----------    ----------

              Total                                        $10,362,438    $2,681,255
                                                           ===========    ==========
</TABLE>

 8.      ACCRUED EXPENSES

         Accrued expenses at December 31 consist of:

                                            1996                 1995

              Payroll and benefits        $1,515,197            $  548,775
              Professional services          814,388               163,540
              Excise taxes                   575,790               117,812
              Rent                             6,600                 4,380
              Interest payable                                      21,764
              Other                          264,787               249,739
                                          ----------             ---------

              Total                       $3,176,762            $1,106,010
                                          ==========            ==========

 9.      CAPITAL LEASE OBLIGATIONS

         The Company leases certain furniture and equipment under capital
         leases at December 31, as follows:

                                                      1996          1995

              Furniture and equipment             $ 841,359      $221,855
              Less accumulated amortization        (261,905)      (73,003)
                                                  ---------      --------

              Total                               $ 579,454      $148,852
                                                  =========      ========



         Future minimum lease payments at December 31, 1996 are as
         follows:

              1997                                          $ 341,883
              1998                                            288,865
              1999                                             54,422
                                                            ---------

              Total minimum lease payments                    685,170
              Less imputed interest                           (95,046)

              Present value of minimum lease payments         590,124
              Less current portion                           (277,844)

              Long-term lease obligations                   $ 312,280
                                                            =========

10.      OPERATING LEASES

         The Company leases certain office space and equipment under
         operating leases. Future minimum lease commitments under
         noncancelable operating leases as of December 31, 1996 are as
         follows:

         1997                               $ 2,113,254
         1998                                 2,206,947
         1999                                 1,737,457
         2000                                 1,530,196
         Thereafter                           2,531,822
                                            -----------

         Total                              $10,119,676

         Rent expense for the years ended December 31, 1996 and 1995 and
         the period from April 20, 1994 to December 31, 1994 was
         approximately $1,024,000, $867,000 and $214,000, respectively.

11.      NOTES PAYABLE

         The Company issued a note payable of $58,650 in 1995 to finance
         an insurance policy. The note was payable in nine monthly
         installments through August 1996. Interest was payable at 6.45%.
         The principal balance was paid in full at December 31, 1996.

         In 1995, the Company issued an additional note payable of
         $46,353 to finance improvements to an office space. The note
         requires monthly principal payments of $831 through July 2001.
         Interest is payable at 8%. At December 31, 1996 and 1995, the
         outstanding principal balances were $37,573 and $44,777,
         respectively.

         In connection with the acquisition of Quest, USNCN assumed notes
         payable to investors of Quest. The notes bear interest at 8% and
         the balances outstanding at December 31, 1996 and 1995 total
         $398,676 and $749,088, respectively. The notes require quarterly
         principal and interest payments in 1996 and 1997 and in the
         first quarter of 1998.

         Maturities on notes payable are as follows:

         1997                                     $386,522
         1998                                       27,204
         1999                                        8,474
         2000                                        9,178
         2001                                        4,871
                                                  --------

         Total                                    $436,249

12.      PRIVATE PLACEMENT OFFERING

         On September 30, 1996, the Company received approximately $55
         million in cash, net of commissions paid, in exchange for 48,500
         units consisting of $48.5 million aggregate principal amount at
         maturity of 14% Senior Discount Notes ("Senior Notes") due 2003
         and warrants to purchase 61,550 shares of Class A Common Stock,
         and 36,000 units consisting of $36 million aggregate principal
         amount at maturity of 9% Convertible Subordinated Notes
         ("Convertible Notes") due 2004.

         The Senior Notes were sold at a unit price, before commissions,
         of $622.75 per $1,000 face amount. These notes will accrete
         interest at an annual rate of 14% from September 30, 1996 to
         March 31, 2000. Thereafter, the notes will bear interest at an
         annual rate of 14%, and will be paid semiannually in arrears, on
         the aggregate principal amount at maturity of $48.5 million.

         The Convertible Notes were sold at a unit price, before
         commissions, of $767.90 per $1,000 face amount. These notes will
         accrete interest at an annual rate of 9% from September 30, 1996
         to September 30, 1999. Thereafter, the notes will bear interest
         at an annual rate of 9%, and will be paid semiannually in
         arrears, on the aggregate principal amount at maturity of $36
         million.

13.      REDEEMABLE PREFERRED STOCK

         The Board of Directors authorized 20,000 shares of Series A 10%
         Senior Cumulative Preferred Stock ("Series A"), and 30,000
         shares of Series A-2 10% Senior Cumulative Preferred Stock
         ("Series A-2"), with par values of $1 in 1994 and 1995,
         respectively. On December 31, 1995, 16,200 shares of Series A
         and 26,235 shares of Series A-2 were outstanding.

         In September 1996, the Board of Directors and the existing
         shareholders approved the conversion of all outstanding Series A
         and Series A-2 Preferred Stock to shares of Class A Common
         Stock. The conversion was consummated on September 30, 1996 and
         267,630 shares of Class A Common Stock were issued in exchange
         for the outstanding Series A and Series A-2 Preferred Stock,
         including dividends accrued through the conversion date.

         In September 1996, the Board of Directors authorized the
         issuance of up to 30,000 shares of $1 par value preferred stock
         designated as 9% Cumulative Convertible Pay-in-Kind Preferred
         Stock ("9% Preferred Stock"). In connection with the Private
         Placement Offering (Note 12), the Company issued 10,000 shares
         of its 9% Preferred Stock to its existing shareholders, for an
         aggregate purchase price of $10.0 million.

         DIVIDENDS - Dividends on the 9% Preferred Stock accrue
         semiannually at a rate of 9% per annum, are fully cumulative and
         are payable through the issuance of additional shares of 9%
         Preferred Stock. No dividends have been declared or paid on the
         preferred stock.

         LIQUIDATION - Upon any liquidation, dissolution or winding up of
         the Company, holders of the 9% Preferred Stock will be entitled
         to receive their full liquidation preference and stated value of
         $1,000 per share, together with accrued and unpaid dividends,
         prior to the distribution of any assets of the Company to the
         holders of Class A Common Stock.

         REDEMPTION - Shares of 9% Preferred Stock are not redeemable at
         the option of the Company, but are subject to mandatory
         redemption in 2006 at the stated value, together with all
         accrued and unpaid dividends to the redemption date.

         CONVERSION - Each share of 9% Preferred Stock is convertible
         into 7.0623 shares of Class A Common Stock, at any time, in
         whole or in part, at the option of the holders thereof.

14.      COMMON STOCK

         In 1996, a 1995 transaction in which Class A Common Stock was
         issued was repriced, whereby the number of shares issued
         increased from 135,899 to 246,056 and the purchase price
         decreased from $1.95 to $1.077 per share.

         DIVIDENDS - The holders of Class A Common Stock are entitled to
         receive dividends as dividends are declared by the Board of
         Directors of the Company out of funds legally available
         therefor, provided that if any shares of Preferred Stock are at
         the time outstanding, the payment of dividends on the Class A
         Common Stock or other distributions may be subject to the
         declaration and payment of full cumulative dividends on
         outstanding shares of Preferred Stock.

         LIQUIDATION - Upon any liquidation, dissolution or winding up of
         the affairs of the Company, whether voluntary or involuntary,
         any assets remaining after the satisfaction in full of the prior
         rights of creditors and the aggregate liquidation preference of
         any Preferred Stock then outstanding will be distributed to the
         holders of Class A Common Stock.

15.      STOCK OPTION PLAN

         The Company has granted options to acquire shares of common
         stock to certain officers and other employees under the 1994
         Stock Option Plan. These options generally become exercisable at
         a rate of 25% every six months over a period of two years after
         the date of grant, although with respect to certain grants no
         vesting occurs until twelve months after the grant date.

         In connection with the financing described in Note 12 and the
         issuance of the 9% Preferred Stock described in Note 13, the
         Company granted 31,961 options to purchase Class A Common Stock
         at an exercise price of $1.50 per share. These options were not
         issued under the 1994 Stock Option Plan, but rather were issued
         pursuant to separate stock option agreements between the Company
         and the option holders. 6,637 of these options become
         exercisable as the Convertible Notes are converted to Class A
         Common Stock, and 25,324 of these options become exercisable as
         shares of 9% Preferred Stock are converted to Class A Common
         Stock.


         Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>

                                                                PRICE                     PRICE              PRICE
                                                                 PER                       PER                PER
                                                   1996         SHARE          1995       SHARE      1994    SHARE

<S>                             <C>                <C>       <C>                <C>        <C>        <C>      <C>
         Outstanding at January 1                  19,050  $         1.10     21,300     $ 1.10
         Granted                                  103,324      1.10-96.00                           21,300  $ 1.10
         Exercised                                 (5,000)           1.10
         Cancelled                                 (6,475)           1.10     (2,250)      1.10     ______
                                                  -------                     ------

         Outstanding at December 31               110,899      1.10-96.00     19,050       1.10     21,300    1.10
                                                  =======                     ======                ======

         Options exercisable at December 31        10,662       1.10-1.50     10,024       1.10          -
                                                 ========                     ======                ======
</TABLE>

         For pro forma information regarding net loss and loss per common
         share, the fair value for the options awarded in 1996 and 1994
         was estimated as of the date of the grant using a Black-Scholes
         option valuation model with the following weighted average
         assumptions for 1996 and 1994, respectively: risk-free interest
         rates of 4.95% and 4.97%; dividend yields of 0%; and an expected
         life of the option of ten years.

         For purposes of pro forma disclosures, the estimated fair value
         of the options is amortized over the options' vesting period.
         Therefore, in the year of adoption and subsequently affected
         years, the effect of applying SFAS 123 for providing pro forma
         net loss and loss per common share are not likely to be
         representative of the effects on reported income in future
         years. The effect on the Company's reported net loss, on a pro
         forma basis, was not material for 1996, 1995 and 1994.

         The Black-Scholes option valuation model used by the Company was
         developed for use in estimating the fair value of fully tradable
         options which have no vesting restrictions and are fully
         transferable. In addition, option valuation models require the
         input of highly subjective assumptions including the expected
         stock price volatility. It is management's opinion that the
         Company's stock options have characteristics significantly
         different from those of traded options and because changes in
         the subjective input assumptions can materially affect the fair
         value estimate, the existing models do not necessarily provide a
         reliable single measure of the fair value of its stock options.

16.      EMPLOYEE BENEFIT PLAN

         On January 1, 1995, the Company adopted a qualified 401(k) plan
         covering all eligible employees in which the Company
         contributions are discretionary. Employees are permitted to make
         annual contributions through salary deductions up to 15% of
         their annual salary. The plan can be amended or terminated at
         any time by the Board of Directors. The Company made no
         contributions to the plan in 1996 or 1995.


17.      INCOME TAXES

         The Company incurred net losses of $25,046,591, $18,097,026 and
         $7,146,789 in 1996, 1995 and 1994, respectively. Accordingly, no
         provision for current Federal or state income taxes has been
         made to the financial statements.

         The Company's deferred tax asset components are as follows:

                                                 DECEMBER 31,   DECEMBER 31,
                                                     1996           1995

         Net operating loss carry-forwards      $ 18,285,000     $ 9,121,000
         Accrued liabilities and asset
           valuation reserves                        172,000         195,000
         Amortization of intangibles                 790,000         309,000
                                                 ------------    -----------

         Subtotal                                 19,247,000       9,625,000

         Valuation allowance                     (19,247,000)     (9,625,000)
                                                 -----------      ----------

         Total                                    $       -       $       -
                                                  ==========      ==========

         As of December 31, 1996 and 1995, the Company had not recognized
         deferred income tax assets related to deductible temporary
         differences and cumulative net operating losses. The ability of
         the Company to fully realize deferred tax assets in future years
         is contingent upon its success in generating sufficient levels
         of taxable income before the statutory expiration periods for
         utilizing such net operating losses lapses. After an assessment
         of all available evidence, including historical and projected
         operating trends, the Company was unable to conclude that
         realization of such deferred tax assets in the near future was
         more likely than not. Accordingly, a valuation allowance was
         recorded to offset the full amount of such assets.

         At December 31, 1996, the Company had net operating loss
         carry-forwards for income tax purposes of approximately
         $46,120,000. The expiration periods for utilizing these
         operating losses begin in 2009 for Federal tax purposes. Of the
         net operating loss carry-forwards available at December 31,
         1996, $12,286,000 can be applied only against future taxable
         income of USNCN. In addition, if the Company or the Company's
         subsidiaries experience an "ownership change" within the meaning
         of Section 382 of the Internal Revenue Code of 1986, as amended
         (the "Code"), the net operating loss carry-forwards allocable to
         such entity will be subject to an annual limitation in an amount
         generally equal to the value of the entity immediately before
         the ownership change at the long-term tax-exempt rate (the
         "Section 382 limitation"). Any unused Section 382 limitation in
         one year is added to the limitation for the next year.
         Generally, an ownership change occurs with respect to an entity
         if the aggregate increase in the percentage stock ownership (by
         value) of such entity by one or more of its five-percent
         stockholders exceeds 50 percentage points within a testing
         period. The tax laws for determining whether an ownership change
         of an entity has occurred are complex and subject to differing
         interpretations in certain respects. It is possible that the
         Company or the Company's subsidiaries have experienced an
         ownership change under Section 382 of the Code and that the
         Company or the Company's subsidiaries may experience an
         ownership change as a result of the Company's future
         transactions including, but not limited to, the issuance of the
         Warrants and consummation of one or more public offerings of
         Common Stock. In such event, the ability of the Company or the
         Company's subsidiaries to utilize their operating loss
         carry-forwards to offset future taxable income would be subject
         to limitations as discussed above.

18.      MINORITY INTEREST IN USNCN

         In September 1996, all minority shareholders' interests in USNCN
         were repurchased, increasing the Company's ownership of USNCN's
         outstanding common stock to 100%. Prior to this transaction, no
         minority interest in USNCN had been recorded, as losses
         applicable to the minority interest in USNCN exceeded the
         minority interest in the equity capital of USNCN, and there was
         no obligation of the minority interest to make good on such
         losses.

19.      COMMITMENTS

         In 1995 and 1996, the Company entered into agreements with two
         independent telecommunications companies ("TelCos") to allow the
         Company to resell the TelCos local telephone service in various
         regional markets. The agreements have terms of up to ten years
         and contain minimum purchase commitments of local access lines,
         ranging from zero to 150,000 lines. These commitments are
         measured by the number of lines in place on the last day of each
         12-month period. The agreements allow for ramp-up periods before
         any commitment levels are required to be met. So long as the
         Company maintains cumulative net shortfalls lower than
         established caps, no payments will be due to the TelCos other
         than for normal usage. Even if no lines were sold by the
         Company, the earliest required payment for any shortfall amount
         is in 1999.

         In July 1996, the Company entered into an agreement with a third
         telecommunications company to allow the Company to resell long
         distance telephone service. The agreement is for a term of 33
         months and contains an annual purchase commitment of $12
         million, with a minimum monthly commitment of $600,000 to
         qualify for the contract rates. The agreement allows for a
         ramp-up period before commitment levels are required to be met.

         In 1994, USNCN executed an exclusive agreement with an
         independent telecommunications company ("TelCo One"), whereby
         TelCo One allows USNCN to establish a local private network on
         its infrastructure in which to provide service to customers. The
         majority of USNCN's local service customers are provided access
         to this network and, accordingly, a substantial portion of
         USNCN's revenue is earned through the use of these access
         rights. Under this agreement, TelCo One provides network
         maintenance and access to telephone switches. The initial term
         of the agreement expires in 2004.


20.      FUTURE OPERATING PLANS

         Although the Company had working capital of approximately $52.4
         million and total redeemable preferred stock and common
         stockholders' deficit of approximately $6.4 million, projected
         cash usage in 1997 combined with an anticipated net loss in
         1997, absent the infusion of additional capital resources, is
         anticipated to fully deplete the Company's working capital prior
         to December 31, 1997. Such events would raise substantial doubt
         about the Company's ability to continue as a going concern.
         Although the Company's management believes that the Company will
         be able to raise sufficient funds, through capital contributions
         or additional equity or debt financings, to meet its operating
         expenses and other cash requirements, there can be no assurance
         that the Company would be able to complete such contributions or
         financing, or that any such contributions or financing would be
         completed on terms satisfactory to the Company.

21.      CONTINGENCIES

         LOSS CONTINGENCY - In April 1995, a derivative action was filed
         by a minority interest owner of USNCN against the Company and
         specific officers and directors. In July 1996, the Company
         settled the dispute for $1.7 million.

         GAIN CONTINGENCY - In 1995, USNCN submitted a claim of
         approximately $1.4 million with TelCo One requesting that
         certain revenues, purportedly not billed by TelCo One to its
         USNCN customers, be paid to USNCN. During 1996, USNCN has
         recorded $867,000 of this claim as revenue. TelCo One is in the
         process of reviewing USNCN's remaining claim and has not
         formally concluded on the amount or terms of a settlement. While
         USNCN believes its claim has merit, it is unable to predict, at
         this time, whether they will be successful in fully resolving
         this matter favorably.

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