ILLUMINET HOLDINGS INC, 424B4, 1999-10-12

ILLUMINET HOLDINGS INC
424B4, 1999-10-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-85779
PROSPECTUS
3,900,000 Shares

LOGO

COMMON STOCK
------------------------

ILLUMINET HOLDINGS, INC. IS OFFERING 3,900,000 SHARES OF ITS COMMON STOCK. THIS
IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES.

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

OUR COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "ILUM."

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 11.
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PRICE $19 A SHARE

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

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.......................... $19.00 $1.33 $17.67
Total.............................. $74,100,000 $5,187,000 $68,913,000
</TABLE>

We have granted the underwriters the right to purchase up to an additional
585,000 shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
October 14, 1999.

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

MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE

October 7, 1999
<PAGE> 2

[INSIDE FRONT COVER]

Inside Front Cover

A diagram illustrating SS7 technology, the services Illuminet provides and
how those services relate to Illuminet's network and other signaling networks.

Fold-Out

Two maps of the United States, one showing the locations of the signal
transfer points owned by Illuminet, those owned by third parties that are
accessed by Illuminet and other significant components of Illuminet's SS7
network, and the second showing the numerous customer switches throughout the
United States that are connected to Illuminet's network.
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................. 5
Risk Factors........................ 11
Use of Proceeds..................... 19
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 21
Selected Consolidated Financial and
Other Data........................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 24
Business............................ 34
Management.......................... 47
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders.............. 55
Description of Capital Stock........ 57
United States Federal Tax
Consequences to Non-U.S. Holders
of Common Stock................... 61
Shares Eligible for Future Sale..... 64
Underwriters........................ 65
Legal Matters....................... 67
Experts............................. 67
Glossary............................ 68
Index to Consolidated Financial
Statements........................ F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. In this prospectus, Illuminet
Holdings, Inc., together with its predecessors and subsidiaries, is referred to
as "we," "us" or "Illuminet," unless the context indicates otherwise.

UNTIL NOVEMBER 1, 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

Our principal executive offices are located at 4501 Intelco Loop, S.E.,
Lacey, Washington 98503 and our telephone number is (360) 493-6000. Our website
address is http://www.illuminet.com. The information on our website is not
incorporated by reference into this prospectus.

3
<PAGE> 4

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this document, including the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," based on our management's beliefs and assumptions
and on information currently available to our management. Forward-looking
statements include the information concerning our possible or assumed future
results of operations, business strategies, financing plans, competitive
position, potential growth opportunities, benefits resulting from the offering
and the effects of competition. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of
forward-looking terms such as the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions.

Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any
forward-looking statements. We do not have any intention or obligation to update
forward-looking statements after we distribute this prospectus.

You should understand that many important factors, in addition to those
discussed elsewhere in this prospectus, could cause our results to differ
materially from those expressed in forward-looking statements. These factors
include our competitive environment, economic and other conditions in the
markets in which we operate, changes in or developments under laws, regulations,
licensing requirements or telecommunications standards, our Year 2000 issues,
Year 2000 issues of third parties we work with and cyclical and seasonal
fluctuations in our operating results.

WHERE YOU CAN FIND MORE INFORMATION

This prospectus is part of a registration statement on Form S-1 that we
filed with the SEC. As allowed by SEC rules, this prospectus does not contain
all of the information included in that registration statement. Our descriptions
in this prospectus concerning the contents of any contract, agreement or
document are not necessarily complete. For those contracts, agreements or
documents that we filed as exhibits to that registration statement, you should
read the exhibits for a more complete understanding of the document or subject
matter involved. You may read and copy any document we file with the SEC,
including that registration statement, at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the SEC's public reference room. You
may also request copies of those documents, upon payment of a duplicating fee,
by writing to the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 or
obtain copies of such documents over the Internet at the SEC's website at
http://www.sec.gov.

We intend to furnish our stockholders with annual reports containing
audited financial statements and quarterly reports containing unaudited interim
financial information for the first three quarters of each fiscal year.

4
<PAGE> 5

SUMMARY

This summary highlights some of the information in this prospectus and
summarizes the material terms of this offering. It is not complete and may not
contain all of the information that you should consider before deciding to
purchase our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" and the financial statements and the notes to those
statements.

ILLUMINET

OUR COMPANY

We operate the largest unaffiliated Signaling System 7 ("SS7") network in
the United States and are a leading provider of complementary intelligent
network and SS7 services to telecommunications carriers. Connection to our
network gives carriers access to the system of signaling networks of nearly the
entire U.S. public-switched telecommunications infrastructure through a single
source.

SS7 is the industry standard used by almost every switched telephone
network operator in the United States and Canada to identify available network
routes and designate the circuits to be used for each individual telephone call.
SS7 networks also provide access to intelligent network services, such as caller
identification, calling card validation and other specialized database access
functions, all of which are performed in the seconds it takes to complete a
call. SS7 networks are specialized packet-switched data networks that provide
these control functions and services in parallel with separate voice networks.

Through our SS7 network, we provide:

- SS7 connectivity, switching and transport; and

- intelligent network services, including local number portability and
support for roaming between wireless carriers and various other
specialized database services.

Also, we serve the telecommunications industry with:

- clearinghouse services to facilitate payment among telecommunications
carriers; and

- network usage software applications.

Our network is composed of specialized SS7 switches, sophisticated
computers and databases strategically located across the country. These elements
interconnect our customers and all of the largest U.S. telecommunications
carriers through leased lines. Our network serves over 600 network customers,
including incumbent local exchange carriers, competitive local exchange
carriers, long distance companies, wireless telecommunications providers and
Internet service providers.

We have been a provider of telecommunications database services since 1981
and of critical SS7 network services since 1990. In 1998, we generated revenues
of $71.9 million, operating income of $9.5 million and net income of $5.3
million.

Our competitive strengths include:

- COST-EFFECTIVE ACCESS TO SS7 NETWORK AND INTELLIGENT NETWORK SERVICES. We
provide our customers cost-effective connectivity to the signaling
networks of nearly the entire U.S. public-switched telecommunications
infrastructure and an array of network-enabled services through a single
source. We believe most of our customers choose not to build in-house SS7
networks due to the significant capital and technical expertise required
to install and manage necessary SS7 connections with the largest U.S.
telecommunications carriers.

independent telephone companies and interexchange carriers. We believe
that the need for such broad relationships poses a significant barrier to
entry for other potential SS7 service providers.

- EXTENSIVE EXPERIENCE IN OFFERING CRITICAL SS7 SERVICES. SS7 signaling is
an advanced technology that is essential in providing telecommunications
services and presents significant operating complexities. We believe that
our customers would be reluctant to outsource this critical function to
other less established SS7 service providers or to attempt to manage
these functions in-house.

- INDEPENDENCE AND NEUTRALITY IN THE TELECOMMUNICATIONS MARKETPLACE. As the
largest non-carrier affiliated SS7 network provider, we have fostered
business relationships with existing and emerging carriers, both wireline
and wireless, and do not compete with them in providing services to their
residential and business customers. We believe that our independence and
neutrality significantly enhance our attractiveness to the entire
industry as a provider of outsourced SS7 services.

- PROVEN BUSINESS MODEL THAT GENERATES PROFITABLE AND RECURRING REVENUE
STREAMS. Our network provides us with a profitable base of recurring
service revenue, while serving as an established platform for additional
growth through the delivery of new and enhanced services. We believe that
the costs incurred by a carrier in moving to a competitor's SS7 network
are relatively high, further strengthening the stability of our revenue
base.

OUR INDUSTRY

Key industry trends that are expanding our business opportunities include:

- DEREGULATION. Deregulation has opened telecommunications markets to many
new service providers, many of which use our SS7 services. In addition,
deregulation has opened specific service opportunities to competition,
such as the provision of toll-free number database services, line
information database services and local number portability.

- GROWING NEED FOR VALUE-ADDED SERVICES. Increased competition in the
telecommunications industry is forcing carriers to differentiate
themselves by providing advanced, value-added services, such as personal
toll-free numbers, caller identification and billing validation services.
Providing these services requires SS7 connectivity and simultaneous
database access through an SS7 network. Most U.S. independent local
exchange carriers and a significant number of competitive local exchange
carriers use us to provide these types of services.

- MANDATED LOCAL NUMBER PORTABILITY. In 1996, the FCC mandated that
telephone subscribers be allowed to keep their existing telephone numbers
when changing local service providers. The FCC required that this mandate
be implemented beginning in 1999 for wireline carriers and in 2002 for
wireless carriers. To provide this service, a carrier must be able to
access a local number registry database to route and complete a call.
Many competitive local exchange carriers, independent local exchange
carriers and wireless carriers obtain this database access service
through us.

GROWTH STRATEGY

Our growth strategy consists of the following key elements:

- PROVIDE NEW SERVICES TO HELP DIFFERENTIATE OUR CUSTOMERS FROM THEIR
COMPETITORS. In addition to our standard services, we intend to
capitalize on the scalability of our network by developing new and
enhanced services and applications that will enable our customers to
broaden their service offerings and improve their market position.

- BECOME THE PREFERRED PROVIDER OF SS7-BASED SERVICES TO EMERGING INTERNET
PROTOCOL-BASED CARRIERS. We believe that providing carrier-class
intelligent network capabilities is one of the biggest challenges facing
emerging Internet protocol-based carriers. We are actively working with
hardware providers, including Cisco and Lucent, to certify new
SS7-related equipment for emerging Internet protocol-based carriers. We
intend to continue to position ourselves to provide intelligent network
capabilities using emerging Internet protocol-based technologies.

- STRENGTHEN OUR MARKET PRESENCE THROUGH SELECT ACQUISITIONS. We will
actively seek to acquire companies that possess complementary service
offerings. Through select acquisitions, we believe we can combine new,
complementary services with our existing product line and extensive
network. This will increase our market reach and allow us to quickly
broaden our service portfolio.
7
<PAGE> 8

THE OFFERING

Unless otherwise indicated, all information in this prospectus assumes (1)
the issuance of 204,941 additional shares of Class A common stock upon the
automatic conversion of our Series A preferred stock upon completion of the
offering, (2) the issuance on October 4, 1999 of 760,524 shares of Class A
common stock in connection with the conversion of our debentures, (3)
optionholders do not exercise any outstanding options, (4) the underwriters do
not exercise their over-allotment option and (5) the conversion of our
outstanding shares of Class A common stock into 25,368,780 shares of common
stock, which will occur 181 days after the date of this prospectus. See
"Description of Capital Stock" for a discussion of the terms of our common stock
and Series A preferred stock and for a description of our stock restructuring
and our debenture conversion.

Common stock offered.......... 3,900,000 shares

Common stock to be outstanding
after this offering......... 29,268,780 shares

Over-allotment option......... 585,000 shares

Use of proceeds............... We intend to use the net proceeds:

- to fund potential acquisitions;

- to develop new and improved services;

- to maintain and expand our network equipment
and infrastructure; and

- for general corporate purposes.

We cannot specify with certainty all of the
particular uses for the net proceeds. See "Use
of Proceeds."

Dividend policy............... We do not anticipate paying any cash dividends
in the foreseeable future. Any future
determination to pay cash dividends will be at
the discretion of the board of directors. The
declaration and payment of dividends will
depend upon our financial condition, operating
results, contractual restrictions, capital
requirements, business prospects and other
factors the board of directors deems relevant.

Proposed Nasdaq National
Market symbol................. ILUM
8
<PAGE> 9

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

We derived the following summary consolidated financial data for the years
ended December 31, 1996, 1997 and 1998 from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent auditors.
We derived the summary consolidated financial data as of June 30, 1999 and for
the six months ended June 30, 1998 and 1999 from our unaudited consolidated
financial statements, which, in our opinion, reflect all adjustments (consisting
of only normal and recurring accruals) necessary to present fairly our financial
position and results of operations for those periods. Other data are unaudited.
Interim results do not necessarily indicate the results that you may expect for
any other interim period or for the full year. You should read this summary
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the notes to those financial statements that are included in the
back of this prospectus.

The pro forma as adjusted balance sheet data as of June 30, 1999 reflect
the stock restructuring, the debenture conversion and redemption and our receipt
of the estimated net proceeds from the sale of 3,900,000 shares of common stock
in this offering, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.

You should read the following information with the data in the table on the
next page:

- In February 1996, we merged with Independent Telecommunications Network,
Inc. We accounted for the merger as a purchase business combination.
Accordingly, the operating results of Independent Telecommunications
Network, Inc., including carrier costs, are only included in our
operating results since the merger.

- The 1996 income tax provision and the 1997 income tax benefit reflect the
benefits of using net operating loss carryforwards of $1.0 million and
$2.4 million, respectively. In addition, the 1997 income tax benefit
includes a benefit of $.9 million attributable to the reversal of
substantially all of the remaining previously recorded deferred tax
valuation allowance due to improved operating results.

- Long-term obligations, less current portion includes (1) obligations
under capital leases, less current portion, and (2) long-term debt, less
current portion.

- Pro forma earnings per share and pro forma weighted-average common share
amounts reflect amounts that would have been reported had the stock
restructuring and the automatic conversion of each share of Class A
common stock into four shares of common stock occurred on January 1,
1996. Pro forma amounts are unaudited.

- Capital expenditures includes purchases and capital leases of property
and equipment.

- Customers is the number of entities that received a bill from us,
including, in some cases, subsidiaries of consolidated groups and
individual locations of a single company.

- Signaling points represents the number of connections to our network.
These points may be either individual switches or connections to other
companies' signaling transfer points with networks attached to them.
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<PAGE> 10

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Network services................... $ 29,434 $ 44,117 $ 60,274 $ 26,600 $ 41,562
Clearinghouse services............. 7,896 6,723 6,232 3,463 3,052
Network usage software
applications.................... 558 3,468 5,406 1,523 502
---------- ---------- ---------- ---------- ----------
Total revenues.................. 37,888 54,308 71,912 31,586 45,116
Expenses:
Carrier costs...................... 9,358 15,313 22,983 10,752 13,598
Operating.......................... 11,139 14,979 19,768 8,547 12,487
Selling, general and
administrative.................. 7,774 8,873 10,287 4,540 6,128
Depreciation and amortization...... 5,714 7,354 9,372 3,783 5,317
---------- ---------- ---------- ---------- ----------
Total expenses.................. 33,985 46,519 62,410 27,622 37,530
---------- ---------- ---------- ---------- ----------
Operating income..................... 3,903 7,789 9,502 3,964 7,586
Interest expense, net................ 838 808 746 225 392
---------- ---------- ---------- ---------- ----------
Income before income taxes........... 3,065 6,981 8,756 3,739 7,194
Income tax provision (benefit)....... 112 (676) 3,463 1,388 2,734
---------- ---------- ---------- ---------- ----------
Net income........................... $ 2,953 $ 7,657 $ 5,293 $ 2,351 $ 4,460
========== ========== ========== ========== ==========
PER SHARE DATA:
Pro forma earnings per
share - basic...................... $ .15 $ .36 $ .25 $ .11 $ .21
Pro forma earnings per
share - diluted.................... $ .14 $ .32 $ .22 $ .10 $ .18
Pro forma weighted-average common
shares - basic..................... 19,980,368 21,182,036 21,425,540 21,388,324 21,465,452
Pro forma weighted-average common
shares - diluted................... 23,889,136 25,586,660 25,989,440 25,988,024 26,124,892

OTHER FINANCIAL DATA:
Capital expenditures................. $ 6,727 $ 10,121 $ 17,870 $ 5,579 $ 5,830

OTHER DATA:
Customers............................ 311 417 544 436 655
Signaling points..................... 388 533 686 627 737
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $11,347 $ 79,296
Property and equipment, net................................. 44,549 44,549
Total assets................................................ 91,828 159,777
Long-term obligations, less current portion................. 20,734 12,710
Stockholders' equity........................................ 40,832 117,273
</TABLE>

10
<PAGE> 11

RISK FACTORS

You should carefully consider the risks described below before making an
investment in our common stock. The risks described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently believe to be immaterial may also impair our business
operations. If any of the following risks occurs, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock could decline and you may lose all
or part of your investment.

SYSTEM FAILURES, DELAYS AND OTHER PROBLEMS COULD HARM OUR REPUTATION AND
BUSINESS, CAUSE US TO LOSE CUSTOMERS AND EXPOSE US TO CUSTOMER LIABILITY.

Our success depends on our ability to provide reliable services. Our
operations could be interrupted by any damage to or failure of:

- our network;

- our connections to third parties; and

- our computer hardware or software or our customers' or suppliers'
computer hardware or software.

Our systems and operations are also vulnerable to damage or interruption
from:

- power loss, transmission cable cuts and other telecommunications
failures;

- fires, earthquakes, floods and other natural disasters;

- computer viruses or software defects;

- physical or electronic break-ins, sabotage, intentional acts of vandalism
and similar events;

- errors by our employees or third-party service providers; and

- Year 2000 problems.

Any such damage or failure or the occurrence of any of these events could
disrupt the operation of our network and the provision of our services and
result in the loss of current and potential customers.

For example, on two occasions, once in 1997 and once in 1998, flaws in
third-party software caused network outages that disrupted the ability of our
customers to connect through our network to other parts of the U.S.
telecommunications system. As a result of these outages, some of our customers
reduced their usage of our network.

Our contracts with customers generally contain provisions designed to limit
our exposure to potential product liability claims. These provisions include
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. In addition, our agreements generally
limit the amounts recoverable for damages to the amounts paid by the customer to
us for the product or service giving rise to the damages. However, a court or
arbitrator may not enforce these contractual limitations on liability, and we
may be subject to claims based on errors in our software or mistakes in
performing our services. Any of those claims, including any relating to damages
to our customers' internal systems, whether or not successful, could harm our
business by increasing our costs and distracting our management.

OUR RELIANCE ON THIRD PARTY COMMUNICATIONS INFRASTRUCTURE, HARDWARE AND SOFTWARE
EXPOSES US TO A VARIETY OF RISKS WE CANNOT CONTROL.

Our success will depend on our network infrastructure, including the
capacity leased from telecommunications suppliers. In particular, we rely on
AT&T, MCI WorldCom, Sprint and other

11
<PAGE> 12

telecommunications providers for leased long-haul and local loop transmission
capacity. These companies provide the dedicated links that connect our network
components to each other and to our customers.

Our business also depends upon the capacity, reliability and security of
the infrastructure owned by third parties that is used to connect telephone
calls. Specifically, we currently lease capacity from regional partners on eight
of the twelve mated pairs of SS7 signal transfer points that comprise our
network. We have no control over the operation, quality or maintenance of a
significant portion of that infrastructure and whether or not those third
parties will upgrade or improve their equipment.

We depend on these companies to maintain the operational integrity of our
connections. If one or more of these companies is unable or unwilling to supply
or expand its levels of service to us in the future, our operations could be
severely interrupted. In addition, rapid changes in the telecommunications
industry have led to the merging of many companies. These mergers may cause the
availability, pricing and quality of the services we use to vary and could cause
the length of time it takes to deliver the services that we use to increase
significantly. For example, one of our regional partners was recently acquired
by another company and has terminated its lease to us of capacity on a pair of
signal transfer points.

We rely on links, equipment and software provided to us from our vendors,
the most important of which are gateway equipment and software from Tekelec and
Hewlett-Packard. We cannot assure you that we will be able to continue to
purchase equipment from these vendors on acceptable terms, if at all. If we are
unable to maintain current purchasing terms or ensure product availability with
these vendors, we may lose customers and experience an increase in costs in
seeking alternative suppliers of products and services.

THE COSTS AND DIFFICULTIES OF ACQUIRING AND INTEGRATING COMPLEMENTARY BUSINESSES
AND TECHNOLOGIES COULD IMPEDE OUR FUTURE GROWTH AND ADVERSELY AFFECT OUR
COMPETITIVENESS.

We may make investments in complementary companies, technologies or other
assets, exposing us to several risks, including:

- greater than expected costs and management time and effort involved in
identifying, completing and integrating acquisitions;

- potential disruption of our ongoing business and difficulty in
maintaining our standards, controls, information systems and procedures;

- entering into markets and acquiring technologies in areas in which we
have little experience;

- the inability to successfully integrate the services, products and
personnel of any acquisition into our operations;

- a need to incur debt, which may reduce our cash available for operations
and other uses, or issue equity securities, which may dilute the
ownership interests of existing stockholders; and

- realizing little, if any, return on our investment.

OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF OUR SS7 NETWORK AND THE
TELECOMMUNICATIONS MARKET'S CONTINUING USE OF SS7 TECHNOLOGY.

Our future growth depends on the commercial success and reliability of our
SS7 network. Our SS7 network is a vital component of our intelligent network
services, which have been an increasing source of revenue for us. Our business
will suffer if our target customers do not use our SS7 network. Our future
financial performance will also depend on the successful development,
introduction and customer acceptance of new and enhanced SS7-based products and
services. We are not certain that our target

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<PAGE> 13

customers will choose our particular SS7 network solution or continue to use our
SS7 network. In the future, we may not be successful in marketing our SS7
network or any new or enhanced products or services.

WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING EMPLOYEES WITH THE REQUISITE
SKILLS TO EXECUTE OUR GROWTH PLANS.

Our success depends, in part, on the continued service of our existing
management and technical personnel. If a significant number of those individuals
are unable or unwilling to continue in their present positions, we will have
difficulty in maintaining and enhancing our networks and services. This may
adversely affect our operating results and growth prospects.

In addition, we have experienced, and we expect to continue to experience,
difficulty in hiring and retaining highly skilled employees. Specifically, we
centralize a large portion of our technical operations in geographic areas in
which competition for technical talent is intense, due to the existence of
competing employers seeking employees with similar sets of skills. Our continued
success depends on our ability to attract, retain and motivate highly skilled
employees, particularly engineering and technical personnel. Failure to do so
may adversely affect our ability to expand our network and enhance our products
and services.

IF WE FAIL TO ADEQUATELY ADDRESS POTENTIAL YEAR 2000 PROBLEMS, WE COULD
EXPERIENCE MAJOR SYSTEM FAILURES.

Our core business depends on hardware and software systems that interact
with customers, including SS7 network signaling, database information and
network usage software applications. If modifications and replacements to our
hardware and software systems are needed to address the Year 2000 issue and are
not made or are not completed in a timely manner, the Year 2000 issue could have
a material impact on our operations.

We also rely on networks, including the Internet, the public-switched
telephone network and private data networks, and computer hardware and software,
owned and maintained by third parties, some of which may not be Year 2000
compliant. The failure of a network or computer hardware or software owned and
maintained by a third party because it is not Year 2000 compliant could
adversely affect the operations of our systems. In addition, to the extent our
vendors and suppliers fail to certify that they are Year 2000 compliant, we may
find it necessary to terminate our relationships with them. If we terminate
these relationships, we cannot assure you that we will be able to find suitable
replacement vendors or suppliers on terms favorable to us, if at all. Our
failure to find replacement vendors or suppliers could increase our costs or
disrupt our ability to provide services to our customers. We may face claims
based on Year 2000 issues arising from our customers' integration of multiple
products and services, including ours, within an overall system. For information
regarding our efforts to prepare for Year 2000 issues, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Year 2000."

IF WE DO NOT ADAPT TO RAPID TECHNOLOGICAL CHANGE IN THE TELECOMMUNICATIONS
INDUSTRY, WE COULD LOSE CUSTOMERS OR MARKET SHARE.

Our industry is characterized by rapid technological change and frequent
new product and service announcements. Significant technological changes could
make our technology obsolete. We must adapt to our rapidly changing market by
continually improving the responsiveness, reliability and features of our
network and by developing new network features, services and applications to
meet changing customer needs. We cannot assure you that we will be able to adapt
to these challenges or respond successfully or in a cost-effective way to
adequately meet them. Our failure to do so would adversely affect our ability to
compete and retain customers or market share.

13
<PAGE> 14

We sell our products and services primarily to traditional
telecommunications companies. Emerging companies are providing convergent
Internet protocol-based telecommunications services. Our future revenues and
profits, if any, could depend upon our ability to provide products and services
to these Internet protocol-based telephony providers.

THE MARKET FOR SS7 NETWORK SERVICES AND RELATED PRODUCTS IS INTENSELY
COMPETITIVE AND MANY OF OUR COMPETITORS HAVE SIGNIFICANT ADVANTAGES THAT COULD
ADVERSELY AFFECT OUR BUSINESS.

We compete in markets that are intensely competitive and rapidly changing.
Increased competition could result in fewer customer orders, reduced gross
margins and loss of market share, any of which could harm our business. We face
competition from large, well-funded regional providers of SS7 network services
and related products, such as regional Bell operating companies, GTE and
Southern New England Telephone. We are aware of major Internet service
providers, software developers and smaller entrepreneurial companies that are
focusing significant resources on developing and marketing products and services
that will compete with us. We anticipate continued growth of competition in the
telecommunications industry and the entrance of new competitors into our
business. We expect that competition will increase in the near term and that our
primary long-term competitors may not yet have entered the market. Many of our
current and potential competitors have significantly more employees and greater
financial, technical, marketing and other resources than we do. Our competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements than we can. Also, many of our current and potential
competitors have greater name recognition and more extensive customer bases that
they can use to their advantage.

OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPACT OUR ABILITY TO MAINTAIN PROFITABILITY OR POSITIVE CASH FLOW.

Competition and industry consolidation could result in significant pricing
pressure. This pricing pressure could cause large reductions in the selling
price of our services. For example, our competitors may provide customers with
reduced communications costs for Internet access or private network services,
reducing the overall cost of solutions and significantly increasing pricing
pressures on us. We may not be able to offset the effects of any price
reductions by increasing the number of our customers, generating higher revenues
from enhanced services or reducing our costs. We believe that the business of
providing network connectivity and related network services will likely see
increased consolidation in the future. Consolidation could decrease selling
prices and increase competition in these industries, which could erode our
market share, revenues and operating margins.

THE INABILITY OF OUR CUSTOMERS TO SUCCESSFULLY IMPLEMENT OUR SERVICES WITH THEIR
EXISTING SYSTEMS COULD ADVERSELY AFFECT OUR BUSINESS.

Significant technical challenges exist in our business because many of our
customers:

- purchase and implement SS7 network services in phases;

- deploy SS7 connectivity across a variety of telecommunication switches
and routes; and

- integrate our SS7 network with a number of legacy systems, third-party
software applications and engineering tools.

Customer implementation currently requires participation by our order
management and our engineering and operations groups, each of which has limited
resources. Some customers may also require us to develop costly customized
features or capabilities, which increase our costs and consume our limited
customer service and support resources. Also, we typically charge one-time flat
rate fees for initially connecting a customer to our SS7 network and a monthly
recurring flat rate fee after the connection is established. If new or existing
customers have difficulty deploying our products or require

14
<PAGE> 15

significant amounts of our engineering service support, we may experience
reduced operating margins. Our customers' ability to deploy our network services
to their own customers and integrate them successfully within their systems
depends on our customers' capabilities and the complexity involved. Difficulty
in deploying those services could reduce our operating margins due to increased
customer support and could cause potential delays in recognizing revenue until
the services are implemented.

CAPACITY LIMITS ON OUR TECHNOLOGY AND NETWORK HARDWARE AND SOFTWARE MAY BE
DIFFICULT TO PROJECT AND WE MAY NOT BE ABLE TO EXPAND AND UPGRADE OUR SYSTEMS TO
MEET INCREASED USE.

As traffic from our customers through our network increases, we will need
to expand and upgrade our technology and network hardware and software. We may
not be able to accurately project the rate of increase in usage on our network.
In addition, we may not be able to expand and upgrade, in a timely manner, our
systems and network hardware and software capabilities to accommodate increased
traffic on our network. If we do not appropriately expand and upgrade our
systems and network hardware and software, we may lose customers and revenues.

WE USE A STRATEGIC RELATIONSHIP TO IMPLEMENT AND SELL OUR NETWORK USAGE SOFTWARE
APPLICATIONS. WE COULD LOSE REVENUES OR INCUR SIGNIFICANT COSTS TO RETAIN
REVENUES IF THIS RELATIONSHIP IS TERMINATED.

We have a non-exclusive agreement with Hewlett-Packard to sell our network
usage software applications. The agreement may be terminated with limited notice
by either party without cause or penalty. In the past, we have received
significant revenues under this agreement. There is no guarantee that
Hewlett-Packard will continue to market our network usage software applications.
If this relationship is terminated or materially changes, we would be required
to devote substantial new resources to the distribution, sales and marketing,
implementation and support of our network usage software applications and our
efforts may not be as effective as those of Hewlett-Packard.

THERE IS A LIMITED MARKET FOR OUR EXISTING NETWORK USAGE SOFTWARE APPLICATIONS.

We derived 7% and 1% of our revenues in 1998 and the first six months of
1999, respectively, from sales and maintenance of our network usage software
applications. Current users of these software products include most of the
regional Bell operating companies, as well as other large telecommunications
carriers. With initial market sales essentially completed, our ability to derive
continued revenue from our network usage software applications is limited,
unless we can develop new derivative products.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS.

We may require more capital in the future to:

- fund our operations;

- finance investments in equipment and corporate infrastructure needed to
maintain and expand our network;

- enhance and expand the range of services we offer; and

- respond to competitive pressures and potential opportunities, such as
investments, acquisitions and international expansion.

We cannot assure you that additional financing will be available on terms
favorable to us, or at all. The terms of available financing may place limits on
our financial and operating flexibility. If adequate funds are not available on
acceptable terms, we may be forced to reduce our operations or abandon expansion
opportunities. Moreover, even if we are able to continue our operations, the
failure to obtain additional financing could reduce our competitiveness as our
competitors may provide better maintained

15
<PAGE> 16

networks or offer an expanded range of services. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

REGULATIONS AFFECTING OUR CUSTOMERS AND FUTURE REGULATIONS TO WHICH WE MAY BE
SUBJECT MAY ADVERSELY AFFECT OUR BUSINESS.

Although we are not subject to telecommunications industry regulations, the
business of our customers is subject to regulation that indirectly affects our
business. The U.S. telecommunications industry has been subject to continuing
deregulation since 1984, when AT&T was required to divest ownership of the Bell
telephone system. We cannot predict when, or upon what terms and conditions,
further regulation or deregulation might occur or the effect of regulation or
deregulation on our business. Several services that we offer may be indirectly
affected by regulations imposed upon potential users of those services, which
may increase our costs of operations. In addition, future services we may
provide could be subject to direct regulation. See "Business -- Regulation."

FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT AND CAUSE
VOLATILITY IN OUR STOCK PRICE.

Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of analysts and investors and, as a result, the
price of our common stock may fall or become volatile. Factors that could cause
quarterly fluctuations include:

- seasonal fluctuations in consumer use of telecommunications services;

- varying rates at which telecommunications companies, telephony resellers
and Internet service providers use our services;

- loss of customers through industry consolidation;

- the timing and execution of individual contracts, particularly large
contracts;

- significant lead times before a product or service begins generating
revenues;

- volatile economic conditions specific to the telecommunications industry;
and

- an inability to collect our accounts receivable.

WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING AND WE
CANNOT GUARANTEE THAT OUR USE OF THE PROCEEDS WILL ENHANCE THE VALUE OF YOUR
INVESTMENT.

Our management will have broad discretion over the allocation of the net
proceeds from the offering, as well as over the timing of their expenditure. As
a result, you will be relying on our management's judgment with only limited
information about its specific intentions for the use of proceeds. The failure
of our management to apply the net proceeds effectively could adversely affect
our future prospects. See "Use of Proceeds."

OUR CERTIFICATE OF INCORPORATION, BYLAWS, SHAREHOLDER RIGHTS PLAN AND DELAWARE
LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.

Provisions of our certificate of incorporation and bylaws and Delaware law
may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. See "Description of Capital Stock." These provisions of our
certificate of incorporation and bylaws:

- establish a classified board of directors, of which only a portion of the
total number of directors will be elected at each annual meeting;

16
<PAGE> 17

- authorize the board to issue preferred stock with substantial voting
rights; and

- prohibit cumulative voting in the election of directors.

In addition, we have a shareholder rights plan that could significantly
discourage, delay or prevent a merger or acquisition. The rights become
exercisable if a person or group acquires or makes a tender offer for more than
20% of our outstanding common stock. If any of those events occurs, each right
entitles the holder (other than the acquiror) to purchase for $150 our common
stock or, in some instances, stock of the acquiring entity, that would be worth
$300. The rights expire on November 20, 2008, unless we redeem them earlier.

We have also chosen to be subject to Section 203 of the Delaware General
Corporation Law, which prevents a stockholder of more than 15% of a company's
voting stock from entering into certain business combinations with that company.

OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED BEFORE THIS OFFERING AND THE STOCK
PRICES FOR COMPANIES IN OUR INDUSTRY HAVE BEEN HIGHLY VOLATILE.

Our common stock has not been publicly traded prior to the offering. Our
common stock (other than Class A common stock) has been approved for quotation
on the Nasdaq National Market at the time of the offering. However, an active
trading market may not develop or be sustained. In recent years, the market for
stock in technology, telecommunications and computer companies has been highly
volatile. The common stock price after the offering may be volatile and may
fluctuate due to factors such as:

- actual or anticipated fluctuations in quarterly and annual results;

- announcements of technological innovations;

- introduction of new services;

- mergers and strategic alliances in the telecommunications industry; and

- changes in government regulation.

FUTURE SALES BY EXISTING STOCKHOLDERS COULD CAUSE THE PRICE OF OUR COMMON STOCK
TO DECLINE.

Sales of a large number of shares of our common stock in the public market
following this offering could adversely affect the market price for our common
stock or impair our ability to raise capital through an offering of equity
securities. The number of shares of common stock available for sale in the
public market is limited by legal and contractual restrictions. The holders of
3,950,318 shares of Class A common stock have agreed not to sell their shares
for a period of 180 days after the date of this prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters. The remaining 2,391,877 shares of our Class A common stock will
not be tradeable in the public market for 180 days after the date of this
prospectus when each share of Class A common stock automatically converts into
four shares of common stock. Immediately after this offering, we will have
outstanding the 3,900,000 shares of our common stock sold in this offering
(assuming the underwriters do not exercise their over-allotment option) and
6,342,195 shares of Class A common stock which will convert into 25,368,780
shares of common stock. We will also have reserved an additional 3,804,941
shares of common stock for issuance under our stock option plan. All of the
shares sold in this offering will be freely tradeable without restriction or
further registration under the federal securities laws.

Upon expiration of the 180-day period referred to above, all shares of
Class A common stock will automatically convert into four shares of common stock
and will be freely transferable without restriction

17
<PAGE> 18

under the Securities Act, unless they are held by persons that have control
relationships with us. See "Shares Eligible for Future Sale."

Shortly after the completion of this offering, we intend to file a
registration statement under the federal securities laws to permit the shares
reserved for issuance under our stock option plan to be sold in the public
market.

YOU WILL HAVE IMMEDIATE AND SUBSTANTIAL DILUTION.

If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value. If other security
holders exercise options to purchase our capital stock or convert their
debentures, you will suffer further dilution. See "Dilution."

18
<PAGE> 19

USE OF PROCEEDS

The net proceeds from the offering will be approximately $68.0 million, or
$78.3 million if the underwriters exercise their over-allotment option in full,
after deducting underwriting discounts and commissions and other estimated
expenses.

We intend to use the net proceeds from the offering to fund potential
acquisitions, to develop new and improved services, to maintain and expand our
network and for general corporate purposes. We currently do not have any
agreements, and we are not involved in any negotiations, concerning any
acquisitions. As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the net proceeds we will have after
completion of the offering. The actual amounts we spend will vary significantly
depending on a number of factors, including future revenue growth, if any,
capital expenditures, the amount of cash generated by our operations and other
factors, many of which are beyond our control. Accordingly, our management will
have broad discretion in the application of the net proceeds.

Pending the uses described above, we intend to invest the net proceeds in
direct or guaranteed obligations of the United States, interest-bearing or
investment-grade instruments or certificates of deposit.

DIVIDEND POLICY

We currently intend to retain future earnings, if any, to finance
operations and expand our business. We have never declared or paid any dividends
on our common stock. We do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the board of directors. The declaration and payment of
dividends will depend upon our financial condition, operating results,
contractual restrictions, capital requirements, business prospects and other
factors the board of directors deems relevant. The terms of our secured loan
facilities restrict our ability to declare and pay dividends without the consent
of our lender, unless we meet minimum net worth and cash margin tests.

19
<PAGE> 20

CAPITALIZATION

The following table sets forth our cash and cash equivalents, current
portion of long-term debt and capitalization as of June 30, 1999. We present
this unaudited information:

- on an actual basis;

- on a pro forma basis after giving effect to the stock restructuring, the
conversion of debentures and accrued interest on the debentures into
760,524 shares of Class A common stock, the redemption of the remaining
$.1 million of debentures and accrued interest and the automatic
conversion of the Class A common stock into common stock; and

- on a pro forma as adjusted basis to reflect our receipt of the estimated
net proceeds from this offering.

You should read the capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes to those
financial statements that are included elsewhere in this prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $11,347 $11,283 $ 79,296
======= ======= ========
Current portion of long-term debt and capital lease
obligations............................................. $ 5,186 $ 4,861 $ 4,861
======= ======= ========
Long-term debt, less current portion:
Obligations under capital leases........................ $ 6,170 $ 6,170 $ 6,170
Secured notes payable to Rural Telephone Finance
Cooperative.......................................... 6,540 6,540 6,540
Convertible redeemable subordinated debentures and
related deferred interest payable.................... 8,024 -- --
------- ------- --------
Total long-term debt............................... 20,734 12,710 12,710
------- ------- --------
Stockholders' equity:
Series A convertible preferred stock, par value $.01 per
share, 2,408 shares outstanding, actual, and none
outstanding, pro forma and pro forma as adjusted..... -- -- --
Common stock, par value $.01 per share, 150,000,000
shares authorized and none outstanding, actual,
25,328,780 outstanding pro forma, and 29,228,780
outstanding pro forma as adjusted.................... -- 253 292
Class A common stock, par value $.01 per share,
7,200,000 shares authorized and 5,366,730 shares
outstanding, actual, and none outstanding, pro forma
and pro forma as adjusted............................ 54 -- --
Additional paid-in capital.............................. 12,857 21,085 89,060
Deferred stock-based compensation....................... (359) (359) (359)
Retained earnings....................................... 28,280 28,280 28,280
------- ------- --------
Total stockholders' equity......................... 40,832 49,259 117,273
------- ------- --------
Total capitalization............................ $61,566 $61,969 $129,983
======= ======= ========
</TABLE>

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<PAGE> 21

DILUTION

As of June 30, 1999, our net tangible book value, after giving effect to
our stock restructuring, the debenture conversion and redemption and the
automatic conversion of the Class A common stock to common stock, was $48.5
million, or $1.91 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities, divided by the number of shares of common stock outstanding.
As of June 30, 1999, our net tangible book value, as further adjusted for the
sale of 3,900,000 shares in the offering at the initial public offering price,
and after deducting the underwriting discounts and commissions and other
estimated expenses, would have been approximately $3.99 per share of common
stock. This represents an immediate increase of $2.08 per share to existing
stockholders and an immediate dilution of $15.01 per share to new investors. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $19.00
Net tangible book value per share as of June 30, 1999....... $1.91
Increase in net tangible book value per share attributable
to purchasers in this offering............................ 2.08
-----
Net tangible book value per share after this offering....... 3.99
------
Dilution per share to new investors......................... $15.01
======
</TABLE>

The following table summarizes, as of June 30, 1999, after giving effect to
our stock restructuring, the debenture conversion and redemption and the
automatic conversion of Class A common stock to common stock, the number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid by the existing stockholders and by the
investors purchasing shares of common stock in this offering (before deducting
the underwriting discounts and commissions and other estimated expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 25,328,780 86.7% $20,468,788 21.6% $ .81
New investors................... 3,900,000 13.3 74,100,000 78.4 19.00
---------- ----- ----------- -----
Total................. 29,228,780 100.0% $94,568,788 100.0%
========== ===== =========== =====
</TABLE>

The table above assumes no exercise of stock options outstanding as of June
30, 1999. As of June 30, 1999, there were options to purchase a total of
2,594,148 shares of common stock at a weighted average exercise price of $2.70
per share. To the extent that any of these options are exercised, you will be
diluted further.

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<PAGE> 22

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

We derived the following selected consolidated financial data as of and for
the years ended December 31, 1994, 1995, 1996, 1997 and 1998 from our
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent auditors. We derived the selected consolidated financial data as of
and for the six months ended June 30, 1998 and 1999 from our unaudited
consolidated financial statements, which, in our opinion, reflect all
adjustments (consisting of only normal and recurring accruals) necessary to
present fairly our financial position and results of operations for those
periods. Other data are unaudited. Interim results do not necessarily indicate
the results that you may expect for any other interim period or for the full
year. You should read this summary information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to those financial
statements that are included in the back of this prospectus.

You should read the following information with the data in the table on the
next page:

- Long-term obligations, less current portion includes (1) obligations
under capital leases, less current portion, and (2) long-term debt, less
current portion.

- Earnings (loss) per share-basic is based on net income divided by the
weighted average number of Class A common shares outstanding. Earnings
(loss) per share-diluted includes the dilutive effect of outstanding
Series A preferred stock, debentures and Class A common stock options.

- Pro forma earnings (loss) per share and pro forma weighted-average common
share amounts reflect amounts that would have been reported had the stock
restructuring and the automatic conversion of each share of Class A
common stock into four shares of common stock occurred on January 1,
1994. Pro forma amounts are unaudited.

- Capital expenditures includes purchases and capital leases of property
and equipment.

- Customers is the number of entities that received a bill from us,
including, in some cases, subsidiaries of consolidated groups and
individual locations of a single company. Information prior to 1996 is
not available.

22
<PAGE> 23

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Network services.............. $ 9,701 $ 8,438 $ 29,434 $ 44,117 $ 60,274 $ 26,600 $ 41,562
Clearinghouse services........ 5,640 7,049 7,896 6,723 6,232 3,463 3,052
Network usage software
applications................ -- 1,123 558 3,468 5,406 1,523 502
Other......................... 1,766 494 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............. 17,107 17,104 37,888 54,308 71,912 31,586 45,116
Expenses:
Carrier costs................. -- -- 9,358 15,313 22,983 10,752 13,598
Operating..................... 9,220 9,547 11,139 14,979 19,768 8,547 12,487
Selling, general and
administrative.............. 4,961 6,764 7,774 8,873 10,287 4,540 6,128
Depreciation and
amortization................ 1,992 2,846 5,714 7,354 9,372 3,783 5,317
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total expenses.............. 16,173 19,157 33,985 46,519 62,410 27,622 37,530
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)......... 934 (2,053) 3,903 7,789 9,502 3,964 7,586
Interest expense, net........... 85 169 838 808 746 225 392
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... 849 (2,222) 3,065 6,981 8,756 3,739 7,194
Income tax provision
(benefit)..................... 305 (707) 112 (676) 3,463 1,388 2,734
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 544 $ (1,515) $ 2,953 $ 7,657 $ 5,293 $ 2,351 $ 4,460
=========== =========== =========== =========== =========== =========== ===========
PER SHARE DATA:
Earnings (loss) per
share - basic................. $ .15 $ (.41) $ .59 $ 1.45 $ .99 $ .44 $ .83
Earnings (loss) per
share - diluted............... $ .15 $ (.41) $ .57 $ 1.27 $ .88 $ .39 $ .71
Weighted-average common shares -
basic......................... 3,732,146 3,729,015 4,995,092 5,295,509 5,356,385 5,347,081 5,366,363
Weighted-average common shares -
diluted....................... 3,732,146 3,729,015 5,972,284 6,396,665 6,497,360 6,497,006 6,531,223

Pro forma earnings (loss) per
share - basic................. $ .04 $ (.10) $ .15 $ .36 $ .25 $ .11 $ .21
Pro forma earnings (loss) per
share - diluted............... $ .04 $ (.10) $ .14 $ .32 $ .22 $ .10 $ .18
Pro forma weighted-average
common shares - basic......... 14,928,584 14,916,060 19,980,368 21,182,036 21,425,540 21,388,324 21,465,452
Pro forma weighted-average
common shares - diluted....... 14,928,584 14,916,060 23,889,136 25,586,660 25,989,440 25,988,024 26,124,892

OTHER FINANCIAL DATA:
Capital expenditures............ $ 2,080 $ 1,579 $ 6,727 $ 10,121 $ 17,870 $ 5,579 $ 5,830

OTHER DATA:
Customers....................... 311 417 544 436 655
Signaling points................ 388 533 686 627 737

BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents....... $ 4,126 $ 6,992 $ 12,515 $ 11,167 $ 11,967 $ 10,545 $ 11,347
Property and equipment, net..... 14,006 12,794 31,377 34,715 43,747 36,799 44,549
Total assets.................... 35,586 39,398 70,822 78,026 89,450 80,967 91,828
Long-term obligations, less
current portion............... 4,396 7,638 21,060 18,014 20,742 18,177 20,734
Stockholders' equity............ 13,955 12,419 21,760 30,226 36,192 32,995 40,832
</TABLE>

23
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial
condition and the results of our operations together with our financial
statements and the notes to those financial statements included in the back of
this prospectus.

OVERVIEW

We operate the largest unaffiliated SS7 network in the United States and
are a leading provider of complementary intelligent network and SS7 services to
telecommunications carriers. Connection to our network gives carriers access to
the system of signaling networks of nearly the entire U.S. public-switched
telecommunications infrastructure through a single source.

Our products and services can be grouped into three general categories:

- network services, which includes SS7 connectivity, switching and the
transport of messages used to route calls and query databases, and
intelligent network services, such as database access, including local
number portability and support for roaming between carriers;

- clearinghouse services that facilitate payments among telecommunications
carriers; and

- network usage software applications.

Our SS7 network connectivity, switching and transport services provide
telecommunications carriers access to the signaling networks of nearly the
entire U.S. public-switched telecommunications infrastructure through a single
source. Once connected, customers use our network to route and complete voice
and data transmissions and access related and complementary services and
applications available from us or from third party vendors. Once a customer is
connected to our network, we continue to provide support services to maintain
and upgrade its connection on a 24 hour a day, seven day a week basis.

Intelligent network services encompass a number of database query
functions, including caller identification, toll-free calling, calling card
validation, local number portability and seamless wireless roaming. Each of
these services uses our SS7 network to access databases, some maintained by us
and others maintained by third parties.

Our clearinghouse services include serving as a distribution and collection
point for billing information and payment collection for services provided by
one carrier to customers billed by another. For example, we receive a monthly
report from a long distance carrier detailing the long distance calls made by
the customers of another carrier. We prepare statements to each billing carrier
of its customers' usage, which the billing carrier then uses to bill its
customers. The billing carrier remits the payments

24
<PAGE> 25

received from its customers to us. We aggregate these payments and remit them to
the long distance carrier, net of our servicing fee.

Network usage software applications are commercial applications derived
primarily from software we developed to create billing data for the use of our
network and services. This software is licensed to carriers and allows them to
create billing data to bill another carrier for use of their signaling network
or their underlying public-switched telecommunications network.

REVENUES

Most of our revenues come from the sale of network services, including SS7
connectivity, switching and transport and the provision of intelligent network
services. To a lesser extent, we derive revenues from our clearinghouse services
and network usage software applications.

Customers generally are charged for connectivity to our SS7 network on a
monthly "per link" basis. If we provision the network facilities that provide
their connection to our network, they pay us for establishing the initial
connections that link them to our network and pay a separate monthly fee to
maintain those links. We generally price these connectivity links on a cost-plus
basis based on our facility lease costs.

In addition, customers are charged for network switching (the transmission
of signaling traffic throughout the network) based on the number of switches to
which they signal. The more switch locations to which that customer uses us to
signal, the more they pay us. We are evaluating the potential to change our
pricing structure to allow for volume-based "per-signaling message" charges.

Our intelligent network services are delivered through our network and a
substantial majority of our customers purchase both SS7 network connectivity and
intelligent network services. Our intelligent network services fall into two
general categories: database administration and database query services. In
addition to paying monthly fees for SS7 connectivity, our customers pay a per
use or per query fee for database services. For example, we price local number
portability service order administration on a per-ported number basis, and
obtain volume-based revenue for accessing the local number portability database
on a per-query basis.

Clearinghouse services are provided on a per message billed basis. Our
revenues vary based on the number of messages provided to us by
telecommunications companies and other message providers for aggregation and
distribution by us to the carrier who will bill to and collect from its
customers. Clearinghouse services are relatively mature and are experiencing
competitive pricing pressures.

Revenues from network usage software applications are derived from licenses
of our software products and continuing software maintenance fees. These
products have a long sales cycle, with each individual license normally
contributing significant revenue to the product line, approximately 50% of which
is recognized when the product is delivered and 50% when the end user approves
the product. New sales opportunities for these products in their current form
are limited, as many of the customers in the top tier market, consisting
primarily of regional Bell operating companies, have already licensed our
product. Therefore, revenues may change significantly from period to period,
depending on the mix of license and maintenance fees in any given period.

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<PAGE> 26

The table below indicates the portion of our revenues attributable to
network services, clearinghouse services and network usage software applications
in 1996, 1997 and 1998 and in the first six months of 1998 and 1999, together
with the percentage change in revenues.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------- ------------------------------
1996 1997 % CHANGE 1998 % CHANGE 1998 1999 % CHANGE
------- ------- -------- ------- -------- ------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Network services............. $29,434 $44,117 50% $60,274 37% $26,600 $41,562 56%
Clearinghouse services....... 7,896 6,723 (15) 6,232 (7) 3,463 3,052 (12)
Network usage software
applications............... 558 3,468 522 5,406 56 1,523 502 (67)
------- ------- ------- ------- -------
$37,888 $54,308 43% $71,912 32% $31,586 $45,116 43%
======= ======= ======= ======= =======
</TABLE>

EXPENSES

Our costs and expenses, which we do not attribute directly to individual
product lines, consist generally of the following:

- Carrier costs, which include recurring payments to telecommunications
carriers for leased lines and signal transfer point ports. These lines
and ports provide connections (1) between our customers and our network,
(2) among our own network locations and (3) between our network and
nearly all other SS7 networks in the United States. Cost of links and
ports to our customers is variable, relating directly to the number of
links and ports we provide to our customers. Cost of links and ports
among our own network locations and to other SS7 networks is primarily
fixed. We generally lease lines and ports under tariffs with volume
discounts;

- Operating expenses, which include the cost of providing network services,
clearinghouse services and network usage software applications. Such
costs primarily include personnel costs and hardware and software
maintenance costs to monitor and maintain our network on a 24 hour a day,
seven day a week basis, maintain and operate our databases, process our
clearinghouse messages, and develop and maintain our network usage
software applications;

- Selling, general and administrative, which consist primarily of executive
and administrative personnel and professional services expense; and

- Depreciation and amortization, which relate primarily to our installed
network equipment, our computer hardware and software, our corporate
facilities and our network usage software applications.

In August 1999, we issued employee stock options for 596,800 shares of
common stock at an exercise price of $8.00 per share. This resulted in deferred
stock-based compensation of $3.9 million, which will be recognized as a noncash
stock-based compensation expense totaling $2.4 million, after income taxes, over
the four year vesting period of the options. See "Management -- Executive
Compensation."

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<PAGE> 27

The table below indicates our expenses in 1996, 1997 and 1998 and in the
first six months of 1998 and 1999, together with the percentage change in
expenses.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------- ------------------------------
1996 1997 % CHANGE 1998 % CHANGE 1998 1999 % CHANGE
------- ------- -------- ------- -------- ------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carrier costs................ $ 9,358 $15,313 64% $22,983 50% $10,752 $13,598 26%
Operating.................... 11,139 14,979 34 19,768 32 8,547 12,487 46
Selling, general and
administrative............. 7,774 8,873 14 10,287 16 4,540 6,128 35
Depreciation and
amortization............... 5,714 7,354 29 9,372 27 3,783 5,317 41
------- ------- ------- ------- -------
$33,985 $46,519 37% $62,410 34% $27,622 $37,530 36%
======= ======= ======= ======= =======
</TABLE>

RESULTS OF OPERATIONS

The table below indicates the results of our operations expressed as a
percentage of total revenues. The historical results are not necessarily
indicative of results to be expected for any future period.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Network services................................. 78% 81% 84% 84% 92%
Clearinghouse services........................... 21 13 9 11 7
Network usage software applications.............. 1 6 7 5 1
--- --- --- --- ---
Total revenues................................ 100 100 100 100 100
Expenses:
Carrier costs.................................... 25 28 32 34 30
Operating........................................ 29 28 28 28 28
Selling, general and administrative.............. 21 16 14 14 13
Depreciation and amortization.................... 15 14 13 12 12
--- --- --- --- ---
Total expenses................................ 90 86 87 88 83
--- --- --- --- ---
Operating income................................... 10 14 13 12 17
Interest expense, net.............................. 2 1 1 1 1
--- --- --- --- ---
Income before income taxes......................... 8 13 12 11 16
Income tax provision (benefit)..................... -- (1) 5 4 6
--- --- --- --- ---
Net income......................................... 8% 14% 7% 7% 10%
=== === === === ===
</TABLE>

SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998

REVENUES

Network services. Network services revenues increased by $15.0 million, or
56%, from $26.6 million for the first six months of 1998 to $41.6 million for
the first six months of 1999. This increase was due to increased customer
connections and signaling across our network, substantial growth in queries
processed in the line information, caller identification or calling name
delivery and toll-free databases and the rollout of local number portability.

During the fourth quarter of 1998, our customer base increased and we
obtained access to additional caller information maintained in third-party
databases. We first recognized revenue from local number

27
<PAGE> 28

portability in June 1998 and revenue from that service grew rapidly throughout
the remainder of 1998 and the first six months of 1999. We expect revenue from
local number portability to continue to increase in the foreseeable future.

Clearinghouse services. Clearinghouse services revenues decreased by $.4
million, or 12%, from $3.5 million for the first six months of 1998 to $3.1
million for the first six months of 1999. This decrease was caused by a decline
in messages processed in the first six months of 1999, due to a large customer
that in 1997 started directly billing messages to its end users rather than
using our services as was required by contract.

Network usage software applications. Network usage software applications
revenues decreased by $1.0 million, or 67%, from $1.5 million for the first six
months of 1998 to $.5 million for the first six months of 1999. This decrease
was due to the inclusion in the 1998 period of license fees, while revenues in
the 1999 period represented only software maintenance fees.

EXPENSES

Carrier costs. Carrier costs increased by $2.8 million, or 26%, from $10.8
million in the first six months of 1998 to $13.6 million in the first six months
of 1999. This increase was due to the growth in leased network connectivity and
link and local access and transport area access charges incurred to support
increased customer use of our network. Local access and transport area access
charges increased significantly due to our decision to build links directly into
local access and transport areas instead of relying on third-party
intermediaries. While the cost of building direct links exceeds that of our
prior arrangements, the reliability of our network is enhanced as we gain
increased link control and monitoring capabilities.

Operating. Operating expenses increased by $4.0 million, or 46%, from $8.5
million in the first six months of 1998 to $12.5 million in the first six months
of 1999. This increase resulted mainly from higher personnel expenses related to
an expansion of the customer support, operations and engineering functions and
increased maintenance costs for new network and systems hardware and software.
Additionally, in the first six months of 1999 we recorded a reserve of $1.0
million for a loss on a clearinghouse services contract. We have entered into a
new contract with this customer and recently began arbitration proceedings to
settle items in dispute under the prior contract.

Selling, general and administrative. Selling, general and administrative
expenses increased by $1.6 million, or 35%, from $4.5 million for the first six
months of 1998 to $6.1 million for the first six months of 1999. This increase
was primarily due to the addition of personnel necessary to support the overall
growth of our business.

Depreciation and amortization. Depreciation and amortization expenses
increased by $1.5 million, or 41%, from $3.8 million in the first six months of
1998 to $5.3 million in the first six months of 1999. This increase was due to
the placing into service of new network equipment, including our network
monitoring equipment accounted for as capital leases and local number
portability service-related assets.

Interest expense, net. Interest expense, net increased $.2 million, or 74%,
from $.2 million for the first six months of 1998 to $.4 million for the first
six months of 1999. This increase was primarily related to increased interest
expense from capital leases signed in 1998.

Income taxes. Income tax expense increased by $1.3 million, or 97%, from
$1.4 million in the first six months of 1998 to $2.7 million in the first six
months of 1999, because of our increase in income. The effective tax rate was
37% for the first six months of 1998 and 38% for the first six months of 1999.

28
<PAGE> 29

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

REVENUES

Network services. Network services revenues increased by $16.2 million, or
37%, from $44.1 million in 1997 to $60.3 million in 1998. This increase was due
to increased customer connections and signaling across our network, growth in
queries processed in the line information, calling name delivery and toll-free
databases and the rollout of local number portability. Calling name delivery
growth resulted from an increase in our customer base and additional access to
caller information maintained in third-party databases.

Clearinghouse services. Clearinghouse services revenues decreased by $.5
million, or 7%, from $6.7 million in 1997 to $6.2 million in 1998. This decrease
was due in part to a large customer that in 1997 started directly billing
messages to its end users rather than using our services as was required by
contract and to the loss, in the third quarter of 1998, of a large clearinghouse
participant to a competitor.

Network usage software applications. Network usage software applications
revenues increased by $1.9 million, or 56%, from $3.5 million in 1997 to $5.4
million in 1998, due to license fees in 1998 derived from installations at
larger customers.

EXPENSES

Carrier costs. Carrier costs increased by $7.7 million, or 50%, from $15.3
million in 1997 to $23.0 million in 1998. This increase was due to the growth in
leased network connectivity and link and local access and transport area access
charges incurred to support increased customer use of our network. Local access
and transport area access charges increased significantly due to our decision to
build links directly into local access and transport areas.

Operating. Operating expenses increased by $4.8 million, or 32%, from $15.0
million in 1997 to $19.8 million in 1998. The growth resulted mainly from higher
personnel expenses related to an expansion of the customer support, operations
and engineering functions and increased maintenance costs for new network and
systems hardware and software. Additionally, in 1998 we recorded a reserve of
$1.0 million for a loss on a clearinghouse services contract.

Selling, general and administrative. Selling, general and administrative
expenses increased by $1.4 million, or 16%, from $8.9 million in 1997 to $10.3
million in 1998. This increase was due to the addition of personnel necessary to
support the overall growth of our business, increased marketing costs to
establish a national corporate image and presence and increased sales efforts.

Depreciation and amortization. Depreciation and amortization expenses
increased by $2.0 million, or 27%, from $7.4 million in 1997 to $9.4 million in
1998. This increase was due to the placing into service of new network
equipment, including our network monitoring equipment accounted for as capital
leases and local number portability service-related assets. During 1998, we
replaced two signal transfer points as part of our network reliability upgrade,
resulting in an expense of $.7 million as we retired the former equipment.

Interest expense, net. Interest expense, net decreased by $.1 million, or
8%, from $.8 million in 1997 to $.7 million in 1998. This decrease was primarily
related to decreased interest expense from capital leases signed in 1998.

Income taxes. Income tax expense increased by $4.1 million, from a tax
benefit of $.7 million in 1997 to a tax expense of $3.5 million in 1998. The
1997 tax accounts and provision reflect benefits of $3.2 million comprised
primarily of $2.4 million due to the utilization of net operating loss
carryforwards and $.9 million due to the reversal of substantially all of a
previously recorded deferred tax valuation

29
<PAGE> 30

allowance as a result of improved operating results. The 1997 tax accounts and
provision also reflect federal alternative minimum taxes that cannot be
completely offset by tax loss carryforwards.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

REVENUES

Network services. Network services revenues increased by $14.7 million, or
50%, from $29.4 million in 1996 to $44.1 million in 1997. This increase was due
to increased customer connections and signaling across our network and growth in
queries processed in the calling name delivery database.

Clearinghouse services. Clearinghouse services revenues decreased by $1.2
million, or 15%, from $7.9 million in 1996 to $6.7 million in 1997. This
decrease was primarily a result of a volume price reduction for a large customer
in the fourth quarter of 1997.

Network usage software applications. Network usage software applications
revenues increased by $2.9 million, from $.6 million in 1996 to $3.5 million in
1997, due to greater license fees in 1997 compared to 1996.

EXPENSES

Carrier costs. Carrier costs increased by $5.9 million, or 64%, from $9.4
million in 1996 to $15.3 million in 1997. This increase was due to the growth in
leased network connectivity and link and local access and transport area access
charges incurred to support increased customer use of our network.

Operating. Operating expenses increased by $3.9 million, or 34%, from $11.1
million in 1996 to $15.0 million in 1997. This increase was due primarily to the
increasing support required for the continuing expansion of our SS7 network and
related products. The growth resulted mainly from higher personnel expenses
related to an expansion in the customer support, operations and engineering
functions and increased maintenance costs for new network and systems hardware
and software.

Selling, general and administrative. Selling, general and administrative
expenses increased by $1.1 million, or 14%, from $7.8 million in 1996 to $8.9
million in 1997. This increase was due to higher personnel expenses related to
an expansion in our sales and marketing and product management functions,
including increased travel expenses and new marketing material costs related to
increased sales and marketing efforts.

Depreciation and amortization. Depreciation and amortization expenses
increased by $1.7 million, or 29%, from $5.7 million in 1996 to $7.4 million in
1997. This increase was due to the placing into service of new network equipment
and additional depreciation of $1.0 million due to the acceleration of the
depreciation of the former network equipment.

Interest expense, net. Interest expense, net was unchanged from 1996 to
1997.

Income taxes. Income tax expense decreased $.8 million, from a tax expense
of $.1 million in 1996 to a tax benefit of $.7 million in 1997. The 1997 tax
accounts and provision reflect benefits of $3.1 million comprised primarily of
$2.4 million due to the utilization of net operating loss carryforwards and $.9
million due to the reversal of substantially all of the previously recorded
deferred tax valuation allowance as a result of improved operating results. The
1996 tax accounts and provision reflect the benefit of $1.0 million due to the
utilization of net operating loss carryforwards. The 1996 and 1997 tax accounts
and provision also reflect federal alternative minimum taxes that cannot be
completely offset by tax loss carryforwards.

30
<PAGE> 31

LIQUIDITY AND CAPITAL RESOURCES

We rely on a combination of cash generated from operations, commercial
borrowings, vendor financing and the issuance of debt and equity securities to
fund our operations and capital needs. Currently, our operating activities
generate positive cash flows. We anticipate continued high levels of investment
in our infrastructure over the next several years to manage increased network
volumes, to enhance customer support systems and to continue to improve network
and service reliability. Additionally, we anticipate continued investments in
the development and acquisition of new services and products related to our
network, database and clearinghouse services in order to address changing
markets and customer needs.

Our working capital (current assets in excess of current liabilities) was
$17.1 million at June 30, 1999. Our cash and cash equivalent balances included
$2.2 million required as working capital to service our clearinghouse services
customers. Clearinghouse funds are received and disbursed on a monthly basis.
The growth in working capital of $4.2 million, or 32%, from $12.9 million at
December 31, 1998, reflects the increase in accounts receivable attributable to
increased revenue, decreased payables related to our clearinghouse services
function and the utilization of deferred net operating loss carryforward tax
assets.

Our property and equipment acquisitions were $17.9 million for the year
ended December 31, 1998 and $5.8 million for the first six months of 1999.
Expenditures for property and equipment are primarily for network equipment to
expand capacity and enhance reliability, including network monitoring equipment
and local number portability service-related assets. We currently anticipate
additional capital expenditures of approximately $9.0 million in the remainder
of 1999 and approximately $15.0 million in 2000.

At June 30, 1999, we had a secured line of credit expiring August 15, 2001
with Rural Telephone Finance Cooperative that permits us, subject to certain
conditions, to borrow up to $7.3 million, not to exceed 80% of accounts
receivable. There were no borrowings against this line of credit at that date.
Additionally, at June 30, 1999, we had $3.8 million of unused loan facilities
established or committed with the Cooperative, expiring in the years 2000 and
2001. Long-term secured notes payable to the Cooperative were $9.0 million at
June 30, 1999, with various maturity dates ranging from August 2000 to March
2015. Also, during 1999, we obtained vendor financing for capital leases related
to a purchase of $2.0 million of new network equipment and applications to
enhance monitoring, data collection and troubleshooting capabilities.

At June 30, 1999 we had approximately $8.6 million in principal amount plus
accrued interest of outstanding 7.5% Convertible Redeemable Debentures. We have
called all of those debentures for payment on October 12, 1999, when the total
principal plus accrued interest will be approximately $8.5 million.
Debentureholders holding an aggregate of $8.4 million in principal and accrued
interest elected to convert their debentures into Class A common stock at a rate
of 90 shares for each $1,000 due them. The remaining $.1 million in principal
and accrued interest will be redeemed on October 12, 1999.

We believe that our existing cash balances, funds generated from our
operations, borrowings available under our existing credit agreements and the
proceeds of this offering will be sufficient to meet our anticipated capital
expenditure and working capital needs for the next 18 months. However,
acquisitions of complementary businesses or technologies may require significant
capital beyond our current expectations, which would require us to issue
additional equity securities and/or incur additional long-term debt. We
currently do not have any agreements, and are not involved in any negotiations,
with respect to any acquisition.

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<PAGE> 32

IMPACT OF YEAR 2000

The Year 2000 issue is the result of some information and operating systems
being written using two digits rather than four to define the applicable year.
Any computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process database or network transactions, send invoices or engage in similar
normal business activities.

We have conducted a comprehensive review of our hardware and software
systems to identify those systems that could be affected by the Year 2000 issue
and we have developed an implementation plan to resolve the identified issues.
Systems that interact with customers and that focus on our core business
functions of SS7 network signaling, database information and network usage
software applications have been given the highest priority. We presently believe
that with the modifications or replacements of existing software and affected
hardware, updates by vendors and conversion to new software, we can avoid any
material adverse impact on our operations from the Year 2000 issue. However, if
the modifications and replacements are not made or are not completed in a timely
manner, the Year 2000 issue could have a material impact on our operations.

Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, conversion, testing and implementation. To date, we have fully
completed our assessment of all critical systems and hardware that could be
affected by the Year 2000 issue. We have completed reprogramming and/or
upgrading the software we maintain. Once software is reprogrammed or replaced
for all or part of a system, we begin testing and implementation. The testing
and implementation phases include not only software maintained by us but
third-party systems as well. To date, we have nearly completed our testing and
have implemented 85% of our converted systems. Implementation of all converted
systems is currently targeted for completion by September 30, 1999.

We are using both internal and external resources to implement our Year
2000 compliance plan. To date, we have spent $975,000 to remedy the Year 2000
issue and we estimate that our total expenditures to complete execution of the
Year 2000 compliance plan will range from $1.2 million to $2.0 million. Most of
these expenses are being capitalized because the costs related to Year 2000
modifications are only an incremental part of overall software and hardware
upgrades.

All non-information technology that uses or might use date sensitive
embedded software chips, such as security systems, climate controls and other
electronic devices used in daily business operations, have been inventoried and
assessed. All identified non-compliant systems are being upgraded and tested as
compliant versions become available. This effort is expected to continue
throughout 1999.

Our SS7 network interfaces directly with significant third-party networks
and databases. We are currently working with these and other third-party vendors
to ensure that their systems and interfaces that are relevant to us are Year
2000 compliant by December 31, 1999. To date, we have been advised by over 80%
of our significant third-party vendors that they expect to be Year 2000
compliant by the end of 1999. In addition, we are participating with national
industry groups such as the Network Reliability and Interoperability Council and
committees of the Alliance for Telecommunications Industry Solutions to assess
Year 2000 network reliability and we will continue to monitor the compliance of
our third-party vendors. Failure to address the Year 2000 issue by a third-party
on whom our systems or services rely could have a material adverse effect on us
or our customers.

We believe we have the proper staffing, tools and procedures to identify
and prepare all mission critical systems for the Year 2000 and we believe the
necessary programs are in place for a smooth Year 2000 transition. However, we
have not yet completed all necessary phases of our Year 2000 compliance plan. If
we do not complete the remaining phases, we may be unable to operate our SS7
network or information databases. Additionally, we could be subject to
litigation for product or service failure. We cannot reasonably estimate at this
time the amount of our potential liability and lost revenue.

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<PAGE> 33

We anticipate having our contingency plans in place early in the fourth
quarter of 1999. Our contingency planning includes the following:

- reviewing, assessing and updating existing business recovery plans;

- identifying teams to be on call during the change in year to monitor our
network, critical systems, operations centers and business processes;

- developing alternate processes to support critical customer functions;

- developing alternatives for critical suppliers that fail to meet Year
2000 compliance commitment schedules; and

- developing data retention and recovery procedures for critical business
data.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks relate primarily to changes in interest rates. We are
exposed to this risk in two specific ways. First, we have debt outstanding. At
the end of 1998, we had $7.5 million of debt in the form of a series of 7.5%
debentures. Because this borrowing had a fixed interest rate, neither our income
statement nor our cash flows were exposed to changes in interest rates. Our
secured notes payable to the Cooperative, which had average borrowings of $11.0
million during 1998 and was $10.6 million at the end of 1998 had a variable
interest rate, which exposed our income statement and cash flows to changes in
interest rates. The rate of these secured notes is based on the lender's cost of
funds. We also have a variable rate revolving line of credit for up to $7.3
million that has not been used. The interest rate on this line of credit is
based on the prevailing bank prime rate plus a margin of one and one-half
percent per year. The lender may, in its discretion, fix a lower rate from time
to time. If market interest rates were to increase immediately and uniformly by
10% from levels at June 30, 1999, our net income and cash flows would decrease
by an immaterial amount.

The second component of interest rate risk involves the short-term
investment of excess cash. Such risk affects fair values, earnings and cash
flows. Excess cash is primarily invested in overnight repurchase agreements
backed by U.S. government securities. These are considered to be cash
equivalents and are shown that way on our balance sheet. Our average balance in
those securities was approximately $10.6 million over the past year. Earnings
from these cash equivalents totaled $.5 million for the year ended December 31,
1998.

Approximately 17% of our total expenses in 1998 were related to access
lines that we lease for our customers. These charges are set by tariff. To date,
we have been able to pass through changes in these charges to our customers. At
this point in time, our operations outside of the United States are immaterial.
Accordingly, we are not exposed to substantial risks arising from foreign
currency exchange rates.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires capitalization of certain costs incurred in
connection with developing or obtaining internal use software. In April 1998,
the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP
98-5 requires that all start-up costs related to new operations must be expensed
as incurred. The provisions of SOP 98-1 and SOP 98-5 were adopted in 1999 and
are generally consistent with our past accounting policies and, therefore, there
has been no material impact on our financial condition or operating results.

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<PAGE> 34

BUSINESS

OVERVIEW

Through our SS7 network, we provide:

- SS7 connectivity, switching and transport; and

- intelligent network services, including local number portability and
support for roaming between wireless carriers and various other
specialized database services.

Also, we serve the telecommunications industry with:

- clearinghouse services to facilitate payment among telecommunications
carriers; and

- network usage software applications.

OUR HISTORY

Our company was formed as U.S. Intelco and began operations in 1981. Our
original mission was to maintain the independent telephone company customer
records portion of the national telephone calling card database on AT&T's long
distance Common Channel Inter-office Signaling #6 network. Throughout the 1980s,
we expanded our service portfolio with the addition of clearinghouse and revenue
administration services for telecommunications carriers.

AT&T phased out its Common Channel Inter-office Signaling #6 network in the
late 1980s as it and other carriers transitioned to SS7 technology. National
implementation of SS7 technology introduced processing of telephone information
by separating the signaling and voice paths and transmitting signaling
information in the form of data packets over a parallel signaling network.

We capitalized on the shift to SS7 in 1989 by forming a subsidiary to
develop and maintain an SS7 network for independent telephone companies that
needed SS7 capabilities but lacked the expertise or resources to develop their
own network. We continued to develop services that use SS7 technology, including
outsourced maintenance of a line information database for calling card
validation, billing

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<PAGE> 35

validation and third-party collect call validation. These services allow our
customers to control their subscriber data and issue calling cards that are
honored on all major long-distance carrier networks. Today, our line information
database stores over 18 million line numbers and related subscriber information.

As the largest non-carrier affiliated SS7 network provider, we became a
principal supplier of SS7 services to many cellular carriers, which use an SS7
network to perform roaming support. Additionally, the emergence of numerous
competitive local exchange carriers since the mid-1990s continues to expand our
base of customers considerably.

We began offering clearinghouse services in 1987 with a revenue
administration agreement with AT&T. This service is still in place today and
involves the passing of billing-and-collection fees from AT&T through to
independent telephone companies who then bill and collect on behalf of AT&T. In
1989, we introduced our toll clearinghouse product line through which we act as
an aggregator and distributor of billable messages between independent telephone
companies and operator service providers.

Our SS7 network today consists of 12 mated pairs of SS7 signal transfer
points, which are specialized switches that manage SS7 signaling, and into which
our customers connect via leased lines. We own four pairs and lease capacity on
eight pairs of SS7 signal transfer points from regional partners. The
combination of these regional partner signaling transfer points with our own
provides us with one of the most extensive inter-carrier SS7 networks in the
United States.

COMPETITIVE STRENGTHS

Our competitive strengths include:

- ESTABLISHED RELATIONSHIPS WITH NUMEROUS TELECOMMUNICATIONS CARRIERS. We
have established relationships with AT&T, MCI WorldCom, Sprint, all of
the regional Bell operating companies, most major competitive local
exchange carriers and a significant number of wireless operators,
independent telephone companies and interexchange carriers. These
relationships provide us with the opportunity to sell additional services
to a broad base of customers while limiting our dependence on any single
customer. We believe that the need for such broad relationships poses a
significant barrier to entry for other potential SS7 service providers.

- EXTENSIVE EXPERIENCE IN OFFERING CRITICAL SS7 SERVICES. SS7 signaling is
an advanced technology that is essential in providing telecommunications
services and presents significant operating complexities. Unlike many of
our competitors, we are primarily focused on providing SS7 network access
and intelligent network services. We have extensive experience in
providing these services and have been recognized through awards for our
industry expertise. In addition, our top five executives have an average
of 24 years experience in the telecommunications industry. We believe
that a broad array of high quality carriers use our services primarily
due to our singular focus on providing SS7 connectivity and intelligent
network services, as well as our recognized superior technical expertise.
In addition, we believe that our customers would be reluctant to
outsource this critical function to other less established SS7 service
providers or to attempt to manage these functions in-house.

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- INDEPENDENCE AND NEUTRALITY IN THE TELECOMMUNICATIONS MARKETPLACE. As the
largest non-carrier affiliated SS7 network provider, we have fostered
business relationships with existing and emerging carriers, both wireline
and wireless, and do not compete with them in providing services to their
residential and business customers. Our customers consider the subscriber
information we manage for them to be sensitive and do not openly share it
with competitors. We believe that our independence and neutrality
significantly enhance our attractiveness to the entire industry as a
provider of outsourced SS7 services.

- PROVEN BUSINESS MODEL THAT GENERATES PROFITABLE AND RECURRING REVENUE
STREAMS. Our network provides us with a profitable base of recurring
service revenue, while serving as an established platform for additional
growth through the delivery of new and enhanced services. The investment
we have made in our network provides a base from which to add additional
customers. Additionally, we believe that the costs incurred by a carrier
in moving to a competitor's SS7 network are relatively high, further
strengthening the stability of our revenue base.

- POSITIONED TO BE THE SS7 SERVICE PROVIDER OF CHOICE TO INTERNET
PROTOCOL-BASED CARRIERS. As one of the largest providers of outsourced
SS7 and intelligent network services in the United States, we are
strategically positioned to provide those services to emerging Internet
protocol-based carriers who must access existing public-switched
telecommunications networks to serve their rapidly growing customer
bases. Emerging packet-based carriers need access to the signaling-based
services that are used by traditional circuit-based telecommunications
providers. By working with manufacturers, such as Cisco and Lucent, to
certify the operation of their equipment with our network, we have
positioned ourselves to provide these signaling-based services to these
new communications providers. Our SS7 expertise also allows us to offer
services to Internet service providers who choose to use SS7-based
signaling to offer more efficient and cost-effective service to their
customers.

THE TELECOMMUNICATIONS INDUSTRY

Historically, telecommunications carriers operated in a highly regulated
environment with little or no competition. Recently, governments worldwide have
begun to deregulate the telecommunications industry in order to reduce costs and
improve service. Deregulation has encouraged the emergence of many new
telecommunications carriers and increased competition. New entrants to the
global telecommunications landscape include:

- competitive long distance and local exchange carriers;

- competitors to government post, telephone and telegraph companies outside
the United States;

- wireless carriers;

- resellers, such as calling card providers; and

- Internet service providers.

Deregulation has also opened specific service opportunities to competition,
such as the provision of toll-free number database services, line information
database services and local number portability.

Increased competition in the telecommunications industry is forcing
carriers to differentiate themselves by providing advanced, value-added
services. Examples of these services include personal toll-free numbers, prepaid
calling cards, caller identification, billing validation services, customized
routing and billing and voice messaging. Carriers in a growing number of markets
are also being required to provide local number portability, which enables a
customer to change local telephone service providers without changing its
telephone number. Providing these services requires SS7 connectivity and
simultaneous database access through an SS7 network.

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Telecommunications networks have also significantly increased in complexity
in order to accommodate the functionality requirements of these value-added
services, such as local number portability, which was mandated in 1996 by the
FCC to be implemented beginning in 1999 for wireline carriers and in 2002 for
wireless carriers. These intelligent networks allow for various functions to be
distributed flexibly throughout the network. For example, intelligent network
functions enable carriers to deploy advanced services on computer systems
separate from the switching systems that connect their customers. The computer
system is accessed through the SS7 network, reducing cost and increasing quality
of customer service.

The growth of intelligent networks, coupled with a significant worldwide
increase in demand for telecommunications and Internet-related data services,
has resulted in corresponding demand for telecommunications infrastructure and
advanced networking technologies. Telecommunications carriers must provide the
very highest quality and reliability of service to remain competitive.

GROWTH STRATEGY

Our growth strategy consists of the following key elements:

- BROADEN OUR CUSTOMER BASE BY TARGETING EMERGING CARRIERS. We intend to
continue to aggressively grow our customer base by targeting new
telecommunications carriers as they enter the market. These carriers
include competitive local exchange carriers, integrated communications
providers, wireless carriers and Internet service providers. We expect
continued growth in the number of telecommunications providers entering
the market. We believe we will be the SS7 service provider of choice to
these emerging entrants who are unlikely to risk outsourcing their
critical SS7 services to one of their competitors.

- PROVIDE NEW SERVICES TO HELP DIFFERENTIATE OUR CUSTOMERS FROM THEIR
COMPETITORS. The competitive nature of the telecommunications industry
requires providers to offer enhanced services to maintain existing or
attract new customers. Many of these enhanced services are implemented
through the SS7-based intelligent network. In addition to our standard
services, we intend to capitalize on the scalability of our network by
developing new and enhanced services and applications that will enable
our customers to broaden their service offerings and improve their market
position.

- UTILIZE OUR NETWORK USAGE MEASUREMENT CAPABILITIES TO GENERATE ADDITIONAL
REVENUE. We will seek to use our proprietary network usage software
applications and related expertise to develop services to monitor usage
of customers' networks and capture usage pattern data. The hardware and
software investments we have made to capture data elements contained in
SS7 signaling messages give us the ability to gather valuable information
about telephone calls facilitated by our network. In many cases, we can
obtain more information about calling patterns and interactions with
other networks from our network than any single carrier can on its own.
We believe this data can be used to enhance the billing and network
management capabilities of our customers, allowing them to gain
additional revenue and more efficiently operate their networks. This data
can also be used to help our customers develop targeted marketing plans.

- BECOME THE PREFERRED PROVIDER OF SS7-BASED SERVICES TO EMERGING INTERNET
PROTOCOL-BASED CARRIERS. We believe that providing carrier-class
intelligent network capabilities is one of the biggest challenges facing
emerging Internet protocol-based carriers. We are actively working with
hardware providers, including Cisco and Lucent, to certify new
SS7-related equipment for emerging Internet protocol-based carriers. Our
core competencies of database management and signaling-based
communications position us well to offer services similar to our existing
offerings in an Internet protocol-based network. As one of our initial
steps in developing services for these Internet protocol-based network
providers, we offer signaling capabilities to Internet service

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providers that help them to improve service quality by reducing
congestion on their networks while lowering their costs. We intend to
continue to position ourselves to provide intelligent network
capabilities using emerging Internet protocol-based technologies.

- STRENGTHEN OUR MARKET PRESENCE THROUGH SELECT ACQUISITIONS. We will
actively seek to acquire companies that possess complementary service
offerings. Companies that have developed signaling-based services or
services that can be improved through the use of SS7-based signaling can
provide us incremental revenues and net income. Through select
acquisitions, we believe we can combine new, complementary services with
our existing product line and extensive network. This will increase our
market reach and allow us to quickly broaden our service portfolio.

ANATOMY OF THE SS7 NETWORK

The following diagram illustrates the relationship of the basic components
of the SS7 network:

SS7 Network Diagram

A telephone call involves two types of information: the call content
(voice, computer data or video) and the signaling information about the call
(such as the party initiating the call and the number being called). This
signaling information is required to connect, manage and bill for the call.
Therefore, modern telecommunication networks not only must convey information
between points, but also must identify the best routes for connections, control
the allocation of resources used to transfer the information and keep
transaction records for billing and measurement purposes.

The call transmission portion of the U.S. public-switched
telecommunications network starts with voice switches located in the offices of
local and long distance service providers. These switches gather traffic from
homes and businesses over local loops and direct it over trunks through the mesh
of different carriers' networks across the country and around the world.
Finally, the traffic is passed onto a local loop for termination at the distant
end.

The SS7 network directs calls through carriers' networks and provides
advanced functions such as completing toll-free calls, identifying calling party
name and tracking telephone numbers transferred between local telephone
companies. SS7 is a standardized set of protocols and architecture that has been
implemented by telecommunications carriers worldwide beginning in the mid-1980s.
SS7 uses packet-switching technology and transmits signaling messages on data
circuits that are independent of the call

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circuits it controls. Because SS7 messages travel on discrete circuits, SS7 is
often referred to as "out-of-band" signaling. SS7 networks are designed to be
reliable, flexible and scalable and have high capacity, enabling
telecommunications carriers to provide new services quickly and to optimize the
network bandwidth used for trunk connections.

Whenever a call originates in a phone network with intelligent network
services, a message signal unit is generated by the originating switch and sent
to the proper destination switch over the SS7 network. All signaling used for
establishing a call, disconnecting a call, database query and response and SS7
network management is carried by these message signal units. As the message
signal unit is routed by the signaling system, the appropriate switches in the
local and, if necessary, long distance telephone networks reserve the circuits
needed to complete the telephone call. Finally, the message signal unit reaches
the destination switch and the destination switch processes the dialed number
stored in the message signal unit to connect the call to the dialed party.

The SS7 network consists of three basic network and software components:

Service Switching Points: "SS7-enabled voice switches." Service switching
points are carriers' voice switches (for example, a Lucent 5ESS switch) that use
SS7 technology. In addition to originating, terminating and switching calls,
service switching points exchange messages with other service switching points,
signal transfer points and service control points throughout the network.

Signal Transfer Points: "data switches for SS7 traffic." Signal transfer
points are packet switches that provide access to the SS7 network and route SS7
messages among service switching points and service control points. These are
the traffic controllers of the SS7 network. Signal transfer points typically
consist of highly reliable computers running special software.

Service Control Points: "intelligent SS7 databases." Service control points
are computers that house databases containing customer and network information.
This information is used by the SS7 network for call routing, billing and
intelligent network database services.

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PRODUCTS AND SERVICES

As illustrated in the diagram below, we provide our customers with various
products and services. The majority of our products and services are directly
related to our SS7 network, as either part of the connectivity, switching and
transport function of the SS7 network or as intelligent network services
delivered over our SS7 network. In addition, we provide clearinghouse services
and license specially designed software for measuring network usage.

PRODUCTS DIAGRAM

NETWORK SERVICES -- CONNECTIVITY, SWITCHING AND TRANSPORT

Our network services provide carriers with:

- connectivity to SS7 networks throughout the United States via access to
our network at any of twelve signal transfer point mated pairs located
throughout the country;

- the ability to deliver a full range of services, via SS7 connectivity, to
the incumbent local exchange carriers who serve 230 of the 237 local
access and transport areas and major independent local exchange carrier
regions in the United States; and

- the opportunity to save time and resources on establishing and
maintaining SS7 links. We provide complete engineering, installation,
testing and activation of all links to our network and work closely with
carriers to ensure configurations meet their specific requirements.

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SS7 Connectivity, Switching and Transport. These are all component parts of
our basic SS7 trunk signaling service. Trunk signaling reduces post-dial delay,
allowing call connection almost as soon as dialing is completed. This enables
carriers to deploy a full range of intelligent network services more quickly and
cost effectively. By using our trunk signaling service, carriers simplify SS7
link provisioning by outsourcing this to us and can:

- increase trunk efficiency through faster call completion and disconnect;

- reach all local, interexchange and wireless carriers' networks through
our access to hundreds of carriers;

- maximize network reliability by having us monitor the performance of
their SS7 connections 24 hours a day, seven days a week;

- facilitate custom local area signaling services, such as caller
identification; and

- lower access costs for local delivery of interexchange and wireless
calls.

Database Access Messaging. We provide the SS7 functions that enable
carriers to find and interact with network databases and conduct the database
queries that are essential for many advanced services. Combined with
connectivity to our SS7 network, we provide access to the database information
that enables carriers to deliver a full range of custom local area signaling
services to their customers.

Seamless Roaming. In 1993, the Cellular Telecommunications Industry
Association endorsed us, for a period of five years, as the nationwide provider
of IS-41 signaling in support of seamless roaming. We remain a nationwide
provider of seamless roaming support using the IS-41 signaling protocol. IS-41
allows carriers to provide support for roamers visiting their service area, and
for their customers when they roam outside their service area. It enables number
validation inside and outside carriers' service areas by accessing our SS7
network. All U.S. wireless carriers providing subscribers with automatic call
delivery and autonomous registration while roaming use IS-41 or the recently
introduced GSM-MAP protocol, which we also support.

NETWORK SERVICES -- INTELLIGENT NETWORK SERVICES

Intelligent network services encompass a number of database query
functions, the most significant of which are local number portability, line
information database access and transport, toll-free database access and
transport and caller identification or calling name delivery access and
transport. Each of these services uses our SS7 network to access our databases
and others maintained by third parties.

Local Number Portability. In 1996, the FCC mandated that incumbent local
exchange carriers implement wireline number portability in all major U.S.
markets beginning in 1999. Local number portability allows a telephone
subscriber to switch local service providers while keeping the same telephone
number. It substantially complicates the process of completing an ordinary
telephone call, since the destination telephone number in an area where local
number portability has been implemented no longer bears any direct relationship
to its actual physical location on the network. In order to complete a call to a
telephone number in an area where local number portability has been implemented,
a carrier must conduct a simultaneous database query to route the call
correctly. We manage interactions with number portability databases and provide
database queries on a call-by-call basis, thereby allowing carriers to deploy
local number portability without the high cost of building their own
infrastructure.

Our local number portability services include:

- service order administration, which gives carriers online access to
manage portability information, send that information to the appropriate
national Number Portability Administration Center and retrieve
information about what actions other service providers may have taken;

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- a local service management system that is the hardware and software
database platform necessary to manage customer call routing information;
and

- data access to the appropriate local number portability service control
point for the information necessary to complete a call.

We believe our local number portability services are highly competitive
because we provide integrated, turnkey management of sophisticated and
time-consuming local number portability databases, a single interface to all of
the seven Number Portability Administration Centers in the United States and 24
hour a day, seven day a week technical support.

Line Information Database Access and Transport. Line information databases
are developed and maintained by telecommunications carriers to store information
about their subscribers necessary to provide enhanced services such as
validating telephone numbers and billing information. For example, when a caller
tries to bill a call with a calling card, the local carrier where the call is
initiated sends a query over the SS7 network. The SS7 network then determines
the appropriate database to validate the card number, routes the information to
the switch that analyzes the response and determines how to treat the call.

Through our SS7 network, we offer high-speed access to all of the line
information databases in the United States for seamless, nationwide access to
subscriber information. We also manage and operate our own database of over 18
million line information records. Our SS7 network and database access allow
carriers to deliver, in fractions of a second, seamless access to subscriber
information through our access agreements with all databases in the country, for
purposes such as validating calling card, collect and third party billed calls.

Key features of our line information database services include:

- fraud protection features, such as usage monitoring, auto-deactivation,
lost and stolen card service and domestic restrictions to fight
international calling card fraud; and

- high capacity and reliability, fully meeting industry standards for call
processing throughput, storage volume capacity, fault tolerance and
redundancy.

Toll-Free Database Access and Transport. Our SS7 network provides access to
all toll-free numbers in the country for call routing. When a caller dials a
toll-free number from one of our customers' areas, our customer launches a query
over our SS7 network. Our network routes the query to a national toll-free
database, retrieves information and identifies the appropriate carrier and other
routing information as necessary. Our network returns the response to our
customer for call routing.

Calling Name Delivery Access and Transport. Caller identification or
calling name delivery service has become an increasingly popular value-added
offering for telephone subscribers. Most local exchange carriers provide a
caller identification service that displays a caller's telephone number. The
originating caller's telephone number is part of the SS7 signaling message that
sets up a telephone call; however, providing the caller's name requires the
ability to obtain the name that matches that telephone number from a line
information database. We develop and offer calling name database access,
allowing carriers to query many regional Bell operating companies and major
independent telephone carriers and reduce the "name not available" messages that
customers receive. We also manage and operate a database for storage of
incumbent local exchange carrier, competitive local exchange carrier and
wireless calling name records.

Key components and features of our calling name database include:

- a high capacity calling name database that consistently meets applicable
industry standards for queries per second and data storage volumes;

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- a city/state database in addition to our main calling name database. If a
caller's name is not accessible, a carrier can deliver the caller's city
and state location, giving subscribers a better indication of who is
calling and reducing "name not available" messages; and

- automatic dual updating of our calling name database and our line
information database.

Other Services. We also provide other intelligent network services to our
customers. For example, in addition to network access, we provide a centralized
database of IS-41 messages that enables a wireless carrier to manage and monitor
its roamer activities more efficiently while also providing protection against
cloning fraud.

CLEARINGHOUSE SERVICES

Our clearinghouse services include serving as a distribution and collection
point for billing information and payment collection for services provided by
one carrier to customers billed by another. For example, we receive a monthly
report from a carrier that provides long distance services detailing the long
distance calls made by the customers of another carrier. We prepare statements
to each billing carrier of the customers' usage, which the billing carrier then
uses to bill its customers. The billing carrier remits the payments received
from its customers to us. We aggregate these payments and remit them to the
carrier providing the long distance service, net of our servicing fee.

With our clearinghouse services, carriers can:

- bill and collect messages in a simple consolidated invoice that other
providers may otherwise bill separately to the local carrier's customers;

- bill and collect operator-assisted and calling card calls made through
MCI WorldCom, Sprint and other interexchange carriers; and

- bill and collect direct dialed long distance calls for selected
interexchange carriers.

NETWORK USAGE SOFTWARE APPLICATIONS

Our network usage software was developed as a commercial derivative of
software originally developed to measure and monitor the usage of our own SS7
network. Using our AMAT7 software, in conjunction with equipment provided by
Hewlett-Packard, SS7 network operators can measure network usage to allow them
to bill other carriers for the use of their SS7 network. Our CDR7 software
captures call record detail directly from SS7 signaling links and provides this
information in a format that allows for billing to, and verification of invoices
received from, other carriers.

OUR NETWORK

Our network consists of 12 mated pairs of signal transfer points
strategically located across the United States. We own four pairs of signal
transfer points and currently lease capacity on eight pairs of signal transfer
points owned by our regional partners. We are currently planning to install two
additional mated pairs of signal transfer points and one additional mated pair
of service control points within the next twelve months.

Our leases generally have renewable two year terms. If a signal transfer
point lease is terminated, we may continue to use the capacity for up to one
year until we are able to move our affected customers to another signal transfer
point. For example, we are in the process of moving six customers from the
signal transfer point of a regional partner that, as a result of having recently
been acquired, has terminated its lease with us. The lease will remain in effect
on a month-to-month basis until we relocate all of our customers.

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Our network is connected to 230 of the nation's 237 local access and
transport areas and major independent local exchange carrier regions, either
through a direct connection to the local access and transport areas or through a
gateway switch belonging to the regional Bell operating company. We have over
400 dedicated connections to local access and transport areas. As of June 30,
1999, we provided signaling for approximately 17,100 trunk groups providing
customers with local access and transport areas access.

We connect our customers to our nationwide SS7 network through links to our
signal transfer points. As of June 30, 1999, we had approximately 1,800 access
links in service.

In addition to signal transfer points and associated equipment, we maintain
a network operations center in Overland Park, Kansas. We also maintain our
databases, related computers and storage devices in our headquarters building in
Lacey, Washington and in our regional signal transfer point offices in Mattoon,
Illinois and Rock Hill, South Carolina.

SALES AND MARKETING

Our sales force is made up of 17 direct salespeople and two telemarketers.
Eleven of these salespeople are located in our Overland Park office, with six
regional account managers located strategically throughout the United States. In
addition to our direct sales force, we maintain a customer care center with 11
customer service representatives in our Lacey office to handle customer requests
and updates.

Our marketing and sales division identifies customer needs for network
services and promotes our large, reliable network, our competitively priced
services and our neutrality in dealing with carriers. The number and complexity
of our products and services increase the required training and specialization
of our sales force and support staff.

We believe strong account management is our key to a successful sales
effort. We use a consultative sales approach, working with carriers to establish
and maintain relationships that identify and serve customer needs proactively.
We also pursue opportunities to develop custom solutions to meet large customer
requirements.

We provide incentives for our direct sales staff to further develop their
consultative relationship with our customers by offering bonuses in addition to
salary and commissions. These bonuses are based on a number of factors,
including customer satisfaction, customer retention and new business
development.

We retain an independent consulting company annually to gauge our customer
satisfaction. This consulting company, in conjunction with our review team,
identifies recent successes and plans improvements for the next year. The
results of these surveys show a high level of customer satisfaction.

CUSTOMERS

Our customer base is diversified across the many different types of
facility-based and reseller carriers in the United States. Our top ten customers
accounted for approximately 37% of our revenues for the year ended December 31,
1998, and no customer represented more than 7.5% of our revenues in that year.
As of June 30, 1999, in addition to 268 independent telephone companies, our
customer base includes 85 wireless carriers, 177 competitive local exchange
carriers and 84 interexchange carriers. Each of our products and services serves
multiple customer types as described below:

- Network Services-Connectivity, Switching and Transport: The customer
focus for these services includes long distance carriers, operator
service providers, independent telephone companies, competitive local
exchange carriers, Internet protocol-based carriers, and wireless
carriers. Our signaling services customers include AT&T, MCI WorldCom,
BellAtlantic Mobile, U.S. Cellular and Winstar.

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- Network Services-Intelligent Network Services: The customer focus for
these products includes long distance carriers, operator service
providers, regional Bell operating companies, independent telephone
companies, competitive local exchange carriers, Internet protocol-based
carriers, and wireless carriers. Our intelligent network services
customers include Frontier, Alltel, BellSouth, AT&T and MCI WorldCom.

- Clearinghouse Services: The customer focus for these services includes
long distance carriers, operator service providers, regional Bell
operating companies, independent telephone companies and competitive
local exchange carriers. Our clearinghouse services customers include
AT&T, MCI WorldCom and ZeroPlus Dialing, Inc.

- Network Usage Software Applications: The user focus for these products
includes regional Bell operating companies and other large carriers.
Users of our network usage software applications include SBC, US West,
and BellSouth.

COMPETITION

The market for SS7 network access and related services is relatively new,
but intensely competitive. It is subject to rapid technological change, evolving
industry standards and regulatory developments. We expect competition to
increase in the future. We compete with a number of U.S. and international
companies that vary in size and in the scope and breadth of the products and
services they offer. Our competitors for SS7 network access and intelligent
network services include subsidiaries of AT&T, MCI WorldCom, Southern New
England Telephone, Sprint, GTE and regional Bell operating companies, as well as
other companies. Many of our competitors are small business units of very large
companies, that currently do not actively market their SS7 networks or services.
It is possible that new competitors or alliances among competitors could emerge
and rapidly acquire significant market share. As a result, those competitors may
be able to more quickly develop or adapt to new or emerging technologies and
changes in customer requirements, or devote greater resources to the
development, promotion and sale of their products. Increased competition is
likely to result in price reductions, reduced margins and loss of market share.
We currently compete with only one other significant company, National Exchange
Carrier Association -- Independent NECA Services, with respect to our
clearinghouse services. INET, Inc. is our main competitor for network usage
software applications.

We believe that our ability to compete successfully depends on numerous
factors, both within and outside our control, including:

- our responsiveness to telecommunications service providers' needs;

- our ability to support existing and new industry standards;

- the development of technical innovations;

- our ability to attract and retain qualified personnel;

- our response to regulatory changes; and

- the quality, reliability and security of our products and services.

We cannot assure you that we will be able to compete successfully against
current or future competitors or that competitive pressures that we face will
not materially adversely affect our business, financial condition and operating
results.

REGULATION

We are not subject to the direct regulation of the FCC or any state utility
regulatory commission. Some of our customers, however, may be subject to federal
or state regulation that could have an indirect effect on our business. Because
we do not provide voice-grade or data services that are deemed to be

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common carrier telecommunications services, we do not anticipate that our
services will be subject to regulation by the FCC or state public utility
commissions. However, future regulation of lines of business we may enter could
directly affect our business or indirectly affect our business through its
impact on our customers. Alternatively, any future change in laws or regulations
could subject us to direct regulation by the FCC or any other federal or state
agency.

EMPLOYEES

As of June 30, 1999, we had 304 employees, of whom 197 were engaged in
operations, 60 were engaged in sales and marketing, and 47 were engaged in
administrative and other business support functions. We believe our relationship
with our employees is good. We have no collective bargaining agreements and no
unionized employees.

Our success depends, in part, upon our ability to continue to attract,
motivate and retain additional highly qualified employees, particularly
employees with SS7 knowledge and experience. The process of locating employees
with the skills and attributes necessary to implement our strategy is lengthy.
The loss of any existing key employees or the inability to attract, motivate and
retain additional qualified employees could affect our ability to expand our
network and enhance our products and services. See "Risk Factors -- We may have
difficulty attracting and retaining employees with the requisite skill to
execute our growth plans."

FACILITIES

Our headquarters and a portion of our operations center are located in
Lacey, Washington, where we own our facility. The building, approximately 13.5
acres of land on which the building is constructed, and some of our computer
hardware and software are financed by Rural Telephone Finance Cooperative. The
Cooperative has a first priority lien on substantially all of our assets,
revenues and property, excluding cash collected and held on behalf of others in
the normal course of providing our services.

We also lease office space, constructed to suit our specifications, in
Overland Park, Kansas, where, in addition to sales and administrative functions,
we have our network surveillance and control center that operates 24 hours a
day, seven days a week. The lease expires January 1, 2006, subject to an option
in 2004 to extend the lease for an additional five years. We sublease space for
our signal transfer point facilities at Mattoon, Illinois. The sublease expires
on July 31, 2001. We lease space for our signal transfer point facilities at
Rock Hill, South Carolina. The lease expires April 30, 2001.

LEGAL PROCEEDINGS

We are a party to various legal proceedings arising in the ordinary course
of business. We do not believe that those claims, individually or combined, will
have a material adverse effect on our business, financial condition or operating
results.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The persons currently serving as directors and executive officers of
Illuminet Holdings, Inc. and their ages are listed below. Roger H. Moore,
President and Chief Executive Officer, is the only director employed by
Illuminet.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger H. Moore................ 57 President, Chief Executive Officer and Class I
Director
F. Terry Kremian.............. 52 Executive Vice President and Chief Operating
Officer
Daniel E. Weiss............... 51 Chief Financial Officer, Secretary and Treasurer
Bruce E. Johnson.............. 51 Vice President - Operations and Engineering
David J. Nicol................ 53 Vice President - Product Management and Development
Richard A. Lumpkin............ 64 Chairman of the Board and Class III Director
Gregory J. Wilkinson.......... 49 Vice Chairman of the Board and Class III Director
Theodore D. Berns............. 50 Class III Director
Eugene L. Cole................ 63 Class II Director
Aubrey E. Judy................ 61 Class III Director
Kenneth L. Lein............... 66 Class I Director
James S. Quarforth............ 45 Class II Director
G. I. Ross.................... 65 Class I Director
James W. Strand............... 52 Class II Director
</TABLE>

Mr. Moore has been President and Chief Executive Officer since December
1995 and a member of the Board of Directors since July 1998. Prior to that, Mr.
Moore served as vice president of major accounts of Northern Telecom from 1994
to 1995. He was president of Northern Telecom Japan from 1991 to 1994, and from
1989 to 1991, he was vice president of Northern Telecom's Western Region. Mr.
Moore held other senior positions with Northern Telecom since joining that
company in 1985. Prior to joining Northern Telecom, Mr. Moore was the president
of AT&T Canada from 1982 to 1985. He has over 30 years of experience in the
telecommunications and business systems industry. Mr. Moore is a director of Tut
Systems, Inc. and The Center for Telecommunications Management at the University
of Southern California.

Mr. Kremian has been Executive Vice President and Chief Operating Officer
since September 1998. Prior to that, Mr. Kremian was Vice President - Marketing
and Sales from November 1997. He joined Illuminet from MCI where he was employed
since 1982, most recently as director of Carrier Sales, National Accounts.

Mr. Weiss has been Chief Financial Officer since February 1996 and
Secretary and Treasurer since April 1996. Mr. Weiss also serves as the Vice
President - Finance for Illuminet, Inc. as well as its Secretary and Treasurer.
Prior to that, Mr. Weiss served as vice president - finance, treasurer and
assistant treasurer for Illuminet Holdings, Inc.'s predecessor companies since
1979.

Mr. Johnson has been Vice President - Operations and Engineering since
February 1996. Prior to that, he served as Independent Telecommunications
Network's vice president - operations and engineering from 1992 to 1996. Prior
to joining Independent Telecommunications Network, Mr. Johnson was responsible
for implementing NYNEX Corporation's SS7 network. While at NYNEX, Mr. Johnson
was responsible for deploying one of the first industry intelligent networks and
played an active role in providing SS7 performance data to the FCC for its
toll-free database mandate.

Mr. Nicol has been Vice President - Product Management and Development
since February 1996. Prior to that, he served as Independent Telecommunications
Network's vice president, planning and

47
<PAGE> 48

administration since 1994. All of his 30-year career has been in technology
industry sectors, the last 15 directly in telecommunications, including six
years at Sprint in various officer positions.

Mr. Lumpkin has been a director since January 1989 and currently serves as
Chairman of the Board of Directors and Chairman of the Executive Committee.
Since 1957, Mr. Lumpkin has been employed by Consolidated Communication Inc. and
its affiliates. In September 1997, Consolidated was merged into McLeodUSA
Incorporated and Mr. Lumpkin became vice chairman and a director of McLeodUSA.
He remains chairman and chief executive officer of Illinois Consolidated
Telephone Company, a local exchange carrier located in Mattoon, Illinois. Mr.
Lumpkin is currently a director of First Mid-Illinois Bancshares and First
Mid-Illinois Bank and Trust in Mattoon, Illinois, and Ameren Corporation, a
public utility in St. Louis, Missouri and Central Illinois Public Service
Company, a public utility in Springfield, Illinois. Mr. Lumpkin is also a former
director and past president of the Illinois Telephone Association and United
States Telephone Association.

Mr. Wilkinson has been a director since February 1986 and currently serves
as Vice Chairman of the Board of Directors and Chairman of the Audit/Finance
Committee. Mr. Wilkinson has been associated with Telephone & Data Systems,
Inc., a communications holding company in various capacities since 1972. Since
1992, he has held the position of vice president and controller of that company.

Mr. Berns has been a director since October 1991. From 1996 until his
retirement in January 1999, Mr. Berns served as chief executive officer of
Integra Telecom, a competitive local exchange carrier located in Portland,
Oregon. He continues to serve as a director of Integra Telecom. From 1993 to
1995, Mr. Berns served as director, president and chief executive officer of
AdVal Communications, Inc., a provider of value-added facsimile services located
in Vancouver, Washington. From 1986 to 1993, Mr. Berns was employed by Pacific
Telecom, Inc., a telecommunications holding company located in Vancouver,
Washington. Mr. Berns held several positions with Pacific Telecom, including
vice president, secretary and president/chief operating officer. In addition,
Mr. Berns is a former director of the United States Telephone Association.

Mr. Cole has been a director since 1981. Mr. Cole worked at Canby Telephone
Association, Canby, Oregon, where in 1968, he was named general manager and in
1986 became president. From 1998 to present, Mr. Cole has been president of US
Telecom West, a telecommunications company located in Canby, Oregon. From 1986
until 1994, and again from 1995 to 1998, Mr. Cole served as president of CTA
Service Corp., a non-regulated telecommunications service provider located in
Canby, Oregon, and North Willamette Telecom, a cable company located in Canby,
Oregon.

Mr. Judy has been a director since April 1982 and is Chairman of the
Nominating Committee. Starting in 1964, Mr. Judy was employed with Farmers
Telephone Cooperative, Inc., an independent telephone company in Kingstree,
South Carolina. He served as its executive vice president from 1981 until his
retirement in December 1993. Mr. Judy served on the National Telephone
Cooperative Association board of directors from 1976 to 1982 and from 1985 to
1992, holding the offices of secretary, vice president and president.

Mr. Lein has been a director since 1987. Mr. Lein managed Winnebago
Cooperative Telephone Association, a local exchange telephone company located in
Lake Mills, Iowa, from 1974 to February 1998. He is a past member of the United
States Telephone Association board of directors and has served as secretary of
that board.

Mr. Quarforth has been a director since January 1989 and is Chairman of the
Personnel Committee. Mr. Quarforth has been an officer of CFW Communications
Company, a local exchange carrier located in Waynesboro, Virginia, since 1991,
most recently serving as chairman and chief executive officer. Mr. Quarforth is
also a director of American Telecasting, Inc., Listing Services Solutions, Inc.,
and Virginia Financial Corporation. Mr. Quarforth is also chairman of the
Virginia PCS Alliance, L.C. and

48
<PAGE> 49

West Virginia PCS Alliance L.C. and a past director and president of the
Virginia Telecommunications Industry Association.

Mr. Ross has been a director since January 1989. From 1970 until his
retirement in March 1999, Mr. Ross was president, chief executive officer and a
director of Lufkin-Conroe Communications Company, a local exchange carrier
located in Texas. Mr. Ross has served as chairman of the board of Texas Exchange
Carriers Association since 1988. Mr. Ross is a member of the United States
Telephone Association board of directors.

Mr. Strand has been a director since May 1992. Since 1990, Mr. Strand has
been president of the Diversified Operations division of and a director of
Aliant Communications, Inc. (formerly Lincoln Telecommunications Company), a
telecommunications company located in Lincoln, Nebraska. Mr. Strand served on
the board of directors of the Cellular Telecommunications Industry Association.

THE BOARD OF DIRECTORS

Our board of directors currently consists of ten directors. Our certificate
of incorporation provides for a classified board of directors consisting of
three classes. Each class must consist, as nearly as possible, of one-third of
the number of directors constituting the entire board. The terms of the current
directors terminate on the date of the annual meeting of stockholders in the
following years:

- Class I, 2000;

- Class II, 2001; and

- Class III, 2002.

At each annual meeting of stockholders, successors to the class of
directors whose term expires at that annual meeting will be elected for a
three-year term and until their respective successors are elected and qualified.
Under our certificate of incorporation, a director may only be removed for cause
by the affirmative vote of the holders of 80% of the outstanding shares of
capital stock entitled to vote in the election of directors.

The board has four committees: Executive, Personnel, Audit/Finance and
Nominating. The Executive Committee consists of Mr. Lumpkin, Mr. Wilkinson, Mr.
Judy and Mr. Moore. The Personnel Committee consists of Mr. Quarforth, Mr.
Berns, Mr. Cole and Mr. Lein. The Audit/Finance Committee consists of Mr.
Wilkinson, Mr. Ross and Mr. Strand. The Nominating Committee consists of Mr.
Judy, Mr. Lumpkin and Mr. Wilkinson.

OUTSIDE DIRECTOR COMPENSATION

Currently, outside directors receive a monthly fee of $300, except for the
Chairman of the board of directors, who receives $500 per month, and each
outside director receives an annual fee in the form of common stock options
granted under our 1997 Equity Incentive Plan, with an estimated value of $7,000
based on the Black-Scholes option pricing model. Outside directors are also paid
$300 per meeting per day for attendance at board or committee meetings not to
exceed a total of $600 per day and are reimbursed for expenses incurred in
attending meetings. Payment of monthly and meeting fees is made in the form of
cash, stock or stock options at the election of the outside director. The
options expire ten years after the date of grant. If a director elects options,
he must do so prior to January 1 of the year in question and the option exercise
price is set by the board of directors at that time. The exercise price set at
the end of 1997 for options earned in 1998 was $2.20 per share. In 1998, 130,044
options were issued to outside directors. For 1999, all outside directors have
elected to receive options. Assuming all directors attend all remaining
scheduled meetings during 1999, a total of 68,032 options will have been issued
at an exercise price of $4.55 per share.

49
<PAGE> 50

EXECUTIVE COMPENSATION

The following table sets forth information for the year ended December 31,
1998 regarding the compensation received by our chief executive officer and each
of our four other most highly compensated executive officers whose salaries and
bonuses for such year were in excess of $100,000 on an annualized basis (we
refer to these individuals as the named executive officers).

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
1998 -------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- -------- ------------------- ------------
<S> <C> <C> <C> <C>
Roger H. Moore........................ $229,774 $120,000 -- $34,422(1)
President and Chief Executive
Officer
F. Terry Kremian...................... 160,008 42,881 40,000 7,250(2)
Executive Vice President and Chief
Operating Officer
Daniel E. Weiss....................... 126,000 31,828 44,000 17,270(3)
Chief Financial Officer, Secretary
and Treasurer
Bruce E. Johnson...................... 143,004 36,123 32,000 20,308(4)
Vice President - Operations and
Engineering
David J. Nicol........................ 143,004 36,123 44,000 20,308(5)
Vice President - Product Management
and Development
</TABLE>

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

(1) Represents $7,316 in 401(k) matching contributions and $14,821 in
profit-sharing contributions made to our profit-sharing plan, and $12,285 in
compensation for 401(k) matching contributions and profit sharing
contributions due to Mr. Moore in excess of amounts allowable under the
Internal Revenue Code.

(2) Represents $7,250 in 401(k) matching contributions.

(3) Represents $6,300 in 401(k) matching contributions and $10,970 in
profit-sharing contributions.

(4) Represents $7,150 in 401(k) matching contributions and $13,158 in
profit-sharing contributions.

(5) Represents $7,150 in 401(k) matching contributions and $13,158 in
profit-sharing contributions.

50
<PAGE> 51

STOCK OPTIONS AWARDED IN 1998

The following table lists options granted during 1998 to the named
executive officers. All of the options were awarded under the 1997 Equity
Incentive Plan. Options are exercisable ratably over four years and expire ten
years from the date of grant, but the officer receiving the options must remain
continuously employed by us at the time the option is exercised. The percentages
listed in the table are based on an aggregate of options to purchase 474,000
shares of our common stock granted to all of our employees in 1998, including
the named executive officers. We computed potential realizable values by first
multiplying the number of shares of common stock subject to a given option by
the option exercise price to determine the initial aggregate stock value. We
then assumed that the initial aggregate stock value compounds at an annual 5% or
10% rate shown in the table for the entire ten-year term of the option to
determine the final aggregate stock value. Finally, we subtracted from the final
aggregate stock value the initial aggregate stock value to determine the
potential realizable value. The 5% and 10% assumed annual rates of stock
appreciation are mandated by the rules of the SEC and do not reflect our
estimate or projection of future stock price growth. Actual gains, if any, on
stock option exercises depend upon the actual future price of common stock and
the continued employment of the option holders throughout the vesting period.
Accordingly, the potential realizable values listed in this table may not be
achieved.

OPTION GRANTS IN 1998

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SHARES GRANTED TO EXERCISE OPTION TERM
UNDERLYING EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME OPTIONS 1998 ($/SHARE) DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Roger H. Moore........... -- --% $ -- -- $ -- $ --
F. Terry Kremian......... 40,000 8.4 4.18 7/1/2008 105,151 266,474
Daniel E. Weiss.......... 44,000 9.3 4.18 7/1/2008 115,666 293,121
Bruce E. Johnson......... 32,000 6.8 4.18 7/1/2008 84,121 213,179
David J. Nicol........... 44,000 9.3 4.18 7/1/2008 115,666 293,121
</TABLE>

On August 20, 1999, we awarded the following stock options, all of which
vest over four years and expire on their tenth anniversary:

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING EXERCISE PRICE
NAME OPTIONS PER SHARE
---- ---------------- --------------
<S> <C> <C>
Roger H. Moore.............................................. -- $ --
F. Terry Kremian............................................ 88,000 8.00
Daniel E. Weiss............................................. 52,000 8.00
Bruce E. Johnson............................................ 48,000 8.00
David J. Nicol.............................................. 48,000 8.00
</TABLE>

AGGREGATE OPTION EXERCISES DURING 1998 AND OPTION VALUES ON DECEMBER 31, 1998

The following table provides information on option exercises in 1998 by the
named executive officers and the value of those officers' unexercised options as
of December 31, 1998. As our stock is not publicly traded, a readily
ascertainable market value is not available. For purposes of this table,
"exercise" means an employee's acquisition of shares of common stock pursuant to
stock option grants, "exercisable" means options to purchase shares of common
stock that are subject to exercise and "unexercisable" means all other options
to purchase shares of common stock.

51
<PAGE> 52

To calculate value of unexercised in-the-money options at fiscal year end,
we used the initial public offering price of $19.00 per share minus the per
share exercise price, multiplied by the number of shares issuable upon exercise.

AGGREGATED OPTION EXERCISES IN
1998 AND 1998 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED YEAR-END AT FISCAL YEAR-END
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger H. Moore............... -- $ -- 624,000 416,000 $10,383,360 $6,922,240
F. Terry Kremian............. -- -- 20,000 100,000 336,000 1,600,800
Daniel E. Weiss.............. 400 1,084 19,600 104,000 329,280 1,660,080
Bruce E. Johnson............. -- -- 20,000 92,000 336,000 1,482,240
David J. Nicol............... -- -- 20,000 104,000 336,000 1,660,080
</TABLE>

BENEFIT PLANS

1997 EQUITY INCENTIVE PLAN

We adopted the 1997 Equity Incentive Plan on October 29, 1997. A committee,
which is appointed by the board of directors, consisting of at least two
nonemployee board members, administers the plan. Our plan sets aside 13% of our
common stock as may be outstanding from time to time for issuance as stock
awards. If stock awards granted under the plan expire, are canceled or lapse for
any reason (with the exception of the termination of a Tandem SAR upon exercise
of the related option, or the termination of a related option upon exercise of
the corresponding Tandem SAR) shares subject to such awards again become
available for issuance under the plan. Effective as of the date of this
prospectus, each employee and each member of the board of directors was issued
options to purchase 200 shares of common stock at the initial public offering
price. As of the date of this prospectus, options to acquire up to 2,200,188
shares are outstanding under the plan. The options to acquire 1,040,000 shares
granted to Mr. Moore were in addition to the options granted to other employees
under the plan.

The committee may grant incentive stock options that qualify under Section
422 of the Internal Revenue Code to our employees or employees of our
subsidiary. The committee may grant nonstatutory stock options, stock
appreciation rights, restricted stock, performance units or performance shares
to an employee, consultant or nonemployee board member of Illuminet, Inc. or its
affiliate. In addition, if we acquire property or stock from an unrelated
corporation, the committee may grant options to former employees of such
corporation in substitution for options granted to them by the corporation. Only
nonqualified stock options have been granted under the plan.

The exercise price of nonqualified stock options may be less than the fair
market value of stock at the time of grant. The exercise price of an incentive
stock option must be equal to at least 100% of the fair market value of the
stock on the grant date. The committee may grant a substitute option with an
exercise price equal to less than 100% of the fair market value of the shares on
the grant date. Because our stock has not been publicly traded, the board of
directors has determined the estimated fair market value of the common stock.

The maximum option term is ten years. However, generally an option
terminates three months after the option holder's service terminates. If such
termination is due to the option holder's disability, the exercise period
generally is extended to twelve months beyond the termination.

52
<PAGE> 53

The committee may provide for exercise periods of any length in individual
option grants. Nonqualified stock options that are granted to employees are
generally exercisable ratably over four years. Nonqualified stock options that
are granted to nonemployee board members are generally exercisable on grant. The
committee, in its sole discretion, may accelerate the exercisability of the
option. The aggregate fair market value, determined at the grant date, of
incentive stock option shares that are exercisable for the first time during a
calendar year may not exceed $100,000.

The committee may not grant an incentive stock option to any person who, at
the time of the grant, owns (or is deemed to own) stock possessing more than 10%
of the total combined power of Illuminet, Inc. or any subsidiary of Illuminet,
unless the exercise price is at least 110% of the fair market value of a share
on the grant date.

The committee, subject to certain limitations, will determine the terms and
conditions, including the exercise price, of stock appreciation rights granted
under the plan. During the period in which the restricted stock is subject to
restrictions, the restricted stockholders will generally have full voting rights
with respect to the stock they hold.

Transactions resulting in a change to our corporate structure, such as a
merger, reorganization, consolidation, stock dividend or stock split, may change
the class and number of shares subject to the plan and to outstanding awards. In
that event, the committee administering the plan will appropriately adjust the
plan as to the class and maximum number of shares subject to the plan. The
committee will also adjust the outstanding awards as to the class, number of
shares and price per share subject to such awards.

Upon a change in control of our company, all awards will generally become
immediately exercisable, unless the committee declares that the event does not
constitute a change in control for purposes of qualifying for
pooling-of-interests accounting. If there is a sale of substantially all of the
assets of, or a merger involving, Illuminet, the committee may require the
surviving entity to either assume or replace outstanding awards under the plan.
Otherwise, the awards will fully vest and become immediately exercisable for a
period of fifteen days.

The plan will continue indefinitely unless terminated earlier by the board
of directors. However, incentive stock options may not be granted after October
29, 2007.

PROFIT SHARING/401(K) TRUST RETIREMENT PLAN AND STOCK PURCHASE PLAN

We have qualified profit sharing/401(k) trust retirement plans covering all
employees, subject to eligibility requirements. We provide matching
contributions to the plans' trusts on a portion of employee contributions to the
plans and may, at the discretion of the board of directors, provide a
discretionary contribution. For 1996, 1997 and 1998, the contribution expense
was approximately $.8 million, $1.2 million and $1.1 million, respectively.

We also adopted a stock purchase plan on October 4, 1999. Any employee who
meets certain service requirements is eligible to participate in the plan and
can purchase our common stock for an amount equal to 85% of the lower of the
initial public offering price or the closing price of the common stock on the
last day of each six month period that the plan is in effect. We have reserved
700,000 shares for issuance under this plan. The plan will terminate in two
years.

53
<PAGE> 54

EMPLOYMENT AGREEMENTS

We have employment agreements with Messrs. Nicol and Johnson that renew
annually on their anniversary date and may be terminated by either party on 90
days' notice prior to the end of an annual term. We may terminate for cause at
any time. The agreements provide for initial annual base compensation of
$110,000 and $108,000, respectively. The annual base compensation has been
subsequently adjusted by the board of directors to $143,000 for both parties for
the year ended December 31, 1998. The agreements provide for the opportunity to
earn bonuses under established incentive plans. In addition, Mr. Johnson's
agreement provides for an annual bonus, the amount of which must be approved by
the board of directors. Each agreement provides that, if the executive officer
is terminated by us for other than cause, the executive officer will be entitled
to receive a severance payment in a lump sum amount equal to 12 months of the
executive officer's then base compensation. Mr. Moore and Mr. Kremian each have
severance agreements with us. A letter employment agreement with Mr. Moore
provides that if he is terminated without cause or he elects to resign as a
result of a subsequent change of control, he receives a lump sum severance
payment equal to his then annual base salary. A letter employment agreement with
Mr. Kremian provides for an initial base salary of $145,000 and for an annual
bonus based under an incentive plan. If Mr. Kremian is terminated without cause
within two years from his date of hire (October 8, 1997), he receives a lump sum
severance payment equal to six months of his base salary.

54
<PAGE> 55

PRINCIPAL STOCKHOLDERS

The following table lists information with respect to the beneficial
ownership of our common stock as of September 30, 1999 and as adjusted to
reflect the sale of our common stock in the offering by:

- each person known by us to beneficially own more than five percent of our
outstanding common stock;

- each of our directors;

- the named executive officers; and

- all of our executive officers and directors as a group.

Unless otherwise indicated, the person or persons named have sole voting
and investment power and that person's address is c/o Illuminet, 4501 Intelco
Loop, S.E., Lacey, Washington 98503. In determining the number and percentage of
shares beneficially owned by each person, shares that may be acquired by that
person under options exercisable within 60 days of September 30, 1999 are deemed
beneficially owned by that person and are deemed outstanding for purposes of
determining the total number of outstanding shares for that person and are not
deemed outstanding for that purpose for all other stockholders. The following
table assumes the effect of our stock restructuring.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
------------------- --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------------------ --------- ------- ---------- -------
<S> <C> <C> <C> <C>
Spectrum Equity Investors................................... 3,682,340 14.5% 3,682,340 12.6%
245 Lytton Avenue
Suite 175
Palo Alto, CA 94301
Telephone & Data Systems, Inc............................... 2,486,224 9.8% 2,486,224 8.5%
Suite 4000
30 N. LaSalle St
Chicago, IL 60602
CenturyTel, Inc............................................. 1,865,964 7.4% 1,865,964 6.4%
P.O. Box 4065
100 Century Park Drive
Monroe, LA 71211-4065
Theodore D. Berns(1)........................................ 59,776 * 59,776 *
Eugene L. Cole(2)........................................... 50,916 * 50,916 *
Aubrey E. Judy(3)........................................... 48,740 * 48,740 *
Kenneth L. Lein(4).......................................... 63,436 * 63,436 *
Richard A. Lumpkin(5)....................................... 1,172,156 4.6% 1,172,156 4.0%
James S. Quarforth(6)....................................... 761,408 3.0% 761,408 2.6%
G. I. Ross(7)............................................... 56,276 * 56,276 *
James W. Strand(8).......................................... 925,708 3.6% 925,708 3.2%
Gregory J. Wilkinson(9)..................................... 2,538,332 10.0% 2,538,332 8.7%
Roger H. Moore(10).......................................... 624,000 2.4% 624,000 2.1%
Daniel E. Weiss(11)......................................... 51,000 * 51,000 *
F. Terry Kremian(10)........................................ 50,000 * 50,000 *
David J. Nicol(12).......................................... 54,884 * 54,884 *
Bruce E. Johnson(13)........................................ 68,656 * 68,656 *
Executive officers and directors as a group (14 persons).... 6,525,288 24.5% 6,525,288 21.4%
</TABLE>

- -------------------------
* Less than 1%

(1) Includes 48,308 shares issuable under options exercisable within 60 days
after September 30, 1999.

(2) Includes 47,972 shares issuable under options exercisable within 60 days
after September 30, 1999.

(3) Includes 45,796 shares issuable under options exercisable within 60 days
after September 30, 1999.

(4) Includes 47,972 shares issuable under options exercisable within 60 days
after September 30, 1999.

55
<PAGE> 56

(5) As a director of McLeodUSA, Mr. Lumpkin may be deemed the beneficial owner
of the 667,976 shares of common stock owned by Consolidated Communications,
a wholly owned subsidiary of McLeodUSA. As a voting member of SKL
Investment Group, LLC, Mr. Lumpkin may be deemed the beneficial owner of
437,584 shares of common stock owned by SKL. The figures in the table for
Mr. Lumpkin also include 52,684 shares issuable under options exercisable
within 60 days after September 30, 1999.

(6) As an executive officer of CFW Communications Company, Inc., Mr. Quarforth
may be deemed the beneficial owner of the 698,868 shares of common stock
owned by CFW. The figures in the table for Mr. Quarforth also include
47,984 shares issuable under options exercisable within 60 days after
September 30, 1999.

(7) Includes 45,008 shares issuable under options exercisable within 60 days
after September 30, 1999.

(8) As a director and executive officer of Aliant Communications, Inc., Mr.
Strand may be deemed the beneficial owner of the 869,256 shares of common
stock owned by Aliant. The figures in the table for Mr. Strand also include
46,180 shares issuable under options exercisable within 60 days after
September 30, 1999.

(9) As an executive officer of Telephone & Data Systems, Inc., Mr. Wilkinson
may be deemed the beneficial owner of the 2,486,224 shares of common stock
beneficially owned by TDS. The figures in the table for Mr. Wilkinson also
include 48,320 shares issuable under options exercisable within 60 days
after September 30, 1999.

(10) Represents shares issuable under options exercisable within 60 days after
September 30, 1999.

(11) Includes 50,600 shares issuable under options exercisable within 60 days
after September 30, 1999.

(12) Includes 51,000 shares issuable under options exercisable within 60 days
after September 30, 1999.

(13) Includes 48,000 shares issuable under options exercisable within 60 days
after September 30, 1999.

56
<PAGE> 57

DESCRIPTION OF CAPITAL STOCK

The following summary of the terms and provisions of our capital stock and
indebtedness is not complete. Accordingly, you should also refer to our
certificate of incorporation, the indenture relating to our debentures and our
shareholder rights plan, which have been filed as exhibits to the registration
statement of which this prospectus is a part.

STOCK RESTRUCTURING

At the time of this offering, we restructured our stock. This stock
restructuring:

- created two classes of common stock;

- renamed all of our common stock outstanding immediately prior to this
offering as Class A common stock; and

- converted our Series A preferred stock into shares of Class A common
stock.

We have notified our debentureholders that we will redeem all outstanding
debentures on October 12, 1999 by payment of the face amount of the debentures
plus accrued interest. Debentureholders had until October 4, 1999 to notify us
if they elected to convert their debentures and all accrued interest into shares
of common stock instead of receiving a redemption payment. On October 4, 1999,
an additional 760,524 shares of common stock was issued to debentureholders who
elected to convert. These shares became shares of Class A common stock
immediately prior to this offering. In addition, Class A common stock will be
issued to our optionholders if they elect to exercise or convert within 180 days
after the date of this prospectus. Therefore, we may have as many as 6,769,920
shares of Class A common stock outstanding 180 days after the offering before
giving effect to the conversion ratio.

On April 5, 2000, 181 days after the date of this prospectus, each share of
Class A common stock will automatically convert into four shares of common
stock. Except for this conversion feature, all of the rights of holders of Class
A common stock and holders of common stock will be equivalent, and the two
classes of stock will be treated as one group for all voting, dividend and other
matters.

As a result of this restructuring, all of the shares to be issued in this
offering will be newly issued shares of common stock. Prior to the offering
there will be no shares of common stock outstanding. Until 181 days after the
date of this prospectus, the common stock sold in this offering will be the only
shares of our stock that will trade through the Nasdaq National Market.

GENERAL

Immediately following the closing of this offering, our authorized capital
stock will consist of 150,000,000 shares of common stock, $.01 par value per
share, 7,200,000 shares of Class A common stock, $.01 par value per share, and
100,000 shares of preferred stock, $.01 par value per share, with 4,416 shares
designated as Series A preferred stock and 7,000 shares designated as Series B
preferred stock. Upon completion of this offering, we will have 3,900,000
outstanding shares of common stock, 6,342,195 outstanding shares of Class A
common stock and no outstanding shares of Series A preferred stock or Series B
preference stock.

COMMON STOCK

Other than the conversion feature of the Class A common stock, the terms of
both classes of our common stock are identical. Subject to preferences that may
apply to shares of preferred stock

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outstanding at the time, the holders of outstanding common stock are entitled to
receive dividends out of assets legally available at the time and in amounts
that the board of directors may from time to time determine. Each stockholder is
entitled to one vote for each share of common stock held by it submitted to a
vote of stockholders. Prior to the conversion, each share of Class A common
stock will have four votes. Our certificate of incorporation does not allow
cumulative voting for the election of directors, which means that the holders of
a majority of the shares voted can elect all the directors then standing for
election. Holders of at least a majority of the shares entitled to vote can
determine the outcome of questions presented to stockholders. However, approval
of any of the following events requires the vote of the holders of at least
two-thirds of the shares entitled to vote on these matters:

- our merger, consolidation or share exchange with another corporation;

- a transfer of all or substantially all of our assets outside of the
ordinary course of business;

- our voluntary dissolution; or

- an amendment, alteration, change or repeal of any provision of our
certificate of incorporation.

The common stock is not entitled to preemptive rights and, other than the
conversion feature of the Class A common stock described above, is not subject
to conversion or redemption. If the liquidation, dissolution or winding-up of
Illuminet were to occur, the holders of shares of common stock would be entitled
to share ratably in the distribution of all of our assets remaining available
for distribution after satisfaction of all of our liabilities and the payment of
the liquidation preference of any outstanding preferred stock. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and non-assessable. Shares of
common stock and Class A common stock include rights to purchase shares of our
Series B preference stock (or common stock, as may be determined by the board of
directors) in connection with our shareholders rights plan, as described below.

SERIES A PREFERRED STOCK

Each share of Series A preferred stock is entitled to 100 votes, votes
together with the common stock unless otherwise required by law and is
convertible into 85.12 shares of Class A common stock of Illuminet, at the
option of the holder at any time that the holder elects to convert the debenture
issued with it as a unit. Each share of Series A preferred stock is convertible,
at our option, into 85.12 shares of our Class A common stock, at any time that
the debenture issued as a unit with it is converted into shares of Class A
common stock. All Series A shares will automatically convert into 204,941 shares
of Class A common stock upon completion of the offering. The holders of Series A
preferred stock may receive dividends only upon a resolution of the board of
directors. The board of directors may not pay dividends to the holders of the
Series A preferred stock unless dividends are paid simultaneously to the holders
of the common stock. If the liquidation, dissolution or winding-up of Illuminet
were to occur, the holders of Series A preferred stock would be entitled to
receive $1,000 per share out of the assets of Illuminet available for
distribution to the stockholders and before any payment or distribution is made
to the holders of common stock or Series B preference stock.

DEBENTURES

We issued debentures that bear interest at 7.5% and are due on August 15,
2001 under an indenture dated August 15, 1991. Interest on the debentures is
payable in quarterly installments. Interest accrued for the period prior to
December 31, 1995 was deferred and will be paid ratably on each interest payment
date over the remaining term of the debentures. Each debenture is convertible
into 90 shares of Class A

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common stock per $1,000 in principal and accrued interest. The debentures are
subordinated to all senior debt.

At June 30, 1999, we had approximately $8.6 million in principal amount
plus accrued interest in debentures outstanding. We have called all of those
debentures for payment on October 12, 1999. In connection with this redemption,
debentureholders holding an aggregate amount of $8.4 million in principal and
accrued interest have elected to convert their debentures into 760,524 shares of
Class A common stock. The remaining $.1 million of principal and accrued
interest will be paid to debentureholders for the redemption of their
debentures.

SERIES B PREFERENCE STOCK

Although no shares are currently outstanding, our Series B participating
cumulative preference stock is entitled to one vote per each one one-thousandth
(1/1000) share and votes together as a class with common stock on matters that
holders of common stock are generally entitled to vote except where otherwise
required by law. These shares were authorized in connection with the
establishment of our shareholders rights plan. The Series B preference stock
ranks superior to common stock upon the liquidation of Illuminet and each one
one-thousandth of a share of Series B preference stock is entitled to receive an
amount equivalent to the amount to be distributed per whole share of common
stock in the event of a liquidation, dissolution or winding up of Illuminet. The
shares of Series B preference stock are entitled to cumulative quarterly
dividends at $.01 per quarter and have the right to elect a director to the
board of directors if we fail to pay dividends for six consecutive quarters.

ANTI-TAKEOVER PROVISIONS

DELAWARE LAW

We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. Section 203 prevents a Delaware
corporation, including those that are listed on the Nasdaq National Market, from
engaging, under certain circumstances, in a "business combination," which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder. An interested
stockholder is a stockholder who owns 15% or more of the corporation's
outstanding voting stock, as well as affiliates and associates of that person.
This is the case unless:

- the transaction that resulted in the stockholder's becoming an interested
stockholder was approved by the board of directors prior to the date the
interested stockholder attained that status;

- upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction began, excluding those shares owned by (1) persons who
are directors and also officers and (2) employee stock compensation plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or

- on or after the date the interested stockholder attained that status, the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.

A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express
stockholders' amendment approved by at least a majority of the

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outstanding voting shares. We have not "opted out" of the provisions of the
Section 203. This statute could prohibit or delay mergers or other takeover or
change-in-control attempts with respect to Illuminet and, accordingly, may
discourage attempts to acquire us.

CHARTER AND BYLAW PROVISIONS

Our certificate of incorporation and bylaws include a number of provisions
that may have the effect of deterring or impeding hostile takeovers or
changes-in-control or management. These provisions include:

- our board of directors is classified into three classes of directors
nearly equal in size with staggered three year terms;

- the board of directors has the authority to issue one or more series of
preferred stock; and

- stockholders do not have cumulative voting rights.

These provisions may have the effect of delaying or preventing a
change-in-control. Our certificate of incorporation and bylaws provide that we
will indemnify officers and directors against losses that they may incur in
investigations and legal proceedings resulting from their services to us, which
may include services related to takeover defense measures. Such provisions may
have the effect of preventing changes in the management of Illuminet.

SHAREHOLDER RIGHTS PLAN

We have a shareholder rights plan that would significantly discourage,
delay or prevent a merger or acquisition. The shareholder rights plan authorizes
the issuance of one right for each share of common stock outstanding on November
20, 1998 or that becomes outstanding after that date. Each right represents the
right to purchase shares of our Series B preference stock. The rights become
exercisable if a person or group acquires or makes a tender offer for more than
20% of our outstanding common stock. Upon the occurrence of such an event, each
right entitles the holder (other than the acquiror) to purchase for $150 our
common stock (or, as may be specified by our board of directors, our Series B
preference stock) or, in some instances, stock of the acquiring entity, that
would be worth $300. In certain instances, the board of directors may also elect
to exchange the rights for shares of common stock. The rights expire on November
20, 2008, unless we redeem them earlier, prior to their becoming exercisable, in
our sole discretion.

Until they are exercisable the rights transfer only with the common stock.
The shares to be issued and the number of rights are subject to adjustment by
the board of directors in certain instances.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is American
Securities Transfer and Trust, Inc.

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UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK

GENERAL

The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock that may be relevant to you if you are a non-U.S. holder under U.S.
federal income tax laws. A non-U.S. holder is a beneficial owner of our common
stock that is, for U.S. federal income tax purposes:

- a nonresident alien individual;

- a foreign corporation;

- a foreign estate or trust; or

- a foreign partnership.

This discussion does not address all aspects of U.S. federal income and
estate taxation that may be relevant to you in light of your particular
circumstance. It also does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code, Treasury regulations and administrative and judicial
interpretations as of the date hereof. All of these are subject to change,
possibly with retroactive effect, or different interpretations. If you are
considering buying our common stock, you should consult your own tax advisor
about current and possible future tax consequences of holding and disposing of
our common stock in your particular situation.

DISTRIBUTIONS

As noted elsewhere in this prospectus, we do not intend to pay dividends.
If we change this policy and declare dividends on our common stock, any such
dividends paid to a non-U.S. holder may be subject to withholding. If the
dividends are not effectively connected with a U.S. trade or business of the
non-U.S. holder or, if a tax treaty applies, are not attributable to a U.S.
permanent establishment or fixed base of the non-U.S. holder, any dividends
will, to the extent paid out of earnings and profits, be subject to U.S.
withholding tax. The withholding tax will be imposed at a 30 percent rate or, if
a tax treaty applies, a lower rate specified by the treaty. To receive a reduced
treaty rate, a non-U.S. holder must furnish to us or our paying agent a duly
completed Form 1001 or Form W-8BEN, or substitute form, certifying to its
qualification for such rate.

Dividends that are effectively connected with the conduct of a trade or
business within the United States of a non-U.S. holder and, if a tax treaty
applies, are attributable to a U.S. permanent establishment or fixed base of the
non-U.S. holder, are exempt from U.S. federal withholding tax. To qualify for
such exemption, the non-U.S. holder must furnish to us or our paying agent a
duly completed Form 4224 or Form W-8ECI, or substitute form, certifying its
qualification for the exemption. However, dividends exempt from U.S. withholding
because they are effectively connected or they are attributable to a U.S.
permanent establishment or fixed base are subject to U.S. federal income tax on
a net income basis at the regular graduated U.S. federal income tax rates. Any
such effectively connected dividends received by a foreign corporation may,
under some circumstances, be subject to an additional branch profits tax at a 30
percent rate or a lower rate specified by an applicable income tax treaty.

Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the United States are presumed to be paid to a
resident of the country of address for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.

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However, U.S. Treasury regulations applicable to dividends paid after December
31, 2000 eliminate this presumption, subject to various transition rules.

For dividends paid after December 31, 2000, a non-U.S. holder generally
will be subject to U.S. backup withholding tax at a 31 percent rate under the
backup withholding rules described below, rather than at a 30 percent rate or a
reduced rate under an income tax treaty, as described above, unless the non-U.S.
holder complies with certain Internal Revenue Service certification procedures
or, in the case of payments made outside the U.S. with respect to an offshore
account, certain IRS documentary evidence procedures. Further, to claim the
benefit of a reduced rate of withholding under a tax treaty for dividends paid
after December 31, 2000, a non-U.S. holder must comply with certain modified IRS
certification requirements. Special rules also apply to dividend payments made
after December 31, 2000 to foreign intermediaries, United States or foreign
wholly owned entities that are disregarded for U.S. federal income tax purposes
and entities that are treated as fiscally transparent in the U.S., the
applicable income tax treaty jurisdiction, or both. You should consult your own
tax advisor concerning the effect, if any, of the rules affecting post-December
31, 2000 dividends on your possible investment in our common stock.

A non-U.S. holder may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund along with the required information with
the IRS.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of our common
stock unless one of the following applies:

- The gain is effectively connected with a trade or business of the
non-U.S. holder in the U.S. and, if a tax treaty applies, the gain is
attributable to a U.S. permanent establishment or fixed base maintained
by the non-U.S. holder. In this case, the non-U.S. holder will, unless an
applicable treaty provides otherwise, be taxed on its net gain derived
from the sale at regular graduated U.S. federal income tax rates. If the
non-U.S. holder is a foreign corporation, it may be subject to an
additional branch profits tax equal to 30 percent of its effectively
connected earnings and profits within the meaning of the Internal Revenue
Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable income tax treaty and duly
demonstrates such qualification.

- The non-U.S. holder is an individual, holds our common stock as a capital
asset, is present in the U.S. for 183 or more days in the taxable year of
the disposition, and certain other conditions are met. In this case, the
non-U.S. holder will be subject to a flat 30-percent tax on the gain
derived from the sale, which may be offset by certain U.S. capital
losses.

- We are or have been a U.S. real property holding corporation for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of the disposition or the period
during which the non-U.S. holder held our common stock. We believe that
we never have been and are not currently a U.S. real property holding
corporation for U.S. federal income tax purposes. Although we consider it
unlikely based on our current business plans and operations, we may
become a U.S. real property holding corporation in the future. Even if we
were to become a U.S. real property holding corporation, any gain
realized by a non-U.S. holder would not be subject to U.S. federal income
tax as described in this paragraph if our common stock were considered to
be "regularly traded on an established securities market" and the
non-U.S. holder did not own, actually or constructively, at any time
during the shorter of the periods described above, more than five percent
of our common stock.

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FEDERAL ESTATE TAX

Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death, or common stock as to which the non-U.S. holder made certain
lifetime transfers, will be included in such holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Under U.S. Treasury regulations, we must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected dividends or withholding was reduced by an applicable
income tax treaty. Under an applicable tax treaty, information may also be made
available to the tax authorities in the country in which the non-U.S. holder
resides.

United States federal backup withholding generally is a withholding tax
imposed at the rate of 31 percent on certain payments to persons that fail to
furnish certain required information. Backup withholding generally will not
apply to dividends paid before January 1, 2001, to non-U.S. holders. See the
discussion under "- Distributions" above for rules regarding reporting
requirements to avoid backup withholding on dividends paid after December 31,
2000.

As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of our common stock effected outside the U.S. However,
information reporting requirements, but not backup withholding, will apply to a
payment by or through a foreign office of a broker of the proceeds of a sale of
our common stock effected outside the U.S. if that broker:

- is a U.S. person for U.S. federal income tax purposes,

- is a foreign person that derives 50 percent or more of its gross income
for certain periods from the conduct of a trade or business in the U.S.,

- is a controlled foreign corporation as defined in the Internal Revenue
Code, or

- is a foreign partnership with certain U.S. connections for payments made
after December 31, 2000.

Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain conditions are met or the holder otherwise establishes an
exemption.

Payment by or through a U.S. office of a broker of the proceeds of a sale
of our common stock is subject to both backup withholding and information
reporting unless the holder certifies to the payor as to its status as a
non-U.S. holder on a duly completed Form W-8BEN, or substitute form, under
penalties of perjury or otherwise establishes an exemption

Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the holder's
U.S. federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.

THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF OUR
COMMON STOCK BY NON-U.S. HOLDERS. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF OWNERSHIP AND
DISPOSITION OF OUR COMMON STOCK, INCLUDING THE EFFECT OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS.

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SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of common stock in the public market after
this offering, or the possibility of those sales occurring, could adversely
affect the prevailing market price and our ability to raise capital in the
future.

Upon the completion of this offering, Illuminet will have outstanding
3,900,000 shares of common stock and 6,342,195 shares of Class A common stock.
Of these shares, the 3,900,000 shares of common stock sold in this offering will
be freely tradeable without restriction. Other than 147,410 shares which were
issued in private transactions, all shares of Class A common stock were issued
and registered with the SEC in connection with our merger in February, 1996 with
Independent Telecommunications Networks, Inc.

Illuminet, certain existing stockholders and all of our executive officers
and directors have entered into lock-up agreements, representing an aggregate of
3,950,318 shares of Class A common stock. The lock-up agreements require that
the locked-up person not dispose of any shares owned by them for a period of 180
days after the date of this prospectus without the prior written consent of
Morgan Stanley on behalf of the underwriters. After the expiration of the
lock-up agreements, those people or entities will be entitled to dispose of the
common stock that they hold subject to the provisions of applicable securities
laws.

The remaining 2,391,877 shares of our Class A common stock not subject to
lock-up agreements will not be tradeable in the public market for 180 days after
the date of this prospectus when each share of Class A common stock
automatically converts into four shares of common stock.

In general, under Rule 144, a person who has beneficially owned shares for
at least one year is entitled to sell in broker transactions or to market
makers, within any three-month period, a limited number of shares. This number
may not exceed the greater of:

- one percent (1%) of the then-outstanding shares of common stock,
approximately 292,688 shares immediately after the offering; or

- the average weekly trading volume of the common stock during the four
calendar weeks preceding the date of filing of the Form 144 required for
the sale of those shares.

Under Rule 144, however, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has held the
shares proposed to be sold for a minimum of two years is free to sell those
shares without having to comply with the volume, manner-of-sale, volume
limitation or notice provisions under Rule 144. All existing stockholders have
satisfied the two-year holding period and, therefore, only our affiliates will
be subject to the volume restrictions. Persons deemed affiliates will hold
shares of Class A common stock representing 3,793,896 shares of common stock
after the offering.

Shortly after the completion of this offering, we intend to file a
registration statement under the federal securities laws to permit the 3,804,941
shares reserved for issuance under our stock option plan to be sold in the
public market.

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UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, severally, the number of shares of common stock indicated below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 1,480,000
BancBoston Robertson Stephens Inc........................... 740,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 740,000
Robert W. Baird & Co. Incorporated.......................... 50,000
CIBC World Markets Corp. ................................... 80,000
A.G. Edwards & Sons, Inc. .................................. 80,000
First Union Securities, Inc. ............................... 50,000
Hambrecht & Quist LLC....................................... 80,000
ING Barings LLC............................................. 80,000
Jefferies & Company, Inc. .................................. 50,000
Edward D. Jones & Co., L.P. ................................ 80,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................. 80,000
Brad Peery Inc. ............................................ 50,000
Ragen MacKenzie Incorporated................................ 50,000
The Robinson-Humphrey Company, LLC ......................... 50,000
SG Cowen Securities Corporation............................. 80,000
Salomon Smith Barney Inc. .................................. 80,000
---------
Total............................................. 3,900,000
=========
</TABLE>

The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of our common stock offered by this prospectus
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take and pay for all
of the shares of common stock offered by this prospectus if any such shares are
taken. However, the underwriters are not required to take or pay for the shares
covered by the underwriters' over-allotment option described below.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to securities dealers at a price that
represents a concession not in excess of $.80 a share under the public offering
price. Any underwriter may allow, and dealers may re-allow, a concession not in
excess of $.10 a share to other underwriters or to securities dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 585,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent this option is exercised,
each underwriter will become obligated, subject to specified conditions, to

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purchase approximately the same percentage of additional shares of common stock
as the number set forth next to the underwriter's name in the preceding table
bears to the total number of shares of common stock listed next to the names of
all underwriters in the preceding table. If the underwriters exercise their
option in full, the total price to the public would be $85,215,000, the total
underwriters' discounts and commissions would be $5,965,050 and total proceeds
to us would be $79,249,950.

The underwriters have informed us that they do not intend to make sales to
discretionary accounts that exceed five percent of the total number of shares of
common stock offered by them.

At our request, the underwriters have reserved for sale, at the initial
public offering price, 175,000 shares of common stock for our directors,
officers, employees and business associates. The number of shares available for
sale to the general public will be reduced to the extent these individuals
purchase the reserved shares. Any reserved shares that are not purchased in the
directed share program will be offered by the underwriters to the general public
on the same basis as the other shares offered in this prospectus.

Each of Illuminet, its directors and executive officers and certain other
of its stockholders have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 180 days after the date of this prospectus:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant, purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or

- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,

whether any transaction described above is to be settled by delivery of shares
of common stock or other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

- the sale of shares to the underwriters;

- the issuance by us of shares of common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
of this prospectus of which the underwriters have been advised in
writing;

- the sale of shares of common stock pursuant to our employee stock
purchase plan and the granting of stock options and/or restricted stock
pursuant to our existing employee benefit plans, so long as those options
will not become exercisable and any restricted stock will not vest during
such 180-day period; and

- transactions by any person other than Illuminet relating to shares of
common stock or other securities acquired in open market or other
transactions after the completion of the offering of the shares.

In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed

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common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. The underwriters have reserved the
right to reclaim selling concessions in order to encourage underwriters and
dealers to distribute the common stock for investment, rather than for
short-term profit taking. Increasing the proportion of the offering held for
investment may reduce the supply of common stock available for short-term
trading. Any of these activities may stabilize or maintain the market price of
the common stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.

Illuminet and the underwriters have agreed to indemnify each other against
a variety of liabilities, including liabilities under the Securities Act.

We have agreed to pay our printing, legal, accounting and other expenses
relating to the offering, which we estimate to be $900,000.

LEGAL MATTERS

The validity of the issuance of the shares of common stock will be passed
upon for us by Blackwell Sanders Peper Martin LLP, Kansas City, Missouri.
Certain legal matters relating to this offering will be passed upon for the
underwriters by Shearman & Sterling, New York, New York. A partner at Blackwell
Sanders owns four shares of Series A preferred stock and $12,496 in principal
amount and accrued interest of debentures, all of which will be converted into
6,440 shares of common stock prior to the offering.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998, as set forth in their
reports. We have included our financial statements and schedule in the
prospectus and elsewhere in the registration statement in reliance on their
reports, given on their authority as experts in accounting and auditing.

67
<PAGE> 68

GLOSSARY

Competitive local exchange carrier. A company that provides local exchange
services, including services from telecommunications lines dedicated to, or
reserved for use by, a particular customer along predetermined routes (in
contrast to links that are temporarily established), in competition with the
incumbent local exchange carrier.

Incumbent local exchange carrier. A company historically providing local
telephone service. Often refers to one of the regional Bell operating companies
or GTE.

Internet. The name used to describe the global open network of computers
that permits a person to exchange information with any other computer connected
to the network.

Internet protocol. The method (or protocol) used to route information sent
from one computer to another on the Internet or other data networks, such as
corporate intranets or industry extranets.

Internet service provider. An organization that provides access to the
Internet.

Interexchange carrier. A long distance carrier.

IS-41. The signaling protocol used in wireless telecommunications that
allows carriers to provide roaming support.

Local access and transport area. The geographical areas within which a
local telephone company may offer telecommunications services.

Local number portability. The ability for subscribers to keep the same
telephone number when changing carriers, specifically when changing from the
incumbent local exchange carrier to a competitive local exchange carrier, as
mandated by the FCC.

Packet-switched network. A communications network in which packets
(messages or fragments of messages) are individually routed between hosts with
no previously established communication path. Packets are routed to their
destination through the most expedient route. Not all packets travelling between
the same two hosts, even those from a single message, will follow the same
route. The destination computer reassembles the packets into their appropriate
sequence. Packet switching is used to optimize the use of the bandwidth
available in a network and to minimize latency.

Public-switched telecommunications network. The switched network available
to all users generally on a shared basis (i.e., not dedicated to a particular
user). The local exchange telephone service networks operated by incumbent local
exchange carriers are the largest and often the only public-switched networks in
a given locality.

Signaling System 7 (SS7). A network signaling system that improves network
efficiency and allows for the provision of advanced services. Signaling System 7
is a means by which elements of the telephone network exchange information.

Switch. A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users.

Trunk. A communication line connecting two switching systems, such as a
line connecting two central offices. Often used to refer to the communication
line(s) with the most bandwidth or capacity on the network, the main line.

68
<PAGE> 69

ILLUMINET HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999......................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998 and for the six months
ended June 30, 1998 and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998 and for the
six months ended June 30, 1999............................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the six months
ended June 30, 1998 and 1999.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 70

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Illuminet Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Illuminet
Holdings, Inc. ("Illuminet") as of December 31, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Illuminet'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 audit 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Illuminet as of
December 31, 1997 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Seattle, Washington
February 12, 1999, except Note 12,
as to which the date is October 7, 1999

F-2
<PAGE> 71

ILLUMINET HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $11,167 $11,967 $11,347
Accounts receivable, less allowance for doubtful accounts
of $1,747 ($1,282 in 1997 and $1,133 in 1998).......... 23,818 27,155 30,830
Deferred income taxes..................................... 3,645 2,101 868
Prepaid expenses and other................................ 377 784 879
------- ------- -------
Total current assets.............................. 39,007 42,007 43,924
Property and equipment, net................................. 34,715 43,747 44,549
Computer software product costs, less accumulated
amortization of $2,065 ($1,223 in 1997 and $1,784 in
1998)..................................................... 1,636 1,075 794
Other assets................................................ 2,668 2,621 2,561
------- ------- -------
Total assets...................................... $78,026 $89,450 $91,828
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 4,554 $ 3,923 $ 2,645
Accrued expenses.......................................... 3,248 3,378 2,403
Due to customers.......................................... 16,931 16,622 16,599
Current portion of obligations under capital leases....... -- 1,706 2,370
Current portion of long-term debt......................... 2,278 3,458 2,816
------- ------- -------
Total current liabilities......................... 27,011 29,087 26,833
------- ------- -------
Deferred income taxes....................................... 2,775 3,429 3,429
Obligations under capital leases, less current portion...... -- 5,146 6,170
Long-term debt, less current portion........................ 18,014 15,596 14,564
Stockholders' equity:
Preferred Stock, par value $.01 per share, authorized
100,000 shares, 4,416 shares designated as Series A and
7,000 shares designated as Series B.................... -- -- --
Series A Convertible Preferred Stock, par value $.01
per share, issued and outstanding 2,408 (2,451 in
1997 and 2,408 in 1998), aggregate liquidation
preference $2,408.................................... -- -- --
Series B Participating Cumulative Preference Stock, par
value $.01 per share, none issued or outstanding..... -- -- --
Common Stock, par value $.01 per share, authorized
150,000,000 shares, none outstanding................... -- -- --
Class A Common Stock, par value $.01 per share, authorized
7,200,000 shares, issued and outstanding 5,366,730
(5,347,081 in 1997 and 5,365,605 in 1998).............. 53 54 54
Additional paid-in capital................................ 11,986 12,712 12,857
Deferred stock-based compensation......................... (340) (394) (359)
Retained earnings......................................... 18,527 23,820 28,280
------- ------- -------
Total stockholders' equity........................ 30,226 36,192 40,832
------- ------- -------
Total liabilities and stockholders' equity........ $78,026 $89,450 $91,828
======= ======= =======
</TABLE>

F-3
<PAGE> 72

ILLUMINET HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Network services................. $ 29,434 $ 44,117 $ 60,274 $ 26,600 $ 41,562
Clearinghouse services........... 7,896 6,723 6,232 3,463 3,052
Network usage software
applications.................. 558 3,468 5,406 1,523 502
---------- ---------- ---------- ---------- ----------
Total revenues........... 37,888 54,308 71,912 31,586 45,116
Expenses:
Carrier costs.................... 9,358 15,313 22,983 10,752 13,598
Operating........................ 11,139 14,979 19,768 8,547 12,487
Selling, general and
administrative................ 7,774 8,873 10,287 4,540 6,128
Depreciation and amortization.... 5,714 7,354 9,372 3,783 5,317
---------- ---------- ---------- ---------- ----------
Total expenses........... 33,985 46,519 62,410 27,622 37,530
---------- ---------- ---------- ---------- ----------
Operating income................... 3,903 7,789 9,502 3,964 7,586
Interest expense, net.............. 838 808 746 225 392
---------- ---------- ---------- ---------- ----------
Income before income taxes......... 3,065 6,981 8,756 3,739 7,194
Income tax provision (benefit)..... 112 (676) 3,463 1,388 2,734
---------- ---------- ---------- ---------- ----------
Net income......................... $ 2,953 $ 7,657 $ 5,293 $ 2,351 $ 4,460
========== ========== ========== ========== ==========
Earnings per share -- basic........ $ 0.59 $ 1.45 $ 0.99 $ 0.44 $ 0.83
========== ========== ========== ========== ==========
Earnings per share -- diluted...... $ 0.57 $ 1.27 $ 0.88 $ 0.39 $ 0.71
========== ========== ========== ========== ==========
Weighted-average common shares --
basic............................ 4,995,092 5,295,509 5,356,385 5,347,081 5,366,363
========== ========== ========== ========== ==========
Weighted-average common shares --
diluted.......................... 5,972,284 6,396,665 6,497,360 6,497,006 6,531,223
========== ========== ========== ========== ==========
</TABLE>

F-4
<PAGE> 73

ILLUMINET HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------- CLASS A
CLASS A CLASS B COMMON SERIES A PREFERRED ADDITIONAL
--------------- ------------------- ------------------ ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ---------- ------ --------- ------ --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996......... 466 $ 23 1,208,696 $ 24 -- $-- -- $-- $ 4,136
Merger dissenting shares
repurchased....................... (6) -- (17,917) -- -- -- -- -- --
---- ---- ---------- ---- --------- --- ----- --- -------
Total before merger on February 23,
1996.............................. 460 23 1,190,779 24 -- -- -- -- 4,136
Conversion to Illuminet Holdings,
Inc. Common Stock................. (460) (23) (1,190,779) (24) 3,673,871 37 -- -- 10
Purchase of Independent
Telecommunications Network, Inc... -- -- -- -- 1,566,988 16 2,675 -- 6,354
Common Stock issued under former
stock incentive plan.............. -- -- -- -- 7,539 -- -- -- 82
Conversion of Series A Preferred
Stock............................. -- -- -- -- 3,235 -- (38) -- --
Conversion of convertible
redeemable subordinated
debentures........................ -- -- -- -- 10,721 -- -- -- 119
Net income......................... -- -- -- -- -- -- -- -- --
---- ---- ---------- ---- --------- --- ----- --- -------
Balance at December 31, 1996....... -- -- -- -- 5,262,354 53 2,637 -- 10,701
Conversion of Series A Preferred
Stock............................. -- -- -- -- 15,832 -- (186) -- --
Conversion of convertible
redeemable subordinated
debentures........................ -- -- -- -- 66,194 -- -- -- 735
Common Stock issued under former
stock incentive plan.............. -- -- -- -- 14,240 -- -- -- 41
Common Stock repurchases........... -- -- -- -- (11,539) -- -- -- --
Deferred stock-based
compensation...................... -- -- -- -- -- -- -- -- 509
Stock-based compensation expense... -- -- -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- -- -- -- --
---- ---- ---------- ---- --------- --- ----- --- -------
Balance at December 31, 1997....... -- -- -- -- 5,347,081 53 2,451 -- 11,986
Conversion of Series A Preferred
Stock............................. -- -- -- -- 3,660 -- (43) -- --
Conversion of convertible
redeemable subordinated
debentures........................ -- -- -- -- 14,764 1 -- -- 164
Deferred stock-based
compensation...................... -- -- -- -- -- -- -- -- 561
Stock-based compensation expense... -- -- -- -- -- -- -- -- --
Stock options exercised............ -- -- -- -- 100 -- -- -- 1
Net income......................... -- -- -- -- -- -- -- -- --
---- ---- ---------- ---- --------- --- ----- --- -------
Balance at December 31, 1998....... -- -- -- -- 5,365,605 54 2,408 -- 12,712
Deferred stock-based compensation
(unaudited)....................... -- -- -- -- -- -- -- -- 135
Stock-based compensation expense
(unaudited)....................... -- -- -- -- -- -- -- -- --
Stock options exercised
(unaudited)....................... -- -- -- -- 1,125 -- -- -- 10
Net income (unaudited)............. -- -- -- -- -- -- -- -- --
---- ---- ---------- ---- --------- --- ----- --- -------
Balance at June 30, 1999
(unaudited)....................... -- $ -- -- $ -- 5,366,730 $54 2,408 $-- $12,857
==== ==== ========== ==== ========= === ===== === =======

DEFERRED TOTAL
STOCK-BASED RETAINED STOCKHOLDERS'
COMPENSATION EARNINGS EQUITY
------------ -------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996......... $ -- $ 8,236 $12,419
Merger dissenting shares
repurchased....................... -- (183) (183)
----- ------- -------
Total before merger on February 23,
1996.............................. -- 8,053 12,236
Conversion to Illuminet Holdings,
Inc. Common Stock................. -- -- --
Purchase of Independent
Telecommunications Network, Inc... -- -- 6,370
Common Stock issued under former
stock incentive plan.............. -- -- 82
Conversion of Series A Preferred
Stock............................. -- -- --
Conversion of convertible
redeemable subordinated
debentures........................ -- -- 119
Net income......................... -- 2,953 2,953
----- ------- -------
Balance at December 31, 1996....... -- 11,006 21,760
Conversion of Series A Preferred
Stock............................. -- -- --
Conversion of convertible
redeemable subordinated
debentures........................ -- -- 735
Common Stock issued under former
stock incentive plan.............. -- -- 41
Common Stock repurchases........... -- (136) (136)
Deferred stock-based
compensation...................... (509) -- --
Stock-based compensation expense... 169 -- 169
Net income......................... -- 7,657 7,657
----- ------- -------
Balance at December 31, 1997....... (340) 18,527 30,226
Conversion of Series A Preferred
Stock............................. -- -- --
Conversion of convertible
redeemable subordinated
debentures........................ -- -- 165
Deferred stock-based
compensation...................... (561) -- --
Stock-based compensation expense... 507 -- 507
Stock options exercised............ -- -- 1
Net income......................... -- 5,293 5,293
----- ------- -------
Balance at December 31, 1998....... (394) 23,820 36,192
Deferred stock-based compensation
(unaudited)....................... (135) -- --
Stock-based compensation expense
(unaudited)....................... 170 -- 170
Stock options exercised
(unaudited)....................... -- -- 10
Net income (unaudited)............. -- 4,460 4,460
----- ------- -------
Balance at June 30, 1999
(unaudited)....................... $(359) $28,280 $40,832
===== ======= =======
</TABLE>

F-5
<PAGE> 74

ILLUMINET HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------
1996 1997 1998 1998 1999
------- ------------ -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income................................. $ 2,953 $ 7,657 $ 5,293 $ 2,351 $ 4,460
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 5,714 7,354 9,372 3,783 5,317
Stock-based compensation expense........... -- 169 507 254 170
Deferred income taxes...................... -- (870) 2,198 1,388 1,233
Change in:
Accounts receivable..................... (1,959) (2,238) (3,337) (3,065) (3,675)
Trade accounts payable.................. 1,631 207 (631) (491) (1,278)
Accrued expenses........................ (1,094) 1,005 130 (1,528) (975)
Due to customers........................ 3,851 (2,306) (309) 1,542 (23)
Other................................... 268 (234) (42) (215) (112)
------- -------- -------- ------- -------
Net cash provided by operating
activities.............................. 11,364 10,744 13,181 4,019 5,117
------- -------- -------- ------- -------
Investing activities:
Net cash payments in connection with
acquisition of Independent
Telecommunications Network, Inc......... (126) -- -- -- --
Capital purchases.......................... (6,727) (10,121) (10,380) (3,677) (3,300)
------- -------- -------- ------- -------
Net cash used in investing activities... (6,853) (10,121) (10,380) (3,677) (3,300)
------- -------- -------- ------- -------
Financing activities:
Purchase of subordinated capital
certificates related to notes payable... (134) -- (68) -- --
Proceeds from issuance of notes payable.... 2,681 -- 1,368 -- --
Proceeds from issuance of Class A Common
Stock................................... -- -- 1 -- 10
Principal payments on notes payable and
capital leases.......................... (1,352) (1,835) (3,302) (964) (2,447)
Merger dissenting shares repurchased....... (183) -- -- -- --
Class A Common stock repurchases........... -- (136) -- -- --
------- -------- -------- ------- -------
Net cash (used in) provided by financing
activities............................ 1,012 (1,971) (2,001) (964) (2,437)
------- -------- -------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................ 5,523 (1,348) 800 (622) (620)
Cash and cash equivalents at:
Beginning of period........................ 6,992 12,515 11,167 11,167 11,967
------- -------- -------- ------- -------
End of period.............................. $12,515 $ 11,167 $ 11,967 $10,545 $11,347
======= ======== ======== ======= =======
Supplemental cash flow disclosure:
Income taxes (paid) refunded............... $ 174 $ (226) $ (342) $ (173) $(2,435)
======= ======== ======== ======= =======
Interest paid, net......................... $ 993 $ 1,219 $ 995 $ 377 $ 569
======= ======== ======== ======= =======
Capital acquisitions financed through
capital leases.......................... $ -- $ -- $ 7,490 $ 1,902 $ 2,530
======= ======== ======== ======= =======
</TABLE>

F-6
<PAGE> 75

ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Illuminet Holdings, Inc. and its wholly-owned subsidiary Illuminet, Inc.
(collectively referred to as "Illuminet") are engaged in the business of
developing, managing and marketing a Signaling System 7 ("SS7") network and
related products and services based on SS7 technology to the entire
telecommunications marketplace. SS7 is a telecommunications industry-standard
system of protocols and procedures that is used to control telephone
communications and provide routing information in association with vertical
calling features, such as calling card validation, advanced intelligent network
services, local number portability, wireless services, toll-free number database
access, and caller identification. Additionally, Illuminet provides advanced
data base services, billing-and-collection services, calling card services, and
network usage software applications to a range of telephone companies as well as
interexchange carriers, operator service providers and other telecommunications
companies and providers of telecommunications services.

Illuminet has its corporate headquarters and a portion of its operations
located in Lacey, Washington; a network control center and related operations
located in Overland Park, Kansas; and additional SS7 Signal Transfer Points
located in Rock Hill, South Carolina; Mattoon, Illinois; Las Vegas, Nevada;
Akron, Pennsylvania, and Waynesboro, Virginia.

Illuminet Holdings, Inc. (formerly USTN Holdings, Inc. through May 1997)
and Illuminet, Inc. (formerly USTN Services, Inc. through May 1997) were
incorporated in the State of Delaware on August 2, 1995.

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the financial statements of
Illuminet Holdings, Inc. and its subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.

Illuminet was formed through a merger of U.S. Intelco Holdings, Inc. ("U.S.
Intelco")and Independent Telecommunications Network, Inc. ("ITN"). In accordance
with terms of the merger, U.S. Intelco and ITN merged with and into Illuminet,
Inc. on February 23, 1996 (the "Merger"). The Merger was accounted for as a
purchase business combination with U.S. Intelco designated as the acquiring
company. Accordingly, references to Illuminet Holdings, Inc. and Illuminet in
the accompanying financial statements and related notes for the periods prior to
the Merger represent U.S. Intelco, while references to Illuminet Holdings, Inc.
and Illuminet for the periods after the Merger represent the consolidated entity
including the net assets and operations of ITN.

UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated interim financial statements of Illuminet presented in
this Form S-1 are unaudited and reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of Illuminet's financial position, results of its operations
and its cash flows for each period presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The results of the interim periods are not necessarily indicative of future
results.

F-7
<PAGE> 76
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

CASH EQUIVALENTS

Illuminet considers all highly liquid investments with original maturities
of three months or less at purchase to be cash equivalents. Cash equivalents
consist of money market funds and commercial paper that are stated at cost,
which approximates fair value. At December 31, 1997 and 1998, and June 30, 1999,
such investments included $11.2 million, $10.0 million and $11.4 million,
respectively, invested in a money market fund consisting of direct obligations
of the U.S. Treasury and repurchase agreements collateralized by such
obligations of the U.S. Treasury. At December 31, 1998, commercial paper
investments totaled $2.0 million. There were no commercial paper investments at
December 31, 1997 and June 30, 1999.

ACCOUNTS RECEIVABLE

One of Illuminet's services involves providing a clearinghouse function for
toll collected by telephone companies on behalf of other telecommunications
service providers. At December 31, 1997 and 1998, accounts receivable included
$10.6 million and $11.5 million, respectively, of such toll amounts due from
telephone companies, and due to customers included $14.1 million and $12.4
million, respectively, owed to such service providers. Accounts receivable from
these companies are uncollateralized; however, uncollected amounts may be offset
against amounts otherwise due to service providers.

Included in accounts receivable at December 31, 1997 and 1998 is $0.6
million and $0.2 million, respectively, due for services and reimbursable
expenses from a customer in which Illuminet has a preferred stock equity
investment currently representing 13% of the voting rights of the customer.
Revenues earned from the customer were $0.5 million and $0.8 million for the
years ended December 31, 1997 and 1998, respectively.

Concentration of credit risk with respect to trade receivables is limited
due to the diversity of the customer base and geographic dispersion, and is
evidenced by a history of minimal customer account write-offs.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives for property and equipment are as follows:

<TABLE>
<S> <C>
Corporate headquarters building........................... 31.5 years
Network assets............................................ 5 to 10 years
Office equipment and systems.............................. 5 to 20 years
Furniture and fixtures.................................... 5 to 15 years
Computer equipment and software........................... 3 to 5 years
Leasehold improvements.................................... 5 years
</TABLE>

Property and equipment and liabilities under capital leases are recorded at
the lower of the present value of the minimum lease payments or the fair value
of the asset. Interest rates on capitalized leases are imputed based on the
lower of Illuminet's incremental borrowing rate at the inception of each lease
or the lessor's implicit rate of return. Depreciation on the leased assets are
included in depreciation expense, and are provided using the straight-line
method over the estimated useful lives of the assets.

F-8
<PAGE> 77
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

CAPITALIZED SOFTWARE

Computer software product costs represent capitalized costs incurred for
development of software products after the technological feasibility of the
product is established. Costs incurred prior to that date are expensed. The
annual amortization, which was $0.6 million for each of the years ended December
31, 1996, 1997 and 1998, is determined on a product-by-product basis as the
greater of the amount computed using (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross revenues
for that product, or (b) the straight-line method over the remaining estimated
economic life of the product. Amortization starts when the product is available
for general release to customers.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets consist of intangible assets and certain capital assets.
The carrying value of these assets is regularly reviewed to verify that they are
valued properly. If the facts and circumstances suggest that the value has been
impaired, the carrying value of the assets will be reduced appropriately.

REVENUE RECOGNITION

Illuminet's revenues are recognized when earned, and are recorded net of
amounts passed through to service providers. Revenues on sales of software are
recognized when an arrangement exists, the price is fixed and collectible, and
the software has been delivered.

STOCK-BASED COMPENSATION

Illuminet has elected to apply the disclosure-only provisions of the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123").
Accordingly, Illuminet accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation expense for
stock options is measured as the excess, if any, of the fair value of the
Illuminet Holdings, Inc. Class A Common Stock ("Class A Common Stock") at the
measurement date over the stock option exercise price.

INCOME TAXES

Illuminet provides for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse.

EARNINGS PER SHARE

The computation of earnings per share-basic is based on net income and the
weighted average number of Class A common shares outstanding. The computation of
earnings per share-diluted includes the dilutive effect of outstanding preferred
stock, convertible debentures, and Class A common stock options calculated using
the treasury stock method.

F-9
<PAGE> 78
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications to the 1996, 1997 and 1998 financial statements
have been made to conform to the 1999 presentation.

SEGMENT INFORMATION

In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information"
("Statement 131"), effective for financial statements for fiscal years beginning
after December 15, 1997. Statement 131 establishes standards for the reporting
by public business enterprises of financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to shareholders. Illuminet primarily provides services
to companies in the telecommunications industry that are located throughout the
United States and considers all of its operations as one segment because
expenses support multiple products and services. Revenues are reported
separately for network services, clearinghouse services and network usage
software applications. No segment information is provided to the chief operating
decision maker for expenses, operating income, total assets, depreciation, or
capital purchases.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The SOP, which was adopted in 1999, requires
capitalization of certain costs incurred in connection with developing or
obtaining internal use software. The provisions of the SOP are consistent with
Illuminet's current and past accounting policy and practice.

In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which was adopted in 1999, requires that all
start-up costs related to new operations must be expensed as incurred. Adoption
of SOP 98-5 did not have a material impact on our financial position or results
of operations.

F-10
<PAGE> 79
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

NOTE 2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Land................................................... $ 912 $ 912 $ 912
Building and leasehold improvements.................... 6,932 7,156 7,202
Equipment and furniture................................ 2,885 3,435 3,676
Network assets......................................... 38,746 51,799 55,579
Computer hardware and software......................... 18,190 21,231 22,994
-------- -------- --------
67,665 84,533 90,363
Less: Accumulated depreciation......................... (32,950) (40,786) (45,814)
-------- -------- --------
Property and equipment, net.......................... $ 34,715 $ 43,747 $ 44,549
======== ======== ========
</TABLE>

NOTE 3. LEASES

In 1998, Illuminet entered into various capital lease obligations expiring
in 2002 for network assets. The lease agreements allow Illuminet to purchase,
for a nominal value, the assets at the end of the lease term. Property and
equipment held under capital leases follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Network assets..................................... $7,490 $10,020
Less: Accumulated depreciation..................... (645) (1,463)
------ -------
Total property and equipment held under capital
leases........................................ $6,845 $ 8,557
====== =======
</TABLE>

Illuminet has entered into non-cancelable operating leases for its various
facilities, other than its Lacey headquarters site. The most significant lease
covers its Overland Park facility. Illuminet entered into a five-year lease,
beginning August 1998 for a new Overland Park facility that was constructed to
suit Illuminet's specifications. Effective January 1, 1999, the lease was
amended to a seven-year term with an option at five years to extend the term for
an additional five years. Prior to August 1998, Illuminet was located in a
different Overland Park facility under a lease that expired in August 1998.
During 1996, 1997 and 1998, rent expense was $0.3 million, $0.4 million and $0.5
million, respectively. For the six months ended June 30, 1998 and 1999, rent
expense was $0.2 million and $0.3 million, respectively.

F-11
<PAGE> 80
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments for the years ending
December 31 are as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999...................................................... $ 2,199 $ 512
2000...................................................... 2,199 512
2001...................................................... 2,199 472
2002...................................................... 1,330 411
2003...................................................... -- 397
Thereafter................................................ -- 795
------- ------
Total minimum lease payments...................... 7,927 $3,099
======
Less: Amount representing interest (at 8.12%)............. (1,075)
-------
Present value of net minimum lease payments............... 6,852
Less: Current installments of obligations under capital
leases................................................. (1,706)
-------
Obligations under capital leases, less current portion.... $ 5,146
=======
</TABLE>

NOTE 4. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Various secured notes payable to Rural Telephone
Finance Cooperative ("RTFC") with variable interest
rates, 6.10% at June 30, 1999 (6.65% at December 31,
1997 and 6.15% at December 31, 1998) payable in
quarterly installments, including interest, each
maturing at various dates ranging from August 2000
to March 2015....................................... $11,459 $10,591 $ 9,031
Convertible redeemable subordinated debentures
("Debentures") bearing interest at 7.5%, maturing
August 2001, net of original issue discount of $0.1
million ($0.2 million at December 31, 1997 and $0.1
million at December 31, 1998)....................... 7,561 7,474 7,498
Debentures, deferred interest payable................. 1,272 989 851
------- ------- -------
20,292 19,054 17,380
Less: Current portion................................. (2,278) (3,458) (2,816)
------- ------- -------
Total long-term debt.................................. $18,014 $15,596 $14,564
======= ======= =======
</TABLE>

Additional borrowings available under the various note agreements with RTFC
aggregated $3.8 million at December 31, 1998 and June 30, 1999. All of the RTFC
notes have variable interest rates that are based on RTFC's short-term funding
costs. In accordance with the terms of the loan agreements, Illuminet purchased
lender-issued, non-interest-bearing subordinated capital certificates based on a
percentage of the gross loan amount. Such certificates are amortized against the
loan principal balance over the terms of the respective loans. Certificates
purchased, net of amortization, totaled $1.1 million at

F-12
<PAGE> 81
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

both December 31, 1997 and 1998, are carried at cost, and are included in
prepaid expenses and other long-term assets. The loan agreements contain certain
covenants, the most restrictive of which requires Illuminet to maintain certain
cash flow-to-debt service ratios.

All RTFC loans are currently secured by a first-priority lien in the case
of the dissolution of Illuminet on substantially all of Illuminet's assets,
revenues and property, excluding cash collected and held on behalf of others in
the normal course of providing Illuminet's services. Cash and cash equivalents
not subject to the lien were $3.3 million at December 31, 1998 and $2.2 million
at June 30, 1999.

Illuminet entered into a secured line of credit agreement with RTFC that
permits Illuminet to borrow up to $7.3 million, not to exceed 80% of eligible
accounts receivable, for a term of five years. The line of credit bears interest
at the lesser of the prime rate plus 1.5% or RTFC's monthly borrowing rate
(6.70% at December 31, 1998), and contains certain covenants, the most
restrictive of which requires Illuminet to maintain a zero balance in the line
of credit for at least five consecutive business days every 360 days after the
initial advance. There were no borrowings outstanding against the line of credit
at December 31, 1998 and June 30, 1999.

The Debentures bear interest at 7.5% and are due August 15, 2001. Interest
on the Debentures is payable in quarterly installments, in arrears. Interest
accrued for the period prior to December 31, 1995 was deferred and will be paid
ratably on each interest payment date over the remaining term of the Debentures.
The principal amount of each Debenture is convertible into Class A Common Stock
at $11.11 per share. Debentures are subordinated to all senior debt. Debentures
were issued as part of a unit that consisted of one Debenture and one share of
Illuminet Series A Preferred Stock ("Series A Stock").

The terms of the secured loan facilities restrict the ability to declare
and pay dividends without the consent of RTFC, unless Illuminet meets minimum
net worth and cash margin tests. In addition, the terms of the Debentures
prohibit declaring dividends that exceed a formula based on net income and
proceeds received from any securities offerings.

The carrying value of Illuminet's long-term debt approximates fair value.

Maturities of the long-term debt for the years ending December 31 are
scheduled as follows (in thousands):

NOTE 5. STOCKHOLDERS' EQUITY

As discussed in Note 12, on September 9, 1999, the stockholders of
Illuminet agreed to change the amounts of authorized capital stock. As a result
of these changes, Illuminet Holdings, Inc. is authorized to issue up to
157,300,000 shares of capital stock consisting of (i) 150,000,000 shares of
Common Stock,

F-13
<PAGE> 82
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

$.01 par value per share, (ii) 7,200,000 shares of Class A Common Stock, par
value $.01 per share, and (iii) 100,000 shares of Illuminet Holdings, Inc.
Preferred Stock, par value $.01 per share. Each share of Common Stock is
entitled to one vote. Prior to the conversion, each share of Class A Common
Stock is entitled to four votes.

SERIES A PREFERRED STOCK

Each share of Series A Stock is entitled to 100 votes, and is convertible
into 85.12 shares of Class A Common Stock ("Conversion Amount"), at the option
of the holder thereof at any time that the holder elects to convert a Debenture
issued as a unit with such share. Each share of Series A Stock will be
convertible, at the option of Illuminet Holdings, Inc., into Class A Common
Stock based on the Conversion Amount, at such time that the Debenture issued as
a unit with such share is converted into shares of Class A Common Stock. If the
Debentures and accrued interest thereon, and Series A Stock had been converted
at December 31, 1998, 990,740 shares of Class A Common Stock would have been
issued. In the event of the liquidation, dissolution or winding up of Illuminet,
Series A Stock will be entitled to a liquidation preference of $1,000 per share
out of the assets of Illuminet available for distribution to its stockholders,
but before any payment or distribution is made to holders of Class A Common
Stock or any other series of preferred stock of Illuminet Holdings, Inc.

SERIES B PARTICIPATING CUMULATIVE PREFERENCE STOCK

Series B Participating Cumulative Preference Stock ("Series B Stock") is
entitled to one vote per each one one-thousandth ("1/1,000th") share, and votes
together as a class with Class A Common Stock on matters on which holders of
Class A Common Stock are generally entitled to vote. Although the Series B Stock
ranks superior to Class A Common Stock, upon liquidation, dissolution or winding
up of Illuminet, whether voluntary or involuntary, other than requiring payment
of accrued and unpaid dividends before the payout to holders of Class A Common
Stock, the only liquidation right of the Series B Stock is that each 1/1000th of
a share of Series B Stock is entitled to receive an amount equivalent to the
amount to be distributed per whole share of Class A Common Stock. No such shares
were outstanding at December 31, 1998.

DIVIDENDS

Payments of dividends are restricted under Illuminet's long-term debt
arrangements as follows: (1) approval of RTFC is required unless Illuminet's
ratio of equity to total assets exceeds 40%, and (2) dividends are restricted to
75% of net income as defined in the indenture relating to the Debentures.
Dividends are not payable to Series A Stock unless dividends are declared, set
aside or paid simultaneously to holders of Class A Common Stock. Dividends on
Series B Stock are payable as follows: (1) should Illuminet declare and pay a
dividend on Class A Common Stock, each 1/1000th share of Series B Stock is
entitled to receive the same dividend amount paid on one whole share of Class A
Common Stock, (2) $0.01 per whole share of Series B Stock offset by any payments
made as a result of a Class A Common Stock dividend. No dividends have been
declared to date.

SHAREHOLDER RIGHTS PLAN

On November 19, 1998, Illuminet's Board of Directors adopted a Shareholders
Rights Plan and declared a dividend, issued on November 20, 1998, of one right
for each outstanding share of Common Stock ("Right"). The Rights become
exercisable if a person or group acquires more than 20% of the

F-14
<PAGE> 83
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

outstanding shares of Common Stock or makes a tender offer for more than 20% of
the outstanding shares of Common Stock. Upon the occurrence of such an event,
each Right entitles the holder (other than the acquiror) to purchase for $150
the economic equivalent of shares of Common Stock, or in certain circumstances,
stock of the acquiring entity, worth twice as much. The Rights expire on
December 20, 2008 unless earlier redeemed by Illuminet, and are redeemable prior
to becoming exercisable at $0.01 per Right.

TRANSACTIONS WITH STOCKHOLDER

Illuminet is party to a contract with the subsidiary of one of its
corporate stockholders that supplies Illuminet with transmission facilities in
the form of private leased lines. Such lines are leased from the corporate
stockholder at rates comparable to third-party service providers. Payments
pursuant to this contract totaled $1.1 million for the period from February 23,
1996, the Merger date, to December 31, 1996, and $1.6 million and $1.7 million
for the years ended December 31, 1997 and 1998, respectively.

NOTE 6. STOCK OPTION PLANS

Illuminet established the 1997 Equity Incentive Plan under which 1,000,000
shares of Class A Common Stock were reserved for issuance pursuant to
non-qualified and incentive stock options and stock appreciation rights that may
be granted. Only non-qualified stock options have been granted under the plan.
Employee non-qualified stock options, which are granted to key employees, are
generally exercisable ratably over four years and expire ten years from the date
of grant except that options expire one year after termination of employment, or
60 days after termination of employment if Illuminet's stock is publicly traded.
Outside Director non-qualified stock options are generally exercisable on grant
and expire ten years from the date of grant. As Illuminet's stock is not
publicly traded, a readily ascertainable market value is not available.
Therefore, the Board of Directors determines the estimated fair value of Class A
Common Stock.

Additional information regarding options granted and outstanding is
summarized as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding January 1, 1997................................. -- $ --
Granted at exercise price less than fair value of Class A
Common Stock on grant date................................ 231,504 8.80
-------
Outstanding December 31, 1997 (70,004 exercisable at $8.80
weighted-average exercise price).......................... 231,504 8.80
Granted at exercise price less than fair value of Class A
Common Stock on grant date................................ 292,511 9.36
Granted at exercise price equal to fair value of Class A
Common Stock on grant date................................ 118,500 16.72
Exercised................................................... (100) 8.80
Forfeited................................................... (14,375) 8.80
-------
Outstanding December 31, 1998 (297,165 exercisable at $9.13
weighted-average exercise price).......................... 628,040 $10.52
======= ======
</TABLE>

F-15
<PAGE> 84
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

\OUTSTANDING OPTIONS

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE REMAINING
EXERCISE PRICE NUMBER OF SHARES CONTRACTUAL LIFE (YEARS)
- -------------- ---------------- --------------------------
<S> <C> <C>
8.80$...... 252,540 8.5
9.43...... 260,000 9.0
16.72..... 115,500 8.9
-------
628,040 8.8
=======
</TABLE>

For the years ended December 31, 1997 and 1998, deferred stock-based
compensation for the stock options granted was $0.5 million and $0.6 million,
respectively, and $0.2 million and, $0.5 million, respectively, was recognized
as stock-based compensation expense.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if Illuminet had accounted
for its stock options under the fair value method of that Statement. The
weighted-average grant date fair value of these options was estimated at the
date of grant using the Minimum Value Option Pricing Model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Risk-free interest rate.............................. 5.9% 5.4%
Dividend yield....................................... 0% 0%
Expected volatility of non-publicly traded common
stock.............................................. 0% 0%
Estimated option life................................ 8.54 years 8.47 years
Weighted-average grant date value for options granted
at exercise price less than fair value of Class A
Common Stock on grant date......................... $5.59 $8.16
Weighted-average grant date value for options granted
at exercise price equal to fair value of Class A
Common Stock on grant date......................... -- $6.17
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period; accordingly,
the pro forma impact of stock options granted may not be indicative of the pro
forma impact in future years. Illuminet's pro forma information for the years
ended December 31 are summarized as follows (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Net income -- as reported................................... $7,657 $5,293
====== ======
Net income -- pro forma..................................... $7,485 $4,796
====== ======
Earnings per share - diluted -- as reported................. $ 1.27 $ 0.88
====== ======
Earnings per share - diluted -- pro forma................... $ 1.25 $ 0.80
====== ======
</TABLE>

In August 1999, Illuminet issued employee stock options for 149,200 shares
of Class A Common Stock at an exercise price of $32.00 per share. This resulted
in deferred stock-based compensation of $3.9 million, which will be recognized
as a noncash stock-based compensation expense over the four year vesting period
of the options which will have an after tax effect of $2.4 million.

F-16
<PAGE> 85
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

NOTE 7. EMPLOYEE BENEFIT PLANS

Illuminet has qualified profit sharing/401(k) trust retirement plans
covering all employees subject to certain eligibility requirements. Illuminet
provides matching contributions to the plans' trusts on a portion of employee
contributions to the plans, and also may, at the discretion of the Board of
Directors, provide a discretionary contribution. For 1996, 1997 and 1998,
contribution expense was approximately $0.8 million, $1.2 million and $1.1
million, respectively. For the six months ended June 30, 1998 and 1999,
contribution expense was $0.6 million and $1.0 million, respectively.

NOTE 8. INCOME TAXES

Components of the income tax provision (benefit) for the years ended
December 31 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997 1998
---- ----- ------
<S> <C> <C> <C>
Current (primarily Alternative Minimum Tax)............ $112 $ 193 $1,265
Deferred............................................... -- (869) 2,198
---- ----- ------
Total income tax provision (benefit)......... $112 $(676) $3,463
==== ===== ======
</TABLE>

Illuminet provides for deferred taxes based on the differences between the
bases of assets and liabilities for financial reporting purposes and income tax
purposes, calculated using enacted tax rates that will be in effect when the
differences are expected to reverse. At December 31, 1997 and 1998, such
differences primarily related to net operating loss carryforwards, tax credit
carryforwards, the use of accelerated depreciation and amortization for tax
purposes, accruals for certain expenses that are not currently deductible for
tax purposes until paid, the tax basis of certain investments that have been
written off for financial statement purposes and software development costs that
were capitalized for financial statement purposes.

During the year ended December 31, 1997, the valuation allowance decreased
$3.1 million primarily through utilization of net operating loss carryforwards
in 1997 and the reversal of substantially all of the previously recorded
deferred tax valuation allowance due to improved recent and anticipated
operating results. At December 31, 1998, Illuminet had a valuation allowance
related to tax benefits associated with capital losses recorded for financial
statement purposes but not yet realized for tax purposes, and tax credit
carryforwards of $1.4 million that expire in 2010 and 2011. These carryforwards
may be limited under certain provisions of the Internal Revenue Code.

The reconciliations of the income tax provision (benefit) calculated using
the U.S. federal statutory rates to the recorded income tax provision (benefit)
for the years ended December 31 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate......................... $ 1,042 $ 2,373 $2,977
State income taxes, net of federal tax benefit............. -- -- 407
Utilization of net operating loss carryforward............. (1,042) (2,373) --
Alternative minimum tax.................................... 112 193 --
Reversal of valuation allowance............................ -- (869) --
Other...................................................... -- -- 79
------- ------- ------
Income tax provision (benefit)............................. $ 112 $ (676) $3,463
======= ======= ======
</TABLE>

F-17
<PAGE> 86
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

The components of the deferred tax assets as of December 31 are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 4,425 $ 1,454
Tax credit carryforwards.................................. 335 1,368
Allowance for doubtful accounts........................... 462 408
Other non-deductible accruals............................. 1,430 1,437
Valuation allowance....................................... (180) (180)
------- -------
Net deferred tax assets........................... 6,472 4,487
------- -------
Deferred tax liabilities:
Excess tax over book depreciation and amortization........ (5,588) (5,801)
Other..................................................... (14) (14)
------- -------
Total deferred tax liabilities.................... (5,602) (5,815)
------- -------
Deferred tax (liability) asset, net......................... $ 870 $(1,328)
======= =======
</TABLE>

F-18
<PAGE> 87
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

NOTE 9. EARNINGS PER SHARE

The following table sets forth the computation of earnings per share-basic
and diluted (in thousands, except share and per share amounts):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Numerator:
Numerator for earnings per
share-basic -- net income... $ 2,953 $ 7,657 $ 5,293 $ 2,351 $ 4,460
Effect of dilutive
securities -- Debenture
interest, net of tax........ 447 498 427 215 194
---------- ---------- ---------- ---------- ----------
Numerator for earnings per
share-diluted -- net income
after assumed conversions... $ 3,400 $ 8,155 $ 5,720 $ 2,566 $ 4,654
========== ========== ========== ========== ==========
Denominator:
Denominator for earnings per
share-
basic -- weighted-average
shares...................... 4,995,092 5,295,509 5,356,385 5,347,081 5,366,363
Weighted-average effect of
dilutive securities:
Stock options............... -- -- 137,327 134,176 188,508
Debentures.................. 787,097 882,073 796,864 807,120 771,383
Series A Stock.............. 190,095 219,083 206,784 208,629 204,969
---------- ---------- ---------- ---------- ----------
Dilutive potential common
shares.................... 977,192 1,101,156 1,140,975 1,149,925 1,164,860
---------- ---------- ---------- ---------- ----------
Denominator for earnings per
share-diluted - adjusted
weighted-average shares and
assumed conversions......... 5,972,284 6,396,665 6,497,360 6,497,006 6,531,223
========== ========== ========== ========== ==========
Earnings per share - basic....... $ 0.59 $ 1.45 $ 0.99 $ 0.44 $ 0.83
========== ========== ========== ========== ==========
Earnings per share - diluted..... $ 0.57 $ 1.27 $ 0.88 $ 0.39 $ 0.71
========== ========== ========== ========== ==========
</TABLE>

See notes 4, 5 and 6 for additional information regarding the Debentures,
Series A Stock and stock options.

Stock options to purchase 70,802 and 1,072 weighted-average shares of
common stock were outstanding during 1997 and 1998, respectively, but were not
included in the computation of diluted earnings per share because of their
anti-dilutive effect.

In connection with the amendment to the Certificate of Incorporation, as
further described in Note 12, Illuminet has provided that each share of Class A
Common Stock will be converted into shares of a new class of Common Stock 181
days after the date of the final prospectus for the Offering. Pro forma earnings
per share (unaudited) and pro forma weighted-average common share amounts
(unaudited) reflect amounts that would have been reported after giving effect to
the assumed automatic conversion of Class A Common Stock into four shares of
Common Stock as if the conversion had occurred at the beginning of each period
presented.

F-19
<PAGE> 88
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

The following table sets forth proforma earnings per share-basic and
diluted:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pro forma earnings per
share -- basic........... $ .15 $ .36 $ .25 $ .11 $ .21
=========== =========== =========== =========== ===========
Pro forma earnings per
share -- diluted......... $ .14 $ .32 $ .22 $ .10 $ .18
=========== =========== =========== =========== ===========
Pro forma weighted-average
common shares -- basic... 19,980,368 21,182,036 21,425,540 21,388,324 21,465,452
=========== =========== =========== =========== ===========
Pro forma weighted-average
common
shares -- diluted........ 23,889,136 25,586,660 25,989,440 25,988,024 26,124,892
=========== =========== =========== =========== ===========
</TABLE>

NOTE 10. MERGER

In exchange for the net assets of ITN, excluding U.S. Intelco's 36%
ownership of ITN on the date of the Merger, Illuminet issued the following
consideration and incurred the following costs (in thousands):

<TABLE>
<S> <C>
Fair value of Common Stock issued........................... $5,562
Fair value of Series A Stock issued......................... 808
Direct and incremental merger costs......................... 678
------
Aggregate purchase price.................................... $7,048
======
</TABLE>

As consideration for the sale, non-dissenting ITN shareholders received
1,566,988 shares of Common Stock and 2,675 shares of Series A Stock. ITN
Debentures were converted to debentures having the same amount of outstanding
principal and interest under the terms and conditions set forth in the Merger.
Payments made to ITN dissenters totaled $0.7 million during the year ended
December 31, 1996.

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<PAGE> 89
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

The aggregate purchase price was less than the fair value of the assets
acquired by $2.5 million, and accordingly, has been recorded as a reduction in
the long-lived assets. The purchase price has been allocated to the acquired net
assets of ITN as of February 23, 1996, as follows (in thousands):

<TABLE>
<S> <C>
Cash........................................................ $ 613
Accounts receivable......................................... 5,880
Other current assets........................................ 282
Deferred tax assets......................................... 992
Network assets.............................................. 12,178
Capitalized network costs................................... 4,049
Other property and equipment................................ 1,290
Other assets................................................ 1,094
Trade accounts payable and other current liabilities........ (5,561)
Amounts due dissenting shareholders......................... (738)
Long-term debt.............................................. (13,031)
--------
$ 7,048
========
</TABLE>

In 1996, Illuminet paid dissenting U.S. Intelco shareholders a total of
$0.2 million in exchange for U.S. Intelco stock held by such dissenters on the
merger date. The payments were recorded as a stock repurchase and retirement
transaction.

Assuming that this acquisition had taken place on January 1, 1996,
unaudited pro forma results of operations for the year ended December 31, 1996
would have been as follows (in thousands, except per share amount):

<TABLE>
<S> <C>
Revenues............................................. $41,697
=======
Net income........................................... $ 2,854
=======
Earnings per share - diluted......................... $ 0.52
=======
</TABLE>

The pro forma results do not necessarily represent results which would have
occurred if the acquisition had taken place on the date indicated, nor are such
results necessarily indicative of the results of future operations.

NOTE 11. LEGAL PROCEEDINGS

Illuminet is party to various legal proceedings arising in the ordinary
course of business. Management does not believe that those claims, individually
or combined, will have a material adverse effect on our business, financial
condition or operating results.

NOTE 12. SUBSEQUENT EVENTS

On May 26, 1999, the Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
Illuminet to offer its common stock to the public (the "Offering").

On June 21, 1999, the stockholders approved an amendment that would
automatically convert each share of Series A Stock into Class A Common Stock
upon a public offering of Illuminet's Common Stock.

F-21
<PAGE> 90
ILLUMINET HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 IS
UNAUDITED)

On August 20, 1999, the Board of Directors authorized management to call
all outstanding Debentures and related accrued interest payable. Illuminet
intends to fund any redemption payments with a portion of the net proceeds of
the Offering. Holders of the Debentures have the right until October 4, 1999 to
convert the Debentures and the related accrued interest payable into Class A
Common Stock at the exchange rate of $11.11 per share. Debentureholders holding
an aggregate of $8.4 million in principal and accrued interest have elected to
convert their Debentures into 760,524 shares of Class A Common Stock. The
remaining $.1 million of debentures will be redeemed.

On September 9, 1999, the stockholders of Illuminet authorized Illuminet to
file an amendment to its Certificate of Incorporation with the Delaware
Secretary of State prior to the effectiveness of a registration statement to
offer its Common Stock to the public. This amendment will create a new class of
Common Stock with 150,000,000 authorized shares, rename the existing Common
Stock as Class A Common Stock, decrease the number of authorized shares of Class
A Common Stock to 7,200,000, and provide for the automatic conversion of each
share of Class A Common Stock into the new class of Common Stock 181 days after
the date of the final prospectus for the Offering. The amendment was filed and
effective on October 7, 1999. In connection with the renaming of the Illuminet
Common Stock, all references to existing Common Stock have been changed to be
referred to as Class A Common Stock in the accompanying financial statements and
the changes to the amounts of authorized shares have been retroactively
adjusted.

On September 9, 1999, the Board of Directors reserved for issuance under
the 1997 Equity Incentive Plan 13% of Illuminet's Common Stock outstanding from
time to time.

On September 13, 1999, the Board of Directors of Illuminet approved a
conversion ratio of one share of Class A Common Stock for four shares of Common
Stock.

On October 4, 1999, the Board of Directors approved a stock purchase plan.
Any employee who meets certain service requirements is eligible to participate
in the plan and can purchase Common Stock for an amount equal to 85% of the
lower of the initial public offering price or the closing price of the Common
Stock on the last day of each six month period that the plan is in effect. The
Company has reserved 700,000 shares for issuance under this plan. The plan will
terminate in two years.

NOTE 13. PRO FORMA AMOUNTS (UNAUDITED)

Assuming (1) all shares of Series A Preferred Stock convert into Class A
Common Stock (2) the conversion and redemption of the Debentures and related
accrued interest and (3) the Class A Common Stock is converted into Common Stock
at a conversion ratio of one for four, the following pro forma amounts would be
reflected as of June 30, 1999:

<TABLE>
<CAPTION>
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $20,734 $12,710
======= =======
Stockholders' Equity........................................ $40,832 $49,259
======= =======
Shares of Common Stock outstanding.......................... -- 25,329
======= =======
Shares of Class A Common Stock outstanding.................. 5,367 --
======= =======
</TABLE>

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<PAGE> 91

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